Basware Financial Statement Release January 1 - December 31, 2018

Basware Corporation, stock exchange release, January 31, 2019 at 8:45 am

Highest ever quarterly cloud revenues

January-December 2018:

• Net sales EUR 141 417 thousand (EUR 149 167 thousand): decrease of -5.2 percent, organic growth at constant currencies 5.4 percent
• Organic cloud revenue growth at constant currencies 15.6 percent, amounting to 63.3 percent (53.9 %) of net sales
• Adjusted EBITDA EUR -4 364 thousand (EUR 3 294 thousand)
• Adjusted operating profit/loss EUR -15 052 thousand (EUR -6 814 thousand)
• Adjusted earnings per share (diluted) EUR -1.44 (-0.61)
• Operating profit/loss EUR -1 471 thousand (EUR -9 509 thousand)
• Earnings per share (diluted) EUR -0.49 (-0.80)

October-December 2018:

• Net sales EUR 36 488 thousand (EUR 39 243 thousand): decrease of 7.0 percent, organic growth at constant currencies 4.1 percent
• Organic cloud revenue growth at constant currencies 13.6 percent, amounting to 65.5 percent (55.1 %) of net sales
• Adjusted EBITDA EUR -826 thousand (EUR 908 thousand)
• Adjusted operating profit/loss EUR -3 419 thousand (EUR -1 839 thousand)
• Adjusted earnings per share (diluted) EUR -0.28 (-0.17)
• Operating profit/loss EUR -3 850 thousand (EUR -2 862 thousand)
• Earnings per share (diluted) EUR -0.31 (-0.24)

Basware’s key strategic priority for the strategy period 2018-2022 is cloud revenue growth. The company continues to strengthen its leading market position in order to grow scalable cloud revenue. For 2019, Basware expects the following on an organic basis at constant currencies:

• Cloud revenues to grow at approximately 15 percent
• Total revenues to grow at approximately 5 percent 
• Adjusted EBITDA to be at breakeven or better

Basware has adopted IFRS 15 Revenue from Contracts with Customers as of January 1, 2018 (mandatory application), with full retrospective application. In connection with the IFRS 15 application, the Group has also made certain changes to revenue allocation between Cloud and Non-cloud. Comparatives for 2017 presented in the interim report have been updated to include IFRS 15 restatements and revenue reallocations.

From Q1 2018 onwards, Basware has made certain changes in the presentation of its financial information. The company has adopted a functional income statement showing the company’s cost of sales, gross profit and operating expenses by function. In addition, the company has changed the presentation of its geographical information. From Q1 2018 onwards, the company reports the following geographical areas: Americas, Europe, Nordics and APAC.

In February 2018 Basware completed the divestment of two businesses. As a result, it is important to consider the organic growth rate when comparing 2018 financials with 2017 financials as the divestments decrease revenues and profitability. During the fourth quarter the impact of foreign exchange movements was minimal. However foreign exchange movements, particularly in US dollars, have negatively impacted Basware’s headline revenues during full year 2018. This has a disproportionate effect on our cloud revenues where US dollars comprise a larger share than in total revenues.

This financial statement release has been prepared in accordance with IAS 34, Interim Financial Reporting. The amounts presented in the summary of financial statements and notes to the financial statements are based on the company's audited financial statements. The Auditor's Report was issued on January 30, 2019.

GROUP KEY FIGURES

*From Q2 2018 onwards cloud order intake is the key order intake figure reported

BUSINESS OPERATIONS

Basware is the global leader in networked purchase-to-pay solutions, including e-invoicing and financing services. Basware’s commerce network connects businesses in over 100 countries and territories around the globe. As the largest open business network in the world, Basware provides scale and reach for organizations of all sizes, enabling them to grow their business and unlock value across their operations by simplifying and streamlining financial processes. Small and large companies around the world achieve significant cost savings, more flexible payment terms, greater efficiencies and closer relationships with their suppliers.

CEO Vesa Tykkyläinen:

“In the last quarter of the year, Basware made good progress in its key strategic target of cloud revenue growth with all time high quarterly cloud revenues. Our organic cloud revenues in constant currencies increased 16% in 2018. By continuing the systematic strategy execution in accelerating cloud growth, I am confident in our ability to capture the market potential and make steady progress towards our long-term growth vision of EUR 1 billion revenues.

Long-term market demand and customer interest continues to be strong for Basware’s solutions. In the last quarter of 2018, companies such as Trek Bicycle Corporation and Kurtz Holding Gmbh chose our industry-leading networked Purchase to Pay solution. Transformations signed in the last quarter of the year include Engie Services Nederland, Terveystalo and Rexel Sverige AB. Our annual recurring cloud order intake amounted to EUR 22.8 million in 2018, increasing 20 percent. However, in the last quarter of the year, the uncertainty caused by market speculation on a possible tender offer had a negative impact on Basware’s cloud order intake, which was somewhat below our expectations. We will continue investing in sales and marketing in order to increase cloud order intake moving forward, while exercising tight cost control as a whole.

We continued to release new innovations and enhancements to our market-leading solutions: new functions introduced in Procurement Marketplace and Basware Analytics, in addition to new enablement services and Basware PDF eOrder solution for suppliers. As a recognition of our great products and strong customer focus, Basware was named a Value Leader in Spend Matters’ Q4 2018 Procure-to-Pay SolutionMapTM, with both good analyst and customer scores.

In 2018 we took big steps forward in streamlining our operations with the disposal of two non-core business functions and outsourcing partnership with Xerox. The move to functional organization with a dedicated partnering function enables us to focus our resources on key strategic areas. During the quarter, we strengthened our partnering network with Aeonvis in Italy and Fitek Slovakia. Furthermore, in the beginning of 2019 we were pleased to announce that Basware’s solutions were made available on Microsoft AppSource. With our streamlined business operations and industry-leading solutions, I am confident that we can take full advantage of the market opportunity ahead of us, worth EUR 15 billion annually.”

NET SALES

Basware’s net sales in 2018 amounted to EUR 141 417 thousand (EUR 149 167 thousand), a decrease of 5.2 percent. This equated to 5.4 percent organic growth at constant currencies. The difference is related to the sale of Banking and Financial Performance Solutions as well as foreign exchange movements, especially US dollar.

Basware’s net sales for the fourth quarter amounted to EUR 36 488 thousand (EUR 39 243 thousand), a decrease of 7.0 percent. This equated to 4.1 percent organic growth at constant currencies. The impact of foreign exchange movements on the fourth quarter revenue growth was minimal, with the difference causes mainly from the sale of Banking and Financial Performance Solutions.

Cloud revenues continued to grow during the fourth quarter. Cloud revenues in the fourth quarter were EUR 23 916 thousand (EUR 21 612 thousand), up by 10.7 percent, and accounted for 65.5 percent (55.1 %) of net sales. This equated to 13.6 percent organic growth at constant currencies. Using 2017 exchange rates to calculate 2018 revenues, cloud revenues in the fourth quarter would have been EUR 23 876 thousand. Full year cloud revenue at constant currencies was EUR 91 071 thousand and this equated to 15.6 percent organic growth at constant currencies.

In the fourth quarter SaaS revenues grew 14.0 percent and transaction services revenues 9.2 percent compared to the fourth quarter of 2017. The SaaS growth rate equated to 21.0 percent and transaction growth rate to 9.3 percent organic growth at constant currencies.

In non-cloud revenues, maintenance and licence revenues declined in line with expectations as we transition customers to the cloud. Non-cloud revenues were significantly impacted by the divestments made in the first quarter. The maintenance revenues declined -12.6 percent and licences -20.6 percent on an organic basis at constant currencies. Consulting revenues declined -6.3 percent on an organic basis at constant currencies.

Basware has adopted IFRS 15 Revenue from Contracts with Customers as of January 1, 2018. In connection with the IFRS 15 application, the Group has also made certain changes in revenue allocation between cloud and non-cloud. The net impact of IFRS 15 restatements and the changes in revenue allocation between cloud and non-cloud for 2017 comparatives is EUR -74 thousand for the full year and EUR -464 thousand for Q4 2017 on Group level, with cloud revenue increasing by EUR 1 163 thousand for full year 2017 and EUR -114 thousand for Q4 2017 and non-cloud revenue decreasing by EUR -1 236 thousand for full year 2017 and EUR -350 thousand for Q4 2017.

CLOUD ORDER INTAKE

Basware’s total cloud annual recurring revenue (ARR) gross order intake in the fourth quarter amounted to EUR 5.9 million, up from EUR 4.9 million in the fourth quarter of 2017, an increase of 20.1 percent. This equated to 19.9 percent growth on an organic constant currency basis. There will be a time lag before order intake is visible in net sales. Typically around one quarter of new ARR order intake converts into revenues in the year that it is won, with roughly fifty to sixty percent converting to revenues in the second year and the remainder thereafter. Further information on the definition of annual recurring revenue gross order intake is included in the section on Definition of Alternative Performance Measures.

FINANCIAL PERFORMANCE

Basware’s adjusted EBITDA was EUR -826 thousand (EUR 908 thousand) in the fourth quarter. The adjustments to EBITDA totalled EUR 431 thousand (EUR 1 023 thousand) in the quarter. Basware’s operating profit/loss for the quarter amounted to EUR -3 850 thousand (EUR -2 862 thousand).

Basware’s adjusted EBITDA was EUR -4 364 thousand (EUR 3 294 thousand) in 2018. The operating profit/loss for the year amounted to EUR -1 471 thousand (EUR -9 509 thousand).

Basware’s profitability in 2018 has been impacted by the disposals that closed in the first quarter and increased spending on sales and marketing, both of which are in line with Basware’s strategy. The disposed businesses contributed roughly EUR 8 million of EBITDA in 2017. Basware spent an additional EUR 2.0 million on sales and marketing in the fourth quarter of 2018 compared to the fourth  quarter of 2017, and EUR 6.6 million more on sales and marketing overall in 2018 compared to 2017.

The company’s cost of sales were EUR 17 026 thousand (EUR 19 087 thousand) and total operating expenses including depreciation and amortization EUR 22 878 thousand (EUR 22 014 thousand) in the fourth quarter. Out of total operating expenses, sales and marketing expenses were EUR 11 969 thousand (EUR 9 947 thousand), research and development expenses EUR 6 848 thousand (EUR 7 603 thousand) and general and administration expenses EUR 4 061 thousand (EUR 4 465 thousand). Other operating income and expenses were EUR -433 thousand (EUR -1 004 thousand).

Research and development expenses in the income statement totalled EUR 6 848 thousand (EUR 7 603 thousand). Of this, EUR 1 499 thousand related to depreciation (EUR 1 517 thousand). Research and development expenses capitalized during the quarter amounted to EUR 2 219 thousand (EUR 2 321 thousand). Basware’s research and development investments totalled EUR 7 568 thousand (EUR 8 407 thousand), or 20.7 percent (21.4 %) of net sales during the quarter.

The company’s net finance expenses were EUR -432 thousand (EUR -349 thousand) for the quarter. 

Basware’s profit/loss before tax was EUR -4 282 thousand (EUR -3 264 thousand) and profit/loss for the quarter EUR -4 518 thousand (EUR -3 431 thousand). Taxes for the quarter impacted the profit/loss by EUR -236 thousand (EUR -168 thousand).

Diluted earnings per share were EUR -0.31 (EUR -0.49) for the quarter.

FINANCING AND INVESTMENTS

Cash flows from operating activities were EUR -2 840 thousand in the fourth quarter (EUR -1 795 thousand) and EUR -6 261 thousand (EUR -4 001 thousand) in 2018. Basware’s operating cash flows are seasonal as a relatively large part of payments for annual maintenance are made in the first quarter.

Basware’s cash and cash equivalents including short-term deposits totalled EUR 40 747 thousand (EUR 20 683 thousand) at the end of the quarter. In addition to cash and cash equivalents, Basware has an undrawn revolving credit facility of EUR 10 million, bringing total available liquidity at the end of the quarter to EUR 50 747 thousand (EUR 30 683 thousand).

Basware’s total assets on the balance sheet at the end of the quarter were EUR 215 688 thousand (EUR 214 811 thousand). Net cash flows from investments were EUR -2 483 thousand (EUR -2 771 thousand) in the quarter.

The equity ratio was 51.3 percent (52.7 %) and gearing 14.9 percent (25.2 %). The company’s interest-bearing liabilities totalled EUR 57 206 thousand (EUR 49 282 thousand), of which current liabilities accounted for EUR 17 089 thousand (EUR 1 996 thousand). The return on investment was -8.7 percent (-6.9 %) and return on equity -16.0 percent (-11.9 %) in the quarter.

PERSONNEL

Basware’s personnel expenses were EUR 21 584 thousand (EUR -25 879 thousand) in the quarter.

Basware employed 1 402 (1 831) people on average during the quarter and 1 412 (1 829) at the end of the quarter. Following the partnership with Xerox announced in the third quarter, 387 employees have transferred from Basware to Xerox in the fourth quarter.

Geographical division of personnel:

In accordance with the new organisational structure as of June 1, 2018, at the end of the quarter 15.4 percent of the personnel worked in sales and marketing, 35.6 percent in R&D and production and products, 38.9 percent in customer services and 10.1 percent in administration.

The average age of employees is 37.3 (35.3) years. Women account for 29 percent (28 %) of employees, men for 71 percent (72 %).

RISKS AND UNCERTAINTY FACTORS           

Basware has a growth strategy with high net sales growth expectations for the cloud business. Executing the strategy requires significant investments in sales and marketing and related resources as well as continued investments in product development. At the same time, the industry transformation from an on-premise license-based business model to a SaaS model will accelerate the decline of certain Basware revenue streams, including license sales and maintenance. The transformation will also make consulting revenues more volatile. Until the transformation is complete, this will act as a drag on Group net sales growth.

Additionally, even higher than expected pace in the license to SaaS transformation would have a negative impact on expected net sales in the short term. In addition to SaaS, Basware expects high growth rates in its network-based transaction services which will, besides successful sales effort, also require an efficient supplier onboarding process. Sales from Value Added Services, are dependent on Basware’s ability to bring innovative and attractive products to the market according to its planned timetable and move customers quickly to a phase where they are using the services extensively enough to provide meaningful revenue to Basware.

The fact that more than 50 percent of the company’s sales are expected to come from non-euro countries exposes the Group’s net sales growth to foreign exchange rate movements. In case there is a significant movement of GBP, USD, NOK, SEK or AUD against the euro, reported net sales may be affected. In addition, a proportion of Basware’s costs are denominated in INR and RON. The uncertainty around the status of the UK in relation to the European Union may have a negative impact on Basware’s ability to do business in the UK.

Execution of the growth strategy and going through constant change puts new demands on the organization as well as its management and leadership capabilities. The company’s ability to attract, retain and develop the right type of talent to deliver on its strategy is critical as well as management focus and ability to drive change. In order to execute the growth strategy, Basware needs access to financing.

Basware considers acquisitions as part of its strategy. Acquisitions entail risks, such as failure in integrating acquisitions or in ensuring that the planned financial benefits and synergies of the acquisitions materialize.

The cloud transformation process requires cash investment. The company’s ability to secure financing for this transformation may affect its ability to deliver on the strategy.

Basware’s biggest operational risks relate to service disruption as a result of for example data centre failures, various data security threats and non-compliance risks related to Basware’s solutions and services, the company’s activities or its employees’ behaviour. Operational risks are actively managed by continuous improvement in risk monitoring and protection practices as well as internal training of Basware’s personnel.

Basware operates in a market where technological and business model innovation play a key role. While Basware is recognized as a leader within its segments by independent analysts, it is critical that Basware continues to innovate and develop its offering.

In the fourth quarter of 2018, Basware was subject to market speculation around a potential tender offer. This negatively impacted order intake in the fourth quarter of 2018 which will feed through to a negative impact on future cloud revenues. If market speculation about Basware as the subject of a potential takeover approach continues, this may have a negative impact on order intake and customer retention, and may also have a negative impact on employee retention.

FUTURE OUTLOOK

Operating environment and market outlook

All organisations need to manage their purchasing processes from procurement through to handling invoices and paying them. Currently many organisations only have unsophisticated or partial tools to manage these processes and as a result many are faced with unmanaged spending, inefficient manual and paper-based processes and poor visibility of cashflows. Basware offers a uniquely complete solution for these challenges that is differentiated by the Basware Network, the largest e-invoicing network in the world, and enables customers to manage 100 percent of their spending and make their purchasing processes completely paperless.

Basware expects the demand for networked purchase-to-pay services to continue to grow. The total potential market for networked purchase-to-pay services is estimated to be worth EUR 15 billion in annual revenues.

Outlook for 2019

Basware is the global leader in providing networked source-to-pay, e-invoicing and value-added services. Basware’s key strategic priority for the strategy period 2018-2022 is cloud revenue growth. The company continues to strengthen its leading market position in order to grow scalable cloud revenue.

Themes affecting revenues in 2019:

• Cloud revenues are expected to continue to grow strongly.
• Consulting revenues are affected by the cloud transition and more standardised implementations.
• Legacy revenues from maintenance and licence will continue to decline as Basware transitions existing customers to cloud services.
• Revenues, particularly for non-cloud are affected by the divestments completed in February 2018.

For 2019, Basware expects the following on an organic basis at constant currencies:

• Cloud revenues to grow at approximately 15 percent
• Total revenues to grow at approximately 5 percent
• Adjusted EBITDA to be at breakeven or better

Constant currencies means that the effects of any changes in currencies are eliminated by calculating the figures for the period using 2018 exchange rates. Organic means that the figures are adjusted to remove the effects of any acquisitions or disposals within the past 12 months.

ANNUAL GENERAL MEETING AND AUTHORIZATIONS OF THE BOARD OF DIRECTORS

Basware Corporation’s Annual General Meeting 2018 was held on March 15, 2018. The Annual General Meeting adopted the financial statements and discharged the responsible parties from liability for the financial period January 1-December 31, 2017. The Annual General Meeting decided that no dividend will be paid for the year 2017.

The Annual General Meeting decided the number of members of the Board of Directors to be six. Mr. Ilkka Sihvo, Mr. David Bateman, Mr. Michael Ingelög and Mrs. Tuija Soanjärvi were re-elected as members of the Board of Directors. Mr. Daryl Rolley and Mr. Asko Schrey were elected as new members of the Board of Directors. In its organizing meeting, the Board of Directors elected Ilkka Sihvo as the Chairman and Michael Ingelög as the Vice Chairman of the Board. Tuija Soanjärvi was elected as the Chairperson of the Audit Committee and Daryl Rolley and Asko Schrey as its members. The Board of Directors also decided to establish a Remuneration Committee. Michael Ingelög was elected as the Chairman of the Remuneration Committee and David Bateman and Ilkka Sihvo as its members.

Ernst & Young Oy, Authorized Public Accounting Firm, was elected as the company’s auditor.

The Board of Directors was authorized to decide on repurchasing a maximum of 1,420,000 company’s own shares. The company’s own shares shall be repurchased otherwise than in proportion to the holdings of the shareholders by using the nonrestricted equity through trading on regulated market organized by Nasdaq Helsinki Ltd at the market price prevailing at the time of acquisition.

The Board of Directors was also authorized to issue a maximum of 2,840,000 new shares and convey a maximum of 1,457,085 of the company's own shares held by the company. The number of shares to be issued to the company itself together with the shares repurchased by the company on basis of the repurchase authorization shall be at the maximum of 1,420,000 shares.

The Board of Directors may grant special rights, which carry the right to receive, against payment, new shares of the company or the company’s own shares held by the company.The maximum number of new shares that may be subscribed by virtue of the special rights granted by the company is in total 1,000,000 shares which number shall be included in the maximum number of new shares stated above. The subscription price of the new shares and the consideration payable for the company’s own shares shall be recorded under the invested non-restricted equity fund. The Board of Directors shall decide on all other terms and conditions related to the authorizations. The authorizations shall be valid until June 30, 2019 and shall revoke the previous authorizations for share issues and granting of stock options and other special rights entitling to shares.

Basware announced via stock exchange release on March 15, 2018 the resolutions of the Annual General Meeting. The resolutions are available at Basware’s investor website at https://investors.basware.com/en/annual-general-meeting

OTHER EVENTS OF THE PERIOD

Strategy announcement

On October 17, 2018, Basware announced a long-term EUR 1 billion revenue growth vision and an update to company’s mid-term strategy. Driven by digitalization, automation, and artificial intelligence megatrends, the market opportunity is estimated to be worth EUR 15 billion annually.

The cloud business model that Basware is transforming to is very scalable. This means that as revenues grow, the cost of sales does not grow as quickly, improving Basware’s gross margin over time. As a general cost philosophy, Basware will continuously reallocate spending from less productive to more productive areas.

Basware’s mid-term target is to accelerate annual organic cloud growth to more than 20% by 2022. Basware will increase its investments significantly into sales and marketing during the strategy period 2019 to 2022 in order to grow cloud order intake. Basware has four sources of cloud revenue growth: new customer acquisitions, customer expansions, customer transformations, and partnering:

• Basware’s key growth markets are the US, UK, Germany and France, where we see the greatest opportunity to win new customers.  
• Our top 200 key customers bring on average approximately EUR 200 thousand annual recurring cloud revenue. With our investments in account management, customer service and customer satisfaction, we believe that we can significantly increase the average revenue from our key customers. 
• Basware is focused on actively transforming the largest on-premise customers to cloud. When our customers transform to the cloud they benefit from a modern, more useable, constantly updated solution and as a result typically the revenues from each of these customers more than double.  
• Previously Basware was mainly focused on direct sales, but with the launch of the new partnering function, Basware aims to increase the percentage of cloud revenues from partners to 20% in the long run. 

Non-binding and highly conditional indicative proposal for a possible tender offer

Basware disclosed on November 16, 2018 and November 20, 2018 that it had been approached by Tradeshift Holdings Inc with a non-binding and highly conditional indicative proposal for a possible tender offer for the entire share capital of Basware. On December 7, 2018, Basware further confirmed that pursuant to the Indicative Proposal, Tradeshift Holdings Inc.’s intention is to launch a recommended public tender offer of EUR 48 per share in cash for the entire issued share capital of Basware on a fully diluted basis. Basware shareholders were reminded that there is no assurance that the Indicative Proposal will result in a tender offer or any transaction.

BOARD OF DIRECTOR’S PROPOSAL FOR DIVIDEND

On December 31, 2018, the Group’s parent company’s distributable funds were EUR 70 066 thousand. The Board of Directors proposes to the Annual General Meeting that no dividend be paid for 2018.

Basware Corporation’s Annual General Meeting is planned to be held on Thursday, March 14, 2019 in Helsinki, Finland.

Espoo, Finland, Wednesday, January 30, 2019

BASWARE CORPORATION

Board of Directors

Vesa Tykkyläinen, CEO, Basware Corporation

For more information, please contact:

Niclas Rosenlew, CFO, Basware Corporation

Tel. +358 50 480 2160, niclas.rosenlew@basware.com

Distribution:

Nasdaq Helsinki
Key media
investors.basware.com/en