Sikri Group ASA

OSE:SIKRI

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Per Lomsdalen, executive]

Good morning, everyone, and welcome to the presentation of the fourth quarter results for Spir Group. My name is Per Lomsdalen, and I'm the Chief Executive Officer of Spir Group. I'm very happy to be here together with our new CFO, Cecilie Hekneby, to present our results for the quarter.

Spir Group is a software house with leading positions in 2 attractive markets in Norway and Sweden with a strong drive for the utilization. Firstly, we deliver mission-critical software for the public sector. This was the backbone of our company when Sikri was founded. Our primary customers within this area are municipalities, government agencies and other public organizations.

Secondly, our business is centered around real estate data and geoinformation. Our primary customers are real estate agencies, homeowners, constructors, engineers, banks, insurance companies and telcos. These are the 2 main markets of Spir Group and markets where we have leading market positions.

Over the years, Spir Group has become a house of scalable technological brands. And these are our 4 brands with our 2 main markets. Sikri on the left side, operating between the public sector in Norway and has a high level of recurring revenue and long-term contracts with minimal churn. Metria is the leading real estate data and geoinformation provider in Sweden. After we acquired Metria last year, we have restructured the whole company by divesting the PSS business and implemented a cost-saving program. The main focus is to develop its core business and increase margins. We are expecting to see this transformation already in the first half of 2024. Ambita is the leading provider of real estate data in Norway, with a high and sustained market share. Ambita creates value by moving upwards in the value chain with higher margins. Then we have Boligmappa, the digital platform for property documentation. This is an investment case for us, with 900,000 unique users with significant potential. We are currently exploring new revenue models, which will give us a higher growth rate and better margins moving forward. Let's take a quick moment to look at some of the operational highlights from 2023, as we have taken important steps this year. Firstly, at the very end of the year, we changed the name of our company from Sikri Group to Spir Group. We believe this is an important milestone as it's now easier to differentiate our brands. The name Spir reflects our aspiration to inspire and take us through the new heights of success. Secondly, we now have a new management team in place. Not only did Cecilie and I joined the company recently, but we have established a new strong management team. We have a good mix of people with long experience from our business and external recruitments as well. Thirdly, our continued focus throughout the year has been on reshaping the company, following the divestment of Prognosesentet at the end of 2022.

We continue to divest noncore business areas in 2023, with the divestment of the planning and serving area of Metria. Following the investment, we will be more effective in the remaining core Metria operation. And finally, we will keep focus on building best-in-class software and maintain our talented workforce to become our customer's #1 trusted adviser. Then looking at our SaaS business model, we have very attractive metrics. Our recurring and recurring-like revenue are at a very high level and the ARR is increased by 7% compared to Q4 last year to NOK 398 million. Our scalable business model has also resulted in profitable during this year. Reported EBITDA ended up at NOK 171 million for the full year, up 35% from NOK 127 million in 2022.

We have also improved our financial position this year. Net interest-bearing debt is at NOK 651 million at year-end compared to NOK 756 million at the start of this year. Those -- we have reduced net interest-bearing debt by NOK 105 million in 2023. This means that we are in a significantly improved financial position compared to a year ago. And with that, I would like to leave the floor to Cecilie.

[Cecilie M. Hekneby, executive]

Thank you, Per Haakon. It has been a great pleasure to get started at Spir Group, and I'm very excited for what's ahead of us. And I'm also pleased to be here today to present the Q4 and half year '23 financial results. Let's start the financial section by looking at some highlights from the fourth quarter and full year 2013 results.

Starting with the fourth quarter. Revenues increased organically by 3%, reaching NOK 241 million. As Per Haakon mentioned, annual recurring revenues grew by 7% compared to the fourth quarter '22, reaching NOK 388 million. More than 80% of our revenues are recurring or recurring-like. Our gross margin has increased from 63% in the fourth quarter '22 to 66% this quarter, following a shift in product mix.

EBITDA in the fourth quarter '23 ended at NOK 34 million compared to NOK 35 million in the fourth quarter '22. There were nonrecurring costs related to M&A and restructuring of NOK 5 million in the fourth quarter '23, and nonrecurring costs related to listing costs, M&A and divestment of NOK 8 million in the fourth quarter '22. Adjusted EBITDA in the fourth quarter this year was NOK 39 million compared to NOK 43 million in the fourth quarter '22. Operational expenses were somewhat higher in the quarter, but we are in the process of reshaping the company.

Moving on to the full year number for '23. I want to highlight that we have improved our financial position during the year. Our revenues grew by 14% in '23, in a combination of organic growth and growth from the acquisition of Metria in April '22, surpassing the NOK 1 billion mark. EBITDA also increased significantly, reaching NOK 169 million. There were nonrecurring costs of NOK 20 million in '23 and there was NOK 39 million in '22.

Adjusted EBITDA for 2023 was NOK 189 million, up from NOK 166 million in 2022. During the year, we have reduced net interest-bearing debt by NOK 105 million. And at the end of 2023, net interest-bearing debt amounted to NOK 651 million. Our cash position is developing positively, and we are in a satisfactory liquidity position, with a cash balance of NOK 55 million as we closed the year.

In the fourth quarter, Spir Group improved revenues by 3% organic growth, which all in all is satisfactory in light of the current market conditions affecting several of our segments. In Sikri, growth is driven by higher activity in implementation projects and steady growth in SaaS revenues. Ambita's growth is hampered by a slow real estate market, with a significant decline in the number of properties put up for sale in the quarter, as well as a decline in the commencement of new homes. This was, however, offset by increased sales of high-margin products.

Boligmappa has a steady growth in annual recurring revenue, and new revenue models are under development. Metria has managed to obtain the same revenue as in fourth quarter '22 despite a challenging real estate market in Sweden. We have an improved product mix across the segments and gross margin has increased to 66%. Capitalized development costs amounted to NOK 22 million in the quarter compared to NOK 17 million in the fourth quarter '22. I'll now touch on some of the drivers for the quarter's results. I will now dive into more details in the key segments of Spir Group. Starting with Sikri, we are pleased that the transformation to cloud solution continues to materialize into higher annual recurring revenues. Annual recurring revenue improved by 12% from the end of '22 to NOK 198 million at the end of the fourth quarter '23. Total revenue for the quarter grew by 5%.

In Sikri, growth is impacted by the number of RFPs 1 year earlier. Sikri has stable and high win rates, and with bid offers on almost all public bids, where our products or services fit. We are pleased to see that the churn rate remains low at 1.5% in the quarter. It has been a priority to upgrade our existing customer base from on-prem to cloud solution, resulting in a healthy increase in annual recurring revenue. Sikri has a dedicated team and a cloud-based, cost-efficient solution for their clients to leverage automation technology. Sikri offers automation as a service and manage all aspects related to this technology. Two of the biggest wins during the fourth quarter are the Norwegian Correctional Service, Kriminalomsorgen; and the Norwegian Railway Directorate, Jernbanedirektoratet. Since the establishment of Sikri, the #1 priority has been to increase our market share by winning a high share of the contracts awarded.

As we bid on all relevant contracts, our 2-year average win rate of 60% has enabled us to grow our customer base. This has led to a steady growth in annual recurring revenue. It is important to understand that Sikri has agreements or long-term contracts with public sector clients who appreciate predictable terms and long-term supplier relationships.

The software is core in nature and thereby naturally sticky. Sikri contracts run from 3 to 7 years with options to extend. This means that the order book is quite substantial. Sikri has predictable and stable revenues and using our unique position, we look forward to identifying new areas to contribute to the further digitalization within public sector. Ambita's fourth quarter was characterized by some headwind, with revenue decreasing by 5% in the quarter. Ambita sale of the user-friendly and flexible Infoland Meglerparkke is correlated to the number of properties put up for sale. The real estate market in Norway has, in general, been challenging in 2023 and in the fourth quarter, in particular. In the quarter, the number of properties put up for sale declined by 12%, leading to slower sales within this area.

The growth in Ambita was also hampered by the decline in commencement of new homes. This market has been poor in 2023, with a decline of 40% compared to 2022, negatively impacting parts of Ambita's business. Despite the challenging market, we are pleased that we increased the revenue by 2% in 2023 and improved the EBITDA margin, mainly a result of good traction for our new high-margin products.

Ambita is a leading provider of digital real estate and construction offerings in Norway, enabling digital transformation and services. Ambita will continue to focus on developing new services as well as increasing the product footprint and the sales of high-margin products. During 2023, Ambita signed contracts with several major banks and real estate agents in Norway, providing digital services that will increase efficiency within the industry. Moving on to Boligmappa, the main focus is to continue to build great products. Nevertheless, it is great to see growth in new subscriptions. Annual recurring revenue has grown by 11% from the fourth quarter '22 and is now at NOK 41 million. Revenue has increased by 25% since fourth quarter '22. Boligmappa will continue to focus on user growth among private users and development of new revenue models.

To understand Boligmappa, it must be placed in the context of investments for future growth. You can already see the effects of our growth initiatives with a solid increase in monthly active users this year compared to last year. There are now more than 900,000 users of the Boligmappa solution, and there is a strong growth in the number of active users, with more than 1,000 documents being uploaded in the solution every hour. Going forward, we are focusing on developing new revenue models, which will be introduced as the platform grows. We expect to see the first effect of this during the first half of 2024.

In Metria, the revenue development was flat this quarter. Metria's sale of real estate information is driven by properties sold and mortgages, and around 25% of Metria's revenue are exposed to these drivers. The number of properties sold in Sweden declined by 14% in 2023. This implies that revenue from Metria's other products has developed positively.

Annual recurring revenue from Metria is now at SEK 117 million. The adjusted EBITDA margin for the quarter has declined from 23% in the fourth quarter last year to 18% in the fourth quarter this year. The margin decline is mainly due to the reshaping of Metria following the divestment of the planning and surveying business area. In the fourth quarter, Metria signed several renewed contracts within forest management, providing SaaS solutions and geo data to the clients. Metria also renewed an agreement with one of the major energy companies, providing access to deliveries of geo data and additional consulting services.

Following the acquisition of Metria in 2022, reshaping the company and improved margins is a focus area. In 2023, we sold a noncore business area of Metria planning and surveying, which led to decreasing margins for the -- from the second quarter '23 due to overhead and other shared costs earlier allocated to planning and surveying. With further cost reductions measures under implementation, we expect to see improved margin going forward.

Spir Group's total revenue increased by 3% in the fourth quarter of '23 and by 14% for full year '23 in a challenging market. We have focus on cost control and operational improvement. EBITDA for 2023 has improved significantly compared to 2022 due to underlying operational improvements and a high level of nonrecurring costs last year. Depreciation amortization expenses have increased compared to last year due to the increased amortization of intangible assets from acquired businesses, in addition to the fact that we have had increased level of investment in Boligmappa and Metria.

Financial income and expenses are impacted by our share of profit for 2023 from associated companies where we hold a minority stake. Interest paid on borrowings amounted to NOK 14 million in the fourth quarter '23 and is at the same level as 1 year earlier. Net income ends at minus NOK 16 million in the fourth quarter of '23 and at minus NOK 11 million for the full year, following the higher financial cost in 2023. Net income for the fourth quarter '22 and full year '22 are highly impacted by profit from discontinued operation due to the divestment of Prognosesentet. As illustrated on the left-hand side of this slide, our free cash flow are impacted by seasonal fluctuations. First quarter is a strong quarter in terms of free cash flow as Sikri invoices a large part of its customers on a yearly basis in January, and fourth quarter is also a seasonable stronger quarter in forms of free cash flow. We generated NOK 79 million of operational cash flow in the fourth quarter '23. The improvement is due to more one-offs in the fourth quarter last year and improved working capital this quarter.

Investment cash flow consists of capitalized development cost and financial cash flow consists of repayment of borrowing, interest and lease payment. In the fourth quarter '23, we draw NOK 30 million of our revolving credit facility. Spir Group's cash balance was NOK 55 million at the end of 2023. Assets consists, to a large degree, of intangible assets, where close to NOK 1.1 billion is goodwill and the remainder is capitalized development, customer contracts and trademarks. Equity is close to NOK 1.1 million, leading to an equity ratio of 50%. Net interest-bearing debt is NOK 651 million at the end of 2023. This includes lease liabilities of NOK 44 million.

It continues to be a priority for the group to maintain a healthy capital structure and net interest-bearing debt has been significantly reduced during the year. 61% of interest-bearing debt as of December '23 is covered by interest rate swaps at favorable terms. We have a solid financial position, and I believe we are in good position to deliver improved results going forward.

Let's have a brief look at the 4 key highlights from the past year. Our full year 2023 revenue increased by 14% compared to '22, driven by organic growth and acquisition of Metria. We have improved gross margin and have continuously focused on cost control. Our operational cash flow is strong, and we are focusing on reducing debt. In sum, this sets us in an improved financial position compared to a year ago.

Per Haakon, would you like to summarize some -- with some closing remarks?

[Per Lomsdalen, executive]

Thank you, Cecilie. Spir Group is well positioned to deliver on our growth strategy, fostering organic growth and explore M&A opportunities. As the real estate markets are improving, we anticipate positive outcomes for our portfolio of real estate brands. We are well positioned to capitalize on long-term market opportunities, and we continue to invest in product development to improve margins and leverage synergies. This approach aligns well with the growing demand for secure IT solutions in public administration. Improving margins, maintaining financial stability and flexibility remains a key priority for Spir Group's overall focus.

That concludes our presentation for today. Thank you for following the presentation, and I wish you a pleasant day.