74Software (74SW) Earnings Call Transcript

Ladies and gentlemen, good evening, and welcome to Axway H1 2023 Results Presentation. My name is Arthur Carli, and I'm in charge of Investor Relations for the company. Before turning the floor over to our management team, who will present Axway performance in H1 2023, I would like to remind you that this event is live and is being recorded. A replay will be available right after our meeting. In addition, as usual, I must inform you that this presentation contains forward-looking estimates that are subject to risks and uncertainties that are described in Axway Universal Registration Document. With that, I would like to hand over to our CEO, Patrick Donovan.

Thank you, Arthur, and thank you all for joining us here today for our first half call. As you're going to see today, the first half turned out to be very positive for us, and we're on track to do the full year. We've put in place a foundation of our business plan that will allow us to drive into the next 3-year cycle with strength. So today, our agenda is quite standard. You're going to hear from me on a few comments about the first half, then Cecile will go into more detail of the financial figures. Roland will join us to give us some customer insights and what's happening in the market. Then I'll come back to you and talk more broadly on what's up next for Axway. And then we'll open it up, as usual, for questions. So let's go ahead and dive right in. As I continue to talk about, we changed our business model, and we evolved our business model, and we're seeing the benefits of all the work we put in over the past years coming through in the figures over the last 3 quarters. So we've had 3 consecutive quarters of strong growth, and we could really thank the transformation to the subscription model for this visibility and for this consistency. And we're now able to -- as we've moved enough of our contracts as subscription now, we're now able to have a reasonable prediction of what's going to happen with both revenues and signings for far out in the future. Our free cash flow, as you're going to see, and we're going to go through in more detail, is starting to come back to us as we predicted at the end of the year. And our portfolio rationalization efforts we took last year and our focus on the portfolio management is positively impacting many aspects of the business, not only on the profitability. And our customers in this period as they did at the end of last year continuing to reinvest at longer term to secure their relationships with us for -- well into the future. So as we exit 2023, and we're ready to start a new 3-year business plan cycle, I'll be giving you some comments of how we're thinking about it, and then we'll be coming back to you later in the year with more detail on that. So let me make a few comments on the first half figures. As you saw from our press release, we finished EUR 145.5 million of revenue, which represented an organic growth of 11%. When you compare the organic to the total growth. Remember, we exited the product lines last year, which has the differential between the total and organic growth. Our profit on operating activities finished strong at 12.2% of our revenue or roughly EUR 18 million, up from the 4.9% last year, and we continued strong subscription revenue growth and ARR growth in the first half and Cecile will cover both of those later. So as I've presented many times before, we have built our strategy and our business plans, and we'll continue to build our next 3-year cycle of business plans to try and serve all 3 stakeholders. For our customers, we want to deliver brilliant customer experiences. For employees, we want to make Axway to be for all of us. And for our shareholders, we want a predictable, profitable company over the long term. And I believe the business plan we've been delivering on is achieving all of these goals. And we've done this by centralizing around our 4 main product lines, and we've continued to put more and more focus on supporting these core product lines, making sure they're profitable delivering what the customers want. We also have some special product lines, which are smaller use cases, and we make sure to deliver the value customers are expecting but they also are profitable for Axway. So we keep them in our specialized lines. But our 4 core product lines, which represent 90% of the overall revenue center around our Managed File Transfer, B2B Integration, API Management as well as our Axway Financial Accounting Hub. And when I talk about the portfolio rationalization, last year, I want to come back and talk about our product portfolio investments we're doing this year because we have our 4 core products, and we want to make sure that the products we carry and go forward serve the customer needs and remain profitable. So we have to build this portfolio disciplined within the business. And we have to make sure that what no longer fits our plans, doesn't stay within our portfolio or is managed carefully in a certain way. And for the product lines we do have, we continue to serve and look forward to how we're serving our customers for the long term. So this year we acquired in April and announced acquisition of Ed valves. This is an e-invoicing product capability that provides e-invoicing for B2BI product line, and it was a technology feature buy. We also are looking at how we invest in other areas around our products. So in the Amplify side of our business, we have built over the last several years, a consumption-based marketplace for the Amplify integration scenarios. And we've started to see traction on selling this into the market over the first half, and Roland will cover some of that in his presentation. And we also added, if you remember, in the summer of last year, DXchange, which is now called AMPLIFY integration. This is a bit of a future-looking technology that all our products are going to need. And so we bought a company that was still in the startup phase, so we can make sure the road maps fit our customer needs. But we're happy to say we've also signed some early adopters of this technology to finalize and harden the production of this. And so we're pleased on the portfolio management of the investments this year and the rationalizations we've done last year, and we're seeing the benefits of all of this. So with that, I'm going to turn it over to Cecile to go deeper into the financials. Cecile?

Hello, everyone. So let's now do a quick dive into the 2023 half year financial results. Going through the half year income statement. As you can see, total revenue is up 11% organic and 6.6% on total. Cost of sales decreased around those licenses costs in consistency with the revenue trend and subscription costs with the optimization of the hosting costs, part of which is due to last year's product disposal. Our gross product (sic) [ profit ] is slightly higher at 70.5% versus the 66.4% in half year 2022. Our operating expenses increased slightly with the R&D increase, which is mainly due to the impact of the Indian acquisition, which occurred last year, second semester. And in sales and marketing and G&A, you can see that we stay relatively stable. We were -- [ sequently ] to generate a higher margin at EUR 17.8 million or 12.2% of our revenues, up from the 4.9% in the prior year. Our operating profit includes mostly the acquisition cost for AdValvas, the Belgian company and stock incentive expenses. Overall, our net profit finished at EUR 3.7 million or EUR 0.17 per share versus the EUR 2.4 million or EUR 0.11 per share in the prior year. Let me now go into detail on the revenue by activity. So license revenue dropped 44.9% organic, which is in line with our forecast and confirming the move to subscription. Maintenance revenue decreased 19.1%, which was expected with both the decreasing licenses revenue and the migration to subscription, but this is still showing a satisfactory level of renewal with a 98% rate. Subscription is growing 50.5% organic with 2 positive quarters. And when added to the maintenance revenue, we reached 85% of our revenue under recurring contracts. Service revenue increased 7.5% back from last year with the impact of COVID slowing down the activity. Overall, our revenue finished at EUR 145.5 million, up from the EUR 131 million reported in the prior year. So to focus now on the license and maintenance activities, as I just mentioned, we experienced a 44.9% organic decrease in the license activity, which is mainly related to specialized products, which are not available for subscription. On the maintenance side, as forecasted and inconsistency with that license revenue decrease and the continued migration to subscription, we have a 19.1% drop. However, we are still seeing that good level of renewal with a 98% renewal rate for the first semester on the maintenance that is to be renewed, meaning that it's not taking into account the maintenance that has migrated to subscription. Now moving to the subscription revenue, which is the growth driver of the company. We observed that in keeping with a strong Q4 2022, we had a strong momentum on customer-managed signatures with a EUR 34.2 million upfront revenue versus the EUR 18.3 million for half year 2022. We also have a strong recurring base with the existing contracts and the renewals which are layering as anticipated. Axway managed contracts pursued the growth with an increase of over 12% compared to H1 2022. All of this resulted in a 50.5% organic growth. Let's now take a look at the services activity. The activity continues on the good trend started in 2022 with strong traction in EMEA and in the U.S. with several key customers. They are more delivered day compared to H1 2022 as well as an increase in the daily rates. This results in a revenue of EUR 19.2 million, which is a 7.5% organic growth. On total, this -- the service activity represents 40% of Axway's revenue. So with regards to our ARR, we have a 11.2% increase at constant scope compared to H1 2022. By memory, our annual recurring revenue is the combination of the recurring revenue generated by all the active contracts we have for both maintenance and subscription. A few words now on our balance sheet. So our cash and cash equivalents finished at EUR 14.2 million with a net debt of EUR 73.4 million, this increase in net debt is mainly due to the acquisition of the AdValvas entity in Belgium and to the shares buyback to serve our free shares plan. Our DSO went up to 137 days as we have added more customer manage on-premise subscription contracts. But if we retreat the unbilled part of our DSO, we are now down at 47 days for H1 2023 versus 68 days end of 2022. So as we mentioned, as I mentioned in the previous presentation, end of -- beginning of 2023, actually, for the result of 2022, the DSO drifted at the end of the year 2022 because of the system changes we were going through, but we are now back down as planned. And our current deferred revenue, which is mainly made of maintenance and subscription ended at EUR 66.5 million, which is increasing compared to last year due to the increase in customer managed contracts. Our assets decrease is mainly due to the account receivables decrease, which is offset by the goodwill accounting for the acquisition of the AdValvas entity in Belgium. Our equity includes the dividend payment for EUR 8.4 million and the share buyback for EUR 4.4 million. Our cash flows for H1 2023 are down EUR 4.9 million compared to H1 2022 when our free cash flow is significantly increasing compared to H1 2022. As we saw in our income statement, we have an improved ROA driven by better margin, and we also see that positive impact in our cash position. Variation on clients is the main reason explaining the change in net working capital, which is increasing by EUR 2.2 million and impacting the cash position positively of EUR 4.5 million. This is mainly due to a significant decrease of the DSO on the billed part, minus 11 days compared to 2022 and minus 21 days compared to full year 2022, which is partially offset by the DSO increase on the unbilled part due to the high level of customer managed contract signature. With regards to indebtedness, we always stay in mindful of our covenants, which are met. And as confirmed, we have the availability of our credit line to use if needed. With that, I thank you for your attention, and I hand over to Roland to provide you a focus on customers and market trends.

Thank you, Cecile, and good evening, everyone. So just let me start by saying that I couldn't be more proud of the team and more grateful for to our customers and partners for the result of this first half. The continuous improvement of our customer success focus and organization that we started years ago, continue to pay off and our customers continue to trust us as their preferred partner for their mission-critical project. And our success and growth is powered by a strong customer success focus driving high renewal rates, value-generating migration to subscription and new business acquisition. These are 3 KPIs that we are tracking are clearly validating our strategy and execution model. The ongoing efforts to invest in our product and in our customers continue to bear fruit. We have established ourselves and our NPS with -- in the top quartile of the NPS for the industry in software. The score of the NPS remain as stable as last year and is really the fuel of the growth. The first KPI here, our net retention rates show that our customers are very loyal with a net retention value over the 100%, demonstrating a strong renewal and Cecile mentioned it and increase their value spending with us. The -- Cecile mentioned the 98%, and we were reporting the renewal of the maintenance. In this KPI, we have this renewal maintenance to maintenance, the subscription renewal and increase of their contract, but also taking into consideration the move to subscription when we are having maintenance moving to subscription. So when we had at the beginning of the year, 100, we had [indiscernible] or renewed for 108%. So you can see on the second one is the average migration multiplayer that we are tracking for several quarters as we are in this migration program, and we continue to deliver this program with a migration multiplier of 1.9. The customer is still taking the advantage of this program to move from new offer benefiting from flexibility in terms of deployment as well as new features facilitating their move to a more modern architecture, leveraging their cloud infrastructure. While the customer base remains a strong and strong asset for our growth, we continue to see new customers selecting Axway as their preferred partner. And over the first semester, during this first semester, we saw -- we had 16% of our transaction made with new customers. So the customer centricity requires a strong engagement with customers, proximity and intimacy with them is essential to fully understand and align with their needs and their vision. And after several years of remote and fully virtual engagement, we finally have been able to resume the fully in-person meetings with our customers. During the first half, our product general managers hosted more than 30 user group or customers' advisory board meetings, engaging with more than 60 -- 600 sorry, participants. And in addition, in end of May and June, we [indiscernible] 3 major events, the 3 Axway Summits in Brazil, Scottsdale and Sao Paulo. And these events of 2 days, we are involving more than 300 of our key customers. That was a huge success in which we have all these customers and customers being keynote speakers, sharing their success, leveraging Axway technology to open their system and transform their business. What's really interesting during this meeting to see customers from Germany sharing with French customers, what they've done with our products and really creating some new opportunities for us based on direct customer feedback and community. All these events, the camps, the summit, the user group are very important moment for us to connect with our customers. It's very important for our customers to connect with themselves and with -- in part of the community. But it's also very important for our product line general managers to present their innovation and vision as well as to have a very interactive session with the customers to define and co-define directions and future investment. The organization that we put in place on the regional side with 4 region and 4 regional managers is also delivering great results, enabling us to adapt our global strategy to the local market and the local customer base. In Europe, we put in place and -- we put in place a team 2 years ago that is fully delivering in full speed, I will say. And you've seen on the result, the nice growth that we have in France, but also in Germany and in the U.K. On the product side, the organization we put in place during last year over the last 18 months, providing a very successful and promising for the future, thanks to the product general management organization. Each of the product line has been able to accelerate the innovation and generate customer growth, thanks to these closer customers' engagement and alignment. And the success of H1 really being have been built on all the product line. Our principal strength remains Managed File Transfer, a domain that never been so critical for our customers and for us. The volumes and criticality of files continue to increase. The need of file transfer, security and resilience has never been under so much pressure. We have seen a high level of booking growth over the first semester for this product line with a clear increase of our customer base and prospect than for the Axway managed file transfer in our transaction and pipeline. The largest deal that we've done this semester was done with a historical B2B customers in Germany, a large worldwide automotive supplier who selected Axway and FT for a multiyear contract for a value of about EUR 10 million, demonstrating the trust and confidence with our vision and strength. The same customer, as I said, the B2B customers, they also went live with the Amplify enterprise marketplace during the semester. This product line, the Amplify enterprise marketplace is an offering where we have -- in which we have invested a lot over the last few years. The API market that we talked a lot about has matured in terms of securing and managing the APIs. And today, we are seeing an increase in customer needs on API governance, but on API consumption and monetization. We may have been a bit early in this market. But today, we are seeing new customers and more and more customers allocating budgets, starting projects to base on the marketplace requirement. We have now several customers live in production. We've signed during the first semester, 6 customers in each across the world. And we have been identifying more than 100 opportunities during the first half on this product line. In North America, for example, the interest in the solution and technology to help financial institution to leverage the open banking movement is growing fast, and we recently signed a financial institution in North America with our Amplify marketplace just to support and accelerate their open banking strategy. Finally, on B2B integration. There is an increased number of early adopters on the Amplify integration that Patrick mentioned based on the DXchange acquisition of last year. We've made several customers, and we now have several customers live on this solution that will allow us to be launching really the product for the full market as we are building pipeline for the end of the year and for the next year. The recent acquisition also in AdValvas, help us to position us as a key player in the invoicing, completing our offering in B2B and creating good traction for us in the -- with the new European regulation that is happening around this domain. So thanks for all of these, our pipeline generation performance. We talked about the booking, but I'm looking at the pipeline generation. During this first semester, we have generated about a 15% more new pipeline compared to what we've been able to do last year during the same period. So when I looked ahead and in conclusion, the momentum that we've built over the last several quarters continue and I feel positive for the year. However, we need to keep in mind that our fourth quarter remains a very high target, and it's critical for the full year result. After a very, very strong booking performance in H1, we are entering the second half with a strong 2.7x coverage rates for the pipeline. We are working on more than 50 opportunities over the 1 million mark. And our continuous effort on the go-to-market will -- should allow us to rapidly get above the 3x coverage that we are always targeting to be secured for the year. I'm confident on our ability to drive this and to drive the success and growth with the strategy that we have and bringing innovation to our customer base, building our success and growth on the positive net renewal rates and customer acquisition for the next quarters and the years to come. And with that, I'm going to turn the over back to you, Patrick.

Thanks, Roland. I'll close with some notes looking to the second half and also going into the next 3-year business cycle. So we started the year 2023 with 3 main priorities around employee engagement. We want to continue communicating our project with the team and helping them understand why we've done all these changes. We've rationalized the portfolio. We've made some acquisitions of startups. We've invested heavily in a new product that was early to market. and we've put in place a new organization to run the business. So we've done a lot of change. And our employees have to understand why we put in place these changes and how it's been fitting us and then for the long term. And I believe we're doing a good job, but it's never over. Every week, every month, we got to continue to communicate what we're doing and why and bring everybody with us because with the employees understanding why we're doing something, they're able to better serve the customers and help the customers and be with them for the long term. So we also had a focus on delivering operational efficiency, and we continue to do so every day looking for how we could do something more efficiently and not waste any time or not build the wrong products or go down the wrong path that won't deliver value back to Axway into the customer. And portfolio management, we really wanted to put in place the discipline around portfolio management. And although it's still new, we've always been operating this way for just over a year. I could see the benefits of all we're doing here on this aspect as well. So these were our priorities for 2023. But without a doubt, we're not forgetting the overall mission constantly to serve our customers well and our customer centricity. It's just now hopefully part of the culture and Axway is no longer the main priority that we have to address because we should be doing it every day. For 2023, I want to confirm our full year guidance. As Roland mentioned, Q4 was a very high comparison. At this time last year, when we were talking to you, we did achieve our sales goals for the first half. But unfortunately, our -- it just how it was. We've signed a lot of Axway managed contracts in the first half last year, which was a lot of revenue that would be done in future periods. This year, we've signed more customer manage. But now with the subscription business model, we're able to look out -- look out at the dynamics of the contracts in the pipeline. We've built models on how we could look at the translation to revenue. And what we see for the full year is that our guidance for the full year is still with or slightly above this range. But normally, we need to have it a little bit above in the forecast to make sure we hit at or slightly at the top of our range. So we feel good about the full year guidance on revenue. And the profit on operating activities between 15% and 18%, we still confirm, and you saw the work we have done and the impact of the portfolio rationalization coming through these figures in the first half. So we're well on track to be able to meet that guidance as well, and we're targeting at the upper end of that metric as well. So as we continue pushing forward for 2023, we're already starting to think about what happens in the future. And I've talked to you about these figures before. midterm ambitions being a profit and operating activity hitting 20 and then driving above 20%. But we're well in place to do this more in the short than the midterm. I'm hopeful that we could have everything in place as we start 2024, this objective is already in sight. And when it comes to the always ambitious goal of achieving the $500 million of revenue, this was something that we've had out there for a while. But let me be clear and go into more detail of why continue to say this, but why it's not something that you're seeing immediate action on, but I continue to talk about it in the midterm because we've talked about it a lot over the years. I want to go back to the Capital Markets Day presentation we did in 2021, I believe it was. And we had this slide here showing our historical performance since the IPO. And the blocks in blue was the transformation we are going through changing our business model. And so since Axway's start, we've always been profitable, and we are growing often through acquisition. But as we moved into 2016, as I mentioned during our Capital Markets Day, we saw that our business was slowing the need for subscription products was really there, and we had to do some changes. So we started to plan in 2018 to move our portfolio, to invest in our products to start pushing into the subscription business well. And this work was done in 2018, '19 and '20. And we are talking to you at the beginning of 2021. We saw that this was coming to an end and we should start coming out, but we actually ended up having 2021 also another full year of changing our business model to where the target was. And we even carried over some of the spillover into 2022 with the portfolio rationalization. But now here on this graph, you could start to see everything that we were forecasting and talking about coming back to us. And so we reached a peak in revenue a bit for 2016, but that's hard to drop with the disruption of the subscription business model. And then we had to rationalize some portfolio, which adjusted our revenues a bit. But all the while, we were starting to build all the pieces to return to a profitable business at a level we expect. And as you could see on the graph, for 2023, if we hit within our guidance, we should be above the prior 2016 performance on profitability, and we should stay above that for all the years after that. So we had to do this change to get a much more predictable business, which was one of our targets with the subscription business model. And now as Cecile said, I believe we have about 85% of our revenue in the first half coming from this recurrent type of business, which means it's very predictable even if you have the fluctuations in the revenue due to the accounting rules, we have control of the cost and what we need to invest and to get this revenue and to build the products. And so we now have good control over the profitability and it's returning to us. And so what's next? Well, it comes back to the cash flow. As Cecile was talking about and went into great detail, this is the slide from the Capital Markets Day, I'm not sure I actually updated this. This may be the same one we presented. The move to the subscription business model, you move to an annual billing cycle. So this changed the license model where we had to get all the license revenue or about 80% of the contract paid upfront or at least within the first year, so we could take the revenue upfront on license. Now with the subscription model and the move in the market, it's more of almost like a pay as you go, but we bill annually, which is quite standard in our industry. By this transformation and the disruption in the subscription on the revenue, you see that we started to drop our free cash flow as a percentage of revenue all the way through 2019. But as these 3- to 5-year contracts need to layer on top of each other to give us predictable free cash flow. 2019, 2020, even 2021, we were pretty much at 0% of our revenue returning to us in free cash flow. But as we were predicting in our prior presentations, and we continue to see the guidance for 2023, we should end up at 6%, 7%, 8% or so of our turnover in free cash flow. In 2024, we'll be roughly double that. And then by 2025, we should get very close to the levels to where our result on operating activities is equal to our free cash flow, where we should be. And so with the free cash flow returning back to us, it gives me the capital ability to do something with it. And so what is the next 2024 to 2026 business plan that we're going to come back to you around year-end and present what we're seeing for Axway for the next 3 years. It's all based on our work we've done for the past several years in building this very sustainable, repeatable, predictable business model that's generating capital and generating capital at the level that you expect from a company like Axway. And we could forecast it, and we see it well within our reach. So now that I have capital, I could start looking at how we allocate that capital. And so for 2021 and beyond, we're going to be looking at how -- now that as we move into 2024, 2025, and we're generating free cash flow, and we're generating the good margin. Now we could go back and reconsider the M&A that gets us to $500 million because for the past several years, I've put a hold on all M&A that wasn't just buying functionality for the product because really, that's all we can afford with our free cash flow and our results as we were making all these changes. Now as we're coming out of 2023 and going forward, we could start to look at consolidation plays on revenue or much larger acquisitions that will impact our business to get us to that $500 million, and it's within our reach. And we will continue to move forward and try to do it in a very measured way, looking at how we evaluate our share repurchases. Currently, our plan, as I've communicated, we're buying out about 3 years of our anticipated employee stock purchase plan to keep down the dilution of any of these plans. But we also could be open for other alternatives if they present themselves and make sense, either in M&A or other activities. Also with dividends, we plan to continue trying to return to shareholders' capital, and we need to put a clear structure and guidance for 2024 and how we're looking at this because we have the elements that drive strongly into the next 3-year period with what we've done over the past period. So with that, I'm going to ask the operator to open it up for Q&A and open up the lines. And operator, do you have any questions queued up so far?

Thank you very much. [Operator Instructions]

Patrick, we've got a first question on the chart. Coming from [ Guillaume ] at [ Gluskin ]. Could you please come back on the bridge between operating profit and net income as the difference is quite significative. What is the reason of the tax surge on H1 2023 compared to H1 2022.

Sure. And I'll let Cecile handle that and go through that.

So if I take the first question on the bridge between operating profit and net income. We have, as mentioned in the presentation, some -- we'll make it... We have some...

We have some amortization, and the intangibles.

Yes, we also have the -- some acquisition costs. We have some restructuring costs due to the disposals we did end of last year, beginning of this year, which is explaining the discrepancy. With regards to the tax surge, the explanation is due to us revisiting our business plan on some of our subsidiaries while starting to review our transfer pricing policy internally. So this is a media review that will be finalized next year, which led us to deactivated some tax deficit on one end -- and then we also have the tax regulation, which has changed in the U.S. with the capitalization of the R&D costs not enabling us to activate as much of the deferred losses we had in the past, which is creating that bump into in the tax for half year. If we -- should we retreat or adjust from those 2 events, we are back to what we will consider a normalized tax rate around 20%, 22%.

And the half year is always difficult for taxes as we've seen over the last -- since we went public, half year is always a bit volatile as we make a lot of our profits in Q4. So you need to look at the tax rates on the annualized basis really half year, it's very difficult to explain, and it's very affected by regional activities.

I've got another theory of question from Derric Marcon. Maybe I go one by one. But the first one is what will be the contribution to your revenue of AdValvas in 2023?

Well, remember, the acquisitions were functionality for the core product line. So AdValvas will just be part of our B2B revenue. AdValvas had very little revenue, and it's really not that material to our overall activities. The European regulations with e-invoicing, we do see an opportunity that it may allow us to have significant revenue growth starting from very, very low numbers over the next 3 years, but the contribution, we're not counting for anything material out of it. It was functionality we needed to meet the B2B market and the upcoming wave on the European regulations for e-invoicing.