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

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Artificial Solutions International AB Q2 2022 conference call. [Operator Instructions] I would now like to turn the conference over to Per Ottosson. Please go ahead.

Thank you, Natalie. So good morning all, and welcome to this presentation of our Q2 results, which I'm very happy to share with you. Also, since we are far into August, we're also including some July numbers since those are available as we speak. The presentation is available on Artificial Solutions' Investors and Quarterly Report on our website. And I will be saying just which slide number I'm on as we're speaking. So let's dive right into it. Today's presenters is Per. I am the CEO of Artificial since about 1.5 years back. I have a long background in this particular area of the IT world, which is called Conversational Artificial Intelligence, or CAI. I'll talk a bit more about that as well. And Fredrik Torgren has a long experience in both the PE-backed tech and SaaS companies and also worked in the capital markets in Stockholm. We are going to present today, like I said, the Q2 results, but I want to first start with Slide 3, which is to tell you what our market is and what it is we're doing and why this is important and relevant for our company. So our market is a customer or an employee or any stakeholder that wants to know something or has some kind of request, comes in from the left, where they, "Can you help me? I need to get this done," et cetera. The conversational AI then needs to interpret this and understand what it is the customer is asking but also what language they're using. Are people, places and details mentioned? What kind of request this is? Does the user seem happy or upset? Have we interacted before? So a typical use case here, we can take the case of Swisscom. Swisscom has built a solution where the conversational AI picks up the phone when you call the Swisscom hotline. So roughly 1 million calls a month go directly into this platform, and the platform will then determine what it is the person wants and if they're happy or upset, et cetera. An upset person will always gets connected to a person -- a live person immediately, whereas a person who is not expressing that they’re upset in any way would probably try to be served by the conversational AI. And what we found is that the actual customer satisfaction improves when the conversational AI, so our technology, picks up the phone. The interesting piece is that this is very new, and there's very few companies that have implemented what Swisscom has done. They're probably one of the top 5 in the world in this. But the other top 5s are also our customers. So this is a niche which is now expanding, and we're going to see a lots of increased traffic in there. And as you see from our revenue model, that's exactly what drives our revenues. Artificial Solutions at a glance, this is Slide #4. So we are the leading software company in the conversational AI space. When it comes to one specific aspect and that is volume, which is also why at the bottom of this slide, you see very large customers. It's the likes of A1, O2, AT&T, Volkswagen Group, Skoda. And customers that have a lot of customer interaction are typically working with us. Also, there are some public entities, which have a lot interaction with, for example, patients or it could be with taxpayers. And when they have a lot of interactions, they're working with us. So this has really shaped our strategy, and these are the type of customers we're looking for. We're not necessarily looking for a volume of customers. We're looking for many of these larger customers and expanding within those customers. And that's also what you will see in our report that our revenues increased quite dramatically in the existing customers. We were founded in 2001. That's quite relevant because we have some of the foundational technologies that are used in its industry. They're used by Amazon. They're used by Apple. They're used by Google, for example, because we were very early in building these technologies. These are patented. There's forward citations on these patents that you can follow to go into the Google Patent sites. And it's highly acknowledging the fact that we were early on and are innovators in this space. Our platform is called Teneo, and Teneo allows somebody to build a communication application, some conversational AI application. And either they build it themselves or they build it with partners, and we support them with something called customer success. So our model is that we provide them SaaS, and we provide help in how to use that SaaS to build. But we do not build for our customers. The customers do it themselves or the partners do it for them, which also then makes partners very important, which why at the bottom right with the strategic partners piece there, you see several partners. The most important one being that we're aligned with Microsoft Azure. We're part of the Microsoft Azure ecosystem. And that is quite important for us since that means Microsoft's salespeople have incentive to also recommend and drive our usage in these large customers. Another partner to highlight is CGI. This -- so this quarter was at the beginning of July. But anyway, recently, we had a press release where CGI had signed a global partnership with us. And we've already on Linkedin seen quite a lot of external parties noticing this and talking about the solutions they're providing, one of them being a very large health care provider that they're implementing and actually going live, but 4 months after initial start of that project. We support 86 languages in a model which is unique to the way we manage languages. It makes it much easier to build a multilingual application than with any other solution. This is becoming increasingly important also in the U.S., since many of the U.S. companies, of course, go international. You see many of our -- we have many smaller competitors who might be only in 1 language. So there might be a Bulgarian competitor that we competed within A1 that only does Bulgaria, whereas we do several languages. And of course, that helps if you have multilingual customers or employees, which most companies do today. We're in the course of shifting from a traditional license usage revenue model to a pure Software-as-a-Service model. We're still pushing to move all our customers over to the SaaS model. It is somewhat slower than I had anticipated, but we're still hoping to accomplish this by the end of the year. It is -- the reason it's been a bit slower is the fact that we've had some certifications that -- we're just about done with now, which have been a reason for some of these customers not to look at this. And also it's a renegotiation of contracts with procurement that takes time since the revenue model is different, the payment the model is different. The SaaS ARR in June was SEK 20 million, but in July, like I said, we're disclosing those numbers as we have them ready. It was SEK 21.2 million. So that's the forward-looking ARR, i.e., that month x12 and that is a substantial increase, of course during this year. We started reporting SaaS numbers only in Q1. So we'll see some of those comparisons as we go through. The patent and IPR portfolio has been valued at SEK 1.6 billion by a third-party evaluation OxFirst. This is -- the patents have very innovative -- we have some very foundational patents in our industry, but we are not using them as a revenue model at this point. Of course, our revenue that we see and the SaaS model is working, and that's where we want to use this technology to provide real value to customers. Just some of the summaries below, we had 3 customer renewals in Q2 2022 and 1 partner signed up. We had an 18-point tNPS increase at Swisscom. This is a number that's been holding steady. That is -- it's an increase versus a human picking up the phone. And that is quite important for this industry. Of course, the cost saving is enormous when you deploy a robot to pick up the phone. But if you also get tNPS increase that has some reverberations around that in the customer experience business as well. We have 9 net new SaaS customers in the last 12 months. And also another thing that we find quite interesting, the fact that Skoda is still expanding and now added 13 new regions in this quarter. So 13 new countries where you can buy Skoda by talking to Laura and Laura, of course, is powered by Teneo. At the top right, this is the development of our SaaS API call volume. So the API calls are the primary monetization of our platform as we grow. And you can see here that it's growing at a healthy clip. And of course, that means that existing customers are growing and that is also where we're putting a lot of our focus through customer success in having these large entities like AT&T and spread this technology across all of their platforms. Some operational highlights on Slide 5. We had a very high growth, again, in SaaS API call volumes, 69%, March '22 versus June '22, so that's 1 quarter, 69% increase. If you just look at the months June versus July, 11% increase. This is quite substantial, and we're very happy with this. And as you note, it is driven by existing customers. The SaaS ARR is also growing quite highly. Of course, the API call is a portion of the SaaS ARR, but it's 55% up in March 2022 versus June 2022 and that we have a 6% increase in July versus June 2022 there as well. So very good, and I'm very happy with this performance and this really bodes well for the future. Customers are continuing to show very strong confidence in our SaaS model. We have 23 customers in total, 13 are now in the SaaS revenue model and 9 of those are net new SaaS customers in the last 12 months. So very happy in that they are growing, Saas customers are showing this confidence in that this works and putting more and more effort into adding a larger volume in there. One of the things that happened, given the fact that we changed our focus to also expanding primarily in volume of customers, but more customer volumes. So expanding into large customers primarily is that we changed our sales strategy to have a dual sales team reporting into me, one being, of course, Sean McIlrath that came in the beginning of -- at the end of Q1 who has built quite a team in the U.S. now on sales and presales. And then Patrik Rosenberg, who we are announcing today is being hired as EMEA VP of Sales. Patrik will be joining us likely sometime in September that's being discussed with his current employer to speak. Patrik has a long experience both within the conversational AI and artificial intelligence in general, and comes from the company in the Wallenberg family of companies that is focused on AI. So a very interesting recruitment and he has large international experience, both from the U.S. and Europe, which is going to be key for us. Since he will collaborate with me in the EMEA team and, of course, Sean in the U.S. team. Teneo, we had a major platform release. You can read more about this in our statement on our Q2 report on the web, it's called Teneo 7. It is the last store of making it a SaaS platform, and it's been a brilliant job by the team to pull this together, lots of new features which are -- which we are alone to have in the industry, and most importantly, being the team-oriented features, meaning that several people can collaborate on the same solution. So incredibly important for us, and we're very happy that this was released in the quarter, and we've rolled out customers without any major hiccups on that. We also did a reverse share split to get our share more in parity with where you would put companies that come into the stock exchange. Of course, we came in through acquiring a company and then divesting of that. So the reverse share split of 1 to 10 [indiscernible] more in parity with where you would have put a new company had we come into the stock exchange from fresh in an IPO. So that's the operational highlights. I'll now give it over to Fredrik to give us some key financial highlights on Slide #6. Go ahead, Fredrik.

Thank you, Per. So some key financial highlights. And I think our sales metrics in the quarter keep growing, and our SaaS business is obviously increasing in importance. Net sales amounted to SEK 10.2 million in Q2 2022 versus SEK 8.2 million in Q2 2021, so up 24%. And more importantly, our recurring revenues increased to SEK 9.1 million in Q2 2022 versus SEK 6.3 million in Q2 2021, up 44%. So very satisfying as this is one of our key KPIs. And the recurring revenues as a percentage of total sales is also continuing to increase. And in this quarter, it was up 89% versus 87% in Q1 2022. So basically, our kind of strategy -- we are executing our strategy and ramping up. I mean, the recurring piece of the business and also the SaaS business. The impact from our new customer wins in 2021 and 2022 on the SaaS model are starting to be visible in our revenues. But even though they are showing up in our revenue increases, they are still in a ramp-up phase. And SaaS ARR increased to SEK 20 million in Q2 2022, so up 55% versus Q1 2022. And also, currency adjusted, the increase was 51%. So still very kind of solid growth. In addition, as Per mentioned, July SaaS ARR amounted to SEK 21.2 million, so up 6% versus June 2022. So this is very satisfying kind of growth numbers month-over-month. SaaS recurring revenues, as I said, constitute now 49% of total recurring revenues in Q2 '22, so up from 34% in Q1 2022. And again, this is also I mean execution of what we have communicated to the market in the past. And this number is also expected to progress. We add more customers to the SaaS model and also as our customers are ramping up on API call volumes. Per also mentioned SaaS API call volumes are ramping up and was up 69% versus March 2022, very impressive growth rate. But here, we also recognize that we have many customers where we, as a company, still think there are significant scale-up opportunities from current levels. But given our model also, we can't make any kind of guidance on that. But we see plenty of opportunity to scale up from the current levels. Overall, we also experienced, I mean, quarter-over-quarter sales growth on all our relevant SaaS metrics. And also looking a bit more on cost, we continue to keep cost control even if we are increasing OpEx somewhat, but that is more in line with what we have guided for in previous reports and we now reported an adjusted EBITDA of minus SEK 22.4 million. End of Q2, we had a -- also had a strong cash position of SEK 64 million. And there, we can also acknowledge that a few customers paid beginning of July instead of end of June, which sometimes happens with large customers who are pushing payments over the quarter ends. And this had an impact of approximately SEK 5.5 million. So adjusted for this, cash and bank position would have been SEK 69.1 million instead of SEK 64 million end of June 2022. But overall, I think we are on a positive revenue trajectory, and our recurring revenues and the SaaS ARR are growing in a good way, even if there is, as I said, still plenty of potential to ramp up API call volumes further. And next slide, Slide #7. Our SaaS model is obviously ramping up, and 2 key KPIs for the SaaS model is the monthly API call data and the SaaS ARR. And the monthly SaaS API call volumes grew with 243% versus December 2021 in relation to July 2022. So a very kind of impressive growth rate, I would say, on the SaaS API call volumes. And this KPI is also an indicator of how our customer application and usage of them are growing. And you can simplify, say that the more application/solutions coverage or covered regions, the higher the API call volumes. So all in all, high volumes means more revenues for our company. The SaaS ARR grew with 126% December versus July 2022. In the monthly SaaS revenues, we have also converted customers entering SaaS model obviously. But overall, very strong growth on 2 of our key KPIs going forward. Slide 8. This slide, we have showcased, I think, since Q1 2021, and it's basically outlining the business model that we are driving towards -- driving over existing customers that are not on the SaaS model into the SaaS model as quickly as we possibly can and then also bringing in new clients only on the SaaS model. And this also clearly showcased if we do a reference to the increase in ARR between June and July, where you actually see that the main part of the increase is actually coming from the dark blue piece of our revenue model, which is the variable piece, which is linked to the API call usage by customers. And that also showcase -- I mean, if we have customers pay the subscription piece to be on the platform, which is the red part that is more kind of the starting point for our customers. But if we have large customers bringing on significant volumes, we can increase the variable part, the dark blue side, and that is what we see the increase in -- between June and July, which was kind of a 6% increase in SaaS ARR is only in this case driven from increased volumes. And that also showcases the scalability in our model. When we once have customers in the platform, we want them to scale last quarter, for instance, we want to grow in more regions in order to get more kind of volumes and that is the very nice piece with our business model and the great scalability with it. So I'll leave it there. We have run through this slide in previous calls. So I think most of you are familiar with the business model as such. Slide #9. I have talked about most of the growth metrics here. But obviously, recurring revenues grew from SEK 6.3 million in Q2 2021 to SEK 9.1 million in Q2 2022, so a growth of 44%. The rolling 12 months recurring revenues is also increasing year-over-year and quarter-over-quarter and amounted to SEK 35.2 million in Q2 2022. SaaS recurring revenues, and the SaaS ARR increased versus Q1 2022 and Q2 2021 to SEK 20 million in June 2022. And SaaS revenues increased further in July, as I already mentioned, and SaaS ARR amounted to SEK 21.2 million in July while total ARR amounted to close to SEK 42 million. So looking ahead, we see clearly that the underlying contracts we have with customers has potential to grow further. And also, as you saw, June between July, we had a 6% increase in SaaS ARR. And that's a key driver also for the total ARR increasing to SEK 42 million in July. Slide #10, looking more on cost. We can see that -- we are increasing our OpEx as guided for in previous quarters. Run rate in the first half of 2022 was SEK 134 million, excluding extraordinary items. And going forward, we expect the OpEx to slightly increase Q2 as Per outlined, front-end investment. So basically, marketing and sales activities to further kind of grow the revenue growth. And with this also, we can also see that our cash position end of June was adjusted SEK 69 million and our current net cash outflow, so that is cash in minus cash out, we expect our current cash and bank position to last at least the coming 3 quarters. And there, we can also just say that, I mean we raised debt from Capital Four in -- at the end of 2021. And we can just say that we have very good relationship with our debt providers and also our large shareholders. And going forward, as a growth company, we are intending to continue to grow and we will finance our continued operations in the best interest of the company and the shareholders, obviously. With that, I'll leave over for you, Per.

Excellent. Thank you very much, Fredrik. Great numbers, great quarter. Things are moving in the right direction. This is a bit of a summary. First of all, then our technology valued at SEK 1.6 billion is the patents that are the foundation of this business, the business we're building is, of course, a SaaS business on top of this today. And you see that from December to July, the SaaS ARR has increased 126%. So very high growth and it really proves that this model is working. We have integrated the cost reduction since we moved over to SaaS, right before we moved over to SaaS of 25%, has good impact, although we are now starting to invest in sales and marketing. The sales and marketing of Microsoft Azure 1,700-plus customers. These are, of course, the LUIS customers that we're very keen on working with, out of those we have identified 200 and those are on our target list, and those are the ones that we're going after with the sales organization of Patrik and Sean. And of course, we already have some of the largest out of that, which is, of course, important as a reference. And maybe the Telefonica reference that was presented in July is something to have a look at as a shareholder as well, it's a seminar that you can find in my LinkedIn profile. The total ARR, SEK 41.9 million [indiscernible] both the legacy and the SaaS uses we both are now driven by paying on a monthly basis, that would be SEK 41.9. million SaaS API calls. So the SaaS revenue-based API cost is SEK 10 million, which is also very, very good and increasing very much. This means that we're powering a lot more than anybody else in this industry, although they may have many customers, we have very large implementations and growing at those customers. This market, the SEK 137 billion market is an unconsolidated market. It's something where things are going to start moving now that we see results on transactional NPS, on customer experience. This is going to start really moving and it's going to be interesting to see what the consolidation plays out here, but nobody is really big in this market. Today, we have the biggest implementations and some others have lots of smaller customers. But nobody has really reached any real size here. So it's going to be an interesting place to see the consolidation of that market. With the SaaS, as we're moving customers to SaaS, we give them an 82% carbon reduction versus running all this in their own data centers. And that is actually a key argument for many of our customers today. So that's it. With that, I'd like to hand it back to Natalie to come back to Q&A here.

[Operator Instructions]

So this was obviously a presentation that explained everything in one go. Fredrik and I are, of course, available for any e-mail questions or phone questions later today as well. But if there's no questions, Natalie, then I -- let's just wait half a minute. Okay. Thank you all.

Fredrik here. I think, operator, I just got a text message from one of the participants here. And he has said that there were some issues to ask questions. So maybe we could give it a few minutes more just to see if that gets solved.

[Operator Instructions]

Okay. I also got a message here. It seems to be some kind of issue there with the star. Natalie is trying to open it manually now. Let's see if that works.

Okay. So we will now take our first question from the line of Forbes Goldman from Red Eye.

So the first one is I am quite curious to learn about the, like majority of your average customer in the SaaS model. I mean, if you take the SaaS ARR divided by your SaaS customers, it appears it's about SEK 1.5 million per customer, and it's increased quite a bit compared to the previous quarter. So could you explain something about this development, please?

Yes, that's -- you're spot on, Forbes. So this is part of why we defined our strategy. What we find is that some of these customers have the potential to go into the millions of dollars in ARR. And we find that there's so much more that they can deploy. Most of them have deployed a few use cases. So the only really mature one is Swisscom, but Swisscom, of course, is not in the SaaS revenue model and also Switzerland being a bit different. It is different -- very difficult to use the SaaS model in that country at this point. But if you look at their maturity and you were to put that on some of these other customers, then you would see that we're scratching the surface of these sites. So we are on the 2%, 3% of the volume that we could do in these. So that's why we're putting a lot of focus on customer success on existing customers, and that's been taking a lot of our effort. Also in the Teneo 7 update, which is very much to enhance the experience for these large clients that are really building on top of this. That's what we spent on some R&D and most of our resource during this year. So yes, that's a good catch. It is growing, and we see potential of a lot more growth in that, in existing customers.

Great. And would you say that the number of SaaS customers have gone live, that number has increased in Q2 compared to the previous quarter then?

Yes, it has, right? So there's at least 2 that have gone live and then another one that went live at the beginning of this quarter -- beginning of Q3, so in July. But it's also the customers are already live. There's lots more potential.

Yes. I understand that. Great. And I'm also curious about the 10 other customers not in the SaaS model. Is there anything you could say about the API costs that these customers are generating and when you expect these to migrate over?