Conference Transcript - XBP 2025-01-15

Unidentifiable

Welcome back everyone. Next we have XBP Europe Holdings Inc. It trades on the NASDAQ under the symbol XBP and is a pan-European integrator of bills, payments, and related solutions and services seeking to enable digital transformation of its more than 2,000 clients. Please welcome its CEO and Director, Andrey Yanovich. Welcome to the conference today, Andrey.

Andrej Jonovic, CEO

Thank you, Anna. It's nice to be here, and I'll be walking you through a presentation we've prepared, and following that, I'll answer the questions that we have received. As Anna mentioned, my name is Andriy Jonovich. I am the CEO of XRP Europe. I thank you for your time in attending the Emerging Growth Conference, just spending your time to learning more about us. We are Europe-based, but U.S. NASDAQ listed. The XBP Europe is a company that I'm very familiar with. I'm part of the family office that acquired the underlying business around 11 years ago, and I was tasked with integrating it into our wider portfolio at the time and i've been i've been in close proximity to this business ever since at the time i was based in london i have since relocated to los angeles speaking of los angeles while almost all xbp europe employees are europe-based a handful of us are la based and we are only modestly impacted by these devastating fires but our thoughts and prayers are with those who have lost a lot including many of our many of our friends so with that said let's begin we won't have enough time to cover everything about xpp europe and we will try and cover uh key highlights um the agenda is on slide three and we will we will jump straight into slide four as anna mentioned we are a pan European integrator of bills, payments, and related solutions and services. We serve some of the largest private and public sector clients in Europe and our services reach a majority of populations across key European markets. We have a secure hybrid cloud infrastructure which really means that we're not limited by the physical footprint we have and that physical footprint is about 32 locations across 15 countries we are able to deploy our services and solutions anywhere in europe middle east and africa we're not a pure play bpo company we're well equipped to be a technology and services provider to the clients who are undergoing what is essentially a digital transformation we've traditionally focused on bills and payments and we process several hundred million transactions each year as our client needs our clients needs have evolved so have our solutions and we're increasingly focused on data modernization ai enablement and overall expansion of that solution suite to remain relevant to our client base. If we move on to slide five, this illustrates, in a nutshell, our solution suite. It is a summary. I will not cover it in detail, but it's fair to say the following. Our solutions and services are all industry agnostic, except for those which are in banking and finance. where we have deep domain expertise. As I said, I don't have the time to cover all these in detail, but what I'm hoping to do is give you an insight into what our solutions do in real life through the product focus as well as the case study further on. if you look at slide six this just shows who we serve we have more than 2 000 clients across europe we do not have a high client concentration as is shown in the in the statistics these are these are full year 2023 numbers the most recent ones we have the full year 2024 numbers will be available in our upcoming 10k the the next slide actually is a very interesting slide and that is a slide on market opportunities and if you just think for a moment um you know how similar or dissimilar the european and u.s economies are one of one of those illustration can be found here. The average European country outspends the U.S. by a little or by a lot in terms of percentage of GDP, and the public spending there has been, you know, much greater over time. In part, there's an alignment between, you know, taxation levels in public spending so the european average is approximately 50 percent whereas u.s stands at about 35 percent as a percentage of gdp you see on the top right hand corner that this expenditure in europe has grown over the years and is not a trend that we assume will decrease In the bottom of the slide, we wanted to highlight to you a number of key initiatives or frameworks or a combination of the two that show you why the European market is a very interesting market. the eu has committed to something called the digital decade 2030 and is committing through its various agencies and funds of investing around a trillion dollars to transform and future-proof the european economies the open banking initiative which is a number of different regulations that aim to reduce the barriers to entry of of non-regulated entities of non-banks in the in the european payment space and is a space that we have we have been active in for for a number of years is is an is an initiative that still has a lot of velocity and we expect that to continue opportunities are coming out of open banking through you know whether it's in the UK or EU at a pretty frequent intensity. And then lastly highlighting the G Cloud 14 framework which is UK specific, the UK is probably one of the most advanced economies in the world in terms of its adoption of cloud technologies and its migration towards them and G Cloud 14 is a public sponsored framework and we have become we have been selected to be part of the latest iteration of that framework and are will be pursuing opportunities in that the the market opportunity slide I think we've covered in sufficient detail so I'll move to our geographic footprint and some of our key operational metrics this slide I think speaks for itself we are present across much of Europe and we cover certainly the key European economies our our company ends up servicing and touching in some shape or form the majority of populations across key European economies so what does that really mean it means that in many cases we are mission critical and it's usually when it comes to payments this this slide is an illustration of that our payment processing does vary depending on country in the uk for example we are both a check processor but we're also a technology provider in the associated clearing infrastructure which means the way we're embedded in that market is broader than just being a payment processor itself. Because we have been in the payment space in the UK for so long, we have developed technologies that the UK market is particularly keen on. One of them is Request to Pay. Request to Pay is a platform that we jointly develop with MasterCard. We were one of the first ones to have it approved by the UK regulator in 2020. And it's really a secure messaging platform that ensures that the interaction between payers and billers is more secure, is faster, and more predictable with more tangible outcomes than is currently the case. it allows the billers to proactively notify payers of their invoices and allows them with it provides them an option as to how they want to handle those invoices that interaction itself is deemed to have benefits it avoids defaults it avoids people postponing procrastinating and overall has should have the liquidity enhancing you know mechanism to it so request to pay has an equivalent to it in the European Union which isn't as advanced or as further along as the one in the UK next up we have something called the COP which stands for confirmation pay and it's really a fraud prevention tool for account account transfers cop is a mature product in the uk but this year 2025 is actually a big year when the european union is looking to adopt and roll out its own version of it which will be called called vop validation of pain across the european union you've got other places uh across europe across the continent where we do other things in ireland we're both a processor and technology provider of almost 100 of the check processing of that country in germany our technologies actually support tens of millions of online banking users in the nordics uh primarily norway and sweden our technologies and services support uh the the entirety of the bank gyro payments there and bank gyro payments are essentially electronic payment instructions or transfers. This slide is in some ways skewed towards our DNA, which is payments, but I don't want to in any way neglect the other part of the business which is outside of payments directly. And so in the upcoming slides, in the case study, I will be focusing on that. Before we get there, however, I want to talk about some of our key financial highlights. So we'll start with segment breakdown on slide nine. We have two reporting segments. The bills and payment segment is where majority of our revenue resides, about 70%. This is where our payment revenue is recorded. This is also where digital transformation revenue is recorded most of the revenue here is recognized in the transaction basis so we charge per transaction then we have a second or smaller segment but a very high margin segment which is our technology segment this is where we sell software software licenses and associated maintenance we have hardware solutions and associated maintenance and this is where our group of techies also is and they're the team that implements these two solutions whether they're software licenses or hardware solutions and this segment is as i mentioned is high margin and revenue is generated on both license basis and different kinds of licenses whether they're monthly whether they're annual whether they're perpetual and we also have time materials revenue that the professional services group charges or bills from the segment breakdown slide we'll move on to our financial highlight slide the financial highlight slide is the slide that covers the most recent publicly reported quarter which is q3 of 24. we recorded revenues of 35.4 million from continuing ops there is a smaller business unit that we've decided to divest and it's pending sale and and so this number reflects continuing ops the the very positive element of q3 is our is that our profitability metrics have all improved and we're very pleased about that and what it really is showing is an inflection point where we work very hard to ready the company for better operational leverage and we spend a good amount of time and effort making our footprint leaner and at the time ready for scale and you see gross margin of 32.6 percent again this is a combined basis both both segments and you see our net our adjusted EBITDA at 4.8 million dollars the other highlights that are worth mentioning in relation to financial highlights is that in mid 2024 Before, we completed for us a substantial financing with HSBC. We used that financing to in part refinance some of our existing indebtedness and it also provided us with the additional liquidity that we plan to use to fund future growth. We have no debt maturities until June of 2028. And our net debt to adjust the Yucatan ratio stands at approximately 1.78 times. With that, we've covered the basics of financial highlights, and I'll move you over to our product focus. And with the product focus, we'll also cover our case study. So I mentioned to you earlier on that a product suite is vast. Its DNA lies in bills and payments, but it has expanded over time to meet the needs of our clients and to meet the needs of the market. One of those things that has sprung out of this evolution has been IDP. IDP stands for Intelligent Document Processing. It is an area that's getting increasing amount of focus because it's seeking to improve the way in which existing workflows can be augmented, can be turbocharged by things such as AI. And we first adopted or embraced IDP and invested in it because we wanted to improve our own operational leverage. But in fact, IDP has become a revenue-generating tool for us. It's essentially a software stack, and it's a workflow that can be very automated, can be configured, it's cloud-based, and it uses AI as needed to more accurately extract information from the underlying documents we're seeking to process. And these documents can vary in type. They're not limited to a type of file or document. So if you think about any industry, because this is truly an industry agnostic tool, we're able to leverage AI for the purpose of extracting data and doing more things downstream with that data. And by leveraging AI, we're reducing our cost, and we are at the same time able to do more. Because it's tied to AI, whatever improvements there are in AI, we also stand to benefit. And so IDP is also a stack that we received recognition on from Forrester that has ranked our broader group as a strong performer along much larger companies. And we're very proud of that. IDP is a perfect segue into the case study that I wanted to highlight to you. This case study is for a very high visibility contract. It's the HNPO contract, and HNPO stands for His Majesty's Passport Office. It's part of the public sector in the UK. Their mandate in this particular instance is to modernize public services, and they're making fully digital all birth marriage and death certificates from the UK dating back all the way to 1837 so just think about that they're there they're they're fully digitizing making available to the public the ability to search things dating back essentially 200 years the complexity of this task is enormous and is also one of the reasons why the previous attempt to do this actually failed and when we heard about this project and decided to bid on it we were very excited and luckily we were able to win it we won this project based on a solution not based on price and it was a solution in which we were able to demonstrate what we are now doing in practice we have achieved a very high degree of automation we're extracting majority of the data data that we process is extracted automatically, which means the minority of the data is touched by humans. Sheer scale of the number of documents that need to be digitized and data extracted is and this is this is a very complex setup that's taken several months to do but i'm proud to say that we were able to get it live on time we are a little bit behind in terms of full ramp but we're doing well and i think we we've earned the trust of the client here the total contract value of it is 40 million dollars over roughly you know four years there about you know it has very high sla standards a highly secure environment um and we're very excited to be on a good path um to process to process this this volume and essentially improve public services um in in the uk so that's all i have in terms of slides and prepared remarks i'd like to hand it over to

Unidentifiable

hannah and to initiate our q a thank you andre and first of all thank you so much for giving us that update so glad you guys are doing well in los angeles and our prayers are definitely with everyone affected by these devastating fires so let's jump in for the 25 million of acv and ramp up about how long until that's fully realized and what is that made up of so the 25 million of

Andrej Jonovic, CEO

acv ramp up and acv stands for annual contract value we've included a glossary in the back of the deck for people to maybe browse through should they have more questions um this is mostly made up of these large public sector projects they have been won they're in the process various process various stages of RAMP. But given the complexity of these, we may be able to control our end of the project, but we can't necessarily control the counterparty. And the complexity and sheer scale means that we have to be somewhat a little bit more patient than we intended. So it's mostly

Unidentifiable

public sector. And how do you plan on replacing the eventual loss revenue stream from large

Andrej Jonovic, CEO

contracts maturing? So that's a very good question. I'd say there are a couple of elements to this question or the response. So we have clients and contracts that we have served for many, many years. And I would say that we're embedded there. We're a certain part of their you know, mission criticality. And I would say that in those instances where contracts are maturing, it's not so much the question of whether we'll be able to renew it. I think it's more a question of whether, you know, what are the terms of renewal? So I would treat that as one bucket. The other bucket I would say is, look, contracts do mature, deals do expire, and this is why you work hard to build a robust pipeline and that's why much of our focus in recent times has been on on on very large multi-year contracts where we can count on renew renew revenue that renews so that we can we can minimize this problem to some extent i think this dynamic applies in both both of our segments, though I think it's fair to say that deals are larger in the bills and

Unidentifiable

payments segment. And with all that said, can you provide a little bit more detail on the factors contributing to this revenue decline over the past few years, and especially what strategies you are implementing to stimulate revenue growth going forward? Okay. I mean,

Andrej Jonovic, CEO

this this is this is a fair question um one that certainly should be should be answered um i i would say the following and this is by no means an exhaustive list but and we we don't want to be spending our time sort of dealing with any sorts of excuses but the fact is that europe has had certain amounts of macro impact um the european economy has been a bit sluggish it came out a bit sluggish out of covet and then entered a period of high inflation and in some markets you're also you've seen recession so what you're trying to do is in some ways pivot towards the public sector given how much the public sector is spending as a percentage of their respective gdp some of the revenue decline has been due to some of the natural exits that occur in some cases it's volume reductions volumes up trade and some in some countries they reduce over time and then there's also the impact of fx the the fx trends have been unfavorable to us over the last several years, euro to dollar and sterling to dollar has made our top line seem a little worse than it actually is. To offset this stuff, to offset it, I think I mentioned that we're focusing on the large multi-year revenue deals. We've expanded our solution suites so that we can remain relevant. we can be in tune with the times we're pursuing initiatives whether they're in the gcloud 14 framework whether they're in open banking and we're betting on some of our platforms cop is a mature product in the uk but it's equivalent in the european union is not and 2025 is the year for it we also have existing relationships that are that are you know very long-standing they're they're in some cases several decades old and there unless you reinvent yourself you can't you can't expect to continue to have the trust of the of the client and that's what we've done and it's always the easiest when you have the trust of a client to to go to them to to pitch your you know your reinvent itself and we're saying that that's also a place where we where we can stimulate that growth that we need wonderful well thank you for

Unidentifiable

explaining all of that um talk a little bit more about your assessment of the long-term viability and relevance of your current service offerings and are you anticipating any changes in market demand or technology that could possibly impact the relevance of your services um that's another

Andrej Jonovic, CEO

good question um for sure uh i think the differentiating factor with xbp europe is that we're not some sort of one-trick pony we play across multiple industries across multiple markets in europe and what we have is a good amount of technology and much of it was has evolved alongside our domain expertise our domain expertise usually isn't bills and payments and so So what I think is happening or will be happening, though I can't obviously promise these things, is that we have developed and evolved and matured enough platforms that are ready for the future. they're future proof we are all about digital transformation i think our relevance and and sort of our our future proofing has been rubber stamped a few times um through these major contracts that we've won in recent times um and then you know most obvious examples idp right idp is a tech stack that enables us not just to continue to reduce cost but enables us to fully leverage AI. And I know that AI is something people talk about a lot. It's a hot topic. It's a popular topic. But I don't know how many companies out there can really say, yeah, we have this 40 million contract and a good chunk of it is heavily connected with AI and our

Unidentifiable

productivity. Well, you're ahead of the game. Last question, just due to time, talk a little bit about regulation in your sector and how big of a challenge that might be with getting deals

Andrej Jonovic, CEO

done. Okay. So there is a saying that I've heard some time ago. It's not necessarily the most politically correct one, but it's something along the lines of America innovates, China replicates, and Europe regulates. And to some extent, it's true. There is a lot of regulation in Europe. A lot of the regulation, you know, is advancing economies. It's advancing those markets because it's imposing higher, better standards. And that's very important. And so we operate in a highly regulated set of markets. We're used to this. And we have adapted to it by making sure that we comply with key standards and regulations. You know, we certainly adhere and satisfy the most critical ones, and because we perform such mission-critical activities on behalf of banks, on behalf of financial institutions, we have to be, you know, we have to keep our standards very high. We're not regulated on the same basis they are, but nevertheless, they require that of someone like us who's a key supplier.

Unidentifiable

And in closing remarks for our viewers, what are your final remarks that you'd want to leave our viewers with?

Andrej Jonovic, CEO

Look, I think we can't make any promises about 2025, but I think we're very excited about the starting point for this year. We have worked hard in 2024, which was our first year of being public, to get our platform ready. We're sort of leaner and meaner. We're ready for scale. And it's nice that we're starting 2025 with a good amount of backlog. And then all we need to do is execute. So I look forward to reporting on our progress over the coming quarters.

Unidentifiable

Well, thank you so much for this presentation and joining us on the conference. We look forward to following along with your journey in 2025.

Andrej Jonovic, CEO

Thank you, Anna. Thank you very much.

Unidentifiable

All right, everyone. We'll be right back.