Earnings Call: Q1 2020

May 6, 2020

Summary

Q1 net sales rose 11.6% to SEK 18.9 million, while ARR grew 20% YoY and recurring revenue reached 90.2%. COVID-19 delayed larger deals and increased churn risk, but investment plans and positive-growth guidance remained intact.

Thank you. Good morning, this is Daniel. For today's agenda, I will do a short presentation of Upsales and our growth strategy. Then my colleague, Elin Lundström, our CFO, will talk about the financial highlights from the first quarter. Moving to slide number 3. Upsales, what we do is we help companies to find new customers and win more deals. We do this by delivering sales and marketing, which we sell as a software as a service, as a subscription. Currently we do this for more than 500 clients in a total of nine countries. Moving to slide number 4. The vision for Upsales is enabling greatness in B2B sales. What we mean by that is that we believe that sales is the number one reason why a company succeeds or not. We also believe that most of the problems and challenges a sales team and sales organization has still not been solved in a good way by great software. That's our mission, to build the world's greatest sales and marketing software to help sales professionals to become more successful. Moving to slide number 5. The business model for Upsales, it's a subscription. Our clients pay us an annual fee, and the fee is based on numerous factors. It's based on the number of users, and it's also based on the number of features and how advanced functionality you need. Our history has been that we've always had a very high degree of our revenue as recurring revenue, but that has increased during the last two years. The first quarter of 2020, we had more than 90% of our revenue as recurring revenue, compared to 79% of our revenue as recurring revenue the first quarter of 2019. This is also one reason why our ARR growth is significantly higher than our total revenue growth. Elin will talk a little bit more about that. The reason why we are able to deliver a fairly advanced platform to both small, medium, and large enterprises. Our largest client has around 300 sales reps in a total of 10 countries. We are able to do this, to deliver to these kind of clients, and still have 90% recurring revenue. That's because we put a lot of effort into the product to make it scalable and to make it easy to implement. You don't need to spend a lot of time in costly consulting projects, which you need to do with other vendors in our industry. Also having 90% recurring revenue makes our current circumstances with the COVID-19 a lot more manageable since when companies start doing cost-cutting, one of the first things you start to look at is consulting. Moving to slide number 6. There are three parts of our growth strategy. The first one is to invest in the product to increase contract values. The second one is to scale our sales and marketing organization to win more contracts with new clients. The third one is to expand into new markets. Moving to slide number 7. As I said earlier, our mission is to build the best sales and marketing software in the world. We have seen very clearly in the past that we have a very high ROI when we invest in product. Because we add features, we add new modules and add-ons, which we sell to existing clients. Building out the platform also enables us to win larger deals and larger clients. Related to our current circumstances, I know some companies are forced to lower their ambition and to lower the amount of investing in the product. At Upsales, our roadmap remains intact, so we will continue our investment. We are actually planning to hire more people to the product organization than previously planned. This is due to the amazing opportunities in the labor market as a result from COVID-19. Moving to slide number 8. Our second part is scaling the sales team, hiring more sales reps. We will also continue with this, hiring more salespeople during 2020. The reason for this is that we have seen clearly that the model of our sales model is very efficient, so we don't need to invest cash for 2-3 years and then see a positive ROI. We see a payback from our sales and marketing investments during year 1. We believe we have a very effective model of onboarding new sales reps to get them up to speed and have them being productive within 2-3 months. A comment here also is that we have continued to close new deals every single week during March and April. Moving to slide number 9. We did a couple of international deals in the first quarter, but with most of Europe in lockdown, internationalization is not our top priority right now. Moving to slide number 10. Our financial goals is to grow our ARR by more than 30% per year over time. We want to continue to have a high degree of recurring revenue, so we want that to be above 80% of total revenue. We have seen some increase in churn during March and April. I would say it's impossible to predict exactly how everything will play out due to COVID-19, but we believe to have the situation under control, and we are confident that we can continue to have a positive growth of ARR and revenue during 2020. But exactly how much or exactly how it will play out, is very hard to predict. That was all I had. I will hand over to Elin, who will talk a bit about the financials from Q1. Thank you, Daniel. Good morning, everyone. We can move to slide number 12. Looking at our annual recurring revenue for the quarter, it grew by 20% compared to the end of Q1 2019. ARR as of the end of the quarter was SEK 72.8 million. Quarter-over-quarter growth in terms of ARR was 4.2%, and net sales increased by 11.6% to SEK 18.9 million. As I mentioned last quarter, a part of our strategy is to make it as easy as possible for new customers to begin using Upsales. Thus, we have focused on building onboarding tools and standard integrations to speed up the onboarding process, which has been very much appreciated by new clients. But as Daniel mentioned, this has an effect on revenue short term, as we're selling less consultancy services. We can see that the share of recurring revenue of total revenue has increased in Q1 2020 compared to the same period in 2019 to 90.2% compared to 79.6%. A larger proportion of our revenue is recurring revenue, which we of course are happy about. Continuing to slide 13. In terms of profitability, our EBITDA was SEK 2.8 million compared to SEK 2.5 million in Q1 2019, and EBITDA margin was 14.6% compared to 14.5% in Q1 2019. Net income of the quarter was SEK 0.2 million. As we are using the Swedish accounting principle, the K3, we amortize goodwill straight over five years, meaning that we have a goodwill amortization for about SEK 0.7 million per quarter. That is good to know. I would also like to highlight that our aim going forward is still to grow, and it is still to grow under profitability. This has not changed due to COVID-19. Yes. Continuing to slide 14. Looking at the cash flow, we have some seasonality. A large proportion of our contracts are renewed in the end of the year, so we get a lot of payments on client invoices during Q1. So Q1 is a strong quarter for us, looking at operating cash flow. During this quarter, Q1 2020, it was SEK 11.9 million compared to SEK 7.8 million the same period last year. Total cash flow for the period was SEK 10.5 million, and net cash at the end of Q1 was SEK 27.1 million. This is, of course, something that we are very happy about, especially now during these uncertain times with the coronavirus. Yeah. So continuing to slide 15, the Q&A. Thank you. If you do 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. The first question comes from the line of Rikard Engberg from Erik Penser Bank. Please go ahead. Hi. Morning, guys. I have a couple of questions, if I may. The first is, can you please shed some light on the increase in churn? Is it customer goes out of business, or is it due to cost-cutting you see an increase in churn from certain clients? I would say most of the churn we expect to see. We do not believe that we will lose the entire contract. We do not believe that we will lose the actual customer. We do believe that the value of the contract will contract due to companies doing layoffs in their sales team, and they do not require as many licenses as they used to do. Okay, so basically due to cost-cutting and that you reduce the number of licenses and salespeople. Yeah. Then some, we of course, expect some customers to go out of business. But we did a fairly ambitious continuity plan. And we have a very diversified customer base, so we feel we have a very good situation for these uncertain times. Okay, thanks. My next question is about the new collaboration that you launched within the public sector. Can you please shed some light on this? Absolutely. It is a partner we are working with who have data on all the public procurement in Sweden. Basically, if you are an IT company and you want to work with the Stockholms stad, you can use this database to know exactly what other vendors are currently selling to Stockholms stad, and you can see the actual amounts as well. In these times, public spending in Sweden is 25% of GDP. Targeting the public sector or targeting companies that target the public sector, is seen by many companies right now as a sort of safe haven. Because, in Sweden anyway, hopefully, the government will not go out of business. Okay, fair enough. My next question is regarding the ARR growth. Can you please dissect it a bit? Is it mostly due to new customers, or is it due to higher ARPU or basically a mix? Usually it is a little bit more from new clients. That usually is around 60%, 65% of growth. For Q1, it was around 50/50. Half of our growth came from existing clients who bought add-ons and upgrades, and the other half was from new contracts with new clients. Okay. Is this a shifting trend? Because last year, you talked a lot about progress to increase the sell to existing customers. Do you see benefits of this, or is it just a coincidence? I would say it's a coincidence. We had slightly slower growth in Q1 in terms of ARR compared to previous quarters. This was mainly due to a couple of larger deals at the end of the quarter who decided to postpone their decision due to COVID-19. I wouldn't say it's a result of our land-and-expand strategy, no. Okay. Fair enough. Thanks. Thank you for your time. Thanks a lot. There are currently no further questions registered. I'll hand the conference back to you. All right. Thank you everybody for joining the call. In conclusion, we would like to say that we feel very confident in that Upsales will handle the current crisis in a good way. As Elin Lundström mentioned, we have a very strong balance sheet, with a high degree of recurring revenue, we believe that we will get through this in a very good way. Thank you very much.