Good morning. Welcome to Otovo's second quarter results. My name is Petter Ulset. I am CFO of Otovo. Today's presenters will be Andreas Thorsheim, founder and CEO, and myself. I will take you through the financial results. With that, I leave the word to you, Andreas.
Thank you, Petter. Today, we have a lot of interesting figures and news for you. Let's start with the installation numbers, that once again are coming in at record highs. We're reaching 13,000 units per year run rate, as we install 3,214 projects in the quarter.
That's handsomely up from the 2,800 and some we did in Q1, and a growth of 84% compared to where we were a year ago. With that, I think we can declare that all supply issues relating to both hardware and labor are out, and we can focus on creating value for customers and for ourselves. That's materializing in our revenue numbers.
Revenues generated are up 165% year-over-year, and for the first time, we're surpassing NOK 500 million in revenue generated. In fact, we're at NOK 514 million thanks to record-high direct sales revenues at NOK 307 million, but also value creation from subscription contracts that came in at NOK 206 million.
We're quite far ahead of the upwards revised guidance that we issued after Q1. Very happy about this first year of 2023. As a consequence of increased discipline on value creation, our gross profit generated is up to NOK 124 million, and the blended margin is at a reasonably good 24%.
That's a result of 29% in the subscription value creation and 21% on direct sales for a blend of 24%, up about 3 percentage points from Q1 and about 2 percentage points from the same quarter of last year. These are margins that we believe we can uphold or improve on in the autumn, as this is an environment in which we can extract value from the services that we perform.
This helps our EBITDA. This is our best EBITDA number as measured as a percentage of revenues generated. We improved by 19 percentage points from last year to a -5%, shows the effect of our focus on profitability being in motion and likely to improve going forward.
Now let's have a look at our sales numbers. In Q2, our sales numbers are up 13% sequentially from Q1, and our view is that the trough in the market is behind us, and we expect further improvements to sales going forward. We're up 13%, as I said, compared to Q1, but that's still below where we were in the same quarter of last year.
What's happening behind these numbers? Well, we're seeing a rebound in progress in some of our established markets, with Poland and Sweden particularly leading the way in this quarter. Overall, sales are still below our installation numbers, and it's providing spare capacity in Southern European countries, Italy, Spain, and France in particular.
New markets are progressing according to plan and are noting as a group, their strongest ever quarter, and they're helping making up for lost ground in the larger and more established markets. As for the pipeline, it's down to 2.6 months.
Customers now can expect intra-quarter delivery in almost all markets. Mixed effects will now favor faster markets with typically less permitting, like in Northern European markets. Let's double-click on the relative performance of each country. Sales performance is picking up overall if we're looking at the whole of Europe. It's quite patchy. We're seeing kind of three different groups of countries. The new markets, Poland and Sweden, represent one group.
These countries are performing well or very close to their best quarters ever and are pushing us forward. New markets will, of course, add more and more as they mature into Q3, Q4, and 2024. We have Norway and Germany.
They're doing decent volumes compared to their sort of average over the last quarters, but they're still quite far behind their top scores from the energy crisis of last year and represent a sales potential and a buffer for us going forward. We have the Southern European markets that I think we can say have been hit by lower gas prices, taking away some of the acute need to improve on your energy bill by getting solar panels and batteries.
Spain, Italy, and France are far away from where we know they can be performing. Now, that said, we believe very small changes in macro, very small changes to gas prices, or other things in these markets can trigger big improvements, and then we'll have the joint effect of old markets coming back and new markets growing.
It's hard to have visibility of where we're headed in the autumn, but in general, we see a gradual, but patchy, improvement, and small triggers in order to launch much bigger improvements. This is something we're following closely in months and quarters to come. One of the things we believe will help on sales is an improving price point.
Otovo is a marketplace. That means that the installers are competing on our platform every single day. As they see cheaper hardware coming in, as they see their pipeline shortening, they're willing to take down their bids on the platform. The hardware cost per watt is, in nominal terms, below where it was prior to the energy crisis last year. In real terms, of course, is cheaper.
That trend is almost certain to continue as we're seeing batteries, inverters, and modules falling in price all across Europe. On the labor side, labor prices on the platform peaked in December. They've been coming down through Q1 and Q2. We believe there's still quite a lot of headroom. The graph on this page shows Swedish prices. We're seeing quite steep declines all across Europe in these numbers.
Some markets, more pronounced in their declines than what we're seeing here for Sweden. Hardware drops and labor price cost reductions means that the combined cost per watt is coming down. We've seen two quarters of cheaper solar, and we expect to see that going forward, a boost to sales as consumers generally respond to products that are cheaper by demanding more.
Now let's look at our subscription portfolio. It's been a record quarter for that. The share of sales on the subscription model came in at 38%, roughly on par with where we were in Q1, and substantially up from where we were in the same quarter last year. We've also added a lot of Accumulated Contract Subscription Revenue.
In total, that's at NOK 692 million now, representing a portfolio size growth of 340% compounded annually. The biggest ever addition, both in nominal terms and relative terms, happening in this quarter from NOK 473 million in the last quarter.
The revenue coming out of this portfolio is now at 43 annual recurring revenue. That's up 327% from the same period last year, and up NOK 16 million from Q1. Turning now to business health metrics. Our battery attachment rate is coming in at 24%.
That's where we've been trading over the last few quarters. We're seeing a positive momentum in most markets. When this takes hold more than the mix effects of new countries coming in, we expect these numbers to keep growing.
The ticket size is at a record high, NOK 146,000 per customer. That's up another notch from where we were in Q1. Thanks to a great cohort of customers that we sold in the winter at peak prices, and also a deterioration of the Norwegian kroner. That means that we're getting Forex gains on this that also substantially lift the ticket size.
Looking into Q3 and Q4, we should be looking at ticket sizes that are more comparable to where we were this winter, typically Q4 2022 or Q1 2023 levels. The subscription share, as share of installed projects, was at 36%.
Of course, lagging the sales numbers that were presented on the previous slides by a little bit, and this is a number we expect to grow going forward. Finally, the gross margin generated, as I elaborated on earlier on, coming in at 24%, a number we're comfortable defending going forward and hopefully expanding on as the effect of watering down from new markets in which we're investing.
You know, peters out, and of course, we expect to add more value as prices on the platform come down, we can extract more margin in our sales. Let's turn to country profitability. This quarter, Norway, Sweden, Spain, Poland, and Italy were profitable on an EBITDA Generated basis.
That means the value creation from the portfolio, plus direct sales taken into account. Poland was a new addition there. Then on the IFRS numbers, Norway, Sweden, and Italy were profitable. Sweden new addition there. Of course, every gray box here is a target for someone in this organization to make green, and we keep pushing for all of this to be green in the medium term.
Now, let me share some exciting news about how we're building the organization and adapting to the competition in the European market. Otovo has, over the last few years, established positions in 13 European markets. That allows us to de-risk exposure to energy prices, political whims, and direct our marketing spend to the places where we see we get the best return on that marketing investment.
Should the cost per customer increase in Belgium, we can redirect our marketing funds to Austria if the prices are better there, and we can keep growing at attractive marketing cost. This only really works if you have an organization that is adapted to follow the projects that you create in Austria when you're redirecting marketing funds from Belgium to Austria, as an example.
This quarter, we've taken the consequence of that and established more of our operations in one center, in one location in Europe. During Q2, we've effectively implemented and staffed up a Madrid hub that comprises our marketing and operations center. In this location, we now have 16 nationalities as of my last count, and they are serving our markets across Europe, both with marketing and operations services.
What are we planning to gain from this? During this quarter, we've done several things that we think will improve our operational cost and flexibility going forward. First, we've cut about 50 FTEs in established markets, particularly Paris, Berlin, and Madrid. In addition, we've planned to reduce future hiring in new markets, locations like Zurich or London, by another 50 FTEs.
What this does is it takes down the cost in our local markets. We've established this service hub in Madrid, and Madrid is an international hub of talent. We can find native speakers of all European languages there. It's easy to recruit Dutch people, Germans, et cetera. It's a talent hub in which we find skilled labor for both solar, for operations and for marketing jobs.
The economic benefit of this is that we're creating a cheaper and more flexible cost structure. The fully loaded cost of employees in Madrid is roughly half of what we have in the markets in which we're replacing costs going forward.
This, of course, creates a structural advantage for us, both in terms of the pure cost, but also in the flexibility of having a pool of people that can follow our growth, to where it's happening. Going forward, this is going to be an increasingly important operational and strategic advantage for Otovo in the competition across Europe. Now, let's turn to Petter for the financial results.
Thank you, Andreas. I will take you through our financial results. Starting with our reported financials, total operating income came in at NOK 317 million. That is up 2x versus the second quarter of last year. Cost of goods sold expanded less, as we had an underlying improvement of gross margin of 2 percentage points.
OpEx is up NOK 16 million from the last quarter. However, out of those, NOK 15 million, NOK 8 million is due to a weakening Norwegian kroner, and NOK 3 million is related to the restructuring in France and Germany. The underlying development in OpEx is quite healthy.
The result of that is a negative EBITDA of NOK 77 million, which is negative 24%, which is an improvement of 12 percentage point versus the second quarter of last year, and 4 percentage points sequentially from the previous quarter. Turning over to the balance sheet, we see that from the second quarter of last year, our non-current assets, which represents assets in the subscription SPV, is up considerably to more than NOK 700 million.
That has largely been financed through increase of debt that we have secured from DNB and SR- Bank in Norway. We also see that our inventory is reduced, as that is currently not required to run our operational business, and that our other current assets is down as a result of offloading a large share of the balance of Italian tax credits.
The cash position is reduced with the NOK 34 million from the previous quarter, and I'll get back to that on a later page. When we look at value creation in our business model, we see that to come from two angles. One is our marketplaces, and that is deployed currently in 13 European markets, and the second is in our subscription portfolio.
We realize that value through investments that we make in our OpEx and over our balance sheet. For the marketplaces, the value driver is our ability to earn a growing gross profit and to maintain a high capital efficiency. Our current focus for the 13 marketplaces is to bring markets to profitability, to continue to improve unit economics while we keep growing installation volumes.
For the subscription portfolio, key value drivers are our ability to deploy capital into the SPV and the return that we earn on that capital. The key value drivers here is our ability to have a good and sound underwriting framework, and to be a good custodian of subscription assets in the markets where we offer the subscription product.
Zooming in on the marketplace. The marketplace creates value from 2 sources. One is direct purchase, where we sell projects directly to end customers in 13 European markets. That is recorded as direct purchase revenues. We also sell projects to our subscription SPV. That is recorded as subscription SPV CapEx, and the total is the revenues that the marketplace makes.
If you then look at how the marketplace performed in the second quarter, we had total revenues of NOK 440 million, out of which 307 was from the direct purchase customers, and 133 is from the subscription SPV CapEx.
Towards that revenue, we had NOK 375 of cost of goods sold, leading us to a gross profit of NOK 65, and an OpEx of NOK 114, leading to a negative EBITDA of NOK 49. Please keep in mind that we are selling from Otovo to EDEA at a discount to protect the yield that we have in EDEA, if we would not sell at a discount, that would lift the EBITDA with around 5 percentage points.
Turning over to the subscription SPV, we deployed NOK 133 million of capital in the second quarter. That capital earned a 12.4% IRR, which is up significantly from previous quarters as yields have... Turning over to contracted subscription revenue, which Andreas mentioned, came in at NOK 206 million. That is, of course, assuming a 5% discount rate and a 2% inflation rate .
You might choose different assumptions, but keep in mind, if you move along the diagonal, increasing discount rates with, for instance, one percentage point and inflation with one percentage point, that number is kept unchanged. The same goes to the accumulated contracted subscription revenues, which is a proxy for gross assets in the subscription SPV. Here, the number that Andreas presented was NOK 692 million.
Should you move along the axis, increasing discount rate with 1% and inflation with 1%, that number would be more or less unchanged. Thing that is important to remember about our subscription SPV is that we, in our contracts, have the ability to increase the monthly payments with development in core CPI. Here we have successfully done that this quarter.
On average, we increased monthly payments with 8.7%. If you turn to the right-hand side, you see the impact from that. There, we in the second quarter of 2021 and 2022, invested NOK 42 million. Those cash flows have now been increased with permanently NOK 5.8 million over the lifetime of their contract. Focusing in on OpEx.
We had OpEx in the second quarter of NOK 151 million, split on NOK 114 million in local OpEx in our 13 marketplaces, and NOK 37 million of OpEx for the group. That is up from NOK 95 million last year, but as you can see, the majority of the increase is driven by local markets. If you zoom in on local markets, NOK 65 million is payroll, NOK 49 million is other OpEx. If you then zoom in on the payroll, you will see that a large share of employees are in new markets, which are under development. You, from the last presentation, is that we also have 39 employees in our Shared Service Center in Madrid.
As Andreas Thorsheim mentioned, these employees provide services such as operations and marketing and accounting to our local markets on a flexible and cost-efficient basis. That brings a total of 300 local FTEs, adding another 73 group FTEs brings the total for the group to 373. That number is unchanged from the last quarter. A key part of our business model is the subscription business. We have now proven that we can build portfolios.
We have proven that we can finance portfolios. We are now working on how we can monetize portfolios. As we stated on the previous presentation, we will start with monetizing the NOK and SEK-denominated assets. A successful sale would, of course, free up capital and also equity that can be used to further build up subscription portfolios. On cash.
We started the quarter with NOK 347 million of cash. We had negative operational cash flow of NOK 34 million. That consisted of cash EBITDA of negative NOK 70. We over the quarter sold off NOK 56 million of Italian tax credits, and we had trade and non-trade working capital.
That in sum was almost flat. Investments in the SPV less kind of new debt that we drew on was flat, as we invested NOK 131 million, and we drew NOK 132 million in new debt if we net out the financing and interest paid in the period. Other items were largely flat, bringing us to an end cash balance of NOK 313 million.
Over to you, Andreas, for the summary and outlook.
All right, it's time to round this off. What's this quarter? Well, it's one where we did record installations, we did record revenue, and we had very strong margin figures. Sales are also picking up amid consumer turbulence across Europe.
In terms of installations, we came in above 3,200. It's our strongest number ever. It's up 84% from where we were last year. In terms of sales, we did 2,200 and some sales. That's an improvement of 13% sequentially, but still below where we were last year. On IFRS revenue, we doubled from last year, and on IFRS margin, we came in above 20%. The margin generated above 24% blended another strong showing and proof of our discipline in installations.
On the subscription portfolio, it's been a very, very strong quarter. We had substantial capital deployment. We put NOK 133 million to use in the subscription SPV. That's up from NOK 31 million in the same period of last year, amounting to a multiplication of 4 of the capital deployed. I think that definitively answers the question to whether we can build a scaled subscription portfolio of solar assets in Europe.
Those assets were also a very good quality, and we saw a strong uptick in IRR. It came in at 12.4%, quite a bit above where we've been trading recently, and up from the 9.7% IRR that we saw in the same quarter of last year.
It's been a quarter where we've taken important measures in order to improve our operational numbers and our efficiency for the autumn and into 2024. In this quarter, we established a Shared Service Center in Madrid that will provide our marketing and operations work for all of Europe. It creates a lower cost structure and more operational efficiencies and flexibility as we direct our growth to where it is cheapest and most efficient.
As a consequence of that, we've also cut 50 FTEs in established markets and avoided hirings of about 50 people in high-cost new markets going forward, and this put together creates a strategic advantage for Otovo that we think we can leverage in months and quarters to come. To sum up, where are we headed in terms of the future?
We're set up for very high speeds in installation. We're set up for higher speeds than we're performing at right now in sales, and we believe we're set up for improved profitability into 2024. For the second half of 2023, we expect to see installation numbers roughly in line with where we're trading right now, roughly the same numbers as we're seeing in Q2 2023, before increasing sales start to take hold throughout the autumn, and improve our installation numbers into 2024. With that, thank you very much. We'll be opening up for the question-and-answer session.
All right, we have questions coming in here. The first one is: Should we expect gross margins to keep improving the next few quarters? Do you wanna go for that, Petter?
Sure. We saw a strong underlying improvement in margins, this quarter. As we have also reported on our sold margins, which are higher, we expect that, gross margins should continue to improve over the next couple of quarters.
Next question is: Any news on the portfolio sales process? Can you sell at the increased interest rate? I can say about that process that we've initiated a process to monetize the Norwegian and Swedish-denominated assets. We are keeping building the euro-denominated assets going forward, and so far we're not discouraged by what we're seeing.
I think it's also worth noting is that we observe the capital market transactions that our German and American peers have done over the last quarter. You see that there is strong underlying interest for these type of assets from investors.
Can you tell us a bit more about which countries are performing well and not? As we said in the presentation, Southern Europe seems more sensitive to gas prices than they were previously and maybe than we thought previously. That remains a bit on the weak side. We do think that the Southern European markets don't need a lot to get triggered back into stronger sales. We see that as an upside. As for Northern Europe, that's holding up better, and new markets are doing well.
I guess that you can split this between a weaker Southern Europe, gas sensitive, and the Northern Europe that is performing better and the new markets that are also stronger. I think that combined makes us quite positive about the outlook for the autumn and the speed into 2024.
Fourth question is: With regards to the hub in Madrid, what is happening to headcount, and what type of resources are you hiring there? What we've done in this quarter is we've taken out 50 headcount of the local Madrid office, the Paris office, and the Berlin office. Some of those Madrid headcount has been repurposed into doing operations for other countries.
In our Madrid center, we now have 39 FTEs in accounting, in operations, and in marketing. They will perform tasks that were previously outsourced to agencies in accounting and marketing. We're saving money by insourcing that.
They're also performing tasks that would have been done by local markets in Germany or France or the Spain unit. Also replacing tasks that would have been done by new markets and replacing FTEs that would have been hired in London, in Zurich, in Amsterdam, and other high-cost locations. Put this together, and we have already built now a service center in Madrid that can take care of a lot of the tasks across the group.
That pool is more flexible in that it can follow our activities without having locked in idle FTEs in markets that are a bit slower. Of course, these FTEs are coming in at a lower, fully loaded cost than in the higher cost Northern European market.
Hopefully that answers the structure on this. The accounting is always gonna be a bit difficult because it's hard to know, like, the what if. Of course, this is a strong improvement in the operational structure of the company. Next question is: You guided the improvement in sales for the second half. How much of this improvement is contributed to new markets, and how will growth from H1 to H2 look like if only at our mature markets?
I guess I've been sort of answering that a bit. That's Southern Europe that's been making up a lot of our sales are impacted by what seems like a more sensitivity to lower energy prices, alongside this change in tax credit in Italy that's hitting our Italian market compared to where they were this time last year. Italy is on its way up from where we saw in late February, March, and we remain hopeful for strength in the Italian market 3 in the autumn.
New markets, of course, were not visible last year, so all of that is net additions to that, you know, weigh increasingly more on our sales improvement. It's not enormous numbers now, but we see that picking up and will increasingly impact our sales in Q3 and then in Q4, and obviously, installations more and more as we progress. Next question is: Could you elaborate a bit on the declining hardware prices? Are we speaking about modest dynamics or a glut of supply coming to the market? Yes. Okay. We get these questions a lot from fund managers who hold hardware stock. What... It is a big change from a year ago.
Inverter prices are substantially down, hardware prices also down. It's quite uniform across markets. The Swedish data that we've put out are rather representative. I deep dove into some of these this morning, and I think it's uniform that we're seeing a big supply increase and an ensuing cost decline on all equipment types. We're, of course, happy about that, and we're seeing a continued trend on it. The hardware cost per watt is now nominally below where we started ahead of the energy crisis. I think there's more room for cost takeouts there.
That, of course, makes the solar product more attractive to consumers who will benefit from this in the shape of more savings. It's also one of the factors that help us take out margin for every EUR in cost improvement. That can be distributed between us as margin and extra benefits for the consumers, we are trying to extract both here. Next question is: Can you comment on the implications of the Norwegian Financial Supervisory Authority's decision on the leasing business?
On Thursday of last week, we received a letter from the Norwegian Financial Supervisory Authority that contained a rejection of our application to have an exemption to the financial leasing license requirement.
It also characterized our product to be financial leasing from a financial regulation point of view. For us, we disagree. We will appeal that decision. That process will take some time. While we're in that appeal process, it's business as usual, and we will continue to sell the product in the Norwegian market. We have experience with similar processes. In the UK, we are now undergoing a similar process to put in place a financial license. We know the steps, but still we disagree with the decision from the FSA and will appeal. Should the decision stand, it will likely imply some increased OpEx in the Norwegian leasing business.
We've had a good dialogue over the 3 years that since we applied with the Financial Supervisory Authority. We expect to have a continued good dialogue with them as we prepare our appeal. I think we'll provide more news on this as the topic progresses. I think with that, there seems that there are no further questions. Thank you for listening. We're hard at work on creating good results for Q3, and we'll see those of you who are not tuning in before that at our Q3 results in the autumn.