Exsitec Holding AB (publ)

So welcome to this quarterly update for the second quarter of 2024 for Excitec. Thank you for joining. Talking now is me, Johan Kalblad. My voice is a little sore today due to a nasty summer cold. And I know many of you have a lot of earnings calls to attend to today. So I will try to make this brief. 15 minutes should cover it. It's possible to ask questions via the hand raise function in Zoom or via the chats. And we'll do our best to answer them. I will start off by making a short recap about our business. And after that, we will cover Q2 financials and the short market updates and the recap of our priorities going forward. So we help medium sized businesses in the Nordics use digital tools to improve their operations. And digital tools can address areas like reducing financial administration through automation or use data for better decision making and forecasting or managing a sales force or adopting e-commerce. We help our customers with an offering that consists of several software components where we allow the customer to do a -by-step implementation, where they don't have to change everything at once. So we are the single point of contact, meaning that we take full responsibility for the entirety of the solution. And we work with the customers over long times where we gradually can extend the solution to cover more business use cases. So we sell and implement software from around 10 software vendors. These are the primary software vendors at this time. And we have a revenue share partnership with these software providers where we market and sell and implement their software to new accounts and make the customers successful in using the software over time. So the business model for us has three revenue streams. We have the software revenue from the selection of third party software together with integrations between the software that we develop in-house. This is on a subscription model where you pay as you use and this revenue stream is 20% of our net revenue. Just under two thirds of our revenue is from professional services where we implement the software and we make the customer successful in using the software over time. We also do custom development and custom integrations when needed. The third part of our business model is our single point of contact support, which is on a recurring fixed price model. In this, we can also cover things like IT security, infrastructure, internet access, and so on. So I've been the CEO here since 2010. And during this time, we've had 10 consecutive years of growth with increased profitability the last 10 years here. Last year and a half, we've prioritized reducing risk in what we perceive as an uncertain macro environment by focusing on our profitability and cashflow. And now in 2024, we are slowly getting back into growth mode again. Historically, our growth is from a balanced combination of M&A and organic growth. And this is also what we expect going forward. I've shown this slide many times before. Next time, you will also see Finland as a geography as we did a smaller acquisition there just after this quarter ended. Sorry. Our primary target is mid-size companies with at least 50 million sec in revenue. We have around 4,000 active customers. Typically in a year, no one single customer is more than 1% of revenue. There is no size limit upward somewhere on ModelWorks. And we do have quite a few large corporations as active clients, but we don't actively target the enterprise segment in our sales and marketing. We can combine our software components in a modular way and we've created packages to fit different industries. And these packages are often made up of the same foundational components with some industry specific add-ons. All in all, the customers are spread through many different industries. So let's dive into specifics for financials in Q2. The super short Q2 summary. It's not a great market for growth, but I'm happy to report double digits top line growth with improved margins. The market is still quite passive overall with long sales cycles. We do however, feel that many of our customers are expecting things to get better. So we had strong sales numbers in the end of the quarter. We ourselves are getting back into an M&A agenda. We've been working on that for the entirety of this year and we're leveraging the finance agreement we finalized last quarter. We have several ongoing discussions and we think the M&A market is functioning well right now and it's relatively stress-free. We get the time we need to take good decisions. For financials, overall growth 13% with organic growth of around a bit over 5%, 211 million SEC revenue compared with 186 last year. The first quarter of this year was negatively affected by an early Easter, but this quarter we got two extra working days compared to the same period last year, which translates to around 2% more revenue for us. We feel pretty good about this. We know the market has been slow in general. So we do feel that the market is a little bit more optimistic and we see larger average deal size this quarter, even if closing details take longer time than even than what it did a year ago. So year to date, we're up around 9% in revenue. Profitability I think is the financial highlight of the quarter. EBITDA from 34 to 44 million SEC, which means the margin improvement of almost 3%. Somewhere around one and a half to 2% came from the extra working days. It's satisfactory in general to improve margins in these market conditions, even when taking out the effect of the extra working day. So we are at 21% margin in the quarter and 20% year to date. I must also say I like the quality of our income statement in general. It gets better the further down you go. Ending in earnings per share, that has improved really, really well, plus a really strong cash conversion with operating cashflow being up more than 40%. I'm getting some questions sometimes around the adjustments we do to EBITDA. We think that the adjusted EBITDA is the most relevant measure because the difference in the adjustments are due to some conditional payments resulting from M&A activities being reclassified as personnel costs. After we did the conversion from K3 to IFRS as accounting standard last year, we're not doing deals in the same way now. So the adjustment on the EBITDA should be very small going forward. And you see that the adjusted EBITDA and the true EBITDA is similar levels now in Q2. Moving into the segments in some detail, we had a really strong performance in Sweden with exceptional margins. Norway has good growth due to the acquisition of integrations partner that's been performing well all year. And we took some one-off costs due to a reorganization this quarter where we had to lay off some stuff to improve efficiency. And that's taken in, that cost is taken in its entirety over the result in the quarter. Denmark is underwhelming in a slower market, but the key thing for us is reaching scale over time in our new offerings here. And it's just been one step forward and one step back the last year, but we think we are moving in a direction that we want over time. Again, recurring revenue stream from software shows solid growth with the LTM numbers being up 29% year over year. The increase in the quarter was actually 39% up from Q2 of last year. The increase in growth rate is due to the acquisition of the integrations partner that accounts for on half of the growth. But as you can tell, we also had really good organic growth here. So recurring revenue is growing a lot faster than the revenue from professional services. This shows the value of our balanced business model with several revenue streams. So short update on the market conditions and our priorities going forward here. This quarter, we didn't find a single true answer from our sales KPIs. They are pointing in different directions to be honest. That's a mixed story. On the top end, we see good KPIs with average order size being up almost 20% in our large system sales compared to last year. Shows some willingness to invest. On the other hand, we still see really long sales cycles around twice the historical average and longer than the same period last year. It does seem to me that we're spending too much time on deals that won't close. This is not strange in a slow market because sales people tend to wanna fill their sales funnels with the deals that are based on hope more than that they actually will close. So sales management is very important in a slow environment. This is a priority for us internally for Q3 and Q4. Overall though, we think we are in a really good shape. We've spent, like I said, a year and a half on actions to improve margins and we have improved and we've kept them at really solid levels despite the challenging market. There are no changes in terms of strategy. We're executing on a business model that we've implemented and refined for over 10 years. So the plan is to continue on a long-term profitable growth journey with, like I mentioned before, an increased focus on M&A activities also the coming quarters. All in all, a solid quarter. We think we are in really good shape financially. Lastly, I want to share an update on one of the prides of our organization, our trainee program. We were a little bit hesitant in committing new costs early on this year and we were considering running a scaled down version of the trainee program, but we do feel that we are moving into more of a growth mode and we will be adding around 18 new colleagues this fall. Bit of a reminder here also to all of you that Q3 is our toughest quarter. Of the year financially due to the holidays first and due to this investment that we always do in the fall. However, this is an investment for future growth. We have a 10-year track record with really exceptional results. So I'm very much looking forward to meeting all my new colleagues in August. So that concludes the presentation. If there are any questions, please feel free to ask. Hampus is not joining me today, but Hanna is joining me. So hi Hanna, did we get any questions on the call today?

Yes, we have Tom, I'm sorry, going to Richard and letting him speak now. Tom. Perfect, thank you,

Kim. Can you hear me?

Yes, yes, we hear you.

Perfect, just a question on the M&A, can you give us any sort of direction on the price tag? 1 million euros annual revenue, is that correct?

Come again?

On the Finnish acquisition here. Yeah, just sort of direction on the price tag. Yeah, we didn't

give the, we didn't mention the specifics because we saw that it was smaller than what was, than what was necessary to give information on and the more, for it to be classified or important for an investor. But it will be in the notes in the coming quarterly reports because all the acquisitions are in the notes to the, to the report. So you will get that in the next quarterly report when we actually, when the deal is closed.

Yeah, and then on Norway you had some restructuring or was that cost sort of the quarter? Otherwise the margin was sort of normalized. Can we expect it to continue improving over the second half of the year?

Yeah, so Norway, if you recall, I had in Q1, I had some specific project related issues. And I took some costs around that. That problem seems like it's figured out. We had some issues going into the quarter also and probably April, but then from May and June, it's actually been pretty much back to, back to normal delivery in Norway. So it's been okay. However, we chose to do another restructuring with a reduction in workforce actually. So this quarter, it wasn't related to, to some of the quality issues we had in Q1. It was another thing, but we decided to do an organization and remove the reduced headcount a little bit. And we got some costs around that. So we took that in the quarter. I mean, we're not doing it, we're not taking that aside and calling it extraordinary or something like that. It's right in there as personnel costs in the quarter, but personnel costs were then a little bit high because you end up paying, maybe someone gets paid for six or nine months or five months or something like that. And you take, we take the entirety of the remaining salaries and take the cost for it to this quarter. So salary costs were a little bit higher, but they should be a little bit reduced going forward. That makes sense.

And on the trainee efficiency, you have quite strong metrics here for the past years and we expect similar dynamics here with the trainees becoming profitable after what, six to eight months? Yeah, I

think eight is the best I've ever had. We were a little bit slower this year, I think we, but they are profitable now, the ones that we hired in August. So it's not as good as it was two years ago. I think that was the best one in 2022, but it's another dynamic also, it is still good. So we're about on the same numbers that we had 2019, 2020 in terms of how long time it takes to, for the trainees to become, become, to add positively to our income statement. But it's not as good as the best year, but also something that I was gonna say that connects to this. It's a little bit with personnel turnover because personnel turnover among experienced staff has reduced a bit. So with lower personnel turnover, it's actually a little bit harder to get the trainees into projects quickly. So we have to work actively on that. So it's good and bad because either the times are really, really great and it's easy to sell and you have a lot of work and it's easy to get the trainees into production, but then you probably get too much personnel turnover and you get costs around that. So you need to hire even more people. And now it's a little bit slower environment and it takes a little bit longer time to get the new employees into production. But on the other hand, you don't have to have quite as many new hires to get the growth. So it's two sides of the same story, but it's not a significant difference this year compared to last year.

Just a final one for me on salary increases.

Yeah.

Do you have any sort of range?

Our salary increases as they are most of the time, they're a little bit higher than what the norm is in terms of when you hear about the collective bargaining agreements. And so when we tend to end up in paying our people a little bit more, but then you offset that by adding a lot of people that are less experienced. So you work on the pyramid all the time. I would expect salary increases somewhere between on someone who's worked, the average increase on a year on someone who's worked, who was employed a year ago and is employed today on average is maybe 5%. And then, which is tough over time because charge out rates are not increasing by 5% this year. They're moving very slowly. So that would be tough, but that's why we also need to keep on hiring new people that comes in and learns and grows and evolves with us to offset that cost. The net salary is

around 4, .5% with lower personal turnover.

Now net salary increase is probably less, but on a person, if you look at the charge out rate, what did you mean by net salary increase? Yeah, including the personal turnover and the

recruitment. So just sort of the report. A little bit lower,

probably a little bit lower. There are many factors going in here, but probably a little bit lower. Maybe, Anna, do you have, I think Anna is on the call. I've been isolated here because I have a bit of a cold, so I'm trying not to make my colleagues sick here, but see if my CFO Anna is on the call. There she is. Hey. So Sally, I got a question. Do you know from on top of your head what's the net effect of the salary increases when you take into account the new hires, employee turnover? 2%? Yeah. Yeah, something like a 2%, Thomas, is probably our best guess. Perfect guess. What's happening? 2 to 3%.

Thank you, Tom. I have Jacob Benen who would like to speak. Go ahead, Jacob.

Yes, hello, can you hear me? Yeah. Great, I asked some questions in the chat, but I realized there were quite many, so maybe it's more efficient to take them here. So my first question is that in Q1, you stated that recurring revenue from software grew 32% and that one third of that was organic. And in this quarter, you state that recurring revenue from software grew 40% where roughly half is organic. So it therefore looks like your organic year on year growth in recurring software revenue had an uptick from 10% to 20% between Q1 and Q2. So can you elaborate on what changed in Q1 versus Q2?

Yeah. I think that we had some little bit higher. So yeah, it's a good question actually. It's a very good question. And I think pretty much you and me are probably the only ones and maybe Tom on this call that spends time thinking of this. But it's a very good question and needs some elaboration. I don't know exactly, but I do agree with your assessment that it seems like organic growth increased a bit. One of the things that happens here is that if you look at churn, then often the effect of churn comes when we have customer churn, we typically don't have that much, but there is some customer churn and there's some downscaling in existing implementations. And sometimes some of that shows up more in Q1. So maybe it was a negative, maybe we had a little bit stronger growth in Q1 than what we said, but it was offset by a little bit higher churn than usual. So usually you get less churn. It's usually around year end that if someone does an initiative to optimize licenses or reduce licenses that would happen more in Q1. Other than that, it's a little bit, this revenue also, it's not quite, since we don't own the software, sometimes we can have an agreement with a vendor where we buy a certain number of seats or a certain transaction volume of a software and then it's up to us in selling it and deploying it and pricing it towards our customers. And then the margin, the net revenue from software, it varies a little bit depending on how efficient we have, how successful we are in filling the entire volume. So we did get a little bit better metrics in Q2, but there are many different things going in here. It's not one single thing. There were also some price increases, but that was no difference in Q2 compared to Q1. So, but we do feel, you asked, Kero, so which for future reports where this we could specify the organic growth. I understand that you would want that. That does make sense. It's not entirely easy to do that because sometimes some things cannot be fully attributed to what is M&A and what is organic. But we could do for sure. I mean, we could do some level of estimation around that, but sometimes we acquire a company that has the same software stack and we may change the pricing after an acquisition. And so then what does the extra revenue come from? Is it from the acquisition? Is it from the organic change of price? Or it's not 100% easy to attribute all the revenue to what exactly cost. It's in the case of integrations partner, it's however, relatively very easy. That's why we talked about it because they have an integration platform that we sold on a very, very limited scale before we acquired them. And now we have a lot of revenue in it. So we just take the entire revenue from that platform and call that M&A revenue. So it's easy this time, but sometimes other times it's not that easy to say what's organic and what's to M&A. But yeah. Is that an acceptable answer to you, Jakob? I think this also, we could actually do some deep diving in ourselves in this.

Yeah, for sure. Yeah, I would love that. I would almost be,

I'm not sure if this is the right thing to say. I was pleasantly surprised to be honest, the numbers. We did, as you know, I mean, as you realize, this is, we closed the quarter. It was only, it's two weeks ago. It's the quarter closed. I mean, you do the invoicing, you do those things. I was, and we don't always know everything and have the time to do a really deep down analysis, but I've been pleasantly surprised around the growth. Yeah. In the general growth of the recovery.

That's a totally acceptable answer. It's just, it's an interesting metric to follow, but I'd rather that you say that one third roughly is organic, then you wouldn't say anything at all. So great, great for that. But on that topic, actually, I had a question in regards to, you said that like, if you make an acquisition and you might do some price increases and stuff like that. And I have a question about like your acquisition strategy and how the business model first, how it works. Is it like, if you acquire a company that's a reseller of a software that that excited is already a reseller too. Can you explain like what happens to the percentage of kickback that you receive? I guess, I suppose you make some kind of increases there, but can you elaborate on like the dynamics there?

Yeah, yeah, because actually the price increase is probably not the right wording a customer. It's more on the professional services where you would adjust pricing. You wouldn't change your customer pricing on the license, typically, if you do an acquisition. But our net revenue from software can still increase because we may have a better partner program with a vendor. So if we resell a certain, if we are, let's say that we have a software provider that has different partner tiers, where there is one like the platinum tier and the gold tier and the silver tier. If we acquire someone who's on a lower tier and we move that into, and when we are on a higher tier, we would typically get a larger portion of the software revenue, but also have a higher expectation on how much we offload the vendor from the customer relations. So for instance, we may have a higher partner commission, but we may also have the responsibility to provide a full support to the customer, whereas someone who was on a lower tier maybe relies on the software vendor's support. If you forget what I'm saying. So it's not, it's varying from different software providers, but it could certainly happen that we acquire a customer base and when the customer base is moved into us, then that would increase just the fact that we are, the new owner of this license base would actually improve the software margins, if that was what you were asking.

Yeah, that was what I was wondering. That's

not, I mean, that's something that actually does happen when we've done, you've seen us perhaps do some customer base acquisition that has actually happened in those instances. It has not been the main driver for, it's mostly around efficiency in support and efficiency in professional services by having a larger customer base. That's the key driver there. And then long-term, if we do things that increase cross-sell, so we can sell and implement other software components into a customer base, that's the real, that's the real big nice synergy. But some of those little small things, this actually helps also, it can improve margins a couple of percent in something we acquire. This is to keep on elaborating on this. It's often a bit challenging in our M&A because we run our business now at around a 20% margin, as you see, and many other companies in our space, they run their businesses on five or 10% margin. So that's actually a bit of a challenge when we acquire something because we don't wanna reduce our margins. So we have to do a lot of active work to make sure that we actually improve the margins in the companies that we acquire if we wanna stay on these levels of total margins.

Yeah, but I just think that's kinda interesting too. I would like to get your take on how does like the software vendor react to that kind of dynamic where firstly they pay maybe a 20% kickback to for a certain customer base and just because you acquire it, then now all of a sudden they have to pay, let's say 25% kickback. How does that affect your relationship with the software?

Yeah, I mean, I see where you're coming from. We think that it's a part of a whole, I think we like to think that we provide a lot of value back to the software providers where we sell and implement and take care of the software and market it. And I think they think, I mean, that portion of it is probably not their favorite portion of it. But on the other hand, I think they like to see us investing and being and reinvesting and reinvesting in their software because then they know that we will keep our sales force working on staying on the highest tiers and keeping on selling their software. So it's actually not a big subject of, I guess if we were to take 100% of the partners, maybe at some point it would be costly for them. But I think in general, they probably see that we provide a lot of value and we make sure that their customers stay on for a longer time and so on. So it has not been a big subject of discussions actually.

Okay, great, thanks. And my next question is at the end of 2023, you stated that you will start like a trainee program but focused on sales. And you elaborated some on the trainee program here in your presentation, but how is this specific trainee program progressing and how does it align with your, as you state in the report, the restraint markets your experience?

Yeah, so the biggest portion of that, we did hire some additional salespeople early on this year and we do have that. And then we're adding a lot more in August. So we're actually the full on trainee program for salespeople starting this August. I don't have the number on top of my head, but I would say it's at least 15 people this fall. So it will be a large undertaking for us. Sorry, did

you say 15 or 15?

It's 15 to 20. Somewhere between 15 and 20. I don't actually have the exact number on top of my head right now, but it's in that range. And we've added around five earlier on this year. So your second part of your question was how is this, how we expect this to perform in this market environment. Now, and I would say, that's how I understood your question anyway. I would say it's challenging. On the other hand, if you are to learn to become, if you wanna get trained to become a salesperson, maybe a market environment where it's tough to sell is a good starting point. And then hopefully the market gets better as long as you learn your skills. So it's gonna be a lot of, it is a lot of focus on opening up new customers and opening up new relationships. Not so much doing deals right away because maybe the demand is not there, but just opening up relationships and talking to customers and getting to know them. And then we will be there when they are ready to buy something. But a lot of companies have needs, but they're not willing to commit spend to their needs. But it's one of those things where we think, we have these strong margins, we'll have a relative advantage to other people by being able to do outwards long-term growth oriented things in a market condition where maybe a lot of our competitors and other companies in this business are more inwards focused. But I mean, for sure, it will not be easy for these guys. It will not be easy, but at least when they perform, we will know that they are really good.

Yeah, I understand, thanks. And-

This is actually a question. We should maybe have a separate call. This is actually a great topic or discussion. These were great questions, thank you.

Yeah, thanks. And my last one before I won't bother you anymore is- Don't worry. You state in the report that you still feel that you have much to fine tune in the organization in terms of sales and internal efficiency. Do you have any low hanging fruits in mind or?

Yeah, first it's not low hanging, but it's a resource utilization and in for instance, the e-commerce field and for instance, in Norway, we're resource utilization and then we have, we need scale still in some parts in Denmark. So it's not low hanging in that we can do them, just do them. It's not that the easy things we've done, but with a little bit better resource utilization, we should be able to... And resource utilization is about the balance of our sales success and our capacity. So keeping them balance, but it's a few areas where we've underperformed and we should think with normal performance, if the worst areas have normal performance and the best areas keep on the performance they have now, overall margins, we should be able to find two, 3% more. So it's not, I mean, it's satisfying to have a 21% to talk about the market being tough and having a 21% margin, but I prefer 25. And we're not quite there.

Okay, perfect. Thanks. I got all my questions that I posted in the chat. Thanks, I hope those are acceptable answers. Yeah. Yeah. So thanks a lot for taking time.

Thanks, no worries. So, Hannah, do we have any other questions?

Yeah, we have an anonymous question here. It is, have you seen a trend where e-commerce customers start to invest in new systems again?

Yeah, I thought actually, in Q1, I thought that they had started. We've seen this being pretty slow in Q2, to be honest. So we think the e-commerce customers in general are doing better. So the active, the existing customers are doing better than they were a year ago, but in terms of new investments, we still see it being very slow. So I know, I don't really see the trend. It hasn't happened yet. So I guess being successful in e-commerce right now is around engaging with existing clients more than having exceptional levels of new sales. There are deals to be had, of course, but it's still quite slow.

Thank you. All right, no further questions.

All right, thank you for listening in and thanks for the great, albeit a little bit complex questions, but I hope all of you have a nice summer and then I'll talk to you maybe around the next quarterly report, thanks.