Xplora Technologies AS (XPLRA) Earnings Call Transcript & Summary

All right, welcome, everyone. As you can imagine, very little sleep the last couple of weeks, so we are basically running on pure adrenaline but are really excited to welcome you to demonstrate and showcase to you what we recently have just announced, a bid to acquire the shares in the tech company Doro in Sweden. I think we have record numbers joining us live. And even on this very, very short notice, we almost have a full crowd here physically today as well, so really, really excited. I will take you first through some of the key takeaways on why we think this has a huge opportunity as acquisition opportunity. Knut will take you then through some of the details in how you can model and how we look into the potential financials. At the end, we will have a Q&A, where also Kjetil will join as this is very much so related to SIM and subscriptions. Without detailed information about Xplora itself, but I know actually we have some new potential investors joining us live today as well. Just one quick slide on Xplora: As you know, we are a category leader within kid -- smartwatches for kids age 4 to 10. Our core business model is to sell smartwatches for kids to enable us to activate high-margin SIM and premium services. We have sold roughly 1.5 million smartwatches over the time of our existence, and currently, we have more than 300,000 SIM subscriptions. And as you probably also know, we have 3 ways to monetize, where our 2 most common is currently from margin on selling the products, still being north of 30%, but of course, it's really the key essence of our business model, to activate SIM subscriptions, where we have north of 80% margin. Lately, we have also started to announce that we have entered into partnership with revenue-sharing model with some our strategic partners. Some very few months ago, we invited you all to a Capital Market Day, where we announced our long-term vision where we said quite boldly so that our objective is to aim for 1 million subscriptions. Those subscriptions should come from our current category, being kids, already 300,000 subscriptions. And as you know, the #1 reason and really the only reason why we currently have churn is that, at the age of 10, kids grow into having their first cell phone and we have no more products, so of course, for us to enter into the youth category in the future is a natural way for us to actually reduce our churn. More on that to come when we are ready. The third category that 1 million subscriptions should come from is the senior category. And as we also said during the Capital Market Day, we had a very clear focus from '23 to '24 to make sure we could pivot from negative EBITDA to positive EBITDA. If we manage that and only if we manage then, as we have done so in '24, we should then start to explore new growth opportunity. In the last Capital Market Day, we announced our goal of 1 million subscription, and we said that could happen organically or via M&A strategies. That's why we have been working late hours. We have actually working on this -- been working on this case for 12 month, last 6 months extensively, so we have a lot of data, insight and knowledge on why we do this and how we are going to capitalize on such a potential acquisition. So by acquiring Doro, we will go from being a leading provider of a proposition in the kids market, to be a European, by far, de facto category leader in both kids and senior. And at the same way as we have our product in that category, Doro have a lineup, which I will show you, in the category for the senior market. And just to give you a very quick overview on what does this mean, just by merging those 2 companies together, in terms of number. And as you know, this is using 2023 numbers. You can see we have almost NOK 700 million worth of revenue, and you see Doro roughly NOK 1 billion in revenue. I will showcase to you afterward, but one of the thing we have really appreciated with Doro is the stability of their sales and how we can predict it also into the future. But combined, almost NOK 1.7 billion worth of revenue. And we have said several times before that actually, from -- just from a hardware perspective, we have been quite in the higher end within our category, within our field, having 30% on hardware. Doro actually have demonstrated a gross margin on 40%, which is quite unique because they are currently only selling hardware product as well. Combined, it's a company that will have just as is '23 numbers, EBITDA on roughly NOK 150 million. And we also said on the Capital Market Day the only way we would ever consider a merger and acquisition would be with someone that could, from day 1, provide positive cash. Knut will take you through some of these details a little bit more. But also as we can see, more than 2 million units in accumulated sale from 2023 perspective. And also it's a really powerful overlap. We are both strong in the Nordic market, we still stronger in the German market. Although, as you can see, in market like Spain, France and U.K., which currently is the market we would like to see more growth, they are very, very strong. And also, being in the market for many years, Doro has even broader distribution footprint than Xplora have, which we also can capitalize from our own products. So as I said, this is what we really like with the way we can predict also the future with Doro, very stable, roughly NOK 1 billion worth of revenue; and also, over years, north of NOK 100 million in EBITDA, which is something we really like. On total, 26 market. Although, the correlation applied the 80-20 rule. Most of the volume comes from the same market where we have our MVNO setups. And the product lineup from Doro is not just a couple of few product. They have a broad lineup of product, feature phone where you can actually push some physical buttons, but also they have introduced a lineup of new smartphone. But their key intellectual property is related to the user interface and how the user are engaging with those product in terms of the software, the application, even the sensitivity and the temperature on the screen optimized for a senior user. This is something they have been doing for 50 years and are really the best in class of providing these products. Knut will showcase a little bit more how you can model this. We have done extensive testing. Actually, we have done testing from 10,000 actual live user of this target group to know exactly the data consumption and the profile on their SIM card. That way, we have been able to calculate our expected gross margin on a SIM card. And we know exactly what is the price point that is that average in the market they are buying and using today. If we could enter into the market with a average [ end ] price monthly NOK 200 per SIM, it will be a very price -- competitive price point as well as drive still north of 80% margin. That is done by physically testing 10,000 actual users in that category to optimize the -- or understand the profile. Okay, the opportunity itself can be summarized in one single slide, and it's the most important slide of today. As we have said, we are doing this for one reason and one key reason only, to accelerate our service revenue, to add more SIM cards in the market to drive service revenue. Xplora, today on an annual basis, we're selling roughly 500,000 units, of which at average 25% will activate our pre-installed SIM card, which up today have led us to 300,000 subscriptions. When we are now, hopefully, closing the deal to acquire Doro, we will access annual 1.5 million sales. That's 3x the volume we have today or a total quadruple of the sales volume. We just also said we have tested the SIM profile. We know we can achieve the same gross margin north of 80% on those SIM cards. And also we have estimated a roughly 30-month lifetime on kids because, at the age of 10, you outgrow that category. We estimate at least twice the length [ of ] the senior market, so from 30- to 60-month lifetime value over time. So our #1 key focus is to allow Doro to continue to sell steady pace as 1.5 million units. And our objective will be to pre-install our SIM card, exactly the same way we pre-install in our watches, to aim for the same conversion rate, to aim for the same number upwards toward the same percentage that activate our pre-installed SIM cards. That's a single, one success factor and our objective. And the question will naturally be, okay, how do we do that? Who's the customer? And what happens during point of sale? That's what we have been working with intensively for the last 6 months, part of the due diligence. This is 2 typical customer users of Doro. It's actually real customers. The primary audience or the audience is primarily 2 different target groups: number one, the user themselves that is normally average age 65-plus. The second category that buy the highest portion of the volume is the family members and caregivers, us sitting here buying to our parents or primary the user themselves, 65-plus. The distribution in gender is almost 50-50 but slightly geared toward Agnete or the female population simply because of higher life expectancies. And as a personas, it's persons that are normally within the independent seniors that would simply just like to use technology to be more independent and more safe, although that find current smartphones and Apples and Samsungs and applications and downloads and upgrades and activation and all that simply just too complicated, but still they would like to have the independence by having something that is really simple to use for their purpose; also normally a slightly target group that is more focused on health, conscious, which is why they have also introduced new products; and of course, the typical caring family members that are buying it for their parents. And what we have really learned is that, when that target group -- and remember 1.5 million purchases every single year. So it's not just something about yes, but do people buy this? They have bought this for years at a steady rate. When they come into the store -- and we know this by fact because it's the same distributions as we have on our smartwatches, Elkjøp, MediaMarkt and so on. When they come into the store, it's not just, "I would like to have a watch, a phone that works to me." It's very clearly, "I'm going to buy a Doro phone. That's what I would like to have. What do you have? Which Doro phone do you have?" It's a very specific request in order to buy. What we will do, same logistic as we have today. We will pre-install our SIM card in every single phone that is being distributed to the retailers and the online distribution channels, every single Doro phone. What we also know on top of that, we have 3 very compelling marketing communication and USPs. It's easier for the user to buy and set up because it's pre-installed, which is very well received by that target group. It's just easier to set up. The SIM card is pre-installed. We know we can, if we have to, go below the average price point because the data consumption is so low that, if we would like, we can compete with every single telco in the market in this category. So we could use price. And exactly the same way as we have done with our smartwatches, we can add services on top of the SIM. So we can add, if you choose our SIM card, to also introduce unique services for that target group. So we have 3 strong USPs to really drive the conversion on our SIM. It's 2 scenarios. You have Jens. He already have a SIM and a phone number from a existing phone company. Or you have Agnete that doesn't really care or do not have any preferences on phone number or a previous phone. That's the 2 scenarios. And luckily, part of our global MVNO setup we have in 9 market, we, of course, have the technology that makes it super simple to port an existing phone number, which will mean, with the one that already have a SIM card from another provider, the salesperson in the store can say, "Yes, you would like this Doro phone." And the client is saying, "But I already have a phone number." "No problem at all. Just provide me the phone number. I enter that when I punch the bill." And automatically, that phone number is activated, pre-installed with the same number. Or the customer do not have any preferences or a previous SIM card. We just enter the phone number that is on the SIM card in the box. So we can handle all the scenarios, technically no barrier and a lot of USP to drive high conversion, so we think it's reasonable to believe that, over time, we should be able to aim for the same conversion rate as we have on our smartwatches, currently roughly 25% of all the watches we are selling. Now we are heading on a path to do the same on senior. And then Knut will take you through some dynamics in the business model.

Thank you, Sten. So I'm -- the pleasure to take you through some of the business impacts of this plan. As Sten went through, this is the combinedco of Xplora and Doro by year-end 2023. And he also said that the 2 companies are together providing a very strong EBITDA, NOK 154 million in 2023. The key for us is to be absolutely sure that we protect, first of all, Xplora, what we are doing today; and develop that and continue developing that as is. And we need also to say that what Doro is doing is that they are selling 1.5 million phones. They should continue doing that. So we want to protect both entities. And the only thing we are going to do, as Sten said, we are going to put SIM card into the Doro phones. Sten also said that today we have about 25% connectivity on our sales of devices or watches. And therefore, we have modeled a similar -- using a similar approach also for putting the SIM into the Doro phones. In this slide, we have -- for the simplicity of it, we have 4 different connectivity percentages, 5%, 10%, 15% and 20%. And a good thing about this is that we have a longer lifetime value from 30 months to 60 months on the Doro side, meaning that when they have a SIM card, we will gradually build that on top of each other. So if we, for instance, use a 10% connectivity, starting at the time we [ start push ] SIM cards, we will have approximately NOK 400 million in additional EBITDA at the end of the period. It's so simple. It's adding SIM cards. And we can focus on how much connectivity are we actually able to connect to Doro phones. That's the only thing we are going to do on the business case. And we are only going to sell this to the existing phones in this business case. There is also history of 1.5 million for previous years as well, but we have not put that into any business case for this. The time line for this, and that's quite important, is that now we are announcing the bid. We will send out the offer to Doro shareholders mid-October that value the company at about SEK 830 million. And we have secured this by debt from 2 of the big banks in Norway, so it's fully funded, this acquisition, by the banks in Norway. What they have been doing when they are -- actually looked into this case. They only looked into the combinedco case, meaning this case, existing case, historical case. Of course, they have also included our Q2 numbers. So we are given the loan based on the existing setup, combinedco; and they have not taken into consideration anything about the future. So that's the condition that we have received the loan on. So what happens then is that we have already received positive feedback from 46% of existing Doro shareholders. And we will then -- when we have issued the offer, it will probably close around November 8. We are not completely sure about the time line, but November 8 is our best guesstimate for the time being. And this is the time when we execute the transaction and the banks issue the debt. So that's basically the time line that we have on this transaction. To sum it up. As Sten said, the key thing we are doing here is that we are accelerating the SIM growth. We are focusing on the SIM growth. This is a pure play putting SIM into Doro phone. And we have the capability of our history of setting up this MVNO. We know how to do it. We have done it for watches. Now we are doing it for phones. And by doing that, we believe that this will create a very strong additional cash flow for the companies.

All right. Actually, with that, we go straight into the Q&A, where we also will have Kjetil to join since this is heavily related on SIM and mobile connectivity -- which is your core area with the team. And we will get all questions from the live audience.

Let's start here. Feel free. Øystein?

Øystein Lodgaard, ABG. I have a few questions, starting with you want, of course, to get the highest penetration of SIM cards as possible. How will you price it to make sure that the penetration is as high as possible? And will you price it below competitors? Can you say anything about that?

Yes. I mean we have, of course, looked into the pricing in all the 9 markets where we are present, from different providers, and found like what we believe we can take for it. We know the data consumption and the voice consumption, so we have calculated, I mean, quite attractive targets for it, but it's also about how we bundle it. I mean, today with our Xplora watches, we don't offer always the cheapest connection in any market, but it's also the way we bundle and combine the offer. So it doesn't have to be the cheapest one to get the customers.

Good answer. And also, of course, you're getting a whole new organization also here onboard. Can you say something about the -- what is the technical expertise of this organization? They have a broad product portfolio. Can you utilize that expertise to also develop other Xplora branded products?

I think the simple answer to that is based on Knut's statement, that we will run it as 2 separate entity as is because the #1 priority is to allow Doro to do exactly what they have been doing so well for many years to secure 1.5 million where we can drive conversions, but of course, there is [ competent ] and potentially also products that can be a synergy. Like we saw, they have tablets and they even have phones that we also could potentially explore and assess for kids and youth, but that's more to explore in Phase 2. Phase 1 is 2 separate entities and secure 1.5 million where we can [ converge ].

Yes. And then I think you also maybe answered my next question, but I'll take it either way just to be clear. So you'll continue to have both separate brands. Will that also then, I guess, apply to your Xplora senior products? Will those continue to be under the Xplora brand?

So first, 2 separate brands, for sure. And we're still in the piloting, as we went through on the Capital Market Day, piloting our senior watch. And it's natural to see potentially we can extend our distribution and reach with that product, but details on that to come.

[ Lars Torrison ], private investor. So I'd really like to stress this one point that I find really intriguing, which is it's a very simple business case. It's all about how many SIM cards you can sell on the Doro phones. Why don't you comment a little bit on actions, activities, incentives? Clearly you can use pricing. I think you have already told you have margin potentials on the subscriptions. So you could use pricing, but beyond pricing, why don't you say a little bit about things, activities you envisage to help drive that penetration? Because I think that's going to be the key question.