Huddly AS (HDLY) Earnings Call Transcript & Summary

Welcome to Huddly's Second Quarter Presentation 2024. My name is Rosa Stensen, and I am the newly appointed CEO of Huddly. Today, I have with me our CFO, Abhi Banik, and we are attending this video using our own technology, Huddly Crew, from our offices here in Oslo. To start with the highlights, for Q2, the results were revenue of NOK 39 million with gross margin of 39%, and we will come back to that later in this presentation. Sales through channels increased by 27% compared to the first quarter of the year and by 2% year-on-year. We have had a successful establishment of our New York sales hub, increasing the channel revenue in Americas by 25% year-on-year. We plan to scale that model further to Austin, Texas in the second half of this year. We are also proud to inform that a U.S. patent has been granted for Huddly Crew as an autonomous video conferencing system with virtual director assistance. And our cash balance at 30th of June this year was NOK 105 million. To support long-term growth for Huddly, we continue to keep focus on the following areas. Huddly will continue to lead with innovation and technology. And as presented last quarter, we will continue to strengthen our channel sales in addition to continue to maintain and build new relationships with strategic partners. By monetizing on our innovation and optimizing the supply chain, we aim to maintain the gross margin. And last but not least, strict cost control is still practice and will continue going forward. So let's recap on what Huddly's aiming to solve. Huddly's technology and products aim to solve real challenges within hybrid collaboration. As the workplaces converge more and more to hybrid work, the result is less effective and more frustrating collaboration and communication. And knowing that over 50% of human communication is nonverbal, a significant portion of that gets lost within today's technology, who misses out the essential social. Huddly's technology removes most of the pain points and makes hybrid collaboration efficient and much closer to physical meetings. So imagine having a live video production crew producing all of your meetings. Imagine that all of your meetings were produced like it was done by a world-class news agency. As you see here, this is what it would take with traditional technology. However, with our state-of-the-art AI technology, we, in Huddly, can now bring live production quality to all meeting rooms and have transformed this to this. With our Microsoft Teams certified Huddly Crew platform, where the Huddly AI director runs on the actual devices, we bring live video production quality to your meetings, as you see coming from this room we are in. The Huddly AI director communicates between the devices by network connection, resulting in a socially intelligent cameras who brings social and nonverbal communication back to the hybrid workplace. The Huddly Crew platform is a scalable, flexible, and plug-and-play solution that brings live video production into every meeting room. As the AI director is trained on people and not on fixed scenarios, the AI director is highly flexible and robust. You simply just add more cameras to the platform and off you go, no configuration required. We are, therefore, extremely proud to announce that we now have support for up to 5 cameras on the Huddly Crew platform. And it doesn't really stop there. The platform is very scalable. By adding more cameras, it adds more compute to the room, allowing the platform to scale even beyond the traditional meeting room experience. One example of the strength of the Huddly Crew flexibility is a user story from our clients at Lafayette College. Lafayette College have taken the Huddly Crew and put it into a test when installed in their podcasting studio on campus. The test discovery was described by Lafayette as a game changer, and it feels like someone is doing it by hand when they described the experience. With Huddly Crew, Lafayette College has now the ability to take content creation to the next level in a very cost-effective way. So if you're curious to learn more about the user story from Lafayette, you can find that great story on our web page. Huddly's groundbreaking AI technology is extensively protected by 14 patent families. As of July this year, a U.S. patent was granted for Huddly Crew as an autonomous video conferencing system with virtual director assistance, which confirms the innovation capabilities and the uniqueness of the AI-directed multi-camera technology developed by us in Huddly. And with that, we go over to the second focus area, sales. Huddly's priority is to grow within our channel sales, and that will continue to be our focus. However, at the same time, we will continue to work with the opportunities, both within existing and new strategic partnerships. In Q2, we have continued to invest and grow our global sales team, with particular focus on the U.S. market. With the successful establishment of our sales hub in New York, we plan for scaling the model to Austin, Texas in the second half of this year. We started to see growth and momentum from the initiatives taken with 25% increase in channel sales in Americas measured year-on-year. This is in comparison to a 2% increase from the channels overall. The sales initiatives have been underpinned by a stronger focus on brand and product awareness, mainly in the U.S. market, and that, together, created the growth we see. And on that, we finish the second part of the presentation, and I give the word over to Abhi to give you the rest.

Thank you very much, Rosa. So far, we have been presenting our thinking around innovation and sales. And I'd like to shift gears a bit and focus more on profitability and the tactical measures that we are taking in order to improve that. I'll first start off with the gross margin. One important component of gross margin is cost of goods sold. During Q2, we consolidated manufacturing, leading to reduced COGS while maintaining operational excellence. During the pandemic, there was a high degree of disruption in the supply chain, and hence, we have focused on resilient operations. We did that by designing a dual manufacturing setup and multiple sourcing of components with one contract manufacturer in Norway and one in Poland. The benefit was quite clear with that. Number one, it avoided bottlenecking in the supply chain by having sufficient access to key components. And number two, this, again, led to [ low ] increase in lead times, which made us capable of delivering goods and products to our customers, while at the same time generating revenue. However, things have changed in the past 1 to 2 years. Fortunately, supply chain has stabilized. And hence, we have changed the focus from resilient operations to efficient operations. With the consolidation this quarter, we see that going forward, we will get more economies of scale with COGS reduction and increased gross margin, and it also comes with the added benefit of reduced operational complexity. I want to share a few more details about our contract manufacturing in Poland. We use Flex, which is a U.S. company with more than 140,000 employees at 100 sites around the globe. With this partnership, we get high-quality production, robust production, and scalable manufacturing. In addition to that, the partnership ensures high quality and full compliance, for example, [ TEA ], which is quite an important tick box for the U.S. government. When talking about economies of scale, having this capability going forward, we are increasing volumes that will further drive margin expansion. Finally, I would like to add that Flex has quite a strong focus on ESG. For example, the site at [ Tczew ] has received several sustainability awards and currently runs 100% of the energy consumption on renewables. We are very proud to have Flex as a contract manufacturer and also very proud that we are providing production and supply chain in the most green possible way. Looking at the costs. We have previously communicated that we are controlling the cost base, and we do see results from that. However, we are doing this without jeopardizing long-term growth opportunities. Headcount, looking at both full-time employees and consultants, reduced by 8%, which then meant a minus -- a 6% reduction in salaries in the same period. If you look at the total cost base, which about 2/3 of that is related to personnel costs, we had a 15% year-on-year reduction, and that is on a cash cost basis. So we do have quite a good control on our cost base, and we do expect, going forward, that we will keep this at a stable and possibly lower level. Summarized, there are 4 main topics and key areas that we focus on. As mentioned and introduced by Rosa, we are continuing to lead with technology innovation as evidenced by this presentation with Huddly Group; increasing revenue by improving our go-to-market with increased sales, both from channel and strategics; maintaining gross margin, both through monetizing innovation, i.e., having higher prices and also in terms of tactical measures such as optimizing supply chain. Finally, strict cost control is still important for us, and we are managing costs without jeopardizing long-term growth opportunities. I'd like to also provide a brief status on the strategic review. It is progressing well, and the Board of Directors expect to conclude the strategic review within a few months. The Board of Directors is furthermore assisted by Sansa Advisors. A further update will be provided at the appropriate time. That concludes the business update in this presentation, and I will now move into the financial details. Starting off with revenue. In the P&L, we do see positive momentum in travel. Revenue for Q2 arrived at NOK 39 million, which was an increase of 18% compared to Q1 2024. Breaking it down into the revenue streams, sales to channels increased by 27% compared to Q1 and increased by 2% versus Q2 2023. And as previously presented, we do see early signs of improvement following the implementation of new measures to grow channels, and we do expect that this will continue in the next few quarters. Strategic sales is still challenging. Strategic partner sales was flat compared to Q1 '24, and it was quite a strong decline compared to the same quarter last year. However, it is a quite big and important focus area for us to actively work on adding new strategic partners going forward. Moving down to gross margin. Gross margin in Q2 was 39%. That is a decline, but that is mainly explained by 2 factors, one of them being a one-off item. So the one-off item is relating to expenses related to price protection for distributors. So we did the price reduction in some of our products in Q2, and we are contractually obliged to compensate the price difference to our distributors, and that is a one-time effect. If you exclude that, the underlying gross margin for the quarter is 43%. The decline is also explained by higher COGS caused by lower production volumes. But going forward, this will be offset by the effects that we see from the consolidated manufacturing. If you want to do an apple-to-apple comparison between Q2 this year and the same quarter last year, the correct numbers will be 43%, '24 and 50% in '23. So the reason for that is that in Q2 '23, we had a release of a one-off sales provision. So that's a one-time effect and the underlying gross margin for that quarter was 50%. Summarized profit and loss statement. As already mentioned, Q2 revenue declined compared to the same quarter last year, mainly due to headwind from strategic partners, but we're seeing positive momentum in channels. We're having strict cost control, so looking at it on a cash cost basis, we actually see a 15% reduction in total cost base. It should be noted that the OpEx, looking at the P&L statement, that reflects, actually, an increase and the reason for that is that, that number includes several noncash items. One example is the new 2024 options program, which implied higher OpEx in Q2 '24. If you take out all of those effects, the approximate change in the total cost base on a cash basis is around 15%. R&D investments, we're still investing in R&D to drive long-term growth. Capitalized R&D in Q2 '24 was NOK 9 million, which is a reduction compared to the same quarter last year. This decline is mainly explained by a higher share of work related to maintenance versus development. But going forward, we do expect development used -- time used on development to return to historical levels. So as you can see, we are continuing to invest to defend our leading position in the market, and we do have a very strong R&D organization of 62 engineers with deep and extensive experience in AI, machine learning, software development, and hardware. Finally, the cash flow statement. Cash balance, end of March '24 was NOK 154 million; and cash, end of June '24 was NOK 105 million. The changes were mainly explained by NOK 25 million negative from operations, then minus NOK 10 million from investments and minus NOK 8 million from financing. Before wrapping up the presentation, I would like to offer some remarks on the outlook going forward. We do still believe in a strong underlying market as the current megatrend of working more and more towards hybrid collaboration mode will be prevalent. We are also seeing that the market penetration for meeting rooms being equipped for video collaboration is still just around 10%, and this penetration rate will grow in the future. So our priority #1 is to increase market share, and we're going to do that by increasing the revenue from strategics channel. Previously, we have provided our financial guidance to the market, and we did that in the last quarterly announcement. However, we do acknowledge that there is quite a high degree of volatility and predictability in our market. And hence, the information in our financial guiding is of limited precision and value to the market. Therefore, the Board of Directors have chosen to not provide any financial guiding going forward and also repeal the previous guidance given to the market. However, our priorities remain the same. We're going to increase revenue. We're going to retain healthy gross margins, and we're going to get into cash flow positive as soon as possible. We're going to continue to report on the progress of these priorities in the next quarterly earnings. And with that, I'd like to wrap up the presentation and so forth. Thank you very much for attending. We will then move into a Q&A session.

Yes. Thank you for attending today.

Yes. We see the questions coming. We have received 1 question in the chat, [Operator Instructions]. The first question we have received is, "Why do you plan a hub in Austin, Texas and not on the West Coast?" And perhaps I can answer that. We have seen that the U.S. market, generally, is stabilizing and showing some early signs of recovery. We also see that with our opening of the U.S. hub in New York, we have increased year-on-year sales in the Americas by 25%. Therefore, we believe that scaling that model will increase further our growth. And why Austin, Texas? We see that the trend in the U.S. is that many large corporations are moving their campuses towards the South and the Southeast. And with Austin in Texas, we can cover that area quite well. In addition to have the geographical location in the central of the United States, we have a great reach. We also will continue to have sales presence in -- on the West Coast. However, we prioritize establishing a second hub in Austin. I hope that answers that question. [Operator Instructions] Second question. "Can you elaborate more, please, on the strategic review development? What means well for strategic review progress?" So as was presented, our Board of Directors are informing the market that the strategic review is progressing well, and they assume and hope to be able to close out and conclude on the strategic review within a few months. And then there is a question about, "Why do you not trim the personnel cost base more. Based on the continued decline in sales, it seems that you should have more people focusing on sales and not engineering." That's a great question. So it's actually a twofold question. So the first part is our engineering. So the engineering staff has been quite stable for a while. The engineers, obviously, our R&D organization is the long-term strategic value for our shareholders. So we are doing refocusing with our go-to-market efforts. We are prioritizing the growth and strategically, in the company, to support the channel sales to even emphasize further the go-to-market plans we have.

Another [ guy who ] asked a question is, "What is the importance of your newly granted U.S. patent for Huddly Crew? And could you expand on your IP strategy?"

Yes. We'll definitely be able to do that. So the importance of our newly granted U.S. patent is quite extensive. It actually confirms the innovative technology that Huddly is making. As you can see from this meeting room live, we are being filmed in a live studio for you. This is Huddly's property according to the U.S. patent, which is important for us going forward, both with regards to the strategic value of the company, but also to protecting our assets. And our -- how we work with our IP is that we already, from the get-go of our product development, include our IP strategy and thinking in them, resulting for Crew in the 14 patent families as we presented today. And then another question is, "Can you elaborate more on the strong decline in strategic sales?" Maybe, Abhi, you can...

Yes.

Elaborate a bit on that.

Yes. So we have, historically, past few years, we have 2 strategic partners. And we provide our components -- sorry, the products to strategic partners who then again bundle the products that they get from us into full solutions and then sell to their customers again. So during the pandemic, which was a time where there was quite a lot of buildup of inventory was certain component issues, which we -- which were not part of the Huddly cameras but part of other components in the full solution. So it was a shortage of those camera items which then led to a bottlenecking for one of our strategic partners. So that was the initial reason for the decline in strategic sales, sort of was the -- sort of repercussions from the pandemic. We're still seeing the consequences of that with still high inventories currently. But as sales, going forward, will improve, hopefully, then it will -- the inventory will go down accordingly.

Yes. And we have received one more question about strategic partners. When can we expect new strategic partners or revenue growth from current ones? So as Abhi was into with regards to our current ones, that we continue to work very closely with them to support them and do whatever we can to ease that situation. But at the same time, we have done a few restructuring activities internally in the organization to restructure how we work towards our strategic partners. And that, we see, is starting to show some momentum. And to say when, that's a bit too early to be able to see, but we work quite actively towards both new and existing strategic partnerships. And then there is a question about, "Please describe a typical Huddly customer, small businesses or large corporations." Well, we actually do have Huddly technology in very many large corporations, where we see that the quality of our video is the kind of the selling point. So many large corporations have been choosing Huddly and choose Huddly to be their standards as due to the exceptional video quality and the camera technology we have. So I would say mainly, our customers are large corporations, but we also do have small businesses using our products as the products are quite scalable, and we have a portfolio that spans throughout the need from every room type you need. So there is a question about how big part of the revenue represents Huddly Crew sales? Maybe, Abhi, you can tell us a few words about that.

So we're not providing a breakdown on a product-by-product basis of our revenue. But what we can say is that Huddly Crew is set to be the long-term driver of our growth going forward, and we are focused on increasing the sales of the Huddly Crew through our revenue streams.

And then there is a question about, "You communicated that the strategic review is progressing well. You said earlier that it was strategic acquirers. Do you speak with one? Or several companies who are interested?" And the Board of Directors would inform that there are several, more than 1.

Okay. It seems like we have gone through the questions.

Let's give it one more minute just to see that -- if there are is late questions coming in, if not, we can -- okay, guys, we are not seeing any more questions coming in. We thank you for attending our presentation today and appreciate the feedback and comments we get through the Q&A. So with that, we say goodbye.

Goodbye for now and thank you very much.