Earnings Call: Q2 2020

Aug 12, 2020

Summary

Q2 ARR rose 16.7% YoY to SEK 75.5m, while net sales reached SEK 18.3m and EBITDA margin was 27.7%. COVID-19 increased churn and delayed large deals; H2 growth investment is planned, with cash-flow positivity retained.

Thank you. Good morning, everybody, and thank you for joining our call today. The agenda is I will do a short company presentation, and then we will look at the financial highlights for the second quarter. After that, we will head into a Q&A. Moving to slide number 2. Upsales, we are a technology company that helps companies to find new customers and win more deals. We do this by delivering a sales and marketing platform, which we sell to our clients as a software as a service, as a subscription. We currently do this for around 600 clients in a total of 9 countries. Moving to slide number 3. Our business model is we have around 90% of our revenues are subscription-based revenues. Our clients pay us an annual fee to use our services. The fee is based on the total number of users that a client has and also on the complexity of their solution. We sell a lot of add-ons and integration, which we also charge subscription fees for. What we hear from satisfied clients when we ask them why they like Upsales is that we have a very dynamic and scalable platform where you can adapt and customize according to your business needs without the need for complex consulting projects or implementation projects, which has been the case for most of our competitors the last years. This makes us more scalable, and it makes us a better choice for a lot of clients. Let's go to slide number 4. Looking at our growth strategy. Our number one priority at Upsales is to grow our annual recurring revenues. We do this in 3 ways. The first one is that we invest in our product to create more add-ons and more features that we can sell to new and existing clients. The second one is that we scale our sales and marketing organization to reach more clients and to win more contracts. The third part of our growth strategy is that we expand into new markets. Let's go to slide number 5 and talk a little bit about the platform and what we're doing there. Our goal is to build the best sales and marketing software in the world. By investing in our product, it enables us to increase our contract values. What we see is that by building off-the-shelf add-ons it's more attractive to customers than to build bespoke solutions. This also facilitates kind of organic ARR growth within the existing customer base. We see that satisfied and happy customers tend to grow and tend to buy more add-ons. One question we often get from customers and also from investors is that this sounds like something that only fits smaller clients. That so if you're a larger company, if you're a larger sales force, you still need to build a custom solution. Well, that's not the case with Upsales. We are able to deploy this to fairly large organizations with hundreds of users with very little consulting work, which is, of course, very appreciated by the clients. Again, it makes us more scalable because you don't need the army of consultants with specialized knowledge in the same way like you would have if you have another approach. Let's continue to slide number 6. This is the second part of our growth strategy. We want to grow by scaling our sales organization. The last year, the last 18 months, we have been working hard with improving our selling process and improving our pricing. Pretty much improving all aspects of how we approach new customers. We feel that we have a very effective model. We have a short ramp-up time for new hires. We have a very good efficiency, a very high efficiency if you look at the total sales and marketing spend compared to new ARR that we bring in. We have a payback on our sales and marketing spend within one year, which, of course, reduces the need for external capital. This is the reason why we continue to grow and have been growing for a long time now with healthy cash flows and with good margins. We have a very aggressive hiring plan for the second half of 2020. As we feel that our product is getting better and better and our way of approaching clients and our selling process is also improving, we will invest more aggressively in both the product and the sales organization going forward. Let's continue to slide number seven. The third part of our strategy is to expand to new markets. As I mentioned, we have clients in almost 10 countries. The product is available in several languages, and the product supports all the aspects that are needed when going internationally, like multiple currencies and international date and time formats and time zones, and so on. In the second quarter, the product continued to prove itself competitive internationally. We had six new international clients in the second quarter. Having said that, during the first half of 2020, the focus from March anyway, going forward, had not been on international, due to the COVID-19 lockdowns in almost all of Europe. We still see some traction despite these COVID challenges in many parts of Europe. All right, so let's go into the financial highlights. If we move to slide number nine. Looking at our revenue, our ARR at the end of the quarter was SEK 75.5 million, compared to SEK 64.7 million end of June 2019, which is a growth of 16.7%. Our ARR grew by SEK 2.7 million in the second quarter. Net sales was SEK 18.3 million, compared to SEK 17.3 million in the second quarter of 2019. To bring some perspective on this, what we have seen in the second quarter is that some of our clients have had challenging economic circumstances due to COVID-19. We have seen a slightly higher churn than normal. We also see that larger clients and larger deals, larger companies tend to postpone larger investments. That customer segment has not been as successful for us as it is normally. We are quite happy to, despite this, continue to grow and to continue to grow profitable. If we move to slide number 10, we also see that our recurring revenue share of total revenue continues to increase. Q2 2019, 82.4% of our revenues were recurring, and this quarter, 89% was recurring. This is also one reason why the net revenue is growing slightly slower than our ARR growth. This is 100% according to our strategy. We want to build a great product that our customers can use, and we don't want to build a consulting business. Some of the examples of clients we closed in the second quarter could get started within weeks instead of months because of ready-made, off-the-shelf integrations and features, which just 12 months ago, were not there. Back then, we needed to make custom bespoke solutions to these clients. All right, let us move to slide number 11. Looking at our profitability, our EBITDA was SEK 5.1 million, which is a 27.7% margin. Our EBIT was SEK 2.8 million, which is a 15.4% margin, and net income was SEK 2.1 million. Our profitability continues to improve, and it is something we expect to see going forward as well. Let us look at the cash flow, moving to slide number 12. Operating cash flow improved from negative SEK 0.3 million to SEK 2.4 million, and total cash flow was SEK 1.5 million. The net cash at the end of the quarter was SEK 28.6 million. That concludes my presentation, and we will now head into the Q&A. Thank you. If you wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause while questions are being registered. First question comes from Rikard Engberg, Erik Penser Bank. Please go ahead. Morning. Great numbers. Morning. Great numbers, although I have a couple of questions. Let us start with the revenue and the annual recurring revenue growth. You see a higher pace in annual recurring revenue growth than in revenue. Can you please elaborate a bit about that? Is that because clients have waited until end of the quarter to sign deals? The main reason that our total revenue is growing slower, I would say, is that we are decreasing the amount of one-offs and consulting. We continue to grow our ARR, but we are actually decreasing the consulting revenue, which, of course, affects total revenue growth. I would not say that it is an effect that the accrued revenue came in too late, so to speak, in the quarter. That is not the main reason. Okay. Can you shed some light upon the quarter? Is it different now on the end of the quarter than it was in the beginning in terms of contacts with clients? Well, I would say that in the beginning of Q2, some companies were still in sort of a panic mode. But at Upsales, we had a fairly even distribution of deals with both new and existing clients. Of course, there is always, I think in all sales organizations, you always have a little higher sales volume in the last month of the quarter. That is just basic sales psychology. But I wouldn't say that COVID-19 had a larger effect in the beginning of the quarter than in the end of the quarter. Okay. Fair enough. If we look on the growth on annual recurring revenue, can you shed some light, whether it is due to more new customers or increased ARPU or a mixture? I would say that this last quarter, the second quarter, was a typical quarter in terms of the distribution of the growth. Around 50/50 from new clients and from existing clients. Usually, we have a slightly higher percentage from new clients, so a little bit more from existing clients this quarter, but pretty much 50/50, I would say. Okay. Makes sense. My next question is regarding the EBITDA margin. Congratulations, it is also a milestone. I would say, what is the main force driving it upwards during this quarter? The main driver. There are a lot of factors going into this. I would say, if you are just looking at the company and the organization and compare it to where we were a year ago, we are a more effective company today than we were 12 months ago. That is also one of the main reasons why I am very motivated to accelerate our investment in growth now. Changing the organization, improving the organization takes time, and I feel that we are really starting to see the effects of the work we have done the last year. We were just able to take care of more customers and to bring in more customers, and the cost is not scaling as fast as the growth. Okay. That is my last question, is if you will invest more in growth, and I guess more hirings, how will that affect the margin? Will you be able to sustain this quite high margin that you had this quarter? Our view and my view of profitability versus growth is that we want to prioritize growth before profitability. But we still want to have kind of a balanced approach to this. We don't plan to run the business in the red. We don't plan to start burning a lot of cash. But we will be more aggressive in pursuing all the kinds of growth initiatives that we can find. So I wouldn't expect us to maintain this high margin over time, especially if our growth initiatives are starting to take off. But we want to stay cash flow positive. Okay. Fair enough. That was all from me. Thank you. Thank you. There are no further questions. Dear speakers, back to you for the closing remarks. All right. So, we continue the work, and looking forward to