Good morning, and welcome to the Qliro Q3 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please contact a conference specialist by pressing Star then Zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then One on your telephone keypad. To withdraw your question, please press Star then Two. Please note this event is being recorded. I would now like to turn the conference over to Christoffer Rutgersson. Please go ahead.
Welcome to the presentation of Qliro's third interim report for 2022. My name is Christoffer Rutgersson, and I'm the new CEO for Qliro. With me today, I have our CFO, Robert Stambro. This is my first quarterly report as the CEO for Qliro, and it's with great pleasure that I have taken on the task of leading Qliro to profitability and growth. I have extensive experience from the European and global payment industry and driving growth in this area in the past. Hence, I'm confident that Qliro is well-positioned for accelerated growth given our platform capabilities and our positioning with a strong merchant focus. I believe that Qliro's capabilities in the enterprise e-commerce segment, with a strong track record of delivering flexible solutions, driving conversion for merchants, as well as following merchants on their international growth journey, is a great starting point for expanding the business within payments.
Please turn to the next slide. Great. It's also with great pleasure that I had the luxury to already build a new executive leadership team at Qliro, given that I have worked in the background for a while before officially taking the CEO position formally in October. During the last few months, we have, first of all, promoted a new Chief Technology Officer, Fredrik Milton, who have led the new platform and tech architectures strategy at Qliro for a while and have extensive prior experience of building scalable credit-led fintech platforms. Secondly, Ole Brænden, formerly our head of sales, agreed during the summer to take on the role as Chief Commercial Officer and have already managed to transform his team and double it in size.
We aim to triple it in size before the end of the year compared to the beginning of 2022. Thirdly, Emma Markström, who have previously led the WOW experience at Qliro, that's what we call how we treat our consumers and merchants, have been promoted to join us in the executive team as Chief Customer Officer, and will continue to lead our operations team with the continued ambition to deliver the best customer experience in the industry. Last but not least, we have recruited Stefan Sjöström as Chief Credit Risk Officer. Stefan have extensive experience from credit risk and the modern modeling techniques that we use at Qliro for our in-house built proprietary credit engine. Most recently, Stefan comes from TWC, which have built deep expertise and experience of credit risk from a wide range of other financial services clients.
Also, we are in the final steps of recruiting the remaining roles for the executive team and expect to have an almost completely new executive team in place by the first quarter next year. It's also worth mentioning that we have driven a lot of changes at Qliro during 2022 already, and so far, more than 50% of all our leaders across teams and levels are now new in their positions in the last six months, with a good balance of internal promotions and external recruitments. As new CEO of Qliro, it's great to see the level of talent, positive energy, and ambition that we now have within Qliro. When I have chosen my team to lead Qliro going forward, I have focused on strengthening our capabilities within payments, technology, growth, and building a high-performance culture with the team committed to deliver on our profitability and growth ambition.
Please turn to the next slide. I'm not sure if it's updating for you, but I still see the previous page. Good. Let's go through a few business highlights from the third quarter. During this quarter, it's worth noting that we had an income increase of 7% in the quarter, despite the decline for the e-commerce market in general. The revenue increase comes primarily from payment solutions, which we'll come back to during the presentation. We continue to develop the business in line with our goal to grow revenues faster than our cost.
If we turn to the profitability program that we launched in the second quarter this year, and I have personally been deeply involved in starting this up, we are continuing to take important steps toward our ambition to be profitable at earnings before tax level for the full year of 2023. During the quarter and continuing, we are reviewing our cost in the business in detail, and by doing so, we create a new clear cost ownership within our different functions. In parallel, our focus has been to renegotiate with suppliers to reduce our external costs, where we have been able to reduce costs in several areas already. As an example, we have reduced our credit scoring cost for payments by more than 30%. We've signed a new contract for our office space, which significantly reduced space.
As part of the profitability program, we're also increasing our technology investment in our payments platform to strengthen our offering to small and medium-sized enterprises, which includes a broadening of our offering, including all relevant payment methods. Furthermore, the technology investments include modernization of our core platform for pay after delivery in order to increase our scalability and flexibility going forward. In addition, we expect to also digitalize and automate internal operational processes to improve our business, especially both in our finance and customer support functions. In order to accelerate our growth, we also plan to triple our sales capacity and transform our commercial team during 2022, as mentioned before. At the end of the third quarter, more than 50% of our new planned sales capacity was already in place.
As part of the profitability program, we plan to absorb this investment with increased efficiency in other areas. Please turn to the next page. Let's run through a summary of our Q4 performance, Q3 performance in terms of KPIs. Our number of merchants increased slightly in the quarter, given a few new SME merchants. Our pay after delivery volume decreased by 11% in the quarter. However, the volumes of part payments and buy now, pay later products, which are our most profitable payment products, had a higher growth rate while our invoice volume declined. What we're seeing is that our customers shows changing consumer consumption patterns. More and more people choose our product and choose to pay down the purchases over a longer period of time. This effect increases our payment balance in the pay after delivery business.
Basically, our lending to the public in the payment solution segment, despite the overall card volume decline. This increase is the main driver of our increase in income growth. We did also see a continued decline in our loan balance growth in our lending to consumers in our digital banking services segment, given the complete stop of marketing of the loan, which was announced in 2021. We are planning to turn around this trend in order to stabilize the loan balance without driving marketing directly towards our payment customers. In summary, we had an income growth of 7% in the quarter compared to Q3 2021. As mentioned, the increase was mainly driven by increased revenues in our primary segment, payment solutions.
Also, our cost excluding items that affect comparability is in control, and it only grew 1% in the quarter versus last year and started to decline versus last quarter as we started the initial results of our profitability program. With that, I hand over to Robert to take us through the detailed financials.
Thanks, Christoffer. Next page, please. Let's look at the financials and focus on the Q3 figures. Income growth with 7% in the quarter, which is good given the decline in the e-commerce market since the year started. Income growth in the quarter is driven by a 12% income growth in payments. Previously communicated, Qliro's board of directors have decided to run a profitability program to accelerate the company and to reach profitability during 2023. In Q3, we invested SEK 12.8 million in profitability, and we are expecting additional cost of up to SEK 42 million until the year-end, but it can require less. Income grows faster than cost in the quarter. Cost, excluding the profitability program, grew with 1% and was SEK 3 million lower than in Q2.
The credit losses compared to last year looks at first sight that they are growing a lot, but it has its explanations. In Q3 2021, last year, we released the last extra provisions held since COVID, the COVID outbreak of SEK 4 million, given by the improving macro environment. In Q3 2022, this year, we reserved in accordance with IFRS 9, an additional SEK 1.6 million due to the current uncertainty in the macro environment. We have taken out these effects in the adjusted net credit losses to be able to compare the quarters like for like. The adjusted net credit losses grew with SEK 5.5 million, driven primarily by payments and the portfolio that is not included in our continuous sale agreement.
Operator, please turn to the next slide. Let's turn our eyes towards the segment in the quarter and start with payment solutions that stands for the absolute majority of our income generation. Vidus portfolio continued to show resilience versus a weak market development. The loan book continued to grow, driven by changing customer preferences in the checkout. Customers are to a higher degree using our part payment products in favor of invoices. Hub income grew by 12%, which is the highest income growth in 3 years for this segment. Core income margin reached 23.1% in the quarter, which is a very attractive margin and 80 basis points higher than same period last year. For payment solutions, we compare the credit losses in the P&L to the originated credit volume to the volume.
As mentioned, we had extra provisioning in the quarter due to increased macro uncertainty of SEK 4.6 million in this quarter. In Q3 2021 last year, we released the extra provisioning held during the pandemic of SEK 1.5 million. In the adjusted credit losses, we have removed this net effect of SEK 2.1 million to ease comparability. As you know, we are having a clean balance sheet strategy in regards of non-performing loans, meaning that we are aiming to sell off all the non-performing loans under the continuous sale agreement. However, as previously communicated, some of the debts are not included in the sales process of the continuous sale agreement. The size of that portfolio is relatively small in comparison to our loan book in total, and amounted to SEK 25.7 million in Q2 2022 last quarter, and SEK 25 million one year ago.
In Q3 2022 this quarter, the portfolio has increased to SEK 30.4 million. The balance increase from last quarter, Q2 2022 to this quarter, Q3 2022, and the corresponding reservation for those loans for this balance, together with the loan book increase of 4% explains the SEK 5 million increase in debt losses for payments. As you understand, our ambition is to hold this portfolio tight, and we are therefore looking over ways of working to keep it that way. The underlying credit losses have increased somewhat to the long-term trend, as illustrated by the adjusted rolling credit losses. Slight increase is explained by the just mentioned increase in balance for the portfolio outside the continuous sale agreement. To sum it up, we continue to show good resilience in a weak market sentiment and income growth with 12% in the segment.
Customers have changed their behavior in the checkout, favoring part payment products. The increase in credit losses is explained by the higher reservation for the balance growth in the portfolio not included in our continuous sale agreement. Operator, please turn to the next slide. Let's focus on personal loans. As you know, we decided to pause our email marketing in September last year, which in its turn has caused us to lend out less than before. As a result, the loan book size has decreased between Q3 and Q2 this year. When looking year-over-year, the loan book declined by 11% and income declined by 10%, meaning that operating income margin level was rather flat year-over-year. As you know, we had extra provisioning in the quarter due to the increased macro uncertainty, which affected this quarter, Q3 2022, with SEK 1 million.
In Q3 2021 last year, we released the extra provisioning held during the pandemic of SEK 2.5 million. In the adjusted credit losses, we have removed this net effect of SEK 3.5 million, and the losses thereby grew with SEK 0.5 million year-over-year. The reasoning for the increase of SEK 10.5 million is a mix effect. We tend to attract less low-risk customers into the personal loans portfolio than previously. This has the positive effect on our income margin and a negative effect on credit losses. The reason for us not getting an increase in the operating income margin this quarter as opposed to Q1 and Q2 is due to the lag in between increased funding costs and the transfer of the same over to customers.
The underlying credit quality in personal loan is increasing slightly to the long-term trend given this mixed effect. The adjusted rolling credit losses were 2% in this quarter, which should be compared to 1.9% in the same period last year. To sum it up, the book is decreasing in size quarter-over-quarter, year-over-year as a result of post marketing. The operating margin remained unchanged given the lag effect between funding cost increase and rate hikes towards customers. Operator, please turn to the next slide. Before I hand over to Christoffer, let's take a closer look at costs. First of all, we had a total of SEK 12.8 million in items affecting comparability in the quarter, and a total of SEK 23 million since the start of the profitability program.
We can already now see that many of the initiatives will take the intended effect, both on income and costs. The underlying cost grew by 1% and reached SEK 91 million, SEK 3 million lower than Q2 last quarter. We have, since the start of the profitability program, made a total review of our cost base and have, on a very detailed level, made sure that we allocate costs to the right place and intend to reach profitability next year. Clear cost ownership and awareness has been established. Important to remember is that it will take a couple of quarters until the savings and growth initiatives will materialize before we reach full effect of the same in 2024.
We will continue our work and invest in profitability in Q4, and estimate an increase of up to SEK 42 million as previously communicated, but it may require less if not deemed necessary. We are confident to reach profitability for the full year 2023. With that, I hand over to you, Christoffer. Please turn to the next slide, please.
Thank you, Robert. What I want us to conclude with is that we are delivering and will continue to deliver on our recently launched profitability program. The progress in the profitability program makes us comfortable that we will reach our ambition of profitability on earnings before tax level in 2023, with the full effect from the program being expected in 2024, in spite of the current macroeconomic climate. As part of the revised strategy presented earlier this year, we are also pursuing an improvement of our offering towards the small and medium enterprise segment in Sweden. We are a more standardized offering, including more relevant payment methods will continue to be developed. We take the great product and features that we have developed for the enterprise segment and package it in a simpler way for smaller customers.
We will also increase our investment in our core payments platform for pay after delivery, as mentioned before. During the quarter, we welcomed several new members in the management team who will make us better equipped for our future journey, and we will welcome more members to the team at the start of 2023. When we're through with the profitability program in the spring, we will also detail and communicate more long-term financial targets. Thank you all for listening. Let's conclude with the Q&A.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your hand just before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from the line of Ermin Keric with Carnegie. Please go ahead.
Thank you, and good morning. Thanks for the presentation. Maybe if we start off on the rate sensitivity, could you give us a little bit more color there? I know you mentioned on the consumer loans there's been a little bit of a lag to pass on the cost to customers, but also generally how you see development going forward on the funding side and kind of general lag effects, how much of increasing rates you think you can pass on or could you even have a positive kind of gap between funding costs and income margins? Thank you.
Absolutely. I can answer it, Ermin. So in terms of our possibility to pass on the funding costs that we have, absolutely the opportunity to do that in personal loans and we are doing it, but it is. I mean, the central bank tends to raise the interest rate quite quickly and there is always. I mean, if you look at our funding mix, it's a mix in between fixed deposits and also short-term deposits, which means that we have a lag effect, and we can only pass on the actual funding costs that we have over to the customers, meaning that there will be a lag effect when the central bank increase the interest rate as fast as they're doing now.
I hope that answered your question, Ermin.
No, generally just if we think about it also outside of the personal loans, do you expect that you can pass everything on the payment side as well?
We see that we can pass over the interest rate hikes both on the personal loans and in the payment side of the business.
Perfect. Thank you. Thinking about the personal loan portfolio, you've been talking about it for a few quarters here that you hope to be able to stabilize the balance there, but perhaps without restarting any email marketing towards your merchants and consumers. Could you give any more color on how we hope to achieve that?
Sure. I can answer on this one. We see a lot of opportunities to improve how we manage our personal loans business without driving direct marketing towards our payment customers. We have recruited a couple of roles to manage this internally that started in Q3. For example, we will more proactively offer top ups as well as improve our customer communication across the application funnel for new loan customers. We have also recently launched what we call a multi-offering functionality in our applications. Offering a larger loan if we see that customer have other kind of larger existing loans that they want to replace with a loan at Qliro so we can cover kind of their full needs.
We already start to see some indication of positive impact on this in the new volume so it cannot stop the declining at least in Q3, and we hope this will make kind of improvements also going forward.
That's very helpful. Thank you. On the payment solution side, you added three merchants during the quarter. You said all of those are within SME. I think the SME segment is something that's been talked about for a few quarters and this more standardized offering for them. Do you have that one ready? Have you started to push it out to potential merchants already? Or is this still something that's being launched? Because I mean, with all respect, three merchants if on the SME side probably still doesn't add as much as one big enterprise merchant. Just understanding if we should expect an acceleration there in the merchant acquisition momentum.
I think you're right. Three merchants are not much to talk about. What we do right now is both scaling up our commercial teams. That's almost fully in place for targeting the SME segment, as well as that will continue to improve our kind of offering on the product side towards this segment. I think that will be an ongoing effort for quite a while before we have at least the product offering and the mission that we need to have for this fully successfully in the SME segment.
Sorry, just one last thought. Could you give any flavor on what things you think you're missing to have that kind of complete offering for the SMEs?
As I mentioned before, I think we have a great product for the enterprise segment with a lot of flexibility in our product suite, as well as focus on conversion for merchants. I don't think we have been great in packaging this for the SME segment. In addition to that, as I said before, we are investing in broadening our offering to all relevant payment methods. As you probably can see in the Qliro Checkout, we already process transactions for all relevant payment methods, but we don't monetize on it today, and we don't package it fully for the merchant. That's something we're working on right now with, for example, with the payment facilitator set up on card payments and similar set ups for other payment methods. That's something that we're building right now.
That's very helpful, and, thanks for taking the questions.
Thank you.
Again, if you have a question, please press star, then one. There are no more questions on the telephone. This concludes our question and answer session. I would like to turn the conference back over to Christoffer Rutgersson for any closing remarks.
Great. Thank you all for listening.