Earnings Call: Q2 2021

Aug 24, 2021

Good morning and welcome to the first interim presentation from SmartCraft. My name is Gustav Line, and I'm the CEO of SmartCraft. It's great to be here to present SmartCraft's Q2 results to a wider audience now that we are listed on Oslo Busch. This is our disclaimer that you need to be aware of, But let's move on to the agenda for today. 1st, I want to give you a brief intro to the company. Some of you know us already, but there are also a lot of new listeners, so hopefully this should be useful to you. After that, we'll look at the quarter highlights and the future outlook for the company before we open up for a Q and A. But please feel free to ask questions and send them in during the presentation. So, what is SmartCraft? SmartCraft is the leading Nordic provider of software to the construction industry. Our customers are typically SME contractors with between 101 100 employees. Some are smaller and some are larger. The construction industry is one of the least digitalized industries and has a lot to gain from digitalization. There are tremendous opportunities, and that's why I joined SmartCraft. With me today is Sartan Boer, our dedicated CFO. He will introduce himself later. SmartCraft has a proud history going back to 1987. I came on board as the CEO in 2018, and since then we've seen geographical as well as product expansion, both organically and through acquisitions. And you can see some of the acquisitions on top of the graph. Our latest add ons, Home Run and Quality Test Control, are not included in this slide. Today, we have a team of 180 employees in 12 locations in Norway, Sweden and Finland, serving around 11,000 customers and 115,000 users. As you can see from the graph, we have a high and consistent revenue growth underpinned by a good EBITDA margin. The construction industry is among the biggest industries in the world, but So, among the least productive, which again affects the bottom line. Our solutions are the hub for our customers. They ensure control of revenue and cost and make sure rules and regulations are followed. There are three reasons why we are very positive about the future. First of all, we are in a large underpenetrated market of 10,000,000,000 in our existing region. The majority of contractors do not have digital tools to really make them productive. They still use pen and paper, email, telephone, Word and Excel, and many of these processes can be digitalized to increase productivity. Additionally, the demand for digital solutions This is expected to increase by 15% annually. And finally, Lately, the increase in building material costs have increased immensely. From March to April, The cost of building materials in Norway increased by 2% 2% in 1 month. This accounts for quite a lot on a building project. So, our customers need to be in control of both productivity and the cost of materials, And that's exactly what we do. That's exactly why we are in business: helping customers to be more productive. Our solutions sit at the center how our customers best run their business. In the office, you have the administration and management, typically using a rich web client, being in control of the project and having an overview. The field users use a smartphone to be in control of the use of time and material, checklists, documentations, and so on. And then SmartCraft also collects product description, prices and technical data from the different suppliers. And finally, we connect with public offices and trade organizations who set industry standards and regulations and require reporting according to predefined templates. SmartCraft ensures that All information and documentation flows seamlessly between the parties involved. Typically, we group software in the construction space into 3 groups. We have software for the designing and planning stage. That's where you will find well known brands like Autodesk and Nemechek. Then we have software for the construction of the building. Procore is an enterprise player in this place and SmartCraft Is the player in the SME space? And then we have the supporting software, typically the accounting software like Microsoft Dynamics in the enterprise space and Fort Knox in the SME space. Fort Knox, for example, is a great solution for financial and accounting. And likewise, we are a great solution for companies who want construction software. That's what we want to focus on, and that's where we want to be best at. And we have accumulated more than 1000 years' experience in this field. We see several growth drivers in existing markets. Firstly, we are a market leader in a largely underpenetrated market, and the market is growing by 15% annually. Secondly, SmartCraft solutions are easy to buy, they are easy to use, and we aim to be easy to do business with. We offer the solutions in different packages, typically small, medium, large, where we upsell as the customer grows in complexity or users. This way we increase the ticket size of each customer. Thirdly, we see a great potential for cross sell and up sell on newly acquired customer bases. This work has just started and the effects are yet to come, but over time this is a nice opportunity. And lastly, there are several adjacent areas that we have not yet focused on. We will get to those later. So, this was a short intro to SmartCraft. Let's look at some of the highlights for Q2. We continue to execute well and are on plan with our revenue growth. The IPO was a success, and I'll touch upon that in a minute. And I'm also happy to announce the 2 recent acquisitions that are in line with our strategy, and I'll talk a little bit more about that later. And then, Christian Salekhi joined us, as the CTO in June. This is a new position and his job is to focus on synergies and scale for the Group. We also continue to expand our presence in several areas, like electro, and we have several initiatives going on in the Nordics. SmartCraft has a very strong sales and marketing engine that we continuously work to improve. Our customers are getting used to digital communication, and we see a great momentum from digital marketing, events and meetings. So, a few words about the IPO. We received great interest in the company at the IPO, and we have some well reputable investors like Capital, Carnegie and Handelsbanken as owners. We've also made some changes to the Board of Directors in order to increase our expertise in several areas. And the success of the IPO has given us a financial platform for growth. So we're very pleased about having all our new investors on board. Being a software company, it's very important to be innovative and here are some examples of some recent launches and focus areas. We launched a BIM viewer in a pilot version in Q2, and we have received good feedback from the pilot customers. We also launched a new Q and A module at the end of Q1, which has reached 600 users at the end of Q2. We have been working on an international version of Elvys for several quarters. This is a solution for electricians. And the version will be launched in Finland in Q3, which we're very excited about. And we released a new app for Bigelit in Q2. Bigelit has got a very big customer base and user base, so it's very important that we have Some really good and intuitive tools for those users. And we're also We are working on a Nordic tendercalculation solution, which is a cross group project between Cordell and Elvys And that is going according to plan, and we plan to launch the pilots in the second half. Our strategy is to buy great SaaS companies within construction in new and existing markets. Recently, we made 2 great acquisitions: Home Run in May and Quality Test Control in July. Qualitares Control will of course not have an effect on Q2, but since we are in the middle of Q3, I wanted to inform you about this add on. Home Run will strengthen our position in Finland and gives us opportunities for cross sale. Likewise, Qualitrix control opens up for cross sales and synergies. But now, enough about me. Let me give you the word to Good morning. My name is Jartan Boer. I'm the CFO of SmartCraft, and I'm excited to be here presenting for you today. So in Q2, we have a strong growth and we have excellent metrics. As you can see on the right, The ARR has increased by 29%, and the average revenue per customer has increased by 21%. Total revenue growth is in Q2 36%. All of these are driven by our 2 latest acquisitions. The organic growth is in the top half of the guided 15% to 20% level. Q2 is seasonally strong quarter and the adjusted EBITDA margin is 47%. We are continuing a low churn and we are we have a strong cash conversion. So as I said, year over year, total revenue growth is 36%. This is driven by M and A and our 2 acquisitions, Kongrid and Home Run. The organic growth at 18% It's driven by continuous focus on our recurring SaaS solutions, and we both upsell to new to existing customers, and we have new sales. The increase in revenue also affects EBITDA. We have a strong margin of 47%. And apart from Q2 being a seasonally strong quarter, this is a result of business scalability. In addition, we have some planned hires being delayed. As a SaaS provider, we are always developing our solutions. We capitalize development each quarter, and in total, we are capitalizing about 6% of our revenue. We have identified 2 segments in our markets: general construction and specialized construction. Specialized constructions are companies providing a specialized service like plumbers and electricians. And as you can see below, our segments have an equal share of revenue, with general construction is faster growing. This is driven by both acquisitions and organic growth. Specialized construction has the stronger EBITDA margin. This is due to the value proposition our solution offer for these specialized needs. If you take a look at our P and L, you see that we have an increasing gross margin of 1 percentage points. We have increasing operating expenses, and a lot of this is relating to both acquisitions and restructuring and IPO. We adjust for these expenses when we calculate the adjusted EBITDA. Depreciation and amortization is driven by the capitalization we do on R and D and also by acquisitions. Currency rates last year had a great impact on net financials. We have no similar effects in 2021, And the financial expense is mainly interest on our loan facilities. In connection with the IPO, We repaid all loan facilities at the end of June. We had the IPO late June, and the IPO and the connected transactions impact the balance sheet and the cash flow greatly. So, as we are a SaaS company with an active M and A strategy, our main asset in the balance sheet It's goodwill and other intangible assets. These are financed after the IPO and repayment of loan facilities by equity. Also, we have a large amount of deferred revenue as customers pay subscriptions in advance. Deferred revenue is increasing with growth. This is resulting in an increasingly negative net working capital. This gives us a strong cash conversion, and historically, we have an annual average of 110%. Strong profitability, a healthy balance sheet gives us an excellent position to execute on our strategy going forward. So, Gustaf, will you join us for a summary and outlook? Of course. Thank you very much, Sartan. So let me summarize before we move on to the Q and A. We have several important focus areas this autumn. They are all important and increase our opportunities for growth. Our targets stay the same as communicated at the IPO. We guide at 15% to 20% organic growth in the medium term. The adjusted EBITDA is expected to increase from 2020 baseline due to scalability and synergies. With the great market opportunities, our solid solutions and competent team, we are well positioned to play a vital role in the construction industry in the years to come. So now let's move to the Q and A session. Okay. Thank you. We have a few questions from viewers. One question is regarding The growth in the quarter, if you look at the ARR growth or revenue growth for that matter, what are the most important growth drivers? Could you elaborate a bit on that when it comes to new customers, I mean, organic sales, up sales or price, etcetera? Can you Say a little bit more about that. Yeah, I think that's a question for you, Sartan. Yeah. We have both sale to new customers and existing customers. We are The new customers, of course, being the new solutions and all that comes with it, but the existing customers, They are primarily an upsell of functionality. We have So far has very little price increases, just the normal index regulations. So we have most of our revenue growth is new customers And we have a smaller portion to existing customers and upsell. Thanks. Also, there's a question on the EBITDA margin and seasonality. It's Quite a high margin compared to, I mean, run rate in Q2. Can you talk us through seasonality in with regards to margin and the business in general for Rembrandt. Yes. So the Q2 is a seasonally strong quarter When it comes to the EBITDA margin, this has much to do with salary pays in Norway. June, as we know, are a season for holiday pace, and that brings EBITDA margin to a higher level than the rest of the year. Thanks. A couple of people are asking about the EBITDA adjustments. Can you say can you be a little bit more On that or what were the main drivers for that? Was it primarily the IPO? Yes, it was primarily the IPO. There might be some there were also some restructuring expenses, but that may mainly the IPO costs. If you want to Add anything, Sjartan? Yeah, about of the adjustments we made in the EBITDA, About SEK 20,000,000 is the IPO and the rest is acquisition costs relating to our acquisitions. Further, can you elaborate a bit more on the Cost increases that you mentioned related to marketing development investments that we mentioned going forward. Yes. I think we have, Like we mentioned earlier on, we have a great opportunity for now that we are on the listed companies. And in order to grow and scale, And we want to see how we can invest in development and also in sales and marketing. We have a very strong Lifetime value to customer acquisition cost, it's a very high value, which means that we could invest more in sales and marketing and benefit a lot from that. So that's something we're going to look into, yeah, going forward and see how we should invest wisely order to get the right results. Would you be able to quantify Currency impact on ARR in Q2? No, we don't. We don't. I don't have that exact figure, sorry. All right, we have a few more. There's a question on the ARR growth here. When you look at The ARR growth, it is lower than the year on year revenue growth. Can you say anything about the effects There and how we see that, how that comes out in that way. And is there any seasonality with regards to growth in revenueARR. Well, regarding seasonality, we only have seasonality On the revenue growth. The difference in the ARR growth and the revenue growth, That comes down to that. We do not only have recurring revenue. We also have a non recurring revenue. This is training courses, expert services, etcetera. So we have growth in all areas. And we have a 94% portion of recurring revenue. Thanks. A few more questions from viewers. You're talking about expanding Elvys into Finland. Can you say anything about the market potential for that particular service in Finland? And What's the strategy to enter that market? Well, Elvys is a great solution for electricians. It's used for calculation and cable dimensioning and documentation for electricians. So it's a very useful tool and they got a very strong position in the Swedish market. And we have been working on an international version and we are now going into the Finnish market. There are a lot of Swedish people in Finland since it is the second language. So it's quite easy us to enter into the market. We also got feet on the ground with 2 solutions and several people in the Finnish market helping us into that market and we also hired people to do sales into the Finnish market. The potential is great. I think the solution is quite unique. There's nothing like that in the Finnish market for the same price and the same value. And I'm pretty sure that we will be able to scale and do well in the market. Of course, the work has to be done, but we are very positive. Thanks. Further, you have already announced 2 acquisitions so far in 2021. Can you say anything about the pipeline, further pipeline for M and A? Is it less is it like are we likely to see more M and A activity this year? So we have a strategy, an acquisition strategy to buy great software companies in the construction industry that fit into the group. That means they have to have the right mentality, the right culture, Sure, they have to have the right SaaS mindset. There's a lot of things to hook off and we want all of those to be fitting nicely into the Group. So we don't buy companies just for the sake of buying companies. We buy companies because they are strategically right for SmartCraft. We have we are in the dialogue with a lot of companies in existing regions, but also outside existing regions. And well, we have managed to do about 2 acquisitions a year. If the right companies come up, we might do another one. So it might happen, it might not. Yes, there's a question on how the Q3 looks, Any updates on the market situation and so on? And are there any factors you expect will influence SmartCraft's Top line growth in the second half of the year? Very positive to the market like we talked about earlier on. There's a great underpenetrated market, it's growing by 15% a year. And we don't guide on quarters and half year, We guide in the medium term 15% to 20% growth. Can you be a bit more detailed on the Our growth, I mean the organic ARR growth and also Pinsam are asking about How much Home Run contributed to the reported ARR? Yeah, we don't specify On our detailed solutions, we have the NOK 260,000,000 total for the group in AR. So that is yes. Congregate, of course, also is an acquisition, Which is not organic and related to the ARR. But again, sorry to say we don't disclose the details on the Separate Solutions. Thanks. I think we have reached the bottom of the list here. I'm just going to do a quick check of that. Yeah, there are no further questions as of now. Well, thank you very much for spending time this morning. We are very happy to be with you and be able to report on the Q2 and look forward to meeting you reporting on the Q3. So have a great day everyone.