Redeye states that topline and gross margin was somewhat better than it expected but that the cost base was somewhat higher. Nepa is however taking firm actions toward lowering its cost base beyond what has previously been announced - and has recruited a new COO, specialized in change management and efficiency improvement, who will be crucial to this. 

Net sales can be divided into two different ways: by revenue type and by segment. Regarding revenue type, around two-thirds of revenues are recurring, and the remaining third is ad-hoc consulting. Nepa has three segments: Marketing Optimization (MO) constitutes around 85% of revenues, whereas Customer Experience (CX) accounts for c10%, and Innovation Acceleration (IA) accounts for c5%.

Recurring revenues amounted to SEK44.8m (+1% y/y) and accounted for 60% of sales in the quarter. Annual recurring revenues (ARR) amounted to SEK174.3m, up 3.3% from Q1. Ad-hoc revenues amounted to SEK30.4m (-28% y/y) and accounted for 40% of sales in the quarter.

Management stated that it will focus on increasing its subscription revenue, and that this increase will be seen from next year already. Nepa states that the strong retention in its subscriptions, and its growing pipeline from its added sales efforts will be the building blocks for next year's ARR growth. Nepa states that churn could hold back, but that the product has proven resilient in tough times before.

Marketing Optimization (MO) accounts for almost all revenues and is also the segment that Nepa is actively trying to grow. MO sales amounted to SEK64.1m (-9% y/y) and accounted for 85% of sales in the quarter.

Innovation Acceleration revenues amounted to SEK3.0m, compared to SEK7.0m in the same quarter last year. Customer Experience revenues amounted to SEK6.6m, in line with last year.

Gross margin landed on 74%, which can be compared to 76% for full-year 2022 and 73% in last quarter. As a general rule, ad-hoc revenues have a higher gross margin than recurring revenues due to costs for consultants not being included in COGS.

Total cost base (excl. costs for cost-savings program) was SEK62.5m, vs estimated SEK58.5m (SEK56.9m OPEX vs est. 51.8m, and 5.6m CAPEX vs est. SEK6.7). As such, OPEX was higher than expected, whereas CAPEX was somewhat lower than we guessed. One-off costs of SEK6.9m from the restructuring program was taken in the quarter.

As communicated, the company is taking actions to reduce the annualized cost base to a maximum of SEK220m by Q4. Nepa states that it is on track to reach this target. Nepa also states that it is taking further actions to reduce costs - that go beyond the SEK220m cost base.

Anders Dahl has been appointed new COO. He is specialized in change management and efficiency improvement - and will be crucial to the ongoing cost-savings initiative.

EBIT landed on SEK -9.7m, and SEK -2.9m excluding for costs related to the restructuring program. We assess that profitability should improve from Q3 and onwards.

Nepa states that the trend has continued into July with reduced ad-hoc sales to non-subscription clients. However, the CEO appeared positive about upcoming growth in subsription revenue - both in the coming quarters and next year.

Due to the quarter's restructuring program, operating cash flow excl. changes in working capital was SEK -6.6m, and SEK0.3m excluding the extraordinary costs. Adding CAPEX of SEK5.6m and the underlying cash flow from continued operations was SEK -5.3m. After Q2, the company has SEK45m in net cash.

Redeye has talked to Nepa’s new CEO, new Chairman, and its second largest shareholder about where Nepa is today and what needs to be done to turn the company into black figures. Redeye believes a major change of mindset has taken place behind the scenes, and that the chances look good to once again post double-digit EBIT margins already next year.

Nepa has during the last year been punished financially by a rising cost base, combined with shrinking ad-hoc revenues. From having posted a solid 14% EBIT margin in 2021, and similar cash flow margin, the company has the last three quarters posted negative cash flow.

It is clear that Nepa, supported by its second largest shareholder, hedge fund Elementa Management, has taken firm action. In the last month, the company has changed its CEO and replaced large parts of the board of directors. We argue that the new board appears more skilled than the previous one and is much more suited to help Nepa get back on its feet – and help it to reach even further.

We have discussed the company’s current status, and its future with the new CEO, the new Chairman, and with Elementa. Our key takeaway is that the company now has both the skill and the commitment to cut costs, deliver better profitability in each project, and once again turn Nepa into a profitable and growing company. Below, we share our insights from each dialogue.

Ferry Wolswinkel was appointed Chief Revenue Officer (CRO) in September last year and has now been appointed interim CEO. He comes from a background of various commercial roles from e.g. Gartner, HP, Market Logic, and latest from Steetbees where he was VP Sales. Ferry chose to join Nepa because he was intrigued by the company’s strong history of growth despite never having had an active sales organization.

Wolswinkel understands that there is a need of a cultural shift towards becoming prouder of the company’s strong client list and use this in new sales, as well as generally becoming more aggressive in sales. He also acknowledges the need to change the sales approach as the company is pivoting from selling consulting to a platform at its core. The new CEO aims to make the organization more performance and data driven than before. For this, a global KPI framework is being constructed.

Regarding the cost base, Wolswinkel is determined to lower this to become profitable while still growing the business. Partly, this will be done be streamlining management layers. Also, he will re-focus the company’s product development on nearer-term product development that can generate revenues soon, rather than several years out. We believe this implies some cost cutting within product development. At the same time, he wants to strengthen the sales team.

Wolswinkel states that returning to profitability is his number one priority at this point. In the Q2 conference call, he stated that two ways Nepa will work to improve organizational efficiency are:

We think highly of the second point, and believe it will be key for Nepa to be able to continue growing while reaching a higher baseline profitability.

Nevertheless, he thinks maintaining a growth focus is important, and states that there has previously been a lack of focus on subscription revenue – something that is now taken care of.

Regarding the weak market climate, Wolswinkel acknowledges that some industries are hit harder than others, and that Nepa should reach out for the ones that have not been damaged. The right size of prospective clients is important in order to shorten sales cycles. In the short term, mid-sized companies constitute a sweet spot because they tend not to have an existing solution yet. Mid-term, the focus is on the UK, where there is plenty of room to grow.

Wolswinkel recognizes that Nepa’s brand tracker is a strong product in itself with a few important USPs on its own. However, he acknowledges the fact that new clients do not buy Nepa’s brand tracker mainly because of its features, but because of the services around the platform. Hence, he puts much emphasis on the brand tracker not being something that should be sold as a pure SaaS offering, but as a whole package including the knowledge of what to do with the insights. This is in line with the way Elementa views the business.

The interim CEO also pushes on the need for the right packaging and pricing. Pricing should be overlooked for all products, both subscriptions and consulting. Also, he aims for more streamlined packaging of the products – not customizing delivery. He emphasizes to create offerings by looking at what the clients as a group wants, rather than what Nepa can offer. Wolswinkel thinks this will increase the average deal size.

Dan Foreman was previously on Nepa’s board of directors but has now stepped in as Chairman. He is a former President of ESOMAR (2013-2014) –  a prominent business community with more than 100,000 members of insights and analytics. Additionally, he has vast experience in data, technology, marketing, social media, and research businesses.

When we spoke to Mr. Foreman, he was clear that there were four main topics to deal with: 1) cost control, 2) reversing revenue fortune for MO, 3) turnaround to profitability, 4) finding a new permanent CEO.

Strict cost control is of highest priority. Mr. Foreman emphasizes the importance of the new board members Adam Lytle and Carl-Fredrik Meijer. Lytle has a long history in private equity and today mainly works as an investor. Meijer is the CFO of Green Landscaping Group, a Sweden-based niche serial acquirer – with an impressive history of both growth and profitability.

Mr. Foreman thinks the communicated SEK220m annual cost base should be reached earlier than Q4 as communicated. Also, we got the impression of Mr. Foreman not being fully satisfied with a cost base of SEK220m, but that it should ideally go even lower - something that was confirmed in the Q2 report.

Just as the interim CEO, Mr. Foreman speaks about Nepa’s strong client list. Partly, he states that Nepa needs to start communicating this – and that Nepa should think globally. This is where the new board member, Fredrik Beltzer, comes in with relevant experience. Beltzer has been driving internationalization through marketing at Tele2, Swedish Match, and currently at Volt. Beltzer has in previous roles been purchasing Nepa’s brand tracker and has thus the customer’s perspective of Nepa’s main product.

Apart from saying that Nepa needs to start communicating its impressive client names, he also thinks several large clients pay too little for Nepa’s services. He emphasizes the need to expand the number of markets per customer.

Additionally, he states several underutilized relationships within the company, and using these relationships is prioritized. He also thinks there is significant potential for upselling, and that a cultural change is needed.

Finally, Mr. Foreman emphasizes the need for better packaging of Nepa’s value proposition. He believes Nepa should not be a pure SaaS company, but neither a pure consulting company. Instead, a blend with a SaaS-based platform at the bottom with consulting on top as an add-on is the way to go. Thus, subscription revenues should form the foundation of Nepa’s revenue base. Mr. Foreman believes the consulting on top, in which Nepa communicates its expertise, is a core part of what sets Nepa apart from its competition. Last, Mr. Foreman thinks the marketing message needs to be improved with a healthy repositioning, resulting in a value proposition that is more straightforward to explain.

This bucket may sound like the same as the first bucket. However, Mr. Foreman puts it in a separate bucket because cost control is direct, but revenue takes time. He emphasizes ensuring that any short-term projects or subscriptions must be profitable. As such, this bucket is not about general OPEX cuts, but rather ensuring sound profitability in all things being sold, whether this is a subscription or consulting project. Once again, the recruitment of Carl-Fredrik Meijer into the board of directors is likely to be a great fit for this.

The fourth bucket is about finding a new permanent CEO. The current interim CEO, previous Chief Revenue Officer Ferry Wolswinkel, could be a good candidate for the role, Mr. Foreman thinks. Thus, in parallel with looking for external candidates, Mr. Wolswinkel is currently being evaluated in the way he can balance growth and profitability. The objectives are clear; profitability must be ensured shortly, but without letting go of mid- and long-term growth ambitions.

The second largest shareholder in Nepa, with 16% of the outstanding number of shares, is Elementa Management. We have met several times with Elementa and our impression is that Elementa is a very rational actor. It is not interested in lofty promises about enormous potential far out in the future but instead focuses on what creates value here and now. A core part of this is not to think Nepa should become a pure SaaS company, but that the consulting on top will remain a core part of Nepa’s value proposition. This view is precisely what we think Nepa needs, and our impression is that Elementa’s firmness on this somewhat clinched with previous CEO (and still principal owner), Ulrich Boyer’s way of running Nepa.

Elementa has been the driving force behind the well-needed changes in Nepa’s board of directors – and we believe the new board is aligned with Elementa’s philosophy. Elementa states that the new board is looking to maximize shareholder value, and not charge hefty fees for just sitting on the board passively. Elementa believes the new board and management team have the right competence for what is needed – and that it is time to deliver results. With this said, Elementa firmly believes Nepa will move where it earns the most money with reasonable risk-taking.

With a new board of directors and an interim CEO in place, we think Nepa has taken action to turn the company’s negative trajectory around. To summarize where we think Nepa is aiming to ensure profitability shortly – and that profitability should not depend on a few large ad-hoc projects. Also, the company is looking to ensure profitability in each new project and subscription being sold. With this in place, we think the company aims to reach some kind of “minimum profitability” of c5% EBIT margin, and that baseline profitability should exceed 10% EBIT margin. With a sound baseline profitability in place, Nepa can then start developing its sales efforts. Here, an emphasis will be placed on upselling to existing clients (more markets) and using existing relationships to boost new subscription sales.