Parrot SA

PAR:PARRO

Earnings Call Transcript 2018-Q2

[Henri Seydoux, Founder, Chairman & CEO]

Thank you. Hello, everyone. Thank you for being with us today for this conference call. With me today are Olivier Maury, Parrot's Chief Financial Officer; and Marie Calleux, Head of Investor Relations. I am going to present our results for the second quarter of 2018, and we will answer your questions together. The information regarding standards and methods is best provided in the press release and concerns the application of the IFRS 15 and the reclassification of Parrot professional and secular sales and our business solutions and equipment following the change to our commercial organization. So first of all, let's look at this period's key developments. With the most important, the launch of the Parrot ANAFI drone. Designed in Paris by Parrot's engineers, the ANAFI has been developed over more than 18 months to meet 4 essential needs: transportability, image quality, performance and ease of use. The ANAFI benefits from next-generation technical specifications: the 4K HDR camera with zoom; the 21-megapixel sensor; the 3-axis stabilization system with, for the first time, the camera that tilts 180 degrees vertically; and the lossless zoom up to 2.8x. It has a flight time of 25 minutes, the best in its class, and advanced piloting and video and photo features, such as automatic framing and Follow Me modes or remote flight planning through in-app purchase. It has been available to consumers in the first week of July, with the price of $699 -- EUR 699. The Parrot ANAFI has received a positive response from the media, the vast majority of influencers and its first customers. It's viewed as a quality product with attractive features at a competitive price, in line with our objective, which is to regain market share in the consumer sector. The product has been rolled out in stores since the start of July, supported by our selective distribution strategy prepared in 2017. The points of sale are gradually receiving the products, and promotional tools, and training programs are being provided for lead vendors around the world. In France, our main physical retailers are Fnac Darty and Boulanger. In the United States, we have selected Best Buy and a few specialized points of sale. In Germany and Spain, this will primarily be MediaMarkt. This concentration will enable us to be more efficient in terms of managing our sell-in and sell-out, in other words, sales to retailers and sales to end customer as well in terms of the quality and quantity of our marketing. Online, we will be focusing on Amazon and parrot.com. All of this is gradually being put in place, targeting the strong seasonality of sales for the end-of-year period. After just 4 weeks of rollout, it is far too early to measure the effectiveness of the distribution choices made and the level of interest among end customers. Looking beyond its consumer positioning, Parrot ANAFI is a scalable drone based on a powerful technological platform, making it possible to meet certain professional needs. Just like this is used at home by families and by businesses of all sizes, we want the Parrot ANAFI to benefit from the same possibilities. It will, therefore, be combined with a range of Business Solutions. Its first launches will be taking place over the coming months to address the core targets on our business markets. In terms of our key developments from the first half of 2018, we can also mention the sale of our subsidiary Parrot Shmates to Horizon, the holding company of Henri Seydoux, Parrot's Chairman and CEO. Parrot Shmates has been focused, since 2014, on the final development project not related to drones in the connected devices sector. This sale, based on the value determined by an independent expert, generated EUR 2.2 million of nonrecurring income, which corresponds to the nominal value of its -- of the subsidiary's capital and the repayment of its current account. Lastly, at the very start of the third quarter, so after our Q2 reporting date, we also announced the signing of a memorandum of understanding with Faurecia, aiming to accelerate our exit from the jointly owned subsidiary, Parrot Faurecia Automotive. After 18 months of working together, Parrot and Faurecia have agreed, on the one hand, to acknowledge the quality of the asset sold by Parrot and, on the other hand, to give Parrot Faurecia Automotive the latitude it needs to succeed, which requires an investment phase, with a return on that, for Parrot, was becoming more uncertain over time. If the operation moves forward after consulting with the Parrot Group’s employee representative in the autumn, the sale will be able to be carried out in autumn 2018, subject to obtaining the necessary regulatory approvals. So total amount received by Parrot would be EUR 108.5 million, including EUR 41 million of bonds converted into Parrot Faurecia Automotive shares. In addition to the carefully reviewed financial considerations, Parrot is becoming a pure player for civil drones in 2018 as the dawn of a new phase of innovation and our entire organization is now focused on the resumption of growth for the Europe-leading drone group. Parrot is, therefore, at the turning point of -- in its story, with the finalization of its repositioning as a pure player for civil drones. We have just gone through 2 difficult years in an extremely competitive market. So the aggressiveness of the compression -- of the competition, which recognize us as a serious challenger, clearly shows this market's potential and also all of the stakes involved. Parrot is the world #2 on this market. Parrot has carried out an in-depth reorganization. Parrot has maintained a strong capacity for innovation as illustrated by the ANAFI's launch. We have carried out extensive work to be more agile in terms of managing our own mark, our commercial organization, our marketing efficiency and effectiveness and generally, at every level throughout the business. This now needs to be reflected in our results. The launch of the ANAFI, key to our own relaunch, has just taken place. This outstanding product will now need to find its market. Our execution will need to be the agile and efficient. Alongside this, we will continue moving forward with our development on commercial drones, with offers for small businesses as well as solutions and services for larger groups and industries. Grouped together under the Business Solutions banner, new offers with different levels of expertise will be launched from the second half of the year. The development of the use of drone technologies will be one of the major 21st-century revolutions, and we believe that the Parrot group has the resources and assets needed to contribute toward this. So the next 6 months, which we'll see a tangible improvement in our commercial performance levels, will therefore be key for the future of our group. Our ability to manage our development effectively and ensure agility with our use of resources will need to be clearly demonstrated. With this in mind, let's take a look at our results for the second quarter. So gross revenue came to -- towards EUR 32.9 million, with a EUR 2.2 million contraction exclusively linked to the EUR 5.9 million decrease in sales of older automotive products and the fact that there have been no sales of connected devices since the start of this year as they were discontinued at the end of 2017, as you know. For our drone operations, revenues are therefore up EUR 3.7 million or 14% to EUR 30.6 million for the second quarter. Business Solutions, 37% of group revenues, are up 2% to EUR 11.9 million. This level is below our expectations. In the second quarter, equipment sales came to EUR 5.2 million, down 13% after minus 19% for the first quarter. This poor performance reflects several factors, which certainly include competition from quadcopters as Parrot is still focused mainly on x-wing drones. We have carried out a strategy review of such line, and we expect its reorganization, which is now behind us, to deliver additional growth. Sales of software and services are up 17% to EUR 6.7 million. This rate of growth is slower than we have recorded previously. As you know, positions on services for farmer generates just EUR 0.7 million of revenues, but it has clearly developed one of the best-performing technique -- technical offer on the market for drone-based data sales for agriculture.Pix4D, the world leader for the drone-mapping software, achieved 21% growth, driven by its flagship product, Pix4Dmapper, which is already used by over 10,000 unique users every month. So a contribution from the other solutions serving the agriculture, construction and real estate sectors is still limited. At this stage, nearly 1/3 of Pix4D's revenues are recurrent, and we are confident that this Swiss business unit will be able to maintain a gross rate at least 30%. Lastly, the recently launched service business with Parrot Air Support is picking up very well, but it's still too small to make a significant contribution. This business unit, which provides experts on base services and consulting for differing drone solutions in various industries such as real estate, construction, energy, represents a key area for growth for the coming years as drone use ramps up. And this contributes to the development of this use and, therefore, indirectly, to sales of our Business Solution. For consumer drones, revenues are up to EUR 18.8 million, with year-on-year growth of 24%, up 171% compared with the first quarter, which was exceptionally lower as forecast. The Parrot ANAFI's contribution for the period is not particularly significant as its commercial rollout has -- was launched at the end of June. Sales had, therefore, been concentrated primarily on the Bebop 2. To prepare for the Parrot's ANAFI roll out in stores, we have ramped up efforts to clear Bebop 2 stock by reducing its price from EUR 599 to EUR 399 on average in Europe. These promotional operations are progressing well and are in line with the startup level from our pricing elasticity strategy. As we have already mentioned, agility is crucial and will enable us to balance our commercial operations over the various quarter, in line with the seasonality and the opportunity we can generate. The Parrot ANAFI's contribution will gradually ramp up in the third quarter. Now let's take a look at our results. Our gross margin represents 38% of revenues. Our result for the first quarter was higher, so this gives an average gross margin of 42% for the first half of the year. So resumption of growth for our Business Solutions activities, the launch of our new business equipments and offers and the acceleration of ANAFI's sales are all factors enabling us to maintain a good level of margin, higher than 2017, which, for reference, came to 34%, in line with that targets announced at the start of the year. The restatement of certain markets in consolidated revenues in accordance with IFRS 15 cost us 1.6 margin points for the quarter. With regards to the cost structure, current operating expenditure for the second quarter came to EUR 25.6 million, down EUR 1.4 million or minus 5% from the second quarter of 2017 and stable compared with the previous quarter. More specifically, R&D spending represents EUR 9.5 million and has been virtually stable for the last 3 quarters following the reorganization. 283 staff work in R&D, with the majority assigned to commercial drones. The acceleration in synergies between our consumer activities and our business operations will enable us to partly limit the increase in R&D staffing levels over the coming months. Sales and marketing spending came to EUR 9.8 million, up again, following the first quarter's low EUR 7.9 million. In addition to this fixed cost base, this increase reflects the resources deployed for the Parrot ANAFI's launch and the promotional action rollouts for the Bebop 2. Other areas of spending are normalizing, in line with our expectations. Specifically, overhead and administrative costs, following a period of deploying equipments, particularly to optimize our IT systems in the last few quarters, and the resolution of 2 expensive legal proceedings in the United States with positive outcomes for Parrot made it possible to limit spending to EUR 4.0 million. Production costs have also benefited from the product portfolio realignment, which offsets the launch of production of -- for the Parrot ANAFI and represented EUR 2.4 million, down 22% year-on-year. Factoring in all of these elements, we recorded the current operating loss of EUR 13.2 million compared with EUR 14.7 million for the first quarter of 2018. The cost structure is effectively under control, calibrated to support an acceleration in growth over the second half of the year. For the first half of 2018, the current operating loss represents EUR 27.9 million compared with EUR 30.1 million at June 30, 2017. The noncurrent income for EUR 2.0 million primarily relates to the capital gain, EUR 2.2 million, recorded on the sale of Parrot Shmates, which we looked at previously at the start of this quarter. So share in income from associates is linked mainly to the losses recorded by Parrot Faurecia Automotive. This churn is one of the factors behind our desire to accelerate our exit from this entity. Now I would provide additional information concerning our balance sheet and cash position. Net cash, including current and noncurrent assets, represent EUR 87 million at the end of June 2018 versus EUR 115.4 million at December 31, 2017. With the following breakdown: EUR 119.1 million of cash and cash equivalents versus EUR 144.5 million at December 31, 2017; EUR 10 million of short-term investments; and EUR 41 million of current financial liabilities, linked primarily to the proposed early conversion of the convertible bonds issued in connection with the Parrot Faurecia Automotive operation. If the memorandum of understanding move forward after consulting with the employee representatives and the regulatory authorities, this will be converted in the autumn. This would be in addition to EUR 67.5 million, paid in cash for Parrot Automotive's remaining capital with a total of EUR 108.5 million received by Parrot. The change in net cash over the first half of the year represents minus EUR 26.4 million compared with minus EUR 67 million for the half of 2017. We are in a healthier position, and we now need to measure our capacity to generate growth. Our working capital shows limited change, minus EUR 1.8 million, while waiting for the full impact of the various launches. Net inventories are down to a low of EUR 18 million versus EUR 23.3 million at December 31, 2017, with sales of older products, drones and retail, provisionally offsetting the impact of the next generation of drones starting up. Following a low at end-March, trade receivables are up EUR 9 million to EUR 33.7 million, in line with the promotional operations rolled outAnd the Parrot ANAFI’s very first deliveries.To conclude, I would like to remind you that we are confirming our objective for 2018: growing our drone business, improving our gross margin and reducing our cash consumption. Parrot is now at the pivotal point in its story -- in its history, sorry. And we are maintaining our full focus on ensuring our agility and the success of this new phase of innovation. Our return to an effectively controlled and managed growth phase will be the foundation for our sustainable expansion in the drone market, which is still in its infancy. Thank you for listening. We are now ready, Olivier and Marie, to answer to any questions you may have.

[Operator]

[Operator Instructions] There are no questions at this time. I hand back to the presenter for closing comments.

[Henri Seydoux, Founder, Chairman & CEO]

Okay. So thank you very much for being with us today for this conference call. We will meet again by mid-November for the presentation of our Q3 financials. Thank you, again, and have a good summer for those who are having some holidays.