Axway Software : Transcript - Analyst Conference of 2023 Full-Year Results

2023 Full-Year Results

Transcript

2023 Full-Year Results

Transcript

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Axway 2023 Full-Year Results

Transcript

February 2024

PRESENTATION

Arthur Carli: Ladies and gentlemen, good evening, and welcome to Axway Software 2023 full year results presentation. My name is Arthur Carli, and I'm in charge of Investor Relations for the company.

I'm here with you today to remind you a few things. First, you should note that this event is live and is being recorded. A replay will be available on Axway's website as early as tonight. Second, you should note that this presentation contains forward-looking estimates that are subject to risks and uncertainties, all described in Axway Universal Registration Document.

With that, I would like to hand over to our CEO, Patrick Donovan.

Patrick Donovan: Thank you, Arthur, and thank you all for joining us here today. I'm really excited to be coming to you today to describe two very important things for Axway. First, a fantastic year. We've had record profitability, very strong growth and the return of free cash flow. And we'll go into more details about that over the coming - first part of the presentation.

And then second, we've made an exciting announcement about 15 minutes ago. So if you haven't seen it yet, you'll look forward in your e-mail or on the website, if it's posted there yet. We've made the announcement that we have entered into discussions, exclusive discussions with Sopra Steria to buy the majority of the software assets of Sopra Banking Software. And we'll come at the end of the presentation and go through those details.

So first, I've got Roland and Cécile with me here, and we're going to go through the fantastic 2023.

So in 2023, we've had very solid performance for the second year running. We've been able to grow revenue and grow ARR. We've increased our profitability as planned, and we've also had the return of free cash flow to the good level as planned. We've built an efficient organization that allows us to achieve these goals. And we've also addressed our portfolio and addressed certain parts of it that needed to be addressed, and we've also added to our portfolio to give our clients a better experience and the richer experience with our products.

And we did all this with a high employee engagement and strong customer satisfaction. And because of this, we're able to translate that into very strong financials. In 2023, we were able to grow 5.8%, very similar to the growth of 2022. We've had a record profit on operating activities at almost 20%. We were able to achieve this goal of 20% in 2023 because we had a better than expected fourth quarter, having a mix of a little more customer-managed contracts than expected, and that was able to drop to the margin as we had the run rate of a company of expense coming out of the year at 20%.

So we're very pleased with that and being able to achieve our goal a little early. We've had a very nice earnings per share for the - for 2023 at €1.71, and as I said, our free cash flow hit roughly 6% of our revenue, right in line with our expectations. And Cécile will go through more of that in her presentation. So we have the financial capabilities where we're ready for the next phase of our program.

And with that, we always do it with the same three constituents in mind: our customers, our employees and our shareholders. And as we finish the 2021 to 2023 business plan, we've been able to achieve almost all our goals for each of these three constituents.

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For our customers, we've seen year-after-year improvement in the NPS. We've been able to offer a stronger product portfolio and we see increased usage of our products within this strong customer base. For our employees, we're tied for the highest employee engagement score in our history of tracking this metric. And we've had a very stable workforce with 13% attrition, which is right around our expectations for normal run rate.

And for our shareholders, we've had 2023 at the growth and profitability levels exceeding our guidance, and we've created a strong financial structure that we can look for what's next in our programme.

I wanted to spend just a quick moment on our strengthened product portfolio. In fact, I believe in 2021, I talked to you about rationalizing our product portfolio and really running the products inside Axway's portfolio with the discipline needed to be a portfolio-based company. This year, we've added to our portfolio, and we've done that within our product lines. So we've talked about before, but it doesn't hurt to mention them again.

We've added AdValvas, which gave our B2B product line e-invoicing capabilities. And especially in the European market, we're going to see the regulations come through that we need to address with our B2B capabilities in our product.

We added Cycom Finances in the second part of the year, which expands our AFAH Solution or Financial Accounting Hub and provides additional capabilities to the users. So we are excited by these external expansions.

But we also now are doing internal expansion. So for '21 - 2021 and 2022, we've been building a new product under the API Management product line called Amplify Enterprise Marketplace. And we had, in 2022, launched it with some early adopters had great success, and now we've been training our sales team and really launching this product in earnest and have been able to build a very nice pipeline and closed approximately 15 transactions over 2023, and we see this growing as we move into 2024. So it's been exciting that we've been able to address different things within our product portfolio.

And overall, for 2023, I'm just really pleased where we ended up, the $319 million of revenue, very strong profit and operating activities and continued subscription growth and ARR growth.

So I'll go ahead and turn it over to Cécile and let her go deeper into the 2023 figures.

Cécile Allmacher: Thank you, Patrick. So going through 2023 income statement, you see the total revenue is up 5.8% organic and 1.6% on total, higher than the guidance, which we announced back in January in our press release.

Our cost of sales decreased around services and subscription cause inconsistency with the revenue trend. Our gross profit is slightly higher at 72.7% versus 70.9% in 2022. Once adjusted from the currency impact, which is €3.6 million, we were also able to pull back some of the operating expenses, as planned.

Sales efficiency ratio improved, while we continue to grow our bookings and to boost our go-to-market activity. Our R&D on core products continued to decrease and we were able to focus our investment on our incubation zone product. We were consequently able to generate a higher margin at €62.8 million or 19.7% of our revenues, up from the 14.7% of the prior year.

Our operating profit is inclusive of about €15.2 million of amortization on intangible assets, non-cash stock incentive expenses as well as restructuring costs. Overall, our net profit finished at €45.8 million or €1.71

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per share versus the minus €40 million or minus €1.85 per share in the prior year, which by memory included €82.1 million write-off of unamortised goodwill, which is non-cash.

Let me now go into detail on the revenue by activity. So license revenue dropped 13.7% organic, which is in line with our forecast and the confirmed move to subscription. The license activity is now mostly based on specialist products that are not available for subscription.

Maintenance revenue decreased 19.4%, which was expected with both the decrease in license revenue and the migration to subscription but is still showing a satisfactory level of renewal with a 98% rate. Subscription is growing 27.4% organic with three strong first quarters.

When added to the maintenance revenue, we reached 85 - 86% of our revenue under a recurring contract. So in terms of product revenue, we are growing 6.7% organic compared to last year.

Service revenue remains relatively stable organic. We had a lower activity level or approximately 15,000 days less delivered compared to 2022, resulting in an annual revenue of €36.8 million, which is a 0.6% organic decrease. This is stabilizing as anticipated at around 11% of Axway's total revenue.

Overall, our revenue finished at €319 million, up from the €314 million reported in the prior year.

So focusing now on the subscription revenue. We observed a growth in both Axway managed and customer managed contracts. By memory, Axway managed as a SaaS revenue recognition pattern over the contract term, whereas customer managed is an on-premise subscription with an average 50% revenue recognition upfront as per IFRS 15.

So Axway managed increased 16% organic with both the full impact of the contract we signed back in 2022 to which renew and new need to be added. Customer managed increased 41.7%, with €93.5 million of upfront revenue versus €78.7 million back in 2022. All this resulted in a 27.4% organic growth, confirming that the strong recurring base with the existing contracts and the renewals start layering as planned.

A few words on our balance sheet. Our cash and cash equivalent finished at €16.7 million with a net debt of €75.6 million. The increase in net debt is mainly due to the acquisition of AdValvas in Belgium and Cycom in France, which Patrick mentioned earlier, and to the shares buyback to serve our free shares plans.

Our DSO went up to 182 days as we have added more customer managed and premise subscription contracts. If we retreat the unbilled part of our DSO, the DSO is down at 76 days for 2023 versus 68 days in 2022. This is mainly due to the increase in invoices we issued in December, but which are not due yet. And this is due, as you can imagine, to a high volume of signatures in December. We don't have any issue from a cash collection standpoint.

Our current deferred revenue, which is mainly made of maintenance and subscription ended at €49.1 million, which is decreasing compared to last year, mainly due to the maintenance decrease. Our assets increase is mainly due to the goodwill accounting for the acquisition of AdValvas and Cycom and by increased account receivables.

Our equity mainly includes the dividend payment for €8.4 million and shares buyback for €4.4 million.

Our cash flow now. So for 2023, we are down €1.8 million compared to 2022. Our EBITDA has significantly increased in 2023 and reached close to €70 million, improving as well our net working capital, which is increasing by €7.5 million. Free cash flow is also showing a nice increase of €16.6 million, as anticipated.

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Our remaining two banking covenants were met, and as confirmed, we still have the availability of our credit line to use, should we need it.

Let's now do a quick focus on the free cash flow chart, the one you know, and we always go back to. As shown on the graph, free cash flow started improving last year. And as anticipated, is increasing nicely this year to reach 6% of revenue. We expect this to continue improving in the coming years with the layering of the annual billings from the subscription contracts.

With that, I thank you for your attention, and I hand over to Roland to provide your focus on customers and market trends.

Roland Royer: Thank you, Cécile. Thank you. Thank you, Cécile, and good evening, everyone. I'm actually extremely happy and proud of the results of last year, results that has been built by an extreme focus, energy and discipline of the Axway global team.

Our customers continue to be satisfied, renewed high rate and are expanding their usage. We are attracting new customers with historical use cases and new cases with our product and our regions all performing well and the distributed GMs model is working, allowing them to deploy the right product in their market. So a very good year, and we are ready for the future. But let's look at how we did it.

The first slide and the first KPIs that we are following for years is on - our focus on customer success that continue to bear fruit. The measurement of the customer satisfaction that - and the experience of our customers reached a record high last year with 37 points of NPS, a level that we aim to sustain for the years to come. The overall renewal success rates remains high at 94%, and the average multiple - migration multiplier at 1.9 demonstrate the value of our new product and solution that our customers continue to adopt in the subscription model.

These three KPIs are clear indicators about the value that the customers sees in our product and services and their partnerships and their loyalty is the foundation of our success. However, we are not working only with our historical customers. The competitiveness of our product and the quality of the services also enable us to attract new customers.

Last year, more than 100 customers selected Axway as their partner with an average price - contract price close to 200k per customer that result in 15% of the booking value with new customers. Patrick mentioned the Amplify Marketplace - enterprise marketplace. We had 15 new customers that decided - selected Axway Amplify marketplace to monetize their digital assets.

One thing important that we need to mention there, it came from all the regions and all the verticals. So we had financial institution in the US, utilities in France or retail in South America that selected this product for their digital marketplace. We also had a large contract on our B2B solution in the US and in Europe.

On this one, we've seen a trend and customers modernizing their management of their EDI systems and selecting Axway managed services to do so.

And still on the new customers, we've seen with Axway financial hubs also selecting Axway financial hubs new customers coming from different industries that we had in the past. Industry and also, for example, the largest publicly held company, selected Axway financial hub to modernise their financial system, managing multiple finance back-end and adding to a fast close and financial consolidation.

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The successful - with the success of 2023 came from all our geographies. In North America, we have several financial institutions selected Axway and came from - moved from competition to adopt the more secure and reliable MFT solution. And in South America, our strong leadership position in the API management is continue to be the fuel of the success of the region.

As you saw in the figures in the press release, EMEA had a very, very strong financial success last year, an amazing performance in the region in converting our customer base into subscription offering, adopting the new version and the new solution, but also being very successful in the region with new customers. While we, for example, are mainly known in Germany for our B2B solution, last year we had multiple great success with our MFT and API management, with verticals like automotive, where we're strong but also tech and pharma.

And finally, in APAC, we had a strong year, where we saw the shift of the customer demand really strong to move to Axway managed solutions. That impacted our revenue growth as we don't have the upfront benefit of our customer managed, but that created a nice growth of the ARR in the region.

The success coming not only from the region, but also have been built with the - across the product line, thanks to the new capabilities that each product line have delivered along the year. MFT new releases focusing on security, reliability and leverage the cloud technology that our customers are demanding.

The acquisition of AdValvas, mentioned by Patrick, brought a nice completion of the B2B offering to provide a wide range of capabilities to modernize the customers' B2B EDI system and help them to address the e- invoicing compliance regulation in Europe. And while we continue on the API management place to expand

• to win and expand with our customers, 2023 we really saw the take-off of the Amplify enterprise marketplace for both governing the API across multiple platforms, but also to drive new businesses, a new business model monetizing the APIs and digital assets.

And finally, the very active year as well on the Axway Financial Accounting Hub, where we had several of our historical big European and French customers that move to the new offering subscription with multiple years contract. And the acquisition of Cycom was a very, very important add-on during the year.

Not only because we managed to sign the first contract we had on this product with BNP in France at the end of the year. But for the strategic partnership that we established with KPMG, thanks to this acquisition.

And finally, in closing, as you saw, product, all the regions. When I look ahead, I'm very, very optimistic and grateful to our customers, our partners and our employees for the past year and for the year to come. We have a strong team in every region with a clear focus with strong energy and executing with a strong discipline.

Each product line, led by general manager are staying very close to our customers to define and build the product that they need. And I have no doubt that our continuous focus with our customers for their success will continue to generate our success and our growth.

And with that, I'll hand it back to Patrick. Thank you.

Patrick Donovan: Thanks, Roland. Now I want to talk a little bit about our focus and ambition. And so we - as we're ending this cycle of three years of a business plan, we wanted to go back to our purpose of Axway, Axway's why?

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And our purpose is to be an independent technology provider that provides sustainably growing - technology provider that sustainably grows enduring value, based upon trust, or three constituents, our employees, customers and shareholders.

This purpose allows us to set the building blocks as a foundation for really what is a software house. And so with the purpose, we've been able to leverage that and build out the vision and mission of Axway as a software house, having the product portfolios of MFT, B2B, API management, our Financial Accounting Hub and Specialized Products that have their own unique purpose. And they have their goals and targets for the year.

We set the business plans for these different product lines, and we try to deliver the best value and service to the customer with those specific offerings. And so we continue to refine and look at these product lines and how we can best serve the customer with the products in them, the capabilities in them. And we also have an eye to the market, is there anything that could help grow with our external growth program in each of these product lines.

But as many of you have talked to me about over the years, there has already been a consolidation in a lot of our core product lines in the market. So there's not that many vendors left in each of our core activities.

So as we set the budget and the plans for 2023 with this - and then as we're looking forward to 2024, we set a new purpose and vision and mission with this software house approach and looked, okay, if we have an external growth target, we could look inside our core product lines but also look outside of our core product lines, as we are now running a successful software house.

And we're doing this to continue to grow enduring value for our three constituents. And we're tracking some internal measurements on how we're doing over the course of our journey such like NPS, which Roland mentioned. And if you remember, we actually started with the negative score, the score range goes negative 100 to positive 100. And at the 25 NPS score level, that started putting us in the top quartile of software companies in our space. So we reached that level in 2020, and we've continued to climb after that.

So I'm really pleased with all the hard work by the Axway team on continuing to improve the value we bring to our customers and the experience for our customers. And we still want to target to do better.

For our employees, we started tracking back in 2018, our employee engagement score. And the survey we use has a score level at 60, you have enough of the employees with you in your mission that you could achieve your goal. And we crossed that level again in 2020, but we've hit that high point this year as well with the feedback we've received from our employee group.

And for our shareholders, over the past five years, we've continued to build a very structured approach to get back to profitability levels that we would expect and really take the focus that we've had with the product lines, with the regions, with the teams and looked at ways we could continue to grow organically our business. We needed this financial health to take the next steps.

And so this year, 2023 has been a fantastic year. We've hit $63 million of profit and operating activities, which was a record for us. We had set the target to get to 20%. With the strong Q4 closings, we got there a little earlier than planned, but we're there now, and we don't anticipate looking back. We plan to stay at or slightly above the 20%.

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And when you look at 2013 to 2017, that's the last five-year period that we were under the pure license model and operating as a software license company. So we've been able to improve our average growth rate over the five-year period by a percentage point, and we're able to improve our profitability through our focus in the last five years reaching this year's result. So really pleased with what we've been able to accomplish, the team has been able to accomplish through their hard work over the last five years, and especially over the last three years of our business plan to land exactly where we expected to land coming out of 2023.

So when we started the journey back in 2021, I was here in front of you talking about our medium term ambitions. We wanted to return to a profit of operating activity above 15% because if you remember on the last slide, we started about 8.6%, which was our low, and to gradually move towards 20%, which we're hitting as we come out of 2023. We wanted to sustainably increase our earnings per share over €1 per share.

And if you take out the non-cashwrite-off of goodwill in 2022, we achieved it in 2022, and we definitely hit it for 2023. So we've met that mid-term ambition as well.

But the thing that's always been hanging around my neck is the €500 million target. And let me revisit for a minute why that was important. We believe back at the IPO in 2011 that when we are doing about €200 million of revenue, my memory is a little bad that far back, but in 2011, when we did the roadshow, we talked about getting to €500 million of revenue and to have a strong profitability around 20% or better.

And at that time, we didn't have the financial strength to get there. And over the past years in our journey, that's always been our ambition, we've not given up, but you have to have the financial strength to be able to look in the market and execute on that program. So as we set 2023 in motion and kicked off the budget, we started looking in the market for external growth opportunities to build that pipeline of discussions that in 2024 or 2025, we could start looking how we deliver on this target, that's always been elusive and out there.

So as we look forward to this three-year business cycle, we wanted to maintain that profit operating activities at 20% and always looked on how we could improve. We expect the free cash flow to come back to us in 2024 and 2025, continuing to grow nicely back to normalized levels, as Cécile presented in her presentation, and we want to achieve the $500 million of annual revenue growth.

And so with that, we started on a journey of discussions externally, but we found a great opportunity within the Group.

So within the broader Sopra Steria Group, they have several software assets, and one of them was Sopra Banking Software. And we had this unique opportunity to look within a Group of companies and actually take the core software within Sopra Banking and to look to carve it out and to run it under the software house model that we've built.

So we've made - we've started exclusive discussions to acquire about 80% of Sopra Banking Software's business. This will allow the combined companies to be at scale and for both of them to run as a global software organization, transforming into a subscription model across both businesses. This will allow us to achieve about a total combined revenue of €650 million, well above the mid-term target ambition that I shared with you a few minutes ago.

And the unique thing about this opportunity is what I'm really excited about is both Axway and SBS share a large part of the DNA at their core. We have common values. We have a very common background, both

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started within Sopra Steria, and we look at the world very similar, and they've been progressively building a software company, and this will help them accelerate on that ambition they have. And this is going to complete our journey to being a true enterprise software house at critical scale.

And so a few details on the transaction in SBS itself. So we intend to acquire most of Sopra Banking Software activities from Sopra Steria at an enterprise value of €330 million, which is on a revenue of about $340 million or about 80% of the current SBS perimeter. Tomorrow, Sopra Steria is going to announce the revenues for the broader Sopra Banking Software primer. But we're looking at those products that are software based that fit our model. And so we're going through the process of a carve out now. And over the next coming weeks, we'll have the first view of the perfected carved out business where we can deeply analyze and go the next steps in our planning for the long term.

Let me give you a few key elements about Sopra Banking Software. They have about 650 customers worldwide. We're anticipating this 2023 carved out revenue to be somewhere around €340 million. They operate in about 80 countries and have about 3,500 employees, financial service experts that will come with the transaction and they have about 29 locations worldwide.

They have both a core Sopra Banking Software platform and the Sopra Financing platform that is about - if I remember correctly, about 75% on the core Sopra Banking solutions, with clients like BNP and Société Générale and Barclays and S&I. And on the Sopra Financing platform, they have about 25% of their revenues with customers like Santander and BMW and Mercedes and Xerox. Several of these are joint customers between the two companies.

And we'll look to build, as I mentioned before, a very robust enterprise software house. And we will look at the Axway side to provide the integration activities, and for Sopra Banking Software, SBS, to provide the banking applications. And we'll run each of those in the best way possible for the customer base that they will get the experience that we expect them to get for the long term.

This will be an enterprise software house at scale to ensure our long-term independent project that is the core of Axway's purpose. This will accelerate SBS' activity and transition to subscription and product models and really allow them to run as a software company with the applications that come over. This is going to strengthen our Group's firepower and visibility in the market, and we're going to be able to leverage the 5,000 total employees and experts around the world.

And to give just a high-level view of the key financial elements, obviously, we just announced €319 million of Axway revenue and about €340 million of SBS revenue will be carved out. And so the combined entity after eliminating the revenue that we generate through an OEM relationship, will be somewhere around €650 million in total. And Axway's profit on that operating activity for 2023 is about 20%. And for SBS, it's in the mid-single digits. This is still being worked out on what activities come over into the carve out.

And so we estimate that for 2023, it'd be somewhere between 10% and 14% operating activities for the combined company. This will immediately double Axway's revenue in the market. And we are going to look

• as I said, we're going to not give up on our target to be over €500 million and over 20% profit on operating activities. And so we're going to look to progressively get the Group to 15% to 20% - back to 20% profit on operating activities over the mid-term.

And a few words on the transaction financing. So we've offered €330 million for the carved out assets of Sopra Banking Software. And we'll do this with a combined capital increase through a preferential

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subscription rights offering of €130 million and €200 million in new debt facilities, which we already have a comfort letter from the banks for that balance.

So the financing is structured and available to us, and we just have to work through all the details of putting those credit facilities in place, putting together the prospectus and doing the rights offering. And Sopra GMT to ensure this transaction is successful, is becoming Axway's referential shareholders. So they're going to make an offer to buy 3.6 million of the Axway shares from Sopra Steria Group, representing about 16.7% of Axway's capital, and the total combined block will not change, but GMT being able to buy these shares will allow Sopra Steria to receive the cash and pay down some of their debt from their acquisitions over the prior years and would allow GMT to now be able to subscribe to not only the rights offerings of both the Sopra Steria and GMT shares, but to secure and backstop the remaining of the rights issues that aren't picked up by the market.

And to do so, they're welcoming in one equity partner that will help secure the financing for this deal. So the time line and considerations we're looking at, we've done the announcement today to the market. We've started the consultation process with all the employee representative bodies and we'll be working with that over the coming months, providing them the information they need to review the project.

We're going to go through the regulatory approvals. We're not anticipating any challenges there, but we have to respect that step. We will be then signing the purchase agreement with a target to closing somewhere around the end of Q2 2024 or Q3 at the latest.

And so with that, George will go ahead and open it up to Q&A.

Questions and Answers

Operator: Thank you very much, Mr. Donovan. Ladies and gentlemen, as a reminder, you can ask a question by phone or by chat. By phone, please press star one on your telephone keypad to access the queue. By chat, you can click on the Ask-a-Question button on the bottom right corner of the player. We'll pause for just a moment for everyone to signal. Our first question is coming from Paternoster calling from Kepler Cheuvreux. Please go ahead.

Hugo Paternoster (Kepler Cheuvreux): Yes. Good evening. Can you hear me?

Patrick Donovan: Yes, we can hear you fine.

Hugo Paternoster: Very well. So my first question will be related to actually standalone and on your business, and mainly regarding your organic growth guidance for the next year. Just wonder what part of this is coming from price increases? It would be my first question. The second one would be to better understand the trend within maintenance, which has decreased a lot in 2023. How should we think about the trend in maintenance and potentially in subscription going forward? And I will have another one on the follow-up.

Patrick Donovan: Maybe, Roland, do you want to take both of those?

Roland Royer: I'll take them. And I'll start with the maintenance because we have that one every year since we - for the last three years, we entered this period of transitioning from the on-prem license, historical

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