Parrot SA

PAR:PARRO

Earnings Call Analysis

Earnings Call Transcript 2018-Q4

[Olivier Maury, Director of Finance]

Hello, everyone. Thank you for being with us today for this conference call to present our 2018 earnings. It is the 15th of March 2019. I'm Olivier Maury, the Parrot Group Chief Financial Officer, and I am with Marie Calleux, Head of Investor Relations.Before we begin, I would like to inform you that the account were approved by the Board of Directors on March 13, 2019. The audit procedures have been completed and the report on the consolidated accounts without any reservations is scheduled to be issued at a later date. The certification report will be issued once the management report has been verified. During this board meeting in line with the strategic guidance announced on November 23, 2018, looking to put in place a streamlined organization for Parrot Drone and continue building the recognition of the portfolio of subsidiaries and equity investment.Parrot S.A.'s directors accepted Mr. Gilles Labossiere's resignation from his position as Executive Vice President. The board invited Mr. Gilles Labossiere to rejoin Parrot S.A.'s team, which he accepted with a mission to oversee 2 of the group's strategic equity interests, senseFly and Micasense, in addition to serving as their CEO.With regards to the account, IFRS 15, revenue from contracts with customers came into force and has been applied as of January 1, 2018, using the simplified retrospective approach. The financial information for previous periods has not been restated, but a presentation of the impact of the application for 2018 is appended to the press release published this morning. The figures presented during this conference call are to be understood without any restatement of 2017.First of all, I would like to remind you about the key developments from 2018: firstly, the sale of the historical OEM automotive business to Faurecia. Parrot sold its entire remaining interest in Parrot Faurecia Automotive as at September 30, 2018, which had been 80% owned by Parrot and 20% by Faurecia since March 31, 2017. On this sale, Parrot received EUR 108.5 million, which is reflected in a capital gain in Parrot S.A.'s account as at December 31, 2018, for EUR 12.8 million before fees and taxes recorded in other operating income or EUR 14.5 million after fees and taxes, including a EUR 1.6 million reversal of deferred tax liabilities and EUR 0.1 million of fees. In addition, Parrot Faurecia Automotive will continue to benefit from the Parrot brand license until the end of the agreed time frame at the end of 2021 in return for royalties based on revenues. License revenues are estimated at around EUR 1.2 million for 2019.We would like to remind you that we sold the connected device during the first half of 2018, in line with our repositioning around drones. The proceeds from this sale represent EUR 2.1 million and include provision for potential earnout in 2023. They have not been valued considering the primary stage of this project.Looking beyond these financial operations for entities that were generating losses, the drone sector, and particularly the consumer market, had a disappointing year.Faced with this situation, on November 23, 2018, we announced a reorganization of our consumer drone operations and the implementation of a plan for departure with a view to reducing the resources used by Parrot Drone's marketing and production structure to adjust them in line with current market capacity. This plan concerns around 100 people and is focused primarily on international operations, particularly in the U.S. and Asia. The cost incurred in connection with this reorganization represent nearly EUR 10 million as at December 31, 2018, and our current estimate includes forecast for a further EUR 2 million to EUR 3 million over the first half of 2019. Alongside this, the revised earnings assumptions and the lower performance level in the drone equipment segment have led to impair in full the goodwill, representing EUR 42 million as at September 30, 2018.Lastly, as you know, Parrot is subject to a public tender offer launched by Horizon, a company controlled by Henri Seydoux, Parrot's Founder, Chairman and CEO for the past 25 years. This public tender offer follows the acquisition of a 9.59% block of Parrot's capital by Horizon at the price per share of EUR 3.2, whereas the share price was EUR 1.43. The AMF, the French Financial Market Authority, announced the offer compliance on March 5. The offer is underway and the detailed information relating to it is available on corporate.parrot.com in the Public Tender Offer section. The proposed price is EUR 3.2 per share and EUR 0.01 per warrant, and the offer carry-out days on the standard procedure is subject to the minimum acceptance threshold of 50%. It concerns all the Parrot shares and all the warrants that are not already held directly or indirectly by Horizon, which does not intend to ask the AMF to apply a squeeze-out.I will now take a detailed look at the income statement. Consumer drone revenues came to EUR 52.8 million in 2018, down 32% and represent 48% of the group's sales. The downturn on the consumer market, which [ clouded ] during the second half of the year, with a marked contraction in the fourth quarter continued at the end of the year with our key regions down by over 30% versus 2017 and a lower contraction in the United States where we, nevertheless, did not perform better.Parrot Drone, the company housing consumer operation, sold around 413,000 consumer drone units in 2018 compared with around 604,000 units in 2017 with volumes contracting 32%. Nevertheless, this period made it possible to sell off the older generations of drones, particularly the Bebop 2 and the Minidrones, which here accounted for the majority of sales in 2018 with volumes down 41% over the year. This does not in any way change the disappointing and financially destabilizing commercial performance of the Parrot ANAFI launched in June 2018.As those who follow us know, this product represents a turning point for Parrot Drone. It's a product with renowned qualities and standout features on its segment. The ANAFI has the best quality, weight, capacity, price ratio and the majority of its users are happy with it. But the fact is that we are not selling enough units neither in 2018 nor currently.While the penetration of drones on the consumer market has slowed down after [ 6 of the growth ], the strengths of our R&D expertise and our consumer sales organization are inseparable from our ability to develop commercial solutions and market for Parrot Drone or its subsidiaries. This situation does not detract from our focus on the quality of our product, our system strategy for innovation in the consumer sector and the global commercial organization that will continue to benefit from even if we are taking measures to limit growth and adapt to the pace of our market, which represents one of the most complex points to be managed when we are developing on markets for new technologies that are still young and not particularly mature.The commercial drone subsidiary, which now represents 40% of the group revenue with 5% growth up to EUR 43.6 million show contracting performance levels -- pardon, show contrasting performance levels. In 2018, Pix4D, which dominates the market for drone modeling software, became the main contributor with revenues of EUR 18.2 million, 19% growth and minor losses. Growth came in lower than previous years, indicating that the segment is gradually maturing, but it continues to be driven forward by a growing number of users and the offering's diversification to target the needs of specific business areas, such as precision farming or construction. This is also combined with a growing international presence. The Swiss-based subsidiary has offices in Spain, Germany, the U.S. and China and is currently opening an office in Japan.senseFly, which is the market leader on the segment of fixed-wing commercial drones, had a disappointing year with revenues of EUR 15.3 million, down 28.5% after the launch of its new product was stood back by 6 months. This product has been rethought for further strengthen its quality and operational reliability. In addition, those development projects had been discontinued. And while they have made it possible to reduce the cost structure and focus efforts on the core business, operations were still far from breaking even in 2018. I would also like to remind you that Gilles Labossiere has been heading up the subsidiaries since mid-2018 and improving its performance is key for 2019.Micasense, the American subsidiary developing and marketing the world's most widely used and most powerful precision data sensors for precision farming, recorded total revenues of EUR 4.8 million with 18% growth and a positive EBIT level. This robust performance follows a year marked by the departure of 2 of its 3 founders during the summer, and Gilles Labossiere has also been appointed as CEO of this subsidiary. Its product development team, which aims to develop increasingly advanced technologies, is continuing to move forward, and the continued growth is expected to help keep it in positive territory.Airinov, the French subsidiary that causes the majority of the drone-based service activity for the agricultural sector in France, is renewing and developing its offers to effectively respond to the operational issue facing operators. It generated revenues of EUR 1.4 million, down 28% and recorded significant losses. Expenditures are focused on optimizing its analysis platform and services. Our level of visibility over its ability to turn around in the short term is still limited, linked to changes done in the agricultural industry and its practices.The gross margin for 2018 came to 31% of revenues and 33.5% restated for the impact of IFRS 15 compared with 33.7% in 2017. While we are focused on quality product with better margins, the 2-point increase is insufficient, and we have been affected by the development of the consumer drone market, particularly at the end of the year.Concerning current operating expenditure, which came to EUR 99.7 million in 2018 compared with EUR 108.7 million (sic) [ EUR 108.8 million ] in 2017. It reflects the strong capacity for innovation maintained with EUR 37.6 million of R&D costs compared with EUR 36.9 million in 2017. The commercial drone subsidiaries have 147 R&D staffs with 139 at Parrot Drone, split between the consumer and the commercial product version.A reduction in sales and marketing costs to EUR 36.5 million in 2018 compared with EUR 44.8 million in 2017. This is linked, on the 1 hand, to the optimization of our commercial organization realigned to address the primarily global market from France and the reduced level of spending allocated to consumer marketing in a flat market. The sales and marketing teams represent 107 staffs in the commercial subsidiaries with 67 for Parrot Drone.Administrative costs and overheads represent EUR 18.9 million (sic) [ EUR 16.9 million ] with the increase linked to the optimization of our IT services in line with cybersecurity challenges as well as the implementation of processes relating to regulatory changes, such as GDPR or anti-corruption legislation, for instance, and the ramping up of the supporting functions in the growing subsidiary. Parrot Drone has 18 staff allocated to these functions compared with 45 at Parrot S.A., where this represents the entire workforce and 33 in our commercial subsidiary.Production and quality costs with EUR 9.4 million (sic) [ EUR 9.1 million ] for 2018 are down EUR 1.3 million, benefiting from the realignment of the consumer product portfolio and the efforts to adjust the organization in Asia. Parrot Drone has 56 employees, while the subsidiaries have 46.With regards to noncurrent expenditure, which came to EUR 37.3 million in 2018, it takes into account the nonrecurring elements presented at the start of this call with EUR 14.9 million of proceeds from disposals and the EUR 42 million write-down of goodwill, with the balance representing around EUR 10 million linked primarily to the restructuring launch in autumn and still underway.Financial income and expenses represents minus EUR 0.9 million, reflecting exchange losses, while taxes are limited by the losses recorded. The share in income from associate for minus EUR 7.9 million is linked primarily to the losses recorded by Parrot Faurecia Automotive with the other minority investments, Planck Aerosystems and Sky Hero accounting for less than EUR 1 million.Concerning our cash position and balance sheet. Net cash, including current and noncurrent financial assets and liabilities, represent EUR 160.3 million at the end of 2018 compared with EUR 115.4 million at the end of 2017. The losses for the year were offset by the divestment, including EUR 108.5 million from the sale of the automotive subsidiary. The change in working capital requirement came to EUR 5.5 million for the year compared with EUR 27.9 million in 2017 with the impact of the product portfolio realignment and the measures adopted at the end of the year to offset the effect of launches and the slowdown on the consumer drone market.Looking beyond the write-down of goodwill and the losses for the year. There are no other significant elements affecting the balance sheet. Since 2017, we have been running out to targeted inventory management policy. The -- all the products from drones to connected devices have been fully written down, and the ANAFI and its commercial versions represent the majority of these items on the balance sheet.The outlook for 2019 remains focused on the use of cash and maintaining a minimum level of around EUR 100 million. Our primary objective is to develop Europe's leading drone group in an industry that is a start of its cycle and subject to significant variations and events. Parrot needs to be agile and mobile, which is the rationale behind the new organization announced on November 23.Parrot is a key player within this young industry and has the means to support its ambition provided that it adapts its cash consumption, which explains the minimum level of net cash for 2019. Taking a more detailed look. We expect business to contract for Parrot Drone in a still bearish market. This trend will be compounded by the full impact, on an annual basis, of the other product brands that have been discontinued. However, we will continue to present the ANAFI commercial model while working to develop this platform to ensure its competitiveness and quality.For their part, the commercial drones subsidiaries are forecasting double-digit growth supported by a diversified offering developed specifically for various target industries, precision farming, 3D mapping, geomatics, inspection and security. But full development, it may be highlighted, is still dependent on the speed of adoption for the new technologies offered by the drones.Lastly, it's important to note that from the first -- I'm sorry for that. Lastly, it's important to note that from the first quarter of 2019 in line with the strategy and organization reporting for the various businesses units will be represented independently. We look forward to speaking to you again on May 15 when we'll be presenting our first quarter earnings, which will continue to show the sign of the evolutions of Parrot Drone's organization and the low seasonality trends foreseen at the start of the year, particularly since the regulatory environment is changing and holding back investment by businesses. However, we expect our product to be effectively compatible with these changes. Thank you very much.

[Operator]

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

[Olivier Maury, Director of Finance]

Thank you very much for being with us, and we keep in touch in the coming weeks. Thank you very much.