Otovo ASA (OTOVO) Earnings Call Transcript & Summary

Good morning, and welcome to Otovo's First Quarter Presentation. My name is Petter Ulset, and I am Chief Financial Officer of Otovo. Today's presenters are Andreas Thorsheim, Founder and CEO; Rikard Eide, Engineering Manager and employee #4 in Otovo; and myself, Petter Ulset, Chief Financial Officer. Today's agenda is that Andreas will start with a business update. I will then take you through the financial results before Andreas will host a strategy update, then Rikard will do a demo session. We will then end with a summary and outlook and the customary Q&A. Then over to you, Andreas, for the business update.

Thank you. Ladies and gentlemen, we're very excited to present this quarter's numbers. And looking back to June and July last year, I think I'd be willing to give up a little more to back then, if I was certain to have the installation pace and capacity that we've had this winter and spring. This quarter is a record quarter for us in terms of installations. We did more than 2,800 installations in the quarter, a quarter that is marked by winterly weather in many of our countries. And despite that, we were up sequentially by more than 600 projects from Q4 of last year and grew about 100% from the same period last year. In this company, we recognize revenue as installations get completed. And as a consequence, this is also a record quarter in terms of revenues. Our revenues generated came in above NOK 400 million and some increase from Q4 last year and a growth of more than 200% from the same quarter last year. And that growth was felt both in the direct revenue and in contracted subscription revenue. We're also happy to say that margins have expanded and are set to continue their climb both measured on IFRS and on the subscription profit. We see an expansion of about 1 percentage point, which means that the blend is also up 1 percentage point. With regards to sales, we are sequentially up 7% from the Q4 slump, and we're seeing increased momentum in several key markets. I'll get more back to this later in the presentation. It's also worth noting that this quarter is 1 where Italy, our strongest market in Q4 was out several months due to the regulatory uncertainty that, that country experienced. And that, in part, explains the sales numbers in comparison to the same quarter of 2022. With regards to our pipeline, that was worryingly long at the end of Q3 at 7.7 months waiting time, came down to 6.3 months waiting time at the end of last year and is now at a much more comfortable 4 months, and that's where we want it to be. The supply chain has overcome the bottlenecks of 2022. And of course, we now can have an accelerated pace of installations. This is beneficial for consumers who see waiting times come down, and that's a positive in terms of meeting the consumers' expectations. It's also worth noting that the faster conversion from a signed contract to an installed project leads to faster conversion from marketing spent to gross margin earned. Now to our subscription portfolio, and this has been a very strong quarter once again for the subscription portfolio. The share of sales in the subscription -- the subscription share of business is up to 39% as measured by the number of contracts sold in the quarter. The accumulated contracted subscription revenue is up to NOK 473 million. It's both the strongest increase ever recorded and a growth of almost 300% annualized from last year. The annual recurring revenue is also up to NOK 27 million, up 238% from the same quarter last year. And that means that this portfolio is now beginning to generate really handsome income. Now let's turn to the business health metrics. And here too, it's a pretty good story this quarter around. The trend is up and to the right for all the metrics. The battery attachment rate as measured at the time of installation is at 24%. It's our second highest number ever. The ticket size as measured in kroner is at NOK 134,000 up NOK 14,000 from Q4 of last year. But here it's worth having a little caveat that a weak kroner helps lift this number on top of the underlying growth that we've seen. In terms of the subscription share installed, it's at 30%, that too is a record. And the gross profit generated bouncing back to 21% from a low point of 20% in Q4 of 2022 and looking to rise going forward. In terms of the profitability of individual markets, and this is going to be an important slide to follow in quarterly presentations ahead. We're happy to say that Sweden is profitable for Q1, second quarter of profitability for Sweden historically, and we'll move towards the right in terms of checking off green boxes on this slide. We also see that all new markets are now having positive unit economics as planned and expected. And as they increase volume, they too will move towards the right here. And of course, as a management, we're looking to have all markets profitable first on generated basis that blends both direct income and the value creation from subscriptions and then eventually on IFRS. So we're happy about this and optimistic about the outlook for Q2 and Q3 when it relates to this. And now over to Petter for the financial results.

I will now take you through our financial results. Looking on our reported financials, we ended the quarter with NOK 281 million in total operating income, that is up 2.5x from NOK 112 million in the first quarter of last year. OpEx expanded relatively less bringing EBITDA to negative NOK 79 million which is a 21 percentage point improvement for the first quarter of last year. Please keep in mind that we have had a weakening NOK in the first quarter, meaning that the impact on revenues is NOK 25 million, while the impact on OpEx is NOK 7 million. The impact on EBITDA would then be that EBITDA -- underlying EBITDA is slightly better than what is shown on this slide. Looking on our consolidated balance sheet. We ended the quarter with NOK 580 million in noncurrent assets. The increase here is largely due to investments that we have done in our subscription SPV. We had inventory of NOK 8.9 million, which is slightly lower than in the fourth quarter of last year and we ended the quarter with NOK 347 million of cash. I will get back to that number. Otovo generates shareholder value through our marketplaces. In our marketplaces, we sell solar systems and batteries to consumers across Europe. Value drivers in the marketplaces are our ability to increase gross profit and to maintain a high capital efficiency by having a negative working capital and also a high operational leverage. Our current focus in the marketplaces is to bring the marketplaces to profitability and we do that by improving unit economics and also keep growing installation volumes. We also build shareholder value in our subscription portfolio. In the subscription portfolio, we're generating a portfolio of cash flow, generating customer contracts value drivers here is our ability to deploy capital and the return that we earn on that capital. Our focus here is to ensure that we originate assets with a good underwriting framework and that we keep following up these customers over time and ensure that they pay according to the contracts we have entered into with them. We are able to build shareholder value in our marketplace and our subscription portfolio by making investments in OpEx. Here, we generally make investments ahead of revenues as we have a company that is growing quite rapidly. Value drivers here is that the over time are able to maintain the operational leverage and also that we can decrease unit costs for that labor. Our current focus here is to ensure that new markets are set up as all markets with a high operational leverage and also that we're able to leverage our pan-European model, where we have varying labor costs across our 13 European markets. Last but not least, we need to continue to work with our balance sheet. Here, we are continuing to work with our debt position to ensure that, that scales according to the -- in the same degree as the subscription portfolio and we will also work to prove that we can monetize part of the subscription portfolio. Otovo customers' can choose to either buy a system directly from Otovo. This [indiscernible] for us and our marketplaces be recorded as a direct purchase revenue. Alternatively, the customer could choose to enter into a 20-year agreement with our subscription SPV. The -- that system would also be sold from the Otovo marketplace to the Otovo subscription SPV on the same price as we would sell to a direct purchase customer. That sale is, of course, eliminated when we look on our consolidated financials and the subscription SPV with finance the acquisition from the marketplace with the proportion of debt and a proportion of equity. So when we then zoom in on our marketplaces, we have here shown what we believe is the underlying financials of the marketplace. Here on the left hand side we show the total revenues which then includes NOK 270 million of direct purchase revenue and then NOK 90 million in subscription SPV cap, which is what the subscription SPV paid to the marketplace. Towards those NOK 370 million, we have NOK 310 million of COGS, bringing us to a gross profit of NOK 60 million. In the first quarter, we also had NOK 97 million of local OpEx, so that is OpEx that is accounted for in our local marketplaces and does not include group costs. That means that the marketplace EBITDA would be a negative NOK 37 million, which is an 8 percentage point improvement over the first quarter last year. Please keep in mind that in the NOK 97 million of OpEx, roughly 1/3 is towards new markets, which has contributed relatively less with installations and revenue in the first quarter. Now turning over to our subscription portfolio. As mentioned, key value drivers for the subscription portfolio is our ability to deploy capital. In the first quarter, we deployed NOK 96 million of capital, which is up from NOK 19 million in the first quarter of last year. Please keep in mind that in the NOK 96 million, there will be a slight currency effect. On that capital that we deployed in the first quarter, we earned a 10.5% IRR according to the contracts. Now turning over to the right-hand side. We see -- we have on the top, the contracted subscription revenue, which is the value of the contracts that we originated in Q1. This show that value for different assumptions on inflation and discount rate. And the center NOK 133 million is what Andreas talked about in his sections as contracted subscription revenue. Please note that if you move across the diagonal here with increasing inflation and discount rates, the value of those contracts is roughly unchanged. Looking at the bottom, we have accumulated contracted subscription revenue. That's the value of the portfolio. Also here shown for different inflation and discount rate assumptions. And the center here is NOK 473 million, which is the accumulate contracted subscription revenue that Andreas talked about in the first section. Please also keep in mind that there will also be some currency impact on those 2 metrics. Now assuming in on inflation. As we have mentioned, we have the ability to adjust customer payments on an annual basis with the development in inflation in the preceding year. In the first quarter, the average change across our markets was 7.2%, meaning that the payments for the 13 month of a customer contract within on average, be increased with 7.2%. Looking on the right-hand side, we see how that impacts cash flow over the lifetime of the customer. Here, we have shown that the NOK 19 million that was invested in the subscription segment in the first quarter of last year was permanently lifted up and that you will also have a compounding effect on that as we move towards the end of the customer data. So for the NOK 19 million that was invested last year, we have roughly kind of the lifetime value of cash flows with around NOK 2 million. This effect is, of course, something that we have seen over the last year and that we also expect to see over the coming quarters as inflation is expected to be elevated for quite some time. Then looking into how we invest in OpEx in building up our 13 European markets. To the left, you see the split between local and group OpEx. And in the first quarter of last year, we have NOK 75 million of OpEx, where roughly NOK 32 million was group, NOK 44 million was local, that expanded in Q1 of '23 to NOK 136 million, where roughly NOK 39 million was group and NOK 97 million was local OpEx. That means that we have expanded the group OpEx with NOK 7 million, while then the majority of the OpEx growth is in our local markets. If we then also split out the local OpEx, you will see that roughly NOK 53 million is related to payroll, while the balance of NOK 44 million is other OpEx. If we then zoom in on the payroll piece, you will see that 70% of the payroll is towards mature markets, while 30% is towards new markets, which in the first quarter accounted for a significantly lower share of installations. That means that we have made significant investments over the preceding quarters in order to build up the new markets. We will continue to see that effect in Q2. But as new markets also deliver more and more installations, we will see that operational leverage starts to work more favorably for new markets and for Otovo. Looking on our cash and balance sheet side. We have discussed our cash performance where we saw that operational leverage improved -- reported IFRS improved 21% year-over-year. We have also shown that we can maintain capital discipline. We have divested our stake in Holu. We make relatively disciplined software investments and working capital remains negative. We also shown our ability to work on our balance sheet where we put in place a new debt facility in the first quarter. We drew on that facility now in the second quarter. It will be a key priority for us is to also unlock the accordion piece of the debt facility. We have also, as stated on our fourth quarter presentation, initiated the process to sell off the NOK/SEK portfolio that will, of course, generate proceeds that we can invest in both our marketplaces, but also in our SPV to grow additional portfolios. As mentioned, in our subscription portfolio, we build portfolios of high-quality customer contracts with attractive yields with low credit risk that is certified green by CICERO. A key part of our business model is that eventually, we will sell these portfolios to third parties to show the underlying value in these subscription portfolios. As stated in the fourth quarter, we have initiated a process of selling parts of the portfolio. We will start with the NOK/SEK denominated assets while we continue to build euro assets to a bigger size. And going forward, we will monetize portfolios more regularly as we now originate a much higher volume each quarter than we have done historically. Then turning over to our debt facility. We announced in the first quarter that we have entered into a new agreement with DNB and SR-Bank. We -- in that agreement, we have a EUR 100 million credit facility and the structure of the credit facility is that we have a EUR 50 million RCF that we have started to draw on and we are now in discussions with the bank on putting in place the last EUR 50 million, which is an accordion option. In that process, our key discussion point with the banks is, of course, to continue to increase the leverage size towards the 75% that we have for Norway, Sweden and Germany. Then ending off with our cash position. We started the quarter with NOK 194 million of cash. We did a private placement that contributed with NOK 244 million. Then operational cash flow for the quarter was a negative NOK 70 million. Investments in the SPV was negative NOK 34 million and other items was positive NOK 13 million and we ended then the first quarter with a cash flow of -- cash position of NOK 347 million.

It really is an exceptional time for the solar industry, and we thought it would be worthwhile to take a step back to look at what's going on and how Otovo is positioning itself. As 2022 came to a close, we closed the door on an exceptional year in energy. And we now believe that solar energy can return to normal, and that's a good thing. All net zero scenarios contain large amounts of solar energy, and a lot of that is residential. That trend was strengthened as we experienced in the electricity shock and an energy shock last year in the wake of Russia's invasion of Ukraine. That increased demand put supply chains of equipment under pressure and led to a rare increase in the price of solar modules. But now we see that trend or rather we see that phenomenon reversing and the return to the declining cost trend that we've become accustomed to in solar and that drives this industry's competitiveness. On the hardware side, the prices were coming up in the beginning of 2022 for plateauing and then starting a downward trend at the end of last year that we've seen accelerate now in 2023. This is driven by increased manufacturing capacity coming online at the end of last year, reduced freight cost from Asia and also reduced the cost of raw materials, most importantly, polysilicon. On the labor side, the increased demand gobbed up all supply of available hands in the solar industry at the beginning of 2022. But throughout the year, an influx of adjacent craftsman from roofers, carpenters, and electricians came to the rescue, and we saw an increase in capacity at the end of last year. Now this capacity is at risk of idling during this spring and summer. And so we're seeing the prices on the platform coming down as installers compete to fill up their pipelines. And it will be interesting to follow this going forward because if you combine a reduction in the hardware price with a declining trend on the labor cost of solar, we could really see an interesting drop in the cost of solar installations. And we expect that, that can be a driver for demand going forward as we transition from a situation of exceptionally high demand with exceptionally high prices. That was the story of 2022 to the situation we saw in Q4 and Q1 with medium demand and high prices for solar into a situation where we have medium demand but much lower cost for solar, increasing solar's attractiveness throughout this year because solar will do well, both in 2023 and years to come as we approach 2030. This slide, we've borrowed the contents from our friends at LCP Delta, who have made a really good report about the outlook for residential solar in Europe now in April. And the main story is that across the board, we see a lot of growth in Europe. And Otovo is glad to see that we're positioned in all of the major growth markets from Germany, U.K., Italy and Spain at the 1 end, but also the rest of Europe where countries like Norway, Austria, Switzerland are expected to grow quite substantially in the years going into 2030. So Europe is really having good tailwinds for solar. This year is, of course, a bit more of a mixed bag and -- a mixed market than what we saw in 2022 when the rising tide lifted all boats. Electricity prices last year were rising and came to all-time highs with record set almost daily. This year, they are somewhat down, but remain high compared to historic figures. And that means that also payback times remain really robust across Europe and could strengthen further as the cost of solar comes down. Consumer sentiment last year was almost desperate to get alternatives to expensive gas and electricity. This year that picture is a bit more varied between countries. And it's clear that in some markets in Europe, subsidies for regular electricity or [ fear of ] inflation, higher mortgage costs are competing for attention with this energy crisis that we are experiencing. On the equipment side, as I said, last year, enormous hikes in equipment cost. This year, we're returning to the declining trend. And when it comes to regulatory support, last year was a story of market created demand. For all the talk, there wasn't a lot of policy action, and we can say that all the talk from EU and national governments, pretty much is still in reserve, and we believe there's a reserve of stimulus that will be unlocked in '23 and years to come. So overall, a very sunny picture last year. This year, a little bit more clouds, but that should benefit a player like Otovo, that is present in many regulations and meeting many types of consumers across Europe. We are a company that's been doing well under changing conditions. Otovo is a 7-year old company. And for our first 5 years, we found ourselves in the type of environment that we're experiencing now with declining hardware and labor costs. In this period, we expanded to 7 countries, and we grew our installation capacity substantially. Then we went into the period in yellow color here with increasing hardware and labor cost, a very different situation, but we kept growing nevertheless. And now this winter, we've returned to normal situation that suits us well in which the constraints are not on the equipment side, not on the labor side, but it's about creating demand. And that's what this platform has been built for. This resilience and ability to grow in different conditions is in large part driven by our software platform. It's a software platform that enables us to help consumers make good decisions online, get good prices online without having a home visit. It's this platform that allows us to monitor the progress of consumers as they come to our website from partners or online sources, get nurtured into a signed contract and then become a project that we need to get installed through our installer network, and we can monitor this in our software. And for the installers, it's a way to create business, to get feedback on their prices and competitiveness and to get the project out the door in a compliant and well-documented manner. But enough talk and tedium. Let me invite on stage, my friend and colleague, Rikard Eide, who's been central in developing this platform to do a bit of a demo. Rikard, please come on stage.

Thanks for having me. So today, I'm going to go through the entire journey, the installer reviewing the pricing in the marketplace until the customer is producing clean and cheap electricity on the roof. So after signing up, installers in all our 13 markets sign into the Otovo platform. They're greeted with a simple and intuitive interface where they can quickly figure out how well they're doing in the marketplace. This allows them to stay competitive and offer the best value to our customers. The installer covers a specific area. And based on our marketplace data, we provide them with insights as to where it might be smart to expand. The installer can at any time revise and update their pricing. They do this by adjusting costs across all different areas of the installation. In this case, the installer is lowering their price, which should give them more projects in the future.

Great. Now let's perhaps have a look at the consumer experience as they become clients of Otovo.

Yes, sure. So our customers can come from different places, some through Facebook and Google. But in this case, we're going to look at how a customer visiting Castorama's, our partner, Castorama site. We'll get the solar panels from Otovo. So the customer visits Castorama's website where he choose to learn more about solar panels for their home. After entering their home address, the customer proceeds to verify the exact roof they want panel zone. Our advanced algorithms then assess the roofs of solar potential, providing an estimate of the electricity produced and the savings it will generate. The customer can then choose to be called by 1 of our sales agents or proceed to configure their own offer. They can review and sign it online, all within a few minutes. We're also proud to announce a new feature where customers can decide exactly where they want their panels to be placed. The customers simply indicate where on the roof they want panels. Then our artificial intelligence will pick up any obstacles on the roof, like windows or chimneys to assist the customer. To the best of my knowledge, this is the world's first. We now let customers buy PV online and fully self served. So what happens next is when the customer is happy, they proceed to review all the details of the offer. If everything is okay, they can go ahead and sign it online.

Great. Well, I guess that's quite convenient for the consumer. But how does this look for the installer who's going to do the work?

So once we receive the project from the customer, the installer is notified through the Otovo platform. Here, we see a new project that just came in. We worked hard lately to improve and streamline our capacity algorithms. We're now able to automatically assign the project to the installer immediately after the deal was signed. The installer then proceeds to review the project details, such as the uploaded pictures and layout so that they can start planning the installation.

All right. So that's the mode that the installer uses as he's in his office or warehouse, but that's not so convenient to bring on-site and up on the roof. So perhaps you can take us through how the installer interacts with Otovo once he is on site.

Yes. So on site, the installer will use our brand-new installer app. This app is typically used by installers on site. At Otovo we have strict requirements for quality and safety. The installer uses the app to review the project details and to indicate that the work has begun. While they work, they must upload a set of images to prove that the work is up to Otovo's high standards. With the app, this is super easy. They take photos of the installation, which are then uploaded to the platform for review. This saves time and money for the installer, Otovo and then the customer by streamlining communication and documentation. The installer also uses the app for editing team details, inputting serial numbers and uploading a regulatory documentation.

All right. So now we've followed this solar project from its beginnings when the installer inputs his prices in order to compete for work on the platform. We have seen a consumer make his choices and sign a contract online. That has turned into a project that the installer plans from his office and then uses the Otovo installer app on site and on the roof in order to complete the installation. And I guess we're almost done, what's next with the consumer now.

So this is where the fun begins for the consumer. This is a place where customers can easily monitor the performance of their solar panels in real time. They can view the energy production during the day to see the environmental impact they're having. They can go back to any given day in the past and compare. Like here, for instance, I think we had some midday clouds. They can also see production across weeks, months and even years. That's great if you want to compare production with previous times. With the solar app, our customers are always on top of statistics.

Great. Thank you much, Rikard, for taking time to walk us through the product. I guess we have a Q&A, but you have more important work to do. So I'll get back to it and we'll now turn to the summary and outlook. So as we look into the year ahead, we've set ourselves a few priorities that are all about capturing the market rebound that we expect and increase the operational efficiency and profitability of this company. First, together with our installers, we will work to reduce the project cost on the marketplace. That means cheaper projects for consumers and we believe that will be helpful in stimulating sales growth during this year. Second, as you've seen, we've been working on our software continuously for 7 years. And this year, a lot of focus is on software automation, in order to improve sales performance, in order to improve our gross margin, but also to reduce the operational expenditure per project. That is something we'll also work on outside of the software to show increased operational leverage in this business as we grow both in existing and new markets. And then for the portfolio of subscription assets, it's clear that we have 2 objectives. One is to increase the leverage ratio on the debt facility. That is important in order to be keep growing the subscription business. We've done that handsomely over the last few quarters, and we plan do that in quarters ahead. And we want to do that with a minimal injection of equity as we grow. And then, of course, we want to prove the value of our subscription portfolio by monetizing a first subscription portfolio sale in order to release cash back to Otovo. This quarter is one where we can say that with regards to OpEx, the hardest part is behind us. The operational expenditure grew by 77%. That's significantly less than the size of the business and the growth in it. And a lot of that has been driven by new market expansion. These investments in new markets happen ahead of their profitability. And that effect is, of course, at its peak this winter and spring in Q1 and Q2. With regards to our spending, we plan to be disciplined in the marketing spend by having a larger portion of the budgets allocated centrally, so we can move our euros to the locations that have the best ROI for every marketing euro spent. And, of course, we will keep discipline on cash with the flexibility and planning that has been laid forward in the financial framework by Petter earlier today. With regard to the outlook for the first half of 2023. We see that revenues generated came in at NOK 408 million. That's comfortably ahead of guidance for the year given previously where we said we would grow at, at least 100% and this represents about 150% growth as we are at the halfway mark of the first half. And it's natural that we would also revise the estimates for this first half upwards. So we're adjusting the first half targets upwards by nearly 30%, so representing 150% growth compared to last year to NOK 850 million in revenue generated for the first half. So before we enter the Q&A, let's sum up this quarter. It is our strongest quarter ever in terms of installations and revenue. We're revising the outlook upward, and we will maintain discipline on marketing and cash. It's been an all-time high quarter. We had profitable installations in 13 European countries. We did 2,832 installations in the quarter. That's almost doubling from the same period last year. On unit sales, we're rebounding from the Q4 slump doing 1,962 installations. That is down compared to Q1 last year, but without Italy at full pace. Revenues come with installations. So the revenue, as measured by IFRS, is up 2.5x to NOK 281 million and revenues as measured by revenue generated NOK 408 million, up 3x, indicating strength of the subscription portfolio. All business health metrics are on the right track, ticket size, subscription share, battery share and gross margin all on the positive trend in this quarter and all up from Q1 2022. The subscription portfolio is scaled and growing. We deployed NOK 96 million in subscription SPV CapEx versus NOK 19 million same quarter last year, that's 5x up from that period. And we're doing that while maintaining a stable internal rate of return, that is at 10.5% this quarter in the band of 10% to 11%, where we've been previously and up from 10% in the same quarter last year. So with a bit of pride and a lot of anticipation for the year ahead, I will now open up for questions, and welcome also Petter back on stage with me. So we'll leave you a couple of minutes to input questions. I see we've had a lot this time around. So I think we'll just get it.

First one is your margins improved somewhat from Q4. Are you done with installing the "bad projects" now? What would we expect for gross margins in Q2 and Q3. I think I'll pass that one to you, Petter.

So I think we start with a [indiscernible] look on the overall direction of travel. And we are bringing new markets and all increasingly up to speed. They are, of course, starting with lower gross margins, which, of course, will have an effect as the projects that have been sold in the first quarter, will get installed in the second and third quarter. So that effect will, of course, then be a negative effect on margins. Then on the positive side, the bad projects that we saw as a result of projects sold in the first half of last year to a large degree has now been installed and that effect should be now behind us.