Xplora Technologies AS

OSE:XPLRA

Earnings Call Transcript 2024-Q3

[Sten Kirkbak, executive]

Good morning. Welcome, everyone here. It's great to see that we yet one more time, full here live, and we also have a record number joining us online to follow the live stream. We even had so many people joining that we have several meeting later today to follow up with all the interest. So that makes us really happy. Furthermore, boy, we look forward to present the numbers for you today. That's for sure. We will follow the format as we have done the whole year. It will be myself, Sten Kirkbak, joining in the intro and then Knut, our CFO, will take you through the financial details. Kjetil will guide us through operational update, and I will end with an outlook. So we have one more topic on the agenda today that we normally have. We have added post 4, which is some post-quarter events because already after closing Q3, quite a lot of things going on in the company. So we'll give you a little update in that regard as well before we move into the outlook.

I just wanted to use this slide to give you a little overview of the quarter before we go into the details and the numbers. And when we started 2024, we had high ambitions and aspirations for this year. We illustrated that, as you can see in our Q1 report with putting a rocket on our shoulder to really kick off our ambitions for 2024. We used that in our marketing campaign, but it was also a symbol internally where we were going. We allowed ourselves to celebrate a little in Q2, celebrating the Women's Football championship, but also symbolizing internally profitable quarter in a row. And then for Q3, even before we started, we should climb the highest peaks to reach new goals, which we have, almost as steep as the development in our revenue. But the most important thing with this slide before we start with the financial is that in Xplora, we are more than 100 employees, and this is accumulated hard work from every single one, our fantastic employee that has made this happen.

Even though it's myself, Knut and Kjetil that's presenting for you today, we are presenting on behalf of every single one, our employee that has made these results possible. With that, let's go into the numbers, high level at a glance. Group revenue this quarter, up 35% to NOK 257 million, of which recurring service revenue also up 36% to NOK 75 million. We ended with subscription of more than 220,000 -- 226,000 to be precise in a combination of SIM and other service revenue. And one of the very important factors, you can see from our gross profit, up 45% year-on-year to NOK 125 million. And the number we have worked so hard to accomplish is our reported EBITDA at NOK 30 million. And I know Knut is very satisfied also to end this quarter with NOK 177 million cash in the bank that gives us great flexibility.

That's the high level, and Knut will now guide us through some of the details before going into the operational update. Knut?

[Knut Stålen, executive]

Thank you, Sten. Now Sten has gone through the most important numbers, and I think all of them, we are quite pleased to dig a little bit more into the details on them. When we see at the revenue, we've gone from NOK 190 million a year ago in this quarter to NOK 257 million. That's NOK 67 million in increase year-over-year. It's a fantastic increase from Q3 last year. If you look at the revenues in services, that increased with NOK 20 million, and the rest then came from the device sales. Looking into the gross margins for the 2 different revenue streams, the services continues to be very, very strong with 83% gross margin in this quarter, and this has been very stable for the last 7 quarters. So it's quite easy for us to predict as of now. And as you can see, if you follow the numbers, the revenue is almost following a ruler and you can easily calculate what kind of gross profit we will have from our service business. Also, the gross margin from devices was very strong this quarter with 34%. That's also on the high side compared to previous quarters.

The overall gross margin was 49% in Q3. And in this quarter, we had exactly the same contribution gross profit-wise from services and from devices. 50% of the gross profit came from services and 50% of the gross profit came from devices. So we are more and more happy about the contribution from the services, even though we have a very, very strong device growth. When it comes to operating expenses, that also increased compared to Q3 2023 with NOK 17 million. And the most important increase in this quarter is the increase in marketing expenses, that's NOK 7 million, and that follows very nicely with the revenue numbers. So it's approximately exactly the same percentage if you calculate marketing expenses from total revenue and also if you also calculate marketing expenses from device revenue. It follows the same percentage in Q3 2024 and Q3 2023 for all practical purposes. It's a 0.5% deviation.

And as Sten already announced, we have a NOK 30 million EBITDA result in the quarter compared to NOK 8 million in the same quarter last year. And please remember that the total EBITDA for 2023 was NOK 34 million. So we consider this as a very strong quarter. When it come to the balance sheet, I always repeated that we have the goodwill and the customer contracts from the Xplora is still the main part of the noncurrent assets here, and the customer contract is fully amortized end of Q1. Inventory is lower compared to previous quarters. We had previous quarter as NOK 100 million. And at that time, I said that, that followed very well the increased demand that we have. And we have also now NOK 80 million in inventory, and that also follow the demand. We have better control of inventory. We have better to plan, and we can manage with some more fluctuations in the inventory. So NOK 80 million in inventory is a level that we are quite happy about. When it comes to -- a second move over to the next slide. This is a new slide, and it tries to present the impact we have on the improvement in net working capital.

And you can see that we have had a very flat net working capital, including cash and current liabilities over quite some quarters. But from Q2 2024 and up to Q3 2024 this quarter, it's increasing. So this is strengthening the whole operations that we are working on. We started the quarter with NOK 126 million in cash and cash equivalents. We had the increase of NOK 70 million in cash flow from operating activities. And we have some change in debt. It's NOK 13 million. The only thing we have there is the reduction in supply chain financing and the down payment on Innovation Norway loan. The Innovation Norway loan is fully paid down in Q3 2025. CapEx, NOK 7 million in the quarter, and that's compared to NOK 6 million in Q3 2023. The CapEx is balancing very good with our target of around NOK 20 million for the year. So by this cash flow overview, we end the quarter with NOK 177 million in the bank. And if you also compare with what we had in the bank exactly a year ago, we had NOK 116 million. So this is absolutely something that we are very happy about. It gives us the flexibility we need in order to do what we should do. Thank you.

Kjetil?

[Kjetil Fennefoss, executive]

Good morning. I will start by taking you through the development of the smartwatch unit sale because that's the prerequisite for our services growth. Then I'll take you into the service revenue and also the ARPU development before I will conclude with some operational things we have achieved in the previous quarter. So we see that the smartwatch unit sales is up 30% year-over-year, and that's the highest number ever, increased from 125,000 last year and up to 163,000 this year, a 30% year-over-year growth, where we see that the DACH region, which is Germany, Austria and Switzerland, had a growth of 44% to 90,000 units and the U.S. grew by 50%. We also had the first delivery of our product that we developed specifically for the German retailer, MediaMarkt together with the MVNO Freenet. And the first 10,000 were delivered in August, and we see that the sales of that product goes very well. I'll come back to that towards the end of my presentation.

We also see that the average sales price, the ASP increased from NOK 1,021 to NOK 1,098 quarter-over-quarter. And that is a result in addition to currency exchanges from the effect of the price increase that we did in the German region on XGO3 and X6. We got a partly effect in the previous quarter. And in Q3, then we got the full effect. So all in all, 30% up, and that is the basis for the growth in the services that I will present in the following slides. The services subscription base, which is a combination of the mobile subscriptions, the premium activity platform service, the service revenue from telcos and the service fee grew by 44% year-over-year to 326,000. That's exactly 100,000 services up compared to same quarter last year. That's quite outstanding growth. And you are very familiar with the mobile subscriptions. That is the biggest individual service we have, 233,000 units. And we operate our telco business in 9 markets. It has also the single highest ARPU of the various services, and we had a 54,000 year-over-year growth alone on the mobile subscriptions.

The premium activity platform has proven to be a true success story for us. We surpassed 60,000 services in the previous quarter. And that is the activity platform, which is our core value-added services. We bundle it with the mobile subscription plan, and we sell it on an individual basis through the Xplora app. The service revenue from telcos is something which is quite unique for Xplora. I think it's quite unheard of that we get revenue from the telcos when they sell our hardware, but that's what we have achieved through our strong brand positions in some of our markets. We have that in place in the Nordics with several telcos, and we have it in the U.S. And we got a breakthrough in Germany when we added our service on top of Freenet's mobile subscription plans that's related to the Let's Go customized product we developed. The service fee is a service fee that we capture for the usage of our services if the customer selects to use a different SIM card compared to Xplora in the Nordic region. The major objective with that service is not to cash in on the service itself. It's to maximize the conversion of our mobile subscriptions.

So when we introduced that end of last year, we see that the effect of that is that we get a significant uptake in the mobile service subscriptions in the Nordic region. That takes the service revenue of mobile or Smartwatch sales to 100%, except for the units we sell to telcos in the Nordics. So the isolated effects of introducing the service fee is a NOK 15 million additional revenue on the mobile subscription plans because we get people to buy our plans instead of using something else. So that's a thing to specifically mention. If we then look at our mobile subscription base, which increased from 189,000 to 243,000, we saw that in Q3, we had the strongest net growth ever within 1 quarter with 22,000. And this is also the service where we have the highest churn. So 22,000 net growth is really strong within 1 quarter. And we see that the share of the net growth is 50% in the Nordic region, but Germany really gearing up with 35% of the growth. So we have now 28,000 subscribers in Germany, which is the second largest market for us after Norway.

Mobile subscription service revenue, again, very high growth, 36% year-over-year. Knut has already mentioned it, going from NOK 55 million last year to NOK 75 million. That's NOK 20 million in the quarter up, and this is where we have 83% margin. The annual recurring revenue grew from NOK 222 million to NOK 301 million. We are getting less dependent on the Nordic region. Germany increased from 2% to 7% share, the U.S. from 2% to 4% and U.K. holds 2% of the service revenue. So more distributed service revenue, but a significant growth of 36%. The ARPU is the monthly income from each subscriber. And here, we measure it based on our mobile subscriptions, either the basic service or the one including the premium service. And you see that the 4-quarter rolling ARPU has increased quarter-by-quarter for many, many quarters. So comparing to Q3 last year, we have an increase of NOK 5 per customer. And that gives us NOK 15 million incremental revenue. So NOK 15 million from the service fee, NOK 15 million from increasing the prices, 83% on the incremental and 100% on this part. So that's a significant contribution to our improved EBITDA.

We have done this by having annual price increases in some markets, especially Nordics, where we have been in operation for many years. But we also introduced a consumer price index adjustment 1st of July this year in the Nordics, affecting 170,000 subscribers. So that alone gives more than NOK 8 million on an annual basis, incremental margin actually. Another effect, a reason for why we are able to grow the ARPU is the churn effect. When we have increased the price over time, we have the oldest part of the customer base churning out, and then we get in new customers on a higher price. So that's also an explanation of the effect. Then you see on the right-hand side that there is a regional difference in the ARPUs. We have the highest prices in the Nordic markets, while the price range from EUR 4.75 to $17 in the U.S. So there's a very big difference in the prices in the markets outside of the Nordics, and they are in general at a lower level, except the U.S., where we also have high ARPU.

Then some operational highlights when it comes to what we did in Q3. We introduced Generation 2 of XGO3, our entry product with focusing on the Jungle team, which kids find very fun with a wide selection of colorful wrist bands, so renewing the entry-level product. As I said, the Xplora activity platform, a big success for us, surpassed 60,000 premium subscriptions, and we released new content every month. And then what I find very exciting and a breakthrough in the German market is that we, for the first time, have achieved a service revenue from a German telco by introducing our premium service on top of Freenet mobile subscription plans in cooperation with the largest German retailer, MediaMarkt. They entered into this project where we specifically designed the product for them by committing to 30,000 units over 1 year. They took the delivery of the first 10K in August this year, and they will take delivery of the entire forecasted or ordered base by December. So 30,000 over 5 months instead of 12 months. Sales going very well, and we can report that they started selling the premium service on the 14th of October, and we already got 1,000 of these services in 2 weeks. So a very good start for us there. And that concludes my part. Thank you.

[Sten Kirkbak, executive]

All right. Thank you, Kjetil. So we added this one slide before we go into the outlook because it's been quite busy for us in a good way. So after we closed the quarter, we would like to emphasize 3 particular topics. The first one is, as you know, 17th of October, the Swedish Finance Authority approved the deal or the offer we made on Doro. So that was published 17th of October, distributing all the offer letters to all the shareholders at Doro. So tomorrow at three o’clock, we will then be receiving all the inbound from the shareholders at Doro, start counting. And once we have finalized accounting, which will go throughout the day tomorrow, we will, of course, publish the result of that. So next action regard Doro because there is a lot of questions in that regard. We start counting at 3:00 p.m. tomorrow, and we will publish once we have finalized that work. So of course, one very important post-quarter event in that regard.

It's also a lot of questions, of course, related to U.S. It's a very big and very important potential market. Kjetil already gave you some insight from an operational perspective. And also post-quarter event was that we published that Xplora together with AT&T, we have now finalized the MVNO setup and for our X6 product, we are now planning jointly with AT&T to have that finalized for the Christmas sale, meaning that as we speak, the product of that collection are now being racked and packed with our MVNO SIM card from AT&T to be made ready for starter sales in order to meet the Christmas time line. So a very important update. We also wanted to highlight that as it's been a long process, but finally, we are there, allowing us to put more emphasis in marketing and investment to grow the U.S. market going forward.

The third announcement we also would like to emphasize in this post-quarter event is that the recent announcement we did with HMD, the largest European manufacturer of smartphone and feature phones, as you all know, we have been working for a long time to evaluate what is the best possible strategy for us to enter into the youth market. As Kjetil mentioned, of course, we churn at the age of around 10. We wanted to have a rock-solid strategy in order to grow quickly into the market of youth from 10 to 15. And we were very happy when we could announce a strategic partnership with the largest European manufacturer of smartwatches in order to enter into that market. I will come quickly back to that as well. So 3 very important announcement we did at the back end of closing Q3. So the road ahead, we wanted just to emphasize our high-level strategy before we go into the summary of the outlook statement.

This is a slide from our Capital Market Day back in June. And as you saw from Kjetil, we have now passed 300 subscription, but we have a long-term ambition to reach 1 million subscription. As we said during the Capital Market Day in a 4-, 5-year time perspective, 1 million subscription is our goal. We also then said we would like to do so by growing into 3 different categories: kid, youth and senior. And that's also why we have been working so dedicated in order first, as we said already back in Capital Market Day last year, we said we will do absolutely nothing except make sure that we can make profit on our core business, the kids. Before we were able to do that, we will do nothing else. We had the turnaround. And as we presented today, on our kids markets, aged 4 to 10, we have now demonstrated a strong profitability and growth. We will continue to focus on SIM conversion and increased lifetime value and RPU, as Kjetil commented.

But our core business, the kids market is now strong. We have strong profitability, and that's our core business. That's why we now allow ourselves to go into these 2 new verticals. And when it comes to the youth market, as we just mentioned, we have now entered into a strategic partnership with HMD, allowing us to quickly enter into this category with a very fast time to market. Because we have a strong lineup of product, we will reduce the need for heavy lifting when it comes to the CapEx. And as we mentioned, we also have lesser concern about the working capital as part of that strategic arrangement. So it allows us to quickly enter into that market. And of course, it will boost our lifetime value. We can address churners and increasingly demand in that market segment, 10 to 15 years old.

As well, that's also why we had a strong M&A strategy into the senior market with a fantastic team from the Doro in Sweden and beyond. They already are specialized into that market category, allowing us to really innovate with them to even grow that category further and beyond. And as we mentioned, key category or key priority in the initial phase of this will, of course, also be to integrate our existing SIM card into that big portfolio. Remember, they are selling 3x more products than we are selling today, which gives us huge opportunity to come. So as I said, next step, 3:00 p.m. tomorrow to start counting shares in that regard. That leaves us with the outlook. It's more or less the same as it's been throughout this year. We started by saying the market expect roughly 15% growth on a revenue level. And with the recent number, we, of course, have increased comfort to beat that market expectation of 15% growth.

We'll continue to focus on our service revenue. And as Kjetil also mentioned, we have managed, as we said initially, to introduce new service revenue deals. Kjetil took you through some details. And also when it comes to our OpEx, operating expenses in percentage of revenue, we will, throughout this year, demonstrate increased efficient-ness in that regard. And also, we have a target for our CapEx to still be below NOK 20 million. We have made a slight change on the product and service launch outlook, saying that we are still targeting for December to launch our first SaaS service deal with 360 in Asia. And then we have added that for the youth phone, the collaboration with HMD, we will announce our first product already during Mobile World Congress in March next year in order to launch that into the market as quickly as possible. And still, we remain with a target to launch the first senior watch in December 2024. One comment to make in that regard, if we close the deal with Doro, we will, of course, analyze timing and details for that launch.

With that, please join me on stage, and we'll go into our Q&A session, both questions from the live audience as well as anyone here present.

[Sten Kirkbak, executive]

The revenue is much higher than your past 6 highest quarterly revenues. Are there any one-off sales or in particular deals done now? Or is it regular sales?

[Kjetil Fennefoss, executive]

Since the service part now accounts for such a major part of the business, that is underlying very stable but growing. So that, let's say, minimizes or reduces the fluctuations in revenue. We have had steady sales, I would say, in Q3. I can't point at any special, let's say, one-off deal, which accounts for an increase in the total numbers. It's all over, I would say, quite a very good strong sales, both in the German region, in the Nordic, I pointed out U.S. where we had very high web sales in the previous quarter. So it's basically all over stable growth and no one-offs.

[Sten Kirkbak, executive]

Actually, the next question is quite similar. Congrats on the strong watch sales. Do you know which markets drove the strongest growth? I think you just actually commented to that. I have to mention as well, you have now about NOK 175 million cash in the bank. Do you plan any dividends to the shareholders?

Knut?

[Knut Stålen, executive]

Well, this is, of course, entirely up to the Board to propose these things, but we are also up for a very exciting days coming in the next couple of weeks. So we need a good cash balance to be taking care of these opportunities. So we might come back to that at some point.

[Sten Kirkbak, executive]

If Doro acquisition goes through, what is the expecting closing date and the time line from the announcement?

[Knut Stålen, executive]

So if it goes through tomorrow, that we have enough shares, 90% or more. We had in the press release announced well, it feels like ago that we will most likely take over Doro around 15th of November. But we will see it tomorrow, that's up to the shareholders of Doro to give us that opportunity.

[Sten Kirkbak, executive]

Actually, another one on Doro. Assuming that the Doro deal closes, can you say something about the time line in order to implement the first SIM cards?

[Knut Stålen, executive]

We are working on the preparations as if the deal goes through. So we have started with designing the mobile subscription plans, but it's, of course, up to the Doro organization to take this to market. I would don't want to commit to any date, but I would, let's say, indicate that the first 1 or 2 markets could happen in March next year.

[Sten Kirkbak, executive]

Here's a tricky one, Knut and Kjetil. Can we expect an equal reaction or results in the next quarter?

[Kjetil Fennefoss, executive]

So we had a very strong quarter compared to Q3 last year in Q3, and we also expect a strong quarter in Q4 compared to Q4 2023. I think that's all we'd like to say at this moment.

[Sten Kirkbak, executive]

Last one here. Inventory seems lower than the historic average. How do you feel about that going into the next quarter? Is it because of planning or other reasons for lower inventory?

[Kjetil Fennefoss, executive]

It's a combination of different things. It's an optimization from the logistics department, but it's also that we have been through a transition where we have new products and at the same time, have had some of the previous generation in stock. So we have been through a change in the inventory and the product portfolio over the last couple of quarters. That is 1 or 2 explanations.

[Sten Kirkbak, executive]

That was all the questions. So if no more questions live from the audience here as well, we will stay here for the next 30 minutes or so. So we are happy to have any one-to-one. We'll be here actually throughout the day as well. So thank you, everyone, for joining us. Have a good day.