Quadient S.A. (QDT) Earnings Call Transcript

Good evening, and welcome to Quadient First Quarter 2023 Sales Presentation. I am Catherine Hubert-Dorel, Quadient's Head of Investor Relations. And I am here today with Geoffrey Godet, CEO; and Laurent Du Passage, CFO. The agenda for today is on Slide 3. We'll try to keep this presentation short to allow as much time as possible for your questions. As usual, you can submit your questions in writing through the web or ask questions live by dialing into the conference call at the end of the presentation. Thank you very much. And with that, over to you, Geoffrey.

Thank you, Catherine, and good afternoon. I am pleased to report a solid start of the year with Q1 sales reaching EUR 256 million or an organic growth of 2.1% for this first quarter. More importantly, and in line with our goal to develop subscription revenues across all our solutions, this increase has been driven by the accelerated growth trend in our subscription-related revenue base. Subscription-related revenue grew by 3.1% organically, representing now 72% of our total revenue or EUR 184 million of recurring revenues for the first quarter. This is clearly proving the strength of our business model and it is even more relevant with the performance of our activities in North America. Our North American operations grew at 5.9% organically and represent now 57% of our total revenues. Today, in North America, each -- I repeat each of our 3 solutions are at scale and mature and all 3 growing in Q1, including our mailing equipment activity. This healthy level of recurring revenue, combined with the solid growth trend experienced in this first quarter allow us to remain confident in the fundamentals of our business as we expect Quadient organic growth to continue throughout the rest of the year. And we, therefore, confirm our guidance for the full year as well as our midterm financial targets. Over to you, Laurent, for the details of this first quarter sales performance.

Thank you, Geoffrey. Good afternoon and good morning, everyone. I am Laurent Du Passage. I'm Quadient's Chief Financial Officer. I'm happy to walk you through the Q1 revenue for Quadient. Now moving to Slide 7. As you can see on the chart on this slide, Quadient's quarterly revenue growth has been refueled in the past 2 years with the growth of subscription revenue along the way, making our business progressively more predictable. In Q1 '21, subscription accounted for 68% of our EUR 246 million revenue compared to 70% of EUR 256 million in Q1 '23. Thus, it shows the growth of 3.1% just over Q1 '23 compared to Q1 '22. This trend is allowed by increase of yearly up to multiyear guaranteed contract as well as monetized usage of the Quadient platforms that can vary in seasonality, but always is reoccurring. Overall, total revenue is trailing up at group level despite the EUR 30 million plus revenue decrease of divestments net of acquisitions along the period, as you can see below the chart. Moving to next slide. We can see the same quarterly revenue evolution but split this time by geography, highlighting the positive evolution of North America thanks to a larger business model maturity and scale compared to many European countries and has obtained a 5.9% organic growth for Q1 '23 year-over-year. This also reflects the return on investment we made in the last few years, notably benefiting from 3 acquisitions in both our software solution as well as our Parcel Locker. In Q1 '23, North America accounts for 57% of group revenues, meaning EUR 145 million, while it was only 50% or EUR 123 million in Q1 '21. This evolution is also positively affected by the ForEx impact over the period, and international geography has been reduced also due to the divestments. We've invested in our European operation in '22, as you know, to organically launch and scale our software business and low-cost solutions. Efforts are paying off and we see positive early results in Q1. These solutions are not yet at the scale necessary to offset the structural decline we see in our European mailing solution. Moving now to next slide. At group level, we are very happy to report a solid Q1 '23 revenue at EUR 256 million and 2.1% organic growth, supported by a double-digit growth in our ICA Solutions at plus 10.4% year-on-year, reaching EUR 58 million of revenue in Q1; a still very resilient Mail-Related Solutions with minus 1.1% year-on-year decline at EUR 176 million; and last, a high single-digit growth for Parcel Locker Solutions at 8.7%, reaching EUR 21 million of revenue for the quarter. You can see the geographical split as well by region on the right-hand side, in line with the chart seen in the previous slide. Moving to next slide. As you see in this revenue bridge, total reported revenue evolution from Q1 last year to Q1 this year is plus 1.3%. However, this includes both scope and ForEx effect. To focus on organic growth, we need to exclude the EUR 3 million scope relative to the graphics in the Nordics as well as shipping solutions sold in June last year, but also exclude the currency effect, favorable due to the USD being on average a bit stronger than last year at the same period. When you exclude those effects, you can see the 2.1% organic growth, which is EUR 5 million over the quarter, made of EUR 5 million positive in ICA, minus EUR 2 million in MRS and plus EUR 2 million in Parcel Locker. I suggest we now move in detail into the solutions review. Over to you, Geoffrey.

Thank you, Laurent. As discussed many times since the launch of our Back to Growth strategy, the mission of our software business, Intelligent Communication Automation, or ICA, is to unify business communication and financial automation into one platform. To that end, we've been working towards the integration of all our software products into a single integrated cloud platform, which we call the Quadient Hub. The primary goal of this hub is to provide an intuitive and user-friendly interface and such for all the products, centralizing access into one location. Importantly, we're focusing on powering the platform with artificial intelligence and driving decisions with analytics to offer very insightful recommendation and data-driven improvements to our customers. Most communication that flow across the Quadient solutions, right, and including our software offering and as well our physical mail solutions in our Mail-Related Solutions business, MRS, are either invoices, statements, payments and other type of related financial business transaction or business communications. The Quadient Hub enables our customers to manage all these communications more effectively and more efficiently. With an API-first strategy, the Quadient Hub easily integrates existing technology stacks and such, including ERPs and legacy back-office systems. And that allows us and allows the platform to automate the creation, the personalization and the delivery of communication, and we can do so, and as such, at scale, while we are unifying all transaction-related processes, such as payments, credit scoring, reporting and many more. The result is a unification of our award winning, now an industry-leading solution into this unique hub, Inspire for CXM, Impress and the recent acquisition, as you know, of YayPay and Beanworks. The platform was released in early April 2023, and we already have over 1,000 customers using it, giving them a single entry point into all of our solutions and all their features. In addition to the platform release, we also continuously focus, naturally, on improving the features from time to time offered by our solution. And to that end, we have recently announced the release of our advanced AI, artificial intelligence, powered Cash App, notably for accounts receivable and for CFO customers. Moving to the next slide. Over the years, the Quadient ICA platform has continuously received recognition from third-party analysts, including Gartner, Forrester, IDC, Aspire, Quadrant and many others. These analyst firms are in a way the voice of the market for these products now today. I'm not going to go into the details of each one of those rankings and only highlight a few for you today. IDC, that you have on the left-hand side, named Quadient a leader in their 2022 market space for cloud customer communication management. The IDC market space listed the customer experience strategy, our performance, the scale and the implementation experience as the strength of our Quadient solution. In their 2023 customer-to-cash receivables acceleration matrix, the Hackett Group recognized Quadient, the customer cash receivable capability, notably. So all in all, the solutions brought by the Quadient platform are very well recognized today and such by multiple analyst firms and the list keeps growing. So if we turn now to Slide 14, I would like to focus on 2 new reports. Quadrant named our Inspire solution as the undisputed leadership position in the market for customer communication management, or CCM, as Quadient Inspire continues to lead the way with innovation, scalability and market-first capabilities. As discussed before, this position is also aligned to other reports from Gartner, from Forrester, from IDC, from Aspire. So a truly multiple recognition -- multiple recognition, sorry, for our Inspire offer. Our more recent offers also are getting additional recognitions. If we look on the right-hand side of the slide, our accounts receivable automation solution, which came from our YayPay acquisition, has continuously been recognized by IDC in the past. And we're thrilled that Gartner has also validated as such for the first time our solution in their 2023 Magic Quadrant for integrated invoice to cash application, recognizing notably as strengths Quadient's impactful sales strategy, commitment to customer success and advanced AI analytics capabilities, notably in credit management, a first recognition in a survey ranking only 9 firms out of 20 surveyed and within a highly and much more fragmented market. Moving to Slide 15 now. I think we could say we have a great integrated platform, which solutions are well recognized by the industry analysts we just shared just a few seconds ago. And while we're very thankful for these recognitions, I think the best validation comes directly from our customers. This slide presents a sample of the feedback our customer shares with the rest of the world. Again, I'm not going to go through each of these examples in detail, but I think it is important to highlight the strong positioning of our cloud offering on the market today. Among others, we can quote Quadient account payable automation solution that has been recognized by several sites, such as the top performer by the site features customers with good reviews as well on Capterra. Our account receivable offering has been recognized as a leader by the G2 Crowd, what you have as well at the bottom, as the best accounts receivable software. And while our CCM capabilities have been praised, notably on Gartner Peer Insight, that you could see on the right-hand side of the slide. Moving to Slide 16. Let's now turn to some examples of customer success and how we go to market. Quadient has intentionally diversified its go-to-market approach and we focus today on 2 main things: acquisition of new customers, and we do that through multiple channels; and expansion within an existing customer. So if we start from an acquisition standpoint, we have 3 main acquisition levers. And I want to describe a few of them for you today. The first is our direct teams. I'm happy to share the progress that we made by direct sales teams, whether inside sales or field enterprise salespeople and notably for the one that we launched in Europe last year for notably AP and AR. You have here listed a few examples of both AR and AP new customers, both in France and in the U.K. We are building from our direct sales expertise in the U.S. to penetrate the European countries with our AP and AR offering. If I take a second example of our acquisition strategy, is our sales team also successfully cross-sell the ICA software solution into our existing mailing solution customers. I've been talking about that quite a few times. Our mailing sales teams did an amazing job again in this first quarter of 2023 by more than doubling the amount of cross-sell booking value versus the first quarter in 2022. This, from my perspective, again, demonstrated one more time the key strategic synergies across the Quadient portfolio. If I take another example, the Trois Moulins Habitat story, which is a French customer, is a prime example of this cross-sell capability. It was a historic -- a historical, sorry, mailing customer who is a smart hardware user. And they have purchased our software solution, Impress Automate, to complement their mailing management. And this clearly shows the benefit and synergies of our solutions when they come together and the value they collectively bring to our customer base. If we give a few examples now and speak a little bit about our expansion strategy. We seek to ensure customers fully benefit from all the modules they purchase, naturally, and how they use them, but also that they can easily deploy and benefit from additional modules of the hub of the platform. This is what we call upsell, right? We upsell within a customer. So if we take an example of -- Performance Systems Integration, I think, is a very good example of an account receivable customer which bought actually YayPay upgrading its solution with our Impress modules for document assembly and presentation. The contribution from this upsell continued to increase year-on-year and contribute to our annual recurring revenue growth, our ARR growth. With now thousand customers on the Quadient Hub just in the last few weeks, we are at the beginning of the potential of what our upsell opportunities can represent in the future. Laurent?

Thank you, Geoffrey. For ICA, revenue is growing by 10.4% organic in Q1. It's standing at EUR 58 million with a reported growth at 11%. As you can see on the left-hand chart, this growth continues to be driven by a 20% plus growth from subscription-related revenue, now reaching EUR 47 million for Q1, meaning 80% of the total. This is the result of the embarked annual recurring revenue from last year, which has continued to increase to EUR 193 million at the end of Q1 with MRS cross-sell significantly contributing to this growth. North America continues to carry a very strong portion of ICA's growth. Licenses revenue continued to decline as expected, accounting for only 7% of revenue this quarter, while professional services decline has accelerated due to the change in business and customer mix, more SaaS and more midsized companies. Over to you, Geoffrey, for MRS.

Thank you, Laurent. The performance of our mailing solution remained extremely strong and the momentum has continued again to be solid now for many consecutive quarters. So we're quite happy and excited about it. For MRS, Quadient go-to-market focuses, like for ICA, across -- focuses, sorry, are twofold: cross-sell and upsell of our existing customers, right? That's our primary focus. Our selling approach introduced increased value to customers as we integrate additional Quadient capabilities. To do so, we leverage, naturally, a very rich solution and product offering today that combines not only our mailing equipment intelligence solution and it combines it with the ICA software, but also with our Parcel Locker Solutions. Today, we benefit from a robust and diversified go-to-market organization, as you know, that supports more than 400,000 customers and such across 27 countries, and we do so for both large enterprise, midsized customers and also smaller organizations. The introduction of mail room automation software in the form of Impress Automate is a natural fit for customers that purchase our intelligent mailroom solutions. It allows our folders-inserters to work faster and more accurately and also allows us to optimize postal expenses without human intervention. It's another automation. So as a result, we see hardware sales driving significant growth for Quadient software. In addition, the combination of both the software and hardware offerings are also helping us capturing new customers by offering them, naturally, equipment -- or new equipment for the first time. So let's take the example of Cineca. It's an Italian consortium of 116 Italian universities. We've been able to sell this customer 2 folders-inserters to ensure the accuracy and integrity of the important university examination communication for the first time. We also acquired new customers from our network of more than 100 partners and dealers. If we take an example. Business Machines, a long-term dealer for us, has been selling folders-inserters to Compassion, a US non-profit organization supporting children in need to manage its direct marketing mail campaigns. As part of nurturing our existing customer relationship, our mailing sales professionals -- mailing equipment sales professionals also helped their own customers with their own digital transformation, and as a result, are able to cross-sell our software, as we have just discussed. Now conversely, which can surprise you, we can also sell mailing equipment to our existing software customers. If I take the example of Print Solution, it was an existing Inspire customer, our ICA, intelligent communication automation, software customer, who has now upgraded its capability to manage short mailing batches with the purchase of our 3 stations of DS700i, which is folders-inserters, which combined now boost the strength of our hardware and software solution as well. Moving to Slide 19 for more details from Laurent on our financials for our mailing equipment business.

Thank you, Geoffrey. So all that being said, performance in MRS continues to be extremely resilient with the sales at minus 1.1% organic decline in Q1 and minus 0.3% reported at EUR 176 million, where subscription-related revenue continues to account for 70% of total. This performance is fueled with the fourth quarter in a row of increasing hardware sales at plus 3.7%, and that's notably driven by North America, but also international, and this despite a weaker contribution from France and U.K. Supplies have continued to show a positive contribution, which is a very good indicator of the level of usage of our intelligent devices. Backlog level has normalized and supply chain tensions have eased at this stage. Back to you, Geoffrey, for Parcel Lockers.

Thank you, Laurent. So let's take a few seconds to describe our Parcel Locker business today. So like for software and mailing solution, we have also focused on the diversified go-to-market approach for our Parcel Locker Solutions. And we have a stronger focus, naturally, on acquisition as we intend right now to scale fast our installed base. This comprehensive go-to-market approach allows us to address the needs of all verticals. Acquisition comes in several forms, from new contracts with retailers, for example, but also through the deployment of our open network of lockers. So if we take an example. In the U.K., we made progress, naturally, in securing sites to install our lockers, notably with the recent agreement with Rontec and APCOA for around 1,000 possible locations in the U.K. These are very important steps to ensure that our open network is successful with lockers installed in very attractive locations. In France, if we take another example, we are making the same progress with a second carrier that we signed into our open network. Partnering to our core customers is also important in the Parcel Locker business. So we have another example with SMARTECH, which is a partner of us, who have added the parcel pending locker solution to their portfolio in 2022 and now manage a pretty large and local contract with the Australian Post. If we turn to the cross-sell as well for the Parcel Locker business, we take the example of the universities in the U.S., where we recently hit a significant milestones with more than 200 universities equipped with our lockers. Most of them has been cross-sold by our mailing salespeople. Universities have significant mail room, right, that manage both large volume of inbound package and also mail. And therefore, existing customers of our mail solutions traditionally find significant value in adopting the Parcel Lockers to now manage the distribution of the inbound parcels. Lockers adoptions from universities is fast and they are also a source of upsell as we can sell them additional columns ordered or new lockers type added, which are usually the 2 most common source of upsell, as I highlighted in this last example of the slide on the right-hand side. Moving to Slide 21. For more information from Laurent our financial performance of the Parcel Locker.

Thank you. So for Parcel Locker Solutions, the sales are up by 8.7% reported and plus 7.4% -- sorry, reported with double-digit growth in subscription-related revenue. Existing installed base continued to strongly contribute to that growth as well as the deployment of the recently signed contracts, both in France and in the U.K., including the U.K. open network. The hardware sales are slightly up thanks to the U.S. lockers installation normalizing after recent delays, both in residential and retail segments. Important to note Parcel Locker total revenue has grown double digit, both in the U.S. and in France. Over to you, Geoffrey, for the year guidance.

Thank you, Laurent, for those information. Let me now move to the outlook and the recent business trends that we have experienced in the company. As we have detailed I think throughout the presentation today, all 3 solutions enjoyed dynamic or strong commercial successes in our main markets. Demand for automations, whether it's for digitalization or e-commerce penetration and last-mile automation remains very solid, which fuels our future growth, while the recurring nature of our business model offers, on the other hand, a good visibility of future revenues. So overall, this is a very solid start of the year and robust business trends across all 3 solutions. And that's what makes us confident in our ability to deliver our full year 2023 guidance. So we, therefore and consequently, reiterate our full year '23 guidance of 3% -- around 3% organic sales growth for the full year '23 versus the full year of '22 and around 10% organic current EBIT growth. So I want to thank you for your attention today. Laurent, Catherine and myself are now ready to take all your questions.

Go ahead. We'll start with a question on the line. Thank you.

[Operator Instructions] We currently have no question coming through. [Operator Instructions] Well, there are no further questions. So I will hand you back to ask the question coming from the webcast. Please go ahead.

Thank you. So we have a question coming through on PLS. How many lockers have you signed with Ferguson in the U.S.?

Ferguson in the U.S., I think Ferguson has probably close to 100, a little bit more potential installation for us. And probably the first batch, probably, represent half of that capacity. So it might be around the 50 installation, which are pretty large configuration. Thank you for this question on Ferguson.

Thank you. So we have another question on the guidance. Could you -- on interest expenses. Could you give a guidance on interest expense for the full year 2023 to be compared with EUR 31 million in the full year 2022?

Laurent, do you want to take care of this question?

Yes, I will take that one. It's a very accurate one. So just as a reminder -- and you're right to mention it -- last year we had half of the usual ODIRNANE payment, so we paid EUR 3.4 million for the ODIRNANE portion. We paid, as you mentioned, EUR 27.6 million of regular interest. Just to note that this EUR 27.6 million is made of 2 parts: EUR 25.7 million for the financial debt; EUR 1.9 million, which is interest on the lease obligation, which is the IFRS 16 treatment of the interest portion on the -- currently we have. We obviously have an increase on that interest payment expected for 2023. I think that we can consider that you would have probably between 0.5 point to a point of additional cost of debt because progressively, notably, we still have variable rates for 1/3 basically of our debt. So we can expect that -- with a gross financial debt at around EUR 800 million, we can expect between EUR 5 million, probably up to EUR 10 million of additional interest expense when it comes to 2023.

Thank you, Laurent. I think we have a question on the line. Operator?