Earnings Call: H1 2023

Feb 24, 2023

Thank you, and good afternoon, everyone. Welcome to the Made Tech interim results presentation for the period ended November 30, 2022. If we could jump along to the next slide. I am Rory MacDonald, Founder and Chief Exec at Made Tech, joined by Debbie Lovegrove, our CFO. Big thank you for your time today. Looking forward to taking you through the progress we have made over the last six months, and talking through our business. If you go to the next slide. Presentation should take about 25 to 30 minutes. I am going to run through the business overview. Debbie is going to talk you through the financial results, and I will talk a little bit about our strategic plan and outlook for the remainder of this year and into FY 2024. We will then hand over for questions following that. In terms of the business overview, it has been a really strong first half of FY 2023. The business growth has continued, so strong revenue growth, 76% growth on the equivalent period last year. I am really pleased with that. I think it has turned out slightly ahead of what we were expecting in terms of we were expecting a stronger, 40/60 split, and the revenue came in stronger in the first half than we were somewhat expecting. Gross profit margin has unfortunately reduced, and we will talk a little more about that later. This was related to the transition from a higher number of contractors and transitioning a number of employees into contractor roles from the end of FY 2022, and some related to our utilization as well. So we will talk a little more about that as we move forward. Our sales bookings were very strong. We were ahead of where we were expected to be on the sales booking numbers. We also closed GBP 27 million in new contracts following the post-period end, which was really good to see. So our contracted backlog figures are now stronger than they ever have been, and really put us in a strong position going into the tail end of FY 2023 and forward into FY 2024. So we feel we are in a really good position. Client numbers have increased. We have gone from 19 to 23 clients, with contract sizes continuing to grow materially. We continue to invest strongly into the development of our own IP, so development of a number of products which will be targeting the local government market, and we have got a first client who signed up in that space. We will be sharing a lot more detail on that at the end of the year, and we will come back to everyone on that later in the year. Headcount has continued to expand. The headcount growth in the first half of this year has not been as aggressive as it was in the second half of last year, but we continue to grow the headcount and looking at really good progress on that. If we could jump on to the next slide. Just wanted to provide an overview of some of our key KPIs as we feel we make good progress on these. So revenue up 76% to GBP 20.6 million, up from GBP 11.7 million in the equivalent period last year. Gross profit up to GBP 6.8 million, growing from GBP 4.6 million in the first half of last year. Adjusted EBITDA is down on last year. That's related to what I touched on earlier around utilization and the transition from contractors to more permanent employees. Sales bookings, yeah, very strong at GBP 32.6 million, up on the GBP 26.5 million last year. Contracted backlog at GBP 47.8 million, which is good, up 54% on the period last year. Overall, I guess the key message here is that the business continues to perform well. Got a strong balance sheet. Cash position is strong, though it has reduced down on the equivalent part period last year due to investment into various areas to drive the long-term growth of the business. But overall, our KPIs are very strong, and we're very happy with them. If we move along to the next slide, please. I wanted to provide a bit of an overview of what Made Tech do, the kind of core offerings and how we are developing on those offerings. Made Tech business is broadly based around these three areas. So transform, deliver, run. Transform is really the early stage of where we get involved in helping to shape clients' thinking on their digital transformation journey. So we work with clients to help them figure out what are their plans around how they're going to transform. And we've got a relatively small team specialized in this within the organization. The deliver area is really the bulk of where our team are based. So, these are the people in our organization who deliver the sort of transformation initiatives. So build the software, build the services for government organizations to help them on their transformation journeys. So we've got these broken out into cloud and engineering, digital delivery, user-centered design, data and AI, and cybersecurity. And then the third area we've got is run. This is when we take on the responsibility for running the technology and the services for our client organizations. So this is a really important part of running the ongoing services that citizens use. And these are the three core parts of our organization. The areas in the lighter green on the slide here are areas where we've continued to invest into. So we've been continuing to build our teams in each of these spaces. And really what we're doing there is looking to expand our capabilities. Expanding the capabilities enables us to win larger contracts with our clients. In years gone by, we'd be winning GBP 2 million, GBP 3 million, GBP 4 million contracts, but now we're looking at contracts that are over GBP 10 million. And what we see is that as the contracts get larger, the requirement on us as an organization to have a broader set of capabilities increases. We're deliberately expanding out these capabilities to meet the client needs, and to win larger and larger contracts. Jump onto the next slide, please. Just turning to clients. Our client base is broad, it's diversified, and it continues to grow in all three of the markets that we're operating in. So central government, local government, and health and social care. We've won nine new clients in the first period of this half year, and we have, as you can see here, a really fantastic client base. So they're really high-quality clients who we can work with over the long term to support them on their transformation initiatives. Clients at the top, so we've got central government departments, and the buying profile of central government departments tends to be larger contracts, which get delivered over a number of years, and you're supporting them on a number of different initiatives. People like the Home Office, DVLA, Department for Infrastructure, these clients bring us in to support them on a number of different things. They are all tied back into their longer-term transformation plans. Local government has a different type of buying profile and buys and looks to transform in a slightly different way. They are more commonly looking to buy solutions off the shelf that will solve particular problems for them, like service line problems. We have been working a lot with local authorities on their transformation journeys, and some of the products that we have been developing are targeted at the service lines where we have identified opportunities, and we will continue to build those out in the years ahead. The health and social care area for us is another important area. There is a mixture of larger government bodies like NHS England and NHS Digital, which have recently come together, and other organizations which do not have a significant budget. We are currently mostly working closely with the larger NHS bodies, supporting them on pretty large-scale transformation initiatives. I think about a year ago, we announced a big contract with one of those NHS organizations. We expect this to be an area that we continue to invest into and continue to build out moving forwards. If we could jump onto the next slide, please. I just wanted to touch a little bit on the market opportunity. Really the sort of market opportunity we are looking at here is fundamentally underpinned by the wider digital transformation shift that is happening across the world. Within government, within public services, there is a lot of legacy, a lot of old school, paper-based technology, paper-based processes and ways of doing things that are not fit for purpose. There is a big shift to operate government more and more efficiently. There is also a lot of suppliers who have been serving government for a long time, who have not necessarily done the best job. There is a big shift to move away from some of the incumbent suppliers to more modern and more digital suppliers who really understand how technology works and how you can really use technology to make a big difference in public services. That is really important for us. As we are taking what we find is the market is growing very quickly. A 22% annual growth rate over the last few years. The market is increasing in size, so the latest data on this from TechMarketView shows the market size increasing by about GBP 3 billion over the next three years. The tailwinds here are really strong as the market is growing, and we are also taking market share from some of the larger IT outsource type providers as government moves away from them. It is a really good time for us to be building our business and you can see that in the numbers, in terms of the rate of growth we are achieving, because we are able to really push forward and that is helped by the wider market opportunity. If we jump to the next slide, please. I have spoken about the U.K. opportunity, and particularly the opportunity within central government, local government, and health. There is also a very significant global opportunity that we are very aware of. It's not an opportunity that we are actively pursuing at this point in time, but it is an opportunity that we think we can capture in the medium term and move forward on. The global opportunity is really rooted in the fact that U.K. has done some things around digital government that are really highly regarded on the global stage. There's lots of other countries, governments who are looking to things that have happened in the U.K. and trying to share learnings and ways of doing things. We think we can capture some of the opportunity from that and in future years, start to expand our business into international markets. As I say, this is a medium term plan. It's not something that's immediately on our agenda. There is also opportunities within adjacent markets, security services, devolved governments, law and police. These areas where we have done small amounts of work, but we haven't currently got a real focus on these parts of the market, and we think there's really good opportunities for us if we can focus on expanding out into those areas. We expect to continue making progress on this when we see the right opportunity, and think it's a really exciting time to be in the public services space and building the business of that nature. I guess the reason I'm talking about this and touching on this is that we see an opportunity that's not short-term. The opportunity we're going after here is a 20-year opportunity, something that we can grow into over a very significant period of time. We're really excited by that, and we're really excited to build our business to capture these opportunities over the long term. If we jump to the next slide. Just wanted to touch on the people side of our organization. Obviously, the people in our business are absolutely critical. All the work we do is done through really talented individuals who work closely with our clients, to deliver great things, and people are really passionate about the work they do. Over the last 12 months, we've increased our headcount significantly. The first half of this year, the increase in headcount wasn't as significant as it was in the second half of 2022, but there's been a lot of bedding in and transition from new people joining the business, that we've been doing. We've spent a lot of time working on that over the first half of the year. We also, unfortunately, had to say goodbye to 18 individuals that we made redundant during this period, and that was tied into us more closely managing our cost base as we scale. It was a difficult thing we had to do, but it felt it was the right thing to do for the business, for the clients. It was important that we did that. Attrition rate in the period has increased to-- Sorry. Our retention rate in the period has increased to 85%, so improved slightly. We expect in the second half of this year it will decrease slightly as some of the changes we made in the organization are driving a slight uptick in attrition. But that's all within the sort of boundaries we would expect for a professional services business like ours. We continue to hire people up and down the country, so we've got Made Techers working in London Southeast, Bristol, Swansea, the Midlands around Birmingham, the Northwest around Manchester and Leeds, and in Newcastle, Glasgow, and Edinburgh. We've got team members and colleagues up and down the country. Some of the locations we're based in don't yet have office space, and we're going to see over the coming months how our team grows and at certain points, how we'll then expand out and can decide to put Made Tech offices in some of these locations. Given the hybrid nature of work at the moment, it's not something we've been prioritizing over the last 12 months. Yeah, really exciting period of growth for the organization, and really, really excited about the progress we're making, and we'll hand over to Debbie to talk through the finances. Thank you, Rory. Can I have the next slide, please? Thank you. Just touching on the key financial highlights. Revenue of GBP 20.6 million, so that's up 76% versus the previous year. Gross profit of GBP 6.8 million, so up 48%. The gross profit margin was 33%, so that was down versus the previous year, which was 39%. Really there's a couple of reasons as to why our gross profit margin was lower. The first one is utilization. Our utilization rate during this period was 68%. That compares against 85% in the previous year. The other reason is contractors. Our contractor usage coming into H1 FY 2023, at the beginning of the year, we had roughly about 16% contractors. We wound that number down, so we replaced those contractors with permanent employees. By the end of November, the contractor usage was 10%. There was a duplication in cost because we had the contractor and the permanent employee. Utilization was also impacted by changes in government and the political turmoil that we saw during this period. We started the year expecting revenue to land sooner, but because of the changes in government, those projects were pushed out, so they were pushed out to the right. They weren't lost. They're not lost revenue opportunities, they just started later. I think what's pleasing is our sales bookings number was high during this period, so GBP 32.6 million, up 24%, and most pleasing of all is the contracted backlog. Our contracted backlog at the end of November was GBP 47.8 million. That doesn't include the three new contract wins that we announced in January of roughly about GBP 27 million. That contracted backlog is much higher now than it was at the end of November. Adjusted EBITDA, so that was GBP 0.5 million in the first half of the year. I think finally, the cash balance. The cash balance was GBP 9 million. That cash balance is really a timing difference that will improve once we drive profit in the second half of the year. Can I have the next slide, please? Thank you. I think we have very resilient revenue. You can see from this slide that our strategy to land and expand clients is working very well for us and is very successful. You can see that we are diversifying, so we're de-risking the business. Also, the client wins, so we are winning new clients all the time. Rory talked about the nine new clients that we've won in FY 2023. Those client sizes, we're seeing them grow. Our average contract size rose by nearly, just under 70%, 69% to GBP 1.5 million. Can I have the next slide, please? Thank you. We have very strong revenue visibility. This is the highest contracted backlog that we have ever had. At the end of H1, it was GBP 47.8 million. That has obviously increased with the three new contract wins. We are bidding for contracts all the time and winning contracts, so that pipeline is growing. What that means is it gives us very strong revenue visibility for the second half of this year and also moving into FY 2024. That coupled with the fact that we have got a more fixed cost base moving forward, we right-sized the business with those 18 headcount reductions. Our cost base is more fixed moving forward. What that means is we can actually drive gross profit moving forward, which will drop through to EBITDA. Can I have the next slide, please? Thank you. Just walking through the P&L. We have seen these numbers already. The revenue of GBP 20.6 million, the gross profit of GBP 6.8, admin expenses of GBP 8.6 million. That does include a share-based payment charge and half a million in severance payments for those 18 people that sadly we had to say goodbye to in November. Just one thing I wanted to touch on is we did an announcement this week that Rory and Chris, who is our COO, have waived their LTIPs. The LTIPs that were announced pre-IPO have waived. This gives Chris and Rory the opportunity to purchase shares in the market to the tune of GBP 1.2 million. It will impact our share-based payment charge. Because we are canceling those shares in the market, it accelerates the share-based payment charge for those LTIPs. The share-based payment charge will increase by roughly about 300,000 in this particular year. It is a non-cash item, so we adjust it out through the Adjusted EBITDA. It will not materialize. It is just a cancellation. Next slide, please. Thank you. Balance sheet. I will just touch on a few things on the balance sheet. It is fairly simple and straightforward. Intangible assets of GBP 3.4 million, so that is our investment in IP that is continuing, and that is to drive future recurring revenue streams. Our working capital has been tightly managed, so our debtor days have improved. They are now 37 versus previous year of 58, and a healthy cash balance. We have got the healthy cash balance of GBP 9 million. There is no debt in the business, so it is all cash, and that will improve as we drive profit. Next slide, please. Thank you. Cash flow from operations was negative of GBP 1.8 million. That is a timing difference that will improve in the second half of the year once we drive profits. We are also investing, so you can see the IP investment of GBP 1.5 million during this period. Now I am going to hand over to Rory, who is going to talk through our strategic plan. Super. Thanks, Debbie. If you go to the next slide. Just going to give a quick overview of the key components of the strategic plan, strategic priorities we're working towards. I guess the first thing to say is growth is a really important part of how we're looking to continue growing the business significantly in the years ahead. We're looking to grow that business through these three areas. Increasing our offerings and capabilities, continuing to build out the offerings and service lines that we can provide to our customers to enable us to win larger and larger contracts, and to better serve the industries that we operate within. That's a really important part of what we've been doing, and we've spent a lot of time over the last six months in building out the right kind of capabilities and the right people in our business to do that. Deepening our industry verticals is a really important part of how we expect over time to increase the size of the health, local government, and other industries that we focus on. Yeah, becoming experts in those industries so we can provide higher and higher value to our clients, and increase rates and things within that market, really important. Third area is around geographic coverage, continuing to expand out the places that Made Tech is based so we can service our customers effectively. There is a big push in government to continue leveling up to deliver more and more outside of London. It's really important for our organization to be based in close proximity to those hubs the government is delivering things. For us, we'll continue to push on that, to continue to make sure we've got strong coverage across the U.K., and then over time, make sure we're putting offices in place and making sure we're working within the local communities to really have a strong presence. We've seen the three of those things having a really positive impact on the growth of the business. Operational excellence, it's really key for us to run a smoother and more and more optimized business and really see all the hard work we're doing growing clients talking through to both gross margin and bottom line. Doing a lot of work around iteratively improving our systems, our processes, and our enabling functions. When I say enabling function, we're talking about the way we enable our teams who are working with clients to work with them really effectively. This is a really big and important part of how we streamline the organization to deliver for clients effectively. The fifth area is around our employee experience. Employees are the absolute core of our organization and the core of everything we do for our clients. For us, really important that we're building out an employee experience that is really leading, is really forward thinking and enables our people to join us and really build a career at Made Tech. There's more and more work we need still on this, but it's a really important part of how we see the business moving forwards over the years ahead. If we jump onto the next slide. Thank you. Just wanted to provide some outlook in terms of how we're looking at things moving forwards. We're trading in line with management expectations, and we're reiterating guidance for the full year. We're confident as our backlog is stronger than it's ever been. At this point in time, we've got a stronger revenue visibility on H2 and FY 2024 than we ever have done. We feel we're in a really, really strong position. We continue to see a really, really buoyant demand environment in public sector. There's lots and lots of contract opportunities out there, and we're really, really well positioned to continue winning new contracts. We've seen the momentum continue in the second half of the year. Overall, we're really excited about what we can achieve over both 2023, 2024, 2025 and ongoing. Really excited to just push the business forward and continue to deliver great growth results and also bottom line results, too. I think that's it from us. I think, can we hand over to Q&A? Thank you very much. To ask your question, click on the Q&A button. We've got a first question here. Are your contracts with clients time and materials or fixed cost? Yeah. All of our contracts, or certainly 99% of our contracts, are time and materials based. Thank you very much. I note that Made Tech held back on announcing the recent significant contracts until the trading update. Is this a new trend, or can we still expect to hear about larger contracts as and when they are secured? We did announce the contracts as soon as they were secured. It was just a coincidence that the contracts were all signed literally at the same time as each other. But as soon as we are able to announce, and we have signed those contracts, we will issue RNSs. Thank you very much. What are the team's expectations for the initial revenue impact from the new in-house IP solutions being released in FY 2024? For instance, do you already have specific projects that you will be targeting existing clients with? Yeah. So, we have got a strong pipeline of clients that are lined up. We have got one customer who is using one of the IP solutions. But we have not provided any guidance yet on revenue for FY 2024. We expect to do that at our full year results. Thank you very much. A question here about revenue growth. FY 2024 forecast revenue growth, as per Singer, is to add 16%. It is a big step down from the near 50% growth forecast for May 2023. Should we expect mid-teens revenue growth at best for the medium to long term, or do you envisage a pickup again? At what rate while Made Tech is still small enough to grow rapidly? Yeah, sure. The revenue growth in FY 2024 that we are forecasting is conservative. We are trying to put numbers out there that we are very, very confident about. We are also conscious of FY 2024 starting to become an election period and the impact that that may have on things as government potentially change at the tail end of that period. We put those numbers out based on that. We will continue to revise guidance as we see changes in the market. I think it is worth saying that we do expect to continue to be a high growth business over the medium term. Great. Thank you. What percentage of the broker forecasted FY 2024 revenues of GBP 50 million were already secured at this stage? We have got, as you can see, very, very strong contracted backlog. The number that is in the presentation was the backlog at the end of November. That is obviously grown since then. We are seeing extremely high percentages of the FY 2024 revenue being delivered from the contracted backlog number. Tremendous. Thank you. How high a priority is reducing the discrepancy between statutory and adjusted earnings figures? One of our key KPIs is the Adjusted EBITDA, so how we look at the business. The key KPIs are ones that we've included in the presentation. Revenue and revenue growth is obviously important. Adjusted EBITDA is important because that's how we're managing the business internally. Thank you very much. Are any of the 23 active clients in sectors outside of central government, local government, or health and social care? No, they're all within those sectors. Thank you. Expanding your capabilities, is this driven by direct client demand or by your view of the gaps that you need to fill in order to win larger contracts? Yeah. It is a combination of both. As an organization, we have got a view on where the market is going within public sector in terms of where we expect them to be medium support in the area, and we are investing into those areas based on the insights we have got on the market. We also take insights from direct conversations with customers, so areas where they are looking for us to support them on, and where we are hearing more and more from customers about that. We also take insights from contracts and things that we may have wanted to go for, but we couldn't go for because we may have had gaps in capabilities. If we see that frequently, that is a good indicator of an area that we should be investing in and developing in. We take data from a bunch of those places. We also look more broadly at the wider tech services ecosystem. Things like AI is an area that is very interesting and going to become a more and more important priority for clients. We look broader than that, and we try and stay on, I guess, the cutting edge of where the market is, where our clients are, and where the opportunities are. Thank you very much. Two questions on utilization. What is the current staff utilization rates, and what is your target utilization rate? If you can say, what gross margin would that drive? During this period, the utilization rates was very low, so it's at 68%. Historically, we have hit utilization rates of about 85%. That 85% is quite a challenge, so really we target nearer to 80%. Gross profit margins, we haven't given any guidance for that in the public domain. But the gross profit margin during this period was low. Historically, we've seen gross profit margins much, much higher, mid-40s. But with the initiatives that we've introduced, we're continuing to focus on utilization and capacity planning to drive gross profit margins moving forward, and that will drop through to Adjusted EBITDA. Thank you very much. Is the low- or no-code approach being adopted by Made Tech? At this point in time, no, we're not operating in that space. We have had clients ask about low- or no-code solutions. We've also seen a number of clients have very significant challenges when they have adopted low-code, no-code platforms. So it's not an area we're currently building out any capabilities in. We do see occasional demand for it, but it's not an area we're focused on. Thank you. Can I ask what the IP is that you're developing? Yeah. We're going to share a full update on this at year end. There's three products that we have been working on developing over the tail end of 2022 and into 2023. The three products are targeted towards the local government space at this point in time. But we'll share a lot more detail on that at the year end. Thank you. Are new government contracts playing particularly hard on pricing? Yeah. We're seeing different things in different places here. I wouldn't say I've noticed a particular change in pricing sensitivity. I think different government departments will have different kind of priorities when it comes to the financial side of things. Obviously, looking to get value for money, and value can be achieved through pricing or other means. We see different kind of tactics taken by different organizations. We haven't really seen a fundamental shift on that. They're always looking for good value for money, and we feel Made Tech is really well positioned to provide good value for money for our clients in the public sector. Thank you. Why are you hiring more staff when your utilization rates are lower? Should you not be offloading more staff? The utilization rates in the first half of the year were lower. We've definitely improved those utilization rates in the second half of the year. We're constantly looking at what headcount we need in the business to drive those revenue streams. As Rory's already alluded to, our retention rate was 85% in the first half of the year, but we are seeing that reduce in the second half of the year. We're hiring because we're really replacing employees that are leaving and those employees, that headcount that we need to drive that revenue moving forward. Great. Thank you very much. What's the bid pipeline like until today? Is that the sales pipeline? Yeah, I think the demand environment continues to be very strong. We're seeing lots of opportunities in lots of different places. We expect in the second half of the year to be strong from a contract booking perspective. Yeah, that continues to be pretty positive from our perspective. Thank you. Rory, why have you given up your LTIP? Let me share a little bit on this. At IPO, there was the LTIP awarded to myself and Chris. I've given that up for a couple reasons. One, I was prevented from buying any shares in the business because of that LTIP. I was not able to. It enables me to be able to do that if I so wish. Secondly, it also enables me to bring in senior members of staff. We're very conscious we need to be able to offer LTIPs to senior members of staff as we look to expand out the executive team. By giving up my LTIP and Chris giving up his LTIP, it gives us additional headroom to be able to do that in the right way. We felt it was the right thing to do. We think it'll be a positive thing for the business long term. Commanders, thank you very much. That's the end of questions. Rory, do you have any closing remarks? I just want to say thank you to everyone for coming to the webinar today. We really appreciate you supporting the Made Tech business, and we're really excited to see the business push forward and continue to deliver great results for Bush Telehealth. Thank you so much. 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 now, you will receive a follow-up email. We would be really, really grateful if you could take a few minutes to complete. Many thanks. This is the end of the webinar.