The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so, and these will be available via your Investor Meet Company dashboard. Before we begin, I would like to submit the following poll, and I would now like to hand you over to the executive management team from Essensys plc. Mark, Sarah, good afternoon.
Thanks, Jake. Good afternoon, everyone, and welcome to the Essensys full year results presentation for financial year 2023. As Jake says, alongside me, I have our CFO, Sarah Harvey, and I'm Mark Furness, the CEO and founder of Essensys. We're now gonna take the cameras off, to save you looking at our faces for the next 30 or so minutes, and help with your bandwidth. Thanks, Jake. So, Essensys, just to recap our business, for those of you who are not familiar with our story. essensys works with the world's largest commercial real estate companies and brands, helping them to navigate the world of more flexible workspace solutions.
Our software and technology is mission-critical and helps our customers deliver better in-building digital experiences as they're looking to deliver more flexible space solutions, shared amenities, and shared building common parts, and other services. Our vision is to power the world's largest community of flexible, tech-driven spaces, and we've been doing this since 2006. Let's have a look back at our progress in 2023, and we think about the year as a year of determined, dogged even, progress. The year just gone by has seen us really develop our strategy to accelerate our path to profitability and cash generation. Really to think about our strategic customers and really focus on them, as they're delivering really strong results for our business, as Sarah will cover a little later.
This year, we've seen an improvement after that focus on strategic customers in our customer mix, which leads to an improvement in our revenue mix, and also our products as we've developed those over the year. We've delivered some major product upgrades and product innovation following what was a period of strategic investment in our product set over the last few years. The market evolution continues really, as hybrid working continues to embed across the real estate industry, and new working patterns, not just only emerge, but really settle down to... So to help us understand occupier demand for space going forwards. We think that's really important as we believe the outlook for the business is all about how that market opportunity continues to evolve. Now, notwithstanding the progress we've made, we continue to see some headwinds post-pandemic.
So firstly, we're in a period of certainly macroeconomic uncertainty, and that's led to capital management from our customers. You know, CapEx budgets and CapEx deployments is still slower than anticipated. We have longer sales cycles, and we also have a longer tail of non-strategic legacy customers that continue to wash out of our base. And again, Sarah will cover that in more detail shortly. Well, let's come to the market opportunity and really, how do we help our customers? So what we're seeing in the global commercial real estate market is a bifurcation of the whole industry. Firstly, we're seeing a flight to quality by occupiers. Companies of all sizes want to be in buildings that are better quality. They wanna be in spaces that really drive productivity and employee satisfaction.
We can see that flight to quality translate in 2 major data points. Firstly, vacancy rates. Vacancy rates are much higher in older products, in products and offices. By older products, I mean older office buildings and older assets. Actually, more recent, better quality product results in much higher occupancy, and that's important for the industry. Also, we're seeing a push for highly amenitized buildings. What does that mean? It means being in buildings with shared services, shared meeting rooms, better quality communal areas, high-quality reception, maybe food and beverage options as well in a building. It's really about ending that commute, and that leads to a big spread in rents. In gateway CBDs, the rent spread is actually 22% for higher quality product versus commodity product at the low end.
So why is this important to Essensys? Well, what it means is that landlords are now increasingly motivated to meet those, evolving occupier demands. A piece of research published recently by CBRE states that actually, over half of all occupiers want to be in buildings, and want to be, in spaces where the landlords are actually bundling access to these type of shared services and flex spaces into their head lease. So if you will, landlords are being driven to deliver integrated flex space options in their whole portfolio, and that's really true for occupiers as well. 'Cause the occupiers themselves, they wanna be in buildings with these shared amenities, you know, flex space options, but they also want a good, and strong, and powerful digital experience in these spaces, too. And unsurprisingly, that's where Essensys can help.
Because delivering this is not just a challenge physically, there's a good example of a 1970s building, which is really difficult in terms of its floor plate, its sustainability credentials, and the ability for the physical space to be evolved and upgraded to deliver those things for their tenants. Not only is it difficult to deliver the physical experience, it's unbelievably challenging for the digital experience. How do I manage many, many occupiers using lots of different parts of the building over time? You know, what systems and tools do I have to allow us to do that? And the challenges that that creates, creates a really poor occupier experience.
You know, monolithic systems means that there's very little in terms of high-quality data or insight to that peak that can be gleaned from these systems to help understand how the occupier experience is. Also, that creates security challenges, both physical and cyber, across all of these systems, and it becomes very expensive to deliver this at scale. So what's the alternative? Well, the alternative is really about if we can improve the occupier experience, we can improve the economic outcomes for these assets. So firstly, the physical experience. This is one of our buildings in New York. This is Tishman Speyer's Spiral. We are deployed in that building. All of our technology is in that location.
Because that building is really about delivering shared meeting spaces across many floors, event spaces, food and beverages areas, you know, flex options on lots of different floors. And to do that, they're leveraging our software and technology to deliver that efficiently and create a great digital experience. Our solutions are designed for the operations teams. Essensys Platform is designed to help them manage occupiers, onboarding and off-boarding tenants, and manage the access to spaces and services. Essensys Cloud is our network solution, which is a smarter connectivity answer for the smarter buildings that we're seeing now in the industry. Our Operate platform is a tool to help manage invoicing and billing, and our soon-to-be-launched Smart Access solution is a dynamic access control offer designed really for the needs of the future of hybrid real estate.
So our fully integrated, integrated suite of capability on multiple products really speak to the challenges faced by operations teams, IT teams, finance teams, and facilities teams. But moving on, how do we think about the future of office, and what does that look like in terms of our market opportunity for Essensys? Cushman & Wakefield completed a piece of research that they published only a few months ago, that looked at the office market in the U.S. out to 2030. And this is where we see a real, indeed, a trifurcation of the office market. The flight to quality, the top end of the market, is clearly outperforming the rest of the industry.
What's interesting is the bottom of the market, the last quarter, 25% of that market, Cushman & Wakefield estimate that they will be completely obsolete by 2030, whether that's due to sustainability requirements or even just the ability to meet the demands of occupiers. For Essensys, we expect 60% of the market to actually need to evolve and upgrade physically and digitally to meet the needs of tenants. Of the 5.7 billion sq ft of inventory expected at the end of 2030 in the U.S., that means nearly 3.5 billion sq ft of space that will need to go through this upgrade process to meet the requirements of their occupiers. Interestingly, the real estate market doesn't move quickly, as I'm sure you're aware. They're permanently risk off.
They want to absolutely trust their technologies and their suppliers. And so today, 61% of all landlords' technology in place today is actually based on legacy systems. And that means as we expand into this 60% opportunity, we can, we can become the embedded platforms, and products, and solutions of choice for an industry for many, not just years, but for decades to come, as that opportunity unfolds in front of us. So that's an overview of the market opportunity and how we help our customers. I'm going to pass over to Sarah now, who'll take us through the financial performance in the business.
Thank you, Mark. Hi, everyone. I'll talk you through the financial highlights and then the operational highlights. So looking at the revenue for the year, we closed at GBP 25.3 million. That was a 9% increase year-over-year, and as in previous years, recurring revenue makes up the vast majority of that. 83% of our revenue was from recurring. What we did see, though, was an increase in the level of non-recurring revenue, and that represents revenue that we earn on taking sites live. So hardware, one-off revenue, and that's an indication of future recurring revenue. We closed with a cash balance slightly ahead of expectations at GBP 7.9 million, and we also closed with GBP 1.1 million of contracted annual recurring revenue. That's revenue that was contracted at the year-end, but not yet live.
We closed down 9% on our annual recurring revenue, which I'll talk through specifically in a moment. North America continues to be our primary market for growth, and you can see the 20% increase year-on-year was a strong result there. U.K. and Europe, as in previous years, has declined with a strong drag in the U.K. from that legacy customer base of small single-site customers who we expect to churn as we focus more on our strategic customers. Some good growth in APAC, where that was up year-on-year, all with strategic customers. Looking through the income statement, you can see there the split of the revenue, so two-thirds coming through the U.S., and an improvement in gross profit in the year.
A slight drag on margin, which is expected as more of our revenue comes from the U.S. That's slightly lower margin there. Within overheads, we had an increase in the bad debt charge. That really is the result of the post-COVID wash through. So we took a hit in the year on that, and that gets us pretty much back to a normal state of affairs, so that shouldn't be considered a normal run rate. Our adjusted EBITDA, so really our underlying trading, improved from a GBP 7 million loss to a GBP 6.3 million loss. Below EBITDA, you can see there a GBP 2.6 million charge, exceptional costs there. We announced a restructuring at the half year, which took place during the half year and completed shortly after the year end.
and the total cost of achieving that was GBP 2.6 million, so that was all taken in the year. I'll move on now to talk through what happened in ARR over the course of the year. So we were impacted by the movement in exchange rates, so the rate moved from 1.22 to 1.28 between July 2022 and July 2023, that represented GBP 800,000 of the difference. What we then had is an improvement in ARR, driven by new activity with strategic customers, and then some drag on ARR caused by churn in that lower end of the base and some strategic rebalancing by our strategic customers. And an ongoing decline in our usage-based occupancy revenue, particularly prevalent in this year, driven by a couple of customer recontracts.
When we look at EBITDA in the year, this is going from the GBP 7 million loss of the previous year to GBP 6.3 million loss this year. We saw a gross profit improvement, and I've already mentioned that increase in the bad debt charge. Staff costs increased year-on-year, but we have taken action to address that already with the restructuring activity that's now completed. Underlying that, you can see an improvement in the non-staff overheads, where we saw both an FX improvement, but GBP 850,000, driven by an underlying reduction year-on-year in other overheads. Looking at the cash flow statement, you can see where our cash was spent during the year. A drag on working capital there at the top, which I'll come to specifically in a moment.
In fact, I will flip straight to the year-on-year waterfall. So you can see there where the cash went year on year. We've got the EBITDA loss there. Of the GBP 2.6 million, GBP 1.6 million of the restructuring costs went out in the year, with the remaining GBP 1 million happening just post-year end. As you may remember from the previous year, we had done a strategic purchase of inventory. That's hardware to take sites live. That was delivered at the end of FY 2022, and so the payment for some of that, the last part, happened in the first quarter of FY 2023. Our capitalized development represents our internal software development team and the work they were doing to build and improve our products. Capital expenditure at GBP 0.6 million increased year -on -year.
That effectively was the payment for the final data centers that went into the APAC region, so again, a non-recurring cash flow there. Lease payments were higher in the year, and that reflects a previous year rent-free period in the UK that we had and a full year impact of those APAC data centers. When you look at the cash burn by quarter, this reflects the changes we've made in the business as we focus on a return to profitability and cash generation. You can see there that the Q1 outflow reflected those one-off items.
Q2 was reflective of the underlying cost base at the time, and through Q3 and Q4, you have the benefit there of both cost savings in the business, net of the restructuring payments, and also some improvement in the working capital position of the company overall. So we closed at GBP 7.9 million of cash. I won't go through the balance sheet. That's there for reference only. Looking at the operational metrics, we closed at 466 sites. That was growth in the year after the previous year being a decline in site numbers, and we also increased the number of customers. It went up by two, but I'll go into that, a bit of the detail on that.
We closed with 152 people in the business, and 30 further people left the business in August, so we're down at the 122 run rate for the business now. Net revenue retention was 98%, that's consistent year on year after taking FX into account. So that 3 percentage point decrease was really the impact of FX. And 2.1 to 1 LTV to CAC is an improvement year on year, and we still work to get to, get up to the, the more like the three level. You can see there at the bottom, the vast majority of our sites are in North America, and that grew in the year, and we also had growth in the APAC region. The UK region was offset by churn.
When we look at the customer base, we took 23 customers live. The vast majority of those were strategic customers. We lost 21, and that represents the small legacy end of the customer base. And you can see there on the right-hand side that the majority of those came through in the UK. And then we look at site changes in the year. I'd said it's a return to growth in sites, which is very positive. You can see there on the right where those sites were coming from. The vast majority of sites were coming through new in the US. In the UK, you can see the impact of where the majority of that customer churn happened, so the single site operators, and in the US, the impact of rebalancing of portfolios by strategics. Everything we're seeing in APAC is net new.
When we look at new sites, 94% of those sites are being opened with strategic customers, those with the ability to give us a $1 million of ARR, and that's a real focus for us as a business. I'm thinking about that strategic customer cohort. Every metric we have tells us that this is the right cohort to be focused on. Where the wider base is 98% net revenue retention, it's 108% for the strategic customer cohort. And when you look at those who are already delivering over a $1 million of ARR, that net retention - net revenue retention is about 118%. Strategics make up 77% of our total revenue, and they are very sticky.
We don't churn our strategic customers, although there's a rebalancing of sites, and the vast majority of our activity is with those strategic customers. And you can see there on the right where the revenue is coming from for the strategics, two-thirds of it coming through from North America, which, as we've said, is our primary growth market. When we look at the pipeline, it's in a strong position. We can see growth in our existing customer base, but 68% of our pipeline comes from new logos, so, very much, opportunity for the future. With that, I'll hand back to Mark to talk through our products.
Thanks, Sarah. So as we build to deliver for our strategic customers who present significant long-term expansion opportunity, it's really critical that we deliver the right products for them. So this year, after a period of significant investment in accelerating our product development in our product set, we now have a multi-product solution for our customers. So Essensys Platform, as I mentioned earlier, is really about managing and automating the relationship between tenants, services, and spaces. Operate is a billing and invoicing tool, Essensys Cloud, a smarter connectivity answer for smarter buildings, and our soon-to-be-launched Smart Access solution. It's really important that as we look to fulfill our ambition to penetrate the industry opportunity, that we have the right products that solve major problems for our customers. And so that multi-product solution now, we're clear it's landing with our customers, and these are just some examples.
Hines is well known as the largest privately owned commercial real estate company in North America. They've been a customer now for a couple of years, and we've been on a journey with them as they look to expand their offer for more flexible spaces across their portfolio of buildings. Today, they use Essensys Platform, Essensys Cloud, and Operate to deliver those products across their portfolio. It's the same with Tishman Speyer. Many of you will have seen the building that I presented earlier in the flesh. That's the Spiral in Hudson Yards in New York. But they're also really well known for Rockefeller Center, which we also power. And they're delivering Essensys Cloud, Operate. They're also migrating onto Essensys Platform as we complete the migrations onto that new product.
And they're a pilot customer in North America, in The Spiral building, for our Smart Access solution. And this story, this penetration of products, goes on across our customer base, and we're increasingly seeing that we're clearly meeting those needs of our strategic customers. If you will, we're demonstrating with each of those customers with clear product-market fit, which is really important as we look out. But we're not stopping there. We're really thinking about the innovation we need to bring to make our customers more successful, to deliver more value to them, and also create more competitive differentiation. It's really important that in the
You know, we don't just build on the 17 years, but we've of our experience with our customers today, but we look to the future and how we can create competitive moats, economic moats, and industry moats to really embed our solutions and our position as the market leader. So just to—for those of you who aren't clear, just let me just talk through, if you like, the cost of sale for each of our elements. Operate and Essensys Platform are pure SaaS products. So our software is hosted on one of the major providers' cloud infrastructure, that's AWS. And so that's a very high-margin product, Essensys Platform and Operate with, if you like, low single digits of cost in terms of percentages. Essensys Cloud is our, if you like, our private network.
So it's layered on top of that is a software solution that we call Essensys Lens, to allow our customers to have real visibility into the performance of their networks, to really understand how the digital experience is for occupiers of these buildings. Now that, because of our data center investment and because of the requirement for us to take third-party connectivity from our carriers to connect the buildings to our data center, is around 40% gross margin solution. Again, with Essensys Platform and Operate being late 80s, early 90s in terms of gross margin percentages. Our soon-to-be-launched Smart Access solution, we're delighted with the progress we've made this year with that solution and our investments there. It's a converged hardware, software, and mobile access solution. So what does that mean? It really means that the
Your mobile device using a mobile wallet credentials, secure mobile wallet credentials, becomes your access pass to get into the physical spaces in these buildings. We developed the hardware too, that we've just recently completed certification for, for the North American markets and also for UK, Europe, and the rest of the world. We've also recently completed the certification program with one of those mobile wallet providers, one of those mobile providers, themselves. So we think this is a really powerful solution and very compelling for our customers, and we're excited for where that can go in the months and years ahead. And so to close, how are we today, and what's the outlook for our business? Our focus on strategic customers is really starting to deliver strong results, demonstrable progress, in that customer cohort with really strong SaaS metrics.
So efficient, future growth and expansion in terms of cost of expansion, a very high retention at a gross and a net level. And we're just at the early stages of that journey with our strategic customers, which represents almost half of our customer base today. We land them, and that's a long program. You know, the industry needs to trust its providers, but we expand with them, and we look to grow over the weeks, months, and years ahead. But we've got to really focus on capital efficiency as we look at that expansion journey. So we focus our attention on driving towards that profitability moment that we've talked about previously. It's really important as well because of the markets at the moment and because of where the business is. And we are, as you know, debt-free.
Our balance sheet is strong enough to support this opportunity and this push that we focus on cash, not just retention, but also cash accretion in the months and years ahead, but not by giving up growth. We really need to prosecute the opportunity with those strategic customers, and that comes on the back of great products. Great products, great experiences, become trusted and become embedded. And the more we innovate and the more we develop solutions to major customer problems, major problems our customers face, the more we're embedding the industry and the more successful we would become. Because that market opportunity that we've highlighted for many years as the commercial real estate industry evolves, is continuing and continues to increase, in terms of momentum.
It's a structural shift in the real estate industry, but it's a long-term one that Essensys can capitalize on. So if we focus on those strategic customers and deliver a great experience for them, not just from our product, but from the experience with our business and our people, and that will allow us to really unlock the market opportunity through the months and years ahead. And so thank you for taking the time as we've gone through the presentation. Just now, I'll hand back to Jake, before we take some questions.
Perfect. Mark, Sarah, thank you very much indeed for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab that's situated on the top right-hand corner of your screen. But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. Sarah, Mark, as you can see there in the Q&A tab, we have received a number of questions throughout your presentation this afternoon. Thank you to all of those on the call for taking the time to submit their questions.
But Mark, Sarah, if I may just hand back to you just to read out those questions and give your responses where it's appropriate to do so, and then I'll pick up from you at the end. Thank you.
Thanks, Jake. Well, thanks, everyone, and thanks for the questions. I'm gonna start and jump straight in with the first one I can see from Alistair. Alistair asks, "How do we see the WeWork situation playing out for Essensys? The press is suggesting that Industrious," and for those of you who don't know, one of our largest customers, "has already picked up eight or nine properties." Now, WeWork was a trailblazer for the industry there, really, you know, we saw the explosion of WeWork, as co-working started to take hold. But obviously, WeWork is an operator and, and takes space in these buildings, and what we're seeing more of is the landlords actually having a view to create integrated offers into their portfolios.
So we're already seeing, even in the last few days, our landlords come to us and our customers and say, "Okay, we are taking back a WeWork space, you know, how do we do that? How do we build that? Because we've got occupiers in there, we've got cash flows in there." And obviously, you know, with WeWork at the moment, they are still handing back locations, and it's great, an opportunity for landlords to do that. So we're definitely seeing an uptick in our customers taking back WeWork spaces and using us to help them operate. Alistair also asks, "You did your restructuring at the end of the financial year. Why did you pick that timing rather than earlier?" Well, the reality is, is, you know, what we've got to do is prosecute the opportunity.
As we migrated a lot of customers from Essensys's legacy products into Essensys Platform on our new product set, we gained some operational efficiencies in the business, but it was a moment in time that we could gain them. We've also pushed very hard on new product innovation, and there's a moment in time that as that product innovation is delivered and you move more into a state of support and maintenance, as well as some new stuff, and you have the ability then to look at your cost base. But earlier this year, we actually changed our structure to go away from a regional structure in our North American markets, our APAC markets, and our UK and Europe markets, to be more centralized with an approach.
And so there was a natural moment in time that would, that was, for Ascensus, the right time to change our structure and our organizational changes. So that's why it was really at that moment in time. Anything to add on that, Sarah? Thanks. Yep.
So the next question has come through from Colin, who asks: You referenced the addition of 21 new customers during the period. How much additional future revenue does this represent for the business? Well, the number of customers we took live in the period was 23, and that represented GBP 1 million of that new ARR that I showed in the chart. The 21 new customers signed in the period, some of those are not yet live, so 15 of those went live in the year and would have been included in that GBP 1 million. Six are not yet live, and they are included within the GBP 1.1 million of contracted ARR that we had at the year-end for sites that were contracted but not yet live.
Yeah, might also add on to that is, how much additional future revenue does this represent for the business? So I think you could also class that as opportunity, and as Sarah points out, you know, a high level of a high number of those customers are strategic, so we consider there is an opportunity for at least GBP 1 million of ARR from each of those customers in the fairly near term. I'll move on to Ross. Ross asks: How has your performance fared versus your peers? Do you typically encounter much competition when looking to acquire new strategic customers? Well, Ross, the real estate industry really is always risk off.
They don't move quickly, and so we've worked really hard over 17 years to establish the trust of the real estate industry at large, and those major commercial real estate companies that you can see listed on our website and in this presentation. And it is really important to them that they can trust their providers, and they can deliver a low-risk solution to their big problems. So actually, when we think about our competitive, the competitive landscape, by entering the market in 2006, when it was very nascent, we had a long time, probably a decade, really, with very limited competition. Now that's changing, and we're seeing new entrants to the market.
That tends to happen in the longer tail, so point solutions that exist in the longer tail and designed for more of the co-working type operators, and we see quite a lot of activity there. But obviously, our job is to leverage and, if you like, a benefit of network effect from the industry. So when people like Hines are talking to other providers, it's great for them to be able to reference Essensys. Same with Tishman Speyer, because actually, that's what people are looking for. They want trust, they want a proven experience and a proven solution, and so we do really well in winning those strategics. Now, the sales cycle is quite long, as you can imagine, you know. Anything around about a year to get the initial agreements and contracts in place for those big customers.
And then once we're there, it's all about the expansion in their buildings over time, and we think that will accelerate in the years ahead. Michael asks: As Essensys is new to me, grateful if you can talk about your competition and why a potential customer should come to you. Now, I think I've covered a lot of that in the answer I've just given, but, you know, for me, it is really simple. We try and delight our customers in every way we can, whether that's in the moments we spend with them personally, whether that's in sharing insight and understanding and details about what the data's telling us, whether that's working with them to build great products and solve big problems for them. It really is a partnership. So we play the long game.
We're playing the long game with the market opportunity. We play the long game with our customers, and by not letting them down and delivering for them, as their trust grows, they look to expand with us. So we see compounding as the real benefit of this approach, that those logos, those customers that control huge swathes of portfolios and assets, that as they deploy more flexible products into across their portfolios, as they integrate these solutions, that there will be a natural pull for our products and services and our solutions into that base over time. Hopefully, that answers the question.
Mark, Sarah, if I may just jump back in there. Thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And, of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended, just for you to review, to then add any additional responses, of course, where it's appropriate to do so, and we'll publish all those responses out on the platform. But Mark, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments just to wrap up with, that'd be great.
Great. Thank you, Jake. Well, thank you everyone for taking the time to join us today, and thank you for your continued support and questions. Just to close, you know, Essensys is all about the opportunity in front of us. We've got great global customers. We're delivering real-world solutions to major problems for them, and we have a market opportunity that we believe in wholeheartedly for the long term. It's really up to us to execute and continue to prosecute that opportunity in the years ahead. Thanks a lot.
That's great. Mark, Sarah, thank you once again for updating investors this afternoon. Could I please ask investors not to close this session, as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Essensys plc, we would like to thank you for attending today's presentation. That now concludes today's session, so good afternoon to you all.