Columbus A/S

CSE:COLUM

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Columbus Interim Report Second Quarter 2024 Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Soren Krogh Knudsen. Please go ahead.

[Soren Knudsen, executive]

Thank you, operator, and good afternoon, everyone. Thank you for joining today's webcast. Yes, as the operator just said my name is Soren Krogh Knudsen, and I'm the CEO and President of Columbus. And I'm accompanied by Brian Iversen, our Group CFO.

And at today's call, I will be covering the financial and operational highlights for Q2 first. Then Brian will cover the financial performance for Q2 and -- in a little bit more detail and guidance for the rest of the year and for the full year. We will then end the presentation with a short Q&A session. So let's go to Slide 4 to begin the presentation. The financial highlights for the second quarter of 2024. So Columbus delivered a 9% growth this quarter. That amounts to DKK 427 million. The growth is primarily driven by a very robust performance in the majority of the business. And in particular, we see strong performance from our cloud ERP business lines, the ones that we call Dynamics and M3, which combined make up around 75% of our total business.

Also, our business lines, Data & AI and customer experience and engagement have shown strong results in Q2. On the contrary, security and digital commerce business lines did not meet our full expectation and experienced a decline in this quarter. And we'll come back to the effect of that and the actions that have been taken. The EBITDA results for Q2 2024 amounted to DKK 30 million. That corresponds to an EBITDA margin of 7%. This is an increase of 2.4 percentage points compared to last year's second quarter. And we do recognize that we see further headroom for improvements before we end at EBITDA of 15%, which we consider the satisfactory result by the end of the delivery period, which stretched out until 2026.

Our efficiency has declined from 63% and that's down from 66% last year, and that is primarily due to the revenue setbacks that I've just alluded to in security and digital commerce business lines. Recurring revenue increased by 13%, mainly due to the acquisition of Endless Gain last year. We see that as a very positive sign that we like this balance of having a proportion of our revenue is recurring and whilst the bigger part is still project-driven revenue. Profit before tax declined by DKK 5.7 million, which is due to the extraordinary adjustments related to the acquisition of the ICY Security, which Brian will elaborate on later in the call.

Cash flow from our operating activities remained positive at DKK 16 million, marking an increase of DKK 12 million. The improvement is mainly due to changes -- positive changes in our working capital. While we are satisfied with the Q2 results and as such with the first half year, we do have our full focus on the EBITDA15 margin improvement program and we'll continue to deliver updates on that as we progress all the way through 2026 at the very end.

So going to Page 5, the operational highlights. Worth noting that we continue to experience a very high demand for our services, especially in our core area of cloud ERP, where we do continue to have a high win rate on large customer projects. A comment from me on that would be, whilst there's a lot of talk about hesitance in the market, investment hesitance, ERP, planning cycles and budgeting cycles, implementation cycles are amongst the longest in the digital landscape and also because our customers tend to be large enterprise customers. They're not so susceptible to small, sort of, macroeconomic swings or they tend to run with a very long planning horizon, and that benefits us very much for the ERP project.

We have a notable new partnership with Schur who have chosen Columbus for comprehensive support for their Microsoft Dynamics solution. This partnership also underscores our commitment to building this long-lasting relationship with our clients. Additionally, we've extended what is now a 30-year partnership with FedEx, the global logistics company that has been reinforced through a new agreement where Columbus will play a significant role in FedEx solution modernization program. Our New Heights strategy aims to sustain a robust top line growth while working towards the 15% EBITDA margin by 2026. A key element of this strategy is improving our commercial excellence to boost project profitability, an area where we really start to see positive results from the initiatives that we implemented already last year. So we basically track a flow where any improvement in EBITDA will typically start all the way up from project margins and then it flows down through the P&L.

So that could be the way we work with subcontractors. It could be our hourly rates. It could be the mix of delivery sources from our different geographies. It could also be in certain contractual terms that we optimize on. On the contrary, we also have some things that we need to get better at, and that's this lower-than-expected efficiency in parts of the business. I already said that is mainly in e-commerce and in security.

And that's been slowing down our progress somewhat. And consequently, we have already streamlined those 2 parts of the organization. And that includes a reduction of approximately 60 FTEs. Not all of them came from those 2 business lines, but a part of them did. This exercise has already concluded back in May and June of Q2. And I believe Brian you will allude to that the costs for the exercise are also included in the Q2 results.

In digital commerce, we've done more than just sort of not only capacity adjustment, we've also implemented a leaner management structure. So we've really done our best to make it more customer-centric, more sales-centric, boost the project quality, which also inevitably leads to better profitability and efficiency. We are starting to see in our business reviews and our pipeline reviews that we're getting more positive signals, outlook signals from commerce. And we'll be excited to see in Q3 and Q4 if we've turned a corner, there are some indications of that.

In security, we also initiated cost and sales measures already back in Q1 to boost the performance. But then in Q2, we went a step further and we've recalibrated the management team. So basically made significant changes to the management team, and we've further optimized that organization. And from now on and onwards, we are integrating our security business into our Dynamics business line, and we're doing that in order to basically enhance our reach to all our existing customers.

Essentially, the security business we bought was very focused on identity and access management, which remains important, and they're really expert for that. But we want to tap into an area which we would refer to as cloud security, and it's pertaining to all our customers that have their operational environments now in the cloud. There is a sort of a shared responsibility with the cloud providers to set up the security platforms and all the security parameters where the customer has a role to play, the supplier has a role to play, and we believe we need to assist in the management of that setup. So that's what we're aiming for going forward. Good.

And then a different point. Last week, we welcomed our new People Officer, Katharina Hofman. Katharina brings over 20 years of experience in leading and developing HR functions in an international consulting firm. Her appointment is very perfectly timed for the phase of the growth journey we're now -- we're in now with our New Heights and our newly launched People First initiative, which will ensure that Columbus attracts and retains the best talent going forward. That's the essence of what we do.

And Katharina succeeds Per Fredriksson, who is actually retiring. He spent the last 12 years with us and remains available to us as a senior adviser. Lastly, I would just like to share that our commitment to deliver innovative solutions was recently acknowledged by Microsoft at the Danish Partner Award 2024, where Columbus was honored with the Business Applications - Enterprise and Corporate” Award, and it celebrates our extensive collaboration with Bang & Olufsen, where we are utilizing the Microsoft technologies.

So next slide, and that's over to you, Brian.

[Brian Iversen, executive]

Thank you, Soren. And let me start on Slide 6, that is the service revenue split per business lines. Just a few comments on that. Firstly, as you see, our ERP cloud business lines would account, as Soren mentioned, about 75% of our total business. Both of these business lines dynamics and M3 is running very well also in Q2 with a growth of 17% in dynamics and 10% in M3. Dynamics is especially seeing a strong uptake in Denmark and U.K. They actually believe it was the same last quarter. So we are very happy to see that. And M3 is gaining market and is growing in Sweden.

Then I think it's worth noticing our Data & AI who show a strong comeback in Q2 compared to Q1 and is ending up with 18% growth. And I think they are seeing an increased request for our AI services as well as other digital services that they are bringing to the table. And then we have our customer experience and engagement business line with a growth of 50%. I know that that's a big number. Of course, Q-over-Q, there can be some project closures and starting points, but still year-to-date 37%. And they're really continuing a deep growth pattern and are basically growing in all our markets as a strong contributor to some of the larger ERP projects we also are doing there.

We continue to invest in these business lines when they grow. We can see increased ask for the demand. And of course, I also need to mention digital commerce and security, what Soren did talk about them, as you can see, both of them were a negative growth, and then we have taken different measures to change that picture going forward.

All right, let's move to the business lines contribution, Page 7. As I normally say, business lines contribution is one of our key financial performance indicators for our business lines. And here, we see Dynamics running on the 27% -- 28% contribution margin on a very solid and high level, and we are glad to see that, that continued -- also continues in this heavy growth period. M3, which is our second biggest business line, do see a good uptake in the profitability. And I think -- I know this is partly due to our focus on the profitability on our contracts, one of our key areas in moving towards EBITDA15. And here, we can see that, that starts to pay off.

Digital commerce is negatively impacted. And as Soren mentioned, some of it is because we have taken a hit due to the restructuring and the layoffs that we took in Q1. So of course, that does impact them negatively when we do these kind of exercises. Data & AI delivering a margin of 14% compared to 12% last year. It's a slight increase, but still, we need to see them on a higher level, in line with M3 and Dynamics. They have a decent size of company or business now when you look at the revenue and the FTEs. So not that we are satisfied, but at least we see some progress and expect to see that in the coming quarters as well.

CXE, strong uplift from Q1. Q1, yes, they had a very slow start also on the revenue side, as you might have noticed or remember. So we see that picking up and that, of course, falls down to the bottom line. Security, we spoke about and the measures we've taken, so I don't want to go further into that. So overall, we had to say the contribution overall is slightly below our expectations. That is driven mainly by Security and Digital Commerce, where we've taken actions, as Soren mentioned. But on the other hand, we are very happy to see that 75% of the business is running on a steady level.

Then let's move to Page 8. Efficiency and recurring revenue. As Soren mentioned, we saw a slight drop -- or a drop from the same quarter last year. But again, a bit the same story. Our bigger business lines, ERP, cloud, Dynamics, M3, landed on a good satisfactory level. Dynamics was running around 68% for the quarter. M3, a bit lower. So here is something that we still need to work at, at least on the strategic business lines, but of course, a lot of that is linked with the revenue uptake and revenue expectations.

Recurring revenue, happy to see, although it's only 1%, growing to 14% of our total business last quarter -- same quarter last year, it was 13% or at least the right direction. So year-over-year, we saw a slightly higher growth than our organic growth for the combined group. And that's also what we would like to see.

Then let's go to the service revenue split per market. Here, we can see that Sweden is the country where we still see some headwind with a negative development of 9%. Although as I mentioned, M3 we're seeing an uptick and growth in that market. We also see that Digital Commerce was declining with around 29%, and that is also what Digital Commerce has the biggest business. And on top of that, Dynamics also had a weak quarter there with a loss or a slowdown in the growth with minus 10%.

Denmark continued to grow fast, 28%. And here it's primarily driven by Dynamics, which actually saw an increase of 24% in Denmark. And we constantly see the ask for our quality consultants delivering Microsoft products and IT services in Denmark, and that is really nice to see that we -- at least in our home market here in Denmark, where we are sitting, that it's really recognized that we are delivering high-quality service.

Norway improved to plus 6% coming from a minus in Q1, slightly uptake, not something that we necessarily celebrate big time yet, but at least we see some light at the end of the tunnel, but it builds smaller numbers that we look into here. U.K., which is basically impressive, growing 43%, 53% year-to-date, slightly impacted by the smaller acquisition, but still without that 31% in the quarter. And here is basically all business lines, and I think that's a strong achievement in a country where the economy is dull, fair to say, but still we are gaining, and that is great to see. U.S., it's 5% of our total business nowadays. So it's not a big thing, but still, we see some stabilization and even slight growth here and there, especially in our M3 projects where there is quite some activity and ask for our support in this area. So overall, we are satisfied with the organic growth of 8%, especially when we also look at the general growth announcement that we have seen in the market, I think it's approved. That's all for me, Soren.

[Soren Knudsen, executive]

Great. And then all that remains before we go to the Q&A session, so you can start thinking about your questions. We'll do the reiteration of the outlook. Before I say it, let me just do the disclaimer, which is to say that the outlook is subject to the general uncertainties in our markets, such as the current macroeconomic conditions, higher-than-normal exchange rate volatility and continuous geopolitical situation that may impact the general business environment. Although we continue to see a strong demand for our digital advisory and services, we do anticipate that some reluctance in IT investments and the need to divide projects up into smaller bits will continue throughout 2024. If the general uncertainties worsen during 2024, it may impact the group's growth and margin negatively.

Based on the financial performance in Q1 and Q2 and the current order book and pipeline forecast, our full year guidance for 2024 is as follows: An organic growth of 8% to 10% and an EBITDA margin of 9% to 10%. And I would just be commenting on that. We do spend more time and efforts, especially between me and Brian, on our forecasting abilities, our pipeline evaluations for the second half year. So we appreciate that there is more volatility in the market than I would say business as usual, and we've taken that into consideration. So thank you, and I think we open up for questions.

[Operator]

[Operator Instructions] As there are no further questions on the phone line, I would like to hand back to the room for any questions on the webcast.

[Soren Knudsen, executive]

Okay. So we have a question here from Steven. In Q2, did the adjusted EBITDA of DKK 30 million include the positive reversal of earnout and 7 point -- at plus 7.7% and the redundancy cost of DKK 9.1 million? Yes, you can allude to that Brian.

[Brian Iversen, executive]

It is just right, yes, that's correct. We have included that in the EBITDA.

[Soren Knudsen, executive]

And the second question asks if we have included the restructuring costs? I know, you should quantify the restructuring costs taken in commerce and security. I would say that the quantification we offer here is the redundancy cost of DKK 9.1 million that has been taken in June and thereby in the Q2 results. We do not specify it all the way down to commerce and security, but I would venture to say that it's approximately a little bit less than half pertains to the two business units you asked about, Jonathan.

Please could you elaborate on the weakness in Sweden? Does this reflect the whole market? And do you see signs of recovery?

Okay. Great question. Thank you. So I would split it in two. I think overall, this general investment hesitance has been a little bit more pronounced in Sweden than in the other markets we operate on, perhaps with Norway as a second. And then we have not experienced that much in Denmark and the U.K., but it is marginal. When it comes to commerce, it's a different story. And our business line commerce is a fairly big unit with a very big exposure to the Swedish market, but not just the Swedish market, it's actually very retail-oriented in Sweden. And retail, if you take that industry vertical, it's probably the one industry vertical that is the most affected across our geographies if we look at it that way.

So when you have this combination of Sweden and then retail in Sweden, that has been the most challenging corner of our business to address. And that being said, we also found internal improvement options, which we've now executed on, which we could have -- I would say we could have done that despite some slowdown in the market, but it's given us a good reason to have a good hard think about it, and that has now been concluded.

And as such, we are starting to see slow signs of recovery. Brian said before that the Dynamics -- although Dynamics has performed very, very strongly on a global level, that was not driven by Sweden. We're starting to see some good things. I think that's mainly due to internal timing more than so to market. And when we look at the pipeline for Q3 and Q4 for our commerce business, which is very Sweden dependent, we're also starting to see some -- the early signs of recovery. But I don't think we want to bank on that yet, but we'll keep you updated on it. And you just say that the whole management team is really putting great efforts into that. It's an important business unit for us, and we are very committed to get it back on track.

Okay, if there are no further questions, I thank you for participating. And we'll just end by saying, Brian and I, well, you know how we'll be spending our time. The plan is laid out. The EBITDA15 plan, the new strategy, we continue to pursue all the items, as we've explained to you before, and we will keep you updated on the next call. Thank you very much.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.