Columbus A/S

CSE:COLUM

Earnings Call Transcript

[Operator]

Good day and thank you for standing by. Welcome to the Columbus Interim Report Q2 2023 Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Mr. Soren Knudsen, CEO of Columbus. Please go ahead, sir.

[Soren Knudsen, executive]

Thank you very much, operator and good afternoon to everybody. Welcome to the Q2 investor call. As the operator just said, my name is Soren Knudsen and I am the CEO of Columbus. Today, I'm accompanied by Brian Iversen, who is our group CFO, who will assist me during the call. And I suggest we just start by going through the agenda on Slide 4.

So today, we'll start with the financial highlights of Q2. Following that, Brian will cover the financial review. And we will end the presentation with an outlook for 2023 and a view of our long-term guidance, followed by a short Q&A session. Also, what I've included here today is, I've asked Brian to do a short session on currency impact as it is a little bit more prevalent in our financial results than what we are normally seeing. So we'll be covering that as well. And you will also be seeing a little bit more of our new business line, Security.

Okay. So let's go to Slide 5 and begin. And I think the first statement is just that the second quarter of the year continues to build on the growth from Q1. In terms of topline growth, we think it is good, potentially even really good. We have an organic growth of 16% when we exclude our acquisition of ICY, so that means in local currencies.

Efficiency is the best we've ever had. I've often talked about reaching 70% on the previous call and to some of you in bilateral meetings and Q2 of 2023 is the first time we have a full quarter of 70%. So obviously, this is an important milestone for us. The EBITDA margin closed at 4.6%, which is quite a bit lower than Q1, obviously.

Our earnings are usually lower in Q2. It's mainly due to the calendar year having less working days in this period of the year. And as such, it sort of follows the general seasonality for our business. So our main takeaway from Q2 is that despite the slightly lower EBITDA margin, our core business is significantly improved compared to last year.

Key indicators for this, I would say, is the improved efficiency but also if you look at the cash flow from operations, which is significantly improved also compared to last year.

Yes. Brian, I think we will start with the currency in focus. So if you could please give us an update on that.

[Brian Iversen, executive]

Yes. Thank you, Soren. As already back in Q1, we had a similar slide on the currency as it does affect us quite a lot on our topline. The decline in the Swedish and the Norwegian krona continued here in Q2, which has a approximately 8% negative impact on our topline when we compare to Q2 last year or equals to DKK 28 million.

In Q2, it was around 5% impact on the growth we saw on our top line. As the Norwegian and the Swedish krona is our two most used currencies in group, they account for around -- or the revenue in Sweden and Norway account for around 55% of the group's revenue in Q2. It does have a significant impact on the topline. We do try to mitigate it as good as possible. And of course, when we're using consultants and from our service centers around the globe and in other Scandinavian countries, we do see a impact, which we, of course, try to mitigate as good as possible.

So this was just a brief update on the currency that we have high on our focus and which we are all talking to you, decline in the graphs on the screen right now.

All right. I will now hand back to Soren.

[Soren Knudsen, executive]

Yes. Thank you, Brian. Yes, just one brief comment from me on the currency. I mean, for the quarter, we delivered a growth of 11.2% in Danish currency, even despite this headwind, which I find this is really satisfying. Obviously, the number is better in local currency but 11.2% is still acceptable and that makes it 9.2% for the first half year in total, measured in Danish kroner with the headwind. So yes, I think that's what we're going to say about that.

Now I will continue with a short introduction to you regarding our security business line, the company we acquired, formerly known or still known as ICY Security. And they are amongst the largest consultancies and implementation companies in the Nordics, which also says something about the structure of the market, given that they have 50 employees, founded back in 2015. And obviously, they already account as a very seasoned and very experienced cybersecurity company.

They are a market leader in Denmark within the security and they have just about 70 customers in Denmark and also some outside of Denmark already. And I would say, even though we can't disclose the customer list that they are really prominent and top-tier customers within that portfolio.

So if we go to the next page, I'll just explain because cybersecurity is a really broad term. And actually, ICY and now our security line specializes in a quite particular part of cybersecurity, which is called identity security. And the way to look at the threat scenario is that today, the primary attack surface for hackers is what is known as identity breach. That actually means that they get access to existing and real credentials and as such, they just [ lock ] onto the systems as any employee would do.

And so there's no sort of traditional sense of hacking. They simply [ lock ] on once they have gained a full set of access credentials. So the most important thing is to protect these access credentials in order to protect your IT environment. And in terms of just maybe explaining a bit more what is identity, well, that can obviously be any one of us as employees that have an ability to access the systems. It can -- if it was within the public sector, it can be a citizen that has credentials to [ lock ] on to public sector platforms. It can be even devices that have -- some devices have the ability to access systems today and retrieve or [ write ] information onto the system. So it can be -- identities can be both for humans, for systems, for IoT devices as well.

Therefore, the number of identities really is exploding. There's -- and it's fast and they are -- continue to be a very interesting target for hackers and therefore, needs to be protected and managed in a proper and secure way. By manage, we also mean that once they no longer need it, they have to be closed. By manage, we also mean that we need to ensure that they have appropriate rights, that an identity has appropriate rights. That means usually to limit the right somewhat so that you can limit the damage that can be done if the identity is breached.

It's relevant on all layers. So it can be on an application landscape. It can be on specific application. It can be on the underlying databases, can be on infrastructure. And as I said before, it can also even be on all the edge devices, any IoTs connected to the system. There are some great synergies we find between our existing Columbus customer portfolio and the ICY security, which is why we are so interested in them. And we see identity and access management as a very natural addition for us.

So we did not go out just to find a cybersecurity match for us. We were specifically looking for the identity and access management capabilities, which we found in ICY. In terms of integrating them, I think there's a great progress. We are very aware that it's a people business. This is about ensuring that all the employees land well with us and integrate well with the model. And equally, it's about integrating them in our pipeline planning, in all our sales activities and making sure we introduce them to all our existing customers as the Columbus customer database is inherently a lot bigger than ICY's, which is well in progress.

The two financial results also, obviously, remain to be seen and will be seen in the second half year and in 2024. Good. So that's all about ICY. I'll now move on to a run-through of our global business lines. And it's a quite positive picture. If we look at our business lines, we have a clear growth across most of them. And since the currencies have become an important topic, we have also included growth rates in local currencies or constant currency, so you can better see the underlying activity level before calculated back into Danish kroner.

And if we focus on the biggest one first, Dynamics is obviously growing well and growth is -- has particularly been driven by U.K. and Denmark. But overall, we are very pleased also in all the geographies with the development of Dynamics. Very pleasing, particularly with Denmark, as we had 0 growth a couple of years ago. And we've made big investments in reestablishing this growth and building a solid pipeline, which we can now prosper from.

If we go to M3, which has their biggest market in Sweden, it's a little bit more of a tricky situation. So we have a large part of the revenues coming in, in Swedish krona and also to some extent, Norwegian krona. So M3 is one of the hardest impacted by the currency situation. Also, M3 is probably the business line we have that deals with the biggest customer. So these are the top, top-tier companies and they have a very long sales process, they have very long planning horizons.

We are still in the process of rebuilding our pipeline. We're doing that also with the technology company Infor, that's behind M3. We are one of the biggest global partners. So we work closely with them and we continue to basically make the same investment as we made in Dynamics a couple of years ago. We are rebuilding it for the long term with a very sort of strong bottom-up pipeline building rather than a short-term fix.

Our Digital Commerce department or business line has particularly strong growth in the U.K., which we find really interesting. Also other markets are doing well but they are either growing at slower rates or maintaining their size. I, personally, I'm a little bit interested to see, I think we -- maybe in the second half of the year, we are likely to see Denmark embark on the same journey as Digital Commerce U.K. is on right now. So that would be my hope and where we've made some investments.

Data & Analytics continue with very strong growth. They're led by U.K. and Sweden that are moving the fastest. And the [ CXE ] business line is also showing some really strong growth and has good progress in most markets. If we then turn to the Security business line, it's reported for the first time. And as I've just said, we're very happy with the acquisition. We think the integration is going really well.

It's a little bit early to comment for us. We've only had them for 3 months. So reaping the full synergies and getting them integrated fully without our own sales pipeline is still a little bit early. Strategy & Change is still a quite small team for us but they are very important as they often lead the biggest sales process we have. And as such, they are -- they obviously need to perform in their own right as consultants. But we also have to acknowledge that they have been part of driving some of the growth we see in Dynamics and other units.

So I'd say, overall, we're pretty satisfied with the revenue growth and we do expect continued growth in the coming quarters. Then I'll go onto the business line contribution and this is a measure we introduced. It remains very important for us because it sort of isolates the performance in terms of contribution from the business. It isolates the business from all the enabling functions. These figures are also a little bit less impacted by the currency issue, as we often have, at least a big part of our revenue and costs associated with generating that revenue in the same currency.

We generally see a slightly lower margin in Q2 and that's mainly due to that we have our annual salary increase, always hits us in April. It's kind of business as usual for us and we usually and we expect to see our margin increase again during the second half of the year. Looking forward and getting even more proactive with this, we will be looking to introduce our price increases a little bit earlier to match up, obviously.

Dynamics remains our business line with the best margin and also has a very high efficiency, which we're very satisfied with. M3, as mentioned before, lower than expected revenue and that is also the main reason that the contribution isn't quite where it should be. Again, I would also just mention that M3, there is even on the bottom line, a little bit of currency as we have a pretty big team in Czech Republic that serves the Swedish revenue streams, the Norwegian revenue stream, so creating a little bit of a currency issue there, although it's marginal for the group.

Digital Commerce, growing very, very quickly for the past years, both in revenue but also the contribution margin, as you can see now, has really improved significantly and that obviously, needed to happen and we expect that to continue. We also have very, very high growth in Data & Analytics and this is really a good example also of balancing out the good growth but also seeing a very, I would say, a very decent contribution margin if you compare the high growth numbers we just showed on the topline.

The Strategy & Change function, as I said before, it is a little bit of enabler business line but we will continue to build it. And at some point, we'll probably start driving it more as a business line. But we are using them very much as a spearhead now to drive our new go-to-market approach. Again, the Security line, I think it's a little bit too early to draw any conclusions on that. Still not up to the expectations, obviously, we have from them long term. But very, very good customer feedback, very good pipeline building.

So overall, we are satisfied with the contributions from our business line. We have an increase in the contribution margin of 1.1% without the slide impact from the currency issues as well. We could probably have seen a little bit more but we think this is -- this speaks to that our operations are generally pretty well improved since last time. Okay.

So over to you, Brian, on the market units.

[Brian Iversen, executive]

Thank you, Soren. Now we will look at the market units, the countries that we operate in and how the topline development has been doing there. And as we have been talking to a few times now, that the currency has had quite a big impact, so I will speak to the constant currency numbers, when I talk about the growth. As you can see, we actually have a positive growth in all our markets in Q2, which is, in general, a very strong sign. Although we can see some of them with a very high growth.

Sweden, which is our largest market has showed growth of 15%, which we are very satisfied with and is well above our 10% target in our Focus23 strategy that is ending this year. Denmark, as Soren also mentioned earlier, showed a very fast growth of 37%, whereof 21% is linked to the ICY acquisition. So underlying, a 16% organic growth. And as you remember, already in Q1, they started with a high pace and that has only continued in Q2 in Denmark.

So we are very pleased to see the turnaround on the topline. Denmark is starting to materialize after some years with a little bit weaker growth. U.K., although it's a bit smaller but still ending at a 46% growth in the quarter compared to last year. And a point to mention there is that the growth is actually coming from all our business lines, which is a very strong and healthy sign in this market. Norway, as you also can see, is a bit slower, 1.4% and growth for the quarter and then we do start to feel some headwinds in this -- in Norway. But we are following the development very closely and we're still confident that they will end up with a good year. U.S., although not a large market for the group, we do see a decent growth in the quarter and demand has -- was very hard to regain a strong pipeline. And there is some very positive signs that they are starting to get some tailwind in that direction.

So overall, strong development in our market units that we can say that, that we are very happy with, for the quarter. All right. Then the next slide is around our efficiency. Actually, another KPI that we are very proud of. And as you can see from the graph, is steadily moving upwards. It has increased now to a new high, as Soren mentioned, in Q2, 70% and this is a clear result of a focus within our business to continuously optimize our organization, with the right people and also a strong customer win on the other side.

And basically, all our business lines has been optimized. There is, of course some that is still lagging and there is still more in the engine to get some more percentage out and there is a continuous work. But I think we are slowly getting to a strong level, although we can always improve. Recurring revenue, as you can see, we showed, both for the quarter and for the half year, is pretty stable. We keep it around the 13% of our total revenue. So basically, they have also seen a growth for the quarter in line with the group's growth.

Subscriptions, which is getting a lower and lower amount is basically becoming very insignificant and the subscriptions is moving over to the Cloud area. And then Care, which also is part of our recurring revenue is of course still a very important revenue stream. And we continue to work hard on developing that and also see if we can grow that faster than our service revenue, as we do value this steady revenue very high. And we do actually in the current environment here, increased customer interest in outsourcing some of their core IT services. So this is a important area for us, again.

All right. That was all through efficiency and recurring revenue. So I'll hand over to you again, Soren, there.

[Soren Knudsen, executive]

I will just briefly cover the guidance for 2023. And the first thing to say is that we maintain our guidance for 2023. And we remind you that it was adjusted in connection with the acquisition of ICY Security. As mentioned in the previous quarterly update, we expect organic growth close to or above 10% and earnings improvements through efficient -- enhanced efficiency and focus on our contract profitability.

Revenue is expected to be in the range of DKK 1.55 billion to DKK 1.6 billion, which will then correspond to a growth of 8% to 12% in constant currencies. If the current exchange rate development continues, it will or might impact the revenue growth negatively. EBITDA is expected to be in the range of DKK 119 million to DKK 139 million, corresponding to a margin of 7.4% to 9%.

And as always, the outlook is subject to general uncertainties in our markets, such as the current macroeconomic conditions, higher than normal exchange rate volatility and recession fear in some countries. Although we continue to see a strong demand for our digital solutions and transformation, we do anticipate and have included in our thinking a little bit of a slower decision pace on new projects and the -- sometimes the wish from customers to divide projects up in some smaller bites, so they get proof points along the way.

We think this will continue throughout 2023. And basically, we have adjusted to this and we see it as the new normal. This -- the general uncertainties worsened during 2023. Obviously, it may impact the group's growth and margin negatively. So that is the guidance for 2023. And I think we're now ready to open up for any questions.

[Operator]

[Operator Instructions] We have no questions from the phone line.

[Soren Knudsen, executive]

Okay. I think we will take the first question from [indiscernible] on the webcast. So [indiscernible] is asking, for those that cannot see it, it's pertaining to new strategies. So basically Focus23 strategy expires this year and we have flagged the announcement of a new and when will this be? Will it be in conjunction with the Q3 report or would it come as a separate announcement? And in that case, when?

So this is a fairly simple one to answer. I think you can expect with a very high certainties that it will be simultaneously or if there's any gap between the [indiscernible] hours or a few days, but we -- they are very closely coordinated. So I think that answers that one. Then [indiscernible] is further asking, whether we expect the strategy plan to contain quantification of future financial potential, for example, the shape of a firm financial target on an EBITDA level in normal values.

So I think on that, [indiscernible], we're not ready to fully commit. But what I can say is that we're working -- definitely working with a financial model. What we will disclose remains to be seen. But I can say for sure that the next one will contain an EBITDA improvement plan already. And we will have a target -- a specific target in mind for group EBITDA in the future.

And questions to the Q2 report, does the Q2 2023 cost base include any one-time items worth noticing, as, for example, redundancy costs? In the Q2 report, you mentioned that the focus on AI will be intensified, please elaborate and where you see this.

Okay. So I think, Brian, just correct me if I am wrong. But the Q2 report does not contain any specific one item, it's pure operations. We can also say that if you read the Q2 report from last year, the numbers we are comparing against, those numbers last year were actually lifted quite a bit by a one-off item. So -- but yes, but this is operations only, so no adjustments. The focus on AI will be intensified and what are we going to do in this area. So this is something definitely that we will come back to in the strategy but let me just give you a very sort of quick one on that now.

Basically, what we're seeing. So obviously, the technology as such holds a huge potential. I don't need to explain that to any of you. However, actually incorporating that for our customers and adopting it into daily business is just as difficult and as it always is, to get new strategy on board in an operating model, making sure that everything works, that it's quality assured, that security is taken care of, that regulations are kept and all of that. It's not an easy task. So we have many teams across Columbus working on different bits and pieces and we want it to be like this. We don't believe we can establish one central team, which will come up with one [ truth ].

So basically, we run a series of teams, which we have coordinated under a steering group structure. The steering group is responsible for guiding these small teams across geographies. So if they work on the same topic, they get to work together. And the steering group also lists any topics where we see significant potential up and we then give them significantly more resources to work with. Also, I would mention here that part of these work streams are very closely connected with our big technology partners, Microsoft and Infor. So we are -- we have very high status partnerships with them. We are an Inner Circle Partner of Microsoft. And therefore, we have access to certain development tracks and we explore that with them as we do with Infor and other vendors as well. So I think that's what can be said for now.

Yes. Do we have more questions on the line?

[Operator]

We have no questions on the phone lines.

[Soren Knudsen, executive]

Okay. Then I think given the time, we will close down the call. Thank you all for joining. And we look forward to seeing you at the Q3 quarterly report. And as Michael has just kindly pointed out, we can also talk our new strategy when we get to Q3. Thank you.

[Operator]

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