Investors, ladies and gentlemen, welcome to this presentation of Otovo's Third Quarter Results for 2024. Today, we will go through the business update as usual. I'll present that before my colleague, Petter Ulset comes in to do the financial results. I'll return for the summary and outlook. Throughout the presentation, don't hesitate to leave your questions in the chat, and we'll do our best to answer them towards the end. So let me just begin by setting the stage in that this morning we signed a term sheet for the sale of our Continental European leasing/subscription assets. And that is, of course, very good news, and that will be something that we emphasize in this presentation. The portfolio sale term sheet was signed today. That is beneficial in three ways.
First, it changes the cash flow dynamics from outflows in the shape of investments to inflows in the shape of forward flow. It creates an immediate cash release, and it leads to a one-time gain in the first quarter of 2025, when the transaction is expected to close. We'll also update you on the cost program, where we're doing a reset of the company, and that is on track. We're reducing our staff by about 170 people and our cost by more than NOK 200 million on annual run rate. It simplifies the company and orients us around our Madrid hub.
Finally, we're keenly aware of the need to increase volumes, and we're reorienting our customer acquisition efforts into emphasizing more on partnerships, being more accurate on our performance marketing spend, and implementing measures to sell more for each customer that comes into our shops around Europe. Let's start by looking at this term sheet that was signed this morning. The key terms are that the agreement is between us and the reputable buyer of this type of assets. The scope of the agreement is for eight European countries that are in Continental Europe. It contains both assets built in the 2021 to Q1 2025 period, and a forward flow agreement in which we get paid on pre-agreed terms for all subscription assets that we feed into the SPVs.
That will have another majority owner. We're setting this up with an alignment of interest, where there is substantial cross-ownership. The buyer will receive warrants in Otovo, 55.9 million warrants, with a strike price at NOK 1.15. Otovo will retain an ownership of just shy of 12% in the subscription SPVs at the start of the agreement, and that gets reduced over time as we add assets with a lower ownership. The timeline of the transaction is that we signed the term sheet today, and we expect this to close in Q1 of next year, subject to customary closing conditions. If we look at these two parts in separation, first, on the cash release part. That has four elements.
First, it's the consideration at the time of term sheet signing that is estimated to land at EUR 56 million, so that's what we get paid in EV. There's an estimated debt of EUR 35 million. We retain ownership in the portfolio companies of EUR 6 million, and we get a cash release of roughly EUR 15 million, and then going forward, we enter what we call the forward flow period. We will continue to sell subscription projects. The SPVs will continue or will buy them, and we will sell them at a uptick of 1.47, so that means for 100 in building cost, we sell for 147. We'll just quite soon double-click into that. 95% of that is paid out in cash, and 5% is retained and released over time.
That means that after this agreement closes, Otovo will be much simpler. Our revenue will be recognized as we go, and we'll have a faster cash conversion. Our revenue streams will be threefold: direct sales to consumers, forward flow in Scandinavia, and forward flow in Continental Europe. Now let's look at the value creation of that forward flow. So here we're taking the example of an asset that costs NOK 100,000 to build. The sales price from Otovo to the leasing entity is then pre-agreed to be 147,000, a difference of 47,000. 10,000 is put into the SPV, and 137,000 is released as cash to Otovo after installation.
Those 10,000 come back to Otovo over the contract period, and on top of that, we get management fees that have a net present value of NOK 6,000 at the time of installation. So that's the value creation from forward flow contracts, and we're very happy about this. Let's look at the third quarter. So in this quarter, we installed 1,458 projects. That's down from the previous quarter, and the installation speeds have been somewhat affected by the fact that we've done reorganization and downsizing, bringing the operational responsibility fully to Madrid in the quarter. The revenues generated follow installations and came in just shy of NOK 200 million. If we look at the quality metrics of the installed portfolio, it's something we're quite happy about.
First, the battery attachment rate in this project is at 55%. It's the first time we're above the 50% mark, and we'll never look back. Consumers see the extreme benefit of having batteries in their homes that can arbitrage day and nighttime prices, can arbitrage the difference between the price of electricity purchased from the grid and sold back to the grid. And as batteries are becoming more performant and cheaper, this is appealing more and more to consumers. And this is only the beginning. That, of course, helps ticket size, and we've broken the downward trend in which the decline in price of the assets and the equipment, that means cheaper batteries and cheaper solar panels, has been the dominant factor.
But now the fact that we're adding more equipment to each contract is helping move that ticket size upwards, and we're quite positive about that going forward. And you can see later on in the presentation that the average ticket size in the pipeline is stronger than what we're installing this quarter. The subscription share has been hovering in the low thirties, and we're coming in at 30% this quarter. We believe also that can increase in coming quarters as we're moving more of our sales to countries with a high subscription share. The gross margin generated is coming in at 28%, and let me double-click on that to give you some more detail. The value capture is on a climbing trend.
We earn about NOK 38,000 per project in this quarter, equivalent to a gross profit generated of 28%. We believe we can continue expanding this, and there's several drivers for that. First is that the ticket size in which we're taking the gross margin from is likely to progress into 2025, as we have a stronger impulse from a higher attachment rate than the price decline impulse. We see potential as a management to increase our margins in select geographies and in select situations with added hardware additions. And that is a good opportunity for us in the current environment.
We believe the leasing share is likely to increase, and we now know the value creation from leasing, both in Scandinavia and Continental Europe, and we think that will be something that substantiates this increasing trend also in 2025. With regards to our sales, we're not happy about this quarter. It has been affected somewhat by layoffs and lower performance from taking the eye off the ball as we are putting more than 50% of our employees into transition this autumn.
But I can assure you that the management that is now, to a large extent, through the cost-cutting exercise and has gotten this term sheet agreed, will put all its effort into creating more sales and get the benefit of more valuable tickets in 2025. Speaking of more valuable tickets, we see that the trend of adding more things to each consumer is keeping up. We sold more than 900 devices that were not solar panels in this quarter. Batteries, of course, the big seller there, but also EV chargers and heat pumps and home energy management systems are starting to add to the totality, and we see that progressing also in 2025. Now let's turn to the cost reduction program, and we've had three elements in that.
One is a more accurate and disciplined marketing spend. We're cutting and focusing our spend, and you can read that straight out of the P&L as we progress through that program. We're also increasingly focusing on partnerships. That is in order to create sales on arenas where Otovo and our brand is alone and not facing the competition that you do when you're using lead generation sites or online platforms, and you'll see that added announcements there keep helping that progress. On the sales side, we're rolling out the hybrid sales model. We've gotten that in place in Italy, Poland, Germany, and Austria, and it will be implemented in more countries throughout the periods ahead of us.
We're enhancing our sales methodology, and we're adding new hardware, as I said, and these things are expected to help the top line going forward. On the organization side, we've reorganized our management around the functional setup. We're cutting costs, and that's well underway, and we're centralizing and focusing on the Madrid hub as the heart and muscle of this operation. On the marketing side, the effort there is twofold. One is to move responsibilities and staff to Madrid, where we're running both our search engine optimization and earned traffic efforts from our performance marketing efforts, and we're allocating the performance marketing in a more disciplined way, both on social search and media spend. We're also happy about our conversion improvements.
We're calling customers back faster, reaching more customers, and using better conversion methods, and we think this is going to start adding up throughout this quarter and into 2025 . On the partnership side, we've seen pleasant progress from the existing partnerships that covers many DIY retailers, electricity and utility players, online marketplaces, and we've now, in the last six months, added more in the mobility sector, notably with the Volkswagen Group's charging arm, Elli, ADAC, the German Car Owners Association, e-mobilio, and more. We're adding also home energy advisors and hardware partners, and you'll see more of all these categories going forward, particularly mobility and home energy management systems.
With regards to sales, I've talked a bit about our internal efforts to get more out of the leads we get, but I thought I'd also give you a few details on how we think about market attack in the winter and the year ahead of us. We're layering our markets in three priorities. The top priority are priority markets. These are the large markets of Europe, in which we're doing the majority of our sales now, and expect to do the majority of our sales in the future. These markets are German-speaking Europe, Portugal and Poland, Italy and France. And when we're looking at the consumer demand in these categories, we see slight improvements in Germany, and we believe we're well positioned to capture that.
Poland and Portugal have been healthy for a while, and I think we can expect that to continue into 2025. And then there's more of a question mark on France and Italy. As the French economy is a bit wobbly, the electricity prices there are revised downwards, but we could get the momentum from a proposal to reduce value-added tax on solar to 5% in the current budget, and if that comes to pass, it will be a positive impulse for France. Italy is also a bit wobbly around its subsidy situation, and we're following that closely. Then we have a second category that are priority markets... opportunity markets. And the opportunity markets are markets in which we have a strong brand, strong market share, but in which consumer demand is subdued in the current environment. That is Scandinavia and Spain.
We see these markets as opportunities, but we see not a lot of grounds for spending there, and we will follow those markets as they rebound. And I think we're very well positioned when that happens as consumer macro improves. And then we have three countries that we call low-burn markets. These are markets in which we experience that growth is more expensive and we'll be diverting resources away from these and into the opportunity and priority markets. And then let me talk about the functional organization and how we're reducing costs. So during this summer, I've transitioned my management to a functional setup that's enhancing leadership roles around specialized areas, and we're reducing the number of middle management and general managers in the countries.
On top of that, we're readjusting the headcount to 200, down from almost 370 this summer. It in isolation helps to reduce cost by NOK 150 million, and we expect much higher productivity from the tighter and more focused teams that we have. And the key part of that is a great shift to Madrid, in which more than a third of our employees will be located once the transition of this year has completed, and we'll sit with a leaner and more focused organization into 2025. Now, let me give the floor to Petter Ulset, our CFO.
Thank you, Andreas. I will now take you through the financial results for the third quarter. Starting with the income statement, total operating income decreased both quarter- to- quarter and year- over- year due to lower installation activity. However, we see year- over- year higher unit decrease in COGS, which leads to a slight margin increase, continuing the trend that we have seen over the latest quarters. OpEx is up to NOK 157 million. That is largely explained by non-recurring items, where we have restructuring costs of NOK 32 million, and we have also legal fees in relation to the refinancing and the portfolio sale of NOK 6 million in the quarter. Then, going over to the balance sheet, total non-current assets increased from the second quarter of this year and the third quarter of last year.
That is primarily a result of more subscription assets. Then we see that all working capital-related items contract. That is due to lower activity, both of leads and installations. And we see that liabilities increase mainly due to draw of debt. The cash balance stood at NOK 270 million at the end of the quarter, and if we zoom in on that, we see that we started the quarter with NOK 334 million of cash. Then we had a negative of NOK 85 million of operational cash flow. That is inclusive of an adverse working capital effect of NOK 11 million. Then we had a positive effect of NOK 27 million from investments in the subscription assets, as we drew more on the debt in this quarter in isolation than we invested in subscription assets.
We also had other items, which is mainly capitalized R&D of NOK -6 million, bringing the total to NOK 270 million at the end of the quarter. Zooming then in on the costs, we had OpEx of NOK 157 million in the quarter. That was inclusive of a one-off related costs of NOK 38 million. That is severance costs, so that is personnel related costs of NOK 30 million, which is recognized in the third quarter on payroll. Then we had other restructuring costs, which is primarily related to office leases of NOK 2.3 million, and NOK 6 million in non-recurring legal costs, which is related to the refinancing of our loan facility with DNB and SR-Bank done in early in the quarter of a total of NOK 6 million.
If we zoom forward, the cost program that was initiated in September is going to conclude in Q4. Nearly all severance costs have been taken in Q3, so personnel costs, which is the total of payroll and also capitalized R&D, is expected to go down from around NOK 80 million in the second quarter to around NOK 45 million in the first quarter of next year. Lastly, on the pipeline, our pipeline of projects has been reassessed during the quarter. As part of the reorganization of Otovo, the new operations team, under the Chief Operating Officer, performed a bottom-up assessment of the pipeline. As a result of this cleanup, 274 projects were deemed to be canceled, as the expected likelihood of completion was considered too low. We don't disregard these projects.
We will continue to work on them, but we have taken them out of the pipeline due to a precautionary method to give you a good view on the future outlook of the pipeline. Then I'll leave the word for Andreas to take you through the summary and outlook.
Thank you, Petter. So, where does this leave us at the end of Q3 and looking into 2025 ? Well, we're very happy to see that the portfolio sale term sheet is signed. The key element there is that it shifts the cashflow dynamic from outflows to inflows. It frees up cash that we'll have on hand from the beginning of 2025 , and it gives a one-off gain in the beginning of 2025 . The cost program and the reset of the organization is on track. We're doing the restructuring of teams as planned. We're taking one-off costs in Q3 relating to this, and we'll see the effect on a simpler Madrid-based functional organization starting in 2025 , fully. And then our customer acquisition methodology is in transition.
It's more disciplined, it's more accurate, it's more proprietary through partnerships, and we're doing moves on the sales side, where we also get help from added hardware content in each sale. Our markets remain challenging, but we're prioritizing our efforts into priority markets and opportunity markets. We've lost some output in Q3, but we feel ready and robust for 2025 . So the main takeaways, portfolio term sheet signed, cash will be freed up, forward flow secures a much better cash dynamic in next year. Cost structure is reset, and customer acquisition improvements change the odds favorably for us going into 2025 . And with that, I'll invite Petter back on the stage, and we'll open up for the questions that may have come in during the presentation.
Allow us a few seconds here just to assess that. Yeah, we're... So this is where we're supposed to be. Okay. So, can you say anything about what type of player the buyer of the portfolio is? Do you wanna say that it?
I think we could say, as we have stated, that this is a highly reputable buyer. The buyer is also very knowledgeable about the space we're operating in, and the buyer also have a balance sheet and capacity to hold these assets on their balance sheet.
Great. Next question: You seem upbeat about ticket size. Where do you see ticket size going in the next quarters? So, first, the main drivers is adding more batteries and more devices. We see that holding up. We're seeing also that the priority markets and opportunity markets, on average, have a good ticket size, so that contributes to be in the most valuable areas. And we're upbeat about our ability to add value here, so expecting NOK 130,000 plus development going forward. Can you talk a bit about the warrants and why they're included in this transition? So maybe we can take this together, Petter, but I think the key point here is that it helps in an alignment of interest.
So the buyer of the portfolio likes Otovo and is interested in ownership here. They receive warrants in the Otovo TopCo, and we retain ownership in the portfolio. So we also get value from the value creation that happens on the asset side. So I think it's a combination of the buyer seeing upside in Otovo, and us keeping our responsibility and getting an upside in the value that we create in the portfolio. Anything you want to add to that, Petter?
I just want to add that, of course, the warrants are not given for free, so there is an exercise price attached to them, which, if exercised, would contribute to cash to Otovo's balance sheet.
That's roughly NOK 65 million, if we do the quick math. How do you expect the closing of the U.K., Belgian, and Dutch offices to impact your sales numbers in Q4 and Q1? First, let me reiterate that we're layering markets into priority markets, opportunity markets, and low burn markets. Otovo every day makes decisions on where to allocate our marketing and other resources. And whether moving across borders or within segments in the country doesn't really matter. It's about putting your efforts into places where growth is as inexpensive as possible. Of course, being hedged by being in many markets is a positive for us, but the main effect or the main hunt for us is to get valuable customers as cheaply as possible.
I think in the medium term, where we play matters less. Your solar leasing share dropped to 25% this quarter. What happened? In general, sales are weak in this quarter. We're not happy with that result. I can say that it's really front of mind for me. This September to now, it's been about restructuring cost and organization, about landing this term sheet. And there's only one thing left in my mind now, is to get the volume of sales up, the battery and hardware attachment rate up, the leasing share up. That's what it's about, selling and selling more. I think that's what we have to say about that at the current time.
Next, on the portfolio sale, how does this compare with your APMs?
Yes.
Those alternative performance metrics, I guess so.
The alternative performance measure that we have is, of course, around the net contracted subscription revenue. And if you look at the discounted revenues that we have in this transaction, it holds up well and is roughly in the same range as the accumulated contracted subscription revenues that we have reported in the report and presentation.
And then, luckily, post transaction, Otovo's business will be much easier to understand. There's really three revenue streams. It's direct sales to consumers, it's forward flow in Scandinavia, and it's forward flow in the Continental Europe. All three getting recognized as we go, and all three generating cash as we go. How long is your runway now before you need to raise capital again? So-
Yes
... Petter, you want to say that?
If you look at the cash bridge that we presented, the operational cash flow, excluding working capital movements, was NOK 74 million in the quarter. Then we have, of course, talked about cost cuts. The cost cuts, we expect to take that down NOK 50 million per quarter. Then the forward flow effect is, of course, dependent on volumes. But if we take this quarter's positive for this quarter's volumes, the positive effect would be around NOK 14 million. We then also don't have to pay interest every quarter of around NOK 5 million. So if we close a large share of the gap and do need to do another 400-500 leasing sales, and then we will be there.
Yes. So that means, you know, we're doing 1,400 to 1,800 sales per quarter in the last four quarters. Getting back to,
The high end of that.
The high end of that, of course, is where we need to be. I think every sale is important to us now, but it's not very long ago that we could cover this shortfall in a matter of a week or two, right? So I think we're quite upbeat about the opportunity to close the profitability gap in 2025. Can you be a bit more detailed on the progress of the layoffs? When is the negative effect on sales over? So yes, we've done layoffs of a bit more than 170 people. The gross effect is intended to be 166. No, net effect is supposed to be 166. So the...
That is about 45% of our employees, and the more than that have been affected in this process. It's a downsizing that has been effectuated in all our markets. And labor law is a bit different. Some places it's rather quick, other places it takes consultation with employee representatives and unions. But we're pretty much all done with the formalities on this, and consultations and selection has been done. The first leavers are out the door, or on garden leave, and this will continue to progress throughout Q4 . And pretty much all our leavers will be out by Christmas, and by then we'll have only the stayers left.
Could you please give us some color on how the new leasing structure could impact Otovo as a potential takeover candidate?
Yes. If I were an investor or a potential buyer looking at Otovo today, I would see three main risk factors. I would see a cost program that is underway. I would see a sales progress that needs to be turned around, then I would understand what the value of the subscription portfolio is. So with this, I guess we can say that the cost cuts are on track, largely done. This term sheet proves the value of the subscription portfolio, and as Andreas says, sales is the key focus that we will now move our attention to.
It certainly is. So, if there are no further questions, I think I'll just thank you for joining. Thank you for supporting us. Tell all your dear and loved ones to buy solar panels, and thank you, and we'll tune in for the next quarter. Thank you very much.