Xplora Technologies AS
OSE:XPLRA
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Earnings Call Analysis
Summary
Q2-2024
In the recent quarter, the company achieved its second highest revenue in history, increasing from NOK 191 million to NOK 195 million, marking a 21% year-over-year growth. Service revenue grew 35% to NOK 66 million, and total subscriptions rose nearly 50% to 281,000. Gross profit reached NOK 96 million, with EBITDA up 33% year-to-date. Looking ahead, the company plans to reach 1 million subscriptions within 4-5 years, targeting kids, youth, and seniors, through both organic growth and potential M&A activities.
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All right. Good morning, and welcome, everyone. Xplora, we have our Q2 quarterly presentation today. We'd like to welcome everyone live within the audience and also everyone watching us live online. It's fair to say we are really excited to present to you the results and the numbers. And as we adjusted the format slightly from this year today as well, it will be myself, accompanied by our CFO, Knut; and COO, Kjetil. And of course, we will all be available during the Q&A at the end.
The agenda today will have almost the same format as previous time or last time this year. I will just make 1 quick introduction before we go into the number comparing some of the key differences from this first half year versus last year in '23. Then we'll go through the high level numbers, financial update, operational update. I'll do my best to have a glimpse into the future in the outlook, and we end with a Q&A session.
So before tapping into the number, I have 2 slides just to pinpoint some key differences, some very important details that is a slight different from this year versus last year. As we see last year, we had a one-off effect, whereby we focused releasing and selling some of our inventory in order to release and strengthen our cash position.
So if you can see this year, we had NOK 195 million, which is a steep increase from our organic sales last year, and we have also highlighted the one-off effect of last year, when we sold our inventory. So I would like the audience to pay attention of that difference as we move forward into the presentation. And as you also see, we are very happy and satisfied with the results being the second highest quarterly revenue in the history of the company. So one important introduction to the quarter.
Also, I would like to use this slide to just allow to pay attention on 3 very important KPIS. As we have emphasized during our Capital Market Day, in particular, there are 3 key KPIs that we would like to monitor and follow throughout our development.
One is, of course, our ASP, our average selling price of the product. And we have said it's a key element for us to make sure to introduce more expensive products also with higher margin and drive up our ASP. And again, if you compare from first half last year, we have an increase from NOK 941 to NOK 1,080. If you adjust for the one-off effect of the inventory, you have the number in the bracket next to it.
And also, we said it's also very important for us to sell units where we can attach SIM cards. And as you see on the image on top, we have also made a change in our portfolio of product, now primarily and only having product where we can attach SIM card. As previous year, we also had some product that was Bluetooth products. So again, compare apple-to-apple, we have an increase of the units sold in the market this half year with 171 versus actually SIM-related product again adjusted for the inventory sale of last year, 154 to 171. Kjetil will take you through some more of those details.
And also, if you look then at the result because we would like to sell product where we can attach SIM cards and sell as many SIMs as possible. In percentage, you can see the total volume we sold last year over the units in total, 26% and now increase to 33% of the volume we have sold with activated SIM cards. So 3 of our main KPI have developed in the right way, also important to pay attention to.
With that slight introduction, we have our high-level number at a glance. This is for the first half of this year, where we can see our group revenue is up to NOK 313 million, which organically is up 22%. Again, if you adjust for the reported one-off sale last year with the inventory, up 9%. Recurring service revenue, NOK 128 million, which is up 36%. And we ended with 281,000 subscriptions, up almost 50%. And Kjetil will take you through a very detailed breakdown of that subscription base.
Gross profit, NOK 165 million, up 13%, and we have increased our EBITDA of more than 30% to SEK 19 million in the first half year. Our fifth quarter in a row with positive EBITDA and a cash balance of NOK 126 million. If you look isolated at Q2, the group revenue, NOK 195 million, organic sales increase of 21%, reported 2% if you account for the inventory sale last year. And recurring service revenue, NOK 66 million, up NOK 33 million.
Of course, the same number of subscription and a gross profit almost NOK 100 million in the quarter, up 8%, an isolated NOK 70 million, which was the same as last year when you included the inventory sale and a cash balance of NOK 126 million. [ High low ] number in the same format as you always have seen, and now Knut will give you some more details.
Thank you, Sten. Sten had then presented the key figures here, and I will go a little bit more into the details. So total revenue increased from Q2 '23 to Q2 this quarter from NOK 191 million to NOK 195 million. And NOK 195 million is the second larger revenue quarter in Xplora's history. So it's a good number.
We also see that the sale of inventory in Q2 '23 boosted the revenue in the quarter, as Sten said. And if you look at the percent increase here, you have a 21% increase year-over-year in the total revenue number. Device revenue ended on NOK 129 million, and we have a constant gross margin above 30% over the last year.
When you look at the service revenue, we have an even steeper increase from NOK 49 million to NOK 66 million. And with the high margin that has been quite steady for the last 6 months, this represents a very important revenue source for Xplora.
Total gross profit increased to NOK 96 million. That's up NOK 7 million from NOK 89 million in Q2 '23. When you look at the P&L for this quarter, we have operating expenses of NOK 79 million in this quarter compared to NOK 72 million in Q2 '23. The main increase here is related to payroll expenses. And we have 3 items, 2 of them is presented there. We had a noncash share-based compensation that is on a higher level compared to last year. We have also sales commissions and bonus accruals that we have on NOK 4.5 million this quarter compared to 0 a year ago. And we have also capitalized less R&D expenses this year than last year. So that also represent the 3 main items in the increase in total expenses. We have also the positive EBITDA of NOK 17 million in the quarter, and that's also a few NOK 1,000 higher than Q2 2023.
A few important items in the first half profit and loss. We have strengthened the gross margin with 25.2%, and we have now a gross profit of NOK 165 million. That's half of the gross profit that we had for total year of 2023. So I'm already there. And usually, we have a much stronger quarter in Q3 and Q4.
I already commented on the major items in the expense levels. And if you can also see here, as Sten said, we have a 33% increase in EBITDA from year-to-date 2023 to year-to-date 2024. When it comes to the balance sheet, it's quite strong and represent what we believe is the right level on most of the items. We have, for instance, the inventory that is NOK 104 million in the quarter, and that's the level that we should be on when we see how many markets that we are selling to. So the inventory level is approximately the level that we believe is the right level.
We are reducing the other long-term debt. Now it's the NOK 10 million. That's our loan to Innovation Norway. That's gradually decreasing. And we have also reduced in the quarter a short-term debt to credit institution for financing of the supply chain.
When I look at the cash flow, we started the quarter with NOK 120 million in cash, and we have NOK 5 million in CapEx compared to NOK 7 million in CapEx in Q2 2023. So we have reduced the CapEx level in these accounts, meaning also that we have more of the cost in the P&L and less that we capitalize. We still have a very good overview over our investment in R&D and feel that this is the right level, as we have communicated before for the CapEx.
We have change in debt in addition to the downpayment that we do every quarter for the Innovation Norway loan. We are also reducing the supply chain financing in this quarter with NOK 22 million. And by that, we are ending the quarter with a very healthy cash position, NOK 126 million. This is up compared to same quarter last year with NOK 27 million. Last year, we had NOK 99 million. Thank you.
Good morning. I will start with the smartwatch unit sales development. I said on the Capital Markets Day, this is the prerequisite for our growth in service revenue. But Sten and Knut have commented on it, but just to clarify a bit more.
Last year, we had a sale of 84,000 units plus the, let's say, onetime sales effect of the Brodos deal, the European Master Distribution deal. And we also sold 17,000 units of the fitness tracker that doesn't bring any service revenue. This year, we have sold in Q2 117,000 units, that's a growth of 39%. That's a good foundation for the service growth.
We also see an increase in the average sales price Q2 this year to NOK 1,080 compared to NOK 999 same period last year. And we see a gradual increase through last year from NOK 999 in Q2 to NOK 1,021 for the full year, and then we continue the growth this year to NOK 1,080 in this -- in the previous quarter. We also during Q2 did a price increase of our 2 best-selling models in the German region, the DACH region, that partly had an effect on Q2, where we will see the full effect in this quarter.
The service subscription base increased by 55% from 181,000 in Q2 last year to 281,000 this year. It comes from 4 different services. The mobile subscriptions, 221,000 units, I'll come back to a little bit more details on the next slide, grew to 221,000 because we expanded from basically 4 markets, the Nordic markets last year, and we started to ramp up in the other markets. So 9 markets in total.
We also have -- we have very much success with our premium service, which is the value-added service, the activity platform that we partly bundle with the mobile subscriptions plan, but we also sell them standalone through the Xplora app. And we will also, in Q3, get the first effects from the premium service being sold to a telco.
We then have service revenue from telcos with 12,000 subscriptions, and that is when the telcos sell the Xplora smartwatch with their own SIM card. We have now 4 contracts in Q2 this year. And then so far, generating 12,000 service revenue from that part. The service fee has proven to be a success. 3,000 doesn't sound like a big number. But actually, the -- what we use it for is to improve the share of smartwatch sales with our mobile subscription plans. So we calculated the net annual effect of the change we achieved through this to NOK 15 million on an annual basis based on only these 3,000 because we come then to a 100% service revenue share of smartwatches sold in the 4 Nordic countries where we have implemented this service.
Let me dive a little bit more into the details about the mobile subscription base. We see a 30% year-over-year growth from 170,000 to 221,000 mobile subscriptions. We had gross sales this year of 37,000 subscriptions in the quarter. We had 24,000 last year. So that's an increase of 54%, quite the aggressive growth. The net growth, that's the growth minus churn, was overall 18,000 in the quarter. We continue to grow strongly in the Nordic markets with 11,000 and Germany with 5,000 in the quarter. So in percentage of the German customer base, this is exceptional growth. And also, as we commented a little bit on previously, the Spanish market is doing much better than earlier.
When we look at the service revenue overall, we have 35% overall growth compared to the same quarter last year, taking us from NOK 49 million to NOK 66 million. We also see that this year of the service revenue coming outside of the Nordic, which historically had been the driving markets, increased from 3% to 13%. And Germany, with a very strong growth, taking us from 1% to 6% of the service revenue, also U.S.A. performing well from 1% to 4%.
What is also important is the ARPU. We have talked about the growth of the 4-quarter rolling service revenue, which is very strong, but also the ARPU. The ARPU is the average revenue per subscriber, mobile subscriber. And here, we see at the top the Nordic region. There is a price difference between the Nordic regions and the new markets. But we see in the new markets, where we introduced the mobile operation service, a very steep growth. The reason for the steep growth is that we had some introductionary offers, and we see small stabilizing on a higher level. But there is a price difference between the different markets.
The reason why we are able to increase the ARPU still in the Nordic markets is because we have gradually increased the price per subscription over time. And there is a stable churn. That means that the new customers that come in, come in on a higher price than the ones who churn out. What we did after Q2 on July 1 was do a further price increase in the Nordic markets for customers who have been with us for more than 12 months, that was 4% for the Nordic base. So that will also give an uplift hopefully going forward.
Some operational highlights. We have just recently introduced X6Pro. That's our top-of-the-line model. And we have launched it in the markets where we now have an eSIM mobile subscription, Xplora eSIM-based mobile subscription. And I think we are one of the first, if not the first MVNO to offer an eSIM profile. So that means that we have introduced X6Pro in Germany, Finland and Norway, where we have the eSIM profile in place.
We also now finally can report a breakthrough in the U.S., where AT&T has now certified our X6Play in the U.S. market. That means that we can move into also MVNO operation in the U.S. Hopefully, towards the end of Q3, we have ordered new products preparing the launch, and it will give us new pricing possibilities, more flexibility and also improved customer service and also somewhat higher service margin in the U.S. market.
Just before we -- this presentation, we were awarded the Best in Test for both the first, second and third place for our new product line. So that's a recognition. [ Tech NO ] is leading, let's say, technical press room for our services, and it's also present in Sweden. So that was a very nice rewards to get.
When it comes to the customer service operation, we have completed the outsourcing of 25 full-time equivalents to a service company that is specialized in customer service. And we have maintained an in-house core service team to improve the processes and drive the traffic even more through automated services. And that's very successful. Our chatbot accounted for 65% of the incoming traffic in the last -- in the end of last quarter. So that takes away a significant part of the traffic.
We also are scaling up the customer service team. We have 25. Post the quarter, we have scaled up further. There has been some, let's say, comments in the press and on social media about the performance. And I would say that this typically back-to-school and growth issues that we have added capacity, but we most likely have to continue to scale up capacity as we grow very fast. That concludes my part.
Thank you, Kjetil. So let's look ahead. And I think the biggest news or guidance in direction during our Capital Market Day was that looking forward, we will have one very clear goal and ambition to reach 1 million subscription. That's our leading guideline into the future.
We didn't mention anything about time. But over the next 4, 5 years, that will be our key lead, developing strategies, how to get there. We also said 1 million subscriptions would most likely come from subscriptions from kids, youth and senior. Kids, of course, in a category we know and lead. Youth because it's the fantastic opportunity for us to reduce churn, to transition from a watch to a phone. And of course, the senior market is very compelling for us because it's a lot of the same technology and also a lot of the same distributors and channels otherwise. Even the same buyer, you buy it for your child and you can buy it for your parents.
We also said, if you remember all the way back to our Capital Market Day in Q1 back in '23, we said we would remain crystal clear when it comes to focus. In '23, we said the only thing we would really do is to turn loss into profit from running our business on EBITDA. Only if we can accomplish that, we would focus on exploring new opportunities in '24. We also said '24 would still be all about driving unit growth with SIM and ARPU and profitability. Hence, we try to demonstrate that with the presentation today.
When it comes to new market, we said we would be piloting and exploring opportunities, not necessarily launch, but explore. And if we can manage all that in '24, we would try to be in a position so that we could scale into new verticals in '25 associated with our future goal of 1 million subscriptions.
We added a little bit more nuance to that in Q2 in our Capital Market Day, where we quantified the goal with the 1 million. And we also said that family IoT growth would most likely come from youth and senior. We added this comment to that slide in the Capital Market Day, that could happen organically or it could happen via M&A. And that 1 slide added quite a lot of questions post the Capital Market Day. So we would just like to add a little bit more nuance to that today, which is some of the questions we received quite a lot of post the Capital Market Day in Q2.
And it's a couple of very important details when it comes to how will we assess organic growth versus M&A growth. Because as Kjetil said during Capital Market Day and reemphasized today as well, the prerequisite for us to reach 1 million subscription is pure mathematics. We need to have a 15% growth on an annual basis. With the same conversion percentage we have today, we will reach 1 million.
We also need to have 15% growth. If not, we are churning from a larger consumer base. So that's kind of what is driving our organic growth strategy. Fueling 15% growth, we will get there within that timeline. We also got some questions, if we are exploring M&A opportunity, what could that be? Because of course, you could easily get concerned. Are we looking into a company that have software innovation, that is some new feature that could add revenue 5 years ahead? No.
If we're exploring those venues, there are 2 very important drivers for that assessment. Number one, potential companies that over a long period of time have delivered positive cash flow and from day 1 would continue to deliver strong, positive cash flow. And also, it would be company or services that will add our portion of high-margin service revenue. So we just wanted to emphasize that as we have received some very clear questions.
Our organic growth, as Kjetil said, it's a prerequisite to continue to chase 15% growth. We will reach our goal at 1 million subscriptions. The other venues, these are the 2 key drivers for what even would be considered relevant for us.
The outlook slide, no changes from last time. Of course, we continue to chase 15% growth. And you can then also argue, it means also a 15% unit growth to drive our ambition. And our ambition is also to beat the category in general. It's also still more important for us to drive subscription growth from service revenue, and also, as Kjetil has mentioned, even to include new types of service revenue deals.
Knut was also very clear, we have the right level of CapEx. Our target is to be below NOK 20 million at the end of the year. And last time, we said we are targeting and we remain steady to launch our first product and services within B2B SaaS. And from the senior division to commercially launch the first senior product within end of this year.
We can now also add 1 new details on the senior division that as of right today, actually yesterday, we have also entered into the first agreement with a major telco in our market to join us on the piloting of the senior product within second half of this year. And if you recall Back to our time with Deutsche Telekom, they also joined our piloting of the first eSIM product, X5Play, with the objective after a successful pilot to then commercially launch that product into the market. We have the same expectation for this as well. So a slight update on the senior development. And with that, we move into the Q&A.
Shoot.
I have several questions. The first one is, normally the first half is around 35% of full year revenues. I guess that seasonal would change somewhat because you have a higher share of services in the mix. But how disappointed will you be if you don't deliver NOK 900 million revenues this year?
I think we shouldn't comment on the revenue, but please comment on the expectations if Q3 and Q4 should increase from Q2.
So it's a very simple answer is that the service revenue is expected to continue to grow as they are doing now. You can pretty much use a ruler on the history on the subscriptions. So far, it looks very good. When it comes to the vice revenue, we also expect, of course, that the 2 second last quarters of 2024 should be stronger than the first half. I think disappointed or not, I think we are doing pretty good by the growth we have as we are doing now.
And just a follow-up, if I may. Even though the ASP is increasing on a number of devices, we see that the gross margin is down on a year-on-year basis. Can you just explain the dynamic whether that is kind of what channels you have sold the devices in campaigns, et cetera?
It's quite steady. It's not that much down on devices. If you saw my slide, it's around 32% to 34%, and that has been on that level for the last 4 or 5 quarters. So it's quite steady. The key driver for our margin here is beside models and markets and so on is, of course, the exchange rate between dollars and euro, and that has been very stable for the last year. So that's also a very important part of the gross margin calculation. But on the devices, we have actually had quite stable gross margin for our products for the last 4 or 5 quarters.
The point being, I would expect gross margins to improve, given the increase in average selling price. That was kind of the point.
Yes. But I think some of this is also linked to exchange rates as well.
Okay. And if I may, I just saw in your notes that you used NOK 10 million on external consultants per quarter. What is that?
That's several things. It's legal. It's audit. It is also customer support, and there's also some marketing activities that is into that portion that is not linked to normal marketing costs.
So basically, the outsourcing of the...
Customer support is in that line.
Okay. Perfect. And final question on M&A is can you specify any type of region you're looking at?
Not because I cannot, but not relevant to comment at this point. But what is clearly relevant to comment is that, of course, even exploring such an opportunity, it would be to leverage 100% on our 9 core market where we have MVNO setups.
Or anything on size, typical size...
No, no. The only thing, as we mentioned, that it's -- if that is the venue, it's a meaningful positive cash contribution historically over time and from day 1. So that also says something about the size indirectly.
While you fire up some new questions in the audience, we can take someone online. Good morning. Regarding customer service, it stated that there is 25 employee reduction. What is the net effect? You briefly commented since some is in consulting, but Kjetil you can comment additionally.
Yes. No, as you asked, I mean, we are basically moving it from personnel cost to consultants cost, but the net effect is close to 0. That was -- cost was not the main or was not any driver for outsourcing. It was the fact that we had unstable workforce. We grew very fast, and we have now entered into a partnership with a company who specialized in customer service. So we have expect more stable workforce and better performance. That is the reason why.
Can you talk more about the phone? Is it under development already? Can you -- when can we expect the launch? I then assume it's referred to the phone for the older kids and youth. If you recall back to '23, actually, the one slide I was referring to. When we -- at '23 level, we had the objective to move from negative to positive. We also had to pause or terminate quite a lot of different activities because we focus only on the thing we -- where we made money and focus on the SIM.
One of the initiative we paused at that time was the development of the standalone parental control. It was roughly 70%, 75% already developed. So on the software side, we have now reengaged those activities. And as you also potentially can imagine, we could also use the same hardware for phones, both the senior market and youth just with different software.
So the simple answer is that on the software side, we have reengaged with the previous development for the parental app, and we are exploring different venues or partnership or strategic models on how we launch the hardware into that market.
The first telco partner that you have signed on the pilot for the senior, is that a revenue share agreement? That will be announced when it will be announced. Now it's focused on having a deal done on the pilot itself and then post the pilot, that will be announced.
Any more questions from the audience? If not, we'll see -- yes, on services. Because of the mix of new markets and subscription with lower price points, can you expect lower ASP on the service side that is going forward?
No, basically, not because we are just converting the, let's say, smartwatches that we already have in those markets to be included with our SIM card. So that shouldn't affect the mix, the ASP.
Can you comment more on what drives the sales increase in the U.S. and how you see the development of sale in U.S. over the next 12 months without guiding on U.S. particular, but in general?
Yes, we have learned that the U.S. market is very different from the European markets. Amazon is dominant. Retailers act differently. Consumers have other habits than in Europe. So we have tried out different ways of selling.
What we are very successful with now is with our own Web sales. And we have started with different, let's say, price points and the way we're selling. That means that we combine the unit sales, the price per unit with the subscription price. And the new MVNO setup that we soon will launch will give us further capabilities in order to have other price points when we sell and mix between the hardware price and the service sales. I think that's -- sorry, at least partly answered the question.
But we, with the new MVNO service that we soon will launch, we have much more possibilities to test out different approaches.
Regarding the road towards 1 million, can you comment on what that will mean for EBITDA goals and numbers if you reach that 1 million?
It's a difficult 1 to answer, but I think Knut, you can comment afterwards. But we are not changing our business model in order to reach that, and that's also why we reemphasize, it can happen organically or inorganically. Regardless of model, it's based on our service subscription growth. And it's also fair to say that within the next 4 to 5 years, our goal is to keep the same types of core subscription, hopefully, with the same types of margin and product portfolio. That's why we are limiting it to say it could happen from kids, youth and senior. It gives us much more clarity on how to develop that strategy. And also, it should be within the same type of gross margin figures you see today. I think that's the only way we can answer that, and then you can calculate using the ruler principle you referred to as how that will -- what will happen at the point we reach 1 million subscriptions potentially based on the same blend we have today.
Just a follow-up question on the MVNO in the U.S. Do you have kind of the organizational setup ready for that so it's basically kind of you just need to get signed off and then push the button? Or do we need more resources of people or anything?
No, we don't need additional resources. We have a U.S.-based team, and we set up the agreements from our Oslo office with the help of the technical resources we have here. So the technical tech setup is being done from here, while the operation is being run out of the U.S.A.
All right. I think that was it. We will be here over the next hour or so if you would like to have a one-to-one chat. Thank you so much for the time. Pleasure to have the presentation today and hope to speak with you afterwards. Thank you.