Qt Group Oyj (QTCOM) Earnings Call Transcript & Summary

Hello, everybody, and welcome to QT Group's Q2 2026 Results Presentation. My name is Herta Eronen. I'm the Communications Lead at Qt Group, and I'm here today with our CEO, Juha Varelius; and our CFO, Ann Zetterberg, who will be presenting the results. After the presentation, we have time for questions, first starting from the room and then if time permits, then from the line. But without any further ado, let's get going. Please go ahead, Juha.

Thank you, and good morning, everyone, and welcome to Q2 results. My name is Juha Varelius, and I'm CEO of the company. Pretty much same all the agenda, business highlights, market trends, financials by Ann, and then I'm going to talk about the outlook and guidance for 2026 later. So if we go into the Q2, our net sales grew 19.6% and the quarterly net sales was EUR 61.3 million, an increase of 19.6% so comparable currencies, 20.9%. EBITA margin, EUR 15.1 million and EUR 9.3 million. ARR increased to EUR 160.4 million, and so it was a healthy growth on there. If we look at the Q2 a bit more detailed. I'm actually pretty happy about our performance since the distribution license sales year-over-year was a bit over EUR 6 million less this year than it was a year before. Last year, we had a EUR 19 million on distribution revenue so that we were able to increase our revenues. Our developer license sales has been developing very well overall. If we look on the IAR, IAR has been performing very well on their subscription changes. We were expecting on aggressive plan that we're going to have a 40% conversion. Now we are on the -- over 60%, if I remember correctly, 68% conversion on the second quarter, which means that the IAR revenue, obviously, compared to last year is in a pressure since we have the already majority of the sales in the subscriptions. I'd say a good news because in the beginning of the year, we, of course, didn't have an idea that how quickly can we do this transformation. And now it seems that we can do it even quicker than we were anticipating. So -- and quicker we do it, then we get on the -- on a healthy revenue growth on the IAR side as well. So given those caveats, I think that we are pretty happy on the Q2 performance. On the profitability side, we've had the change management negotiations going on. We've done them in the USA and in Finland, they're still going on in some parts of Europe, and we do have one-off costs of those in Q2. So given those one-off costs, we're pretty happy on the profitability as well. We are definitely going in the right direction and at the pace even quicker than we were hoping for. So I expect that the next year, the profitability will be well in the old healthy good numbers that we were used to see. So -- and the change management negotiations where we're targeting 20 million cost savings are well on track. So I have no doubt that we're going to be able to reach those numbers. If we look on the license sales, well, we do have -- it's kind of -- it's a mixed package in a way that the -- we do have different industries, medical and defense industries overall are doing globally very well. If we look at automotive, we obviously -- our customers are having challenges in Europe, whereas in Asia Pacific, the automotive industry is doing relatively pretty well. So for us, we do have pockets in the automotive industry where we're doing okay. And then we have pockets where our customers are suffering along with us and the -- of course, the Tier 1 as well. On regions, well, I would not read too much on the regions on a quarterly level because there is -- as you know, in this business, there is quite a lot of fluctuation. EMEA was good. Americas stable. APAC was on this quarter more moderate. If I look overall on the longer term, let's say, that the end of this year and next year, I'm expecting USA that quite a substantial improvement still where we are. So the -- that's where there is a room for improvement definitely. Well, I already mentioned the IAR subscription licensing model. So no doubts about that, that can we drive through that change in IAR pricing models that will happen, and that's been very well adopted. So the -- that's well on track. Well, depending on these industries, it's always good to remember that we operate on 3 regions. So we are a very global company. We do have 70 different industries that we serve. Some of our industries are a bit under pressure like the automotive. But then on the other hand, some industries are doing very well like the medical and defense. We also do see overall economy kind of stabilizing. I think that the latest disruption and uncertainty came from the war in Iran. Well, let's see what's going to be the next big disruption because there's been many of them. But if we now look at the -- what our customers are saying and how people are looking for the future that there is -- I would say that the market has stabilized pretty much. On APAC, it's been more or less stable all along, but in Europe and in U.S., we've seen some disturbances. I'm not going to talk about much on AI, but the -- I think that if I look, there was a lot of hype in February, March, April, and then there was a conclusion that the software industry is going to disappear and AI is going to take over everything. Now I think it's calm down there a little. And I'm not saying that AI is not coming. AI is definitely coming. But is it coming so that it's going to take over everything? I have a bit of my doubts. Here are the kind of the same phrases I said last time. But what do we see in the market is that the companies are not really getting rid of developers because of AI. We do see companies downsizing, but they're downsizing because their business is not doing very well, right? And they're downsizing developers and they're downsizing in certain industries, they're downsizing quite a lot of other people as well. So we know -- I mean, you've read the news, there are big automotive companies that have announced that they're going to downsize 100,000 employees by the 2030 and so on and so forth. But do we see that companies are downsizing because of AI? We don't. Do we see that the developers are using AI as a tool to be more efficient? Yes, of course, that we do see. We also see that the AI adds kind of a complexity in a way that the AI does software very quickly and quite a lot. And it's still in a phase that somebody needs to look into it, a human needs to look into it, but what was done, human needs to look into it that does this actually make sense. AI, as you know, also has imagination of its own. It's like a good -- AI is like a good coworker that never says, I don't know. It always gives an answer. And the -- I've actually encountered this in real life as well, but the AI can be very confident of giving that answer and AI can do a lot of things. Also, what we see is that on a cute, what is say a framework, Framework kind of gives an architecture to software. And it's like a plumbing of the software in a way. And even for AI, it makes sense to use this. So that's kind of where we are. And what do I envision is going to happen is that the -- all those that we are now watching and wondering that why I paused there were people coming in and I started looking at should I say hello or not. So that's why I paused and I didn't say hello, but hello, welcome. So what we see on AI is the fact that the -- it's -- we need to find a way on our monetizing model that it also takes into account that AI does do some coding. And this means that, we need to start monetizing and invoicing not only per seat, but on the usage of the Qt technology. And when that shift is going to happen? Well, it's probably going to be something like the subscription change that we're going to have a new version of our framework and then we start implementing it. We are working on it, and we are now working on different models. We're monitoring that -- how to implement it and whatnot. And you can expect that during next year, we'll start moving into that direction once we figure out what is the best model for us and for our customers so that we can take into account that there is a developer doing development and then there is also AI doing development. On IAR, that's kind of already taken care of because IAR is selling subscription and then IAR charges for simultaneous compiling already now. So it's based on the usage on that sense. And then on Squish, we think that the -- since everything that AI does needs to be tested and whatnot, we expect the software testing market to grow in the future. We, of course, use AI extensively internally, not only in our R&D and developers are using AI to understand that how it works and how can they be more efficient. We use it pretty much everywhere in the company, nowadays. I think that the big thing for -- going forward is that as AI moves into consumption-based pricing models, we need to be careful that how much we absorb cost as a company when we are using AI. So I think that these business models will be evolving just because AI's business models will be evolving and how and where AI -- how much we need to pay for using AI because very easily on R&D, we're using millions of tokens on one go. So the -- what's going to be the cost of it. But -- so we do use it internally on many various things starting from sales and marketing. Of course, for example, sales guys making a sales pitch nowadays, it's much more easier using AI because you can get all the info of the target customer and tailor -- make a tailored personalized presentation on each customer meeting you have, and you can do that very quickly. So of course, it's giving a lot of efficiencies. We're also looking for the opportunities as we go forward because, as you know, nowadays, we're looking on the development process, and we're looking at where can we offer services and solutions to our customers so that they can be more efficient on their development process. But yes, as AI comes along that, well, the most obvious thing that comes to mind, of course, is a vertical integration because using AI on our tools on smaller customers, we should be able to offer actually ready-made solutions more than we are doing today. So we're looking into those opportunities that we have. Very particularly strong now is, of course, all the functional safety and safety critical things because there you need certifications and you need -- you can't use open source, you need to be able to prove that your code meets the criteria that are required for car breaks and whatnot, everything that is somehow functional safety or safety critical. And we do have tools starting from IAR. Our compilers are certified using an IAR compiler, that you can have a certification that it's done according to the specs and you can use Qt and our testing. So we have a very comprehensive offering in safety critical functional safety industries, and that's a very sweet spot for us in this current portfolio we are having. So I think that the AI will be there a topic for the future. But for the investors, I would say, I kind of see this twofold that, yes, it's going to change very many business models, but at the same time, and it does give us efficiencies internally. But at the same time, of course, it also opens up new opportunities for companies that are awake. So I don't see AI only a threat. I see that, it will open up new opportunities as we go forward. So there's going to be a whole service layer on top of that on these data centers we see as of today. And of course, we're going to be on that wave as well. So in that sense, on this AI, I would conclude that we use it ourselves. We are looking for the pricing model change. We are adapting it, and we are looking actively to new business opportunities it potentially will give us. And with that, the financials.

Yes. Thank you, Juha. Well, as Juha said, this was quite a nice quarter for us. We had a very good growth. It's fine to repeat it, I think, since it was so nice. The growth was 19.6% in the quarter with a small exchange rate impact. So therefore, at comparable currencies, it was 20.9%. And the year-to-date growth was also pretty decent, 15.8% with a larger exchange rate impact of EUR 3.3 million, and that's -- it brought us up to 19.7%, about the same level as in Q2 at growth at the comparable currency then. And if we look at the products we sell, as we illustrate them in the interim report, licenses and consulting, it grew 10.3% in Q2, and it grew by 5.3% year-to-date. The maintenance revenue almost tripled like it did last quarter because of the IAR effect. IAR has a lot of maintenance revenue in sales. Historically, it's been about half of the revenue that's been those maintenance contracts. Now, it may -- it's a little less because of the transition into subscription. So we're selling less of support and update maintenance contracts in IAR. And instead, we're selling subscription. About the distribution licenses, those declined. That was totally anticipated. We knew we had a lot high distribution license level last year. So we knew those were going to decline. They declined in Q2 by 32.4% and year-to-date 17%, so totally anticipated. But that also -- if you remove that from the development license and consulting part, we actually had a growth there in Q2 on 38% on that and 18% year-to-date, which we are actually quite happy with, I must say. And looking at the ARR, also rolling 12, we ended up at EUR 160.4 million, like Juha said. And rolling 12, it grew 33.8%. Obviously, IAR was not there last year. So that is separate, and that is why the growth becomes a bit large for 12 months at comparable currencies, it was 32.2%. But for the quarter, it's still also a decent growth. I mean, 4.5% increase in ARR, like Juha also showed in his slide, and that is 2.4% growth at comparable currencies. IRR is growing in ARR as we're moving into subscription, removing perpetual revenue and instead selling subscription, which is annual recurring revenue instead then. And then looking at the cost side, unfortunately, though, the revenue side was good. The cost side grew more. They grew by 31.2% in Q2 and year-to-date, 21.7%. So we are, as you know, working on lowering those. Doing those reconstructions, efficiency work, removing some employees here and there as a result of the acquisitions, of course, but also some cost adaption to various parts of the sales that needs to happen. But looking at the personnel, that grew 38.2% in Q2 and 32.1% year-to-date. We have had 1,035 employees end of June, and that is a year-on-year growth of 119 people. IAR has 200 people. So you can already in that see the effect of the people that we have downsized in Finland, the U.S. and partly in Norway. We have still got Germany, France to go. And those are ongoing and those one-off costs will come in Q3, hopefully, instead. But in Q2, we have EUR 3.7 million one-off costs under employee costs and EUR 0.6 million costs under other costs that are one-off costs also. Part of it is relating to that business unit security in IAR, which we are removing over time as it was more of a cost burden than any type of revenue really. So that relates to the EUR 1.6 million. But we are, of course, looking at other costs also as part of the integration, offices, merging entities and whatever we can do to be a more efficient and strong company for the future. But if we look at the EBITA then, EUR 9.3 million today is lower than what we had last year, EUR 11.6 million and the margin was 15.1%. But if you remove the one-off costs, we are actually up to 22.2%, which is quite in level with what we had last year. So the Q2 is still in level with the profitability there if you adjust for that. And the year-to-date, that brings us to the EBITA level, 12.6%, up to 16.3% if you adjust for the one-off cost also. So still a fairly decent profitability there also with that adjustment, even though it is actually still then lower than last year. Balance sheet, not much happens in the balance sheet every quarter. A lot happened when we purchased IAR, but still, it can be good to give it a quick run-through. Goodwill, EUR 166.9 million. That is a constant. It doesn't change. We doesn't depreciate it. You don't never do that with goodwill. And most of the goodwill, as you can see, refers to IAR. The rest of it is pretty equally distributed on Froglogic and Axivion. Other intangible assets, EUR 120 million. Those are the technology assets from the purchases of the acquisitions, and we depreciate those over 15 years. IAR also, as I told you before, capitalizes some development assets investments already in the -- still in the balance sheet. We have a couple of those, and those will be finalized in 2026. So the capitalization for Q2 was EUR 0.4 million. That increases or resolved then by that because we increased the technology in the balance sheet instead with that same number. So no large numbers, but it's good to understand that, that is still happening in IAR. It will, over time, as we have harmonized the handling in Qt with the handling in IAR, likely not happen much of this anymore. It's not our intention to do that. And the trade receivables are at a pretty good level. They are around 20% of the rolling 12 sales, a little higher now as we don't have IAR in the rolling 12 sales looking back, but it will harmonize itself down to that over time. And we still have a very healthy cash balance, EUR 42.4 million, even though that is, of course, lower than it was last year because we put a lot of money into the acquisition of IAR. And looking at the interest-bearing debt, that was EUR 126 million, of which the bank loan is still EUR 120 million, but we have paid off EUR 30 million. It was EUR 150 million initially. So we have a good cash flow and a good position there in paying off the debt in good time. Other receivables still have those EUR 5.2 million under receivables and on the debt. As you remember, the arbitration for us to purchase 100% of the shares is still ongoing in Sweden. We haven't bought 100% of the shares, but we have booked 100% of the shares in the balance sheet. And that we have an interim booking on the asset side for those EUR 5.2 million and the debt to those shareholders on the debt side for when we pay the shares, and those are still there. It is moving along this arbitration, but rather slowly, I must say. So I hope it -- we can make it move forward in a faster speed. The equity ratio is still decent, 53.6% compared to 83%, which, of course, is why -- because we expanded the balance sheet with the IAR acquisition and the debt. So it's a pretty solid balance sheet still looking at it. And the operating cash flow was EUR 20.6 million compared to EUR 28.9 million last year. The main other cash flow apart from the operating cash flow was really the amortization of the debt, which we amortized in Q2 with EUR 15 million. So the total cash flow for the period was EUR 2.3 million compared to EUR 27.3 million last year. But of course, it is lower because the profitability is also lower, which we are working on improving for the future. So with that, I guess I will hand over to Juha again to talk about the future.

Thank you. So well, we haven't changed our full year guidance. So net sales 10% and operating profit at least 15%. And as I said last time, those are the floors, so at least -- and we're not giving an upper range on that. So that's the change. Usually, before, we used to give a range. Now we give the kind of the floor. Well, our plan was that we're going to transition the majority of the IAR customers into subscription in the next 3 years. That's what it took roughly in Qt when we did that. And of course, not all the customers will change, but the majority. We're well on track on that. I'm happy how the integration has gone. It's gone actually so well that we, I see that we didn't even mention it on the slides anymore because we think that it's already kind of a done deal. But of course, the integration is still there. But it's gone very smoothly. And so we haven't had any big problems, and I don't expect to have, and it's going to continue as planned. So on IAR integration doing well, the subscription change doing well and IAR sales on bookings, that's been doing really well. So I'm happy on the IAR performance, and I expect that to continue. On Qt, on license sales, very happy. The distribution licenses, they do fluctuate from quarter-to-quarter, and they are, of course, a result of deals done before. So even though they were a lot less this quarter than they were a year-on-year ago, that's only natural. They do fluctuate, and it's based on the fact that how much our customers distribute. So I'm not worried about that, and we're looking the overall number is heading where we estimated it to be. On regions, I think that -- well, there is always a room for improvement. I think that the United States, we've been -- we've had some execution issues in the past. So I think that there we are in the right track, but in the United States, we can still improve our business quite substantially. And other than that, the things are looking pretty good. On the macro and global environment, of course, if a country overall is doing well, usually our businesses are doing well because our customers are global customers. They're very big customers, building products for either B2B or B2C customers. And if the economy is doing well, then usually we're doing well. So if I look now that the how does the rest of the year look, if we're not going to get any big disruptions over here. I'm relatively positive that our numbers will keep on improving. And next year, I'm definitely, they're going to be improving on profitability and also on the top line. So this is kind of a slow-moving business. So this web technologies, they move very quickly and the moves are very rapid on embedded businesses, the trends are slower moving. But if I look on the -- overall, the rest of the year and next year, I'm pretty confident that we are or I am confident that we are going in the right direction. The operational reorganization, well, there are always tough things to do. We said that we're going to have at least EUR 20 million savings, and I reiterate that we are definitely going to have at least EUR 20 million savings. We still have some negotiations in Europe ongoing. Once they are finalized, then we're done. And like I said before, Finland is already done, USA is done. But in Europe, we have a few countries that we're still in that process, but I have no doubt that we'll be able to finalize them during the H2. Well, yes, challenges in the market environment continued, of course, I think that in a way, I guess, we should stop talking about the market because it seems that at least for the next 2 years, we're going to have surprises every week. So I expect that there are going to be some disruptions coming. I don't know where, but there will be. So the market will be volatile for the next 2 years. On AI, it's going to come and it's going to be a big thing, but it's like Internet at a time. It not only changes some business logic, but it also gives new opportunities. And I have no doubt whatsoever that Qt will be one of the companies finding also those opportunities and being able to utilize as the years come. Again, that's like a few year thing. It's not like what's going to happen in H2. Well, long term, I mean, nothing has changed. People do want to have products. They want to have displays. They want to have intelligent mumbling, products going into also in the future. All our customers, if they want to be in a business, they need to improve their products, they need to have new product lines and whatnot. So the overall prospect is not going anywhere. I think that also in the future, customers will realize that there is a need for developers, there is need for a software testing and whatnot. So even a lot of things are being automized, it's still -- humans are still needed there for a long, long time. And we're not going to let the machines run over. So in that, I thank you and some questions, which there seem to be.

Waltteri Rossi from Danske Bank. Congrats on a good result. First question related to the U.S. You mentioned that you can improve there substantially. So what has gone wrong there? If you can go through that once more?

Well, in the United States, I think we had some management changes. We did have some operational, how would you describe not so great operational efficiencies, some attrition over there, a combination of these things. So if I look at the operational efficiency in EMEA and APAC, just internally, we can do better in the U.S. And then if I look into region numbers that now U.S. is improving. But if I look in the previous that the U.S. was weaker than the other markets, all our customers are pretty much global. If we're doing well in -- with our product portfolio and products in EMEA and APAC, I don't see any reason why it should be. So there have been some people changes. There have been attrition but not and those -- so just the operational efficiency numbers are not in the level that they are in the other markets. So multiple internal things.

All right. Second question related to the ARR development growth there is quite high. And I guess it's partly explained by IAR.

Mainly 3 letters.

Yes, it's difficult. So how much is IAR from ARR?

IAR. Yes. It's -- we need to -- I mean, I'm having the same trouble with the IAR. We need to change the name. I don't think we've disclosed that number because we've not been disclosing the BU numbers. Sorry about that. And as a matter of fact, I don't have that figure in my mind now.

Okay. But is that one of the top kind of drivers behind the growth?

Well, of course. Yes.

Okay. Okay. And you also don't disclose organic growth.

No, we haven't. No, yes. I think that the -- as we get a bit better, that's a discussion we need to have internally that we start a BU reporting next year because that would kind of give more highlight. Having the BU numbers myself, I can tell you that you're going to have more questions than you probably get answered when you see them. And it's sometimes a bit difficult for us to estimate. But that's definitely a discussion we're having internally that what would be our next year reporting. And well, I'm sure we definitely -- it's going to change. And one obvious way probably going forward would be the do the BU reporting and then -- well, then you still have a whole other costs, which are central costs and whatnot, but you would see a bit more of the business. But then you have latter numbers that are going like this on every quarter on different directions. So it's the -- they all fluctuate really randomly.

All right. And one last one related to that pricing model change that you foresee also for Qt products starting from next year. So --

Sometime next year, not in the beginning, yes.

Okay. Do you expect any -- what kind of impact do you expect that to have potentially for your business or sales?

Well, that's too early to say really. And that's why we need to be testing it so much so that we need to be kind of simulating now that if we do this kind of a pricing change, how would that actually affect in a real life so that we don't do a pricing change where we have our revenue, right? So we need to do -- there is quite a lot of -- we need to look into very carefully. If you go in a consumption-based usage and you would think that the people start using AI extensively, you would think that there is a lot more usage than there is as of today, but how do we actually do that pricing? And would there be a different pricing for a developer consuming and AI consuming and all of that? So we need to simulate that and test quite a bit. I mean, our target is not to start charging more from our customers as we do today, obviously. But how that will turn out, that's too early to say. So I wouldn't calculate any revenue increase on that because at the end of the day, there is also competition, right? And we are kind of -- I would say that in the market, our products are really good. I mean, they are really, really, really good, but they are not the cheapest either. So I don't -- my gut feeling is that do we -- should we do a massive price hikes? No, I don't think so, then we would be too expensive. Then we would be like on a very high-end usage like Formula 1, very high price, very small volume. I think that where we are as of today that we have pretty high volumes, and we're not definitely the cheapest. So I don't see a whole lot of price increases in the future. Of course, there always -- there is inflation, but not tens of percent. Then how do we price the AI usage? Because what AI does is that it does say a lot of goes very quickly. And I mean, it consumes a lot. So we don't have enough -- we need to do simulations on that. So I wouldn't -- if you think from a revenue modeling perspective, I wouldn't put any price revenue increase based on that at this point that I wouldn't do.

Felix Henriksson from Nordea. Continuing on the pricing change topic, is it sort of fair to assume that this would change your developer license revenue recognition in a way that it moves the lumpiness stemming from the 1 and 3 years.

SaaS model, yes.

But at the same time, could it even be that the revenue impact will be negative as you start that process?

Well, I don't see that, no. But yes, the lumpiness will probably go away apart from the distribution licenses, of course.

Got it. And then on the quarter, can you sort of elaborate on the developer license mix in Q2 between the 3- and 1-year licenses? Was there any shifts there?