Earnings Call: H2 2023

Sep 14, 2023

Welcome to the Made Tech full year 2023 results webinar. All attendees are in listen-only mode, and at the end of the presentation, there will be the opportunity to ask questions. At any stage during the presentation, you can submit a question by clicking on the Q&A button. This webinar is being recorded. I now hand over to Rory MacDonald, CEO, and Debbie Lovegrove, CFO. Rory, over to you. Thank you, and good afternoon, everyone. Welcome to the Made Tech results presentation, the year ending 31st of May 2023. Most of you will know me. I am Rory MacDonald, founder, Chief Executive at Made Tech. Joined this morning by Debbie Lovegrove, our CFO. Thank you all for your time today. Really looking forward to talking through the progress that we have made as a business over the last 12 months. We have got about a 30-minute presentation to talk through. I will give you a bit of an update on business progress. Debbie is going to talk through the financial results, and then I am going to give a bit of an overview on the strategic plan, and then cover off the outlook. Of course, we will have some time for questions at the end. Talking about business update. First of all, let me say that FY23 has been a really challenging year for Made Tech. Quite possibly the most challenging year since I founded the business in 2008. There was a lot going on within the macroeconomic environment. It has had a massive impact on society. Lots going on politically, which has impacted our clients. There has been a lot of changes at Made Tech, which has impacted our business. So overall, it has been a tough year. Amidst these challenges, I feel we have made some really, really good progress in a number of different areas. Our sales bookings hit an all-time high of GBP 70 million. That is a really significant number. Something we are really pleased with. That number comes on the back of a number of contract renewals and really deepening relationships with key clients. It really goes without saying that it really speaks volumes for the quality of the services we are offering to clients and the relationships our teams have built with clients over the last few years. So we are really pleased with the GBP 70 million booking number this year. Diving a bit deeper into our contracts. There has been a real trend this year of winning bigger deals. We signed two contracts over GBP 10 million. Seven over GBP 5 million, and 10 over GBP 2 million. Really, this is not just growth. It is really showing a significant increase in the significance we as an organization are playing in the market. Really, that is something we are expecting to continue moving forwards. We have been investing into the development of some SaaS products, and we have continued with the investment into the development of those products this year. Really, those products are really designed specifically for local government. If we look at that market, that market's full of software providers providing antiquated technology, which frankly really isn't fit for purpose. A lot of the transformation that's happening in that market is to try and move away from those software providers. Really what we've been doing in that space is trying to use the insights that we've got from the local government market and our expertise in modern software delivery to take transformative products out to this market. We've launched three SaaS products last year. We've now got a handful of clients that have signed up to it and a really nice, healthy pipeline that's starting to build as we move into this year. I'll talk a little bit more about that later, but we're excited about the future and the opportunity in that space. On the capabilities front, we've made some really good progress. Capabilities are really kind of the services and the things we provide to customers and the core of our business. Really since launching our design capability in 2021, we've really grown that significantly to nearly 100 people in the organization now that are part of that design capability, and we're really pleased with that. Recently hired a new design leader into the business to look after that area of the organization moving forwards. If I look back to 2022, we launched a dedicated data and AI practice, and we've been seeing that grow nicely. Approximately 20 people in that team now. I'm not going to talk too much about AI today. I know there's probably a million different organizations talking about it, but we do genuinely see a significant opportunity in that space for us within the public sector in the years ahead. We see lots of demand in that space moving forward. We're interested in seeing how that progresses and moves forward in the months and years ahead. Overall, in FY23, we spent about GBP 1.6 million in helping to build out our capabilities. Across data design, managed services. Really all of the investments in these spaces are all about driving future revenue streams and new areas of growth for the organization and are strategically important for us as a business. Alongside introducing these new capabilities, we've also been doing a lot of work around expanding our senior team. Really delighted to have Tim Waddell join us as Chief Delivery and Transformation Officer and Wayne Searle join us as Chief People Officer. Really important that we bring the right people into the business who help take us on the next phases of our growth journey. Both of those have got fantastic experience and will help progress the business forwards. Really pleased to have them on the team. Despite a challenging macro environment and political landscape, we've come a long way. We've made good progress in a number of areas. Of course, there are things that we need to improve in FY24, things we could have done better in FY23, and really just want to talk a little bit about a couple of those now. Shall we jump onto the next slide? I think to those of you who have followed the Made Tech story, you will know we have really had no problems in delivering growth. We have been driving a market-leading organic growth figure for a number of years now. While we continue to push hard on growth, our current focus has really shifted to be more about the fundamentals and driving profit margin and cash generation. Over the last 6 months, we have really put an emphasis on this, a particular emphasis on the fundamentals around the margin and profitable performance and improving cash conversion and cash flow from operations. Debbie is going to talk a little bit about the numbers shortly, but you will see from these that our H2 FY23 performance was significantly improved on our H1 performance. We are seeing that performance trend continue into H1 of FY24. For me, as I look out over the next few years, I am going to be really pushing the business to grow from a GBP 40 million business to a GBP 100 million business. Before we really make this push, I want to ensure the fundamentals are solid and the next phase of growth delivers for shareholders. Our focus is on this for the rest of this financial year. If we move on to the next slide, I am going to hand over now to Debbie to talk about the numbers. Thanks, Rory. If we look at the financial performance of the business, and looking at the key highlights, we can see that we continue to see strong top-line revenue growth. Our revenue has grown by 37% to GBP 40.2 million. That is a combination of growth from existing clients and also winning new clients, and winning new contracts with new clients. Our gross profit was GBP 14.4 million, which was up 28%. However, disappointingly, our gross profit margin was lower than the previous year. Our gross profit margin was just under 36%. Previous year was 38%. The reason it was lower is because it was impacted by some delays that we saw in some project revenues, particularly in the last quarter of FY23. This impacted our utilization levels, and it had an impact in terms of our gross profit margin and our EBITDA. Our average utilization was roughly about 70%. Prior year was 81%, so it was significantly lower. Thing to highlight is that the utilization level at H1 was 2 percentage points lower than H2 for FY23. Some of those improvements that Rory was talking about, we can see that in the second half of FY23, and that is continuing moving into FY24. We have done some significant improvements in profit margin. We have done an awful lot of work to improve our profit margins and improve our cash flow balances. Building on what Rory was already talking about, we are seeing the results of that moving into FY24. Adjusted EBITDA. Adjusted EBITDA was lower, so it is GBP 1.5 million, so it was down 43%. That is a direct result of the delays in those revenues coming through, mainly at the last quarter of FY23. We are dependent on clients when those contracts kick off. But I think what is pleasing is that our sales book at December was GBP 69.9 million. As Rory just talked about, it is up 37%. Also, our contracted backlog was the highest at 67.9%, so up 78%. Cash flow. You can see that our cash flow from operations was down GBP 0.5 million. Our cash balance at the end of the year was GBP 8.5 million. I will walk through the cash flow a bit later. The majority of that cash outflow was due to the investments in capabilities and products. It is important for us to invest in that product development. It is part of our ambition to continue to grow and scale the business, and growing that product offering diversifies our revenue streams. More to follow on this a bit later. If we look through the summary P&L, we have covered most of the kind of revenue and gross profit. Overheads, you can see that our overheads increased to GBP 15.9 million, so up 38%. That number does include the share-based payment charge. It also includes some exceptional costs. We had about half a million of exceptional costs related to some headcount reductions that I will talk to in a minute. We have been increasing our investment in sales and marketing, which is the majority of that spend, and that is to grow future revenue streams. If we look through the cash flows, if you look at the graph on the left, that is the bridge between our EBITDA and our cash flow. Our adjusted EBITDA was GBP 1.5 million. But you can see on the bar on the right that our cash outflow was GBP 3.9 million. The majority of that cash outflow is tied into the exceptionals of the half million, which is severance costs, GBP 1.6 million in investments and capabilities, and GBP 1.5 million in investment in the product and the three products that Rory was talking about earlier. I think what is pleasing is if you look at the graph on the right, you can see that there is a real difference between the cash outflows in H1 and H2. The cash burn in H2 is significantly lower than H1. We are seeing that trend continue due to the improvements that we have made in the business. That is going to continue into FY24. If we look at the people side of our business, our headcount has reduced. Our headcount at the end of the year was 430 compared to the number of 478 in the previous year, so down 10%. We did do some headcount reductions. We talked about those when we were doing our interims in H1. That was a deliberate effort to make sure that we right-size our business to make sure that we had the right staffing mix to ensure that we can improve things like our utilization, our gross profit margins, and our profitability. That work was done in the year, sort of around February, March time. We are seeing those improvements in terms of utilization. We saw that towards the end of FY23, and we are seeing those improvements in FY24. Contractors, you can see that we have reduced the number of contractors. We are replacing contractors and third-party suppliers with employees. That trend is continuing, and that is ensuring that we are delivering a higher gross profit margin and that is dropping through to adjusted EBITDA. What is disappointing is our retention rate is lower. The average retention rate during the year was 71%. That was down versus the previous year, which was 73%, and also down at the interim, we were reporting a number of 85%. There's a couple of reasons as to why our retention rate is lower. The first one is the business was impacted by the headcount reductions that we did during the year. Also, whilst there has been well-publicized headcount reductions in the tech industry as a whole, our employees still have options. There are still some companies employing people on quite high salaries that obviously we can't match. So we did see a bit of churn during the year. This is a key area of focus for the business. Churn does cost the business. This is a focus that we have been deliberately looking at. We've seen that retention rate improve as we move into certainly Q1 of FY24, but we're seeing that retention rate definitely improve for the business. Utilization. The utilization, as I just referred to, was lower at 70%. Again, this is a key focus area for the business to make sure that's improved. We're seeing those improvements in the first quarter of FY24, but it was impacted by those project delays, particularly in the last quarter of FY23. With that, I'm going to hand over to Rory. He's going to talk about the strategic plan. Super. Thank you. Thank you, Debbie. I'm just going to give a quick overview of the overall strategic plan. I'm not going to go into a huge amount of detail on it at this point, but just want to provide a bit of an overview for those who are new to the organization. We jump onto the next slide. Really the market opportunity that's been underpinning the growth of Made Tech is really driven by the broader digital transformation shift that we're seeing across a whole bunch of different sectors. Within government and public sector, there is a lot of legacy technology. There's a lot of paper-based processes. There's a lot of old ways of working that are really not fit for purpose anymore. The market really, there's a lot of antiquated suppliers who've been working with government organizations for decades and frankly, doing a pretty poor job. Really across government, there's a real drive and desire to use digital, to use more automation, to streamline government services, to make them much more agile, more efficient, and generally try and make government a more efficient place to run. Really, that's the opportunity that we're going after. The immediately addressable market, the area that we operate in is approximately GBP 2 billion-GBP 3 billion in size. Really that's calculated using the digital spend that's existed over the last few years. Now, there's a bit of a change that's happening in the market over the next 12-18 months due to the election. The market's been growing very, very quickly. But obviously there's an election coming up at some point over the next 12 to 18 months. That's creating a bit of uncertainty in the market over the kind of forward period. The annual growth rate of the market is expected to slow over the next year to two years as the election plays out and kind of new priorities move forwards. But the underlying trend within the market will continue. All the signs are pointing towards continued investment into driving transformation and change and to move things forward. I think it's a really kind of strong market to be operating within, and really provides a really great foundation for us to grow our business within. If we jump onto the next slide. I think some of you will be new to the Made Tech story. I just wanted to kind of talk a little bit about what it is we do, some of the services that we offer. We are a digital transformation provider to government and U.K. public sector. We help them to move from paper-based processes to digital processes. To give you some examples of the type of things we're involved in, we work with HMRC on the tax platforms. That's the thing that underpins that and PAYE. We work with people like the Ministry of Justice on the electronic monitoring. We work with Ofgem on green gas support schemes. We work with DVLA on provisional driving licenses. We're involved in delivering a lot of the core technology that's involved in kind of running and operating government on a day-to-day basis. The business is really organized around these three areas. So transform, deliver and run. In the transform space, really, this is about supporting clients in the early stages of their transformation journey, providing advice, helping them to design and think about change that is required, and really shape out what that transformation looks like for a government organization. That might be a new policy priority that's coming in. How might we test that policy priority and then go on to deliver it? It could be we're trying to move away from a legacy contract. How do we do that? How do we split up the different services that exist within a legacy contract and deliver those in a more modern way? The transform area of our organization is focused on those type of things. We then move into the deliver side of things. Really this is about the delivery of the core transformation initiative. That is developing bespoke services for government departments. It's designing those services. It's building on the data platforms that underpin them, supporting on the cybersecurity initiatives. All the services in and around delivering on those government transformation initiatives are within this area. Really this is where the bulk of our team are based. 90-plus percent sit within this area here. On the right-hand side, we've got the run side of things. That's more about running the ongoing operations for our clients. Supporting them to run and operate things moving forwards. That's a smaller part of our business at this point in time. But we expect it to grow and develop over time as we get more and more contracts in that space. This has been one of the areas we've been investing into over the last few years. Yeah, I just wanted to give a bit of color around the kind of services and capability we offer. If we could move on to the next slide. Also just wanted to touch a little bit on the product side of things. As touched on earlier, we have been developing some new products, specifically for the local government market. The first product is a thing called Housing Repairs. Really that is about supporting local authorities and residents of local authorities to manage housing repairs for their area. Second product is around Voids and managing the voids period within housing stock within local authorities. The third product is called Evidence, and that is enabling local authorities to verify individuals' identities, and enable them to issue things like licenses and different kind of things to citizens who live within a particular local authority vicinity. These are sort of three products that we have been working on over the last 12 months. Really all of these products are tied back into really the transformation of local authorities and government. So it is about how do you deliver things more effectively and more efficiently. Really that efficiency and driving efficiency is really, really important. We all know there is a lot of strain on local authorities at the moment. Tools like these and products like these, which help to free up people's time to deliver things more effectively, will ultimately help to find savings within authorities. We have been developing these products and taking these products out to market. We have made some nice progress. We have signed up a few clients into the product space today. We have got a really nice pipeline that is building. It is important to mention that the commercial model around these products is different to our core services. These products are being sold more on an annual recurring basis. So it is more of a license model, with much more significant gross margins for the business. Over time, we would expect to see these products grow and gain market penetration and start to contribute nicely to the business's gross margin and then ultimately bottom line. We are quite excited about the work we are doing in the product space, and we think it is an important area for the business moving forwards. If we jump onto the next slide. Yeah, just wanted to quickly just touch on customer base. We have got a great selection of customers. Across central government, this is really where our large customers are. We work with the likes of the Home Office, Ministry of Justice, Ministry of Defence, Met Office, organizations that spend billions on technology and change every year. We are in a really fortunate position to have I think eight of the top 10 central government bodies as active clients. We are supporting them on their transformation journeys. What we typically see in this space is these clients signing very large contracts, so multi-million-GBP contracts that get drawn down over a number of years on a time and materials basis against a range of different services and capabilities. I touched on earlier the expansion of our services and capabilities. That is important because it enables the customers who are awarding these contracts for us to deliver more value to those customers as we build out those capabilities. Our healthcare clients, we've got a bunch of clients in the healthcare space, organizations like NHS England. These bodies also spend lots and lots of money on technology and change. We've been building out our clients in that space, and we'll continue to do that over the coming years. Certainly been a bit of a challenging period in the healthcare space for the last 12 to 18 months, as there's been a lot of change within government around how healthcare is structured. But it's looking quite positive moving forward. We're excited to build and grow within the healthcare space in the years ahead. If we jump onto the next slide. I just wanted to touch just quickly on ESG. We're really proud of the work we've been doing around ESG. We've got an ESG committee who looks at a number of different initiatives across the organization. Over the last 12 months, we've significantly- Rory, could you just get your hands going over your mic. Could you just keep it off that? Thank you. Sorry. Thank you. We've significantly reduced our carbon impact over the last year, on track to achieve net zero by 2030. Our ethnic diversities remained the same, FY23 as it was in FY22 at 20%. Our gender balance has declined slightly year on year. 30% of the workforce are women. It's declined slightly, but it's still kind of significantly ahead of the industry average for women in IT. Lots of work for us to do, but really kind of focused on this as an area for the organization over the year ahead. If we jump onto the next slide. Just wanted to talk a little bit about outlook. Moving forward, we're continuing to deliver on the strategies that we've set out. From a revenue perspective, FY24 has started a little more slowly than last year, but we expected that given the dip in revenue that we saw in April and May. We've seen the recovery in June, July, and August. Overall, we're expecting our revenue to be flat in H1 FY24. However, despite this, profits have grown. Really, that's been driven by the operational improvements that we've made and that we touched on earlier. We've seen significant improvements in utilization margin and profits. We're positive about that. We've just secured a place on the DALAS framework. The DALAS framework is a significant new framework that has just been launched. There's a relatively small number of suppliers on that framework. The lot that we've been awarded a place on has got a GBP 750 million spend over a four-year period. If we manage to have an equal share of that GBP 750 million, which there's no reason why we will not, that will make a significant contribution to the business in the years ahead. We're pretty excited about that. I think overall, the demand environment still remains positive. There's a lot of contracts coming out to market. There's lots of opportunity that exists in the market. But we do know customers are just being a bit more cautious. There's a bit of an unknown around timings on the election. There's some question marks around that, and that's creating a bit of caution with customers, but there's still a lot of contracts in the market. We're pretty excited about the year ahead. We think we can make good progress. Really, we're kind of focused on delivering short-term performance and then capturing the long-term opportunity, and we've got the whole team focused on that. Yeah, that was everything from me. Great. Thank you very much indeed, Rory. If anyone has any questions, click on the Q&A button and type your question in. We've got quite a few questions. You've said that the revenue is likely to be flat, so similar to full year 2023 and full year 2024. But what percentage do you expect to be SaaS sales during full year 2024? We haven't released any of those figures to the market. We are expecting some SaaS revenue in FY 2024. It won't be a significant percentage of our total revenues. Really, we're expecting those SaaS revenues to drop through in FY 2025 and FY 2026. Great. Thank you very much. How many new clients have you signed up this year in full year 2023? Sorry, to date. Yeah. In FY 2023 or 2024, I've not got the data to hand, but I would expect it somewhere in the region of 5 to 10, I would've thought. There'll be some larger customers and then some smaller customers as well. Great. Thank you very much indeed. Who are your competitors, and what are your differentiating factors that help you win new deals? Yeah, sure. The way we look at competitors is, it is quite complex because the competitors vary based on every industry and in some cases, every account that we are operating in. From a public markets point of view, I think probably the obvious one would be Kainos and TPXimpact being the two that we would see from a public markets perspective. But on private markets, in the private sector, we would look at organizations like BJSS, Version 1, organizations like that who we will compete with. In terms of how we differentiate, really for us, the key thing for the market we are operating in is our absolute focus on public services and aligning everyone in our organization around delivering technology into the public service space and deeply understanding the challenges that exist in that world. That is everything from the specific security requirements that exist in government to the assurance standards to the way government is trying to operate and the kind of challenges that exist. And there is not many organizations who have got a focus as strong as ours in one particular market. And that has really helped us to differentiate today. I would also say that for us, we are known and we have got a reputation for delivering value very, very quickly. That is rooted in our heritage as a company that is working a lot with startups and taking that sort of really fast lean model into government, into public sector, and that has stayed with us as a really important part of how we differentiate in the market. Tremendous. Thank you very much. Can you explain what happened with the cancellation of work streams at the end of FY23? Can you add some color? Yeah, sure thing. I think there was a few different things going on. As most will know, March is the end of the financial year for the public sector. As you go into April and May, there are often some changes that happen around that time. What we ended up seeing was a very significant number of changes in April and May. Like far, far higher number of changes to priorities than we have seen previously. There was shifts across a number of different clients in terms of areas that they wanted to focus on going into the new year, and things they wanted to deprioritize. That happened in a number of different accounts. What we saw was then April and May being much slower months for us from a revenue point of view as people were realigning to different priorities. Then we started to see a strong recovery in June, July and August. It was tied into the new financial year for government and some bigger changes there than we'd seen previously. Great. Thank you very much. You've already commented a little bit on salary inflation and that it's contributing a little bit to staff attrition. Could you just expand a little bit and tell us if it's also increasing your costs? Yeah, I can touch on that. For salary inflation, we really started to see salary inflation in FY 2022. When we were ramping up our hiring and our headcount in the second half of FY 2022, we started to see that the market was really, really hot. What we did in that period is we adjusted. We've got very transparent salary bands, so we work with the different SFIA levels. We did increase our salary bands, and we were successful in passing on those increases to some of our clients. Since then, FY 2023, the market has been very different. There's been a lot of well-publicized headcount and severances in a lot of our industries. So the market is remarkably different from what it was in FY 2022. What that's meant for us is that we haven't had to amend our salary bands, so we're still maintaining those existing salary bands and hiring within those salary bands. Now, where it has impacted our retention, our employees can leave. They can leave and join other larger organizations for higher salaries. But for us, for Made Tech, we've not had to increase those salary bands. We're not chasing that market. Great. Thank you very much. We have already covered that the revenue will be flat in FY 2024. What is expected on EBITDA with this focus on driving profitability? Yeah, I can talk about that. I think Rory has also talked about the revenue being flat. There is some guidance out in the market from some analysts. We have not given guidance on profitability, but we have seen significant increased adjusted profitability. We have seen that in the first quarter of FY 2024 as a result of the measures that we started introducing in FY 2023. We are definitely seeing increased adjusted profit for the first half of FY 2024, and that will continue. Great. Thank you very much. When will the company turn cash flow positive, and what will the dividend policy be? Yeah. Cash flow is another area of focus. I think we talked about earlier, the focus being on profitability and cash. The cash balance, there were cash outflows in FY 2023. We talked through that on that slide. The majority of that cash outflow was because of those investments in capabilities and products. As mentioned, it is important for us to invest in products because we see a significant revenue opportunity in those products. We are continuing to invest in products in FY 2024, but not at the levels that we were investing in FY 2023. Cash, as I just talked about, the profitability, we are seeing improvements in profitability because of the measures that we introduced in FY 2023 and continuing into FY 2024. Cash flow from operations in FY 2024 will be positive. The investments in products will continue, but at a lower level. We are expecting the cash to improve towards the end of FY 2024, but moving into FY 2025 and beyond. Great. Thank you very much. You have referred to coming into an election. How vulnerable are relationships and contracts with a change of government? Yeah, I can talk a little bit about this. I think that there is a few things to mention here. Our contracts, they are all with Crown Commercial Service and the civil service, so they are not political contracts. A change in government does not directly impact any of our contracts in terms of they will continue to operate and will continue to deliver them. All the contracts we are working on have got long-term allocations in terms of funding that has been allocated to work with, to deliver long-term change programs in government. Although there may be some reprioritization around initiatives, new things that are booted up, we are not expecting major contractual changes off the back of there being an election. What we are expecting, though, is you will see within certain departments, the areas of focus moving forward to change. I know a lot of our clients are talking to the ministers at the moment about their current focus. They are also looking to talk to shadow ministers to understand both sides of the table really, and build up a view of what the future pipeline of things is going to potentially look like. Obviously, that is then tied back into political cycles and so forth. Our clients are planning around this, but we do not see significant contractual risk around it. We are expecting everything we are working on is core to running key parts of government, right? Tax platforms, prisons, lots of really critical things that are important for a society. Those things are going to be required moving forwards. There is increased risk given the level of change, and that's why we've got a much more cautious outlook over the rest of this year and into 2025. Great. Thank you very much indeed. That's the end of questions. Rory, do you have any closing remarks? We've just got a couple more questions that have come in. Great. Can you be. I don't know that I understand it, actually. No, I don't think it's very well-phrased. I think I might leave it. Thank you very much, Rory. Do you have any closing remarks? Yeah, I just want to say thank you very much for supporting the business. We're really excited about the year ahead, and continuing to move the business forwards. Thank you. Tremendous. Many thanks, Rory and Debbie. To everyone listening, you will now be taken to a webpage to give feedback on today's presentation. If you are unable to complete it at this time, you will receive a follow-up email. We would be really grateful if you could take a few minutes to complete. Many thanks for joining. This is the end of the webinar.