Welcome to Lemonsoft Q3 results presentation. We will start first with the presentation from CEO Alpo Luostarinen, followed by the Q&A. You can send your questions throughout the event via the chat. Now, Alpo, floor is yours. Go ahead.
Thank you. My name is Alpo Luostarinen. I am the CEO of Lemonsoft, and I will be presenting to you our Q3 results, as well as our strategic development. Let us dig into our financial performance. The quarter was quite uneventful in terms of numbers, since basically we did two transactions during the quarter, Lixani in financing round, as well as Finvoicer divestments, which basically cancel each other out with the Jakamo acquisition in the beginning of the year.
Our net sales was 7.2%, slight growth from last year. Our SaaS income grew well 8% from last year. Adjusted EBIT was at the same level as last year, and the adjusted EBIT margin was also quite the same. Pretty much even level from all aspects. After the end of the period, we concluded our change negotiations in October, November, resulting in seven personnel reductions and two material changes to employment terms.
Going to our market, manufacturing and wholesale market is our most important sector, which has been developing rather well this year, and continued developing well in the third quarter. The latest figure for the manufacturing, revenue indicator for manufacturing is not yet available, but otherwise, wholesale sector has developed and continued to develop really well. Digging into our strategic development, which is very much different from what the numbers show at the moment. First of all, the market recovery is performing and creating good opportunities for us. We have also increased our sales resources to increase our lead generation, which basically lifted our monthly ERP leads 2x-3x previous levels. We were able to increase the lead generation already in May, June, and then from August onwards, we have been able to increase that again once more.
We won during the quarter several new customers from competing and competitors' end-of-life ERP systems. Now after the end of the quarter, we have been continuing on that track and also been able to win customers in competitive bidding competitions with our key major competitors. Now, we have been also working with international pilots with several existing customers in specific countries, specifically in Sweden, Germany, and the Baltics. Especially in Sweden, our product suite looks quite good already at the moment, and we have been able to provide a comprehensive product offering already in the first few months that we have been working with one of our key customers. In Germany, we have been looking at creating a production offering there, and that manufacturing execution system works well in all regions thus far. The Baltics, pretty much the same. We are working mainly with the production warehouse management solutions there.
Moving on to the category-defining solutions. The key aspect of our strategy is to increase the competitiveness of our ERP product, and that has developed really well during the third quarter. We've been able to bring new improved features into many of our existing and new modules. Especially manufacturing execution system, MES, warehouse management system, our supply chain, and financial management modules have been. Now, we've been able to increase the level and complexity of those modules. We've also brought several new AI capabilities, especially Lemonsoft MCP interface has been very, very well received by our customers, and they've been very enthusiastic about the capabilities that it brings, especially to their reporting and internal sort of data analysis.
We've also brought features into the product, for example, AI production assistant, which enables the customers to manage their production lines better, which is a very, very interesting feature as well. The agent-based development has changed quite rapidly during the year. In Q1, we were only at the beginning. In Q2, we were able to bring in several new ways of working. In Q3, we were able to develop that further, combining several different agents and sort of developing quite ready larger features and functionalities in a few weeks' time, which has been a drastic change to previous quarters. This is very exciting for the next few months and for 2027 to see what kind of features we can bring to customers.
Basically, that also expedites our sales processes, so we can basically, within a few weeks and months, bring completely new solutions to customers during the sales process as well. Going to organization, the organization has been focusing on customer engagement. We've been working with and meeting our customers through a wide range of touchpoints. We've been meeting in fairs, meeting in our own live events, meeting in webinars, and so on. That has also, one of the objectives of those meetings has been to speed up the introduction of modern solutions, AI-enabled solutions at the customer site. The contract terminations of our customers have declined after the summer, so that's been developing to the right direction, although the realized churn still remains higher than what we want it to be and will remain during the next few months as well.
We did during the and in the beginning of the quarter, we did two transactions, which we announced already in Q2 report, the Finvoicer divestment and Lixani financing round, which ended up in a situation where we own a minority of the company, and thus Lixani is not reported in Lemonsoft's figures anymore. Those two changes have already increased our management's attention to the key areas of our business, manufacturing and wholesale software businesses, and those have also increased our gross margin and SaaS share of revenue. The impact of those changes in the subsidiaries is already visible in Q3 financials almost fully, and it reflects a more focused portfolio going forward. Let's dig into our financials a bit deeper.
Looking at our net sales split, the SaaS share increased. SaaS increased from EUR 5.5 million to EUR 5.9 million. Otherwise, there were quite limited changes in transactions and consulting, which basically cancel each other out. The increase in SaaS is basically our most important figure that we follow. The revenue and ARR bridge for Q3 basically shows us that the new sales has still remained rather flat, and we haven't been able to increase that figure as well as the objective. During the next quarter, next few quarters, we expect those figures to gradually ramp up. The net downsell upsell has been around zero. That figure is also something that we emphasize quite a lot, and we are now looking into increasing resources in our current customer management and upsell potential. That's something that we are looking to grow in the future as well.
Churn has remained at the level of Q2, a bit lower than Q1. We expect that figure to remain fairly high as well in the next one to two quarters. As I mentioned earlier, the new contract terminations after the summer have been very much more limited than before, which shows us the right direction. Divestments have brought a - 2.2% impact on the Q3 ARR. Looking at the right side of the graph, ARR share of revenue and SaaS share of revenue has grown from 77.5% to 82.6%, which is a big increase, and we want that to continue in the future as well. Looking at our cost split, there's been basically two major and two most important changes.
Materials and services has gone a bit down, 3.4 percentage points, which is basically due to the transactions in Finvoicer and Lixani, as well as Lemonsoft's own platform costs coming a bit down after the platform transition last year. Employee benefit expenses, so personal costs have gone up 3.2%, which is basically a normal development based on the salary levels increasing. We've been looking at that figure as well quite thoroughly, and we've conducted the change negotiations to manage that increase going forward as well. Finally, the personnel figure has gone down from 207 to 184, which the biggest impact comes, of course, from the Finvoicer divestment. Otherwise, changes have been rather limited. R&D headcount is still the highest headcount in our company, and that remained roughly the same as before, around 100. Customer functions decreased, and that impact comes from the Finvoicer divestment.
That's it for the financial update. More information, we'll be sending our financial calendar, publishing that at the end of the year, and then we'll come back with Q4 update in February. Good. Thank you.
Thank you, Alpo. Now let's move on to the questions. Starting from Atte Riikola, Inderes question. New ERP deals picked up at the end of Q3. How quickly will they show up in your SaaS growth?
Basically, at the end of Q3 and the beginning of Q4, what we already see is a gradual increase in the number as well as the size of the deals, which both look rather promising. The impact is still fairly small, so we need a combined impact of new deals as well as current customers increasing their use as well as reducing churn. All those need to be in the positive direction to make a material impact. We expect the new sales figure to be visible in Q1, Q2 in more drastic manner, and then the churn figure also needs to come down. We expect the Q4, Q1 figure still in the churn side to be a bit negative. But from Q2 onwards, probably, we would expect to see some better signals.
Okay. Then customers replacing end-of-life ERP systems are now choosing a new provider. What kind of win rate you have on these against your competitors?
Yeah, we've been ramping up the volume only a few quarters now, and there's a limited number of decisions made by the ERP system, or made by customers for replacing the end-of-life ERP systems. But at the moment, we see quite an interesting development in our competitiveness since last year. If we take a look at a year back where we were, my feeling was that we were, let's say, one step behind some of the key competitors. Now, during Q3, some customers have also been saying that our AI capabilities and our enhanced new features and functionalities have brought us almost one step ahead. So, it's looking good at the moment. We've been able to win several good cases from our key competitors.
Okay. Atte Riikola continues. Churn from notices received early in the year will hit Q4. Do you expect churn figures to go up from this or just stay on the elevated level as previously?
This is a bit hard to estimate since the biggest impact comes from a few individual customers, which it's hard to estimate since they might go on for a few quarters or even years before they transfer to another system. It's pretty hard to estimate, but we assume that we'll stay pretty much the same level as before.
Okay. Related to that, is higher churn still going to impact your growth in early 2027?
Most probably it has some impact on our growth, and looking at, let's say, growing our net sales growth figure significantly, that, as I mentioned, requires improvement in all those figures, churn, net upsell, as well as new sales.
Okay. Gross margin was 86.4% in Q3. Is this a sustainable level now, or are we going to see some fluctuations also in the future?
My assumption is that that's a sustainable level for now. As I mentioned before, the impact or the growth of roughly 3 percentage points has come from Finvoicer and Lixani divestments, or Finvoicer divestment and Lixani, not in the figures, as well as Lemonsoft platform costs coming a bit down from last year.
Okay. Financial expenses were high at EUR 1.2 million in Q3. What was behind this?
Yeah, there's been some material one-off items in the Finvoicer acquisition, or Finvoicer divestment.
Okay. Then, your feature output roughly tripled thanks to AI-based development. Have you seen competitors speed up their releases in the same way?
We've seen some announcements from our competitors, but during the competitive or bidding processes that we've had, we haven't seen as fast development, which has been positive for us. But, of course, we expect all the competitors to ramp up, or all the key competitors. But if you look at the market, you basically see 10- 15 different ERP solutions, which I would say at least two-thirds or even more are legacy systems, which are not investing in new product development and AI functionalities. So, we are talking about three to five competitors that actually invest in product development, and we want to be in the front-runner end of that space.
Okay. Are you charging separately for the new AI features, or are they included in existing subscriptions?
For now, we've included those in the packages that we already have. We haven't seen basically any material costs for those AI functionalities thus far. Our first priority is to increase our competitiveness for the ERP product, which we do with adding new AI functionalities. Going forward, we estimate month by month whether we need to add the cost and what kind of structure that would have. But we, first of all, want to give our customers very cost-streamlined solutions with a lot of functionalities.
Okay. Then about the AI still, have you noticed AI-related churn in any of your products?
No. No, we haven't.
Good. Then one more from Atte Riikola. Lemonsoft's ownership is now heavily concentrated with two main shareholders. What does this mean for the remaining minority shareholders?
Yeah, there's been some eagerness with our largest shareholders, or the largest institutional investors in the Nordic countries, basically the small cap funds, to liquidate their ownership. Our main owner and largest shareholder, Rite Ventures, has been eager to acquire those shares, and their share of Lemonsoft has increased. Basically, what that means for the existing owners, we still have a good base of, let's say, 2,000 minor shareholders, which provide a liquid base for transactions. So, there's basically no real changes from our side.
Okay. Then a couple of questions from Daniel Lepistö, Danske Bank. What kind of costs do you expect associated with the international expansion, looking into this and next year?
Yeah, as we've highlighted, we are taking a rather cautious approach, and we are working with our existing customers. At the moment, we haven't seen basically any additional costs. We are working with our existing team to product development, product management, and customer support to provide support for those customers. But there's very limited cost at the moment, and we just direct our existing resources towards those projects.
Okay. Then, your recently joined COO left in late September. Are you planning to fill the role looking forward?
Yeah, unfortunately, he decided to leave to another investment company, but we've actually found a rather good solution running our subsidiaries with our management team approach. We are very happy where we are right now with the organization. At the moment, we are not planning to fill that role.
Okay, that was the final question, so back to you for any closing comments.
Thanks a lot from my part. That was our Q3 update in quite a short package, and we will come back in more detail for the full year update, as well as detailed Q4 results in February. Thank you very much, and have a nice day.