Okay, good morning, and I welcome you to join this Tecnotree Quarter Two and H1 2024 Results publishing event. As you may know, my name is Timo Holopainen, and I will be the moderator for this session. We will record this and make the recording available on our website later today. And today's key speakers are our CEO, Padma Ravichander, and our CFO, Indiresh Vivekananda. And in this session, first, Padma will give a business review, then Indiresh will present the numbers in more detail and discuss our prospects for this year. After the presentation, as usual, we have the common question and answers part, and you can always write down the questions on your screens during the session. And with this short introduction, I will hand over the presentation to our CEO, Padma Ravichander. Please, Padma.
Thank you, Timo. Good morning. I welcome you all to the H1 2024 Investor Webinar. Thank you for your continued trust and belief in Tecnotree mission. As we navigate our ever-changing market landscape, our commitment as Tecnotree remains very clear. Our objective is to turn challenges into opportunities and opportunities into growth. As you see, H1 has been a very, very active and thriving quarter, half for us. Our net sales have remained resilient at EUR 34.9 million, in constant currency terms, a 5% increase, and a 6% year-on-year increase in our order backlog to EUR 72.6 million. This isn't just growth, it is proof that our strategy is not only sound, but it's future-focused. In uncertainty, we find strength. We have also focused on free cash flow in Q2, particularly, a milestone that underscores our financial discipline.
It is a reminder that cash is important, and it fuels our future dreams and builds investor confidence in the company. While there is a very cyclical nature to our collections, Q2 saw an improved collections as well, and an improved reduction in the DSO days. The adjusted operating result increased by 10.7% to EUR 10.9 million in the quarter. Q2 also saw growth in net income to EUR 2.1 million, excluding one-time impairments of EUR 2.9 million. In Q2, we are on track with our cost optimization plans, which I will talk to a little bit more. We also, in addition, witnessed a positive trend in terms of reduction in Forex losses. In the telecommunication industry, the overall expected growth has been recommended to be modest at 2.1%.
However, Tecnotree is not just keeping pace with, with this growth, but we are also setting the pace. Innovation is not an option for us. It has been a necessity. Our investments in AI, cloud solutions, the marketplace innovations, have all not just been responses to trends that we have seen in the industry, they are actually setting new standards for the industry as we move forward. I want to expand a little bit in terms of the free cash flow that has been driven in Q2, the focus on free cash flow, and on collections in terms of optimization. Our free cash flow in Q2 2024 was EUR 0.8 million, a significant improvement from Q1, which it was negative EUR 4.7 million.
This is supported by strong collection growth of 19.3% in the quarter, so it's been a better quarter in Q2 in terms of overall collection, collections, a consistent growth in revenue, and strong order backlog. The focus on operational efficiency through 'Think Cash, Do Cash' initiative that we started in the beginning of the year, has gained momentum, bringing in timely invoicing and enhanced cash management practices throughout the company to achieve significant results in Q2. On the cost reduction alone, we announced in Q2 of H1 2024, a multifaceted cost reduction program, promising a EUR 4.5 million cut in OpEx and a EUR 7 million cut in 2025. EUR 4.5 million in 2024, and EUR 7 million in 2025. We are on track to achieve these expected results and benefits across the board.
In addition to our R&D investments, which are crucial for us to stay competitive, we have been consistently focused on rationalizing our product portfolio and ensuring fair valuation to align with investor expectations. We have been consistently monitoring our R&D investments and ensuring proper impairment reviews are conducted on a quarterly basis, and the capital allocation is also monitored up in the senior executive board of the company. This, of course, has to be balanced with competitive prices for entry into new markets, where we see a very effective and priced position for our products today. While the traditional return on research capital is a little high for Tecnotree, you have to understand that R&D expenses in telecom industry cannot be realized within a year.
The actual cumulative benefits in terms of invested capital comes over a period of 15-24 months minimum in these large digital transformation projects that we undertake in our with our customers. We hope to enter mature markets for, for the stack, and we are continuously monitoring and evaluating the quality of our assets and ensuring consistent fair value. And towards that, we have seen that we have also realized an impairment in Q2 of EUR 2.9 million, which includes product rationalization in it, among other things. We have also institutionalized within the company a very strict CapEx spend across the board, and our, that is because our stack, we believe, is today mature to enter new market, growth markets like North America and Europe.
Finally, one of the other factors that we have constantly monitored in terms of our overall collections and focus on cash is the global currencies in which we earn. Predominantly, most of our earnings are in U.S. dollars, and we have constantly focused to reduce the exchange risks and losses in on quarter by quarter. It's, as in Q2 alone, we reduced our Forex risks and losses by 50% to EUR 0.8 million. I personally have been in this company for 14 years, and since I joined, I have noticed 80% of the revenues typically came from frontier markets, where we have worked... And over the last five years, since I've been CEO, we've been working very hard to shift our focus from stable markets like the Middle East, to, to stable markets like Middle East, APAC, Europe, and North America.
I'm proud to say that today, less than 40% of our revenues come from frontier markets, market currencies, and we have established a very strong relationship with operators in Middle East, such as Saudi Telecom, Zain, Ooredoo, Telenor Group in the Nordics, and we plan to continue to expand into mainland Europe and North America with a very tailored and targeted product strategy approach. With this, we plan to bring our exposure and foreign currency risks to under 15%, 20%-15% over the next three to four years. In terms of key highlights, we completed 10 digital transformation go-lives in H1 and expanded into new markets with new logos, entering into new markets like South Africa, Kenya, Latin America, Brazil, and also markets in Asia- Pac.
The delivery of our product stack also into our product stacks, we were also able to introduce 600 new product features, which are focusing on key areas like multi-tenancy, AI/ML, and cloud-native, and campaign management and marketplace, which we believe are significant value creators and revenue monetization opportunities for us in terms of product investments. In addition, I think we forged a partnership with HCL and Emirates Integrated Telecommunications Company, both of which are very strategic in nature. SIs help us expand our footprint into newer markets like North America and Europe, and they can be resellers of our enterprise stack, which gives us greater market share and competitive advantage in the market.
Today, I'm proud to say the HCLTech relationship is growing strong in North America, and we are hopeful that in Q3 and H2, we will be able to announce some new deals along with HCL Technologies. The reseller concept de-risks our ability to capture revenue quickly. As the reseller takes the delivery responsibilities, they reduce the risk of delivery, they reduce the risk of acquiring scale in local markets and the cost of acquiring new capabilities in local markets, and increases our ability to collect license revenue faster. We will align our go-to-market approaches with several of these SIs, hopefully, as our product stack is now mature, and we will also have local SIs in certain markets where that would give us greater channel penetration into those countries.
I'm proud to share that in H2 of 2024, Tecnotree, for the very first time, was recognized by Gartner in their Magic Quadrant for AI in CSPs for customer and business operations. I believe that this is extremely strategic as we aggressively embrace AI/ML applications and use cases to improve and innovate businesses. The telecommunication industry is rapidly investing in AI technologies to improve customer experience, operational excellence, and product reach. Tecnotree has embedded Sensa Fabric into our marketplace after the acquisition of the AI/ML assets from North America, and today, our solutions have AI/ML use cases embedded, and we have been able to offer these to our existing customers, as well as attract many new customers, like Umniah Jordan in the Middle East, because of these capabilities on our stack.
In addition, this is also the first time our investments that we made in the marketplace in Tecnotree Moments is being recognized by Gartner in three Hype Cycle reports: one on Partner Ecosystem Management, the other one on Digital Marketplace for CSPs, and the third one on Enterprise Monetization. Tecnotree Moments was positioned as an innovation trigger to help CSPs monetize their business horizontally and vertically over the next five to 10 years. This is absolutely a breakthrough position for us. We started an early investment into Tecnotree Moments two, three years ago, and today we are reaping the benefits of that as our CSPs are implementing the digital transformation, they are looking for new ways to grow their revenues, and the Moments marketplace is definitely providing leadership, particularly in the areas of healthcare, e-commerce, and e-education capabilities in some of these frontier markets.
We are already seeing the benefits of this with the new contracts we have won with MTN, Claro and with Emirates Integrated Telecommunications Company, who have been early adopters of the marketplace technology. So finally, to sort of, summarize our position in the market, I would say we have a very leading position in the market, with very strong gross margins and high return on invested capital. But our challenge has been the DSO days that have to be further worked upon and mitigating foreign exchange losses. If you evaluate our track performance as Tecnotree over the last four years, we are among the best in terms of high gross margins compared to our peer set. Our profitability has been also very high, suggesting that we have created a moat in terms of our product and our value proposition to our customers.
Our EPS growth has been year-on-year at 6%, and our return on invested capital is one among the highest at 21%, despite the heavy CapEx spend, which is really backed by the strong revenue growth we have been able to show above the market, and also the order backlog that we carry year-on-year in terms of retiring revenue from the orders that we have won over the past several years. The order book is also strengthened by the ARR revenue that is available in the backlog, and today, I would say about 60% of the revenue is segmented towards ARR revenue. However, it is important to note that we do face, you know, headwinds in terms of current operations in frontier markets with collections, foreign exchange losses, and DSO days.
The Forex losses and the lack of free cash flow have therefore taken a beating. We hope that the operational measures that we have put in place, including the cost reductions and the CapEx spends that we have implemented, will definitely help our free cash flow and improve our position in terms of entering growth markets. Telecom market is evolving, and Tecnotree, I believe, is extremely well positioned to capture good market share with our innovative solutions and strategic partnerships, which I've already explained in the slides before. The most important factors to note is the forecast by Gartner for growth in the industry is still 2.1% in between 2022 and 2027.
However, the telecom industry itself is looking to diversify its revenue streams, and that is where some of our innovative products, such as the marketplace and the AI/ML use cases and the cloud-native solutions, are enabling us to enable our customers seek new revenue pastures. We have doubled our addressable market with these innovations in the last four years, as you can see, creating a strong demand for our AI/ML capabilities on our Digital Marketplace and our campaign management and cloud-enabled solutions on our digital stack. Our partnerships with hyperscalers like Microsoft and SIs like HCLTech and more announcements to come, I think, will help us expand our footprint. One important product launch that we shared in the beginning, there was a video that we played on Sensa CertifAI, which is a new product launch that we have brought in in Q2.
You will hear more about this product. It is absolutely tailored to make a strong foothold for Tecnotree in the European markets. What we are observing very strongly in Europe and Middle East is that there is a key requirement for trust, governance, transparency, and explainability of the AI models that our customers are using, especially CSPs who carry a lot of GDPR-compliant subscriber data. 50% of the CSP consumers today believe that there are ethical issues in the AI/ML models that are being used, and over 75% of the community, both enterprise and consumers, are requiring the regulators to imply compliance in the use of AI. So the European Union has been among the first in the world in terms of imposing a regulation with the EU AI Act on certain industries, including telecom networks.
While our competitors and partners have been focusing on traditional AI/ML use cases such as generative AI, copilots, chatbots, et cetera, we at Tecnotree, through the acquisition of our AI/ML Sensa Fabric stack, and the 137 patents, have focused on this key requirement of trust, governance, explainability, and transparency of the AI models. Today, I'm proud to announce the launch of Sensa CertifAI product that is tailored to the European requirements and ready to address key areas like risk management, governance, cybersecurity with Sensa CertifAI. We believe we are compliant to the EU AI Act for trust, transparency, and human oversight features. We believe with this, we will enhance the accuracy and robustness of the use cases that we deliver to the European telecom operators, and we will ensure cybersecurity and quality assurance.
Once again, this is one of our innovative products and strategies that we have brought to market just in time and hope to realize benefits as we further forge ahead in the Nordics and Europe. Finally, I'd like to conclude that we continue to focus our efforts on growth markets, expanding into North America, taking strategic initiatives to displace our competitors in these markets with our standardized product portfolio, which is TM Forum certified, and recognized by a number of industry analysts for its capabilities and strong feature sets. We believe we also have a healthy order backlog and a healthy pipe ahead of us, and an increased focus on revenue, recurring revenue, which will ensure our continued growth in terms of revenue capability.
Our second important focus will continue to be remaining competitive in terms of our product portfolio, with very careful, measured innovations, such as in growth areas such as AI, trust, governance, cloud, and marketplace. We really have created a moat in terms of competitive advantage of our products, and we have brought many of these products first time to market and fastest time to market to our customers against our competition. We will also remain highly competitive in pricing, and we will be compliant in terms of the European Union requirements for ESG. We have some new solutions that can even make our customers compliant, in terms of their ESG norms, and, we continue to work very steadily for further recognition with industry analysts and, and forums. Finally, we will never miss our target in terms of our focus on operational profitability.
The OpEx control, as I said to you, will continue. Indiresh, in his presentation, will further expand on the areas of controls that we have brought in. We will continue to focus on Forex risk mitigation and ensuring free cash flow that ensures profitability and a healthy balance sheet. I will now call upon Indiresh to take us forward in terms of explaining the financial results. Thank you.
Thank you, Padma. Good morning to everyone. Thanks for sharing the insight from the CEO desk. I would like to now walk everybody through the financial highlights. I walk through comparatively on certain P&L items on the balance sheet. Let's start with the P&L items, and I have the comparative for the last two years as well, so it gives us a more insight into the current half year operations. To begin with, it looks like our revenue for the first half of this year is almost as flat like the last year's H1 2023. Last year we did EUR 34.8 million, and this year we are clocking at EUR 34.9 million, practically a same number. But in the constant currency, if you look at it, the constant currency definition is the...
If the exchange rates had remained same as it was at the end of the last year, my revenue would have been higher by 5.1% to EUR 40.8 million. Similarly, last year also, because of the exchange rate, instead of 34.8, my revenue could have been at 38.8. You have the adjusted EBIT at 10.9, which is about 10% higher than the last year's at 9.8, and substantially higher than 7.1 in 2022. We have taken an impairment provision for EUR 2.9 million. That is on account of two items, couple of items. One is on the business termination cost, and the other one is on the impairment on the product developments.
As a part of our, cost optimization, we revalue all our, product capitalization every quarterly with the strict technical, norms, and whenever we feel that a certain product, by way of cost optimization, may not give us the benefit what it is intended to be, we make an impairment provision against that. Because of this one-time impairment, what we have taken, or provision what we have taken, my EBIT is lower than the last year's at EUR 8 million, compared to EUR 9.8 million in the previous year.... The net income as a consequence, is also lower at EUR 3.7 million, compared to EUR 5.5 million in the last year.
The cash collection, while it looks lower than the last year, I want to draw the attention of the shareholders to the Q1 of the current year, where my cash collections were substantially lower because of the seasonality. We had EUR 9.5 million collected in Q1, but substantially higher in Q2. The order received, we got a EUR 23.4 million new orders, and the order backlog, which is a combination of the new order received and the revenue recognized on those orders, is still at 72.6, 6% higher than last year's position. The 6% is the increase in the OBL compared to the last year. Now, I'd like to present the balance sheet. Balance sheet is the combination of the total assets and liabilities.
Today, we have classified our intangible assets into one, which is on the own product development, which we walked through earlier. The second one is the external one, where we procure the software from the outside companies. We have the deferred tax asset. Again, we take a re-look at it at the end of each quarter, and I have taken a small reduction in that. We do have trade receivables. While it looks like it has come up from last year's same position, but quarter on quarter, there is a substantial reduction in that. Subsequently, cash and cash equivalents has been substantially higher compared to last year at the same time, at EUR 16.8, compared to EUR 10.7 in the last year, same time. Shareholders' equity, which is a combination of the equity plus the profits that are earned by the company.
Last year, it was at 81.6, and now it stands at 87.6. Compulsorily convertible debentures, so far we have received EUR 23.1 million of that, and trade payables stands around the same amount at EUR 14 million. On the comments, balance sheet is strengthened by 57% increase in the cash and cash equivalents, and for the current quarter, we did achieve a positive cash flow of EUR 8 million compared to negative in the earlier quarters. Increase in net worth is because of the higher profits and increased net assets. CCD update, there's no change in the commitment given by Fitzroy to pay before the end of December 2025, which was as announced earlier.
On the acquisition completed, we completed the acquisition of the software assets, completing complementing the current stack of products after a due diligence at EUR 3 million in the current quarter. I also want to draw attention on the global cost reduction program, which we announced in this quarter, and happy to report that it is on track. The OpEx to the net sales in the current half year was at 66%, compared to 70% in 2023 for the same period. 5%-7% of the global OpEx reduction is expected by 2025 through cost efficiency measures, which we are already in place. Out of this, EUR 4.5 million is expected in the second half of the current year, and the full benefit of EUR 7 million is expected to come to us in 2025.
On a broader one, what are the ways we are reducing the cost? One is on the headcount. I have a reduction of 5% year-on-year numbers. Personnel expenses is about 10% lower. General and administrative expenses, we are able to bring it down by about 8%, and so is the travel expenses by 6%. We also announced in our earlier report, we consolidated the erstwhile real estate and healthcare businesses in North America, and we are repurposed them for our core telecom operations. Also, we are taking a lot of actions on the processes. That's for increased efficiency and utilization. Some of the activities we are doing is lean process model in engineering framework, working closer to the customer, tools and automation, and also the ESG for reduced power consumption.
On the H2 cost optimization plans, we are looking at reduction of CapEx to sales, reduce in OpEx to ensure stable free cash flow, further focus on invoicing and cash collection. The biggest thing is we are also moving our people and delivering at a lower cost, like nearshore experience, where we send our people to the customer place to deliver it at a much cheaper cost. Some of the things on the financial highlights also I want to draw the attention. One is on the DSO days. As we know that, our company has a very cyclical cash collection model, which we are trying to address it. As you can see, the DSO days is one of the good indicators of how much I'm able to collect and how many days of my revenue are still outstanding.
The markets which we are in and the telecom markets which we operate, always have a very long DSO days. As you can see, at the end of Q1, my DSO days stood at 216 days, and we are able to bring it down to 170 because due to the better collections in this quarter. Improving the DSO days in H2 is one of our top priorities. The methods we are following is rigorous internal collections tracking and process streamlining, favorable payment terms with the customers, increase in ARR business model. This is one of the main important reason which helps us to have a steady growth both in my revenue and cash, unlike earlier, which had a high seasonality into both our revenue and collections. Improving receivables, prioritizing the product stability, and delivery automation also helps me to collect faster.
Now, the contracts, we are trying to move into more stable markets that will help me to have a lower exchange risk. Competitive pricing and business value offerings to mature markets ensure that I get a stable, both revenue and cash collections. The account receivable is at EUR 35.4 million, out of which, we have made a provision of EUR 2.8 million, as per the IFRS norms. Majority of the AR, if you look at it, is not due. We bill it, and there are certain credit terms agreed with the customers and which are not due, and that is how my receivables stack up. The other major financial item in our company is the foreign exchange losses.
We were able to reduce it by about 11% year-over-year, compared to about EUR 8 million in the current year, half year. Compare Q2 compared to EUR 0.9 million in the previous thing. How do we minimize the foreign exchange losses? We have been talking about this. One is hedging techniques, which we are negotiating with the leading financial institutions, invoicing in more stable currencies, and also ensuring that we do get certain currency swaps. Then what are the way forward? The way forward is also to look at more forward contracts, which helps me to have a better visibility on the future money coming in and also minimizes the exchange risks.
We also are following what we call as a sun approach, where contracts with the developed markets, where I move my people right across the world to different locations, which will minimize my exchange risks. Padma, back to you.
Thank you, Indiresh. So finally, in conclusion, I just wanted to reiterate the guidance that we have given for 2024. We have stated the revenue to be higher by 2%-7% this year in 2024, and we continue to maintain that guidance. In addition, we had also stated operating profit, EBIT, to be higher by between 7%-15% for 2024. We definitely continue to maintain that guidance for the rest of the year. But what is most important is that we are expecting to generate positive free cash flow, reflecting our ability and our ongoing commitment for a strong financial discipline and value creation within the company.
It is extremely important for us, under these tough financial conditions, for the company to remain focused on demonstrating profitable revenue growth, stable free cash flow, and create an optimized capital allocation policy to create a positive impact on our investors, and we are committed to that. These projections, as far as I'm concerned, are not just numbers. They represent our confidence in Tecnotree's strategic direction and our people. Our strong order backlog, focus on recurring revenue, rigorous cost management, are all key drivers that I believe will enable us to succeed in these targets that we have established for ourselves. We are extremely well-prepared to navigate these challenges and seize the opportunities that lie ahead of us. As we move forward with our commitment, we remain unwavering to deliver sustained growth and innovation and expand exceptional value to our shareholders.
Together, we are strong, and we want to build a future for Tecnotree that leads the industry, both in terms of our resilience and our vision for growth. I truly want to thank you for your belief and trust in Tecnotree, and I look forward for a bright future for the company. Thank you.
Okay. Thank you, Padma and Indiresh, for the good updates. And I think so that those, your updates already clarified a lot of doubts and questions. But, now it's anyway time to the question and answers, and we already have a couple of questions over here, so let's proceed with those. Like, like our first one first question is that: How is the transition to an annual recurring revenue model progressing? And is that ARR one reason for the modest reported growth in quarter two?
Indiresh, do you wanna answer that question?
Yes, Padma, I can answer.
Thank you.
Thank you, Timo. Thanks for the shareholder who has asked this question. Great question. Yes, ARR, as we have always explained, when we move into an ARR model, it does two things. Always, Tecnotree had a high seasonality of both revenue and cash collections in the earlier years, which made having a predictable revenue and cash model was always difficult. So when we move into an ARR model, what it does is, in the initial period, it reduces my revenue recognition, but it assures me a stable cash inflow. That can be seen that in the—in this quarter, we were able to turn into a positive cash flow. That is one of the reasons for a stable revenue growth, and again, on a constant currency, as I can see, we had an increase of 5%, revenue in hedged....
one of this year compared to the last year. I hope that answers. Just to add one more thing, yes, my OBL also, nearly 60% of my OBL today comes from my ARR model. Thank you, Timo.
Okay, thanks, Indiresh. Good answer. The next one is like the question related to prospects or guidance, that you are maintaining your guidance, and what is giving you confidence to do that, thinking you are behind on growth in EBIT after H1?
Indiresh, why don't you take the question first, and then maybe I can add to it?
Sure. So we gave a revenue guidance of 2%-5% for the whole year, and as you can see that we are already achieving that in a constant currency terms. And given the backlog, quality of backlog and the current state of the deliveries what we are in, that gives us a confidence that we'll be able to meet up to the guidance, and that is why we are not offering any changes to our guidance. We are retaining the same guidance. And Padma, you want to talk about why we are giving it on a free cash flow?
Yeah, as I said earlier, I think we are extremely committed to running a profitable business. I think the operational effectiveness that we brought in with cost optimization and with the product rationalization and technology rationalization, the focus on impairments of assets, the focus on 'Think Cash, Do Cash,' in terms of following the order backlog to invoicing to cash, are all important operational initiatives that strengthen the position of the company from remaining in the black and ensuring profitability. So we feel that the company now is in a place with a strong product. Our digital stack is, you know, highly standards conformant. As you know, we have more than 59 TM Forum compliant APIs, one of the largest in the world.
We are also recognized for our compliance to the ODA architecture standards for telecom industry. We are also SID compliant in our models, in our data models, and we continue to be recognized by the likes of Gartner and Omdia and multiple analyst reports for our ability to penetrate into new markets. So we feel confident, as Indiresh has already stated, as of now, about the ability to grow. Obviously, the geopolitical situations are being very closely monitored by us, and we... You know, while we remain conscious, cautious, sorry, we are also extremely, you know, aggressive in terms of capturing, you know, new markets and displacing the competition where we can. That's where the visibility to free cashflow comes from, and we are committed to remaining a profitably growth-oriented company.
Okay, thank you so much, Padma, and as well for Indiresh. I think so we have answered quite or all questions what we have got in the presentation or these additional questions what you just answered. So I think so thank you for you presenting and answering to the questions, and thank you for the whole audience joining to this webcasting event. And it's time to conclude this quarter two result webcasting, and we will publish our quarter three results 25th of October, and until then, please follow us on our investor pages and get the latest news from there. So after this, I think so thank you once more, and have a nice rest of the week, and enjoy the coming weekend.
Thank you again, and goodbye.
Thank you, and follow us on LinkedIn. Thank you very much.
Thank you.