Welcome to the Nepa audiocast with teleconference Q3 2022. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Today, I'm pleased to present CEO Ulrich Boyer and CFO Ann-Christine Fick. Please begin your meeting.
Thank you very much. Good morning, everyone, and welcome to the presentation of Nepa's second quarter, 2022. Third quarter, yeah. My name is Ulrich. I'm the CEO of Nepa, and with me to present today, I have our CFO, Ann-Christine Fick. Turn to page two, please. Nepa in brief. What we do is that we use data to help marketeers with the insights they need to understand the impact of their marketing investments. How we do it, our core competence is Brand Tech and marketing optimization, and we use our tools, Brand Tracking, Campaign Evaluation, and Marketing Mix Modeling, to do most of the work we do for our clients. We serve lots of interesting and big brands in the world, and we are doing this in 60 markets around the world today.
And about up two-third of our revenue is recurring, meaning that it is long-term contracts. We have a proven business model. It shows in our financial figures. We have an average growth of about ten percent per year, and we have an operating margin around ten year to date, and a strong cash position that will improve again in quarter four. Turn to slide three, please. Fortifying our brand tech position. In summary, the demand of our-- for our services improved during the quarter, although we had a slow start after the summer and experienced a more hesitant attitude for marketing insight investment. We grew by only four point two percent and one point six organically. We are, however, pleased that our largest and fastest-moving solution-- growing solution area, marketing optimization.
It showed a strong growth of 17% this quarter and accounts for 80% of our revenue year-to-date. Marketing optimization is also our focus area. As we have said in all the recent quarterly meetings, it is a report. It is the area where we want to grow and where we also have the majority, the big majority of our recurring income. Recurring revenues grew by 10%, while our ad hoc declined 5%. This is what we typically see when what we have also seen during the corona crisis, that the ad hoc decline when the demand is a little bit going down. It's also part of our strategy to transition our business towards more recurring revenue.
In some way, you could say that the crisis like this is helping us to do that a little bit faster. On the other hand, of course, we do not control all the factors in that manner. On the cost side, we continue our focus on building our sales organization and investing in our brand technology. We report an EBIT of SEK 4.9 million at a margin of 7.1%. Last year, we had two large profitable ad hoc projects over the summer and that created difficult comparison figures throughout this year. In addition, we experienced a client loss due to a bankruptcy procedure. Turn to page four, please. As said, our marketing optimization continues to grow 17%, and that is exactly in line with our strategy.
Our long-term strategy is to really make that growing. We have also seen that this gives us a lot of traction in the market because here we have, like, our latest tech, and we also have a lot of AI components in there that do our products to one of the best you can have as our clients in the market. Brand Tracking is also our largest product in terms of revenue. Here we have, like, the best technical platform. It's most scalable, and we have the long-term contracts, and we have long-term client relationships. This is why we focus so much on this one. Turn to slide five, please.
Within Brand Tracking, we just recently, a few weeks ago on this year's annual ESOMAR event, presented one of our innovation called Brand Noise Reduction. We were the winner of the Insight250 at this conference. It's our proprietary technology. Again, Brand Noise Reduction, an AI-driven algorithm that provides a 75% reduction of the noise in continuous tracking data. As always, when you gather a lot of data, you know, you have certain noise that makes the data little bit instable. This tool is basically taking 75% of that away, which makes it clearer for when you do an analysis to see what is driving your brand compared to what is just accidentally in the data.
Therefore, we will also continue our established investment level in line with the previous quarters 2022. Basically, you can await the same amount of investment during next year if not something very special happens in the world around us. Turn to slide six, please.
Thank you, Ulrich, and good morning, everyone. First, Ulrich mentioned we see continued stable demand in most markets during the quarter, and our focus area of growth, marketing optimization, grew 17% compared to the same quarter last year, showing that we are on the right track with our strategy. Net sales increased by 4.2% to SEK 69.5 million, and our gross profit decreased by 2.4% to SEK 61.9 million. The decrease in GP margin from previous year is, as Ulrich also mentioned, mainly due to large projects with a very high GP margin that we had that affected last year's margin. Total personnel costs increased by 10%. However, SEK 5.9 million of these are attributable to investments in internally generated intangible assets.
We have continued to invest in and focus on development of our platform and digital tools. Adjusting for this, our operational personnel costs increased by 5.6%. Out of our other external costs, SEK 1.1 million are attributable to system upgrade costs, and we have also invested more in marketing this year compared to last year. Also, traveling, equipment, and office costs in general have increased compared to last year when COVID was still affecting the attendance at the office and traveling, et cetera. EBIT amounted to SEK 4.9 million, a decrease of SEK 6.1 million from the third quarter last year, and earnings amounted to SEK 5.5 million, a decrease by SEK 4.7 million from Q3 last year. We continue to maintain a strong net cash position amounting to SEK 62.5 million at the end of the quarter.
Turn to slide seven, please.
Thank you, Anki. Finally, I want to give you a brief outlook and a business update. As we started our sales organization just after the summer, and I want you to remember really that we did not have an active sales organization. We didn't generate basically any active outbound sales during the last two years, which of course is not a good place to be in. We created that organization by taking it out from our existing organization, and we will continue to do so. We already see the first positive effects of this, and yeah. We will accelerate our sales, and we are focusing it on our M.O., especially on our Brand Tracking offer.
However, we are aware that the economic headwinds make it a little bit tougher for us. As I said in this words of the CEO, we will have to work a little bit harder, but we are also sure that it will be rewarded in the long run. It's also the case that when we have this insecurity in the market in the past, Nepa has always been a winner in this situation. I'm very confident that we will be again a winner during the next year. We have a very strong recurring business model based on a scalable platform. We have large international clients, and we have really long client relationships.
We have taken measures in quarter four to save SEK 7.2 million of operations personnel cost on an annual basis from December onwards. We have also taken a precautionary measure in hiring freeze in Europe and in all non-sales-related roles. We really stand firm in our long-term strategy, and we are very confident about our future growth within Brand Tech. Turn to eight, slide eight, please. Thank you all. Thank you all for listening into our presentation of the third quarter 2022. I will now hand over to the operator, who will handle the Q&A.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. I remind you again, if you have a question for the speakers, please press zero one on your telephone keypad now. Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. The first question comes from Jesper von Koch from Redeye. Please go ahead.
Hi, Ulrich, and hi, Ann-Christine. Let me just start with some questions on the top line. I mean, it seems that your Brand Tracking sales continues to develop well. Could you just talk about like the underlying traction that you're seeing from your increased sales efforts for this product?
Yes. If you could just speak up a little bit, then. The main part of your question was that if we see traction from our efforts to sell tracking. Is that right?
Yes. Yes.
Yes, we do. Yes, we do. We do.
Yeah.
Remember, it's early days. We started our journey to shape an active sales organization in May by breaking out people we already had. Our CRO is on board since the first of October. We're having him now for the last six-seven weeks. It's early days, but we see the efforts. Yes.
Okay, good. I mean, you state that like the lower ad hoc sales is partly according to the strategy towards selling like your Brand Tracker subscription directly rather than first completing an ad hoc project and then like as an add-on selling your subscription. I mean, could you just talk about like how you balance this? I mean, because before you mentioned that the ad hoc projects are kind of important to your sales of these subscriptions.
Yes. It's absolutely true that there are two. Basically, we have some ad hoc that are just outside everything, and they are like coming in from clients, often from existing clients that want us to add on things on what we already do. They are like incoming leads. That is the kind of business that always goes down when our clients are tightening their budgets. That's like a natural effect of it. We have these ad hocs that we start with when we, for example, do a tracker. It's not all clients that start a tracker that do, for example, a category insight before. Some do, some don't.
You can, you know, like especially, you know, when you are coming into the bigger clients that often are like handling like these kinds of through their, what is it called? Procurement department. They don't do that. They had most likely a tracker before or they have at least an idea about what they want and then they ask for it. We see both.
Okay.
Uh.
Yeah.
If our ad hoc.
Yeah.
If our ad hocs are going down, which is basically because we have less incoming leads. That's why I'm especially happy that we now have a sales organization that is out there trying to get ahold of the clients. If we wouldn't have that, we would be in a very bad position in the future or the near future.
Okay. Yeah. I mean, we should see it like regarding the market climate also. The cutbacks or the hesitancy, it mainly affects the ad hoc revenues. That, I mean, they are a bit more hesitant, but you could still sell your brand tracker quite well.
Yes. Yes.
Good. Yeah.
But, but-
Uh-
That I think there are two things. One is of course that the overall market is a bit more hesitant. On the other hand, you know, like usually as our products generally are more price efficient compared to the competitors, I think we have a good chance of getting more clients in outside of Sweden as well. Because when they are looking around, most companies want to keep their trackers, but they maybe want to lower the cost and then Nepa would be a natural choice.
Yeah. I mean, you mentioned in the CEO letter that you lost one client due to bankruptcy.
Mm-hmm
Is there any other churn than that?
No, there's absolutely nothing like that. What you can notice and you can see that when you look at our net cash position is of course that there are some clients that need to be reminded one time extra to pay in time.
Mm-hmm.
Let's say it like that.
Yeah.
That we notice.
Yes.
Maybe we can admit as well that we maybe were not enough on our toes there in August to remind them.
Okay. Okay.
Yeah.
All right. I see. I mean, of the 10% year-over-year growth in the recurring revenue, could you say anything about like how much is price adjustments and how much is volume?
On the recurring side, the price adjustment during this year, you know, like usually this, we adjust prices like in the end of the year 'cause often these contracts go yearly. The main price adjustment will come now in with the beginning of 2023 and some even a little bit later. That is how it is. 'Cause, you know, we can rise with what we have done during the years, of course, that we have sold our ad hocs at a higher price. The revenue, if you have like a 12-month rolling contract, then you can rise the prices once a year, and usually that is around the end of the year, beginning of next year.
Okay
We will see that effect next year.
Yeah
Fourth one.
Okay. You have mentioned previously this year that you have made some price adjustments already. I think it was started.
Yes. That is everything.
Q1.
Absolutely. We raised our prices for everything that we sold as new.
Mm.
When you have a contract with a big company, you cannot just call them and tell them that, well, now, you know, you have to keep to the contract.
Okay. Basically all of your recurring revenue base, I mean, you plan to raise prices. So far we haven't seen any of that effect.
Well.
In the recurring revenue.
Yes. Let's say like that it's a bit better than planned. Now we have raised prices, but the effect of that we will not see before next year.
Okay.
Maybe even somehow December. You know, like it's affecting the autumn a little bit. Basically, you know, we can only rise the prices when, you know, you have a 12-month contract, then you have a 12-month contract. Three months before the contract is at the end, then usually you have a window of like a few weeks before that where you discuss, okay, how should the work we do during the next year or the delivery look like? At that time, you also look on the prices and discuss what kind of delivery, what kind of price, and that typically is in the autumn.
Good.
What we did in spring was raising all prices on everything we were selling from then on and all the ad hocs, Campaign Evaluation, and all that. We already raised the prices, I think, in January this year. That is not the big volume. It's helping a little bit, but it's not where the big volume is.
Okay. Understood. Also regarding your cost base, I mean, you say that you will decrease your cost base in 2023 and freeze hiring of non-sales employees in Europe. Does this mean that you expect like your cost level in 2023 will be lower than for full year 2022?
Yeah
If you could just, like provide some more comment to the cost base.
Mm-hmm. You should always see this in relation to sales. In relation to sales, I would say the cost base needs to be lower, yes, and it will be. Maybe not every quarter because I cannot, like. Even if I would like to, I would like exactly have an idea about how much we would sell in quarter one, quarter two, quarter three, quarter four.
Mm-hmm.
I think, of course, we have a budget for that. You know, like in how the world looks like right now, I think you need to be prepared for different scenarios. We will absolutely try very, very hard, and I think also achieve that we will have a better ratio between sales and personnel costs, yes.
Okay.
We will.
It sounds like you have a kind of a strict profitability target that you're looking at. Depending on how your sales is developing, you will adapt your cost base to that. Is that?
Yes.
Correct assumption?
Yes. Yes. That, that... Exactly. We will, we will take ac-the, the action needed to keep that. Uh, then, of course, you know, there's always the risk of depending on how fast the development in the, in the, in the world is. And, uh, you know, like, we try to be as fast, but you know how, how the rules are. It's not-
Mm-hmm.
We cannot always be as fast as you wish.
Yes. I mean, I guess this also goes for the sales expenses that they will kind of depend on how everything is going and how your margin is looking to be. Could you say anything more about, like, how you expect to grow your sales force from today's level?
Can you repeat that? Yes, I didn't really get you.
Like, how much do you expect to grow your sales force going forward?
Well, basically what we are talking about when it comes to growing is that what we will need is, like, three, 4 SDRs. You know what is that? That's the people that are, the junior people that are, like, trying to get hold of clients and qualifying leads. This is the only recruitment, active recruitment we are looking for. That's what we are talking about. That will be, like, neutral to our present cost because as we will equal that out.
Okay.
Because that's something I already said, like, a few months ago when we were talking about the sales organization, that it will be carved out from the existing delivery organization or consulting organization. Because, of course, they have been doing this kind of sales, but maybe not efficiently enough. We believe that having them a more clear role will make us more efficient in sales.
Okay.
Not more people.
Okay.
Not more people.
No more people in the sales organization. Like, the only possible additions that will be made is that you carve out people from the existing.
Yes.
Perhaps move them. Okay, good.
Yeah.
Uh-
Yeah.
Great. Thank you much. That's all for me. Good luck going forward.
Thank you, Jesper. Thank you very much for the question.
Thank you. Let me remind you again, if you have a question for the speakers, please press zero one on your telephone keypad. There are no further questions at this time. Dear speakers, back to you.
Very nice. Thank you all for your time and I hope to present a great report in a few months time. Thank you so much.