Otovo ASA (OTOVO) Earnings Call Transcript & Summary

Good morning, and welcome to Otovo's Second Quarter Results. My name is Petter Ulset, and I am CFO of Otovo. Today's presenters will be Andreas Thorsheim, Founder and CEO; and myself. I will take you through the financial results. And with that, I leave the word to you, Andreas.

Thank you, Petter. Today, we have a lot of interesting figures and news for you. Let's start with the installation numbers that once again are coming in at record highs. We're reaching 13,000 units per year run rate as we installed 3,214 projects in the quarter. That's handsomely up from the 2,800 and some we did in Q1. And a growth of 84% compared to where we were a year ago. So with that, I think we can declare that all supply issues relating to both hardware and labor are out and we can focus on creating value for customers and for ourselves. And that's materializing in our revenue numbers. Revenues generated are up 165% year-over-year and for the first time, we're surpassing NOK 500 million in revenue generated. In fact, we're at NOK 514 million. thanks to record high direct sales revenues at NOK 307 million, but also value creation from subscription contracts that came in at NOK 206 million. And so we're quite far ahead of the upwards revised guidance that we issued after Q1, very happy about this first year of 2023. As a consequence of increased discipline on value creation, our gross profit generated is up to NOK 124 million, and the blended margin is at reasonably good, 24%. That's a result of 29% in the subscription value creation and 21% on direct sales for a blend of 24%, up about 3 percentage points from Q1 and about 2 percentage points from the same quarter of last year. And these are margins that we believe we can uphold or improve on in the autumn as this is an environment in which we can extract value from the services that we perform. This helps our EBITDA. This is our best EBITDA number measured as a percentage of revenues generated. We improved by 19 percentage points from last year to a minus 5 and shows the effect of our focus on profitability being in motion and likely to improve going forward. Okay. So now let's have a look at our sales numbers. In Q2, our sales numbers are up 13% sequentially from Q1. And our view is that the trough in the market is behind us. We expect further improvements to sales going forward. We were up 13%, as I said, compared to Q1, but that's still below where we were in the same quarter of last year. Now what's happening behind these numbers? Well, we're seeing a rebound in progress in some of our established markets with Poland and Sweden, particularly leading the way in this quarter. But overall, sales are still below our installation numbers and it's providing spare capacity in Southern European countries, Italy, Spain and France, in particular. New markets are progressing according to plan and are noting as a group, their strongest ever quarter and they're helping making up for lost ground in the larger and more established markets. As for the pipeline, it's down to 2.6 months and customers now can expect intra-quarter delivery in almost all markets. Mix effects will now favor faster markets with typically less permitting like Northern European markets. Now let's double-click on the relative performance of each country. So sales performance is picking up overall if we're looking at the whole of Europe, but it's quite patchy, and we're seeing kind of 3 different groups of countries. Now the new markets, Poland and Sweden represent one group. These countries are performing at or very close to their best quarters ever and are pushing us forward. New markets will, of course, add more and more as they mature into Q3, Q4 and 2024. Then we have Norway and Germany. They're doing decent volumes compared to their sort of average over the last quarters but they're still quite far behind their top scores from the energy crisis of last year and represent a sales potential and a buffer for us going forward. And then we have the Southern European markets that I think we can say have been hit by lower gas prices, taking away some of the acute need to improve on your energy build by getting solar panels and batteries. And so Spain, Italy and France are far away from where we know they can be performing. Now that said, we believe very small changes in macro, very small changes to gas prices or other things in these markets can trigger big improvements. And then we'll have the joint effect of old markets coming back and new markets growing. And so it's hard to have visibility of where we're headed in the autumn. But in general, we see a gradual but patchy improvement and small triggers in order to launch much bigger improvement. So this is something we're following closely in months and quarters to come. One of the things we believe will help on sales is an improving price point. Otovo is a marketplace, and that means that the installers are competing on our platform every single day. And as they see cheaper hardware coming in, as they see their pipeline shortening, they're willing to take down their bids on the platform. Hardware cost per watt is in nominal terms, below where it was prior to the energy crisis last year and in real terms, of course, is cheaper. And that trend is almost certain to continue as we're seeing batteries, inverters and modules falling in price all across Europe. On the labor side, labor prices on the platform peaked in December. They've been coming down through Q1 and Q2, and we believe there's still quite a lot of headroom. The graph on this page shows Swedish prices and we're seeing quite steep declines all across Europe in these numbers. Some markets more pronounced in their declines than what we're seeing here for Sweden. Hardware drops and labor price cost reductions means that the combined cost per watt is coming down. We've seen 2 quarters of cheaper solar, and we expect to see that going forward, a boost to sales as consumers generally respond to products that are cheaper by demanding more. Now let's look at our subscription portfolio. It's been a record quarter for that the share of sales on the subscription model came in at 38%, roughly on par with where we were in Q1 and substantially up from where we were in the same quarter last year. We've also added a lot of accumulated contract subscription revenue. In total, that's at NOK 692 million now, representing a portfolio size growth of 340% compounded annually. And the biggest ever addition both in nominal terms and relative terms happening in this quarter from NOK 473 million in last quarter. And then the revenue coming out of this portfolio is now at -- sorry, it's NOK 43 million annual recurring revenue. That's up 327% from the same period last year and up NOK 16 million from Q1. Turning now to business health metrics. Our battery attachment rate is coming in at 24%. That's where we've been trading over the last few quarters but we're seeing positive momentum in most markets. And when this takes hold more than the mix effects of new countries coming in, we expect these numbers to keep growing. The ticket size is at a record high NOK 146,000 per customer. That's up another notch from where we were in Q1. Thanks to a great cohort of customers that we sold in the winter at peak prices and also a deterioration of the Norwegian kroner, that means that we're getting ForEx gains on this that also substantially lifts the ticket size. And so looking into Q3 and Q4, we should be looking at ticket sizes that are more comparable to where we were this winter, typically Q4 '22 or Q1 '23 levels. The subscription share as share of installed projects was at 36%. Of course, lagging the sales numbers that were presented on the previous slides by a little bit and this is a number we expect to grow going forward. And then finally, the gross margin generated, as I elaborated on earlier on coming in at 24%, a number we're comfortable defending going forward and hopefully expanding on as the effect of watering down from new markets in which we're investing and Petter is out. And of course, we expect to add more value as prices on the platform come down, we can extract more margin in our sales. Then let's turn to country profitability. This quarter, Norway, Sweden, Spain, Poland and Italy were profitable on an EBITDA generated basis. That means the value creation from the portfolio plus direct sales taken into account. Poland was a new addition there. And then on the IFRS numbers, Norway, Sweden and Italy were profitable. Sweden new addition there. Of course, every gray box here is a target for someone in this organization to make green and we keep pushing for all of this to be green in the medium term. Now let me share some exciting news about how we're building the organization and adapting to the competition in the European market. Otovo has, over the last few years, established positions in 13 European markets. That allows us to derisk exposure to energy prices, political wins and direct our marketing spend to the places where we see we get the best return on that marketing investment. Should the cost per customer increase in Belgium, we can redirect our marketing funds to Austria, if the prices are better there, and we can keep growing at attractive marketing cost. Now this only really works if you have an organization that is adapted to follow the projects that you create in Austria when you're redirecting marketing funds from Belgium to Austria as an example. And so this quarter, we've taken the consequence of that and established more of our operations in one center in one location in Europe. During Q2, we've effectively implemented and staffed up a Madrid hub that comprises our marketing and operations center. And in this location, we now have 16 nationalities as of my last count and they are serving our markets across Europe, both with marketing and operations services. What are we planning to gain from this? Well, during this quarter, we've done several things that we think will improve our operational cost and flexibility going forward. First, we've cut about 50 FTEs in established markets, particularly Paris, Berlin and Madrid. And in addition, we've planned to reduce future hiring in new markets, locations like Zurich or London by another 50 FTEs. Now what this does is it takes down the cost in our local markets. Then we've established this service hub in Madrid. And Madrid is an international hub of talent. We can find native speakers of all European languages there. It's easy to recruit Dutch people, Germans, et cetera. And it's a talent hub in which we find skilled labor for both solar, for operations and for marketing jobs. And then the economic benefit of this is that we're creating a cheaper and more flexible cost structure. The fully loaded cost of employees in Madrid is roughly half of what we have in the markets in which we are replacing costs going forward. And this, of course, creates a structural advantage for us, both in terms of the pure cost but also in the flexibility of having a pool of people that can follow our growth to where it is happening. And so going forward, this is going to be an increasingly important operational and strategic advantage for Otovo in the competition across Europe. Now let's turn to Petter for the financial results.

Thank you, Andreas. I will then take you through our financial results. Starting with our reported financials. Total operating income came in at NOK 317 million, that is up 2x versus the second quarter of last year. Cost of goods sold expanded less as we had an underlying improvement of gross margin of 2 percentage points. OpEx is up NOK 16 million from the last quarter. However, out of those NOK 15 million, NOK 8 million is due to a weakening NOK and NOK 3 million is related to the restructuring in France and Germany. So the underlying development in OpEx is quite healthy. The result of that is a negative EBITDA of NOK 77 million, which is -24%, which is an improvement of 12 percentage points versus the second quarter of last year and 4 percentage points sequentially from the previous quarter. Then turning over to the balance sheet. We see that from the second quarter of last year, our noncurrent assets, which represents assets in the subscription SPV is up considerably to more than NOK 700 billion. That has largely been financed through increase of debt that we have secured from DNB and Essar Bank in Norway. We also see that our inventory is reduced as that is currently not required to run our operational business and that our other current assets is down as a result of offloading a large share of the balance of Italian tax credits. The cash position is reduced with NOK 34 million from the previous quarter, and I'll get back to that on a later page. When we look at value creation in our business model, we see that to come from 2 angles. One is our marketplaces, that is deployed currently in 13 European markets and the second is in our subscription portfolio. We realize that value through investments that we make in our OpEx and over our balance sheet. For the marketplaces, the value driver is our ability to earn a growing gross profit and to maintain a high capital efficiency. Our current focus for the 13 marketplaces is to bring markets to profitability to continue to improve unit economics while we keep growing installation volumes. For the subscription portfolio, key value drivers are our ability to deploy capital into the SPV and the return that we earn on that capital. The key value drivers here is our ability to have a good and sound underwriting framework and to be a good custodian of subscription assets in the markets where we offer the subscription product. Zooming in on the marketplace, the marketplace creates value from 2 sources. One is direct purchase, where we sell projects directly to end customers in 13 European markets that is recorded as direct purchase revenues. Then we also sell projects to our subscription SPV, that is recorded as subscription SPV CapEx and the total is the revenues that the marketplace makes. If you then look at how the marketplace performed in the second quarter, we had total revenues of NOK 440 million, out of which NOK 307 million was the direct purchase customers and NOK 133 million is from the subscription SPV CapEx. Towards that revenue, we had NOK 375 million of cost of goods sold leading us to a gross profit of NOK 65 million and an OpEx of NOK 114 million, leading to a negative EBITDA of NOK 49 million. Please keep in mind that we are selling from Otovo to EDEA at a discount to protect the yield that we have in EDEA. And if we would not sell at a discount, that would lift the EBITDA with around 5 percentage points. Turning over to the subscription SPV. We deployed NOK 133 million of capital in the second quarter. That capital earned a 12.4% IRR, which is significantly from previous quarters as yields have increased across Europe. Turning over to contracted subscription revenue, which Andreas mentioned, came in at NOK 206 million. That is, of course, assuming a 5% discount rate and a 2% inflation rate. You might choose different assumptions. But keep in mind, if you move along the diagonal, increasing discount rates with, for instance, 1 percentage point and inflation with 1 percentage point, that number is kept unchanged. The same goes to the accumulated contracted subscription revenues, which is a proxy for gross assets in the subscription SPV. Here, the number that Andreas presented was NOK 692 million. Should you move along the axis increasing discount rate with 1% and inflation mid-1%, that number would be more or less unchanged. Also, a thing that is important to remember about our subscription SPV is that we, in our contracts have the ability to increase the monthly payments with development in core CPI. Here, we have successfully done that this quarter. On average, we increased monthly payments with 8.7%. And if you turn to the right-hand side, you see the impact from that. There -- in the second quarter of '21 and '22 invested NOK 42 million. Those cash flows have now been increased with permanently NOK 5.8 million over the lifetime of their contracts. Then focusing in on OpEx, we had OpEx in the second quarter of NOK 151 million split on NOK 114 million in local OpEx in our 13 marketplaces and NOK 37 million of OpEx for the group, that is up from NOK 95 million last year. But as you can see, the majority of the increase is driven by local markets. Then if we zoom in on local markets, NOK 65 million is payroll, NOK 49 million is other OpEx. If you then zoom in on the payroll, you will see that a large share of employees are in new markets, which are under development. And then you from the last presentation is that we also have 39 employees in our shared service center in Madrid. As Andreas mentioned, these employees provide services such as operations and marketing and accounting to our local markets on a flexible and cost-efficient basis. That brings a total of 300 local FTEs, adding another 73 group FTEs brings the total for the group to 373. That number is unchanged from the last quarter. Then a key part of our business model is the subscription business. We have now proven that we can build portfolios. We have proven that we can finance portfolios. We are now working on how we can monetize portfolios. As we stated on the previous presentation, we will start with monetizing the NOK and SEK denominated assets, a successful sale will, of course, free up capital and also equity that can be used to further build up subscription portfolios. Then on cash. So we started the quarter with NOK 347 million of cash. We had a negative operational cash flow of NOK 34 million. That consisted of cash EBITDA of negative NOK 70 million. Then we, over the quarter, sold off NOK 56 million of Italian tax credits, and we had trade and nontrade working capital that in turn was almost flat. Then investments in the SPV, less kind of new debt that we drew on was flat as we invested NOK 131 million, and we drew NOK 132 million in new debt if we net out the financing and interest paid in the period. Other items was largely flat bringing us to an end cash balance of NOK 313 million. Then over to you, Andreas for the summary and outlook.

All right, it's time to round this off. So what's this quarter? Well, it's one where we did record installations. We did record revenue and we had very strong margin figures. Sales are also picking up amidst consumer turbulence across Europe. In terms of installations, we came in about 3,200. It's our strongest number ever. It's up 84% from where we were last year. In terms of sales, we did 2,200 and some sales. That's an improvement of 13% sequentially but still below where we were last year. . On IFRS revenue, we doubled from last year. And on IFRS margin, we came in above 20%. The margin generated above 24% blended, another strong showing and proof of our discipline in installations. Then on the subscription portfolio, it's been a very, very strong quarter. We had substantial capital deployment. We put NOK 133 million to use in the subscription SPV. That's up from NOK 31 million in the same period of last year amounting to a multiplication of 4 of the capital deployed. And I think that definitively answers the question to whether we can build a scaled subscription portfolio of solar assets in Europe. Now those assets were also of very good quality, and we saw a strong uptick in IRR. It came in at 12.4%. And quite a bit above where we've been trading recently and up from the 9.7% IRR that we saw in the same quarter of last year. And then it's been a quarter where we've taken important measures in order to improve our operational numbers and our efficiency for the autumn and into 2024. In this quarter, we established a shared service center in Madrid that will provide our marketing and operations work for all of Europe. It creates a lower cost structure and more operational efficiencies and flexibility as we direct our growth to where it is cheapest and most efficient. As a consequence of that, we've also cut 50 FTEs in established markets and avoided hirings of about 50 people in high-cost new markets going forward. And this put together creates a strategic advantage for Otovo that we think we can leverage in months and quarters to come. And then to sum up where are we headed in terms of the future. Well, we're set up for very high speeds in installation. We are set up for higher speeds than we're performing at right now in sales and we believe we're set up for improved profitability into 2024. For the second half of 2023, we expect to see installation numbers roughly in line with where we're trading right now, roughly the same numbers as we're seeing in Q2 2023 before increasing sales start to take hold throughout the autumn and improve our installation numbers into 2024. With that, thank you very much. We'll be opening up for the Q&A session.

All right. So we have questions coming in here. The first one is, should we expect gross margins to keep improving in the next few quarters? Do you want to go for that, Petter?

Sure. So we saw a strong underlying improvement in margins this quarter. And as we also reported on our sold margins, which are higher. We expect that gross margins should continue to improve over the next couple of quarters.