Knowit AB (publ) (KNOW) Earnings Call Transcript
October 25, 2023
Earnings Call Speaker Segments
Ladies and gentlemen, welcome to Knowit Interim Report Q3 2023 Conference Call. I'm Andre, the operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. [Operator Instructions ] the conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Per Wallentin, CEO. Please go ahead, sir.
Thank you, and a warm welcome to this presentation of Knowit's report for the third quarter of 2023. We can take the next slide, please. Well, my name is Per Wallentin, and I'm the CEO of the company. And I also have Marie Bjorklund, our CFO, with me here to take us through some numbers later on. Next slide, please. First, I would like to take you through some operational highlights during the third quarter. We have been faced with weakened demand all through 2023. And this trend continues in the third quarter. We do, however, see stabilization in the quarter. Our utilization rate is still too low, and that's why margins are not satisfactory. We faced the largest challenge is in Sweden, where sales cycles are long and projects are postponed unless been business-critical. We continue our focus on reduction of general costs with many initiatives implemented in the quarter as well as in Q2 before summer. This includes cost savings from travel, conferences, et cetera, but also a reduction of staff in areas where demand is weaker and also in pure administrative roles. So far, we have reduced our capacity with around 165 employees due to lower utilization. And with this said, we maintained recruitment in areas where demand is high, and we are able to quickly utilize the consultants in new projects. We can take the next slide, please. We will now take a look at our business areas more in detail. Solutions, our largest business area reported net sales of SEK 884 million for the quarter, corresponding to 1% decline. The EBITA margin was 7%, margin decreasing following lower utilization. We still face challenges in maintaining high utilization but this is somehow stabilizing during the quarter. And Sweden is impacted more than the other markets. We keep high focus on cost reduction and reallocation of resources. We also work to consolidate our operations with the purpose of creating ability to take on bigger customers and increase efficiency. All of this, of course, gives results, but we are still not on a satisfying level. We can take the next slide, please. Looking into Experience our digital agency. Reported sales of SEK 331 million in the quarter, a decrease of around 2%. The EBITA margin was 2.2% due to low utilization also here in Sweden, Norway and Denmark showed stable development year-over-year. Finland is improving from quite low levels. We maintained high focus on cost reductions to secure future profitability. And that has also impacted the result. These cost reduction initiatives have impacted the result in Q3. We can take the next slide, please. Our business area Connectivity reported SEK 252 million in the quarter, a small growth compared to last year and the EBITA margin was 10.4%. The development in the quarter is very strong and especially in the current market situation, we maintain a high level of proactive dialogues with our clients, which leads to results. We also work hard with sales to find new projects and new clients. Our Polish operations delivered very strong results, thanks to their ability to adapt to market changes quickly. We have a really high competence in the Polish operations. We can take the next slide, going into our management consultancy Insight. Insight's reported net sales of around SEK 170 million for the third quarter, growing by 4%, including acquired entities. The EBITA margin was minus 6.3% and Insight normally has a seasonal effect in Q3 with lower utilization and a slower start. But this was stronger this year as several projects were postponed and downsized. The largest challenge is still to utilize general management consultants for example, strategy projects, et cetera. This is also the areas where we see the postponing projects impacting overall margins. The business has maintained a relatively high recruitment level in the quarter for roles where demand is high. For example, defense, energy, cybersecurity and legal and in the quarter, we see a positive net recruitment due to that focus. These new employees have quickly been utilized in new projects. We also have initiated and implemented several measures to reach solid profitability long term. To ensure full effect from these initiatives, we have, of course, the highest priority in the coming months. We can take the next slide, please. As you might have seen earlier today, we are very pleased to tell you about the deal that we press released today, a new frame agreement with Norwegian police. And together with 2 other main partners, Knowit will deliver digitalization services to the police covering a wide range of competencies like architecture design as well as security and data analysis. The contract is worth NOK 4 billion over 4 years. estimated net sales for Knowit, NOK 200 million to NOK 400 million a year. And with that said, we can take the next slide, please. And I would like to hand over to Marie, who will elaborate on our financials more in detail.
Thank you, Per. Next slide, please. Looking at the group as a whole, we delivered sales of approximately SEK 1.5 billion, same level as we reported for the same quarter in 2022. This is an increase of 1.5%, and unchanged when comparing Knowit now and including the acquired units a year ago. Adjusted for FX effects, revenues declined by 3%. Connectivity and Insight are growing, while Solution and Experience are decreasing in sales. EBITA adjusted for acquisition and integration costs, which for this quarter was minor amounted to SEK 74.9 million for the quarter. This is a decrease compared to the same quarter last year. This leads to an adjusted EBITA margin of 4.9% in the quarter. Last year, it was 6.2%. And as we already mentioned, this margin decrease is due to the slowdown in demand causing lower utilization affecting several markets and all business areas except Connectivity who is still stable. Sweden has hit especially hard. But on another note, our hourly rates are under pressure, but still, they increased compared to a year ago. So the negative growth of comparable figures is still coming from our utilization. Actions to increase the profitability was initiated already in the second quarter and it has started to give effect in this quarter. In total, so far, we have agreed with 165 employees that they will leave or they have already left the group in 2023. Following all these initiatives, we have one-off costs of around SEK 14 million in the quarter, relating primarily to staff reductions. A cost cut program is ongoing, and we saved SEK 20 million during the third quarter. Savings include cost of travel, conferences and events that will be kept at the minimum, but also some staff costs and other external costs. We will continue savings during the fall, and our main focus right now is to increase our margins. Next slide, please. This slide shows the development over time and also on a rolling 12-month basis. Our adjusted EBITA for the latest 12 months is at SEK 529 million and revenues at SEK 7.2 billion and at an EBITA margin of 7.3%. Next slide, please. This is an overview of our net debt development. We have SEK 600 million in used credit facility. Knowit has a total credit facility granted of SEK 1.050 billion. Future considerations amounting to SEK 62 million has a decrease since last quarter due to payments of earn-outs for Ascend in krona and also a revaluation of the last earn-out concerning krona, which is due in 2024. Leasing debts amount to SEK 571 million, an increase towards last year because of new leasing contract checks in several places, mainly in Stockholm and the amount has a small decrease since last quarter, and this is because of amortization. This totals a net debt of around SEK 1.1 billion and divided with our EBITA of [ SEK 704 million ] on a rolling 12-month basis, we are at a leverage of [ 1.6 ]. I wanted to mention the working cap in our cash flow. We have a higher accounts receivable than usual, and this is because this quarter ended on a weekend and payments due on September 30 was to an extent paid on the following Monday, that is on October 2. This was expected from our side and something that we normally have when we see a closing on a weekend. But of course, this affects also the cash balance negative. All in all, we still have a stable balance sheet and a good financial position. And most important, we are well within our financial target, which is set not to exceed 2. Next slide, please. We do have a solid platform and a strong position as a digitalization partner in the Nordic region. There is, of course, no safe haven but having a broad footprint is a strength in tougher times. And the share from the public sector has increased, as you can see, compared to last year, and this is mainly driven by an increase in the defense sector, where we see high demand. In other parts of the public sector, we noticed greater caution than previously and competition is becoming more difficult. But above all, we know that clients remain focused on business critical projects also in an economic downturn. Back to you, Per. Next slide, please.
Thank you, Marie. Well, to summarize, we present a quarter where the we meet a weaker market, but the negative trend from Q2 have stabilized. We have a really high focus on reallocating resources to areas where demand is high. We have a strong focus on sales and internal efficiency. Several measures to reduce costs have been implemented, but we do not see full effect yet. The market outlook for the coming year is uncertain and market visibility is low, but Knowit is strongly positioned to continue delivering growth and profitability even in such a market. And last but not the least, the digitalization trend remains very strong among our customers. The speed of change is actually increasing with the development of AI even in economic downturns. And with that said, we are now open for questions.
[Operator Instructions] The first question comes from the line of Raymond Ke with Nordea.
So am I correctly understanding that most of the 165 employees that were laid off were laid off in Q2?
It's a mix of Q2 and Q3.
Yes. And you're right that it has cost about SEK 14 million in restructuring costs and phase out of employees here in Q3. What about Q2.
It wasn't as much, otherwise, we would have mentioned in the second quarter. I think it was around SEK 2 million.
Okay. So you laid off more in Q2, but the cost was less in Q2.
No, it was a mix of Q2 and Q3. Those 165.
It is a mix, but it's also -- we took higher costs, and it's during the time that our employees are on [ guardian ] leave but there are 2 ways, either they are on guardian leave or they work their full time before the notice period. And then we haven't taken this cost. So there is a difference there.
That makes sense. And just on the contract with the Norwegian Police there, considering size, how should we view the use of sub-consultants in this and profitability of this contract comparing to the Solutions division over all.
We will have to -- it's such a big contract. And we are actually happy to announce that this contract is already starting off late this year, actually, it's a quick start on it. We will use subcontractors as we mainly do in all of the big deals, especially connected to public sector. So there will be a substantial amount of public subcontractors. The profitability in this special deal, this is public information will be really good and fair due to quite high prices.
Okay. And did you say what's worth an estimated SEK 200 million to SEK 400 million annually. Was that -- did I get that correct?
That's right.
The next question comes from the line of Daniel Djurberg with Handelsbanken.
I was wondering, first of all, I think a little bit of -- congratulations to , in my view, strong report given the circumstances in the market. I would like to ask you a little bit on the cash flow though. Marie, you mentioned, you talked about it, but then I was disconnected. So I didn't hear really on the working capital build. We see that the current assets is up 17%. Obviously, I understand that large clients of yours are holding into payments. But can you comment a little bit on what you see between the DSO and the DPO and going forward on bad debts risks, et cetera?
Yes. We're following the accounts receivables closely, of course, but we don't have any high risk on bad debt other than normal. But the closing of the quarter wasn't a weekend. So we have a portion of the accounts receivables being paid instead of the Friday, it's being paid on the Monday. So I would say this is around SEK 100 million coming in on Monday instead of before. So that is the explanation and it was expected from our side. Actually, the effect was a little bit lower than we expected. We worked hard to try to receive as much as possible before the weekend. But that's the explanation.
So the delta is much less than if you would go on Monday instead breakeven, I guess, cash flow from operating activities. That's good.
Yes. [indiscernible] in mind also for 2024 because I think that we have a couple of quarters ending on a weekend then as well.
Good. Another question, if I may, a little bit on the SEK 4 million restructuring charges. Is it fair to assume that it's mostly within the Insight business that had this -- I think it was SEK 11 million loss in the quarter? Or is it evenly spread over the business areas.
Well, it's not actually more in Insight than anywhere else. I would say if any business area having more, it's Experience.
And also, if I may, a little bit on -- obviously, you're breaking some and you're pushing the portal at some areas, and you talked about cybersecurity and also defense, et cetera, to be strong areas. Can you talk a little bit on your internal processes to reeducate to -- is that this possible in these kind of markets or if it's more in other types of markets that works. And if that is on your -- in the scale?
Yes. It's in a bigger scale than for many, many years right now due to the situation in the market in other places. And of course, to get into the defense industry it's long lead times. It might be up to half year or something, but we try to do that where it's the right competence because I think that the defense industry will remain high in demand for quite a few years, many years, as you might have noticed yesterday there was a lot of people from [indiscernible] in Stockholm, talking about the defense industry and procurement processes for Sweden into the NATO system, we were there, of course, on place talking with those people as well. So we think about this not only as a short-term initiative to gain profitability in Q4 or Q1, but also long term for '24 and '25 and further on.
Perfect. And my final question, if I may, would be a little bit on the rightsizing, so to say, is it possible to work the demographic at the same time? Or is it so that senior consultants or experts more in demand for -- that is pinpointed by the clients. So you can't really layoff elderly people like myself and take in a little bit younger.
I understand what you mean. It's harder to elaborate that structure. We are on that as well. And as you know, as you see, we actually have some areas where we have high demand even in Insight. And in those areas, we are able to elaborate -- have that focus. And we have a lower employee turnover, of course, now than before but we still do have some employee turnover. So we are able to work with that focus as well.
There are no further questions from the phone.
Okay. We have a few questions from the webcast. The first 2 coming from [ Thomas Neudorf ] . Why are you growing your FTEs while dropping EBIT?
It's because we still focus on growing the areas where we see a high demand.
And second question from Thomas. Are you laying off people in Insight to mitigate the EBIT development?
Yes.
Great. Then we have 2 questions from Halvor [indiscernible] . First being, how is the utilization among junior talent compared to senior talent.
It is quite all right. I think that we see a little bit tougher times to utilize more generals connected to junior talent, but that is -- it's not a battle of juniors or senior consultants. It's more that in certain competence areas or industries, we see a lower utilization.
Yes. And the juniors we recruited during the fall, they are in the finance now, most of them.
Yes.
How has the price developed during the quarter? Do you see any price pressure in especially the Stockholm region?
Yes. We do see pressure, as I mentioned, the prices have -- they have increased against last year and also during the quarter. But yes, there is a pressure.
And there is another question related to price because you said hourly rates are increasing. How are the hourly rates increased in percentage compared to salary increases?
Well, we don't disclose those details, but so far hourly rates increased more than salary increases.
All right. Another question from Halvor [indiscernible] , how does the market for M&A look at the moment? Do you have any potential acquisitions in pipeline?
Our main focus right now is the focus that we just presented in the report to work with the margin, high focus on cost, high focus on sales to increase utilization.
What do you consider to be the most important thing for clients to accelerate investment decisions?
Connected to -- I think that it's very important right now for quite a lot of customers to handle the quite big changes that we see connected to AI and connected to actually the lower cost of digitalization because with AI, the cost of implementing new systems, new ways of working, new processes et cetera, go down. they will face challenges from competitors that we'll digitalize and with that said, lower their costs. So it's a raise of digitalization amongst quite a lot of our customers.
Great. And there is another question on cost cutting that we may have already touched upon. But anyway, how do you cut costs? Are you cutting a number of consultants, overhead costs or other OpEx?
Well, we reduced the capacity with 165 and that includes both consultants and also overhead. I would say that the overhead is in relation to total higher than consultants and it's also less in headquarters. And concerning the costs, the SEK 20 million that is a cost, is not a salary saving of consultants or overhead. It does include some staff cost, but that is more like onboarding costs and education. But the major part of cost that is the conferences and travels and so on, which I said it's kept at a minimum.
Great. We have a question from Tom Guinchard at Pareto Securities. Can we expect similar cost savings effects in Q4 and Q1 as Q3 per day or higher in Q3 as conferences kick off, et cetera, is complicated in Q3.
Well, it is true that we have high costs normally in Q3, but we will continue the savings as long as our margin is under pressure. So when taking that into consideration, yes, we will have a similar effect in both Q4 and probably in Q1.
All right. And then there is a question from [indiscernible] . Do you see stable as opposed to further falling in demand in all markets? Or are there significant differences in the different countries?
There are significant differences. We saw that in Q3, we foresee that for the future and for 2024 as well. but we see a stabilization. There was a big decline in demand before summer, and we see a stabilization of that. For example, we have a lot of public sector, as you all know. And if we exclude the part of public sector that is defense, of course, that is very positive. We see that there was no extra budgets for 2023. We foresee that, that is not going to come for '24 either. But with that said, there are budgets and the demand is there, but it's on a little bit lower level and then we are able to adapt to that.
Great. There are no further questions from the webcast right now. So I hand over to the operator.
We have a follow-up question from Daniel Djurberg with Handelsbanken.
Yes, I had a little question to Marie just for my curiosity. On Q3, obviously, you have half of the quarter is more or less vacation times and so forth. And we do provisions during the year? And is -- are those provisions, the same across your business units? Or is it that some units have perhaps higher profitability on back of higher provisions during the year? Or is it [indiscernible] In the units?
Well, it's spread between the units, but I would say that Experience is sticking out of it with higher provisions.
Perfect. And may I also ask you on -- my last question on -- obviously, don't guide, but it would be interesting since I think it's a bit dangerous to extrapolate on Q3 too much given the vacation, et cetera. But when you look into the October start and also September, you can comment a bit on the overall. Is it fair to assume similar trends as we saw in Q3? Or is it something that has changed materially year-over-year compared.
We can see that the market now, we believe, is quite stable. But of course, I mean, we took a lot of measures and actions and not a lot of people go. So of course, we're hoping that, that will give an effect on the utilization.
But the market is still stable, but it's quite tough.
That was the last question from the phone.
And nothing further in the webcast either.
All right. Thank you, everyone, for listening in, and hope to hear from you soon. Thanks.
Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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