1Q’20 results: usage revenue starting to shine

Artificial Solutions continues to expand its customer footprint with large, multinational enterprises. 1Q’20 saw the addition of Deloitte Netherland as a customer for its own business (having delivered strong outcomes for its clients with the Teneo product), as well as a Scandinavian financial services provider, and a three-year extension with Swisscom worth SEK10.6m over three years. More than 80% of order intake came from systems integrator (SI) partners. Surging usage of the Teneo platform, based on transaction volumes, is a highlight – with this trend expected to persist.

• Solid revenue and order intake growth in 1Q’20: Net sales were up 21% YoY to SEK15.3m, while order intake was up 15% to SEK19.5m. New contract wins were accompanied by further additions to the SI partner base (Babel and CSG). The gross margin expanded 100bps YoY to 60%.
• Usage revenue is a metric to watch: As discussed in detail in our recent research reports, the shift to usage revenue within the mix is accelerating, as large customer deployments experience strong end-user volume growth. Overall transactions processed by Teneo more than quadrupled YoY in 1Q’20.
• High revenue scalability: Management has previously noted that individual large customers have the potential to scale to annual recurring revenue in excess of €5m each. An example cited is a major US telecoms customer that has seen broadband support volumes through Teneo treble in 1Q’20.
• Growing visibility: Despite the pandemic, order backlog increased, ending 1Q’20 at SEK56.4m (up from SEK40.9m at end-2019). 47% of backlog is expected to be delivered from 2021 onwards. The high usage revenue element resulted in a backlog gross margin of 82%, consistent with future margin expansion.
• Investment summary: Conversational Artificial Intelligence (AI) is a sweetspot in terms of enterprise digitalisation. Together with robotic process automation, it is a key element of a broader hyperautomation trend (a term coined by Gartner). Our DCF produces an equity implied fair value of €115m, while the most recent IP valuation analysis, undertaken in 2019, generated a patent valuation range of $125m to $153m.