Artificial Solutions International AB

STO:ASAI

Earnings Call Transcript

[Operator]

Hello, and welcome to the Artificial Solutions International AB Q1 2020 Conference Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Lauren Flynn, CEO; and Chris Bushnell, CFO. Please go ahead with your meeting.

[Lawrence Flynn, Former CEO & MD]

Thank you, and good morning, and welcome to everybody. My name is Lawrence Flynn. I'm the CEO of Artificial Solutions. Today, Chris and I will be presenting our Q1 earnings, and a copy of the presentation is available on the company's website.Should you wish to find that, it's at www.artificial-solutions.com. If you select the Investors section and scroll down to Financial Reports then on the tab of Presentations, you will find the presentation that Chris and I are referring to throughout today's call. So we will actually commence the presentation on Slide 3. Just for those people who are less familiar with the company, a very brief recapping of Artificial Solutions International. Artificial Solutions International is a Swedish-based software company specializing in enterprise conversational artificial intelligence through its product, Teneo. It's a price conversational artificial intelligence is technology that businesses and governments use such that they can communicate with their shareholders -- their stakeholders, my apologies, their customers, their employees, their suppliers or in the case of governments with citizens for a normal dialogue. Customers of Artificial Solutions are typically large B2C companies plus local and national government. Use cases of enterprise conversational AI in that sector are predominantly customer interactions for sales and customer service, citizen an interaction for exposure of information and services and the command and control of real-world things such as televisions and vehicles and devices. Applications in conversational AI can be text, SMS or speech-driven, are often in multiple languages and often surfaced on multiple channels such as the web, or in call centers, or on mobile phone apps or in social media, et cetera, et cetera. The company has slightly less than 110 staff, of which 50% are technical specializing in machine learning and linguistics. Our headquarters are in Stockholm. We have 12 offices ranging from North America, Europe and 1 office in Asia Pacific. Our product, Teneo, is available in over 35 languages and our developer portal Teneo Developers in 7. We listed last year in Q1 of 2019 on the First North Growth Market in Sweden. As I mentioned, our customers are largely blue chip, and there's a selection of those that you can see on Slide 3. And also our key component of our strategy is our go-to-market strategy in conjunction with strategic partners. And you can see the list of technology partners like for Vonage and UiPath and Blue Prism on the right or systems integration partnerships like Accenture, Capgemini and Deloitte on the left. And in the environment where we go-to-market with strategic partners, strategic partners role is often to deliver software and services associated with the projects to implement the Teneo platform, meaning that we focus on the higher value license and usage components of our technology and the systems integration companies focus on the delivery of what is to us a lower gross margin business around professional services.So with that introduction, we'll move on to Slide 4.And we'll talk about quarter 1 2020. We're pleased to present to you what we consider to be a very, very solid performance in Q1, with very good growth numbers and excellent progress across a number of the major indicators for the company. As those of you more familiar with, we track a number of things, including order intake, which is essentially sales that are booked in the quarter, which essentially may not be taken to revenue at the same time because they might be multiyear transactions. We're pleased to report that we increased our order intake from SEK 16.8 million last year to SEK 19.5 million. And perhaps even more gratifying, we -- the share of orders that came via partners was 82% of the entire book, which is very good for us in terms of the gross margin of the orders that we took.We closed the quarter, obviously, in the midst of the COVID-19 circumstances across the globe. And it was very gratifying to still be able to bring such a good number in during Q1, despite the fact that we did suffer some customers having some delays as they struggled with internal processes of approvals whilst they were working in a work-from-home basis. So we're very pleased with the bookings that we made during the quarter. And for those of you who are familiar with the business, obviously, we take bookings, and we take them to revenue ratably according to our revenue recognition policies. And that means that we always have a backlog of orders and our backlog of orders went from SEK 40.8 million to SEK 56.3 million during the quarter or by the end of the quarter more accurately. But what is, again, most gratifying is that the highest gross margin components of our revenue streams, namely the license fees that we charge and the usage fees that we charge, now represent 76% of the total backlog. And that went up by 53% in the quarter, which means that our future revenues, as we draw down from backlog, will be of a higher gross margin nature, which is good news for the company's aspirations towards profitability and cash flow positivity. Revenue in the quarter was likewise, a good improvement, up to SEK 15.3 million as we took that from backlog. And at the same time and in the very same theme, the gross margin of that SEK 15.3 million of revenue improved full 10% over the same quarter last year from 50% to 60% gross margin.And also, we had a very significant increase in license and usage revenue as a percentage of the overall revenues, which increased by 72%. And that's left us with an EBITDA that adjusted because last year, we had significant costs in the first quarter associated with our reverse takeover, such that our adjusted EBITDA last year was minus SEK 27.7 million and this year is minus SEK 25.1 million. So overall, we believe that's an excellent start to the year for the business despite the challenges of operating in an environment where most of our large B2C customers were impacted by the COVID crisis and at the very least, have moved to a work-from-home environment. If we move on to Slide 5, we can perhaps see what is actually the most interesting underlying story to the quarter. On Slide 5, you see a graph of usage.This is the -- this graph has been normalized to interactions because different customers express usage of our solutions in different ways. Some people are success-based, some people are based on sessions or conversations and some are based on interactions, which is a pair of dialogue items where that [ you will ] say something to the technology and then the technology says something back as one interaction. So in order to make a like-for-like comparison, we have normalized the numbers on the graph. And we've also excluded our old customers, who are not on usage-based contracts. And what we end up with the graph here, which you can see ticks up very sharply at the right end here. We see that through the latter half of '19, we were already seeing significant growth in usage of applications. But 2 other factors have kicked in. One factor is that old contracts that we had already won and were in the implementation phase have come on stream, which has ticked up the usage quite dramatically in its own right. And also, particularly during the months of March and April, we can see an effect where some of our customers had seen very pronounced increases in usage of their self-service solutions, particularly in customer service as a result of the COVID-19 crisis with more people needing to utilize self-service capabilities at a time when our customers' call centers and contact centers were perhaps unavailable or under extreme load. So very gratifying, therefore, that we're able to report an annualized growth rate in usage of 551% and a quarter-on-quarter increase in growth of 91%. And I want to stress that neither of those numbers are a blip that is dependent on COVID-19. They are accelerated, perhaps in the months of March and April as a result of that, but they are predominantly driven by a number of customer projects that started earlier, coming on stream from the fall of 2019 onwards. This is very important to us as is, of course, one of our very high gross margin revenue types, although the numbers that are shown on this are actual interactions and not revenue because the way that revenue is accounted is more complex than a normalized curve as each customer has both a rate card and a capability to buy usage in advance. So we're really, really pleased to see an uptake in the use of the Teneo platform across a great many customers, and we see that as very key to underpinning some of our forward-looking guidance, which we'll get to later. Inside the quarter, as we turn to Slide 6 of the presentation, the major events that we made in our allowance was the Swisscom extension of their commitment with a new 3-year commitment to the Teneo platform and to Artificial Solutions. And if you had the opportunity to see that announcement, you would see that it covers off both the set-top box TV control applications. It also includes the customer service applications, and it is just an incremental commitment from them as they extend yet further their commitment as they intend to offer Teneo services as a partner of Artificial Solutions in the Swiss marketplace. So that's really good. Very pleased with the technology, and we are very pleased with the growth in usage as the applications have come onstream during the fall and into Q1. In addition to that, we signed up 2 new clients, the Scandinavian financial services Company and a global management consultancy. And in fact, during the course of this week, you will see further press releases from the company, clarifying one of the names behind those 2 new wins. So it's really good we perceived that we were able to close new business in Q1, despite that happening in both cases after both the prospect customers had already moved to a work-from-home model. So despite the turmoil of the COVID crisis, we were able to write new business. And a number of the pilot projects that we signed up during the phase of last year also went live. So the usage revenues -- the usage graph that I showed you before will continue to flourish in Q2 and beyond as a result of go-lives that we did not really see the impact of from the usage perspective during the quarter. I have mentioned that partnerships are critical to the company, and we continue to extend our partnerships in 2 dimensions: one, with additional partnerships with Babel and CSG, both specialized Systems Integrators in Spain and in London.And also by extending our partnerships in the robotic automation space, where we already had a partnership with Blue Prism. And now we have extended that to also include UiPath. Robotic Process Automation stand side-by-side with conversational AI in the enterprise, where robotic processes can clearly be driven by customer interactions that are conducted through conversational AI. So conversational AI is an enabling technology for Robotic Process Automation within our customers. Similarly, in record time and as a direct response to the COVID crisis, the company launched Tiva, which is an artificially intelligent virtual assistant, which is targeted at helping organizations, HR and IT departments as they struggled with the COVID crisis to get information to their workforce and provide their workforce with assistance, particularly around the work-from-home environment. And we launched it, and within 3 days of the launch, we already had our first customer. We made it free to our existing customer base, and we have extended it through our partner channel. And we have already interest in the partner channel from as far as field as Asia and North America. Another critical milestone during the quarter was the rights issue that we conducted, and I was very gratified to see that we were 100% fully subscribed for that, which closed during the month of March, which, obviously, we have made the necessary statutory announcement for. So as we turn to Slide 7 in the presentation, it would obviously be remiss of me not to cover off the COVID-19 crisis and its impact or otherwise on our business. And as you would imagine, we were impacted by the COVID crisis in it much the same way as other businesses were as legislative closures and lockdowns impacted our workforce across the globe from Singapore to North America to Barcelona and other European countries. So we did close our offices during the month of March. However, we are a technology company, and we have a high experience and normal usage of remote working technology. So moving to a remote -- work-from-home basis for our company was not a challenge, and we were able to take that very much in our stride and deliver our products and services very much as normal to our customers. We also acted swiftly to maximize the company's cash resources. As you would expect for a company of our type, we looked at the deferral of expenditure of rent and taxes through government assistance schemes. 70% or so of our costs are driven by the people on our payroll, and therefore, we took advantage of short-term working and made various applications to the government support in various different geographies to facilitate that. And management, the Board and other staff also took pay deferral actions, all of which in total amounted to a deferral or a cancellation of EUR 1.8 million of expenditure during 2020. So we've made quite significant steps to conserve the cash resources of the company. In terms of the COVID-19 impact on our business, well, obviously, we've reported a very strong initial quarter. Despite the fact that at the end of the quarter, some businesses were still in the transition to work from home and were struggling in that, we were able to close new business. But we did have some customers, who were less able to manage their internal processes and some customers who are more focused on managing the crisis than actually engaging in procurement cycles. And therefore, we did have some transactions slipping to April, which we've managed to subsequently close. However, whilst we've had some short-term turbulence with the COVID-19, we have a few things that we should also draw your attention to. One is that we have not yet been through full sales cycles in a completely no-touch manner. That is to say that we haven't run our typically 6- to 9-month sales engagement with customers that we've been unable to meet with face-to-face. And therefore, there is some uncertainty as we move perhaps into Q3 and Q4 of this year how that will impact our business -- our ability to write new business. However, having said that, 82% of our order intake in the first quarter was through partnerships. And in many cases, new names that we're signing are already known to our partners. So in many respects, we may be immunized to the effects of the crisis as our partners will already know the customers that they're bringing into the Teneo user community. Further and I think very importantly, one of the lessons that the large enterprise market will take away as the dust settles from the COVID crisis is how badly they were impacted in their ability to service their customers. And the more digital their businesses have become the better they were able to provide those services to their customers. So as CIOs of large enterprises look forward as lockdowns come off, we confidently expect that actually conversational AI will become more important to those CIOs as they seek to protect their business from the challenges that were presented to them. And one of the key ways that they can do that is providing fully self-service customer interaction for sales and for customer support, whether that is through chat box, whether that is through call center automation or what have you. The net effect of this for the conversational enterprise conversational AI marketplace is a midterm acceleration. So although nobody wants to be the beneficiary in the time of suffering, it is very much our belief that the conversational AI marketplace will accelerate in the midterm as a direct consequence of the COVID crisis. So Christopher, if I could hand over to you for Slide #8, please.

[Chris Bushnell, Former Chief Financial Officer]

Yes.. Thank you, Lawrence. Good morning, everybody. As usual, Lawrence has stolen all of my thunder and pretty much all of the key figures that we list here have already been dealt with. So I think I'll just quickly remind people that our order intake, that's the value of new contracts received from customers in the quarter, grew by 16% in the quarter from SEK 16.8 million to SEK 19.5 million. And we increased the backlog from SEK 40.8 million to SEK 56.4 million, that's a 38% increase. And I'll talk a little bit more about backlog in the future, and that drove net sales increase from SEK 12.6 million to SEK 15.3 million.So generally -- and our gross margin grew. And our gross margins grew because it's worth remembering here that license and usage come from the development of the software, the software that we've built over the last several years. And we've developed everything that we sell. So we don't -- we have no external costs when we sell licenses or use it. We don't pay any royalties to anybody. So it's a very, very high gross margin business, whereas delivering professional services, you have to feed and water consultancy business and there are costs associated with that and downtime. So it's a much less profitable business and that's why we work. It's one of the benefits of working through our partner channel.So moving on then quickly to Slide 9, focusing a little bit more on order intake in the quarter. What we look at is that backlog is when it's going to be delivered, and we've spoken in previous releases about how the length of the commitments that we have from our customers is getting longer as they become more confident. And as Lawrence spoke about earlier, we had Swisscom in Q1, extended their agreement with us to a 3-year agreement for both the license usage and some services as well. But the gratifying thing from order backlog, as you look at the column on the left in that chart, is that more than 70% of our backlog now is coming from the more profitable license and usage. And therefore, if you look at the gross margin, the 70%, the 82% and 82%, it means that the backlog is holding license and usage revenues, which are very highly profitable items of business. So therefore, as we deliver that backlog over time and about half of it will be delivered next year and the year after, the margins that tied up in there are high at 82%. So the mix in revenue is -- the mix in orders is improving towards that license and usage and the mix in revenues is improving as well. Moving on to Slide 10. Lawrence mentioned also that the partner-led business is important to us, and we increase -- and that's what's driving the increased gross profit and the higher margins. The partners can focus on the lower margin professional services.They have big armies of people that they can manage much better and become more profitable than us. And they also have existing relationships with the customers that they can -- that we can join them to provide solutions to their customers. So we can then focus on the high-margin license and usage revenues. The revenues that came from our partners in Q1 did, in fact, drop from 50% to 40%. That was because, in fact, it was a good new story that looks a bad one. We managed to close some business in -- with a couple of customers earlier than we did last year was direct business. And therefore, that's forced up the direct number and forced down the percentage that came from partners. I think you normalize that over time, and we're still on an upward curve of revenues coming from our partners. And as Lawrence has already said, the 82% of our orders came from partners in Q1. And we think that's going to carry on increasing as we go forward, but our direct sales team will carry on supporting the partners in delivering their business as they become educated in all of the important things around the product.So that's a very quick we're through the financial numbers. So Lawrence, I'll hand back to you for Slide 11.

[Lawrence Flynn, Former CEO & MD]

Thank you, Chris. So I think it is quite rightly expected that companies we will revisit the market guidance during the crisis and the Q1 earnings announcement is a good time to do that. And with this graphic, we tried to focus on the 4 items of guidance that we've previously given to the market.The first one is that the order intake on the medium to long-term should grow for the company in excess of the NLP market. We are maintaining that guidance on a go-forward basis. Despite the fact that there clearly has been some global impacts to our customers, we still believe that our partner model and our competitive technology means that in relation to the overall NLP market, there is no reason to believe that our company should underperform. Given that all boats are in the same water then we believe very much that we will continue to be as competitive as able to write new business as any other company in the market, and, thus, we can stand by our guidance.Secondly, we look at the gross margin. And as you've already seen, we can be fairly confident in regard to gross margin based on evidence as in the fact that our backlog is already densely populated with the high gross margin license and usage revenue types. Further, we enhanced that by writing 82% of our business in Q1 with partners, thus, focusing our company further on the high gross margin aspect.We reported revenues with a gross margin of 60%, which we believe is well on the way to the 70% target that we set for the end of the year, and thus, the company is standing by its gross margin.In the event that there is perhaps a second spike around the COVID-19 crisis with some analysts are concerned about, we still believe that the gross margin would be above 70%. For the simple reason that the softness in revenues that we would expect, if there is a second spike, would be in our professional services business because the vast majority of our license and usage fees will come from either backlog or from customer service applications, which we know, in the previous crisis, actually generated more usage, i.e., more high gross margin revenues.So there is one very positive news there that we already have good gross margin in our backlog and one not so positive that if there were a downturn, the second downtown around the COVID crisis, it would actually affect our lowest gross margin revenues, thus, we can stand by our gross margin.The other one that we're obviously confident about is usage, where we predicted that more than 80% of our revenues by the end of '22 would come from usage.And as you can see from the graph that's in the earnings announcement and has been repeated in this presentation, it's very clear that there is a hockey stick upwards of usage being driven as customer projects come on stream. And we know that we've constantly been adding new customers to the portfolio, and we know that they're constantly incrementing the number of deployments, the number of languages, the number of channels, which the Teneo applications are running. And thus, we're very confident that the usage will continue to grow, and in a couple of years' time, will represent, by far and away, the largest revenue stream for the company. However, there are material uncertainties as a result of the COVID-19 crisis. And therefore, our positive cash flow guidance, we do not have a concrete opinion on whether or not we will achieve that by the end of 2020. We can see impacts on the business, which are both positive and negative. I described the impact of the COVID crisis on CIO's desire to have enterprise conversational AI applications, and we believe that to be true and positive. However, it is difficult to predict exactly the timing of that and how it will, in fact, specifically the cash flow of our business. And of course, we can also see some negative impacts, particularly in our professional services business, where people would obviously not be keen to have consultants traveling to their place of work and so on and so forth.However, we do not feel that at this stage with so much uncertainty in the global economy that we can accurately predict, which will win out between the positive and the negative impacts in relation to cash flow. So the guidance is that we will monitor this and that we will give you a further quarterly update as we announce the Q2 numbers. So in summary, the cash flow guidance is under monitoring and the other 3 guidance that we gave previously remain in place. So Chris, if you could just talk us through the financial calendar, and then we can move after that to the Q&A session.

[Chris Bushnell, Former Chief Financial Officer]

Thanks, Lawrence. Yes, just very briefly. Again, our Annual General Meeting is now -- is scheduled for the 17th of June. We'll be issuing our annual report on the 27th of May. And the Q2 report -- our interim earnings report that Lawrence just referenced to will be out on the 30th of July. So with that, can we hand back and do questions?

[Operator]

[Operator Instructions] Our first question is from the line of Mr. Milan.

[Milan Sudhir Radia, Analyst]

My first question is, in terms of the RPA contract or agreement that was entered into with UiPath, how does a partnership like that come about? Is that being driven by specific customers or specific partner feedback? What's the driver for that type of or kind of relationship to be struck?

[Lawrence Flynn, Former CEO & MD]

It is -- well, it's mutually beneficial, as I described. The revenue models for UiPath and Blue Prism are not dissimilar to the revenue models that we ourselves on. So the running of robotic processes is what they're interested in driving within their customers. And of course, their customers are very, very commonly, our customers. They are the large B2C customers, who have lots of interactions with customers that they want to automate as much as possible. So it's a symbiotic relationship and the driving forces are either their partnerships and alliance in our partnerships and alliance people seeking each other out in order to mutually benefit our companies. But more commonly, they're driven because we will come across implementations of our respective technologies at our customers. And when I say we will come across them, of course, that may well be one of our partners, who's doing the implementation coming across these sorts of relationships. However, what it then changes to, as we look to the future, is that we do bid collectively for new name accounts. So we'll bid competitively alongside each other in new name business. So it starts off probably driven by a mutual understanding of benefit, a shared customer base, but it also transitions as we seek to win new business side by side.

[Milan Sudhir Radia, Analyst]

Got you. And in terms of how significant RPA-related revenue might become over the next sort of 2 to 3 years, is this seen as a significant driver? I mean, RPA forecast -- market forecasts are certainly very buoyant over the kind of next few years, is that something that becomes meaningful for you guys over that same time frame?

[Lawrence Flynn, Former CEO & MD]

I think it will be an increasing part of our portfolio. I think there are 2 things in particular, which have probably been accelerated as a result of the COVID crisis, which may make those numbers even more buoyant. And if you look at our partnerships, particularly with, say, UiPath and Blue Prism, one is about customers seeking to do more and more self-service -- full self-service and have less and less capability, particular on offshore business process outsourcing operations.So they want to reduce that because a number of our customers did get hurt with their back-office operations being based in India or in Manila, for instance, and then becoming subject to very stringent lockdown. And the other thing that we see is that the call centers became and the contact centers became under absolutely astonishing load, and we saw that ourselves. One of our customers, U.S. Telco, their usage for one of their customer self-service applications in the broadband space as a direct result of the lockdown trebled. So they had basically 3x the traffic through their self-service application.So in addition to the back-end processing, which is where the RPA vendors are, we also see a very big drive on the front end, the use of voice-driven self-service applications. So this is where a contact center would already have some sort of automated voice recognition technology perhaps some partner of ours like [ Bosch ], and then we would be able to conduct a full speech-driven dialogue by down a phone line to get the customer self-service task completed, which, in turn, may actually be executed by a robotic process automation robot. So yes, I think we do see automation -- digitalization and automation has been very important to the future of our company, and we do see that it is a trend that we're going to benefit from, not just purely through partnerships with Blue Prism and UiPath, but partnerships with Vonage and CSG support center platform provision and so on and so forth. So yes, they're big news for us in the medium-term acceleration of the business.

[Milan Sudhir Radia, Analyst]

Understood. And you mentioned the usage boost, for example, in this case, in the U.S. Telecom customer.So the fact that you're seeing more backlog or usage revenue within backlog suggests there's a change in the way that those usage credits are being purchased because I know in the past, it's been built in arrears, and now presumably, customers are taking slugs of the usage capacity, however, they're defining it in advance. So is that new customers doing that? Existing customers are getting more comfortable doing that? How is that sort of playing out?

[Lawrence Flynn, Former CEO & MD]

You are correct. Your supposition is valid. The -- we predominantly saw customers with a usage rate card on a pay-as-you-go model. But it's only human nature as you see the uptake in uses that you want to take advantage in that from a procurement point of view.And therefore, it is mostly our installed base customers at this stage who are taking advantage of buying usage bundles and less so the new name business. And there's logic to that. The new name accounts are obviously not going to use the usage up until they've completed the implementation project. So there may be 3, 6 or 9 months away from actually realizing the burn down of usage. So it perhaps doesn't make sense to buy it upfront quite as much as it does, if you're a customer who's seeing more and more people divert to self-service channels. So it's mostly the installed base that are doing that, but we believe it is a trend that will continue.

[Operator]

[Operator Instructions] As there are no further questions, I will hand it back to the speakers.

[Lawrence Flynn, Former CEO & MD]

I'd like to thank you very much for your attendance today for our earnings call. Very much appreciated. And please stay healthy and stay safe. Thank you very much, indeed.

[Operator]

Thank you.