Thanks for joining. Talking now is me, Johan Kallblad. I've been in this role as CEO of Exsitec since 2010 and I expect this presentation to be around 15 minutes and if it is possible to ask questions we have a hand raise function in Zoom or we have a chat function. As usual I will start off by making a short recap of our business a reminder of what it is that we do and after that we'll cover Q2 financials and a short market update and a recap of our priorities going forward. We exist to help medium-sized businesses in the Nordics use digital tools to improve their operations and we help doing this so they can focus on their own core business which rarely is digital solutions and more often is helping their customers.
Digital tools can address areas like reducing financial administration through automation or use data for better decision making or forecasting or adopting e-commerce or managing a sales force. We sell and implement around 20 software packages from around 10 software developers and these are the primary software providers at this time. We have a revenue share partnership with these software providers where we market and sell their software to new accounts and we make the customer successful in using the software over time. Our ideal customer uses up to 5 or 6 different components delivered through us but the average customer today only access over 2 so there is a lot of work remaining in growing our footprint on existing customers. The business model is built on 3 revenue streams.
Our own sales and marketing is focused on selling software from the selection of third parties together with integrations between the software that we develop in-house. This is sold on a subscription model where you pay as you use and this revenue stream is around 20% of net revenue for us. Just under 2/3 of our revenue is from professional services, where we implement the software, and we make the customer successful in using it over time. We also do custom development and custom integrations where needed. The third part of our business model is that we offer our customers a single point of contact support on a recurring fixed price model. In this we can also take care of infrastructure and internet access and IT security.
We try to keep implementation projects relatively small, and we want to earn trust and scale our engagement with the customer over time where they also get a predictable cost structure with most of the running costs on a subscription model. I became CEO of Exsitec in 2010, and it took us a few years to set up this current business model and to reach scale. Since then we've had 10 years of solid profitable growth and at this moment we're just over 500 employees. We actually have reduced headcount a little bit in the last two quarters with a specific reduction in the workforce on the e-commerce area where we had a weak financial performance and also some reduction in overhead, and a general focus on increased efficiency.
We defined our target market as medium-sized companies with at least SEK 50 million in revenue. We have around 4,000 active customers and typically in a year no one single client is more than 1% of revenue. There's no size limit upwards on where our model works we don't actively target the enterprise segment in our sales and marketing. We're happy to exist if they reach out to us with a specific need we do have quite a few large corporations as active clients as well. An interesting thing we can do with the software components we work with is to combine them in a modular way we've created packages to fit different industries these packages are often made up of the same foundational components with some industry-specific add-ons.
All in all the customers are spread through many different industries. Talking a little bit more of what we've done in Q2 of 2023 before moving into financials. I have communicated before that from the second half of 2022 we revised our priorities a little bit and decided that improved margins should be number one before maximum growth. That has been a key focus for us, working on stronger margins and operational excellence in what we have. Also we worked a lot on the business in Norway and we're seeing very encouraging results from those operations. A somewhat unexpected statistic is the strong order intake, where we actually saw a record number of new deals.
It's a little surprising as we felt the market has been slow-ish a little bit soft from Q3 2022- Q1 2023. Lastly, a big internal undertaking was moving the business in Stockholm to one location from being scattered on three sites and this is where the picture is from. Let's dive into the specifics for financials in the 2nd quarter here. Overall growth of 13% organic growth around 7%. Quarter, little bit challenging in terms of working days with a lot of holidays, which affects our professional services as well as our customers. We've kept on prioritizing margin over maximum growth and this means that we're taking out some businesses where we don't see a long-term profitable viability for us.
Primarily, that would be work done by subcontractors and custom consulting that doesn't contain products. Nothing dramatic really just focusing on the things that we do best. Profitability, I think, is the financial highlight of the quarter. EBITDA is up from 25 million- 34 million SEK which means the margin improvement of over 3%- 18.2% margin in the quarter. Year to date, we're up 31% in EBITDA which is really nice since we have been able to cover for some things that are actually challenging like little bit worse calendar change of the premises in Stockholm and more travel and people activities post-pandemic and inflation.
Takes some time to change focus in an organization but I think we were quite early on it in changing to prioritizing margin over growth last fall which means I think we can also be well prepared for getting back into a stronger growth mode when the external conditions are favorable. I've gotten a lot of questions on prices we have not made specific price increases in Q2, but we are keeping up indexing on existing contracts according to the labor cost index which covers the increased salary costs as well. Going through the segments in a little bit more detail. Sweden again with a strong quarter solid growth and earnings. EBITDA margin is at the same level from last year.
The weak performance in the e-commerce business led to us having to do a reduction in force here, and we had some costs associated with severance payments that we put in the quarter. Feel much better now with the balance of demand and capacity. Norway is still operating at a lower profitability but good signs of a turnaround going from a negative margin of -3% in 2022 to an 8% margin this year. It's all that we hope from the new management that has been in place for some time now. Also around the 10% growth. To get one or two more quarters of improvement we should be on solid grounds moving forward here.
Denmark keeps on doing a good job at a decent growth, despite divesting a business unit in Q3 of 2022, that we see a future in. Margins are improving here, too. I'm quite happy with all the segments this quarter to be honest. The recurring revenue stream from software is a nice consequence of our business model, and that helps us having more stable results and cash flow than if we were only a professional services company. In Q3 we did divest our Pet-Booqz retail business in Denmark which does reduce the revenues a little bit and we have not made an adjustment for that in the graph but several of our suppliers made price increases in the start of the new calendar year, which will help us throughout the year.
On the negative side, we do have the feeling that churn is a little bit higher this year than the last few years, with customers, for instance, looking over the license usage and removing unneeded usage. It's not a big problem, we're coming from a few years where churn was almost zero. All in all, solid growth in this revenue stream, total growth of 22% year-over-year. I wanted to share a short update on the market conditions and our priorities. The market has been Q2, some unexpectedly strong sales numbers, actually. I track four KPIs to monitor sales: how many leads do we generate, how long time does it take between a qualified lead and a sale, how many sales do we do in total, and what is the average order size?
The negative KPI that's been going on for some time, is that we have seen lead times increase. The time from lead to close deal, it increased in Q3 and Q4 of 2022 and Q1 of 2023, peaking out at more than 50% longer sales cycle times than the historical average. We saw some encouraging signs actually very late in Q1, where lead time stopped getting longer, but they are still longer than the historical means, and mean. This is indicated also in Q2, when we see the sales process is being 20%-30% longer, rather than the 50% longer that we had in Q4. Throughout this slower period, we have been generating a lot of new leads.
Now, when the lead time stops increasing, we are seeing something like a 30% increase in the number of deals, with a 25% increase in the average deal size compared with Q2 of last year. This is probably the best improvement in a quarter that I can remember. Total order intake is up more than 50%. We do not know why. It could be that some things that were stuck in a sales process just fell in the right place, but we are talking about some 400 deals here, so it's not a single deal or a one-off that we're through that's skewing the message.
We will track and get back with more info in the coming quarters, as we understand if this is just a temporary improvement or if it's a change in the market conditions. Quite a little bit surprised to be honest I'm quite encouraged. Looking at priorities for 202 overall I think we're in a really good shape. We've taken actions to improve margins, and we intend to keep on doing this. There is still some improvements to be made, and I think we'll see the results going forward if we've done the right thing. There will be challenges, of course. We do have a lot to work with on developing existing accounts also. No changes in terms of strategy.
We're executing on a business model now that we have implemented and refined for over 10 years. The plan is to continue on a long-term, profitable growth journey. The macro environment may be challenging but we will not be restricted by our own execution. All in all solid quarter and we think we're in really good shape financially. Lastly, I wanted to share an update on one of the parts of our organization our training program. We are again getting back to record numbers at least in Denmark and Sweden. In Norway some work still remains on internal efficiency. We were a little bit reluctant in committing new costs early on this year and we were considering running a scaled down version of the training program.
Because we had such exceptional performance in last year's program, and strong sales numbers in 2023, that we decided to scale up after all, and all in all, there will be around 80 people that will start in the [Cryptex ] training program this fall. I'm looking forward to welcoming these new colleagues in early August. Before that I will try and enjoy the Swedish summer as best as I can. That concludes the presentation. If there are any questions please feel free to ask. As always, you can use the hand raise function in Zoom or the chat function, also always, also possible to send an email to ir@exsitec.se, and we'll try and respond as quickly as we can.
It doesn't look like we have any questions so with that we'd like to thank you for listening.
Yeah, we have.
Now we have a question. Let's see there.
I'm switching to something.
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Can you hear me?
Yep.
Yeah. Hi, it's Carl here from Reuters. Congrats on the strong results. Looking good here. I'm just wondering a bit on the order intake. It sounds quite bullish I must say. I'm just wondering when we will see that in the revenue growth again because I think revenue growth is a bit maybe lower than what we're used to and what it should be over time in Exsitec. Just curious to hear your thoughts on that.
Yeah. We were actually... First, to comment on the sales numbers, on the overall revenue since we know that we take out some of the things that we don't think add much like the low the low-margin operations that reduces revenue but it doesn't reduce earnings. We have actually in some areas chosen not to keep up doing some revenue-generating work that does not produce margins for us. It's a little bit by choice the lower revenue so I'm not actually worried about that in the short term. But it's a good question. Typically, when we look at sales numbers we try to...
Most of the revenue that we sell in the professional services side is realized over a 6-month period after the sale. Typically, it's a little bit slower after the summer because if we sell something late June we won't start delivering probably until September or, it should be August. I wish for August but it's usually September and sometimes October. It's a few months between a sale and professional services revenue 1 to 2 months, typically, and then the project goes on for up to, maybe 6 months. The revenue stream from product is, what we look at in order intake, is the 2-year product revenue. Actually, most customers are customers for 10 years or 15 years.
It's actually even understating the long-term revenue, but it will, before it's a significant product revenue, you should expect it to be 3 to 6 months on the license side and maybe 2 to 3 months on the professional services side.
Yeah. I have a question also on the growth again on the top line growth-
Yeah.
I think the organic growth was at 7% in the quarter. If I just look at the big trends sort of the revenue split it seems like consulting grew a bit faster and the main you know lower sales year-over-year is related to the other part. Is that anything? I think that is some.
Yeah.
Like-
Other. Yeah, yeah. That's mostly in the [Techforce business that we divested in Denmark.
Okay.
There were some hardware sales and other things. That's one of the examples of revenue streams that doesn't produce much value for us. It's for instance reselling hardware and we tracked it as other revenue so it's not the focus of ours.
the core underlying organic growth is probably maybe 10%, around there or?
You have to do a. That's a very hard thing to calculate. I mean, but one thing that is, that I wrote about in the report is that we actually had for instance we have a negative 30% growth in an acquired unit that we acquired last year that does e-commerce. That's very unfortunate. It was a bad timing on our decision to do the acquisition there. We cover those negative 30% with other organic growth. I think in a steady state looking at the business as it is I think it's fair to assume somewhere above 10% growth.
Yeah.
That should be supported by the underlying market. We tried to get rid. Again, we tried to get rid of things like things that if we have product delivery or consulting deliveries that are purely done by subcontractors it's just that's not a part of our PNL sheet. Same thing, if we have hardware deliveries where we add very little value to the hardware it's also nothing that we want. We try to clean up the PNL a little bit, and I know it's going to be a few quarters where it shows us slower growth I think Q1 and Q2, and then you know sometime-
Yeah.
Q3, Q4, we should be done with that. It's my expectation.
Yeah. Sounds good. On the, you're right, that you're taking a direct cost of SEK 2 million, I guess, maybe to hire from the purchase in the e-commerce business. Is that adjusted for in the adjusted EBIT figure?
No, no.
Okay.
Adjusted, I decide that we have not changed the.
Okay. Yeah.
Yeah. No. That, and that is, I mean, to some extent, and it shouldn't be, I don't think, that happens, sometimes you, sometimes you end up with the wrong competency mix, and then, and then you need to do adjustments, and then you should take that over the results. We discussed that back and forth a little bit, but we felt that this was the honest way to do it. We still wanted to talk about it, because you may get the feeling that our salary costs are increasing more than they actually are, because you have some severance payments, that are actually going to be paid out, in, in the months ahead.
We take that cost right away, so you may get the feeling, if you deep dive in our results, that salaries are increasing more than they, what they have been. It's not a huge thing, all in all, but we decided to take that throughout.
Okay.
Not do an adjustment for it.
Yeah. And then just-
It's a part of the people business that this sometimes happens, too.
Yeah. Yeah. It's just that, a lot of companies have different system, how they do with adjustments, et cetera. They just.
Yeah.
Shift that. That's good. Thank you. Just the last one is on Norway. I missed the beginning of the call a bit, was on another call. Just curious to hear your thoughts on Norway. Have we seen a clear turnaround there now?
Um-
any potential there?
You know, I reported, not sure if you remember, but I reported already last, actually after Q4, that we saw some encouraging signs, and then we had a better result in Q1 and now in Q2 the margin as you can see there, we went from a negative 3% margin to a positive 8% margin. That's an 11% margin turnaround in one year. It's been now this is the third quarter where we actually are encouraged by the movement. It's you know it's still early but I do think I'm a lot more confident than I was, two quarters ago.
Okay.
We're feeling pretty good. Actually, we were a little bit lucky here or in that Visma or just it's 75% of the business in Norway for sure is working 80% maybe, is working on the Visma product line. They released a new version of a legacy software where we have a large customer base. It's a lot of conversion projects going on and actually we've only converted I think less than 5% of our active customer base. I think this assuming that we keep having the strong interest in the market for doing this conversion and so far so good we have about 16 customers live. Assuming this continues and should we should have a good solid.
I mean, we should have three, four years of nice conversion works even enough you know giving us a solid foundation for a reasonable growth over the last over the coming couple of years. We're feeling a lot better about Norway.
Sounds good. Thank you.
Thank you for your questions and have a good summer you all.
Thank you.
We've also got two questions through the chat. The first one is: What do you believe are the possible margin expected to read in midterm and long-term in Denmark and Norway?
Yeah. This is a good question. I will choose to answer that vaguely. It's in Denmark, we have the need to invest a lot in growth and training programs and people and that will limit the margin a little bit. There is no reason for why the margins should be lower than in Sweden now, because now we've changed the set of offerings that we have in Denmark to be the same softwares that we work with in Sweden. It's much more aligned with Sweden and it's no different. We work on the same sort of vendor agreements, and we have the same sort of of revenue share agreements and so on.
There's no structural reasons for why margins should be lower in the long term. You know, before we're at 20% margins, I think there will be, I think we should be happy if we see the coming two years, if we see a 16% margin from Denmark, that should be nice and encouraging. We do want to invest in hiring new people, and it's a relative higher number of new people, and new sales, and new offerings there so it will take some time in Denmark. Norway, this may be counterintuitive considering that we had such bad performance over the last 2 years and it's now going through an acceptable performance. We still see no structural.
I've been asked this for a year and a half or 2 years. We still see no structural reason for why for why margins should be lower in Norway, actually. We've had an internal culture problem around cost and efficiency, and so on. If we keep on working through that, if the management keeps on working through that then and we get to a similar culture that what we have in Sweden we actually expect it to align to the Swedish level faster rather than slower. In my most positive projection is we're only a year away from having the same margins in Norway as in Sweden.
in Sweden but I've been disappointed in Norway before so I'm not making that as a solid prediction. Does that make sense? Is that, is that clear or vague enough?
The second question I've got is regarding the software kickback that you get. How does this work? Do you get a recurring kickback during the whole time that a customer uses specific software or for a limited time?
We don't talk so much about kickbacks and kickback structure. We try to have more of a revenue share partnership where we sometimes it's we that invoice the customer sometimes it's the software vendor that invoices the customer. We share the money. We share the money over the lifetime of the customer's usage as long as we keep on providing value. There are some exceptions but they're not a significant portion of our revenue. Typically, we only sell and market software where we have a long-term revenue share with the vendor. That limits us. I mean there are a lot of softwares that we don't sell because they don't have as attractive partner programs and attractive revenue share models.
I would say 95% of or probably more probably 98% of the software that we sell, we have a long-term revenue share partnerships. Then there are some things on the side that where we are so small that we can't define. Maybe we sell a really large and really popular set of software from a large vendor with their own... Where we don't have like a strength in negotiation and then it might be different but that's not a significant portion of our revenue.
As it is now, we don't have any further questions. We'd like to thank you for listening to the call. We wish you all.
We can give it another 30 seconds if someone needs a clarification on the follow-up on the chat, because I was not sure if I was clear enough. Yeah I assume we were clear enough.
Yeah.
You can always send an email to ir@exsitec.se and then and then we'll try and get back to you and clarify.
Thank you for listening in.