Crayon Group Hldg As

Good morning and welcome to Crayon's Q4 presentation. My name is Celana Hansen and I'm the head of investor relation. With me today presenting the results for the quarter, we have our CEO, Melissa Mulholland, and our CFO, Breda Huser. After the presentation, there will be a live audio Q&A session. And with that, I hand it over to Melissa.

Thank you for joining our Q4 presentation. I want to start by summarizing our 2024 results. In early 2024, we defined three clear priorities, boosting network and capital, gross profit, and adjusted EBITDA. I am very pleased that we have grown and improved our adjusted EBITDA margin, which for the full year ended at 18.7%. That is up from 16.2% in 2023. This is primarily driven by improved margins in our software and cloud business, where we have scaled considerably internationally. In addition, we have delivered strong improvement in our consulting business, with a focus on scaling as well as our strong improvements in consulting because of the capacity adjustments we made early in 2024. We also delivered improved working capital. The response from the organization during 2024 has been very positive. The focus and attention are demonstrated by our performance. I'm confident that we are now able to deliver solid and sustainable cash flow performance going forward. December growth was clearly below our expectations. But if we look at 2024 combined, we increased our gross profit with 11% year-on-year, well below both our ambitions and our potential. As we enter 2025, I am encouraged to see how the Crayon team is responding to the last year's performance by embracing the growth mindset that is embedded in our culture. As already highlighted, our Q4 was impacted by an unexpected December gross profit shortfall, leaving the gross profit growth at only 2%. I will go into the details in the subsequent slides. Our adjusted EBITDA increased with 5 percentage points to 19.6%. Lastly, we had another quarter with record-setting net working capital performance. As mentioned, I want to take a few minutes to explain our Q4 gross profit performance. This chart illustrates our software and cloud gross margin development on a quarterly basis between 2021 and 2024. As you can see, our gross margin has historically been stable. We entered the quarter with a strong opportunity pipeline, both within public and private sector. Looking at Q4 in isolation, historically and on average, approximately one-third of this sales comes in the second half of December, meaning that by the start of November, we saw clear potential to accelerate growth in Q4. As planned, we took advantage of the market demand. signing a significant number of new deals, and had a record high 27% growth in gross sales in software and cloud, excluding consulting and software and cloud economics. However, a significant amount of these contracts were done at lower gross margins than we initially expected and have experienced historically. In addition, the reduced share of GP from high-margin enterprise software also puts pressure on the gross margin in Q4. As a result, Q4-24 is, as you can see, a clear outlier, dropping from 7.2% in Q4 prior year to 6%. It is also worth mentioning that 6% gross margin is not low in isolation, but compared to historic Q4 performance, is not what we historically have delivered and see this as an isolated event. I will go into the underlying drivers for this development in the next slide. There are three main drivers behind the weak gross profit development in Q4. First, we secured several large software deals in the public sector with very low margins, more than last year. At first glance, this might raise questions, but in reality, this is part of a deliberate and calculated strategy. Public sector tenders are highly competitive, often awarded to the lowest bidder. To win the deal, we sometimes take an initial margin hit, knowing that long-term success lies beyond the first contract. Historically, our average gross profit margin for software in the public sector has been 4.7%. And the pattern is clear. The deals we took in Q4 will follow the same trajectory. reaching this level within the next two years. This has been an inherent part of our business model and success in the Nordics. It is also our strategy for international growth, consequently enabling us to develop the volume of opportunities and deals this year. We achieve margin growth on these deals by taking the following measures. First, volume and expansion. Once inside an organization, we expand our footprint, driving additional software sales. Second, with value-added services. Over time, customers increase spending on services and support, boosting profitability. And lastly, strategic renewals. When renewal time comes, we focus on our trust established and knowledge of the business to negotiate improved pricing and terms. The second cause for the gross profit shortfall is due to what I call the Microsoft effect. There was an unexpected change in the market dynamics for Microsoft's enterprise agreements in the fourth quarter, largely as the market had to adopt the changes in Microsoft's incentive programs. Given the changes, and as I highlighted in our Q3 presentation, to ensure we can accelerate incentive earnings, it is essential to secure customers and enable CSP conversion and cross-sell and up-sell opportunities. We took every opportunity to acquire customers with a strategic focus to deliver value-added services, which will be accretive over time. We also believe that the market was not fully ready for the changes as the rules of engagement on EA versus CSP were unclear, resulting in competitive pricing and lack of understanding from the Microsoft sales force on what customers should be on EA versus CSP due to unclear segmentation. It was also acknowledged by Microsoft in their recent earnings call. Microsoft continues to focus on getting this balance right, and we now believe that the actions they have taken with the new sales incentive to transition EA agreements to CSP, clarity on account segmentation, and organizational restructure predominantly resolves the challenges seen in the quarter. In my experience, Microsoft excels at making quick corrections when needed and is taking the necessary actions to do so now. The third component to the margin decline was the lack of sales execution on enterprise software, which is the software business for vendors such as IBM and Oracle. There was a slightly slower demand environment, and we didn't really see the usual end-of-year cycle and budget flush. However, we did see a clear pipeline opportunity, which we failed to execute on. Some of this could be related to the lack of focus due to a very active market in the Microsoft space. But at the end of the day, it's a result of weak sales execution. Building on the importance of our service model described in both public sector and enterprise agreements, I want to use the opportunity to illustrate how we work and expand business with our customers beyond the initial transaction and sales of licenses. Crayon's business model is not built around the software transaction only, nor the incentives. but our ability to be an advisor to the customer, providing services throughout the whole cycle of managing software and cloud licenses, optimizing IT costs, and implementing consulting services. Crayon has had a long relationship with Orkla, Norway's leading consumer goods company, and we deliver a full suite of Crayon services. This is a customer we speak with daily, given the complexity of their business needs and vast number of services we provide. Orkla needed a partner to help provide independent licensing advice to make informed decisions. They struggled with order corrections and agreement renewals and required guidance on new licensing models and market pricing. They chose Crown to provide expert licensing advisory and market insights, support on software asset management, implementation, and management in contract negotiations and compliance tracking. The cooperation with Crayon gives clear and tangible returns. We have optimized licensing decisions, reduced costs and risks. We've simplified renewals and error resolution, improving efficiency, and better negotiation outcomes, leveraging Crayon's expertise. Overall, we've built a trusted relationship with OrkLab, and this is a great example of the business model that we have today in Crayon. Looking at the market, we are well positioned to drive continued profitable growth based on market position, strong CSP capability, and service footprint. Our software and cloud business grew 7% in Q4 and 15% for 2024, with margin improvement of 10% in the quarter and 7% for the full year. We see strong demand for software solutions such as E5, which grew 56% in Q4 alone. As we focus on scaling up across strategic markets in Europe, the Middle East, and U.S., we continue to accelerate our growth in public sector. This is a turning point in our business as we now have the size and market brand to compete in countries such as Germany, France, and the Middle East. Turning to services, we delivered 7% growth in the quarter and 9% for the full year, with EBITDA margin of 10% in Q4. This is a result of our focus on maximizing utilization. To drive growth, we are focused on hiring in key areas where we see increased demand from our customers, such as our cybersecurity practice, which has also contributed to our Microsoft E5 growth, And in addition, we continue to see Gen AI as a growing market opportunity as companies prepare for cloud workloads and modernization of their application to see the ROI of AI in the workplace. Turning over to the business areas, the gross margin impact we saw in Q4 impacted our direct business and consequently growth ended at only 6% for the quarter. For the full year, our direct business grew 17%. This was driven by growth in Microsoft with strong E5 and Azure performance as well as growth in AWS. The direct business saw a strong profit improvement of 11 percentage points to 60%. However, some of this is related to the bad debt reversal in the Philippines. I will go into the reasoning behind this momentarily. However, even excluding this impact, the adjusted EBITDA in direct increased 5 percentage points compared to Q4 prior year. Channel grew 7%, and adjusted EBITDA increased 5 percentage points to 57%. To rebound growth in 2025, we are prioritizing hiring and scaling channel internationally, as well as extending vendor offerings with our provisioning platform, CloudIQ. Software and cloud economics gross profit ended at 5% growth, negatively impacted by weaker sales, but see an improved pipeline in 2025. Margin ended at 3%. Our consulting business grew 8%. Profitability improved from minus 5% in the prior year to 14%. We continue to ensure we balance growth and profitability in our consulting business, ensuring the utilization rates are at the necessary levels, and we continue to see some positive data points indicating a somewhat stronger market in 2025, and we are naturally accelerating hiring to deliver growth. Growth in the Nordics ended at 10%, impacted by slower growth in the direct business based on the margin shortfall I described earlier, as well as continued cautious consulting market. Europe grew gross profit 18%, driven by strong consulting and direct performance with a focus on customer acquisition. In the quarter, both Channel and SCE had negative growth with 11% and 21% respectively. Channel was, as mentioned in prior quarters, negatively impacted by the changes in the Broadcom distribution agreement in Europe. In software and cloud economics, this is driven by decelerated performance in Switzerland and Germany. APAC and MIA ended at 2% growth. The direct business in APAC and MIA saw some of the same dynamics within the EA space. However, in Q4 23, we had a very strong sale in enterprise software. And in APAC, one single Oracle contract generated $30 million knock in GP. Our channel business in APAC and NIA, where we included RIPE, continues to improve and grew 9% in the quarter and 13% for the full year. In Q4, we made a decision to close down our South Korea business. The business was not profitable and had limited growth potential. Furthermore, we also closed a call center, which was a first-line support function, where we operated on behalf of the customer in the Philippines. This business was part of the RIPE acquisition when we did the acquisition in 2021. Over the last year, profitability has declined into negative territory, and this is a clearly non-core part of the business with efficiencies being gained through areas such as generative AI and chatbots. We are now discontinuing the operations. The business consisted of around 250 employees. In the quarter, we booked 12 million knock-in expenses related to these discontinued operations. U.S. grew 7% impacted by strategic public sector wins and gross margin deceleration to acquire strategic enterprise customers. Going into 2025, our focus in the US is to continue to scale up our go-to-market with a focus on software and cloud services and diversification with AWS and GCP. While the growth is modest, we continue to see progress according to plan. The process of collecting the significant overdue public sector receivables in the Philippines developed positively during the quarter. The receivables originate from 2022 at approximately $45 million. To be able to release the payment, it has been agreed between PSDBM, Microsoft, and Crayon to file an accelerated money claim process that is expected to be resolved within six months. Money claim is a formal procedure for enforcing payment for services provided to the public sector in the Philippines, and the claim is expected to be handled on an expedited basis. The claim is done together with Microsoft in order to also cover Microsoft's claim for the use of Azure subscriptions after Crayon's contract period, deriving from PSDBM's consumption of Azure services after the end of the contract with Crayon. The extended payment terms on certain accounts payable offsetting most of the negative net working capital impact for Crayon continues and are expected to be valid until the receivables are settled. A bad debt provision of $7 million NOC has been considered related to the time value of the expected settlement. This specific provision is reduced from $30 million NOC in the last quarter. With that, I'll hand it now over to Breda to take us through the financial presentation.

Thank you, Melissa. I look forward to taking all of you through the financial section of our Q4 presentation. Networking capital ended at minus $1.5 billion. This is a solid improvement compared to the same quarter last year, and it means that 2024 in percent of GDP came in at minus 15.1%, which is in line with the high end of our outlook. Included in the performance is also a significant reduction in the use of factoring. In Q4 2023, factoring amounted to 460 million. This was reduced to 57 million by the end of 2024. This means that the underlying improvement in net working capital compared to last year was 755 million. As a reminder, our working capital performance is driven by our gross sales, which in 2024 totaled close to $60 billion. This creates significant working capital swings and requires strong liquidity management and working capital control. We have focused intensely on networking capital since I joined the company in September 2023, and I strongly believe we will continue to deliver on this going forward. Our outlook for 2025 is approximately minus 15%, which aligns with our mid-term target. When looking at our P&L, we see that our gross sales ended at 16 billion in the quarter, and as I mentioned, close to 60 billion for the full year. Our reported EBITDA ended at 286 million, an increase of 130 million compared to Q4 prior year. Adjustments consist of share-based compensation of 6 million, 17 million in M&A costs, and 12 million related to the close of call center operations in the Philippines and the closure of our South Korean subsidiary. Depreciation and amortization is at the same level as Q3. but an increase from 76 million in the prior year. Interest expense ended at 76 million, down from 78 million. The reduction is driven by lower interest rates on the new bond loan and RCF, but offset by increased cash pool interest as we actively use our internal cash pool to mitigate the FX impact on our balance sheet, and also due to increased lease and amortized transaction costs related to the new RCF. Other financial impact ended at minus 43. The expense includes an impairment from a 20 million loan to the new owners of our prior subsidiary in Russia, The write-off is part of a process to get final government approval of the management buyout of the company that took place in 2022. Net profit ended at 42 million, an improvement of 165 million compared to Q4-23. Looking at the balance sheet... Our long-term interest-bearing liabilities amounted to 1.2 billion. This consists of our bond loan. Both the RCF and overdraft were undrawn by year-end, and compared to Q4 last year, factoring was reduced from 460 million to 57 million. We are exiting 2024 with a very robust financial position. Our operating cash flow for Q4 ended at 1.9 billion. This is driven by working capital release. Our cash position and available liquidity reserve remain solid at 3.5 billion. And our leverage ratio measured as net debt over EBITDA ended at 0.3 compared to 1.2 in Q4 of last year. For 2025, we are providing the following outlook. Gross profit growth of 15 to 20%. This is a somewhat wider range than we historically have provided, reflecting a higher uncertainty in the market outlook. Adjusted EBITDA margin of 19 to 22%. And as I mentioned, net working capital of approximately minus 15%, which is in line with our midterm guiding. I will now hand it back to Melissa.

We have a clear path towards our 2025 outlook, and I'd like to provide some additional details of the drivers behind our growth ambitions. Across both our direct and channel business, we will focus on continued acceleration of our CSP business, delivering value-added services to our customers and partners. We continue to see strong demand from our customers on both the private and public sector side and will increase our ability to serve both AWS and Google Cloud to provide multi-cloud offerings and scaling with AWS in distribution. We are innately focused on increasing our software procurement with seamless access to software providers in our Cloud IQ platform, delivering increased stickiness to our customers and our partners while providing a creative margin opportunity. Cloud costs continue to rise, and to support our customers, we have our new FinOps platform called Crayon Cloud Cost Control now available to help manage software and cloud spend across the hyperscalers. On the services side, we will focus on the growth drivers where we see market demand in cybersecurity and cloud modernization. We see now the hype of Gen AI has moved beyond discovery to deployment and are well positioned as one of nine global Gen AI partners for AWS, our co-pilot strength on Microsoft, as well as our ability to deliver Gemini with Google Cloud to be able to respond to customer demand. There are also risks and challenges facing us in 2025. Most prominent is the uncertainty for our employees created by the potential combination with Software One. As such, it was great to see last week that the timeline is now accelerated to June. To summarize, we see ample growth opportunity ahead and we will focus on hiring to deliver upon the GP ambition. Based on this, we expect 15 to 20% GP growth for 2025. Before we round off and go into Q&A, I'd like to take a moment to share my perspective on perhaps the most significant event during 2024. In December, SoftwareOne announced a voluntary bid for Crayon shares. This is a significant milestone in Crayon's 23-year history and a testament to the success we have built since inception. I see a strong strategic rationale behind the proposed merger and want to take a minute to explain why. From a geographic perspective, service offering, and customer footprint, we are highly complimentary. On a combined basis, we'd be the leading global provider and expert for software and cloud, servicing top enterprise customers with SoftwareONE's portfolio all the way down to SMB with CRAM's channel partners. This further creates strategic relevance to the software and cloud vendors, given our unique combination of software procurement and cloud implementation capabilities. Servicing enterprise customers over SoftwareOne's 25-year history has paved the way for its global expansion. To support global enterprise needs, SoftwareOne invested in its internal processes and automation, which would enable Crayon to leapfrog in seeking market growth. Based on our inherent business model of software asset management and licensing, this creates a cultural fit that is unparalleled. I see significant value opportunities for shareholders, customers, and employees with the combination of these two global companies. To conclude, while the combination with SoftwareOne naturally is an important milestone in 2025, We remain committed to deliver further value creation through improving on all key metrics. We continue to see opportunities to expand and grow, and we are well positioned to support our customers with long-term market opportunities given our scale and global strength. Our international markets continue to scale, and we are seeing stronger profitability throughout the businesses. Lastly, networking capital management and cash generation remains a key priority. I am confident we will continue to deliver a sustainable and healthy cash flow performance going forward. We will now transition to Q&A. Continue to scale. And we are seeing stronger profitability throughout the businesses. Lastly, networking capital management and cash generation remains a key priority. I am confident we will continue to deliver a sustainable and healthy cash flow performance going forward. We will now transition to Q&A.

Can we increase the volume? Can we increase the volume? Please go ahead. Thank you. Can you please provide some more color on how you, or how we should expect goals to develop through 2025? Obviously Q4 will be one large driver here, but do you see any continuation of the market dynamics in Q4 into Q1, making it sort of increasing through the year,

Thanks, Christian. It's a good question. We see Q4 as an isolated event, as indicated earlier, and this is due to several factors. The first is due to the changes that Microsoft is implementing now. They launched this in January to support the acceleration of CSP with the full commitment of the workforce. This is taking impact now, and we do not see this carrying forward into Q2. It's also important to remember that Q1 is our smallest quarter, and the results are back-end loaded. And I think lastly, we are ramping up in hiring to capitalize on the potential so that growth trajectory would carry forward through the back half of the year.

Thank you. that you were branding up, right, like in France and Finland and so on, but rather new on and outs enterprise agreements that you entered very late in the quarter. Could you elaborate on that, give some additional color around it?

Yeah, it's a great question, and you're correct. So these public sector agreements that I'm referring to are net new. They happened late in the quarter, mostly in December. We had double the volume than we normally expect, and I think this is an indication of the fact that we've now gotten to a size that we're starting to win in key markets such as Germany, but also the Middle East and in the U.S., And so we will provide more detail over time, but, of course, these deals are fresh as they were published in December. All right.

And on the working capital and cash flow side, are there any timing effects that we see here in Q4 that are more temporary in nature?

as a structural and sustainable improvement. There were no, call it one loss, influencing the numbers in either direction. All right, very good.

Thank you. Thank you, Oliver. The next question will be from the line of Marcus Heiberg from S&P. Good afternoon, I'll be unmuted. Hi, I'm...

Oh, that's a good question. It's difficult to say because, naturally, it's a mix of the combination of public sector, you know, Microsoft, as well as, of course, the lack of enterprise software in terms of big, you know, deals that we had in 2023 and the year-over-year effect. I think it's certainly a large portion of it, naturally, because we have a large Microsoft mix in our business today. But I also want to emphasize that with Microsoft, we also accelerated customer as indicated in terms of the gross sales performance that we see with 28% year-on-year. So I'm confident that this will also indicate margin accretion as we deliver services over the course of 2025.

And on enterprise agreements, do you expect that to be a significant share of your new business also in Q1?

I wouldn't say it's going to be a significant. Rather, I would say it's a mix of enterprise agreements and, of course, CSP. So we're also working on CSP in addition, which is extremely important. And as you know, the margin on CSP is higher, and that's also the growth is something that we're deeply focused on as an organization. So it will be a combination of both.

Thank you. And final for me is?

It's hard to say, but I would say that we're deeply focused on gross margin improvement as an organization. This is something that is really important as part of our business model. Naturally, as I mentioned, we see that gross margin development strong in terms of public sector over time. And as I indicated earlier, Oracle is a good example of it. We never just deliver off of the licensing alone. We always make sure that we're delivering services, and it's important because at the end of the day, we measure our business on gross profit and EBITDA.

Thank you. Thanks. Just a question on the HQ line on gross profit, which includes the incentives or kickbacks. It's really low for Q4 and just looking at the

Thank you, Christian.

That's quite an interesting question.

I would say from, you mentioned incentives, I would say there are no significant... Okay.

And also, could you provide some color bread on... Just how we should think about the drivers for the increased cash flow interest from mitigating the FX risk on the balance sheet.

The drivers going forward on the interest costs for mitigating the FX risk going forward. It's difficult to specify drivers because it all depends on our, call it, our liquidity situation within the different currencies. And as we have mentioned, we use our cash pool to, call it, build up negative currency positions to offset the FX risk in our balance sheet going forward. So it's difficult to specify the drivers, but I expect year-over-year improvement going forward in the total interest cost. Okay, thanks.

Thank you, Christian. Next in line, we have Christopher from D&B Markets. You'll now be unmuted.

Hi, thanks for taking my questions. So just kind of following up on that interest question, given that although debt levels are down, net interest debt is down significantly year over year, but the interest expense is not. So can you kind of help us understand how you kind of expect to see that decline in interest next year, you know, Do you use that hedging strategy less? Or if you could help us understand, that would be helpful.

On one thing, we saw the interest cost or the small decrease in interest cost. One negative factor in Q4 was the build-down on network and capital came a little bit later than last year. So we had a higher draw in a longer time period on both the RSF and overdraft in Q4. And going forward, of course, at some point in 2025, we'll enter into the year-over-year period where we had refinanced both the RCF and Overdraft, so the interest cost per se will equalize. Going forward, we are looking into more cost-efficient methods to mitigate that FX risk. So it is a focus area to reduce the cost on it.

All right, thanks. And then on the U.S., I'm just wondering, given the focus on efficiencies in the U.S. with Doge and all of that, if you can help us understand your public sector exposure in the U.S. business.

Our public sector's business is relatively small. I mean, the U.S. market is significant, and you have large players like Insight and SHI who have a much larger presence in the public sector. But nonetheless, it has been strategic, as we know that there's a lot of investment being made in terms of modernization, in terms of infrastructure for the public sector space. But in terms of exposure, I would say that's quite limited.

All right. Thank you.

Thank you, Christopher. As no one else has lined up for questions, I'll now hand it back to the speakers.

Thank you, Operator. We do have a couple of questions also on the chat. The first one is from Petter Kongsli. You say that average margins on public sector wins have been 4.7%. Is this where you expect to be within two years?

Yeah, good question. Historically, just as a reminder, historically our average gross profit margin for software in the public sector has been around 4.7%, and we do expect that this would reach over the next level over the next two years, so yes.

And a second question from Petter. How large part of gross sales is related to E5 licensing?

We don't publish the breakdown of our Microsoft SKU mix, but what I can say is that we have the highest mix of what I would classify as premium SKUs, which E5 falls into. And we are the largest partner delivering E5 out of the global LSKUs today.

Thank you, Melissa. There's also a question from Petter on the Broadcom agreement in Europe and when it will be out of the figures.

The Broadcom changes occurred over the summer, and the year-over-year impact would be out in Q3.

And then there's a last question from Petter. Also, what should we expect in CapEx going forward?

We have previously guided that our CapEx will be between 2.5% to 3% of GP going forward. So we will see a small and steady increase in line with our GP.

Thank you. That concludes the Q&A, and I will now hand it over to Melissa for closing statements.

Thank you so much. We are confident in our ability to deliver in terms of growth, profitability improvement as working capital. Our business model is sound, and we see the opportunity to continuously grow and will be focused on execution across the entire Crayon sales organization. Thank you so much for joining.