Good day, and thank you for standing by. Welcome to the Columbus Financial Report Third Quarter 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press Star and One on your telephone. If you are listening on the webcast, you can also submit your questions over the webcast link. Please be advised that today's conference is being recorded. If you require any further assistance, please press Star Zero. I would now like to hand the conference over to your speaker today. Søren, please go ahead.
Thank you, operator, and good afternoon, everybody. My name is Søren Krogh Knudsen, and I am the CEO and President of Columbus. I'm accompanied by Hans Henrik Thrane, our CFO, and we are pleased to take you through our results for Q3 and the first nine months of 2021. At today's call, we will start by looking at the operational and financial highlights of Q3. I will then share a short update on our strategic priorities. Hans Henrik will continue, and will share the financial review of Q3 in a bit more detail, and we will end the presentation with an outlook for 2021 and long-term guidance, followed by a Q&A session. Let's go to slide five to begin the presentation.
I would like to start with the most recent event that some of you might have seen, which is the divestment of our U.S. SMB business unit. Well, actually, I should say U.S. SMB business, because on Monday this week, we signed an agreement with the U.S.-based SMB company, Enavate, for them to take over the SMB business unit of Columbus U.S. The divestment comprises 55 employees and up to 1,400 customers in the SMB customer segment. This divestment is an important milestone in our strategic direction to simplify the business and focus on digital advisory to larger companies, so hence why we're selling off the SMB part of it. The divestment impacts full-year revenue with approximately DKK 150 million and EBITDA with approximately DKK 25 million.
On a global level, Q3 continued to be a busy quarter with high demand across our markets. During the spring and summer period, we have worked hard on hiring new people to the organization to keep up with demand, but also to fuel for further growth. In Q3, we onboarded 171 new people, resulting in a net increase of 122 FTEs, compared to the end of Q2 of 2021, so last quarter. So quite a significant growth that we have achieved. During October, we also announced two major leadership changes. In Sweden, Lena Rydström will take over from Markus Jakobson as the Market Unit Executive. That is Columbus' term for what you could call the general manager or the managing director of a Columbus geographical entity.
Mathieu Scholthuijl will take over leadership of our global Care M3 business unit. Both leadership changes were expected and are result of quite well-planned succession plans to ensure that we have a continued strong leadership in Columbus. The execution of the Focus 23 strategy is proceeding, as you can see from both the hiring and the SMB divestment. We have defined 17 strategic key acceleration tracks, which I will cover in some detail on the next slide. Looking into the Q3 financial highlights, which Hans Henrik will cover briefly, I would just like to highlight that we realized a revenue of DKK 323 million, which corresponds to an increase of 11% year-over-year.
We saw significant growth in our Norwegian business, growing by 42%, and we also saw strong growth in Columbus Sweden and Columbus UK, and they grew by 22% and 15% respectively. Columbus Denmark and Columbus US delivered below our expectations, declining by 5% and 24%. On a global level, the service revenue on an aggregate level increased by 12%, and the increase is mainly driven by most business lines, but especially driven by Columbus Care, our digital commerce unit, and the data and analytics unit, and they all grew with double-digit numbers. The recurring revenue part of the total revenue increased by 6% and now constitutes about 23% of our total revenue.
In terms of the efficiency of the organization, the year-to-date customer work increased by 4 percentage points from 53% to 57%. Our normalized EBITDA declined in the quarter by 83% from DKK 22 million to DKK 4 million, and this decline is mainly related to the hiring costs for all the new people that have joined us, the onboarding costs, but also to our efforts related to our new ERP platform, which we have gone live with and some extraordinary external costs, both for the ERP implementation, but also some other matters. Year to date, the normalized EBITDA decreased by 6% to DKK 78 million. All in all, the management considers this consolidated results for Q3 in line with our expectations.
I'll go to the next slide. In terms of update on the strategy implementation, you have already mentioned the U.S. SMB divestment, the leadership changes, and the hiring of new employees, which are important components. I'm just going to share a little bit about these 17 tracks, as I said before. As the Focus23 strategy is being executed, we have focused on expanding our current strengths, addressing operational challenges and adding some of these new digital advisory capabilities to the organization that we need to fulfill the strategy. In order to deliver progress quickly or swiftly, we have defined 17 acceleration tracks which are meant to help us in the short and midterm.
Each of these tracks is already mobilized, has a clear scope, clearly defined leadership, a delivery timeframe, and a timeline for them to deliver. The tracks are meant, as I said, to accelerate our strategy in the short term, and they will also be augmented by some longer-term investments in, particularly in the digital advisory capabilities, but also building up of the industry expertise that we need, for our chosen sector verticals. That is, again, manufacturing, retail, and food. The 17 tracks include initiatives such as, talent and leadership development, commercial optimization. We have some market unit and business line expansion, and also a track dedicated to, improving our strategic alliances.
In addition to this, I would just like to say a few more words again about this implementation of a new common ERP platform across Columbus. We have directed a lot of energy and attention to this in Q3 and have gone live with the platform. We will begin to reap the benefits of this in the coming quarters. The main benefits in a business context is to have less friction as we do business between countries and business units. It's much easier for us to conduct business and getting the right experts from anywhere in Columbus in front of any clients.
Also in terms of financial management, it gives us a much simplified operating model, so much better transparency and visibility of performance. A lot of work has gone into this, and I'm sure we will be very pleased with the result as we stabilize this platform. I'll now hand over the presentation to Hans Henrik, who will take us through the financial review.
Thank you, Søren. We're now on slide seven, which is sort of an overview. Here you again see the 11% revenue growth. We have a DKK 6 million currency impact if we had sort of like-for-like currency. We have a DKK 6 million tailwind on currency, primarily deriving from Swedish krona, Norwegian kroner, and British pounds. Had it been like for like currency our growth or in stable currency, our growth would have been 9%. When you look down on the EBITDA, you see we do have what we call normalized EBITDA of DKK 4 million compared to DKK 22 million last year.
The EBITDA we do report is the DKK 37 million, and it is because we want to show what is the real development in the business, because we had two major or extraordinary elements last year. There was a DKK 13 million provision on the Norwegian loss-making projects. But we also had a reversal of earn out with regards to the iStone acquisition. Like for like, the EBITDA is for the quarter dropping from DKK 22 million- DKK 4 million, and year to date from DKK 83 million to DKK 78 million. Let's move to the next slide and our income statement.
Here again, you see the total revenue of 11%, but we in the quarter actually have a growth in product or service revenue of 12%, leaving us to if you look further to the right a 4% year-over-year or year-to-date growth in total. Then going down to staff costs, we do see a growth of 11%, which is sort of being underlined by all the new recruitments we're doing, but also supporting the growth we have in our services business. When we look at the year-to-date growth in staff cost, we now have a 6% growth in staff cost here.
Looking at other external costs, they are for the quarter growing with about DKK 10 million, primarily from some additional consultancy fees, as we are spending some money in the transformation process with our new ERP platform to create that transparency Søren mentioned just earlier. Also, if you look at the year-to-date numbers, this account is growing by only 9%. There's also an element of that we have saved some spending in kickoffs and get together as we normally have earlier in the year. That leaves us down with the Q3 2020 column.
There's 28 million last year in the other operating income, and that was the one I mentioned on the previous slide that was an extraordinary element in last year. Good. Let's move down to depreciations. They are at the same level as last year and also both in the quarter and last year, and that is primarily related to depreciation of all our office leaseholds but also all our other equipment. Down to financial expenses. We do have a slight increase in the quarter of DKK 7 million. This is normally related to currency adjustment on monetary items in our balance sheet, and normally on intercompany payables and receivables.
Again, if you look at it, the year to date, it's being reduced from 16- 9. That's fluctuating a bit. That's sort of the normal parts of it. Then finally, if you look down in the year to date number, we have a huge element of DKK 736 million in profits from discontinued operations, which is related to the divestments we have done. It's both the sale of our software company and our Baltic companies we had in the first. We still have with us in January. Then finally here, our U.S. SMB business.
That's the capital gain we had on those items you see cumulated in DKK 736 million. Next, slide nine. Now a breakdown of our service business. Here you see that we now have growth on Cloud ERP in Q3. However, still cumulated year-to-date, we have a decline of 3%. That is still because we had a big reduction in people last year. The pickup, even though we have hired a lot of people, is still not kicking fully in the year. We also have a slower sales execution in the Danish market units. That is also causing a
That we are not fully on par with our Cloud ERP yet. However, a really strong growth on Columbus Care in the quarter of 18%, bring us to accumulated growth of 12%. Digital commerce growing 32%, bring us to accumulated growth of 15%. Digital data analytics growing 25%, take us up to a 15% accumulated growth. We unfortunately have a small decrease on customer experience and engagement, but we still have year to date growth here. It has more to do with some phasing on customer products that we have this small decline here. So it's still small numbers. But all in all, very nice with strong service growth here.
Let's move on to the next slide, where you have a graph of our development in recurring revenue. Recurring revenue increased by 6% to DKK 73 million. The recurring revenue now constitutes 23% of total revenue. For the third quarter, it's a small decline of one percentage point compared to third quarter last year. Year to date, this development in the recurring revenue shows a great progress in Columbus Care contracts increasing by 20%, but also cloud products that increased by 43%. However, the subscription, which is related to sort of old perpetual or owner licenses, declined as expected 20% due to the continued cloud conversion. Next slide. Now here's an overview of our customer work.
In Q3 this year, which is normally a big vacation quarter and therefore normally the least productive quarter of the year, we had 50% in customer work for the third quarter compared to 48% last year. Even though it's a slow quarter, it is still a slight increase, again, with all the new hires we had on board. That's a very good development. That brings us to accumulated year to date chargeability of 57% versus 53% last year. Again, despite the large number of new employees, customer work remained pretty high and we experienced sort of a steep learning curve ensuring our many new consultants that they are quickly to deliver on customer projects.
All in all, we consider this development satisfactory. Next slide. I'll now take you through our sort of the other way we look at our business. That is our market units in the geographies where we do our performance. What you see here is that Sweden, Norway, and U.K. we had very strong two-digit growth. In Denmark we had investment in sales capacity and other key hirings to address sort of the lack of performance in the Danish market.
Again, due to sort of a very high demand in Norway and Sweden, the people in the Danish unit have also been focusing on supporting the growth delivered both or primarily in Norway, but also in Sweden. That's also an element in the strong growth in both Sweden and Norway and the lack of growth in Denmark. That was the overview of the geographies, and now I'll hand back the conference to Søren.
Thank you. I will now cover the outlook for the remaining part of 2021, which we have on slide 15. Columbus' ambition during the current strategy period is to gradually increase our profitable growth to a minimum of 10% annually by 2023. Due to the divestment of the SMB business in the U.S., our guidance is adjusted accordingly. As the SMB business will be reported as discontinued business, revenue guidance will be reduced by DKK 150 million, and EBITDA will be reduced by DKK 25 million. The revenue guidance hereafter is the range from DKK 1.5 billion- DKK 1.65 billion. The EBITDA guidance is now in the range of DKK 100 million- DKK 125 million.
I think that concludes what we had planned for you, and we will now hand over for questions.
Thank you. As a reminder, if you wish to ask a question on the phone lines, please press star and one on your telephone. To cancel your request, please press the hash key. If you are listening on the webcast, you can also submit your questions over the webcast link. We are going to take now our first phone question from the line of Dennis Nilsson. Please go ahead. Thanks.
Yes. Hello. Thank you for the presentation. I have a question about the net staff increase of 122 people. Is that because of normal organic growth, or is it like new hires for expecting this new digital advisory strategy, like people for that strategy?
Okay. Thank you. Thank you, Dennis. The net increase of 122, which actually represents 171 people that have joined during Q3. Let me just try to break that down a little bit. Out of the 171 that have joined us, 84% are what we call PFTEs, which is Columbus speak for productive resources, so those that conduct consultancy work for our clients. That's a pretty big increase over the average that we come from. It improves our ratio, if you will. The ratio we come from is about 66%-68%. In addition to that, four of them are dedicated to sales, which is also fairly directly linked.
Your more specific question, is it capacity increase, or does it move us toward the desired market position for the future? It definitely moves us toward the desired position. I would say that some of it is just you know, capacity to keep up with market demand in our existing business model. It's a mix of both. A mix of both, but with more PFTEs than we have before, and it is our ambition to improve that ratio gradually over time.
Okay.
That was different parts. Does it answer your question?
Yes. Is it like one big hire you did, or do you expect like something similar in the upcoming quarters?
A good, it's not one big hire. It's really hard work in every country we are in and in every business unit we're in, except, as you might imagine, not so many new joiners in the U.S. right now. We do expect to continue hiring, but only to the extent that we can see our efficiency keeping up with it. At the moment, we're now well into Q4. We have pretty good visibility of how quickly we can get our new resources onto paid work, which is kind of the limitation on how quickly we can onboard them, as well as finding them, of course, but those are the two ones. Assuming we can keep our efficiency ratio at a decent level, we will continue.
Okay. My second question is, do you see any risk in like the general market perception of Columbus regarding this digital advisory strategy, like as Columbus has always been seen like implementing consultancy and suddenly will do more advisory? Do you think it will be difficult to change that label or is it like will it need some kind of longer-term rebranding strategy of people's perception?
Very good question. In terms of risk, I don't really see any risk of going backwards. I mean, we have a pretty strong foundation platform on the business we do today. I guess when we talk risk, it's more in terms of how far can we advance on that desired market position, which we've stated, which both includes the implementation part we have today, as well as an advisory part on top. I think your question is really precise. I mean, we need to rebrand. The progress, the speed of progress is different for every market. In a market like Sweden, where we're seeing a lot of progress right now, we have moved the brand a lot towards the desired position already. Norway is moving fast.
The U.K. has currently moved and some. I think it's actually down to another way of explaining it is going back to our service offerings, the nine doors. The more revenue we have from some of the newer doors you will see then the brand changes immediately. I don't think it's something we do with a marketing campaign. It's something we do with the composition of business we have. I think we're progressing, but it's not something you do overnight. I think that's what I can say, Dennis Nilsson, about it.
Okay. Yeah, thank you. That was all my questions.
Thank you. Okay. Should I read the question, and will you take the first one? I'll read it, and then you can explain it. It's from Stian. EBITDA is down by over DKK 30 million year-over-year. Can you please quantify the various investments and extraordinary costs? How much investment extraordinary costs should we expect in Q4?
Okay. First, when, as we talked about doing the call, there are a couple of extraordinary items, and then normalized, we are not down by DKK 30 million in EBITDA year-over-year. We have dropped from DKK 83 million- DKK 78 million, sort of cleaned up for those extraordinary items, and that's a drop of 5% year-over-year. It is, as we are in a big strategic change journey with running our business in business lines. We have been through a big organizational change.
We are currently implementing new business systems for the whole business and how should I say, completing integrations of earlier acquisitions. That's the reason why we do spend the extraordinary on consultants and also on some tests to provide the services for changing. That's the reason for the drop in EBITDA that is primarily related to the big earn out we took as income last year. That was hopefully a reply to Stian Runde.
Yeah. I think the next one is from Dag, and it says, There is a decline in number of employees in the Nordics and a big increase in the rest of the world.
Yes.
What is the underlying development in number of employees this quarter in Denmark, Sweden, and Norway compared to Q2?
Yeah. I think the reason why when you look back at the quarter report from second half of Q2 is that when again we are changing our operating model and in the old sort of model we ran our business very much country by country. In that model we did report a number of people from India that were working only for Denmark as part of Denmark, and those who were working only for Norway they were reported as Norwegians. Now we take all these people and put them in other or sort of offshore or nearshore centers.
Now when we report number of employees in Norway, that's actually those who are in Norway because now they are working seamlessly across market units, and then it sort of loses its relevance to tie these people closely to Norway. That's the reason for that change, Dag.
I think I can add to Dag also. I'm just gonna break down. I think that might create some clarity. The 171, you wanted to know, maybe your question is also partly answered by saying where, you know, how many were hired into these geographies. Out of the 171, 23 people were hired into Denmark, 14 were hired into Norway, and 43 were hired into Sweden. Good. Then I think we proceed to the next one. I'm gonna read it, and I think it may be for you, Henrik, like, to answer it. So just a request, all comparison numbers have been changed since last reporting, making it difficult to monitor and understand the underlying development in the Columbus business, both on an overall but also divisional level.
Obviously, the divestment of the U.S. SMB had an impact on the numbers, but other changes have also been made. Going forward, could you please provide comparison numbers for the last eight quarters when changes are made to the numbers? Thanks. Can we do that?
We will not make a reporting on eight quarter . When we clean the numbers for the divestment, it is according to how we of course should report and therefore the development we look at quarter-over-quarter is comparable and shows the best, you know, comparison to how the remaining business is performing compared to last year. I'm not sure I can promise to give two years back on that note. It will be.
I don't know if it makes sense, but you know, the last year's numbers are corrected, so once we get to the year-end, it will be. You will see an eight quarter comparison that is like for like for what we call the continued business, if that makes sense. I hope that gives reply to you, Michael.
Thank you. I’m sorry, I skipped a question from Jonas. Hi. If we look at Columbus margin in 2021, it’s quite a lot lower than IT services peers. What is the main driver behind the margin gap versus peers? And what margin level do you expect Columbus to be able to deliver over time? What concrete actions are needed to reach such targeted margin levels? All right. I’ll give that one a go. I’m not quite sure what the peer comparison you’re referring to is saying, Jonas. What I’m gonna do is to say, are we happy about the margin level we’re at, or do we expect it to increase over time? I do agree with you.
Henrik and I are currently discussing on how to include some target EBITDA measure going forward. Just to try to sort of preempt that a little bit, I think our number one priority at the moment, and it should be very clear, is to create 10% of profitable organic growth, which is doable, and we are sort of as you can see on the quarterly results we are approaching that. We cannot at all say we're going to do it on an annual basis for 2021, but you can see some of the quarterly results are starting to look the way they need to.
In terms of the EBITDA, I would also expect to see improvements. I'm tempted to say something, but I probably shouldn't.
I can-
Hang on a second.
Yeah.
You can see what the margin level is in our current guidance. I think that ranges from about 6.3%-7.5% at each end of the spectrum. Yes, that is going to increase over time. The main components, there's still efficiency which we can take out of just running a better operation. There's definitely something we're going to do about that. I do think also our hourly rates will be increasing both as a result of commercial discipline, but more so as a result of the value we can take out of our industry knowledge and our sort of more total portfolio approach to digital advisory over time.
The latter one is the one that requires some buildup. Yeah. I would say the rest, to be honest, is just cleanup and removing some redundancy in terms of processes and yeah, mainly just process, just a tighter operation. I think that's what I can say about it. Did you want to add something, Henrik?
No, it's just that during the development of the strategy, it was with the new way we are organized and having a bigger span of planning with the services, we would be able to drive up efficiency. It would also higher prices with the segment we're targeting. Last, but also we talk about the span of control, so we need less leaders for the same amount of people who are sort of the drivers in gradually bringing up the margin. Then sort of meanwhile, we also, there was an intermediate or a temporary investment in getting us from A to B that sort of temporarily took our margin down.
That was just to supplement what and add to what you said, so.
Yeah. The next one from Dag. Sorry, I think Stian is asking about the remaining U.S. business, and I think also that is Dag's question as well. I think I'm gonna answer both of them with one. Yeah. We just concluded the SMB divestment on Monday. Obviously, it's quite right of you to point out that we have a job to do with the enterprise business in the U.S. We have about 50 people left in the U.S., and we have about $12-$13 million left of revenue. Actually, you know, in terms of the client portfolio and the services, there's nothing wrong with that. However, as we have divested just the 55 employees and the revenue associated with...
The clients, the SMB clients, we have an overhead which is too high, which sits now and is only carried by our enterprise business. It's gonna be a combination of fine-tuning that and then obviously growing the business. The current size of the business is not going to be a really viable business. In terms of the timeline, it's not a complicated business for us to have a look at. I think we're, you know, I don't wanna promise anything in terms of back figures, but it's more like a quarterly effort for us to go through. By that I mean like a post effort, but that's sort of how that is. Okay.
How much time do we have left? Can we take some more, or? Yeah, we can. Okay. Dennis has one. What is the primary reason that Danish revenue is down compared to Sweden and Norway? Which measures are you planning to increase it? Okay. I think I'm gonna divide this one in two, and the first one is related to our big business unit, which is the Cloud ERP business unit, where we're just not seeing the growth we want to. What we're doing there is we are investing in a lot more business development capacity to be much more basically much more present in the market. We're trying to strengthen our partnerships with the technology vendors to just increase the performance of that big unit.
The second component is that some of the strong global growth that Hans Henrik mentioned, you know, from the commerce unit, and for instance, also the CXE business unit, are not really present yet in Denmark. So those are white spots in terms of the sort of the Columbus matrix that we really need to fuel to have some new business units that carry the future growth as well. So those I would say are some of the reasons behind it. So we need more legs to stand on, and our main leg currently had its business development capacity increased. Yeah. Then one more from Doug.
The sold SMB unit in the U.S. was sold at what from the outside looks as a very low multiple. Could you please give us some more color on why you were satisfied with the price achieved? Well, okay. Again, the first thing I would say is sort of, you know, we needed to address our performance issues and simplify our presence in the U.S., and the SMB client segment is not part of our core strategy, so it was that kind of divestment for us. It's not something which was sold for other reasons than that. I think we ran a really structured process in the market to make sure we had the correct valuation of the assets.
In terms of some of our more internal considerations, I'm not sure how much I can disclose because we have an agreement also with the
Yeah.
I think that's what I can say about. I realize if you look at the EBITDA, you can and you do a multiple on that. I know where the question is coming from, but I go back to what I said before, is we have the full remaining infrastructure of the U.S. entity now sitting in enterprise, and therein lies part of the answer. Yeah. Okay. I think that concludes the questions. Do we have any more on the phone or?
There are currently no further questions on the phone lines. Thanks.
Okay. Thank you. We have one more on the web interface. Which players do you see as your biggest competitors going forward with the new Focus23 strategy? How will Columbus differentiate itself from competition? All right. Okay, I think actually the first thing I'm going to say is that we should probably have a longer one on this at our next call, so we can do a little bit more of a deep dive into a proper strategy run through. This is going to be a very short and then thereby also insufficient answer to it.
The first thing I can say to, just to make some things clear, is I don't see any major global competitor which is sort of the one we need to. We are competing very much against local and regional competitors. Hence, the list becomes pretty long because I would need to give you one for each market, more or less. I'm gonna refrain from doing that. In terms of the differentiation, we can have the starting point today, but. Main point of differentiation, number one, is that we are focusing on three sector verticals. This really works and already works for us today. We've actually been pursuing this strategy for a while, a little bit more implicit before, now it's very explicit.
We know much more about manufacturing and food and retail than we know about banking, for instance, or something else. Our employees really know the taxonomy of the customers in these sector verticals. That is of great value because you can save time, you can do a better setup, you can suggest more things. You can advise when you know the possibilities of, for instance, let's say, the salmon, what is that even called in English? Salmon, I don't know what that's called. I'm gonna say something else. Dairy products, for instance. You know, if you really know how those, the taxonomy of those companies, you can do much more for them.
This is becoming increasingly important, and if you want to be a real digital advisor, you know absolutely have to know the regulation, how their supply chains work, upstream, downstream, and the taxonomy, basically, how are these companies built, how are the financial models, how are the production models built. That's a very big part of it.
The second part of it is more like the total portfolio of digital advisory, that we don't just go out and say, "Hey, we can help you with ERP." But that we can change to a position where we can basically say, "Okay, so you have a commerce platform, you have an ERP platform, you have some data and analytics needs and other things, and we can tie it together." We can start by having the discussion is like, what problem are we trying to solve and not what do we have to sell. That's a highly simplified way, we can come back to it in more detail. I would say that the third one is that we are zooming in on a client segment, which we know very, very well.
It's not the blue chip. It's not the S&P 500, but they're quite sizable companies that typically are represented in more countries. Often we find where we are also matching to some degree their geographical spread. We're used to setting this up in like a multi-market, multi-geography environment. I think that was it, Dennis, for that one now. I think we could go into more depth at a later stage. Michael is asking again, would you consider hosting a Columbus mini capital markets day at some point in the near-term future? Hans Henrik?
We'll consider it and get back with that directly, Michael.
Great. Yeah. I would certainly love to share more about the strategy, whether that's enough to call it a capital markets day. I have to learn about that.
Yeah.
All right. I think that concludes it for today. I thank you for attending and for all the great questions, which proves that you have you know your details. So thank you very much for both attending and taking the time to look through the Q3 report. Yeah. I wish everybody a great day, and I think the next date is already disclosed, not yet disclosed. Will be disclosed in December on the Q4 and full year. Thank you. Bye.
This concludes today's conference call. Thank you for participating. You may all disconnect.