Welcome to Nepa Q4 2023 report presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now I will hand the conference over to Interim CEO Ferry Wolswinkel and CFO Sonja Thorngren. Please go ahead.
Good morning, everyone. Thanks for joining, and welcome to Nepa's presentation and conference call of the year-end report 2023. My name is Ferry Wolswinkel, Interim CEO and Acting Head of the Commercial Organization, and with me today I have CFO Sonja Thorngren. Before I dive into our Q4 report, I'll just give you a brief background for those less familiar with NEPA to what we do. We help marketers and insight professionals measure and optimize the impact of their marketing activities and enable our clients through unique insights and advisory to build stronger and sustainable brands. We optimize for short and long-term effects of marketing efforts to continuously lower customer acquisition costs and improve our clients' ROI. We turn data into growth opportunities by combining technology, data, and advisory. Every day we track and measure the impact of marketing activities for 7,500 brands across 60 markets.
Q4 in summary: We had a good ending quarter to 2023 with positive momentum in our core markets. These grew by 6.2% or 3.8% organically. Throughout the year, we have been laser-focused on restoring profitability. The concerted efforts of our teams and diligently working on our KPIs have steered us toward this goal, and as a result, we have made substantial progress on that way. We saw a strong project margin trend in the quarter to significantly better levels with an all-time high in Q4. This is a result of the reduction in headcount, efficiency improvements, and our pricing and packaging initiatives that we launched in Q3. We completed the cost savings program in the quarter, which resulted in savings beyond our targeted cost base of SEK 220 million and a restructuring cost of SEK 3.3 million.
Throughout the year, we have scrutinized all our operating costs, resulting in efficiencies and new ways of working, enabling us to operate more efficiently. Moving forward, we have a more dynamic approach to our cost base, aligning tightly with the performance of our business. When we started our savings program, this led to more internal focus, and we anticipated that this would have some negative effect on employee morale and our business. We made every effort to keep these as minimal as possible, and I want to thank our fantastic colleagues who gave it their all in this difficult time. As expected, though, we experienced lower retention levels during the fall, and despite a very good quarter in terms of new ARR sales and upsales, it did not offset the churn. ARR declined in total by 4.1% year-over-year, SEK 264 million.
During our review of the whole group, we encountered accounting errors for the Nepa APAC subsidiary spanning the period of 2019 to 2023. These included incorrectly recognized project revenue and costs without basis of project completion, invoicing, or payment. The subsidiary has been subject to local audit, but due to inadequate internal control of the operation, the accounting errors had not been discovered until then. The correction of the errors, including revenue reversals, data cost reversals, and provisions for bad debt, impacted the results in the fourth quarter negatively by SEK 2.6 million. As a result of this, together with the subsidiary's suboptimal alignment with the group's overarching strategic objectives, we made the decision to concentrate our efforts on our core markets and close down the APAC sales office in India. It has accounted for less than 3% of the group's net sales and impact results.
This closure has nothing to do with our Indian Global Research Lab, which is operated from a separate entity and is a well-functioning production unit. Now I'll go over the financial highlights for Q4. As I said, we had some good momentum in our core markets in the quarter. Subscription revenue rose by 6.5% to close to SEK 45 million. Ad hoc revenue from subscribers declined, however, 13.6%, and is a direct result of lower ad hoc project activity from churned subscribers that also paused or discontinued their budgets for one-off projects. Having said that, we did see a positive uptick in new projects from non-subscribers that offer potential to be converted into future subscribers. Ad hoc revenue from non-subscribers increased 10% in the quarter, albeit from low levels. As you can see under eliminations, you see the net effects of the revenue reversals in Q4 on revenues from Nepa APAC.
All in all, reported net sales declined by 2.2%. We achieved a strong gross margin of 79%. This was partly driven by data cost reversals from NEPA APAC that decreased our overall data cost and partly by rebates from our data suppliers. Excluding these factors, we are comparably better off than we were in Q4 last year, as we've also increased our prices and made margin improvements throughout the year. In total, we had items affecting comparability of SEK 5.9 million. SEK 3.3 million of those are attributable to restructuring costs and from the cost savings program, and SEK 2.6 million from the correction of historical accounting errors and provisions for bad debt in NEPA APAC. Adjusted EBIT amounted to SEK 5.2 million with a margin of 7%. 2023 as a whole: reflecting back on the year, it's been a year that presented us with significant challenges and some tough decisions.
I'm proud of our collective achievements, and I'll share some more context on this. In the first half of the year, we grappled with a declining sales trend, particularly among non-subscribers. In total, ad hoc revenue from non-subscribers experienced a 33.2% year-on-year decline. However, through focus and hard work, the sales trend started to reverse and stabilize in the second half of the year. Our focus on ARR and clients paid off, and revenue from subscribers increased. Unfortunately, it wasn't enough to fully offset the non-subscriber decline, and despite our efforts, we experienced a slight decline in growth margin. This was noteworthy given our increasing share of subscription revenue. The silver lining lies in the scalability of our subscription model. While it demands more data, it also offers greater efficiency in terms of resources and project deliveries. Throughout 2023, we undertook substantial cost savings initiatives.
These efforts resulted in items affecting comparability totaling SEK 13.8 million. Our restructuring operations were thorough, ensuring we optimized our processes and streamlined our financial operations. Our adjusted EBIT stood at SEK 0.9 million, and as we move forward, we remain steadfast in our pursuit of sustainable growth and profitability. In summary, our year has been marked by resilience, adaptability, and teamwork, and I'm confident that our collective efforts will continue to steer us in the right direction. Throughout the year, we've done a lot of work with our sales organization and increased our focus on serving new subscribers and increasing the scope of many of our current subscribers, including new add-on modules launched during the year. Our efforts in building more ARR pipeline paid off as we started winning more new subscription business in the quarter.
Most of these contracts are sold with standardization following our pricing and packaging initiative, and we are set up to deliver all new projects more efficiently than previous ones. While we have lost some clients and more smaller ones as a response to the economic situation, we are slowly adding larger ones to increase the averages. The average subscription revenue per subscriber during 2023 rose to SEK 1.41 million, up from SEK 1.29 million in 2022. We also increased our ad hoc revenue to those clients to slightly SEK 0.5 million per subscriber on average. But again, despite these positives, our sales average did not offset the lower retention levels during the fall. Industry-wide budget constraints and reorganizations among our clients, coupled with an internal focus on restored profitability and loss of employees, have had a negative impact on client retention in the quarter.
We are addressing these challenges through strengthening client relationships, targeted campaigns, and continuous improvement on the value we deliver. The churn in the quarter rose to 6.1% from the historical average quarterly of 1%. In total, ARR decreased to SEK 164 million. The big challenge for 2023 was reacting to the weakening market with an expanded cost base. In response to the challenging market conditions we faced in the beginning of the year, we implemented decisive measures to adapt and restructure our business. We initiated and completed comprehensive cost savings, including a big reduction of headcount. We optimized our internal processes accordingly and aligned our focus on our core markets. These decisions are never easy, but they were necessary to streamline our organization and swiftly respond to changing market dynamics, positioning ourselves for future profitable growth.
Today, our cost position is in a far better place, and we've entered 2024 with a significantly lower and more structured cost base that we are working with more dynamically moving forward. Due to the successful implementation of internal efficiency improvements, we have returned to far better project margins. In 2024, we will continue to focus on running a profitable business with focus on ensuring project profitability from price and packaging to delivery. Besides profitability, however, we also strive for growth, which includes rebuilding and strengthening our sales and marketing efforts. We focus our investments on larger markets such as the U.K. This is where we see bigger opportunities for exponential and sustainable growth. We will continue to deliver on our product strategy, enriching our subscription offering, and ultimately driving new sales while fostering high customer satisfaction and profitability. This was all from us.
Thank you for your time, and I now welcome any questions.
If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Jesper von Koch from Redeye. Please go ahead.
Hi guys, and thanks for the presentation. Just want to go into the kind of the more slim organization that you now have, and it seems and it's obvious that you've downprioritized customer delivery in some cases, leading to increased churn. But what is your view on how sufficient the current organization is for customer delivery?
Yeah, thanks, Jesper. Yeah, we had to adjust. Of course, we had to serve a large number of customers with a smaller group and had to prioritize in that way. So as you can imagine, the new ways of working that we implemented throughout the quarter take some time to really take full effect. So I'm very confident in where we are today in terms of adopting these new ways of working. And I must say that every day we are getting better. I think I'll be too optimistic to say that we're fully there, but I'm pretty confident in how we are progressing and how both the sales teams and our client teams are working together in a different way to, again, ensure both client retention and more efficient collaboration on upselling on our existing clients.
All right. All right. And I mean, you've previously indicated that you try to use your personnel between markets rather than only on different individual markets. So how is that developing?
Absolutely. That has been a great help in the situation that we were in. So we have definitely benefited from resources in other markets such as the UK and Finland when resources were needed more in Sweden and vice versa. So I think the decision we made back in last year to have a more global organization. The teams are more adapted and onboarded into these cross-country teams, and it's, yeah, showing real resilience in being able to make more effective use of our resources.
All right. All right. Good. And then just going into the OpEx or the actual or the total cost base going forward, I mean, you say that you've finalized the cost savings in the quarter, but then you chose to close down your APAC office. So I guess that means even lower cost base than previously. But then you say that you're also aiming to increase your investments in sales. Could you just try to elaborate on your thoughts on the total cost base? If you compare Q4 except the one-off costs with the runway going forward.
Yeah. So firstly, the decision to decide to close the APEC sales office, as said, this was partly due to these historical accounting errors as well as our more strategic focus long term. And yes, that does mean that our cost base for the year will reduce, but at the same time, our top line will, of course, be impacted by closing down that business unit as well. So we are partly repurposing some of those costs to invest in sales and marketing where we believe there's a better return on investment. Our cost base, yeah, we overshot quite a bit to our SEK 20 million target, so that's very positive. At the same time, you have to look at it in relation to the business, of course, and this is now a much more flexible number that, of course, adjusts based on the performance of the business.
I don't think it's very helpful to give you a number that could change month over month depending on the performance of the business, but we have a much better and much faster way of responding to business, whether that's in growth and increasing our investments or turning down our investments.
What does that mean in more concrete terms, being more flexible both up and down? Do you have your own internal cost base, is that kind of much lower and then you have some consultants both on the delivery organization and sales organization on top? Or could you just yeah, I'm not really aware of that.
Yeah, organizationally, that doesn't really change that much. It's more that we strive to run a profitable, positive cash flow business where the investments that we're making keep that in mind. So again, in a scenario where, for example, churn would get worse, we are really quick to act on those kind of trends. Vice versa, where we see that our efforts in, for example, the U.K. are really picking up steam and that allows us to grow without dipping into cash flow and to go into negative territory, that's kind of what we mean by that. So it's not necessarily changing the organization in that sense, but more adaptable to how the business is performing.
Yeah. Okay. Okay. So yeah, not something like my way is the highway, and yeah, I will use this cost base no matter what. Yeah. Okay.
Absolutely not. No.
All right. Good. I think in the presentation, I mean, you indicated somewhat because that you increased ad hoc revenues to non-clients. Have these led to new subscriptions?
Yeah, it means that doesn't go that fast because when we win these new projects, of course, we have to also deliver on them, and the focus in the short term is more on those projects themselves. However, we have a clear kind of customer journey and where the opportunities are, we kind of work with the clients. They typically also present opportunities to prove ourselves and deliver the value, and that tends to increase by either new projects or at times to upselling to subscription business. So it's different from client to client, but they typically take a little bit more time to see the effects of that.
Okay. Okay. And then in the last conference call, you indicated that your product will become offered as a subscription offering quite soon. You indicated Q2/Q3. Is that still on? And also, what response do you see there?
Yes. So we definitely still aim to scale that. And I must say, I think Q3 is a safer bet to make right now. But again, we have made a lot of progress with our pilot customers that, as mentioned in our last call, are working with us on this solution. And it's more kind of working on what the scalable solution will look like because, as you can imagine, in these pilots, we get a lot of feedback. We learn a lot from them. Of course, we have to keep in mind our competition as well. And we are assessing where we can best invest to, yeah, develop a scalable solution that the market really wants and not having to iterate too often from the get-go.
Okay. And then also on the same theme or the same as upselling and so on, the other products such as the AI Trend Boost and some more, how is that proceeding and how scalable do you see those sales processes being?
Yeah, we have achieved some successes already with both AI Trend Boost and as well as our packages that I covered in our last meeting where we have more standardized prices and packages for different client segments. And yeah, we see that now converting in new clients with much better margins. We definitely can still do better. So we're still working a lot with both the sales go-to-market and client teams to get more clients aware of this. And I think particularly for AI Trend Boost, I think it will in the future be a critical component in differentiating ourselves for new pitches as well as making it part of our offering for certain more premium packages as part of our solution. So it will just make our offering much stronger. And with that, our expectation is that it will also improve our retention.
Okay. Good. And then just one last about. I mean, in the last year, I guess since the beginning of October, a new major shareholder has emerged now owning more than 20%, I think, of the outstanding shares. And I guess that later today at the extraordinary general meeting, we will get to know who that is. But have you received any kind of indications of what the purpose of that shareholder's ownership is?
No, unfortunately, I can't really share more than I think what we will find out today in the EGM. So I don't think I have any useful or relevant details, yeah, that I can share or more than you know. So I think we'll have to wait until this afternoon.
Okay. Good. Okay. Thank you. That's all from me. Good luck, going forwar.
Thanks, Jesper.
As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Jesper, for your questions. In summary, last year was a tough year, a tough year where we, yeah, had to make a lot of changes to our business, but I am extremely excited for this year. We've gone through the difficulties, and it's now really following through on what we implemented and rebuilding and strengthening our teams. For the ones who are joining this afternoon in the EGM, I look forward to seeing you there. Yeah, thank you all for your time.