Qt Group Oyj (QTCOM) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Qt Group's Second Quarter Results Presentation. My name is Heli Jamsa, IR manager. And with me today are CEO, Juha Varelius; and CFO, Jouni Lintunen, to present the results. After the presentations, we will first have Q&A in the room, and then via conference call lines. Without further ado, please, Juha the floor is yours.

Thank you. Good afternoon, everyone. My name is Juha Varelius and I'm the CEO of Qt company. I'm going to go first through the business highlights for the second quarter briefly, then Jouni is going to walk through the financials, and then I'm going to after that talk about the outlook and guidance for 2022. I will also the -- after the presentation, we're going to have a Q&A and like Heli said, we'll start first here in the room and then we go into conference lines. If we look at the second quarter business highlights, the -- we had a net sales growth of 9% year-on-year growth and an EBIT of EUR 9 million and personnel increased by 30 people. So we've been continuing the -- our growth investments. As we all know, we did change our guidance already. So I'm going to talk about the future outlook later, but the -- where we did see a softness in the market in Q2 was in Asia Pacific. So the Asia Pacific was behind our targets. Europe was pretty much on target and U.S. was just a little soft, but very little. So we can say that the Europe and U.S. went into the target and Asia Pacific was a bit below. We've been able to attract new customers very well and also the business in APAC grew. So I'm not saying that it was the -- but of course, our sales targets and our targets are very high, so the APAC was not entirely to be able to meet those targets. What we've been seeing in the market is that the -- there is uncertainty. So we've been seeing some projects being pushed forward. We've been seeing our customers being very cautious and what we saw specifically was that the sales gears even more towards the end of the quarter, what is -- that's always been the case, but now we saw that even more. So the decisions are being postponed as much as possible at the moment. And I think that this is a -- well, it's basically the uncertainty. We all know the inflation, the war and implications, the high energy prices and whatnot. So what we see is the customers being cautious of not building inventory on high prices and then maybe being forced to sell them later with lower prices and also the uncertainty that how much the interest rates are going to go up and how the economy is going to slow down. I think that we saw a bit of the same type of behavior when corona was first time introduced to the world, but then the uncertainty actually went away fairly quickly. Now I think that we are still in uncertain times and of course, this poses a bit of a risk also for the future. In Asia Pacific, or specifically in China, we also saw that the -- as we all know, that the COVID restrictions are much harder than they are in the Western world. So we see that even just small infections here and there and entire cities are closed. That, of course, affects a bit on closing business, having customer meetings, et cetera. And I think that poses kind of a bit of uncertainty also for the second half of the year, specifically in China that how strict COVID restrictions will be there. Our profitability increased as we planned, and it was 24% of net sales. I think that the -- on a profitability side, I don't see uncertainties that much because the -- it's our -- we do increase our personnel quite a bit, and we are hiring quite a bit of people. We are also using subcontracting quite a bit. So for us to manage the EBIT on the guidance levels, we wouldn't have to do anything else than just slow down a bit of recruiting if need be, which we haven't done. So we are still hiring as much people as we were thinking of, and we're adding personnel as we speak and that's what we're going to be doing also going forward. I'll talk that a bit more when we go into the future outlook. So we're going to continue our growth investments as planned and we don't -- we're not intending to slow down there at all. We also do have a good sales pipeline for H2. And now that the -- some of you may remember that I said the same thing about 2 months ago, as I did. And now we have even a bigger sales pipeline, which means that the -- the case is that we weren't able to close on the second quarter, most of them are being postponed forward. So the sales pipeline is actually bigger, of course, now I am very cautious on that because we weren't able to close them, so that's why we took down the guidance, so I'm not expecting that. I do expect that some of those projects will be postponing even further. However, we've been able to build the pipeline even further. So I don't see, in that sense, a softness in the market going forward. Well, some of the Q2 offering highlights, like I said, we continue our growth investments as planned. We introduced Qt 6.3, significant performance and quality improvements, yet again. We had an new Qt Studio 3.5, enhancing the 3D scenes. New Qt Android Automotive version 6.3.1 and QT MCU long-time supported version. So in R&D, we continue developing the product you're going to see new versions, new enhancements. Also, there is not a mention of the QA tools. We didn't have any highlights on the QA tools development, but the QA tools sales been progressing very well. So the froglogic acquisition and the integration has gone well and the QA tool sales is going very well. So the combination that we offer a software development tool, and we offer a software testing tools, it's a very good fit. And I'm very happy with that acquisition as well. On the -- we actually had a press release on the collaboration with Bosch and I think that the main takeaway over here is that now we are also available in AUTOSTAR platform and Bosch is a -- Bosch resells Qt product to the market. So when Bosch is a Tier 1, they are offering Qt along the side. And for us, it's of course, we are very happy and proud that such a household name as Bosch is our partner in the automotive sector and offering -- and now enabling the digital cockpit with their offering together with ours. Bosch -- we all know Bosch from many different products, consumer electronics and so on, but they are also a very big automotive Tier 1 supplier. So they support quite a lot of services to automotive industry. And now we are working together, so I'm very happy about this opportunity going forward. So this very shortly the Q2 update. I'm sure you're going to have lots of questions afterwards on it. So looking forward to that. And now I'm giving the floor to Jouni to go through some financials.

All right. Thank you, Juha, and welcome from my behalf as well to the earnings calls of Qt. I'm going to go through some specifics about financials, some discussion about net sales, income statement and then balance sheet. As disclosed already earlier, we did grow by 9.3% year-on-year in second quarter. And we were somewhat soft, as Juha said, in Asia Pacific when it comes to the consulting and development licenses sales. We did see a positive good trend on the distribution license sales, even though it -- they missed as well slightly their targets for first half year. As said, the licenses and consulting was the growing entity. And then in the -- especially in the second quarter, we did see a major exchange rate fluctuation, namely USD got stronger by a bit and this gain was like a EUR 2.5 million tailwind for sales and in the comparable currencies, our net sales grew by roughly 2%. And also in this regard, we need to remember that last year Q2, we did have this one specific large deal that made it a very tough comp. In the first year, we grew by 19.9% driven as well by licenses and consulting. And overall, the FX impact in the first half is EUR 3.7 million, meaning currency-neutral sales increased by 12.7%. We expect to see a very strong quarterly fluctuation going forward as well. It's because of timing of the large deals, timing of distribution licenses sales. And also, we will remain seeing the impact of the exchange rate fluctuation going forward. Roughly 2/3 of our revenues are in USD and we are reporting in euros. Here is a summary of our income statement for the first half year. First, I'm going to talk through the materials and services. This is the account which we use mainly for booking the third-party professional services to execute the consulting projects. And this is an item that we can use when balancing the volumes in regions for consulting work actually. So we are not preparing our consulting for customers by in-house but through third-party services as well. There was a slight decline in that in the second quarter, which is in line with the development on the consulting revenues as well and 9.3% increase in the first half year. Our headcount grew by 34% year-on-year, up by 130. And we did grow our headcount during Q2 by 30 employees. So we are heavily investing in growth initiatives going forward as well, mainly in sales operations and R&D. Personnel expenses did go up by 25%, reason being the headcount additions. No news in depreciation and amortization. It's up by the 70% from last year because of the amortization of froglogic that we acquired last year in April. Other operating expenses, it's up by 40%, and this is a reflection as well of the growth initiatives. We are doing a lot of external R&D. We are doing a lot of projects in ventures development. And then we are seeing increase in travel expenses as well after 2 long years of COVID. So the main drivers for the other operating expenses account. This leads us to EUR 15.5 million earnings before interest and taxes or 22.7%. EBIT margin, we did see a major sequential increase in that from Q1 from 14.8% to 24.4% as planned and EBIT margin being now 20% for the first half. We see EUR 1.7 million financial income actually in our P&L now for the first half year and this is mainly driven by the unrealized items because from the intercompany accounts. So there is this part that will keep on fluctuating from quarter-to-quarter. And now when we saw a major change in USD, it kicked in as strongly. And income taxes actually were pretty low actually for the second quarter. There are some tax deductible items from our long-term incentive program that we paid out in the first half year, and that makes our effective tax rate to below 10% now in the first half year. The net profit for the first 6 months, it's EUR 14.0 million or 20%, down slightly percentage-wise from last year. And then a couple of words about the balance sheet where we see only little movement. Our current assets are up by EUR 2.4 million from end last year, out of which cash is bringing EUR 1.2 million. Cash is not up more because of the cash flow impact from the long-term incentive program and then some acquisition earn-out payments in the first half, adding up to some EUR 13 million. Equity, up by EUR 4 million; net profit EUR 14 million positive and offset by the LTI impact in the first half. And that's pretty much it. No significant changes in other accounts in this regards. Now I will hand over back to Juha to go through the market outlook and the guidance for 2022.

So if we look at the long-term prospects, our long-term view, I don't see actually any change on that. I mean there is a continuous need for graphical user interfaces, there is continuous need for touchscreens, there is continuous need to develop more software for embedded devices and there is continuous need to test that more and there is a continuous lack of developers in that sense. So there needs to be a software performance done in a way to be able to accomplish all this. And so there is a growing need for our Qt offering and our QA offering our test tool offerings. And if we look to market in a longer-term few years ahead, I don't see any change on that. If I see the -- so there is a clear need for cross-platform tool like ours. If I look to competition, we do have a competition now we're losing more to the competition or are we losing less, I don't see any significant change over there. So our product is still very competitive in the market. So I don't see any worries on that. Well, is there uncertainty in the market? Well, I'm sure that all the people in the room know that you're following different companies, you know that there is lots of uncertainty in the market at this very moment. And do I see that the -- we did lower our growth estimate from 30% to 40% now into 20% to 30% range and with a very good EBIT. So I do understand that it's a great disappointment to lower the growth estimate. But I do want to highlight that our numbers are still very strong. It's -- we do still have a very strong growth and a very strong profitable growth that we are experiencing. So how is the -- obviously, we do see that on the short term, the -- we've seen all the economic reports and whatnot, I think that the consumer spending will slower quicker than majority of the people I'm expecting. I mean I do see that the -- if I look in the United States, the -- how high the inflation is, if I look in Europe, I think that the -- with this combination, the consumer spending has to come down. I mean, it just can't continue as it is. If I look at our customers and how they're developing, however, this happens, they may have to slow down a bit on their inventory building. They may have to slow down a bit on the -- on selling their products, but can they slow down in a significant way for developing new products and the answer is no. So I think that the -- as this uncertainty goes away, we're going to get more back to normal. And with uncertainty, I mean that there is more clarity than what's happening in the economy. So the basics I see over here are still very strong, and I do believe that we have growth for many years to come. So our guidance for 2022 was updated to 20% to 30% year-on-year growth and profit margin to 20% to 30%. As we -- as I said before, we are now currently working on the next year plan. And as a matter of fact, a year plan before that or after that. And by that, I mean that in order to grow, we need to hire people at least like 6 months ahead. So the -- for the next year's growth, we need to be hiring people already now because onboarding takes some time if they are salespeople, it takes some time to build the pipeline and so on and so forth. And those hires we've been doing, those hires we are continuously doing and we'll do so, and now we're working on the next years. We're finalizing our next year plan that the -- what revenues we're targeting and with what personnel. I'm very happy that our attrition rate has been relatively -- it's -- well, on industry standards, it's good. So we have attrition rate, which is single digits, where on IT industry, it's like 20%, 30% is like a norm. Also, we've been able to attract new talent quite a bit. So we're adding new people, which is a good thing. The labor market has been somewhat competitive as we know. And so in that sense, I think that a bit of a cooldown in the economy on the longer term might be even a good thing. So looking forward into coming years, I think that the -- nothing has actually changed in that environment. If I look at the second half, what we see now how much pipeline we have, how much the sales activity we have, the -- all looks good. So I think that the -- we're going to be able to deliver on these growth guidances that we've been giving. And I'm sure there are going to be lots of questions about the future outlook. So in that sense the floor is yours.

Felix Henriksson, Nordea. I have a few questions, so I can go one by one. Firstly, on your guidance for 2022, I'm sort of curious on what it is sort of expecting from the external operating environment. For example, what needs to happen with the Asian lockdowns in order for you to achieve your growth guidance? And also on the distribution license side, how do you expect that to play out given the changing supply-demand dynamics that your customers are facing?

Can you repeat the first part of your question?

Essentially asking about what your guidance assumes for the operating environment.

What my guidance assumes for operating. So what needs to happen?

Yes, exactly. In terms of China lockdowns, et cetera.

Okay. Well for our operational environment, we expect the things remain pretty much as they are at this moment, at this point of time. We are -- of course, we do expect that the -- it's not -- let's put it this way that if the -- there will be major lockdowns in China and people won't be able to move at all, everybody is going to be at home, then obviously, it's going to affect our ability to close deals specifically in China. Then again, you have to -- we have to keep in mind that we do operate globally in many various countries. So that would have to be relatively severe. If I look into -- in Europe, I think that the -- well, it seems that the war is not escalating. It seems that things are relatively okay over here. Our Russian business wasn't very big to the begin with so that doesn't affect us so that if the war doesn't escalate in Europe, more than it stays where it is, I think we're going to be okay. I think it's going to be a -- in run times, will it have effect this year on what happens on the distribution of products, I don't expect that the effect so much. We are being affected now on the component shortages, which is the -- so we are a bit softer in run times that we were anticipating before COVID and all this hassle, but run time has been growing okay. I mean, there is good growth on run time. So I don't expect the economy effect much. But as the economy slows down, then next year, obviously, it's going to be a very good question because I think that the cold winter in Europe and consumer spending going down, that's going to start affecting us around year-end and next year. So that's going to be -- next year is going to be a tricky year for many of us.

Then my second question relates to your licensing model and the sort of subscription-based model that you introduced in late 2020. Can you help us out at all on how large a share of your customers are currently in that model? And how much of the sort of tailwind from the, let's call it, embedded price increase that is still yet to come from that shift?

That's -- maybe that's a better question for -- better for Jouni to answer. Indeed, we've done the subscription change, it does vary a bit. We do sell mostly 1 or 3-year licenses. And now currently, I would say that the -- we're mostly selling 1-year licenses. So the -- that's a typical that what customers are now buying. And the -- but what are the exact effects, I'll hand over to Jouni to answer those.

Yes. I mean we have been now like 20 months into the licensing model change. And we assume back then that it's going to take roughly 3 years. So we are somewhat 2/3 in time. We are not probably quite there in the amount of licenses, probably, I don't know, somewhere between 50%, 60% of that. I mean, from the license base back then. And Obviously, there will be a tail that will never be changing into subscription, at least in a very short run. Some long life cycle customers who want to stick with old versions or who wouldn't necessarily need the latest one. The impact of a tailwind from that change, it's kind of limited if you think about that from kind of a year-on-year perspective since we were on that strongly already last year. So it's very minor impact from there.

Final question relates to M&A. You've been sort of hinting that you might be doing some additional bolt-on acquisitions this year. So what's the latest on that front?

Well we're going to announce it when we announce it.

But I guess to be a bit more specific, how is the pipeline looking? What exactly are you looking to add? And perhaps how are the multiples at the moment as the public company multiples have declined.

Well, yes. It's a very good question, and I'm happy to highlight that a bit more. Well, first of all, what we have seen, obviously, is that the multiples have come down in the stock market, right, we've seen and specifically on the technology side. What we haven't seen that the multiples would have gone down on the private sector, right, on start-ups and the nonlisted companies. So their multiples are still high. And I'm having a hard time. I mean I don't want to spend too much money on acquisitions, right? I mean, fair amount, right? So that's the first thing. What we are looking -- so if you look at the -- our long-term strategy, what we have currently. So what are our assets? Well, we do have a great product, right? And now we have 2 great products. We have froglogic testing tools are really good and Qt technology is really good. They're really unique and that hasn't actually changed at all. We do keep develop them further. We do keep the feedback we get from developers is very good. We've built a global sales channel, global sales network. So we have locally salespeople and presales engineers, so we can serve our customers in a local language in their premises, we can help them out. And we have -- and we do have those Fortune 500 companies. We have a very impressive customer list. It's unfortunate that we can't make it public, but it's many, many known brands, big brand names as our customers. And so our long-term strategy is that when we're looking at these customers, they are all getting -- some of them are more in the software development, some are coming into software development. So many of our customers, the fact is that they were producing products before, and it was the physical factors, form factors that made the difference. And now it's the fact that software needs to be embedded in those products to be competitive. So it makes all the sense for us to add products into our portfolio that will help those customers to be more efficient, more competitive. And so therefore, we're looking in future, so if you look 5 years down the road, what you can be seeing when you see Qt is that we have multiple products that we add on our sales channel that we add on to our existing customers. So -- and then the next question comes that, well, are we going to buy those products? Or are we going to develop? Well, we're going to buy because if you think like the testing tools, would we've been able to develop a testing tool set ourselves, well probably, but it would have taken a long time. So it made all the sense in the world to acquire and add into our sales. So your question in that sense, are you going to be seeing acquisitions where we acquire products that fit into our software offering in a way to our existing and becoming new customers that can enhance their software development capabilities, yes, you will. And are you going to see acquisitions rather than developing in-house, yes you will. Our internal development will be more closely related developing Qt to be even better and QA tools to be even better and so on. But the total new products we're going to acquire. Well, have we been -- what is our pipeline? Well, we've been -- and we are in different phases on different acquisitions. And the -- but of course, as a public company, we announce them when we announce them. But are we active on that side? Are we actively working on that side? The answer is yes. So -- but I'm not going to give any time line. I mean it closes when it closes. And if it doesn't, it doesn't. And rest assured, we won't spend the shareholders' money unwisely.

It's Matti Riikonen, Carnegie. A couple of questions. First, regarding your internal estimates now behind the guidance numbers. Do you expect that the softness that you saw in Asia in Q2 would be kind of escalating more in Asia? Or do you think that there would be more other areas like Europe and U.S. kind of becoming as weak as Asia. So how do you see the different geographic areas developing going forward?

Well, we took our estimate a bit down in Asia Pacific. So obviously, when we got these numbers, Q2 numbers, what we did was that the one -- we went through the -- that the -- what happened, what deals were put forward and for what reason. And then we look at the pipeline for the rest of the year. And we made new estimations that the how we estimate the H2 to develop. And yes, I think that the biggest softness or the biggest downscaling was done in APAC. So we estimated what the APAC did in the first half, and we kind of looked at what we estimate to happen in APAC in a second. So the APAC is -- Asia Pacific is the area where we're going to expect to see the most softness also in the H2 going forward. And we don't expect that much softness in the -- we expect U.S. and Europe to be pretty much on target.

But if you say that it's the kind of consumer-driven softness in the economy coming from the inflationary pressures and others. Is it logical that, that would be isolated only in Asia and not happen in Europe and U.S. Because -- yourself mentioned that we have seen inflation in all parts of the world and what is your reason not to think that, that would be escalated in other parts of the world?

Yes. Well, like I said, the run times were a bit soft, right? But they're still growing very well. So the softness we got from Asia Pacific was developer licenses and consulting mainly, right? And so we expect that to continue in Asia Pacific, and we don't see that much happening in -- we don't see that much the target setting. If I look at the target setting in EMEA and U.S.. And if I look at the pipelines, the softness, well, of course, there is going to be softness. But the -- to your question where is the greatest software is going to be, we say it's Asia Pacific. Of course, that could also affect that the -- when we've done our budgeting and our target setting, we've done it, they're a bit wrong in a way that we've been expecting too much from Asia Pacific rather than in the U.S. But yes, we don't -- I think that the -- to our targets, the biggest gap is coming from Asia Pacific.

All right. Then could you describe in what ways the customers are now kind of saving money. So is it -- you mentioned that they are making shorter license term payments but -- and they are postponing projects. Have you kind of lost some projects altogether? Or have you just seen that they are being postponed?

Well, yes, that's a -- that's a good question because the -- well, the first what we see is that the people prefer buying more 1-year licenses rather than 3-year licenses even though we see that the projects will be longer term, which means that they are spending more money in a shorter term to have the flexibility. We have also seen that they try to start maybe a bit more cautiously. Postponing it's -- in our business, when this is developing -- we're selling a developer license, which means that the customer has an idea that this is what we're going to be starting to build. And then they have a plan that this is what we're going to be doing, but they haven't yet started and the development process that you can actually postpone very easily, right? You can put it in the next quarter. And then on the next quarter, the customer may decide that I'm going to put it yet in next quarter ahead, right? There is no imminent need. And that's also in our sales in a way that the -- there is no imminent pressure for a customer to make a decision in this particular moment, whereas when you have something under development, you're already developing, if you then need something -- you can downscale it maybe or whatnot. But if you're already in a development process, then you need to go forward, you can't any more postpone it. So sometimes, we do actually see that the customer may postpone it a long time. I mean, that it's -- you can easily postpone 2 quarters or 3 quarters something and maybe then later decide that I'm never going to do this, right? But the -- I would say that the -- well, I think that the -- it's hard to generalize, but I would say that on certain items, you can postpone maybe a quarter or so and on certain items, you just need to -- you need to do it. So we do have 70 different industries, so I'm trying to figure it out how to generalize it. So we kind of are seeing a bit of runoff, but in this -- and you can kind of a smaller product you can postpone. If we're talking about automotive models, then you usually -- it goes like a train, right? You don't move anything. You have so many moving parts. If you're going to build something simpler, then you can postpone it and you can go with the old product for a while, but so...