Parrot SA

PAR:PARRO

Earnings Call Transcript 2018-Q3

[Gilles Labossiere, Executive VP & COO]

Hello. Hello, everyone. Thank you for being with us today for this presentation. With me today are Olivier Maury, Chief Financial Officer; and Marie Calleux, Head of Investor Relations. Before we begin, I would like to remind you that the accounting standards for this third quarter have not changed compared with the previous quarter this year. Excluding the impact of operations, the change primary concerns the integration of the capital gain from Parrot Faurecia Automobile's sale for EUR 108.4 million and the write-down of goodwill reduced to 0. I'm going to be direct as the results are very disappointing. The reversal on the consumer drone market has been as brutal as it has been unexpected, and also growth crisis are commonly seen with new technologies. We now know that this risk has occurred at the worst possible time. The situation in the market, our assets, our subsidiaries and our interests in other companies have been reviewed in detail. The options and their consequences have been evaluated and an action plan is being rolled out. It was approved in full at Parrot board meeting yesterday.Let's start with the market context, which I would like to clarify and it is important to note exclusively concerned consumer drones. The trends that I will be using are taken from GfK and NPD. The main market results firms collecting checkout data for physical retailers. As such, they do not include online sales. They provide details of sales for panel of retailers in the United States, Germany, France and the U.K. In total, these countries represent around 70% of the drone market. For the researched panel, the market represents EUR 100 million for the third quarter and shows an annual contraction of 19% in value and 22% in units. For the segment that we are primarily concerned with, drones from EUR 500 to EUR 800, the contraction is 40% in units and 33% in value. It's more marked but also show that prices have been maintained more effectively. These trends show a significant deterioration compared with the previous quarters during which the main firms had not carried out any launches, for which sales seasonally is lower. In 2017, the third quarter and the fourth quarter respectively, represent 26% and [ total ] 33% of revenue for the year. For the researched panel, and specifically the segment for drones from EUR 500 to EUR 800, Parrot shows market gain -- market share gains for all regions by 5 to 15 points, positioning it as a solid #2 behind DJI. These gains have been achieved thanks to the launch of Parrot ANAFI, the high-performance, lightweight drone whose capabilities and ease-of-use are highlighted by clients. Now these trends have not been able to mark it -- to make up for the crisis on the consumer drone market. Consumer drones have been growing since 2010 and currently have a penetration rate of around 8% to 10% according to value studies. So they are not, at this stage, being bought on massive scale by broad client segments looking beyond technology fans, higher earners or professionals. The renewal rate is, without a doubt, still low and the challenge will be to develop multiple users and client segments. It was, therefore, in the midst of this reversal, which we could not have anticipated that we launched our new drone. The sales and marketing strategy is being ramped up as planned with a growing number of online resellers and retailers. In week 46, we have nearly 5,000 points of sales around the world compared with 3,800 at the end of September. Our ratings on Amazon are now close to 4 out of 5 stars. The pricing policy is being managed effectively, with offers ranging from EUR 500 to EUR 700 depending on the tax. The prices are well positioned in relation to the competition, but we do not know when the market will pick up again. In this context, the consumer market's instability calls into questions all our guidance. ANAFI sales growth will not be enough to offset the contraction in sales for the drone historical products, which generated EUR 14.5 million less revenues in this third quarter compared with the third quarter of 2017. The gross margin is being affected by the production delays and sales price policy and takes into account our expectations forecasting, cautiously maybe, but this is a good option, a flat market. This is not making it possible to offset the operational costs, which represent around EUR 25 million per quarter currently and are stable. Of course Parrot, the drones market's world #2, needs to provide management response to address this growth crisis on the consumer market. In this unstable euro market, we have huge, solid convictions, which are as follow. Number one, we have real R&D capabilities, which are reflected in a very high level of innovation and a wide range of quality solutions created by French, Swiss, German and North American design teams united within Europe's leading drone group. Number two, we have a portfolio of outstanding companies and interests that is unique in the world. On a market that is still growing, we need to free up value creation for our commercial subsidiaries and associates and enable them to capitalize on all the opportunities for commercial developments. We are moving to an autonomous, independent management approach. Number three, we need to secure our net cash at around EUR 100 million. These 3 principles represent the foundations for the action plan that we are rolling out. It was approved yesterday by the Board of Directors, here are the key features. We are continuing to invest in R&D. Each company within our portfolio anticipates the next-gen technological change and use required. Parrot Drone is ramping up the gateway between consumer drones and commercial drones. Pix4D is investing in the radicalization of its solutions and artificial intelligence. SenseFly is preparing to open up its solution for other users. Airinov is expanding its range of analysis for the agricultural sector. Micasense is preparing the agricultural sensor to mention just the subsidiaries in which Parrot S.A. has majority control. Second, as the issue with results is focused on Parrot Drone, we are taking measures to adjust its resources in line with its outlook. The departure plan covering around 100 people is being rolled out. Focused primarily on international sites, it will also impact the teams in Paris based on a voluntary approach. This plan will make it possible to adjust our sales, marketing and production structures in line with the market's current level. R&D spending has already been reduced with the departure of external contractors, so current size of the design department is consistent with our roadmap. This really is one of the Europe's leading department in terms of drone expenses. The roadmap is still focused on the convergence of the technologies used for the consumer and commercial segment. You have seen the launch of the first ANAFI Work solution for the real estate and construction professionals as well as law enforcements. You would also -- you would have also seen the launch of Bluegrass Field for farmers. These 2 products offer multiple uses for men and women and professionals at a competitive price from EUR 1,000 to EUR 5,000. Overall, without a tangible recovery on the consumer drone market, which we'll not allow ourselves to count on in the short term, we aim to reach a level of loss that is much more sustainable, making it possible to have around EUR 100 million of net cash at the end of 2019 and portfolio of outstanding commercial owned companies.I will now present the rest of our results for the fourth quarter. Revenues. For this quarter, the commercial drones' subsidiaries represent 40% of revenues with EUR 9.3 million, and the market is continuing to be driven by productivity gains, based on analyzing the precision data collected and processed by the drones [indiscernible]. Over this quarter equipment sales came to EUR 3.3 million, down 23%, they have been impact by the delays with launches for the senseFly's next generation of fixed-wing drones. Linked to production and component sourcing issues these have been resolved at the start of the fourth quarter. The order book for the eBee X is in line with senseFly's previous performance level, and the dedication shown by the team and the progress made with regulations in several European countries and the United States are consolidating the upturn in this company's course. Also in the equipments segment, Micasense, which sells a range of sensors that are proving very popular for precision farming has continued to grow. Following a change of management and the resolution of a patent dispute, this company has just launched Altum, a powerful sensor that combines thermal, multispectral and high-resolution imaging as well as versions that can be adapted for DJI's Matrice 200. In the precision farming sector, Airinov, which has gradually transformed its model from a product-based offering to a service offering has reached a plateau with its growth while waiting for new offers to be launched. Pix4D has continued to deliver solid performances, all the software from its multiplatform and business offering are growing, and its technologies are proving very popular. A dedicated center for agriculture has been setup in Berlin, and another center has just been opened in Madrid. And we further strengthened the headquarters in Switzerland and the sales office in China and the United States. Globally, sales of software and services are up 28% to EUR 6.0 million. With this portfolio of commercial drone companies, we also need to make trade-offs. In this context, Parrot Air Support is being put on standby. The market for industry services is being held by -- backed by the slow development of regulations and the majority of the needs for expertise currently required are covered by all the other subsidiaries. In the Defense and Security segments, we are moving past the phase to research and understand expectations. We have integrated expert management capabilities and we have developed the technological partnerships particularly through interests acquired in Planck Aerosystem and Sky Hero, and we have signed our first contract. The development of our offering and our commercial operations will continue moving forward. A range of high-performance, lightweight, silent, easy-to-use and European drones offers numerous advantages for security and defense services which are seeing growing demand. These markets represent an area of development that we are investing in and that we will be communicating on. We are taking into account the fact that these markets will be slow to open up. In terms of the gross margin, the good performances achieved by the commercial drone companies have been erased by the impact of the reversal in the consumer business. In a pricing environment with electricity effectively under control, the cost of goods sold includes a purchase of components and provisions for Parrot Drone to adjust its production and inventory levels in line with the market context. Without a reversal of this trend, we would need to wait until the end of the first half of next year to resolve this situation. With regard to the current operating expenditures for the third quarter. They represent EUR 25.8 million, virtually stable, plus EUR 0.2 million for the second quarter of 2018. Our headcount at the end of September was 658 people with the majority made up of staff from the commercial drone subsidiaries. R&D spending came to EUR 9.3 million, down 2% compared with the previous quarter. Each commercial subsidiary is moving forward with a strategy for innovation focused on its clients and prospects, while Parrot Drone is focusing on the convergence of consumer and commercial technologies. Sales and marketing spending came to EUR 9.3 million, down 5% compared with the second quarter. This reflects the resources deployed for the launch of the Parrot ANAFI, and the new business solution with ANAFI Work and Bluegrass Field launched by Parrot Drone, eBee X from senseFly, Pix4Dfield from Pix4D and Altum from Micasense. Administrative costs and overhead represents EUR 4.9 million plus 23% compared with second quarter of 2018. The change compared with the previous quarter mainly reflects the adjustment of cost linked to the change in the bonus share plan for a subsidiary as well as nonrecurring legal costs. Production and quality spending, EUR 2.4 million minus 1% is stable and effectively under control. Other operating income and expenses represent minus EUR 29.9 million with the following breakdown: minus EUR 42.3 million for the write-down of goodwill linked to the revised business and earning assumptions, plus EUR 12.8 million for Parrot Faurecia Automobile sales, and plus EUR 2 million for the sale of a connected device subsidiary already reported in the second quarter. With regard to our cash flow and balance sheet position at September 30, the net cash position, including current and noncurrent financial assets and liabilities represent EUR 171.8 million with a change of plus EUR 84.9 million compared with the end of the June -- with end of June 2018. The quarter's operating losses are offset by the finalization of the sales of the automotive subsidiary, Parrot Faurecia Automobile for EUR 108.4 million. The change in working capital requirements represents minus EUR 6.3 million for the quarter, minus EUR 8.2 million at September 30, 2018. With the impact of the various product launches and the slowdown on the consumer drone market. Parrot shareholders equity represents EUR 181.1 million. It was EUR 231 million at June 30, 2018, with a total balance sheet of EUR 276.6 million, EUR 358.8 million at June 30, 2018. The decrease is linked to the total write-down of goodwill, and of course, the operating loss for the period. To conclude, I would like to remind you about the revised expectation for this fourth quarter. We expect to see revenues of around EUR 35 million and a stable gross margin rate on an annual basis without any further deterioration into consumer drone market. The adjustment of Parrot Drone's resources is expected to require around EUR 15 million to EUR 20 million, part of which will be recorded in the year-end accounts. This adjustment will enable us to achieve substantial savings in 2019. Over 2019, we expect to see a significant contraction for Parrot Drones business in a consumer market that is expected to be flat, with commercial users to slowly ramp up. We aim to reduce the annual loss to a sustainable level to continue responding to the market's long-term potential. We expect to see also a stronger growth for the commercial drone companies, consolidated by the solid offers in a still growing market within which the development of drone technologies for business clients and key accounts is being restricted less by the regulatory framework. Most of them are expected to be close to breakeven by the end of the year. Based on these elements, Parrot is expected to have around EUR 100 million of cash and an outstanding portfolio of companies and interests at the end of 2019. We will continue to adapt our strategy in order to evolve and anticipate, when we can, the drone market emergence. The quality of our assets, our agility and our responsiveness are crucial for continuing to develop solutions that effectively meet the needs of a growing number of professionals who like us, would have contributed to drone industry emergence. Thank you for listening, we are now ready to answer your questions.

[Operator]

[Operator Instructions] And there are no questions at this time. I hand back to Gilles Labossiere for closing comments.

[Gilles Labossiere, Executive VP & COO]

Okay. So thank you very much for attending the meeting. We will be publishing our fiscal year earnings on March 15, and road showing with ODDO in Lyon on January 10. Thank you very much. Buh-bye.