Penneo A/S
CSE:PENNEO
Earnings Call Analysis
Summary
Q3-2023
Penneo, a specialist in digital signing and KYC compliance, exhibited resilience in Q3 2023 with a 27% year-on-year ARR growth despite being a traditionally weak season. The company's ARR rose by DKK 3.3 million quarterly, reaching DKK 82.5 million year-to-date. New customer ARR improved, and existing customer engagement increased, contributing to an ARR net retention rate of 114%. While customer churn remained stable at 4%, operational improvements were indicated by ISO certifications and key executive hires. International expansion is on track, with Belgium succeeding and 63% of new ARR sourced from outside Denmark, despite currency headwinds in Norway and Sweden. Looking ahead, the ARR guidance for year-end is narrowed to DKK 87-92 million, targeting a 23-30% growth. EBITDA guidance is maintained, projecting a negative EBITDA of minus DKK 10-15 million for the fiscal year.
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Welcome to all. We will start the recording of the presentation now and it will be available afterwards on our home page. Welcome to everyone on this call to our presentation of our Q3 Financial Results. And here with me, I have Casper and myself Christian and we will walk you through the presentation here. And as usual, we will have our agenda here with a short introduction to Penneo and then we will have looking into our Q3 results, have an outlook for 2023 and then we will have the question and answer at the end and we will answer all questions you have.So let's start with an introduction to Penneo, very short one. We were founded in 2014 by entrepreneurs with the ambition to reduce the hassle to get documents signed by replacing pen and paper with a digital alternative. Here fast forward to where we are today where we are a business-to-business software-as-a-service company with 120 employees at the end of Q3 2023. Our key focus is on digital signing, document workflow and know your customer and we're part of the antimoney laundering regulation so AML. And this workflow platform enable AML regulated business-to-business companies to optimize and automate critical workflows that are involved in the client onboarding, servicing and offboarding. This secure and flexible platform that we have is already trusted by the world's leading auditors and more than 2,700 other companies in Denmark, Norway, Sweden and Belgium.And these customers rely on Penneo to mitigate risk, ensure compliance, boost operational efficiency and elevate the client experience. And then we have the vision to become the preferred platform for all your accounting across Europe. And if we then go into some facts about Penneo. In Denmark, 81% of all annual report filed to the Danish business authorities were filed using Penneo. And by the end of Q3 2023, more than 130,000 client relationships were created for onboarding and verification using Penneo KYC. And if you look across all markets, a total of 1.8 million Penneo Sign case files were completed in 2022 and we know at this point of the year, we have exceeded 2 million. So that has increased this year. And in 2022, an estimate of 62 million sheets of paper were saved using Penneo Sign, which caused approximately 1,000 tonnes of wood or 2,300 tonnes of CO2.Let's then dive into the Q3 2023 results. So Q3 is typically a low season for Penneo, but we have continued to make good progress achieving a year-on-year ARR growth of 27% and ARR increased by DKK 3.3 million compared to DKK 1.5 million in Q3 2022. So that's reaching a year-to-date total of DKK 82.5 million and this marks Penneo's best Q3 ever from an ARR point of view. In Q3 we saw an improvement in the currency exchange rates especially regarding the Norwegian and Swedish krone compared to the Danish krone and this positively impacted our ARR by DKK 0.2 million compared to the end of H1 2023 where we saw a significant negative impact. But it's really important to note, however, that we expect this continued significant fluctuation for the remainder of 2023 in both the Norwegian and Swedish krone against the DKK and that will impact our ARR results as that's always based on the currency at the end of the quarter.ARR increase from newbiz amounted to DKK 2.1 million compared to DKK 1.1 million in Q3 last year and then we onboarded 113 new customers in Q3 compared to 78 new customers in Q3 last year. Our year-on-year ARR net retention rate amounted to 114%. We have observed a continued healthy uplift from existing customer base on an increased engagement with Penneo Sign and the revenue from cross-selling of Penneo KYC. The year-on-year amounted to 18% and we maintained a year-on-year customer churn rate of 4%. If we look at the EBITDA, that amounted to negative DKK 7.4 million compared to negative DKK 4.7 million in the Q3 last year and that is in line with our expectations. If we just go into some business highlights of how we have seen in Q3. Then in Q3, our sales team continued seeing the cautious buying behavior that we have also encountered in the first half and also in the end of last year.And that is applied both to existing and new customers and led to lower deal size due to smaller initial sales commitment and also longer sales cycle. So what we have seen before, that continue also in Q3. This applies mostly to our established markets meaning Denmark, Norway and Sweden whereas our new market in Belgium is displaying a much stronger growth both in terms of acquiring new customers, but also achieving higher initial deal size. In general, the trend of lower deal size across some markets is being outweighed by a stronger performance in terms of acquiring new customers. So as I just mentioned on the previous slide, we onboarded 130 new customers in total in Q3, up from 78 in Q3 last year. We have continued our strong growth in foreign markets. 63% of our total newbiz came from foreign market and this is driven in large part by Belgium.In Q3 alone for example we secured 44 new customers compared to 8 in Q2 and 29% in Q1 this year. We have additional sales capacity in place to make sure we continue this good momentum that we [Audio Gap]. In Q3 we also reached our key milestone by obtaining 2 important ISO certification. This basically demonstrates our prioritization of security and price and translate into value for existing and potential future customers simply because they can do business with us knowing that we adhere to leading security and privacy best practices and are committed to maintain a high standard of operational excellence. We have also strengthened our senior management team with the appointment of Mads Aabling as Chief Sales Officer and Sara Lindgaard as Chief People and Culture Officer.In general, we do not believe that the current economy has changed the longer-term growth potential of Penneo and remain a company with a solid subscription-based business model with a growing ARR from both existing and new customers with the low year-to-year ARR and relatively high contribution market. And we also see the underlying market trends that are good and that translate into attractive possibility in both our existing and new foreign markets across our 2 distinct solution areas that we cover with our digital signing and with the document workflow with Penneo Sign and also our Know Your Customer software, the Penneo KYC. So this was our business highlight for what happened in Q3.Let's dive into the details and here I will hand over to you, Casper.
Thank you, Christian. I'm glad that I can spend some few minutes with you guys. I've chosen to bring 6 slides, 3 of them is focusing on our ARR and portfolio of customers and 1 of them is just matrix and then we have 2 of how we're investing into the organization. Starting out with this slide. It represents all the cohorts, cohort is a group of customers and we have grouped the customers in the year they became customers. So at the bottom here you see a light blue color, that's the customers -- that's the ARR from customers being customers since '14 and then year-over-year development. What is pretty unique for us is that all our cohorts is growing year after year after year and it's also a true fact at the end of Q3 this year. There's only 1 cohort here who has slightly decreased. All other cohorts has developed positively.Moving 12 months back from end of Q3 last year to end of Q3 this year. First of all, our ARR back then was DKK 65 million split by 10% to Know Your Customers and the rest 90% to the original Sign product. When I just start from the end here, we start to see churn uplift and newbiz. In terms of churn, we still are maintaining a pretty low churn on 4% ARR churn and we are satisfied as long as it's below 5% and I'm glad that we once again now can say that it's below 5%. On top of that, we have added 18% bringing our net retention rate to 114% meaning that when we end this quarter Q3 this year, we have an ARR on current customers meaning customers who was customers before end of Q3 last year DKK 73.9 million and 13% of that ARR is coming from Know Your Customers.And on top of that, we have added new customers in 13% meaning that we end our ARR at 82.5% and approximately 12% of that is coming from Know Your Customers meaning that the product we introduced back in 2020 is now having a higher percentage of our portfolio than we had back then and it's mainly that uplift has driven that figure. Then domestic and foreign ARR base split. The reason for me to bring this slide is to present the kind of status on how is it actually going since new and internationalization journey. It's also important for us to highlight how much our ARR meaning portfolio is coming outside of Denmark. The first thing I'd like to highlight here is that the percentage of ARR coming outside of Denmark is now up at 29% compared to 22% some years ago. So it's actually going in the right direction.If we look at the region, then one of our best and biggest market right now is the Belgium market. It's based on EU as you might know obviously to Norwegian and Sweden, which is local currency. So one of the reasons for Belgium to take a higher percentage of the foreign ARR is both that Belgium is a great success for now. We have a very high traction in that market, but also in Norway and Sweden there's kind of pressure due to currency loss at the moment. And if we look at the ARR from new customers, 63% of new ARR is coming from outside of Denmark and that supports our case that we want to grow outside of Denmark meaning taking traction out in Europe. One of the reason why ARR from Denmark or domestic market is also growing is that a big part of our business is to grow our current customers. So of course Denmark is still supporting our growth.And then I have just done some calculation. If we hadn't seen this currency loss in Norway and Sweden, the growth from foreign market would have been up to 32% year-over-year. Well, SaaS matrix, that's another measure which is important for us since it highlights does it make sense to scale the business meaning getting more customers onboard and so on. So before I dive into the 12 months period, I'll just dive down to the quarters here. Q3, as Christian said, is a low season for us so we are pretty glad to see that we have more customers meaning 113 customers coming in this Q3, this low season compared to 78 last year. And we're also glad to see that the average ARR per new customers has increased from DKK 14,000 last Q3 to DKK 18,500 this year. And even despite that, we are willing to invest more into the sales organization meaning scaling the sales organization.We see lower customer acquisition cost and the reason here is that we have had that many customers in a low season. So if you look at the number last year and Q3 is a low season meaning a high customer acquisition cost, we have the same cost invested given the fact that customers [indiscernible] is on holiday. Then last year it was DKK 36,000 and now it's down to DKK 32,000. So it's pretty cool to see that we are having more customers in, they are bigger and they're cheaper to acquire. In previous slide, I highlighted net retention rate at 114%. So it's a testament that we now in this level 113% and this quarter when you look at 12-month period, we actually managed to increase 1 percent point to that strong number. And when we have bigger clients in or customers in and we have a strong net retention rate, we also increase the average revenue per account.Looking at the 12 months period when we replace Q3 last year with this Q, we see that we also increased the total number of new customers in the 12-month period, we increased ARR from new customers, the initial ARR per customer and we decreased the customer acquisition cost. So in terms of both the quarter and also the 12-month period, we are pretty glad about this development. And then we are coming to the P&L meaning what are we actually investing into this organization. What you can see here the revenue is growing by 20% and when we look at the ARR growth, it was 27%. The main reason for that is that we have a delay in invoicing the transaction-based ARR. So we have already seen that we have catchup with this meaning that when we end Q4, the full financial year, you will see a growth in revenue approximately on the same level as ARR. So that's kind of just a fluctuation.In terms of cost of sales, it's only growing by 5%. One of the reason is that we are doing a great work about our Amazon Web Service, the server that we're using to host our product and the customers' documents and the [ ceiling ] and so on and that results in a higher contribution margin. Due to seasonality, it's a lower number than at the end of H1 and we expect the Q4 to end in approximately where we saw the H1 was so approximately 85%. Other external expense is increased by 10%. One of the reasons for that is investing into marketing related activities. That's a part of our journey that we want to scale the sales organization meaning also the marketing efforts. When we then look at the last number here, the staff cost, it's increasing by 28% and it corresponds to the increase in headcount. So if you look at the first 9 months last year and compare with the first 9 months this year, you have scale up in last year and this year it's more or less steady, we have scale up at the beginning.So the average number of headcount you have in each month is approximately 30% higher this year while it corresponds to the increase in the staff cost. Hope it makes sense. Meaning that especially the fluctuation in the revenue bringing the EBITDA negative to 17.7%. And when you take into account both the low seasonality in our invoicing and also the fluctuation in the transaction-based ARR, then when we look at the end of Q4 meaning the full financial year, we are pretty confident that we will be within our guidance and Christian will come back to our guidance, but it's between negative DKK 10 million to negative DKK 15 million. So we are confident that we will reach this amount in the financial year. And then the last slide for me is a slide where I compare the growth in our ARR. For me, the growth in ARR is representing the short-term outcome of investment and I compare it with the negative free cash flow.Negative free cash flow is a combination of 2 things, both how much cash does the operation either generate or take out of the bank account and the other part is how much are you investing into product development, activating cost. So if you combine that, then you see that we have a negative free cash flow on 25% and a growth of ARR on 17.5% meaning that the ratio between those 2 numbers is a negative DKK 1.4 million here. What is special is that if you open up our H1 report, we actually expect that number to go in the wrong direction. But what we have seen is that we actually managed to get the better result in Q3 due to some fluctuation in tax where they have postponed some employee taxes. So when I look at the numbers, we expect in this financial year approximately on this level DKK 1.4 million negative and that's a part of our investment plans that we set out in the spring last year.This slide also highlight -- and that's the reason for me to bring 2020 and '21, highlight that when we start up a new investment period, you will see that we invest a lot into scaling the organization, the product team and so on. And before we see the results in the growth of ARR, then it will take some time. Exactly what it did back in 2020 when you had negative relationship on DKK 1.7 million and then a lower negative relationship in '21. Here is the same we start out this investment period in '22 and now we see we are again on this DKK 1.4 million. And what we have stated in the report is that we are able to actually manage next year where we can balance out how much does ARR growth compare with the negative free cash flow. And I think we have said it like we expect the ARR to be higher than our cost base next year. So when you end the next year, you could expect that we have balanced out this negative amount meaning it's still negative, but it's more balanced.And then I will hand over at the camera and the mic to Christian.
Thank you. So let's go into the outlook for the remaining of the year starting with the ARR guidance. So as we are getting closer to the year-end, we have updated the ARR. So we assume an ARR level of DKK 87 million to DKK 92 million so this corresponds to an ARR growth of 23% to 30%. This is a narrow ARR guidance, but within the previous communicated range of DKK 87 million to DKK 95 million at the end of 2023. So the outlook is based on the currency exchange rate per end of 2022. In the Q3 report, we had a positive impact from the change in the currency exchange rate between the Norwegian and Swedish up against the Danish krone. But since we closed the book there, the rates have changed and we do expect that to continue and this can have both a positive and a negative impact as we report the ARR based on the current currency end of the quarter.If we go into the EBITDA. For the EBITDA guidance, we are maintaining the guidance for the remaining of the year. So we anticipate a negative EBITDA between minus DKK 10 million and minus DKK 15 million for the full fiscal year. So as you just also mentioned, Casper, while the EBITDA end of Q3 2023 was below the guidance range; we also expect as we also commented back in the H1 report that we are confident that we can meet the guidance for the entire year. There are fluctuations in our billing cycles and that's the primary reason why the EBITDA varies between quarters. So this was for the guidance for the EBITDA and this also is our last slide.So now we are open for questions for everyone.
And I can see that you, Mikkel, you're the first to raise your hands. We will take all questions that were coming from all of you. But let's start with you, Mikkel.
So I have 3 questions. The first one is related to the hirings seeing that your net intake is down quarter-on-quarter. Could you shed some light on what your expectations are for Q4 in terms of hirings and also into '24?
So if we look at the numbers here, then we have hired a lot in the beginning of the -- from the beginning of the year and we are basically continuing investing in our growth and now we have levels going up. And then we expect that that be more or less the level. There can be a few more in Q4, but then now we are into that level. So it's another growth or lower growth in our employees compared to what we have seen so far.
You can also say, Mikkel, that if you look at this slide, it represents that we have hired a few people. We have set the team up for success and now we need to see that the outcome is also coming then next year. So we actually see that it says that we have reached this level as a great talent and now we just need to work with the team.
Okay. Makes sense. Second question is related to your guidance, I think it's quite wide I know the ARR guidance since you only have what 1.5 months left of the year. Could you talk about some of the risks in terms of the top line guidance? What could make you fall sure of the guidance? What could make you exceed it, large KYC deals?
Yes. So what we experienced. So even though we are close, then we have a range still and that's when we look into our pipeline for the remainder of the year. Q4 is normally our biggest quarter and there are some fluctuations when the order will be. Will it be this year or will it be next year? So we have now kept our guidance according to what our expectation is and that is true still. There are a lot of deals to be closed either this year or next year. So that's the reason for it.
Okay. And the final question I have before I jump back in the queue is related to the smaller deal sizes you're currently signing. So have you had any examples of customers that have initially or that have agreed to take on smaller deal sizes and have actually already say, bought more or fewer solutions or is that too early?
Yes. So what we experience is that that we have the initial deal size that are maybe smaller because they want to start in a corner and not make too big a commitment. And then when they are increasing the engagement, then they are also increasing the commitment to what they buy. So that we have seen already, yes.
Already from customers in the past few quarters, new customers.
But normally it takes some time. It depends a little bit on how few it is they are buying. But over time we expect them to buy more.
Can I ask some questions? I will be asking some questions on behalf of other investors. So the first question here. In the last few quarters, you have explained that a lot of the investments you are doing is for the mid or long term not the short term. Can you elaborate a bit more on this on the product side? Is the investments primarily upgrades and preparing for expansion to Germany or are you also focusing on big new product releases to go with your current suite of products?
Yes. So we are investing in both our products Sign and KYC and that's to benefit both our existing customer and existing market, but also new markets. So that is both. So we are preparing for new markets. But as we have just recently seen, we have released an updated version for our KYC for Sweden and also for Norway with some enhanced functionality and some more best practices according to the legislation and how that is translated. So that we are going on an ongoing basis. So these investments are to the benefit both from existing market and new markets and existing customer and also new customers.
Okay. Perfect. And then just a kind of follow-up question here. Do you have an updated timeline on entering the German market or a time where you expect to start this expansion?
So the update is as according to our plans that we have right now that we expect that we will enter Germany. We are still in this investigation phase with a few customers where we are in dialog and also preparing the solution for meeting the requirements. So that's why we are still here compared to the same status that we also gave in H1.
And then I would just have 1 more question before going into the queue again. You are seeing great traction in Belgium. Can you put some numbers to the total addressable market that you see in Belgium compared to Norway and Sweden and maybe also some figures on the market size in Germany? If not in Danish kroner than in a number of ideal customers.
So if we look at Belgium and basically Belgium, that is larger than Denmark and Norway altogether. So even though someone says that's a small country, that's only physically; but from a total addressable market, they are very much bigger and that's both due to the size of the country, but also the number of advisers they are using in both businesses and private persons. There's a lot of tax advisory services that are using. So that's quite big and that's the reason why we all focus on Belgium is high continue our momentum in Belgium. It's a very high focus for us. When we look at the German market, that's the biggest of Europe so that is more than 10x bigger than Denmark. So that's very big as a market and in reality it's also different markets within the market because it's so big. So there are difference between north and middle and the south from the different regions. So that's a very big one. So let's go back to you, Mikkel.
I have another question related to Germany. So now we just talked about hiring in Q4 and it seems like you should not expect too many new hirings. But is that including Germany? I mean do you already have the resources there? Would you need to hire additional people if you enter Germany in, say, H1 '24?
So we are adding more resources. But when you look at the growth we have had so far where we have invested a lot in our product as we have also described, then we are at that level. So the future growth of additional resource will go into sales and marketing into these markets.
[ Alan ], you are welcome to take the next.
So you are still experiencing some smaller deal sizes for new clients. Do the clients you acquire at the moment look like the clients you acquired a year or 2 ago or has anything in the characteristics of these clients changed?
That's a very good question and it is more or less the same. So same type, also the same ideal customer profile going after. So when we see the reduced especially in the Nordic countries reduce in total sales, that's because of the initial commitment that they are taking up. They're simply more cautious in their buying behavior. We do not see the same in Belgium right now.
Okay. And does this change anything in the way you work with uplift of the clients moving forward or do you work the same way as if it was the same deal sizes that you would start out with?
Yes, we will. So it becomes even more important also going forward that we secure that we are only committed to part of the organization, but also continue to uplift. So that is an increased focus for us also as we go. There's only both of those new that we have got onboard, but also secure that all the existing ones continue to have the value of our solution. So that is our focus area also going into next year after we have closed the deal and customers are happy.
Perfect. And then a final question here. You have a saying that you will never run out of cash. This can mean 2 things. When the current investment periods end in 2024, either you go out and raise more capital or you turn profitable? As I see it, the market today values profitability a lot higher than growth. So if you should make the decision today, are you then leaning toward raising more capital or turn profitable?
So in our current plans, we are planning with never run out of cash as you said and that we will never do and that means that we will have the ability at the end of 2024 then to be in a situation where the ARR is above the cost line. So we will basically be profitable and that is the current plan. And whether we then raise capital or do other things, yes, that will be at that point of time. But we are focusing and all our plans is according to be in that situation.Are there any others that would like to ask a question. Otherwise I would say on behalf of Penneo and both of us, thank you very much for attending this call. And if you have any more questions, you are always welcome to reach out to us directly and then we can continue any dialogs you would like to have. Thank you so much.
Thank you.