Welcome to the Upsales Technology Q3 2021 report. Throughout the call, all participants will be in listening only mode, and afterwards, there will be a question- and- answer session. I am pleased to present CEO Daniel Wikberg and CFO Elin Lundström. Please go ahead with your meeting.
Thank you. Good morning, everyone, and thank you very much for joining the call for our Q3 report. Today's agenda, I'm Daniel Wikberg. I'm the CEO and Founder of Upsales. I will talk a little bit about our growth strategy and our expansion plans. After that, Elin will cover the financials from our latest report. Introducing Upsales, let's go to slide number two. Upsales, the company, has been around since 2003. We have a head office in Stockholm, where we are a team of around 75 people. We work with a total of 1,800 customers in a total of 11 countries. Our mission is to help B2B companies find new opportunities, win more deals, and grow their existing customers.
The way we do this is by providing a sales and marketing platform, a sales and marketing software which we sell to our clients as a subscription, so we are a SaaS company. Next slide, our business model. We have a subscription-based model with more than 90% of our revenue as recurring SaaS revenue. Our customers pay us an annual per user fee. On top of that, we offer over 20 add-ons, which we sell to existing clients as they grow and as they need solutions to more complex problems. We invest a lot in creating a scalable company and a scalable delivery of all our services.
It's very important for us to continue to be a streamlined organization, which is one of the major reasons why we are able to grow and to accelerate our growth with retained profit margins. We are a bootstrap company, so we never raised any money, so we have a proven model with organic and profitable growth for many years now. Let's move to slide number four. We are now working a lot with our U.K. expansion. We started targeting U.K. companies almost a year ago. We see that we have been getting increased traction for every quarter. We think the U.K. market is very exciting.
It's estimated at SEK 24 billion, so it's roughly 10x larger than the Swedish market. During Q3, we closed several new U.K. deals with quite a higher average deal size than previous quarters. The feedback we get from our U.K. customers is overall very good. We've done quite a lot of investment in the product to create integrations and data sources and specific features for U.K. companies, which is very appreciated by the customers we talk to. We will continue to invest more in marketing and hiring more people to our sales organization, which will work dedicated towards the U.K. market. Next slide.
If we look at the strategy, the core elements of the Upsales strategy. We focus on these three things. I think it's pretty much for all SaaS companies, the same three things you need to do. We wanna build the world's best B2B sales software, so we invest a lot of money and time into the product to make it world-class. We are working effortlessly with growing our sales team to bring in more clients. We also, as all SaaS companies, need to invest in customer success to make sure that our customers get the value they were looking for when they bought the product, which helps us keep our churn rates low and also growing all our existing accounts.
If you go to the next slide, Upsales has adopted a very deliberate land and expand model. We grow our sales team. We hire more sales reps to be able to bring in more clients every quarter. At the same time, we invest a lot in marketing to generate awareness and new leads and to be able to cover a larger part of the market. That's the land part, basically. If you look at the expand part and how that relates to our strategy. A very important thing for us is looking at how can we create what's usually called as product-led growth.
What are the features and add-ons which we can build that our existing clients are willing to adopt and to pay more to use, basically. We work very closely with our customers to understand what other problems they have where Upsales can solve. We use this feedback to expand the platform to be able to sell more add-ons to our customer base. We continue to invest in growing the customer success and the customer service team. It's very exciting and it's very rewarding for me to see that. I mean, the growth has been increasing the last quarters for every quarter.
It's also very nice to see that when you look at some of the more quality indicators or softer KPIs, if you will, such as customer satisfaction and net promoter score and we also look a lot at usage data to understand, do our customers use the product as much as they should. All of these KPIs are improving and starting to become world-class, which is something me and the entire team is very proud of. Just to summarize, if we go to slide seven, the growth philosophy for how we operate as a business is based on these four items. We believe in running a sales team with best-in-class effectiveness and we want quick returns on our investments.
We don't believe that with the product we have and the market and the kind of customers we work with, we shouldn't have to invest a lot of money and wait 18 or 24 months to see the returns. We should see them in a matter of weeks and months. That's something very important. We also believe that we wanna be a truly international company without local subsidiaries or the product translated into 20 languages and so on. All of the stuff we're doing towards the U.K. market, we do it from our Stockholm office, and we are able to close quite large deals actually, without having to go to travel to see the customers.
The third item, which is very important for us, is that we want to prioritize scalability and being a truly modern SaaS software company. We don't wanna build the traditional old-school software type organization where you have customized tailored solution for every customer. You have an army of consultants and pre-sales personnel. We believe in building an absolute kickass product which solves all the problems for our customers without the need for these long implementation project, which is quite common in the traditional way of doing this.
The last point is, we continue to have a relentless focus on improving the product every day to expanding the product, making it better, solving more problems for our customers, rather than, like some other companies are doing, growing through acquisitions and ending up with a kind of a scattered product portfolio. That's four things we really believe in and I would say these four items are the main reason why Upsales is able to increase growth, increase the growth rate, and still be able to do it in an effective way with positive cash flow and good margins. All right, that was everything I had for this call. I will hand over to Elin to talk a little bit about the financials from the Q3 report.
Thank you, Daniel. Hello, everyone. Let's continue to slide number nine. Looking at ARR and revenue, our annual recurring revenue grew by 31.4% compared to the third quarter of 2020. The ARR as of the end of this quarter was SEK 103.6 million compared to SEK 78.8 million during the same period last year. The quarter-over-quarter growth in terms of ARR was 5.3%. Net sales increased by 25.6% to SEK 22.4 million. Continuing to slide number ten. In terms of profitability, EBITDA was SEK 4.4 million compared to SEK 6 million in Q3 2020.
EBITDA margin was 19.5% compared to 33.4% during the same period last year. Net income of the quarter was SEK 2.2 million. Let's continue to slide number 11. We have some seasonality in our cash flow with a large proportion of contracts renewed in Q4 and Q1. During this third quarter, we had an operating cash flow of SEK 3.4 million and a cash flow of SEK 1.2 million. We also continue to have a strong cash position with net cash of SEK 52.6 million at the end of the period, compared to SEK 27 million in the same period last year. Let's continue to slide number 12 and the Q&A section.
Our first question comes from Markus Almerud from Penser Bank. Please go ahead.
Hi, this is Markus Almerud, Penser Bank. I'm standing in for Richard. Can you hear me?
Yeah, we hear you.
Yeah. Perfect. My first question is on the margin guidance. So regarding 2022, I think it is. You've said, right, that it's gonna be lower in the first half of next year and then increase in the second part of all 2022. What is the base for that? Could you please elaborate a little bit about that? Is it just the margin, the margin was higher, right, in 2020 at least right now. Is the base the current or is it 2020?
The base is the current, I would say. I mean, one of the main reasons why the margin is lower now than compared to Q3 last year, I would say two reasons. Q3 was an exceptionally good quarter in terms of EBITDA margin last year. It was a tough quarter in terms of comparison. As we ramp up growth, as we communicated previously, margins in the short term will have less priority than growing the ARR. In the first half of next year, as we are growing the organization, we doubled the size of the team the last 12 months.
We have some increased costs where one of them is we're moving to a quite a lot bigger office space in the beginning of next year. Other costs just related to us becoming a bigger organization.
Okay, okay. My second question is on the sales force. Where are you in the recruiting process? Are you able to build up the sales force in the desired pace? Are you on track?
Yeah. I mean, I think we're quite happy with the pace in terms of the new number of team members joining the company. I think we can do a little better job. There's still some upside in terms of how fast we can do it. So that's obviously, I mean, one of my top priorities to look at, okay, what are the ways in which we can accelerate that. All in all, I would say we're quite happy and things are going pretty much according to plan.
Okay. My next question is on the customer mix. What is the mix between the new customers and an increased revenue per customer? Just how have you achieved the ARR growth?
The ARR growth, I would say that this quarter was a typical quarter for us. Around half of the revenue comes from expansions from existing customers, and half comes from new customers.
Mm-hmm.
Expansion, I mean, since we have a land and expand model, we expect new customers to grow quite fast during the first 12 to 24 months. Expansion is a very important part for us. It's still important to point out that a big part of the expansions comes from customers who haven't been customers for that long time. I mean, if you would look at the growth, if you would just look at customers that haven't been customers more than 12 months, you would see that a large part of the expansion comes from them. Yeah.
Can you say anything about what is the retention rate for the existing customer base?
We don't report churn as a KPI, but I would say all of the KPIs in terms of, as I mentioned, in terms of customer satisfaction and NPS and retention are improving. That's also a driver to why we are able to increase the ARR growth rate for the fifth quarter in a row now.
Mm-hmm. Mm-hmm. Okay. Okay. My next question is on the U.K. strategy. Is it very different from the strategy you have on the German market?
The German market, I would say it's pretty much dead for us. We stopped focusing on the German market quite a while back. We had a clear focus on the German market a couple of years ago. At the same time we worked with the Swiss market and also started looking at the U.K. market. For a few quarters back now, the only thing we're doing, like deliberately outside of Sweden is for the U.K. market. The strategy there is very similar to what we're doing in Sweden. We try to invest in the product to make it as attractive as possible for the specific customers.
We invest a lot in marketing to attract the potential leads and customers.
Okay. Then one final question, if I may. Just a question on cash. Not more than 50% of the balance sheet is cash. And you see accelerating cash flow. Have you said anything about your plans on how to deploy this cash and how to use it?
No, we haven't said anything about that. I mean, we expect to continue to be able to grow the business and increase the growth rate without running the business in the red, at least for extended periods of time. The kind of investments we do and the kind of risks we take don't tend to use a lot of cash. I would say that the bottleneck, because I get that question a lot, "Why don't you take all this cash and just invest it more in growth so you can grow even faster?" I always say that the bottleneck for growing faster is not cash.
The bottleneck is being able to grow the organization in an effective way and scale it as fast as possible and retaining the quality and the effectiveness. We don't expect to. I mean, acquisitions is absolutely not at all a part of our strategy and so on.
Okay. Well, thank you. Thank you very much for that. That's all for me.
Thank you.
I remind you that if you do wish to ask a question, please press zero one on your telephone keypad. There are no further questions. I hand back over to our speakers.
All right. Thank you everybody for joining today. We're quite happy with the third quarter and looking forward to continue growing the business and to our next call. Thank you.
This concludes our teleconference. Thank you all for participating. You may now disconnect your lines.