Good morning and welcome to the SmartCraft Q3 presentation. My name is Gustav Line, and I'm the CEO of SmartCraft. Today we'll talk a little bit about SmartCraft to begin with, and then we'll take you through the Q3 highlights and financials, and as usual, we'll finish off with a summary and a Q&A, and you'll have an opportunity to input any questions you may have in the web tool. First, let me give an introduction to those that do not know SmartCraft that well. SmartCraft is a software we deliver to small and medium-sized construction companies, and we basically solve some important challenges for them, so let's look at some of those challenges. The companies in this part of the construction industry struggle with a high level of bankruptcies. They basically hardly make money.
There's also a high level of conflict between our customers and their customers, the end customer. There's a lot of conflict related to whether things have been built according to rules and regulations, and whether people turn up on time and extra bills, and so on. And there's also a high level of accidents and deaths. And in the Norwegian market, 29% of all deaths at the workplace is related to the construction industry. So basically, over the last years, there's been a high increase in documentation and need for reporting in order to beat these challenges. So it's actually become a lot more challenging to be a construction company because you also have a lot more paperwork to fill in.
What we do is to deliver solutions to have control of three things: people out in the field, the materials used in projects, and the documentation that you need in each project. And when people are out in the field, we know they can actually report a number of hours, they can take pictures of the jobs, they can use a mobile phone to record the materials, and fill in checklists, and so on. And this information is then given to the people sitting in the office on the web browser, and they can be in control of what's happening in the different projects in their company. So this way, we give good insight and control, and people can actually sleep well at night because they are in control of the different projects in their business.
Today, we have a leading position in the Nordics, and we've had a very strong growth since we IPO'd in June 2021. You can see that our ARR has grown nearly 30% over the last years. But maybe more importantly, we also had a very strong growth in adjusted EBITDA margin. And it's important to note that we've done 12 acquisitions over the last years, and most of those companies that we acquire come in with a very low margin. So this increase means that we actually raised the margin in the acquired companies as well. So today, we have 16 offices in the Nordics, but also now in the U.K., and we have more than 250 employees. And we think this is a good position to grow in existing markets, but also potentially in new markets.
The construction industry is being challenged by probably the biggest downturn for the last 30 years, and we are in a quite lucky position because the SME construction companies are mainly focusing on renovation. They are focusing on existing buildings and how they can sort of service, maintenance, and renovate existing buildings. This market is actually bigger than the new build market, and it's actually growing every year. There are some nice things happening for our customers. There's a need to make these buildings more energy efficient, which is good because a lot of our customers are plumbers and electricians, so that's a nice drive for them, but not to forget, this is a massive underpenetrated market. There is a need for digitalization.
It's going to happen, and that's why the underlying market is actually quite good, although we are in a challenging position, or the market is quite challenged at the moment. When we look at the four countries we're in, I just wanted to give you a sort of really high-level view of the way we look at those markets. We see some positive signals in Sweden and Finland. In Sweden, there have been three interest rate cuts this year, and we can see that there is an improvement among our customer base and that we have some positive effects, most likely from that. We also see in the Finnish market that the construction projects that have started have now surpassed the construction projects that are being completed, which is also a positive factor for our position in Finland.
In Norway, we experience a tough market, and at the moment, it doesn't look like there's any positive uplift in the Norwegian market. It's sort of continuing to fall. And in the U.K., there is a really positive thing that the new government wants to build 1.5 million new homes over the next five years, which is a massive increase. But on the other hand, they also suggested some pretty tough tax increases, which counteracts to a certain extent this initiative. So there are some mixed signals. Some things are quite positive, and some things are a little bit the way they have been for the recent year. So to move on to the Q3 highlights, I'm pleased to announce that our annual recurring revenue, which is basically our holy grail, has increased by 29%.
Most of that increase, or a majority of that increase, is related to the two acquisitions we did in Q2 of Clixifix and Locka, but also a nice organic growth from new sales and upsells to existing customers. And also, there is a currency effect as well. When we look at our margin, we have a strong margin, but it is down compared to last year. It's basically twofold. One is related to the two acquisitions we did. They have low margins, so the dilution from these acquisitions sort of accounts for a little bit more than 50% of the down from 33% to 25%. The other half is related to some one-off initiatives that we have, initiatives and costs that we see in Q3. Basically, initiatives that we do to boost our position in the market and also some one-off costs that we have this quarter.
We also, this quarter, see that we have invested NOK 6 million more in development in order to sort of be in a pole position when the market turns. This is related to some new projects, not maintenance of existing solutions, but some new projects that we want to develop in order to be in a good position now that the market is like it is. And also, we think that could increase our competitiveness going forward. We're pleased to see that our operating cash flow increases by 58%, and we see that our churn is slightly up to 8%, which is a little bit higher than it was last year. And about 6% would be probably our normal churn in a normal market. So this rise from 6% to 8% is largely related to bankruptcies.
We expect when the market gets better that we get back to a more normal level. Like I said, we are in a market that is quite challenged, and we want to invest in marketing in order to sort of really be in a strong position. We have invested more in marketing this quarter than we did last year, but we also invested in a branding project in order to have a more stronger voice. We can sort of consolidate some of our communication from our different solutions to have more of a consistent and visible voice in the market. This is a project that we invested in in Q3, which will be good for the company going forward.
The investments we've done in marketing has, in total, given us 41% brand exposure, which basically means that we've been seen 44 million times in Q3, which is quite a high number by all means. That creates more inbound leads, which means that more customers knock on our door to say, "Look, I really find this really interesting. Can we have a meeting?" We have a 62% increase in sales meetings, which I think is quite nice to see that there's a lot of interest in the market for our solutions. It means that they fit the market well, and there is a lot of interest in the market.
But we do also see another thing is that the conversion from those meetings to sales is at 35%, which is by all means a good number, but it's actually down 15% to what it would be in a more normal market, what we've had historically, where it's been about 50%. And that means that the customers that we meet, we don't lose those customers. It's just that the sales processes take longer time. There's a longer lead time for them to make decisions. They are quite unsure about the future, so they are also a little bit hesitant to make investments, which means, again, that we are, to a certain extent, building up a nice pipeline going forward as these customers really sort of sitting on the fence haven't really made a decision.
And when we look at the start of Q4, we can see that our biggest brands actually have a very nice start on Q4. And of course, it's early days. Q4 is still a lot more to do, but we have a good start on the fourth quarter this year. So we also acquired the solutions Clixifix and Locka in second quarter. And I just want to give you an update of what we do to position ourselves to be able to grow further with those solutions. And Clixifix, which we acquired in May, we regard Clixifix as a platform for growth in the U.K.. We're pleased to see that they have an organic growth or a recurring revenue growth of more than 30% in the third quarter, and also that the EBITDA- CapEx margin has gone from negative to double digits in the same quarter.
At the moment, we are looking at some of the Nordic solutions to see how they can fit the U.K. market together with Clixifix. So this is a project we're looking at. We are also developing a list of potential acquisition targets as we think we could do a lot more in the U.K., and we want to do it both organically and through acquisitions. Then we have Locka. We acquired it in April. It is slightly different compared to Clixifix in the way that Locka is actually sort of included and integrated into the Swedish organization, which means that they benefit from the practices and the marketing and everything we do in the Swedish organization and being part of a larger group. The main focus in Locka is to shift revenue from non-recurring to recurring revenue as they came in with 50% recurring revenue.
We want to see how we can raise that to the company average, where we should, for the group, have an average of about 95% plus in recurring revenue. There are some key takeaways. We have continued strong growth and high margins, although we have wanted that we have done some investments and some initiatives in the third quarter. We have a very strong cash flow despite a challenging market. We do see some positive signals, although there are some mixed signals in the market, where we see definitely some positive signals in Sweden and Finland. We also see that sort of pushing and spending money on marketing and sales activities creates a lot of buzz, creates a lot of interest, which we think is very good for the company, both in the short term but also in the longer term.
And like I said, we are investing quite a lot more than we have in the past in solutions for the future. And that should put us in a good position when the market turns. So both the development and the branding project is quite exciting in order to build extra momentum going forward. So with that, I want to give the word to Kjartan and take us through the financials.
Good morning. So let's look at the financials. So we have still a high growth in ARR, 29% year on year. Organic growth is 10%. And Q3 is a seasonally slow quarter when it comes to new sales. And we still have a high level of churn and downgrade, so that affects our organic revenue for the quarter. We focus on, as Gustav said, transitioning non-recurring revenue streams to ARR and recurring revenue.
This has, of course, a potential growth tailwind for us as we grow ARR going forward, but also it puts a bit of pressure on total revenue as we lose the revenue of the non-recurring immediately. When we look at revenue, of course, still high growth as well, 32% overall, with now a 94% recurring revenue share. As Gustav said, we have invested in the profitability for the quarter. We decline the margin to 25%, where 4.4 percentage points is dilution from acquisitions. The rest of the decline, roughly four percentage points, is certain. One of the items we have done marketing more than we had planned. We see when we can do marketing activities to boost our position, then we wish to do so. This is true for Q3.
Additionally, we have done a branding project, and all of this is roughly 50% of the 4.1 percentage points. The rest is related to onboarding, the acquisitions, some overlapping system costs, etc., and we have also some increased losses from customers. On the capitalization side, we have capitalized more in Q3 than we did last year. We have invested more in development projects to be in pole position when the market turns, and we see we had a lot of resources available in Q3, not on vacation. For the year, we're still expecting roughly 9% or just above. In Sweden, the market is quite stable from before. We do see some positive signals, and we have had three interest rate cuts, which is starting to materialize on the pipeline. We have an 11% organic revenue growth, recurring revenue growth.
The EBITDA declined in Sweden as well, but that's much related to Locka. As Gustav said, Locka is focusing on transitioning non-recurring revenue to ARR. In Norway, the market is still quite challenging. We see that we have a strong performance when it comes to new sales, but our growth is hampered by increasing churn and downgrades. The markets are tense, and we expect it to be improved going forward as well, and hopefully we can see some interest rate cuts here. We see an improvement in the EBITDA margin as we have less development capacity needed on existing solutions. In Finland, we see an improvement. We saw in the first half of 2024 a negative 6% growth. It stabilized from Q1 to Q2, and now going into Q3, we see an improvement close to zero, so we're at 0.7% negative growth.
ARR growth is trending upwards, and churn is trending downwards, and we see several positive market signals. The initiated construction projects is exceeding the project completions. It was first quarter in Q2 for, I think, since 2021, but we still see the trend continuing in Q3, so as we have a project-based revenue model, it implies a growth tailwind when the market turns.
On the cash flow and balance sheet side, we still have our very strong position. We are still cash positive every quarter, and we have a very good growth in Q3, 58% growth in operating cash flow. On the balance sheet, there are less changes. We are very stable. We're still net cash positive, and we have a negative net working capital. Currently, we hold roughly 2.2 percentage points of own shares, of which a small amount, roughly 180,000 shares, is still owed to the sellers of Clixifix. So, Gustav.
Thank you Kjartan. So to sum it up, we are very close to our customers, and some of the initiatives and development projects that we have are really done in close relationship with those customers. We will continue to work with marketing and sales excellence, continue to work to create buzz and build a solid customer pipeline. And also, we will continue to see how we can optimize and do more self-service in our business. We think there's a great potential to do more and also include AI in that work. And hopefully, I'll be able to tell you more about that at a later stage. We have some projects going on in that area. And we will use our flexible business model to keep the cost level down.
This quarter, we decided to spend a little bit more in order to be more competitive going forward, but we could have chosen not to, which would have kept a high margin, but we decided not to. And then also, we will continue to do M&A as we have a strong balance, and we think it's a good way to grow the company in addition to organic growth. So we reiterate our medium financial targets of 15%-20% organic growth, and we do expect the margins to increase as we synergize and scale the business. And with that, I would like you, Kjartan, to join me, and then we will open up for Q&A.
Thank you very much. There's still an opportunity to post questions in the webcast player, but we have several already in the inbox.
First question, do you think we have reached peak churn now, or are there any reasons why churn may go even higher from here?
Yeah, it's a good question. I think it's really difficult to predict. We have seen churn being around 8% the last quarters. We do work hard to keep churn down, but it's really difficult to predict if companies are going to go bankrupt or not. So I would hope the churn doesn't increase more, but I can't promise anything. I've learned one thing in business: not to promise anything in the future.
Thanks. There's one question on the cash flow. What were the drivers of the positive cash flow, cash inflows from working capital items this quarter?
Well, in general, the major driver of cash flow for us is deferred revenue. So we invoice in advance everything between one and 12 months in advance. And the deferred revenue is what's driving net working capital and cash flow.
Thank you. Are you planning to extend any of the initiatives to increase scale and synergies into Q4? If so, could you give some flavor of the scope?
Maybe you can throw some more light on this, Kjartan. But in general, what we mentioned is that there were some initiatives that we have done in Q3 that are one-off initiatives. So that's basically what we don't expect those to go into Q4. I don't know if you want to. Well, if we look at the marketing initiatives we have done, we can divide it in two. We have one group brand project, which is isolated for Q3, that will not be continued, that is finalized and will not come back in Q4.
And then we have some marketing activity increases, which is when we see an opportunity to take a good position to make a higher impact, then we wish to do so, regardless of declining the margin. We don't have planned to do this in Q4, but if we see a good possibility, I can't rule it out either. The onboarding, as I said, with the system overlapping, etc., that will possibly be some more in Q4, but it's a very short-term initiative. Thank you.
Then there's the question on the market development. One question goes on the Norwegian market, where there is an observed backlog for small craftsmen being slim moving into Q4. Can you comment on your discussions with these clients and the churn in Norway in particular?
Yeah, I did talk about the number of meetings we have and the strong interest we see for our solution, which is higher than it has been in the last years, even higher than what we had when the target market was in a normal market back in 2021, 2022. So we see a high interest, but we also see that sales processes take longer time. So from our point of view, we have a nice pipeline of existing customers, which, sorry, not of existing, of potential customers. And actually, what I mentioned is that we see a good business activity at the beginning of Q4, which also means that we have a good strong pipeline for Q4. Whether this is reflected in our customers' pipeline, I wouldn't know, but at least from the interest we see from the market, it looks okay.
But again, it's uncertain times, and especially in Norway, things are a little bit more shaky than it is in the other three countries.
Thank you. A question along the same lines for Sweden. I don't know whether you have some more granularity for Sweden. Which data points do you track there to tell if the market is improving?
We have especially Bygglet, which is our biggest solution in Sweden and accounts for a lot of the revenue. They really have a lot of customers, and it's quite, I would say, having followed Bygglet for many years, we can very much see the market trends in the interest from our Bygglet customers. Also, the decision times from when we meet the customers to when they make a decision is quite short.
The interest for Bygglet at the moment is, in my opinion, very positive. This seems to be a lot of customers that knock on the door and a lot of customers that want to know more. And it's much more positive than what you would assume when the market is as depressed as it is. So whether that is a result of our excellent marketing activities or sales activities, or whether it's a view on the market that the market is improving, I'm not sure, but maybe there's a combination of both.
Thank you. One question on Clixifix in the U.K.. How is the financial performance? How has the financial performance been since the acquisition in terms of revenue growth and margins? I believe you touched upon it, but maybe you can elaborate further.
Yeah, we don't have Clixifix or U.K. as a separate segment, as we only have one solution in the U.K.. But we wanted to give you some flavor on what has happened and how the development has been. And we're pleased to see that the organic or the ARR growth has improved more than 30%. So it's a growth of more than 30%. Not improved, it is a growth of more than 30%. And that we have changed from minus margin to plus double-digit margin in Q3. So I think it's really nice to see that not only can this be a great platform for growth, which we think it is, we like the people a lot, we think the company is really great, but it's also growing nicely on its own, which is really good.
So let's see how we can sort of add some more companies and do some acquisitions in the UK. I think it would be really exciting.
Thanks. On M&A and this quarter's P&L, it had a significant effect, obviously, on the P&L. Is it possible to say a little bit about Q4? How do you expect this to develop into Q4? Could we see another quarter with higher effect sequentially, especially considering the transition from non-recurring to recurring revenue?
Well, first of all, we don't really guide on the short term. But looking at Q3, and we had a higher decline in Q3 than in Q2 from the acquisitions, the dilutions were greater. We're not expecting it to be further declining due to acquisitions. 4.4 percentage points, which it is in Q3, would be, I would assume, to be the bottom point.
Partly, this is because Locka, which has 50% recurring revenue share, had a natural decline in non-recurring revenue during the summer holiday. When we go into Q4 without such a long period of holiday, the non-recurring revenue would likely be higher. Although, of course, we try to transition it, but we can't transition it that fast. Yeah, likely we would see not as high dilution in Q4.
Thanks. One question on the way you are now transitioning the acquired companies. What is the initial feedback from customers when you transition them from a pay-per-use to a recurring revenue model?
Basically, we take away the non-recurring, is basically initial setup fees, installation fees, training fees, support fees, all of those things that we think should be included in the monthly fee. To take away that one-off initial cost reduces the hurdle to buy our solutions.
So the feedback from, yeah, like the U.K. team, for example, is very positive. They think this is a great initiative. It's easy for the customers to make that decision because it's not an investment decision. It's just something that goes below the line as an operating cost. And that's what we want to do, is to have great solutions that are easy to use, easy to buy, easy to understand. And also that is just an operating cost on the same line as a lot of other operating costs that you approve every month, and it's not a big investment that you have to make and a big decision that has to be on the board of directors to take that decision because we don't think that's the way our software should be bought.
Thank you. Can you comment on the increase in average revenue per customer? How much was driven by M&A?
Well, a lot is driven by M&A. In Q2, Clixifix was a part of the quarter in two months. In Q3, it's part of the full quarter. So with a high average revenue per customer, that, of course, drives the group average as well.
Thank you. How much R&D and marketing growth investments are in the P&L, if any?
Marketing and growth investments in the P&L? All marketing, all growth investments are in the P&L. The only thing we have adjusted for is acquisition costs. One more question on UK and the market.
In the U.K., housing building starts are coming down significantly, which will drag completions very soon. How do you see this development? Has Clixifix taken any measures to address this?
Like I mentioned, there is a concern in the U.K. that there are too little, well, there's a lack of housing.
And the Labour government has an ambition to really speed this up dramatically by building one and a half million new homes over the next years. And there have been initiated quite a lot of investments and initiatives to make this happen. But there's also, like I said, there are also things that are working a little bit against this because they're raising the insurance tax for companies and also raising the capital gains tax, which is also not really working in that direction. So I think all in all, this should be positive for the industry because there is a challenge that there are too few buildings, too few new construction projects started. So this is a concern that is definitely something that everyone knows about and they are trying to beat. So yeah.
Thank you very much. There's one final question. And just to remind everyone, if you want to post any more questions, please do so now. We'll take the final one that we have, which is related to M&A. Could you provide an update on the M&A pipeline, specifically with such a tough market, our valuations coming down, making M&A more available? And finally, are you considering larger transformative acquisitions as well?
I think there are more potential targets that we are in dialogue with over the past year, I would say, due to the changes in the market. And for the companies that are not doing so well, the valuations are definitely coming down. For companies that are doing well, I would say the valuations expectations are fairly high still. We are in dialogue with quite a lot of companies. So it looks in that respect quite promising.
We are building a pipeline in the U.K. as well that we think is going to be interesting to dive into. When it comes to more bigger, sort of really bigger acquisitions, we have been quite good at doing smaller acquisitions. And that's something that we have done, I think, with great success. And we might do bigger acquisitions, but I think also it does always come with a slightly larger risk because then, of course, there's more politics, there's more bigger changes to be done and so on. So I wouldn't rule it out, but I think we are more likely to maybe make smaller acquisitions, meaning up to sort of 50 companies with about 50 employees and so on.
Thank you very much, Gustav. There are no further questions from the webcast now. All right.
In that case, I would really like to thank you for joining in, and again, we are very proud that we are growing in a tough market. We have a 29% annual recurring growth, but also remember that we have a 10% organic growth, which is quite okay, not where we want to be, but it's still quite good considering the market, so thanks a lot and have a great day.