Qt Group Oyj (QTCOM) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Qt Group's third 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 the Q&A in the room, and then we will have conference call lines. Without further ado, please Juha, the floor is yours.

Thank you. Very warm welcome to our third quarter results presentation. I'll go through briefly some of the business highlights, and then Jouni will talk about the financials, and then we have the outlook and guidance for 2022. So the business highlights, our net sales grew 31% year-on-year, and it was a very good growth quarter. Our developer licenses could take through especially strong and the QA tools, the quality assurance testing tools and then on this quarter, we had a bit softness on the distribution licenses. However, already at this point, I want to stress out that there is always a quarterly fluctuation on the distribution license sales so we still do see and expect that the overall distribution license sales will be very healthy this year. Our EBITDA margin was 22% of net sales and EBIT impact on our activation acquisition impact for our EBIT was minus EUR 1 million negative. Jouni will talk more about the acquisition impact to our numbers. Our personnel increased 66 people in the third quarter, mainly the growth comes from sales and R&D, and it's good to realize on this number that the 41 people was actually the Axivion headcount impact so it was roughly 20 people, a bit over 20 people, that we hired quarter-on-quarter. If we looked at the -- what was the economic situation in the third quarter, it remained pretty much the same as it was on the second quarter, i.e., the -- we do see a bit of differences. So in APAC, we see a bit of softness and there we see covid impact specifically in China. There are a lot of restrictions in China that are slowing down the business. What we see in Europe is a bit softness from -- well, we all know what's happening over here, including the war inflation and so on so there is a bit softness. And in U.S., we see, as a matter of fact, at this point of time, economy is still pretty healthy and going well. So if we look at our numbers, we pretty much hit our targets on Europe and in U.S. and had a little softness than in APAC. So that's pretty much the same picture we had on our second quarter. If we look on our recruiting, we see that the -- we're still recruiting as of our plans. If we look some of our customers, we can see that they are slowing down on their recruiting. We're also seeing some cautiousness in our customers and there, we can see that we are selling more 1-year licenses than 3-year licenses, and again, that was pretty much the same situation in the second quarter so we haven't seen much of a change over there. At the same time, we do see that the projects that our customers are doing, they're going forward. We don't see project cancellations or we don't see, in that sense, slowness in the market as it is. A couple of words about the Axivion acquisition. What Axivion does, it's kind of -- in a very short way, it adds value. It kind of fits into -- in our quality assurance tools in a way that with Axivion developers can test the architecture and they can test the software while they are developing the software whereas froglogic is more like for the -- it's testing the user interfaces. So these 2 complements each other and what does it complement for Qt as a whole, we're selling the software development tools and we're selling also now testing tools to test what our users been developing. While it's good to mention over here is that both Axivion and former froglogic tools, they are stand-alone products so they can be used to test software that's been developed other software development tools not only Qt; so it expands our total addressable market. Axivion in 2021 was EUR 5 million revenue and EUR 1.5 million EBIT and personnel was 41 people as of September 30, 2022. Before our acquisition Axivion was concentrating mainly in the German market. So what we're going to do with Axivion is that we're going to introduce it more to a global market. It will expand our offering to C++ developers and beyond, and it will strengthen our ability to engage customers in multiproduct one-stop shop called Qt, and the addressable market is, say, EUR 1 billion. We see just this quality assurance tools business, testing market, very attractive market as a stand-alone market, and we have very high expectations for it in the coming years. Some of the Q3 offering highlights, we did introduce 6.4 where were major improvements on our web assembly support. There were also other introductions on 3D and so on. We did 6.0 on Coco. Coco is the quality assurance tool name for the product. We did introduce 3.7 on Design Studio and to a new version on Android Automotive. So in short, we're doing quite a lot of product development on part of buying new products and making sure that our existing products stay very competitive, which they are. All the time, we are getting feedback from the developers that the acute product and our quality assurance tools products are very high quality, and we are exceeding the expectations from our users, which is very important. If we look what we did in Q3 on a product, we continued enhancing our existing products. We bought Axivion to our product portfolio, and we keep on developing our product further and we continue those investments. We also continued our investments on sales and sales operations, which is basically sales and presales engineers, and we intend to continue on that path and keep on hiring. So we don't have any plans to slow down on our growth plans or growth projections. And without further ado, Jouni will go through the financials.

Thank you, and welcome from my behalf as well to the Q3 earnings call. I will talk through the financials, some notes about the net sales, income statement and then a couple of words about the balance sheet. As already mentioned, our net sales grew by 31% in the third quarter and the growth came from the licenses and consulting part, specifically in which the testing tools and consulting did show good growth numbers and some softness then, on the other hand, in distribution licenses part. Maintenance is down year-on-year as expected, and that's as a result of our change into subscription licensing mode and that maintenance part will keep on going down in coming quarters. Exchange rates, again, this quarter gave us a piece of a tailwind and the impact of the exchange rates now was EUR 2.5 million, meaning that our net sales growth in comparable currencies were 20% year-on-year in Q3. For the first 3 quarters, our net sales grew by 23%, and that's as well for most parts coming from licenses and a consulting part. We have been gaining from the exchange rate impact for pretty much all the quarters so far, the impact of which is EUR 6.2 million and in comparable currencies, our net sales growth was 15%. We will keep on seeing the strong quarter fluctuations from timing of the large deals, also timing of the distribution license bookings, and then also we want to note that the exchange rates will keep on having the impact on our revenues going forward as well. Roughly 2/3 of Qt revenues are in USD and then rest in euros. Here is the income statement from the third quarter and as I said, the net sales grew to EUR 35 million. In expense lines, the materials and services were pretty flat. That's the account we use for the third-party consulting services to be provided for our external consulting sales projects. Personnel expenses, up by EUR 4 million. We are year-on-year up -- our headcount is up by roughly 180 employees year-on-year and roughly 40% of this increase is coming from the sales operations, 41 people as an outcome from Axivion, and then next biggest one is the R&D, which are aligned with our growth initiatives. Other operating expenses is the growth is to support the growth projects in Ventures business development. Also, we do see increase in R&D outsourcing our marketing and also now in travels after 2 slow years with Covid. The EBITDA, earnings before interest, taxes, and amortization is EUR 8.9 million or 22.3% in the third quarter. This is on the same level as it was in the first half year. Juha said that there is negative EBIT impact of EUR 1 million because of the Axivion acquisition, and that's coming from the amortization, roughly EUR 0.7 million, and then onetime due diligence cost of EUR 0.3 million. EBIT then for the third quarter is EUR 6.3 million or 18%. We are seeing good guys in items below EBIT this year, specifically in the financial items. That's because of the exchange rate -- the impact in the balance sheet items when it comes to intercompany balance sheets and then also, our effective tax rate will be low this year, and that's because of the kind of reporting of the impact of the long-term incentive program that was executed in the first half year. All in all, net profit for the third quarter is up from EUR 4.4 million to EUR 6.9 million or 19.7% of the net sales. Here, the same story for the first 3 quarters' time. We reached EUR 104 million and earnings before interest, taxes and amortization is EUR 23 million, 4% up from last year's last year, and EBITDA margin is 22.4%. No change pretty much from first half year. Amortization is up. We are now having the full kind of period of froglogic amortization, and now also Axivion as a newcomer, so amortization is up from EUR 1.8 million to EUR 3.4 million, bringing the EBIT margin to 19.3% or EUR 20 million. We do get the positive impact from the financial items and taxes in total net profit for the first 3 quarters is EUR 21 million or 20.2%, which brings our earnings per share to EUR 0.84. Balance sheet, the most movement is coming from the Axivion acquisition. Noncurrent assets up because of the intangible’s bookings and goodwill. Current assets are up because of the customer receivables, receivables from Axivion acquisition, and then also tax receivables. Equity is up from since end of last year by EUR 19 million, obvious net profit, EUR 20 million; the negative impact of the LTI impact early this year and now the share issue because of the Axivion acquisition of EUR 8 million. Long-term liability is up again by EUR 44 million, and that's the loan we took for the acquisition and then also the tax liabilities and earnout liabilities relating to that. Now I will hand this back over to Juha to talk through the market outlook and guidance for the full year.

Thank you. Well, if we look at our long-term market outlook and prospects, we do actually see it pretty much unchanged. There is the underlying need for developing better products and underlying need on those better products to have better user interfaces, graphical user interfaces, and user interfaces overall, and we see new product cycles, new product families coming and being launched all the time. We don't see any change on that long-term prospect on that respect. We also see that Qt is very well positioned. We do see competition. Some of the early competition we had in 2015, we see that competition going away and getting smaller, and we see that our product lineup is very -- our products are very good. Now that we are increasing our product lineup like we've said before that we are looking for the software development process as a whole, and we are looking to enhance the developers. We want to make the developers life -- software development fun and easy, and we're looking to ways to offer to our customers to be more efficient in that software development because the bottom line is that there are not enough developers for all this software to be developed in this world in the coming years and we are very well positioned in that. I think that these product acquisitions we've done, they add perfectly into our strategy and I'm very happy that the froglogic acquisition we did a year ago, how we've been able to integrate that and how it's performing, I'm certain that Axivion will be on a similar path. So there is a very clear need for our offering. We see that the market will be growing on a longer term, and we see that growth for years to come. In that sense we're very confident on that, and we don't have any reason to believe that that would change somehow. On a shorter term, I'm sure that you've heard this pretty much on every presentation so far that you've heard that there are uncertainties. I would say that they are a bit different. We are operating in a global market. We see in Asia; we see the very strict COVID restrictions. They affect the business -- how business is being done in China, and we see some softness over there also in the economy. Japan, obviously, the Japan currency has weakened quite a bit and so there are some challenges in Japan economy in that sense. We see some softness coming through in United States, although, we still see that the economy over there is going very strong. I think that Europe is in biggest trouble at the end of the day with the inflation, with the energy prices, and whatnot so my expectation is that the European economy will be pretty much in deep trouble in the coming winter and a few coming months. How long that's going to last, well, there are different estimations that this slowed downturn will be relatively short, and some people are saying it's relatively long. The truth of the matter is that nobody knows, but there will be a slowdown; that's for sure. COVID is also -- well, it's rising up again, so we'll see that that will have some effects. We do see some countries, apart from China, are also issuing more restrictions, but we haven't seen travel restrictions so far, a whole lot. Like I said, our quarters are very different and a quarterly comparison in our business is very difficult to do because sometimes there are bigger deals. Customers are buying more developer licenses, but also the run time revenue does fluctuate from quarter-to-quarter and all this slowness, if I look at the first 3 quarters up until now, the developer license sales been doing fine. I mean, if we see that our people are starting new projects, are they continuing with the existing one, are they pushing new products to the market? Yes, they are, and so I think that, that's going to be -- overall, if we look on a yearly basis, that business seems to be going forward and we don't have any reason to believe that that would change a whole lot. If there is going to be an economic downturn, then I would say that then the effect is going to be on a runtime revenue and obviously, the run time revenues are growing share of our total revenue all the time. So that will have an impact and it's going to be -- we do expect healthy runtime revenue development in the fourth quarter and we do know that there are quite a lot of projects that the products are hitting the market next year. So we do expect our run time revenue to grow also next year pretty healthy. We'll see that how much this economic slowdown will have effect on that but at this point of time, we're still looking and still feeling that it will slow down from an ideal world, but they're still growing pretty healthy. That's what we see. Guidance for 2022 is unchanged so we're saying that the full year '20 will increase 20% to 30% and the EBIT margin will be 20% to 30%. As we know the -- usually the second and fourth quarter are the strongest quarters, fourth quarter being very, very strong, and the third quarters are kind of the slower quarters for us. The why that goes, well, obviously, there is a summer vacations in the third quarter, and then there is a year change on the first quarter so a bit of a slow start for the year but that's how it works. If you look at our previous fourth quarters, they've been always substantially higher than the what we have on the other quarters. And so it looks again on this fourth quarter that we have a quite a lot of deals lined up for the fourth quarter that we are expecting to close. Also, we do know that there are quite a lot of existing business that is closing as we speak. For the fourth quarter, I would say that the -- I'm sure there are going to be questions that where do we see the risk. I actually don't see -- on our bigger deals, if we look at the bigger deals that we have, we usually don't have a whole lot of risk involved in them that they're going to go away or we're going to lose them because at that point that when we're negotiating with our customer about a bigger deal, that means that customer has already decided that they're going to design and develop and manufacture a product that's going to go into the markets. Obviously, there are quite a lot of decisions already being made, and we're in that discussion. Those projects very seldom go away but the timing, of course, is an issue that we will be able to close these deals in the fourth quarter or will some of the deals being boost on a first quarter because sometimes our customers rather have to invoice on the first quarter rather than on a fourth quarter. That’s mainly the timing issue we see that there could be a potential risk. And -- with these words, thank you, and do you have a question?

Yes. So Veikkopekka Silvasti, Danske Bank. Let's maybe start with the guidance for this year. Could you just once again describe the reasoning behind reaching the 20% to 30% constant FX growth so that obviously requires now cost of FX growth of over 30% for Q4. Are you expecting customers to maybe move back to 3-year licenses? Or is the sales pipeline just so heavy now that you expect to get those closing? Or is there some other changes or expectations in the market?

Very simple question hear. Very simple answer to your question is that the pipeline is just so heavy. So obviously, at this point of time, we've gone through the pipeline very carefully. We've gone through all the bigger deals very carefully, and we looked at where we think we're going to be ending up and that's why we think that we're going to be within the range. I think it's fair to say that we're going to be most likely towards the lower end of the guidance rather than the higher end.

I understand. Then, the classic question about potential deal slippage from Q3 to Q4. Have you seen some large deals you may be expected to get in Q3 moving on?

Yes, there were a couple.

I understood from Jouni's presentation that especially strong growth in testing tools and also in consulting, but then distribution license revenue missed. How about the developer license of the core product of your developer license? Has this grown as you planned or…

Yes, I think Jouni was referring to line developer licenses and consulting so developer license has been growing very nicely, yes. And so if we saw some softness, it was on our distribution license sales. But over there, I wouldn't make too big conclusions because some of the distribution licenses we do get that people report that well, this is how much we shipped and here is license check, and then we have customers that they buy, for example, 0.5 million and once they've shipped those 0.5 million, then they buy more. And so there is a quarterly fluctuation on that. If I look at the distribution pipeline, if I look at the distribution that what do we expect for the whole year, that number, at least as of now looks very healthy for the whole year. But if we just look at the third quarter, yes, then the distribution licenses were a bit softer.

Yes. Can you just briefly describe how you kind of combine this kind of distribution pipeline that you expect because as far as I'm concerned, looking at your past reports, I think distribution license revenues has been the line that's been missing essentially; missing the expectations. I mean -- so how do you construct this kind of pipeline? And how do you make sure that it's aligned with the reality that will then come through?

Yes, it's a very good question. If I look on the distribution licenses as a whole -- well, by the way, there is a -- we need to I need to get these terms right because I talk about run time, so I talk about distribution licenses and the same thing. It's the same license. I use kind of 2 terms for a same thing and have to learn away from the run time. So run time word -- so the distribution licenses, if we look in 2020, when the COVID hit, and there were a lot of closures and whatnot, our distribution license sales was very small. It was like a very single digit. Then, in '21, it started to get better. And in '22, like I said, if we -- if everything goes like it looks now, the whole year growth for distribution licenses will be a healthy growth. How do we estimate, obviously, when we do make deals with our customers, the negotiation goes like: what are their expected volumes and when are they planning to be shipping and whatnot, and so we have a rough idea that the -- how much do we expect on the automotive market that is actually fairly accurate, that's easy to make estimations that how many cars are going to be manufactured and delivered because they kind of make those decisions beforehand, and they order quite a lot of different parts for the cars, and so they kind of a plan. That's fairly accurate so we know that the -- when they're going to be launching, how much they're going to be shipping. So that's no problem at all. When you go on a cheaper price products like rice cookers or shuts, then it kind of gets complicated and if you look at the number of sources where we do get run time, we do have a huge number of phantom customers as of today because we serve 70 different industries and very low -- from very low-end products to very high-end products. So we do have customers that are actually manufacturing very low-end products and some of those customers are buying some of the run times also beforehand. There is some uncertainty on those estimations. That's fair to say and of course, we do look at the -- we do have a list that -- where it's coming, we're constantly following it, and we are fine-tuning the estimation. But in this kind of situation, when we do have a large number of customers, we have 3 continents, and there is an economic slowdown hitting, it is fair to say that, of course, we don't have accurate that what's going on just right now that how much they are and what kind of decisions they are making. It’s an estimation. I don't have exact information that this is what's going to happen. On a deal slippage, yes, that's always a possibility. I mean, we do have like I think a year ago or a couple of years ago, we had a deal, a bigger deal that -- everything was negotiated, everything was ready, and then the customer signed it on 2nd January. So they didn't sign it into fourth quarter, they signed it on the 2nd January for whatever their budgetary reasons. So that can always happen.

Okay. I think I need to speed up in order for other analysts also to get to ask, but a few questions still. So it seems like this kind of customer behavior from buying 3-year licenses towards 1-year licenses has continued from Q2. So should this kind of change be permanent? How does this affect your, let's say, first of all, 2023 outlook? And then on 2025 outlook, so your longer-term growth prospects? And does this, by the way, affect distribution license revenue.

No, it doesn't. In a way, it helps next year because most of the -- well, I can't see any development project that it's done in a year. Which means that the -- they're going to continue and the year licenses will be sold again after a year on distribution licenses that does not affect. I think on these uncertain times, we do see some of our customers, as a matter of fact, they're slowing down their hiring. Some of our customers are even laying off people, as we know. Even some big tech companies are laying off people as we know and companies are clearly getting ready for tougher times. They're looking for their cash flows and they try to secure their cash flow. There's a lot of uncertainty. So a lot of our customers say that they rather buy a 1-year license even though it's more expensive than a 3-year license and yes, we do expect to see that sales to happen again next year. In the short term, yes, it does not effect on the runtime or based on the fact that how much product goes out, and then they're going to be buying those licenses again. If I look at the number of licenses and how the number of licenses is growing, that's on a very solid trend in that sense.

Okay. So selling 1-year licenses doesn't affect your 2025 targets?

No.

And then final one. So you said that the -- some old competitors are fading away. Probably this industry-specific offerings and so forth. But how about new competitors? Are there some new technologies rising? To name a few, Flutter and Unity. How do you see this?

Yes. So the ones that the -- we see that -- when we started in 2015, there were offerings like EP Guide and Kanti was there quite a bit. We were about the similar size. If we now compare the sizes, I think EP Guide is pretty much gone. Altia was one of the companies I think that they kind of remained the same. We made quite a lot of investments and we've been growing quite a lot. I see them specializing on some things or some specific things but the -- clearly, we are gaining more momentum as they are. On Flutter -- Flutter is actually not a very new thing. I don't know when Flutter was introduced, let's say, a language and started from mobile and we've seen it in mobile. We've seen it a bit on desktop. We haven't seen it on embedded. Unity, we've seen that Unity is a game engine, and they have a very good 3D offerings and whatnot. On the other hand, we see that with our products, building, for example, the digital cockpit in a car with Qt, you can do that with Unity can't. We do see some of these game engines mainly in some high-end automotive cars. If you want to build really cool 3D effects where you don't have any hardware constraints or electricity or memory constraints, trade products for that, for sure.

Exactly. So Unity will be one more tool in Mercedes-Benz toolbox and you will be there as well in the future or...

Yes, yes. By the way, when you see automotive, we do have a few customers where you can say that the Qt is dominant, so that pretty much everything is built in Qt. But I think that in a normal situation, what you see is, say, a hybrid still, you see a hybrid so that the automotive manufacturer is using many different tools to build the digital cockpit. We have a few customers that are using Qt extensively. We also see that the customers using Qt extensively, they actually do gain quite a lot of benefits. So using many tools, having many development teams and whatnot on a longer run, I don't kind oversee that to continue. It is much more efficient to try to combine and use only one set of tools building. At this time, I think that there are a lot of experiments, there are a lot of people experimenting doing different things and whatnot. It's a very common thing that if you see a car that you -- there is software being made with many various ways and many various tools so it's not all unified as of now. Yes, I do expect sometime -- yes, I do expect you to see Qt -- if I look at our position in the automotive market, I think it's very strong. We do have a very good offering. Of course, there are some fluctuations all the time so you may win or you may lose something. I'm not to -- but overall, our position is very strong and again, I want to stress out that even as of today, our runtime revenues are coming from very, very multiple sources. We have a very large number of customers in that specific area. I don't expect the automotive overall -- if you look 2025, if everything goes like a trend then, the automotive revenue will probably be 20%, 25% of a total, but not more than that so majority of the revenue is coming outside of the automotive market, even as of today.

Thank you. Any more questions in the room?

[ Peter Freeze ], private investor. I will continue on your product offering and how competitive it is. Are you considered being in various -- for various industries, the market leader or an average product offering company?

Well, we actually considered that our product is very world-class, and it's extremely good. So the -- and if we look at our -- it depends a bit where you; how you define if we looked at the -- we serve over 70 industries throughout the world on those different use cases from a very low and hardware memory footprint into a very high end. We're probably the only gaming town that can serve customers in a large scale, which means that you can build your lower-end products and your high-end products and everything in between using Qt. We're very good on that. We're very proud to be so widely a cross-platform tool and our framework is -- we do see that it's -- it's one of the best in the world, and that's what we do get feedback on. Then if you take a very specific comparisons like you take only 3D and then you forget that you forget everything else, then, yes, it's fair to say that if you take a mentions and you want to build really cool 3D effects, and you have limitless amount of hardware and the processing power, then obviously, the game engines are better but the game engines are made to make games and they've been doing that for a long time so obviously, that's their stronghold. We've been always looking that we want to be a horizontal product. We want to have a very wide variety of the use cases, and therefore, we do have these 7 industries. So if you look at that strategy, we're pretty much the only game in phone. And yes, we do surveys on our developers and the feedback is extremely good. The one cornerstone for our success, obviously, is that the product is excellent. If I look at the -- our acquisitions, the quality assurance tools, froglogic, and then we have the Coco, Squish product names. The feedback on those is also excellent. And actually, on its own sense., I think if you want to make a comparison in Axivion, I would say that's like a Formula 1 car.

Okay. I maybe would like to continue for CEO regarding the profitability. I looked at the 9-month figures and revenues even if maybe slightly lower than expected among investors. But when we look at the EBIT level and especially if you look at the currency exchange rate adjusted, there is hardly any increase in EBIT this year compared with the previous year in 9 months. So is this a concern which the company is addressing or do you see this as a temporary situation, whereby the scaling impact will gradually get more pace.

Well, we've guided that our EBIT will be between 20% and 30% year-on-year going forward and we do see that we're going to be well in that guidance. We're not looking, obviously, on a short term, would we be able to make even better EBIT? Yes, we would. But I think that at this point of time, it makes all the sense in the world to invest in this growth and make sure that we're going to be on this growth path for the years to come, which we are going to be. I have no doubt about that. Therefore, we do have R&D investments. We do have our own product development investments. We're going to continue. We do have research projects going on where we're testing different things. Maybe some of them will be announced later and some of them will probably be killed as it is and we are also hiring more people on sales and R&D as we speak and we intend to continue those growth investments. On EBIT side, we're very confident that that we'll be able to be on that 20% to 30% range. We have no doubt about that on a yearly level. I'm not concerned on that. Then if we look at where is our -- one measure we actually look is that on a yearly level that what is our growth rate in percentage and what's the EBIT percentage, and if we see that the revenue growth percentage plus the EBIT percentage, if that's over 40, we're actually very happy because having such a number that is over 40% on a year-on-year basis, it's kind of a tough measure to meet. And that's not official guidance we're giving, but that's our internal that that's our internal measure that we want to be on those 2 numbers summed up together. We want to be on over 40. So we're looking for profitable growth in that sense. Like I said, the revenue fluctuates a bit and, in our business, it has a direct impact on EBIT. But on the EBIT guidance, 20% to 30% EBIT this year, we're very confident on that part. So not concerned. On the other hand, to your question, are we going to be slowing down on our recruiting -- or are we going to be slowing down on our investments for the growth, no.

Okay. Then I have 2 specific questions for the CFO. There was quite a heavy increase in other operating expenses. You'd understand that there were some onetime expenses related to this latest acquisition? Or can you open a…

Sorry. The other operating expenses primarily are driven by the growth initiatives and the Axivion acquisition is only like EUR 0.3 million, 300,000 of that what comes to due diligence on this transaction-related costs. So that's a limited part of that.

Okay. Then the other part, depreciations and amortizations are heavily up. So how big is all in all the amortization amount related to these 2 acquisitions? And then how long period are you going to depreciate those?