Good afternoon, everyone. My name is Juha Varelius. I'm CEO of the Qt Group, and we are here today to tell a bit about our Q3 results and also our outlook for Q4 and beyond. With further ado, the agenda is, as usual, business highlights, financials by our CFO, then outlook and guidance for 2023, and then, yeah, we have this time a bit of strategy update to share with you. If we look at the business highlights, this Q3, it was obviously a soft quarter for us. We had a net sales growth only of 8% on comparable currencies, 13%, and it was definitely on the low end what we were expecting.
However, it was a typical quarter in a sense that large part of the sales skewed towards the end of the quarter, and we had some slippages over there, slipping into the next quarter, some of which we've already closed and some that are in progress. So we're not looking to lose those deals per se, but we weren't able to close them in a Q3. But nevertheless, it was a slow quarter for us. I'm gonna talk about the future outlook on this occasion.
Might be a good already to highlight that if we look for the whole year, and we look at where we are at the moment, I would say that the most headwind we are having from currency exchange rates, so the U.S. dollar exchange rates being a bit ahead of headwind for us, then our consulting business is slower than we expected ourselves, so we have a bit of a headwind over there. And then the mixture of the one- and three-year license terms are more towards the the shorter-term licenses, i.e., the one-year licenses, and that has a effect on our revenue.
If I look at the number of licenses we're selling, it's pretty much where we'd budgeted and expected for the whole year so far. And if I look at the runtime revenues, they've been growing nicely, and they are in line what we were expecting this year. So what we see is that definitely the consulting business has been softer. What we've done there is that we've got our subcontracting over there, so our profitability on that is still on a good level, but of course, the revenue is lower. But the underlying business, selling licenses, our customers doing a product development and testing and seeing the runtime revenues growing, the underlying business, we think, is very healthy. And that's why we remain very confident for our future in that sense.
We haven't seen losing business to any new technologies or new competitors. Of course, the market is tough, and it's tough for everyone, but at the end of the day, we just need to perform a bit better. I'll talk about the Q4 and outlook when it comes to the outlook part. The main reasons for a bit slow year this year has been the product mixture consulting and then the currency exchange rates. Other than that, the underlying business is doing very well. I know on Q3, unfortunately, we saw some last-minute slippages on our deals that happened basically during the three last days, some of them already being signed and whatnot, and that ended up having a bit of a soft quarter for us.
Our EBIT margin was at 24%, increase of 16%. So profitability is still developing very well along the business, and we expect the profitability for the year to be a on a very good level. Personnel total, 746, so increase of 17 employees. We will continue our investing on growth, so there is... We're not looking to slow our growth investments in any particular way. I think that the going forward, we're gonna see more, relatively more investments on the QA side. As you know, we've acquired a couple QA businesses a year and a half and a year ago, so two businesses, Axivion and former Froglogic, and they've been performing, developing very favorably. So we're very happy with the development of our QA business, and we see a bright future for them.
They're also doing a... It's a licensed product business, so the profitability is pretty good. I'll talk about more on those, the, future outlooks in a minute, and now I hand over to Jouni to go through the financials.
Thank you, Juha, and welcome from my behalf as well to the earnings call of Qt Group. You have talked quite a bit already about the Q3 and kind of softness in that respect. As a repetition, we did grow by 7.7%. We have seen, especially in early first three quarters, we have seen headwind from USD, and in Q3, the amount of that was -$1.7 million. So our net sales grew by 13% in Q3, isolated. The growth is coming, no surprise, from the licenses and consulting, and the maintenance revenue is going down as expected because of the subscription license model change.
And that will kind of be about the level we are seeing right now, and then start going up gradually when the license volume is increasing. For the first three quarters, year to date, we are seeing revenue growth of 17%. In constant currencies, it is 19%, so two points difference in between there. We are seeing shorter maturity from the new customer sales than what was happening last year. Then, on the other hand, renewals with the renewal base is growing all the time. And, I mean, those licenses to be expired, they are renewing by default on the same term that they have initially been sold. We will keep on seeing the fluctuation quarterly going forward as well.
That's because of the timing of the distribution license deals, timing of any larger developer license deals, and also we will keep on seeing the exchange rate impact, affecting our revenue numbers. And assuming that USD remains about the level of end Q3, namely 1.05 or 1.06, we expect to see for the full year, like, EUR 2-3 million negative impact from that. Here is a slide about the Q3 and first three quarters income statement. No major news on this one. We see decline in the materials and services, which is the account that we are using to buy third-party consulting services for our customer projects. And when consulting is down this year, slightly, we are offsetting the margin impact by lowering the outsourcing or the purchases.
Headcount expenses are up by 11% in Q3 and 21% for the full year. We are seeing headcount increase of 95 or 15% during last twelve months' time. So it's pretty much the same ratio at what we've seen organically being earlier as well. Personal expenses are up by 11%, which is slightly less than the headcount increase in that regards. There are some somewhat lower bonus accruals now for this period. That explains that. No major changes in depreciation bucket, and other operating expenses are flat year on year on Q3, and for the first three quarters, they are up by 9.1%, explained by increased travels, IT, and facilities cost, for example.
This leads us to the EBITDA margin of 24.1, up by roughly two points from last year or EUR 9.22 million. The intangibles amortization. The run rate is EUR 2 million a quarter, and they are coming from the froglogic and Axivion intangibles amortizations. EBIT margin is slightly up from last year's 18.8% or EUR 7.2 million. And in Q3, the exchange rate changes were somewhat limited, meaning that then it does not show up in major movement in the financial items. And also the Q3 effective tax rate was around 22%, and for the first three quarters it's roughly 20%, which is in a range that we have been indicating also going forward.
Net profit is EUR 5.5 million or 14.4% of the revenues, and EPS is 0.22. On the balance sheet side. Well, just to start from the cash flow. Our cash flow has been, so far in the year, pretty good. Operating cash flow up by positive EUR 34 million, and ending cash balance is EUR 31.3 million, up by EUR 24 million. The receivables, customer receivables, receivables part, trade receivables, and then contract assets, which are tied to the longer payment term deals, it's down by EUR 6 million from December 2022, so down by roughly EUR 6 million. And then the...
If you go to equity and liability side, no major movements here except that loan liabilities and some of the earn out liabilities have moved from long-term to short-term now. Also we have paid out some of the loan that was taken for the Axivion acquisition that happened as well in Q3. Other short-term liabilities, the increase is pretty much driven by the earn-out liability from long-term liabilities side. So no major movements in the balance sheet. Now it's time to hand over back to Juha to go through the outlook and guidance for the year and strategy update. Thank you.
Thank you, thank you. So I already briefly touched the market. We don't see... On the market, we don't see a substantial change in that sense that majority of our customers in 70 different industries, they are producing new products, new applications, and they continue their investments. So if I look the market outlook, the only thing we've seen is that maybe a bit less consulting is being used, and they try to do insource instead of outsourcing. So that we do see, but we don't see. If I look the number of licenses we're selling, if I look the number of projects we are estimating there is to be, we don't see a big slowdown over there.
What we do—well, this is going a bit. If I look into the next year, obviously, we see in the environment now that many businesses and different markets are not doing equally well, so that may have effect next year on the growth rate on the distribution licenses, but it's still too early to say. If I look this year, the distribution license growth so far has been very satisfactory for us. So that's basically how we see and, of course, there is market uncertainty more so on how long this downturn will continue. If I look in Europe, Europe is maybe a bit slower.
The American economy is still doing amazingly well, and we do see quite a lot of activity also in Asia Pacific, at least at this point of time. We don't see that these big customers of ours would be scaling down their future development or their future services or products in any particular way. Instead, we actually see new industries coming all the time. We see new customers coming that wanna build the graphical user interfaces and digitalize their products that have not done so before. So we've talked a lot about automotive in previous interactions, and if I look now, we see more and more consumer electronics and smaller and smaller devices getting graphical user interfaces and getting a user feel like on mobile phones.
So everybody expects that every product usability is like on a level of mobile phones, basically. So our guidance for 2023, we refined that our net sales will be in a range of 20%-25%, and our operating margin will be on a higher end of the scale, 25%-30%. And, well, this, of course, if we look the first three quarters and now the third quarter, and we look on the in the fourth quarter, the. That's pretty well, it's pretty obvious that we're not gonna be able to reach the 30% on our revenue growth, so that's why the lower guidance over here.
I just still wanna highlight the fact that this is a very profitable business, so even though we are looking to make a on a lower end of our guidance, the revenue, the profitability is on a higher end. So that's the change of today. Very quickly on the strategy, there is not a whole other change. We've all talked about this before, that the product development cycles are getting faster. What we see in our customers is that the faster and faster the products are wanted to, to get to the market, so the development cycles need to be faster, there are more cycles, and yet there are about the same amount of the software developers.
So basically, the need for our type of solutions that we accelerate the development phase, and we also accelerate the testing phase with our quality assurance tools, there is a growing demand, and we don't see anything changing in that. I already touched the fact that the more and more people are expecting that the user interfaces on whatever product are more like a mobile-like. So there is a great demand to have a great user interface, and the software in a product actually defines the value of a product, and that's spreading more and more wider. It you know... A few years back, we talked about automotive, now we talk about all consumer electronics, and it's getting smaller and smaller products and so on.
So the demand for this kind of a solution, that the solutions we're offering, it's growing. So if we looked at the, we are offering—what we do get, we have the best platform and tooling framework for the digital user experiences used in over 1 billion devices, and that's actually the cornerstone for our success. The fact that the continuous feedback from developers and users of our product, they're telling us that our product is excellent, and it's beyond their expectations, and that's basically the reason why we are so successful. And of course, our intention is to keep it that way. We help our customers to manage the complexity, reduce their regulatory risk, and increase the quality of their products. Well, that we already touched upon.
So people using our services, our testing services or our products are very happy, and we help them in their tasks to develop world-class products. If we look at the difference we have on many of our competitors, we do cover multiple industries, and we are very horizontal, and that's the difference to many of our competitors. Actually, I don't know any of our competitors that would be so horizontal than we are, and that's one of the cornerstones. Like we've talked before, the other difference we have with our competitors is that we are very globally expanded. We have our own local sales network, our own local pre-sales engineers and so forth, to deal locally with the customers, and that's a bit different that we see in our customers.
Many of our customers rely on the third party OEMs or third parties and reseller networks in different strategic partnerships. Instead, we've invested quite a bit over the years that we are locally very close to our customers and so there is not a big change on that. Well, as you know, we have a recurring revenue. We do sell subscriptions on Qt and quality assurance, so we do sell licenses over there, and then we do get redistribution license from Qt. So not from QA, but from Qt, we do get a distribution license. The quality assurance is expanding also to other markets than Qt.
So, this is not set in stone, but what we've said is that we hope to see in the future that 30% of the QA revenue would come outside of the Qt ecosystem. So we see QA to expand our addressable market beyond Qt. Of course, we do see that our quality assurance tools are very well integrated to be used by Qt users as well. So all our products, they fit very well together, but they can be independent. That's another principle we have, that each of our products, they need to be so strong that they are, they can stand on their own feet, so they have to be successful on their own, as well as integrated together.
We are looking for on QA. I've said before that if I look Qt in 2013, 2014, in the early days, and I saw that where we grew with Qt, we set a EUR 100 million target. I see a for our quality assurance tools, a similar path, just a bit faster. So we, we see no reason that it'll hit a EUR 100 million mark on its own on quality assurance markets in the coming years. We haven't set a timeline for that, but we do see that the development can be faster than on Qt because we already do have the sales network. We do already have customers that we can sell to, whereas when we started Qt, we had to build the sales network and get the customers.
So the QA acceleration will be faster. It's also a very profitable business. We are looking for inorganic growth opportunities as well, and like I said, we're looking in organic growth opportunities in the sales, in the software development process. So we look at us from design to developing to testing and everything there is in between, and that's the domain we're looking for acquisitions to be made. We're very careful on our acquisitions, and I don't think we're gonna be doing... My guess would be that our acquisitions are like the two acquisitions we've done before. So we acquired basically the businesses were about EUR 6 million on revenue, and we paid roughly about EUR 30 million on each. That's kind of the size we're looking for. So we're not looking mega deals.
Instead, we're looking great products that we can put in our sales channel, basically. So financial targets for 2027, we're looking annual growth of 20%-30% annually, and we're looking at EBIT margin of over 25%. And of course, on the EBIT margin, we're pretty much, we're pretty much there, and on our growth, we're pretty much there as well. So if I look the, if I look the growth next year, that how do we see? We see that the, obviously, that guidance for the next year and the year after, that's that we can basically already see that what's happening. We know quite a bit the, the outlook for next year, and so we're very comfortable with this guidance.
This, of course, means that in a few coming years, we're gonna double the size of the company, and it's gonna be on revenue-wise, and it's gonna be a... We see that the profitability will remain very strong going forward. So we're very excited about our future ahead, even though... I must say that the market is not the best at the moment, but of course, that's over time that's gonna change as well. But we do believe very strongly that we can meet these numbers very well in the coming years and the next year particularly. So that's the end of my presentations, and if you have any questions, please. If you use the mic. Yep.
Hi, it's Matti Riikonen, Carnegie. Couple of technical questions first. You mentioned quite a lot of negatives affecting the Q3 report, like deal slippages. Could you just kind of somehow quantify what importance did they have? How many millions of revenue did you lose into the next quarter? And when you said that some of those deals have been signed already, what size of deals were they?
Well, we missed our internal target by a few million EUR, and that's about the... And those have been signed.
No quantification? Okay.
Well, let's put it this way. If I look on the deal slippage, the typical deals we have now on Q3 and Q4 on a higher end, they are typical deals around EUR 1 million-EUR 2 million, the bigger ones. So there are no mega deals. There is no EUR 5 million deal that we lost. Or that was slipped. They are the bigger deals now, and the bigger deals to close on the Q4 are in a range of EUR 1 million-EUR 2 million. So that's basically the. And then there is a very long tail of smaller deals, where we talk about EUR 100,000s and whatnot.
So if I look now at the few deals that we were expecting to close in Q3 that moved into Q4, they were in the EUR 1 million-plus side. And they, you know, couple are signed, and one is in the signature. PO is there, signed tomorrow. So it's very typical for us when you think that the... How much work there is before you are in a deal signing. There is usually, if it's a new customer, there is testing, there is proof of concepts, there is the deal negotiation. It would be very uncommon that the customer would go all the way that far and then not, that deal would fall off.
You know, if the deal is gonna fall off, it's gonna fall off well before that situation. So that's why I'm so confident that deals that usually slip over to a next quarter, they are deals that it's only price negotiations or very terms negotiations or something like that, so they're very close. So unfortunately, there were a bit too many of them this quarter, and that's why it's soft. And that's basically the reason that I think that your technical questions are coming towards this, so I'll answer. If not, I'll answer anyway.
If I look our pipeline on Q3 and Q1 and Q2, if I look the pipeline in Q3, if I looked at what was the close rate for the pipeline, if I look now at the pipeline for Q4, and if we can keep the same close rate that we had on Q3, then we are in our guidance, right? So we do have a pipeline over there, and if we close at the same rate we closed on Q3, then we're done. So we don't have to sell anything further. There is also no big mega deal that it's like win or lose, that if we win, then everything is fine, and if we don't, then we're lost.
It's a high volume of deals that we need to close on the Q4. If I look to Q4, it says, you know, this is not exact science, but to give you an idea, I would say that 50% of the Q4 revenue will be sold in December, and 50% of that will happen in the two last weeks of December. And why is that? I don't know. If I could change that to be a bit even, I would do that, but the... That's how it works pretty much each quarter, and it's been all along. So the deal signing goes towards end of the quarter.
One reason, of course, is that in these big customers we have, it's business usually does all the things they do, and then they decide that, "Hey, Qt is what we want." And then it goes into sourcing, and then the sourcing keeps negotiating to the last minute, trying to get a better deal, trying to... So they will negotiate to the last minute they can, and then it's signed, and that's kind of how it goes.
All right. Thank you-
Can I affect that? Well, yeah, giving bigger discounts, but I'm... You know, we don't do that.
All right. Thank you for that. Just for reference, when in Q2, you said that some deals slipped, have you closed all the deals now in Q3?
Well, probably, yes. I can't remember all those deals, but yeah, probably, yes. They usually don't slip. Customers, they, you know, when they buy our stuff, they have something they're gonna start using them for. So they can, you know, it can slip over a quarter but, you know, slipping six months would be very unusual because it would mean that the project is not starting. And our customers are starting projects that manufacturing something or they're doing something to help their manufacturing, so usually there aren't delays. There might be volume changes, but a thing that somebody decides to manufacture something and builds everything up for that and then calls it off, very, very, very unlikely event. Hardly ever happens.
All right. Then the second softness factor you mentioned was consulting. And what was the share of group sales in Q3 for consulting, and how does that compare with the group share in Q3 last year?
That I'd have to look somewhere. We've said long time ago that we don't want to see consulting to be more than 20% of a total. It's nowadays that the company has grown. It's, you know, we're in 10%. So if we are looking for the whole year effect on consulting softness, what we were expecting, we're talking about EUR single millions though. But EUR single millions there, some EUR single millions on exchange rates and some EUR single millions on the mix and there you have EUR double-digit millions.
Right. Then the third part you discussed was that the contract maturity mix was more geared towards the shorter contracts, like one year. And, could you somehow quantify that? What is the difference between if in a different world, all the contracts would have signed as three-year contracts, and now many of them are signing in one-year contracts? What's the kind of difference in your growth rate that comes from that?
Well, I can't. It would be substantial, but to give you an exact number from here, it would be a that. You know, if everything we sell would be three-year licenses compared to the mix we're having now, it would be a double-digit EUR millions. But to give you an exact number, I don't want to say it here when the webcam is running, because I would probably give you a wrong number, and then I would regret it later. So that is something we would have to look into. I'm sure Jouni doesn't have that. We would have to calculate that. We've never calculated it that way.
Okay.
Because we're selling... You know, some people want to buy a three-year license. There's obviously benefits for that. You know, you fix the price, and you know, you don't have to worry about for three years. Other people want to buy a yearly license for many various reasons, maybe cash flow reasons. I would think that now our customers... We saw a spike on one-year deals when Ukraine war started. And so basically, whenever there is some sort of a crisis or the outlook gets dimmer, we see our customers starting to secure their cash flow, and then we see that they prefer more the one-year licenses, even though it's not economically beneficial for them. What we think, of course, we could change that.
We could, we could lower the price on a three-year license. We could try to drive people more towards the three-year license. However, we see that many, most of our customers using our services, they, they do it year after year after year after year. So the customers we have, they're yery long-term customers. So if I take a view that if I would really want to sub-optimize and have a very high revenue on one particular year, maybe then it would make sense try to sell the three-year licenses at a discount. If we take, like, a bit longer-term view, we see that all the one-year licenses we're selling this year, they're going to renew next year. So, in a big, longer-term view, we're not worried about the mix at all.
But of course, it does affect our short-term revenue a bit.
Right. So then to wrap these three, these three factors together, deal slippages, consulting, and the maturity mix, which had the biggest impact on your, your not meeting your internal targets for growth in Q3?
On Q3, it was the deal slippage because the... It's good to make this difference now that this product mix and the consulting softness and the currency exchange rates, that, of course, has been there all year. So if I look the whole year, how it looks now that we're gonna be on a whole year at the lower end of our guidance, that's the affecting factor. Of course, we've seen this all the year long. So if I looked at our guidance on a Q3, that it was, say, a bit soft, it's the deal slippages, basically. Because on our...
If I look now at our guidance, I look at the pipeline, I look at the mix, if I look at next year, at how the next year looks, we've basically, we're budgeting our next year with the same mix we're having as of today. We're basically, budgeting the consulting to be flat, right, and so on. So we're taking all this into consideration to, for the next year guidance as well. So, for the Q3 guidance and why it was softer than we were expecting, it's the deal slippages. All the other facts have been there all year long, and so we don't expect that to change going into next year. So we're budgeting and looking forward as that this is kind of a status quo on the one-to-three year deals, licenses.
Right. Thank you. Then one technical question still, and then I give the mic to, to others. How was the distribution license sales in Q3? And, has the share of group revenue coming from distribution licenses increased this year? Earlier, you talked about big manufacturers' programs coming live this year.
Yeah, this year, on distribution licenses, this year is a very good year because there's been a lot of new programs hitting the market this year, even though the market is slow. We do expect we're gonna report the distribution license revenue. Obviously, we still have one quarter to go, but I think that we're gonna be very happy on our distribution license sales growth this year, and it's particularly good. So I do expect that it's gonna be a bit lower. The growth rate will be lower. It's gonna be growing, but the growth rate will be lower going into next year. But let's see, like, you know, we have a huge quarter ahead of us, right?
We're gonna be selling over EUR 60 million on this quarter, which is, if you think that, few years back, we made EUR 60 million a year. So, you know, there's still a huge quarter ahead, and let's see where it settles. But the, I'm very... So far, the distribution license revenue has developed very favorably, and we do believe that this is gonna be a good year, definitely.
All right, thank you. I'll take a break.
Thank you. Felix Henriksson from Nordea. I have a few questions as well. Starting off with the developer license maturity mix, 'cause last time we discussed among the sell-side analysts and you guys basically hinted that the price differential between the three-year license and one-year license on a per year basis is really, like, nonexistent these days compared to the history when the three-year license implied a discount to the customer.
Mm.
So my question is: Isn't this sort of mix shift from three-year to one-year licenses also a bit self-induced because the customers doesn't have that much incentive to choose the three-year license no more?
Well, yeah, there is still a... You're right. So if you compare, you know, like, couple year, couple years back, the difference is a lot less. So yeah, you could, you could argue that there is a, a bit, it's a bit self-driven, that we're driving it towards that. On the other, there is still a small discount if you take a three-year license, plus if you think the current inflation rate, that you can fix your price for three years, obviously, you know, there is a value. Well, what is gonna be the inflation rate three years going ahead? Don't know. But, you know, if we look at the inflation rate looking back, the people that did a three-year deals like couple years ago, they have not done entirely a bad deal compared to one-year deals, right?
But if the inflation rate is pretty much close to 2%, what is the target for the central banks, then, of course, we need to think and look into that... How do we change the pricing and... But now that's basically, you save the inflation, whatever it is, and our price increases, and there are yearly price increases, so you lock into that, and you get a small discount. But other than that, yeah, it's pretty, it's pretty close to the same. Obviously, I don't have a exposure to all of our customers, but I think that the driving factor, and this is our belief, that the driving factor choosing one-year licenses is actually nowadays the securing the cash flow.
So I don't know how much discount we would. We feel that, you know, for the customers that they wanna secure their cash flow, there is no discount whatsoever that we could give them to get them a three-year license, in that sense. That's our belief in the market right now. And so the people that want to secure their cash flow and pay only one year, that's fine with us.
Right. Thanks. And then regarding the 2023 guidance, you already mentioned that it sort of requires that you close your Q4 deal pipeline with the deal closing rate that you did in Q3, but what does it require from the developer license maturity mix?
Oh, the same.
Same mix as in Q3?
As it's been now. Yeah, yeah.
Okay.
Yeah. The same mix that it has been, so it doesn't mean that the mix changes in any way. If it goes still worse, then, yeah, but I don't see that happening. I mean, it's been very constant where it is, it is. We don't see that getting any worse anymore.
So basically, it's more or less what you saw in Q3, meaning that new deals will be done more or less with shorter maturities, but the renewals will be renewed with the maturities that they had previously?
Yeah, and that's what our experience so far, that-
Yeah
... that's how it's been doing. So if everything stays the same in Q4 that we did experience in Q3, then we have everything in place, and of course, we do sell... Quality assurance is actually a business where the turnarounds are quicker.... So quality assurance is something that we can still find customers, make offers, and even close them on a Q4. So it's what I'm trying to deliver over here is that we don't need any surprise mega deal, or we don't need any surprise. We do have all the ingredients in place to meet the Q4 targets, right? So that's the message.
Great, that's helpful. Regarding the new financial targets, obviously, you mentioned that you aim to double the size of the business by 2027.
But I'm curious about the sort of revenue mix that you envision, especially when it comes to the distribution licenses. 'Cause back in the days, I think you were talking about 40% of revenue coming from distribution licenses. Now, I think over the past year, that's been talked down a little bit, given that you now also have quality assurance, et cetera. How large share of revenues do you think that can come from the distribution license business in 2027?
Yeah, Felix, that's a good question. I, I should be able to answer that. Let me put it this way, when we set the 40% share of the license business in previous years, if I look at the distribution license revenue as it is, it is developing as we envisioned, right? So it's, it's not getting lower. The share is getting lower, however, because we do have a QA business to sell the licenses. And then the subscription model is, especially when you have the one-year subscription model recurring revenue, that's becoming very... That's becoming bigger than we envisioned when we said that 40% of the license revenue will be the distribution revenue.
So the share will be a bit lower, but the absolute amount that we see on our distribution license revenue, it's where we've been expecting it all along. So it's growing very nicely, and there are more and more devices. And, of course, we're also looking at it value in that sense that we can increase the value to our customers on the distribution licenses and increase the prices on those as well. But the volumes are growing as expected, but the share will be a bit smaller. But that's a very good question. I need to think about that, what kind of guidance we give on that in the future.
Yeah, 'cause you've been talking about the quality assurance as being, you know, envisioned it being a 100 million business eventually, so it would be helpful to also get kind of a ambition level on the distribution license side as ... as well, obviously, for-
Yeah
... for us.
Yeah, yeah.
Maybe sort of related to this, the margins, obviously, distribution license growth is a driver of that, and now you're set out to target more than 25% EBITDA margin for the longer run. That sort of leaves the upside sort of open. So right now, you know, if you look at the sales side analysts' expectation level already for next year is that you're at +30%.
My question is, is there any reason why we shouldn't expect +30% margins for you in the medium term or next year?
Well, yeah. I give the same answer that I basically gave four years ago when I was asked that what, you know, why do we on profitability. On this business, if we wanna have over 30% profitability next year, it's very easily done. I mean, you know, it's in that sense, it's the having over 30% EBITDA next year, you know, we can deliver it very easily. So now the question is that the how much do we wanna invest for the future? And how tight we wanna put that EBIT margin, right? And then the question is the what's driving what what's the volatility on that?
If you take the distribution license sales and license sales per se, it's very profitable business in a way that if we now sell EUR 1 million more on licenses, it kind of goes to the bottom line directly, right? So if you put the, we do know that we have a bit of a fluctuation on our top line, and we do know that we do wanna invest also for the future growth because we see still a tremendous amount of growth opportunities. Like, you know, a year and a half ago, we didn't talk about QA at all, and now we're talking about that we bought EUR 12 million of revenue, and we're talking about that in a few years it's gonna be EUR 100 million revenue with a great profitability.
We wanna leave room for growth investments. So, I would say that whenever the profitability, you know, starts hitting 35%-40%, we've run out of ideas how to grow in the future.
Thanks. Makes sense. Final one from me before I let others ask: Just out of curiosity, in conjunction with the strategy update, have you done any sort of assessment or calculation of your sort of total addressable market or your market size at the moment? 'Cause I think that would be massively useful in estimating your sort of long-term potential.
Yeah. Yeah, we do. There is no ready-made report. There is nothing that we would be able to use and say that this is exactly our market. We've used these type of numbers that on Qt, our market is roughly EUR 1.5 billion as a current setup. We've said that on QA, it's, you know, double of that, but those are not exact numbers. So, on the other hand, we've said that the, given the market and given our size, we're still very small. And the markets both on QA and Qt environments are fairly fragmented, so we don't see even a consolidation happening on yet, for example, on QA. So we do see a lot of growth opportunities going forward.
So we don't see that, if I look at our product portfolio, I would say that if you think the old-fashioned S-curve, where you have the... I would say that our consulting business source is on the top of the S-curve, so it's, you know, it's, and it's not gonna go down, but it's not gonna grow a whole lot. But other than that, we do see that more and more industries are coming into this business all the time, and they are doing their first graphical user interfaces. We see more and more businesses coming, but they've built something, and they're getting in trouble of testing all that they have.
We see more and more customers that they built something, and they are wondering if their architecture on a software architecture is in good shape, and they wanna use our tools to check that. And we see still the market in... We see new customers coming into this field all the time, so in that sense, we don't see a market limit, and we see a big, big market. Having said that, when we think, we obviously need to think about. Like, now we're concentrating a lot on Q4 execution, but we're also concentrating next year, and we're looking for many years forward.
And, many, many years forward, I mean, you know, 5+ years forward, we're also looking that we need to, we still wanna grow this company, and we're looking at where are we gonna be getting more addressable market. And QA, again, fits very well on that because large part of our, QA offering can be used in, on our Qt business, but we're looking to get addressable market outside of the Qt ecosystem. I think that our next product investments will be such that they will again expand our, addressable market. So that's kind of our, on our long-term vision, that we make sure that we have enough addressable market going forward, and when we do add new products in our portfolio, that fits into that, strategy.
Thank you. So Matti Riikonen, Carnegie, a couple of add-on questions. First, regarding the distribution license revenue and the cyclical impact. When you started the year and made a budget for distribution license revenues, both coming from kind of apples to apples customers, basically manufacturing the same goods as they did last year, and then net new customers starting some new programs, are you able to quantify the cyclical impact of distribution license revenue, i.e., has there been kind of some negative from the overall economy turning weaker, consumers buying less goods, and that kind of impact? It would be interesting to hear your thoughts on that. What kind of magnitude are we talking about, and how do you think going forward?
Because the economy doesn't seem to be easing, or it's certainly easing, not improving, so the situation is not easing, so that must be a consideration for 2024 as well.
It is, and like I said, the, this year we had a, a big program sitting the market, and so we're having... Now that's why, you know, early on in the year, we knew, and we said that the distribution license revenue will be growing nicely. Of course, we've seen on, we've seen on some of our customers' softness on their volumes that they were expecting they're, selling less, but, so, and going next year, yes, of course, on consumer electronics, I mean, with this interest rates and, and if the interest rates keep on staying such a high level, some of the, consumer electronics companies', or products will be selling less. That's, that's very obvious.
On the other hand, we serve 70 industries, like I said, and our distribution license revenue comes from, you know, hundreds of different sources. We talk about automotive very often, but it comes, you know, very horizontally on hundreds different sources. And then our distribution license revenue is such that, like we said, if I use the automotive market, that we get a roughly about EUR 1 per screen, per car. So if you think that there is, you know, the volume changes need to be very substantial before we start feeling substantial pain. And then we always have a we do have pockets on different industries, where are doing actually very well at the moment.
I'm not talking about the Distribution license revenue per se, but if you know, our defense sector, for example, at these unfortunate times, is doing very well. So we do sell to defense quite extensively.
All right. And I take that as an answer as also to the factor that we have seen many automotive companies now cutting production or delaying some production starts in both electric vehicles and traditional vehicles. Do you think that that will be of any concern to you this year or next year?
Well, not this year, no. But the, like I said, the, when we're gonna announce the distribution license growth, let's see where it ends up after the, Q4, that, what's the growth this year? I'm already now saying that the growth rate will be less. It'll be growing, but the growth rate will be less, and the, let's see where it ends up, yeah. But of course, I mean, you know, consumer electronics, cars, whatnot, with these interest rates, obviously there will be less demand next year. Well, it, it'll slow our distribution license growth rate a bit. It'll not slow our, developer license sales, I don't think that it... And, the, and the consulting, we're estimating that we'll keep it flat. Basically, we're not looking any growth in there, so...
But, you know, let's see when we get closer to next year.
All right. And then, out of curiosity, if we think about the automotive market and electric vehicles and then traditional, is your market share basically the same in both? I'm not talking about monetary terms, but your kind of share of different models. So-
Ah.
... exposure to kind of OEMs, the whole product, product mix.
Ah, okay. I can't answer you on that. What I can answer you is that the, we do have quite a bit of automotive makers where we've started, like, on a one program and one car model, and then they found that, "Hey, the Qt is very good," and then the usage has expanded. And, and so that's more like that the... I would say that it's more typical that the, on particular, automotive manufacturer, if we are in, we are in, in on many places, we are in on many screens and many car models, and if we're not in, then we're not in. And, and so the, usually what happens is that once we're selected, we are found so good that they start using us pretty much very widely, which makes sense. And, so I haven't looked into that.
We do have. I've said some time before that I think that, you know, the Chinese electric car manufacturers will be big players in the future. It's very fragmented market, but we're there. And in that sense, on electric vehicles, you know, we're well-positioned. But from the user interface point and the point where our software is being used, it doesn't really matter if it, you know, what's the engine or what's the power source of the vehicle.
All right, thank you. Then finally, a technical one. Regarding contract assets, there was a slight increase again in the number. Just out of curiosity, how do you book them? What is your, your mechanism in recording contract assets?
Well, yeah, if I go first to the topic, contract assets going up from Q2, if that's what you mean, that's driven because of the exchange rate change from Q2. USD has gotten a bit stronger, but, yeah. I mean, operatively, there is no increase in that regards. And the contract assets, well, then, a slight increase as well on the distribution license accrual that we do at the end of every quarter, so these two are driving the slight increase on that. We book them as if we have the kind of longer payment term deals, that's one part, and that's going down. And then distribution license revenues that we accrue on quarterly basis, that's part of the contract as a short-term one then, and that gets relieved then next quarter.
Is that based on some estimate of how the customer will then eventually end up paying you, and who is doing that estimate, and how does it work?
Yeah, that's based on the estimates, and that's based on the information we've got from the customers. And it's done by, well, obviously accounting with the help of account managers, and then at the, kind of after the quarter end, we will get the reports from the customers, and then at that point of time, we will then issue the invoice and release the accrual at that point. And that's something that we want to be cautious, though. We must not kind of overestimate these volumes, so no risk in that regards.
Okay.
All right, thank you.
I think we're pretty much on time, so, thank you very much everybody watching and participants over here, and thank you very much for very good questions. As a closing remark, we did have a bit soft Q4. We're looking Q3. We're looking for Q4. We do have all the ingredients to build a great Q4 and, looking forward next year, we do believe that we are in a great position to continue the very profitable growth for this company, and we're really looking forward to that. Thank you!