Seco SpA

MIL:IOT

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon, everyone, and welcome to Seco S.p.A. Full Year 2022 Financial Results Presentation. Before I hand over to your host today, please be advised there will be an opportunity to ask questions at the end of the presentation. I now have pleasure handing over to Massimo Mauri, CEO.

[Massimo Mauri, executive]

Hi, to all, and welcome to the conference call. It's a pleasure for me today to present our results. So let's jump into the presentation. 2022 was a very complex year where despite the shortage of the components that we faced was able to grow in a very strong way, top revenue at EUR 201 million, which was 43% of organic growth. The adjusted EBITDA came at 22% of the sales and 74% versus the last year at EUR 44 million. And I think our growth was well distributed over all the verticals. We did a lot of things during the year. One of the most important was dealer with a lot of supplier to acquire the components well in advance to be able to ship them to the customers. And that's what we did, and we were able to maintain the capability to serve the customers in the right way.

Besides it, the cash generation was equal to 7%, which was basically made in the last 3 quarters. And there is another important good sign that is the inventory level is going down, decreasing by around EUR 7 million in the last quarter. This is due to the supply chain that is improving, the average lead time is moving from 54 week. It was the peak at 27 where we are right now, we are expecting to see it back to the normality, which is 12 weeks in a couple of quarter. So besides all the things related to the shortage, we were able to keep our gross profit margin stable. It's proving that our business model is resilient to the -- I kindly ask to all the people to put themselves in mute. If not, it's difficult. Sorry about it.

So I was saying that the fact that we were able to keep the gross profit margin stable and basically to protect our margin even in this such difficult scenario was really important because proven that our business model is solid, can resist through a [indiscernible] shock. The CLEA business grew a lot moving from EUR 4.5 million that we did in 2021 up to EUR 18.5 million, equal to 9% of the total share in 2022. The order backlog is EUR 170 million at end of February, which is up about 8% versus the previous year.

On it, let me explain just because you need to compare apple with apple, that in the 2022, the order backlog was so big at that time because of the lead time. The lead time was, as I said, 54 weeks. So the customers at that time were forced to cover a larger period of time, meaning don't make the mistake to keep this backlog as an indication of our future growth level, which is not true because this backlog is covering a smaller portion of period of time comparing with the previous one. Anyway, we have a weighted pipeline about EUR 0.5 billion on -- only on the hardware. This is a pipeline covering 2023, 2025. It is in addition to the backlog, and it's a pipeline where you can appreciate that EUR 370 million are very close to the contract and 30% of this pipeline came from new customers, providing us a lot of visibility on the future and a lot of indication that the business will continue to grow at a very superior growth part. So I already commented the supply chain. I don't want to stress it again. So let's go on the results.

As I said, the results, in my opinion, are pretty good. So net sales was EUR 200.1 million. Gross profit margin in the range of 47% to EUR 94.3 million. EBITDA, EUR 44 million, 22%, and net adjusted income at EUR 20.5 million, almost double from the 2021. Well, I think on the spreadsheet of the result and looking to revenue, you can see how the growth was very well distributed over all the area and a lot of the verticals that we are covering. The vending was the best performer sector, especially due to the fact that this sector recovered a lot from the COVID and pandemic situation, but also industrial performed extremely well and medical fitness, many others. So it's very -- this is the [indiscernible] of the company, the fact that we are very so fragmented in terms of vertical. We are very [ regional ] in many, many vertical, in some way anti-cyclical to the end markets. So maybe Lorenzo you want to comment in a few slides on the economics and balance sheet parts.

[Lorenzo Mazzini, executive]

Yes. Thank you, Max. Thank you very much, and good afternoon to everybody. Let's have some additional comments on EBITDA performance. As Max already said, we've closed the 2022 at EUR 44 million, a really important result for us. But what was most important for us is the EBITDA margin. We closed the year at 22% of profitability with a really slight decrease with respect to the data on which we closed 2021. This, thanks to the important operating leverage that we gained during the year. You can see this in the chart, in the low part of the slides with operating leverage impacted for about 5%. This give us the opportunity to counterbalance the slight decrease that we had in gross margin in relative terms, obviously, due to the complex scenario in which we operated during all the year due to shortage even if -- thanks for God, we are looking some first very important signal of reduction of the shorter.

Moreover, then these operating leverage also give up the opportunity to counter balance the impact of other revenues in terms of sales because we keep the revenue stable at more than EUR 4 million like 2021. As you know, in the other revenues, we count all the grants -- the government grant that we gave over our R&D, the absolute term was stable, but obviously, the relative term reduced.

Just last comments on this slide regarding EBITDA adjusted. What are the adjustments that we did to the EBITDA like all other co-authors, the most important part is the 3-year actuarial value of the stock option plan that accounts for about EUR 2.1 million. Other than this, the residual part is mainly represented by extraordinary costs related to the M&A transaction that we did during the year, in particular, the [indiscernible] asset purchase deal that we closed, as you know, in July 2022. Thank you, Max for moving to the next slide.

Well, adjusted net financial position, we closed the 2022 at EUR 118.8 million. We are really happy of these results because as you see, despite the shortage, we have been able from Q1 2022 to improve quarter-by-quarter. Our net financial position generating from Q1 2022 to over EUR 7 million of cash in these 3 quarters. Another data that Max already mentioned before is the fact that for the first time in the last fourth quarter, we get a reduction in the inventory of about EUR 6.7 million, and this is an important result considering the shortage situation that is remaining, is improving. But lead times, again, our suppliers are still high -- are improving, but far away from the level of 2 years ago before the shortage. Data that we would like -- I would like to stress is our financial leverage. So net financial position adjusted divided EBITDA adjusted with respect to 2021, we decreased [ deleverage ] of 4 notches from 3.1% to 2.7%. So another good data on our, let's say, balance sheet performance. I give this speech again to Max, and thank you for your attention.

[Massimo Mauri, executive]

Okay. Thank you, Lorenzo. So let's talk about the 2023 business as we already discussed in 2022. So as a business update, I think it's important to mention that we expected to see the first quarter of the year with a year-on-year growth of 30% on the revenue. I think that is coming after the 43%, and it is all organic. So it's in a very important growth path. The -- we see we are facing a robust demand both on the Edge computing and on the CLEA business. I can say that the CLEA business will be in the range end of the Q1 of EUR 6 million already -- being already well above the 10% of the total revenue. Most important point that we are observing is the recurrent part of the CLEA business is increasing. So you will see it already from the Q1 results.

On the business model, which is very important to me, we signed 2 important partnership, 1 with Axelera and the other 1 with Google Cloud. I will be more specific on it in a second. I think the CLEA platform as a standard product as I know you asked is really something that is providing benefits to customers because it's flexible. It's something that customers can really personalize by themselves. This is something that is exactly matching the kind of request that we are getting from the market.

To continue to evolve the business model and to continue to pursue our mission, which is the mission where we want really to anticipate the demand of our customers, we will launch the CLEA App Store in April, and we will present it during an Investor Day that we will organize in May. I think that will be important as a further evolution of our business model. I think just for the people that are not familiar -- so familiar to our story. This is the harder part of our business where we build, what we call, the system and 70% of our revenue is coming from this. The rest is coming from software and the building block of the hardware partner that we design and produce all of these products mostly internally. We are making a system together with the display, the case of the electronics inside for many, many different kind of customers. Here, you can see some examples on the fitness on the Bowling coffee machine, industrial, medical machine, voting, transportation and so on and so forth.

And well, let's focus on the partnership. We signed 2 important partnership. This 1 is a partnership with Axelera. This company, they are a private company, like, already did EUR 50 million of capital increase. We designed a new generation of processor specifically to run AI algorithms. Why this partnership is so important because 2 points. One is because these guys selected 2 companies around the world in our sector. One was SECO and the other one is Advantech. So that is definitely stating that we are considered from a third party like a market leader in our space, but it's also very important for our future because starting from the 2024 and going forward, we will start to sell a lot of product that will be based on AI processor designed by Axelera. They will be considered very like an add-on to existing hardware, meaning existing customers where we will provide to the customer the capability to run AI on the Edge.

Why this is so important because it's so simple. If you run AI models on the cloud, it will cost you 5x, 7x versus running them on the Edge. Running them on the Edge will be possible only adding additional hardware, because the existing one, you are using it to run the customer's application. So you don't have enough computational power inside your computer now to run additional AI algorithms since this kind of algorithm will generate a lot of value for the customers and customers will increase a lot of the demand of algorithm. Well, this is a solution that we are working on, and that will be another revenue stream that we will add from the 2024 and going forward.

A month ago, we signed a very important partnership with Google Cloud. This is a partnership with European part of Google Cloud. We will try to extend it to the global level in the second part of the year. We are now focusing in creating such a story with customers. This partnership is important for few results. One is because these guys did an extensive technical due diligence from the platform provider and we are so proud that this giant said that our platform is so good. They decided to enter into a business partnership with us. Second, because Google Cloud will use CLEA to substitute the IoT core, it was the platform -- the IoT platform that Google will dismiss officially from July 2023. So they will propose CLEA to customers and it will accelerate our growth on the software. Last but not least, thanks to the fact that we were selected by Google. It provide us a lot of visibility on the system integrator world.

And we are acquiring a lot of partnership with system integrator, which is so important in our business model because the system integrator will go to the customers enrolling the last mile of the installation of CLEA, which is something that we did by ourselves nowadays because we were in the beginning. But from now, we are building an ecosystem of partners that are really providing us a lot of help in short term, our go-to-market strategy. Moreover, we are creating an ecosystem also with AI start-ups or companies that are making algorithm on the AI because our strategy is to sell the platform, leaving the third party to make AI apps or customization and leveraging on our standard solution to make it very scalable and to achieve a bigger critical mass in a short-term -- period of time.

Well, this is what we are building on CLEA. CLEA is really an open standard platform that can provide a full stack of ecosystem to the customers bringing to them a lot of value. Together with our hardware, it is really a unique end-to-end solution, which is something that the customers really need in their future to improve the performance of their devices on the field and to reduce the cost of the maintenance of these devices as well. So we will launch, as I said, the App Store. It will be important for 2 points. One is because we are enabling all the third-party ecosystem that we are building in making money because the App Store will be a marketplace where all the third party can publish up -- publish solution and sell them to our customers.

But it's also important for another reason because we will provide customers with a unique technology infrastructure to enable them to sell services by themselves, meaning that we will have a lot of private App Store, customer branded to enable customers to sell solution up by themselves leveraging on our tech infrastructure. In that case, we will retain 25% of the total revenue generated by the private store. It is fair and well received from customers.

So as I said, the backlog is growing. It's growing, but it's not the same kind of backlog. Basically, this backlog is covering the last period of time, but the backlog that we had at the same time last year. So don't make the mistake to think that the 8% will be -- will predict the growth path that we will have during the course of this year because it's not true. We will grow much more. And on the weighted pipeline, what is really important is we have 30% of it is based on new customers. That is so important because [indiscernible] extremely well, but we will continue to grow in our business when we get new customers, you are adding a revenue line that is -- will stay there for at least 5 years or more. So it's very solid what we are building something that will continue to grow progressively in a very nice way.

I think while investing SECO where a lot of things that I can say, just to conclude my speech, we are inside digitalization trend, which has just started. We are a technology enabler for our customers, meaning that we are bringing a lot of value on the customer table. We have a unique business model. And so we are really well positioned to be a winning player in a new market that will be formed in 2, 3 years from now, that will be a market where the solution will be the -- will make the difference, meaning to be able to provide hardware, software altogether from the Edge to AI and providing customers an end-to-end solution will be a real difference in between SECO and the rest of the competition. So thank you very much for your attention. Let's start now with the Q&A section.

[Operator]

[Operator Instructions] The first question today comes from Mr. Marco Vitale. Please Marco, the floor to you.

[Marco Vitale, analyst]

Good morning all. It's Marco from Mediobanca. I will start with 3 questions actually. The first one is on the gross profit margin. Actually, we were expecting sort of an improvement -- sequential improvement in Q4, while we saw a decline. I was wondering if you could provide us additional color on what happened in the quarter and how we should look at these figures over the coming quarters?

And then the second question is on CapEx. If you could provide us an overview and outlook on the investments that you are planning to do across this year, if there is some specific projects in addressing to expand your production capacity across your main geographies?

And then I have a technical question maybe for Lorenzo. I noted a jump in D&A, probably should be attributed to the PPA related to [indiscernible]. If you could provide us what could be the full impact for 2023?

[Massimo Mauri, executive]

Marco, let's start from the end. I will cover all the 3 anyway. So let's start from the end. So D&A, you should understand 2 things. One is, there are a certain kind of D&A like the price allocation for [indiscernible] that we accrue them only at the end of the year, not during quarter-by-quarter. It is true for the P&A, but it's also true for staff that we have. But we not accrue during the year. So you can easily double check it also with the 2021. It was more or less the same. So thinking this way, the D&A that you are observing the first 9 months are not the total D&A of the company because in the last quarter, you ever have some sort of more D&A because of the mechanism of the accrual. That is what regarding the last question.

Regarding the gross profit margin is super easy. It's driven by a product mix. This is more correlated to the kind of product that we are delivering. As I said, we have customers where the price increase will enter in force only on January 2023. And the contribution on the hardware that we had in the last quarter was slightly over, these customers. So it -- the mix of it will affect slightly anyway at the gross profit margin.

On the CapEx level, the expectation for the 2023, you can keep around EUR 12 million for the R&D CapEx, around EUR 6 million for the CapEx related to the production and around EUR 2 million, EUR 3 million for the IT CapEx. That is the CapEx.

[Operator]

Our next question today comes from [ Titus Veraski ], please floor to you.

[Unknown Analyst]

It's [ Titus ] from Goldman. I've got 2 questions. First one, if you could quantify the shortage impact on Q4. The reason I'm asking is because your order backlog as of February was broadly flat versus what you reported in October. Could you provide more color on that? Is it because you're able to ship more supply chain -- is normalizing? Or is there something else at play. How is your order intake trending?

And my second question is on M&A strategy. As you continue to deleverage your balance sheet, could you provide us an update on your strategy? And what sort of targets are you looking at? Is it more on the software side or hardware side?

[Massimo Mauri, executive]

Okay. So let's talk about the backlog. As I said before, the backlog is always different, meaning the backlog that we observed in 2022 was a backlog that covered a larger period of time. I don't know if it is clear, but the backlog that you have now is covering last period of time, meaning if you look the backlog that you are observing right now is not really comparable with the backlog that you had last year because of the shortage. Customers are now giving you maybe 6 months of order against 1 year of the order that they gave it to you last year. So the backlog is not comparable. You are comparing apple with Orange. That's my message on the backlog.

On the order intake, February went extremely well. It was a month of EUR 26 million, EUR 27 million of order intake. That's just to give you a sense on the order intake. So the order intake is strong -- still strong. And I think -- don't remember exactly which was your question -- on M&A. On M&A, yes, I think 2023, we will be focused on executing our business plan in deleveraging the company, which will be completely executed by the end of this year. At that point, we will return back on M&A side, starting from 2024. And I should say, as always, that my target is a hardware company in the U.S. to leverage on the dimension and to leverage on the opportunity to upsell CLEA on top a larger customer base. That's in a snapshot on the M&A.

[Operator]

Our next question today comes from Mr. Matteo Bonizzoni.

[Unknown Analyst]

Sorry, it's not Matteo, it's [ Mathias Sarrazin ] from Credit Mutuel Asset Management. I guess it's problem of link. But anyway, just a question on the CLEA and the slowdown, the sequential slowdown in Q4. Could you please give us some color on that regarding the amount of revenue you made in Q4. And second question, still on that, could you give us the mix in the revenue between the kind of upfront fees that you get in the beginning of the project and the share coming from our recurring revenue. Yes, that's it.

[Massimo Mauri, executive]

Absolutely. So first of all, the revenue in Q4 was in the range of EUR 3.7 million, about CLEA, Q4. As always, 15% of it was recurring and roughly speaking, 85% was one-off related to NRE charge. It was slightly down from the previous quarter because of the dynamic of the customers of the projects. Anyway, we are observing already EUR 6 million in Q1 this year related to the CLEA and the good news is in between 30% and 40% of the EUR 6 million are related to recurring revenue. So the 2023 will be a year where you will see the recurrent revenue part growing -- start growing because we have different customers that are entering into rolling out the solution on the field, and that will provide you a lot of recurring revenue that will come during the course of the year.

[Unknown Analyst]

And are you happy with the current development of new projects with CLEA. If you have any color on that?

[Massimo Mauri, executive]

I am super happy. Thinking this way, we have 3 on the other side. We have 450 customers active now as a total, okay? On CLEA, we have 20 customers only right now. Good news is we have around 50 customers that are testing the platform and using the platform for 3 -- right now for 3 months. And we observed in the past, a very good conversion rate in between the test phase and the production phase, so let's see what will happen, but I'm really excited about CLEA's grow -- how CLEA is growing. I think also that we are acting in a B2B space where the velocity of the customers is not to source so fast as it is in the B2C market. So as you may understand, it is going to take time from the commitment to the rollout of the solution on the field. But on the other side, I will see you will have the solution on the field, you will be there for a very long time. So my opinion is the development on CLEA is largely positive.

[Operator]

We currently have 3 questions in private from [ Ms. Valerie Lavebras ]. Her first question is, what is the price impact on the growth in 2022? Then, for 2023, how do you expect the evolution of the growth quarter per quarter? And her last question is what size of company do you look at in the U.S.?

[Massimo Mauri, executive]

Okay. Let's see, the price impact was in the range of 7% of the total in 2022. We do not provide quarter-by-quarter indication. So we are happy to say what we already said that we are observing a 30% of year-on-year growth in Q1, which is in my mind after the 43% that we did in 2022, a very strong growth path that we hope will continue to keep for the entire year. Let's see what's happened. But that's the only indication that I can give to you right now.

About the last question was regarding the size of the company. This is something that we will look into 2024. Size wise, I think something in between EUR 40 million up to EUR 60 million in revenue. That's vested the ideal size for us.

[Operator]

Our next question now comes from Mr. Marco Vitale. Please, Mr. Vitale, the floor to you.

[Marco Vitale, analyst]

Just a brief follow-up. You were talking about the focus in 2023 will be on deleveraging. I was wondering if you could provide us any sort of guidance or specific target that you have on the target of leverage that you expect by year-end? Or so in other terms, what is an average incidence on net working capital and says that do you expect over the year?

[Massimo Mauri, executive]

Yes. I think as you may understood, the level of working capital on sales that we have right now in 2022 is really abnormal. It was 44%, and I think we will be back progressively to the historical one, which is in the range of 37%, 36%, 38%. That's the range, which is pretty normal for the company that is like Seco that is growing at our group path.

Since the lead time of the components is improving in this go to the normality, I think the working capital, net working capital on sales will follow with maybe couple of quarter of delay, but will follow. It's already started because we decreased the inventories in Q4 by EUR 7 million. And you will see this progressively -- with EUR 7 million progressively jump into cash in the next 4, 5, 6 months. So that's -- this is a trend that is already started, but we will continue to observe it for the entire year.

[Operator]

Our next question today comes from [indiscernible]. Please the floor to you.

[Unknown Analyst]

Sorry, I didn't book any question. I don't know why...

[Unknown Analyst]

No, so sorry, it's the problem of the names of Matthias speaking again. A question on the CLEA App Store. Could you just give us some color if you have any regarding the level of CapEx that you still have to invest to develop the platform? And maybe the -- I don't know, the business model, I understand that you will take a 25% take rate on revenue from customers. What level of profitability do you think you can achieve here? What will be the OpEx that you will have to pay to maintain the platform. So yes, some details on the business model.

[Massimo Mauri, executive]

Okay. Let's start from the beginning. So basically, the App Store CapEx are already done. Basically, the App Store is ready, is in the test -- internal test phase, is working well. It's done. So nothing else to maintain it, we will have a cost of people and cloud services, the cloud services will be strictly correlated to the users, so the volume of the business that we will be able to achieve, in terms of profitability, at covering the OpEx level of the App Store, it's on pure margin, thinking this way. At a certain level, you will have only pure margin. I think 2023, this is a full investment but you already had in 2022 because we started the development already from 1 year ago. So you already have all the costs in our P&L. You will see the revenue will start maybe last part of the 2023, for sure in 2024. And the first portion of the revenue will cover the cost. But after it there are plenty of space to make money and that the profitability in terms of gross profit margin will be 100%.

[Operator]

There are certainly no further questions queued, so we will wait just a few moments to give everyone the opportunity to ask your questions. Thank you.

As there are no further questions, I will now hand back to the management team for any final comments before bringing this presentation to a close. Please go ahead.

[Massimo Mauri, executive]

No, thank you very much to everyone for your time today. We will be in touch. We are always available for any further questions that you may have. Please follow up directly to Marco Parisi. Thank you very much. See you soon. Bye-bye.

[Operator]

Thank you, everyone, for joining today. If you do have any follow-up questions, please do reach out to the team. This presentation will now come to a close. Thanks.