BTS Group AB
STO:BTS B
Earnings Call Analysis
Q4-2023 Analysis
BTS Group AB
In the face of adversity, BTS has managed not only to weather the storm but to chart a course to calmer seas. Despite three challenging quarters, the company's earnings remained flat with the previous year, buoyed by a record fourth quarter. This period marked the company's largest in history, signaling a 21% EBITA growth and demonstrating the fruits of BTS's strategic focus on efficiency and scalability. The company's agility and innovation in addressing CEO priorities and industry demands have positioned it for an anticipated growth in both top line revenue and earnings in 2024.
A closer look at the regional performance reveals a nuanced picture. North America exhibited a commendable recovery with an 8% growth and a significant margin improvement from 14.2% to 18%, thanks to the synergies realized from efficiency initiatives and the notable contribution of the Boda acquisition. In contrast, BTS Europe faced continued conservatism, leading to a dip in revenue even as margins held relatively steady. Other Markets outshone as the year's highlight, delivering a 13% growth and an improved margin of 21%. Lastly, APG made a comeback with a focus on margin improvement, rounding out a year where company-wide growth reached 2%.
BTS's financial prudence extends to its dividend policy, echoing a commitment to stability and growth. Upholding a tradition since its IPO, barring the pandemic year, the proposed dividend for 2023 is SEK 5.7, to be distributed semi-annually. This move aims to balance profit distribution with the company's long-term strategy of rewarding shareholders while maintaining a reservoir for investment and operational flexibility.
As we gaze towards the horizon, BTS does not provide specific quarterly guidance, but the sails are set to catch a similar wind as in the fourth quarter. North America and most of the world sustain a favorable momentum, albeit Europe's caution persists amidst layoffs and delays. The sail through the market remains challenging, with some delays in project initiation, signaling that while BTS is poised for growth, it must navigate the capricious currents of the global market.
BTS reaffirmed its margin target of 17%, incrementally up from the closing figure of 12.9% for 2023. The pursuit of this goal encompasses a multi-faceted strategy, with potential acquisitions to bolster margins, productivity breakthroughs, particularly from AI implementation, and maintaining pricing discipline in the face of competition from larger consulting firms. Moreover, innovative partnering models, including monthly run rates and subscription services, are foreseen as a catalyst for transformative growth.
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Yes. Hi, and good morning, everyone. Today, we are happy to present BTS Q4 report. My name is Daniel Thorsson, analyst at ABG covering the company. And with us, we have BTS CEO, Jessica Skon. So I'll hand over to you to present the quarter and then we will come back to Q&A in a little while.
Super. Thank you, Daniel. Good morning, BTS shareholders. Look, besides tough year and following 3 tough quarters, we are very proud, we're able to keep our earnings flat with 2023, and we have a record fourth quarter. So the biggest fourth quarter in the company's history, the biggest quarter in the company's history with 21% EBITA growth.
And look, as you've become used to BTS over the decades, we tend to use challenging markets in times to our advantage and to set ourselves up for scale. I'm really proud that the cost, the efficiency, the internal innovations that we set out to do at the beginning of this year, even starting in Q4 of 2022 have played out pretty beautifully according to plan. And those efficiencies set us up for scale. They were not short-term costs.
So more specifically, as I mentioned, we tend to be very creative, innovative and move quickly in more difficult markets. So just to remind you what we did. We're now on our sixth quarter of an intentional focus on the CEOs, the companies, and the industries that are most likely to invest on the people side of change and to invest in these types of initiatives at this period of time.
We innovated. Our clients are asking us for more support as they scale the tens of thousands of people trying to get them to be more adaptive and to change and more in the moment when they need it, more team-based, more leader-led. So we've innovated new client partnering models. We've -- that includes easy-to-use micro simulations at scale, digitize content and tools and so forth. We've invented new, of course, AI and generative AI services that really empower clients people to be tinkering and trying on a more grassroots level.
And I think we're bringing to the world a much different approach to consulting in terms of process and ways of working change. We also used the year instead of short-term cuts to upscale our talent around the world. We've done a lot of internal training and capability building, and we are feeling kind of the next level of high performance from the team. And we did a great job this year of cross-country collaboration and teaming at a level and scale that we had not done before, which allows us to smooth out resource utilization and billability across the consulting teams.
So some highlights of the fourth quarter. So in addition to those efficiency measures playing out over the course of the year, boosting the margins in the fourth quarter, we also saw some growth improvements. The big one -- the big improvement was in North America where we're seeing an overall trend reversal. I would say, starting towards the end of the third quarter, definitely in the fourth, our software and tech clients, at least their spend with BTS is back to growth.
We continue to have strong demand and growth from our focused sectors, such as energy, CPG, biotech and pharma. The Boda acquisition, which we made in May of 2022 continues to perform, and I would say, meet and exceed our expectations both in terms of winning work in the BTS client base and also bringing BTS services into the Boda network. And as I mentioned, the EBITA margin improvement for North America was due to those efficiency initiatives that we were now 4 quarters in, in terms of realizing the benefits. But we have really strong margins in the fourth quarter across all BTS market segments.
If you look at the first line North America, you can see that North America grew 8% and their margins went from 14.2% to 18%. BTS Europe is still feeling, I would say, the client conservatism that we experienced in both the tech sector and some of the other sectors. So they declined in terms of revenue in the fourth quarter, but we're able to maintain a decently good margin despite that of 17.6%.
BTS Other markets is the shining star, right, of the year and of the fourth quarter with 13% growth and improving margin from 18% to 21%. And APG is back to growth, which is nice to see, and they'll be focusing on margin improvement this year. It was more of a onetime hit due to the nature of the services that their clients are asking them for.
If you look at kind of the overall evolution of revenue per quarter. You can see that the bars -- so the orange bars for Q1, Q2, Q3, Q4 are all 2023. So at the annual level, our -- the company grew 2% over the course of the year. BTS Other markets leading the way at 8%, North America at 1%, BTS Europe negative 2% and APG negative 3%.
And if you look at the overall profit per tax per quarter in terms of the 4 quarters and over the history, look you can see the strong ending visually, right, followed by the slump in Q1, Q2 and Q3. If we look at the earnings as a percentage of the margin by the units for the whole year, and NAM was 13.2% compared to 13.6% the year before. Europe was 13% compared to 17.9%, given that they shrunk. Other markets was 14.2% compared to 13.1%. So nice improvement from Other markets for the year, and APG was 0.1% compared to 1.5%.
Many of you have been long-term investors in BTS, which we are grateful for. And I think you've become used to, and we certainly hold ourselves accountable for long-term profitable growth.
So just to remind you, to educate the new investors, this is our historical performance. So average revenue growth of 12% since 2001 and average EBITA growth of 15% CAGR.
In terms of the dividends, you can see the overall dividend story over the years, we have a stable and growing dividends since our IPO, excluding the pandemic year. So the goal of this is to distribute between 40% and 65% of the profit after tax in the long run. SEK 5.7 is the proposed dividend for 2023 to be distributed in 2 installments of SEK 2.85 each.
In terms of the outlook for 2024. So we have a really wonderful cost structure in place, right? As I mentioned, the efficiencies of 2023 help us set us up for scale. They were not short-term cuts. So we've got the cost structure in place. We carry the efficiencies with us. We will obviously continue to improve our ways of working, both from a global perspective and in the individual units. And given all of that, we are expecting growth in 2024, both top line revenue growth and earnings growth as well. Thank you.
Excellent, Jessica. Thank you very much. I'll start off with a few questions and then we'll let other dialing in ask questions as well.
I have a question regarding your thoughts about recruitment ahead. At the end of the year, you were 6% less employees than a year ago, you are now guiding for growth into 2024. I guess utilization is quite good in the company given that sales were flattish and a number of employees down. When will we see you coming back to recruitment mode again during the year?
Yes. So 2 part -- 2 answers to that question. One, we think we have about 5% capacity right in the team that we have in terms of growth. But secondarily, we are continuously recruiting. We did last year as well. I mean, not to bring the influx way up, but to find really great talent, right? Senior talent who are really good in our space or can bring us a new capability or drive revenue. So we are continuously recruiting, but we've got some room from a capacity perspective still.
Okay. So you can grow without adding too many new employees in 2024. Again, and then the second question on your guidance regarding earnings growth next year. I see that license of sales were down in '23 versus '22, and I guess that those comes with pretty good margins. Should we expect that to increase in '24 as well helping the margins upwards? Or how should we think about the license as part of revenues?
Yes. Yes. Our license story is shifting a bit, in terms of one of the innovations, in terms of how we partner with clients. We have something called the BTS Access Pass, which our clients can then get access to the broader portfolio on a subscription basis, and it comes in 2 different forms. That's a very long way of saying, I expect it to grow in 2024.
Cool. And then my final question here before we let others ask questions as well. The start of Q1 is typically quite important and interesting because you have many sales kickoffs with customers, et cetera. And in the fall, you commented that your pipeline look pretty good into Q1 and January, especially. Can you say something about the start of 2024 so far? We're almost 2 months into the year here?
Yes. We typically don't give specific guidance per quarter, but I would say that the markets, in general, feel similar to the fourth quarter in terms of North America and most of the world and with the client conservatism in Europe continuing. Right? So if I think about kind of the noise there's I still hear more frequently about new layoffs hitting some of the European companies and clients, some more stalls and delays there.
I don't mean to leave us the impression that it's a breeze at the same time. Right? I mean, even in North America and Other markets, we still get some delays. We win work. They went on to start 6 months later. So it's still a mix, but it feels similar at this moment to the fourth quarter.
Okay.
Yes. From the demand. And you mentioned sales kickoff. So I would be remiss. But at this very moment, 45,000 people around the world are going through a sales kickoff with us doing a 4-hour simulation, practicing their most important move. So that's what I mean about like simulations at scale and teams preparing, running plays together, upping their game. It's happening today. So...
Cool. Let's see if we have some more questions.
[Operator Instructions] The next question comes from Karl Norén from SEB.
Congrats on the good results here this morning. Just a question here on the North American and Other markets margin, which, of course, was very impressive. I'm just wondering if there's anything specific positively impacting the margin in the quarter? Or if you think that this is a, let's say, a new sustainable level, not the Q4 level, but I mean, are there anything impacting margins positively that we should be aware of going forward? That's my first question.
There was nothing extraordinary, right, or unusual in the fourth quarter, giving a kind of a onetime bump to margins. It was the combination of the better cost efficiencies, the smaller contractor spend, better pricing and scoping all the stuff we've been working on. Obviously, the growth helps. So, and the thing to remember is that the fourth quarter is typically our biggest quarter in revenue. Right? So, yes.
But also on a question on the European market. If I remember correctly, I've implemented the same model that you did in the U.S. now like 1 year ago, also in the European market to get that margins there. When should we expect that to take -- start to see the results, in the figures, so to say?
Yes. From a cost basis in the first half, right, yes, that's where we'll see the lift over the Q1 and Q2.
Yes. And on the European market, it seems to be quite slow here. Is there any specific sectors where you see slow demand?
I mean, the slower demand for us is in professional services, right? I think, it's a tough market for many companies right now. I would say we've been winning in insurance, in industrials. Those are the 2 are kind of the main wins of the last couple of quarters have been in, if that's helpful.
Yes. And then a question on acquisitions. I mean, you still have a quite strong balance sheet here with a strong net cash position. Can you give us an update on your pipeline on the M&A side?
Yes. I would say we're pretty busy right now, which is great. And so looking at both opportunities for strengthening geographical expansion outside of, let's say, the U.S. and Europe, some tech opportunities as well. And yes, we're spending, I would say, more time than usual on it at the moment, which is great.
Sounds good. So as the last one from my side on Other markets. I mean, quite strong organic growth here of 13%. Can you explain a little bit more what is driving, I mean this strong results?
Yes, yes, they had such a good year, right? And the markets that are driving the most growth, I would say, is Southeast Asia and the Middle East. It's been that way for the last 3 quarters. It continues to feel really strong there. We also had really nice performance from Italy and Spain. I mean, despite a tough economy there, the teams there are really doing a great job.
So I think those are the main growth drivers of most of the world. South Africa came back to growth as well last year. The markets where, that struggled more was Korea. I mean, a high percentage of our work in Korea was tech-based and some of the same layoffs hit there, but we're seeing that turn around now in terms of demand and so forth. And Japan was soft. Yes.
Okay. So it sounds like you expect strong demand in Other markets to continue there or in a strong performance on there. No reason why it shouldn't continue, I guess.
No. I mean -- in general, Other markets if you look historically, have a softer kind of start of the year and then it keeps growing. But yes, no, the feeling of demand is similar to the fourth quarter.
The next question comes from Rikard Engberg from Carnegie Investment Bank.
So I had one question. If you could please talk a bit about the sentiment within the tech sector in North America. How that has changed during the year and how it's looking going forward?
Yes. It's -- I would say they're moving more. There's more movement, right? They've gone from restructuring layoffs, fear, conservatism, let's wait and see as a general, right? Obviously, you have exceptions to that, but as a general sentiment to kind of working through those initiatives, getting their profitability up and their margins up and now kind of back to focusing on growth. We saw a lot of companies, 6 to 3 quarters ago, laying off a lot of the go-to-market side of the business.
Now there are still tech companies who are doing another round of layoffs. Don't get me wrong. It's not like a complete rebound of sorts. It's still hard for start-ups to find capital and all of that. But I would say it's a little bit like they stalled some things, they knew they needed to do. And it's -- the movement is a little faster, right? It's are not back to boom times, but it's moving again.
Okay. So you could say that the lead times has become a bit shorter now compared to the start to the year.
Exactly. Yes.
Excellent. We got a question on e-mail as well, which related to the business climate in North America and the tech sector, which I think we responded to here with Rikard's question. But to follow up on that one is, is change coming and driving business for you, particularly some words related to AI and what you can offer in that regard to help companies? Is that the driving force for you?
Absolutely. I mean, our biggest clients basically feel like they're constantly needing to adapt in order to be successful. And then they're figuring out what's the most efficient way to drive behavior change at scale. I mean, that is the core need. And I would also just say there seems to be kind of a realization that large companies should think of themselves more like elite teams, elite sport teams and give people the chance to prepare, to practice, to run, play, because if you don't, they don't know what you're talking about. You know, like the traditional memos of work this way if they don't have a chance to co-author that, visualize it, practice it, that they tend to not change. All right. So -- and then in terms of AI, especially with prompt engineering and generative AI and the large language models, in particular, it's much more of -- in its nature, a grassroots human-first tool now, right? You don't have to be a PhD to have -- which we all know and that actually serves our value proposition really well, which is like trust your people, let them tinker, let them come up with how they can improve their own ways of working, and that's a lot more doing than it is telling or philosophizing. So we do a lot of training and consulting services around the adoption of AI and then shifting the ways of working around those insights.
I see. I have a question on counter cross-selling. You said that you were happy with that, that enables stronger margins, and you worked a lot with it in 2023. We can understand it works very well in the U.S., obviously, across regions. But in Europe, you have different languages, you have physical distance, you need to move people between countries. Is that well functioning now? Have you reached kind of the top level you can do in terms of cross-country selling?
Specifically within Europe?
Yes. In Europe, exactly.
Yes. I mean, Europe made a huge improvement on this over the last 3 years, I would say. Have we reached our max? No. I think there's always like the next level of high performance. And at the end of the day, it has to do with the mindset, right, of if this is the client problem, who do we have that's the most expert in that to either apprentice the team or help them win the work and then stay involved in the project.
So the more people want to partner with maybe their colleagues who they haven't worked with before, but they have the right expertise, the higher the win rates, the more fund the project, right? That's -- but I think Europe has made a lot of improvements in.
And it works well across languages and industries, et cetera.
Yes.
Good. And then, kind of a follow-up on that one. Independent, make you need to shift from fiscal deliveries to virtual deliveries to a much larger extent. Where are we kind of that mix today? I remember it was like 50-50 a year ago or so. And how should we expect it to develop going forward? I guess that's enabler for cross-country deliveries as well, the virtual delivery. Is that going to stay at this level ahead? Or is it going to come down and we go back to more of a physical delivery world? How do you expect it?
I mean, physical delivery has continued to go up. People and company cultures just have missed each other, right? And so the lift that you get from a sense of community and the bonding and the relationship building and all that, even when you're doing really hard core topics, I think most companies absolutely are craving and wanting. It's more of a budget issue, right? If the cost of travel for 1,000 people to get together versus virtual is considerable. So long answer is 50-50 is probably still about right, give or take, but yes.
And that feels like a good mix ahead that you can maintain? Or do you expect the physical part to increase the share of revenues? Because I guess that comes with a little bit more OpEx, slightly longer lead times with traveling, et cetera.
Yes. But the benefits of being together with the client are huge from a business development perspective. So I would -- personally, I would love us to do more and more in person together with clients. The leads are, they come in faster. And so, I think it actually outweighs the efficiency.
Yes. We have a second question on e-mail here, which is a follow-up on AI. Maybe we responded it before, but I'll read it and we'll see if you can add anything. Has the group formulated a strategy for utilizing generative AI to increase efficiency and help clients utilize their data more effectively? Do you have like [indiscernible]
So both internally, how are we using it and then using it for clients?
I guess so. Yes. And also how clients can improve?
Yes. I mean, so for our internal work, we have done quite a lot, right? Starting in May of last year, we started to build the consultants guide to AI, the BTS consultants guy. I think we're on like our 1,000th version because you keep learning and adding to it, but we did training around the whole world on that. We've had, I would call it, breakthrough productivity gains in 4 areas of the business.
One is obviously in our -- on the digital side and in particular, that's the time it takes now to build practice space spots. It used to take like 12 months, it now takes 4 weeks. Another one is, for the first time in the company's history, we are able to provide benchmarking analysis back to our clients given the custom nature of their qualitative content. And that could have taken years to build, right? But I mean, that was an absolute breakthrough. Another one is in the assessment side. I've mentioned this before, the speed to like providing reports back to clients has dropped 75%. And then in the part of the business that does a role-specific digitized kind of high-performance training, they're getting some breakthroughs on custom video content productions, probably no surprise there. Those are the big ones.
I would say on the core general consultant base, it's an evolution. Some offices jumped in right away and like they're sharing now their learnings around just writing and research and all of that. We have a BTS generative AI service, but the quality of that isn't quite as high as what you can get on open AI, because our company size. So we don't have quite have access to that yet, but we're waiting. So I would say we took a grassroots approach where we had breakthrough productivity gains. We have shared that both at the conference in Vienna that we had in January with our teams and virtually.
The next step is, like any company would be the next level of governance to ensure that those gains show up either in faster growth or in the operational efficiencies in the P&L, right, over the coming 4 to 8 quarters. So that's where the rubber hits the road, right? And we find our clients going through the exact same evolution. So -- is that helpful?
Excellent. My final question is around the margin target. You raised it in 2021 to 17% when you were at 15%. Now we're closing out 2023 at 12.9%. So I'll just tell you're at 13%. How should we think about the trajectory from 13% up to 17%. What's kind of the main margin drivers except from growth, volumes and scale? Are there anything else we should keep in mind?
Yes. I mean it's definitely still our long-term plan and margin target. So besides the obvious things, right, look, depending on kind of which acquisitions we go after, we could look at the margins that you could get there. Obviously, breakthrough productivity gains through AI couldn't be another more material one than in the past.
This one might be, from a real estate perspective, we're still studying in kind of evolving the strategy, but the more people are together, the more productivity gains we tend to have and higher retention. So I don't think we're going to do anything dramatic on that front. For us, the thing to remember is when we take share from the big 4 consulting firms, we are still less expensive by quite a lot. So there is a certain discipline on pricing and then partnering models, which is more like the monthly run rates plus the Access Pass subscription thing, I was talking about, could be a breakthrough for us over time. Those would be the main ones.
Excellent. That was my final question. All analysts have asked questions. We're out of questions on e-mail as well. So thank you very much, Jessica and congratulations on the strong quarter.
It's my pleasure. Thank you.