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Lemonsoft Oyj (LEMON) reported its Q4 2024 earnings, highlighting a challenging market environment that led to a notable 6.45% drop in its stock price. According to InvestingPro analysis, the company appears undervalued at current levels, with a GOOD overall financial health score. Despite strong recurring revenue and strategic acquisitions, the company’s profitability faced pressures, impacting investor sentiment.
Key Takeaways
- Recurring revenue remains robust at 82%, indicating strong customer retention.
- The stock price declined by 6.45% following the earnings announcement.
- The company completed significant migrations and acquisitions to enhance its market position.
- Adjusted EBIT decreased to 22.3% from 23%, reflecting profitability challenges.
- Market conditions remain challenging with low visibility into future trends.
Company Performance
Lemonsoft demonstrated resilience with a 9.7% growth in net sales, driven by a strong recurring revenue base. The company’s strategic focus on manufacturing, wholesale, and services markets has solidified its competitive position. However, profitability challenges have emerged, reflected in the reduced adjusted EBIT.
Financial Highlights
- Annual Revenue: €28.9 million
- Net Sales Growth: 9.7%
- Adjusted EBIT: 22.3%, down from 23%
- Recurring Revenue: 82%
- Annual Recurring Revenue (ARR): €20.6 million
- New Sales ARR Growth: 4.2%
Market Reaction
Following the earnings release, Lemonsoft’s stock price fell by 6.45%, closing at 6.2. This decline places it closer to its 52-week low of 5.6, with analyst targets ranging from 6.7 to 7.02 EUR. InvestingPro subscribers can access detailed Fair Value analysis and additional ProTips about the company’s moderate debt levels and profitability outlook.
Outlook & Guidance
For 2025, Lemonsoft anticipates net sales growth between 0% and 10%. The company expects technological changes to impact early 2025 profitability negatively but remains focused on improving organic growth and integrating recent acquisitions.
Executive Commentary
CEO Alper Ostermann expressed cautious optimism about market development, stating, "We are cautiously optimistic on how the market will develop." He also highlighted the strategic importance of completing the Azure migration by Q2 2025.
Risks and Challenges
- Market conditions remain challenging, with low visibility into future trends.
- Profitability pressures due to technological changes and market dynamics.
- The integration of acquired companies presents potential operational challenges.
- Employee satisfaction and organizational changes could impact productivity.
Q&A
During the earnings call, analysts focused on the company’s profitability challenges and AI development strategies. Lemonsoft’s management clarified its acquisition strategy, emphasizing bolt-on acquisitions to strengthen its market position.
Full transcript - Lemonsoft Oyj (LEMON) Q4 2024:
Alper Ostermann, CEO, Lemonsoft: Thank you, and welcome from my part as well to Lemonsoft’s twenty twenty four results presentation. My name is Alper Ostermann, and I’m the CEO of Lemonsoft. I jumped into the CEO position in September 2024 and before that I’ve spent a bit more than three years working on M and A and strategic development at Lemnosoft. We’ve had quite an eventful year in 2024. Our revenue grew to EUR 28,900,000.0 and our net sales growth was 9.7%.
Adjusted EBIT was 22.3%, reducing a bit from 23%. Personnel grew to two twenty eight employees from two zero eight the previous year and the most of that growth came from our two acquisitions, Spotela and Aperette. We’ve had a lot of changes during the year. First of all, our biggest change is the migration of data centers on which lemons softwares is run-in all the way to Azure, which is very crucial for our future development and has been we’ve been working on the migration for one point five years now and expect the completion to finalize in first half of twenty twenty five. We are quite far at the moment and looking to finalize everything soon.
We also did a transition to new e invoicing operator, which was successfully completed quite early at the later stage of 2024. Both of these changes we expect to have a positive effect on our profitability, our scalability, our service offering or how the service is run and how the customers are served. We also had a lot of changes in the management and organization. In addition to the CEO changes, which we actually had two during the year, We also had Thomas Koivisto joining the management team as Chief Commercial Officer in June and Jan Natangme as Chief Technology Officer in November. We also did other smaller structural changes and responsibility changes within the organization, the aim to make the organization more efficient and to provide more value to our customers, especially with regards to Thomas’ position.
He’s working on getting the group sales function to function as one team and to provide one unified solution to our customers. The two acquisitions we did in 2024 were a bit smaller than we’ve done before. Combined revenue was EUR 1,500,000.0 and EBIT EUR 300,000 roughly. Spotilla is a well suited addition to our manufacturing offering, which is our main focus area going forward or one of the main focus areas. And UpliRent expands our offering to rental management, which works quite well with our especially our transaction business and Aberrant has a wide ERP solution for that segment and has been working there for the past decade.
Looking at Q4, especially our net sales growth was very limited compared to our previous years and one of the main reasons is our consulting sales being significantly lower than earlier. One target we have is to increase the share of continuous income recurring revenue and that also has an effect in the consulting revenue in the future as well. Gross margin was a bit higher, 86% than the previous year. We’ve reduced the use of external services, which has an effect on that figure. Adjusted EBIT was 19.6%, which is of course a lot lower than what we typically target.
A few of the reasons or one of the major reasons is the Azure migration, which had a direct expense effect for the whole year and especially in the last quarter. And of course, also we had parallel expenses coming from the previous platform as well as the new one. So that both of those changes will affect also in Q1, but in a smaller scale. Recurring revenue grew to 82% and we expect that figure to grow going forward as well. Looking at the past five years, we’ve had a continuous growth in revenue ending close to SEK 30,000,000 the past year.
Adjusted EBIT came down a bit from SEK7.2 million in 2023 to 2024 figure at SEK6.4 million and that’s of course not the direction we want to go and we expect the changes we’ve done in the past six months and longer than that as well with the offshore migration, we expect the effects to be positive especially in the second half of twenty twenty five. Looking at the quarterly development in the last three years, one of the aspects you might consider is the higher revenue, especially in the last quarter of the year, each year. In 2024, the effect was more limited than in previous years we’ve had. Especially in 2023, we had a really good consulting sales quarter at the end of the year. And then going forward, we expect that difference to be lesser.
Looking at the market, we focus on manufacturing, wholesale and services market and especially the market in manufacturing has had quite a difficult year. ’twenty two was a really good year for many companies and especially ’twenty one, ’twenty two. And after that, we’ve had quite a ride in ’twenty three and going into ’twenty four as well, especially the beginning of ’twenty four was difficult, interest rates going higher, The market the labor market negotiations were tough in the beginning of 2024 and that had an effect on the whole demand supply situation. Going into the later part of 2024, the situation got better. We are still in a situation where we have pretty low visibility on how the situation will develop.
Of course, we expect the positive trend to continue, but we are sort of, I would say, cautiously optimistic on how the market will develop going forward. What we’ve been focusing operationally especially in the last quarter is to develop our sales operations. As I mentioned, our new Chief Commercial Officer has been focusing on getting all of our products to be sold as a unified proposition to especially manufacturing and wholesale customers and on the other hand as a horizontal offering with financial management solutions, HR solutions to a wide range of small and medium sized customers. We’ll be talking in Q1 more about the commercial approach we’ve taken and how we expect us to win new customers. From the group point of view, we’ve focused a lot on integrating the acquired businesses, both the two ones acquired last year and the ones acquired the 10 companies acquired before that.
We’ve nominated a person acting as Chief Operating Officer focusing purely on integrating subsidiaries, making sure that the processes we have in place for all companies combined and aligned with the KOK group’s overall vision. Cross selling initiatives have been increased. We are building or selling a broader solution and we are actually focusing one individual metric that we follow is the number of companies using more than two different software solutions that we offer. Customer implementations, we had quite a difficult situation after the summer or actually during the whole year of 2024. We made a lot of effort at the end of the year to improve the resource capacity in that specific function.
We addressed the challenges that we’ve had before and we made some individual changes in the responsibilities of the management of that function. And now we have a really much better solution situation. We’ve had the capacity restored a few more resources in the function and we expect customer satisfaction to improve going forward. Technology transitions are discussed a few times before. We expect the Azure migration to finalize at the latest Q2 twenty five and in Azure operation to provide a better service quality for our customers in the future.
As you probably know, we had a ransomware attack basically two years ago in twenty twenty four spring. After that, we’ve hired information security managers. We’ve put a lot of effort into getting our information security level, but much better than it’s been before. And we’ve also made a lot of effort in the management team and with the key individuals within the organization to regularly practice situations that might happen regarding information security risks. And we are very confident that the work we’ve done provides us a very good position to react in any case in the future.
We’ve also initiated a capital efficiency program focusing on share buybacks and the objective is to improve our capital efficiency and earnings per share and that has been going on since November and it’s been developing well. Looking at the acquisitions we did in 2024, Spotilla is one of the market leading solutions for maintenance, field service after sales management and it’s a really easy solution to take into use, easy, very intuitive solution to use Around 200 small and medium sized customers, especially in industrial manufacturing, use Spotilla’s software and services and that has a really good effect on our market position within that segment. The company is around EUR 1,000,000 in revenue at the moment, is growing well and has a positive cash flow and EBIT position. Aplirant is focusing on rental and fleet management and has a customer base in construction, manufacturing and wholesale segments. Around 100 customers, a bit more a bit bigger customers on average size than Spotilla.
Companies quite the same size as Spotilla grows a bit more sort of slower but steady and EBIT profitability is very good for that size of business. And then let’s move on to detailed financials. If we look at our revenue distribution in the past few years, we’ve had an increase in especially in transaction revenue, which is due to the acquisition of Finvoicer in the middle of twenty twenty three and that also brought some revenue increase in transactions in 2024. Consulting revenue has grown also in 2023, but due to the focus that we have right now, it’s going a bit down and we expect that trend to continue. Organic SaaS metrics, churn has grown a bit before in 2023 up to 5.4%, which is the highest we’ve had on an annual basis in the past years.
And during 2024, churn went down a bit to 4.4%, which is a good direction and that hasn’t been bit of alarmingly high at any time. Net revenue retention is on the other hand, it’s on level that we are not at all satisfied with, especially upsells, downsells and downsells within our current customer base that needs to improve. We are focusing on getting our current customer sales processes in place and we’ve actually at the end of the year, we moved the current customer care and sales function from customer care to under the sales function, which we expect to have a positive effect on that. Good. And then let’s look at the ARR development in more detail.
We had annual recurring revenue at the end of twenty twenty three at €20,600,000 New sales was 4.2%, which is of course a lot lower than we expect it to be going forward. Down sell and up sell, as you can see, it’s on a positive side, but it’s still very low and down sell has been or let’s say our customers have been reducing the use of our software in the difficult times in the market and upsell has been limited. And now we expect that to improve in on both sides. Cern, I’ve discussed quite a bit and we expect that we expect the Q1, Q2 situation still be not that positive since we have a lot of changes going on, but that we expect the churn to remain fairly limited. We had 6.7% growth from M and A, Spokylana plant acquisitions and that goes to from a revenue side that brings some revenue to 25% as well.
And then on the expense side, no significant changes, but something that we could take a look at the employee benefit expenses, so personnel expenses has been going up, which is a direction that we want to change and that figure is now close to 50% and we expect that to go down at least at the end of twenty twenty five. The other operating expenses has been higher than before at 13.4 in Q4 and that figure has a lot of expenses from the Azure migration and the parallel expenses with the previous and the new platform. From a personnel side, we’ve grown to two twenty eight people. The organization is currently at the size of the organization is currently at the level that we are satisfied with and we don’t expect a need to significantly increase the number of employees. We’ll invest in increasing the number of sales employees especially and make some other smaller changes but nothing drastic.
From a management point of view, I discussed the changes that we did at the end of last year. We also changed the roles in the product management organization. So Karajok Helantri, the founder of the company, moved from product development to manage the product management function. So basically driving the direction that we want to develop the whole product suite that we have. And Jan Natami joined the management team and he leads the product development function and his main objective is to increase the efficiency and quality of launching new products and further developing our product portfolio.
We’ve had difficulties in the speed that we have to bring new products into the market and to develop existing products to lead in the market. And both of those problems, we expect NANDANA and KALI to be well suited to fix and they are in full speed at the moment. As I mentioned, we also strengthened resources and clarified responsibilities within customer implementation and we also combined the two functions of implementations and customer care and we want those two functions to act better in Unison. Good. I think we are fine with the organization.
And then going into the year 2025, we have a fairly cautious outlook on growth, Net sales growth from 0% to 10%, which is we expect the organic growth to improve, but we don’t we are still looking at the growth outlook from a current situation point of view. And as far as we don’t see significant changes at the current state, which we at the moment have a lot of changes going on still. We don’t expect to guide a strong growth momentum yet. And also the market uncertainty is quite high at the moment. Still, we expect positive trends to continue, but as you all know, the market situation, especially from a wide geopolitical point of view is quite uncertain.
As I mentioned a few times, the technological changes will affect profitability negatively during early twenty twenty five and after that it should have a positive effect. Then looking at the IR point of view, we will publish our annual report during week 12. We’ll have our annual general meeting in April 25 and the interim reports will be published pretty much the same schedule as previous years in April, August and then in October. Good. And then I would like to give the mic to Jan.
Sene/Sandeep, Moderator/Analyst Relations, Lemonsoft: Key five on your telephone keypad or use the raise hand function in the web browser. For the moment we don’t have any questions on the lines but we do have a few questions in the chat from Apte Ricola of Inderes. First question, your organic growth in 2023 and 2024 has been slightly negative. How do you assess this development in relation to your overall market and competitors?
Alper Ostermann, CEO, Lemonsoft: Yes. Thanks, Sandeep. Our overall market position is fairly good if you look at it from manufacturing wholesale point of view. We win the right kind of customers and we lose very limited amount of the same type of customers. In some aspects, if you look at our one of some of the companies that we’ve acquired, we’ve had some changes in the management of those companies and some of the companies have experienced higher churn that we’d like to see in this point in time.
But we have invested in sales and customer care functions in all of those subsidiaries and we expect the trend to change going forward. We’ve also invested in customer care within Lemonsoft and that should have a better effect on customer satisfaction. And when we get the product development, the Azure migration, product development up to speed and all the changes back, I expect the situation to improve.
Sene/Sandeep, Moderator/Analyst Relations, Lemonsoft: Okay. Thank you. Next (LON:NXT) one, could you open up the profitability impact of Azul migration this year after the project is done and the old platform is shut down?
Alper Ostermann, CEO, Lemonsoft: Yes. So this year the costs for direct costs have been around EUR 500,000.0 and then we have had an effect from the parallel use of both platforms around EUR 100,000 to EUR €200,000 After the old platform is shut down, which should happen sort of it goes gradually down, but should happen in February, March, we expect the costs of the parallel years to go down close to zero from current of to per month.
Sene/Sandeep, Moderator/Analyst Relations, Lemonsoft: Okay. Thank you. Then next up, you are basically guiding flat or slightly decreasing profitability for this year with guidance midpoint. What is burdening profitability this year?
Alper Ostermann, CEO, Lemonsoft: So if you look at our overall profitability, how our profitability develops, it depends pretty much on organic growth. So if our organic growth is zero or negative, we will not have a positive profitability effect if we don’t reduce the number of employees significantly. At the moment, we are putting a lot of resources into the technological transitions. And before we finalize that and we get to focus on the development of the actual functionalities in our software, improving our organic growth drastically is not easy. So we expect those changes to finalize then we expect to be able to focus on selling new software solutions and selling to our current customers.
And then after that, we expect organic growth to improve and then have an effect on profitability. As I mentioned, we have quite a cautious guidance on both profitability and growth from this point of view.
Sene/Sandeep, Moderator/Analyst Relations, Lemonsoft: Thank you. Then still Aptereikola for interest continues. Lemonsoft’s profitability has decreased a lot after IPO and during that time announced over 40% EBIT margin target seems nowadays really high. What is your current ambition with profitability in midterm?
Alper Ostermann, CEO, Lemonsoft: Yeah. When we announced those targets back in 2021, the geopolitical economy or whole economy was quite in a different situation at that time. During the past three years, we’ve had difficulties, surprising difficulties, both in our own software development as well as information security as I mentioned. So all of these changes and of course the acquisitions we’ve made, 10 plus acquisitions in four years, have been a bit more difficult to manage from profitability point of view. So all of these changes have been have had a negative effect on our profitability and we expect that to turn around and we are working a lot on that.
And it, of course, depends on when we are able to do that. But we’ll provide an update on the long term and mid term financial targets later on.
Sene/Sandeep, Moderator/Analyst Relations, Lemonsoft: Thank you. Then there’s been lots of changes in Lemonsoft organization. How has employee satisfaction and attrition level developed during 2023, ’20 ’20 ’4?
Alper Ostermann, CEO, Lemonsoft: Yes, especially in 2023 and going into 2024. We had a lot of changes in our attrition level and a lot of changes in the management team and in the higher and upper management as well. And during the past three months and looking forward, my personal point of view is that the situation has stabilized the employee satisfaction we go through on a quarterly basis in detail and we talk to all the teams that we have and what issues they have and we’ve seen positive development from that point of view. But of course, that’s a continuous issue and we work on that heavily.
Sene/Sandeep, Moderator/Analyst Relations, Lemonsoft: Okay. Then about MFA, are you mainly looking for smaller bolt on acquisitions or are you still open for some bigger deals if the opportunity would be there?
Alper Ostermann, CEO, Lemonsoft: Yes. We’ve been focusing on bolt on acquisitions for the past four years. We always carefully analyze the market if there are bigger deals available and we’ve been participating in discussions regarding bigger deals as well and we’ll definitely consider those going forward as well.
Sene/Sandeep, Moderator/Analyst Relations, Lemonsoft: Okay. Then what is Lemonsoft’s view on AI and what kind of development projects do you have related to that?
Alper Ostermann, CEO, Lemonsoft: Yes, good question. We focus on using AI as a tool in our product development and we’ve actually in the past two months focused on getting all of our product development people to use the right tools at the right sort of from the right perspective to use the right tools. There are a lot of tools available at the moment and the number of tools improves and increases all the time and we have already seen a lot of good development in our own product development side. From a proposition point of view, we are piloting a few efforts that we want to bring into the market. We’ll discuss those more in detail.
I’d like not to sort of promise anything, but we are working with a few partners to develop AI solutions for our own internal use, but especially for our customers.
Sene/Sandeep, Moderator/Analyst Relations, Lemonsoft: Okay. And then about cross selling, is there some specific product combo that has been working well on that side?
Alper Ostermann, CEO, Lemonsoft: Yes. We actually follow on a monthly basis the number of customer companies using specific combos of our products. And one combo that has been working well for the past four years is Lemnosoft and Kela Corte combination. So there’s Lemnosoft’s ERP solution, could be manufacturing company, wholesale company that uses Lemosoft’s product management function or production function or warehouse management function and then combine that with financial management, HR and then time management solutions of Gallakorte, which is quite a good combo. Then we have FINAZILLA, which is a reporting budgeting solution and that works quite well with all of our products, especially LEMONSOFT, FINNOYSER and so on.
FINNOYSER provides a few different alternative propositions. They work on invoice lifecycle management and invoice financing and so on. And we built Finvoicer’s proposition basically and are building the financing option as well into Lemnosoft and that combination has been quite heavily taken into use by customers.
Sene/Sandeep, Moderator/Analyst Relations, Lemonsoft: Okay. That was the last question in the chat. So back to you, Alper, for closing comments.
Alper Ostermann, CEO, Lemonsoft: Thanks, Sene. We look forward to finalize all the development that we have ongoing in ’twenty five. And at the end of the year, we expect us to have a good market position, good product position and a lot more efficient processes within the organization. So looking forward to developing to the right direction. And thanks a lot for joining.
We’ll come back in the next Q1 report in April. Thanks a lot.
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