Columbus A/S

CSE:COLUM

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Columbus Interim Report Q1 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Soren Krogh Knudsen, CEO. Please go ahead.

[Soren Knudsen, executive]

Thank you very much, and welcome to everybody. Yes, my name is Soren Krogh Knudsen, and I'm the CEO of Columbus. I'm accompanied today by Brian Iversen, our Group CFO. And at today's call, I will be covering the financial and operational highlights for Q1 of 2024, and then Brian will cover the financial performance for Q1 in a little bit more detail and also comment on our guidance for the year. We will end the session with a brief Q&A session.

So let's go to Slide 4 to begin the presentation. And overall, in terms of financial highlights for Q1 2024, I would say that we have had a good start to the year. As is being commented a lot in the media, there are some market challenges that we need to address. But it's something I find that we've handled quite well. So the overall sentiment is that we see this as a good start to the year. This quarter marks the start of our New Heights strategy. Our focus has been on continued implementation of the strategic growth initiatives that were sort of already commenced in the past strategy period, but we continue to implement them. But also we have been integrating our newly acquired company, Endless Gain, as well as my beginning statements really focusing on strengthening our both short- and medium-term pipeline in some of those markets where we see the market a little bit more hesitant than the under ideal conditions.

We delivered a 14% growth, which amounted to DKK 444 million compared to DKK 390 million in the same quarter last year. And organically, that means we grew by 11%. I think is Brian will comment on later. Currency has not had a big impact this year. So that's a big difference to Q1 last year, where we saw big currency impacts. The growth has primarily been driven by robust performance in Cloud ERP. So that's the Dynamics business division and M3. So it's our 2 biggest divisions that are really top performing at the moment.

We do find that there's a slight change in customers' priority. We find that sort of words like resilience, agility, operational continuity are a bit more prioritized, which is very likely linked to some uncertainties in the macroeconomic environment. But given that ERP forms the core of our service offering, this has actually not slowed down demand in that part of the business, which sort of equates to 75% of our business. And I think also competing in that segment, we have been able to increase our win rate against competition even further. So we -- we're very happy with the performance there, both in terms of the market demand, but also our ability to compete.

When we talk about the other business lines, our CXE business line, which has been delivering strong growth in the past years, also continued to deliver good growth in Q1. We actually expect a further pickup in that business line. Whilst our Data & AI and Digital Commerce have had a little bit more of a challenging time, especially linked to the geographies of Sweden and Norway, where we see this hesitation a little bit in the market a bit more pronounced. It's a very -- in terms of root cause analysis, it's probably something about the overall economy and perhaps also that commerce -- Digital Commerce is very -- has a very big share of its revenue coming from the retail business, which, again, if you go in terms of industry verticals, is maybe one of the verticals slowing more down than manufacturing does. So that is part of the explanation.

In terms of our Security business line that we acquired last year, we continue to work -- we've completed the integration. But in terms of getting the cross-sales synergies that we want to build, we've not reached the level we need to reach yet, and we continue to work both on refining the service offering, but also the talent pool. We've changed the capacity of it, we've changed -- so it remains to be solved and we continue to work on that. In terms of our strategic analysis that we need to build a presence, we have not changed our position at all.

Yes. Then if we go to an overall comment on the Norwegian and the Swedish markets, these are the 2 big markets where we experienced the most slowdown. And it's basically expressed in sort of -- there's still a lot we can compete for, but we experienced that the bidding processes we participate in are sometimes prolonged and sometimes they are even put on pause. So basically, there is no winner, no loser at the end, and then there's a break and then we -- usually, we reconvene and then we can win it later on. And what it does, it means we need to have a bigger pipeline. We need to be even more focused on resource management and allocation of resources because we can't in the same extent -- to the same extent as usual bank on when a certain project will start. So we -- I would say it's almost thinking in terms of overbooking the resources slightly and then managing that situation.

The EBITDA margin for the quarter was 12.4%, and that includes the DKK 20 million for the 1 legal procedure against M3CS. Without that, it's a 7.9% margin. We find that acceptable. It should be noted that there's an effect of Easter, which is -- was in Q1 in 2024. It was in Q2 last year. So there's an effect of 2 working days. And in week 1, calendar week 1, just after New Year, we lost the working day there as well. So that should be taken into consideration as well. Efficiency dipped very slightly to 62 from 64, attributed, I would say, to the things I've said before. However, as I've said in many, many calls, this is one of our most important KPIs. And we have our eyes firmly on that and also initiated initiatives to bring it back up to the level where it needs to be.

Our cash flow from operating activities remained positive at DKK 24 million. That is a decrease by DKK 12 million compared to last year, and this is mainly due to changes in working capital. Our accounts receivables have grown as our business has. And I guess, Brian, you will also comment on just the technicality of the 31st of March being on a Sunday after Easter, that means that they've had a slight spillover effect in terms of cash received in the Q2 then.

I'd say, overall, we are satisfied with the results in Q1. It's good start. There's still 3 quarters to go. We continue to shift our focus more and more towards the EBITDA improvement initiatives. And then we will go to the next slide, and I'll just take a few operational highlights. A key objective of the New Heights strategy is to solidify our position as a trusted partner in the life science industry. We're already at well plus 50 customers within this industry, and it has some great synergies with existing customers in the Food & Beverage, but also in the Manufacturing segment. They're not the same, but there's a lot of carryover that we can use. That strategic focus in life science allows us to intensify our joint efforts across Columbus and basically run joint sales activities more effectively and also to collectively across the geographical business units to deliver some new value creating services for the life sciences industry. So it's been a very good start.

We have established a global team for the life sciences industry. And this team is dedicating to driving the development and progress of our initiatives within the sector. And so far, their focus has been on developing the go-to-market strategy and enhancing some sales enablement, which was specific to the sector and also looking into some strategic partnerships that we need to establish to be fully effective in the sector.

Also a few more points here at the end. As I said, we've welcomed Endless Gain. They mainly have personnel in -- or have now, they are part of us -- in the U.K. and India. I would say the integration is more or less complete. It's been a very smooth process. And they've clicked on to our Digital Commerce team very well. So already very successful, and we've started now to engage with the Swedish -- primarily the Swedish and Norwegian market to benefit from their services in those 2 geographical markets as well.

And then this final point, we spent some effort, time and resources on upgrading our offices, making them more suitable to how we're set up now. So as you can see in the pictures, we moved our Norwegian office in Oslo at the beginning of the year. We simply outgrew the old office in terms of size by quite a lot. So it was overdue. And then we've moved into a new location in Nottingham, which is a lot more central and more modern, provides better working space compared to the one we came from. So it wasn't as much a size upgrade as a location upgrade. So we are very pleased about that. And of course, the employees that have the benefit of working for those locations. And that concludes the operational highlights, and then I hand over to you, Brian, for the financial run through on the next slide, please.

[Brian Iversen, executive]

Yes. Thank you, Soren. And let me start with the service revenue split per business line, which you can see on the screen now. And let me see if I can find a few areas that Soren did not comment on already in his introduction. But overall, we do see, as you can see in the overview, quite a mixed picture. The 2 bigger business lines, Cloud ERP Dynamics and M3 both started Q1 with a solid growth, especially Dynamics leveraged on the strong relationship with Microsoft in Denmark and U.K. And actually, M3 saw a strong uplift in Sweden, which is their key market, although Sweden as such, had a flat development.

On the other hand, as Soren mentioned, Digital Commerce, which actually have roughly more than 60% of their business in Sweden were off to a hard start with a decline of 9% Q-over-Q. As he mentioned, as Soren mentioned, primarily linked to some of the customer in the retail sector where we do see some postponement or delay in delivery plans. Data & Analytics, or Data & AI, as we call it now, came in a flat development of minus 3 percentage points, but they continue to see some uplift in the coming quarters. CXE demonstrated a growth of 25%, and that is on top of 48% last year in total 2023. So they really continue to have a strong momentum, and we continue to invest in strong consultants in this area.

Security, Soren mentioned, they -- we didn't have Security into Q1 last year, so that's why we have 0. So of course, 100% is good, but comparing a bit to the previous quarters and last year, we do see not a satisfying development in the revenue and then we take different measures, as Soren mentioned here. So overall, we are actually quite satisfied with the development. But of course, there is some hot and cold water within our business lines, which there normally is.

Let's move then to the profitability or the business line contribution, which is one of our absolute key measure of financial performance indicators for our business lines. Here, again, we have a solid start from Dynamics, more or less in line with last year, but delivering DKK 10 million more to the bottom line if you compare in DKK. Percentage-wise, more or less around 30%, which is a strong, healthy level.

M3, we saw uptake of 6% compared to last year from 20% to 26% contribution margin. And that is delivered on back of a strong uptake in revenue and a solid and good efficiency and usage of our consultants basically around the globe. So we are very happy to see that M3 is getting back on track after some quarters last year that was a big slow.

Digital Commerce, Data & AI started the year very weak. A lot of that is linked to the slow revenue development, as we discussed or mentioned just early on. And as it is in a consulting industry, we cannot hire and fire consultants within a month. So of course, now and then we have a few sitting on the bench ready for new assignments that is coming on. CXE, flat development or slight decrease, as I mentioned before, they have a strong growth, and we, of course, invest and continue to invest in that. And sometimes you do invest in new people that it takes a few months before they get out running. But we feel confident that they will be back on track as well as the coming quarters.

Security, again, no comparison, but you can see it's a minus DKK 4.5 million. and that is definitely not as expected or as expected as I mentioned, but we have taken some different initiatives to adjust that for the coming quarters. So overall, Q1 contribution is in line with our expectations on group level. Again, there is a bit of hot and cold water in that. But we are -- we feel comfortable that we are getting back on track in the coming quarters.

Next slide is our slide on efficiency and recurring revenue. Efficiency is seeing a slight drop compared to Q1 last year of 2% from 64% to 62%. And that is highly linked to the different comments I had on the profitability and revenue on the different business lines. What is very good to see is the Dynamics and M3 business line, our Cloud ERP business is running at a good solid level. And fair is that our smaller business lines. Now and then if there is postponement due to a smaller pool, don't have the same flexibility in switching around with their people, and that do hit efficiency in this business line and overall for the group for Q1.

Recurring revenue remain on a relatively stable level, although we did see a growth of 18% Q-over-Q, but they are still around 13% of our total revenue. It's still a high focus area, and we do see some strong indications that our customers is willing and listening to us in relation to outsourcing of the IT service deliveries.

Good. Then let's move to the revenue split per market unit. And again, here is Soren commented on some of them. But as Soren also mentioned, the FX is not really an impact, at least not so far. The Norwegian and Swedish krona is kept on a stable level also compared to last quarter. We don't show it in the organic deviations, but just like-for-like. Sweden came out with a flat development. Although within Sweden, M3 had a strong growth. But on the other hand, Digital Commerce, which is very heavy in Sweden, as you see, a significant drop there in Q1. And again, as I mentioned, linked to the partly the retail segment of our business.

Denmark continues the fast growth. Very happy to see that in -- adjusted for security, they had a 26% organic growth, primarily driven by our Dynamics business line, where we really are gaining market share, also when we look at our colleagues reported growth for the quarter. Now Norway, it's fair to say it's less impressive with a minus 8%. Again, Digital Commerce was one of the negative drivers up there. But we do start to see a few lights at the end of the tunnel. So we hope to see some kind of change there in the coming quarters.

U.K. continue to impress, came out with a 50% organic growth or combined growth of 65%. There we have Endless Gain. Even though U.K. as such is also, let's say, a dollar economy at the moment, we are not huge there. So there is plenty of activity and business to gain. And that is what our colleagues over there are doing quarter-over-quarter quite for some quarters now.

Good. I think that's all I would like to mention for the revenue split on market. Then let's move to the last slide, I believe, before questions. It's the outlook. As always, our outlook is subject to the general uncertainties in our markets, macroeconomic conditions, exchange rate volatility, et cetera. I think that is the standup sentence that I would definitely have to mention. We continue to see a strong demand. And as I mentioned, we see that we are gaining market shares in many of our markets if we can look at our colleagues at least, what we can see out there. And -- but we also see that project is postponed here and there, and they are given in smaller bites. And we actually see that, that will continue throughout the year 2024.

But based on the beginning of Q1, our order backlog and our pipeline forecast, we still confirm, we confirm our outlook for 2024, which is organic growth between 8% to 10% and an EBITDA margin of 9% to 10%. Good. I think that was all for me and Soren as well. So if there's any questions or if there's any on the screen here that I can see that is when...

[Brian Iversen, executive]

You highlight the impact of the profitability from early Easter and project delays. Can you please quantify the impact on the EBITDA margin from those 2 issues?

Yes. Thank you, Michael, and that's a good question. And I can see -- I also noticed that some of our colleagues in the market have mentioned Easter as a [ point. ] We discussed if we should use it or not. But the fact is that there is 2 days that is less in Q1 compared to Q1 last year. And if I do a rough calculation on that, that is around 1 percentage point -- no, sorry, 2 percentage points on our EBITDA margin. Then you can really start to discuss is that then related holidays compared with Easter and what is the full impact. Some of our colleagues also say it's 3 days for the quarter compared to last year. But I would envision around a few percentage points on the bottom line -- on the EBITDA margin that the Easter move impact us this Q compared to Q1 last year. Yes. I hope that makes it -- I'll answer this question from Michael.

I think that's all the questions we have so far. We still have, what, 4 minutes. We are a bit early. It's only a quarter this time. We don't have any year-to-date and quarter's numbers.

[Soren Knudsen, executive]

Okay. Are we showing any further questions?

[Brian Iversen, executive]

No. Not there Soren.

[Soren Knudsen, executive]

Okay. But then I think we would just like to thank everybody for participating. We can give a few minutes back. I think actually, Brian, to be fair, we took 2 extra minutes last time. So it's only fair that we finished a few minutes early. And it is the first quarter, of course. So we hope you'll be back for the second quarter update, and we look forward to talking to you again. Thank you very much.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.