Q2 2019 Cxense ASA Earnings Call
OSLO Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Cxense ASA earnings conference call or presentation Wednesday, August 21, 2019 at 6:30:00am GMT
TEXT version of Transcript
* Christian Printzell Halvorsen
Cxense ASA - CEO
* Jørgen Evjen
Cxense ASA - CFO
Christian Printzell Halvorsen, Cxense ASA - CEO 
Good morning, and welcome to the Cxense Q2 presentation. In this quarter, we have continued to execute on the strategic plan that we put forward in the first quarter of this year. In addition, we have also invested substantial efforts into the dialogue with Piano leading up to the voluntary offer to acquire the company, which we announced a little bit more than 2 weeks ago. So these are, of course, 2 topics that I will touch upon in this presentation, both the execution of our strategic plan as well as giving some more information about the offer from Piano.
But as usual, I'd like to start by reminding everyone what kind of company Cxense is. And we are a well-established global Software-as-a-Service company with more than 180 customers worldwide, of which we have some of the world's most reputable media companies. And with our data management and personalization solutions, we serve more than 400 million people with targeted and personalized content on a quarterly basis. From our core products, we then extract around $16 million in annualized revenues. And we have a high gross margin, which indicates that we also have a significant scalability in our business model.
So now let's take a look at the Q2 highlights. And of course, the most important event, the offer by Piano to acquire the company that happened after the reporting period. And I will, of course, talk more about this later. But in short, I would like to say that I think this offer represents a good solution for the company and for our shareholders. And both management and Board of Directors recommend shareholders to accept this offer. After we announced it, we have received very positive feedback from shareholders on the offer. And even before the announcement, we had pre-acceptance from around 53% of shareholders, including all the largest ones.
But even so, we have, of course, continued to execute on our strategic plan as we put forward in Q1. And most importantly, we have increased our organization in several areas: sales, customer success, engineering and data science. And this then puts into place the foundation for improved growth in the second half of this year.
If we look at the numbers, core revenues were slightly up year-over-year, both in the quarter and also in the first half of the year, but they were slightly down sequentially from the first quarter. And there were several factors behind this, but the most important one was a slight decrease in consulting fees. Adjusted EBITDA ended at minus $1.2 million in the quarter, which was also a little bit lower than last year. And this comes from, among other things, full year effects of the Enreach acquisition, lower noncore EBITDA revenues and also hires that we have done after the launch of the strategic plan.
If we then look at the sales and churn. And in this area, we are starting to see some operational improvements, but maybe a bit slower than what we had expected. In this quarter, we had hoped to see a net positive growth, but we ended up slightly negative. Sales was up from Q1, which is a positive thing, but it was still a bit behind where we have our ambitions and targets. So in general, I think we can say that the trend is that we see solid demand for our Conversion Engine product. But in the Data Management area, we see somewhat longer sales cycles due to some increased maturity in this market.
On the churn side, the churn in Q2 was a little bit higher than in Q1. And Q1 was then, if I can remind you, a very, very good quarter in terms of churn rate, has very little churn in that quarter. And I will also say that Q2 numbers in this year was better than any quarter of last year. So we are seeing some improvements also in this area. The kind of clients that are churning continue to be smaller clients and also clients that have either nonstandard solutions or nonstandard setups in some way.
We also signed a few key deals in Q2. The 2 most important ones on the new clients were Penske Media Corporation and De Persgroep. Penske is a U.S.-based media business with some very well-known titles, including Rolling Stone magazine and Variety. And they have decided to use our Conversion Engine product to drive their subscription business. De Persgroep is the leading Benelux publisher. And this deal comes as a direct result of the data alliance that we signed an agreement within Q4, NLProfiel. And De Persgroep is now signing up to use our Data Management Platform across all their digital properties.
And of course, we also have announced that we have renewed our partnership agreement with Dow Jones and Wall Street Journal. And we are, of course, very satisfied with that. It's a 2-year renewal with the option to extend for another year. And with this renewal, Dow Jones will expand their volumes with us and expand the usage of our tools across their properties. So to me, this is a good sign that they put a lot of trust and value both in our technology and the competence that we bring to their business.
So with that, I will hand it over to Jørgen to say a little bit more details on the financial numbers.
Jørgen Evjen, Cxense ASA - CFO 
Thank you, Christian. So Christian touched upon some of the main figures for Q2. I will now take you through our P&L and some of the key figures. For more details, please see our financial report on cxense.com, which you will find under the Investor section.
So for Q2 this year we saw stable core revenues, up 2% from last year. And as Christian said, down 2% from last quarter. This is mainly related to lower consulting fees, but core revenues as such is fairly stable. Total revenue is also more or less at the same level as Q1, a slight decline in the noncore business, which is related to the video section that we still have.
So looking at the gross margin, we saw a decline from 78% in Q1 to 76% in Q2. So this is then a result of the lower total revenues that we had in the quarter, combined with an unchanged hosting capacity that we have.
So going down to the OpEx side. Our adjusted OpEx ended up at USD 4.6 million compared to $4.3 million in Q1. So the difference is mainly related to the increase in write-down in receivables. And we also had an IFRS correction on a sublease contract in the U.S. And we also, according to our new plan, had some more marketing and travel expenses in the quarter. So we are increasing also the operational activity as such.
Meaning that the adjusted EBITDA ended at USD 1.2 million for the quarter. So it's lower than Q1, mainly related to the topics that I've now been through: the lower gross margin, and then again, some onetime effect of write-downs on receivables and IFRS adjustments.
Going over to the cash position of the company. We started the quarter with USD 10 million in cash after we did the share issue in February, March. At the end of Q2, we still had a cash position of USD 8 million. So the difference in the quarter is of course then related to operating expenses, general EBITDA level; but then also, in addition, some working capital fluctuations that we've had.
The cash flow going from investment is mainly related to our research and development, but also some investment in a new office location in Russia. What you see here on the net cash from finances is related to IFRS adjustments and also a small change in our debt in Finland. So overall, we then ended up with a cash -- net cash position of $8 million at the end of the quarter.
Christian Printzell Halvorsen, Cxense ASA - CEO 
Okay. Thanks, Jørgen. Now I'd like to go through a little bit more detail, the execution of our strategic plan and also give some more information about the Piano offer and the rationale behind this offer. But I think we can start with our product portfolio, which you can see on this page.
And just to simplify a little bit, I think you can say that the foundation for all our products is that we enable companies, mainly media companies, to use data to drive digital revenues and profitability and we do it in different ways. So the Data Management Platform, or DMP, does that for digital advertising, data-driven advertising. Conversion Engine applies similar technology but does it on the subscription part of the business, which is, of course, of increasing importance for most media companies these days.
Then we have Cxense Insight, which is our analytics tool, which provides a deep reader and user insight into their behavior. And then finally, we have Cxense bring your own data scientist, which is a beta product, which is a tool for our most advanced customers, enabling them to build proprietary machine learning solutions.
If you simplify even more, we can say that we have 2 main product lines, we have Personalization and DMP, and we have 2 main customer segments, publishing on one hand and digital marketing and subscription economy on the other side. And then if we then look into how we enable our customers, then you can say that Personalization is all about increasing customer and user engagement, and then to turn that engagement into revenue. And in terms of subscription, that means turning first-time visitors into repeat visitors. And then finally, to paying and loyal subscribers.
On the DMP side, it's all about either selling or buying advertising, but doing it in a very targeted way using data, so that you can choose very specifically which audience you want to reach. And one general trend in the digital advertising market is that it's being increasingly challenged by the global platforms, Google and Facebook in particular. And one trend that we are seeing as a result is that more and more publishers go together, form data alliances, share data to be able to create highly targetable segments that can actually compete with the global platforms. And our technology has proven very well suited for these kind of data alliances, and we've seen some success in this area.
So as I mentioned in the quarter, we have continued to execute on our strategic plan that we put forward in Q1. And we have continued on many of the same initiatives that we started in Q1 as well. The most important thing we're doing is to strengthen the organization, and we have added new employees in all the areas that you see listed on this page. And we are also continuing a number of initiatives that you see on this page.
I'm not going to go into those in detail, but just to give you a few examples. In sales, for example, we have, also Jørgen mentioned, increased marketing efforts significantly. And one thing that we are doing is that we have established ourselves as thought leaders within some of the areas that we are operating in. For example, dynamic paywalls.
In customer success, we have not only added new people to have day-to-day touch points with customers, we have also launched improved versions of our products that give new and added value to existing customers. And on the product side, we are, of course, continuing our evolution of our products, adding new features. And one of the key features that we added in Q2 was support for optimizing multiple subscription products.
Now let's talk a little bit more about the Piano offer. And as I said, Piano has made a voluntary offer to acquire Cxense. And let me just start by saying a few words about Piano. They are a U.S.-based company, roughly the same size as Cxense and also operating within the same space as Cxense. They have a product portfolio which is much more directed towards subscription management than we do. But as we have ventured more and more into subscription optimization space, Piano is a company that we have met as a competitor more and more often.
And then during the spring, they reached out to us and they proposed that we would explore structural solutions for the 2 companies. And as we went into this discussion and explored this area, we realized more and more that there is a strong industrial logic behind combining the 2 companies. And that by doing that, it's an opportunity to build a really scalable business.
So it is based on this industrial rationale that they are able to offer a share price of NOK 16 per share and this did require all the shares of Cxense. And based on that, this bid has then been fully supported by both management and Board of Directors, and also supported by fairness opinions by Arctic Securities and KWC. This was then announced a little bit more than 2 weeks ago, and at the same time we also announced that we already had pre-acceptance from 53% of shareholders, including management and the Board as well as the largest shareholders.
But now, we are live in the acceptance period. And in order for this transaction to close, there's a requirement to reach 90% shareholder acceptance, and there is then an offer period now that ends 10th of September. So again, I want to stress that the Board of Directors and management recommend shareholders to accept this offer and just reminding you of that time line.
I'd just like to spend a few minutes maybe on this industrial logic behind the transaction. And as I said, these 2 companies are -- they fit very well together. And if you look at them, they are remarkably complementary. And the idea is to build a combined company that builds on the strength of both. And here, I've listed a few of the dimensions that are important.
We are targeting the same kind of companies, mostly media companies, and we have roughly the same kind of size of the product portfolio -- or customer portfolio, but very little overlap in customers. In terms then of the where we are strong, Cxense is very strong in Europe and also in Asia, particularly in Japan, while Piano has most of their business in North America.
In terms of products, I have gone through the Cxense product portfolio, where Piano is strong is in subscription management, billing, identity, e-mail and they also have a customer journey tool, which is similar to our Conversion Engine. They call it Piano Composer. But that is actually the only area where there is some overlap in the product portfolio.
In terms of technology strengths, we are very strong in real-time data and behavioral data from anonymous users, while they have a very strong rules engine, and they're very also strong in identified data. So I think you can see how these 2 companies can fit together.
So that leaves me just to summarize. Of course, the Piano offer is the most important event of this reporting period. Again, I wanted to say that, I repeat, that we recommend shareholders to accept this offer. And that the alliance for the acceptance period is September 10. Even so we are continuing to execute on our strategic plan and strengthening our organization for that. In terms of Q2 financials, I think we can say that revenues have been fairly stable overall and EBITDA ended at minus $1.2 million in the quarter.
So with that, I will only thank everyone for listening in and attending today's presentation. Thank you.