Carasent ASA

OSE:CARA

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to Carasent Q3 report for 2023. For the first part of the conference call, the participants will be in listen only mode. [Operator Instructions]. Now I will hand the conference over to CEO, Daniel Ohman; and CFO, Svein Martin Bjornstad. Please go ahead.

[Daniel Ohman, executive]

Good morning, and welcome to our presentation of the third quarter. This is the agenda for this presentation. I will start with some highlights of the third quarter, then give a business and market update, and then I will hand over to Svein Martin, who will give a financial update. So let's start with the highlights.During the third quarter, we have continued our transition to a more focused and nimble organization with a lower cost base and working very much closely with our customers. If you look at the ARR growth, we are growing more or less in line with history. But in Norway, we are a bit behind. And the reason for that being that in Norway, our systems in Norway typically have much larger customers and much longer sales processes. But we have very good pipelines that we get back to a bit later on this.The inorganic growth in the quarter is coming most from HPI and Confrere, just to mention briefly, Confrere is the product where we bought the customers and the brand a little bit more than a year ago. We're still paying for the old technologies. All revenue we get from that product as directly to the owner of the technology will transition those customers to our own platform during the first 6 months of next year, lowering our costs come considerably in that area.During the quarter, we have also started distributing roughly NOK 250 million. This comes from our strategic review, where we have concluded that we do not need all the cash we have on the balance sheet. We have very many exciting acquisition targets, but we want to go ahead at a sensible pace make sure the good deals and that we can handle them correctly. So therefore, we have realized that we do not need all our cash the coming 2 years. Looking also at Webdoc, in the quarter, we signed 28 clinics, roughly where we usually are. What's worth noting is that in September, we had a record month with the Mosconi ever signed, which I'm very happy about.Continuing to the this is a market update, we can see here that our revenue, this third quarter is not the best quarter from a revenue perspective. It never is for Carasent. And this trend has been strengthened by the acquisition of HPI, which do many tests, and we do very little tests in the vacation months. What you also can see here is that we improved significantly on cash EBITDA. That's a result of the cost-cutting program, obviously. What's also worth noting is that the third quarter, it's not that good from a revenue perspective, it's really good from a cash EBITDA perspective.So we have some vacation effects in those 11%, so for the next quarter, I expect that to be roughly flat, and then we'll continue to grow into our cost base. EBITDA is improving same way as cash today. That's reflecting our focus on our present products and investing in them and also a bit more conservative view on capitalization. In general, we really focus on cash EBITDA and not EBITDA. So what I'm focusing on at the moment, there are 3 areas that are my main focus. It sales is to grow into our cost and launch were to X.In general, we focus on selling our present product. And the way that's been done historically mostly by word of mouth. That's really a key. So the investing impressive products really improves in that sense, and it will help sales going forward. And I think a good evidence of that an early indicator, so speak, of sales is that the number of support calls has been lowered by roughly 40% the last 6 months compared to the same 6 months the year before. And that's even though we have more customers, and it's really a result of working a lot with the product, getting rid of bags, improving functionality, which has had the most negative effect for our users.So we really expect that to translate into more sales. We are also testing and experimenting with many new types of sales, working with inbound marketing and strengthening the organization within both sales and marketing with new different competencies. We are also investing a lot in home pages, search and new results and branding, where I think we've been lacking a bit. In Norway, where we are a bit behind, it takes longer because those products are heavier. It takes longer to sell in the typical customer is larger, and the implementation process is much longer. With Webdoc, for example, where many customers who are live within a month of signing up for Webdoc.For our Norwegian product, it takes much longer to a year-long process but much larger contracts on the other hand. What I'm really happy about is the pipeline in Norway and where we also signed a letter of intent with a very large customer, which I hope to be able to present a finalized deal with in short. And in general, it's good to note we're not aiming at selling consultancy services. We want a recurring revenues. So if there's any place we give rebates on selling our products, it's on the consultancy side, and that's something we're really pushing in that direction to make sure that we have good recurring revenues, and we don't want this lumpy results moving up and down.Looking at our cost structure. We took down the cost structure quite a lot during the second quarter. We're still investing a lot in our present products. We still have a quite high cost level, which we aim to grow into. And that is a lot of the part will be, of course, improving on our sales side, but also to make sure that we have run tight ships and speak and that we have control of our costs. And we have 2 products which are not really living up to our expectation in the quarter and the last couple of quarters, and that's HPI and Ad Opus, where we, therefore, have decided on NOK 5 million of additional savings on a yearly basis. That's starting by the end of the year. It should be noted though that those are savings within those products. We are also investing, as I mentioned earlier, in the marketing sales and also compliance. So the important part here is to cost under control, make sure that we go in the direction we want and keep costs steady, so to speak.There's also a lot of folks on COGS where we can do quite a lot out. That's not really been our focus so far, but we start working quite a lot with that. The third area, which we're working a lot with is the launch of Webdoc X, and Webdoc X for you who doesn't know is our brand-new system, or system, where we take all the learnings from Webdoc, which is an excellent system but been for Swedish market where we take order learnings from that, building complete a new system from ground up toting Europe and where we're putting a lot of effort in the last quarter is listing potential customers in different countries, really understanding the market dynamics, the competition, what our customers are looking for the niche market and then deciding on which market to go ahead in and in what way.And I really look forward to talk more about this, much more about this on our Capital Market Day in 1 November. So I hope that all of you can make it. With those words, I will hand over to Martin.

[Svein Bjornstad, executive]

Thank you. So looking at the financial highlights of the quarter. We had revenue growth of 17%, where organic growth was 7%. Recurring revenues and net retention rates grew in line with the previous quarters, approximately, while EBITDA margins of 8% was quite flat, but cash EBITDA improved significantly compared to Q2. And we had an ARR of NOK 222 million as per September. So our revenues ended at SEK 56 million in Q3, where we had recurring revenues of 95% of total revenues. And organic growth was, as you can see on the bottom side of the graph, lower than it has been in the previous quarters at 7%.And that is a result of low consulting revenues, as Daniel mentioned. So Metodika been the main driver of consulting revenues during the first half of the year. And Metodika Q3 focused on other projects, and that mainly includes winning new business, which we hope to see effects of going forward. Also, our Norwegian HR system acuities finished a large customer development project before summer and also focused on recurring revenue growth in the third quarter. So that is our main strategic focus.Our recurring revenues grew 13% year-over-year, which is quite in line with the history. If we look at decline in recurring revenues from Q2 to Q3 from NOK 56 million to NOK 53 million. That is mainly driven by currency effects of NOK 2.5 million. And also the transaction-based revenues, including, for example, SMS and HPI test, as mentioned, are typically very slow during the summer months, which we also saw last year. When we take a closer look at where the recurring revenue growth comes from, we had a net retention rate of 108%, as mentioned. And this is driven by a net upsell of 10% and churn rates around 2%. And churn rates have been around 3% for the last couple of years, and that is also including involuntary churn when people go out of business and retire, et cetera. So it's an extremely strong position we have. We operate in protected niches, and we truly have a business-critical system for our customers.So it's when we now focus a lot on our customers in developing functionality. We also see that we have an excellent position to build from. New customers accounted for 5% growth in the quarter. And that's relatively in line with what we have posted the past few quarters, and we are doing a lot now where we focus on driving this ratio through the sales initiatives, but also on the product development side.Looking at our cost base, we had completed a cost savings program in Q2, as mentioned, where we had cost savings of approximately SEK 40 million on an annual basis. And also that these savings have taken effect in Q3. The SEK 15 million decline from Q1 is also partly driven by holiday effect as we have lower personnel costs and salaries during the summer months. But the main driver is still the cost savings program. And we now have a cost base where we aim to grow our revenues and scale into this cost base as we still have a lot of capacity in the organization for growth.Looking at the profitability development, we see that the EBITDA margins is quite flat during the year, but capitalized development has decreased significantly as a result of the cost savings. So we have improved cash EBITDA from Q1 to Q3. We see an improvement of SEK 12 million on cash EBITDA level and the improvement in last quarter of SEK 5 million. And the target here is to keep costs quite steady for many quarters going forward and grow our revenues and then scale our margins as we do that. With that, I can open up for questions.

[Operator]

[Operator Instructions].

[Svein Bjornstad, executive]

We have got some questions in the chat. If there is no one on the phone. First question from [indiscernible], can you share what you will be doing to lower COGS more specifically?Yes, sure. So there is a couple of different initiatives where the first initiative is what Daniel mentioned related to confer where we have 100% COGS on the revenues as of today, and we aim to move the customers to our own product, where we basically have no COGS. Secondly, we are working on moving some of our customers in the Norwegian market from semi-cloud solution to a fully web-based solution, which has been done for Ad Opus in Norway, where we basically have very high cost on the revenues as is on the current solution, but the new product will have will have lower COGS. And thirdly, we are working quite systematically now on negotiations with our supplier on the different levels where we see great potential now that we have the scale that we have to do something about the costs.

[Operator]

Next question from [indiscernible]. The number of developers is still very high in relation to total ARR, Meanwhile, ARR installing over the last few quarters despite efforts to revamp sales when will the very large investments into [indiscernible] generate any returns and this current still too cost heavy at this growth rate, reasonable profitability levels will take many years to achieve.

[Unknown Executive]

So thank you for that question. Yes, for sure, we haven't focused on maximizing cash EBITDA at this point in time. We believe very much in our products going forward. So we really believe in investing in them. I think we're looking at the number of developers and you're into Africa, many are working with Webdoc, which do not have any revenue. So when looking at a number of developers in relation to ARR, I think you should not include developers working with X because I will give you X is not driving any revenue at the moment at all.We still believe very strongly next. Looking at the European market, the Nordic companies are ahead. Webdoc is an excellent product. It's very well liked both by using them and management of our customers and taking what we learned from that, both good and bad and doing an even better product for other European countries with much larger markets make a lot of sense, especially since some of them are just at the moment, opening up to cloud-based solutions. And then the question, and it takes some time, I think, for our efforts to translate into to sales.I think we will see step by step, it will improve quite significantly. The basis for sales historically has been the word of mouth. And as I mentioned before, many of our customers felt that we're not feel there for them. The last couple of meetings we had with major customers have been very positive. And we're putting out a lot of new functionality. We also will add new customers if you talk about Webdoc. In Norway, we really have these very long sales processes. It takes typically like 1 or 2, almost 2 years for large customers to translate into ARR from signing off contract. So for example, letter of intent, I mentioned earlier, which would be a very large customer for us.That will take roughly 1.5 year before it translates to ARR. There will be some consulting revenue on the way. But that's not where we focus on, we have focus on getting a really good ARR in 1.5 year when that contract starts having effect. So what's really good to know is that we're building it for the long term, not here now. We're also investing a lot in the home pages, marketing efforts. Something work, something doesn't. So we're testing. And I think it's important to test. None of our competitors are really doing any kind of inbound marketing. So we have to see [indiscernible] works, but we have a good bit on board doing that. We're adding a couple of more components actually within that area at the moment. So we have high expectation of our ability to grow sales.

[Operator]

Okay. Next, we have a few questions from market [indiscernible], could you comment on the transaction-based revenues and consulting revenues besides lower summer months? Has anything else happened here, previous Q3s have often been flattish quarter-over-quarter, not least on the recurring revenue side. The sizable pattern seems to be somewhat new. And you mentioned HPI it's something more. So I can start.

[Svein Bjornstad, executive]

I would say, the development quarter-over-quarter is partly driven by currency, as I mentioned, without currency, it's quite flat. And then also HPI has a business model that's almost exclusively linked to volume and tests. So when we have slow months, we have very low revenue. And when we have active amounts, we have higher revenues. So that makes the effect stronger. I would say if you look at the development quarter-over-quarter, Q2 to Q3 last year, but the figures were a bit boosted by the acquisition of Confrere in Q3. So that was the reason it was flattish. But if it hadn't been for that, it would be a decline there as well.So I would say it's nothing new on the seasonality, except HPI, which enforces it a bit. Our Consulting is lumpy. It will vary from quarter-to-quarter. And I would say we had a very active first half of the year. And the main focus for us is the recurring revenues. Next question has the variable revenue picked up pace again after the summer months. Yes, I would say there's nothing changed in the seasonality aspect of that SMS and test revenue compared to previous years.Do you expect consulting revenue to pick up pace again? Or was it impacted by a few finished projects?

[Daniel Ohman, executive]

Quite a lot were finished projects during the first half, and it's really not the focus in getting that type of revenue. Consultancy is great to get our customers to use our products better and to improve products for our customers. But what we're aiming for is to build profitability through ARR, and that's really our main focus. And looking at for example, when we're selling Webdoc at the moment, we're trying just to get really, really happy customers. And an important part of that is that you get good education that this system is implemented really, really well. I know it's first time from being a caregiver that sometimes was a problem. And you try as a caregiver, you really want to guard your cash, right. So the implementation cost is something that you really don't like and when it's time to change your system, you know that you will be standing sinful a while with high fixed costs.And then on top of that, you have consultancy you have to pay for implementation of system. So it's much better for us to give rebates that lowers the threshold for customers to join, for example, Webdoc, and then we pick it up through the ARR over time instead. And that's how we're thinking all our system. And also if they do not ship out on the implementation phase, they will be much more happy with implementation. So we started measuring all implementations, what our customers think about it because once again, word-of-mouth is really important for sales. We try to move into other areas of sales, but it's been the main driver at least [indiscernible].And in the last couple of implementations we have had an average score of, I don't remember it was 4.5 or 4.6, so really high core for implementation. And that's when the Carasent says how have with the implementation overall of Webdoc. So we're doing really well that, which we also expect to translate into stage going forward.

[Svein Bjornstad, executive]

I think next question you talked about Daniel. But could you talk about the pipeline you see in general, larger clinics for Webdoc and Norwegian market, et cetera?

[Daniel Ohman, executive]

Yes. So if you start with Webdoc, we had a record number of clinics, but they were quite small in September. A key part into getting up to large clinics is doing the surgery module. Surgery is typically much larger clinics. Then we talked about employees between like from 35 up to 150 employees. So really big clinics, also an area where the competition is, I would say, even lower than a number of other areas.We have started discussing that module with customers having really good responses. But that will go live first transversion roughly next summer. So it will take some time that translating to lower customers. But I think in general, work we do with improving one of math, improving sales for new home vices, new rebound technics and so on we will translate into more sales. Let me take some time for us to really know when. When looking at Norway, we have the systems that the large system customers for the large systems we sell in Norway [indiscernible], they typically have large customers, much slower processes in sales.So the discussions are long, that speaks to 1 month or year almost sometimes before you sign up. And then the implementation is another year at least. So it takes time to go in to say that, the positive part is that one large customer run revenue for quite a long time. And then what we've seen in Norway with [indiscernible] which has been a large customer, leading to growth for quite some time. We're done with implementation of that customer. And we are now working getting the Nexstar customer online for that system. What we need to make sure going forward is that we will not get this timing in between that we always continue to sell.So that the organization is robust enough to even ask you are implementing a large customer, which takes a lot of effort from [indiscernible] that we still have the time to work with new customers. So that's not stating still while we're implementing a large customer that is an important area. And as I mentioned, we also signed a letter we tend for a large new customer in Norway. And I really expect it to translate into deal quite soon. And in that case, we will be no so far that we've done with Carasent with customers. So we really hope to get that finally side within short.

[Svein Bjornstad, executive]

Great. Next to what can COGS, I think we answered that. And then how do you view the organic growth rate in Q3 compared to previous quarters? Do you expect organic growth to bounce back during fall?

[Daniel Ohman, executive]

Yes, I expect there are to start improving. As mentioned in Norwegian, customers will sign takes time before they translate it to ARR, but they translate into some consultancy revenue on the vendor. So that's good. And then yes, all of these efforts we're doing, and we're doing really a lot our marketing to now is 4 people. And if you look at our home page or you look at our materials, we are updating it step-by-step, doing such an optimizing buying ads and so on, doing cold calls, we're testing a lot of different things. But good effects are going into Webdoc home page, and you see that there's some work to be done, and that's what we're investing in at the moment also to make sure that when you're looking for a medical ecosystem in Sweden, you will have Webdoc on top, and that is sold from webdoc.com and not Metodika, and it's really clear what you can buy, and that's a strong site for you to buy on. So it's in all areas, we're improving our sales process and material around it.

[Svein Bjornstad, executive]

Do you expect to grow into your cost structure next year?

[Daniel Ohman, executive]

That's what you mean. I mean, over time, and we'll talk about this at the Capital Markets Day, we want to have really good margins. And that will take some time. But we get back to that, [indiscernible].

[Svein Bjornstad, executive]

For record, you mentioned a large development project for an individual customer, development t project for individual customers part of Carasent strategy?

[Daniel Ohman, executive]

No, not really. So we're moving away from that. The development projects we do now for customers are most just as a result of sales. So some of our especially Norwegian systems are implementation heavy. So Webdoc, it translates from sales to implantation really, really quickly. Sometimes when users all know the system, it's in a day or so. So it can be really quick for a small clinic different. But also for lighting, its which went up been very quick. So setting up the system, the Norwegian system for our Norwegian customers takes much more effort. And there, we have to get paid on the way, but that's not where we make any good margins, and that's not where we want to make it more. So it's not a reported our strategy from the point of revenue, but it's an important part of getting new customers online for new systems.

[Svein Bjornstad, executive]

Next question from Adam. You mentioned that you will use the remaining cash balance for acquisitions. Can you elaborate on your pipeline and what type of acquisitions you're looking for?

[Daniel Ohman, executive]

Yes. So in the near term, we have a long list of potential targets that would really strengthen our position in our present markets and would add value to our present products. But the main aim in the short to medium term is to add a geographical market with Webdoc X. I think it's very important to do that through an acquisition because to really know the market, understand the customers, have some customers to stock worth have some fits on the ground, not starting with the back page, so to speak.So that's really what we focus on the near term. If there are acquisitions hoping up that we have on our list from our strategic review, we will take part in those process, but we're not starting, we do not initiate any process at the moment. Also, I think in the private market, price hasn't come down as in the public so far what we said. So it also the acquisitions have to make sense from a financial perspective.

[Svein Bjornstad, executive]

Yes. Next question from Simon at Danske. Did you lose a big Webdoc customer in the quarter. This is the first time Webdoc is not growing sequentially. I would say, when you look at the figures that we report on Webdoc, it's affected by currency as well, if you compare it to Q2, where we had the current NOK 1.02 now we have 0.97. So that is the main reason for the development. We didn't have a lot of new implementation during July and August, which is typically the case during summer. So that's the main reason for the trend. [indiscernible] How should we think about growth and profitability going forward? Should we expect gross OpEx to be flat going forward? Or could we expect further cost reductions if you are not successful in driving accelerated growth [indiscernible]?

[Daniel Ohman, executive]

So we'll get back to our financial targets soon to get them on stay. But in general, our different products are growing at a little different pace and doing different well, so speak from a financial perspective. We have a clear budget and [indiscernible] for each of our products. for them to reach good levels of both growth and profitability. If they do not, then we will do further cost cuts, but that's not our main strategy. We believe in the products we have, we believe that we can win customers.The challenge is a bit that many of our products haven't been out trying to win new deals for quite some time because the main goal before was the one [indiscernible]. So they have really been out meeting customers. So for example, in our new winter organization, we have a Head of Sales, which we never had before I started. I think it was somewhere on March. In the heads of the organization haven't had time either to go out and meet customers.So now we're out really meeting customers, and it takes some time for that to translate into sales, but we believe strong new products. We have a good pipeline in Norway. So I'm quite confident that we will gain there. There, we have, as you always have minor issues. And if in any part of [indiscernible] those get too big, we will do further cost reductions. We can, and there is room for it. But at the moment, we believe strong in our products.

[Svein Bjornstad, executive]

On the operating free cash flow, EBITDA, I mean is CapEx you say most cost reductions are in full effect in Q3, but still EBITDA once CapEx is at the same level as in Q2. Why is this, it's [indiscernible] of SEK 5 million, and that's seasonality, of course, but that also affect at the upcoming Capital Markets Day?

[Daniel Ohman, executive]

So as to send them out to all of you, that's something that needs to be communicated directly when those take and especially what those stores will look like.

[Svein Bjornstad, executive]

What was the organic growth. And the final question, we have targeted revenue generation?

[Daniel Ohman, executive]

It takes time to launch a new system. [Indiscernible] to make sure that we have a really competitive system. But we'll come back to all of this on November 7.

[Operator]

Okay. That was the final question. You want to wrap up?

[Daniel Ohman, executive]

Yes, then I would really like to thank everyone for all the questions and for the time, and I hope to see as many of you as possible on 7th November. Thank you for today.