Columbus A/S

CSE:COLUM

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Columbus Interim Report First Quarter 2023 Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded.

I would now like to hand over to your speaker, Mr. Søren Krogh Knudsen, CEO. Please go ahead, sir.

[Soren Knudsen, executive]

Thank you. Thank you very much, operator, and good afternoon to all of you. Yes, my name is Søren Krogh Knudsen, and I am the CEO and President of Columbus. And here with me, I have Brian Iversen, our CFO, to help me through today's presentation. And I suggest we all start by going through the agenda on Slide 4 to see what's ahead of us.

So at today's call, as always, we will cover the -- first, the financial highlights of Q1. Then following that, Brian and I will cover the financial review in more detail. And then we will end the presentation with an outlook for 2023 and long-term guidance, followed by a Q&A session, should there be any questions. And with that, I think we are ready, and I will start us off on Page 5 with the financial highlights.

So as you can see, the quarter stands at DKK 398 million, which corresponds to an increase of 7% in Danish kroner. However, 12% growth in constant currencies. And following my run through here, Brian is just going to explain the currency impact in a bit more detail, so you'll have the full insight on that. Our EBITDA grew by 33% to DKK 39 million. The EBITDA margin increased by just shy of 2 percentage points to 10%. And the recurring part of the total revenue increased to 4% -- or increased by 4%, I should say, to DKK 49 million, which leads to an after-tax results of DKK 15 million, which again corresponds to an increase of 14%.

On the right side, you have the split between the business lines. We will comment on them in a bit more detail later on in the presentation, so I won't go through them in detail here. But in the lower right corner, I think it's worth noticing the efficiency development, which basically now stands at 67%, which compared to the same quarter last year is an increase or an improvement of 5 percentage points, and that is a very large part of our operational improvement that stems from that.

So from a commentary perspective, I think we see Q1 as a good start to 2023. It's driven by an intake of -- a continuous intake of new customers that are bigger in size than what we have on average. So we're driving up the average size of our engagements. We are very true to the 3 selected industry verticals. So we have the vast majority of new customers coming from that, and they are sort of the right customers for us in terms of the ideal customer profile that we devised in our strategy.

So overall, we see a good high activity level. But we're still investing quite a lot in sales, so we also have a strong stock of work in pipeline, which allows us to see further ahead. Our cross business line, so the collaboration between the different service units, has improved significantly. Although I would say this is one of the areas where we are only starting to harvest the full potential. So the cross-selling between the business lines is going up. And on all new big customers, we are represented from the beginning with more than one line, but we have a big stock of customers where we can improve our performance in the future.

When it comes to cross-border operations, which is more to be seen as the same service unit but in just different geographies working together to even out capacity spikes, I would say, we have still improved and we are getting pretty close to optimal here. So basically, our resources flow very freely, and we deliver in -- some consultant in Norway can deliver simultaneously on 2 projects, one in U.K., one in Norway, and then move on to a Swedish project and assist on a U.S. project. So we are very mature in that sense.

Also, project quality has had a great focus. Basically, over the last 2 years, we've been concentrating on becoming more accurate in our predictions for resource consumption that leads to a much better customer experience because we tend to deliver on time within the predicted cost and resource allocations. But it also helps us because we can then plan for the next project. And we are much more likely, of course, to have a follow-up project with the same customer. So that has been a big driver of our improvement as well.

Finally, I think I would like to just call out that we're seeing Denmark returning to genuine growth here. We've talked about that with those of you that have participated on the call before. Denmark has had a high activity level in the past 2 years. But a lot of the hours delivered by Danish consultants have been delivered in -- primarily in Sweden and Norway. And that led to a temporary loss of focus on the Danish customers and the Danish revenue itself, which we have worked hard to rebuild the pipeline and gain traction and take more market share in the Danish market. And I think that's what we are seeing now in the quarter.

And not for quite the same reasons, but we're also seeing a very big pickup of our U.K. performance, driven by, again, I would say, the same stern focus on structured pipeline building, going for the right customers, being very well organized in terms of our partnerships with our big technology partners, but also smaller specialist companies to make sure that we are -- we have the best offering out there.

Then my final opening remarks here will be about the ICY acquisition. That's mainly to say that it's actually not included at all here. If you remember, the effective date was at April 1, so it will be fully included with Q2. But again, just to reiterate, we're very happy about that acquisition. It -- we thought about long and hard whether to enter the security market, but we had a lot of customer demand for it and we saw a really good fit with ICY. We are well underway with the integration. They've already moved into 2 of our offices in Jutland, and we have the one remaining here in Copenhagen.

And we are doing -- we have actual cross-sales going on already, introduction to customers back and forth across the 2 portfolios. And then next step will be to build out the 24/7 operations for the ICY portfolio. They didn't have the size to do it themselves, that's why they were also interested in us, so one of the reasons. And then we're now looking at where to establish, basically we already know where to establish, and we will be establishing the 24/7 service operations for ICY within Columbus.

And I think with that, Brian, I will hand over to you for the currency focus.

[Brian Iversen, executive]

Yes. Thank you, Søren. And yes, as you said, we have definitely seen some headwind on the currencies here in the first quarter compared with same quarter last year, and that is actually in some of our major markets, which actually in the past have been very quiet on the currency development scene in the Scandinavian markets. So it is relatively new, and that's why we decided to add a slide on the topic just to explain very briefly or to show how the exchange rates have developed.

And we have already seen some impact on our growth comparing like-for-like numbers. On the graph, you will see the development in the Swedish and the Norwegian crowns exchange rate against the DKK. And these 2 countries or markets within Columbus account for roughly 60% of our revenue. So it is a big part. And both the Swedish and Norwegian crowns have decreased around 7%-ish when you look quarter-over-quarter. That result in a 5% negative impact. So as Søren rightfully mentioned, we have seen a growth of 7%, but are we looking at it like-for-like or in constant currencies, it's a 12% growth.

It's also worth mentioning that as we have our cost primarily in local -- delivered by our local consultant, our bottom line is not affected in the same manner and we are not counting on that as such. But we see a fair mix between where we have the revenue and where we have the cost overall in the business.

So this is just a brief update on the currency and how we come from the 7% to 12% growth when you look at it in constant currencies. So Søren, I'll hand back to you.

[Soren Knudsen, executive]

Super. And I'll just cut of the business lines, so the service units. First, the development in revenue and then in the contribution. And if we look at the business lines, we see growth across most of them. Currencies have become quite an important topic for the first time since I've been here, but Brian has just made a remark to that. But we have included here for your reference, the growth, both in -- calculated in Danish kroner and you can also see it in Danish -- sorry, in local currencies, so you can see for yourself.

I think if we just go through the headlines, Dynamics is moving very, very fast for us, particularly Sweden and Denmark are big growth bastions. We have a lot of business in both Sweden and Norway already. So they have been affected by this currency development. A bit of a focus area for us is the M3 business unit, our second largest. So we do have marginal growth in constant currencies, negative growth in Danish kroner. We have a big program with Infor, that is the technology company behind M3, and ourselves to drive further activity.

We've been hit by a few postponed projects. So we're driving hard to get our activity level up to what is their usual -- we're just running a few percentage points lower on efficiency than what we usually do for that business unit.

Our Digital Commerce units continues to expand very fast in Sweden, and we are also keeping traction in our Danish, Norwegian and also our U.K. unit, where we've made some investments in new leadership that have proven very successful for us. Data & Analytics, good traction in most of the markets, with Sweden moving the fastest. Also, I would say there, we have had a slight delay in one of our Danish projects, which we have resolved. Denmark is quite a good chunk of the overall Data & Analytics, so this business unit has not been as exposed to the currency impact.

Customer Experience is also moving very well ahead, and the main growth there comes from Norway, the U.K. and Denmark. So looking at Strategy & Change, it's a fairly small unit, where we haven't seen the progress. We are still actually quite pleased with the performance, I would say, we're getting from them. They are instrumental in the way we've changed our way of selling. So they orchestrate a lot of our go-to-market efforts. We need to make sure we get them better engaged on the delivery side of the projects as well going forward. So that's my comment to that.

So I think, overall, we're satisfied with the revenue growth in our business lines. And we expect to -- as you will hear further in our long-term guidance, to be able to continue our growth in the coming quarters.

Going to the contribution. I think I'll just start by explaining the difference between business line, contribution and EBITDA. We've chosen to increase our focus on business line contribution, and that is basically the profit level that sits below all specific costs to each of the business lines. So it means that it's much more independent of the currency fluctuations, and it also means that the leaders of each market unit in each country are fully responsible for that cost. So it's without any sort of group reallocation costs, which they may not feel as responsible for. So that's why we want to drive performance while we have this measure here.

So if we look at how that has worked, Dynamics, again our biggest unit, they've been really working hard for a long time on improving that efficiency, and they are running at very satisfactory levels at the moment and with a strong pipeline going ahead. So that leads to a contribution market -- margin of almost 30%, which we find actually quite or very satisfactory. Again, as I said before, M3, very sales invested at the moment, and that has had a little bit of a negative impact on the contribution margin. And you can see that they're running just shy of 20%.

So Digital Commerce has grown really quickly, as we said, on the revenue, and they have now reached a size which enables both growth and profitable business at the same time. So I think the contribution margin is very satisfactory there. And on the whole delivery setup that we've built is working well, and is also able to support the further growth. Access to talent, as you know, is a big thing for us. And this means that we have to find new and qualified people all the time. And we seem to have a very good setup here.

When it comes to the remaining 3 business lines, so Data & Analytics, CXE, Strategy & Change, they're still investing a lot in the top line. So they are driving good top line growth, and that does still impact their contribution. We're not looking for them yet to be the major cash cows, we're driving hard for big top line still from those units. And overall, we are satisfied with the contribution from our business lines, which is an increase in contribution of 15.4%. And that is the main driver also of the increased EBITDA and following earnings of -- at Q1.

And then it's over to you, Brian, for the geographical units.

[Brian Iversen, executive]

Yes. Thank you, Søren. And as you said, we changed slightly in the way we report, even more comprehensive reporting on our business lines down to contribution margin and contribution level, as Søren just highlighted. And at the same time, we decided only to report on revenue on our market units. This also goes in line with how we manage the company internally, how we performance and manage our business line executives and our markets.

But overall, as Søren already mentioned, we delivered a very significant growth -- service growth in Q1 in all our markets. And as already mentioned as well, Norway and Sweden were impacted by the weakened currency, but they both delivered above 10% growth. Looking at Denmark, we actually saw a very good start. And they are returning from a challenge in 2022, as we also mentioned in the last quarterly update. So we are very happy to see that they are getting a very strong foothold in our home turf. And especially within the Dynamics and Digital Commerce business lines, we see a really positive development and progress in Denmark.

A similar comeback, if you can call it that, U.K. have seen here in Q1, in a very challenging market environment or uncertain market, they came out with a growth in constant currency of 21%. And I think we definitely can say that they have regained their fleet and are delivering a profitable growth also in the U.K. markets. U.S. show a smaller growth, although at growth -- although the market still shows some challenging to operate in. We are not as big as we would like to be. But even though we stick on and we still gain newer customers and [indiscernible] grow. But that said, it is high on our focus and our agenda to this market.

So overall, the development in the market units as well as business lines is definitely considered in line with and above our expectations for Q1, and definitely a good start to the year. So thank for that to all the market units. And then my next slide, that is Slide 10, I will briefly comment on the efficiency and recurring revenue.

As Søren also mentioned in the highlights, we've seen a good growth or uplift in the efficiency with -- from 62% in Q1 '22 to 67% in Q1 '23. And this is, of course, a result due to our strong focus on optimizing our delivery organization and also strong customer wins in our different markets. That said, we are still working and still have a lot of positive development ongoing, especially our smaller business lines, which is growing into a critical mass, is areas where we still can optimize and get smarter. But we are on the right track. I think the efficiency graphs clearly show that. And at the end of the day, some of this improved, efficiency is driving down the EBITDA. So there is, of course, a strong [ correlation ] in that.

Recurring revenue increased slightly, although it remains on around 13% of our total revenue. As mentioned earlier as well, subscription is becoming a significant part of our total revenue, with the cloud products taking over. Care, which is the biggest part of our recurring revenue, has increased and did increase in line with our total revenue in Q1. We keep and have committed to keep a high focus on our recurring revenue. And I think we definitely want to have it at least on the 13% or even higher on our combined revenue going forward as well.

All right. That was all for the -- my comments to the efficiency and recurring revenue. Then I will hand over to you, Søren, on the outlook.

[Soren Knudsen, executive]

Yes. Sure. I will cover the outlook for the remaining part of 2023, and that is on Slide 12. And so we -- based on the acquisition of ICY Security, we have adjusted our guidance for 2023. And I would like to say just the guidance is solely related to the acquisition, and the expectation for the existing business for now remains unchanged.

As mentioned in the previous quarterly update, we expect organic growth close to or above 10%. And earning improvements through enhanced efficiency and focus also on the contract profitability. Revenues is then expected to be in the range of DKK 1.550 million to 1 point -- sorry, I will do that again. DKK 1.550 billion to DKK 1.600 billion, which corresponds to a growth of 8% to 12% in constant currencies. If the current exchange rate development continues, it will impact the revenue growth slightly negatively as we have seen and as Brian has alluded to.

The EBITDA is expected to be in the range of DKK 119 million to DKK 130 million, which corresponds to a margin of 7.4% to 9%. And of course, the outlook is subject to the general uncertainties in our markets, such as the current macroeconomic conditions and sort of, I would say, the higher-than-normal exchange rate volatility and some perhaps recession fear in some countries, although I think we are getting used to that now. It's part of our operating environment.

And we do continue to see a strong demand for our digital solutions and the transformation capabilities we bring to market. We have adjusted, I would say, to the slightly slower decision pace of some of our customers, and that has meant we have increased our business development and sales investments accordingly. Yes. And I think we expect those conditions not to improve during 2023. I don't think we have the reason to. And on the other hand, I think it seems to have stabilized somewhat. So that is our current operating reality.

And I think with that, we would like to hand over to questions, if there are any.

[Operator]

[Operator Instructions] We have no questions on the phone lines at the moment. I hand back to you for the webcast questions.

[Soren Knudsen, executive]

Yes. And I think we have a question from you, Jonas, I'm just reading through it. So the question relates to what is the reason that the EBITDA margin does not increase in line with the efficiency?

Okay. So I think I get it. In a company like ours, where salary cost is the majority, I think the point you're making is that the marginal revenue should fall directly on the bottom line. So why is there no direct correlation. I think that's the question. And yes, I think there are a few things that can impact that. We do sometimes use specialist subcontractors. And in an ideal world, you would use subcontractors unless you had 100% capacity utilized of your own people. But in reality, that is also some specialty skills or other reasons for us to do it.

And so -- and then there can be some investments also. There can be fee rate developments affecting. Yes, yes. So I think that's the best I can do to answer that. And then there's a follow-up question. With reporting of contribution per segment and fee down on almost DKK 9 million year-on-year in contribution, temporary and more structural issues and road back.

Yes. So Jonas -- so the question from Jonas here is like what's the outlook for M3, is it just a short blip or is it a little bit more of a structural thing?

And I think we would have to go with the second one, Jonas, here. It's -- just like with Dynamics, this is something we saw coming. And we've actually worked on quite a while to strengthen the pipeline further, optimizing our relationship, as I said, with Infor. The product that they -- the cloud-based product, M3, that they brought to market to substitute their old on-premise space is very, very good. So we get super feedback. But we need to improve our abilities to bring onboard new customers into that universe. And they are going for really, really big industrial customers like really global companies and it takes a while for us to build that pipeline. And we've been going at it for quite a while, and we have some very interesting ones coming through to fruition. So I would say it's not short term, but it's not like we've just started to turn the boat. We have started a long time ago to turn the boat on that one.

[Brian Iversen, executive]

Yes. Maybe I'll take the last one, that's about enabling functions, question three. And that's a good question. Enabling function is down 9% year-over-year on the FTE, but increasing 6.5% year-over-year in cost. So I wouldn't say necessarily there is any extraordinary numbers in this one. But remember, enabling function is also a facility. We have a lot of employees sitting in our support center in India, which, of course, is not impacting the cost as much as in other places in the world.

There have been some salary inflations over the period. And then there might be a few that have moved right and left in the organization, so there could be some kind of negotiation in that move. So it's a good -- it's a fair question, but it's not like there's anything extraordinary. It is just might be that when and what kind of people move and different costs. So that's my sort of quick answer to that one without being able to put exact numbers on each point.

[Soren Knudsen, executive]

Thank you. I think we've reached the end of time, and I just want to respect your [ batteries ]. So unless there are no quick final questions. I think we will hold it there for today. Okay. Thank you all for listening in. I hope to see you again or talk to you again, whatever it's called here, at the Q2 interim earnings report next time. Thank you. Just bye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.