Seco S.p.A. (IOT) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you very much for joining us today for our quarterly earnings call. As usual, our CEO, Max, will share with you a detailed update on our strategy as well as some trends on our business. And before that, Lorenzo, our CFO, will cover the key items of our financial results. But first, let me start with the usual snapshot of our first quarter numbers. We are kicking off the year with a 3% year-on-year top line progression in line with the guidance we had given to the market. In what remains a complex market environment for memories, our P&L has shown strong resilience, both at gross and EBITDA margin level. The quarter was also punctuated by good momentum for our hardware business with our new modular vision product line receiving strong early interest as well as for our Clea division, which is seeing a high level of conversion to long-term recurring contracts as illustrated by the Hitachi win and the 20% year-on-year revenue progression. All of this continues to support a positive outlook for the year and keeps unchanged our 2026 management objectives. Now let me hand over to Lorenzo to go through our full year results in more detail.

Thank you, Clarence, and good afternoon to all. I want to start by pointing out that this first quarter was marked by further and significant increase of memory costs with an impact on the availability of those components. In that context, the group was able to react promptly, securing the critical materials and negotiating with the customer the measure to protect its profitability. Therefore, a 3% growth in net sales versus Q1 '25 is for us an important result given the two very different market context. Regards gross margin, we recorded in the quarter a level of 52%, one percentage less than Q1 '25. We are really happy about this result, considering the spike in the memory prices, we were properly able to manage from a purchasing point of view. In the quarter, we registered also a positive sales mix in profitability terms. Passing to EBITDA, we recorded a minus 1% of profitability, primarily explained by gross margin and by lower other revenues. This including mainly grants over R&D development, which will be partially recovered in the next quarters. Having a look to the sales breakdown by geography, I want to highlight the good performance of EMEA, Germany, in particularly, driven by the important growth quarter-on-quarter of customers like Shearer and System, Coesia Group entity. By industry, I want to point out that the industrial vertical is growing pretty well, while banking decreased as expected due to the completed rollout of our Edge payment model over the tobacco sector. Most important is the 20% growth quarter-on-quarter of Clea recurring revenues achieved thanks to the progressive penetration of the platform among customers. Analyzing our Q1 '26 EBITDA performance, we were able still considering the cost, thanks I was mentioning before to preserve a profitability close to Q1 '25 level. We recorded a stable OpEx and similar operating leverage. The 1% EBITDA margin reduction follows mainly the impact of component cost increase over gross margin. I want to point out that from the second quarter, our price increase actions should start to take effect. Adjusted net financial position rose by about EUR 7 million respect to year-end due to inventory expansion. We reacted immediately to the memories cost spike through strategic purchasing of stocks at acceptable prices. Besides, we had to take in consideration the increase in procurement lead times and so enlarge our inventory level. Despite this growth in net debt, our leverage position remain pretty solid. Thank you for your kind attention, and I hand over to Max for the business update section. Thank you.

Many thanks, Lorenzo, for this clear presentation, as always. Let me start with a bigger picture what underpins our strategy. We are witnessing a fundamental shift in the way how the artificial intelligence is begin -- rolled out for industrial application. The direction of travel is clear from the cloud to the edge as an increasing begin deployed directly where decision need to be made on field device close to the action. This shift is being driven by three core factors: one, faster real-time decision-making in mission-critical environments; two, improved cost efficiencies at scale; third, and greater resilience and data protection. As a result, we are seeing the emergence of a new class of AI-driven application, and this plays directly into our core capability. This is exactly where Seco is strategically positioned. And this is where the intersection between the edge AI and all our end-to-end technology capability really play a crucial role for the customers. So let me now show you how we translate this positioning into concrete solution. So -- here in Seco, our approach is end-to-end vertical integration. We addressed a broad set of application where Edge AI can create tangible value. This includes industrial automation through HMI, scalable embedded models and advanced robotics, including autonomous and humanoid system. And this sector, I can tell you, is starting to give us very good results, especially considering the business in the '27 because we are getting traction with a couple of very good and very large robot maker. We are also active in the high-performance vision application, Intelligent Retail and Automatic Vending where edge analytics improve customers' experience and operational efficiencies. In addition, we support a critical infrastructure such as smart energy grid, security system and medical devices, all of which require reliable real-time data processing. And of course, we are more than ever a key partner in more specialized domain like defense, aerospace and drone. And the areas where we are facing a very strong demand from the market. So having given this such of positioning, let me now to continue with some feedback that we are getting from the market by the launch of our modular vision, which is offering a very good beginning phase of market adoption. The core idea is simple but powerful, a standardized modular HMI platform that can be configured across different chipset and application needed. This approach brings multiple benefits. For Seco, it reduce R&D complexity and enable a more scalable business model. For customer, it's shorten their time to market and simplify the integration, thanks to our ready-to-use customizable solution. We are seeing this translating into a grow pipeline across many verticals like Industrial automation, Medical, Smart building, Energy and Professional appliances. And we are expanding our go-to-market through distributor and strategic partnership with leading silicon vendors. These altogether are very good early signals and the sales data that we are receiving are very positive. I think that talking about the traction that we are seeing in the modular vision is almost the same also with Clea and the customer engagement is really growing also in this specific business. And we recently secured a multiyear, multimillion agreement with a Tier 1 global leader in electrification. This is a strong validation of our end-to-end approach. Hitachi was looking for a secure and scalable way to digitalize distributed energy assets, including data collection, real-time processing and device management across a global fleet. They also needed to unified platform capable of handling different kind of hardware, both new and installed base. Our Clea platform was selected because it's a very complete product with strong differentiation factors. It enables secure data transfer, fleet management and Edge solutions for AI models and for immediate deploy of this model into the hardware. All of this with a very agnostic approach on the hardware side, meaning that our platform is capable to run Seco as well as no Seco hardware and therefore, can be used successfully also for the retrofitting program that Hitachi had in place. I think that this is a very good example of how our technology stack can address complex large-scale industrial needs. And this project move into the deployment, they also start to impact our revenue mix, which brings to me the next point. So one of our strategic goal is to increase the recurring component of our revenue on the software side. As project progress from the deployment -- from development into deployment, more devices get connected to CLea platform, and this drive recurring revenue growth. In the first quarter of this year, the recurring revenue presented 60% of the total mix and showed 20% year-on-year growth. This is an important trend and confirms that our platform-based model is gradually getting traction. Of course, you will see this growth factor continue growing over the next for coming quarters because as much as our strategy of deployment go into revenue as much as this progression will be even better. Let's now look at the order intake, which provides a good visibility on the future performance. We are seeking the continued momentum in order intake. The pipeline is converting into confirmed orders at a healthy rate, contributing at a growing backlog and improved visibility. As you can see, we have a very good data point like the 60% of the order intake year-on-year counted from January to April. And this is encouraging, particularly in a market environment that remain somewhat volatile. At the same time, our order book-to-bill performance remained consistent, which suggests a balanced flow between demand and delivery. Again, we view this cautious optimism as a positive trend but one that we want to continue to monitor because it's a tough year, supply chain, macroeconomic tensions, geopolitical tensions. So a lot of things are happening as we speak. And therefore, we need to continue to monitor it very closely. But I can tell you that data are growing and moving definitely in a positive direction. So looking ahead, the second quarter of the '26, the environment remain, as I told you, complex. However, the year started with a solid pace supported by continued demand for our product and our solution. We expect our revenue for Q2 to continue along this trajectory at EUR 50 million plus revenue. We think that this growth factor will accelerate significantly in the second half of the year, and this is based on an already taken orders. And therefore, we remain positive for the rest of the year. Overall, our priorities remain clear, executing on our pipeline, scaling our recurring revenue base and maintaining discipline in a still uncertain environment, especially on the cost control. In the summary, we see encouraging signals across multiple dimensions, technology adoption, commercial traction and order momentum, while remain focused on a consistent execution. I think that's all. I hope that this presentation has addressed all the key points, and I want to thank you again for your attention. We can now open the line up for questions. Thanks again.

[Operator Instructions] The first question today comes from Marco Vitale.

Two from my side. The first one is on the, say, 2026 outlook. On one hand, we noted that -- I mean, you provided very encouraging comments on the order backlog year-to-date and also on the, say, positive interaction you're having with your clients. On the other, we see still growth, say, in the low single digits, you're guiding for a flattish revenue trend basically in the second part of the year. When looking at consensus numbers, top line is still increasing at, say, high to high single digit to low double digits, requiring an acceleration in the second part of the year. So the first question is on -- if you can comment on this, say, different trends and which are the key factors that should underpin the, say, a very strong acceleration in the second part of the year, whether second quarter guidance is just driven by, say, temporary factor or slow backlog execution. The second one is on the -- if you could provide us an update on the ongoing, say, supply chain tensions. You mentioned that the gross profit margin is just a temporary effect and you already increased -- planning an increase in, say, prices from the second quarter of this year. If you could share with us that if you still see this as a very temporary factors, you should be, say, able to overcome the supply chain over the next quarters? And also, if you could provide us a rough indication of the magnitude of your share price increase.

So first of all, let me start with revenue. As you said, and I can confirm based on the trend of the order intake and the book-to-build that we are observing in this slide, I can confirm that we are expecting a significant growth factor in the second half of the year. This is confirmed based on the order as well as on forecast that we have from clients. But I would say this is something that will happen based on data. And I have no doubt about it. On the margin side, I guided personally in the market over all the interactions that I had both in a public speech like this one as well as during all my meetings in the roadshow that the memory, we cannot think that having a so big and event like this one with a magnitude of 700% of price increase on the memory side, we cannot think that we can come out with having no impact on it, clearly. As well as I confirm that we already secured with all the customers negotiation about the price increase. So therefore, we will see our margin improving over the next quarter. I would say the normal situation will be achieved in the second half of the year, but we will see a sort of progression as we go. As Lorenzo said, first quarter was affected negatively by the memory for over 3% in gross profit margin, which was also positively affected by the recurring revenue increase on Clea in one end and a positive sales mix by margin in the second end, that was able basically to neutralize a large portion of this impact and we was able to see just 1%. That was good and I think is a concrete proof how the Seco business model is resilient also in a very tough market condition. On the supply chain, in general, we are seeing and facing delay into shipping, especially with the boats. And therefore, also the guidance of the second quarter take it in account because we have components that will arrive later in the quarter and therefore, are not included into this guidance. But we was able also to did a very good job increasing our level of inventories, stocking a lot of memories to cover the entire 100% of the demand of our budget '26 as well as, I would say, a portion of the 2007 (sic) [ 2027 ] demand. So thank you very much for your question.

[Operator Instructions] The next question comes from Bharath Nagaraj.

Just a quick clarification on the previous answer, Max, if I may. Did you say that the delays in receiving some of the components, et cetera, has been taken into consideration for your Q2 guidance? Did you -- can you clarify that? I kind of misheard it, please.

Yes, I can. As I said, there was an unexpected delay into all the shipping basically over the box because they run a war. That's not a secret. So therefore, when we did our own calculation about the second quarter guidance, we had carefully reviewed our shipment dates arrival of the components and therefore, production dates available. And we took everything carefully in consideration. It will shift in some way some revenue from Q2 and Q3, and we will see a very good effect later in the year.

Okay. Understood. So my questions include the first one would be around the Hitachi revenue, the contract that you won. Has that already started contributing in Q1 to your revenue? And should -- how much should we expect -- should we start expecting it to ramp up during the course of the year from Q2 onwards? And then a related question on Clea. Given the decline in the nonrecurring engineering revenue, obviously, because it's moved to the recurring revenue, the customer has moved to recurring revenue contract. Should we be expecting decline in Clea revenue for the full year given this mix effect?

Yes. On the nonrecurring revenue, absolutely, yes, because as I already guided the market many times, we changed our business model into Clea, shifting from a big NRE in the very beginning and the time to revenue between 1 year and 2 years into something that is more ready to use with a very low barrier in terms of nonrecurring fee let me say, nonrecurring fee. So therefore, I would see the decline into the nonrecurring portion of the business consistent for the entire year as well as a strong growth of the recurring revenue just because the multi-year multimillion agreement we just signed with Hitachi, the good news. It will be already making a positive effect on the recurring revenue side starting from the second quarter this year, but will continue to give more and more positive effect as we go. And we have a good line of additional customers that are entering into Clea as a very short time to revenue now, thanks to the new business model. I think it will contribute to a further acceleration into the recurring revenue in the second part of the year. That's important not only because it's proving that the strategy and the business model that we designed is working well, but it's important because it contributes even better to our profitability as well as to our capability to generate free cash flow.

That's very helpful. The last question for me is around -- just a question around your peer, Advantech, who I know are more into standardized manufacturing. They have a lower gross margin than Seco, et cetera. But in the context of them growing much quicker, I just wanted to understand if there's anything to call out with regards to the demand profile from your customers, Seco's customers versus Advantech.

I think what we are seeing into the growth of Advantech, we will see it historically speaking, and this will be true also this time sic to nine months later. And this is simple because the different kind of product we are selling. Basically, they are more based on a standard solution. And therefore, they have a time to revenue, which is faster than Seco. And so the positive effect of the demand, they capture a bit earlier. We are more focused on system HMI customized. So this such of product have a longer time to revenue. And therefore, we are able to capture the same kind of trend in terms of growth, which is confirmed by the way, by our book-to-bill as well as by our order intake. And it will come into the results in the second half of the year. And also in 2027. So we will see a very positive trend into revenue and thanks to our capability to have operating leverage profitability starting from the second half of the year, but moving into the '27 in a very consistent way.

The next question comes from Aleksandra Arsova.

I think we have some problem in connection. So I would keep this one to go ahead if we have any other questions.

The next question today comes from Pietro Nargi.

The first one is on the organic growth. We have seen a 3% growth in the first quarter. I would like to understand what could be the organic growth at constant exchange rate since more or less 20% of your revenues are outside the EMEA. So I would like to understand what is the impact from the FX. I guess it would be negative since you are exposed to the U.S. dollar. So I think the organic growth at constant exchange rate could be higher than the 3% we have seen. And the second question is on the OpEx side. we have seen OpEx almost stable year-on-year. I would like to understand better if this trend could be, let's say, a proxy also for the coming quarters. So just to have an idea on the part of these operating expenses.

Okay. On the -- on the exchange rate, I think you should consider between 1 and 1.5 in terms of better growth factor but as a constant effects. Into the OpEx, I think we are working with the entire team, especially with Lorenzo to control the OpEx. I think this is a good proxy. However, keep in mind that as we are expecting, as I said already many times, an important growth into the second half of the year. I will suggest also to take in account in terms of OpEx because maybe we can have some temporary workers just to execute the production in addition during the second half. But as a company structure, I think we are controlling carefully the level every quarter because that is the level where Lorenzo and I want to keep the company also to scale in terms of profitability as soon as we will see the growth of the revenue accelerating.

The next question comes from Tommaso Martinacci. Tommaso can you hear us?

Can you hear me?

Yes.

Can you provide more color on Germany in the first quarter, including its current weight on group revenues versus the historical level of 30% and clarify whether the weakness remain purely macro driven of -- or if you are seeing early signs of stabilization in customer orders even with the last all-time high order intake.

Right. So Germany is counting roughly speaking, about 30% of our total revenue and is growing in the first quarter was above 10% year-on-year, showing a very good growth factor, not only because the revenue we recorded into the quarter, but more important, looking at the order intake as well as the pipeline, which is growing every week in the region. I can confirm that the positive sign of recovery for the German economy are really happening right now. Meaning that we will see positive impact as we go and especially in the second half of the year as well as for the '27. Looking to the situation of the order intake as well as the pipeline, despite the -- let me say, the environment condition, which is really tough here on war. War in Ukraine that is never stopping. I think a lot of problems on the supply chain, not only for memory, but shipping longer time to market. So all these such of things -- despite all of that, I think what is really exciting in this moment is looking how many large projects we are facing right now with new logo. So new customers that we are winning also a lot of them actually with a very strong conversion rate into design win. It looks very promising also ahead the '26. But in general, the level of discussion that we are having both with existing and new customers is very good. It's actually clients are asking for more. in terms of innovation, in terms of new generation of project and all these such of things are mainly driven by the first slide trend that I showed to you during today presentation, which is basically the physical Edge AI. Physical Edge AI is happening. It's something that Agentic AI, LLMs are starting to be used into the HMI into the machine, into all the products that we are selling. This is driving basically the adoption and the demand of the market at a very high level, very, very high level. And this is really good for the next future.

As there are no questions queued, we will wait just a few moments to give everyone the opportunity to ask a question. As there are no questions queued, I will now hand back to the speakers for any final comments before bringing this presentation to a close. Please go ahead.

Thank you very much to all for attending. Clarence and I will be always available, and we will be on the street already later this week and then next week having meeting with many of you. So we will see soon. Thank you again, and have a nice day. Bye-bye.