Earnings Call: H1 2021

Sep 21, 2021

Good morning and welcome to our Q3 Trading Update 2021. Thank you for joining us today and we are looking forward to taking you through this webcast and of course to your questions in the Q and A at the end. This webcast will be streamed, recorded and made available on our Investor Relations website of the call. I would of course briefly draw your attention to our standard disclaimer. And your presenters for today will be Jan Dirk Henrich, CFO and COO, who is responsible for all finance related functions at Exosol, including accounting and controlling, legal and compliance, human resources, internal IT and Investor Relations. And myself, Aaron Orch, CEO of Exosol, I'm responsible for the strategic direction of the company, strategic communications as well as key business relationship management. To summarize the key points in this webcast in brief, we achieved a run rate of 28.2 €1,000,000 in annual recurring revenues to the end of Q3 of 2021, which represents an increase of 31% versus the same period in 2020. We are now projecting annual recurring revenues of €30,000,000 to €31,000,000 to the end of the year as opposed to the more than €35,000,000 we have previously communicated. And the midterm target of €100,000,000 in annual recurring revenues have subsequently moved out to 2025 as opposed to previous timeframe of 2024. In order to address the lower than expected growth, we have initiated a number of changes, including revising our organization to reduce complexity and create integrated ownership of key functions, sharpening our go to market focus under the leadership of our newly appointed Chief Commercial Officer and adapting our product strategy to align with evolving enterprise data strategies, which will comprise moving to full platform independence and cross platform consumption based pricing as a service, which we are terming our high performance bridge to the cloud strategy. We will also introduce a new Investor Relations cadence with quarterly webcasts and roadshows to update our investor community on our progress, among other informational and transparency events, which we intend to organize in the coming year, especially with the start of our new Investor Relations Manager from the first in January 2022. Following from this summary, our topics for today will be our Q3 trading update and guidance, what we learned in 2021 so far and the measures we've taken in the context of those learnings. We'll introduce the financial calendar as it stands today and we'll cap the presentation of course with a Q and A. And at this point, I'll hand over to Jan Dirk to take you through the trading updates and guidance. Thanks, Aaron. Well, let me provide you with some details on the key drivers of ARR developments up to September, and the implications for our guidance for 2021 and midterm. And as you know, we do not provide full P and L and cash flow figures in Q3. And nonetheless, I will also provide you with an update on the development of available liquid funds and the associated cash burn and the development of headcount as our most important cost Sorry. Let's start with AR development. And first, in terms of ARR development by type. As mentioned, ARR stood at 28 €200,000 as of end September, representing a 31% growth versus same quarter in 2020. If we look at where this growth came from, It came by 2 thirds through our ongoing strength in increasing revenue with existing customers. Gross ARR retention stood at 123%, And while both ARR churn and customer churn decreased significantly, leading to a net ARR retention of 120%, and that's up 7 percentage points versus prior year. Now that strong upselling performance notwithstanding growth contribution from new customers We remain behind expectations with an overall contribution of 11 percentage points or €2,300,000 ARR. In total, EksoSol won 33 customers in 2021 while losing 7, bringing the customer base to 207 as of end September. If we look at the breakdown by geography, we get a little bit of a clearer picture of where the root causes are for the new customer slower new customer development. Looking at the ARR breakdown by region, You can see that the major driver for the shortfall is the new business in the U. S. And U. K. Markets. Over there, while upselling Was similarly strong, albeit from a lower base. New customer acquisition was behind expectations both in terms of number of customers and average deal size. In his section later on, Aaron will elaborate more on the key learnings we drew from this and what the implications are in terms of changes that we initiated moving forward. Now that shortfall in new customer acquisition notwithstanding, EksoSol continued to demonstrate its ability to convert large scale data players, particularly in key verticals that support use cases where our product has a unique advantage. Since June, we converted 3 multibillion dollar corporations in financial services alone with first use cases, with significant upsell potential that we see in 2022 and the following. And as mentioned before, these customer acquisitions were bolstered by strong net revenue retention and upselling from existing customers in the course of the last 12 months. More than 60 customers increased their business with us by an average of 80 ks to 85 ks per year. That's more than 30% of our total customer base who have expanded their business with us. Now given this overall described ARR performance, what are the implications for full year 2021 and our original guidance for this year. It is undoubtedly that we will finish 2021 with a lower growth momentum than we originally aspire to due to several delays of larger new customer and upsell projects into 2022 and the lower overall customer acquisition momentum that we described before. Based now we sat together, together with Don in the ELT and reviews holistically our sales pipeline, And we now project to reach end of year about €30,000,000 to €31,000,000 ARR, translating into a growth of 24 29% versus the very strong Q4 2021 compared to our original projection of more than €35,000,000 This lower growth momentum then also translates into an adjusted midterm outlook as well. With the growth acceleration, particularly in new geographies being delayed by 6 9 months. We now project to reach €100,000,000 revenue by 2025 instead of the previous projection of 2024. This will then also set the boundary parameters for our planning in 2022, for which we will provide our guidance in our February webcast once we Know how 2021 will ultimately have ended. Now during the last roadshow, many of you inquired about the cash requirements of the business and the associated cash burn. And although we don't report full financial statements in Q3, let me nevertheless give you an update on the development of liquid funds. In liquid funds stood at €33,400,000 as of end September. That's down €13,200,000 versus June. This, however, did include prepayment for Q4, especially in the field of marketing for approximately €800,000 as well as one off payments related to legacy employee stock programs of €1,800,000 In September, the leadership Team started to rigorously review and reallocate investments, not delivering the expected return. The reorganization and we took some reorganization measures in over that Aaron will elaborate on in his section, and they were a first step in this process. They will deliver payback already in 2021 and will allow us to enter 2022 with a lower operational cash burn rate. We therefore expect Year end liquid funds to come in at around €24,000,000 to €26,000,000 and that already includes €1,000,000 approximately €1,000,000 of The one time costs for implemented reorganization measures and then with further positive impact in the ongoing cash burn rate into 2022. So as a consequence, Q3 2021 will have been, so to say, the low point in terms of cash burn rate that we'll have seen with improvements to be expected moving forward. Finally, let's look at headcount developments as our most important cost driver. As of September, headcount already was flat at approximately 290 people compared to end June. This, of course, as an end of Q3 number does not yet include the reorganization measures that I just mentioned. How would that change the picture? The measures will have led to an overall slight reduction, but more importantly to a structural shift towards EMEA lowering average cost per employee in the organization. And while the overall U. S. Footprint will now have been reduced, The reduction primarily affected the global functions that were previously located in the U. S. The U. S. Go to market organization Per se remains largely in place, continuing business development in this strategically important market and working our pipeline. And with that, I conclude the numbers part of the update, and I hand over to Aaron, who will lead you through some details regarding the key learnings we drew from the development 2021 and the changes we've initiated as a consequence of these learnings. Thank you, JD. So moving to the second item on our agenda today, the key learnings and the initiated changes. We made major changes and additions to the organization in 2021 and we invested strongly to grow the company and and our footprint in terms of company size and market impact. And clearly, not all of the planned measures worked the way we had originally anticipated. So what have we learned from this process and what changes have we initiated to regain ground? Let's start with the organization itself. What we realized in the recent past was that despite establishing a cross functional collaboration platform, some may have heard you mention our OKR framework Previously, the go to market organization lacked a single clear owner and leader with the necessary experience and skill sets to align the different functions and stakeholders and execute on our strategic direction. This was exacerbated in no small way by the COVID restrictions and uncertainties that we have all seen continuing throughout the year. We recognize of course that everyone has been subject to the same constraints. However, in this critical initial growth phase at Exosome, they clearly impacted our coming together as a team and the ability to recognize misalignment sooner. We have responded to this realization now by restructuring our leadership teams and cadences and in particular the ELT or the executive leadership team, which we have extended to include a new Chief Commercial Officer to ensure that our go to market strategy does have end to end ownership and that as an organization we understand clearly that integrated execution is key for success. We have also shifted product marketing under the Head of Marketing role, which now moves under the ultimate control of the Chief Commercial Officer and product management back under the CTO to ensure much closer integration with R and D and engineering and drive agile and reliable roadmap delivery. With respect to our go to market activities, we have come to the conclusion that our value proposition is still insufficiently articulated and understood in terms of capability and specific outcomes. Therefore, we are in the process of redefining our product positioning, most importantly to fully embrace enterprise cloud first strategies, provide extended capabilities to address those strategies and focus our execution on leveraging our unique technological strengths. And finally, we recognize that our business model is geared to highly operationalized use cases where the data, the users, the use case and the expected outcomes are fully understood and calibrated. However, Until now, we have not provided our market with a more versatile model for evolving data strategies, which at enterprise level are increasingly required to address multiple use cases and stakeholders moving at different speeds with different tools and wildly varying proficiency levels. Increasingly, we have seen that the narrower scope that we cater to is constraining our ability to be more widely adopted as a strategic solution at enterprise level. To change that perception and reality, We will extend our deployment capabilities and business model to provide consumption based pricing on all platforms and software as a service automation in order to deliver real time business analytics as a service for hybrid enterprise data environments. In other words, where substantial amounts of customer data will remain on premise and certain use cases will move to 1 or several cloud platforms. All of which built on our unique strengths, which we have designed, developed and refined over multiple years, starting with our superior performance and the clear cost efficiencies which this enables in terms of infrastructure usage and cost and which are consistently underscored and endorsed by multiple international benchmarks, analyst reports and engagement surveys. As I explained earlier, we have made substantial readjustments to the organization, which have also become possible due to the new and experienced activities we have onboarded in the last couple of months. Moving ahead, my role will be to focus primarily on the strategic direction of the company, driving a clearer internal and external communication to frame that strategy and what I consider to be extremely important to leverage and operationalize the valuable relationships we have built in the market over the years to benefit our overall go to market strategy. Dom Kaye, as our new CTO, will integrate all sales and marketing functions under his leadership, including a heavy emphasis on partnerships and strategic alliances to deliver end to end market execution. Matthias Golombek, as our long year CTO, will reassume overall responsibility for the value chain between R and D, engineering, product management, customer support and the community to provide a faster, more agile and customer oriented roadmap to drive product led customer engagement and on quarter to deliver the key components of our extended capabilities product strategy. And our new CFO and COO, Jan Dirk, will manage finance, legal, HR, internal IT, including security, compliance and risk management, and of course Investor Relations. Overall, we are a strong team that is working extremely well together and this gives me a very high level of confidence in our ability to accelerate growth moving ahead. He has been referenced several times and since he is not joining today's webcast, It helps me to briefly introduce Don Kaye, our new Chief Commercial Officer. Don joined mid October and has assumed end to end possibility for sales and marketing, partnerships and alliances and of course customer success management. He brings extensive experience in leading go to market activities in software and services, both in large scale operations such as Apple, Microsoft and Kaspersky and emerging players like Ground Labs and Kinetics. Don is already making fast inroads into understanding where we are as an organization, collating its findings, coming to conclusions and to set clear targets in terms of when and how our North Star will be defined. In other words, how and when the go to market strategy will be set and ready to move to execution. We speak as a leadership team several times a week and Don and I speak several times a day. And I can say that I am very impressed by savviness, clarity and the experience that he brings to bear. Don's first focus of course on delivering will be on delivering customer value, accelerating customer adoption and driving revenue growth. We know that we need to leverage our strengths, in particular, where customers require high value real time business analytics. In other words, use cases, which are highly operationalized to drive business critical processes, where deep granularity and time to value decision support counts. For data strategies, where hybrid deployment across on premise and multiple cloud environments is still and will remain a key requirement and where companies are seeking a seamless replacement strategy away from their business critical legacy systems in particular when implementing a cloud first strategy. Our focus will continue to be on North America and Central Europe while building confidence in the UK and U. S. Markets across verticals where we have already proven our value with clear domain and outcome excellence. From 2023 onwards, create the framework to scale the rest of Europe, Asia and Latin America. And how will this be achieved. We will simplify the sales process at all stages from first engagement to contract and onboarding and substantially improve ease of trial and adoption, in particular via software as a service. In other words, automation, auto scaling, usage based pricing in the cloud and on premise, automated data warehouse building and infrastructure as a service, all of which will enable us to provide customers with cloud benefits and economics on premise and in hybrid environments paired with our clear performance advantages. We will continue to build on our customer obsession strategy and work to obtain trusted advisor status in all major enterprise accounts. And we will focus much more deeply on strategic channel and technology partnerships to ensure greater access to our target sectors and customers, increase vendor credibility and create a stronger foundation for growth based on a clearly understood value proposition. We have articulated our vision to be the analytics platform trusted by the world's most ambitious organizations. Of course, the question is what are the key components of that vision and what does the path or roadmap that look like? Taking where we are today as a starting point, we already deliver the best in class solution for on premise high performance analytics based on our unique high speed in memory technology. We know from our customer base that the capabilities which we put in their hands of business critical and unbeatable in terms of performance and price performance. When use cases are fully operationalized and running 20 fourseven, Then our data volume based pricing model is fully accepted as an appropriate model from the customer perspective. However, we know from multiple conversations now with CTOs and CIOs in our larger enterprise accounts that their data strategies are evolving to include use cases which are by their nature not 20 fourseven or else are still in the process of being fully understood and operationalized. Often such strategies are cloud first, which to be clear does not mean cloud only. In cases like these, the ability to scale up and down to pay for usage rather than volume and benefit from certain cloud economics is becoming increasingly important. For this reason, we have engineered cloud elasticity for all 3 major cloud platforms and we'll be introducing elastic auto scaling on AWS in the coming weeks. Another issue we are seeing more and more in enterprise is the move towards decentralization. In other words, moving analytical capabilities away from centralized IT to the individual business users, which is why software as a service is also becoming increasingly important. We are addressing this by releasing our own software as a service offering based on Amazon AWS. This will incorporate consumption based pricing and cloud ETL integration and will provide customers with much more flexibility for their data strategies and enable a seamless transition to the AWS cloud. As we see data analytics democratization evolve, we will introduce usage based models for on prem analytics and provide cloud elasticity for the Google Cloud Platform and Microsoft Azure. To boost adoption, we are intensifying our collaboration with major strategic partners to define an infrastructure as a service offering, which will allow us to provide customers with a holistic on prem analytics as a service offering while preparing a seamless integration path to multiple clouds and back if necessary. As part of our increasing automation push, we will also be introducing our autonomous data warehouse product, which will enable business users with no prior technological knowledge whatsoever to build data warehouses or data marks for automated analytics on business data in real time, combining data from multiple data sources, including data lakes. And from today's perspective, the final step of this roadmap journey will be to deliver Complete platform independent auto scaling, enable the unification and integration of artificial intelligence with business intelligence at scale powered by a deep GPU integration layer for further acceleration. Also, we intend to create an open extension marketplace for users to build, provide and commercialize adapters, connectors and other tools to extend the usability and versatility of our database technology. And on my final slide for today, we have broken out the schedule for releasing the different technology components in simple table form, which provides a good overview of what is coming and when. As I mentioned at the outset, this will be available on our website if you want to study this in more detail. And with that, I will pass back to Jan Dirk. Thanks, Aaron. As Aaron pointed out, We are confident about the learnings we took from the past 12 months and the changes we initiated moving forward, and we would like to support this journey with an intensified investor dialogue and financial calendar in 2022, which I would like to conclude today's presentation with. In 2022, we will update you as investors on progress in quarterly webcasts and roadshows as compared to the semiannual cadence that we had Before and like today's call, these webcasts will be recorded and made available on our Investor Relations website. In terms of timing, We will reduce the time between closing and reporting on figures compared to this year, particularly with respect to full and midyear financials, where in the past or also in this year, we had a relatively big gap between the actual closing date and the time we talk to you about it. Within these updates, We will increase the transparency on core KPIs as hopefully you've already realized today as we've increased kind of the breakdown and transparency on our ARR development as well as on ESG topics and KPIs. All these processes will be accompanied by an experienced internal HR Investor Relations head starting in January, which I've already mentioned in the last webcast, who will be at your disposal for ongoing dialogue and interaction. And with these overall initiatives, we are convinced to aDrive business forward and also hope to retain your trust as investors and regain wherever needed. And with that, we conclude our presentation, and we look forward to your questions. Thank you very much. Thank you. We will take our first question today from Robert Vanderherst of Warburg. Please go ahead. Your line is open. Hi. Thank you very much for taking my question. I have several, if I may. The first one Would be a little bit on the shift in the marketing strategy going forward in combination with your software as a service Krawi, I understood that in the past, this was especially attractive to smaller customers or to like Customers that would start at a lower level. If I understood you correctly, the focus will be now more shifted into More sophisticated applications where Axosol and its performance can really shine. So Do I understand this correctly that the main advantage of your software as a service Approach going forward will be the elasticity and not so much smaller customers. And the second question is kind of the obvious one about the cash burn and the liquid funds available with An expected amount of liquid funds between €24,000,000 €26,000,000 by the end of the year. The question of course is How long will this last? What do you expect in terms of cash burn in 2022. Just give us an idea Now this will develop going forward, which costs you have this year that might not recur next year and how much is actually available for further growth. Thanks. So to answer the first part of your question and thank you for all those The two questions, Jan, we'll take the second, obviously. You are absolutely right. I think for what we term commodity level analytics, lower end obviously is a very competitive market and where price is key. And that is not the market we are targeting, although we can serve it. What we are targeting and we have Proven that we can win those kind of customers in the past and this year is the enterprise level data strategy where There's a lot of heavy lifting. There's high demand across the organization. And as I said in the presentation, there are just very many different kinds of use cases which need to be addressed. So adding the elasticity and the automation for non technical users expands our viability or let's say our acceptance as the strategic Technology for enterprise in the required way. And that's what we had been seeing that we were used for those High impact or high value use cases, we basically run the business and where if they stop or if there's Some other issue is immediately impactful for the business. But we weren't necessarily being considered for wider adoption through the organization where they are decentralizing analytics and putting the capabilities into the hands of the business units. And at that level where you are still working out the value of the data, You do have use cases which are only being used intermittently or maybe once a week or once a day where elasticity really makes sense. And so being able to provide that to our enterprise level customers turns us from a much more specific technology to a strategic technology. At the same time through our SaaS offering, of course, we are offering a price point, which makes us very competitive with the other vendors as well. And in fact, compared to our most fierce competition right now, the way the pricing will look is that fundamentally You will get more for the same price or you will get the same for less, which will be an interesting proposition to the market as well. And with that, I'll turn over to Jan Dib to answer the second question. Yes. Thanks, Aaron. With regards to the cash burn, At this stage, the way we manage it and what we have as in going cash burn momentum already now with the measures already taken, We expect our funds to last us well through 2022 and into 2023, and the way we manage the business is in a way that We actually don't need capital measures. And if so, and if we execute them in the future, then it is to boost growth and not because we run out of money. And just to kind of give that a possibility check, yes, if you look at our guidance for end of this year, which comes in at €30,000,000 to €31,000,000 And you look at our net revenue retention track record of 115% to 120% that kind of carries us already to €56,000,000 next year. And then with kind of simply taking the new customer acquisition that we had this year Of EUR 2,000,000 to EUR 3,000,000 takes you to EUR 38,000,000 already. And the cost base that we currently sit on or with the just the measures that we've now initially taken in October, depending on how much discretionary marketing spend you include, is between €45,000,000 €50,000,000 which brings you to a total cash need of €7,000,000 to €12,000,000 next And this is, as I said, prior to any additional growth that we factor in, and it is also prior to any additional efficiency measures that we might take. And this leads us to the conclusion that we I'm confident that our funds that we project for end of the year will last us well into 2023. And if and when we go back to the Capital Markets to As for additional funding, it is with a much more attractive growth to cash burn ratio and with a clear and compelling and proven case. Perfect. That was very helpful. Thanks. Thank you. We will take our next question from Lucas Spang of Tigris Capital. Please go ahead. Yes. Hi, good morning gentlemen. Good morning. My first question is on ARR, the €100,000,000 for 2025. So can you please give us a regional split on this number? And did you take any changes compared to the previous plannings on this? I would take the questions one by one. Thanks very much. I think in terms of the regional split, We will continue to see about, I would say, 60% as we projected from our core markets and DAS With 40% coming from kind of the new markets that we currently start penetrating in U. S. And UK, The exact kind of split of kind of how U. S. And U. K. Factor in is currently something we look at with Don in a lot of detail. But as Aaron pointed out earlier, the Approach that we're taking in the U. S. Now moving forward is also more focused in terms of the key verticals instead of a very broad penetration strategy that we aimed at last year, which kind of added to the fact that it was a little bit of an ineffective strategy that we took. And as a consequence, the share the U. S. Share in the 2020 or in the midterm target is a little bit lower than in our original business plan. Okay. And then if I calculate the customer loss in the 1st 9 months and Take the number you gave us in the presentation. It seems that you just lost very small customers. So The question is, is this a kind of intended reduction of some customers, so you didn't Revolve them and so focus on higher valued customers or this is an interpretation? No. First of all, the numbers that you see on the ARR bridges, they are always 12 months. So that's always Q3 to Q3. That's not the losses of the 1st 9 months this year. To your question as to the nature of that churn, there is no intended churn in there. So we don't throw customers out. As any business, we, of course, look at customer contribution margins, and we look at kind of where we believe the biggest potential is and steer our customer support efforts a little bit in that way. But overall, we don't Intentionally phase out customers that we don't see promising. So also because once the customer is on board, if you look at the gross margin from customers, it's quite high typically, yes. So there's no need for us to force out customers. No. And it was still the same kind of Situations that we've seen in the past where we have seen some companies fail, some who really reverted to open source products because they couldn't afford any proprietary software or takeovers. So this is basically a continuation of what we've seen in the past. Okay. And then on your Deutsche Bahn project, How much of this do we already see in the ARR number and what can we expect in terms of upselling or upside potential from this? I don't think we disclose such specific numbers. What we can say of course is that as a relatively new customer, It's a reasonable sized project, but the main issue for us is that we continue to grow into the accounts and become the strategic platform for them. So the main thing for us this year was to get through the door, which is no mean feat for a company of our size winning a customer of that size. Okay. Thank you. Thank you. At this time, we have not received any further telephone questions. I would like to hand the conference back to our hosts for any additional or closing remarks. Thank you very much, Mali. So thank you everyone for listening in today and following the presentation. We know that we have a whole Row of additional one to 1 discussions starting tomorrow and going all the way through week, which we're looking forward to and going into more detail with you. So we'll look forward to that. And thank you very much for today. Have a great day. Have a great weekend and look forward to connecting again soon.