Volue ASA

OSE:VOLUE

Earnings Call Transcript 2022-Q3

[Trond Straume, executive]

Good morning, everyone, and welcome to Volue's presentation of the results from the third quarter of 2022. My name is Trond Straume, and I'm the CEO of Volue.

Together with me today, I have Arnstein Kjesbu, who is our CFO; Felix Dorsemagen will also be joining. He will talk about the European market opportunities for our Power Grid business. There will be opportunity to submit questions throughout the presentation, and we will hold a Q&A section at the end.

Let me start by giving you a brief overview of the company. Our roots date back to 1969 as part of a Norwegian Research Institute. We were asked by Scandinavian energy companies to solve two problems. First problem was to help improve valuation of forecasting power production. Second problem was to help them move from analog to digital management of the electrical distribution grid.

Today, we would call it digitalization. Two problems, one for power producers and one for power distributors. We researched these two topics for 27 years before we were privatized in the mid-90s. To date, we spent more than NOK 4 billion in R&D and still counting.

In a nutshell, we focus on helping our customers capture energy from nature to transform it to electricity that is monetized, distributed and consumed. Over the years, we have also expanded our business into water and utilities as well as construction sectors.

2 years ago, we decided to merge 4 companies to double down on our efforts, helping customers master the ongoing energy transition. Volue is now the front runner with digital coverage along the clean energy value chain from monitoring using sensors to realize cash in trading.

Building from our success in the Norwegian home market, we have now earned the trust of more than 2,200 customers across more than 40 countries. At the core of our value offering is our platform. We measure success by how the platform is utilized by our customers, led by more than NOK 30 billion automated calculations in the cloud. We execute more than 25 million trades every year on behalf of our customers.

Our market insight service for power professionals holds 150,000 price curves, excessed 650 billion times annually. Our sensor platform collects 120 trillion data points from a 4,500 installations. And these numbers increase every year, and this is how we retain 99% of our customers.

Volue is active in 3 segments, all with relevance to the transition to renewable energy. For the Energy segment, we decided to expand from a dominating Nordic position in 2013 and into Continental Europe. Since then, we have worked to expand our platform into thermal solar wind batteries, et cetera. This is important to our customers as they continue to operate their existing assets while expanding capacity in new asset types.

For our Power Grid business, we enjoy a strong market position in the Nordics with decades of experience supporting our customers, building probably the strongest grid in Europe and now tested through the EV revolution. We believe we can expand on our footprint on the back end of our market position in the Energy segment.

With our infrastructure business, we have so far focused on SaaS transformation in our home market with more than 900 customers in the infrastructure construction business, and covering 85% of the Norwegian population with our water and wastewater business. Combined with ongoing expansion to Sweden and Denmark, we believe in further increased profitable growth in Scandinavia.

Now let's look at some of the key developments in the Volue group in the third quarter. Looking at the financial performance in the quarter, we delivered recurring revenues of NOK 181 million, which represents 19% growth compared to last year; SaaS revenues ended on NOK 70 million in the quarter, which is a strong 27% growth compared to the same period last year; and we continued to grow our operating revenues to NOK 294 million, which is 23% higher than Q3 2021.

Looking at our segments. We see that our Energy business was the largest growth driver with 36% revenue growth. We delivered an adjusted EBITDA margin of 17% in the quarter, which is an improvement from first half this year.

Over the past year, we have changed the Volue into a truly international company with much stronger organization. During the third quarter, we made two key additions to the management group, which illustrates our international focus: Colm McCarthy, who's Irish joined us as Chief Product Officer; and from Germany, Jörg Lienhardt joined us as Chief Technology Officer. Excellent guys, that we're thrilled to have on board, on the team.

We delivered sales performance that was very strong, and we closed 800 contracts in the quarter, representing 60% higher ARR closing compared to the same quarter last year. To us, this is a testament to our resilience and stickiness despite the turbulence in the world economy. We've seen increased performance in the Energy segment over time, and it is rewarding to see that our offerings for power trading is ever more attractive in a turbulent European energy market.

Looking at the Infrastructure segment, we're progressing well with our expansion to the Swedish markets. And year-to-date, we've grown our customer base with 50% on a pure SaaS model in Sweden.

Later this year, we will launch new and exciting capabilities in the construction suite that will enable continuous growth in Sweden next year. To summarize the growth opportunity in Volue's markets. It is driven by climate change and our collective efforts to decarbonize the planet. Both growth drivers are already present and looking at the world around us, the market opportunity is only growing.

By 2030, more than half of the energy capacity in Europe will be weather-dependent generation like solar and wind. The crisis in Europe is here. We read about it every day in the news, and we see the consequences every single month on our utility bills. At the same time, we buy heat pumps and electric cars like never before, leading to even more problems to solve. In many ways, you can say that our end markets experienced what we think is the perfect storm, to weather this storm, the energy industry must optimize assets, improve strategies and automate trading.

This is what we do, and we know how to do it. For the section of results for the third quarter of 2022, I will hand over to Arnstein Kjesbu, our CFO.

[Arnstein Kjesbu, executive]

Thank you, Trond. I will now go through the financial performance for the third quarter of 2022. Volue you had a very strong growth in the third quarter. And combined with a stable uplift in recurring revenues, this is -- has been one of Volue's best quarter ever.

Operating revenues ended at NOK 294 million, and this gives a growth rate at 23% in Q3 with an organic growth of 20% compared to third quarter 2021. The revenues are driven by a very volatile power market, and this gives a solid market opportunities. In addition to energy, we are also very pleased to seeing that the shift in business models gives us a solid growth rates from the infrastructure segment.

Volue continues to invest in scaling the organization to meet our long-term ambitions. But as stated at our Q2 presentation, improving margin and cash flow is core priority, and we are very pleased to see uptick in the margins from first half 2022.

Adjusted EBITDA margin ended at 17%. With the improvement in free cash flow, we also see an increased net profit with 130% from Q3 2021. We are currently taking on strategic investment to scale our further growth, that also is impacting our adjusted EBITDA margins. Growth and scalability is core for meeting our long-term ambitions and creating margins over time. We'll keep on strengthening product offerings and the SaaS platform, and we expect the R&D CapEx level to increase going forward to capture the new market opportunities that we see.

Growing recurring revenue is core for Volue as a software company, and our growth journey is based on uplift in annual recurring revenues. Our share of revenues is 62% for the last 12 months. And in the quarter, we generated NOK 181 million in recurring revenues, creating a growth of 19% from Q3 2021. The growth rate in recurring revenues is in line with our targets. The growth in ARR is driven from all our segments. And in 2022, the SaaS revenues grew with 27% from similar quarter in 2021, leaving the SaaS share on 23% or out of total revenues for the last 12 months.

Growth in annualized recurring revenue basis is mainly driven by new sales, both due to new logos and upselling on existing customers. As stated previously in the presentation, we have seen a strong sales in the quarter, and it gives an uplift in the base.

Combined below churn, this is a proof point of our growth path and profitability plan. At the end of Q3, our ARR basis, annualized recurring revenues on a 12-month basis was NOK 819 million. The base was growing with 18% from Q3 2021. We are undergoing transformation in business models, and we are very pleased to see that the churn level remains very low. To us, this is a testimony of our services are critical and vital to customers' business processes.

Statistically speaking, churn level under 2% suggests that an average customer life cycle is 50 years.

Shifting to the segments. Our main growth is coming from the Energy segment with a growth rate of 36% in Q3. We see a very volatile power market, and this creates a tailwind for our trading advisory parts of the portfolio. Both annualized recurring revenues and nonrecurring revenues are growing solid in the quarter. The power markets volatility create increased demand for our services. Our business outside of the Nordic is growing rapidly, but also we are very pleased to see that a strong market in the Nordics. The adjusted EBITDA margin for the segment has somewhat weakened compared to last year due to more investments in the organization for further scalability and also shift in business models.

However, we see a solid improvement in margins from Q2 2022. We expect also to increase the investment level for the area going forward.

For the Power Grid segment, we had a quarter with a strong sales and it gives an uplift in recurring revenue base and is also expected revenue growth going forward. The market outlook is huge. The order backlog is growing and Volue will increase capacity on the delivery side to improve the growth rates going forward.

The margin in the quarter has decreased from Q3 2021. The main reason for this increased activity to expand our market footprint and building the organization for further growth.

Volue also invest quite significantly addressing new market opportunity, both within the Spark program and expansion in product portfolio, which impacts margin. We'll talk more about this later in the presentation by Felix.

For the Infrastructure segment, we are very pleased to see that the shift in business models are progressing as planned, and we have managed to protect the software revenues despite a large shift in revenue stream. For the quarter, we have seen a growth rate of 12% compared to last year. The margins are improving from Q3 2021, and we see an uplift in ARR that impacts the profitability for the segment. More of our spendings are more towards R&D investments for our SaaS platform. However, we expect the CapEx level to be in the same line as it is going forward for this segment.

Volue's plan is to increase the profitability towards 2021. The main elements for increasing our margins as a growing SaaS company is growth in economic of scale. Most of our revenues will come through existing products towards 2025, and this gives a solid uplift on ARR levels.

So what are the main drivers for why profit and cash flow will improve towards '25 in line with our targets? Shift in business model will increase profitability with centralized technology and services and capabilities on the Volue platform. We are doing significant investment to meet market opportunities and profitability increase by getting more and more services upon our SaaS platform.

Volue's investment in sales and marketing and building an organization for scale, we will see scalability as an integrated organization to take out synergies and market opportunities towards 2025. But most of all, we are expanding our market footprint and meeting an increased addressable market that gives us a profitable upsell and growth in new markets.

Towards the end of the period, we expect impact from larger ongoing investments that will drive growth and return on those investments. However, in the quarter, we are pleased to see that the cash flows are improving compared to first half, and we are delivering gradually an uplift in our profitability plans.

So in the short run, we have several activities that impact our short-term profitability. We are investing in scaling the organization. The SaaS journey, we are undergoing shift in business models, and several new business activities are taken into account that will impact the growth margins also forward.

As a proof point, by Volue see increased profit, we see an uplift in contribution from our products already in 2022. And as you can see, we are planning to steadily -- steady uplift in EBITDA margins towards 2025. And this is a core priority to get uplift in margins already in 2023.

Then I will give the word back to Trond, who will go deeper into the industry development and strategy.

[Trond Straume, executive]

Thank you, Arnstein. The purpose of Volue is to help our customers succeed with the transition to renewable energy, whilst mastering ongoing and upcoming crisis along the way. Traditional energy production, like thermal and nuclear are being phased out in favor of renewable energy, such as Solar wind. These new asset types are non-regulated, meaning that the production capacity is weather dependent.

In addition, renewable energy is being installed where climate and political conditions are being met, not necessarily within geographical reach for critical demand. The consumer side becomes more unpredictable in a world that is ever more dependent on electricity. This means that the load on the grid is creating problems and a result is volatility in the power markets, creating more opportunity and more risk for the power industry.

Our customers are talking about the need for wall-to-wall digitalization across processes and disciplines to manage this transformation. For a company like Volue, who's been serving a conservative energy industry for decades. This represents a shift change. Helping power producers, distributors and industrial consumers to manage this transmission is what we do, and we know how to do it.

2022 has been the year where the European continent fully realized its dependence on electricity. We closed down nuclear and coal power plants to deliver on our goals for the green transition. The new energy sources are in large part weather-dependent solar and wind assets. Gas shortage is now being a reality here in Europe.

The power industry has been widely recognized as stable, predictable and conservative for a century. However, a number of colliding factors and incidents creates concerns for governments and regulators. The consumers are left with unprecedented high power prices. The big conversation this year has been the risk of rationing power consumption this winter. But that is only the short-term picture.

In Volue, we have Europe's largest team of power market analysts. They see increased risks of power blackouts in certain weather scenarios with low wind and solar production in combination the low temperatures. This is a risk that is predicted to last for the next 10 years.

We were all shocked by what happened in Texas last year. But this can be a reality in Europe too, when the balance between supply and demand gets out of control. In fact, the power industry battles this balance every single day. Has a nightmare example from Germany. Due to differences in supply and demand, customers were facing imbalance costs of up to EUR 3,200 per megawatt hour, a disaster for the holder of the imbalance and a unique opportunity for the companies prepared to capitalize on a volatile market.

Let's see what the future holds. Even for Volue, having Europe's largest analysis team, it is hard to give an exact guidance for the energy market. The explanation can in parts be described by these two charts.

The green shift triggers a close race between increase in supply and demand with periods of shortage of supply. Also bear in mind that the new production capacity is being fed into the system. By and large, it is weather-dependent renewable energy sources. It is interesting to hear from our customers how Volue helps drive top line growth. To date, we focused on delivering 5% improvement.

To the left, we see a larger utility who recognized 5% improvement, translating to EUR 40 million increased revenues annually. Another example is a smaller utility who achieved a return on investments in 3 months and saw a 3% improvement in the first quarter after go live.

Now we're looking to find the next 5%, 10% in total. In conversations with executives who are often challenged if we can provide evidence upfront before commitments. Our answer is that we only need to realize 0.5% improvement to provide ROI in 12 months. In that way, it's an easy value-based sell.

Across all our segments, a more volatile and complex world, increase the need for advanced offer. This, in turn, creates business opportunities for us. Looking at our financial figures, this is most obvious within the Energy segment, which was mainly responsible for the strong top line growth in the quarter.

We've also touched on the good trend within the Infrastructure segment with particularly exciting progress within the construction industry in Sweden. But at this point, we would like to highlight some trends within the Power Grid segment. This is where we traditionally support local and regional grid operators mainly in the Nordics.

However, the business is changing along two axes. First, the market is becoming more complex due to distributed energy resources, such as rooftop solar, batteries and electrical vehicles. And second, we're expanding beyond our Nordic base and into Continental Europe, where Germany obviously is a key market.

So it's a pleasure to introduce Felix Dorsemagen from our Düsseldorf office, who will talk more about volumes offering in this growing market. Felix, please.

[Felix Dorsemagen, executive]

Good morning, everybody. As Trond said, I work for the business development department for the Power Grid line of business of Volue in Germany. And I would like to talk about what we see as interesting market opportunities during the next years for Volue and why we are expanding into Continental Europe.

The energy transition is accelerating and it's mainly driven by solar panels, by increased batteries and high penetration of EVs and heat pumps. Overall, we will have 200 million new distributed energy resources, or DERs in Europe by 2030, creating an increased need for demand and supply to be balanced continuously in the local grid.

It is all about increased flexibility needs and how to handle these flexibilities and the market potential is NOK 35 billion. This is also part of the energy transition with broad political backing with regulatory barriers being removed continuously, like, for example, in Germany, to incentivize solar panels on every rooftop and to produce more than your own consumption.

On the downsize, these are new resources that challenge the local power system creating problems that call for new instruments with high scalability. This is where Volue wants to help. Volue has more than 50 years of history in the energy business, and inside the value chain of the energy system and especially in energy system that is driven mainly by distributed and renewable energy, we recognized three market opportunities that are most in line with our experience and the upcoming customer needs.

As Trond and Arnstein have shown, we already very successfully offer solutions for the existing electricity markets. In addition to that, DERs that offer flexibility to the system are at the center of the value chain. And with an increased amount of DERs, there will also be an increased need for addressing these flexibilities. This gives us three areas of interest for Volue.

First of all, since the DERs will be connected to the distribution grid and because of our long experience with helping grid operators, the Power Grid line of business is, of course, a crucial part of this journey. Secondly, there is our Spark program, that will be a matchmaker in the neighborhood energy system, emphasizing that large parts of the energy transition will take place in the local communities.

And last but not least, there is a need for our energy management and aggregation in the system that will be addressed by Volue's software solution for residential and customer -- commercial end customers.

Let me add a little bit more detail to these 3 market opportunities. Neighborhood energy coordination by grid-aware charging is in the local communities is the new market opportunity addressed by Spark. Spark will make EV charging smarter. It will coordinate demand and supply on a neighborhood level and it will aggregate flexible demand on neighborhood level to participate on regional markets. That means that Spark serves as a matchmaker, making smart charging at scale and opportunity for the power system, both on neighborhood level and regional level. As such, Spark is a business-to-business offering, addressing 3 segments of subscriber, owners and operators of DERs, like, for example, charge point operators or public parking operators, local grid operators and regional market sectors like power producers or virtual power plant operators.

With Spark addressing and grid operators and charge point operators first, Volue is also taking a position in the aggregation of the many resources within households and commercial customers. As a service provider to the end customer, Volue is active in the energy management. The overall goal in this part of Volue's offering is to help these customers to get access to the power market, and, at the same time, increase the resilience and the security of supply of the energy system.

With increasing energy prices, residential and commercial customers have the need for local optimization behind the meter. And with automatic and scalable solutions, for example, for network fee optimization or self-consumption optimization, we help our customers to adapt their energy usage. At the same time, the aggregation of the many energy resources can help our customers decrease their energy costs or generate additional revenues both through the participation on existing or future energy markets.

Last but not least, we're addressing grid operators in the European market. There are 3,000 electrical utilities in Europe, which each year spent NOK 11.4 billion on software, and we are planning to take a European position here as well. One good example of the challenges we are helping grid operators with is the private transportation sector. With the electrification of this sector comes the need for EV chargers at household level, and the huge amount of connection requests for these chargers create a lot of manual labor to be done by a few experts, creating a bottleneck at the grid operators.

In Germany, we will see a 50% increase in these requests in the coming years and NOK 1 billion are going to be invested in Europe each year in this part of the value chain. We, as Volue, learned from a similar increase in Norway, which is why we have created a Software-as-a-Service solution to optimize and evaluate these requests and help grid operators save time and money. And this is just the beginning with the challenges and the strong growth in the three presented market opportunities and our long experience and offering in these areas, we will find many more possibilities to grow our business.

And with this outlook, I thank you, and hand over to you, Trond.

[Trond Straume, executive]

Thank you, Felix. That concludes industry development and strategy. If you'd like to learn more about Volue and what we do to create customer value, a full recording of our recent Capital Markets Day is available on volue.com/investors.

Now let's shift our focus to summary and outlook. Our services are very sticky as we are ingrained in the customers' business process and value creation. And providing an integrated value chain in the cloud is the answer to our customers ask for wall-to-wall digitalization of the value chain. And for us, this also opens opportunities to cross-sell and upsell our capabilities, fueling growth.

Now let's take a look at our priorities and ambitions for the fourth quarter of 2022. As we continue to pursue synergies within the Volue Group, we see there are many opportunities for increased operational efficiency. This is one of several levers that will help improve the EBITDA margin from H1.

At the core of our growth strategy is to grow our recurring revenues through our ongoing SaaS transformation. An important goal for us this year is to invest in market expansion outside our European home market with focus on Japan. We operate in attractive end markets undergoing transformation, and we focus our investments on scalable growth.

The energy market is quite fragmented and we believe there is an opportunity to take a leading position in a much needed market consolidation. We laid out some ambitions at the IPO 2 years ago. These haven't changed. We believe in about 15% organic revenue growth, increase in recurring revenues towards 80%, with more than half of our revenues being generated from our SaaS business. By protecting and growing our margins, we believe in adjusted EBITDA levels towards 30%.

We operate in a highly fragmented market in need of consolidation. And combining these growth metrics with M&A, we believe in NOK 2 billion in revenues by 2025. So to summarize, we see the shift to green non-controllable energy sources lead to increased volatility and complexity for our customers, requiring more advanced software solutions.

We in Volue help our customers with wall-to-wall digitalization of the clean energy value chain. Our ongoing SaaS transformation leads to growth in recurring revenues and uptick in EBITDA margins over time, and our 2025 goals of exceeding NOK 2 billion remains. So thank you for your attention, and we'll now open for Q&A.

[Unknown Executive]

We have some questions coming online. So the first one's for you, Trond. Although SaaS revenue shares has grown the ARR share or total revenue is declining. Why is that?

[Trond Straume, executive]

Well, first of all, our ARR revenues are growing according to plan. We see a very nice uptick in the ARR levels in third quarter. But we're seeing volatility in the market. So if you look at the overall growth of top line revenues, that is on 23%, which is a bit above our guiding. So the share of NRR is also growing in this volatile market.

[Unknown Executive]

Can you also -- there's a question related to how the volatility in the market are affecting Volue? And the question goes to if about there is next year or going for less volatility than we see today, how will that potentially impact Volue?

[Trond Straume, executive]

So first of all, volatility is something that we in Volue were quite equipped to help our customers master the volatility, and we sell our software solutions to our customers to not only master volatility in the end market, but also volatility in power production. And given the green transition, volatility as such in the energy system is a fact and it will remain growing. But we can see some drop in volatility in terms of pricing. We help our customers to secure the value creation of their assets. And sometimes in the past, we have seen very low prices that has led our customers to accelerate the full digitalization of the value chains to become more automated and more performant and efficient. So there is no doubt that volatility helps drive top line growth. And also, as we just talked about, it also helps fuel some NRR.

But in general, I think we've proven we master both a volatile and a lower market.

[Unknown Executive]

There is a question also on if it is possible to give some comment on the increased investment in Power Grid, since it affected the EBITDA levels, it's assumed to be operational, but also when it comes to the investment in products and service itself. Could maybe give a comment on the level itself, currently, as Felix was speaking about during the presentation, we are doing quite significantly business development investment. That is the investment that we don't put in our CapEx. So we're increasing our operational expenses for those activities quite significantly. In addition, we are also investing in products and services and will expect that to increase in line in market readiness going forward for the sector. So mainly, there is operational expenses that we are taking and that's impacting our margins.

There is a question also when it comes to M&A. As you highlighted, M&A is a priority for Q4. Could you please be more specific on near-term opportunities? Should we expect M&A in Q4?

[Trond Straume, executive]

So over the past 2 years, we've built a quite comprehensive M&A capability within the company. We have analyzed now 350 million companies across Europe and also in the U.S. We maintain a long list of about 50 candidates, and we maintain about a handful of opportunities that we're working really focused on. For us, M&A isn't quite binary, either it's happening or it's not, but there are some attractive candidates there in the market that, that we are pursuing and being more interested in than others.

[Unknown Executive]

That was the question that has been raised. So if there is no further questions, then we will -- that end out the Q&A section.

[Trond Straume, executive]

Thank you very much for attending. Have a fantastic day.