Lemonsoft Oyj (LEMON) Earnings Call Transcript

Welcome to this Lemonsoft Strategy Update Webcast Presentation. Today, we'll first recap our achievements during the recent 4-year strategic period from 2021 to 2025. And after that, I will present our updated strategy for the next year -- 3-year period from '26 to '28. First, a short recap on where we are at -- or where we've been in the past 4 years. Basically, during the strategic period, we've transformed from a private ERP company to a publicly listed multiproduct B2B software company. Our net sales has more than doubled from EUR 13.6 million in 2020 before the beginning of the strategic period to nearly EUR 30 million during the last 12 months period. And adjusted EBIT has grown from EUR 4.4 million to EUR 6.9 million during the last 12-month period. We've completed acquisitions of a total of 10 software products with roughly EUR 12 million in revenue at the time of the acquisitions. From a technological point of view, we've made a complete transformation journey in our ERP moving from a desktop-focused ERP solution hosted in our own data center to a web-based ERP in Azure cloud infrastructure. Also, our other products within the group are all run fully in cloud infra. From a product portfolio overview, we've expanded from core ERP product to a multi-product B2B software portfolio. Our organization as well has transformed from one main team focused on one main product to an integrated teams with shared admin and business development functions with capabilities for further growth. We are not still happy with where we are -- where we've been in the past 2 years with our organic growth. We have very high ambition levels for growth, both organically and inorganically with acquisitions, and we will definitely be growing aggressively in the years to come. We see actually very good growth opportunities, both in Finland and nearby markets. And then let's jump into our strategy for 2026 and 2028. We'll first take a look at the, how we see the future of ERP. ERP is the segment where we are and where we play. So that's our environment. Then we'll take a look at what we will be focusing on in the years to come. We've divided these into four distinct areas, looking at the customer segments, the category -- the product categories that we play in, the organization that we want to achieve these goals with, and finally, the value-driven M&A that supports our growth and profit targets. We'll also take a look at why customers really choose us and where we need to be excellent at, to achieve these targets. And finally, we'll take a look at our brief financial targets for the period. Looking at the market from afar, we think that ERP is the most crucial target area for Lemonsoft. Lemonsoft has during the past 20 years, grown into a leading player in vertical ERP software in Finland. Vertically-focused software solutions are increasingly competitive even in the AI era, the vertical and local compliance structures provide competitive advantage for players like us. Secondly, we also see that the ERP is used by different types of users, different types of customers in different environments. Some use ERP in office desk work, some use on production floor level as well as in field services, mobile work. And for all of these, we need to provide different types of UI solutions. And finally, AI is moving from LLM model enhancement to industry process workflow automation. And this is something we want to be active in. We will focus on developing processes to eliminate manual work, remove process errors, enable smart analysis of large data sets. Independent AI agents make this transformation possible as well. So this is how we see the ERP developing. And next, I will go through how we aim to answer these questions. What we'll be focusing on is basically described in this slide. So we are active -- basically, Lemonsoft's vision is to be the leading ERP software provider solution for SMEs in chosen customer verticals in Finland. This has been our vision for a long time and continues to serve as such. We focus on four distinct areas. We want to be the market leader in the selected focus segments that we play in. And for us, that means that we want to be the #1 player in manufacturing and wholesale in Finland. Secondly, we want to be creating category-defining solutions for those areas that we play in. That means that we want to have category leadership in each key product area. We have, for example, work time management, we want to have a deep solution that wins in that area. We have maintenance management solution where we want to be the leading player. We have logistic cost optimization areas that we want to be the leading provider in. Thirdly, we want to have an organization that is as excellent as possible to support in the first two areas. We will focus resources. We will recruit talent to these priority areas. We'll prioritize everything from a manufacturing and wholesale point of view. And we'll create a model from an HR management perspective that supports these targets. And we'll also develop an organization and are quite far in that developing an organization that has a clear two-step model for portfolio management and sharing best practices with the acquired products as well. And finally, we will be investing in value-driven M&A. We'll be investing in targets, especially in our key product segments, and customer segments that support where we play in. We want to acquire products. We want to acquire talent, and we want to make efficient capital allocation decisions, both in M&A and other areas, operations as well as dividend distribution and acquiring our own shares. And all of this serves as functions for our strong net profit growth in the strategic period. And I'll go through all of these segments in detail and describe how we want to win in each area. First of all, looking at the customer segments that we play in, our key focus area is in manufacturing and wholesale. We are active in multiple industries, but the most important industries are manufacturing and wholesale, which bring roughly 60% of our total revenue. Our wide and deep offering serves these sectors perfectly, and we'll prioritize strongly our investments into these core industries, for example, through sales and marketing investments, product development, talent recruitment and key acquisitions, which are all directed towards this target. The extended industries are sectors that are close to our core industries, but either their needs or our offering to them aren't as deep as wide as in our core industries. So we basically extend our core industry solutions into these industries. And additionally serve these customers with deep point solutions, typically which we've acquired. We will also make selective investments into extended industries and consider some smaller add-on acquisitions to these sectors. And finally, we have a wide administrative solution offering, which we utilize to serve core and extended industries. Roughly 30% of our revenue comes from other than core or extended industry customers, though, almost all of our customers use the general admin solution. And additionally, we do have a customer segment focused on easy-to-buy, easy-to-use self-service products that are focused towards micro companies. These solutions are typically invoicing and work time management solutions. We have roughly 8,000 micro companies, and these companies bring roughly 5% of our revenue in total. And looking at the same from a product point of view, we have -- in our core industries, our main product is Lemonsoft, which we then complement with several deep point solutions, which support that offering. The other solutions that are focused towards -- only towards extended industries are construction software solutions, bringing roughly 10% of our revenue. In the general SME customer segment, our key solutions are focused on financial management and work time and salary management. And looking at the same from a product point of view, from a product and infrastructure point of view, we have a strong technological base. We have a hybrid infrastructure where we strongly emphasize cloud solutions. Basically, all products currently run in cloud. As we see ERP systems increasingly used in different environments, we want to serve our products with different types of UI. So in addition to web-based solutions, we provide mobile and desktop solutions. Going forward, AI will be more and more important as developing -- LLM-based solutions develop, we want to bring that as another UI set, for example, through [ speech ] directed solutions. And then AI as a whole, we want to develop the efficiency within our own operations. We want to develop innovative solutions for our customers. And also, we want to improve our customer centricity and increase clients' use or enhance the clients' use of our software. And all this base supports the product portfolio on top of that, which starts on a general level from CRM, financial management, HR, work time tracking solutions for general SME companies and micro companies, which then support also extended industries and core industries, which focus more on production planning, supply chain optimization, smart warehouse solutions, asset management solutions, project management and resource management. And then looking at why customers really choose us. We have defined three different areas where we want to be best at to win in the Finnish segments that we've chosen. First is what I just described from a deep and wide solution perspective. The client needs to be able to have the whole set of solutions that we want to serve them, but also they need to be able to purchase only 1, 2, 3 different products in different areas that support them best. Secondly, we want to provide really high value for money. And this -- changes depending -- changes a bit depending on what type of product we are serving. If we provide an ERP solution, which has a really wide set of software solutions on top of that, the value for money may be -- the value may be very high and then the total price may be a bit higher. But the total cost of ownership is still really much lower than the actual value received by the client. And on the other hand, if you provide a self-service solution, we might be competing more with price where we want to provide the easiest solution with the lowest price to the customer. And finally, we will serve high-quality services for the customers, and we want to have the most satisfied customers in the chosen segments. We will improve our basic customer service operations. We will provide the required services on top of that, so the customers know how to use the solutions best. And these three areas will define the ERP that shapes basically the industries that we are in. We want to be the one player that defines what the ERP looks like in these segments, in these areas. How our organization supports that we've been developing our management team in the past 12 months towards a wide, deep expertise in this field. I act as the CEO. Kari Joki-Hollanti, the founder of the company, will continue to act as Chief Development Officer, focusing on long-term development projects. Mari Erkkila has been acting as the CFO for 10 years. And Janne Tammi has acted as the CTO for a year now. We've now added to our management team, Chief Sales Officer, Jarno Lehikoinen, who will jump into the helm of sales and marketing functions in a few weeks' time; and Kari Yli-Hakuni, who is focusing on product management. We also have a very strong Board of Directors, which has been in place for 3 years now with the current setup. Christoffer Haggblom, the Chairman; Kari Joki-Hollanti, Michael Richter, Saila Miettinen-Lahde and Ilkka Hiidenheimo as Board members. Finally, we have very simple, clear financial targets where we focus on increasing our adjusted EBIT on an average annual basis for the 3-year period from 2026 to 2028. We'll basically achieve these profit growth targets through increasing market share in our core industries as well as putting in place a tighter cost control. We'll balance -- depending on the market situation, we'll balance these targets, the growth investments and the tighter cost control, depending on what the market there looks like. But in all market situations, the cost control is a very critical factor in achieving our consistent profit growth targets. On top of that, we do acquisitions, and we will be investing in further products in Finnish and nearby markets. And that basically outlines our targets and strategy for the next 3-year period. I'll move on to the moderator, and let's see if we have questions to be answered.

Yes, we have some. The first question goes, is average annual adjusted EBIT growth of 25% during 2025 to 2028 calculated so that 2025 EBIT is the base level?

Yes, definitely. So basically, we are looking at 3-year annual average growth from 2025 revenue figures to the 2028 revenue -- our adjusted EBIT.

The next question goes, what's the impact of M&A on your financial targets?

We will be focusing on achieving roughly 10% to 15% M&A growth to the profit -- adjusted EBIT profit growth. That's not a clear target, but that's a rough guideline on where we focus on.

What kind of return on invested capital you are targeting when doing M&A?

We typically try to achieve roughly 15% to 25% return on invested capital. Typically, if we do more cash flow-based investments, we might have a bit of a different return on invested capital requirement. But typically, we want to be on the higher end of the 15% to 25% return.

Do you have any internal targets for free cash flow conversion from adjusted EBIT?

We've historically been somewhere around almost 100%. We've been at some points during the last strategic period, around 75% to 85%, but we aim to get that quite close to 100%. We do not have at the moment a clear target for that, but around there.

What are the key risks that you would not be able to achieve your financial target?

The most -- two most important things are basically achieving our sales objectives and achieving the organic growth target. The second point is to achieve the M&A acquisition targets. So those two provide the biggest numbers. Of course, there's -- another threat is customer churn, which, of course, if we don't -- wouldn't be able to keep the customer base that we now have that, that would be a huge risk. But that's also, of course, something that we've always put a lot of emphasis on. But basically achieving a good market position and growing that with our sales activities is the most important target.

Consolidation in Nordic ERP software markets has increased in recent years. Why target companies want to join Lemonsoft family?

Good question. If you look at the options of smaller software companies and the founders, they typically have a few options. If they want to grow fast, they would go for additional financing maybe from a venture capital company or angel investors or something like that. If they want to sell the whole business, they have private equity investors, they have some strategic buyers. But looking at the core markets that we are active in, if you look at industrial manufacturing, wholesale focused players that are not growing, let's say, 100% a year, but somewhere around 10% to 30% a year and want to accelerate that growth while maintaining some type of independence and getting support from admin functions, information security functions and so on, we can provide a perfect home for that type of businesses.

Has the increased M&A competition affected valuation levels of target companies?

Well, I think I've answered this question in the past 4 years with pretty much the same words. We have quite a structured view on how we evaluate companies and that has quite little to do with the current market feelings or situation. So basically, we target the same type of companies with the same type of valuation targets. And from the founder or seller point of view, there -- at some point, there has been, of course, somewhat inflated expectations. But from our point of view, the situation has remained pretty much the same. There are a few competitors that pay quite high prices from different reasons, but we want to be quite disciplined.

Any plans for international expansion during the strategy period?

Yes. As you noted, probably from the presentation, we don't have a clear international expansion target. We are constantly and during the previous strategy period, we also evaluated a lot of opportunities in the nearby markets, and we'll continue to do that. But we haven't set a definite target on how much we want to expand internationally.

Any updates on capital allocation priorities?

The first priority is, of course, finding operative and inorganic investment targets for our capital. That's the main objective. Basically from the point of view of investing large amount of capital, the main priority is acquisitions. Secondly, if we don't see good enough targets at a specific point in time, we will then use other options on our playbook, which basically are dividends and share buybacks.

Are you seeing any signs of improvement in your markets?

The markets have been for, let's say, 12 months' time, they've been looking at -- looking like they've been showing a short or, let's say, small improvement from a negative to neutral and then towards positive outcome. But changing from the neutral situation to the positive one has been slower than we've expected. And during the fall of '25, we've seen some fluctuating development. We see some signs of improvement. We haven't seen the full results yet, but we see positive signals from the market and our customers. Many of our customers have, let's say, a 6 to 12 months positive outline. So some signs, yes.