Axway Software SA

PAR:AXW

Earnings Call Analysis

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, welcome to Axway's conference call. Patrick Donovan, CEO, will be the speaker today. After his intervention, he will be joined by Cecile Allmacher, CFO, and we will open the Q&A session. [Operator Instructions] And I will now hand over to Axway's CEO, Patrick Donovan.

[Patrick Donovan, Chief Executive Officer]

Thank you, Jess, and good morning to everyone joining in Europe. And for myself, it's about midnight in the Arizona where I'm joining you from today. I have with me on the call, both Arthur Carli, Head of Investor Relations; and Cecile Allmacher, our CFO, who will join in the Q&A section. So I'll open by making a few comments, and then we'll go straight to Q&A. As you all have seen by now, yesterday, we put out a press release outlining where we see the revenue landing for 2021 at about EUR 285.5 million, or an organic decline of 2.7% and which included the currency impact of about a negative EUR 3.7 million on the 2020 comparable. Clearly, we are not pleased with the results. Over the past several years, we have built the organization to provide good visibility at the beginning of the quarter for how we would finish that quarter. So we knew this situation in advance and did not have surprises like we did at the end of Q4. In fact, for the last 7 quarters before rolling into Q4 of this year, we had done our internal forecast at the beginning of the month of the quarter, and we finished at or above that internal forecast. This fourth quarter was unfortunately different. As we entered October, we had the pipeline and the forecast to hit our guidance of between 2% and 4% organic growth for the year. All 4 regions had the pipeline and the forecast and the deals to hit that forecast. However, as we marched through the quarter month after month, we saw deal closings at a pace far below the similar months in prior years. This turned out to be every month of the quarter as we did not have the big hockey stick in December as we have had 1 or 2 times in our past to bring the quarter back in line. So what happened to this pipeline and forecast? Well, as we have built good teams in sales, I'm confident in my team's ability to close the deal with all the aspects that is in their control. What they cannot control fully is the larger market conditions. In the fourth quarter, in every 1 of our 4 regions across every product line, we had delays coming from almost every angle but the common theme was staffing issues and priorities within our prospect base. We saw this trend hit our noncore portfolio harder than our core and amplified portfolio. But the trend was the same across the board. Some real examples of larger deals we were tracking included issues with the lack of legal or purchasing staff to work on the transactions to complete them at year-end or COVID or staffing issues in general. Having engaged too many projects earlier in the year and having lost staff in the technical side to which they cannot engage in any further projects this year. No staff available on the prospect side to start or run through proof of concepts, or no security people to go through all the security controls that goes through our larger prospect ordering process.And to further illustrate this point, almost all our complex larger deals we have had to work with a constantly changing team on the prospect side as they are struggling to keep all their projects moving forward with the staff turnover, shortages or COVID impacts. This was something we did not encounter really ever before at this level, but it is something we have faced heavily into Q4, and I expect that may roll into the first quarter of 2022 as well. So as we go into 2022, we are still optimistic that we can push for some level of growth. Our customers still utilize and need our product portfolio, and we bring value to their operations. We will continue to do our part to go after the market. And as the general market has some challenges, we will continue to work to do the best result we can under the conditions in the market. With regards to margin, we provided the guidance all year that we would be between 11% and 13%. At the first consolidation before in the audit, we are seeing a margin of just over 11%, so within the guidance provided. We will be showing an absolute value and improvement and results from operating activity for the second year in a row as we planned, and we will target this level of improvement for the years to come.So with that upfront statement, Jess, can you please open the lines, and Cecile, can you open yours as well to join me for the Q&A?

[Operator]

[Operator Instructions] The first question comes from the line of [ Jason Kraft from High Cliff Capital ].

[Unknown Analyst]

I -- it's not as if the market has been rewarding you guys for the subscription transition and growth ambition given the revenue multiple, it's been under 2x. So can you maybe add some color and comment on perhaps the situation maybe forces you to re-pivot from the growth ambitions and refocus on the business you have in committing to accelerating or at least rapidly improving margins and the cash profile of the assets?

[Patrick Donovan, Chief Executive Officer]

Yes. So that is -- that's an interesting question. I do still believe there's some level of growth we can achieve. This Q4, like I said, caught us a bit by surprise but under normal situations, we should have seen a few points of growth. We do have a plan, and this was always our plan to improve the margin and looking to accelerate the margin quickly could disrupt a bit a couple of points of growth. And I know that in the -- in certain worlds that would be all that mattered was the margin, but we're trying to still maintain some level of the top line growth. So we will bring back the margin steadily over the years, and we have planned to do so. And if we had the expected revenue growth that we were forecasting, we would have actually been closer to the top end of the margin guidance, so in line with the bump we expected of about 2.5 points or so.

[Operator]

[Operator Instructions] Your next question comes from the line of Antoine Lensel from Kepler Cheuvreux.

[Antoine Lensel, Equity Research Analyst]

My first question, you explained that several deals have been postponed due to labor shortage at our customers or due to the COVID-19 impact in December. Is it possible to have the amount of revenue related to this deal? And how confident are you in signing this deal in H1 2022 over the year 2022?

[Patrick Donovan, Chief Executive Officer]

Yes. So we had -- we missed where we are forecasting by about EUR 14 million, which would have put us where we were expecting to close for the year. And of that, we had about EUR 13 million of that in the subscription or license. So upfront subscription or license impact for revenue. And there's a little bit of a mix, how that came about. But in general, we had the pipeline of a signature value slipped enough to cover that range. And so when we pushed that pipeline out of the year, we didn't lose any of those deals. So just in the deals over EUR 100,000 value, we had close to about 75 of those, I believe. But we didn't lose any of those deals. They just pushed out of the quarter. So we would expect to sign them in the first half. But my concern is we're going to see the first half deals take longer to close as well. So I'm not sure these will come back, and we'll have a fantastic first half and off we go. I think this will just be a general push of all the deals taking 3 to 6 months longer than expected to close.

[Antoine Lensel, Equity Research Analyst]

Okay, I see. And after this revenue mix, how confident are you on reaching your 2023 objective following this headwind?

[Patrick Donovan, Chief Executive Officer]

Yes. So that's an interesting question. And you just have to understand we have just consolidated the figures about 48 hours ago. And so we're in the deep analysis now and are planning to reconfirm what we were budgeting for 2022 and looking out beyond. For 2022, we'll come back to you with guidance when we finish the analysis in the February time frame. But we had planned some level of growth like we had planned for the range we gave for this year. For 2023 -- and we'll have come back and confirm the figures after we go through and build all the tables. But it still looks like we presented in the Capital Markets Day that we're going to have a significant uptick in the subscription [indiscernible] subscriptions that we signed start coming back to us in 2023. And at a level of about triple of what's in the 2022 budget. So that should give us more confidence in this ability for 2023 and beyond to have a very forecastable business at that time. We're still in the building the subscription mode right now.

[Operator]

The next question comes from the line of Derric Marcon from Societe Generale.

[Derric Marcon, Equity Analyst]

I hope you can hear me okay. I've got 3 questions, if I may. The first one when -- if we come back on the revenue mix, so the EUR 14 million that you mentioned, can you split this figure between legacy products, non-core product and API management or Amplify? That's my first question. The second question is about the -- what you will do in the coming weeks regarding the pipeline? Will you launch a complete review of this pipeline to take into account the potential risk or additional risk of delay as observed in Q4 2021? Or you think that it's not necessary because the visibility on this deal or the Q1 pipe -- the pipeline for Q1 2022 is not enough to do this exercise? And third, regarding the cost base for 2021 so slightly above EUR 250 million if I'm calculating correctly. Do you know already or have you [ 0.35 ] the benefit of COVID on this number? So i.e., less travel, less sales and marketing spending and expected at the beginning of the year. Any potential tailwinds that explains the good margin resilience in the context of revenue mix?

[Patrick Donovan, Chief Executive Officer]

Sure. So the first question on the roughly EUR 14 million miss, as I said, there was about EUR 13 million coming from customer managed upfront or license. And your question was around the mix, and we don't have the perfect detail but from what I'm seeing so far, it's about half of our what I would call core Amplify side and the other half coming from the non-core products. So in the core, I'd include our MFT, B2B and Amplify. And so the non-core pieces have a little stronger miss than the core ones. And in fact, in our core, which includes MFT, B2B, API, we actually did grow for the year, so we had the drop in the non-core a little stronger than planned, and the growth in the core business not as strong as we did plan. So it was across all the portfolios. It wasn't product specific, this problem in Q4, it was specific to the process of closing the sales deal. And that's why I'd said, it's something we haven't really experienced before. And I've been with the guys in the field, in the deal closing and they're getting, they're doing their job. I don't have doubt our team is strong. This was just something I was talking to many of the sales leaders, we just haven't experienced before having teams go on a full -- we had a few of our large deals where they sent all the legal and purchasing team home to get a break from the stress of COVID because they were short staffed and overworked, and it's hard to push a deal close in that environment. On the pipeline, as we go into 2022, yes, that's part of the normal process as we start the year. So really scrub the pipeline and to look at the deals and make sure we have the pipeline and the ability to do the budget. We did that to build a budget and that gave us a little organic growth. But given the results of Q4 that we just consolidated, we'll reengage in that review just to ensure that our budget is still achievable from what we see at the beginning of the year, and we'll be doing that work over the next couple of weeks just to revalidate the revenue for the budget. On the cost base, we don't have the allocation perfected yet by the function. So what's R&D, what's sales and marketing, et cetera. And we're working on that now. But in total, our total cost base, if you take operating expenses and cost of sales dropped about EUR 13 million. We did about EUR 266 million last year. We do about EUR 253 million this year, I would say just over half of that, so about EUR 7 million of that was savings from variable compensation that kicked in as natural, as planned. And so that's the buffer. So if we have done forecast, we would have been closer to the EUR 13 million, the top end of the range. And if we would have done the revenue but not had the variable kick in on the savings, we would have dropped down to EUR 9 million level, but the variable compensation works to provide that buffer that keeps us in the guidance range. So we'll just be above the EUR 11 million mark is what we're seeing right now and that's as designed. So we saved about EUR 6 million, EUR 7 million, and that was the forecasted savings as we went through the year and not a COVID savings. Actually, we had the reverse. We started opening up some travel and in-person activities this year. And so as we build the budget for 2022, you have a little higher expectation of some more travels as teams get together, and we have had people join in 2020 that we still are meeting for the first time in 2021. And so I expect that travel and a few other in-person events to pick up a little bit in 2022 as well. But we got our planned savings, and we did our job on that side and then the variable kicked in for the rest.

[Operator]

The next question comes from the line of Jeremie Couix from HC Capital.

[Jeremie Couix]

Two questions for me. So the first one is, can you give us some detail on the region? Is it the same picture you have in all region? Is it really located in 1 region? And then the other one is just to make sure I understood it correctly, what type of people are missing at your customers? Is it on the -- it's not on the deployment and the implementation it is only before -- what happened before signing, so the POC and the test and so on and the final decision?

[Patrick Donovan, Chief Executive Officer]

Yes. The regional one is easy. We saw it in all 4 regions, it hit all 4 regions. So normally, as we go into the last part of the year, we may have 1 region miss, but never before have we had all 4 regions miss our forecast like this. So it was consistent. We saw it in every region. We saw the same challenges in every region. That's just the surprising thing for us is that all 4 regions missed and all 4 had the same type of staff messing issues at the customers or slowness of the deals and was hitting all the product lines. The time of staff missing...

[Jeremie Couix]

It's not linked to budget cut or stuff like this?

[Patrick Donovan, Chief Executive Officer]

No. well, the budgets may have been reallocated to the projects for which they could staff. But no, we didn't see companies taking a budget cut. Everybody was just having staffing problems. And it was the strangest thing and it's hard to put a finger on. But administratively, we had some of the deals slip because there wasn't the legal accounting side, but on the technical side, if we had to do a proof of concept or have -- we go through a lot of security checks in the sales cycle. We were just -- I personally was on a couple of these where we had 2 or 3 different security teams through the sales cycle. And every security team has a different opinion about things. And so you're starting from scratch and when you're seeing a security cycle for months and can't get out of it because you have new staff coming in because of shortages or just turnover of the customer then you can't push the deal to close because they won't go with our technology, they won't go past the security checks and place the order. They have to get that signed off. And so these -- all these different shortages at the customer's side caused us to just get stuck in POCs or security slowdowns, and then we just can't get the deal over the line. And so in the technical side, our CIO -- I'm sorry, our CTO, Vince had logged in a series of workshops with CIOs midway through the quarter, and he came back to me and this was the first -- I started getting a real indication of this. He said he talked to, I think it was about 50 CIOs, and it was this type of workshop where few technical presentations and then they share information. And at the closing of these workshops, they're asking what was their #1 challenge for the quarter and as they rolled into the year. And it was across the board, they all agreed to it was lack of technical staff, meaning they didn't have the technical people to do the projects they had in the business. And that's an interesting thing to where we -- I'm kind of expecting the services sector, so the system integrators and body shop service firms probably will have decent years because the staff augmentation and their customers with their services, they're having to reach out looking for help for getting their projects done. And we saw that happen to our deals in the fourth quarter. I'm just not confident yet on what that means for 2022. I believe it may just be a slowdown in our process to close deals, which would mean this may be a 1- or 2-quarter bump and then we should get the average of the projects that roll through.

[Operator]

There are currently no questions in the queue. [Operator Instructions] The next question comes from the line of [ Rafael Louise from Monitor ].

[Unknown Analyst]

I have three questions. The first one is, does it make M&A or you are looking for target a bit less likely in the short term where you have to fix your own internal issues? The second one is internally, do you also see some pressure on resources I mean your own staff in terms of salary expectations or just the ability to recruit? And so maybe it's too early, but I saw that you maintain some part of the 2021 guidance on the margin, but you don't repeat when you look per share of the 2023 to 2025 guidance or ambition? Is it just because it's too early? Or do you think they are still valid?

[Patrick Donovan, Chief Executive Officer]

Okay. So I'll tackle these with what I could say at this point. On the M&A side, I've been actively leading the M&A side, and I'll give you a flavor of what we're seeing. So we have some deal flow at the low end. So at the either pre-revenue or early revenue side where we have tech buys that could add to and the valuations on that side is rich, but there's still deal flow that's possible. And we're talking to several now in would hope something in the first half of next year, just it took a while to get M&A ramp back up, and we kicked this off at the beginning of last year. And have been going through our share of discussions, and this doesn't slow that down. What I am seeing is that the larger end so when we present the M&A strategy, we had 2 types, the lower end that we're strategic activities that were technical to add on to help us on the growth side or they were roll-up consolidations at the revenue that we'd look to grow more margin and cash flow by consolidating the market. Those types of deals just are not so present at the moment on the larger side, where we've talked to a few, but -- and they're quite pricey. So I'm not sure you would get the cash flow that would return to show the ROI on that transaction. So I haven't seen any yet that make financial sense for us to do, but we'll continue to look and we'll continue to be in the market. And I'm hopeful that as some of the market slows down, we should be able to see some of those returns. But in the hot market that it is now, I'm not sure the larger revenue consolidations will be in the short term.Internal resources. We've had a higher attrition than planned. We were -- first figures I saw were just over 20%. And as a reminder, I think last year, we were around 13.5%, 14%, somewhere in that range. And so we have seen higher attrition and the job market is getting tighter for candidates. So it is making it challenging internally. So far, it has not caused us to have any slowdown on our ability to sell or close or perform the work we need to do. So we -- but we are impacted as well.On the elements of the longer-term forecast. I'll have to come back to you as we build it out for the February analyst call. On the margin side, a lot of that's under control. And I believe as [ Jason ] earlier was pushing the -- the margin is under control, and we can do what we need to do, and we will continue to do that. The revenue guidance, we need to come back and revisit and come back to you in February.

[Operator]

We have no more questions in the queue. So I will hand the call back to your host to conclude today's call.

[Patrick Donovan, Chief Executive Officer]

Okay. Thank you, Jess, and thank you for joining Cecile, Arthur and I here today. As I referenced, the full details for the year, and we'll go into more of the how we ended up our cash and some other elements, we'll share those on the 22nd of February. After market close we will do our publications and then we'll be going through and have more details and analysis and guidance for you at that time. I believe the call is at 6:30 that evening. So we'll speak to you all again at that time, and we could go ahead and close the call for today. Thank you all.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.