Cyviz AS (CYVIZ) Earnings Call Transcript & Summary

Hi, and welcome to the second quarter earnings call for Cyviz. My name is Espen Gylvik. And with me, I have the company's CFO, Karl Peter, and we will take you through today's agenda. So we're going through go to Q2 in a brief, some sort of, like, aggregated view from 2020. That's the time when we went public to 2025. Some of the business highlights within the quarter, the Q2 and H1 financials. And I think we agreed today to also do a short recap on the strategic priorities that we presented at the Capital Markets Day. I think it's a good opportunity for us to give some sort of directional guidance on where we are and where we're heading and are we on track? And then just summarize with the outlook and then at the end of the day, do the Q&A. So hopefully, there's a lot of good questions, and we are more than happy to respond to that. So let's move on. So second quarter was, I would say, a soft quarter in a sense, not necessarily because the underlying business was underperforming, rather the contrary, but more due to the impact on timing on some significant large deals, in particular, in the U.S. market that was planned to come early June that we now have signed in August. And they've had a significant impact on largely all the financial KPIs. So as you can see, the revenue ends at NOK 129 million, which is down NOK 10 million compared to similar quarter last year. Gross profit, still quite good with a good gross margin of 53%, partly also because the mix of what was delivered and recognized as revenue in the quarter had higher margins, again, back to some large projects slide into the third quarter. EBITDA of minus NOK 2.6 million, which is down NOK 4.8 million versus last year. And the order intake or booking ended at NOK 123 million, which is NOK 32 million down compared to last year. So again, quite soft quarter.

And Espen mentioned, those large deals, which were in final stages of negotiations at the end of the quarter, which were closed in August. Those also affects the 12-month rolling development on order intake, which ended at NOK 609 million, which is a decrease of 10%. We'll get back shortly to what it looks like as of yesterday, which is significantly different. Gross profit, different story, continued to increase, NOK 315 million, up 10% on last year related to the gross margin Espen just mentioned. I'll also get back to that later. And then lastly, EBITDA on a 12-month rolling basis continues to increase and landed at NOK 28 million, which is an increase of 32% on last year.

Yes. So just a side comment on that. I think we gave a guidance when we went public around 30% CAGR year-over-year. And I think despite those significant deals moving into the third quarter, we are ballpark around the target we set with 30% CAGR on order intake, a little bit on the revenue side and quite close on the gross profit side. So looking at it in a larger type of scheme of things, the underlying business still performed well. But since a significant part of our business still are project driven, we are somewhat impacted of when the large significant deals end, if they end inside a quarter that is planned or if it's for certain reasons, slide over to the following quarter.

And this holds for both order intake and also revenue recognition for both. And this quarter is kind of affected in multiple ways by that.

Right.

We mentioned those deals, so we thought it relevant to break it down and show you the total picture. And as of yesterday, the company had a year-to-date order intake of NOK 399 million. That's 10% up from the same date last year and is also an all-time high for this time of year for the company. That takes the backlog to more than NOK 400 million compared to the NOK 281 million at quarter end. So the differences here are major, and that's why we're focusing so much on after quarter end events. Order intake by brand, year-to-date, as you can see, it's quite well diversified, both in terms of geographical regions and also in terms of the different verticals, and you will dive into the different verticals in a minute. So as Espen was saying, the underlying business is performing well. Q2 for multiple reasons came out financially on the softer side. Gross margin, you touched upon it, affected this quarter by timing of large projects and how the revenue recognition happens. And then also the order intake exacerbates the margin picture. So there is an underlying positive margin drift, which is driven by larger projects, economies of scale and so forth and also more recurring revenue. We'll talk a bit more about the recurring revenue also later. But it is worth mentioning that the gross margin is elevated and has been for quite some quarters for accounting particularities. So we do expect some reversal in the second half, but the underlying trend is still on the positive side.

Yes. Let's look at some of the business highlights. As Peter mentioned, I think one of the things that has been important for us over the last years is to really diversify the portfolio, both regionally, vertically and solution-wise. And I think this quarter as literally the last 6, 7 quarters are good evidence that we are still capable of attracting inside new verticals, but also balancing in between verticals and regions. If there are incidents or certain things happening inside regions for different reasons, we now have a much better base to like balance any unforeseen type of incidents. If it happens in U.S. driven by unpredictability related to tariffs or whatever or the war in Gaza that has sometimes impact on certain deliveries in the region of Middle East, we now have that flexibility and that type of opportunity to balance. And Q2, as most of the last quarters is a good mix of continue to sell to existing clients, which is a sentiment and an evidence that what we deliver is really, really good and appreciated by customers and provide the value they pay for, but also the ability to go out and attract new clients and new logos to enhance the base that we are working on. And it's a mix of control rooms, operation centers, some software-driven sales and advanced meeting rooms across actually all the regions. Europe, in particular, quite significant in the quarter, largely driven by both, again, new opportunities with Aker BP, but also now we start to see a traction inside the defense space. And we talked about that a little bit in the Q1 earnings call. The defense sector with the increase in budgets across NATO countries in Europe is starting to pick up. The interest is increasing significantly. And I think, as a company, we are probably better positioned both on the technology side, the security side related to our technology and also the new certifications that we have regarding framework for going directly after NATO business is good indications for a positive projection of future growth inside that vertical in Europe, in particular.

I mentioned here that we have now, for the first time, split out defense separately. If you look at the pie chart to the left, it used to be government and defense, and we now split those 2. And if you combine them, you see a substantial growth compared to previous periods, which is driven by defense. So a lot of defense traction, both in the pipeline and also closed orders.

Yes. And as you can see, the energy sector still continue to have a significant portion of the business. And I think we, at least, internally see that defense and energy are probably the 2 most significant verticals for growth for the next 2, 3 years as well inside our industry. Okay. Let's move into more data-driven financials.

Yes. So we've touched upon it quite a lot. It's a quarter which is affected by both the timing of revenue recognition and also by the orders that came in, in August. So I'll be quite brief. Revenues year-on-year down 7.1%. 12-month rolling trend, quite the opposite with an increase of 15% compared to the same period last year. Gross profit stable, kind of again relates to projects and slightly elevated margins. So even though revenues were down, gross margin unchanged. EBITDA down NOK 4.8 million compared to the same period last year for the quarter, 12-month rolling basis to the contrary, up 32%. And then bookings, which we talked a lot about, so I'll just skip going into the details there. Half year results on the revenue side, up 8% gross profit, again, stable compared to the same period last year, with a decline on the EBITDA side of NOK 8.7 million related to the same things that we've talked about and Q2 is the primary driver. And then lastly, bookings, again, down 5% compared to the same period last year, driven solely by the Q2 performance. Operating cash flow, we achieved a positive operating cash flow in the quarter of plus NOK 3.6 million, driven by improved collection efforts and particularly letters of credits in more challenging regions. So we're able to recuperate funds on time, and that offset the operating loss completely. And then for the quarter, I won't go into details as we covered this in Q1, but it looks a bit different, but trending in the right direction.

Okay. So let's see if we can spend some minutes around, I mean, the half year recap and relate that to the Capital Markets Day and our full year strategic plan. So this is just like a picture that -- I mean, some of you have seen before. We spent significant time on that during the Capital Markets Day. I think the left side of the picture is just like a visual indication on the components that sums up what we do as a company and what we deliver to clients. And the inner circle is the gross margin share today, and the other larger circle is the expected gross market share inside those categories when we reach 2030 depending on delivering on, of course, the strategy we have carved out and that we are delivering the operational part of it. But the essence here is just related to the 2 new business lines. We have 27 years of legacy, fantastic technology, incredibly happy customers across 84 countries at current state. I think an essence of what we are doing is to capitalize on that legacy and that technology. And finally, allowing partners to take Cyviz's core technology, which contains the video processor, the operating systems and the software and the controller and of course, now the new software platform and give them the opportunity to take that and go out and attract new customers and build Cyviz solutions without Cyviz involvement. So it's an important strategic part of our scale-up, the ability to reach out to a lot more customers with way less cost and risk, paired up with what we anticipate and plan to do on our new software platform, which is going to be a very, very partner-driven play and the key element of the subscription revenue growth for the company going forward. And those 2 things paired up is literally the essence of why we are confident and also talking about driving improved profitability and also improved share of recurring revenue going forward.

And stability in earnings?

Of course, yes. So it helps also build a much more predictable business model than we have today when 98% is project driven and quite unpredictable. Okay. And the uniqueness, I think I touched upon it when I talked about the first slide, but we have an in-house developed software component and a hardware component. I think the beauty of it, if you can talk about it in that sense, is that Aker BP uses Cyviz technology to like literally modernize and run their business across control rooms, operation centers, drilling, production, this and that, the same building blocks, the same technology without any change whatsoever is used by Microsoft to run the technology centers. The only difference is how the customer and we configure the setup for the user experience and the user purpose. So it gives us competitive benefits of being able to enable existing technology across any type of use case, any type of vertical without adding a lot of manual work related to like config and coding and adjusting to the solutions. Hence, also why we scale faster, we can deliver faster, more reliable and also collect better margins on the projects we do than anyone we compete with. So it is a scalable model that we are now also allowing partners to go out and sell to their customers.

And it's good for the customers as well. One thing is the scalability for us as a company, but for the customers, it's quicker to do changes and also do the install. So it's good for customers, it's good for us.

Yes. And any type of new service or solution or application we built or function we built, we can share that with any customer across the world.

Exactly.

Through the web without having to send people out and do physical install on site.

And amendments can be done remotely to a large extent as well, contrary to sending install.

Yes. Okay. Let's look at the growth priorities.

Yes. And this is a slide which is a recap from the Capital Markets Day, but it shows how we predict things will change over time. So the blue -- dark blue color on the board, that's called the base, that's the turnkey business, which we're running today. And then gradually, more and more revenue and contribution margin will come from the new product lines. And the essence of this slide is that by 2030, we expect more than half of the company's contribution margin to come from new product lines, will increase margins, more recurring revenue, more stable earnings. But as you can see, it takes time to build. So 2025 is kind of building the fundament. This is where we are building a partner ecosystem. This is where we're doing the final kind of fine-tuning on the product according to what feedback we're getting. And then commercialization is happening essentially this half of the year with a building pipeline and then converting it over to orders and deliveries in 2026. So a bit of a status. We are, I'd say, well ahead on both the Cyviz core technology, that's the hardware component and also the software management platform. So currently, we have 11 partners signed for the Cyviz Core technology. The full year target internally for 2025 was 6, developing well. We now have 3 tailored packages, small, medium and large for different solutions. And we're actively building pipeline, and it's looking fairly well, I'd say. So...

Just to add to that, I think, what we experience is quite positive response when we are out talking to like partners, potential partners. So I would guess that we, at the end of this year, would have a partner portfolio on the core technology kit anywhere close to 20 with an ambition when the year started at 6. So I think that builds a solid fundament for the scale-up and the type of sale of those type of kits going into 2026.

And software management platform, likewise, we have 24 partners signed. Full year target was 15. And we are in advanced negotiations with an additional 10 more partners, late trials there. And so I'd say the incoming interest is a lot stronger than we anticipated. And we also have converted 7 end customers into our cloud solution with even more pending and some of the large global corporates that we have as existing customers are moving their entire solution to our cloud, which we're very happy about.

Yes. And I think when we get to the earnings call for the third quarter, I do anticipate and hope that we can talk a lot more about, I mean, customers migrating over to our cloud platform and also some of the significant large global customers that have signed and started to use that and the type of referral that comes with it.

I think also it's worth mentioning that the map on the right-hand side in terms of the software management platform where you can see that the partners are well distributed between regions. So it's not only kind of European interest or U.S. interest, but it's kind of split between the Atlantic, which I think is great.

Okay. Let's see. So I think to summarize what we have talked about, second quarter, slightly on the soft side. But again, as we explained and probably people have seen since we have done, I mean, announcements of deals, significant deals over the last weeks. I think when we get to the Q3 earnings call and present the Q3 numbers, we would be well aligned with, I mean, the full year target of this year. So you just balance Q2 and Q3. The pipeline is there. I mean, we have closed close to NOK 200 million already within Q3. So quite confident that we will be on track, balancing Q2 with Q3. This is good or bad. I mean, the living of doing project-based business. The partner ecosystem is building for our core tech business going forward faster and better than we anticipated, which is good. The same with the software platform. And I think the key essence for future success when it comes to predictability, improved margins and profitability and reaching the 25% type of recurring share of our business is largely driven by the core tech kit sold through partners and partners taking the new software platform out in the marketplace. And we are quite happy and positive as of today on the traction on that. And we are continuing to build new applications and new plug-ins on the platform as well, opening up an even larger marketplace for the platform going forward. So overall, a quarter as expected, soft because of deals moving into Q3, the majority of them already signed. We will activate those deals within 2025. So the majority of those bookings that came now in August will turn into revenue and profitability during the year. And of course, as we have talked about for 6 months now, the defense sector inside Europe is going to be critical, but also fantastic for future growth for the company and especially for our European type of region that is now engaging with multiple countries and multiple divisions inside the different branches of defense, to provide, I mean, the best-of-breed control rooms and operation centers, either fixed on site or as one of the few companies on the planet in a mobile container. So we are still confident, quite positive. Q2 doesn't change anything, and we are looking forward to present a fantastic Q3 when we get there. And with that, I think we open up for questions.