Pexip Holding ASA

OSE:PEXIP

Earnings Call Transcript 2021-Q4

[Øystein Dahl Hem, Interim CEO & CFO]

Hello, everyone, and welcome to Pexip's Q4 ARR update. My name is Øystein Hem, and I'm the Interim CEO and CFO of Pexip. For today's presentation, I will be joined by our President of Global Sales and Marketing, Åsmund Fodstad. The presentation itself will last for approximately 15 minutes, followed by a Q&A session of some of the analysts following Pexip. And with that, let's get into this. And let me start off by a quick recap of who Pexip is. Pexip is a video conferencing company, delivering video conferencing software on a subscription basis. In short, Pexip is targeting the large enterprise and public sector. And today, we are proud to serve more than 15% of the Fortune 500 as well as distinguished public sector organizations across the world. We are able to do this because of our unique video technology and our ability for our customers to customize our digital platform to fit their unique needs. Because of this technology and our laser focus on being the best on video technology in the industry, we have built strong partnerships with, amongst others, Google and Microsoft as well as a range of system integrators in order to serve our common customers. Our business plan is built on a close to 10-year long track record of running a growing and profitable software company, and we are now at USD 106 million in annual recurring revenue. In our initial years, we raised a total of $25 million. We used that capital carefully to build a $47 million ARR by the end of 2019. At that time, we thought that the market potential was huge, so we raised capital in our IPO in May of 2020, just in time to hit the wave of COVID-19 and the explosion in video usage. This capital we are deploying now to take the next leap on our growth journey, which will help us return to profitable growth during 2023. In terms of Q4, we added a total of USD 6.6 million in annual recurring revenue for the quarter. We continue to win Fortune 500 customers and large public sector organizations. On the negative side, we have seen that the increase in COVID-19 restrictions during Q4 as well as delays in video system deliveries for our customers have delayed purchases of Pexip. Those deals remain active, and we have a record high number of proof of concept running now with our customers. This puts us in a good position for 2022. But we do expect to continue to see the same uncertainty in Q1 as COVID restrictions are on the rise across the world. From Q4, we saw a positive impact from the acquisition of Skedify, which we announced earlier this quarter and added in excess of USD 0.9 million in annual recurring revenue. For the full year, we grew with USD 25 million or 30% year-on-year. And with that, I give the word to Åsmund Fodstad to give us some more insight into the growth drivers for Q4.

[Åsmund Olav Fodstad, President of Global Sales & Marketing]

Thank you, Øystein. It is the focus on where we can be unique and where our technology shines that drives Pexip's success whether it's in video infrastructure where we support interoperability across more video endpoints and more video platforms than anyone else and with certifications from Microsoft and Google that are unique to Pexip. In critical meetings were the most security-conscious organizations with the highly critical meetings are moving to Pexip or in video enablement where the world's leading telehealth services, retailers and financial institutions are running their customers' experience on Pexip, thoroughly integrated in their workflows with the open Pexip APIs. In Q4 '21, we experienced growth across all our core business areas: in video infrastructure, in continued close cooperation with Microsoft and Google; in critical meetings, where Pexip keeps on winning customers both in government and defense sector as well as in large enterprises; and in video enablement, Pexip keep on adding customers within health, finance, core services and with large enterprises. Pexip enjoy clear competitive differentiators in all these segments, and we keep on winning major logos and customer opportunities. Let's have a look. In Q4, these major logos in Pexip again key business areas underlines that Pexip secure and unique self-hosted solutions. Integrations with Microsoft to Google and Cisco are important to these organizations and government bodies as they choose our solution. Australian government, shared services in Canada, which happens to be the Federal Government in Canada, U.S. Federal Reserve, U.S. Army War College, Charter Communications, Technip or FMC and GM Financial. These wins fuel that in Q4 Pexip keep on having the most growth in our key segments with large organizations making the customers with more than $100,000 annual recurring revenue with us, our best segment. Looking at the yields and products. The development in Q4 was overall in line with previous quarters. Americas' growing the most out of all theaters, and we're very pleased to see that we keep on getting more and more traction in the U.S. market. It represents a huge opportunity for us. In relative terms, the growth in Americas and India is contributing with about the same dollar amount. Asia Pacific keeps on being a growth opportunity for us and is increasing its contributions. In terms of products, we continue to see that offering the flexibility between Software-as-a-Service and self-hosted software is a competitive advantage for Pexip, allowing us to meet any customer need. The growth in Pexip-as-a-Service, very often is referred to as a SaaS offering, continues to be strong as we see customers, especially in video infrastructure, who have already chosen a SaaS offering like Microsoft or Google also very often choose this deployment option from Pexip. Main driver for annual recurring revenue growth. This page shows the split of the growth from new and existing customers. The majority of the growth over the last 12 months is from net new customers, and it is at 29% year-on-year. That means that 23.6 million of Pexip's annual recurring revenue is from customers that were not customers 12 months ago. And we continue to be successful in reaching new customers. We are, in particular, happy to see that our retention rate last 12 months is at a normal level of 101% and that the investment and extra efforts in customer success throughout 2021 gives continued results with churn at 9.7%. In addition, we keep on enjoying significantly lower churn rate of 3% amongst our largest customers across, again, large enterprises and government institutions. And with that, I'll hand it back to you, Øystein.

[Øystein Dahl Hem, Interim CEO & CFO]

Thank you, Åsmund. So to summarize, we ended the year at $106.4 million in ARR and a 30% growth year-on-year. Going forward into 2022, continued ARR growth, together with a normalized investment level and with that, a lower growth of -- lower growth in costs will help increasing our profitability throughout the year. This is what will drive our return to profitability during 2023. As Åsmund touched upon, we see solid growth in all of our 3 core markets and among our largest customers, which is a segment where we have consistently lower churn than our average. Together with a massive and growing market opportunity, this could is in a solid position for further growth in the years to come. And with that, I thank you so much for your attention, and we will open with questions from the analysts.

[Øystein Dahl Hem, Interim CEO & CFO]

I welcome Fridtjof Fredricsson from Pareto Securities, Oliver Pisani from Carnegie and Kristian Spetalen from Arctic Securities. Fridtjof, we will open with questions from you.

[Fridtjof Semb Fredricsson, Research Analyst]

Can you hear me?

[Øystein Dahl Hem, Interim CEO & CFO]

We hear you loud and clear.

[Fridtjof Semb Fredricsson, Research Analyst]

Okay. That's good. Okay. So given your targets and investment, we assume that you have not targeted all potential customers yet. You talk about the large potential market share. So if possible, can you give a rough estimate of how much of the market you have not targeted yet?

[Øystein Dahl Hem, Interim CEO & CFO]

That's a great question. And I do think that in terms of geographies, we are present in most of the markets where we would like to be. Although I think our presence in Europe and the U.S. have been there for a number of years. In Asia pacific, we have just gotten started with a lot of the markets where we had our first employees during 2021 and in a few other markets in 2020. So there, we have a relatively short amount of time actually being present in the market. So for us, it's more about really expanding within the existing markets that we are in. And as a small organization, we need to be very focused on selecting which deals we go after. One of the things that we have gotten throughout this -- over the last 2 years is the ability to scale much more. And so we are able to go after more of the opportunities in parallel than what we would have been able to do in the past.

[Fridtjof Semb Fredricsson, Research Analyst]

Okay. That makes sense. But is it possible to give some kind of a rough number of how much of the potential and for example, U.S. you have not targeted yet? Or that might be difficult to do right here?

[Øystein Dahl Hem, Interim CEO & CFO]

I think that's difficult to do. Åsmund, do you have a view on that?

[Åsmund Olav Fodstad, President of Global Sales & Marketing]

Maybe that one we can come back to when we do a more thorough update on Q4. But just as a reference, we referred to that we have 15% of Fortune 500, right? So that's a number in itself. And that is a Fortune 500. Just as an example, it's a market, if I can put it that way, that we're systematically going after, right?

[Fridtjof Semb Fredricsson, Research Analyst]

Yes. Okay. So another question for me should be -- and so yes, to our understanding, the competition from Cisco has increased throughout the year with regards to your infrastructure edge. So if possible, can you please elaborate on how often or actually on how this has developed throughout the year and maybe how often you meet Cisco in a competitive situation?

[Øystein Dahl Hem, Interim CEO & CFO]

I think overall, in terms of how it's developed over the year, we've increasingly seeing them in 2021 if you compare it to 2020 on video infrastructure in particular. And I think it's -- they continue to be a strong competitor, although I think we have also a lot of views on our side that has helped us counter that better towards the end of Q4. Åsmund, any other things to elaborate on that one?

[Åsmund Olav Fodstad, President of Global Sales & Marketing]

I think that's a good one. I mean we built the whole Pexip despite competition. So it's been a bit tougher in 2021 for sure. But when we meet Cisco as an example, we very often either team up then with Microsoft or we team up with Google so we're in a good position to fight them.

[Fridtjof Semb Fredricsson, Research Analyst]

Okay. That makes sense. Maybe just a follow-up question here. How has this development, call it, impact your strategy in terms of focus areas?

[Øystein Dahl Hem, Interim CEO & CFO]

So I would say that competition from Cisco is nothing new. And in that perspective, it hasn't really shifted our focus in terms of the markets where we play and where we play the best. So I think that -- Cisco has been our main competitor since the start of Pexip. I think the main driver in the shift in our strategy where we have increased our focus on the markets where we are unique is that we see that the video market in general has become much, much bigger. And so as a small player, it's been important for us to focus on the segments where we have a truly differentiated and long-lasting niche and where we can be, sort of, markedly better than what the others in the market are able to bring. Thank you, Fridtjof. Oliver, any questions from you? You might be muted on your side. Now we hear you loud and clear.

[Oliver Schüler Pisani, Research Analyst]

Okay. Good. Now perhaps I can begin with sort of a dramatic one because you mentioned in the beginning that you benefited from COVID-19 in the first round, whereas now you actually cited that as a headwind. So what has changed since the first round of COVID-19? And why are you seeing it as a stronger headwind now?

[Øystein Dahl Hem, Interim CEO & CFO]

Good question. I think for the first round of COVID-19, we saw a lot of existing customers as well scale up their deployments with Pexip. And as such, when we -- when those existing customers adopted to working from home, continued restrictions on COVID-19 doesn't necessarily mean that they need even more video capacity as they sort of rightsized themselves into that reality. I think for Pexip, also given the increasing importance of our video infrastructure offering where the main use case for Pexip is that we connect video meeting rooms that are in large enterprise and public sector offices with the meeting platforms that they use. Microsoft Teams will meet numbers. That use case is less relevant when those offices and video rooms are not in use or in less frequent deals than they will be in a normal situation. As such, we believe that when people go back to the office, they will use video far more than they did prior to the pandemic. And then Pexip will be very well positioned to meet that need connecting teams, which has seen tremendous growth over the last 2 years with the video meeting rooms that are present within most large enterprise offices.

[Oliver Schüler Pisani, Research Analyst]

Yes. That makes sense. Right. And then I was considering seasonality this year. Do you expect the normal seasonality pattern to hold? You commented a bit on Q1. But I guess normally that's sort of a downtick from the Q4 level in just the ARR at least.

[Øystein Dahl Hem, Interim CEO & CFO]

Correct. And I think in general, that's been driven by the procurement cycles of large enterprise and to some extent, also in public sector, although that varies more with geography. So overall, we believe that will continue to be the case. I do think that in 2021, the impact of COVID-19 and restrictions has probably had as much of an impact. And so we've seen a more stable development across the quarters this year than we did both in 2020 and the years to come. And as of the normal seasonality that we see have been more muted this year than what we have expected previously.

[Oliver Schüler Pisani, Research Analyst]

That makes sense. And perhaps the last one from me then. Do you have any comments on the progress with respect to permanent CEO?

[Øystein Dahl Hem, Interim CEO & CFO]

In terms of the search for the new permanent CEO, that is ongoing. The Board is sort of in the interviewing phase now with the candidates. And well, I'm not very close to the process myself, during Q1 is the likely estimate in terms of when the permanent CEO announcement will be made. Thank you, Oliver. And then Kristian, any questions from you? We still don't hear you, Kristian. Now we hear you.

[Kristian Mørk Spetalen, Analyst]

Okay. You hear me now. Perfect. So based on your segment overview on Slide 6, it seems that video infrastructure had a strong quarter. Could you please elaborate a bit on sales split in Q4 and how this was versus your expectations and how the pipeline for the next 6 months is looking?

[Øystein Dahl Hem, Interim CEO & CFO]

So in terms of the strong quarter 4 for video infrastructure, it's -- that has been one of our biggest growth drivers throughout 2021 and to some extent also in 2020. So in that regard, it continues to be the biggest driver of growth for us and that we're satisfied with. Even though I think in -- it's also the segment where we saw the most headwind in terms of the both COVID-19 restrictions and in terms of the chip shortages that have impacted several deals that are in play. In terms of the distribution of pipeline, we continue to see a lot of business within video infrastructure. And when I refer to the record number of POCs that we have going, that's -- a lot of that is within the video infrastructure. That being said, we also see a lot of pipeline on critical meetings and video enablement, although those are usually longer period deals that take somewhat longer to close than in video infrastructure because it's usually something that requires more hands-on adaptation from the customer than video infrastructure.

[Kristian Mørk Spetalen, Analyst]

And how is that pipeline on the latter too in terms of contract sizes? Is it sold like a historical one, so we should expect some significant contract announcements over the next 6 months?

[Øystein Dahl Hem, Interim CEO & CFO]

Yes, the size of those deals are typically large when they come in. So it's -- because it's then usually a broader program for the customer, and we saw that during 2021 as well. Critical meetings are -- and we sold some critical meetings to governments in this quarter as well as with the Federal Reserve in the U.S. as an example. And there the size is more dependent on the size of the organization where you have the -- of course, the larger ones covering the full armed forces of a country to a more midsized deal opportunity like the Federal Reserve or other more specific organizations within either a public sector or even within large enterprise.

[Kristian Mørk Spetalen, Analyst]

Okay. And how is the -- my last question is how's the recruitment went in Q4? How many new employees did you onboard? And are you still confident that you can continue to recruit according to plan? And with the sales efficiency necessary to deliver on your targets?

[Øystein Dahl Hem, Interim CEO & CFO]

I think recruitment in Q4 went according to plan, and we're now 537, so just short of 540 people out of Q4. In 2022, our expectation is that we will continue to add people in key positions. But we expect a lower growth in headcount in 2022 than what we had in 2021 than in 2020 because we've been really focused on building a strong global organization now. And then we will leverage that investment in terms of getting growth for 2022 and in the years to come. And in that respect, I'm not concerned about the access to talent even though we remain in a competitive market for both software engineers and strong sales talent. I don't see -- that's less of an issue for us in 2022 than it has been in 2021. Thank you, everyone. We have also received some questions on the -- through [e-mail]. So let me take those questions here. One, could you elaborate on your launches of Pexip Private Cloud and Pexip Room and how much revenue have those generated and if we're satisfied with the uptake of those products?I think for Pexip Room, that use case mainly within the active meeting vertical. And as such, we have pivoted that use case to be relevant to our critical meetings offering. As such, we haven't seen that much update on that as a product compared to what we would've expected to do at the start of 2020 when we first launched it. In terms of Pexip Private Cloud, that has been an important contributor for us on several large deals within the software space. And as such, we're satisfied with the offtake of that. In terms of revenue, it has -- those deals have still contributed with somewhat below $1 million in ARR, so it's still a large potential for us. But in terms of a use case and the differentiator to both competition, it continues to be important. Then we have a question on how come that the added revenue per headcount of sales drops and we continue to mature our sales team over time, but the performance in Q4 suggests the other way around. I think what we are seeing there is mainly that the impact on Q4 with COVID restrictions and chip shortages related to video infrastructure is impacting that more than what you would expect from a maturing of our sales team in general. And we see that impacting both our existing sales team and the new hires that we have brought onboard. So in that regard, it's less of a, in terms of maturing and onboarding our team, as more in terms of a market shift that has impacted all those. That being said, those deals are not going away. And so the customer needs continues to be there even though there's a less of an immediate need to close the deal now in the eyes of the customer. And as such, we believe that we're well positioned into 2022 as we continue to mature and close those deals. And with that, I believe that concludes our Q&A session. Again, thank you so much for your attentions and looking forward to seeing you again as we get back to the Q4 presentation in mid-February. Thank you so much.

[Åsmund Olav Fodstad, President of Global Sales & Marketing]

Thank you.