Verimatrix S.A.

Hello everyone, welcome to the presentation of Verimatrix which will cover the activity of the second quarter of 2024 and then the financial results of the first semester. Before starting, I will introduce you to all the excuses of Amedeo D'Angelo who was supposed to participate in this call and unfortunately there is a little plane problem which is very late and therefore he is still in the air so he will not be able to join us. So, as I told you, we will look at the important points of the quarter from a business point of view. We will also focus on the second quarter in terms of turnover, on financial results, and then I will finish with the 2024 prospects as we see them today. We will start with key elements, and I will start with something important for Verimatrix, in light of the transformation of the Group. Since, as you know, we are trying to transform the Verimatrix turnover by increasingly orienting the business towards much more recurrent revenues. And for that, we rely on two important offers. The first is a SaaS offer that covers the protection of video content in streaming mode. And the second is a cybersecurity offer that protects applications and connected objects. On this last point, Virematrix needs to build its recognition and legitimacy on this market. For a very simple reason, it is that through the protection of applications, we can address this solution to our historic customers, who are essentially telecom operators and media customers, but we can go and look for new customers. And as you know, we are trying to address banks, all services and the automotive sector. In these new sectors, Verimatrix is not yet quite recognized and that's why we participate in a number of workshops and we communicate a lot about all the trophies or awards that we can have concerning our new offer. We talk a lot, you have here a number of rewards that we have that we had in the first semester, which covers the offer of Counterspy. Counterspy is very interesting because it is our video protection offer on the OTT and Counterspy is the analytical brick that allows us to potentially identify the attempts of piracy and above all to neutralize these attacks. We have been recognized as a major player in this sector, with a fairly high execution quality and functional quality. We are also beginning to see some recognition in cyber security-related workshops. I will come back a little further, we have reoriented our marketing investments to be a little more present in these dedicated salons that can increase, I would say, the visibility of Verimatrix on the application protection market. So all these elements are very important, they are very important because when we respond to calls for offers, this type of recognition or this type of reference are often asked by our future potential clients. So a good first part of the year in terms of recognition. We continue to be always referenced on market studies. Here, what you have is the update of a study done by Quadrant, the Sparx Matrix, which specializes in the protection of applications. I think I shared with you two or three quarters ago the 2023 framework and the one from Q1 2024 has been published. The good news is that we see that Verimatrix is at the top right. So what does it mean at the top right? When a company looks for a supplier to protect its applications and that it looks, among other things, at this type of study, to be positioned at the top right, it means that we are recognized as a function, as an efficient solution, easy to install and especially very innovative in terms of technology. In other words, there is a good chance that Verimatrix will be consulted to respond to this offer. And overall, when you look at the four players who are at the top right, these are the four players that we regularly find in the offer calls to which we are led to respond. So here we are, we have progressed. We are now among the top two leaders on this framework, which is a very good news for us and which is also a recognition in relation to all the investments and efforts made on cybersecurity. So, other important elements. I told you about Counterspy earlier. We have improved our offer in 2023, Counterspy, to enrich our range of products, of video content protection on the OTT, in streaming, and we have started with this new deployment that came out in 2003, marked a certain number of commercial successes that you have here, which made the choice to take the StreamKeeper solution with this CounterSpy functionality, which gives us an important competitive advantage on this market segment. And on the Extended Threat Defense part, you will see it later, we have also started to embark on new logos over the first two quarters of the year. New logos that are interesting because they are not necessarily customers who come from the video sector, but who are customers who comfort our positions on new segments. Since we are talking about new segments, you have here a few examples of new clients that we have signed at Verimatrix. So on the anti-piracy part, which includes traditional broadcasting and also all our new video content protection solutions on the OTT. You see that we have embarked on a number of new interesting clients. I will mention one called Airtel. Airtel is the second largest telecom operator in India. We were already present in India, which helped us. Airtel launched an important offer call at the end of the first quarter and I can tell you today that we won this offer call. A solution that will be deployed on the second part of the year. This example is interesting because it also shows that even in the traditional profession of Verimatrix, there is still a supported activity. We know that it is a mature market and that growth relays are more the streaming part. But with the example of Airtel, we see that we are present in geographical zones where large operators continue to invest in their APH television infrastructure. So a very good commercial success. And then we continued to diversify more or less in all regions. You can see that we have signed clients on the Europe area, on the North America area and then also on the Latin America area. We will come back to this a little later, but the Latin America area is a very dynamic area. at Verimatrix for several months now. It is this region that is currently pulling the performance of the turnover and the financial performance of the company. RBS TV is a Brazilian television that has equipped itself with Verimatrix solutions. If I now go to the cybersecurity part, which we call XTD, we continue to deploy on sectors that are not necessarily the historical sectors of Verimatrix. We signed a bank, for example the Bank of Cyprus, We signed a client in England, which is the one in the middle, I do not dare to pronounce the name, but overall it is a music application that allows you to convert your voice through a digital application. This company needed to protect this application because there is a lot of personal data which are contained in this application and they have therefore retained the Verimatrix solution to protect this application. Other elements Other important elements, we are working more and more with companies, we can quote Tutum in Latin America or European Lisa for the IMEA part. Here we are dealing with companies that actually provide content distribution platforms And at the same time, they are looking for, to enrich the value of their platform, they are looking for protection solutions associated with this platform. The protection offer of the Verimatrix application fits perfectly into this strategy and it is also an important form of reference for us, for our prospects, for our prospects to come. We will now move on to the review of the turnover. I remind you of the great challenges when we started the transformation of Verimatrix. We only had 35% of our revenue that was recurring. And in this 35%, most of the recurring revenues came from maintenance revenues that we received from our customers on the perpetual license sale that we had carried out. Our goal in the long term is to reach two-thirds or 70% of total recurring income. One of the important indicators is the growth of recurring income from our new SAS offers on the OTT part and on the application protection part. In the second quarter, we see that we have our annual guaranteed contract revenues We are at more than 25% growth compared to the second quarter of 2023. This is a satisfying element because it guarantees the growth of our future recurring revenues over the next four quarters. This is the determining element. I remind you that we gave a guidance of more than 20% growth of the ARR over the entire year. You will see a little later that, given the performance of the first quarter, we are very, very well committed to achieving this objective. So when we look at the structure of the turnover in detail, we achieved a turnover of 16.6 million. So it's the same turnover as the turnover of the second quarter of 2023. However, the nature of this turnover is much more interesting for Verimatrix, since we see that we have a part of recurring revenues that is higher than non-recurrent revenues. The non-recurrent revenues, I remind you, are the sale of licenses, it is the rebates that we touch on the decoders and it is a little bit of professional services. We know that non-recurrent revenues, as they are revenues that are essentially sitting on the mortgage television market, these non-recurrent revenues are structurally declining at Verimatrix. So the whole game for us is to manage to compensate, and even more than compensate, the decrease in these non-recurrent revenues by a growth of two figures of recurring revenues. So that's what happened in the second quarter. We have 14% of total recurring revenues. with a stabilization of maintenance, but above all with a growth of 33% of subscription revenues, which is the result of the commercial successes of the previous trimesters. We also see that in the structure of recurring revenues, the share of subscriptions is now higher than maintenance, which was not the case until the end of the 2023 exercise. So, two elements of satisfaction. We have passed the bar of 50% of recurring income and subscription revenues in recurring revenues are higher than maintenance revenues. So we are completely in line with our trajectory. of transformation. And concerning ARR, you see that the subscription ARRs are doing well since we are making 25% ARR growth compared to the second quarter of last year. So what does that mean for the first part of the year? So not right now. Before, we will look at the evolution of ARRs, which is our main indicator. So you see that every quarter, VERIMATRIX increases the annual embedded revenues guaranteed for the next 12 months. And that's our goal. We must see every quarter an ARR increase higher than the previous quarter. So here we have two markers. We are almost at 17 million, we are at 16.8 million by the end of the second quarter. So we can compare it to Q2 2023, which was at 13.4. We can also compare it to the last quarter of the year, to Q4 2023. So since the beginning of the year, we have increased by 2 million in absolute value the annual value of our subscription contracts. I remind you that our goal is to increase by 20% the amount of ARR from Q4 2023. So we are already at more than 13% growth over half the year. So that's why we are very confident about our growth goal of more than 20% over the entire year. So how does that translate into the first semester? So in the first semester, we remain in slight growth of 1%. We had a first trimester that was in slight growth. And you see that in the end, the whole dynamic of revenue transformation that I explained to you in the second quarter, it is confirmed in the first quarter. We have passed the 50% revenue bar, we are at 55%. And we have subscription revenues of 8.6 million on the first quarter compared to 8.5 million on the first quarter of last year. So we have subscription revenues that now become higher, which is very interesting for us because basically the dynamic of recurring revenues, we know that maintenance, we managed to stabilize it on the first half, that's excellent news and it's thanks to the sale of perpetual licenses that we continue to deploy to our most important customers. But above all, with this new distribution of turnover, we will be able to accelerate the growth of total recurring revenues. So to compensate more and more strongly for the decrease in non-recurrent revenues that we expect over the next few quarters. So, a good performance over the first six months of the year in terms of turnover and in terms of revenue structure. A little focus on the distribution of turnover. This time, given the two important product lines of Verimatrix, you see that the video part, which we call anti-piracy, remains important and it is very resilient. Why is it very resilient? It represents 92% of the turnover. It is a product line that is in full transformation since it is the one that carries the entirety of the traditional business of Verimatrix. But despite that, we have limited the drop to 1%, which is our short-term goal. Our short-term goal is to limit the drop in anti-piracy before recovering and finding a permanent growth. In addition, we have SweatDefense which continues to perform well. So on the cybersecurity part, we have a growth in the turnover of 21%. It still represents only 8% of the turnover, but this turnover has increased over the previous trimesters. So we are in full validation of the strategic orientations that Verimatrix chose at the end of 2021. By geography, I was talking to you about the dynamics of the region. You see that the most dynamic region today at Verimatrix is the Latam region, South America. We have a very strong growth of 62%. And the good news is that we have a very strong growth both on non-recurrent income and on recurring income. The two important areas in this region are Mexico and Brazil for Verimatrix, but we are working on other opportunities for countries outside of the two that I just mentioned. On the US part, we have a little disappointment. It represents 14% of the turnover. We expect to find a greater growth in this area. This growth depends heavily on our ability to raise new customers on the offer of cybersecurity. This is one of the priorities we have today in this region. The Asian region is 11%, so I told you about this new client for which we had won an important offer call in India, we do not see it yet in the turnover. So we are waiting for the share of Asia in the turnover of Verimatrix to increase over the coming quarters. So, we will now move on to profitability, to the V&M results account on the first semester. So, we replant the decor, a revenue in slight growth. The very good news is EBITDA. You see that EBITDA has increased in a very important way at Verimatrix. We made 400,000 dollars of EBITDA in the first half of 2023 and the almost equivalent turnover on the first half of 2024. Verimatrix generated an EBITDA of 1.7 million. So an important progression. I'm just going to make a little comment on the pressure on the gross margin, on the gross margin in percentage. This pressure is partly linked to the increase in amortizations linked to the important R&D projects that we had, especially in 2021, to prepare for the launch of new offers for OTT and cybersecurity. So it's a non-cash element that explains the evolution of the gross margin. Apart from that, the margins are doing rather well. The other element of satisfaction for us is that all the optimization projects that we had launched from 2022, which we accelerated in 2023, We reviewed the go-to-market or the presence in Asia Pacific. For example, we continued to rationalize, to reorient our investments in marketing to have a more targeted presence in the field of cybersecurity. We also continued to optimize our development and support resources through the centers that we deployed in Hungary and Mexico. And then we also continued to optimize our back-office functions. All this contributed to a significant decrease of our operational expenses over the first semester, which has contributed to improving the EBITDA of Verimatrix. And you see that if we go down at the level of EBIT and at the level of the adjusted net result, we have a significant improvement in performance, once again with an almost equivalent turnover. What does this show us? It shows us one thing, we have sized, we have dimensioned the structure of Verimatrix to be able to have a very strong contribution of revenue growth points, which we expect over the next quarter, thanks to the growth of our recurring revenues. So every dollar of growth, which will be generated by the company in the future, will have an important direct contribution to the profitability of Verimatrix. We will now talk about cash flow. We have a fairly high consumption of cash in the first part of the year. We are talking about 10 million in cash consumption. Usually, we always have a cash consumption on the first part of the year at Verimatrix. But here we see that we have a BFR that has degraded significantly. There are two important elements to remember. The BFR degradation is very clearly identified on a customer balance for which the payment deadlines have been extended. So I told you about the dynamics of South America earlier, it's no coincidence. It should be noted that these are customers for whom the fees are, I would say, a little more complex to obtain compared to other regions. So that's why we had a little degradation of our BFR and our customer balance. The good news that I can share with you right now is that on the first two weeks of July, in fact, on the customer payment delays that we had at the end of June, we have about 30% of these customers that we have already cashed in. So let me tell you that we have a plan of action in place and that is beginning to bear fruit, but it is clearly a performance for which we are not satisfied with Verimatrix. There is no particular impact in terms of covenants and we are waiting to recover and find a level of BFR, more or less normalized, over the next two quarters. In terms of balance sheet structure, there are not many changes. The debt structure has not changed compared to the first quarter of last year and compared to the end of the year. Once again, the priority for Verimatrix is to find a normative BFR and you also know that by increasing the power of subscription revenues, we will have a BFR that will structurally be in decline over the next few years. So let's move on to the perspective. So I remind you, as I explained to you, the anti-piracy product line is made of broadcasting and OTT. Broadcasting is still much more important than OTT at Verimatrix. Our strategy is to raise subscription offers on this product line to be able to limit the decline of this business line, which happened in the first semester. On Threat Defense, on the other hand, we are more on growth targets with two figures. as we generated them in the first semester, growth only based on subscription offers related to the protection of our applications. And then, over the whole year, we are aiming for a growth of 21%. We have already achieved 13% over half of the year. An obviously improved EBITDA. I remind you that the EBITDA for the whole of last year was 1.3 million. You can see that we are already at 1.7 million at the end of the first quarter, so we will be able to confirm a significant improvement in EBITDA by the end of the year. Once again, the big drivers of the value of Verimatrix are a lot of innovations. We continue to invest heavily in R&D and in the field of cybersecurity. We plan to invest about 4 million dollars on our R&D developments this year, which is slightly lower to 2023, but which remains a pocket, I would say, of important investments. We see that the elements of transformation are beginning to deliver the first results and that this transformation is not done to the detriment of profitability, since we are improving the profitability of the company. And finally, we have the important support of the Board of Directors and our shareholders, so a structure of shareholders that has not moved at Verimatrix. Voilà, j'en ai terminé pour la présentation. On va maintenant ouvrir les questions. Vous avez eu la possibilité de poster vos questions sur le Q&A. Et puis, à la fin, s'il y a des gens qui souhaitent poser des questions par téléphone, ça sera possible également.

On va ouvrir le Q&A. So, we have a few questions. A question about the course of action.

It's always a difficult question. How do you explain the weakness of the volatilization, while the main shareholder has not moved his position with 29.4%? I don't have many comments to make on the course of action. What is certain is that Verimatrix announced an important transformation plan a little over two years ago. This transformation plan takes a lot of time anyway, since the starting point, once again, It is a very important traditional activity that is on a mature market and a market that is gradually replaced by recurring income. So it's quite disruptive. it always takes time and it has an impact on profitability. So that's how I can explain the weakness of the course and I believe that for us the only important answer that we can post is our results and our performance, quarter after quarter, which will convince the market of the relevance of the value of Verimatrix. So, then we have a question on Netflix. Is Netflix a potential prospect? I will answer, I will make a fairly general answer. Yes, of course, Netflix is a potential prospect, but it is not a client of Verimatrix to this day. So, the turnover of the first quarter remains stable, but shows a strong improvement in the EBITDA. Do you think there will be a growth in the turnover in the second quarter that will catch up with the S1? So, that's a very good question. Once again, what is important for Verimatrix is the growth of recurring revenues and the growth of recurring revenues embedded. So for me, from the moment we are able to deliver a growth of subscriptions greater than 20%. And you see that in the first semester, we are beyond this goal. For me, it is a guarantee that in the long term, we will be able to generate a permanent growth. The element of satisfaction is that we make more than 55% of the revenue in the form of recurring. On the other hand, that means that we still have 45% which is non-recurrent income linked to the ability to go looking for, to win offers on the world of paid television. So there is a volatility on this income which is more important. That's why we don't necessarily want to communicate on or get involved right now on a growth, a growth on the second semester. Once again, if we do subscription growth, If we continue to see this performance of growth in subscriptions, we will be online with our indications, including EBITDA.

Regarding the decrease of 10 million in the treasury, do you intend to recover it entirely?

No. What we intend to recover is the element of the working cap. At the moment, we will continue to consume a little bit of cash at Verimatrix. So, in the second half, there will be a recovery of operational cash flow, but at the moment, we are not yet positive cash flow. at the company level. We also have a question about the churns, about subscriptions. Historically, we are on 10% of churn. What is 10% of churn? It is that we lose 10% of our ARR at the end of the previous year, on the year in progress. When I look at the performance on the first semester, we are more or less in line with this indication. So, how do you see the financing of debt coming to maturity in 2026? Do you think that the risk that Verimatrix represents always deserves such a high interest rate? So, without making a small note of humor, you're right, it would be better if we could finance ourselves at a lower interest rate. I think we all agree on that. The people who finance us today are mainly a bilateral line with Apera. These are important partners who have supported the acquisition of Verimatrix, among others in 2019. These are people who trust us and it is important to have partners like Apera today. So, on the debt financing strategy, I will not answer you, it is an element that will be addressed in 2025, but it is an element that will be combined between the return of growth, a continuity of improvement of profitability, an improvement in the production of cash flows, which will put us in a position to look for an adequate refinancing at an attractive price. an operation that has not actually started at this stage. And then I have an interesting question. Have you made the object of a purchase or merger offer? The answer is no. Was an exit from the coast discussed by the board? No. It's not an element of discussion. The discussion elements with the board are much more oriented towards the execution of the strategy. The success in new solutions, I would say the dimensioning of investments is realized to achieve the objectives and this is one of the main roles of the administration council of Verimatrix to this day. So how do you explain, there is a technical question, how do you explain that the ARR divided by 4 of the subscriptions is lower than the number of subscriptions of Q2 2024? So there are elements in the subscriptions that are variable. So what is the standard model? It's a subscription, a loan. A loan that is based on a certain level of consumption for our customers. If our customers exceed these levels of consumption, there is, so we don't do it every month, but there is regularly a catch-up of invoices. It's like telephone bills somewhere. These elements can play on the difference in the turnover between the amount you have on the RR divided by 4 and the recognized subscription income. This is an indicator that we follow a lot internally because it allows us, at the time of renewal of contracts, to renegotiate the mortgage with the customer at the highest if the latter is structurally exceeding the mortgage. So that's a flexibility that we want to keep. So do you plan to develop in China and more generally in Asia, outside of India, which works well? So that's a very good question. We work outside of India, we work a lot with distributors. So we're not going to lie to ourselves, Verimatrix is a company that does which is a medium-sized company, even small in terms of turnover. So the investment effort to be made to develop on Asia-Pacific zones is very important. So we chose to have an indirect distribution on the Asia-Pacific zone. with the exception of India, but we are already working with the two largest operators in India, which provides us with a significant part of the turnover and which allows us to finance this local presence that we have. Moreover, the reason why we won this offer with the second Indian operator is also because we were already present with its main competitor. And it's also because we had an organization based in India to even, I would say, to respond and to give comfort in terms of support to its customers. When should profitability be adjusted to become an attractive company for investors? So yes, we are making losses. So today we are making losses for two reasons. There is the weight of the debt which is important. We still have restructuring costs, but once again, these restructuring costs are much more useful. In fact, the optimization of our structure costs. So in fact, profitability, as I explained to you earlier, it will come naturally with the production of growth, since once again, the future growth of Verimatrix will be very, very contributing. So, there are a lot of questions tonight, that's good. So wait, are some of your subscription contracts pluriannual? Yes, most of our subscription contracts are pluriannual. and our important value contracts with large telecom operators or with banks are often between two and a half and three years in terms of period. That said, we have clauses that allow us to revise this subscription in the event of overconsumption, as I explained earlier. But we actually prefer to have subscription contracts that give us visibility of the turnover on a medium-term horizon rather than limiting ourselves to annual subscriptions. Then, a very interesting last question on whether we would not be interested in making an alliance to have a better distribution and a better go-to-market. These are topics of reflection that are in progress at Verimatrix. We already have a lot of partnerships to develop on the video part, anti-piracy, and we are now putting in additional efforts to deploy a network specialized in cybersecurity offers, since we are convinced that it will be more efficient for us to develop our activities through distributors. Basically, we're going to do both. We have a hybrid model, we have sellers who are more and more specialized in XCD solutions, who are in countries where we are already well implanted. and we will have more and more distributors that will allow us to extend our activities to countries where we are less present and for which the size of the investment would be too important if we wanted to develop ourselves through direct distribution.

I think there are no more questions.

No, there are no more questions, so I don't know if there are any questions by phone that we could answer.

No, Jean-François, there are no questions for the moment.

Very well. Well, listen, thank you very much for your attention. So you can always ask questions on the site We will be happy to answer it quickly. I wish you all a very nice summer and I give you an appointment in mid-October for the publication of the turnover of the third quarter of 2024 of Verimatrix. I wish you all a very, very good evening. Thank you. Goodbye.