Welcome to Nepa Quarterly Report 2022. Throughout the call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. If you wish to ask a question, please press zero one on your telephone keypad. Today, I'm pleased to present CEO Ulrich Boyer and CFO Ann-Christine Fick. Please begin your meeting.
Good morning, everyone, and welcome to the presentation of Nepa second quarter 2022. My name is Ulrich. I'm the CEO of Nepa, and with me to present today, I have our CFO, Ann-Christine Fick. Turn page. If we summarize our second quarter, we continued with our growth and profitability. Our net sales increased by 10.2% to SEK 86.5 million, or 7.9% currency adjusted. Most of our markets had a stable development, and our customers' willingness to invest in marketing activities remained. We are well in line with our strategy to focus on growing recurring revenues. They grew 17.5% during the quarter, and corresponded for 65.4% of our total net sales. Our primary solution, marketing optimization, increased by 25.8%, which we are especially glad about.
For us, this is the proof of our product offering and also the area where we will focus our future products, our future product line. During the quarter, we completed the transition of our business, or what we have previously referred to as the legacy cleanup. From now on, our goal is to focus on growing into selected markets and with our Marketing Optimization offer, which already now is more than 80% of our recurrent income. Turning to the costs, we keep the margin stable during the quarter, amounting to 11.1%, the same as quarter one this year. This is partly due to temporary system upgrades and increasing investment in sales and marketing initiatives. We have, during the first half of the year, gradually introduced price adjustments to offset increasing costs. This won't have an immediate effect, but rather give gradual results.
We will continue with price adjustments in the coming future. Turn to the next page, please. I also wanted to give you an update of each respective market. Before that, I will just shortly talk a little bit about what we have done with our sales organization. Before, as I had pointed out in several meetings with the investors before, we basically rely on our clients to come to us with and asking us for offers or for work to do, and we are not so very active in our sales. It says this is. What we have done now during the spring is to get ready for a more active approach to sales.
We have carved out eight or nine people from our key account organization into a sales force, which will be focusing on recurring income within our MO offering. That will then be led by our new CRO, who will join Nepa on the 1st of October. We go from being more a passive organization when it comes to sales into a more active sales phase, and that is also supported by our marketing.
We still saw a continuous growth in most of our markets, if you think about our sales organization as it was, with an exception for Finland, where the Finnish market is a little bit special, as a lot of companies are highly dependent on the Eastern market, and they have been strongly affected by the blockade of Russia. The new sales there have been a little bit more challenging than they are. We feel confident that we make our targets there this year anyhow. Sweden, our largest market, is going stable. As said, more can be done. Finland has been growing very good last year as a bounce back effect after COVID.
Yeah, that combined with the situation. Yeah, it's a bit tougher right now. U.K. growing very, very strong, although from what I consider to be rather low numbers. We hope to change that as it's one of our focus markets. In all other markets, it is India that sticks out with high growth. We strongly feel that a lot of Western companies are now focusing a little bit more on India when both China and Russia is not so popular anymore. There we hope that we gather a high market share in the growth set. Turn to the next page, please. Our focus forward is growth and higher profitability. We have during the summer completed the legacy cleanup phase and now have a stable and profitable platform in place.
However, a good platform is never finished, and we will keep to facilitate and strengthen it so we can reach better scalability. One of the targets, of course, is always, you know, to sell more product only and not so much hours connected with that, so in order to raise profitability and scalability. In the coming years, we envision ourselves to undertake a new growth phase. We will continue to work on profitability and solution development, but focus forward will be on growing our business through active sales and marketing activities. We made several investments in our marketing organization. For example, we have developed our CRM system and we launch a new website during the fall. In addition to that, we announced this week the appointment of a new role as Chief Revenue Officer that will coordinate these growth initiatives.
I have great trust in the abilities of our new CRO to optimize sales in selected markets and product categories. All in all, we are focusing on a more international sales perspective with the strength in group management to facilitate growth in the European market. Now I hand over to our CFO, Ann-Christine, who will give you an update on the financials. Please turn the page as well.
Thank you, Ulrich. Like mentioned before, we saw continued stable demand in most of our markets. Net sales increased by 10.2% to SEK 86.5 million, and our gross profit increased by 9.3% to SEK 67 million. Both these are record levels of sales and gross profit. Sweden and U.K. contribute the most to our gross profit. Looking at the total personnel costs, they increased by 18.2%. However, SEK 6.4 million of these are attributable to investment in internally generated intangible assets. We have invested in the development of our own platform and digital tools. Adjusting for these, our operational personnel costs increased by 8.1%. This is also including provisions for an incentive program where final outcome depends on the results of the full year 2022.
EBIT amounted to SEK 9.6 million, a decrease of SEK 6 million from the second quarter last year, and earnings amounted to SEK 9 million, a decrease by SEK 1.7 million from Q2 last year. We continue to maintain our strong net cash position amounting to SEK 79.6 million at the end of the quarter. Please turn to the next slide. If we look at the capital expenditures line item, as was also mentioned on previous slide, we can see that there has been a focus on development of our platform and digital tools in Q2, which we also had in Q1 compared to last year. Out of other external costs, SEK 2.2 million are attributable to temporary system upgrade costs.
We have invested more in marketing compared to last year, and we also need to remember that last year was a year with some cost savings still due to COVID. This year, employees are coming back to the office, which increases costs of running the office, and people have started to travel again. Looking at the financial income and the positive deviation from the second quarter last year, it is mainly due to unrealized currency gains from a loan to our U.S. operations. Handing the word back over to Ulrich, and please turn to the next slide.
Thank you. What is the Nepa investment case? First, we are a growth story. We have until recently cleaned up our legacy organization to achieve higher internal efficiency. This phase is completed, and our focus forward is growth and higher profitability. We will achieve this by steering our organization and focus towards sales and marketing of our proven business model. Second, we have a strong product offering to customers who want to understand the impact of their media and marketing investments, how to optimize customer experience, and understand their own market and get ahead of their competitors. What we will do is focus more on what we call marketing optimization for Echo in our reporting. Third, we have sticky customers. We have over time built up a sticky customer base.
Approximately 67% of our revenue is recurring, and we have a history of long-term customer funds. For us, this is proof that we create value for our customers. Four, our solid financial position. Fourth, and lastly, I have to reiterate our strong financial position and profitable business. We have a net cash position of almost SEK 80 million, operating cash flow for the last six months of SEK 80 million, and the EBIT margin for the second quarter of 11.1%. Together, this shows that we have a resilient business taking on our next journey from a solid base. Thank you very much for listening to our presentation of the second quarter. I will now hand over to Anders, who will handle the Q&A.
Thank you. If you wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two on the console. Our first question comes from Jesper from Redeye. Please go ahead. Your line is now open.
Hi, Ulrich Boyer. Let's start with the capital expenditures of SEK 6.4 million in the quarter. Could you just talk about the underlying EBIT of this? I mean, how much is for, like, moving customers from the old to the new platform? How much is for new development and also how long should we expect this to last? Is it also into 2023?
Would you please just repeat your question? Is it about the?
I mean, the investments that you're making.
Yeah
... which amounted to SEK 6.4. If you could just talk about the inside of that and how long it will last.
Yeah. Well, the investments, as we said before, will last at least during this year, and we have not decided anything about the next year yet. They are mainly focusing on, as you say, transferring a client to the new platform, which is less than 20% of it, I would say. The rest is to develop the platform so we can handle it more efficiently. To streamline basically our production lines, that's what we are doing. There's always an aim in all this, of course, to improve the what is it called? The dashboard access for our clients so that they feel that there are things happening.
'Cause, you know, otherwise people or customers tend to look up the new things if they never get anything new from us that doesn't work.
Okay.
Sometimes-
And, and-
In that we have to go a little bit deeper.
Yes. How far have you come with transferring the clients? I mean, in what markets do you still have clients on the old platform? How much is left?
I think we have one or two, really, one of the bigger clients which has a very specialized solution for their needs. They are like in a separate production line, and basically all the rest of it is moved. There's not much left.
Okay. On all markets, they have been moved to the new one.
You know, you don't move. Now we don't move a client on different markets. We rather move clients, then they might be on one or several markets. You know, one client has one solution, basically, on all markets.
Okay. I understand.
But we did the-
Regarding like the, I mean, the cost base from these investment, is this like 100% consultants, or what is it?
No, the people, the work of the people we are like taking as an investment, that are technicians. There are no consultants.
Okay.
Maybe a consultant sometimes gives some input to the work, but we do not activate that hour, those hours. That would be. No. That's only technicians.
Okay, good. I'm wondering about the investments that are capitalized right now.
Yeah
Perhaps like that capitalization will go away next year or not. We'll see. Then how do you expect, I mean, your staff to develop going forward, like the number of employees? Also what parts of the organization will change?
I think the part that will change is, you know, like with the technical side, that depends a little bit on what we decide during the budgeting process and the strategy. You know, like we have a strong technical platform and we always have to work on it more or less. Well, that is something I haven't thought in detail about. You know, the rest of the organization, you know, we will focus more on sales, and we will carve out the active sales organization. We have already started with that, and we will do it even more going forward.
We will most likely need a, whatever you call it, customer success team, which we don't have today, and this kind. We will not employ more people for doing these organizational changes. The question is, okay, how much will our personnel costs grow in relation to our growth? I would say that next year, we expect some raises, of course, in personnel costs because we have to higher wages, but that should not affect our bottom line. Let's say it like that. I don't expect a lot of new hires next year if we do not gain a considerably higher growth than this year. That's what I think.
Okay. Basically, what you mean when you talk like in your CEO letter about bringing out the scalability of the platform is that, I mean, one delivery person, if you call it that, can deliver on more projects due to more optimization, so that you will be able to grow your sales while not growing your cost base so much?
Yes.
Is that a correct assessment?
Yes, Ben. Yes, Ben. It is totally. If that will not happen next year, then what we have done during the last nine months has been a waste. Yes. To be very clear.
We should expect that the margin expansion should happen like from the beginning of 2023?
I hope so, yes. Well, the thing is that we need to sell more, you know. The margin will not expand on our-
Yeah. Yes, yes.
Uh.
Okay.
We have to cut costs. On the other hand, if we don't grow, we will cut costs, let's say it like that. Either you will see that we cut costs or you will see that we grow and not expand our cost base. That's it.
Good. Just one last from me regarding the price adjustments that you've made, but not all of them have been, I mean, have come through to the revenue base. How much or how big of a percentage of the clients have already done the price adjustments?
Well, I can't give you any numbers about that. If you think about that, you know, you have a lot of clients that. It's a little bit up to when, in which point of time we have the renewal of the contracts, because we cannot adjust just whenever, you know. Either we have like an index in our contracts, which a lot of our clients have, and then it's easy, but then it is a certain point in time when that happens, and that is not always the first of January. It's more like distributed all over the year, which is good and bad, of course, because it's stable, but it's. Sometimes you would wish to press a button for all of them at once.
Of course, you know, we have like the ongoing, the upsell business. That part is not recurring. With every new sold project can, of course, adjust prices. From that you can be okay about where we are today. Yeah.
A fair assumption about the recurring revenue base could be that perhaps 25% or something like that have already gone through the price adjustment and 75% is left. Like somewhere around that.
Yeah. Well, you. It's your guess.
Okay. Good. Thanks. That's all for me.
Yes. I would love to answer these questions for you, but I can't, you know that. Sorry.
Yeah. I know. I know. Thanks.
Thank you. A reminder, if you wish to ask a question, please press zero one on your telephone keypad. There are no further questions at this time. I hand over the word to you, Ulrich and Ann-Christine.
Yes. Thank you so very much for listening to us and Jesper for asking interesting and relevant questions. It's always fun to answer. Even sometimes you are hindered not to answer as you wish.
Yeah. No problem.
I'm looking forward to this autumn and to see that we actually succeed with what we have said with starting our expansion, meaning more growth, and also profitable growth. I hope you all help us with that and buy a lot of Nepa shares. Thank you very much.