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Good morning, and welcome to the Q1 2023 Earnings Call of EQS Group AG. I'm Andre Marques, the CFO of the company, and I'm really happy to have Marcus Sultzer, our CRO, with us today, who will give us an update on where we are staying on our journey to conquer the compliance market in Europe. And I think Marcus today really an exciting day, right?
Yes, absolutely. Good morning from my side. The weather isn't like spring, but the day feels like spring breaking news this morning, the Bundesrat, the Federal Council finally adopted the German whistle-blowing law, and that is really fantastic. And that's why we are both looking forward to this results webcasting.
So perfect timing for today's webcast and let's start with our purpose, the foundation for everything.
Yes, absolutely. Our purpose is that we strongly believe that integrity and transparency creates the most important corporate capital. And that is trust. Trust is the foundation for everything we do, trust for a sustainable corporate development. And that's why we are on a mission to creating trusted companies.
Well said. Yes. Like always, we start with a quick summary on the Q1 2023 highlights, and then we go for the whistleblowing. So with this exciting news of today, but not only, and then we'll give an outlook on the full year 2023 and beyond. And then we very much look forward to our Q&A session with you.
So let's start with the summary. And yes, revenue growth was good, I would say.
Yes, absolutely. I'm really, really happy with the Q1 revenue growth. Main contributor was compliance, but not only our whistleblowing business, but also our compliance products or services business where we were especially successful with our ESEF reporting and filing.
Yes. And I'm very happy about the EBITDA in Q1, which increased strongly to EUR 1.3 million. And that's what we said, right? So we have a very scalable business. And once we are entering the scalable period, we can really see strong profitability development.
Yes. And then whistle blowing, it's not only Germany. We want to conquer Europe, and we're going to talk about this later on, but we see good momentum in some core markets like Italy and Spain, where the law was transposed in the first quarter. And I will share some insights on how this reflects.
And last but not least, we now show discontinued operations. So the Russian operations we have, we show in the P&L has discontinued operations as we exited the market, which is sad, but there was no other option.
Yes, absolutely. We both spent time there.
So looking on to our group KPIs as of Q1 2023. Maybe you want to comment on the customer and the top line development Marcus?
Yes. I mean we have to remember the big growth driver for us is the whistleblowing compliance topic, and we're still waiting -- or we were waiting for a lot of markets to adopt and transpose the whistle-blowing -- even still, when we look at the top line KPI, we see growth all across. We won over 270 new customers in the first quarter number. All of them, of course, SaaS customers with sustainable ARR -- revenues growing in compliance, 19%. We are growing slightly in Investor Relations again. So in summary, for me, the first quarter is really good quarter.
Yes. And I mean, looking on to the revenue, we already now have nearly 90% of recurring revenue in this revenue. So very, very strong, predictable basis.
Exactly.
And what we show for the first time this time in Q1 is the gross margin we calculated. And we are here at 76% in Q1, which is a great level. And it really, again, shows the scalable -- scalability, the potential we have as a company. But let's move on and look a bit deeper into our IFRS figures.
So as Marcus mentioned, we had this double-digit growth on the revenues. On the other side, operating expenses increased at a significantly lower rate. And thus, we had the strong hike in the EBITDA growth. But even more, even better, the free cash flow has doubled to EUR 3 million. So our business is really cash generative. And with that, we could increase our cash position to EUR 11.4 million and decrease the net debt to EUR 25 -- 26 million. So overall, very solid P&L and balance sheet.
And maybe to add on, I mean you have the job of looking after of the EBITDA. You manage this nicely. It's not an easy job internally to convince everyone to be a bit careful in spendings, you did. So really, really happy.
Yes, thanks for that. I think that's, at the end, the teamwork, right? So we all together on the management level, but also the employees -- we really understand the metrics and we were able as a company to adapt to the speed of the market and the legislative environment. And we saw that there are delays and we had to manage costs on the one side. But now we are right in the perfect position now to write a whistle-blowing wave that's coming up.
And let me give you also a quick overview on the development on EBITDA so that you also understand what were the main drivers that lead to this significant increase. And as you can see here on our EBITDA bridge, which we always show, which compares Q1 2023 versus Q1 2022. You see that within these 12 months, there were no big effects on the overall cost side. So we had less consulting spend.
So you remember last year, we had the capital increase and there were significant consulting expense. We are more or less stable on the marketing spend versus the last year. And on the IT spend side, we have a constant increase. As you know, we said that in the past. We keep investing into IT security into our IT infrastructure. That's really important and crucial for our business.
So overall, looking onto the effects, you see they more or less mitigate. But what's really nice is that the incremental operating business contribution on EBITDA from the around EUR 2 million additional revenue is EUR 1.3 million. And that really shows again that we have a very profitable business.
Yes. And looking a bit further into the next quarters, how EBITDA is going to evolve. So we see here in this chart that we expected to build up over the year and it at the end, we come out at nearly -- at least a double the EBITDA from 2022.
So that's about the financial so far, but now I'm really looking forward, having Marcus with me here today to give us an overview on where we stay with the whistle-blowing growth plan.
Yes, happy to do so and to give you a bit more in-depth update on this one. When we look at that slide, you see over 1,800 new customers we acquired since 2021. As a reminder, end of 2021, the EU states were supposed to transpose the whistleblowing directive that did not happen in many countries over the past 1.5 years. And still, we were growing steadily and are at close to 3,000 whistle-blowing customers in total now. And this is before the spike will really happen. Yes, and breaking news we shared it with you after a long, long journey with really ups and downs emotionally as well for us. We finally have the law transposed this morning. It will now need to be signed by the Federal President and then published in the Federal Gazette, and 4 weeks later, companies will have to have an internal whistleblowing channel in place.
So overall, we talk about 5, 6 weeks from now. So in June, we're going to have it. And this makes us, I think, really happy and...
So happy really such a long journey, if you look at this, right? I mean, that is really -- it was really tough in Germany, right? It was. but let's have a look also into the other markets, right? So what's going on in Europe?
In Europe, I mean Europe made progress in the past months. We have now with Germany, 22 markets, 22 countries, which have transposed the law. 5 are still outstanding. They will come, but we are really now in the year of whistleblowing we can say. And maybe we look at a little bit more in-depth into our core markets, France, Spain and Italy.
France Transposal Law, last year. In autumn Italy and Spain followed in the first quarter with effective dates in June and July. When we look at these numbers shown here, you clearly see the effect of a transposed law. We see double the clients in the first quarter in France. So even though France is maybe not as quick as we expected, we see now client numbers really going up, Marques. We have Spain, where we see sales opportunities, our salespeople really see a potential to sell doubling quarter-on-quarter. And we have just came back from Milan last week.
In Italy, where our team is super busy. They have 6x more pitches, way more pitches a week than they just had before a couple of weeks back. So that is great. We won, again, nice reference customers. So when we just take a piece of it happening in Germany, then we will see the scaling happening there on the growth side.
Great.
And the same happens on the partner side. I mean, partner business is gaining traction now. Finally, partners, they all have their own business. And obviously, they are waiting until there is a real opportunity to win with from their perspective, with the new business. So that's why it's good to see now that there is a higher amount of customer numbers we won in the first quarter year-on-year. We see that in our -- in the markets where we have a law effective like in Portugal, like in France, like in Denmark. They are really the biggest contributors. But not only there, also in other markets, for example, a whistleblowing course, we did in Italy, 1,500 people registered to join the whistleblowing course we did with one of our partners there. That just shows how the interest is going up, and that is just a taste like an appetizer of what really will become in terms of customer numbers, ultimately.
Yes, but it's great, but it's not only about whistleblowing, right, when we talk about the growth.
No. It's -- I mean it's getting a foot into the door of our customers. There is a law that helps us pushing this. We want to win 5,000 whistle-blowing customers by end of this year, having a foot in the door, but then grow throughout the compliance and ESG journey with our customers. And with increasing ARR. So there is a lot more to come after this whistle-blowing wave. And we are executing on this in parallel. So we do with blowing, but we also execute on our compliance cockpit journey. We have now about 250 customers on the compliance cockpit already. Some of which we acquired with whistleblowing and we onboarded them directly since we went live. But we are also executing on migration from legacy systems. And I'm really happy that we really signed the first 10 customers paying also to get other services.
And an example, some of you might have seen already is our first compliance cockpit customer we acquired already last year. BKW a Swiss company, 11,500 employees. Here, you just can see what is ahead of us in terms of ARR ticket size. We are winning once the customer decides to not only work with whistle-blowing, but also policies, approvals, risk management, rule book. This is where we're heading to.
And this is exciting. This really makes me exciting. It's -- you might recognize that I'm really relieved today. Looking at the first quarter results, looking at the transposition, looking at the experience I gained in the past weeks in France, Italy and Spain. So there is a really good journey ahead of us within this year and the years to come -- and this Andre brings us already to the...
The outlook. Definitely, yes. As you said, right, so there is really a bright future ahead of us looking on to the expectation for 2023. And as shared with the full year results, we are nicely on track in Q1. Very happy to go that track. As you know, Q1 is the in terms of revenue contribution, but obviously, due to the scalability also in terms of EBITDA contribution, it starts with the, say, lowest levels in Q1, and then it builds up throughout the year. So we're totally on track for 2023.
Looking ahead on the midterm outlook. Yes, I think Marcus explained nicely what are the contributors to the growth on the customer basis for whistleblowing and then the cross-sell. And by that, our journey in terms of scale -- of increasing profitability will continue. And yes, we very much look forward to it.
Yes. And maybe to add on, yes, I mean there is a lot of other regulatory drivers supporting us in the next years. We have the supply chain law, [Foreign Language] just needed to mention this in an English call. Already in place in Germany, it will come across Europe. So a lot of things will help us to really get there.
You're totally right. Yes. So that was it from our side. That's our goal as you know.
We look forward to the Q&A now, very much invite you to ask your question. Just as a quick reminder. On the upper left that you find a question mark symbol, you can press on that and then you can submit your questions. We'll get them in.
And let me have a first look, Marcus, on what questions we have already here. Just a moment, I will open this up again.
So the first question we have in here comes from [ Wale from Waterbank. ] So hi Andreas and Marcus, what is the expected impact of the discontinued operations in Russia in terms of revenue and EBITDA for the whole year 2023. And how fast do you ramp up demand now with whistle blowing law being approved today.
And then there are 2 more questions. I will just come up in a minute with that. So maybe I will start with Russia and you can take the one for the law.
So on the Russian business, as you might have seen already in the published, in the morning published Q1 report, you see that the revenue contribution was fairly slow. So we talk about less than 30,000 revenues in Q1, which is significantly less than we had the year before. And the same we will see in the in Q2 will be even less. And then most probably there will be no revenue anymore. So we are in the process, of course, of unwinding the business.
In terms of EBITDA, the overall. So for the full year last year, there was EUR 1 million. I think you have this figure also in the full year report. And there was an EBITDA contribution of 200,000 to 300,000. So both are relevant, but not really significant in order to make an impact on our guidance. So that is something that we, of course, have factored in when we were publishing the full year results, and it does not have a impact in order to change the overall range we gave as the guidance for revenue, which is EUR 71 million to EUR 74 million and of EBITDA, which is EUR 9 million to EUR 11 million, right?
So I think that's sad as we said, but I think that's something we have to proceed with and -- impact is limited.
Yes, absolutely. Andre, Thanks for the other question in regards to how fast do we ramp up demand now that the law has been improved.
I mean we have a pipeline built with hundreds of customers where there is a huge amount of companies saying, "I'm going to sign with you, I just want to see the final law transposed". So we will, as you say correctly, we will see an immediate impact on direct sales, where our sales team can now follow up and say it's there now, let's move on. Especially given that the transposition timeline in Germany is fairly short with 1 month.
And this is confirmed by markets like Italy and Spain, where 3 months -- approximately 3 months before the effective date of the law, we saw the lead and opportunity numbers starting to spike and increasing. So we will see now really a fast movement there. In terms of partner business, you are right, there might be a delay in terms of first direct customers and then partners, but it won't be huge.
We have this huge partner, Bundestag in Germany, they will now go out to the entire market, especially of the smaller companies. So we will see fast movement there as well, and we have a partner network of over 200 partners across Europe. And they are in place. Some might need to start their marketing activities now. Some are already a step further. So we will see an impact very quickly and that's why we are also confident that we are pretty well on track with our guidance in terms of new customer numbers in...
Makes sense. So yes, just for all the others quickly, we -- Marcus directly answered another question that comes head on direct and indirect partner sales, what are the differences? So just that you know how to put that answer into. So the next question comes from Marius Fuhberg from Warburg Research.
Should we expect significantly higher marketing expenses in Q2 given the transposed law?
Yes, absolutely, but that's what we planned. So as we had in our expectation the assumption that the law will come into force latest in Q3, we had and planned for an ramp-up of marketing expenses during the course of the year. So from Q1 to Q2 to Q3, with the increasing probability that there will be a law in place. So that's definitely for sure. But just as a reminder, the revenue in Q2 is, of course, also significantly higher in absolute amount than in Q1. And that's of course -- that of course allows us also to spend more marketing.
And then another one coming from Marios and that's maybe one for you, Marcus. How large is the mention pipeline of customers that waited for the law to be transposed? We have shown that in the past. I think this time, we didn't have it anymore in the in the presentation, but you have most probably a rough idea where we are staying there.
Exactly. So we have about 2,000 opportunities in our sales pipeline at the moment. A big portion of it in Germany. And yes, these are opportunities we will see coming in the next weeks and months.
Great. So another one comes from [ Alexander Howard from Alfa Star Capital. ] Do the changes to the law, so no obligation to have an anonymous reporting channel have an impact on EQS. How do you see it?
I don't think so. I don't think so because, I mean, we need to look at what happened, yes. There was a political discussion -- compromises needed to be made on a political level, on a factual level these compromises are, yes, vague, to be frank. Because we have data at hand that anonymous reporting is established. It will be established by the Federal Office of Justice in Germany, which is the external reporting organization.
So they said we will have anonymous reporting. We have data from our own research showing that at least 50% of the initial reports are done anonymously. So companies will see this as a chance that reporters stay with the internal channel first and don't go to the external function. So that is why I don't think that this will have a huge impact. It's a pity, politically, frankly speaking, but it is not a big issue for EQS group.
And it's far from unexpected, right? So we knew that -- I mean there is a discussion there is a compromise and one of the key matters was the anonymous topic. And I think trading, having a law in place versus having it in there, it's way more valuable for us having the law now in place, right?
Absolutely.
So Lukas Spang from Tigris Capital had basically a -- I think, a similar question. But there is maybe one follow-up on the customer side. So what are potential customers -- what the customers say on this fact? Do we already know -- no debt.
No.
Okay. So we're going to see, Lucas.
No, we don't. And I mean, Lucas, practically, thanks for the question, yes. Practically, obviously, we didn't go to customers and say, "Look, what would you do if there is no anonymity mandatory anymore." So we didn't do this. We will see what happens now, what we see though in our conversations is that companies pretty much understand not only the legal requirement of a system, but also the value it will have.
And what I strongly believe is that in the next quarters to come, we will also see that this whole whistleblowing topic will get better established in Germany and in Europe. That will increase numbers which are reported internally or if not, properly possible externally. And so there will be a culture of this. And we have some data seen from Austria, how things developed in the past years. So that's why I don't think we will now see huge disappointment of loads of companies not going for a software system.
Also because there is a lot of other requirements in the whistle-blowing law. It's not only about anonymity, it's about feedback timelines you have to do, yes, storage of data, audit proof storage of data. And I mean there is a lot of arguments for software system.
And what we heard from -- when talking to MDs from family companies, sometimes on this matter, they normally have this topic on [Foreign Language] how we call it in German. So kind of a negative connotation to if some employee sense through some claims against some other and wants to blame. So what they say basically is -- "I don't want to be forced by a law to if this is an anonymous led to go after each of these things." But of course, I want to have them. I want to read them. I want to know what's going on, right? So I think this is also something to keep in mind that the value -- that's totally understood for everyone, the question is, are you forced by law to go behind this? And there are different opinions on that. And as mentioned, yes, specifically smaller family companies, maybe these entrepreneurs from the old kind of way of managing, they see also some negative and they just don't want to be forced to do everything, but they want, of course, know what's going on in their company.
Yes, I guess, for now, that's all questions that came in, I think you are still as enthusiastic and overwhelmed with the law of today. Yes? That it came finally into place. So that's all good.
One follow- is coming here. But just as a reminder, of course, if you have any follow-up questions after our call, you just feel free, of course, to send them through, and we will answer them also afterwards.
But here's one more coming from Lukas. One month for the introduction of the whistleblowing law is a very short time frame. How do you see this time? And how do you handle this short time frame? Do you see any danger to lose possible customers here?
Yes. So thank you, Lucas, for this follow-up question. It's probably target towards can we manage onboarding and signing and the whole inflow of requests. With the customers on the sales side, we are in the pipeline, we are pretty far. So it's about contracts are prediscussed. So it's really about signing them. We have still a strong sales team. We discussed just yesterday, practical insight to use people from other sales teams. Short term to handle a high inflow and the same is for the implementation and service teams, not only about selling it's an also onboarding these customers.
So we are well set to really cope with this inflow. And therefore, I don't think that there is any bottleneck in the next weeks to execute on this.
Great. Thank you for your insights. Thank you to join me today in this call. I think that was really great looking back to a great Q1. Looking forward to a great whistle-blowing wave across Europe to come and then a lot of growth potential with the compliance cockpit in the future.
Yes, it's exciting -- was a challenging time, waiting for more -- we were not always in agreement in what we do. But ultimately, we did. I think we did it right. We made the right decisions. We made weather-wise the wrong decision to do our spring party today in Munich, today evening. But timing-wise, we did it right. I look forward to this. Thank you for your trust in EQS Group and yes -- let's execute the next months and enjoy what will come there.
Thank you very much. Bye-bye from Munich.