Exsitec Holding AB (publ)

Welcome to this quarterly update for the third quarter of 2024 for Excitec. Presenting will be the CEO, Johan Kallblad. And without further ado, I will leave the word to Johan.

Thank you, Hampus. And thank you for joining. Talking now is me, Johan Kallblad. I've served as CEO of Excitec since 2010. I expect this presentation to be around 15 minutes and it is possible to ask questions via the chat or the hand raise function in Zoom. So I usually do. I will start off by making a short recap about the business. And after that, we'll cover Q3 financials and talk a little bit about our priorities going forward. So Excitec, we exist to help medium-sized businesses in the Nordics use digital tools to improve their operations. And we are a one-stop shop, so the customer can focus on their core business and leave IT to us. Digital tools is an important part of almost every business wanting to stay competitive in a mature market like the Nordics. Our offering can address areas like reducing financial administration through automation or use data for decision making. And it can also be creating integrations and information flow between business applications that are used in an organization. Like I said, I've been overseeing this operation as CEO since 2010. It took us a few years to set up this current business model and to reach scale. But since we did that in 2012 or 13, we've had 10 plus years of good solid growth and both top line and bottom line. So Market conditions have made growth challenging for the last 18 months or so, and we are working ourselves back into a growth mindset. We have increased headcount quite a lot this quarter and going after the quarter, we're around 625 employees in Sweden, Norway, Denmark and three colleagues in Finland. target market is medium-sized companies typically at least 50 million sec in revenue and there is no size limit upwards on where the model works but we don't actually actively target the enterprise segment in our sales and marketing and since we don't have the largest companies in our target market we have a quite a large customer base typically in a year no one single customer is more than one to two percent of revenue And we combine the software components that we work with in a modular way. And we created bundles of software to fit different industries. They're often made up of the same foundational components with some industry specific add-ons. And all in all, we sell and implement around 20 software packages that we combine in this way. And these are the primary software providers at this time. We have revenue share partnerships with the software providers where we market and sell their software to new accounts and we make customers successful in using the software over time. We also add our own in-house developed integrations to this. A dream customer can use up to perhaps five or six different components from us. The business model built on three revenue streams, sales and marketing is focused on selling software and integrations. This is sold on a subscription model where you pay as you use. And this revenue stream is around 20% of our net revenue. Two thirds of the revenue is from professional services where we implement the software and make the customer successful in using it over time. We can also build, do custom development and custom integrations where needed. The third part of the business model is that we offer the customers a single point of contact support on a recurring fixed price model. And in this engagement, we also can take care of infrastructure, internet access and IT security. And we try to give the customers a predictable cost structure with much of the running costs on a subscription model. So going into specifics for Q3, on a high level, this is what defined the quarter for us. As always, a reminder, Q3 is seasonally very weak given the vacation period for us and our customer. But this year was extra internally intense for us by design as we took on around 115 new colleagues. About 80 people went into our trainee program for consultants and 20 people went into a new sales talent program. And the rest of the people were already experienced in our offering, including a number of rehires of people that have worked with us previously. On the customer side, unfortunately, we had a really slow start of the quarter. We did see improving utilization and pretty good sales numbers towards the end of the quarter. Still a long lead time in closing deals, but as long as the market sentiment is not getting worse, we should be able to get back into organic growth over the coming quarters and Lastly, even when we struggle with overall revenue, we do see good growth in recurring revenue. And this is because our customers continue using the software and integrations and new implementations sold in prior quarters are going live, even if the general consulting market was weak. So looking at the numbers here, total revenue for the quarter was 161 million, an overall growth of 5%. However, with a negative organic growth of almost negative 5%. Most of the negative growth came from Norway, where it's been one step forward and one step back for the entire year. We do see really strong sales numbers in Norway towards the end of the quarter, actually up about 100% from last year. But we've continued struggling with some quality issues and an uneven resource utilization. The biggest segment, Sweden, organic growth was flat with a slow start and a stronger ending of the quarter. And we did have definitely the capacity to take on more work. But we've also been very occupied with training new employees here. So this is where most of the new people are. Adjusted EBITDA. It's where we really see the cost of the new employees, margins of around 4% compared with 8%, almost 8% last year. Obviously not great, even if it's not that big of an outlier compared to historic Q3s. Time will tell if we're making the investment in new staff too early. Given the market conditions, these things are hard to predict, but we do feel the combination of some easing in the macro environment along with strong underlying finances for Excitec and a pretty good order intake should make this a long-term good choice for us. We have 10 years of track record in running trainee programs and we expect to recoup the costs, the investment sometime in Q2 of 2024. Year-to-date earnings up 22% from the year before. Looking at the segments, Sweden has been performing on exceptional margins for a long period. In Q3, of course, adding a lot of staff is costing us a lot of money. We have been running at profitability levels that are over our long-term goals in Sweden. So we do feel creating conditions for long-term growth is more important than optimizing for short-term profitability here. Norway again had good overall growth due to the acquisition of Integrationspartner, but organic growth has been very weak in the quarter, which is a disappointment. I realize I've been saying that the performance in terms of growth should be better and more predictable for a couple of quarters now, and still we are not there. We do see really strong sales numbers in the quarter, and I must believe that this will turn into better growth numbers. Denmark, again, is underwhelming in a slow market. And again, the key thing for us is reaching scale in new offerings where there's been one step forward and one step back also here. For practical reasons, we package Denmark and Finland here. Finland is small with only three employees at the time. So after these numbers, I need some financial strong points. And I do want to remind the audience that we do see good growth in our recurring revenue from software. This is the in-house developed integrations, along with recurring margins from resold software. We see a growth of 32% here year over year. And the growth comes partly from M&A, where we have a larger customer base and a broader offering. And to some extent, it still comes from price increases. These have been slowing the last year, but were strong primarily during 2023, leading into 2024. And it is growth from customers deploying new software. This is an important contributor to our earnings. And it's also a good proxy to see that we have a strong offering and customers continue using and deploying software from our offering. So... I want to finish up with a short update on the market conditions and our priorities. Some comments on the people here. There was a massive undertaking for us in hiring more than 110 people in the quarter. So average full-time equivalents was... FT East was 33 people added from Q2 to Q3 compared to 14 last year. But since most hires started in the second half of the quarter, outgoing numbers is actually a lot more. It's around 80 people more on staff after this quarter compared to what we had going out of Q2. Direct additional costs compared with last year in the quarter was, if we look at the sizing of the trainee program, was around 4.5 million in direct salary costs and of course a lot of overhead in terms of training and mentorship also. The 4.5 million was the additional cost compared to last year, so probably 14-15 million for running the trainee program in the quarter. With 10 years of track record here, we expect a positive contribution from Q2 of 2025 going forward from this initiative. The market, not a single answer. Overall, we see sales growth of 5% in the quarter. We started slow, but in September we saw a really strong end to the Q3 sales. We also see that sales cycles are still longer than historical mean. No real improvement, but not really getting worse either. On a really positive note, existing customers are starting to scale up. We see a big increase in existing customers ordering extra licenses and services, especially towards the end of the quarter. October has also started on a good note. So we do actually feel pretty good about this. Looking at M&A activities, we see an increased level of M&A activity, especially driven by ourselves, I suppose. Valuations are feeling that they are on historically average levels, about the levels that we paid before. We're not looking for massive acquisitions at this time. We want to use the existing debt structure. So we do expect free cash flow and debt to be primary sources of financing going forward. We did close two deals early in Q3. These were very small in terms of the revenue implications. But we have a strong M&A funnel and reasonable competition, meaning that we can take the time we need to make a solid due diligence. So we do have a pretty positive outlook on opportunities for M&A going forward. So as for business priorities going forward, three priorities. The first one is the operational excellence, where we are typically running at around twice the margin of our peer group of publicly traded IT services companies due to a higher level of reuse and a higher level of recurring revenues and obsession of taking good care of customers over time. This is always something that should be expected of Excitec. The second priority is talent development. We're doing a huge investment this fall in training both new consultants and sale people. And we want to be a great place to start a career or develop leadership skills or sales skills. So obviously now a huge priority for us. Lastly, we are investing for growth in terms of capacity, which means we need to acquire more customers through organic sales and through M&A. We think that we are early compared to competitors in scaling on for growth, and time will tell if we are too early, but we are switching more to a growth mindset after a year and a half of consolidation. So Last slide here. What's up with me? So after this is a news report that came out about two weeks ago after 14 years as a CEO, it's I feel it's time for change. So I've asked the board to start looking at replacements for me. The timeline is open, no rush really, but then there's no reason to have it take more time than it has to. And I'm really looking forward to continuing working with Excitec from a board level. So I'm not leaving the company per se. So this concludes my presentation. And if there are any questions, please feel free to ask.

Yes, so we have a question. Jacob, Benon, you can activate your microphone. Yes, thank you.