Volue ASA

OSE:VOLUE

Earnings Call Transcript 2024-Q1

[Trond Straume, executive]

Presentation of the results from the first quarter of 2024. My name is Trond Straume, and I'm the CEO. Together with me today, I have Arnstein Kjesbu, who's our CFO. There will be an opportunity to submit questions throughout the presentation and we will hold the Q&A session at the end. For those of you who are new to Volue, the company was created in 2020, but our roots date back to 1969 as part of a Norwegian Research Institute. We have more than 2,500 customers across more than 40 countries. Our team of more than 800 colleagues are spread across 9 countries and share the same passion of helping our customers navigate the green transition. Volue is active in 3 segments, all relevant to the transition to renewable energy. For the Energy segment, we decided to expand from a dominating Nordic position in 2013 into a continental leader. Since then, we worked to expand our platform into thermal, solar, wind, and batteries, et cetera. This is important to our customers as they continue to operate their existing assets while expanding capacity and new asset types. For our hiring business, we enjoy a strong market position in the Nordics with decades of experience supporting our customers, building probably the strongest group in Europe, and now tested through the EV revolution. We believe we can expand our footprint on the back end of our market position in the Energy segment. With our infrastructure business, we work to complete a SaaS transformation in a home market with more than 1,000 customers in the infrastructure construction business and covering 85% of the Norwegian population with our water and wastewater business. Combined with ongoing expansion into Sweden and Denmark, we believe it further increased profitable growth in Scandinavia. Now let's move over to the highlights of the first quarter of 2024. Looking at the financial performance. We are pleased to continue our track record of strong growth in ARR and SaaS revenues. Operating revenues came in at SEK 400 million, representing a growth of 18% compared to the same quarter last year. Our product line volume Energy Market Services delivered strong sales of its platform for handling asset operations on behalf of customers. Volume Energy Market Services is the result of combining volume with MRM's domain knowledge and technology platform, a platform which is the foundation for a SaaS transformation in the product line, and we'll come back to them shortly. In the quarter, recurring revenues amounted to NOK 284 million, representing 27% growth. SaaS revenues ended on NOK 126 million, which is 42% higher than Q1 last year. The Insights product line won 25 new customers from 14 different countries in the quarter, adding to our upsell pipeline and highlighting the geographical spend in our ongoing efforts. Presenting the Q4 results, we spent quite some time on the performance of the infrastructure segment. When we today present results from the first quarter, it is rewarding to see the segment continuing to display strong growth in operating revenues, ARR, and SaaS in combination with improved profitability. Our organic growth in the quarter was 10%, impacted by the shift away from non-ARR providing more robust revenue streams over time. Additionally, we are delivering on the improvements in profitability, which we have been consistently communicating since the first quarter of 2023. As a final highlight remark, I'd like to draw attention to our disclosure of net retention rates. NOR is an important KPI for SaaS companies, and we're pleased to disclose strong numbers, validating our ability to upsell existing customers and leveraging our position in the market. Now I'd like to zoom in a bit on volumes product line, volume energy market services, or then for short. At the tail end of 2022, Volue's power market analysts predicted a softer power market in terms of volatility. And this motivated us to initiate a business model transformation of Volue energy market services. An instrumental part of the transformation was the acquisition of Enerim to leverage their platform for offering our solutions increasingly on ARR and SaaS forms. In the year that has passed, we have seen a clear trend in the market in addition to the decreased volatility. Large power generators and traders are announcing their exit from financial power trading. However, overall power volumes are only increasing. For us, this is a confirmation of our message since listing back in 2020. The shift to renewable energy leads to liquidity being moved from financial power lockers into short-term physical power markets. And this trend is playing right into the hands of Vonage Energy Market Services with ready-to-operate assets for only half of the customers who would traditionally sell their production on long contracts. Looking at KPI development over the last year, we've taken massive strides in increasing ARR from 41% to 68%. Having executed a successful SaaS transformation of the infrastructure segment. We're confident in our ability to replicate the journey for volume energy market services. The core priority in this transformation is to shift non-ARR to ARR. Like with the Infrastructure segment, business model transformation cools down organic growth and profitability in the short term, while ARR builds momentum. Once completed, Volue energy market services will contribute to driving growth on Volue key metrics.Now let's tune back and have a look at Volue's strategy for growth. For decades, Volue has built a solid license and maintenance business on mission-critical solutions, continuing to provide stable revenues. These robust cash flows limit churn and vulnerability and enable investments in the solutions of tomorrow. This allows for an attractive combination of profitability and strong growth. On top of this foundation, we've been in SaaS revenues with our land and expanded go-to-market strategy. It allows us to deliver SaaS revenues that are outgrowing ARR and nonrecurring revenues, avoiding the bathtub effect while transforming the business model and improving profitability. We have gained a strong foothold in Europe through our strategy, and we've established a stronghold in Alberia. The markets we operate in are already enrollments and to add to our efforts in chasing growth, they're increasing in size at a high pace. Looking at this holistically, Volue is in a perfect position for profitable growth and business model transformation. And we've proven our ability to execute. Volue solutions are at the heart of the everyday processes of our customers, enabling efficient production and trading of power across Europe. Unlocking sustainability benefits and operational improvements with higher and more consistent returns provides Volue with robust revenues. Delivering unparalleled customer value every day has held Volue's faster long-standing relationships with a highly conservative customer. Consequently, Volue has gained a great vendor position, where we are on the right side of the feds with industry giants, accompanied by high switching for customers. So our history, track record, and domain knowledge provide us with predictable recurring revenues from current solutions, combined with an industry-leading customer churn below 2% creates a great foundation for this journey by Volue.And oncology, we have decades of experience in mastering complex optimization problems at scale for our customers. As power producers diversify their portfolios, bringing more asset classes into the mix, the optimization problem becomes increasingly complex and Volue thrives in this environment. On this slide, you'll see what good looks like when we put our decades of experience into the next-gen optimization solution, SmartPower, and optimize production for major European parcels. The green line represents power production and the blue line is the market price for electricity. But starting at the left-hand side of the graph, production is stable when using their legacy solution. When reaching the go-live mark, the value of SmartPower becomes clear as daylight, hundreds of assets across hydro, thermal, and batteries, all singing in the unit metaler market. The business outcome for the customer is twofold. Firstly, the solution clearly drives the revenues and profitability. Secondly, the producer contributes to improved balance in the energy system, exemplifying profitable energy transition in practice by volume. Looking at how Volue's solutions help drive business performance. It's not hard to see why Volue enjoys local customer churn. On top of a robust foundation, we're building SaaS revenues with our go-to-market strategy. First, we lead with the Insight platform. The offering is an industry-leading analytics platform for energy professionals, allowing for a full overview of energy markets and fundamental data. The sales cycle of this offering is typically 6 hours to 6 weeks and a relatively easy sell for us, providing a foot in the door with the customer. Secondly, what our customers have gained knowledge of the markets, they want to trade. And that's when we follow on with our trading solutions as Volue is the market-leading algo, reaching the milestone of 55 million trains over the last 12 months. The sales cycle of this offering is typically 6 weeks to 6 months. Thirdly, we have our SmartPower platform in Energy Solutions. When customers have insights of the markets and are trading sophistically they need to optimize their production, exemplified on the previous slide. Using this offering requires customers to change how they monetize their assets. And consequently, if the sales cycle is longer, typically from 6 to 18 months, the cutting is that when sold and onboarded is super sticky. The value we bring is obvious and combined with our efficient go-to-market strategy, we were able to achieve net retention rates of 109% in '21, 107 in '22, and an impressive 117% '23. In our view, these numbers are clear evidence of our growth journey and our ability to grow customer relationships, and we're pretty proud to present them, and Arnstein will dive deeper into net retention rates later in the presentation. Here's the selection of news pieces we published during Q1.The common denominator is one's growing position in Europe and Alberia in specific. They highlight how we're taking smart power live with [indiscernible] in Italy, allowing them to reap the benefits of improved profits and a better balance in the Italian energy system. We've also extended our partnership with Iberdrola with utilizing our trading capabilities. All 3 companies are crucial players in the European energy system and long-time customers overview. Also during the first quarter, our cutting-edge algo trading solution has officially been enabled for continuous internal trading on the Iberian energy exchange only. This wasn't a solo mission. Only requires working with a market agent. So we did what we do best and teamed up with one of our fantastic customers. The approval by Umi provides the foundation for further Iberian growth on our outgo trading capabilities. These stories highlight how we at Volue are able to build on our unique skills to foster long-term and growing customer relationships. Looking beyond our strong foundation, the building of SaaS revenues as well as a strong position in Europe. Let's look at the markets we operate in. We estimate the current European and Japanese sum for Volue's Energy Systems serving portfolio is NOK 20 billion measured in ARR. The energy system is in transition, and few other markets are fueled by global megatrends like the markets we operate in. At Volue, we believe the push for electrification will provide market tailwinds for as long as we can see. From 2020 to 2030, the number of power producers in Europe is estimated to increase with a CAGR of 6% from 8,600 to 15,000, bringing more potential customers to Volue. Furthermore, from 2023 to 2030, the installed renewable capacity in Western Europe is estimated to grow with a CAGR of 10% from 390 to 750 gigawatts, bringing more volatility into the system and increasing the need for Volue's solutions. Combined, this gives ample room for growth as market sizes will transform and Volue will expand its serviceable addressable market through geographical expansion and product development. In some, these building blocks sets up Volue for success. Our long-standing customer relationships, built on decades of domain knowledge and delivery of system-critical solutions are rare and really difficult to replicate. They provide us with long cash flows and share protection from which we can build SaaS revenues through our go-to-market strategy. We have a strong position in Europe, while our end markets are growing at a high pace, leading all Volue growth. With such a promising field to play on, why should Volue be the player to drive? The best and most tangible evidence are what we find when we look in the rearview mirror. Since listing, we've been able to execute on the opportunities arising in the market and grow operating revenues by 71% from NOK 892 million in 2020 to EUR 525 million over the last 12 months. ARR has increased by 3% in the same period from NOK 572 million to SEK 1,046 million. SaaS revenues have increased 196% from NOK 147 million in '20 to SEK 435 million. The pace at which SaaS is outgrowing ARR, which is, in turn, is outgrowing operating revenues speaks directly to the ongoing business model transformation. Adding that, our annualized ARR base has exceeded NOK 1.2 billion, bring some visibility to our growth. Furthermore, after headwinds on profitability in 2022, we've been able to increase adjusted EBITDA margins as guided, while undergoing such powerful growth on key metrics. From a more operational point of view and one of the indications we have on market developments are the number of algo trades on our platform. Since listing, this has increased by 162% from $21 million to 55 million over the last 12 months. The Volue platform has become the market leader and executes about a quarter of all intrastate on the European Power Exchange FX on behalf of our customers. This is a testament not only to our ability to bring customers onto the platform but also the underlying movement in the market, which is moving faster and faster, precisely like we wanted to. So with these pro points on our ability to execute, it is time to hand over the word to Arnstein Kjesbu, our CFO, for the first quarter financial results.

[Arnstein Kjesbu, executive]

Thank you, Trond. I will now go through the financial performance for the first quarter of 2024. All revenues continued to grow in the first quarter. Operating revenues ended at SEK 400 million with 18% growth from Q1 in 2023. The organic growth in the quarter ended at 10%. The Energy segment faced a headwind in nonrice royalty revenues when compared to the first quarter of 2023. The abnormal volatility revenues were estimated to be 14% lower for the quarter compared to last year. With that, especially pleased with the uplift nearest is out with the decrease in recurring revenues with growth rates with 27% and 42%, respectively. Furthermore, the margins have improved despite the performing in nonrecurring revenues that also contain higher margins on the gross margin level. As a proof point on increased profitability also going forward when building more and more recurring revenues. The cash flow in the quarter was affected by the prepayments on recurring revenues following the year-end cycles. [indiscernible] when you continue to invest in NextGeneration Solutions to meet our long-term ambitions, but also improving margins and cash flow is more priority for the group. Our share of ERA is 71% for the first quarter of 2024. And in the quarter, one generated NOK 284 million in recurring revenues. That lift brings ARR levels for the last on 69%, which also has substantial improvements. Our share of revenues from SaaS for the first quarter was 31% and Valiant NOK 126 million in SaaS revenues. The uplift in Q1, 2. 31% of total revenues also is a significant improvement. The ARR and SaaS are driven from all our segments, strengthening our revenue mix and foundations as well as continued recurring revenues. Growth in annualized recurring revenues driven by new sales is driven by new sales and price lift as you've seen from our net retention rate features. As previously taken in the presentation, has seen strong growth in the quarter, and the base was growing with 31% from Q1 2023. At the end of Q1 our ARR-based annualized recurring revenues on a 12-month basis was one broken over SEK 1.2 billion revenues. This comes from strong sales in 2023 and in Q1. And furthermore, we will action our ARR levels for 2024. Combined with a good market outlook, we expect the ARR growth to be solid also in 2024. As we are undergoing a transformation of our business models, we are pleased to see that our churn level remains very low and also dropping on the last man spaces. Please note that the features reported as churn is on our total ARR revenues. Once earlier, we reported churn based on total revenues, as you can see from an overview, and new KPIs in the quarter is reporting on net retention rates. These features cover only Q1 2024 and hence, does not look on a yearly basis, as shown in the next slide. The total MRR, monthly recurring revenues is a sum of delivery contracts to customers at also the end of the period. The main share of the contract [indiscernible] when it comes to price increases and is taken into account in the first quarter. The same applies for churn and down-sell. The amounts are only indications of MRR on an annual basis, however, we do see a very strong first quarter when presenting also these features. For your reference, we also disclosed the net retention rate on a yearly basis also going back to 2021. Throughout the period, we see a strong uplift in the pictures as a proof point of all is ability to upsell and deliver value to our customers. Moving on to the Energy segment. We are pleased to see that our progress in the Energy segment continues. This quarter, the segment is growing with 26% with an organic growth of 7%. We are especially pleased to see with the potency seen in the growth rate in recurring revenues and services continues. The volatility has decreased [Audio Gap] versus last year. And with the volatility revenues coming down with an effect of approximately SEK 40. This is especially pleasing to see such strong growth in the recurring and it has also a story of a cash business and are building every day.The adjusted EBITDA is reduced compared to last year, but given the high-margin profits from the nonrecurring revenues in 2023, the underlying development is strong, and we are on the right way. The integration is in is growing at [indiscernible] we are able to create momentum towards our combined service offering for the product line. The Power Grids segment is developing the right way. This quarter, we can report a growth of 9% and improvement in both adjusted EBITDA and our share compared to the same period last year. We are seeing a lift in recurring base, and that also gives growth going forward with a combined good market outlook. The margin in quarters has increased with a more stable cost base is the main reason compared to last year. Furthermore, will you invest quite significantly in addressing new market opportunities for the product area to meet the long-term growth opportunities. For the infrastructure segments, we are pleased to see that the growth is very strong, and our sixth ambition most business models are progressing as planned, a very strong growth from last year at 20%, 22%. This is mainly driven by a strong closing of new projects. Margins has improved as the model of the highest business been able to report for segments. They expect the ARR improvements is to provide a margin uplift also in the time to come. The current team is skilled to capital growth and improving cash processes will contribute to driving margin at lines also for the infrastructure segment. So then back to you again, Trond.

[Trond Straume, executive]

Thank you, Arnstein. Let's shift our focus to guidance. Volue maintains its long-term guidance on organic growth and active M&A agenda and year-on-year improvements of important KPIs. I [ dissipate ] on these guidance elements, the previously communicated ambition of NOK 2 million billion in revenues by 2025 will be met. As Volue do not provide short-term financial guidance and maintains growth and M&A guidance, the target of SEK 2 billion in 2025 is now deemed redundant and hence removed. There we move up. It's not only the result of successful growth over time but also a demonstration of dedication towards attractive M&A opportunities and continuous streamlining of the business. Hence, Volue maintains the following long-term guidance to the market. Annual long-term organic growth of 15%, active M&A agenda with 1 to 2 deals per year, a year-by-year increase of adjusted EBITDA margin, cash conversion, and share of ARR and SaaS revenues. So that concludes the presentation, and we might now move over to Q&A.

[Operator]

Thank you so much, Trond and Arnstein. [Operator Instructions]. So while you guys type in your questions, we can maybe start with one from me. Firstly, on growth. So in both Energy and Power Grid, you deliver 7% organic growth in energy and 9% in Power Grid. So should we be worried with regard to the 15% organic growth targets?

[Trond Straume, executive]

We feel very confident about the long-term organic growth targets. And we spent quite a bit of time last year to talk about the softer volatility in the market leading to less nonrecurring revenues in 2023. And that's a trend that's continued into 2024. We're able to offset that as we shift over to ARR and SaaS revenues. So we're super pleased to see that we delivered 7% to 9% organic growth. And we will simply just continue building ARR and SaaS and what we've seen in the interest rate that more, we're now seeing the energy market services segment is ARR and SaaS will continue to move ahead and delivering a much more attractive revenue class, if you like.

[Operator]

Thank you. And as you know, we've received some questions. Firstly, I'll try to summarize some of the similar types of questions there. Firstly, on CapEx. So reported CapEx was around 15% of revenue, while R&D CapEx was only 10%. What drove this other CapEx of 5% of sales? And how should we think about this other CapEx and similar type of questions? Tangible CapEx in quay the quarter, if you give some color on this and phasing effects.

[Trond Straume, executive]

Yes, the rest of CapEx is mainly not related to R&D, that's been the reason in schematic segment. But what we are guiding up on when it comes to CapEx is we like to say that we are around 10% to 12% out of total sales. It varies across the quarters due to both the projects and kind of power and the hours. But we feel quite comfortable on the CapEx level and then are striving to kind of hold a level that is reasonable on investments while taking down kind of more of a maintenance effort in the products. So that's also the reason why we invest to streamline the portfolio to ensure the profitability at cash margins.

[Operator]

One question here on the new metric, the net retention rates. So great that we started to disclose this. But a question looking backward a little for the '21 to '23 period, would it be possible to say something about how much has been average price increases? And how much is the volume?

[Trond Straume, executive]

Yes. I do think looking back on these features, a very little part has been price increases. So it's been earlier in the range of EUR 20 million to EUR 30 million, which is the price increase.

[Operator]

And on that topic, do you plan to do any sort of increases? I mean we've seen very high inflation. We know that it impacted your cost levels to be. How do you use that in your price I think towards customers.

[Trond Straume, executive]

We continue to work on the pricing model. Our focus is shifting business loan and moving towards SaaS throughout life, and that's where we also have more flexibility on the pricing compared to oil prices models. But we mainly strive to take in pricing with a change in business model and that rig. So that's why we follow kind of the overall profitability on the products and networks, where, of course, pricing is an important element, but not early price increases stand-alone.

[Operator]

Okay. I hear a question on the gross margins. They came down a bit year-on-year in both Energy and Power, could you provide some details there?

[Trond Straume, executive]

Yes. For the Energy segment, the trading-related revenues has come down, and that falls a high gross margin. So comparing this, that's natural. And also when you're moving over this, the minerals margin loan on the SaaS there, the product is pretty stable as the Power Grid segment also has some more uses of third-party components in some of the products, and that has kind of been the reason for over lower gross margins in powered segments.

[Operator]

Okay. And staying on the trading PARP scenario, which I think we all find very interesting given its strong growth in the number of algo trades and the increase there we've seen in the last couple of years. Can you tell us a bit about the pricing models and the revenue impact you have there? Is there is it a platform fee? Or do you get fees from the number of trades and how do you see the development there?

[Trond Straume, executive]

So this is volume-based. So it's a recurring fee. And given the size of the customer, you move sort of from band to band. And as you increase activity on the platform, you add more power volumes and it's those volumes that dictate price. So as we grow with customers, then we have also grown revenue, but also that if customers trade more, the same customer trades more also.

[Operator]

There is one follow-up question on the CapEx we discussed earlier. When you say 10%, 11%, 12% of total sales over time, is this only the R&D CapEx or the total CapEx, including the tangibles assets that are sort of in the cash flow statement.

[Trond Straume, executive]

Yes, that's only different R&D books even foresee very little of the CapEx. Yes, there was some more in a quarter, but usually very little of that in our core business.

[Operator]

In the Power Grid segment, which is the segment where you are from the shortest in terms of switching towards ARR and SaaS. I mean that's still, of course, the plan you invest a lot there. You've invested in high capacity, but still you expect the consultancy revenues to drive results going forward, at least what you stated in the slides today. And any comments on that and when we will see a larger uptick in the ARR so share in that segment.

[Arnstein Kjesbu, executive]

Yes. Of course, we are -- as you stated, more product-related growth. And there are some levers for that with growth programs that we have in Spark we think will come more time. In addition, we are doing also having SaaS products that we are in sense-off that also will drive more of pure SaaS growth for the segment going forward.

[Operator]

On the cash conversion this quarter, the free cash flow was close to SEK 400 million, so very strong. And it beat the previous Q1 by quite a mild. Is this mainly driven by the weaker 2023? Or is this sort of this higher ARR base start to truly impact now?

[Trond Straume, executive]

I would say it's mainly company -- it's a combination. Of course, the ARR base where we are now on 71% of total revenues for the quarter, that is have prepayments. So that helps. In addition, we see the movements in net working capital also being positive, and for the sold Market Services was not weak at Q4, we kind of catch up in Q1, but has more volatility in the net working capital for that part of the business. But we typically see a normal cycle for our ARR business as being more and more recurring and should we see a strength in cash profile over time.

[Operator]

Yes, it's possible to quantify the effects of the sort of the timing infection in Q4 into Q1 on this more.

[Trond Straume, executive]

We don't have a number to disclose now so that we need to--

[Operator]

Talking a bit about the target you obviously discussed it in the presentation within NOK 2 billion 2025 revenue target removed, of course, between the lines here, it seems like this is you expect large M&A impacts. You reiterate 1 to 2 a year. Can you say something about the focus you do on the scene? Are you more focused on larger M&A deals to get customer portfolios? Are you in the nice tech side of things? What should we read into with regards to the new target or removal of that target and M&A deals in particular?

[Trond Straume, executive]

I think when it comes to M&A, I think we have had a pretty consistent M&A strategy ever since listing. We are quite picky on the M&A targets we are assessing. We have a substantial lowest. And we're looking at 2 categories. So it's the same strategy, so one for additional capabilities along the value chain, another one for basically for market access. I think what we've demonstrated ever since listing the venue, we remain quite picky. So we're looking for attractive deals, and we will only engage in companies and targets that could really contribute with material value to the company. In terms of size, that's panning from sort of smaller companies to a bit more [indiscernible]

[Operator]

Thank you. And with that, it seems like you've answered all the questions. Thank you, Trond Straume and Arnstein. And thank you all for listening in, and have a good day.