U.S. Markets closed

Edited Transcript of BAS1V.HE earnings conference call or presentation 6-Aug-19 8:00am GMT

Half Year 2019 Basware Oyj Earnings Call

Espoo Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Basware Oyj earnings conference call or presentation Tuesday, August 6, 2019 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ben Selby

Basware Oyj - VP of IR & Treasury

* Klaus Andersen

Basware Oyj - CEO

================================================================================

Conference Call Participants

================================================================================

* Julian Alexander Serafini

Jefferies LLC, Research Division - Equity Analyst

* Matti Riikonen

Carnegie Investment Bank AB, Research Division - Financial Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning and welcome to the Basware half year results presentation. I'm Ben Selby, Head of Investor Relations, and I'm joined by Basware's CEO, Klaus Andersen; and Interim CFO, Tuija Mäntyniemi.

This presentation is taking place live at Basware's HQ in Helsinki and also via webcast for our international audience. There will be an opportunity for both the audience in the room and for those participating in the webcast to answer questions after the presentation, so please save your questions until the end. (Operator Instructions)

Before we begin, I must draw your attention to this important notice about forward-looking statements as well as the risk factors outlined in Basware's half year report.

I will now hand over to Klaus to begin the presentation.

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [2]

--------------------------------------------------------------------------------

Thank you very much, Ben. And also good morning from me to everyone in the room and everyone dialing in remotely.

Let's start with the key takeaways of this presentation. So the Q2 cloud order intake was all-time high for us in Basware, and our productivity program is progressing as expected and planned. And as a result of that, we are upgrading our expectations for the full year on the adjusted EBITDA.

On the external side, let's have a look at what the external world is saying about us in Q2. So we continue to be recognized by the outside world as a market leader, and was again here reconfirmed by Gartner last week, actually Friday. And it's the fourth time in a row that we have been named as a leader in our space, and Gartner once again scored us as the #1 AP automation solution available worldwide and among the 3 best solutions available when it comes to procurement-led P2P business. Gartner reiterated our strength as our technology, the best solution for large multinational companies, ease of deployment, ease of integration and the most extensive e-invoicing network in the world.

In Spend Matters' Q2 SolutionMap, we came out again as a leader in our industry, a value leader, as they call it. We continue to launch new products and product enhancements also in Q2. And SmartOrders functionality was released, which is an actionable e-mail functionality, making it possible for the workflow between the buyer and the supplier to do that via e-mails, and making the workflow between the buyer and the supplier as simple as it can be. So the purchase orders are sent via an e-mail in a PDF format, and the suppliers can accept the order just by clicking a button in the e-mail and actually flip the order into an invoice immediately from the invoice -- from the e-mail, sorry.

We also continue to enhance our analytics capabilities. The new AP performance dashboard enables our clients to benchmark and optimize their internal processes. And the new AP productivity dashboard gives real-time insight into the actual operations of our clients, making it possible to spot potential backlog issues in the operations, predict risk of late payments and identify potential for early payment discounts.

If we then look at the clients that we have signed up within Q2. Then again, in Q2, we continue to add really well-known and large clients to our client base, especially from North America, from Germany and from Finland. I'm especially happy about the fact that we continue to see more bigger deals in our order intake and bigger deals with large international companies, which is a core component in our strategy because it creates a really good foundation for expansion business for us in the future.

In Q2, we welcomed very prominent names like Holcim, HunterDouglas, and a large global bank in the U.S., which we unfortunately are not able to name in the presentation because of internal compliance rules at the client. But the fact that we are doing business with large players in the financial sector is, I think, a good sign of us being a very mature vendor in the space we operate in. Texas Roadhouse is also worth mentioning because it's a deal that came to us through our advisory partner channels.

The relative amount of net new names in our order intake is increasing, and the mix between net new names and transformations is moving in the right direction. So in Q2, transformations compared to the rest was roughly 20-80, whereas if you compare that with Q1, it was 30-70. So the long-term trend is exactly as we would like to see it, even though we will also, in the future, see fluctuations in the individual quarters, but the long-term trend is exactly as we want it to be.

If we then roll into the details of our productivity program, which we launched in Q1, then the productivity program is progressing well and almost all of the planned actions has now been implemented. We have a tail of activities that we will see in Q3 and Q4 that has not been fully implemented yet, but it's a minority compared to what has already been implemented. The effect of the productivity program is not really visible in our numbers. There will be much more visibility into the effect of this in Q3 and Q4, but we are on track to achieve the stated targets of cost reduction of -- on an annual basis of EUR 10 million compared to Q1 this year.

Sales and marketing has been relatively untouched as previously stated as well, and so has the investments in R&D when it comes to core and strategic areas. And with the actions we are doing now, we can reiterate that we are on track to reach positive EBIT in 2020 and positive free cash flow generation when we enter 2020.

Let's dig into the details a little bit about what we have actually done on the productivity program. So long-term product strategy has been implemented in the areas where we have overlapping solutions, and investments have now been either reduced or moved to areas that is of strategic importance for us longer term.

So Basware's global operating model and the organizational setup has now been implemented worldwide. Activities has been or is in the process of being moved to lower-cost areas as well. And here, we include some of our support services, some of our internal IT services and services which previously was delivered by the use of external consultants. Sales and marketing investments are being reallocated in accordance with need and the -- in accordance to where the opportunities for us lie, but the net investment level have been kept on the same level as we had in the second half of 2018.

Professional Services has been reorganized to better take advantage of the global setup, and roles have been moved from being internally focused to now being client-focused. This is a relatively big structural change, which is a good foundation for further improvements, but we will continue to improve the Professional Services areas as we go forward. External spending has been analyzed, and actions has been taken. But again here, this is an area we will continue to work with, and examples here are key suppliers and our use of external consultants.

64 active headcount reduction has been implemented and the vast majority of that is -- has been done. In addition to the 64, comes voluntary attrition not being replaced, so the number is actually higher than the 64. What you have to have in mind here is that the net headcount numbers are affected by the fact that we are moving some tasks to lower-cost areas.

The actions required to make the planned step change in our cost structure has now been almost fully implemented. Going forward, we will continue our cost-conscious approach and continuously improve our efficiency and drive cost savings wherever possible to enable ourselves to reallocate costs to areas that has the biggest impact to us for our future growth.

We're also making rapid progress in filling open key management roles, and I'm very pleased to say that we now have a CFO on his way in. Martti Nurminen will join Basware in January or earlier if possible, and I'm looking forward to his arrival. He has CFO experience from listed Nordic IT companies, combined with solid international experience from working abroad. He's a very energetic person who is used to drive both operational efficiency as well as actively being engaged in more strategic long-term thinking.

Blair Tolbard starts in June as the new leader of our U.S. organization, and he did hit the ground running. He has a long background from within our space, working at Jaggaer and MiCore. And he is already making a significant impact to our business in the U.S.

We also have a new leader for our U.S. business lined up to start within the coming month. We can't share a name yet unfortunately, but we're talking about a very senior leader with a lot of experience also from within our space. He has experience in both managing direct sales reps -- teams of direct sales reps, but also a lot of knowledge about how to handle channel partner sales. So I'm looking forward to him joining us well.

That means that we are -- very, very soon we have the full management team in place and are fully up and running operationally also on senior management level.

A few highlights on the financials before I will hand it over to Ben again to take you through the details of Q2 and the first half year. We're making good and steady progress in our strategy execution. Cloud order intake, EUR 6.4 million, all-time high for Basware. Top line is growing as expected and our cloud revenue is up 12%. Our cloud revenue now constitutes more than 2/3, and it's up with 0.5 percentage point compared to last quarter.

With that, I would like to hand over to Ben to take you through the more detailed financial review of Q2. Ben?

--------------------------------------------------------------------------------

Ben Selby, Basware Oyj - VP of IR & Treasury [3]

--------------------------------------------------------------------------------

Thank you, Klaus. We'll start off the financial review with an overview of the second quarter's revenue development. In the second quarter, cloud growth was 12% on an organic constant currency basis. This growth rate was negatively impacted by a number of one-offs, which we will go through in more detail later in the presentation.

Cloud as a proportion of total revenues continued to grow. It was at 68.1% this quarter, which was up 0.5 percentage points from Q1 and almost 6 percentage points from a year ago. Total revenue growth was 3%. This continues to be impacted as expected by the decline in our legacy business revenues.

Moving on to order intake. Order intake, expressed as annual recurring revenue, was at an all-time high both for the second quarter and for the first half of 2019 at EUR 6.43 million and EUR 11.37 million, respectively. We saw good performance in the competitive U.S. market as well as in Finland. Finland is back on track from Q1. And pleasingly, we also saw a good development in sales through partners that we sell with in both the U.S. and France in particular.

Overall, the order book quality also continues to improve. The average deal size for net new names continue to improve, and we also saw less reliance from transformation cases and a higher contribution from new customers.

The year-on-year order intake growth rate was negatively impacted by a high comparison period number. In fact, Q2 2018 was previously the highest-ever quarter for order intake at Basware. Additionally, we continue to be impacted by unsatisfactory performance in the U.K. market. Given the size of the contribution that the U.K. should be making to Basware, this has a significant effect on the quarter's order intake result.

And finally, it's important to remember that we achieved this order intake in a quarter when Basware was going through a productivity program. So to sum up on order intake, even against significant headwinds, Basware delivered a record quarter for order intake and the quality of the order intake continue to improve.

Turning to net sales progression. Cloud revenues grew by 13.6%, whilst consulting, maintenance and license revenues declined as expected. Our cloud revenues grew 12% on an organic constant currency basis. This growth rate was slightly below the Q1 growth rate and was negatively impacted by a couple of factors.

Firstly, in Q1 -- sorry, in Q2, there was a higher-than-average number of credit notes related to billing corrections. This had more than a 1 percentage point impact on the cloud growth rate. Additionally, we started to ramp down some nonstrategic, nonprofitable business. As part of the productivity program, we will actually continue to actively not renew nonprofitable contracts, so this will continue in the future.

Maintenance and license revenues declined as expected, and that trend will continue to accelerate as we announced in Q1 the end of life for a number of our legacy solutions. Consulting revenues were down by 3%, which was a lower decline than in the first quarter. All of this fed through to a total revenue growth of 3%. Whilst cloud revenues are growing in the double digits, the overall growth rate was impacted, as expected, by the declining legacy revenues.

Turning to profitability. In the second quarter, our adjusted EBITDA was already at close to breakeven at minus EUR 213,000. Even after taking into account the positive impact that IFRS 16 has on that number, on a like-for-like basis, this is significantly better than the profitability in Q2 2018 and we have yet to see the benefits of the productivity program actions feed through to EBITDA.

Commenting on the line items. The cost of sales was roughly flat on a year-on-year basis and was impacted by temporarily higher hosting costs as well as previously unbilled license costs. Together, these had more than a 1 percentage point impact on the gross margin this quarter. Our hosting costs have come down from Q1 levels; however, there is still around EUR 150,000 of quarterly run rate to come out of these numbers by year-end as we complete the AWS transition.

The increase of 17% in the sales and marketing line is primarily driven by the investments that we made already into sales and marketing in the second half of 2018. In Q2, our R&D expenses were roughly flat whilst our G&A expenses came down by 38%. The biggest part of the change in that line item is due to the reversal of share-based compensation accruals due to executive team departures.

The productivity program costs of EUR 2.1 million can be seen in the other operating income and expenses line. This is below the EUR 3.5 million cost expectations that was announced in April with the productivity program. There will be more one-off costs coming through in the second half of 2019; however, we expect the total costs to be below the EUR 3.5 million.

As announced in April as part of the productivity program, Basware expects to reach positive free cash flow on a run rate basis by the end of 2020. The purpose of the free cash flow metric is to give investors an understanding of all the costs related to Basware's operations and so is calculated as EBITDA minus capitalizations, minus finance expenses, minus taxes and minus payment of lease liabilities. It excludes the effects of share-based compensation to align with the peer group and also the effects of any acquisitions or disposals.

We will continue to report this metric quarterly to enable investors to track the progress of the productivity program. We've also provided the quarterly data going back to the beginning of 2018.

In the second quarter of 2019, the free cash flow metric equated to minus EUR 9.8 million. If we look at some of the components of this, unadjusted EBITDA was minus EUR 2.25 million. This includes the productivity program costs and was significantly better than in Q2 2018 even after adjusting for the IFRS 16 effect.

Overall, the single biggest change in the line items here is in finance expenses, which went up by around EUR 2 million as a result of the new financing entered into Q1 and drawn down at the beginning of Q2.

It's important to note, however, that there are overlapping costs in this line item as we do plan to repay in September our EUR 30 million club loan.

Looking at actual cash flows. Cash flows from operating activities in Q2 was significantly better than in the second quarter of 2018, mainly caused by positive changes in working capital. Overall, the cash position increased to EUR 63 million as a result of the incoming funds from the new financing, offset by some of the repayments of other facilities. Our net financial debt at the end of the quarter was EUR 23.9 million. We expect the net debt will peak during 2020 and reduce thereafter as we get to the free cash flow positive as part of the productivity program.

A purpose of the recent financing was to address upcoming maturing debt. Basware therefore repaid already a EUR 10.3 million bilateral loan and plans to repay its EUR 30 million club loan during September. After this is repaid, Basware will be left with 3 pieces of debt: its pension loan due 2022 which has EUR 5 million remaining and is amortizing, its EUR 10 million participation in a multi-issuer bond due 2023 and the new financing from Bregal Milestone due 2024. This means that through to the end of 2022, we will have only a total of EUR 5 million of debt maturing. So no more than EUR 2 million in any 1 year. EUR 2 million in 2020, EUR 2 million in 2021 and EUR 1 million in 2022.

So to sum up on cash flow and balance sheet, Basware's actual operating cash flows improved significantly in Q2, and we have taken care of refinancing for the foreseeable future.

Thank you. And over to Klaus again.

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [4]

--------------------------------------------------------------------------------

Thank you. So what does all this mean for us looking at the full year? So total revenue growth on an organic constant currency basis approximately 5%, which is what we previously have announced, and that outlook is unchanged. Our expectations to cloud revenue growth of approximately 15%, that outlook is also unchanged. And as a result of good progress in our productivity program, we now upgrade our guidance in adjusted EBITDA, and our guidance is now that adjusted EBITDA is EUR 3 million or better.

Let's go back to the key takeaways of the presentation. So cloud order intake in Q2, all-time high, EUR 6.4 million. Cloud order intake for the first half year, all-time high, EUR 11.4 million. Our execution of the productivity program has progressed very well. And as a result, we now upgrade our expectations to adjusted EBITDA for the full year.

So our performance in the first half year has been relatively okay despite decent amount of headwind. First, we had the takeover attempt, then significant senior management changes. And lately in the last quarter, we have the productivity program implemented. And if you take all of this into account, I would even be tempted to say that our performance in Q2 and our performance for the first half year is actually better than okay. It's actually good.

I am at least happy about the performance and the outcome of the first half year, and I'm also very, very happy about the steps that we're taking now to better position ourselves for the future.

So with that, I would say thank you very much, everybody, for listening in. And then I would like to open the floor for questions.

--------------------------------------------------------------------------------

Unidentified Company Representative [5]

--------------------------------------------------------------------------------

Let's start with questions on the line. So operator, over to you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Julian Serafini from Jefferies.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I wanted to inquire about the cloud order intake and how we should think about it going forward. And the reason I ask is that it looks like comps get a little tougher in the second half of the year. But then on the other hand, I know you've been making more sales and marketing investments as of last year, maintained those investments; so we would expect to see a pickup in new order intake as well just through sales and marketing spending.

So can you help guide us a little bit and share your thoughts on how we would expect cloud order intake to evolve for the rest of this year?

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [3]

--------------------------------------------------------------------------------

We can share with you our thoughts, but externally, we actually do not share expectations of explicit expected order intakes. But if we look at it, then, of course, H1 has been quite a turbulent half year for us. Whether that has impacted the order intake in the first half year or not is a big question. But I would say, yes, it has.

In the expectations for the full year that we are releasing right now, they are, of course, based on also our expectations for order intake and there's nothing in our expectations for the order intake for the second half which gives rise to change any of the expectations that we have said previously. All that said, I would also say that the second half of 2019 will be a more normal half year than what we have seen in the first half year.

--------------------------------------------------------------------------------

Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [4]

--------------------------------------------------------------------------------

Okay. And then I guess just one follow-up. In terms of the CAC-to-LTV ratio, in the past you disclosed a 7 -- a ratio of 7, right, for LTV to CAC, which is a very, very healthy ratio. Can you share how that may be trending nowadays? Is it -- are you in a similar range? Do you think it's better or worse? It'd be interesting to get some color from you on that.

--------------------------------------------------------------------------------

Ben Selby, Basware Oyj - VP of IR & Treasury [5]

--------------------------------------------------------------------------------

Yes, we released that in October of last year, and I guess it's the kind of metric that we don't update on a quarterly basis, but we'll revisit as and when we come to a Capital Markets Day type event. What we can say is that our churn rates is pretty much at the same level, so around 5%, if that gives some context to you.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Matti Riikonen from Carnegie.

--------------------------------------------------------------------------------

Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [7]

--------------------------------------------------------------------------------

It's Matti Riikonen, Carnegie. I'm giving a follow-up question on the order intake. If we go back to Q1, I think you mentioned that the bid turmoil had an impact on order intake and then you had a fairly very low order intake in Q1. But you said that in the beginning of Q2, I think you talked about 3 fairly large orders coming to the quarter. Now that should have been a positive contributor to order intake growth in the second quarter.

Now when that kind of didn't happen, so it was only kind of flat against the Q2 last year, of course, it was a tough comparable, but I was just thinking that has some of the momentum kind of gone away during Q2? Or is it just a matter of many things happening at the same time and the outcome would then be just 1% growth in cloud order intake? Any kind of thoughts you could share on that would be appreciated.

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [8]

--------------------------------------------------------------------------------

Yes. I can address that question. I think if you look at it, first of all, if you look at the timing during the quarters of the order intake, then we are in Q2 back to a more normal timing than we saw in Q1, where we, in Q1, saw very back-end-loaded order intake. I think the turmoil, as you're saying, that we have been going through has had an effect. It's very, very difficult, I would say, impossible to quantify. But the fact that deals are being prolonged and the sales cycle are being prolonged means that we are losing calendar time in our deal closure.

But what I would say, the numbers that we are looking at, if you analyze Q2 in more details than what we have shared here, I can say we are much more back to a normal situation compared to Q1.

--------------------------------------------------------------------------------

Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [9]

--------------------------------------------------------------------------------

All right. Maybe the second question related to cloud revenue growth. Ben already mentioned that there was more than 1 percentage point impact of higher amount of credit notes, but then also that there was a rundown of nonprofitable contracts.

Could you share some thoughts about that? I mean cloud business usually should be regarded as a fairly profitable business when you get it up and running. Now if it's unprofitable, was there any particular reason for it to be unprofitable? Some change in the customer behavior? Or how should we think about that?

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [10]

--------------------------------------------------------------------------------

Okay. But we have -- that's a very, very good question. Thank you very much for asking that question. No, no. What we're talking about is old cloud solutions which are very much sort of bespoke solutions that we have historically entered into with individual clients. So they're not -- we're not talking about the cloud business, which is our core mainstream cloud business.

So what we're talking about here is legacy installations and legacy services that we are either moving to the standardized SaaS and cloud business. And if we can't move them, then we will not renew them when we get to a point of renewal. So it's not -- and that's very important, it's not our mainstream core services and offerings we are talking about. There, we don't ramp down anything; to the contrary.

--------------------------------------------------------------------------------

Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [11]

--------------------------------------------------------------------------------

All right. That's very good. That's helpful. Then regarding the financing cost, you mentioned that there's some duplicate costs in Q2 related to the Bregal money coming in, and you're still paying some of the earlier loans that you have and this would be then repaid in September. So how much exactly in the finance expenses would you expect to lower your financing costs going to, let's say, normal situation when there's only the Bregal loan that you have on you?

--------------------------------------------------------------------------------

Ben Selby, Basware Oyj - VP of IR & Treasury [12]

--------------------------------------------------------------------------------

So roughly speaking, when we have the 3 pieces of debt that we talked about remaining, the -- once the club loan is repaid, the quarterly club loan interest is about EUR 300,000. So you can expect that to come out of the expenses.

--------------------------------------------------------------------------------

Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [13]

--------------------------------------------------------------------------------

Okay. Then finally, I think you mentioned in the report on Page 5 about the R&D capitalization, and that's still fairly high. It came down from a year ago, but it's still EUR 7 million according to your report. So what exactly are you investing in? And since it's capitalized, you have to have the kind of customer expectation of -- or customer deals that allow you to capitalize. So what kind of products and customer groups and segments are we talking about here?

--------------------------------------------------------------------------------

Ben Selby, Basware Oyj - VP of IR & Treasury [14]

--------------------------------------------------------------------------------

Klaus may want to comment on kind of what we are doing, but just a brief kind of clarification. What we say on Page 5 is that the total investments, which includes capitalizations, were EUR 7 million. The actual capitalizations component of that is about EUR 2.2 million and is down EUR 100,000 from the year before. So EUR 7 million is rather effectively the cash spend on R&D.

--------------------------------------------------------------------------------

Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [15]

--------------------------------------------------------------------------------

But in the Finnish-speaking report, you talk about capitalized costs being 7-point-something in the quarter. I mean which...

--------------------------------------------------------------------------------

Ben Selby, Basware Oyj - VP of IR & Treasury [16]

--------------------------------------------------------------------------------

Well it's the total investments that include capitalizations and excludes depreciation was EUR 7 million in the quarter.

--------------------------------------------------------------------------------

Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [17]

--------------------------------------------------------------------------------

Okay. Then the wording is incorrect. But if you say that it's both capitalized and expensed -- expenses, then I understand.

--------------------------------------------------------------------------------

Ben Selby, Basware Oyj - VP of IR & Treasury [18]

--------------------------------------------------------------------------------

Yes. Excluding depreciation. And we provide that also, a breakdown, on Page 23, what is capitalized, what is total investment and what is expensed.

--------------------------------------------------------------------------------

Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [19]

--------------------------------------------------------------------------------

Okay. And then what is it?

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [20]

--------------------------------------------------------------------------------

There's 3 sort of big projects that we are capitalizing, and one is the next generation of our AP automation services products. That's one. The second one is our investments in the procurement offering. That's number two. And the third one is our investments in areas where we use artificial intelligence and machine learning to be able to automatically take unstructured invoices and turn them into structured machine-readable data.

So these 3 areas are the 2 -- are the 3 main areas that we capitalize, the 2 first ones being the most significant ones from a numbers perspective.

--------------------------------------------------------------------------------

Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [21]

--------------------------------------------------------------------------------

All right. Very good. And when do you think that the capitalization of these would be over and you would be starting to earn money and of course making the amortization?

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [22]

--------------------------------------------------------------------------------

I think earning money and stopping the capitalization is -- might not have to be in that sequence. But the AP automation project, the majority of that will be finished by early Q1 next year. Then there's the last phase of it, which will continue in 2020. And on the procurement side, it's more longer term, where we will continue to invest in our procurement.

And as you saw in the -- maybe in the presentation, the fact that we are #1 in the AP automation worldwide, we need to remain being #1. And that's why we are building completely new generations of our software and services in that space. Whereas procurement, it's an area where we have gaps in the functional coverage. And there, the investments will continue for longer.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Thank you. And as there are no further questions on the phone lines, I will hand the word back to the speakers for any questions from the floor.

--------------------------------------------------------------------------------

Unidentified Company Representative [24]

--------------------------------------------------------------------------------

Thank you, operator. We have a couple of questions. First off from [Johann Vares]. A lot of changes in management and strategy. What is current employee satisfaction level, employee turnover and how these 2 have changed during the last 12 months?

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [25]

--------------------------------------------------------------------------------

Yes. And I can address that one. I think we're running an employee survey again in September, so we will have sort of more facts on that in September. The general impression and the mood in the organization is good. I would say the attitude and the understanding and the belief in what we're doing and our future is quite strong. And I would say that we've actually managed to go through the productivity program in a very, very, very smooth, relatively said, way.

The employee attrition we have right now is around 15%, which is not alarming in any shape or form, taking into account that we operate in countries where the attrition is normally higher than what we have in other countries like Finland, for example. So there's nothing in the numbers or in the knowledge or whatever that points in the direction of -- that this has created more turbulence than could have been expected. Actually, the opposite.

--------------------------------------------------------------------------------

Unidentified Company Representative [26]

--------------------------------------------------------------------------------

Next question from Sami Sarkamies, Nordea Markets. You are increasingly selling P2P and network together. Can you please explain why the accelerating SaaS growth is not combined with similar uptick in transaction revenues?

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [27]

--------------------------------------------------------------------------------

Yes. Do you want to take a shot?

--------------------------------------------------------------------------------

Ben Selby, Basware Oyj - VP of IR & Treasury [28]

--------------------------------------------------------------------------------

Yes. I mean I would say -- first of all, Sami, I mean, exactly as you say, we are selling these typically as combined deals. And this has been very much the move towards subscription on the network side where the majority of network deals are now sold as subscriptions. And that's essentially why we are moving away from the split reporting between SaaS and transactions and reporting a cloud number. We're already providing the old breakdown purely for transparency, but the way we look at the business is to look at the 2 together.

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [29]

--------------------------------------------------------------------------------

And the observation is completely correct. So in almost every P2P case that we close, it includes the network. We are still doing network-only business, but it's included in the P2P deals that we are closing now.

--------------------------------------------------------------------------------

Unidentified Company Representative [30]

--------------------------------------------------------------------------------

Given implemented restructuring, new management hires and solid order intake, should one assume accelerating cloud growth going into 2020?

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [31]

--------------------------------------------------------------------------------

I would like to stick to the expectations of the full year that we have set and also the targets that we have set out in -- around EBIT and free cash flow for 2020. And then I would like to come back later in the year with our expectations to the order intake for 2020. But there's nothing, as far as we can see right now, that should actually mean that this would be significantly different than what we expected.

--------------------------------------------------------------------------------

Unidentified Company Representative [32]

--------------------------------------------------------------------------------

Next question from Kimmo Stenvall, OP. Free cash flow in H2. Q2 was EUR 9.8 million negative. What is your planning assumptions on later part of the year? Should we expect clear improvement from Q2 level?

--------------------------------------------------------------------------------

Ben Selby, Basware Oyj - VP of IR & Treasury [33]

--------------------------------------------------------------------------------

I would say that we provided the quarterly data for this which you can see it doesn't go in a linear fashion. There will be some lumpiness between the quarters. So I would say you need to look at this metric more on a kind of year-on-year comparison basis than looking at where it will go from here for the rest of the year. But the important point is that, as part of the productivity program, we expect that number to be positive on a run rate basis at the end of 2020.

--------------------------------------------------------------------------------

Unidentified Company Representative [34]

--------------------------------------------------------------------------------

Next, Petri Aho, Inderes. The overall growth in your largest market areas, Europe and Nordics, is stalling. Could you comment on the underlying cloud revenue growth in these areas?

--------------------------------------------------------------------------------

Ben Selby, Basware Oyj - VP of IR & Treasury [35]

--------------------------------------------------------------------------------

Yes. I guess you are probably referring to the revenue breakdown that we give in the report. I mean it's only natural that you would see this kind of effect because in the Americas that's obviously a newer market for us where we have a much higher proportion of cloud revenues and therefore the growth rate is higher, whereas the Europe and Nordics are the ones that are most affected by the transformations and the drag from the legacy revenues.

--------------------------------------------------------------------------------

Unidentified Company Representative [36]

--------------------------------------------------------------------------------

No more questions.

--------------------------------------------------------------------------------

Klaus Andersen, Basware Oyj - CEO [37]

--------------------------------------------------------------------------------

Good. I think on a positive note, the increase in sales and marketing that we did in the second half of 2018, a lot of that investment was going towards North America and a lot of it was going into sort of brand recognition activities and longer-term activities in that market. And we are actually already now started to see an effect of that, which is really good. And we also invested in other areas.

And I would like to repeat also what I said in Q1 that, of course, we will, on a continuous basis, look at where we're putting our investments also in sales and marketing, and then we will reallocate things into areas where we judge that the output is better than in other areas. But I'm actually very, very, very happy to see that we are seeing a visible effect of our investments in the U.S., in the North American market.

Good. Any more questions?

Thank you very much for taking the time to listen in. I hope you enjoyed the presentation. Thank you.