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

Okay. It's 9:00, and we're going to kick this off. Fredrik, can you just tell me, am I coming through loud and clear?

Absolutely.

Thank you. Great. So we're going to kick this off. It is a very different Teneo this time around than it was last time in our report in Q1. Most of you have seen press releases coming out, not extremely communicative because there's been a lot of work that had to be done for each one of those. So I'm going to try to give a picture of where we stand. It is a totally different company. It's a totally different route to market. We're going to grow profitably. And also importantly, it's a rebuilt product. So with that, I'm going to start the presentation presenting -- by the way, this is being recorded as well, just to make sure everybody knows that. Presentation will be published soon on the web as well. So presenting today is -- I'm presenting, I'm the CEO since 5 years here, so very much responsible for what's been going on; and Fredrik, our CFO, who is also going to be presenting and talking about the restructuring from a financial standpoint, but also, of course, the numbers for Q2. And starting off with that, it's a very -- a lot of things happened from -- essentially from February to June, July, but very much accelerating also in April. So it's -- there's no real way of sugar coating it. So what I'm going to try to do is, of course, use AI to explain this in an infographic. Those of you who are added users of AI will know that this came from Gemini. So Gemini, Claude and Copilot, of course, get to be part of all everything we do as well as open-source models that we use internally. So I want to start by just going through sort of what happened and where we stand, and I'm going to use this infographic for that. So we became very dependent on one partner in the U.S. And this was not a good idea, not necessarily because it was a partner, but more because this partner, we let them take over the control of the customer in such respect that they were building. And we trained them, and they were delivering to the customer. Now that's the way a partnership should work. But what we also needed to have is not just contractual protection against the partner taking over the business, but also we should have had more engagement directly with the customer throughout the process. So that's something that we totally have learned in how we're going to be approaching this. Now I've never seen anything like this before. But of course, it's been discussed in both Q1 and in other press releases as well, what's happened here, very, very bizarrely people that have acted very differently from what I'm used to in business. But that's their problem, and it became our problem. So the challenge was also that we failed to adapt to the buying experience. The buying experience today is very much driven by people using AI themselves at home like ChatGPT or Gemini or something else and then feeling that the way that we were presenting ourselves was not as cool or as easy to use as these tools are. So we really were providing that experience in the first sort of phase of it. And this very much was shaped by Sierra, Elea Labs and others that were sort of providing that experience upfront. That's something that we missed to adapt to and our Teneo wasn't really perceived as being as sexy. We tried to plug this by always going for a pilot. But even if the pilot proved that we were much better, it still was difficult to get the CXO layers actually to accept that the product was -- that they wanted to buy that product. And also what we failed to do is implement AI for our development processes. So we tried many different ways to break down the old sort of Teneo stack. And we broke it up. You might remember, we made it into different pieces that communicated with each other, so it would be easier. But we still failed to really take the latest AI development tools and use them for our development. And the AI development tools today are, of course, very, very powerful. And that also meant that we had both slower development, but also we failed to adapt the organization to that. So all this resulted in a significant revenue shortfall. It's not we're talking going back 2, 3, 4 years in time to see that type of revenue from Teneo, from the product. However, we still have great customers, and we're seeing now also that the new product, which I'll come into is providing great feedback from customers. So all this, of course, led to a liquidity crisis that was well published in press release as well. Liquidity crisis led to us not being able to pay, obviously, suppliers, but also salaries. Also, this led to a pause in the M&A process. We couldn't really be -- keep discussing with the customers -- sorry, with the potential buyers when we were essentially in the liquidity crisis, which was breaching the covenants in the loan agreement. So we had to do restructuring in that process as well. That is starting up again soon. I'll come back to that. So we had to make the changes during the summer in hyperdrive. And some of these changes, very painful. But there was intense internal pressure to really save the company. And I believe that, that is what we have done. So what we did was -- sorry, I need to click apparently. What we did was we started by looking at the Teneo products already back in March, April, saying, "Okay, since we're not really managing to use AI to rebuild Teneo 8, we're just going to build a new product with the same type of concepts that we had before." So it is a complete refactoring of the product that we've done using the latest AI tools, but also building our own model for AI development. So we now have our own model for building, which is the model that not only builds but also tests the software that we're building. So that's an in-house AI model that we've been building up during this period. Now that enables a lot of the changes that we've done, but it also was really crucial in order to get customers to accept the product. And I'm going to dive into a bit more what it was and how that changes affect. The really regretful thing in this is that because of the cash squeeze and the fact that, well, there essentially still a little cash, but we'll come into that, too; we were forced into a collective dismissal and restructuring of our Spanish entity. So there's a great AI team in Spain that is now available if somebody needs an AI team, and we're going to be publishing that on channels as well. As of today, essentially, that team is no longer with us. This is very painful. It's a team that's delivered really great results, and it's definitely not the best way to part ways, but it was the only way to sort of manage that the whole company wouldn't have to go into -- due to the liquidity. So very, very painful restructurings during the summer, which has now resulted in -- which I'm going to talk more about as well, of course. The [ from-scratch ] rebuild of Teneo, which then -- [ as ] produced what we call Teneo 10. Teneo 10 is currently in preview. So we're -- because of the changes, we can't really implement today. So we have a slight delay in implementation because we're taking it into full production in October. And that, of course, has to do with the testing schedules. So we are -- as you know, we have ISO, SOC, HIPAA, GDPR, EU AI Act; all these compliance things that we need to adhere to, and that's what we're testing currently. So we've shown it to customers. We've done pilots with customers with Teneo 10. Great feedback. And we have 2 customers also that already have said, "Yes, we do want to implement this." And one is Medtronic. They're going to put a voice to their ServiceNow, so AI voice to their ServiceNow implementation, meaning that Teneo is the interface that gets to talk to customers and patients and employees rather than having an AI model doing that directly. So very, very great message. And of course, ServiceNow runs a lot of the business processes internally at Medtronic. And then we have the telco in Turkey, which had already started, where we're now going to just move this into Teneo 10 as we move along. That is -- those two are sort of the big potentials that are also going to bring us up to the goal that I'm going to talk about going forward. Also what has enabled and unfortunately, not in a great way as well since these reductions in Spain happened very abruptly; is a 50% cost reduction in the company. So the company is going forward with using an AI build process and also running internal processes with AI, which enables us to really restructure very quickly. Now there's a bit of a lesson in this that we might go into some time, but restructuring an ongoing operation with AI is quite difficult. So this is really a complete rebuild of the company from scratch with a lot fewer people than before, but not done in the best possible way. But the results are now that we're going to be at a 50% cost reduction versus before. Also, very, very importantly is because of the rebuild of Teneo, the cost of sales; so it's a factor lower, it's a factor 10 lower, meaning that we can enable now a much larger ICP. It used to be that we dictated who we sold to by the fact that our instances cost quite a lot to provision. So it costs a lot to set up a new customer, meaning we couldn't really sell to smaller customers, which is why we went after the 238 customers that we did. This ICP is much, much larger, and that already shows in the pipeline that we can now go after also and win business but also make money on business that is smaller. So although that revenue footprint is not going to be as big, it's going to be as good. Well, the profitability is going to be good. So strategic focus going forward, given all this, the big restructure, the new build of the product and rebuild of the organization; is that we're going to have -- we're going to focus on the existing customers and pursuits to bring us to profitability, and that is the focus. So we're now moving away from trying to grow into a cost structure. Instead, we're trying to reduce the cost structure, get back to profitability and then build from there. Now partly this is because it's obviously impossible to compete with the Americans that have like billions of dollars of venture capital, and we're going to compete instead from a happy customer perspective in a traditional sense like a true Swedish company would do as well. So that is our pure focus. We're going to go cash positive. The whole organization is triggered on that, is bonused on that, and then we're going to be growing from there. Also, a comment quickly on M&A and legal. M&A process will kick off again. That is not going to be the focus of the company itself, rather the Board and, of course, JPMorgan. And there is still interest in that. The technology is still very interesting in the space. The legal process, we're going to also not focus on, but we are going to try to see -- find somebody that finances that. And we discuss -- we have discussions on that already. Somebody that finances the legal process, that is the process with the partner. And then the proceeds of that will, of course, come to the shareholders. So that's sort of -- this is the infographic that captures what happened during the summer. A lot of really painful restructuring. Really like to emphasize again, we have a great team in Spain that is very versatile and useful for AI development, but it's just too big for us and the revenue footprint that we have going forward today. So with that, I'm going to let Fredrik talk about the main work that's been happening on the financial side and the restructuring side during the summer. So Fredrik, over to you.

Yes. Thank you. So a lot of happenings during the summer, as most of you have followed in press releases, as Per mentioned. And one key event during the summer was the fact that we, in constructive discussions with our large lender, Capital Four, agreed on a principal agreement to restructure the existing senior debt of SEK 290 million, including accrued interest. And this essentially means that the company is becoming debt-free. At the same time, we also managed to receive a SEK 10 million bridge funding from a shareholder, and that will partially be offset in the rights issue that is ongoing as we speak. So SEK 8 million will be distributed to the rights offering, and SEK 2 million will be later on be repaid to that shareholder. During the summer, we also agreed with the lenders that provided SEK 25 million in a subordinated loan earlier in Q1 to essentially set off that against shares at 2.5x the issue price in the ongoing rights offering. And following this transaction, Capital Four will hold close to 30% in the company and they will also have the right to the first SEK 25 million as similar to a profit-sharing agreement that will go to the lender in a scenario of a public bid and similar. And on top of that, in the rights offering, SEK 10 million will be also repaid to the lender. So I think all in all, a very favorable outcome for all parties in this transaction, I think, with the current structure. We can go to the next slide. Just briefly on the rights issue that is ongoing. So there is a fully secured rights offering, bringing in SEK 74 million to the company, excluding transactional costs. And this was also then announced on August 10. Subscription price will be SEK 0.05 per share. And the rights offering was covered with 20% of existing shareholders, including Board and management. And 80% was covered through a guarantee led by Pareto. And yes, I'm coming back a bit on use of proceeds, et cetera. But as we mentioned, SEK 10 million from the rights offering will be used to repay the lender as part of the agreement. SEK 2 million will also be repaid to the bridge loan financier. So there will be some repayments, and then we will also have some transactional cost of approximately SEK 10 million for the different transactions related to this kind of joint transaction. I think they are all dependent on each other. So -- and yes, the intention now with, as Per mentioned, I mean, it's basically to fund the operations and the development of Teneo 10 until we can hit cash flow positive. So very much as a smaller company and a lower cost base and then driving growth from there. And as you can see, also the dilution for shareholders not participating in the rights offering is quite substantial. So hopefully, as many existing shareholders as possible will subscribe in the rights offering. I think we can move to the next slide, Per. Just recapping on what Per already said. Unfortunately, we have been forced to take measures in order to reduce the cost base. And part of that is also that we are actually today dismissing and will dismiss over the autumn, all employees in Spain, which is a really sad day for us, since it's a lot of well-reputed and skilled people in Spain. But that has also been -- I mean, measures that we have been required to do in order to also save the company, given this challenging situation that we have been in during the summer and following the exit of the partner that Per mentioned earlier. I think we can -- over to you, I think.

Yes. So maybe just add to Fredrik's there, [ Asfawadden ] has been looking at asking us questions. apparently, our press releases have not been informative enough, but it's been in [ Asfawadden ] as well. Fredrik, so the CTO, CFO, COO; so we're 4 people in the management team today, and we're all taking our pro rata of this. Maybe that's an important thing. Now if we have been -- press releases have not been informative enough, it has been very, very difficult negotiations with many stakeholders at the same time. And sometimes things could not be published and sometimes they could. That's why we're trying to bring everybody up to speed now, so everybody has the same information. But yes, we are taking our pro rata, of course, in this. And if you look at the valuation of the 30% versus SEK 300 million, essentially, the lender is converting at SEK 1 billion valuation, which is kind of interesting in this as well. And of course, [Audio Gap] aligned interest, which is much easier for us as a management team. So focus is obviously lower cost base, no debt, very focused. We have a broader ICP, so we can sell to more customers, which is what we're going to be focusing on, right, selling and serving Teneo, nothing else. The management team is going to be focused on that. Now the Board focused on JPMorgan, potentially a separate entity or separate organization; is going to might be focused on the process with the partner, the legal process with the partner. But we're going to focus everything on Teneo 10 and converting that into revenue and getting back to profitability. Essentially, this is how we've been working through this process. We have a cost base -- revenue base right now of SEK 2 million. Fredrik is going to dive in more to that. We have commitments to start as soon as we get Teneo 10 implemented to lift that into SEK 1 million already. And then we have growth in the existing customer and baseline that lifts us an additional SEK 2 million, which gets us to SEK 5 million cost, SEK 5 million revenue. And our aim is to do this during Q1 to get to that breakeven line during Q1 and then build from that. So it's not to invest before, but now it's reducing the cost and making sure that we can grow profitably going forward with this great product. I want to talk a bit about the great product. We call it [ Teneo X ] in our development. It has been totally refactored, rebuilt and that enables several different things. So before we dive into deeper in the financials, I really want to talk about this because I think this is the meat of the company. Actually, I do want to mention one thing also before on the focus going forward. We did try with our patents that have been valued at very high valuations. We've been trying to get somebody to either buy them or to license them. But it turns out the process of getting there is very expensive, meaning that with our balance sheet and with our -- it's just not something that's doable and it's probably not financially viable to do that at all, right? So that's why I'm no longer talking about the patent strategy. We did try. We tried several different avenues. But really, the focus is now M&A, where there was interest before we had this blowup where everything went on pause. We're going to reactivate that actually starting, I believe, next Wednesday. And then it's Teneo 10. So let me get into Teneo 10. So first of all, we always used what we call hybrid AI. But hybrid AI is a margin lever for us, but it's also a margin lever for our customers. And we're going to be much more focused on explaining this to customers now that we see that a lot of customers are getting upset about the fact that they are paying too much for LLM tokens. So very, very much hybrid AI is important to us and the customers. We put a totally different observability on this. What does that mean? A lot of our customers were actually still sending Teneo and other data to India for transcription to data mine what customers are talking about. That is no longer needed. With Teneo, you have everything in one product. So this is a separate sort of thing that customers have to do to get real analysis, no longer observability here is full. So you get everything served through this internal AI model that we built. So brilliant [ grasp ] of what your customers are talking about. We're adding the voice telephony thing directly into the product. So if a customer wants, we can provide them with a phone number, the speech to text, the text to speech, the full solution rather than just a part of the solution. Now that turns out to be very important, especially slightly below the enterprise level. So with our old 283 customers, not that important, but with the layer -- this layer. So Medtronic wouldn't be using that, but our sort of customers below that would probably be -- are looking very happy about this, and we're in discussions with a few such smaller customers today about doing this. That is going to change slightly our cost of sales since we're now going to put input in, but it's also going to increase our revenue since we have revenue. We're going to be adding revenue, of course, on top of that or margin on top of that. The authoring UI has totally changed. You can now go into Claude and build your product. So you can directly work from Claude, for example, so prompting. It is also very graphical, and it's very much what people are now used to from developing in Claude code or Codex in OpenAI. So much, much faster to develop and get a solution up to speed. The testing suite we built in now was something we -- our customers used to rely on an external source. That is something that is now built in. So the system test itself. So we have agents that actually run the process that you build. So the business process you built is built -- is run by agents through the telephony or through the chat or whatever you want to implement, it's tested before it comes out. And then, of course, it's still that proven at scale technology but now delivered at a much lower unit cost. So we're talking a factor 10 of the unit cost for us to deliver. So with that, I'm going to again give it over to Fredrik to go through some of the financials, which again are not looking great at this point, but this is where we start.

Thank you, Per. No, indeed, and I'll try to be quite brief on this. So net sales in constant currency amounts to SEK 6.6 million versus SEK 22.1 million the same period last year. So a significant drop. And Per already mentioned the reasons for this decline. So I will not reiterate that again. Same with SaaS ARR, in constant currency, amounted to SEK 12.2 million versus SEK 65.2 million, so also a significant decline. Total ARR in constant currency amounted to SEK 21.4 million versus SEK 83.7 million last year. And this is obviously, I mean, not to reiterate too much, but linked to mainly the full exit of our previous distribution partner in the U.S. And also, this forms a bit, as you could see on previous slides presented by Per, where we are starting at roughly a revenue base of SEK 2 million per month, and that's the starting point. And also there where we -- I will come into that later also on our current cost base of roughly SEK 5 million going forward. Gross margin amounted to 70%, so a drop from 88% last year, and that's mainly related to the decline in volumes. As many of you recall, we have had -- even if we now have a lower delivery cost going forward with Teneo 10, we are still dependent on also having volumes again to bring up gross margin. EBITDA adjusted amounted to minus SEK 17 million versus minus SEK 3.9 million last year. So a significant impact there also from the drop in volumes. Adjusted cash position as of June was SEK 3.5 million, and the actual reported cash position was SEK 1.4 million. And I'll come back a bit on the cash later on in the presentation. So I think we can move to the next slide, Per. Also here, SaaS ARR and total ARR in yellow and SaaS ARR in purple. As you can see, same as on previous slide, but also over time. So we have had a very tough half year and the quarter. And that's where we are starting off with this rebuild of Teneo essentially. I think we can move to the next slide, Per. Yes. this is also, as I said on the first slide on the financial parts, 70% gross margin and an effect essentially of lower volumes. We can move to the next slide, Per. OpEx, important aspect here. As you can see to the left side, we have Q2 2025 and Q2 2026 annual operating run rate costs. So yes, close to SEK 115 million. And as Per also mentioned, we are bringing down the costs approximately 50%. So when we start September, we expect to have roughly a cost base of SEK 60 million in operating expenses. So that is equivalent to SEK 5 million per month. And that's how we're steering the business going forward with roughly SEK 2 million in revenues and then SEK 5 million in cost base. And then the intention is to, as quickly as possible, bring in more customers and reduce the cash gap essentially to become cash flow positive. We move to next slide, Per. Just quickly on cash, we had, as I said, SEK 1.4 million in cash and bank positions as of June 30 and adjusted SEK 3.5 million. And we are now bringing in SEK 74 million in the ongoing rights offering, and this will also make the company debt-free. We can move to next slide, Per. Also a bit just to recap on what has been happening. So when we ended June, we had SEK 1.4 million in cash in the bank. Following that, we agreed with a shareholder on a bridge loan of SEK 10 million, adding to our cash position. And then we are now adding SEK 66 million aside from the SEK 8 million of the bridge loan that will be converted into the rights offering as well, adding up to SEK 74 million in total. But then we added SEK 66 million there when we get the funds in from the rights offering. And following the rights offering, we have agreed with Capital Four to repay SEK 10 million to the lender and then also SEK 2 million to the bridge loan provider. And that roughly means that we have SEK 65 million as a pro forma balance as of June 30, and this is excluding transactional costs. So that's where we stood pro forma in June, and now we're approaching September and with full focus on delivering in new customers essentially. Over to you, Per.

Thank you, Fredrik. So I'm going to summarize. But before I do that, I had -- actually have 2 questions in the chat. So I'm just going to start with those right away. So we're talking about addressing smaller customers with the Teneo 10. Essentially, a smaller customer here would be SEK 1 million annual revenue. So a lot smaller than our traditional customer base that we address. Now that is something that's going to be sold through partner channels, but with a totally different partner governance structure than we've had before. But that is -- so essentially offering partners a complete solution for their type of customers. And then there's a question there on -- Fredrik, in the chat, which I think is more for you. SEK 5 million monthly OpEx run rate excludes cost of sales with the Q2 gross margin of 70%. How does SEK 5 million monthly revenue in February result in breakeven against the SEK 5 million monthly cost base? SEK 60 million. Yes.

Yes. I would say that we will also with higher volumes, improve gross margin. But also as a counterweight to that, we may also bring in customers with -- at lower volumes, and that's also why we have rebuilt -- one of the reasons we also rebuilt Teneo 10, right, to have a lower delivery cost. So I think the actual -- I think we will have an opportunity also to bring the gross margin up from this when we bring in new customers.