Exsitec Holding AB (publ)

to this quarterly update of 2024 for Excitec. If you want to ask any questions, you're more than welcome to use the raise hand function in Zoom or to use the chat. And with that said, I'll leave the word to Johan Kallblad.

Thank you, Hampus. And thank you for joining and talking now me, Johan Kallblad. I've been the CEO of Excitec since 2010. I expect this presentation to be just over 15 minutes today. As usual, I will start off by making a short recap about our business and a reminder what it is that we do. And after that, we'll cover Q1 financials, short market updates, and a recap of our priorities going forward. So we exist to help medium-sized businesses in the Nordics use digital tools to improve their operations and We aspire to be a one stop shop so the customer can focus on their core business and leave the business side of it to us. Digital tools can address areas like reducing financial administration through automation or use data for decision making and can also be creating integrations and information flow between business applications used in an organization. We market and sell a portfolio of software components that we can combine in a modular way into different target markets or industries. Our target market is medium-sized businesses in the Nordics and we've created some bundles of software to fit different industries. These bundles are often made up of the same foundational components like an accounting software with some industry-specific add-ons. There's not really a size limit upwards on where our model works, but we don't actively target the enterprise segment in our sales and marketing. We have around 4,000 active customers spread through many different industries, and typically in a year, no one single customer is more than a few percent of our revenue. All in all, we have selected around 20 software components that we combine with the integrations that we develop in house. These are the primary software providers at this time, and we have a revenue share partnerships with these software providers where we market and sell their applications to new accounts and make customers successful in using them over time. A dream customer of ours can use up to five or six different components from us, but the average customer is today only just over two. So there's a lot of work remaining and growing our footprint on existing customers. Business model has three revenue streams. Like I mentioned, sales and marketing is focused on selling software together with integrations that we develop in-house. And this is sold on a subscription model where you pay as you use. This revenue stream is around 20% of our net revenue. Two-thirds of our revenue is from professional services where we implement software and make the customer successful in using it over time. We also do custom development and custom integrations where needed. The third revenue stream is that we offer our customers a single point of contact support on a recurring fixed price model. And in this engagement, we also take care of things like infrastructure, internet access and IT security to be a one stop shop for the customer. So like I've said, I've been the CEO since 2010. During this time, we've had 10 consecutive years of growth with increased profitability. The last 18 months, we've been trying to reduce risk because of uncertain macro environments by focusing on profitability and having solid cash flows. And historically, our growth is from a balanced combination of M&A and organic growth. In the quarter, we completed our 11th trainee program. Due to a little less demand in the market, getting to profitability has been harder for the 2023 trainees than the year before, but actually we've been doing pretty good. So it's actually no difference from the 2021 and 2020 years. So we stay committed to this and we are actively recruiting for our 12th program that starts in August. Recruiting is a lot easier than the last couple of years. We see around three times the number of applicants per open position that we saw two years ago. And let's dive into specifics for financials in Q1. First, a super short summary. Overall growth, very slow. We're keeping our margins and profitability solid despite some challenges. We feel the market is passive overall, but we do have some pretty good sales KPIs. So it's actually more of a slow activity level from existing customers that limits us. Not enough positive changes and positive feelings in the society in general makes people be quite cost conscious. Third, we've had some challenges, but also some good experiences with Business Next conversions that we've started with in Norway. And as expected in any major shift in technology, it does affect results a little bit in the quarter, however. And lastly, we finalized a new financing agreement with Nordea that gives us long-term financing in place to help us finance M&A activities without having to reach out to the capital markets. So net sales, overall growth, only 6%, which is much lower than the last couple of years. Passive market in general has been... It has been our main constraint after a couple of years where resource constraints was the biggest thing. But there are some other specific things also here in the quarter. Actually, I was going to say organic growth, a few percent positive in Sweden, flat in Denmark, around 10% negative in Norway. We lost some working time moving to new office locations in Oslo after having spent 20 years in Asker, around 20 kilometers southwest of Oslo. When comparing years, we should keep in mind that the Easter holiday was very early this year. So this affected all markets with losing one or two working days, but also more vacation, especially in Norway and Denmark. Of course, we have Easter holidays once a year, so this all evens out. We don't do any adjustments for these things in our numbers, but for someone comparing, it's good to note. Margins, adjusted EBITDA around 19% in the quarter, solid performance in Sweden, more challenges in Denmark and Norway. In Denmark, it's the same reaching scale problem we've had for some time when we changed our offering to be more in line with Sweden. And also generally, even in Denmark, quite the passive market. In Norway, we had specific internal issues with a lot of unpaid work for converting customers to the new cloud product, Business Next, as well as moving to a new office location. Non-adjusted EBITDA, 18%. The difference is the compensation related to contingency payments in acquisitions that we adjust for. Of course, EBITDA and adjusted EBITDA gets closer when we have less of these, so less acquisitions. I'm not sure which is most relevant from an external view, but internally, we measure ourselves against the adjusted EBITDA. Moving into segments, a little bit more detail. Mentioned again, good performance in Sweden, albeit in a passive market. We do see improving sales numbers in the quarter, but we also see many existing customers holding off investments where they have a choice. Norway has good overall growth due to the acquisition of Integrationspartner in early Q1 that has been performing well in the quarter. Organic growth is actually negative due to fewer working days because of Easter and the cost for these cloud conversion projects and the cost for moving the office. Denmark is underwhelming in a passive market, but the key thing for us here is reaching scale over time in our new offering, so I'm actually not that... worried about that we'll have some better quarters and some worse. We're not at scale yet. So it depends very much on getting efficient resource utilization and the right number of projects for where we are. The recurring revenue is probably the most positive part of our financial performance in Q1. So recurring revenue stream from software shows solid growth with the LTM numbers being up 26% year over year. Increase in the quarter was 32% up from Q1 of last year, and the increase in growth rate is due to the acquisition of Integrations Partner that accounts for around half of the growth. So even organically, we saw good growth. In 2023, we saw more partial churn than we're used to, where some customers stayed on a software, so they didn't churn out as customers, but they did ramp down number of users or transaction volumes to save money. We still see some of that, but it's not as apparent as last year. So we should see transaction volumes and user volumes increase if we are able to keep adding customers through sale and the economy starts to pick up. So we feel there is more upside on this one. I was going to say a few words about the Visma Business Next conversion. It's a big undertaking for us that's been going on since Q2 of 2023. It's converting our large on-premise customer base from Visma Business to cloud software. As you can read in the report, we're taking some charges over the quarterly result in Norway because of this. This is long-term very good for us as it moves the customer investments from hardware, if they have their own hardware or from hosting, if they have on-premise software with outsourced hosting. that we have no part of. It moves this investment from the customer side to a software revenue instead, where we have a revenue share with the software provider. So it moves the spend from hardware or hosting, that's not a part of our business, or a big part of our business to something that is a part of our business. So there are some significant short term challenges, including actually our own learning, having to rewrite integrations for customers, having to refit custom development. And so far, we have underestimated some of this effort in the early projects, which cost us around two and a half million in the quarter. As the product keeps improving and we get better, we will see less of these costs, and it should provide a long-term increase in recurring revenue. So short-term costs, long-term benefits in this area. So looking forward, some of our priorities going forward, and also I'll start with some words about the market conditions. The market we see in Q1, overall very passive customer sentiment. Not necessarily a negative one, but a passive one. Overall, very few customers are increasing user volumes or transaction volumes or suggesting rearchitectures on their own. So the growth that we get or any growth is a result of our own sales rather than changes initiated on the customer side. So there are, however, some positive signs in our sales metrics, especially in Sweden. We track number of qualified leads, number of days from a qualified lead to closed sale, the average order size and the total number of deals. And this quarter was actually the first one in six quarters where we saw a significant reduction in the number of days from lead to closed deal. which was reduced by around 20% from Q4. And we also saw an increase in average order size. So total order volume for new sales was around 10% higher than the same time last year. For similar business units, this is excluding Integrationspartner. And this was entirely driven by Sweden. Sweden was also the first market that shows sign of weakness in the market around 18 years ago, which moved our priorities into margins of overgrowth. But we do see positive sales metrics here, which I think is very interesting looking forward. So what does this mean? Even though the majority of our customer base is very cost conscious and actually passive, There are segments and individual customers that have started to invest and often making big investments. This could be customers in defense or some in infrastructure or various business to business operations. So it's more like 90% of customers are reducing spend with 5% and 10% are doubling their spend. rather than a 10% increase over the board. It's a little bit more difficult for us, but it still is a positive sign, I think. So looking forward to priorities for 2024, while the overall market has been challenging, it's actually quite an enjoyable time to be in charge of this operation. We know that when we close a deal, it's not because of the market being favorable, it's because we've not a good job in sales, and we have a good offering. I love the business model with a large portion of recurring revenue, and I feel that we're in really good shape and in a really good position for long-term growth when we can deliver a 19% margin in a short quarter in a tough environment with specific challenges in our way. We are very active in our sales and marketing, and we are pushing ourselves to compete in some sectors that we have not prioritized before, like public bids and the enterprise segments. We actually do this more to learn than to make money in the short time because competition is obviously tough. We're trying to learn where we can have success and add value, and our strong margins make it possible for us to invest in long-term capabilities when competitors have to focus inwards. We just announced a new financing agreement with Nordea. And of course, this is because we think there are M&A opportunities, especially we are looking for smaller bolt-ons that can improve market position and add to our offering with reasonable risk. We have a long list of active discussions ongoing. So all in all, macro environment may be challenging, but we will mostly be restricted by our own execution and our own ambitions. That concludes the presentation for the first quarter of 2024. And if there are any questions, please feel free to ask them. Hampus, did you get any questions?

Yes, we've got one question from Fredrik Nilsson. Can you elaborate around the sudden drop in organic growth quarter over quarter? Is the weaker overall consulting market we have seen in H2 of 2023 something you are starting to experience now, or are there any other factors?

Well, first, there is a change in working days and also Easter, so you have to take that in. We don't adjust for that, and it's not that easy, but it's not only working days. We actually got an additional working day on 29th of February also, but the quarter is is shorter in a working day perspective, but it's also vacations and things because the last four years Easter has been entirely in Q2, right? So that's just something to keep in mind. But even accounting for that, it is slower growth. We see a little bit lower utilization rates, but it's actually not that much. We measure that internally. We don't think it's an extremely relevant measurement for us externally because it's so different in different business units for us. And they should be different because they have different levels of recurring revenue. But it's around a percentage and a half. So a little bit lower resource utilization, but not the massive one. Not a not a massive drop off. It's actually so the main thing to get to answering the question. The main thing is just a slow general customer sentiment where they don't call and and Like we get a lot of our automatic consulting work driven through support because customers call support and they need help. And then we tell them when something is not actually support, it's actually a consulting engagement. We tell the customers that this is something we're going to charge you for. And it's a lot more common now that they say, oh, we can wait for a while. if this is not covered by support. So it's a general customer sentiment that's pretty slow. We don't see any changes. It's a behavioral change in a lot of places. It's not a big change. Other than that, as for the general market, if I were to guess, I would expect that everyone who's involved in consulting sees a fairly slow market and a behavior like that. But I don't actually know. I care about Excitec. I don't look so much as what other companies do.

Yes, and we also have a raised hand here from Tom at Pareto. Tom, you're welcome too.

Sorry, actually, can I elaborate? So he didn't actually ask especially about consulting, I think. Maybe he asked about the entire growth. We had good growth in top revenue and in other revenue, so it's actually only consulting that was slow.

Tom, you're welcome now.

Can you hear me?

Yes.

Perfect. I was just wondering about the consultancy services in Norway. It looks like you had about negative 8% organic. Is that fair to assume? Adjusting for the calendar effect as well.

We don't adjust for calendar effect internally. I think calendar effects even out, but I understand that you need to. So could you repeat, what's the number? I'm looking at the

I'm looking at around negative 8% adjusted in the consultancy service segment in Norway.

Something like that would make sense. Maybe even more. Because we did a lot of work. It's not actually because we didn't have work to do. We did a lot of unpaid work. Yeah. It's a bad business model, but it's actually long-term good. We need to get through these problems, but I understand it looks bad in the quarter.

And the revenue split for Integrations Partner was around 50-50, as you stated before. Was that any different during the quarter?

It wasn't. Integrations Partner was performing as expected in the quarter.

Yeah, but you had 81% software revenue growth. And 10% consultancy growth in Norway.

Yeah, software growth both in the old business and in integrations partner.

Yeah. So around 3% to 5% organics software revenue growth. Okay.

probably uh correct uh maybe a tiny bit uh more than that but uh but i think that's a fair assumption i can we we can get back to uh to you with a more detailed analysis on that a few percent the positive growth correct yeah all right thanks that was all for me yeah I can elaborate one more thing here also on a detail level, especially maybe for Tomo's very detailed in our numbers. When we move to Visma Business Next, we will get higher recurring software revenues, but it's not the initiation of the project that drives the revenue increase. It's the completion of the project. And when we have a problem completion projects, For many reasons, we don't get the increased revenue. So the organic revenue growth should improve over time as we are completing more of the projects.

I'm going to follow up on business next as well. You said you'll be deploying it in Sweden and Denmark as of 2024-2025. It should be quite a significantly smaller market for the new software, right?

relative to the overall actually in Denmark is somewhat similar to Norway to if you compare adjust for a relative size But it's fewer customers, but the operation in Denmark is also a lot smaller. In Sweden, it's a lesser part of the business because we're actually more relying on, we have two other Visma offerings in Sweden that we are, that is in total a larger part of the operation. But Visma Business in Norway is the most important software and it's not as large in Sweden, that's correct.

Or around 80% in Norway and 15-20% in Sweden.

No, a little bit more than 15, 20. It's probably around 70 in Norway, maybe 70, 80 in Norway and maybe 25 in Sweden.

Thank you, Tom. We also got another question from Fredrik Nilsson. You increased your M&A firepower recently. Is the increase motivated by a substantial improvement in the M&A market?

It's motivated by a substantial improvement. It's motivated by a substantial improvement in ambition. So, in a way, yes. It's not necessarily that the market has been that bad over the last 18 months that has reduced the number of deals we've done. It's that our ambition has been lower. We've had other things to focus on, and we thought it was wise to focus on having solid profitability in units that we acquired earlier. But we feel we are at a good place. So our ambitions are higher. Is it a significant change in the market? I don't necessarily think so. But we do feel that there are a lot of active discussions that we have that do feel good. So, yeah.

And that concludes all the questions we had. Thank you for listening in to the quarterly call. And we wish you a very good day. Thank you.