Earnings Call: Q2 2021

Aug 10, 2021

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome and thank you for joining the Artificial Solutions Invitation to Presentation of Q2 Report 20 21. Throughout today's recorded presentation, all participants are in a listen only mode. And I would now like to turn the conference over to Per Otterstrom, CEO. Please go ahead, sir. Good morning. Thank you, Emma. Good morning, and welcome all. You will find the presentation on the investors. Artificial solutions.com. And it is, of course, the Q2 report. So for those of you who have not done that yet, you can find it there, and we'll go be going through that presentation today. So let's start with just briefly mentioning Per and Fredrik. I think some of you are new to at least I have not met and talked to if I look to the names on the list here. So Per and Fredrik, we came in to the company at the end of last year and have basically done a turnaround of the strategy in the company. And our backgrounds are from similar companies to what we are setting up right now. And the software company in the software as a service industry rather than a licensed PA software company, But with a very good basic technology at the back of it. So that's Fredrik and I, and we're going to be presenting to you today. The next slide is about artificial solutions, and this is essentially the foundation of our journey. It's a company with a very strong technology. It's a technology within the conversational AI space. I will Do one slide also to explain that space a bit more. It is today the only one that has 86 languages. It's also the only technology that exists within the Microsoft Azure ecosystem that can collaborate together with Microsoft's products in the same space. And it's a technology which has been valued from a patent portfolio perspective at over $100,000,000 A very strong technology platform, partially because we've been around for a long time, which means that we've had millions of human machine conversations that have translated into a corpus of natural language. So we have a body of a data set of natural language intelligence, which we can use to then develop, for example, the 86 languages. Our product is called Teneo, and our product That we're taking to market is LUIS to the Power Tuner, LUIS being Microsoft's product within the AI space. It is an enterprise conversational AI framework. It's something that You can build your entire conversational AI solution on top of. Listed on NASDAQ Q1 2019, it's It's a bit more than 2 years at this point. But the most important part is on the right side of the slide. That's our global clients. We have some very large clients with some very, very nice use cases, which, of course, is what we're building on top of. So Swisscom recently replaced actually during Q2, replaced their IVR. So instead of dialing in and you press 1, 2, 3, You talk to the system about what you want to solve, and they've experienced a 26% cost reduction And then 84% increase in customer satisfaction with this. AT and T is troubleshooting your home network in the U. S. With this solution without human intervention. Some very, very strong use cases and very, very strong customers around mostly in Europe and in the U. S. And that's also our focus going forward, Europe and U. S. On the partner side, some very strong partners that we've had for some time. I'd like to highlight a few. CSG Has turned into an even stronger partner in the last few months with some very nice implementations, Mahindra doing some nice implementations. Ernst and Young, very active in new opportunities across Europe primarily at this point, But the most important one is Microsoft Azure. We are a part of the Microsoft ecosystem, and this is really key to our whole strategy. So that was slide about artificial solutions. I will move to the next one to explain the market that we are in. The market we are in is called conversational AI. It constitutes both the chatbot and the virtual assistant market And then the enterprise conversational AI tool sets. So we are in all those 3. We have a tool set which can be used to build a chatbot but also to build to conversational AI solution. The solution itself is always going to be addressing a user, a customer, A vendor, somebody to the left, the person with a nice blue tie and the user is coming in saying, can you help me with That will be a service request, it would be an information request, action request, decision request. The person comes into the system. The system understands What the person wants, and that's to the right. What language are they using to start off with? And do they now mention people, places, details? For example, if you put a date and a price into a sentence, the system needs to be able to extract those, and so it's very important data points. What kind of request was it? Was it an actual request, something I need to do now so the bot also needs to actually do something? Is you so happy or upset? Or have we interacted before? To build this in a large scale environment, You need a very strong conversational AI tool set. And in the market today, globally, We are positioned as maybe 1 or 2 or 3, and I would say we're number 2 in terms of size of the implementations that have been built with our system. So we have a few customers at this point, but very large customers that have built very large implementations of conversational AI. In total, 10,000,000 conversations happen every month with our software. So it's quite strong. The market is very big, but it's a replacement market. So the $50,000,000,000 market today has a CAGR of 20%. The software vendors are not there quite yet because a large portion of this market is actually addressed by humans today. So The $50,000,000,000 is what the market will be valued once we span out the conversational AI space. That's on Marketplace. I'm going to move into Q2. So Q2 basically, and I would say half year 1, Has built a platform for us, which is very important in what we're going to do for it because now we can start expanding on this new market positioning, this new market footprint, this new market references, which are very key. And there are large customers that we've been going after, And we've now sort of done with that part of our expansion. And now the next part is building more on marketing and building up sales organization to build on the success that we've had. So let me tell you about this. The first deal we're not allowed to talk about, It happened in Q2. It is a very large U. S. Tech company. They deployed very quickly, and we've also now Already, the our partner that is implementing this has started to implement the next phases of this, which is basically moving this into the U. S. And into Japan into the rest of U. S, I would say, and into Japan. It's a very key reference for us in the industry, Even though we're not allowed to mention it as it has a big impact in within the partner community and within the analyst community, Where people do know about this since things do spread every once in a while. We also signed a 3 year SaaS deal with Telefonica in Bergshan. This was Probably the biggest conversational AI RSP. So this was a structured process That's going to happen this year. Telefonica in Germany has roughly 50,000,000 interactions or sessions per year. So it's a very large entity and a leading telco operator, very structured in their process, Very structured in how they go to market. And they're going to be using our SaaS platform here as well, which is also, of course, a testament to and security work that we've done and the compliance work that we've done with the platform. We also signed a lewis to the Power to Neo, so the Telefonica, of course, as well and also the strategic important solution to the Power to Neo. That's our product where we go together with Microsoft. We also signed us together with Microsoft to our Telco operator A1 Bulgaria. A1 Bulgaria is So sort of the testing ground for A1, which in turn is the testing ground. A1 has a it's called A1 Digital, Which is a bit of a testing ground for America Movilis, which the coral slim operator, which is almost 400,000,000 subscribers today. So An important milestone at EMAN Bulgaria in itself, quite advanced and quite large as an operator as well. So also key strategic deal for us and with engagement from Microsoft throughout the deal. So Very, very good for our model going forward. 1 of our partners, which Also at this point, we're not allowed to mention because they're building this out. They signed up and are deploying users of the powered to Neo for their own business, which where they have support to their customers, which is also, I believe, key that they're building it themselves and makes and even more powerful partner for us. I already spoke about the U. S. Tech company there. We also signed 2 renewal agreements, 1 with the U. S. Government department, which is a very interesting department as well. We'll see if we can actually build out and governmental business in the U. S. On the back of this. And then Circle K, which we just recently announced as well, has renewed and increase their engagement together with us. The Tineo platform now supports 86 official languages. That is by far the most covered languages in the market. It also is very key for Microsoft since this gives Microsoft the capability to position AI solutions in 69 more languages than they do by themselves. We were highlighted together with Microsoft by Gartner as practical innovator for conversational AI in the beginning of the quarter. That's also quite key. This is somewhere where this is how you can end up on shortlist and RFPs and so forth. So it's very good marketing from a marketing perspective. We also appointed a Chief People Officer, which It's very key to us. We're going to start working on our culture initiatives, which is important for our continued recruitment in our continued growth. Paloma was within the company already for a year, but comes from a similar position in a different SaaS company. So congratulations, and thank you, Paloma. We also successfully raised €120,000,000 in a directed share issue. This is to be able to execute now on the strategy now that we laid the foundation. We reduced the cost quite a lot at the end of last year, laid the foundation for the new strategy and then are starting to build out on top of that strategy with recruiting people, but also increasing marketing spend. We've already so far in 2021 signed 3 times more customers, new customers than we did in 2020. And we also had 12% growth in recurring revenues on the rolling 12 month basis. So essentially, what we've done, We turned the business around, made it into a SaaS business. We can see now success with this. We've been focused mostly on the large customers during the first half. And now we're going to take that and move into expanding with marketing and adding onto the sales organization. So with that, I'm going to hand it over to Frederic to deep dive a bit more into the numbers. Frederic? Thank you, Per. Let's then move into the next slide covering key financial highlights in the Q2 of 21. Looking at the financial highlights in Q2, we can conclude that we, as Per said, experienced growth of 12% for the rolling 12 months adjusted recurring revenues. We also experienced growth on the quarterly usage revenues of 38% And that we'll continue to keep a low cost trajectory. And also, in addition, which is Still perhaps not too significant in our reported numbers is also the fact that we have won a number of new and interesting clients that Par elaborated a bit on earlier. And as we have communicated in the quarterly reports for Q4 2020 and now onwards to Q2 2021, We continue to report adjusted sales numbers to provide better guidance on our underlying contracts and revenues in order to align all ways of recognizing revenues. Excuse me, it's the operator. We have lost the connection of Frederic Torbjorn. I will dial out and reconnect him. Ladies and gentlemen, please hold the line while we try and reconnect. Please continue. Yes. Let's try it again. Sorry for the technology issues here. So let me firstly then maybe start off where I started. So Key financial highlights for Q2 'twenty one. We can basically conclude that we have experienced growth of 12% for the rolling 12 months adjusted recurring revenues. And we also have experienced growth in the quarterly usage revenues of 38% And that we now continue to keep a low cost trajectory. And in addition to what Per also elaborated on, I think We have also which is not yet that visible in our numbers, we have won a number of highly interesting new science. And for those of you that have followed us, know that we have that we presented also kind of adjust the numbers to better align with the new kind of SaaS model and revenue recognition that we apply for the new mobile basically. And we continue to report adjusted sales number to basically provide better guidance on our underlying contracts and the revenues and in order to align all way of recognizing revenues with the new SaaS business model. And the main difference or the only difference is basically in the revenue recognition for usage revenues. Previously, a committed and invoice usage contract by customer was recognized to 100% at the time of invoicing, And that was basically regardless of the length of the contract, so very much an upfront kind of recognition policy. When we then apply the new SaaS business model principles, that would instead mean that such usage would be recognized as consumed or proportionally over the life of the contract. So basically, it's flattening out the initial revenues. So basically then, our adjusted net sales for the Q2 2021 amounted to SEK10.7 million versus SEK12 point 5 Milliseconds the same quarter last year, a decline of 14%. And the adjusted recurring revenues, That is basically usage, license and support for the Q2 2021 amounted to SEK8.8 million versus SEK8.9 million for the same quarter last year. So a slight decrease we can see there. However, I think the increased portion of recurring revenues as percent of net sales highlights the transformation we drive now with the SaaS business model and strategy. And these are basically the valuable revenues that we see in the company and what we are trying to build ahead as well. And as said, I mean, the adjusted user revenues were up 38% versus in the same period last year. And also then, the rolling 12 months adjusted recurring revenues increased from SEK 31,100,000 last year to SEK 34,800,000 this quarter, so an increase of 12% basically. And then I think we can also say that, I mean, despite lower reported net sales, We can also see that EBITDA, adjusted EBITDA, improved considerably, and that is, of course, a consequence of our cost reduction program that we initiated in Q4 2020 and which we have experienced kind of fully impact in Q1 2021. And also, I mean, I think we are also experiencing following a successful directed issue. We also Have a very much improved cash position, including credit facilities. So we now have Some plus €130,000,000 at the end of the quarter. And just a bit kind of to elaborate a bit on Why we see the decline in reported net sales numbers? I think it's just important to conclude that There are, I mean, 2 main reasons for that. And one is, of course, the fact that we no longer focus on professional services. So we are a kind of product company, product led SaaS company, and that's how we are driving the business. We will have some Revenue is coming in from professional services, but that's not really the priority. And that's part of the decline that we see in reported net sales. And also, as I have elaborate quite a bit on, is also the way of doing the revenue recognition. That also has A significant impact on numbers, and that's also why we are reporting adjusted numbers. So let's move to the next page, which is a bit kind of continuation basically on recurring revenues. And I think our recurring revenues, I mean, that is license, support and usage revenues, are key for us in transitioning to the new SaaS model, but also going forward. That is the kind of key metric for us. And the recurring revenues, I would say, is also a proxy of our ARR, which is frequently used by SaaS Companies, but excluding growth and new customer additions. So, so far, I would say that given that we have limited revenues from new customers Coming in 2021, on the new SAAS model, the impact on the recurring revenues are relatively small. But of course, we foresee that this will change over time as our kind of contracts with the customers mature as well. But anyhow, I think it's still satisfying to see that our rolling 12 months recurring revenues are growing from €31,000,000 in Q2 2020 to €35,000,000 in Q2 2021. And as I said a couple of times now, That is a growth of 12%. And also, we can see that the revenue growth for the usage revenues are even more kind of strong than for the total recurring revenue part. But I think overall, we see strong commitment and really High interest on our source offering from our existing customers. And I think also the fact that we have won these kind of highly interesting New customers is also an evidence of that our technology works and that we are also doing the right things. Let's move on to the next slide, please. So this Slide basically covers our kind of OpEx level. And as I said earlier, we are continuing our lower cost trajectory. And I think OpEx reductions carried out in Q4 showed effect in full in Q1, Basically, reducing run rate from SEK 178,000,000 in Q1 2020 to SEK 105,000,000 in Q2 2021. In the 1st 6 months, we had an OpEx run rate of SEK 111,000,000. So basically SEK 6,000,000 higher than in Q1. And I think this is also in accordance with what we have internally planned. But still, the monthly OpEx is still below €10,000,000 per month in Q2 2021. And we are also I mean, we are continuing to expand, and we are also hiring people on the commercial side now. And therefore, we also see that we will have a slight increase in the OpEx going forward as well. But I think this is very much I mean, we are steering the company based on what we see and also to execute on the strategy in the best rational way. And I think this is very much in line with The what shareholders and also Board wants us to do basically. If we then go into the next slide, please, Covering the fact that we successfully managed to close and oversubscribed and or directed share issuance together with Pareto Securities in Q2 2021. And with the directed share issue of SEK 100,000,000 excluding transaction cost, We basically are in a strong financial position to drive and execute on our new strategy. And of course, I mean, we are very pleased with the outcome of the directed issue And also the fact that we further strengthened our shareholder base and are very grateful for the support provided by all the participating shareholders in the directed issue. But overall, I think just looking At the graph on the slide, I think we can all conclude that, I mean, with some plus SEK130 1,000,000 in available funds, most of it in cash. We are in a strong financial situation ahead to continue expanding on our new SALT strategy, basically. Over to you, Per. Sorry, I was muted. Thank you very much, Fredrik. So the next slide is called ongoing transition to a SaaS model. This is a bit of a summary of what we've been talking about, but to give you a perspective on where we are going. So We started in the beginning of the year with a complete reengineering of our solution, making it a SaaS solution, making it a part of Microsoft Azure And also decoupling it so that we were able to use LUIS as the best of breed intelligent engine in our in our products. We launched this at the tail end of February 2021, and we then achieved a Microsoft co sell partnership, which was quite an important key for us. And then we had a first lose to the Powhatan Mill customer deployed already in March 2021. That was a select quote. We I got the ISG and gotten recognition for our strategy. This is also part of the foundation. We Then signed up the strategic SaaS deals with in April July, we signed A1 and Telefonica, which are quite key. And then also with a multinational U. S. Tech company, which is also a key foundation for us. And then if I may, we did this share issue. We boosted the NIO support 86 languages. We also Made a public API structure into the product, meaning that you could access The functionalities without using the complete portfolio. So very key things done to position us for where we are today. And during July, we also then Circle K renewed with us again, and we also had a trackmaker renew with us in Q2. And this is quite important to us. We are not losing existing customers. We are keeping them. And we've now focused on the larger customers, And we're now also going to start marketing wise to focus on smaller customers where our software as a SaaS software fits quite well as well. So I'll hand over to you, Frederic, to go through a bit about our pricing structure. Thank you, Per. So moving to the next slide. So basically, I mean, this is a slide that is intended to basically show the scalability in our SaaS model. And we have also done an illustration on How revenues for 2 types of customer can look like in order to provide better guidance on What could be the potential future revenues from customer contracts that we Have won, but also look ahead to win further deals as well. And I would say, I mean, starting off, I think The basis for the revenue model is basically the subscription revenues from Accessing Kineo Development Suite, that is the basis, together with The 100% volume linked user revenues, so basically the API calls. And these revenues, I mean, The subscription revenues for using the platform is basically The reddish part, which is the Teneo studio, and that's something you pay based on number of seats used. And as you can see, depending on if you're a small customer or large customer, we kind of navigate with different pricing, of course. And the more seats you use, the more you pay, right? And that's the reddish part in the graph And in the boxes here. Then we have the second kind of primary revenue type, which is basically then based on the actual usage. I mean, The API course, I mean, consumed when using the engine. So that's the Teneo engine, which we call then API course. And the illustration here is basically covering a large client and a small client. And you can also see then that on the reddish part, which is the Subscription revenues that we get every month from customers that are using our platform, we get that. There is not that big of a deviation between a large and a small customer. But then the Big difference is, of course, in the kind of volume linked user revenues, the API calls, where you then see that What we have done in this illustration is for a large customer, we foresee EUR 24,000 per API calls a month, and that corresponds roughly to 400 ks number of API calls a month, whereas for a small customer, that corresponds to more kind of 30 ks in API's cost per month. So that's the clear distinction between a large customer and a small customer. Then on top of that, we also have some other revenue types. So the more kind of turquoise part, which is Teneo Data. So that's you can see that more as a data analytics tool and which we have not yet Kind of fully implemented and in a structured way, sell. So this is Something we see in the future as a top up of the revenue streams. And then we also have on top of that, of course, that We have people with a lot of knowledge in our customer success team that we sometimes also can invoice for, But that doesn't really mean that we focus on professional services, but we will have some income coming also from that part. But the clear distinction is basically that the high scalability in the model lies within the subscription revenues for accessing the software, the reddish part and then mainly on the volume linked user revenues, the API course. So there is a clear kind of scalability in the model. And I think also here in this setting, I think, Tara explained a bit about our 6 new customers. And that basically means that we have 3x more customers for 2021 versus what we won for the full year last year. And also in the quarterly report, I think we also mentioned that in June, we experienced 10,000,000 sessions in our platform. And that corresponds to roughly 80,000,000 API calls. Then doing some kind of rough estimate on that would mean that, that would basically be SEK 6, SEK 6.5 million per month in revenues from those number of API calls. But also, as we have we are in this kind of transformation or transition phase, We also have existing contracts, which are not fully directly linked to The volume consumed in terms of API calls, and that is also something that we are driving them, Firstly, with our new customers that all go into the SaaS model, but where we're also transitioning existing customers into the new SaaS model as well with more kind of volume linked user revenues. So just to give some illustration on the potential and scalability in our revenue model and also in contracts that we're buying with customers. Over to you, Baer. Thanks. So I'm just going to do a summary with the last slide before we go into Q and A. This is just a this is basically the platform that we're building upon. It's a technology that, from a patent perspective, has been valued at $100,000,000 I think we've seen in the market in the M and A space that the valuation, if you look at it from an ongoing concern platform, is even higher than that. Very strong technology basis to work on. We have 3x more customers signed up in 2021 already that we did in 2020, thanks to the new model. We also achieved a cost reduction visavis the year before with 37%. We have a focus today in the Microsoft ecosystem. We are working together with Microsoft to many of these opportunities. There are 1700 plus LUIS customers across the globe that are one of our prime targets for working. Although some of these customers that we signed actually were not newest customers, so they're net new also from Microsoft, which is strong for us. But the $17,000,000 plus is, of course, a key that we're going to be focusing our marketing on going forward in Q3 and Q4. The team that we brought in, we haven't gone through all of that. You can, of course, see that on our web page. Many of them come from a company that today is valued at roughly SEK 13,000,000,000 similar industry or same industry, I would say, and similar offering, although it's an enterprise solution offering, so more of a PS Plus license offering in terms of how it's perceived by the customer. Even if it's a software service, it is something the customer buys a solution, complete solution. This team that built that, many of these people have come over and joined us here. So it's It's a team that's already built a highly valuable software as a service business. The CAGR in our market is 22 point So this year, it will be a market of about $100,000,000,000 of CorningTide, you see. So it's a very large market. But this is a market that Right now, maturing. So it's now people are starting to actually use the technology to replace existing solutions. The last one is the carbon reduction that we achieved by moving from an on prem data center solution to a software as a service offering. The cover reduction on the average for that would be around 84% moving from on prem to an Azure based solution like we've done today. So also very key strong message for us. So the 3 customers the 3x customers, the customers we brought in now are category large. We're working now, of course, to also address smaller customers. We want to expand the base, And we're building starting to build that pipeline now in Q3 and Q4, and that will yield dividends in the beginning of next year. We'll see that we're going to be able to address of large and small customers. That was all we had for today. So with that, I'll leave it over to Emma for running a Q and A here. Thank followed by 2. And there are no questions on the line at this time. Okay. Then thank you all very much for listening in. Excuse me, We have a question come in from Paul Goldman from Redeye. Please go ahead. Mr. Forbes, your line is open. Please go ahead. Thorpe Goldman from Red Eye. Please go ahead. Your line is open. Yes. Sorry, sorry, I was on mute. You can hear me now right? Yes. Yes, perfect. Right. Thank you for the presentation. I've got a Couple of questions for your customers. So many of these, Telefonica A1, belong from rather big companies. So gaining a foothold And these rather big groups, do you see a prospect for gaining organic growth in some of their other subsidiaries. Yes. So what we see is that we have very high customer satisfaction and we have high customer retention. If you look at our existing customers, they're all expanding at this point. We haven't lost any customers with the new strategy. And then we believe that This is something that we'll see also in these customers. Yes, absolutely. And that's an aim of why we have our customer team engaged with these customers as well. It's not for the partners that are implementing, we also have our own customer success team engaged on it. Great. And for the new customers, would you say this is the first Like conversational AI solutions they are implementing? Or are you guys replacing existing similar solutions? So we these are all the large ones here are 2nd or even 3rd generation tires in the space. So Many of them have had used what I call low code, no code solutions that are simple to start with But do not really scale. So many of them have dipped their toes already into that space. I'd say, actually, most of them are 3rd generation buyers in this space. So it's a replacement in the sense, yes. Yes, great. And while looking A bit closer agreement with Telefonica Deutschland. It's for well, it's for 1 market And two languages. And would you say that this setup is sufficient to reach The long term ARR target or would you need to add additional markets and languages? So in Germany, the actually, the first project is not for To complete the customer care, so they're starting in one part of customer care and then they're moving to the others. So there's expansion within Telefonica Germany. But obviously and the other companies in Telefonica, of course, make their own decisions. But obviously, It's something we want to do also expand in there. So but it's a bit of both because it's also expanding into others on the basis of the fact that we have this very strong This is a very strong brand, so it's a very professional organization that we're coming into. So in terms of ARR target, I'm Not really sure if you mean on the large customer basis. They are absolutely a large customer basis. And within, Let's say, a year or 2, depends a bit on I mean, obviously, the customer Controls the pace that they deploy the solution. But within a year or 2, they would absolutely be generating a large customer type revenues. Yes. All right. Yes. No, that was definitely the answer to my question. Thank you very much, Harry. That will be all. Thank you, Forbes. There are no further questions registered at this time. I would like to hand back for any closing remarks. And I would just like to thank you all for listening in, and thank you all shareholders for your support. We are On our way into a great journey to create a great software as a service company conversation AI. So thank you all very much, And have a great day. Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.