Verimatrix SA

PAR:VMX

Earnings Call Analysis

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Verimatrix conference call. I now hand over to Mr. Amedeo D'Angelo, Chairman and Chief Executive Officer; and Mr. Richard Vacher Detournière, Chief Financial Officer. Sir, please go ahead.

[Amedeo D'Angelo, Chairman & CEO]

Thank you. Thank you. Thank you to all for participating to this call for the first quarter 2020 revenue release. And I'm happy even though I am at my home. I'm in north of Italy, which is a region very hit very strongly by the COVID-19. But let's say, happy to report our figures. As you can see from our presentation, we did $20 million in revenue for our core activity with 3% gross quarter, Q1-on-Q1, Q1 2019 on Q1 2020. As a consolidated revenue in IFRS, the growth is 26%. Because if you remember, we acquired Verimatrix end of February 2019. Our -- we had a strong growth into subscription business, and I will explain about our strategy that we applied in Q1 2020 with a 68% growth from Q1 of 2019. Recurring revenue of royalties, maintenance and subscription had a growth of $14.2 million. These are the basic, let's say, the figures that we announced with the Q1, but you can read the press release. Some comments -- the comments about -- first of all, even though you hear a lot about COVID-19, we have put all the necessary measure to protect our -- the health of our employees. And as per today, we have no one in our company that has been positive to COVID-19. Let's say that Verimatrix is a company who develops software products and services, and therefore, our employees were quite used to work from home. So for us, overall, it was not a big shock of having the employees starting all working from home. We have only a few employees in Germany that needed to be there to deliver some secret codes. And so for -- from practically 98% of the company, they are all at home since March 8. The business has been quite resilient because, as you may imagine, there was a big consumption of content at home. There was a strong increase of content at home therefore weeks after the -- beginning of the year, especially in Asia-Pacific, in January, February, by a shortage of set-top box that were delivered to the final client. And we take what we call royalties from set-top box because a part of our software sits in the set-top box. And the set-top box manufacturer, they manufacture mainly in China. And in January, February, the Chinese manufacturing plants were closed down, and they have difficulties to deliver set-top box to the clients. But we had a huge increase in number of set-top box delivered during the month of March, and therefore, the royalties were quite substantial in the last months of the quarter. As you know, Q1 is typically a low quarter compared to the rest of the year. But we have seen -- there was a small change into the activity, while the current customers, they increased the number of subscriber, and therefore, our revenue of subscription customers have increased while the revenue on new CapEx, new investment for new project or launching new solution has been a bit slowdown compared to the first quarter of 2019, especially in Europe. For the new investment, there was a slowdown. In Latin America, the demand has been very strong, and we overachieved all our targets for U.S.A. and Latin America. So there are some challenges, but the business has been quite resilient. The position, the financial position, as you know, is largely deleveraged. We have a solid financial situation. We have no risk for the company. We have a good pipeline for next quarter. And therefore, there is no risk from a financial standpoint. And we believe that we could even look for some acquisition going forward to increase the product offering and our SaaS business and the subscription business. The demand for content is growing a lot. We believe that the content provider and the telecom operator should make the content available at a lower price into the market to expand even more widely the market. You know that FBI, the Federal Bureau of Investigation in the U.S., just released a report saying that all types of fraud over the network, over the Internet has grown during Q1 of 2020 by 646%. So the fraudster are more active in Q1. While if we take only our sector, this fraud doesn't reflect only video as the overall [ software-making ] sector. There are the content owners. They want to distribute even recent movies since the theaters are closed down. And movie theaters are closed down, they release movies, and you can see that on Disney Plus. They release over the network even quite recent movies. Therefore, they need more security. And it is also an opportunity for us, for our business looking forward. Most of the activity we have done has been in Q1 to push more for recurring revenue and the subscription business. We did this because we know that some telecom operators, even though they are growing their usage base and their customer base, they are demanded from government to distribute content at lower prices. And therefore, an offer of subscription, they see it more favorably because they do not have a high CapEx to invest. On our side, we are increasing the recurring revenue going forward to have a more solid base for 2021 and 2022. Our contracts are minimum 3 years, but they go even up to 5 years. We have decided not to give indication for the future because the COVID-19, as you have seen, behavior is not under control yet, and we don't know the impact that it could have on the overall business. We have kept, from one side, a tight control of expenses for the company to increase and keep our profitability, our cash for the future. But also, we have kept the employees quite motivated. Just to tell you, we are in 14 countries worldwide, and every employee is working from home. So my personal decision has been the decision to motivate, keep the employees quite motivated. We applied the salary increase that we have promised beginning of January, so we did not cut the salary increases or 2019 bonus. So from one side, we keep a tight control of cost. From another side, we have been motivating our employees to look for innovation. We have issued a new -- we have set up for a new prize to give to our employees that we call Isaac Newton during Q1 to have innovative idea, and we will give extra bonus prize to our employees to motivate them to push ahead for innovation. We need to be ready for the market once we will be free to travel again to be present into the market with new products and new solutions. Therefore, I did decide not to cut into the company, people or anything. So COVID-19 for us, it did not impact, not on morale, not on the revenue. And I keep a very strong optimistic attitude for the long-term potential for the company. I believe that once all the lockdown will be released, we have better opportunities, strong opportunity to emerge much stronger from this crisis. So I -- these are just a few comments, if you wish, because we announced just the revenue of Q1, but I'm very open to all the questions that you may have and also Richard with me are ready to answer to all your questions.

[Operator]

[Operator Instructions] We have the first question from Stephane Houri from ODDO BHF.

[Stephane Houri, Research Analyst]

I have a few questions for you. You said in your introductory remarks that, in fact, COVID-19 did not have a significant impact on the morale of the company, but though it seems that Q1 has been impacted, at least the revenue growth, by COVID-19 situation. So can you help us understand how this has been impacted? Meaning, is it because your customers are not taking the investment decisions or just because you can't travel and the sales guys just can't see their customers? Or is there any other reason? And also about the impact of the COVID-19 epidemic, the 2020 and 2021 objectives are suspended. So I'd like to understand what is, in your view -- what is, in your view, will be the impact? Of course, it depends of the length of the crisis. But taking an assumption that it will last a few months and then we'll get back progressively to normal, do you expect still some growth for the year?

[Amedeo D'Angelo, Chairman & CEO]

As I said, let's say, if you go -- thank you for the question, Stephane. But if you go to the basic, the demand overall of video streaming and the video by linear TV overall has increased. So let's say that our -- the platform of our business is increasing. In Q1, we did increase compared to Q1 of last year where there was no COVID-19. But every day, there were news of closing down, going up, opening lockdown like we say in Italy, [Foreign Language] like leopard dot. It was not a consistent problem in every country, in every region. The reaction also of the governments toward even telecom operator has been quite different. If you take in Mexico, the government told to the telecom operators to distribute content for free. And this will put a stress also on the telecom operator because they say you have to do it for free because many people do not have money even to buy food. And they stay at home. You have to entertain them. You cannot ask them to pay. So every country has reacted in quite a different way. And we are not over the -- even though there are some signs of a decrease of people positive to COVID-19, there is not a clear pattern to the way out. So Verimatrix grew the revenue, as you know, last year, and we are used to grow the revenue every year. And a part of this revenue growth comes from the fact that we win market share from our competitor. And part is linked to the market itself.Now if you cannot travel, it's a bit difficult to convince customers to buy from us. And typically, customer, when there is some kind of crisis, they tend to stay with the previous -- the incumbent supplier. They don't want to change supplier to avoid the risk. So when we say that Q1 was a bit impacted, I think from the market share gaining because we set up at the end of last year all our strategy to win a bigger portion of market share, and this did not happen. But the reduction of revenue or the impact of revenue -- actually, the revenue, I repeat, because I want to avoid confusion, increased by 3%. So if you look around yourself in the industry, you don't see many companies that increase their revenue. Having said that, the revenue was -- it could have been much higher. We closed in Q1 $5 million of subscription business, okay? This subscription business is to be recognized over 3 years, okay? In the past, what we did, we did license on-premise, and we would recognize the whole revenue, the time of the signature and the delivery of the software. In this $5 million, it will be recognized over 3 years. So this year, it will impact only $1.7 million and not even in Q1. So you can see that for the subscription business, the revenue will be divided by 3, okay, what we recognized this year. The strategy is to have higher SaaS business and higher subscription business so that our platform for revenue, our way to calculate or forecast revenue will become more solid. So we have a plan to grow more than 100% on subscription revenue this year.And you have to calculate the debt revenue as if it was 3 times compared to what we did last year and the previous year. And in this sense, I don't want to give an indication, market guidance now because of COVID. We do not know how COVID will impact all the customers in Q2 and Q3. We have a good pipeline. I am quite optimistic about the future. I am transforming the company more toward the SaaS and recurring revenue with the subscription contract. I think we'd take also some times. And the steep quarter for revenue growth will be in the years to come. So I'm overall quite confident about the future of the company and quite optimistic. But to give a guidance, in a way, you give the numbers, okay? And myself, as you know, I have been a CEO since -- almost 30 years, 25 years, and I never did a profit warning, and I don't want to do a profit warning. When there are so many variables linked to COVID-19, it is unreasonable to give a number because they don't depend from our business. The solidity of our business does not depend from our marketing or sales force, does not depend from our engineers. It depends on government how they decide to manage their countries. And it could impact also our business. Even though today, we can say, among other businesses, okay? My daughter is -- she is in hotel business, and I can tell you their revenue is 0, okay? Our business is resilient. And it shows that it grew in Q1, and it will be, I think, I can tell you, good in Q2. But to give you a market guidance until 2021, today, is quite complex. I don't say impossible, but it's quite complex.

[Stephane Houri, Research Analyst]

Okay. And -- but just to understand the dynamic of your business during the quarter. Could you share with us the growth rate of January and February? And then what happened in March? Meaning, probably a decline, but what kind of decline and what kind of growth before? Just to see if you were in line with the target for the year.

[Richard Vacher Detournière, CFO & General Manager]

Let me deal with finance...

[Amedeo D'Angelo, Chairman & CEO]

Stephane, there was not a decline. So not just -- what happens in the business typically is the March, June, December, the last month of every quarter, there is an increase of the revenue. So all the quarters, besides the seasonality of Q1, we have typically, as you know, a low Q1, a stronger Q2, a bit weaker Q3 because there is August and things like this, and then a very strong Q4. This is the cycle of our business. But also the cycle within the quarter is to have a March much, much stronger. So March was the stronger than January and February, but slightly lower than what we wish to have. Sorry, Richard, you wanted to say something?

[Richard Vacher Detournière, CFO & General Manager]

No. No, that's okay. That's okay. Just to complement, indeed, as a software company, most of the revenue of the quarter is closed in the last month of the quarter. And to give you some color about Q1 2020. So we did $20 million overall in the quarter. And $12 million in March. So that's why the second -- the monthly sequence is meaningless, contrarily to, I don't know, a chip business where you deliver your microprocessors every month. And then you can restock in the manufacturing facility, stop, or will be phasing out and so on. Here, it's really about closing deal. And once we close, we can ship the license remotely, obviously. It's available -- it's made available on the server, and then we are good. The -- but also that's why we intended, even before COVID-19, to grow our security as a service business and, more generally, the subscription business because subscription, you can get subscription, not only as a service, but also you can have a license on-prem but you ask your customer to pay you on a monthly or quarterly basis for a longer period compared to an off-prem license and then you generate recurring revenue, and you make available to them on top of the right to use the license, the upgrade. So this is what is growing significantly, and we can see that COVID-19 increased interest from customers to offload the burden of maintaining a platform to service providers. So that's quite interesting for us. It does not help solving the short-term lack of visibility and difficulty to forecast because I can tell you that if -- one alternative could have been to release a range. But given the magnitude of the range, it would have made the size almost meaningless. So step-by-step, we are trying to have more information from customers when they want to implement the new system, the new upgrade, which require some integration work, in particular, with the support of third-party system integrator. And this is maybe the bottleneck now because China is back in terms of manufacturing, so set-top box makers, they can deliver. That's information we see, we have and we see. So it's more the ability to travel and to visit customers on their premises for system integrators to be able to plug our software within the broader environment of the customers.

[Stephane Houri, Research Analyst]

Okay. Okay. And maybe a last one, and I will leave the floor. Are you -- well, I think you barely said it in the press release. Are you taking some specific cost control measures? And can you share with us like you did in the past, the targeted OpEx number for the year.

[Amedeo D'Angelo, Chairman & CEO]

Yes. Well, we announced when we did acquire Verimatrix that we were going to have $10 million in synergies. And then we increased that to $12 million for the full year. It impacted more or less $7 million last year. And if you saw the numbers in 2019, we were doing on a pro forma basis, $13 million in 2018, and we end up at $23 million in end of 2019. So we improved the EBITDA by $10 million last year. Part of it was for the increase in sales. Part of it was for the synergies that we applied to the business. So this was in last year. For this year, let's say, that the synergies left from what we promise is about $5 million. What we have done is a budget exercise. We did also increase some cost in hiring to grow faster this year and also for next year. But we forecast any way to increase our EBITDA this year. I don't want to tell you now which measure. We are not planning to do any restructuring now. We did a reorganization at the beginning of January with new people in charge of sales and operation. We made some modification to the organization, and we did some streamline. We still hired people in Q1, but we tend to delay some other hiring because today, everybody works from home. It's very difficult to train people when they join the company that they cannot go to the office. So we hold on the new hiring. And therefore, also the cost of people this year will be slightly lower than last year because of this holding on hiring. We have a cost of decrease in traveling, as you can imagine, and some cost of decrease to the show of participation to shows because there are no shows. So from the profitability standpoint, the company will deliver a good healthy EBITDA this year. But we are not cutting down costs. As I said, we keep our employees very motivated with the bonuses, paid bonuses, salary increase. We applied the salary increase to the old company. We are not firing people. We are giving new goals for innovation. So there is some people always that you can reduce if they are low performer, but this doesn't mean a major restructure or anything. We are running the company quite lean. So you may expect anyway that the synergies promised last year will kick in this year.

[Operator]

The next question comes from Anthony Dick from Portzamparc.

[Anthony Dick, Financial Analyst]

Amedeo, Richard, I had a couple of questions. Most of them were answered. But if we could just do a follow-up on the impact of COVID-19. So we've talked about the impact on the commercial side of the business. But what about the impact on the delivery side? So if I remember correctly, you had quite a strong backlog at the end of the year 2019 of about 1 year of sales. Will you be able to deliver what you were planning to deliver on that backlog? Or will that be impacted by -- also by the crisis and social distancing and confinement measures?

[Amedeo D'Angelo, Chairman & CEO]

Well, when we -- in our business, how we run it, we have a typically stronger backlog, a big backlog. But the customers, they can call the backlog according to their subscribers time by time. Some people even the backlog, they call it in 2 or 3 years, not in 1 quarter. If you look at our backlog, you are -- you could be impressed by the size of the backlog is quite important. But that backlog is difficult to forecast when will be delivered because it depends from the call also from the customers. So -- and then with the pipeline, and the pipeline as well is quite solid. The pipeline is the contract that are under negotiation as we speak. I don't want to hide the fact that if you have 3 or 4 people going to the customer and they have 3, 4 people on the other side with the legal, with the technical people and sales, it's much faster to negotiate the contract and to sign. Now everybody is scattered. Each one is at their home. So legal is at their home. They -- it's more complex to sign contract from the pipeline. But if I look the pipeline and the backlog for Q2, I'm quite -- I don't say relaxed, but I feel that the pipeline and the backlog is quite strong for delivery in Q2, okay? Let's say the COVID-19 has introduced some kind of anxiety in every one, okay? And not so much in me as a person because I have a good way of making forecast, calculating. I am -- just to tell you, in 2019, our budget was $105.6 million, and we did $106.4 million, or something like this one. So between the budget, what we deliver, we were very close and it's not easy in the industry to find the companies that really perform according to budget. And I've done the same the previous year in my history.But this time, with this COVID-19, every day, there are new announcements, new things that happen. Some customers are scared to make big investment. What we are lucky is, first of all, for the consumption of content. And second, our customers that are telecom operator or media company are quite solid. Besides the fact that what I told you in Mexico that the government asked to deliver some content for free. In general, the telecom companies, also due to the usage of Internet that they distribute, the telecom companies are doing quite well compared to the situation in the market. So we have no risk of being paid also. But you have to consider when there is a recession like this one, many types of businesses, all type of business, the customers try to keep cash tight to the heart. They don't want to pay or they cannot pay. And we are with the customers that are a very big corporation like the bigger customer -- the bigger customer we have is Deutsche Telekom. So they are very solid. They pay their bills. And so overall, the whole chain of our business is overall quite good. So -- but COVID-19 anyway is a question mark for everyone. So it makes me a bit not anxious because I'm not anxious, but a bit nervous about giving forecast numbers. You have to come out from this call with the true feeling is the one that I have. The company is solid. There is resilient to COVID-19. We did a good Q1, okay? And from profitability standpoint, we did better than Q1 of last year, quite better. And we will do a good Q2. But as we go into Q3 and Q4 to give numbers, I have a feeling, but to give numbers is not fair.

[Anthony Dick, Financial Analyst]

Okay. Also I noticed that there were no NFC license revenue over this quarter. I mean, obviously, it's a more volatile activity. But is there a reason that this line of business would be more impacted by COVID than the others or not at all?

[Amedeo D'Angelo, Chairman & CEO]

Well, NFC has always been, in French, they say [Foreign Language] in the sense we don't control that revenue that comes from France Brevets. It's not core business. Of course, when it comes, we accepted quite well. Today, I guess, the account that France Brevets is focusing on are difficult to take to court or to do some activity on this patent activity. I can have Richard to answer the question. He's in contact always with France Brevets. He can give you some comment on this.

[Richard Vacher Detournière, CFO & General Manager]

So actually, I wouldn't call it a line of business because it would be a line of business to include the mostly in our control and us operating. But actually, except for me and part of our General Counsel, nobody in the company is working on this because this is the underlying technology. We don't use it anymore. So it's really, from time to time that France Brevets is successful to close a new license, and that would generate a peak of revenue from 1 quarter. So there is no conclusion to draw on the fiber. There was no revenue from NFC in Q1 this year. Now having said that, France Brevets, our partner is in business. Indeed, COVID-19 is making things more complex and smaller -- slower because you cannot meet people. Courts, when courts must be engaged, they were closed. I'm thinking about China, for instance. And the people you target, the companies you target, they have much more urgent matters to deal with, which is a continuity of delivery and business. So we remain completely confident on the fact that France Brevets shall be able to sign new licenses in the future. Just as usual, it's difficult to predict how much and when it will occur.

[Anthony Dick, Financial Analyst]

Okay. And I had the last question on the recurring nature of the business. You mentioned your subscription business and the fact that you signed contracts for 3 years. Does that mean that usually after the 3 years are over, the contract ends? Or is it most often extended and goes beyond these 3 years?

[Amedeo D'Angelo, Chairman & CEO]

These type of contracts that they go over, the customers they engage themselves for 3 years. The good part of a subscription contract is that if and when the customer want to stop to pay, we just put the plug. He has not the service anymore, he's in deep trouble. The loyalty from the customer increase much more when you have a subscription. And typically, it renews. And we are going forward with the subscription revenue because it is the interest of the customer because they offload the capital investment. Instead of doing a capital investment to have our service, it becomes an OpEx that is a much lower front price. They don't have to do a big investment to start a business. But then they go on with the contract also for the future years. Let's say that our recurring revenue is made by several things, and some are also royalties, some is maintenance. The subscription-based contract is growing at a very rapid pace. And it will make our long-term revenue strongly predictable. Last year, we did on recurring revenue, 56% of our business. And this year also, it will grow. I don't want to indicate by which percentage, but it will grow. The subscription business itself, as I said, it grew 68% from Q4 of 2019. But over the whole year, it's a small amount still compared to the total revenue of the company, but it will grow more than 100%. And we will push ahead also in 2021 to have more and more customers on subscription. And that will allow us to take also client from our competitors, increase our market share for the years to come.

[Operator]

We have no more questions for the moment. [Operator Instructions] We have no more questions by phone. Back to you for the conclusion, sir.

[Amedeo D'Angelo, Chairman & CEO]

Okay. So I think we already shared also our conclusion. The business has been, for me, been a good satisfaction to see the resilience to COVID, because when we were going all to work from home, I have to tell you, I was a bit -- I had some concerns. Our employees reacted very well. They are very motivated, very enthusiastic, any way to work for Verimatrix, because they see the opportunity for future growth. And as we said, financially, we are quite solid. So I think we will be quite satisfactory to our investor going forward because we will overperform the industry. Thank you very much for coming today.

[Richard Vacher Detournière, CFO & General Manager]

Thank you. Good evening.

[Amedeo D'Angelo, Chairman & CEO]

Bye.

[Operator]

Ladies and gentlemen, this concludes the conference call. Thank you, all, for your participation, you may now disconnect.