Seco SpA

MIL:IOT

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, everyone, and welcome to SECO's Q1 2023 Results and Business Update Presentation. [Operator Instructions] I now have pleasure handing over to SECO's CEO, Massimo Mauri. Please go ahead, Massimo.

[Massimo Mauri, executive]

Thank you. Thank you very much and hi to all. We are here to discuss together the first quarter result. So we posted a solid performance during the first quarter of this year with a stronger revenue growth, all organic, which was in the range of 28%. I think we grew a lot in all the countries where we are acting. We have a very good contribution from the CLEA business that grew more than proportionally of our revenue. And a bigger contribution also of the recurring revenue about CLEA, which came above 30% of the total. I think, well, also the profitability increased, and we did an improvement in profitability, both on gross profit margin and EBITDA margin. The gross profit margin was 47.5% from 47% same quarter of the last year and the last quarter of 2022. The adjusted EBITDA was in the range of EUR 12 million, 22% of the sales, 40% above the Q1 and it was at 20% in Q1 of 2022.

During the quarter, we did also a strategic agreement with a new shareholder, which is 7-Industries. We basically made an injection of EUR 65 million as a capital increase into our company, which is really good because it leverages our balance sheet, and we are now in a position to look M&A again. And while I think we have a good visibility for the 2023 and 2024, we are building our business. We are set to post all-time revenue record in Q2 this year, where we expect to have a stronger growth as well as we did in the first quarter, and we will address business and the situation later on.

I now to hand over to Lorenzo Mazzini, our CFO, that will describe numbers. Thank you very much.

[Lorenzo Mazzini, executive]

Thank you, Max, and good afternoon to everybody. Here in the slide, you can see the key highlights of Q1 2024 -- Q1 2023, sorry. Our consolidated net sales, you can see here that we closed the quarter at EUR 54.6 million with a really strong organic growth with respect to the same period of 2022. As you can see here, the growth has been backed by a solid growth in both our business, so in edge computing, but more important, as Max already said, in the software part that grew really more than proportionally in respect to the edge computing. And as you can see, almost doubled respect to the same quarter of 2022.

In terms of profitability, so high level profitability, gross margin, we recorded an important growth in relative terms of 0.5%. These are thanks to 2 factors, mainly the first factor is the gradual reduction of the shortage situation in terms of components that is causing a little by little, a gradual reduction in the cost of our components. And the second factor that is really important for [ others ] is for sure the growth of the software business that, as you know, is another contribution in terms of gross margin with respect to the [ other one ].

In terms of EBITDA, we closed the quarter at EUR 12 million with respect to EUR 8.6 million of Q1 2022 with a more than proportional growth with respect to sales actually, you can see that is 40% respect to 28% in terms of sales.

This thanks to operating leverage that is start working pretty well in our P&L. Actually, you can see that the impact of OpEx on revenue has been in Q1 '23 at 29% with respect to 32% in Q1 '22. This is one of the most important factor that explained the growth of our EBITDA on relative terms. The other factor is obviously the growth of gross margin in relative terms. Regarding the last line of our P&L, so net income, we recorded also here an important growth more than proportional respect to sales. And this, besides higher D&A and higher financial expenses with respect to Q1 of 2022. And this obviously due to the important increase in interest rates that the market recorded in the last year. Thank you, Max, for moving to the slides.

In these slides, we represent to you distribution of our sales by geographic area and by end market. You can see what is really important to highlight in this slide is the growth of all our geographic area with a good diversification, not only on sales in percentage terms, but also the growth. So we are growing pretty well in all our geographic areas with no dependency of the growth by a single geographic area. We can say the same things in terms of end market, all end markets recorded a really positive growth rate with just the exception of fitness that, as you know, it means one customer for us.

Thank you, Max, for we can go to the next slide. adjusted EBITDA, well, in this slide, we present to you a bridge from the adjusted EBITDA of Q1 2022 that was at EUR 8.6 million and 20% of relative terms, up to EUR 12 million at 22% in relative terms. Here again, you can see from the bridge that what contribute most is that the operating leverage, the actual OpEx reduced from 32% of sales to 29% of sales. And we will -- thanks to our growth, we will leverage again on our OpEx in the future quarters. Just a comment in terms of the adjustment that we did in this quarter to EBITDA that accounts for EUR 600,000. The biggest part, as usual, is represented for EUR 400,000 by the actuarial value of the 3-year stock option plan that, as you know, is the plan that is '21 up to '24.

We can move to my last slide that is the bridge and the trend of the net financial position. Here, we present to you a bridge from the last quarter on '22 up to the first quarter of '23. We closed the year with EUR 119 million in net financial position while we closed the quarter at EUR 124 million, with an increase of EUR 5 million. As you can see in the bridge and in particular, in the bridge of net working capital represented in the chart on the left of the slides, the explanation of this increase is driven by trade receivable and the growth of trade receivable is obviously explained by the important growth of the business that has been recorded in the quarter. An important point to be highlighted here, as you know, in the beginning of April, in the first day of April, we closed the capital increase that was underwritten by 7-Industries by EUR 65 million. So the adjusted net debt, including the equity injection by [indiscernible] was up around EUR 60 million, so with an important reduction in respect to the EUR 124 million. And as you can see here, with also an important reduction of leverage ratio from 2.7x down to 1.2x in terms of multiple of net debt on EBITDA. Thank you very much, and I pass again the speech to Max.

[Massimo Mauri, executive]

Thank you Lorenzo. So business wise, what we are observing on the market is there are signals of economy slowdown around the world and a few customers that are asking for delay in shipment. But overall, we are facing a very good growth that is coming from both existing customers and new customers. And especially into the new customers, we are converting very well, the opportunities that we are receiving from the market. And we are now addressing a big opportunity into the water pump market that is really booming in terms of request for IoT product and solution as well as electricity metering and EV charger station and industrial solution.

Well, I think that this kind of markets are just in the beginning. We will see further growth that will come from customers because the digital trend has just started and the AI solution that are coming progressively on the consumer market, but they are arriving also in some way on the industrial market will accelerate a lot our -- the introduction of our technologies on the market in the forthcoming years. Well, I think what we are doing besides that we are getting traction on the order with a good number of new customers in basically all the region. We are building an ecosystem of partners on CLEA with the aim basically to accelerate our time to market, to create a standard reference and also to expand our offering.

As you know, we did agreements with Axelera and Google Cloud, and now we are working really to expand with other partnerships that will come during the course of this year to basically create an ecosystem and creating an ecosystem is so important for our future because these types of ecosystem will enable us to accelerate further the introduction of CLEA into the market. And we also launched the CLEA store, the solution to really distribute apps for our customers by themself. We already collected a couple of customers on this technology very it be basically live with better solution within the end of this year. So this new revenue stream will start to generate revenue in 2024.

A lot of customers are anyway evaluating this type of technology because it's really combining what we are doing and completing what we are doing in the direction to enable customers to sell value-added services by themself. So we found a lot of interest from our existing customer base. And I think -- it's important to mention that thanks to the deal that we reached with 7-Industries, we are now in a position to come back to M&A where, as always, we have find quality M&A deals, meaning target -- our target that are profitable, we have a good business model in place. We are looking at our company, basically based in the U.S. with local production to be able to accelerate their growth path, thanks to the CLEA offering and thanks to a lot of synergies that given our dimension, we can really put in place as we did in Germany and really [ taking fruits ] from our shareholders and our company as well. But I think that is where we are and where we are going. And now I would like to leave the time to people to make questions. So it's Q&A section, can start.

[Operator]

[Operator Instructions] All right. Our first question today comes from Mr. Marco Vitale.

[Marco Vitale, analyst]

It's Marco from Mediobanca. I will start with 3 questions from my side. The first one is on the outlook. If you could provide some additional indication of what you expect over the coming quarters. So also looking at the speed, the strong start of the year and the speed of growth that you are experiencing in the first quarter?

The second question is on profitability. We noted an improvement in gross profit margins and also on the EBITDA on a year-over-year basis, I was wondering how we should look at these trends over the coming quarters, if the ongoing ease in the supply chain is providing relief on gross profit margin. Do you expect further improvement over the rest of the year. And the question is about CLEA. We noted the path in the rate of recurring revenues from this business. I was wondering if you could provide us a more indication on the number of actual device installed and whether this percentage is expected to further grow into the rest of the year?

[Massimo Mauri, executive]

Well, I think starting from the top line growth, as you probably know, we changed our strategy to communication. We don't want to anticipate too much what will be the future. But what I can say is the second quarter of the year will be stronger, and we are expecting to reach the record, all-time record in revenue for the company. We are setting for another good quarter. And generally speaking, the 2023 will be -- and as I said, from already a couple of quarters a year we've have an organic growth stronger. But in our mind, it's well above 20% year-on-year. That's the kind of indication that I can give to you on it.

On the margins, yes, we are recovering margin for basically both hardware and the software. On the other side, what is happening, we are acquiring better than the 2022, the price of the components excluding the CPU are decreasing. And thanks to it, we will have a better margin. You will see it progressively because we have a lot of materials in our inventories, but it's material that we bought in 2022 -- sorry. And so I think you will see progressively an increasing of the margin, the gross profit margin that is coming from hardware that is true, and you will see it over the entire year, I would say.

And also on the CLEA business, the fact that the recurrent revenue coming from CLEA is increasing from 15% over 30% already, and it's producing a better margin as well because that part has a higher margin. So as a consequence, I will expect the gross profit margin -- and good during the 2023. On EBITDA level, we are entering into a space where the size of our revenue are really producing operating leverage. But Lorenzo already described an incidence on the OpEx, which is decreasing progressively on the revenue, which is good to enable the company to perform an increasing trend in EBITDA as well. So basically, those are the trends that we are observing and we think we will continue to observe during the course of the year on the profitability side.

On the CLEA business, we are getting traction with customers. I don't have exactly the number here with me, but we will follow up via Marco Parisi later on, on exactly the numbers of devices connected that are now. But just to give you a sense, we are progressively convincing customers one by one by one by one in adopting CLEA. And -- as you know, the life cycle of the introduction of the product is not a quarter, it's more or less 4 quarters. But due to the fact that we did a lot of job in end of 2021 and 2022 already, we are continuing now in keeping customers one by one into CLEA. But again, we're starting now to leverage on the work that we did because a lot of the 2022 customers are entering actually in the production, meaning that they are running connected devices every month.

And as well as we will continue and we are continuing in increasing the numbers of the customers as a total, meaning that we have a clear trend of growth that will continue. And in my mind, when we launched CLEA in 2021, it was a big bet on a new product, which is now after almost 2 years from the launch, we can say that we won the bet. This is a product that is taking traction and will be a consistent part of our business in the forthcoming years. So we definitely added a piece of value to our offering and a piece of technology, very important to our customers.

[Operator]

Our next question came in via chat. It's from Ms. Terazzi. Good afternoon. Thanks for the presentation. Just help us better understand your visibility. Could you please give us some more color on your backlog and order intake?

[Massimo Mauri, executive]

The backlog and the order intake still strong. And we are getting also -- we got over 6 new customers during the first quarter, and we are continuing to add customers also in this second quarter, which is good because it is providing us a very good visibility, not only for the 2023 but also for the 2024 where when this set of customers will enter into mass production hardware-wise and software-wise and it will add new revenue stream that will add to the existing revenue, which is good because put the company in a position to think the future as a future of growth.

And this is one of the most important point in my mind because we are a growth story. We are a tech story, but the strong part of our story is the growth. We grew a lot in the last 5 years. And the aim and the strategy and what we have in mind is to continue to grow at a superior growth path, meaning beating market and competition with a superior growth path also in the next 5 years. And that's something that we are building piece by piece by piece by piece, but is going extremely well.

[Operator]

Our next question today comes from [indiscernible].

[Unknown Analyst]

It's [indiscernible] from Goldman Sachs. Congratulations on the quarter. Two questions for me, if I may. First one on working capital. You had around EUR 10 million of outflow in the quarter, mainly driven by increase in trade receivables. Could you provide more color on that? Is it just noise between quarters? Or do you see customers trying to negotiate longer payment terms given the current macro backdrop? And my second question is on CLEA revenue. Right now, CLEA revenue is dominated by nonrecurring project revenue. I think a couple of quarters ago, it was around 85% of CLEA revenue and I believe to do we still the majority for this year. But going forward, once those projects go live and CLEA apps will become more meaningful, what do you think is a reasonable expectation for FY '24 for recurring revenue share of CLEA? Do you think it can be 50% or even above that?

[Massimo Mauri, executive]

Yes. Let's start from the last question for sure. In the 2024, the recurring revenue of CLEA will be above 50% because they are increasing basically due to the fact that customers are entering into mass production and the level of projects, which are the component of nonrecurring engineering is increasing as well, but not so much. So in the end of the story, I think it will be over 50% of the total recurring revenue already in 2024. About the working capital and as you said, yes, there are 2 dynamics. One was basically quarter related basically payment that arrived 5, 6, 7 of April that basically don't count into the quarters. And there is someone, not so many, but some customers that are asking for better condition into payment due to the high interest rates.

We are trying to accommodate it because the relation with the customers, the long-term relation with the customers is so important in our business. But if we get requests that are reasonable, we try to accommodate them just for a couple of quarters or within the end of the year. It's the right way in my mind to improve the relationship with the customers and to keep the business going. The interest rates starting to be too high. That's my opinion, especially in the U.S. and they will affect the business sooner or later, not our business, but business in general. And this is the reason why you are going to see a reverse into the strategy of the central banks by the end of this year because it will provide a lot of [ will ] into the business.

[Operator]

We currently have no further questions. We will wait a few seconds to give everyone the opportunity to follow up. Mr. Marco Vitale, the floor to you.

[Marco Vitale, analyst]

Thank you -- sorry for a follow-up. Maybe if you could provide us an update on how is the implementation of the Camozzi partnership ongoing. If you're running ahead of schedule, in line of schedule with the delivery of the expected top line in SaaS business.

[Massimo Mauri, executive]

Yes, we are going in line with the schedule slightly better. We got a couple of very important customers in the first quarter on the industrial side, thanks to the Camozzi contribution. We won't see revenue starting from these customers in the end of the 2023, 5-year contracts on CLEA. So we will see them for a very long time making business on CLEA, thanks to the Camozzi contribution. And I would expect to see another big important achievement during this quarter because we are working now to finalize an agreement with very important customers and Camozzi as well into CLEA, and we'll see that could happen by the end of this quarter. And I think -- so we are in line/a bit better.

[Operator]

We will now wait a few seconds to see if any other participants would like to raise their hands. As we have no further questions, I will now leave the floor to Mr. Massimo Mauri for any final comments. Thank you very much.

[Massimo Mauri, executive]

No, I would like to thank you very much today for your attention. Marco Parisi is always available for further specific questions that you may have, and see you soon. Bye-bye.

[Operator]

Thank you very much, everyone. This presentation will now come to close.