Teneo AI AB (publ) (TENEO) Earnings Call Transcript & Summary

Welcome to the Artificial Solutions International AB interim report for the second quarter of 2020. [Operator Instructions] This call is being recorded. I will now hand the word over to Lawrence Flynn, CEO; and Chris Bushnell, CFO. Please begin your meeting.

Thank you very much, and a very warm welcome to everybody to our Q2 2020 presentation. As you've already heard, the presentations will be from myself, Lawrence Flynn, CEO; and from Chris Bushnell, CFO. If you haven't seen the presentation, which we are going to use today is accessible via the company's website, which is www.artificialsolutions.com. And if you navigate to the Investor Relations section underneath that, you will find the financial reports section, and there are some tugs there. And you can see both the presentation tab and the interim reports tab, and that's where you will find both the Q2 interim report and additionally, the presentation that Chris and I are going to be working from today. So we're going to get started on Page 3 of the presentation. Apologies to those of you who have listened to our introduction on numerous occasions, but I just want one slide just regrouping on the fundamentals of our business principally for the benefit of new participants, new shareholders, new members of our community. So just to reiterate the fundamentals of our business. We're obviously a Swedish-based NASDAQ-listed software company, focusing in a branch of artificial intelligence. The specific branch of artificial intelligence in which we work is called conversational AI. And specifically, we work in the enterprise sector. That means to say that we are not a direct-to-consumer company. We sell to some of the world's largest customers. And we're extremely proud of that customer base. And you can see just some examples listed here on Page 3 across a number of industries, across a number of geographies and a number of use cases. So ranging, as you can see, perhaps with VW and Scania in automotive with AT&T and Swisscom in telco, for example, retail with ECA and Circle K and so on insurance, medical devices, et cetera. Obviously, we're not able to put all of our customers on. But we want to give you a sample so that you understand that our customers are major players. The company itself employs 111 people. Roughly half of those are pure technicians in either product development or the delivery of services. We operate on a global scale. We have offices in Europe, in Sweden, in Holland, in Germany, in Italy, Spain and the U.K. And we have representation in North America and a very small satellite office in Singapore. From the outset, the company has always been a multilingual company, which is one of the great strengths of our conversational AI platform, which is called Teneo. And we provided support for over 36 languages today. And our developer portal, where people can come and Try Before You Buy is available in 7 of those 36 languages. But we developed languages extensively in order to support the needs of the market dynamics. We're now 15 months into our presence on the first north growth market in Sweden. And our principal go-to-market strategy is to work with a network of strategic partnerships, both technology partnerships and partnerships focused on implementation services. And the implementation services partnerships that we leverage are with blue chip companies, and you'll see from this quarter's announcement that we've added Tech Mahindra to that list of systems integration and business process outsourcing partner. And we're very, very pleased with that. The purpose of strategic partnership channel for the company is that it gives us enormous reach and scalability, and it allows us to focus on our highest gross margin revenue streams, which we'll get into in the course of the presentation, specifically our license and usage revenue because our strategic partners deliver the professional services that are necessary to bring projects for life, for example, at Folksam or at TIAA or Vodafone or whoever it might be. So that's just a little bit of a recap on the fundamentals. If we turn to the fingers on Page 4 of the presentation, the key metrics we'll go through in a moment. As a company, we measure some non-GAAP metrics to give you an indication of performance. And 2 of those are our order intake number, which in the quarter was SEK 6.5 million, and our order backlog number. The difference between those is that the order intake number is the closed sales contract that we won during the quarter. And the SEK 6.5 million number is the irrevocable commitments that customers are making in those contracts to us, but we are unable to take those to revenue immediately and quite rightly. And therefore, orders that we have that are fully contractually committed but have not yet been taken to revenue are recorded in our backlog number. And this gives people and insight into the current trading, which may not be reflected immediately in the revenue or EBITDA numbers for the quarter. Now it is very, very clean for everybody to see that the quarter that we are reporting on today, well, I certainly hope is the one that represents the peak impact for COVID-19. Of course, we cannot be sure of that statement, but we would very much hope so. And it would be naive to assume that the company during those 90 days have traded would have been completely immune to any of those consequences. However, we did manage to continue to work with existing customers and add at least 1 new enterprise customer that we are very excited about during the quarter, but we did see the impact of the quarter where some customers had some prospects, apologies, some prospects of ours had delays to their projects and had budget reviews that were positioned in halfway through their selection cycles and so on. As CFOs of large enterprises were, of course, trying to manage the impact of the COVID-19 crisis on their own business. However, even though we've had a disappointing quarter from the order intake number, the strength of our underlying business model has been able to shine through during the quarter, and we have been able to report revenue numbers, which are up an exceedingly pleasing 22% on the year. And that is because we already had a very substantial order backlog, which allowed us to power through some lean time when it came to order intake. And that was further underpinned as we'll come into later in the presentation by an extremely strong revenue performance around one of our key revenue sources that have usage. Usage revenue in the quarter was SEK 5.6 million, which is 80% up on the last quarter of -- on the same quarter of last year, apology, and 113% for the full half year. That's a very, very pleasing number to myself and the rest of the team. And as I've already indicated to you, partners represent a very large part of our revenue stream. And in the quarter, we tipped over 53%, where we were at 34% of transaction being done through our partner channel at the same time last year. And this has a very positive effect on our gross margin where we are reporting quarterly figures of a gross margin of 69%. For those of you familiar with our business, you know that our market guidance is to achieve 70% by the end of this year. And of course, 69% indicates that, that is eminently achievable. Although it should be added that there may well be fluctuations in our gross margin as the mix of revenues between services, license and uses will flex on a quarterly basis. All of this is pleasing because it resulted in a net reduction in the trading loss for the business. And we'll come on to some of the cash implications of that. So we reduced our trading deficit by about SEK 8 million in the quarter. I've mentioned usage. And if we turn to Page 5 of the presentation, you will see that we're able to again report considerable growth on a last 12-month rolling average basis for our customers. I know that there may have been some confusion. And therefore, I want to call out that the numbers that I'm citing here are actual usage. They are not a revenue number which I've just talked about on the previous page. So this is actual usage that we have measured that our customers have used as a direct result of live production implementations in the field. We have to normalize this because not all of our contractual agreements are identical. And I stress this is not directly tied to revenue. However, it is a very good indication of where our revenues are going to be because over time, this graph will become much more directly associated to the usage revenue. However, what should not be avoided is an understanding that the numbers are fantastic and represent a fixed fold increase in usage revenues over the last 12 months. And this is in part because, as I mentioned, we're not a direct-to-consumer business. And therefore, even during the peak quarter, we hope the peak quarter of the COVID crisis, our customers were continuing to invest and deliver an expand solution-based on the 10-year platform. And that has been reflected in the actual usage numbers that we're pleased to be able to report to you today. Moving on from that. As we turn to Page 6. Some other quarterly highlights. Even though it was the peak of the crisis, we were still able to onboard a brand new customer. We're very, very excited about this customer. It's a world-leading fresh food delivery service operating in 14 countries, and we think that over time, it will be amazing contributor to the usage revenues of the company. For the sole reason that not only is it a major player in the sector, but it is a fully online business, a fully digital business that of course, we'll benefit from conversational AI heavier than businesses that are more multimodal. The second thing that we're also very pleased and indeed excited about is a new partnership with Tech Mahindra probably a name that means no real clarification for you, but a global leading systems integrator infrastructure provider and business process outsourcer. And we have already added considerably to our pipeline of opportunities through our partnering agreement with Tech Mahindra. As indicated, the proportion of revenues delivered by our partners has really gone up in the quarter, and this has resulted in a net positive impact on our gross margin as we have not needed to deliver the services, and we've been able to focus on our 90% gross margin revenue streams of license and of usage. Outside the operational side of the business, we also concluded a fully subscribed directed share issue in June, which raised a further SEK 26.9 million for the company. And if anybody is here as a result of participation in that, I'd like to welcome you to our community of shareholders. It was a very gratifying to be fully subscribed for that transaction. And one other thing to draw your attention to because we've made 2 more announcements about it is that the company facilitated the sale and repurchase of SEK 6.3 million of bonds during the month of July. So we facilitated the transaction by initially buying the bonds and then selling them on to the intended it party par value, and both of those have been disclosed through more announcements over the last few days. So turning to Page 7. Obviously, it behooves me to address the implications of the COVID-19 and what we're doing about it. I think the first thing to state is that as a company, we have already commented in our annual report that we actually believe that the longer-term implication of the pandemic is that enterprise businesses will turn increasingly to digitization as a method to become more successful in the post pandemic world or in the new normality of living in the pandemic world. And that means that we predict that the conversational AI marketplace and indeed artificial solutions, we'll see a medium to long-term acceleration of growth. And we are beginning to see the signs of that, not in GAAP measures of revenue or EBITDA, but some of the things that we're able to track within our business. So for example, the earliest phase of tracking that we do within our business, in our sales force system is what we call marketing qualified lead. These are leads that the company would hope to turn into prospects and in due course, turn into customer's license and usage revenue. And when measuring those, we have a 31.4% increase for the first half of 2020 when compared to the first half of 2019. And perhaps even more strikingly, in quarter 2 of 2020, we actually saw a 58% increase in inquiries into our -- sorry, marketing qualified leads into our business. And when we look at marketing qualified leads, we also try to assess the source. Did we go out and solicit these people? Or did they come proactively searching and find us? And I'm very, very pleased to indicate that there was a 23% increase on the first half of this year to last year of people who sought us out proactively and found us. And if you look at that on a Q2 basis, it was actually a 31% increase. So demonstrably, we are being able to see the early signs that our claims that conversational AI marketplace and artificial solutions as a business may get an acceleration effect, but it does take time for enterprises to go through selection and purchasing transactions. And we have to accept that during quarter 2, the company was adversely affected by that. Large enterprises completely understandably in some cases, had to focus on managing what was the crisis situation within their business. And they certainly had to be careful about revisiting already planned investment decision. And the biggest single impact for the company has been that, that has delayed selection processes rather than canceled them. And it additionally add extra checks and balances into those processes, which has lengthened the time to closure. However, we still believe that we will get those deals caught up, and the company still predicts a medium to long-term acceleration as a direct result of the pandemic. We've still been able to continue to work remotely delivering projects, delivering services and supporting our customers. The company already was a very distributive business. And the company, obviously, being a technology player is very used to leveraging technology for video conferencing and so on and so forth to support our prospects, our customers and our partners and that continues to be our modus operandi today. We have, of course, taken prudent steps to manage the resources, especially cash of the company whilst we are in the middle of the COVID pandemic. So we have put some members of our staff on short-term working. And of course, in some cases, government support us in doing that. And some of those governments support us by salary support. And some of those governments, for example, in Holland and in the U.S., support us through loans. However, because the loans are forgivable, but technically not yet forgiven, they don't have an immediate short-term effect on our P&L and they're therefore not positively reflected yet in our EBITDA numbers. We've obviously taken a share of the burden as employees, board members and staff, we pay deferrals. And we've reduced other nonessential expenses like travel, marketing, et cetera, et cetera. And in some cases, expenditure on rent and very commonly deferred expenditure on tax and social charges, which governments have been keen to support in different ways across the geography. So once again, I must apologize for Chris trampling all over the numbers, but at this stage, I'll hand over to him to give you a little bit more insight and color about some of the numbers that we are specifically reporting during the quarter.

Great. Thanks, Lawrence. I'm used to it. So if we move on now to Slide 8, where we'll look quickly at some of the key figures, which, as Lawrence said, he's already discussed. So our order intake in the second quarter was SEK 6.5 million, which was down from SEK 22.8 million the previous year. Lawrence has described the reasons for that. And backlog, the value of backlog, it's really like a store -- a stock of revenue that we will deliver over time. Because we delivered more revenue in the quarter than we brought in as new orders in order intake, the value of stock at the end of the quarter reduced from SEK 50.7 million to SEK 44.6 million. We'll go into a bit more detail about how that is made up later on in the slide. But as we've also said, we're very pleased that our net sales increased to SEK 15.4 million in the quarter. Compared to last year, it's up 22%. And it's also very slightly up on the same quarter -- sorry, on last quarter on Q1, where it was SEK 15.3 million. So continuing to show improvement and to support the whole business model. And also, our gross margin has increased from 60% to 69% with 2 reasons for that. And again, we'll go into this shortly is that as we move more and more to delivering more revenue through our partner channel and more of our revenue is made up of the more -- the high gross margin license and usage, then our overall gross margins improve. So we're very pleased to see that. Just moving on to Slide 9. I know that some of the analysts, particularly instead of looking at net sales will look at our total operating income. So our operating income also includes some capitalized research and development that we do. In the quarter, that was SEK 2.6 million, same as last quarter. In the half year, it was up to SEK 6.5 million from SEK 4.9 million. Now the amount that we capitalize each quarter depends very much on the nature of the R&D work that we're doing. If it's a lot of -- if it's research focused, looking into possibilities of new products, then we tend not to capitalize it. But where we've made a decision and we start to develop new products, then we will capitalize that expense. So that would explain the variance there. And then the other operating income of SEK 0.6 million is part of the government support that we received in Sweden. Now I'll do -- again, I'll talk about this later, but the way that the government supported the furlough, the COVID -- the steps that people have taken for COVID means that it's quite confusing as to how it appears in the accounts because, again, the Swedish GAAP requirements and the SEK 0.6 million here relates specifically to Sweden require that money to be shown as other operating income in other places will show as reduced expenses. And in other places, it's still sitting on the balance sheet waiting to be forgiven. So the overall increase in operating income is up 25% in the first half and 21% increase in the year -- or in the quarter. So again, reflecting the same increase that we showed in revenues. So moving on to Slide 10, where we keep going down the key figures. I talked about our gross margin increasing. Now operating expenses did decrease from -- to SEK 41.7 million from SEK 48.3 million. I do say though that the PPP loans of SEK 2.7 million are included on the balance sheet. Now PPP loan is a paycheck protection plan, which is the way that the American government has decided to support companies, and they provided what they call -- what they described as forgivable loans. So we've taken out the loan of SEK 2.7 million, and there are certain criteria against which that loan will be forgiven. We already know that we've met all of those criteria, and we fully expect the loan to be forgiven at some stage in the future, but the governments and the banks haven't yet worked out exactly the process by which that happens. So until that time, we'll keep the loan on the balance sheet and then we'll release it when we have formal forgiveness. And then adjusted EBITDA is -- as a result of the improved operating expenses has reduced to at SEK 19.8 million. So just dwelling shortly on the savings that we've had on -- as a result of the COVID impact, it is a confusing situation, which I'll try to explain. So we've got several different places. We've reduced personnel costs by putting people on furlough and reducing temporary staff, et cetera, we think that's worth about SEK 0.6 million, in the quarter is about 2 months' worth. We've also reduced other external costs. As Lawrence said, we reduced the amount of marketing campaigns we're not going to live events is travel and expenses as almost stopped completely, where we had temporary office space, we've reduced that. And we think we've saved about SEK 2.3 million in the quarter on that. And then we've had other operating income, as I described earlier, the support from the Swedish government SEK 0.6 million. And then finally, the loans that we've received in the U.S. and from the Netherlands, which is SEK 2.6 million. So overall, we think we've saved SEK 6.1 million against our operating expenses in Q2. But that's not a full month, we didn't start furlough until the 1st of May. So that's 2 -- mostly 2 months of payroll savings, but 3 months of property and marketing travel, et cetera. So moving on to Slide 11. We look at the overall backlog. So the value of sales that we contracted sales that we've received that we have not yet delivered. Now it's important to remember here that we've got SEK 44.6 million at the end of the quarter of orders, which have not yet delivered. Now that's not the entirety of the revenue that we're going to take in future quarters, but it's because not every customer buys from us and a contract in advance, some customers, particularly some of the large ones will take usage revenue. And they will -- we will count up at the end of the month or the quarter, and it will come and we'll invoice it and book it to revenue at that time. We don't have any future contractual commitments for that. So this SEK 44 million is just what we have contracts for, and we will recognize a bit under half of that, we know in the rest of this year and the balance in 2021 and 2022, but you can see that there's professional services in there that we would deliver mostly this year or very little in the future years. And then as we -- as the contracts roll out in 2021 and 2022, the gross margin increases from, we think, in 63% roughly in the backlog out to 82%. So again, it supports that the contention that will get to 70% gross margin by the end of the year. Now finally, moving to Slide 12. The other thing that we've seen is the revenue from our partners for the first time, exceeded half of our revenue. So 53% of our revenue came from our partner channel. Again, as Lawrence said, we're pleased to sign Tech Mahindra and the amount of business that those partners are delivering means that they provide the professional services, and we can focus on the license and usage revenue. So we continue to expect that share of revenue from our partners to increase, but we will continue to have our direct sales team support that order intake process to support the partners as they get more tuned into the benefits of our solution and how to sell it. So Lawrence, with that, can I hand over to you?

Thank you, Chris. The only thing that I was going to cover was Slide #13, the market guidance review. And here, we have some obvious comments. The order intake number in the quarter was not exactly where we wanted. There are no comparators to the market available that we are aware of, but on the medium to long term, the company still has a very strong belief that we'll grow in excess of the overall natural age processing marketplace. And we believe that we've got early stage evidence of that in the growth in our pipeline. We reported a gross margin of 69% against our target of 70% for the end of the year. So we believe that, that is imminently within reach. And as you can see, we've recorded a very large growth in usage and a very large growth in usage revenues. So our longer-term trend towards the end of 2022 where we expect usage to be the vast majority of our revenues, in fact, to exceed 80% of our revenues, we believe that we've got evidence to support that trend as well. In the previous quarter, the direct result of the COVID crisis, we had said that we would quarterly review when the company would turn cash flow positive from operations. And of course, we have done that in accordance with our statements this quarter, and our guidance remains unchanged. There will be positive and negative impact of the COVID crisis on the business. And at this stage, we're not in a position to either confirm or to change the guidance regarding cash flow. We wish to monitor this and report back to you with the quarter 3 earnings when we hope but cannot guarantee that the situation will have clarified sufficient for us to be certain of our cash flow through the end of the year. So therefore, with this announcement, we are not changing any of our market guidance. We think that we have had a very solid quarter. We think that we've had a sort of quarter that has demonstrated the inherent strength in our business model, where we have a large backlog, if times are lean. We have been impacted on the front end of our business regarding order intake, but we have been able to deliver very strongly on our key metrics around gross margin and usage and our overall revenue and indeed an improvement on the EBITDA. So [Rasmus], that's going to end the presentation formally. If you want to open up for Q&A, that would be appreciated.

[Operator Instructions] There appears to be no further questions. So I will just hand the work back to the speakers for any closing comments.

Thank you. So finally then, just to give you advanced notification from a calendar point of view. Our interim report for Q3 will be on the 29th of October, and the year-end report for Q4 on -- for the 4th of February of next year. We thank you for your participation and interest in our company today. And we wish you all a safe and enjoyable rest of summer. Thank you very much for your attendance.