Sikri Group ASA

OSE:SIKRI

Earnings Call Transcript 2023-Q2

[Per Lomsdalen, executive]

Good morning, everyone. My name is Per Haakon Lomsdalen, and I started in the position as Head of Sikri Group earlier this month. I'm very happy to be here together with our CFO, Camilla Aardal, to present our results for the second quarter. I spent time throughout the summer meeting customers and employees. So far, as in how Sikri Group plays an important role in the digitalization of our society. I'm more enthusiastic than ever about how we will be able to continue to create value for societies, business and consumers. I really look forward to being a part of this. As the Sikri Group definitely is a company with great potential to generate shareholder value. I've also been looking forward to this day, not only to be able to present strong results but also to meet investors and analysts who follow the company and to answer questions from you who are watching this webcast. Please feel free to ask your questions throughout the webcast player as we go. And Camilla and I will answer them at the end of this presentation. But first, let me quickly go through some highlights from the second quarter and present why Sikri Group is such an exciting company. We had a very strong quarter driven by solid growth and improved margins. We had a revenue growth of 9% year-over-year, and we had an improved EBITDA margin of 19%. This growth was driven by additional customers, good traction for new products and improved revenue mix. for the whole group. Looking at our SaaS business model, we have very attractive metrics. On the left side, you can see that we have 85% recurring and recurring like revenue, which is very strong. Looking at our ARR, we have a growth of 9% from last year, building up to NOK 383 million. Looking at our reported EBITDA increase we have an incredible growth of 118% from NOK 23 million to NOK 49 million.

And we have extremely solid cash flow on NOK 77 million, which we had NOK 12 million last year. So overall, the picture for the second quarter is very healthy. As a company, we are market leading positions, which we're looking at two different segments or attractive markets in Norway and Sweden. On the left side, we have public sector mission-critical software, which is our backbone where we started. We are working towards customers like government agencies and public organizations. On the right side, we have real estate data and geoinformation, which we're working towards real estate, homeowners, constructions, banks/insurance and telcos. Those are the two big markets that we are in and which we are leading in those different markets.

We have market-leading positions in four segments: Public, we have a high level of recurring revenue high growth and high margins. And we also have long-term contracts. Metria, broad offerings and customer base, growth in a highly challenging real estate market in Sweden but we have an uplift of 5% in EBITDA margins after the divestment we did earlier this year. On Private, we have high and sustained market share for real estate information, high traction for new products and services and we continue building new products is our key priority. When it comes to the consumer market, this is an investment case and first mover position is a volume game increasing number of monthly active users is a key priority. Currently, we have 850,000 unique users. And with that, we'd like to go more in details on the numbers. So Camilla?

[Camilla Aardal, executive]

Thank you, Per Haakon. I look forward to going into more details on the operational and financial development for the second quarter, which was a solid quarter for the Sikri Group, with good progress across the company. As Per Haakon, mentioned revenue grew organically by 9% compared to the same quarter last year. The growth was mainly driven by the public and private segments. Leading the way is the public segment, where growth was 14%, mainly driven by higher activity in implementation projects and steady growth in SaaS revenue. The Private segment saw some tailwinds in a continued challenging Norwegian real estate market, driving growth in real estate transactional revenue through Meglerpakke as well as growth in SaaS Solution revenue. On the other hand, the Construction market is currently declining, which leads to lower revenues in some of our other products within property development. The consumer segment is an investment area for the group, which we will come back to later, but is nevertheless good to see double-digit growth in revenues year-over-year. Annual recurring revenue is growing steadily, and we're currently working on the development of new revenue models. Metria's flat revenue development in local currency is satisfactory given the fact that the real estate market in Sweden was very weak which I will give more details on later in the presentation. The adjusted EBITDA margin for the Sikri Group for the quarter was 19%, up from 17% in the same period last year. The improved profitability for the group in the quarter is driven by an improved product mix and a continuous focus on cost and scalability in shared services across group companies. The strong focus on operational results has also materialized in a significant improvement in actual reported EBITDA, as Per Haakon mentioned. This furthermore translates into a strong improvement in net income as Q2 last year was affected by a higher level of one-off costs related to the Metria acquisition and listing of Sikri Group, while Q2 this year was a quarter focused on operations and organic growth. Finally, we capitalized development cost of NOK 22.6 million in the quarter versus NOK 25 million in Q2 2022. As a software house, growth in SaaS Solution and cloud models is our most important goal. And indeed, this is materializing as an increase in annual recurring revenue of 9%. We have a scalable business model, and our ambition is to continue to increase annual recurring revenue within our segments across Norway and Sweden. Our annual recurring revenue right now is at NOK 383 million and total recurring or recurring like revenue is now around 85% of our total revenues for the group, meaning that a high share of the group's revenue is predictable. I've touched on some of the drivers of the quarter's results, and let's now dive more into details of the four key segments of the Sikri Group. Starting with the Public segment, which consists of Sikri AS our strategy has always been clear, and we are pleased that the transformation to cloud solutions continues to materialize into higher annual recurring revenues. Annual recurring revenue improved by 15% from Q2 2022 to NOK 190 million at the end of Q2 2023, and total revenues for the quarter grew 14% from Q2 2022. The growth is driven by stable and high win rates and our ability to implement new agreements. We're also pleased to see that the churn rate remains low at only 0.3% in the second quarter. As many of the contracts in public sector are long agreements, the annual recurring revenue represents a large order book of future revenues. The public segment submits offers on almost all public bids where our products or services fit. It's also a priority for Sikri Group to upgrade our existing customer base from on-prem to our cloud solution. At the end of Q2, all because our customers had been moved from on-prem to cloud. One major win in the quarter that I would like to highlight is IKT Nordhordland a customer that we won from our biggest -- one of our biggest competitors. IKT Nordhordland comprises 3% of all Norwegian municipalities and is responsible for the development and operation of the ICT infrastructure in 11 municipalities in the Vestland County. This is just one example, and we're continuing to enhance our sales organization to strengthen our ability to capitalize on this type of large contracts. Furthermore, we have a growing business delivering digital automation with the use of artificial intelligence and had several customer projects in progress during the quarter. To further strengthen our AI capabilities, we acquired the start-up company, AIoT in Q2. The acquisition has provided Sikri with an improved offering towards both new and existing customers and we've already entered into an exciting partnership with Telenor for use and distribution of our AI solutions. The Private segment saw revenues increase by 9% in the quarter and delivered all-time high revenues and EBITDA margin. The real estate market in Norway is still challenging, but an upswing in the number of properties put up for sale drives higher transactional revenues in the quarter. Furthermore, the Private segment is quarter-by-quarter increasing its revenues from SaaS Solutions due to product innovation and good sales efforts. The sale of the user-friendly and flexible version of Infoland Meglerparkke, which is an information package for properties for sale was positively affected by the increase in number of properties put up for sale during the quarter. On the other hand, growth in the Private segment is also driven by the commencement of new homes. This market has been poor so far in 2023 with a decline of 43% compared to the same period last year, negatively impacting part of the private segment business. We are especially pleased, however, to see that the EBITDA margin has improved from 16% in Q2 last year to 22% in Q2 this year. The margin development is mainly a result of good traction for our new high-margin products, including the digital purchase agreement service, digital Kjøpekontrakt and our solution for digital registration and collaboration, Tinglysing or Samhandling. Going forward, we will continue to increase our product footprint, investing in services that we expect to improve the overall profitability. The main focus for the consumer segment is to continue to build great products, reach and network effects. Nevertheless, it is great to see growth in new subscriptions. Annual recurring revenue has grown by 19% from Q2 2022 and is now at NOK 41 million, and revenues increased by 12% year-over-year. To understand the consumer segment, it must be placed in the context of investments for future growth. We are investing in the development of the solution, broadening functionality, improving user interfaces, increasing focus on market visibility and preparing for future new revenue models. We can already see the effect of our growth initiatives with a solid increase in monthly active users this year compared to last year. The number of customers has increased by 13% in Q2 compared to Q2 last year. And as Per Haakon mentioned, there are 850,000 users of the Boligmappa solution today. More importantly, we have seen a strong growth in the number of active users. This is a volume game, and the value of the solution is increasing daily with 1,600 documents being uploaded to Boligmappa by every hour. Going forward, we're focusing on developing new revenue models, which will be introduced as the platform continues to grow. In the Metria segment, reported revenues increased by 5% and compared to the same quarter last year. However, excluding currency exchange rate impacts, the revenue development was flat. This is actually very positive in the light of a very weak real estate market in Sweden. The number of properties sold in Sweden declined by around 20% in the first half of the year compared to last year, impacting Metria's sale of real estate information in a slightly different way than for the private segment in Norway. Metria's sale of real estate information is based on -- or driven by properties sold or renegotiated loans, and around 25% of Metria's revenues are exposed to these drivers. This implies that revenue from Metria's other products have developed quite positively. Annual recurring revenue for Metria is at SEK 111 million, excluding the planning and surveying business area, which was sold for SEK 52.5 million in the quarter. Adjusted EBITDA for the quarter, as Per Haakon mentioned, was bolstered by the divestment of the planning and surveying business area. The presented figures are pro forma, and that does exclude planning and surveying also historically, but the actual uplift is around 5 percentage points. Now that the segment's business is focused on the group's core services, our priorities are reshaping and tuning the organization, continuing to gain traction in the market with Metria's SaaS solutions and developing further synergies with other group companies and thereby further improving profitability. Moving on from our four segments. We also want to highlight our income statement presented as actuals both for the quarter and the first half of the year. These figures are as reported and not pro forma. In H1 2023, Sikri Group's revenues increased by 22% inorganically and 5% organically compared to the same period last year. We also had a solid development in the gross margin, driven by a shift in the product mix. The EBITDA is significantly improved since last year, mainly due to a high level of one-offs last year related to the acquisition of Metria on the IPO. Depreciation and amortization expenses have increased compared to last year due to the increased amortization of intangible assets from acquired businesses. And net income has developed positively, as I mentioned earlier, from last year as the underlying business is improving and fewer nonoperational costs have impacted both our P&L and our cash position. The increase in financial expenses in the first half of the year is mainly explained by the increase in borrowings due to the Metria acquisition and some minor increases in interest expense on lease liabilities. As a portion of debt has been reduced, financial expenses are expected to be lower going forward as seen now in Q2 where the reduction already is visible. As illustrated on the left-hand side of this slide, our cash flow is impacted by seasonal fluctuations and Q1 is a strong quarter in terms of cash flow as the Public segment invoices a large part of its customers on a yearly basis in January, while Q2 is a seasonally weaker quarter in terms of cash flow. In line with this, we generated NOK 135 million in operating cash flow in the first half of 2023, translating into NOK 77 million of free cash flow when deducting CapEx and lease payments. Operating cash flow has improved since Q2 last year due to improved underlying profitability and the one-offs I mentioned earlier last year. Additionally, the reduction in CapEx, of course, impacts cash positively and lease repayments have decreased due to the divestment of Metria's planning and surveying business. The divestment brought proceeds of around NOK 43 million, positively affecting investment cash flow. And the group's cash balance was at NOK 110 million at the end of the second quarter 2023. Assets consist to a large degree of intangible assets, where NOK 1.1 billion is goodwill, and the remainder is capitalized development, customer contracts and trademarks. Equity is slightly above NOK 1 billion, leading to an equity ratio of 49%. During the first half of this year, borrowings were reduced by NOK 74 million and net interest-bearing debt is at NOK 625 million at quarter end. This includes lease liabilities of NOK 50 million. It continues to be a priority for the group to maintain a healthy capital structure and we have proved during the last year that we are focusing our efforts in this important area. We have a solid financial position and with improved results in this quarter, I believe we're in a great place to deliver even better results going forward. Thank you so much for following our presentation. Per Haakon and I will both return in a few seconds to answer any questions that you have placed to the webcast player. So if you haven't placed any questions yet, feel free to do so now. Thank you.

[Per Lomsdalen, executive]

Thank you, Camilla for a very good presentation of the numbers, and thanks for giving me a good start in the new company.

[Camilla Aardal, executive]

Very happy too. So now we have received a few questions, which we will answer I think we should start with you, Per Haakon. This is a very interesting question. You mentioned during the presentation that you will be working on improving margins going forward? And what do you see as the most important actions to realize this?

[Per Lomsdalen, executive]

Yes. So basically, I mean, I started last week, what we have been doing is that we look at all the different companies in the Sikri Group and dividing into the different product lines. So we are doing some analysis on where we really have good margin and where we do not have any good margins for the moment. And we're also looking at how we can merge the different product lines. And we have internally, we said we need to look into this in [ unused ] like one quarter to get up to speed, and then we will do a new analyze on which products we should keep focus on, which we maybe should not have that much focus on for the future. So it's a number game and we spend some time with the different categories to deep dive into the different product lines.

[Camilla Aardal, executive]

We have a new question that just came in. Stating and this is also, I think, very important. Hi, I know you're still new to the job, but what do you see as Sikri's biggest asset and biggest challenge as a company?

[Per Lomsdalen, executive]

Yes. Correct. I'm quite new. No. So I think we need to look into the different -- as I said, we are -- we have four segments, right? And we have the Public part, which is Sikri AS and then we have Sweden Part and then we have Boligmappa, and then we have Ambita. So it's four different companies. So we need to make sure that they are talking to each other when it comes to sales and also when it comes to the products. So we are right now sitting and looking into having a more cross function on the IT level when it comes to a CTO IT-level Board to make sure that we gain a positive relationship between the different product lines out in the market. So we make sure that customer can use us more broadly than they are doing today. And then we need to look into, again, where do we gain profit and where do we not gain profit for the moment. We sold a huge part of the Swedish organization to make sure that we are focused on the core business. I think for us, it will be essential that we are focusing on what we do and what we can't do. So we are focused on the Public side, which we are extremely strong. We have long-term contracts. It's a very solid part of the company with Sikri AS and is growing, as you can see in the numbers, and it's very profitable. And also when it comes to the Ambita part, which is the private market is extremely profitable, and we are growing in a tough market. And that's where we have our strong part of the organization. And then we have the Swedish organization, which deliver extremely well compared to the market situation in Sweden. But the market situation in Sweden is rough and it's not really something that we can do about, we can't really do anything with the market situation, but we need to make sure that we have the correct products who hit the market and that we get a good margin of those products. And we do that because if you look at the numbers in Sweden, we are growing more than the market situation. And then we have Boligmappa, which is a different kind of animal because that's where we are trying to -- we are building up a huge platform with we have almost 900,000 users on that platform. So that's a platform game. And we need to look into how do we do it with the revenue models for Boligmappa? Because for the moment, that's for us building up and the awareness of Boligmappa in the market. We have a very good awareness hit of Boligmappa, which would be stronger. But of course, it takes time. But we will start to look into the revenue models when it comes to Boligmappa. That was a long answer on that question.

[Camilla Aardal, executive]

Well, it's a diversified company. And I think you touched on it. I mean, the different companies do have their own very clear assets and strengths, which they're showing now and which do complement each other also in seasonality or in a poor market. I think a lot of people have asked us previously in investor dialogues and about Metria specifically because we now sold the planning and surveying area. And you touched on it a little bit. One question we've received here is what are our next plans in Sweden. So I think that kind of.

[Per Lomsdalen, executive]

Yes. Firstly, we are going to Sweden next week. So what we have been doing in Sweden shortly is that we have changed the whole sales leadership, the management team in Sweden on sales. We will be there and talk to them. I think we have now sold, as you said, P&S, which we don't -- real, that's not a part of our core. So we are now just focused on what we do and what we can do in Sweden, which is a core. Those products we can also use in Norway. We have a team in Norway sitting down now looking at how we can we add the synergies between Sweden and Norway. I know that we have been saying that before, but now we have a clear plan, which will be reported up to me and you for the quarter and where we can drive some synergies between those products and especially on the geodata part. But I think for the -- we need to get the sense of urgency into the sales organization in Sweden, build up a strong sales organization. And by doing that, we will get a clearly more to the market. But that said, we are in a very, very good situation in Sweden. We are growing faster than the market when it comes to our core business because the market, as I said, is rough in Sweden. Of course, it will pick up and we are ready to take that market with extremely well products. And last one, looking into the margins, you can easily see that where we have obviously good margins in some of the key products in Sweden.

[Camilla Aardal, executive]

Very good. Let's see a financial question. You've generated positive free cash flow in the first half of 2023 and improve the cash balance and capital structure. What are you going to do with the cash we've generated this year.

And I think this is a very good question because I know during last fall, we were challenged a lot on our capital structure which also didn't enable us to have a lot of room to move to make changes in the company, do other investments or those type of things. So I think right now, we're in a situation where the operational -- the business is the most important thing to get the margins up to work on the product mix as we were saying and the areas that are already strong to make them even stronger. There are some things we probably have to stop doing as you were touching on. But of course, our situation now will enable us also to possibly pick up a little bit more when it comes to looking at some M&A or that type of activity. And we always have our ear to the ground and we're not going to do M&A just to do M&A. It would be where there is a strategic fit and where we can boost our growth and margins. So it gives us some more opportunities to look into some of the opportunities that are around us. Great. Let's see. We have a question asking us about our growth. So our annual recurring revenue has increased quarter-over-quarter and the question is IRR increased by 9% from Q2 last year. What are your growth ambitions going forward?

And I guess the one thing that's for sure is our annual recurring revenue, we've been able to show the growth in that quarter-over-quarter for quite a long while. So we have a good track record on a subscription revenue. And I think it just links to what you were saying, the growth we want it to come from our own products. We are a SaaS business, we will continue to develop the products that are really good and have strong potential, work on sales to get those out in the market and that will also generate more profitable growth. So to me, it's to continue to work on our long contracts, winning those contracts, keeping up our competitive edge within the public space and developing the new products, maybe especially then within property technology where we have a lot of really good competence.

[Per Lomsdalen, executive]

And just to mention when it comes to the development, we have also looking at the numbers and the cost of the development, of course, we need to spend huge time on the development to be best in class and have the best products, which we have. But we also need to have a real look in, okay, how should we do that with the development part. And it could be that we should slim it more and have, like, as I said, one CTO organization who strings it together. So we need -- we spend some time looking into the development as well to make sure that we get even more or better profits on a different department. For the different segments that we have.

[Camilla Aardal, executive]

Okay. So one final question. Boligmappa, of course, is something that a lot of people are interested in. So Boligmappa seems to have a big increase in the number of active users in the last few years. When are you expecting to see profitability from this business area?

[Per Lomsdalen, executive]

Yes. I touched upon it. But I think we are looking into the new kind of revenue stream. We can -- I think we have enough users on that platform. We have spent quite amount of time to get up to a [ decent ] good amount of users, which we have now. So we will now start looking into revenue models without any -- we can't really touch upon that, how we're going to do it. But for sure, it's going to be a profitable business of Boligmappa. And I think now it's time to look more into details on how we do the revenue models on it.

[Camilla Aardal, executive]

All right. I think that concludes the Q&A. Thank you very much for watching and...

[Per Lomsdalen, executive]

See you next time. Next quarter.