Text S.A. (TXT) Earnings Call Transcript

So we still have people coming but let's start. I will start to record and [indiscernible] will share my presentation. so good morning and welcome at the presentation, where we will present a preliminary results for the Q3 of our financial year. The whole IR team is here. I'm with Lucja Kaseja and Marcin Droba and Lucja let me share presentation. And let's begin with presentation. [Operator Instructions]

Very well. Good afternoon, everyone. It's very nice to meet you in here, Happy new year, by the way and we'll go straight to few preliminary results for Q3 2022 and '23. And as usual, we will start with a very brief summary. So continually, our vision is customer communication without barriers, and mission still is to help people and businesses communicate better and fully express themselves. As a very quick reminder, especially for those of you who are the first time with us, we are a global SaaS company. We operate globally around 40% of our revenues are generated in the U.S. And also, we generate revenues in English-speaking countries. So Canada, U.K. and Australia are important for us. Poland, where we are based in and is a less important in terms of revenues. And now it accounts for less than 2% of those. We operate in B2B subscription revenue model. So our customers subscribe to our products. We have a very unique customer acquisition model, and that allows us high and sustainable margins. And that also allows us to pay out dividends. We are paying dividends, the highest possible part of our net profit in form of a dividend to our investors. And on the product side, we have now 5 products. LiveChat, ChatBot, HelpDesk, KnowledgeBase, which are the -- which you already know. And also since November, we have a fifth product OpenWidget, which is a pre-product, but what is common to all of those, they are premium -- they are premium customers -- they provide premium customer service. Maybe as you all know, the products, I will spend a little bit of time on OpenWidget because it's our newest addition to the portfolio of products. It is actually a free tool, and it allows to create and install the widget on the website of our customers. And actually, for us, it is an important part of this strategy to be able to get to more clients as when the customers are trying our other products. One of the lookers for them is actually to put on a widget on the website. And by providing a free product, we hope to see more customers using it. And in the future, it will become -- it can become a way of acquiring customers through that. Probably the most important thing this quarter is the fact that at LiveChat, we bought a new domain, which is text.com. As you know, it all starts with text. We are in the communications sector for a long time. And this domain it actually -- it is our will to have text.com as a kind of umbrella brand for our -- all of our products, so we want to be able to sell the whole suite under this new name. And in the future, also, we want to transform the company into text. So we want to change the name of the company. The key events for this quarter, actually, the one I described is probably the most important one. We also have this new product, OpenWidget, but also some other things took place. So for example, LiveChat has got an integration with Squarespace and Square marketplace. It is very important to us because the team has spent a lot of time on actually working out this integration. And on Squarespace, we are the first live chat solution that is offered, so it gives us an advantage on this platform. Also, we are in the process of obtaining new U.S. patent and also the work on product continues and maybe not most crucial information, but a kind one, we -- LiveChat software became one of the big priority companies on the [ versus ] of exchange among priority biggest companies. And having said that, I want to talk brief -- well, maybe not that briefly about the numbers for this quarter. So actually, the estimated -- still the same slide, Marcin, please. So actually, the estimated revenues for the quarter increased by 35.8%, and also a monthly recurring revenue, so MRR grew by 43% year-over-year and exceeded well over USD 6 million. And also, ARPU, so average revenue per user for both LiveChat products and ChatBot increase, and this is all because of the price changes that we have done during this quarter, not only due to the fact that there is new pricing, so an increase in prices, but also we transferred the remaining legacy plans from -- especially from pay-per-seat model to per-pay-agent model in Q3. That took a good few months, but it was all finalized this quarter. And now I'll go more into detail about the numbers. So what is important, and we also stress it out, the revenues that we booked in the quarter are revenues for both monthly payments of our customers, but also if the customers pay annually, all of that, the whole payment is booked in a quarter when we receive it. So therefore, in this quarter, we have actually a record high USD 18.9 million in revenues, which is an increase by almost 36%. And compared -- we have to compare it with monthly recurring revenues. So next slide, please. So it is actually the revenues that are distributed evenly for the period. So for example, the annual payments are all divided into particular months. And if you look at this metric, actually, the monthly recurring revenue for December this year was USD 6.35 million. And this is an increase, first of all, [ 33% ] year-on-year and 29% quarter-on-quarter. It is also important to say that we generate all the revenues in U.S. dollars, so no matter whether the customer comes from Poland, U.S. or any other country, they all pay in U.S. dollars. In terms of KPIs, actually, it is very interesting because after 3 months of decline in number of customers, so that started in September this year. December was the first month when we got a revamp in number of customers, and we're actually able to add 44 customers to our customer base and in the year with 36,850 customers for the year. And a very interesting picture is here. So how ARPU was presented during those last month. So as you can see, at the end of December, it crossed USD 160, which is a big increase as compared to previous hundreds -- around $120. And there are 2 things responsible for that. First of all, the price increase that initially was launched in late August 2022 for new customers. And later, this quarter at the end of October, the whole customer base started to see the new pricing. Of course, there were some exceptions because some of the negotiated deals remained on the old pricing. Also some of the customers were offered to stay with the old pricing, if they choose annual payments. But still, the majority of the customer base is now on new prices and on per-pay-agent model. This is due to the fact that also during this quarter, we rolled out the change of the legacy plans, the previous plan that we had, that we do not want to continue anymore. They were all changed to the existing pricing model, so pay-per-agent. And the resulting ARPU is actually the effect of those 2 changes that took place this quarter. This is also shown here on this graph where you can see that ARPU actually had a huge increase and so has, but to a lesser extent, initial ARPU, you can see that it is -- it held for the last months, it has increased slightly. But again, this is -- the initial ARPU is the very first payment that the company does -- that the customer does and usually, the discounts that we apply are exactly to this first payment. So although this number is much lower than the ARPU itself, it is the usual way that with every next month, this number goes up per a particular customer. In case of ChatBot, the picture is slightly different because it hasn't been that successful quarter because the number of the clients was rather stable. And so we ended with 2,625 active and paying customers at the end of the year. So the additions were not that great. However, it was the first quarter when we crossed the USD 1 million in terms of revenues. And actually, for MRR, it was USD 300,000 monthly. Also, and here, I'd like to comment a little bit on ARPU. So you can see that we had a spike in initial ARPU. This is -- this took place when we increased the prices. And actually, in the case of ChatBot, the situation is slightly different because this price increases, the 25% increase was applied only to new customers. The previous customers, the customer base did not have a price increase. And hence, you can see that the effect of this price increases in case of ChatBot didn't have that much of an impact or at least not to such an extent as it had in case of LiveChat products. And to be fair, this is the very brief presentation that we have for you today. However, we are very happy to answer any questions that you have. And together with Marcin, we will be answering those. So please either write them in chat, or if you want to speak of out loud, you're welcome too as well.

Thank you for all the questions. We have some good questions. Some of them were actually at the last partly answered by Lucja during the presentation, but I think it's good to return to them anyway. So the first question from Steven and in NASDAQ dual listing plans? And the answer is pretty much the same from the very long time. Actual NASDAQ was always something we had in mind. So we think that that's the right place for us. Our businesses in the U.S., our competitors are there, so actually, yes, that would be a good place for us. So yes, we we'd like to see LiveChat someday in the future released at there that always was our ambition. We were telling that from the very long time, and at the same time, I have to say that we are pretty much concentrated on our business on actual challenges. We have, at this moment, the business. So our focus is on the business now and we are not -- so don't expect anything on that [indiscernible] like in coming months or quarters. Don't expect any news in the coming quarters, like that. It's not something which will happen very soon, although it's our ambition for the future.

And so the second question is what percent of revenue is received in U.S. dollars? For instance, if a customer is in Germany, would the monthly fee be paid by the customer in U.S. dollars? 100% of revenues are received in U.S. dollars. And so whether you're a Polish company, a German company, you will be paying in U.S. dollar.

That means, for example, that for Polish companies, like many others, but for the good end to Polish, received significant increase in the price during last year even before we change pricing, yes, that would be true. We have some -- I can say that Alex is want to ask question. So maybe we let Alex speaking and turn -- we will return to written questions.

Sure.

Alex. It's good -- it's good to have you here.

Good to be here as well. Thanks for this chance and exciting developments. I'm sorry if I missed it. Have you talked about the expected the impact on margins from the price increase? Do you expect that to be 100% margin accretive? Or do you want to reinvest some of that incremental revenue into business?

So the very first investment was done already. So we bought text.com domain. So if you think of it as an investment into products, then yes. But of course, we have to work on the products further. And actually, maybe it's not that it will require more investment. But what we have been doing for the past months was preparing global accounts, so ability to sell all the products as one in the future.

Understood. And apologies, maybe not being clear. So the 25% price increase should be very accretive to EBITDA and operating margins. Do you expect to just report high margins? Do you want to reinvest some of that extra revenue into business?

Yes, you should see the FX -- that's the economics of that scale here. So definitely -- definitely expect that visible in our margins, definitely. But of course, we will be -- we still will be investing. We still be investing. And we still -- I think there will be some challenges if you think about margins. So yes, that definitely you should see effect on the margins immediately here. And over the time, yes, we have some things we have to invest in. For example, we will invest in some research in the area of AI. So yes, there's a lot of things. We can't and we will invest in. But nevertheless, that is economics of the scale and definitely when we will publish -- when we will publish results -- full results for the quarter definitely, you should expect that the impact on margins -- positive impact immediately.

That's helpful. And my other question was, if I look at the number of LiveChat customers, like you discussed that there was a slight decline, and then they picked up recently. So how are those discussions are going? Is it mostly new clients who have been hesitant to join given high prices? Or did you see some meaningful churn in your existing customer base?

Definitely, the churn was higher in November. So in the first month after we have introduced the higher prices for the old customer base. And that churn declines over time. So December was lower, but still not to the usual 3%. It's above this average. And also initially, so when this price increase was applied to new customers only, what we've seen is the lower return -- lower number of returning clients. So when they were faced higher prices, they were not willing to come back. That's the usual thing that some of our customers use the product just for some period of time or just for conferences or events, and then they come back.

Understood.

Yes. But also definitely, we can see that much more churn customers are pointing to the fact that the -- out of the business, that they're quitting business that they have some business problems, it's like 20% more.

Understood. And how does that churn among existing customers compared to your expectations going into that price increase? Was it in line or different from regional expectations?

We've never published that. That would be unfair because we never published this expectation. So we can -- now we can say anything. So no, but -- but we -- of course, we can see what sell-side analysts expects and we have some forecast according to them, we were supposed to lose some 1,000 or 1,500 customers in the last quarter. So definitely, when you compare the results with this expectation, that was pretty good results. That was -- we are not happy losing customers, definitely. And that's not something we used to. That's not something we'd like to see. But when you compare that grim expectations from sell-side analysts, yes, that's whether it was not so bad. And we can -- okay. We can go back to the written questions.

Exactly. So the next one is, I think your January 2023 press release mentioned you purchased the domain text.com. Approximately when will you have a product to market using this domain? So this is the process in the making. So actually, we started with the domain. We are working on the product. However, there is no official time line for the start. What we want to do in the future also is to change the names of the companies. So the U.S. company and the Polish one, but that be dependent on the consent of shareholders. Also, we will be at some point doing rebranding, but text.com will be the name for this suite product. We will remain -- we will leave the other products as they are. So LiveChat will still be LiveChat, and it will be present on livechat.com. and so will be the other products.

So exactly. And the next question is, is there any revenue pull forward for instance, did more than average customers in the entire year free during the most recent quarter and that on December? So yes, that was also partly answered. And the other...

It's also very valid question because some of our customers were on the monthly payments. They were offered to remain on the old pricing if they pay for the whole annual subscription. And this was the case for some of the customers, not that many to be sure, less than 1% of the customer base chose that. And actually, it's not that our customers are very much in line with the calendar year in terms of how -- when they start subscriptions, either monthly or annual.

So definitely, when you also look just at the numbers at our results, it's good to compare reported revenue and MRR. So yes, because we booked the whole -- call revenue for the given quarter when we received that payment and in terms of -- and when we discuss MRR, this revenue will be split into 12 quarters. So it's always good to look at revenue and MRR, and then definitely you have -- you should have a good emit of how we are doing. So then nothing is really hidden. Everything should be clear about what happened and what should happen in the next quarters. And the next question. As it pertains to OpenWidget, will you break out the percent of total company revenue that it is derived from this? Well, for now -- revenues generated by OpenWidget are exactly as planned and it's 0. And now it has only a free version. So in the future, hopefully, yes, you have -- we have 2 possibility. We have 2 possible way of expanding OpenWidget actually, that the both are varied that we can do both things, and one thing is to add some premium version, some premium feature paid features for that solution, but also we -- the OpenWidget itself can become another channel of distribution for our premium paid products. And that's possible because OpenWidget is fairly free -- is fairly cheap for us. It's not a huge investment actually. It's -- but small because that's the same team, which is preparing, which is work on widgets for the other products. So actually that's no new team. That's of course, a very strong team, but that's -- so not only things they are doing for us. So it's definitely not something. I think in coming quarters, you shouldn't bother about OpenWidget when you think about revenues. But we also -- we have some other things in the making. So something should happen not in this quarter, but we have some other ideas for the product.

So actually, the next question is, regarding the USD declining in value relative to most other currencies, including EUR, GBP, PLN, did you see a larger jump in ex-U.S. customers buying this quarter? To be fair, I have not checked all of them, but for the main markets, so the English-speaking countries, that was pretty the same for U.S. as for U.K. or Australia. I don't want to comment more on other countries because I have not followed them very closely. The next question comes from Leonard Drake.

Leonard, it's great to have you hear.

We received some congratulations. And in terms of the question, I know that the majority of your customers to date are small businesses, and the churn during COVID-19 was in many ways driven by business closures, do you see any patterns to keep in mind any specific segments or trends you have identified? Secondly, there are your thoughts regarding a more tax-efficient way in returning free cash flow to owners via share buybacks?

So 2 questions. Maybe I will start with the second, which is easy. So we had -- the buybacks was something, we thought about, but nothing, nothing. I don't expect that to happen. Yes, that something. Yes, we know why it's a good idea for the large shareholders. We thought about that. But no, we don't have plans for buyback.

In terms of the first question, whether we see trends or segments that there are any patterns for. As Marcin mentioned, we basically collect the reasons for churn. And one thing that is taking place is more of the churning customers point out to the fact that they are either closing the business or changing the sector, for example. But apart from that, not that we have seen any specific trends that affected the new customers or like the main things that we were observing this quarter were the implement -- well, the impact of the pricing increases. So -- but definitely, economic downturn is there. And we already said that earlier, but the first half of the year was very good, in our case, whereas our competitors already have seen a slowdown. And we started to see it since July, and it continues. Although December was after 3 months of declines in a number of customers was actually the first month to show an increase in number of customers.

If you want us to go deeper in some area. If you feel that we are not fully answer your question, let us know, we'll try to be more precise. Meanwhile, let's go for the next question to hear is one from Peter [indiscernible] How do you explain the stagnation of customer numbers in the last quarter of 2022?

That's actually a chance to go deeper certain things.

Yes.

So for us, we've seen a few things. So first of all, because we imposed the price increase on the almost whole customer base at the end of October. November was actually the month when we -- when the churn was very high as to our standards. And that was the #1 reason was connected to the price increases. And this is due, as I have mentioned, 2 things took place. So the first one was just a simple price increase this by 25% on monthly subscriptions. And the second one was connected to changing from the pay-per-seat model to pay-per-agent, where actually some of the clients were faced with quite higher invoices because of the fact that they have not -- how to say it. They have not actively -- they didn't make changes that with a number of agents before the new pricing or the new pricing model started. So therefore, some of them simply churned because of that. And the second thing was -- is also the fact that the economy does not help, although we see that -- and we've always talked about the product, LiveChat products, as quite helping the companies to increase their sales to actually help the business. So that was not our thinking that it will be one of the first solutions that the companies will be dropping if they face some economic problems. Should we go to the next one?

Okay. Yes, I think we can go to the next one. And this is how could the LiveChat business model overcome a potential economic recession and the decline in revenue this year? So of course, I would say we have some history, and we were growing despite many difficult times. And I think our model is -- I don't want to convince you that economic slowdown is something we are not worrying. It's not -- it's something we don't care. Of course, we can see what is happening on the market that a lot of especially small companies have a lot of problems and that affects us. And -- but I would like to point today, a very strong diversification we have. So one, diversification is geographic, one, so of course, the U.S. is the most important because that the key market, it accounts for some 40% of our business. At the end of the day, we are in 150 countries. So there's a lot of diversification here. It's not only about the U.S. I think also to U.S. is pretty much more -- more, I would say, economy proof that a lot of European countries than you -- when we think about -- but not maybe a strong. That's not the most important. The important is diversification. But also if you look at the industries, which are using LiveChat, it's very good, very strong diversification. Here, we are actually, I think, are pretty fair to say that we are in every industry, even if you don't think that it's natural industry in the context of LiveChat like production companies, like many B2B companies, but they are using LiveChat for different purposes and or other our tools. So the next thing also is I think even if you think about this price increase, LiveChat is still fairly cheap tools. So it's still cheaper than a lot competitive solution and definitely cheaper that, for example, voice solution, it's definitely much more effective compared to voice. And also it can prove, for example, that it can helps you in modernization of our business. That the -- actually tool, which helps to monetize your website, your business, it's not something you want to get rid of when sale that is coming. So I'm not saying we will be -- we are not affected. We will be not affected because that wouldn't be true. But I think that for these reasons, we are well positioned to survive that value pretty much well.

Okay. So the next question is how many employees do we have as of end of the year? Those numbers won't be that much difference to the ones from a quarter ago anymore because we are slowly reaching the 300 people on the team. And we have mentioned already that this is the shape of the team that is almost complete. So we want that if the team further grows to 305, 310 people, it will be complete. So we will have all the important roles filled in. Actually, what has changed if you were looking at the Careers website in the past, you would see 40, 50 open positions. Now there are only 5 of them. So this is actually showing like where we are in terms of the team size.

And the next one from Robin [indiscernible] Can you share more information about the patent fillings you mentioned during the presentation? What service or product are you seeking a patent for? And does LiveChat have a portfolio of existing patents are already? So that would be our fourth patent. Yes. So we have 3 already and you can find more information on our website in the News section. Of course, we can go deeper on that. But maybe that's not the place and time. And of course, we have to wait to share more info about this coming one and I hope that where we will be able to share more information very soon.

What is important, what -- we see the patents to actually secure the things that we have made for LiveChat products. So for example, some of the patents relates to writing the chats or displaying the welcoming messages, so all the things that make LiveChat product a good product. And we've started this process 2 years back. However, it was a rather long process. So now it's kind of getting fruits out of the process because in the last 2 years, we received 3 patents and now we are waiting for the fourth one.

And some other processes are on that proceed.

We have a question from Stuart Lucy, how we noticed that the customer growth has been a little lower for the last few months? Do you think the pricing changes or the general downturn in e-commerce had a bigger role to play in this trend? And would you expect lower customer growth going forward? So we answered almost completely this question apart from the last part about how the future will look like. However, it is quite hard to predict partly because the way we acquire the customers, we only have like 2 weeks visibility in the future prospects. However, the economy does not help. So but again, the product is important to the customers because it brings value, it brings revenues. And we think that even in the downturn, it will be demanded.

So yes. So we hope that the growth is back. Definitely not the December results from the December is -- bring some hope here. So definitely, we hope the growth will be back, but also honestly the coming months will be a challenge. If you think about customer acquisition, as Lucja said, economics is not happening. We also -- increase of the prices, will still impact, we still have some impact on the churn. We have some customers on the rolling contracts will be rolling. So we should be ready for at least slightly higher churn than usual. So yes, the coming months will be challenged. That is hope for some growth. But at the same time, it's -- we don't like to be concentrated on the next quarter or the next 2 quarters. So I think we are well positioned on the graph when opportunities arise, when economics improved. And also it's -- for us, it's not the game of survivor. It's not survivor game in the context of the next quarter for us, it's much more important to have a much -- to put much more value on the products to still be on that market in the context of the coming years -- and have much, much better products. So definitely, we think that we are -- also, I think that our products, especially LiveChat is now much highly valued. Each -- it probably worse too cheap when you think about the value behind that product. So yes, the coming quarter could be current quarter can be a challenge, but that's strategically speaking. It's not so important.

I have answered some of the questions in a written form. So if it was your question, then please have a look at the answer. That was mainly about the numbers. The next question is, how does it look at the percentage of customers leaving the company? So the usual one that we observed is 3% customer churn. So 3% of customers each month stop using products. However, now because of the fact that we have increased the prices, this number is much higher. It was the highest in November and it in -- for December, it is down a little bit, but it's beyond usual 3%.

And the next question from Leona Drake. How do you see the general salary increases/OpEx in general to develop during the coming year? So yes, we observe the situation. We react to what is happening, to inflation. Of course, the most huge -- huge majority of our team is located in Poland. The inflation is very hard, very high here. So we have to react, we will be forced to react, and it will be dependent on inflation, mostly on the inflation.