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

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thanks for joining the Artificial Solutions invitation to presentation of Q2 report 2021. [Operator Instructions] And I would now like to turn the conference over to Per Ottosson, CEO. Please go ahead, sir.

Good morning. Thank you, Emma. Good morning, and welcome all. You will find the presentation on the investors.artificialsolutions.com, and it is, of course, the Q2 report. So for those of you, who have not done that yet, you can find it there, and we'll be going through that presentation today. So I'm going to start with just briefly mentioning Per and Fredrik. I think some of you are new to -- at least I have not met and talked to, if I look at the names on the list here. So Per and Fredrik, we came in to the company at the end of last year and have basically done a turnaround of the strategy in the company. And our backgrounds are from similar companies to what we are setting up right now. It's a software company and the software as a service industry rather than a license peer software company, but with a very good basic technology at the back of it. So that's Fredrik and I, and we're going to be presenting to you today. The next slide is about Artificial Solutions, and this is essentially the foundation of our journey. It's a company with a very strong technology. It's a technology within the conversational AI space. I will do one slide also to explain that space a bit more. It is today the only one that has 86 languages. It's also the only technology that exists within the Microsoft Azure ecosystem that can collaborate together with Microsoft products in the same space, and it's a technology, which has been valued from a patent portfolio perspective at over $100 million, a very strong technology platform, partially because we've been around for a long time, which means that we've had millions of human machine conversations that have translated into a corpus of natural language. So we have a body of, a paper set of natural language intelligence, which we can use to then develop, for example, the 86 languages. Our product is called Teneo, and our product that we're taking to market is LUIS^Teneo, LUIS being Microsoft's product within the AI space. It is an enterprise conversation with AI framework. It's something that we can build your entire conversational AI solution on top of. Listed on NASDAQ Q1 2019, so a bit more than 2 years at this point. But the most important part is on the right side of the slide, that's our global clients. We have some very large clients with some very, very nice use cases, which, of course, is what we're building on top of. So Swisscom recently replaced -- actually during Q2, replaced their IVR. So instead of dialing in and you press 1, 2, 3, you talk to the system about what you want to solve, and they've experienced a 26% cost reduction and an 84% increase in customer satisfaction with this. AT&T is troubleshooting your home network in the U.S. with the solution without human intervention. So very, very strong use cases and very, very strong customers around, mostly in Europe and in the U.S., and that's also our focus going forward, Europe and U.S. On the partner side, some very strong partners that we've had for some time. I'd like to highlight a few. CSG has turned into an even stronger partner in the last few months with some very nice implementations. Tech Mahindra doing some nice implementations. Ernst & Young, very active in new opportunities across Europe, primarily at this point. But the most important one is Microsoft Azure. We are a part of the Microsoft ecosystem, and this is really key to our whole strategy. So that was a slide about Artificial Solutions. I will move to the next one to explain the market that we are in. The market we are in is called conversational AI. It constitutes both the chatbot and the virtual assistant market and then the enterprise conversation with AI tool sets. So we are in all those 3. We have a tool set, which can be used to build a chatbot, but also to build through conversational AI solution. The solution itself is always going to be addressing a user, a customer, a vendor, somebody to the left, the person with a nice blue tie. And that user is coming in and saying, can you help me with something? That will be a service request. It would be an information request, actual request decision request. The person comes into the system. This system understands what the person wants and that's to the right. What language are they using to start off with and do they now mention people, places details. For example, if you put a date and a place into a sentence, the system needs to be able to extract those as very important data points. What kind of request was it? Was it an actual request? Something I need to do now? So the pop also needs to actually do something? It's a usual happy or upset or have interacted before. To build this in a large-scale environment you need a very strong conversational AI tool set. And in the market today, globally, we are positioned as maybe 1 or 2 or 3. And I would say we're #2 in terms of size of the implementations that have been built with our system. So we have a few customers at this point, but very large customers that have built very large implementations of conversational AI. In total, 10 million conversations happen every month with our software. So it's quite strong. The market is very big, but it's a replacement market. So the $50 billion market today has a CAGR of 20%. The software vendors are not there quite yet because a large portion of this market is actually addressed by humans today. So the $50 billion is what the market will be valued once we span out the conversational AI space. That's our marketplace. I'm going to move into Q2. So Q2, basically, and I would say, half year 1, has built a platform for us, which is very important in what we're going to do for it because now we can start expanding on this new market positioning, this new market footprint, this new market references, which are very key. And they're all large customers that we've been going after. And we've now sort of done with that part of our expansion. And now the next part is building more on marketing and building out the sales organization to build on the success that we've had. So let me tell you about this. The first deal we're not allowed to talk about it happened in Q2. It is a very large U.S. tech company. They deployed very quickly, and we've also now already the -- our partner that is implementing this has started to implement the next phase of this, which is basically moving this into the U.S. and into Japan -- into the rest of U.S., I would say, and into Japan. It's a very key reference for us in the industry, even though we're not allowed to mention it as it has impact in -- within the partner community and within the analyst community, where people do know about this since things do spend every once in a while. We also signed a 3-year SaaS deal with Telefónica in Deutschland. This was probably the biggest conversational AI RFP, so this was a structural process that's going to happen this year. Telefónica in Germany has roughly 50 million interactions recessions per year. So it's a very large entity and a leading telco operator, very structural and process, very structured in how they go to market, and they're going to be using our SaaS platform here as well, which is also, of course, a testament to the security work that we've done and the compliance work that we've done with the platform. We also signed a LUIS^Teneo, some of the Telefónica, of course, as well and also strategically important is LUIS^Teneo. That's our product where we go together with Microsoft. We also signed us together with Microsoft to a telco operator, A1 Bulgaria. A1 Bulgaria is sort of the testing ground for A1, which in turn is the testing ground A1, what's called A1 digital, which is a bit of a testing ground for América Móvil, which the telecom operator, which is almost 400 million subscribers today. So an important milestone, at A1 Bulgaria and itself quite advanced and quite large as an operator as well. So also a key strategic deal for us and with engagement from Microsoft throughout the deal. So very, very good for our model going forward. One of our partners, which also at this point, we're not allowed to mention because they're building this out. They signed up and are deploying LUIS^Teneo for their own business, which -- where they have support to their customers, which is also under the key that they're building it themselves and makes them an even more powerful partner for us. I only spoke about the U.S. tech company there. We also signed 2 renewal agreements, one with the U.S. government department, which is a very interesting department as well. We'll see if we can actually build out a governmental business in the U.S. on the back of this. And then Circle K, which we just recently announced as well, has renewed and increased their engagement together with us. The Teneo platform now supports 86 official languages. That is, by far, the most covered languages in the market. It also is very key for Microsoft. So this gives Microsoft the capability to position AI solutions in 69 more languages than they do by themselves. We were highlighted together with Microsoft by Gartner as a practical innovative for conversational AI at the beginning of the quarter. That is also quite key. This is somewhere where this is -- how you can end up on short list in RFPs and so forth. So very good marketing -- from a marketing perspective. We also appointed a Chief People Officer, which is very key to us. We're going to start working on our culture initiatives, which is important for our continued recruitment and our continued growth. Paloma was within the company already for a year, but comes from a similar position in a different SaaS company. So congratulations, and thank you, Paloma. We also successfully raised SEK 120 million in a directed share issue. This is to be able to execute now on the strategy now that we laid the foundation. We reduced the cost quite a lot at the end of last year, made the foundation for the new strategy and then are starting to build out on top of that strategy with recruiting people, but also increasing marketing spend. We've already so far in 2021 signed 3x more customers -- new customers than we did in 2020. And we also had 12% growth in recurring revenues on a rolling 12-month basis. So essentially, what we've done, we took the business around, made it into a SaaS business. We can see now success with this. We've been focused mostly on the large customers during the first half. And now we're going to take that and move into expanding with marketing and adding on to the sales organization. So with that, I'm going to hand it over to Fredrik to deep dive a bit more into the numbers. Fredrik?

Thank you, Per. Let's then move in to the next slide, covering key financial highlights in the second quarter of 2021. Looking at the financial highlights in Q2, we can conclude that we, as Per said, experienced growth of 12% for the rolling 12 months adjusted recurring revenues. We also experienced growth of the quarterly usage revenues of 38%. And that will continue to keep a low cost trajectory. And also in addition, which is still perhaps not too significant in our reported numbers is also the fact that we have won a number of new and interesting clients that Per elaborated a bit on earlier. And as we have communicated in the quarterly report for Q4 2020 and now onwards to Q2 2021, we continue to report adjusted sales numbers to provide better guidance on our underlying contracts and revenues in order to align old ways of recognizing revenues... [ Technical Difficulty ]

Excuse me, this is the operator. We've lost the connection of Fredrik Torgren. Ladies and gentlemen, please hold the line while we try and reconnect. Ladies and gentlemen, please stay on the line while we reconnect. Please continue.

Yes. Let's try it again. Sorry for the technology issues here. So let me firstly then maybe start off where I started. So key financial highlights for Q2 '21. We can basically conclude that we have experienced growth of 12% for the rolling 12 months adjusted recurring revenues. And we also have experienced growth in the quarterly usage revenues of 38%. And that we now continue to keep a low-cost trajectory. And in addition to what Per also elaborated on, I think we have also -- which is not yet that visible in our numbers, we have won a number of highly interesting new clients. And for those of you that have followed us know that we have that -- that we presented also kind of adjusted numbers to better align with the new kind of SaaS model and revenue recognition that we apply for the new model, basically. And we continue to report adjusted sales number to basically provide better guidance on our underlying contracts and the revenues and in order to align old way of recognizing revenues with the new SaaS business model. And the main difference or the only difference is basically in the revenue recognition for usage revenues. Previously, a committed and invoice usage contract by customer was recognized to 100% at the time of invoicing. And that was basically regardless of the length of the contract. So very much an upfront kind of recognition policy. When we then apply the new SaaS business model principles that would instead mean that such usage would be recognized as consumed or proportionally over the life of the contract. So basically it's flattening it out the initial revenues. So basically then, our adjusted net sales for the second quarter 2021 amounted to SEK 10.7 million versus SEK 12.5 million, the same quarter last year, a decline of 14%. And the adjusted recurring revenues that is basically usage, license and support for the second quarter 2021 amounted to SEK 8.8 million versus SEK 8.9 million for the same quarter last year. So a slight decrease, we can see there. However, I think the increased proportion of recurring revenues as a percent of net sales highlights the transformation we drive now with the SaaS business model and strategy. And these are basically the valuable revenues that we see in the company and what we are trying to build ahead as well. And as I said, I mean, the adjusted usage revenues were up 38% versus the same period last year. And also then the rolling 12 months adjusted recurring revenues increased from SEK 31.1 million last year to SEK 34.8 million this quarter, so an increase of 12% basically. And then I think we can also say that, I mean, despite lower reported net sales, we can also see that EBITDA -- adjusted EBITDA improved considerably. And that is, of course, a consequence of our cost reduction program that we initiated in Q4 2020, which we have experienced kind of full impact in Q1 2021. And also, I mean, I think we have also experienced being -- following a successful directed issue, we also have a very much improved cash position, including credit facilities. So we now have some plus SEK 130 million at the end of the quarter. And just a bit kind of to elaborate a bit on why we see the decline in reported net sales numbers, I think it's just important to conclude that there are, I mean, 2 main reasons for that. And one is, of course, the fact that we no longer focus on professional services. So we are a kind of product company, product-led SaaS company, and that's how we are driving the business. We will have some revenues coming in from professional services, but that's not really the priority. And that's part of the decline that we see in reported net sales. And also, as I have elaborated quite a bit on is also the way of doing the revenue recognition. That also has a significant impact on numbers, and that's also why we are reporting adjusted numbers. So let's move to the next page, which is a bit kind of continuation basically on recurring revenues. And I think our recurring revenues, I mean, that is license, support and usage revenues are key for us in transitioning to the new SaaS model, but also going forward, that is the kind of the key metric for us. And the recurring revenues, I would say, is also a proxy of our ARR, which is frequently used by SaaS companies, but excluding growth and new customer additions. So far, I would say that given that we have limited revenues from new customers, coming in 2021 on the new SaaS model that the impact on the recurring revenues are relatively small. But of course, we foresee that this will change over time as our kind of contracts with the customers mature as well. But anyhow, I think it's still satisfying to see that our rolling 12 months recurring revenues are growing from SEK 31 million in Q2 2020 to SEK 35 million in Q2 2021. And as I said a couple of times now, that is a growth of 12%. And also, we can see that the revenue growth for the usage revenues are even more kind of strong than for the total recurring revenue part. But I think overall, we see strong commitment and really high interest on our SaaS offering from our existing customers. And I think also the fact that we have won these kind of highly interesting new customers is also an evidence of that our technology works and that we are also doing the right things. Let's move on to the next slide, please. So this slide basically covers our kind of OpEx level. And as I said earlier, we are continuing our lower cost trajectory. And I think OpEx reductions carried out in Q4 showed effect in full in basically reducing run rate from SEK 178 million in Q1 2020 to SEK 105 million in Q2 2021. In the first 6 months, we had an OpEx run rate of SEK 111 million. So basically SEK 6 million higher than in Q1. And I think this is also in accordance with what we have internally planned. But still, the monthly OpEx is still below SEK 10 million per month in Q2 2021. And we are also -- I mean, we are continuing to expand, and we are also hiring people on the commercial side now. And therefore, we also see that we will have a slight increase in the OpEx going forward as well. But I think this is very much, I mean, we are steering the company based on what we see and also to execute on the strategy in the best rational way. And I think this is very much in line with the -- what shareholders and also Board wants us to do basically. If we then go into the next slide, please, covering the fact that we successfully managed to close and oversubscribe and a directed share issuance together with Pareto Securities in Q2 2021. And with the directed share issue of SEK 100 million, excluding transaction costs, we basically are in a strong financial position to drive and execute on our new strategy. And of course, I mean, we are very pleased with the outcome of the directed issue and also the fact that we further strengthen our shareholder base and are very grateful for the support provided by all the participating shareholders in the directed issue. But overall, I think just looking at the graph on the slide, I think we can all conclude that, I mean with some plus SEK 130 million in available funds, most of it in cash. We are in a strong financial situation ahead to continue expanding on our new SaaS strategy, basically. Over to you, Per.

Sorry, I was muted. Thank you very much, Fredrik. So the next slide is called ongoing transition to a SaaS model. This is a bit of a summary of what we've been talking about, but to give you a perspective on where we are going. So we started in the beginning of the year with a complete reengineering of our solution, making it a SaaS solution, making it a part of Microsoft Azure and also decoupling it, so that we were able to use LUIS as the best of these engine in our products. We launched this at the tail end of February 2021. And we then achieved a Microsoft co-sell partnership, which was a quite important key for us. And then we have a first to the LUIS^Teneo deployed already in March 2021, and that was a select quote. We had got the ISG and Gartner recognitions for our strategy. This is also a part of the foundation. We then signed up the strategic SaaS with -- in April and July, we signed A1 and Telefónica, which are quite key and then also within multinational U.S. tech company, and which is also a key foundation for us. And then in May, we did this share issue. We boosted Teneo to support 86 languages. We also made a public API structure into the product, meaning that you could access the functionalities without using the complete portfolio. So very key things done to position us for where we are today. And in July, also then Circle K renewed with us again, and we also had capital renewed with us in Q2. And this is quite important because we are not losing existing customers, we are keeping them. And we've now focused on our larger customers. And we're also going to start marketing whilst focused on smaller customers, whereas software as a SaaS software fits quite well as well. So I'll hand over to you, Fredrik, to go through a bit about our pricing structure.

Thank you, Per. So moving to the next slide. So basically, I mean, this is a slide that is intended to basically show the scalability in our SaaS model. And we have also done an illustration on how revenues for 2 types of customer can look like in order to provide better guidance on what could be the potential future revenues from customer contracts that we have won, but also looked ahead to win further deals as well. And I would say, I mean, starting off, I think the basis for the revenue model is basically the subscription revenues from accessing Teneo development suite. That is the basis together with the 100% volume-linked user revenues. So basically the API calls. And these revenues, I mean, the subscription revenues for using the platform is basically the reddish part, which is Teneo Studio. And that's something you pay based on a number of seats used. And as you can see, depending on if you're a small customer, a large customer, we kind of navigate with different pricing, of course. And the more seats you use, the more you pay, right? And that's the reddish part in the graph and in the boxes here. Then we have the second kind of primary revenue type, which is basically then based on the actual usage. I mean the API calls, I mean consumed when using the engine. So that's the Teneo engine, which we call them API calls. And the illustration here is basically covering a large client and a small client. And you can also see then that on the reddish part, which is the subscription revenues that we get every month from customers that are using our platform, we get that. There is not that big of a deviation between a large and a small customer. But then the big difference is, of course, in the kind of volume in user revenues, the API calls, where you then see that what we have then in this illustration is for a large customer we foresee 24,000 users per API calls amount, and that corresponds roughly to 400,000 number of API calls a month, whereas for a small customer, that corresponds to more kind of 30,000 in API calls per month. So that's the clear distinction between a large customer and a small customer. Then on top of that, we also have some other revenue types. So the more kind of turquoise part, which is Teneo Data. So that's -- you can see that more as an data analytics tool and which we have not yet kind of fully implemented and in a structured way sell. So this is something we see in the future as the top-up of the revenue streams. And then we also have, on top of that, of course, that we have people with a lot of knowledge in our customer success team that we sometimes also can invoice for. But that doesn't really mean that we focus on professional services, but we will have some income coming also from that part. But the clear distinction is basically that the high capability in the model lies within the subscription revenues for accessing the software, the reddish part and then mainly on the volume-linked user revenues, the API cost. So there is a clear kind of scalability in the model. And I think also here in this setting, I think Per explained a bit about our 6 new customers. And that basically means that we have 3x more customers for 2021 versus what we won for the full year, last year. And also in the quarterly report, I think we also mentioned that in June, we experienced 10 million sessions in our platform, and that corresponds to roughly 80 million API calls than doing some kind of rough estimate of that would mean that, that would basically be SEK 6.5-ish million per month in revenues from those number of API calls. But also as we have -- we are in this kind of transformation or transition phase where we also have existing contracts, which are not fully directly being to the volume consumed in terms of API calls. And that is also something that we are driving them, firstly, with our new customers that all go into the SaaS model, but where we're also transitioning existing customers into to the new SaaS model as well with more kind of volume-linked user revenues. So just to give some illustration on the potential and scalability in our revenue model and also in contracts that we sign with customers. Over to you, Per.

Thanks. So I'm just going to do a summary with the last slide before we go into Q&A. This is just a -- this is basically the platform that we're building upon. It's a technology that from a patent perspective has been valued at $100 million. I think we've seen in the market in the M&A space that the valuation, if you look at it from an ongoing concern platform is even higher than that. Very strong technology basis to work on. We have 3x more customers signed up in 2021 already than we did in 2020, thanks to the new model. We also achieved a cost reduction vis-a-vis the year before with 37%. We have a focus today in the Microsoft ecosystem. We are working together with Microsoft amenities, opportunities. There are 1,700-plus LUIS customers across the globe that are 1 of our prime targets for working. Although some of these customers that we signed actually were not LUIS customers, so they're net new also from Microsoft, which is strong for us. But the 1,700-plus is, of course, a key that we're going to be focusing our marketing on going forward in Q3 and Q4. The team that we brought in, we haven't gone through all of that. You can, of course, see that on our web page. Many of them come from a company that today is valued at roughly SEK 13 billion. Similar industry or same industry, I would say, and a similar offering, although it's an enterprise solution offering, so more of a peer license offering in terms of how it's perceived by the customer, even if it's a software as a service, it is something the customer buys a solution, complete solution. This team that built that many of these people have come over and joined us here. So it's a team that's already built a highly valuable software as a service business. The CAGR in our markets, 22.5% this year, it will be a market of about $100 billion according to IDC. So it's a very large market. But this is a market that's right now maturing. So it's now people are starting to actually use the technology to replace existing solutions. The last one is the carbon reduction that we achieved by moving from an on-prem data center solution to a Software as a Service offering. The cover reduction on the average for that, it would be about 84% moving from on-prem to an Azure-based solution like we've done today. So also a very key strong message for us. So the 3 customers -- the 3x customers, the customers, we got in now are category large, we're working now, of course, to also address smaller customers. We want to expand the base, and we're building -- we're starting to build that pipeline now in Q3 and Q4, and that will yield dividends in the beginning of next year, we'll see that we're going to be able to address both large and small customers. That was all we had for today. So with that, I'll leave it over to Emma for running a Q&A here.

[Operator Instructions] And there are no questions on the line at this time.

Okay. Then, thank you all very much for listening in. And...

Excuse me, we have a question coming from Forbes Goldman from Redeye.