Quadient S.A. (QDT) Earnings Call Transcript & Summary

Good evening, and welcome to Quadient 9 Months 2023 Sales Presentation. I am Catherine Hubert-Dorel, Quadient's Head of Investor Relations. And today's presentation will be hosted by Geoffrey Godet, our CEO; and Laurent Du Passage, our CFO. You have the agenda for the call on Slide 3. And as usual, there will be an opportunity to ask questions at the end of the presentation. You can submit your questions in writing through the web, or ask questions live by dialing in to the conference call. And with that, thank you very much, and over to you, Geoffrey.

Thank you, Catherine. Good evening to everybody. As the year unfolds, I'm pleased with the performance of our recurring revenue over the first 3 quarters. Organic growth from subscription-related revenue is now a solid 3.6% for the first 9 months of the year, which represents 71% of Quadient's revenue. This accelerated growth level of our recurring revenue largely offset the impact of our change in business model towards more subscription revenues. So consequently, Quadient delivered a solid 2% organic growth, underlying, I think, the success today of the repositioning of the company. The high and growing level of our recurring revenue is also visible through the growth of our ARR for our cloud platform, which had EUR 202 million at the end of October, has exceeded the EUR 200 million mark for the first time, a tremendous achievement in a short period of time. And we believe that this establishes Quadient as a leader in our software markets. I will come back to this in more details in the presentation with Laur. North America also remains a key driver of organic growth with a 4.4% increase in the first 9 months of the year. It represents now 57% of our total revenues. North America has maintained the same positive dynamic in Q3, where we delivered since the beginning of the year as well. So an overall positive performance for the first 9 months of the year, confirming the trend delivered so far in the first half of the year. So turning now to Slide 6. As you may remember, in H1, we shared with you the entry of Bpifrance to our share capital. And this [ case ] the governance agreement signed at the time of the H1 results, Bpi held roughly 6% of Quadient capital. I am pleased to report now that they own 8% as of the end of October. In Q3, there was also another significant new shareholder that crossed the official 5% ratio level, VESA Equity Investment, that's the investment company from the Czech businessman Daniel Kretínský, who now owns 6% of Quadient as well. The investments of these 2 new large shareholders, I believe, are a significant mark of confidence into the success of the repositioning of Quadient today on the market. I believe also it outlines the choice that we made towards our recurring business model. Their investments, I think we need to take notice of that, are also happening at a pivotal time in our history. This is at the end of our current 3-year strategic plan, which is almost nearing its end by the end of this year, and just ahead of our new Capital Market Day for the period '24-'26. Moving now to another topic. I would like to update you on the partial bond repurchase that our team has fulfilled in Q3. So as you know, our EUR 325 million bond is the largest refinancing event upcoming for Quadient, as it will mature in 2025. As we have always done with the management of our debt, we are being very proactive in the refinancing of this bond. And we're taking the opportunity to partially buy it back ahead of its expiration date. Our bond is currently trading at very attractive levels and making these early transactions financially very attractive. Last but not least, our corporate strategy has placed, as you know, ESG at the core of what we do. So I'm naturally very proud that we have maintained our AA rating with MSCI ESG rating. We have now been ranked in the leader category for 8 years in a row. It's a strong achievement and for which I, obviously, would like to thank -- I think we need to thank all of the Quadient employees for their passion and for their key contribution on such an important topic for all of us. I also would like to stress that this year again, the employees of Quadient have once again achieved record participation into the World Cleanup Day. I think we have roughly 700 of our employees which have been involved in cleaning initiatives in 15 different Quadient locations throughout the world. So this is a great way, I think, to demonstrate our engagement on those topics. I will now hand over the floor to Laur.

Thank you, Geoffrey. Good afternoon and good morning, everyone. I'm Laurent Du Passage, I'm Quadient's Chief Financial Officer, and I will start by providing you with the details of our key sales metrics at the Quadient level. Moving now to Slide 8. Revenue for Quadient in Q3 stands at EUR 263 million. It's up 2% year-over-year on an organic basis. It's confirming the trend delivered over the first 2 quarters of the year, and therefore leading to a similar 2% organic growth for the 9-months period. This is our sixth quarter of growth in a row, demonstrating the sustainability of our growth. Organic growth in subscription-related revenue remains solid. It's outpacing the Quadient organic growth, even if in Q3, the organic growth in subscription retail revenue suffered from the change of business model linked to the Yamato contract renegotiation. We have detailed these changes during the H1 results, if you remember. Of note in Q3 is the organic growth in hardware, coming primarily from our activities in North America and the International region. The strong Q3 performance at plus 3.5% leads to an overall positive performance in the 9 months with a 0.3% organic growth. From a geographic standpoint, North America continues to be the Quadient's main hive of organic growth, with a solid organic growth trend delivered over H1, even slightly accelerating in Q3. North America accounts for 57% of our total revenues. The performance from main European countries was more contrasted in Q3 with a weaker quarter from the U.K. and Germany, while France and Benelux posted organic growth. This is quite an achievement for our French region. This is the first time that the growth of our software and low-cost solutions offset the traditionally stronger decline of our Mail Solution in this country. Lastly, Q3 is a very good quarter for our International operations with a remarkable 13.7% organic growth. It's a very strong performance in the context of the change in the contractual agreements with our partner Yamato, and mainly driven by hardware sales. Turning now to Slide #9 in our traditional revenue bridge by solution. So from the EUR 793 million reported last year in the first 9 months, we had a negative EUR 5 million scope impact from the divestment of our Graphics activities in the Nordics and Shipping Solutions in France in June '22, and the initial impact from the Daylight acquisition in September. ForEx is negative by EUR 19 million, which is mainly linked to dollar weakening against euro. Turning to our solutions. Both ICA and PLS posted organic growth which more than offset the small organic decline of MRS. All in all, organic growth stands at 2% for Quadient in the period. I will now hand over the floor to Geoffrey for the business review of our software solutions.

Thank you, Laurent. Turning to Slide 10. We announced in September the acquisition of Daylight, as you remember. It was a former partner that was specialized into iPhones. So I'm pleased to report that the integration of Daylight is progressing very well and is actually even ahead of schedule from our original plan. In terms of product offering, I'm also pleased to say that our candidacy to the PDP or platform of payment, pilot phase for the upcoming French B2B invoice law has been successful. This means Quadient will play an active role in the initial pilot phase starting in 2025. Further enriching our platform, we have also recently signed 2 new partnerships; namely, with COFACE and with Altares. Both partnerships are focusing on enriching the corporate credit data available into our financial automation solution. And this information, combined with machine learning and artificial intelligence, right, provides to the users of our platform with very much improved financial analysis and risk assessment of both -- for their customers. It's also helping them reduce the risk of late or non-payments. Quadient AR private solution, especially in the field of accounts receivable, is really an important asset that helps set our solution apart from the competition. Improving our product offering is key to continue driving the new business and winning customers. And Q3 has been another strong quarter for customer wins, with actually an accelerating trend in terms of small and midsized business deals. Just a few information, since the beginning of the year, we have signed more than 1,500 new logos. We have experienced some delayed decision-making, right, and longer sale cycles, but mostly in the large enterprise segment. And we still have been able to continue signing some significant deals and partnerships such as BBVA, for example, in Q3, or KPMG. So with this macroeconomic environment being a little bit more challenging, right, our integrated approach has enabled us, right, to benefit from solid cross-selling between our mail customers and our software business, as you know. And the cross-sell effort represented 36% of the booking value again this quarter. Moving to another topic, I'm proud also to say that Quadient has maintained its 15th position in the 2023 ranking of the Top 250 French Software Companies. We have also maintained our fifth position in the Horizontal Publish category. After those [ relevant highlights ], Laurent will now comment the financial performance of ICA.

Thank you, Geoffrey. Slide 11 represents EUR 179 million of software revenue for Quadient in the 9 months of the year, an increase of almost 10% on an organic basis. Organic growth was primarily driven by the subscription-related revenue, which is close to 18%, and it's more than offsetting the further decline in license sales and professional services. Subscription-related revenue now accounts for 80% of total revenue for ICA. Similar to the trend delivered in H1, all regions are still contributing to the growth in subscription-related revenue in the 9 months, as mentioned by Geoffrey. We've experienced a differentiated sales pattern between dynamic penetration of our software offering with SMBs, and longer sales cycle for large enterprises. It is also important to note that the postponement of 2 large projects impacted our Q3 revenue growth trend. Our annual recurring revenue continues to increase, and stands at EUR 202 million as of 31st of October '23. It's an annualized growth rate of 13.4% versus the end of fiscal year '22 (sic) [ 31 January 2023 ]. We are pleased to have crossed the EUR 200 million mark for ARR, and this has been done despite this negative impact from the postponements of large projects. As you know, the ARR is a net number. Over to you now, Geoffrey, for Mail-Related Solutions.

Thank you, Laurent. Q3 has been another solid quarter in terms of market share gains for our mailing equipment business, with some significant contract signed, such as the contract with the French Social Security. This is a large contract to equip all of their offices, and we have already installed more than 300 installations and equipments. These wins have contributed to Quadient gaining market share again, in the French market in particular. Moving to another topic. The cross-selling within Quadient customer base is a key lever of growth in synergies within Quadient, as you know. It is also an asset that is setting us apart from the competition. So let me give you a very concrete example of how our Mail salespeople are able to cross-sell their hardware products bundled with the software. So we have recently signed with the Department of the Veteran Affairs in the U.S. with the combined placement of not just 2 but 3 Quadient products. The first product is the Quadient Impress Automate software, which is really our communications software. We also have bundled DS-700 iQ, which is our folder inserter equipment, which we truly differentiate ourselves in the market. And the third product is the new iX-9 smart mailing machine combined together. So it's a complete suite of products, which I believe demonstrate the strengths of our combined software and hardware product offering today. I often talk about the importance also of innovation for our Mailing business. And we discussed at the end of H1 results, if you remember, the launch in the U.S. market of our iX-1, the latest final member of our iX Series family. This launch is actually also coming along with the launch of our S.M.A.R.T. ESSENTIAL software, which is really adapted for our mid- and small postal range in the U.S. This software allows for detailed cost accounting and multi-carrier shipping functionalities. So this creates the perfect combination of both software and hardware, again, for our customers. And as you can see on the chart, the share of upgraded installed base continued to increase fairly rapidly now, reaching 30% versus the 20% at the end of 2022. So overall, another strong quarter for Mail-Related Solutions, where we continue to outpace the competition. Laur?

Thank you, Geoffrey. And yes, Q3 has been another strong quarter for Mail-Related Solutions. With a 0.9% organic growth at EUR 181 million, this consolidates into a 9 months performance at EUR 539 million, only marginally down by 0.6% on an organic basis. It's a very solid performance, which continues to outpace current market trends. Looking into the details, this outstanding performance was driven by strong hardware placements from multiple regions, including the U.S., France/Benelux and International. International segments is benefiting from the large EUR 3 million NBT deal that we discussed at the time of the H1 results. Subscription-related revenue also posted a good performance, only down by 1.2% in Q3, benefiting from the solid hardware placements from previous quarters. Bookings and backlog remain solid for MRS, but similar to what we are seeing in software, we are experiencing some delays in investment decision for the larger dealers, being offset by the continued solid dynamics in the SMB segment. Over to you now, Geoffrey, on parcel lockers.

Thank you, Laurent. So turning to Slide 14 now. During our H1 result presentation, we discussed our open network strategy and the progress made notably in France. We're securing some prime location to install our lockers, but also for carriers, right, to drive volumes. In the third quarter, we signed an additional carrier for our French network with GLS France. This is a major partnership for our open network strategy, as GLS will now have privileged access to the network, with an exclusive reserved space on a number of specific sites. By 2025, GLS is expected to have access to up to 1,500 sites, including the lockers installed in the Auchan super and hypermarket stores. So still on the topic of our open networks, we have also spoken about our innovative Drop Box that allows for the consolidation of returns for carriers. I'm proud to say that this Drop Box has won the Innovation of the Year in the 2023 Parcels and Postal Technology International Award. This is a great recognition for the ability of our R&D team and product team to continuously innovate. Now turning to our lockers deployment, we continue to make progress, with a global installed base now at more than 19,500 lockers at the end of Q3. And we expect the pace of installation to further accelerate in Q4. Laurent will now detail the financial results of our Parcel Locker Solutions.

Thank you, Geoffrey. Revenue for Parcel Lockers is EUR 66 million for the first 9 months of the year. It's a 3.9% organic increase. The performance of the 9 months being impacted by a lower growth trend in Q3, with a weak 0.9% organic growth suffering from both lower subscription-related revenue and hardware sales. Subscription-related revenue in Q3 was hit by the negative impact from the change in contractual agreement with Yamato, which was only partially compensated by the double-digit organic growth in France and North America. Hardware sales declined in the quarter due to the weak placements in the retail sector in the U.S. and the end of contract deployments in International. On the positive side, the ramp-up of volumes in the existing lockers of the open network is progressing well, both for the last mile delivery but also for the retails, which is the use of the Drop Box. Turning now to Slide 16, this slide presents you with a summary of the 9-month sales. You'll find the same information as discussed before, with the EUR 785 million revenue for the period and a 2% organic growth, broken down both by geographies and by solutions. Over to you, Geoffrey, now for the outlook.

Thank you, Laurent. As we have mentioned a number of times throughout this presentation, Q3 and the overall 9-months performance has been achieved despite the challenging macroeconomic condition. Q3 marked the sixth quarter in a row of organic growth for Quadient. And we expect this organic growth trend to continue into Q4 at a similar level than seen in the first 9 months of the year, which is also the same trend, by the way, as the last 6 quarters, which also averaged 2%. This is slightly below our original expectation of around 3% organic growth for the year. The slightly lower growth trend is mostly due to the current macroeconomic situation. And Laurent and I have mentioned that we see the slowdown of investment decision, specifically in the enterprise, a large enterprise segment, impacting both our software and MRS business. The transition phase experienced in our lockers business, transitioning to more subscription and volume-based pricing, as illustrated by the new contract in Japan, now is also temporarily impacting the performance of Parcel Lockers. We do expect though, the growth from Parcel Lockers to pick up in 2024, thanks to the combination of the lockers deployments and the ramp-up of usage and volumes for our open network and the [ NOVC ] of the transition phase in Japan. More importantly, this lower organic growth in revenue does not jeopardize our focus on improving our operating profitability. We are maintaining our ambitious guidance of around 10% organic increase in the current EBIT for the full year 2023. We continue to expect improving our operating performance for our software business, driven by the change in business model to SaaS. And we also expect further organic growth in Q4. Our Mail business is doing very well and should also continue to contribute to the improving EBIT trend, while our locker business progression should also drive a reduced EBIT loss for the Parcel Locker. So consequently, we slightly reduced the full-year 2023 organic revenue and growth guidance to around 2% versus around 3% previously, and adjusting naturally, consequently, the midterm guidance to around 2.5% CAGR over the period '21-'23 period versus the minimum 3% previously mentioned. But I do also confirm our full-year 2023 current EBIT guidance of around 10% organic increase in the EBIT level, and I also confirm our EBIT midterm guidance. With this, we are at the end of this presentation. And I want to thank you for your attention, and we are now ready to take your question, with Catherine and Laurent all together.

We will now start with the questions on the conference call, please.

[Operator Instructions] The first question comes from the line of Augustin Socié, calling from BNP Paribas.

Two questions from my side. Maybe the first one, can you give to us some guidance in terms of the number of lockers targeted by the end of the year, if it was possible? And the second question is about your EBIT guidance. You don't change your guidance despite a decrease in organic growth. So on what specific expenses do you have plan to make some efforts to reach the EBIT guidance?

So on the first question -- and thank you for those two questions. So on the first question on the lockers, we anticipated to be originally at the end of the year around 21,000 lockers. With the numbers of lockers we have added in Q3 now and what we expect to do in Q4, we'll definitely be above 20,000 installation, but maybe a little bit shorter of the 21,000. It will depend on the phase of the implementation that we could expect in the fourth quarter, so it will be between 20,000 and 21,000 lockers, most likely.

And I'll take the second one on the EBIT guidance. So you have two aspects, in fact, on that. The first one is, obviously, we adapted the level of OpEx, and that has been ongoing in the past weeks already. And the second is obviously the mix impact that we have because, in fact, the top line that you see is a resultant of another performance on the MRS side that carries a higher margin. And we know it was north of 22% at the end of H1, while the delay that we suffer from is mostly on MPLS, that has the lowest margin of the solution, and to a certain extent, of ICA. So that combination makes the, I would say, EBIT picture more favorable than the top line one.

The next question comes from the line of Jean-Francois Granjon calling from ODDO BHS.

Just a question regarding the guidance expected for the EBIT. You expect 10% for the organic growth of the EBIT. Could you just give us some magnitude of the impact of the ForEx impact on the EBIT, due to the fact that we saw a decrease for the top line due to the ForEx impact? What will be the impact on the EBIT expected?

It's a hard one, Jean-Francois, that you ask me here. To have a crystal ball of the ForEx on the coming 2 months is probably hard. So when we here just to -- for the sake of clarity, the growth that we are communicating is obviously excluding scope and ForEx impact. So basically, we are always looking at last year rate to be able to forecast that. That being said, if I remember well, at the end of H1, we had some adverse impact of EBIT, but it was relatively limited. Why? Because, as you know, we are relatively naturally hedged. In other words, you have -- we have OpEx in dollar with close to the same proportion of the revenue in dollar. That being said, I think we are talking about probably a couple of millions of ForEx impact on the EBIT at the end of H1. So I estimate 2 million. So I would assume that doubling that number would be wise, Jean-Francois, if we assume all things being equal. But again, that's an assumption.

We currently have no questions coming through. [Operator Instructions] There are no further questions, so I will hand it back to your host to switch to the questions coming from the webcast.

Thank you. So we'll start the questions on the webcast. So the first question is on the partial repurchase of the bond. Can you please give some details on the average price of those repurchase?

So without disclosing exactly the price at which we purchased that bond, what I can tell you is it was, I would say, a good arbitrage from a debt management standpoint because we purchased it at an implicit yield above 5% when we were paying a 2.25%, I would say, rate on that bond, meaning that we paid it lower than the nominal value of the bond. So it's a favorable impact for us at 2 levels. First, obviously, because you pay back debt at a lower price than the debt initially taken; and second, because you will save some interest rates in the meantime before we have to refinance that amount.

Thank you, Laurent. We'll move to some questions on ICA, we have several. Firstly, regarding the delay of important projects in ICA at the end of Q3, have these contracts been signed since the beginning of Q4 or are still pending negotiation?

No. So the delay of those contracts are related to large deals that we signed last year in '22, I believe, in Q2 and in Q4. So they're programs that we started to implement. And basically, those customers, for financial reasons, needed to be able to postpone the continuation of the rollout. And this is why for this time, it's impacting, obviously, the revenue and the ARR that we were expecting naturally for the rest of the year.

So still on ICA, can you give us more color on the bookings from ICA? Some U.S. SaaS company position in the same market as Quadient are announcing slowdowns for the months ahead. So can you give us color on bookings?

Of course. And I think it's an opportunity to explain, right, the overall dynamic sales, dynamics that we've seen since the beginning of the year. From a level perspective, we've seen basically the impact on lower bookings in Q1 and Q2, and we see Q3 bookings being higher in terms of absolute level, right, than Q2. And we do expect Q4 to be higher than Q3. So we still, for us, in a dynamic where, I think, mostly the impact that we've seen from delayed sales cycles and decision makers on large deals for large [ companies ] having impacted us mostly at the first part of the year on the booking side, right? That's why there is a little bit impact delayed on the ARR and the subscription-related revenue that will come after. But from a dynamic perspective, the slowdown of those bookings that we've seen in H1, a little bit from H2 last year, has been largely and are more than offset by the stronger dynamics in bookings that we see on the small and midsized deals and also driven by the cross-sell activities that we have from our Mailing customer base and Mailing sales organization. And it's where we see the progress on the booking coming back up, as we've seen in Q3. And we do expect some further improvements as well in the booking in Q4. So I think that the diversified customer base that we're going after, and the diversification also of region and channels, is obviously, probably, putting us in a better position compared to the competition that sometimes solely rely on the customer segment like only the large enterprise. So naturally, that's why they go down with it. And I think most importantly, because of our privileged access to the customer base that we have on the Mailing side, it's always easier to cross-sell a software on an existing customer than knocking on the door and trying to convince a new logo, a new organization to sign up with you. So it's probably why we are now continue to perform better than most of the other SaaS companies that definitely has communicated and delivered results that were lower than before.

Thank you, Geoffrey. Let's move to PLS and a question on our Parcel Locker. Regarding the Japan joint venture, have you signed new carriers agreement to replace the local volumes left by Yamato?

Okay. So on that, we need to differentiate the JV, right, which we have naturally extended and we have communicated on that, versus the commercial agreements that we operate with our various customers. In addition to Yamato, we have other carriers such as Sagawa, Japan Post and other customers that use the network, the open network that we have in Japan. What we see this year, and in the Q3 performance for the Parcel Lockers in particular, are two things: We have moved from a quarterly fixed fee that Yamato was paying us in the previous commercial contracts, to now a relationship with Yamato that is mostly, not all but mostly, with a price that is volume-based driven. That being said, we have also reduced some of our pricing with Yamato. So the volume actually in Q3, which for the first time is impacting the revenue recognition because it's a volume-based pricing, is actually almost stable compared to Q3 last year. But because we have provided a discount, we did anticipate that we would have an impact temporarily before we could offset the discount with higher volume, either coming from Yamato itself or from the other carriers. And in Q3, in particular, if I look from Q3 last year, we have some significant increase from the other carriers, from Sagawa, Japan Post, of more than double-digit and 20%, 30% increase in their volume and their usage of the network, but just not fully big enough to offset the discount in price that we had given to -- with Yamato.

Thank you, Geoffrey. Let's move on to MRS. Have you noticed enhanced competition in the recent replacement at Pitney Bowes?

I'm going to take this one, too, but you can add color obviously, Laurent. I'm not going to comment particularly on the transition of their -- the interim CEO of Pitney Bowes. What we could say, I think, on the market, when we look at the average market performance, we are seeing an improvement of the gap in performance between the Quadient performance and the market. So if we look at all the other players, we use sometimes to have, a few years ago, 0.5 point or 1 point of difference. We were doing better than the market by a point, and we were quite happy. And then now, we are more in the 4 to 5 points. We need to be careful always. I'm always saying that we should be careful not looking just quarterly performance in this market, but more on a yearly basis. And definitely, it seems that for the first 9 months of the year, our MRS team has done quite a great job to continue to outperform the market.

Another question on MRS, unless you want to comment. So another question on MRS. Looking at the accelerated decline of MRS in the U.K. and in Germany, is there an outstanding risk of goodwill depreciation in these countries?

I will take this one. So if you remember, end of last year, we had an impairment in this region. That was a related impact to the evolution of the WACC level that we were applying to that scheme. Here, the question is around more the business performance of this region. And yes, we mentioned, was less dynamic than North America. That being said, what counts for us from the goodwill aspect is, how is the region performing against the anticipated plan? And both in U.K. and Germany, the trend is better. In fact, even if it's declining, it's still better than the one we're expecting. And I think it's an overall statement for the MRS business across the globe for Quadient.

This year, again, having a very good performance...

This year, yes. So just to reassure you, the trend that we see from a business standpoint doesn't put at risk the calculation that we had earlier this year.

We have no further question on the web, but I see that Jean-Francois, you have your hand raised. Do you want to ask another question? On the line? No. So I think we'll close the call here. Thank you very much for joining. Over to you, Geoffrey, maybe for some closing remarks.

Thank you, Catherine. Thank you, Laurent. In conclusion, I'd like just to reiterate the solid performance delivered in Q3 that was a 2% organic growth. This is our sixth consecutive quarter of organic growth. And while the current macroeconomic situation remains a little bit more challenging than at the beginning of the year, with notably a little bit extended sale cycle time amongst the large enterprise segment, I would like to stress that our SMB sales momentum stays robust so far, and our recurring revenue business model is resilient and makes us very confident in our ability to drive profitable growth in Q4 2023 and obviously, and beyond that period as well. Thank you, and have a wonderful evening.