TeamViewer AG

XETRA:TMV

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome to the TeamViewer AG Q2 202 Results Call and Webcast. Today's conference is being recorded. And at this time, I'd like to turn the call over to [ Michael Lennar ]. Please go ahead, sir.

[Unknown Executive]

Good morning, and welcome to TeamViewer's Q2 '22 Earnings Call. I'm [ Michael Lennar ] from Investor Relations, and I'm joined by TeamViewer's CEO, Oliver Steil; and CFO, Stefan Gaiser. They will now present our business and financial update for the second quarter of 2022.

As always, the presentation will be concluded by Q&A. Please pay attention to the note regarding forward-looking statements on Page 2 of the slide deck.

Oliver, over to you.

[Oliver Steil, executive]

Thank you, Michael. Good morning. Thank you for joining TeamViewer's Q2 earnings call. Let me start with some business highlights, which is contain in detail. Let's begin with a high-level summary. As you can see on this slide, in Q2, we achieved double-digit billings growth and revenue growth and a strong adjusted EBITDA margin above market expectations. The same goes for the first half, again, double-digit billings and revenue growth and a margin above [indiscernible] The overall current economic and political environment, our results are solid. We remain confident in our future growth trajectory and our strategy also works in the current environment. We continue to grow and do so very profitably. This is particularly true for SMB, where the resumption of our monetization campaigns resulted in a 10% billings increase compared to Q2 2021.

So a major uptick from the 4% year-over-year growth that we saw in the first quarter. But obviously, like many other firms, we began to feel the effects of the current macroeconomic uncertainties and geopolitical tensions. We see decision-makers around the globe becoming more cautious, and we experienced tightened procurement processes resulting in overall longer sales cycles. This began to translate into a softer order intake for both of our business segments.

Enterprise, in particular, saw lower than usual pipeline conversion, but still the segment grew by more than 20%. We now have more than 3,000 enterprise customers, and we have a growing pipeline for Q3 and Q4. And as you know, the Enterprise business generally is leaning more towards the end of the year and particularly to the fourth quarter. And TeamViewer remains in a strong position to navigate through the current headwinds in the second half of the year. We are very profitable and have proven repeatedly that we can maintain this profitability even in challenging environments.

We further optimized our financial profile by strengthening our financing structure, which increases resilience and flexibility. We successfully concluded the cost optimization part of our ReMax program, resulting in a further sustainable lowering of expenses. We continue to win key customers and to enter into high-level partnerships. And last but not least, we continue to record the highest growth rates in the largest ACV buckets in both the SMB segment as well as enterprise. That clearly shows the ongoing shift of our business towards high-value customers.

Now, we will most likely have to go with ongoing lower visibility due to the economic uncertainties in the coming months, but we are well prepared. Fundamentally, the demand for our products and services remain strong. And if anything, the megatrends fueling our business model are getting even more relevant.

And with that, let's move to the next slide. Taking a quick look at TeamViewer's regional performance. The regional breakdown nicely illustrates the benefits of our globally diversified structure because the strongest increase in billings on a year-on-year basis was recorded in the Americas. Here, Q2 billings increased by 22% to EUR 48 million and by 20% to EUR 101 million in the first half, respectively. Our strong operational performance in the Americas was also significantly driven by the U.S. dollar appreciation against the euro, obviously, as seen by the comparison with a constant currency rate.

In EMEA, like in the previous quarter, Q2 growth continued at a stable 8% year-on-year to a total of EUR 69 million. However, the ramification of macroeconomic uncertainties and geopolitical tensions became particularly evident here and consequently impacted our pipeline conversion. Our decision to terminate business activities in Russia and Belarus also negatively impacted billings in EMEA in the first half.

Lastly, APAC clearly challenging and clearly not what we had expected. As you can see, billings in Q2 grew slower by 4% year-on-year to EUR 19 million. Our leadership team in APAC is continuously working on the transformation of the business. Remember, our President APAC joined beginning of December only. However, with the new COVID-19 outbreaks and the lockdowns in several APAC countries, China, in particular, it temporarily slowed down sales activities. Hypothetically, if we would exclude China, then APAC would have recorded the same growth rates as EMEA. We are happy with the strategic part of our business and the changes we made, and therefore, expect the business momentum to increase again.

If we go to the next slide, I mentioned large customer wins and strategic partnerships in my intro and as always, let me provide some insights into 3 relevant additions to our enterprise portfolio from the second quarter.

So firstly, we're really pleased to announce a strategic partnership with Siemens digital industry software. And I think that's another example of how our technology helps digitalizing industrial processes. So together with Siemens, we will innovate in the product life cycle management space with our AR platform frontline. We allow Siemens global customers to improve their product development process based on experiences with interactive 3D content, which is then connected to the digital twin of the product.

I think after SAP and Google Cloud, Siemens partnership is the third really high-profile collaboration to expand our access to global Tier 1 technology players.

Let me continue with another example of leveraging again our mixed reality technology, which is also part of the Siemens piece. So this case is DB Netze, the railway infrastructure manager of Deutsche Bahn. And they use TeamViewer frontline spatial, that's how it's called, to train their employees in maintenance procedures. So more specifically, our solution enables the client to illustrate training rooms and embed virtual information, including projections of technical equipment such as components or malfunction.

And generally, we see that remote maintenance and virtual training environments gained a lot of traction during the beginning of COVID-19 pandemic, and clear here to say this is a promising growth market, micro trainings with increasing importance of more and more businesses and industries.

And let's conclude the customer spotlight with the customer Wendy's. As you know, the global restaurant chain with operations in 27 countries, while leveraging the potential of our AR platform frontline, when this can improve critical areas such as food safety and quality, for instance, by monitoring suppliers and complaint investigations. And in this context, the experts in Wendy's centralized restaurant support center performed remote product evaluations or supplier walk-throughs via smart classes. In total, the mentioned partnerships and customer cases further demonstrate our TeamViewer solutions are increasingly integrated into different business-critical processes at commercial customers around the world, clearly meeting their demand for solutions that foster digitalization of their operations.

With that, let me now hand over to Stefan.

[Stefan Gaiser, executive]

Thank you, Oliver, and good morning to you all. It's my pleasure to guide you through the financial details for actually one last time in my role as TeamViewer's CFO. As you all know, Michael Wilkens, will take over my role as of September 1. And actually, in the past few weeks and months, Oliver and I already touched base with Michael repeatedly to make sure that we have a really smooth transition. And I'm pretty sure that from day 1 on Michael will be up to speed with respect to all major strategic and financial topics.

And just on a personal note, thank you all for the collaboration and very open discussions over the past years, which I really thoroughly enjoyed.

So now let me start with the financial highlights in terms of top line, probability and cash flow. On Slide 10, total billings up 12% to EUR 136 million or 7% in constant currency rates, which then basically brings total H1 billings to nearly EUR 300 million, up 12% or 8% at constant currencies. Also double-digit top line growth from a revenue perspective, grew 12% in Q2 and 13% in H1, respectively. Revenue growth is largely in line with our expectations, even though we saw a softer order intake amid the macro headwinds, Oliver already explained.

In terms of profitability, adjusted EBITDA of EUR 85 million -- sorry, EUR 58 million as well as the adjusted EBITDA margin of 42.6% in Q2 was above market expectations and clearly showing that we continue to successfully grow our business while maintaining strong profitability. The H1 margin of 47.2% was actually slightly above our full year guidance already.

Free cash flow in the second quarter, as we as year-to-date, slightly down, basically solely reflecting the planned marketing partnership repayments, which are pretty much on front loaded. So in H2, the second half of this year, we will see a better free cash flow conversion again.

Let's move on to Slide 11, 12% overall growth. As already pointed out, total billings up 12%, which represents, I'd say, a robust quarterly development that is clearly also due to favorable FX movements broadly in line with our expectations. If we take a closer look at the quarterly segment billings on the left, you can see the accelerated growth in the SMB business. which is the effect of our monetization campaigns. With that, we basically mean that we've reactivated the paywall for commercial users within the free ecosystem.

With a 10% billings growth compared to last year's Q2, the second quarter saw a good billings growth acceleration from my perspective. And I will explain in more detail in a second. This was also again driven by successful upselling of SMB customers into the higher ACV buckets.

If we take a look at the enterprise billings, they increased 21% in Q2 and now amounted to a total of EUR 27 million. And as you can see, on a half year basis on top right, enterprise clearly remains the growth driver for the total billings growth. From H1 2021 to H1 of this year, enterprise contributed 53% or roughly EUR 62 million to total billings growth. And between H1 2020 and H1 2021, enterprise growth contribution only amounted to roughly 1/3.

So despite a somewhat slower enterprise pipeline conversion, we are still seeing the ongoing mix shift in our maturing business. And in Q2, the enterprise contribution to total billings was 20% compared to 21% in the first quarter. I think the slowdown of the enterprise growth rate reflects the aforementioned macroeconomic uncertainties. And to be more specific, we noticed that decision-makers turned more to the [ cost ] side amidst lower visibility. This led to extended deal cycles and also resulted in a softer order intake for us.

I do not expect these macroeconomic uncertainties to disappear in the short term. But I want to emphasize that we have a growing pipeline for Q3 and the second half in total. But obviously, at the same time, we have to take into account the before-mentioned factors. Overall though, we remain confident with regards to our back-end loaded enterprise business.

Now against this background, new billings on a quarterly basis, shown on the bottom right side, slightly improved by EUR 1 million compared to Q1 over EUR 17 million.

Let's take a look now on Slide 12, a detailed look at our SMB segment. As you can see in the chart on the left side, LTM billings in that segment developed positively on a year-on-year basis, especially considering the shift between ACV buckets in Q2 with total LTM billings amounting to EUR 470 million and an LTM growth of 8%.

Clearly saying the SMB segment remained robust and certainly particularly lease that we saw continued upselling trends towards higher ACV buckets clearly approved for the attractiveness and importance of our solution portfolio. The low end in the SMB segment remains competitive, but at the same time, the successful upselling fuel the growth in the stickier and higher quality cohorts with ACVs over EUR 500.

The segment above EUR 500 in the segment above EUR 1,500 recorded the highest increase with 12% and 22%, respectively. This trend towards higher ACV bucket is also reflected in the number of absolute SMB subscribers, which you can see then on the right-hand side.

The lowest ACV market below EUR 500 decreased, mainly driven by the exit of Russia and Belarus, both the middle and upper end cohorts actually increased significantly by 18% and 20% year-on-year. And therefore, total subscribers finally amounted to 623,000 in the second quarter.

Let's turn to Slide 13. I think the key points here on that slide are the continued churn reduction. I think that's a very good and consistent development over the last 3 years, I think, and clearly confirming that we migrate to a stickier customer base. The recorded subscriber churn rate in the SMB shown on the lower left-hand side, was 14%. However, considering the effects of our Russia, Belarus exit, which we mentioned earlier, the adjusted churn rate would have been slightly lower at only 13%.

So again, a very healthy development from my perspective that our customer base remains very stable. The exit from Russia and Belarus will cost us about 10,000 subscribers over a full year.

And again, just as a reminder, as I already noted in previous calls, we stick to providing the churn rate for the SMB. This is clearly the more meaningful metric for the segment as opposed to the NRR, which is very important for the enterprise business.

Moving on to the enterprise business. in Q2 that amounted to 20% of total billings. On an LTM basis, those billings rose by 62% to EUR 210 million. And as you can see in the upper left-hand side, the relative ACV bucket distribution remained almost stable year-on-year with the lowest ACV cohort that dose between EUR 10,000 and EUR 50,000 contributing roughly half of overall enterprise billings.

The second largest ACV bucket between EUR 100,000 and EUR 200,000 in absolute terms, nearly doubled year-on-year to more than EUR 40 million and slightly increased in absolute terms to slightly increase to 30% in relative terms, really indicating a significant boost in higher-value contracts and substantial customer demand for our comprehensive high-value solutions portfolio.

If we move on to the chart on the upper right-hand side, you can see the total enterprise ASP in the second quarter remained relatively stable at EUR 36,000. The enterprise net retention rate slightly declined to above 110%, a drop-down though from the first quarter, as you can see on the bottom left. This reflects, from my perspective, the implications of the uncertain macroeconomic environment, some customers getting more has tend to close new deals or upgrade existing contracts.

Nevertheless, we achieved a net retention rate of 101% on a Q2 LTM basis. And therefore, we managed to consecutively in through the NRR 4 quarters in a row now. And as you can see in the right-hand chart, on the bottom right chart, now the final numbers of enterprise customers exceeded for the first time 3,000 [indiscernible] are more important points in the second half year. We also intend to launch an aims to transition a significant amount of our larger SMB customers to TeamViewer Tensor, the enterprise edition of our remote connectivity software, which we talked about a lot in the past. That's really the version those customers should use, and we have seen great upselling here over the last 3 years.

We will now make this an even more streamlined focus area for our upselling activities and expect to move quite a few of our existing SMB customers towards the enterprise segment, which should accelerate enterprise growth rates again.

Let's move on to the next slide. Year-on-year, our adjusted EBITDA increased to EUR 58 million to EUR 57 million as a result of strong operating leverage, clearly successful execution of project ReMax and lower bad debt expenses. I think overall, this is a particularly strong achievement given last year's second quarter did actually not include any material costs from the marketing partnerships.

And also one remark regarding those sizes or contracts in marketing, they do not include any material inflationary adjustments. So a large amount of those are relatively fixed.

For the first 6 months, adjusted EBITDA was EUR 141.3 million, while in the prior year period, it amounted to EUR 147 million, both the Q2 margin as well as the H1 margin were above market expectations.

Moving on to cash flows on the next slide. You can see that we maintained a high free cash flow and cash conversion in the second quarter. IFRS pretax operating cash flow was down 18% in Q2 overall, amounting to EUR 48 million. Levered free cash flow in Q2 declined by 13% compared to the previous year. Again, this is pretty much solely due to the [ blend ] sport partnership repayments in Q1 and Q2. Those partnership prepayments are pretty much front-end loaded and very little remains to be paid in the second half, therefore, providing a boost to cash conversion in the second half.

Total CapEx accounted only for EUR 2.4 million, representing a very low level with no investment in heavy projects and significantly reduced expenses due to the successful rollout of the new ERP system. I think in total, it's fair to say that our cash flow profile and the cash conversion remained very healthy and added to us maintaining a very strong liquidity position, as you can see in the next slide.

On Slide 17, you can see the waterfall cash and cash equivalents at the end of the second quarter, amounting to EUR 383 million. Clearly, the largest cash outflow came from the payments for the share buyback. The other outflow contains a positive FX impact of EUR 16 million and negative EUR 4 million lease payments, netting overall EUR 12 million. The net financial liabilities increased in the second quarter and amounted to EUR 527 million as of June 30. But all in all, our liquidity in Q2 remained very strong with a leverage ratio of 2.1x.

Let me also give you a brief update on the share buyback program, which we announced earlier this year. As of end of July, we have bought back approximately 19 million shares of our own stock. This corresponds to roughly EUR 249 million or 83% of the target volume of EUR 300 million, which we announced. What is important here is that roughly premium shares of the mark has restricted stock units, clearly, an important feature of our long-term employee retention.

And as discussed when we introduced the SBB, the share buyback, we will continue the program until the amount of EUR 300 million is fully invested, and I expect it to be completed within the third quarter of this year, so relatively soon. We also increased the maximum number of shares to be repurchased under the program to 30 million shares in total. And actually, using our strong cash conversion profile, we were able to refinance our leverage structure with, from my perspective, very attractive terms.

Let me quickly provide you some details on the next slide here. Our new revolving debt facility comes now with an extended maturity profile. The refinancing included a down payment of EUR 477 million term loan by using existing cash from the balance sheet and entering into a new significantly lower term loan of EUR 150 million in combination with a revolving facility. The total RCF facility amounts to EUR 450 million and is currently drawn with EUR 150 million. And on the left, you can see how much more balanced our maturity profile has become, thanks to the extended revolver and the new extended term loan.

The optimized financing, which now also includes an ESG component provides us clearly with more flexibility for potential future investments. And secondly, it bolsters our financial resilience. We have less FX volatility as well. And lastly, we significantly improved our midterm maturity profile, which is now both flatter and more extended compared to before the refinancing. So overall, very good news from my perspective.

And maybe just quickly on Slide 19, to some things up on this slide. I think we have clearly done our housekeeping. TeamViewer is very well prepared to navigate through the current economic environment and beyond. Very strong focus on the bottom line, even better financing structure in place, and we have proactively addressed long-term employee retentions as well. We successfully executed on ReMax, next to many other benefits of the program, we have clearly reset the cost base and realign top line and OpEx growth that could be seen in our flat OpEx development despite the double-digit top line growth.

And secondly, with the refinancing, which was clearly made possible by the strong financial performance in the past quarters, we substantially improved the financial structure going forward, stronger balance sheet, great liquidity and lower financing costs, so a very good result.

And lastly, we also significantly improved our long-term employee retention by introducing now a modern RSU scheme across the employee base on a global basis. The cash outflow for this program is already fully done in the second quarter, and will cover us very well for the next 2 to 3 years.

Now most importantly, the guidance, we maintain our current guidance. We've analyzed a variety of different scenarios over the past weeks. And despite the macro uncertainties and limited visibility, we are confident to reach the guidance though at or around the bottom end of the predicted range at least for billings. However, full disclosure here, we also came up with scenarios where this will be challenging, especially in light of recent volatility and customer cautiousness.

It really remains to be seen how enterprise develops and how we can push through with pricing and upselling our large installed base. This means for the full year 2022, we continue to expect revenue to increase in the mid-teens to EUR 565 million to EUR 580 million, and an adjusted EBITDA margin within the range of 45% to 47%. We expect billings for the full year of 2022 to be at or around the bottom end of the current guidance, which means somewhere around EUR 630 million.

Now let me conclude the outlook section with a rather long-term view. While we recognize the positive brand building effect of the partnership with Manchester United, we do not intend to extend the sponsorship agreement with the club beyond its term. In light of the current macro environment, we have decided to reassess the long-term marketing strategy and has already touched base already touched on over the course of today's presentation.

We have already implemented several short-term measures to ensure and increase our direct affordability. And I think in the next step, we now increase our focus on medium-term measures.

And as a result, we expect that the combined effect of these measures will lead to significantly improved margin following the end of the current sponsorship agreement. And with that, I'll hand over again to Oliver for concluding remarks. And let me end by saying thank you all again for the very open, respectful and inspiring conversations and discussions over the past years. Looking forward to having some final one on ones later today and tomorrow during my last few days in the office. Thank you.

[Oliver Steil, executive]

Yes. So this concludes today's presentations. We now look forward to taking your questions. But before commencing the Q&A session. I would like to sincerely thank Stefan for his net contributions to TeamViewer, the outstanding refinancing he secured for TeamViewer and which we presented to you some minutes ago, it's just one of the numerous proof points of how good as a CFO, Stefan, works for TeamViewer.

I'd also like to thank you, Stefan, for ensuring the exceptionally smooth transition with your successor, Michael Wilkins. Thanks to you. I keep -- have a head start when beginning in September. Stefan. I think everybody knows that I really enjoyed working with you, and I really wish you all the best for your future.

And with this, I think we move over to Q&A.

[Operator]

[Operator Instructions] We will now take our first question from Kathinka de Kuyper from JPMorgan. Please go ahead.

[Kathinka de Kuyper, analyst]

Two from me, please. Pressing on the demand environment, you saw some customers being cautious and postponing yields. Can you give a bit more color on the vacation which regions, which sectors and even kind of what type of deal size is?

Then secondly, you still need to see a meaningful acceleration of billings growth and both billing growth in Americas and APAC slowed sequentially in constant currency terms. So what is the visibility you have into the second half?

And then finally, during the first dynamic, the lockdown accelerated the demand for your solutions. And now you're mentioning that the lockdowns are having a negative effect in APAC. So what has changed?

[Stefan Gaiser, executive]

Yes. Let me start here, think with the regions and the deal sizes. I think from our perspective, we experienced first slowdown in the EMEA region, sometimes during the second half of the second quarter, I think generally more cautious tonality from customers. We then basically came in line with our forecast for EMEA, but clearly, we had hoped for more. I'd say the U.S. enterprise actually pretty resilient. Yes, we had a few larger deals which slipped. Those deals are still very much alive, and we expect to close them shortly.

But overall, actually, the enterprise contribution in the Americas was pretty strong in the second quarter. Some of those deals, which slipped are significantly for us, 0.5 million roughly in duties -- so quite significant deals. Again, they are still live, but let's see whether we are able to close them. We should know that pretty soon.

But all I would say the slowness was more pronounced in EMEA than in the Americas. APAC very much differs by country, frankly, our most mature markets, Australia and New Zealand, actually very strong growth, clear double-digit growth in those markets. In China, a tougher spot for us. The lockdown certainly there hasn't helped because, look, the basic remote access products, I think that market has certain maturity achieved over the last couple of years, but the lockdown certainly doesn't make it easier to pitch new products to meet customers and present our technology, especially for the newer use cases, and therefore, the lockdowns had a negative impact.

We can really see that in EMEA in the U.S., where we had a significant amount of field activities going on, lots of customer visits and trade shows and that clearly helps us building the funnel.

In terms of billing growth and visibility for the second half, yes, it requires an acceleration. That's not untypical for an enterprise software company. We have seen that last year as well, to a certain extent, Q4 was very strong. That's the time of the year when you typically close the larger deals. We expect the same to happen this year. But at the same time, obviously, we need to be cognizant of the tougher macro environment out there, and that's why we put the language around the outlook statement clearly based on the pipeline, we're confident to achieve the guidance of the scenarios in which that continuing cautiousness on customer side and deal slippage.

And then the last question...

[Kathinka de Kuyper, analyst]

So just how much of FX are you assuming in the guidance of EUR 630 million.

[Stefan Gaiser, executive]

We basically assume a continuation of the current FX rates, which means the U.S. dollar euro to 102, 103, it really only started strengthening towards the end of last year. I think the average rate for Q4 was still around 115 last year. So we still expect a significant FX tailwind there.

[Operator]

Thank you. We will now take our next question from Mohammed Moawalla from Goldman Sachs. Mohammed seems to have stepped away.

We will now take our next question from Gianmarco Conti from Deutsche Bank.

[Gianmarco Conti, analyst]

I have a few, and then I'll ask some follow-ups maybe later. So the first is on exactly which customer cohorts. Do you see most of the slowdown in all the [ Ent ] you're coming from? Would that be from enterprise or SMBs?

And the second was just like a curiosity about how come more [indiscernible] Paid campaign activated. That was sort of under the impression that the growing subscribers using the strategy could perhaps mean that you'll be acquiring lower-quality customers. and that then will sort of like turn away in 12 months. So I just want to understand the strategy around this.

And the third question is, what was the main reason for the slowdown in NRR going below the 100% mark?

[Oliver Steil, executive]

Yes, maybe I can start. So I think the slowdown, if you look at the -- it's most pronounced in the enterprise segment, obviously. So if you look at pipeline conversion to towards the end of the quarter, that's where we see delays in decision-making, which doesn't mean that the deals are not there anymore, but customers really take time. And it started in Europe and is now, I think, also the case more in the Americas.

I think generally, SMB is not so much a conversion topic, but I think that's, in general, just deal flow leads coming in weaker and current environment, but the conversion piece is really slow down is for us most important, most pronounced in the enterprise segment.

On the monetization, we were running monetization campaigns. You're right. These customers are mostly coming in at the lower end. We have been running campaigns across the regions. But we're trying to really move customers into the business license or not so much into the remote access license. And we are less aggressive, I would say, in terms of promotions and pricing than we have been in the past. That reduces the overall volume of the monetization impact, but it's also reducing the risk of a churn 1 year later, which you mentioned. Obviously, this is the entry-level cohort.

So there will always be slightly higher churn or higher churn in this cohort than in the higher end segment. So you're absolutely right with this. But I think relative to other times when we did significant monetization campaigns, for example, after the COVID, where we had a big wave of conversion of monetization of customers or users I think that looks very different.

Stefan, do you want to touch...

[Stefan Gaiser, executive]

They are down. Clearly, the biggest driver of that is the slower up and cross-sell activities. So it's not a churn topic, which is good news. I think the business continues to be very resilient. Churns has actually come down. If you adjust for the Russia Belarus from 40% to 30%, so very good from my perspective. But other in cross-sell suffered under the current macro environment.

So customers continue to use our software. It's an important solution, which they need, but they've been more caused in terms of extending and increasing the volume under the current environment. So that's the main reason for the NRR drop.

And it's in the enterprise business, I mean, it's still north of 110%, which is quite good, but it saw a deceleration compared to the last quarter.

[Gianmarco Conti, analyst]

Right. So that kind of leads me to a few follow-up questions. The first one is given you had slower up and cross-selling activities, sort of what gives you the confidence that you're able to do that in H2. You sort of like briefly said that you have a strategy to try and upsell from existing SMEs to enterprise.

So I guess as the macro like environment deteriorates as you're seeing order intake or intake slow down? What sort of gives you the confidence that you'll be able to do upselling and cross-selling in H2? That's my first question.

And the second question is just a final one on do you expect sort of H2 margins to trend in line with H1? This strong margin beat was driven, I'd imagine mostly by the ReMax program. But what are sort of your expectations of ReMax having an impact in H2? And should we expect something similar.

[Oliver Steil, executive]

Yes, maybe I'll take the first one. So up and cross-sell from SMB to enterprise a couple of thousand euros. So it's a gradual increase quarter-over-quarter, a bit more than 3,000. I actually started with a in ACV per customer.

What we think we should do now and we started we think is just reflective of the current economic environment where many customers look for kind of good offers to improve their security positioning and improve the feature set, work more remotely and have the right solution, which is our Tensor place.

We know there's many customers in our base that want it and have expressed interest in the past, but we have been, I would say, on the high side of pricing. And you remember discussions we had where we often indicated that from the 3x, 4x increase of ACV when we move these customers. We feel in the current economic environment, where company is under pressure, there's really room to be more -- a bit more aggressive on these campaigns and offers.

So we are providing these functionalities at a lower ACV increase to make it an attractive bundle for our customers. And we believe that there is a significant amount of customers that would then move to the solution that they anyway want in a way because it comes with inertia and many more functionalities.

So this is why we believe if we run this as a campaign across the regions that there can be significant more upsell and cross-sell than we have seen in the first half of the year.

[Stefan Gaiser, executive]

And then margin development. If you take a look at the quarter development of our total OpEx, I think, came down from roughly EUR 90 million in Q3 and Q4 last year to now around EUR 80 million ReMax is pretty much fully concluded, at least from a cost-cutting perspective exercise. So we are now sitting at a run rate of around EUR 80 million, give or take.

We continue to invest, but more selectively, we'll continue to invest into sales and R&D, but other functions, we are more cautious in terms of overall investment and replacements. So I'd expect a slight increase in our cost base in the second half. But obviously, we also have a higher billings number in the second half, and therefore, margin should be pretty much in line with what we've seen in H1.

Overall, I feel really confident about adjusted EBITDA for the second year and also talk about second half and also about adjusted EBITDA margin.

[Operator]

We will now take our next question from Ben Castillo from BNP Paribas.

[Ben Castillo-Bernaus, analyst]

A couple for me, please. Billings guidance for the full year, I guess what does that embed in terms of pipeline conversion versus what we've seen in Q2? Are you sort factoring the same level of deal slippage and pipeline conversion or some deterioration or going to be some improvement? That will be the first one.

Second question on the news of the Man United sponsorship, I guess -- how should we read that? Why make that announcement now given you're only 1 year into a 5-year deal? What's the message in there? Has the return on that investment maybe can different to your expectations? Clearly, there will be little impact to the next 4 years of your financial -- the financial impact. So curious on the message there.

And then third, if I may, on capital allocation, you're over 80% through your share buyback. What's the outlook for M&A in H2? Should that pick up as a use of capital or more buybacks on the capital.

[Oliver Steil, executive]

Yes, maybe I'll start. I think we are -- I mean it's -- this is a difficult environment at the moment. So it's difficult to read how macro and demand trends in enterprise will continue. I think what we've communicated is that pipeline conversion was weaker than we had expected. We don't assume a deterioration there, but we also don't assume an improvement on conversion. I think what we do see, based on our partnerships that we have, SAP, Google, now Siemens, and also the activities we've been doing since we can travel again and visit trade shows and generate leads. We see a growing pipeline.

So the pipeline cover relative to what we need to achieve in order to get to our guidance is better for the remainder of the year and especially also for Q4. So that's the current thinking. Again, hard to read how it will evolve in terms of buying behavior, but we are operating with a growing pipeline quarter-over-quarter sequentially. And therefore, we feel better towards the second half of the year than we feel for the first half.

Manchester United, Stefan....

[Stefan Gaiser, executive]

I think from my perspective, in the first year, we clearly got a significant brand boost through those partnerships, especially in Man United in the visibility of TeamViewer as a global brand has certainly accelerated substantially. No doubt about that. But at the same time, we entered into these partnerships under different assumptions, especially in terms of our long-term growth. We entered this partnership. We felt that we will be growing more to 20% or close to 30%. And obviously, the situation has changed. And therefore, we needed to reassess the long-term investment strategy for TeamViewer.

From my perspective, now we've done all of our homework in terms of the short-term profitability preservation, where I think we've done that extremely good project ReMax fully concluded and very effective. And we've kept margins at the 47% level. But I think it's also now time to think about the future and the long-term alignment of our cost base with top line growth, and that's why we made this decision so that the analysts know out there about the margin profile going forward in light of the current environment. And that's why we took this decision and announced it today.

[Oliver Steil, executive]

Capital allocation?

[Stefan Gaiser, executive]

Capital allocation, share buyback now pretty much completed. Will be done within the third quarter. In terms of M&A, yes, we are actively screening the market. I wouldn't expect anything to come shortly, frankly. That's not the time right now, but let's see how things evolve. Clearly, we will continue to do M&A, but nothing short term on the horizon here.

[Oliver Steil, executive]

Yes. I think from my perspective, adding to this, obviously, now being the transition from Stefan transitioning out and then Michael coming. I think it's absolutely important to keep focus on profitability for the business. do our homework, grow the business in the areas where there is growth and opportunity like the discussion we had before in enterprise upsell and cross-sell and also SMB. It's very important to focus there.

Brand building and investment into our technology brand is very important and remains very important. And we have these partnerships that we're using. But it's also clear, as Stefan said, growth is different. We need to prioritize. We need to keep cost in order for the midterm and the long term. And hence, we wanted to provide clarity on how we think about this at the moment and capital allocation, as Stefan said, I think it's currently the time to do -- to focus on organic and drive our billings and develop the business in the different regions. There's enough to do. Obviously, in the current market environment, there might be opportunities coming at some point, but it's not a priority for now.

[Operator]

Will now take our next question from Gustav Froberg from Berenberg.

[Gustav Froberg, analyst]

I have two, if I may. First, on pricing. I know we talked about ACV expansion, et cetera, I'm shifting among cohorts. But could you share with us how your underlying pricing has developed over the quarter just across the regions?

And then my second question on caution in the market. When exactly did you see this arrive with your customers? And would you say that the situation has improved, worsened or stayed the same as it stands today in August versus the end of the quarter?

[Oliver Steil, executive]

Pricing. So I think underlying development is, as we always said, we don't do -- typically don't do like-for-like price increases. However, we started last year upon renewal to do slight increases upon renewal. So that we talk order of magnitude, 3% to 4%. This is for some segments in some cohorts also happening this year, but not very pronounced. I would say in the other elements when we talk about new business, I think the pricing environment has stayed relatively the same.

Yes, there's more discussions. But I think most of the project and most of the situations we have, there's anyway some price exploration going on, what is the value that we generate for customers, what is the overall size, rollout speed and the likes for like.

So I wouldn't say that there is a fundamental change there. We also had reported already last year that at the bottom, and what it means like really below EUR 500, there is competition. There's more competition. That hasn't worsened, I would say, I think relatively the same. We have done in some regions, some adjustments there to be a bit more competitive, but generally speaking, I think on the pricing side, quite stable development.

As I've said before, when we do upsell when we will do upsell into the base relatively, relatively to our price book, we might be a bit more aggressive to have interesting offers in these recessionary environments to SMB customers to move to the Tensor platform. But that's still a significant ACV increase, a very significant ACV increase. So therefore, they wouldn't be visible as a price pressure or so it's actually an ACV up.

Looking forward, as you know, we just had some weeks ago, our new Chief Commercial Officer, joined Peter Turner. And I think given the significant inflationary environment in many markets, I think it's really worth looking at the price development and the renewal price increase going forward. There probably will be countries and cohorts where we should push through a slightly stronger price increase, but that's all under analysis, and I don't want to kind of jump on here because Peter just joined and he will take his time to analyze and then come up with actions.

[Stefan Gaiser, executive]

In terms of corn environment, I think clearly, things have not deteriorated. I think they are stable now on this level. I think we've seen a slowdown probably first starting in EMEA in Q2, then a little bit of slower conversion in the enterprise pipeline in the Americas, but still very good numbers for the enterprise, which I had hoped for a bit more. July off to a good start. Things are stable, I would say, or I can clearly say. So let's see how things evolve. But I think that it was mainly in Q2 and from there on, it seems stable.

[Oliver Steil, executive]

Yes, I think the organization is clearly also -- I mean, it has adjusted to the fact that you need more pipeline to get to a certain number of good deals. And I think there's always an adjustment phase, so to say. Europe was very harsh tough early in the year when the war started. I think Americas was more gradual. Everybody knows what we have to and the environment we are working in.

So full focus working on building pipeline with all the partnerships in all the different segments and for different use cases. I've shown some of them in new industries and new verticals. So all hands on deck to work on this one. Stefan said, July, always the first -- I mean, the first quarter of the month, never in easy months, but if we compare with the beginning of last quarter, we actually see it looks better.

So again, this is early days, just 1 month, but beginning of Q2 was a tough one. Everybody in the adjustment mode beginning of Q3, it feels organization is more on it, and we have been able to early days, just a few days ago, but it seems like we have been doing better than at the beginning of last quarter.

[Operator]

We will now take our next question from George Webb, Morgan Stanley.

[George Webb, analyst]

Oliver, Stefan. I've got a few follow-ups. Firstly, just on the sports marketing partnerships. I think the annual report from last year had total contractual obligations for this year at EUR 72 million, which I guess, most of which will be relating to Manchester United. Do you have any early thoughts on how much of that marketing spend you will look to reinvest back through other marketing channels versus what we might see as uplifted EBITDA margin once that trend ends in a few years.

Secondly, on the free to paid monetization, I think what I asked on the Q1 conference call, there was a broad comment about perhaps linking the restart of that post Peter Turner starting as CCO seeing his thoughts and then making a decision. So I'm curious as to when during Q2, that was turned back on and what drove that decision?

And then thirdly, just on your employee base. Can you talk about what you've seen through this year so far around attrition levels and also on the flip side, your ability to hire?

[Stefan Gaiser, executive]

Yes, let me start with the sports partnerships. Let's bear in mind that this is not only mention but also Formula 1, clearly, significantly less compared to Manchester United, but in the EUR 72 million, that's also includes a Formula 1. But that being said, if we come to the end of our term, there will be significant belief of the P&L, but we still have significant marketing funds available. I would -- at this point in time, I would not expect that we need to continue to invest, reinvest a significant amount. So I think most of those savings will actually go to the bottom line. That's why we announced it today. I think there will be a step-up in margin going forward, everything else being equal.

And look, I think coming back to my earlier comment, I made about the marketing partnerships, I think for us, this decision is really about realigning our long-term growth with our long-term cost base. And this longer-term growth rate has come down. And therefore, now the longer-term growth in the cost base also needs to come down, and that's what you will see happening. And therefore, you should see and model an increase in our margins going forward beyond the term of this partnership agreement.

[Oliver Steil, executive]

Maybe I'll take the attrition levels. I don't think I got the -- understood the second question well. So employee attrition levels, what are we seeing. It has been for the first half of the year, it's a very competitive marketplace. And I think we've discussed that early. We've done our homework in terms of respective salary increases where we need to do it. We also launched [indiscernible], as Stefan explained before, was a small portion of the shares that we bought back. So that's all done.

Attrition levels Americas high. Obviously, we have inside salespeople slow and the service people where the fluctuation is any way high. But clearly, the attrition levels are higher than we want them to be. EMEA, I would say, so far, still relatively in line with expectations. APAC is in transition anyway.

So there's lots of call it, wanted attrition where we actually change of the organization and do then also people changes for performance reasons. So I would say, really, the big area or the most affected area is the Americas. From what we see now, I think it's early, but it seems like the recessionary trends are coming through more. It seems to ease a bit, but early days.

As we see [ Cliffside ] hiring. Yes, we hire for key positions, absolutely. And I think in some regions that works well in other is very complicated or functions. I think it's not a significant change to before. But obviously, we -- anyway, we're disciplined. We look at every position in the senior leadership team, where we replace where we add positions for strategically important topics.

I think it's an environment at the moment where kind of we're disciplined, and that's what you see in the FTE development. And if we have higher attrition here and there, we're also sometimes a bit slower in backfilling because that's also a good measure to keep our costs in the right place.

[Stefan Gaiser, executive]

Can you repeat your second question on monetization?

[George Webb, analyst]

Yes, of course. Now just looking back at the Q1 call on, I recall asking how would you think about restarting the monetization campaigns? I think you made a broad comment that you might look to see Peter Turner start as CCO before you made a firm decision on timing. But of course, you started it in Q2. So wondering when in Q2, you kicked that off again, and why you decided to go ahead in Q2 versus more in the second half?

[Stefan Gaiser, executive]

Yes. Obviously, I think as we mentioned that we do a few test runs in the second quarter. And I think those test runs from really show us it makes time now to monetize again because there's no benefit to be had to wait longer. And that's why we launched those campaigns. I think from my perspective, they've been very effective, but they're also proved to us from all what we've seen. It doesn't make sense to hold back longer. If anything, maybe actually do it more regularly and more frequent but maybe less intense. So that's our current thinking. That was one of the reasons based on those test runs that we actually had it activated more broadly in the second quarter.

[Oliver Steil, executive]

As a matter of -- it's a function of when are these users active and when you best approach them to buy a license versus letting them be active maybe for 6 months and then activity goes down and then they're less likely to convert. So it's always a -- these are micro campaigns that we're testing across countries, different regions, and after the testing, we felt it's probably time to do some of it in some markets, not all, there's still potential left, of course, for the remainder of the year. But we should -- we thought we shouldn't wait too long also taking into account Peter joining in July and then obviously taking some time to understand and probably also focusing a bit more on other topics. So we felt we should probably continue to work on this on a regular basis.

[Operator]

We will now take our next question from James Goodman, Barclays.

[James Goodman, analyst]

Stefan, wish you best for the next chapter. Firstly, just a clarification, please. Stefan, I think you said in your preprepared remarks, I might have missed some of it, but you said something along the lines of you're targeting the low end of the billings guidance. I think you said to be frank, there are scenarios where you see yourselves coming below that. Did I get that right? And if so, can you be a little more specific around what scenarios you were discussing -- then just a couple of specific questions.

One, I think, I see that you set up a new share-based compensation plan for employees in the second quarter. Can you just talk to the magnitude of that? I mean, is that just a sort of underlying wage increase for employees?

And what's the annualized stock-based compensation now on a normal basis because it's sometimes hard to separate that out from the -- what's funded by the sponsors from the IPO?

And then finally, just on bad debt. very low bad debt this quarter. I'm a bit surprised. I thought maybe given your macro commentary, bad debt might be increasing slightly. So what's happening there and you're expecting that to remain low.

[Stefan Gaiser, executive]

Yes, sure, maybe on the scenarios. Look, I think when we see the analysis of our pipeline and the upsell campaigns all over explained with the SMB -- within the SMB segment to push them to our Tensor product. I think all of those numbers make us very confident that we hit the low end of the range. But at the same time, I think we have to be cognizant of the macro environment out there and extended sales cycles and cautiousness on customers' decision to extend or extend contracts, and therefore, there are also scenarios where we will not make our guidance and that's what we wanted to bring across.

So if the situation deteriorates, then this will be a scenario where it will be tough to get there. But again, from the pipeline build and so forth, we clearly have confidence to get to the low end of the range, but it requires good or deterioration in kind of convert.

And in terms of the RSU skill to be [ I refer you to appendix ] in the second quarter, it was very little, I think, a EUR 1 million charge. The [indiscernible] IFRS 2 charges are still related to the previous sponsor non cash outflows. The RSU scheme going forward. I think that's a very attractive element, which will clearly help us to retain key talents. It's a broad-based block as we fully financed already through the share buyback. I expect that just in the next 1 or 2 years to be mid- to high single-digit million euros. So still relatively small or very small compared to other companies. But clearly, a key element in our employee retention.

And then on bad debt, I think we have seen a very good development over the last few quarters already. And I think at the time of the IPO was 3% to 4%. It has trended down to 3% even during overtime when we relaxed our payment terms and donning procedures and so forth to help our customers. But even then in 2020 and 2021, bad debt has come down. Now the more we move to enterprise, the more important that gets, the more we are having business with the existing installed base to lower our bad debt ratio gets.

As you can see from the balance sheet, our AR exposure, I think it's EUR11 million or EUR 12 million. So very well covered there, and I expect a significant decrease in bad debt going forward as well. Yes, the macroeconomic uncertainty might result some higher bad debt here and there. But so far, I haven't seen it. I think we're still very much applying a conservative accounting here, and I expect bad debt to trend at those levels going forward as well.

[Operator]

We'll now take our next question from Victor Cheng from Bank of America.

[Hin Fung Cheng, analyst]

Just two from my side. Just a follow-up on the monetization. Can you talk a bit about the contribution of the monetization in Q2? And what is the expectation of it for the rest of the year? It sounds like you were just starting to test it in Q2, but that seems like to have taken a hit on active devices. So how much further should we expect the contribution from it going into H2?

And then just check on the subscriber contribution on Russia. I think you mentioned 100 subscribers from Russia and Belarus. How much of that is from Q1? And how much of that is from Q2 -- is that 10,000 coming off from Q1 entirely?

[Stefan Gaiser, executive]

Yes. So maybe free to pay, first of all, we had roughly low to mid-single-digit million contribution in the second quarter. I expect the same to take place in the second half. I think it's pretty much actually in line with our assumptions when we did the budget that we expect around EUR 10 million overall less compared to last year, clearly, but still a very decent number and pretty much in line with our expectations.

So Q2 now low to mid-single digit and the same will happen in H2, whether that's probably more Q4 though and less Q3.

Now to the subscriber count, the 10,000 that's on a full year basis. So that will manifest itself in our subscribers' numbers over the next few quarters. In the second quarter, we probably had a fourth or maybe 1/3 of those subscribers leading to roughly 3,000 or so in the second quarter and the remainder to come in the next few quarters.

[Operator]

We'll now take a follow-up question from Mohammed Moawalla from Goldman Sachs.

[Mohammed Moawalla, analyst]

Yes. Stefan and Oliver. I had just one question. When you think about your medium-term guidance, which is kind of in the kind of high teens given some of the macro risks that you've sort of identified, how feasible does that look? Or do you need to kind of revisit your kind of margin guidance over the long run as well to try to stimulate more investment to stimulate growth?

And just related to that and a follow-up, you've done the Man United sponsorship. Is there any way to kind of measure the benefits of that given kind of it's been 12 months on in terms of your billings growth.

[Stefan Gaiser, executive]

In terms of margin and midterm outlook, I think this is right now not the time to think about midterm. I think I certainly would need to experience Q3 and Q4, frankly, to assess the midterm outlook. So that's just a bit premature given the volatile environment. I feel very optimistic about the fourth quarter and the enterprise pipeline, but obviously, at the same time, it is environment, I need to wait for that and then make a just call about the midterm guidance.

In terms of margin midterm guidance, look, I think with the announcement today and the cost measures we've taken, I don't believe the TeamViewer is underinvested, frankly. I think we will see a margin step up clearly beyond the term of the Manchester United partnership agreement. We still continue to go ahead with investments in sales and products, as you can see from our P&L. But at the same time, we have seen scale effects within G&A, right? And I expect that's going to be the case going forward as well. So margin profile of this company, I feel very confident. And there's no investment needs to -- or to address the biddings potential.

In terms of billings impact from Man United, look, I think the focus clearly was, as we communicated, this will boost our brand, yes. It certainly has helped us to boost the brand. But billings impact in the first year, we always said that we'll be very, very limited, and that's certainly the case.

[Operator]

Thank you. There are no further questions. That will conclude today's conference, ladies and gentlemen. You may now disconnect.

[Stefan Gaiser, executive]

Thank you very much. Have a good day, bye.

[Oliver Steil, executive]

Thank you. Bye.