Verimatrix S.A.

Ladies and gentlemen, welcome to the Very Much Rich Conference Call. I now hand over to Mr. Anedio D'Angelo, Chairman and Chief Executive Officer, and Mr. Richard Bachard de Tournier, Chief Financial Officer. Sir, please go ahead.

Thank you. Thank you. Thank you to all for participating to this call for the first quarter 2020 revenue release. And I'm happy even though I am at my home. I am north of Italy, which is a region very strongly by the COVID-19. But let's say happy to report our figures. As you can see from our presentation, We did 20 million in revenue for our core activity, with 3% growth quarter Q1 on Q1, Q1 2019 on Q1 2020. As a consolidated revenue in IFRS, the growth is 26%, because if you remember, we acquired Verimatrix end of February 2019. We have a stronger growth into subscription business and I will explain about our strategy that we applied in Q1 2020 with a 68% growth from Q1 of 2019. Recurring revenue of all of this maintenance and subscription. at a growth of 14.2 million. These are the basic, let's say, the figures that we announced with the Q1, but you can read the press release. Some comments, the comments about, first of all, even though you hear a lot about COVID-19, we have put all the necessary measures to protect the health of our employees. And as of today, we have no one in our company that has been positive to COVID-19. I'd say that Verimatrix is a company who develops software products and services. And therefore, our employees were quite used to work from home. So for us, overall, it was not a problem. a big shock of having the employees starting all working from home. We have only a few employees in Germany that need to be there to deliver some secret codes and so for practically 98% of the company, they are all at home since March 8th. The business has been quite resilient because, as you may imagine, there was a big consumption of content at home. There was a strong increase of content at home. Therefore, we suffered in the beginning of the year, especially in Asia, Pacific, in January, February, by a shortage of sets of boxes that were delivered to the final clients. And, you know, we take what we call royalties from set-to-box because part of our software sits in the set-to-box. And the set-to-box manufacturer, they manufacture mainly in China. And January, February, the Chinese manufacturing plants were closed down, and they had difficulties to deliver set-to-box to the client. But we had a huge increase in number of set-to-box delivered. during the month of March, and therefore the royalties were quite substantial in the last month of the quarter. As you know, Q1 is typically a low quarter compared to the rest of the year, but we have seen there was a small change into the activity, while the current customers, they increased the number of subscribers, and therefore our revenue on subscription customers have increased, while the revenue on new cafes, new investments for new projects or launching new solutions has been a bit slowed down compared to the first quarter of 2019. Especially in Europe, for the new investment, there was a slowdown. In Latin America, the demand has been very strong, and we have achieved all our targets for USA and Latin America. So there are some challenges, but the business has been quite resilient. The position, the financial position, as you know, is largely deleveraged. We have a solid financial situation. We have no risk for the company. We have a good pipeline for next quarter. And therefore, there is no risk from a financial standpoint. And we believe that we could even look for some acquisition going forward to increase the product offering and our SaaS business and the subscription business. The demand for content is growing a lot. We believe that the content provider and the telecom operator should make the content available at a lower price into the market to expand even more widely the market. You know that FBI in the Federal Bureau of Investigation in the U.S. has just released a report saying that all types of fraud over the network, over the Internet, has grown during Q1 of 2020 by 646%. So the fraudsters are more active in Q1, while If we take only our sector, this project doesn't affect only video and the overall program every sector, there are the content owners that want to distribute even recent movies since the theaters are closed down and movie theaters are closed down, they release movies, and you can see that on Disney+, they release over the network even quite recent movies. Therefore, they need more security, and it is also an opportunity for us, for our business, looking forward. Most of the activity we have done has been to push more for recurring revenue and the subscription business. We know that some telecom operators, even though they are growing their usage base and their customer base, they are demanded from governments to distribute content at a lower prices. And therefore, an offer of subscription, they see it more favorably because they do not have a high capacity to invest. we are increasing the recurring revenue going forward to have a more solid base for 2021 and 2022. Our contracts are minimum three years, but they go even up to five years. We have decided not to give indication for the future because The COVID-19, as you have seen, behavior is not under control yet, and we don't know the impact that could have on the overall business. We have kept, from one side, a tight control of expenses for the company to increase and keep our profitability, our cash, for the future. But also, we have kept... the employees quite motivated. Just to tell you, you know, we are in 14 countries worldwide, and every employee is working from home. So my personal decision has been the decision to motivate, keep the employees quite motivated. We applied the salary increase that we had promised beginning of January, so we did not cut the salary increases So from one side, we keep a tight control of cost. From another side, we have been motivating our employees to look for innovation. We have issued a new, we have set up for a new prize to give to our employees that we call Isaac Newton during Q1. who have an innovative idea, and we will give an extra bonus prize to our employees to motivate them to push ahead for innovation. We need to be ready for the market once we will be free to travel again to be present into the market with new products and new solutions. Therefore, I did decide not to cut into the company people or anything, so COVID-19, for us, it did not impact, not on morale, not on the revenue, and I keep a very strong optimistic attitude for the long-term potential for the company. I believe that once all the lockdown will be released, we have better opportunity, strong opportunity to emerge much stronger from this crisis. So, these are just a few comments, if you wish, because we announced the revenue of Q1, but I'm very open to all the questions that you may have, and also Richard with me are ready to answer to all the questions.

Thank you, ladies and gentlemen. If you wish to ask a question by phone, please press 01 on your telephone screen. We have the first question from Stefan Uli from Odobe HF. Sir, please go ahead.

Hello, good evening. I have a few questions for you. You said in your remarks that in fact COVID-19 did not have a significant impact on the morale of the company, but though it seems that Q1 has been impacted, actually the revenue growth by COVID-19 situation, So can you help us understand how this has been impacted, meaning even because your customers are not taking the investment decisions or just because you can't travel and the sales guys just can't see their customers? Or is there any other reason? And also about the impact of the COVID-19 epidemic, the 2020 and 2021 objectives are suspended. So I'd like you to understand what is in your view, what will be the impact. Of course, it depends on the length of the crisis. taking an assumption that it will last a few months and then we'll get back progressively to normal. Do you expect still some growth for the year? Thank you.

As I said, thank you for the question, Stefan, but if you go to the basic, the demand overall of video streaming and video by linear TV overall has increased. So let's say that our, the platform of our business is increasing. Q1, we did increase compared to Q1 of last year where there was no COVID-19. But every day there were news of closing down, going up, opening, lockdown in a It's like we say in Italy, Leopard, or like a Leopard process. There was not a consistent problem in every country, in every region. And the reaction also of the government towards even telecom operators has been quite different. If you take in Mexico, the government has told to the telecom operators to distribute content for free. And this puts a stress also on the telecom operators because they say you have to do it for free because many people do not have money even to buy food and they stay at home. You have to entertain them. You cannot ask them to pay. So every country has reacted in quite a different way. And we are not over the, even though there are some signs of a decrease or people positive to COVID-19, there is not a clear pattern to the way out. So the matrix grew the revenue, as you know, last year. And, you know, we are used to grow the revenue every year. And part of this revenue growth comes from the fact that we win market share. from our competitor. And part is linked to the market itself. Now, if you cannot travel, it's a bit difficult to convince customers to buy from us. And the typical customer, when there is some kind of crisis, they tend to stay with the previous, the incumbent supplier. They don't want to change the supplier to avoid the risk. So when we say that Q1 was a bit impacted, I think from the market share gaining, because we set up at the end of last year all our strategies to win a bigger portion of market share, and this did not happen. But the reduction... of revenue, or the impact of revenue. Actually, the revenue, I repeat, because I want to avoid confusion, increased by 3%. So, you know, if you look around yourself in the industry, you don't see many companies that increase their revenue. And instead that, the revenue was, it could have been much higher. We closed, in Q1, $5 million of revenue. subscription business. Okay? This subscription business is to be recognized over three years. Okay? In the past, what we did, we did license on a premise, and we would recognize the whole revenue, the time of the signature, and the delivery of the software. And this five million, it will be recognized over three years. So this year, it will impact only 1.7 million and not even into one. So you can see that for the subscription business, the revenue will be divided by three. Okay? What we recognize this year. The strategy is to have higher SaaS business and higher subscription business so that our platform for revenue, our way to calculate the forecast revenue will become more solid. So we have a plan to grow more than 100% on subscription revenue this year. And we have to calculate the test revenue as if it was three times compared to what we did last year and the previous year. In this sense, I don't want to give indication of market guidance now because of COVID. We do not know how COVID will impact all the customers in Q2 and Q3. We have a good pipeline. I am quite optimistic about the future. I am transforming the company more towards a fast and recurring revenue with a subscription concept. But it will take also some time. And the steep curve for revenue growth will be in the years to come. So I'm overall quite confident about the future of the company and quite optimistic. But you give a guidance. In a way, you give a number. Okay? And myself, as you know, I have been a CEO since 2008. almost three years, 25 years, and I never did a profit warning, and I don't want to do a profit warning. When there are so many variables linked to COVID-19, it is unreasonable to give a number because they don't depend on our business. The solidity of our business does not depend on our marketing or sales force, does not depend on our engineers. It depends on government, how they decide to manage their country. And it could impact also our business, even though today we can say among other businesses, okay, my daughter, she's in hotel business, and I can tell you the revenue is zero, okay? Our business is resilient. And the show shows that it grew to one, and it will be, I think I can tell you good and true truth. But to give you a market guidance until 2021, today is quite complex. I don't say impossible, but it's quite complex.

Okay, but just to understand the dynamics of your business during the quarter, could you share with us the growth rate of January and February and then what happened in March, meaning probably a decline, but what kind of decline and what kind of growth before? Just to see if you were in line with the target for the year.

There was not a decline. What happens in the business typically is March, June, December, the last month of every quarter, there is an increase of the revenue. So all the quarters, besides the seasonality of Q1, we have typically, as you know, a low Q1, a strong Q2, a weaker Q3 because there is August and things like this, and then a very strong Q4. This is the cycle of our business. But also the cycle within the quarter is to have a much, much stronger market. So March was stronger than January and February, but slightly lower than what we wish to end. Sorry, Richard, you wanted to say something?

No, no, that's okay, that's okay. No, just to complement, indeed, as a software company, most of the revenue of the quarter is closed in the last month of the quarter. And to give you some color about Q1 2020, So we did $20 million overall in the quarter and $12 million in March. Okay. So that's why the sequence, the monthly sequence is meaning like comparatively to, I don't know, a cheap business where you deliver your microprocessors every month and then you can be stopped if the manufacturing facility is stopped or the testing house and so on. Here it's really about closing gigs and once we close, We can ship the license remotely, obviously. It's available. It's made available on the server. And then we are good. But also, that's why we intended, even before COVID-19, to grow our security as a service business and more generally the subscription business. Because subscription, you can get subscription not only as a service, but also you can have a license on-prem that you ask your customer to pay you on a monthly or quarterly basis for a longer period compared to an upfront license, and then you generate recurring revenue and you make available to them on top of the right to use the license, the upgrade. So this is what is growing significantly, and we can see that COVID-19 increased the interest from customers to... to offload the burden of maintaining a platform to service providers. So that's quite interesting for us. It does not help solving the short-term lack of visibility and difficulty to forecast. I can tell you that one alternative could have been to... to release a range. But given the magnitude of the range, it would have made this a site almost meaningless. So step by step, we are trying to have more information from customers when they want to implement the new extent, the new upgrade, which requires some integration work, in particular with the support of third-party system integrators. And this is maybe the bottleneck now because China is back in terms of manufacturing, so set-top box makers, they can deliver. That's information we see, we have and we see. So it's more the ability to travel and to visit customers on their premises for system integrators to be able to plug our software within the broader environment of the customer. Oh, sure. Okay. And maybe the last one, and I will leave the floor. I think you barely said it in the press release. Are you taking specific cost control measures, and can you share with us, like you did in the past, the targeted OPEX number for the year?

Yeah, well, we announced when we did the very matrix that we were going to have 10 million in synergies. And then we increased that to 12 million for the full year. It impacted more or less the 7 million last year. And if you saw the numbers in 2019, we were doing on a performer basis 13 million in 2019. and we end up at $23 million in the end of 2019. So we improved the EBITDA by $10 million last year. Part of it was for the increase in sales. Part of it was for the synergies that we applied to the business. So this was the last year. For this year, let's say the synergies left from what we promised is about five million. What we have done in the budget exercise, we did also increase some costs and hiring to grow faster. this year and also for next year. But we forecast anyway to increase our EBITDA this year. I don't want to tell you now in which measure. We are not planning to do any restructuring now. We did a reorganization at the beginning of January with new people in charge of sales and operations. We made some modifications to the organization and we did some streamline. We still hire people into one, but we tend to delay some other hiring because today everybody works from home. It's very difficult to train people when they join the company, but they cannot go to the office. So we hold on on the new hiring. and therefore also the cost of people this year will be slightly lower than last year because of this holding on hiring. We have a cost decrease in traveling, as you can imagine, and some cost decrease to the show, participation to shows because there are no shows. So from the profitability standpoint, the company will deliver a good, healthy data this year. But we are not casting down costs. As I said, we keep our employees very motivated with the bonuses, paid bonuses, the salary increase. We applied the salary increase to the old company. We are not firing people. We are giving new goals for innovation. So there is some people always that you can reduce if they are low performer. But this doesn't mean a major refraction or anything. You know, we are running the company quite lean. So you may expect anyway that the synergies you promised last year will kick in this year.

Okay. Okay. I think that is for me. Thank you very much. And take care. Thank you. You too.

Thank you. The next question comes from Anthony Dick from Pogon Park. Sir, please go ahead.

Yeah, thank you. Good evening, Amadil. Good evening, Hesha. I had a couple of questions. Most of them were answered. But if we could just do a follow-up on the impacts of COVID-19. So we've talked about the impacts on the commercial side of the business. But what about the impacts on the delivery side? If I remember correctly, you had quite a strong backlog at the end of the year, 2019 of about one year has failed. Will you be able to deliver what you were planning to deliver on that backlog or will that be impacted by the crisis and social distancing and any confinement measures?

In our business, our design, we have a typically strong backlog, a big backlog. But the customers, they can call the backlog according to their subscribers time by time. Some people, even the backlog, they call it in two or three years, not in one quarter. If you look at our backlog, you could be impressed by the size of the backlog. It's quite important. But... that backlog is difficult to forecast when will be delivered because depends from the call also from the customers so and then we have pipeline and the pipeline as well is quite the solid the pipeline is the contract that are under negotiations as we speak i don't want to hide the fact that if you have three or four people going to the customer and they have three or four people on the other side with the legal, with the technical people and say it's much faster to negotiate the contract and to sign. Now everybody is captured. Each one is at their home. So legal is at their home. It's more complex to sign contracts from the pipeline. But if I look at the pipeline and the back of the for Q2, you know, I'm quite, I don't say relaxed, but I feel that the pipeline and the backroom is quite strong for delivery in Q2.

Okay?

Okay. COVID-19 has introduced one kind of anxiety in everyone, okay? Not so much in me as a person, because I have a a good way of making forecasts, calculating. Just to tell you, 2019, our budget was 105.6 million, and we did 106.4, or something like this. So, you know, between the budgets, what we delivered, we were very close. And it's not easy in the industry to find companies that really perform according to budgets. And I've done the same the previous year in my history. But this time, with this COVID-19, every day, there are new announcements and new things that happen. Some customers are scared to make big investments. What we are lacking is, first of all, for the consumption of content. And second, our customers that are telecom operators or media companies are quite solid. You know, besides the fact that what I told you in Mexico that the government has to deliver some content for free, in general, the telecom companies, also due to the usage of the Internet that they distribute, you know, the telecom companies are doing quite well compared to the situation in the market. So we have no risk of being paid also. You know, you have to consider when there is a, at a recession like this one, many types of businesses, you know, all type of business, the customers try to keep the cash tied to the heart and they don't want to pay or they cannot pay. And we are with the customers that are a very big corporation, like, you know, the biggest customer we have is Deutsche Telekom. So they are very solid. They pay their bills. And so, overall, the whole chain of our business is overall quite good. But COVID-19, anyway, is a question mark for everyone. So, it makes me a bit not anxious because I'm not anxious, but a bit nervous about giving forecast numbers. You know, you have to come out from this call with the, you know, the true feeling, the one that I had, the company is solid, they are resilient to COVID-19, did a good Q1, okay, and from profitability standpoint, we did better than Q1 of last year, quite better, and, you know, we will do a good Q2, but as we go into Q3 and Q4, to give numbers, I had feelings, but to give numbers is not fair.

Okay, thank you. Also, I noticed that there were no NFC-licensed revenue over this quarter. I mean, obviously, it's a more volatile activity, but is there a reason that this line of business would be more impacted by COVID than the others, or not at all?

Well, NFC has always been, in French, in the sense that we don't control data. that revenue that comes from France Brevet is not core business. Of course, when it comes, we accept it quite well. Today, I guess, you know, the account that France Brevet is focusing on are difficult to take to court or to do some activity on this patent activity. I can have Richard to answer the question. He's in contact always with Transparency and we'll give you some comments on this.

So actually I wouldn't call it a line of business because it would be a line of business and it would be mostly in our control and us operating. But actually except for me and part of our general counsel, Nobody in the company is working on this because this is the underlying technology. We don't use it anymore. So it's really from time to time that France Brovet is successful to close a new license and that will generate a peak of revenue from one quarter. So there is no conclusion to draw on the fact that there was no revenue from NFC in Q1 this year. No, having said that, our partner is in business. Indeed, COVID-19 is making things more complex and slower, because you cannot meet people. Of course, when courts must be engaged, they were closed. I'm thinking about China, for instance. And the people you target, the companies you target, they have much more urgent matters to deal with, which is a continuity of delivery and business. So we remain completely confident on the fact that France Gourvet should be able to find new licenses in the future. Just as usual, it's difficult to predict how much and when it will occur.

Okay, thank you. I have a last question on the recurring nature of the business. You mentioned your subscription business and the fact that you signed contracts for three years. Does that mean that usually after the three years are over, the contract ends, or is it most often extended and goes beyond these three years?

No, but these type of contracts, they go over, you know, the customers, they engage themselves for three years, you know, The good part of a subscription contract is that if and when the customer wants to stop to pay, we just put the plug. He is not the service anymore. He is in deep trouble. The loyalty from the customer increases much more when you have a subscription. And typically, it reduces. And, you know, we are going forward with the subscription value because it is the interest of the customer because they offload the capital investment. Instead of doing a capital investment, to have our services become an op-ed, that is a much lower front price. They don't have to do a big investment to start a business. But then they go on with... with the contract also for the future years. Let's say that our recurring revenue is made by several things, and some are also royalties, some is maintenance. The subscription-based contract is growing at a very rapid pace, and, you know, it will make our long-term revenue strongly predictable last year we did on the current value 56% of our business and this year also it will grow I don't want to indicate you by which percentage but it will grow the subscription business itself as I said it grew 68% from Q4 of 2019 but over the whole year It's a small amount still compared to the total revenue of the company, but it will grow more than 100%. And we will push ahead also in 2021 to have more and more customers on subscription. And that will allow us to take also clients from our competitors, increase our market share for the years to come.

Okay. Thank you very much. That was my question. You're welcome.

Thank you. We have no more questions for the moment. Ladies and gentlemen, if you wish to ask a question by phone, please press 01 on the telephone. Okay. We have no more questions by phone. Back to you for the conclusion, sir.

Okay. So, I think... We already shared also our conclusion. You know, the business has been, for me, has been a good satisfaction to see the resilience to COVID because when we were going out to work from home, I have to tell you, I was a bit, you know, I had some concerns. Our employees reacted very well. They are very motivated, very enthusiastic anyway to work for Verimages because they see the opportunity for future growth. And as we said, financially, we are quite solid. So I think we will be quite satisfactory to our investor going forward because we will overperform the industry. Thank you very much for coming to the show. Good evening.

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.