Earnings Call: H2 2021

Aug 25, 2021

Welcome to the investor presentation of 3PL's results for the 2021 financial year. I'm Matthew Samblom. I'm the new Chairman of 3PL as of the merger with Blake e Learning about 3 months ago. I'll also be joined on this presentation by Jose Palmera, the Chief Executive Officer as well as Dimitri Arone, the CFO. So we have a lot to cover because of the combination of 2 companies. So there's a bit more than normal to get through. And I would also like to thank Sam Wiss for his great job on being Chairman for the last 7 years. I'm really excited to be back involved with 3P Learning. Tim Powers, Shane Hillen and myself founded 3P Learning back in the early 2000s and it was one of the early EdTech success stories growing very rapidly and eventually doing an IPO in 2014, at which time I also left the company. Tim stayed on as CEO for a bit longer, and Shane had already left the company by that point. Now that I'm back involved in 3P Learning with the other company I founded in the meantime, Blake e Learning, I'm very excited now by this combination because I think it brings together the strong points that both companies have. Obviously, with 3P Learning having great sales organization or in multiple countries and Blakey Learning having a great product development team and also a very fast growing consumer facing market. So there's a lot of positives. There's also a lot of changes and there's also some accounting changes, which come about due to the merger of the companies. So I think you need to understand to understand the dynamics going forward for the company. And so I will move on to the next slide. So what I'm doing in the first part of the presentation is mainly looking to the future. Dmitri will talk more about the year that's gone, but the company has been transformed by this merger. And it's a much different looking company than it was before. It's a much bigger company. It's got a much better growth prospects. It will generate should generate more cash. So I think so I thought we better to really understand how the company is going to look going forward is the key part of the investor proposition involved in 3PL. So obviously, it's now with me back in charge, at least as being Chairman, I and a significant shareholder. I think that's a positive as I think tech company led by founders have a very good track record overall. There's a lot of synergies we've realized between the two companies, over $9,000,000 worth so far with more with some more to come. We also, for the years past, revenue was up marginally at 4%, EBITDA was all right at up about 11%. But going forward, I think we'll be generating much better cash flow than 3PL has in the past, as it should with a business that builds in advance generally when it provides services. There will be some lag in recognizing this revenue, but certainly, we will be generating should be generating good cash flow before any investment activities. And we're looking at revenue in the $92,300,000 to $97,300,000 range for the current financial year. But long term, we think we have a lot of growth in this, and we want to eventually become several times bigger than we are. We also have now got good balance between both the direct to school market, the B2B market and the B2C market where we sell directly to parents to help their kids to learn. And the 2 biggest spend areas, which are in school spending, which are literacy and numeracy. These are the 2 key areas. And in particular, we're going to focus on English speaking markets, but we will eventually do material for other markets as well. We also now own all the IP, the key IP, including Mathletics, Reading Eggs and Mathfeed. Previously, 3PL only really earned the IP to Mathletics. And we have well over 5,000,000 users and 17,000 schools across the world. Thank you, Matthew, and good morning, everyone. Very happy to be part of 3P Learning once again, this time as the company's newly appointed CEO. I've worked with Matthew for a long time and together with the Board and our management team, I look forward to leading the group in this new and exciting chapter. Before I share the financial results, I wanted to comment on a few key items. Firstly, the results for FY 'twenty one include only about 5 weeks of trading from Blake, so they are not an informative guide to the future prospects of the combined business. I'll detail Blake contribution to revenue and EBITDA when I share the results, as well Dimitry in his section a bit later. Next, the company has significant corporate advisory fees and costs of 5,500,000 relating to the Blake transaction and 2 takeover approaches from IXL and BYJU'S in FY 2021. And finally, we have reviewed our product strategy and written down 4,800,000 that is impaired for Readurita. As you know, Blake already has developed Reading X, so we decided it was better to focus on our hero products being Mathletics, Reading X and MathSeeds and discontinue Radiorita. Now to the financial results for FY 2021. Revenue for the year was $57,400,000 which was up 4% year on year. Underlying EBITDA was $10,400,000 which was up 9% year on year and underlying EBIT $1,100,000 This was before applying extraordinary items that totaled $11,600,000 after tax which resulted in a net loss after tax of $9,400,000 dollars As I mentioned, Blake contributed about 5 weeks of trading to these results. The Blake contribution was $3,400,000 in license revenue and $1,100,000 in underlying EBITDA from completion date, which was 28 May. The FY 2021 results are of course important, but in essence, the merger with Blake is a transformative deal for 3P Learning. It provides a stronger revenue growth, profit and cash generation platform for the years ahead. We have put together a longer investor presentation that we normally would to try and better explain the revenue and profit drivers of the combined business. I'll start with the 2 important changes that the merger of 3P Learning and Blake brings about. The first one is IP ownership. 3P Learning now owns the IP in Reading X and MatSEED and therefore accounts for 100% of the income as principal, whereas previously we were recognizing only the portion, which is about 60% of the revenue as the distributor. Athletics revenue, of course, continues to be recognized at 100%. The second important change is that going forward, 3PL will make at least 30% of its billings from the direct to consumer space compared to 3% previously as it was then predominantly a B2B business. While the consumer market has different attributes to B2B including shorter subscription times, we strongly believe this is a fast growing market that benefits from economies of scale. I'll now hand over to Matthew so he can cover B2B but also B2C in more detail. As I mentioned, B2C is a significant addition to the business and likely to become an even bigger contributor to the company's growth in years to come. This is Matthew's area of expertise, so it's good that we hear directly from him. This slide talks about the schools market, the B2B market. It shows the amount of invoicing we do for each product, we've done for each product and we're expecting to do for each product in both the current financial year and previous years. The trends here are fairly clear with reading eggs growing quite nicely over the last 4 years, mass seeds growing quite strongly off a lower base. And matheletics sort of stable with a slight amount of decline over the last few years. We expect these trends to continue, although we also, the next year or 2, expect NAFLETICS to grow again once we have done some work on fixing a few things we think the product needs where it needs to improve a little bit. Some of the key growth drivers in the school market for us beyond the normal sales growth that we expect in different markets selling directly to schools is that we're also working on some enterprise level deals in different parts of the world. Now we haven't included revenue in the for these deals in our projections because they're quite lumpy and hard to predict the timing. And also, we are focused on recording these deals when we actually get paid for them rather than when we have signed a contract because we find, based on previous experience, that's a more reliable guide. So we have quite a pipeline there. We can't really talk about any of those deals at the moment, but we would hope to close some of those deals in this financial year. We also are building out Mathseeds to cover grades 3 to 6, which is alongside what we're doing to improve Mathletics because lot of people do like the approach of Mathsea than it is an alternative to Mathletics, and we also hope to win back some of the people we've lost who've used Mathletics in the past. As I mentioned before, we are doing some work to improve the mathematics offering. We just think there's a number of areas which were part of the original appeal of mathematics, which maybe have been diluted in the meantime, and we want to bring those back as well as adding some new features. This is not a quick process. It'll probably take us 18 to 24 months to fully implement the changes we want. And in the meantime, there are some small things we can do to improve the user experience. So that will provide the long term basis for further growth for what it has been and always is still a good strong program in mathematics. So I spent a bit of time in this investor presentation talking about the direct to consumer market because I'm sure most people are familiar with selling directly to schools at EdTech products, but not as familiar sometimes with the dynamics of the direct to consumer market for EdTech products. This is a skill set that we've built up. Actually, we started when we first published Reading Eggs, it actually started as a consumer facing program and did quite well right from the beginning back in 2,009 as a consumer based program. And only then after we had some success in the consumer market did we switch and also do a school based version of it. So that's where we really have our sort of right from the beginning, we were a very consumer focused company. And as we've gone along, we've got better and better at this market, and we think we can still get a lot better again. I mean, in the consumer space, it's about monthly renewal rates, not yearly renewal rates, because ultimately, the end users of our products are quite young children. And yes, the parent is the customer, but you've got to keep the child engaged. So that is a challenge. And we're also working within a parameter of a lifetime value per customer of under $100 So you've got to really be good at this digital marketing to make those numbers work. But it's also a market which does respond to scale, as I'll talk about in the next slide. The 3 key things you need to be good at direct to consumer marketing in the EdTech space is you need data. The more data, the better. And that means the more customers, the more even people who free trial product, the better. And obviously, we have reached a decent size now where we're dealing with several thousand people signing up most days for at least a free trial. So our data has built over the years and it continues to get bigger. Then you need to be able to afford to have a decent sized direct marketing or digital marketing team. So you have specialists in different areas. You have a Facebook specialist, you can have content producers, video producers, someone who focuses on SEO, data scientists, all these roles are a key to getting better and better at digital marketing. And we're continuing to build our team and skill sets and because we can afford to with our bigger revenue base. And also, the more you spend with online spaces, be it Google's AdWords or Facebook advertising or Instagram or which all the other methods we the more you spend, the quicker the results you find out what's working and what's not working, the more AB testing you can do and the more you can optimize and further refine your digital marketing efforts. So they're all three things which are all very scale based, and we've got a nice scale. We're expecting over $34,000,000 in revenue with a growth of close to 25% happening in the current financial year. This slide gives you a good idea of where we're generating the revenue in terms of the major platforms. We've got both our web platform, which is where people go to our website directly. Then we've got the major sort of mobile platforms, which is iOS and the Android platform. So it gives you a good idea. Obviously, we've had a lot of growth in the iOS platform over the last 4 years, and I'm expecting continual growth there. But we're also now getting good growth out of our web platform due to some of our changes we've made and how we give out free trials with credit card instead of without credit card as we did before. And also, Android is beginning to grow steadily as well. And then that's also the next graph you see, the share of revenue by the major geographic areas. Australia has been growing at a steady rate, but the biggest growth has been overseas in the U. K. Or, say, North America, the U. K, Europe. Those markets there are the ones which are growing at quite a fast rate, and we expect to continue growing at good rates in the future. So these are some of the areas we're going to get growth from in the consumer space in the future. These are the drivers. I mentioned about the we used to just give people a free trial without having to provide a credit card. Now on our web based trials, you do need to supply a credit card. It just has increased our conversion to pay customers quite significantly, at least 50% and sometimes quite a bit more in all our key markets. This is similar to what Apple App Store and Google Play Store already do where you basically have a credit card launch. It just means it does tend to make a higher conversion rate. Obviously, as I mentioned also U. S. And U. K, we have a strong growth there. Although we're still only 25 in America in terms of top educational apps. We're not even quite there yet. So we've got plenty of growth potential there. And we also do a lot of work with homeschoolers. It's quite a big market in America. Previously, before COVID, at least 3,000,000 children were being homeschooled, and now maybe it might be quite a bit more than that because we're hearing even now a lot of people are not willing to send their kids to school because of COVID. But there are also some people who like some of the advantages of homeschooling. And we're also working a lot of other markets like Canada, Ireland, South Africa and as well as New Zealand, which also growing quite well. And collectively, we'll probably be about similar size in the next few years as the big three markets already in. Thank you, Matthew. We are of course focused on business drivers, but we are equally committed to making our accounts as simple to understand as possible. In our line of business, payment is made in advance of delivery of services, so you can expect the level of cash flow to be higher than that reported EBITDA unless the company is making large investments to grow the business. In the past, 3PL has capitalized a lot of its product development costs on the basis that these assets would generate future economic benefit and would deliver significant revenue growth. It is the assessment of the current board and management, however, that historical investment in RadioWriter has not delivered new sales and therefore has been retired and fully impaired. Additionally, the accounting policy to account for customization costs incurred in relation to 3rd party SaaS arrangements has been changed retrospectively to now be fully expensed. This includes €6,500,000 investment in RadioRita which to date has only delivered about €500,000 in sales and €7,200,000 in other programs over the past 3 years. In future, we will clearly identify any new programs or substantial additions to existing programs and the amount of that investment. Under Ifrit guidance, the cost of any new programs released to the market will be amortized over the useful life, which 3P Learning currently assesses over 3 years. In terms of revenue recognition, as I mentioned earlier, prior to the merger, 3P Learning as the distributor of Blake Products recognized only its share of sales to schools, which is about 60% at the time of invoice. Blake in turn recognized the remaining 40% when 3P Learning supplied a monthly sales statement. Subsequent to the merger, 3PL will recognize 100% of the revenue from BLAKE product to schools and spread it evenly over the length of the contract. Effectively, because the majority of school sales happen in the second half of the year, only 40% of Blake's school billings will be recognized as revenue in the FY 'twenty two year with the remainder to be recognized in financial year 'twenty three and beyond. This will have the effect of reducing recognized net revenue by approximately $13,000,000 in financial year 'twenty two compared to what the standalone businesses would have otherwise recorded. The impact on the EBIT line is the same amount as the cost base does not change. These changes will wash out from financial year 'twenty three. Another significant accounting change that boosts top line revenue but has no positive impact on EBIT is that Blake sales made through the distributors like Apple or Edmentum now have to be grossed up to include the fees retained by the distributors. Previously, Blake only accounted for the net sales after distribution fees. We estimate this will have the effect of increasing top line revenue by $5,000,000 in financial year 'twenty two. And this takes us to the FY 'twenty two guidance. Although the performance in FY 'twenty two may be impacted by the transitioning accounting, we believe the FY 'twenty two revenue range of $92,300,000 to $97,200,000 and EBITDA range of $12,100,000 to $15,400,000 is achievable based on the key drivers detailed before and the assumptions we've outlined in the appendix to this presentation. I will now hand over to Dimitri for his comments on the FY 'twenty one results. Thanks, Jose. I'll now turn to the FY 'twenty one results summary. License revenue was up $2,300,000 to 53,800,000 Blake contributed $3,400,000 to license revenue. This was offset by $1,200,000 due to the B2B revenue on Reading Eggs and Mass Seeds post acquisition being recognized on a straight line basis and not at the point of sale. Gross margin percentage is 86% and indicates that as the business scales up incremental revenue will generate significant EBIT growth. Sales and marketing have declined $2,200,000 due to the revised strategy which has meant a partial reduction in headcount, particularly in the Americas region, combined with savings on sales related travel. Product and technology is consistent with the prior year and is yet to reflect the revised hero product strategy, which will see a reduction in product development costs next year. General and administration costs have increased due to the adverse foreign exchange movements. Adjustments have been made for significant one off items during the year. An adjustment after tax of CAD5.1 million has been made for corporate advisory costs relating to corporate activity experienced during the year from offers received from IXL and BYJU'S culminating in the acquisition of Blake. Integration and restructure costs relate to the cost of incorporating Blake into the group and impairment charges have been recorded against product development assets due to the revised hero product strategy. License revenue on an ex acquisition basis was down 2%. This was impacted by $1,200,000 by the B2B revenue on Reading Eggs and Mass Seeds post acquisition being recognized on a straight line basis and not at the point of sale. Fleck e learning contribute $1,100,000 of revenue generated from sales made to 3rd party distributors. Sales and marketing costs have declined $2,300,000 due to the revised strategy which has been a partial reduction in headcount particularly in the Americas combined with savings on sales related travel. This reduction in expenses combined with a slight improvement to gross profit has led to an increase in underlying EBITDA of 14%. License revenue is down $100,000 on a like for like ex acquisition basis. Blake e Learning contributed $2,300,000 of revenue to performance generating gross margins of 87% and EBIT margin of 39%. With Blake's contribution, EBITDA has grown 78%. Cash flow conversion before capital expenditure is 79% and was impacted adversely by a decline in working capital. This decline in working capital was due to the timing of large vendor payments in June 2021. The cash flows presented exclude 3,600,000 of cash acquired on the Blake acquisition and 5,900,000 paid in relation to the corporate advisory, employee restructure and integration costs in FY 2021. Net assets have increased from $1,700,000 to $194,800,000 at 30 June 2021. This was largely due to the acquisition of balances from the Blake merger. Now, let's take a closer look at those individual balances on the balance sheet. As at 30 June 2021, cash was $24,900,000 and the company had no bank debt. Moving on to accounts receivable, which has increased $1,700,000 of this was from the Blake acquisition with the remainder due to an increase in sales. Inventories have now been recognized on the balance sheet and this represents workbook inventory that was acquired as part of the Blake acquisition. Lease receivable, right of use assets and lease liabilities predominantly relate to offices premises and is unwinding with time. Intangibles have increased significantly due to the Blake acquisition. Within this balance is goodwill of $167,500,000 and other finite intangible assets acquired including products of $26,500,000 dollars customer relationships of $2,700,000 and distributor relationships of $2,700,000 Deferred tax assets have decreased again predominantly due to the impacts of the changes to the intangibles excluding goodwill. Income tax payable increase represents $1,800,000 tax payable by Blake brought in as part of the acquisition. Contract liabilities have increased as a result of the Blake acquisition. Current contract liabilities will flow through to revenue in FY 'twenty two with no future cash outflows. Provisions have increased through the acquisition of annual leave and long service leave balances for Blake employees. Now looking at equity, 137,000,000 shares were issued for the Blake acquisition resulting in contributed equity increasing by 182,000,000. No dividend was declared during the year and cash is being retained to support working capital and growth opportunities. Thank you. You. Your first question comes from Shou Yang of Macro Equities. Please go ahead. Hi, good morning. Thanks for the question. Just want to clarify my understanding of the R and D capitalization policy going forward. I'm just not quite clear. Are you saying there will be compilers that will be expensed, but certain specific programs will still be capitalized and amortized over 3 years? Hi. Thanks, Shiro. It's Dmitry here, the CFO. What I'd say is that the accounting standards don't provide the company technically with a choice and eligible costs would be capitalized if it met the future if we thought there was future economic benefit coming through that. Having said that, with the going forward, we kind of we do expect that the capitalization may come down as we believe that those future economic benefits will come from products that are kind of newly created products with new revenue streams. Okay. And the product enhancement work you're doing on athletics, that will be mostly capitalized? So the in terms of that work and it's obviously a future project, so no decision has been made. But the expectation would be that that potentially might not meet that test that we've suggested and therefore would be expensed. Okay. Just on the B2C product, obviously, during the initial COVID, you had a surge in new customers. And I think some of those customers are coming up to their sort of annual renewals. Just want to understand some of the churn experience you've noticed as those customers have come up to renewal time. Yes. I'll take that one. It's Matthew. Look, over COVID year, yes, we certainly had some big bumps there. Though, generally speaking, it did bring down the average length of subscription quite a bit over that time as people just came on sometimes for their lockout period. But it has also just raised the base level of subscription substantially as well. And we do get a lot of word-of-mouth and everything. So, the we will so yes, it did there's certainly some there was greater churn during that year, but at the same time, it also raised the level the water raising them all boats to some degree as well in terms of just a greater prominence and knowledge about online learning and continues on into the New Year. Yes. Okay. Understood. Thank you very much. Thank you. There are no further questions at this time. I'll now hand back to Mr. Palmero for closing remarks. Thanks very much, Bernadette, and thanks, everyone, for attending. As we said at the beginning, this is a transformative deal for 3PL. As a management team, Board and people coming back to the company after many years, we're all very excited about the prospects, and we look forward to sharing those details with you in our investor calls and presentations over the next few days. So please feel free to ask any questions at the time. We've allowed plenty of time for questions and interaction then. So we look forward to seeing you then. Yeah. Thanks very much.