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Edited Transcript of BAS1V.HE earnings conference call or presentation 21-Apr-20 8:00am GMT

Q1 2020 Basware Oyj Earnings Call

Espoo Apr 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Basware Oyj earnings conference call or presentation Tuesday, April 21, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ben Selby

Basware Oyj - VP of IR & Treasury

* Klaus Andersen

Basware Oyj - CEO

* Martti Nurminen

Basware Oyj - CFO

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Conference Call Participants

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* Julian Alexander Serafini

Jefferies LLC, Research Division - Equity Analyst

* Matti Riikonen

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Sami Sarkamies

Nordea Markets, Research Division - Senior Analyst of TMT

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Presentation

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Ben Selby, Basware Oyj - VP of IR & Treasury [1]

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Hello, and welcome to the Basware Q1 2020 Results Call. I'm Ben Selby, Head of Investor Relations; and I'm joined by Klaus Andersen, CEO; and Martti Nurminen, CFO. This presentation is taking place live via audio webcast, and a recording of the presentation will be made available on Basware's website after the call. There will be the opportunity to ask questions at the end of the call.

Before we begin, I must draw your attention to this important notice about forward-looking statements. Today, we will begin the presentation with a discussion of Basware's Q1 activities and numbers before concluding with an update on the COVID-19 situation and Basware's outlook for 2020.

Now over to Klaus.

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Klaus Andersen, Basware Oyj - CEO [2]

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Thank you, Ben, and also welcome to this result call from me. Let's jump straight into it. So Q1 was a good quarter for us in terms of profitability and revenue growth. Top line as well as bottom line developed according to plan. We generated positive EBIT for the quarter, which is a major improvement compared to a year ago, where our EBIT was minus EUR 7.8 million. And now we have positive EBIT, which is a very strong and very positive development.

Order intake in Q1 was below our expectations and significantly impacted by COVID-19. We experienced a number of decisions being delayed or even put on hold, and this became very visible in the last months of the quarter where we normally close the majority of our new orders, and the behavior was visible globally, but particularly distinct in the U.S. and particularly distinct for net new names. We closed new orders for EUR 3.6 million in Q1, which is below what we expected when we entered the year and before COVID-19 entered the scene.

We successfully implemented our business continuity plan mid-March. And overall, Basware operations continued broadly as normal through a 100% global remote working setup. Appropriate forward-looking cost-saving actions has already been initiated. I will come more back to that later on in the presentation.

We added a number of well-known companies to our client list in Q1. And amongst others, we closed business with SCC from the U.K., Groupe Dubreuil from France, Republic National Distributing Company from the U.S., Compass Group in Finland and Maersk Drilling in Denmark. Not as many deals as we had planned, but nice to see net new name business now coming in from the U.K. and very solid performance from Finland and France. Rest of Europe, APAC and especially the U.S. saw deals being postponed or even put on hold last minute because of COVID-19.

The average deal size is not as high as it was in the previous 2 quarters, driven by the fact that some of the larger deals were put on hold or postponed in Q1, but still on a higher level than what we saw in the first half of 2019. So it's developing in the right direction even though a little bit slower than we had anticipated. Our expansion business with existing customers continued well during the quarter, and almost half of the order intake in Q1 came from expansion business with existing customers.

Our product innovation continues completely unaffected by COVID-19. And in Q1, we officially launched our completely new Accounts Payable module, AP Pro, as we call it. It's a new user interface based on state-of-the-art technology, additional business functionality and designed for automation and exception handling only. AP Pro is designed for professional users and shared service centers with high-volume requirements in mind.

AP Pro delivers a completely new user experience, allowing easy tracking of invoices in all stages of processing. Receiving, matching, proving, paying invoices electronically is much easier and much faster now with the new AP Pro. We have had more than 10 pilot customers worldwide using the beta version of AP Pro since the second half of 2019. Some of the customers already use AP Pro now in production.

As an example, DB Schenker has been part of our AP Pro pilot project since October 2019. And DB Schenker has been a Basware customer since the early '90s, and they transformed from on-premise to cloud in '18. They have been very pleased with how user-friendly, modern, fast and flexible AP Pro is, which is why they have decided already now to use it for production purposes. AP Pro will be deployed to all customers in tranches during the remainder of the year.

Moving on to the situation that is currently affecting us all. After the COVID-19 pandemic situation accelerated in mid-March, we implemented our business continuity plan. First priority was to ensure health and safety of the employees and customers and partners. And all employees are working from home, and all cross-border traveling has been stopped. I'm pleased to say that no employees has been tested positive for COVID-19 so far.

Second point is that Basware systems and services are fully operational. We have full remote capabilities for systems operations, customer support, project execution, sales and account management, all Basware functions are operational. The only exception to that is our validation service, which is part of the Scan and Capture service, which we have outsourced to a third-party service provider. And the lockdown in India and closure of the third-party provider Scan and Capture validation center has led to lower capacity and reduced data capture accuracy for some customers. Service capacity is being restored gradually, and we are working together with the service provider to make that happen as fast as absolutely possible.

So Basware is fully operational, and the switch to our business continuity setup would have been completely seamless for our customers if we haven't had the validation issues that I've just discussed.

With that, I will hand over to our CFO, Martti Nurminen, who will take you through the Q1 numbers in more detail. Over to you, Martti.

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Martti Nurminen, Basware Oyj - CFO [3]

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Thank you, Klaus, and good morning, good afternoon. Let me proceed to the financial review of the quarter. First, on the key takeaways of the financial performance. As Klaus pointed out, our order intake was substantially impacted by the COVID-19, and we delivered EUR 3.6 million for the quarter, down 27% on a year-to-year basis. In terms of our revenue performance, the quarter was solid. We delivered EUR 38.2 million in total for Q1, and that is up 7% on an organic constant currency basis.

In terms of our profitability, we continued on the improvement track, we set track during last year, and delivered a positive EBIT of EUR 0.1 million for the quarter, up a substantial EUR 7.9 million on a year-to-year basis. Last, our cash performance was as expected. And we ended the quarter at EUR 22.6 million (sic) [EUR 32.6 million] of cash at hand, up EUR 0.9 million sequentially. So Q1 performance was as expected.

When we then turn and we look at cloud order intake, clearly, what we saw, especially during the last 2 weeks of the quarter, that our performance was impacted. We had the deals coming into the month of March to deliver a robust quarter also on order intake, while we estimate that deals valued in several million euros towards the last 2 weeks were either postponed or delayed as we look into the future.

Finally, as one would expect, the industries that we saw impacted the most were retail and hospitality that are largely behind the miss in terms of Q1 compared with our expectations in the beginning of the quarter.

Turning to net sales. Our cloud and consulting revenue continued to grow in line with the trend of H2 of '19. SaaS growth at 24% on an organic constant currency basis, and consulting delivering a strong 20% growth at EUR 6.5 million for the quarter. Equally, we saw that our maintenance decline continued in line with prior quarters, and we expect that this level of decline will also continue during the rest of the year.

Also, transaction services still grew on a year-to-year basis at 6%, while, clearly, during the last 2 weeks of the quarter, we saw a substantial deceleration related to the transaction-driven part of this revenue line. And overall, the company estimates that approximately 70% of the transaction services revenue, which was EUR 12.4 million for the quarter, is driven by transactions, and approximately 30% of this revenue line item is subscription-driven. This level of information is provided to you to help you assist in terms of understanding how this revenue line item is made up.

Finally, briefly on cash -- sorry, before cash, and profitability, of course. So overall, the profitability improvements on the quarter, we can see that our strategy execution is yielding the results. So the clear focus that the company has placed on scalable growth as well as on increasing our operational efficiency and simplifying our enterprise operations is bearing fruit. As a consequence, we saw a strong margin expansion, both on a total company level as well as related to our cloud business.

For the total company, we delivered 5 points of margin expansion compared to Q1 of last year at 54%. And related to our cloud business, we delivered 6 points of margin expansion in the quarter, landing at 67%. Equally, our consulting business continued to improve during the quarter, driven by billable utilization. And we expect that we will be able to improve the consulting business profitability underlying, while, of course, now the COVID-19 is also going to have an impact on the consulting levels, and Klaus will talk more about that later in the call.

Also, in terms of the COVID-19 impacts to cost, clearly, for the quarter, we saw minimal impact of the cost actions that we are now taking on a proactive basis to address our cost base. So again, the Q1 profitability outcome reflects very much the organic performance for the quarter. And again, the impact of the cost actions we are taking is not yet reflected in the numbers almost at all.

Then finally, on cash, we landed the quarter at EUR 32.6 million, and that is the EUR 0.9 million increase on a quarter-to-quarter basis. From a cash perspective, we, of course, continue to manage the situation, given the external environment on a day-by-day and week-by-week basis. Especially on receivables collection, we are placing heightened efforts. And as of now, we have not yet seen any material changes in the customer payment behavior. But of course, this is an area of our business that we continue to manage very carefully, again, on a day-to-day and week-to-week basis.

Finally, a brief comment on the increases in our gross and net financial debt. These increases on a year-to-year basis are driven by a spike in the interest as well as the accrual on the principal amount on the debt vehicle we have from Bregal Milestone.

With that, I'd like to turn it back to Klaus for the outlook-related part of the review.

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Klaus Andersen, Basware Oyj - CEO [4]

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Thank you, Martti. Let's now start talking about how we see the future and especially how we see the remaining of the year 2020. So before we go into the details on how we see the business affected by the current situation, I would like to share with you what scenario we have modeled against when we have done our financial modeling and our business modeling for the full year of 2020.

So we foresee a general slowdown of business activity in Q2 and Q3 and a gradual improvement in Q4 towards more normal levels. During Q2, many major countries will start reopening gradually. That's already happening now, but some countries are behind the curve, and we expect that we are in Q3 before all countries have lifted all restrictions. It will require calendar time before business activity recovers fully. And combined with the fact that we are entering the summer vacation period means that we are in Q3, at least what we believe, before the recovery really takes off. So in the last 2 weeks of March, we began to see customers and prospects delaying decisions and also a slight decrease in our network volumes. But besides the order intake, our Q1 numbers were relatively unaffected by the whole situation.

In Q2 as well as in Q3, we expect a negative impact on the order intake compared to what we expected when we entered the year. In Q2, we will see our Professional Services being impacted as well. But the portfolio of existing projects and our ability to run projects completely remote compensate to some extent for that impact. Professional Services will be increasingly impacted in Q3 because some of the existing projects will finish and fewer new projects will start because of the lower order intake earlier in the year. So the scenario modeling is the foundation for our planning for the rest of the year, and it's the foundation for the corrective actions that we have already taken.

Which brings me to this slide. So Basware is, as said, fully operational. Services are up and running, with the only issue being the validation part of our Scan and Capture services. Support is fully operational. R&D is working as normal. Sales and presales activities are being performed remotely, and we have switched all our marketing activities to fully digital now. So Basware is very much open for business in spite of the COVID-19 situation.

As said, we will see a slower Q2 and Q3 than originally anticipated, but the majority of Basware's business is subscription or recurring by nature, which reduces the immediate impact. We have already taken a series of actions to ensure we scale our business and cost base in accordance to the expected lower activity, especially in Q2 and in Q3. So parts of our costs scale by design with business activity, which is scanning, printing and validation costs as well as parts of our IT infrastructure costs. We have implemented hiring and salary increase freeze. We've reduced our discretionary spending, including the use of external consultants, internal projects, travel, face-to-face education and training and marketing activities, which are not fully digitalized.

We have, on top of that, offered employees to work part-time where the business activities allows it. And we are looking into what cash flow optimization options are made available from different governments in countries where we operate. Uncertainty is unavoidable right now, but we have a clear scenario model, and we are adjusting our business to manage the situation in the best possible way already now.

We are updating our 2020 guidance to reflect the estimated impact of the COVID-19 pandemic. And due to the significant uncertainties in the economic outlook in our main markets, we will, at this point, not guide on net sales. We will provide guidance again when it is possible to estimate the COVID-19 effects more precisely. Our cost base is scalable and has variable cost components that can be reduced to a certain extent to maintain profitability in spite of a slower-than-expected revenue development. Consequently, we expect that EBIT for the full year continues to be positive.

And before we jump to questions, let's just recap on the key takeaways where we started the presentation. We had a good quarter in terms of profitability. EBIT was positive and EUR 7.9 million better than in the same quarter last year. Top line grew in line with expectations, but order intake was impacted by COVID-19. Basware is in business continuity mode and fully operational. Immediate action has been taken to accommodate for a period with reduced business activity. Our cost structure will be adjusted to the extent possible to protect full year EBIT.

The situation is carefully monitored. And if it starts to deviate too much from our scenario modeling, we will adjust accordingly to the extent possible. COVID-19 is impacting globally and will have a negative impact on most businesses and countries for a period of time. That said, it's our view that the situation we are in now is only temporary, and it will normalize again at some point in time. And when that happens, then at least the awareness of the importance of fully digital processes will have increased and become very obvious to almost all businesses. So longer term, that will actually play in our favor, and it will increase the demand for also fully digitalized networks and P2P solutions to keep your supply chain going, also in extraordinary situations like the one we're in right now.

With these words, I would like to open up the lines for questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Julian Serafini from Jefferies.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [2]

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So I guess the first question I'd like to ask is about the phasing of the new cloud order intake into revenue. And what I'm trying to understand is just how long would it take for a new cloud order intake to convert to actual revenue? And the reason I'm asking is that it would be helpful to get a sense if we'll see more of a second half of 2020 or 2021 cloud revenue be impacted by the deceleration due to COVID-19 in your cloud order intake.

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Klaus Andersen, Basware Oyj - CEO [3]

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Martti, will you take this one? Or do you want me to take it?

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Martti Nurminen, Basware Oyj - CFO [4]

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Right. Yes. No, I'll take that, Klaus. So basically, we already see, to an extent, an impact of that into 2020. Obviously, the full year ARR figure is still only going to be up and running and the related impact of that into 2021. But to an extent, of course, there's already going to be an impact into this year's revenues.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [5]

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Okay. And I guess just one follow-up, too. Then I guess on the transactional revenue, I think you mentioned, right, you're seeing a slowdown in transactional revenue today as well. Can you give us a sense or maybe just quantify like how big of a slowdown you're seeing in the transactional revenue today at this point in time right now? Because I know you said there's a slowdown exiting the quarter, obviously.

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Martti Nurminen, Basware Oyj - CFO [6]

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Yes. So towards the end of the quarter, related to the transactional part, we saw year-on-year declines on transaction volumes up to down 20%.

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Operator [7]

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And our next question is from Matti Riikonen from Carnegie.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [8]

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It's Matti Riikonen, Carnegie. A couple of questions. Maybe I'd like to continue with the transaction business and the 70% revenue that you now say is transaction-driven. How much of that is kind of purely transaction-driven in the sense that it's related to the exact number of invoices that you process? And how much of that is kind of tiered volumes where the volumes can fluctuate within the certain range and, basically, the customer still pays the same amount? I think that that's been the target of yours to basically increase the tiered pricing and go away from the purely transactional model. But just to get a clear idea what we are talking about here, that would be helpful.

Martti already mentioned that you saw a year-over-year decline in volumes, 20%. So is that clearly in relation to the revenue decline that we are supposed to be seeing in the coming quarters?

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Klaus Andersen, Basware Oyj - CEO [9]

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Thank you for the question, Matti. Let me take that. So first, when we look at the composition and make of our network revenue, so now what we are saying is that approximately third -- 1/3 of that revenue or 30% is subscription-driven, whereby it has been steady as we go in terms of the revenue, to a large extent, irrespective of the volumes. Naturally, since control mechanisms apply in contracts, also in the subscription business, but then again, from a short-term and midterm perspective, that part of revenue comes in, in line with subscription-based pricing.

Then when we talk about the 70%, a lot -- to a large extent, the correlation in terms of lower transactions is coming in and does impact the revenue in line with the reduced number of transactions coming in. Also within the 70%, there was certain overreach and under-reach-based invoicing. But when we then take into consideration that it's overreach and under-reach versus to, so to say, baseline volume is brought into the calculus, again, the correlation from number of transactions in the revenue does hold. And we do see also revenue declines then for that 70%, in line with transaction volumes.

Clearly, last but not least, this is, of course, a very extraordinary situation. And generally speaking, the business volumes also in the 70%, of course, in a normal situation, are relatively steady. And then second of all is that, of course, as we continue to sign new deals every time we make the effort to move towards the subscription pricing related to transactions.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [10]

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All right. Maybe a follow-up on that. If we assume that the market growth in electronic invoicing volumes is roughly 20%, which it has been for some time, the 20% absolute decline would actually indicate 40% drop in the overall volumes or the kind of, yes, effective drop 40%, that would suggest that, of course, there would be basically -- or it would suggest a very large drop in the number of invoices sent, almost kind of total collapse in the economy. Do you think that, that is mainly due to the shutdown that has taken place? I would imagine that the kind of economic impact of that volume would come only later, maybe stabilizing on a slightly more positive level. What's your view on that at the moment? Do you get any indications from your customers explaining why the number could be that low?

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Martti Nurminen, Basware Oyj - CFO [11]

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Klaus, you might want to add. But Matti, first, if I may, I believe, yes, you are fair in terms of looking at the market growth. But then when we are looking at the underlying nature of how transaction services revenue has been growing for us, if I just point to those numbers as part of the Q4 interim, our Q4 transaction services revenue grew at 6% at constant currency. And our FY '19 transaction services grew at 8% at constant currency, so the delta to how we're seeing at the moment. And that's for the total, by the way, for total transaction services. So then again, from that perspective, the delta to what we are now seeing in an individual week in the end of March is not as big as if you are looking at it against the markets, right?

Second of all, when it comes to the existing environment, of course, also our customers' businesses are very much in different phases in different industries, and different industries are being impacted by a very different way, as we know. So to generalize that in terms of feedback from customers would be very, very challenging given the current levels of uncertainties.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [12]

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All right. Fair enough. Then another question related to maintenance revenue. We know that it should be on a declining pattern, and part of that decline is deliberate so that you are basically trying to force your customers to get away from the on-premise contracts to either cloud or then discontinue altogether. Now would you say that the maintenance revenue is still -- it can be kind of estimated with some kind of accuracy so that you have a feel for the customers who are about to churn at some point. And basically, that is what you have already penciled in. And some customers then turn to cloud, which is kind of churn in the maintenance, but positive in the SaaS line. Do you see any change in the customers' willingness to churn at this moment when the coronavirus is basically working? Is there -- is that -- are you able to comment on that?

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Klaus Andersen, Basware Oyj - CEO [13]

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Yes, we can comment on it, but it will be a very light comment because when we look at Q1, then we have not seen any change in the behavior from customers who are actually transforming, as we call it. What exactly will happen in Q2 and Q3 is a good question. In our scenario modeling, we have actually expected that not to significantly change compared to what we would normally see. And I think that will be the case. So we still expect to see the same decline in maintenance and the same level of transformations as we expected when we entered the year.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [14]

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All right. All right. Then finally, on the profit improvement that you made, to what extent do you think that it's due to the good revenue growth in consulting and the higher utilization? I suppose it must have been a similar situation as in Q3 when you saw that consulting actually fared well and created a positive boost to profits. And so -- and if that's the case, what is then going to be the impact in the next couple of quarters where I think everybody should assume that consulting is perhaps the most affected part of your business? Or correct me if I'm wrong to say that, but how do you feel about that?

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Klaus Andersen, Basware Oyj - CEO [15]

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I can comment on that, Martti, and then you can add afterwards. So I think you're completely right. But if you look at the -- if you look at our cost structure and so on, then you will also be able in the numbers to see that we are running the business in a more efficient way than we have done previously. I think, for sure, the increase in consulting revenues has helped on the profitability, of course, in Q3 and Q4 last year and now again in Q1. And we do expect to see that slowing down in Q2 and also in Q3, as I said before. But we also expect that we are able to manage that on the cost side in a way that it will not have a too significant negative impact on the bottom line. But of course, there are assumptions behind the scenarios that we are working with. And we can only compensate the profitability on cost adjustments to a certain extent. But the scenarios we have right now shows that we can do it.

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Martti Nurminen, Basware Oyj - CFO [16]

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The only thing I would add to that, Matti, is that when we think about the 20% growth, 20% growth on a year-to-year basis, so that's to the tune of EUR 1 million. And then when you think about that, the overall EBIT improvement is to the tune of EUR 8 million. Just again, when we talk about in the buckets of millions, certainly, there's a little bit of a cost improvement to consulting as well. But again, as Klaus is pointing out, it is broad-based in terms of the profitability improvement.

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Operator [17]

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(Operator Instructions) Our next question is from Sami Sarkamies from Nordea Markets.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [18]

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I have several questions. Firstly, starting on the top line, I know that you're not providing any revenue guidance on a full year level, but it would be helpful to get some color on your expectations. Do you foresee negative top line growth in second and third quarter, which should be the most difficult ones for you from a lockdown perspective?

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Klaus Andersen, Basware Oyj - CEO [19]

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So let me take that one, Martti, then you can add. So first of all, you're completely right, we have not given guidance on top line as of now. And we have promised to do that when we have more certainty into exactly what is expected for the full year. But our scenario modeling, which is very important to distinguish that to a proper financial forecasting, because it's not, it's actually showing that our top line is sort of flat and maybe even slightly declining compared to 2019. But please have in mind that this is not guidance. This is a matter of sharing with you what our scenario analysis and what our modeling is showing and what we are planning against.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [20]

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Okay. And just to verify, was this regarding the full year outlook or Q2 and...

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Klaus Andersen, Basware Oyj - CEO [21]

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This -- no, this was the full year outlook.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [22]

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Okay. And then just wanted to understand your assumptions regarding the consulting revenues in the coming quarters that how severely could those be impacted by the lockdown situations?

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Klaus Andersen, Basware Oyj - CEO [23]

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So again, here, I think it's very difficult to share exact numbers with you. But what we expect is that we have -- that we will see a visible drop in Q2. And then we will see also a visible drop in Q3, and Q3 might even be slightly higher than the drop we will see in Q2. And then in Q4, we will be back to something which is much closer to a normal situation also for Professional Services. So the net-net here is, of course, that we will have a quiet period over 2 quarters, and then that will start to pick up again. This is a very, very difficult area to estimate. And we are, as we speak, we are monitoring this on a weekly basis, especially our billable utilization and other utilization KPIs to see if this starts to deviate compared to what we have anticipated in our modeling.

On the Professional Services side, there is, of course, possibilities to do adjustments on the cost side. Again, here, I think the obvious adjustments and the things which sort of make sense from a business perspective to do straightaway, we are doing. But the more longer-term adjustments on the capacity and so on can -- needs to be considered very carefully because it's expensive to scale down and then scale up again relatively quickly. So the adjustments that we will do on the cost side also on Professional Services will only be done if we think it makes sense from a business perspective and also with a slightly longer horizon than maybe just 2 quarters.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [24]

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Okay. And then I would actually continue on cost savings. Can you elaborate on the financial impact from planned savings measures on an annual level, that what sort of OpEx saving it will be talking about?

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Klaus Andersen, Basware Oyj - CEO [25]

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Yes. And here, again, Martti, you can add to it. I think it's very important that to understand that the cost-savings actions that we have initiated and are implementing as we speak are cost-saving initiatives which relates to cost savings compared to what we expected and what we budgeted for and what we planned for before COVID-19 entered the scene. So some of it, you will be able to see in the numbers when you compare to Q1. But the majority of it will, of course, be related to initiatives and costs, which were in our plans, in our budgets to drive the future and to do some of the initiatives that we had planned to do this year.

So you will not be able to see it directly when you compare Q1 to the next quarter when we get to that at some point in time or Q3. But what I can share with you is that from a budgeting perspective and compared to how it looked like when we entered the year, we are working with initiatives which adds up to more than EUR 10 million in cost reductions compared to the plans and the budgets that we entered the year with.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [26]

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Yes. I just want to verify...

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Klaus Andersen, Basware Oyj - CEO [27]

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Does that answer your question?

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [28]

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Yes. And how should we think about the 2020 OpEx relative to 2019 OpEx? Is it sort of flattish as you were earlier indicating flattish revenues?

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Klaus Andersen, Basware Oyj - CEO [29]

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So Martti, will you take this one?

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Martti Nurminen, Basware Oyj - CFO [30]

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Yes. I think, Sami, that isn't something that if you look at backwards from Klaus was indicating, it kind of broadly gets you there. But clearly then, what you have to do is to bake in that from the revenue modeling that Klaus was indicating, again, in the scenario analysis to be approximately flattish to negative and then when you bake that into the calculus and you take into consideration that how much depreciation and amortization we have in the business based on the run rate, I think you can then straightaway kind of in the math then find yourself on OpEx level that, that would kind of indicate and imply for 2020. So that's how I would be thinking about it. So thinking through top line and then thinking about what the D&A, depreciation and amortization run rate is, and that's kind of what we'll get to the -- for the full year, thinking based on the scenario analysis.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [31]

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Okay. And then a question on guidance. What would need to happen for Basware not to reach the positive EBIT during this year?

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Klaus Andersen, Basware Oyj - CEO [32]

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So the -- as I've said a couple of times, the scenario that we have used as the foundation for the modeling for the full year, I think, so far, it looks as if we can compensate for the development in top line with being cost-conscious and manage it over cost. But we can only, of course, manage that to a certain extent. So if the world turns out completely different than our scenarios, then, of course, we will not be able to do it. If it turns out more positive and things comes back to normal faster than we expected, then it will turn out better than that. So I would say it completely depends on exactly how precise we have been in our modeling of what we expect to see during the next 3 quarters.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [33]

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Okay. And my final question is on balance sheet. Are you planning any backup financing facilities? Or is the assessment that this will not be needed?

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Martti Nurminen, Basware Oyj - CFO [34]

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I think, Sami, that is something that, based on the cash position, what we have now, that's, of course, the #1 thing, day in, day out, laser-like focus on managing the existing cash. I believe to be prudent, most of the companies, including us, we are actively also exploring potential other avenues just to be ready in case there really would be even a substantial further deterioration in our external world. So as always, we continue to keep our eyes open and then looking and considering potential other options as well.

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Operator [35]

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(Operator Instructions) Our next question is from Matti Riikonen from Carnegie.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [36]

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It's Matti Riikonen again. A couple of smaller questions. Firstly, related to the projects that the customers have delayed or canceled, has there been a lot of cancellations? Or are we mainly talking about delays at the moment?

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Klaus Andersen, Basware Oyj - CEO [37]

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We are primarily talking about delays at the moment. So we have not seen that many, if any, to be honest, sort of real cancellations. But we have seen a number of projects where the customers have asked to put them on pause for a period of time because of the situation.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [38]

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Right. Good. Then just a question on capitalized R&D. I think you have revealed a number earlier. How much of the R&D expenses in Q1 did you capitalize in Q1?

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Klaus Andersen, Basware Oyj - CEO [39]

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We capitalized in Q1 about the same level as we have capitalized the last couple of years as well. I think the capitalization, and correct me if I'm wrong, Martti, but I think the capitalization last year was -- was it 8-point something?

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Martti Nurminen, Basware Oyj - CFO [40]

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Yes, yes. And this is on a total year level. If we look at the quarterly R&D capitalized costs, it's available on the last page of the interim report, and it was EUR 2.465 million for the quarter compared to EUR 2.449 million in Q1 '19, and the '19 full year was EUR 8.8 million.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [41]

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So it was on the -- did you say last page of the report?

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Martti Nurminen, Basware Oyj - CFO [42]

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Yes.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [43]

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Oh, yes, there it was. Then finally, the India validation thing, just how much of your capacity did you lose in the first place? And in what kind of time frame do you think that you will get back to 100% of your capacity?

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Klaus Andersen, Basware Oyj - CEO [44]

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So what happened was that we, in principle, and with we, I mean the service provider that we are working with, lost all validation capacity in the Indian office. They still continued in the Indian office in Chandigarh. They still continued through the office that they have in Romania. And they continued in another office in India, which is located in the south compared to Chandigarh, which is in the north, where they could continue and where they had the possibilities for people to work from home. So the capacity has never really been -- went down to 0, but it has been relatively low because the majority of the capacity is located in Chandigarh.

At this point, we, together with our service provider, have managed to restore about 40% of the total capacity. So that's where we are running right now. And there are initiatives which are progressing on a daily basis, which could potentially switch it back to full capacity from one day to the other. But we're waiting for permissions or, let's say, the service provider is waiting for permissions to move stuff around inside Chandigarh, which is completely locked down, so any transportation of goods and so on is prohibited. So they're struggling with getting the permission to do that. But we are hopeful that we get it. And then when that happens, then the capacity will be actually fully up and running again in a very, very short period of time, which is a few days, and then it will be up and running again.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [45]

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Right. Should we expect that, that triggers some quality of service claims from the customers? Or is it kind of other ways revenue related to you? What...

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Klaus Andersen, Basware Oyj - CEO [46]

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No. I would say, to be completely open, yes, we can expect that because, of course, we have service level agreements with customers and so on, which we are not living up to as we speak. That said, because this is a service that we are buying from a third-party service provider, then, of course, we have some back-to-back arrangements around these kind of service level credits and potentially other claims, which will, to some extent, cover what we are looking at here.

I would not expect that to be substantial because even though it has been a degradation of the quality of the service, it has not been a full stop because what we did as soon as we realized that the validation would stop is that we changed the system so that we were able to send invoices to the receivers directly from the OCR process, so we call it pass-through. So we skipped the manual validation, but we're still sending the data. So the data is still arriving. The invoices are still coming into the buyer systems, but the quality of the data is, of course, not as good as it was before because it has not been manually validated. But it's not -- it has not caused a complete stop of the flow for any of our customers.

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Operator [47]

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And as there are no further questions, I will hand the word back to the speakers for any final comments.

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Ben Selby, Basware Oyj - VP of IR & Treasury [48]

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Yes. Thank you. We do have some questions on the online message board. So firstly, from Paul Devaux at Erasmus Gestion. Do you expect a negative growth for Q2 and Q3?

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Klaus Andersen, Basware Oyj - CEO [49]

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So Martti, will you take that one? Or should I take it?

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Martti Nurminen, Basware Oyj - CFO [50]

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Yes, I was -- I believe you also already covered that, Klaus, in your earlier remarks in terms of the growth. So again, from a full year expectations -- or sorry, from a full year scenario analysis model perspective, we were saying that we are currently seeing the year approximately flat to slight negative growth for the year as such. And again, that's a full year number. So from there, when you are thinking on the back end of Q1 where we grew 7%, I think from where you're going to approximately then see how Q2 and Q3 would need to play out as we are also expecting then in Q4, the economic activity will start to gradually pick up. So that's how I would be thinking about Q2 and Q3 in the context of the full year scenario analysis model as well as then the Q1 delivered revenue growth at 7%.

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Ben Selby, Basware Oyj - VP of IR & Treasury [51]

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And another question from Erasmus Gestion. Could you help us to understand the impact of the negative cloud order intake on future level of sales? If growth in order intake would remain negative, would it mean a negative growth in cloud revenues or just a flat growth?

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Martti Nurminen, Basware Oyj - CFO [52]

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I think the way to think about that is that what we said historically is that approximately 25% of the annual cloud order intake converts to revenue in the current year and then approximately between 50% to 60% more in the next year and the rest thereafter. So clearly, there is certain gas in the tank on the back of ARR, what we've signed last year and what we now also signed in Q1, even though, obviously, Q1 is negative on a year-to-year basis. So of course, there comes a point in the future that our overall ARR starts to then also have an influence. But for us to get to negative or flat growth in terms of the cloud business that is based on that trend of 25% of ARR into revenue in year 1, then 50% to 60% in the second year and then rest thereafter. I think then again, that implies you that the pathway to that point that if you're looking at flat to negative in SaaS is then a little further out there.

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Ben Selby, Basware Oyj - VP of IR & Treasury [53]

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Question from Kimmo Stenvall from OP. How much will you take costs out going forward from the Q1 level comparing the cost of goods sold of EUR 17.5 million and the OpEx at EUR 20.5 million in Q1?

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Martti Nurminen, Basware Oyj - CFO [54]

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I would say on that, the same thing, Kimmo, first of all, we are not going to provide here an exact number. Again, the way I would be thinking about the operating cost levels or OpEx levels, as I also alluded to Sami's question, is that when we think about our full year modeling, and as Klaus was alluding to, on a full year basis to that flat to slight negative revenue modeling. And then again, if you back out the depreciation and amortization, relatively flat, flattish on a year-to-year basis, that kind of gives you an idea in terms of where the rest of the spending would need to be for us to maintain that positive EBIT. So that's the way I would be looking at it.

And then again, of course, Klaus already went through the different elements on the page that we're looking at in terms of addressing the cost base. So net-net, I would look at the Q1 levels, similarly to the revenue growth rate. And then now with the information in terms of our modeling thinking, given to you on a full year basis and then back to yourself into the OpEx from there.

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Ben Selby, Basware Oyj - VP of IR & Treasury [55]

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And final question from John Hales of Bregal Milestone. Can you provide a range on the cost-reductions initiatives you have already implemented in terms of Q1 impact?

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Martti Nurminen, Basware Oyj - CFO [56]

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In terms of Q1 impact -- or I believe it's meant that the actions we have taken already and then the potential impact. And then I think Klaus already mentioned a number which was a little bit more than EUR 10 million.

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Ben Selby, Basware Oyj - VP of IR & Treasury [57]

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That concludes the messages and questions on the message board. So with that, we've also taken questions from the lines, over to Klaus for any final remarks before we close the call.

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Klaus Andersen, Basware Oyj - CEO [58]

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So no, I just want to thank you all for listening in to this quarterly call. It's quite a different quarter than some of the other quarters that we have seen lately. I think Q1 numbers, just to reiterate that, I think we did really well in Q1, everything else equal. And now we are preparing ourselves to also cope with the change in the situation now over the next at least 2, 3, maybe even 4 quarters. And I think we have a pretty good grip on things. And we have now updated the guidance according to what you have seen. And we will use the flexibility we have on our cost base to track towards positive EBIT for the full year. But -- and that's important.

Of course, if things changes in the future, then we will not do things which is harming the business longer term just to reach a positive EBIT for the year. We are thinking longer term than just 2020 in our thinking. But so far, our scenario and the attached modeling on top of that shows that we can, with sensible decisions and proper focus, can actually achieve positive EBIT for the full year 2020 without jeopardizing the future for the company.

So thank you very much for listening in, and thank you very much for all the questions.

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Martti Nurminen, Basware Oyj - CFO [59]

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Thank you.