Earnings Call: H1 2021

Feb 21, 2021

Good morning, everyone, and welcome to our H1 FY '21 results presentation. Here's our agenda, and as usual, I'll provide an overview of our results and the strategy progress. Dimitry will take you through our financial performance in more detail and then I will conclude with an outlook for the full year. So first, an overview of our results. Our annual recurring revenue adjusted for royalties is up 3%, licenses up 5% and statutory revenue up 3% when compared to H1 FY20. Underlying EBITDA is up 26% and we have 15,000,000 in cash up 20% half over half. And encouragingly, our net dollar churn improved by 4% compared to H1 FY 2020. Now an update on our progress against our accelerate growth strategy. You will recall that we announced our 2022 Accelerate Growth Plan at the beginning of FY 2020 and FY 2021 marks the 2nd year of this plan which is premised on 3 key areas for sales growth. I'll now take you through our progress against each of these areas. First, we have accelerated sales growth through a stronger and expanded product portfolio which has given us the ability to address new customer segments as well as defend our core markets. We've made good progress against this growth lever as evidenced by like for like new business in athletics ARR has grown 32%, ready rider ARR has grown 64% and licenses grew 51% in the Q2 of FY 'twenty one. We saw a 4 fold increase in trials now that we've implemented an improved auto trial experience and our lead growth is up 12%, but more importantly, our sales conversion is up 2%. Finally, our enterprise sales opportunity pipeline has continued to grow and we have a sizable pipeline at contract stage. Americas. Despite uncertain trade conditions, we did see new business ARR growth of 44% and ARR growth overall of 8% in local currency and improved net dollar churn of 15%. Encouragingly, we saw EBITDA grow over 2 67% when compared to H1 FY 2020. Our 3rd growth lever is to improve retention rates through improvements to the product and customer experience. With that in mind, we saw a 4% increase across our product portfolio and new customer retention improved 7% indicating our work around improved onboarding for customers in year 1 is paying dividends. Overall, we improved net dollar churn by 4%. And on the usage front, we saw a 25% increase in teacher logins and a 13% increase in student logins. We continue to improve the B2C acquisition and retention journeys and we saw a 21% improvement to our B2C ARR and we see strong potential here as we build out our product portfolio. Encouragingly, customer support case volumes have reduced by 70%, again showing that we have improved the customer experience. So overall, we're pleased with the progress against our plan. Let me hand you now over to Dmitry, who will provide you more information around our financial performance. Thanks, Rebecca. Let's now take a look at our first half results for 2021. Overall performance of the company has been resilient during the COVID-nineteen pandemic and in the background of corporate activity. License revenue was up 4% on a consolidated basis. Annual recurring revenue adjusted for royalties grew 3%. Expenses were impacted by $600,000 due to the unrealized FX losses offset by savings on travel and entertainment and tenancy costs. Underlying EBITDA was up $900,000 or 26 percent. And NPAT improved by $400,000 despite corporate advisory costs after tax $700,000 being recognized in relation to the recent corporate activity. Now looking at the performance in the APAC region. Annual recurring revenue adjusted for royalties was up 5% due to retention improvements from improved product and customer experience. License revenue included an additional $600,000 of revenue generated from early bird renewals when compared to the prior year. After removing this timing benefit, revenue was up $200,000 due to the retention improvements. EBITDA margin has improved 2 percentage points to 73%. ARPU has increased due to the additional $600,000 of revenue generated from early bird renewals. Full time equivalents increased mainly due to the prior comparison period having full vacant headcount as well as an additional headcount brought on in the current year to support increased sales volume and sales administration. Now turning to the focus and outlooks for the APAC region for the remainder of financial year 2021. We expect to see retention improvements from improved product and customer experience. Improvements to retention, upsell and new business will be supported by releases of our new assessments platform, additional understanding practice and fluency content for extra year groups in Australia and the release of Meritopia, a new student engagement platform across Smithletics and ReadyRider supporting mastery. In addition to these product improvements, we expect an emerging pipeline of new enterprise sales opportunities outside the ANZ. We also expect a decline in copyright income. Now on to the EMEA region performance. Annual recurring revenue adjusted for royalties was up 3% or 7% after adjusting for the impact of foreign exchange. This is due to the improved retention rates during the key back to school period and 100% improvement in new business annual recurring revenue versus the prior comparison period. Despite the royalty adjusted annual recurring revenue growth, license revenue only grew 2% as it was impacted by a lower opening annual recurring revenue balance than the prior comparison period and also due to our accounting policy, which requires revenue on first party products to be straight lined over the service period. Contributing to H121's performance was ReadyRider, which performed well during the period. Expenses were impacted by unfavorable foreign exchange of $400,000 and improved new business sales generating increased commission expense. Now turning to the focus and outlook for EMEA. Today, COVID-nineteen has had a sustained positive impact on the EMEA region's performance. However, the recent lockdowns in the U. K. And other European and Middle Eastern countries introduces inherent uncertainty. FY 'twenty and H1 'twenty one new product releases such as Fast Phonics and Ready Writer Spelling as well as product improvements such as Problem Solving and Reasoning and Understanding Practice and Fluency and Meritopia and our new assessment platform will continue to drive annual recurring revenue growth. We also expect to continue to build and close our enterprise sales pipeline focused on Ministry of Education, Multi Academy Trusts and Corporate Social Responsibility Programs. Now looking at the performance in the Americas region. License revenue was up 3% in U. S. Dollars or flat in Aussie dollars despite challenging conditions in the USA due to funding uncertainty caused by COVID-nineteen. Royalty adjusted annual recurring revenue declined 1%. However, after adjusting for the impacts of foreign exchange, it showed 9% growth. New business annual recurring revenue was up 44% on the prior comparison period despite lower headcount and lower customer acquisition costs. This reflects the successful execution of the go to market optimizations we made at the end of FY 'twenty. Net dollar churn percentage improved 15 percentage points from the prior year. EBITDA grew AUD0.8 million to AUD1.1 million reflecting an increase to EBITDA margin of 16%. ARPU has declined due to the product mix. Now turning to the H2 focus and outlook for the Americas region. We expect continued sales growth momentum from our North American direct sales teams who are ready to capitalize as any additional USA federal funding is made available. We also expect an expansion of our indirect partners into LATAM to distribute our Spanish version of MATHLETICS. Moving on to the consolidated income statement for the first half of FY 'twenty one. Employee expenses have increased by $200,000 as a result of improved new business sales generating increased commission expense. Headcount increased from 269 December 2019 to 272 full time equivalents at December 2020. Technology and occupancy costs have decreased by 400,000 dollars due to a decrease in short term office rental costs and decreased operating expenses related to the office premises as a result of COVID-nineteen. Other expenses include a $600,000 increase in foreign currency loss, offset by a $400,000 decrease in travel costs as a result of COVID-nineteen increased amortization of $300,000 due to the increased investment into product development The effective tax rate in the prior year was impacted by 2019 tax adjustments. The current year effective tax rate includes tax benefit from R and D of 8.5% and tax benefit from adjustments on the prior year tax return of approximately 10%. There are $700,000 of corporate advisory costs after tax, which have been excluded from the underlying EBITDA, underlying EBIT and underlying NPAT. Moving on to H1 'twenty one cash flows. During the period, we saw a $2,200,000 improvement to operating free cash flows before intangibles. This was generated from improved performance with annual recurring revenue adjusted for royalties increasing 3% from the prior comparison period. FX and other non cash items improved as unfavorable FX movements of $600,000 were recorded in the P and L. The change in working capital is mainly due to COVID-nineteen VAT deferral in the UK, higher employee benefits and accrued corporate advisory costs. As indicated in the FY 'twenty investor and analyst briefing on the 14th August 2020, we have increased investment into product development during FY 'twenty one to accelerate the development of features which open up new markets or expand opportunities within existing markets. Now looking at the balance sheet. Trade receivables and contract liabilities have increased from 31 December 2019 due to improved new business and renewals and as more customers in APAC elected to be invoiced the next school year's renewals during Q2 'twenty one. Lease receivable, right of use assets and lease liabilities have decreased due to the passage of time. Additionally, during the period, we subleased our office premises in Bristol, UK, resulting in a derecognition of the to use asset of $300,000 offset by a recognition of the lease receivable of $300,000 Property, plant and equipment has decreased $400,000 due to the sublease of the Bristol office premises. We've seen an increase in intangibles due to continued investment in product development. Trade and other payables have increased from 31 December 2019 as the U. K. Government has deferred payment terms on VAT due to COVID-nineteen. No dividend has been declared with cash being retained to support working capital and growth opportunities. Let's now take a look at investments in product and technology assets. During the period, we enhanced athletics with the release of the new assessments athletics with the release of the new assessments platform, new understanding practice and fluency content for additional grades in our key markets, Meritopia and our new student engagement platform across athletics and Ready Rider supporting Maestro. Literacy capitalization has accelerated as we started to build of Ready Writer writing in addition to enhancing Ready Writer spelling with features to measure and demonstrate student growth and Ready Racer, our new spelling game based on personalized revision and which improves student engagement. From H220, 3P Learning has been engaged in exploring strategic alternatives to realize greater value for our shareholders. As part of this process, we've been engaging corporate advisers, legal consultants as well as incurring other fees and services related to this activity. This has included costs incurred in relation to IXL's offer and the proposal to merge with Blake. Additional costs month to month are expected to be incurred during H2 '21 as the process with Blake e Learning continues. A success fee would become payable in the event the group is acquired or in the event the group acquires 100% of Blake e Learning for the terms set out in the announcement released to the market on the 21st January 2021. Now, I'll hand it back to Rebecca. Thanks, Dimitry. Let me now close with our full year outlook before we open it up for questions. We expect low single digit revenue and EBITDA growth for the full year in APAC. In EMEA, we expect low single digit revenue and EBITDA growth. However, this could change if we deliver on our MOE agreement as well as other enterprise opportunities in the funnel. In the Americas, we expect double digit revenue growth driving significant EBITDA growth from our core business. Revenue and EBITDA could further be significantly enhanced with closure of 1 of the many enterprise opportunities in the pipeline. Despite the improvements we have made across the group in local currency, we expect foreign currency movements since prior year to impact revenue and EBITDA performance. Our cost base is now set. Our mix of cost is optimized and we expect to deliver revenue growth with increased operating leverage, allowing our existing headcount to drive significant revenue growth at high margins similar to other SaaS businesses. On that note, we'll now open it up for questions. Thanks. Thank you. The first question comes from James Bales from Morgan Stanley. Please go ahead. Hi, good morning guys. How is it going? Good. Thanks. Thanks for taking my questions. Firstly, I wanted to understand the progress on the MOE contract. Can you tell us your latest thinking on the contract timing? And what are the key factors that will influence that going live? Yes. And I'll get Dimitri will respond to that. But just to let all the folks on the line know that we've got Chairman Sam here as well, Sam Weisz, if there's any questions around corporate activity and specifically the Blake e Learning DB. Dimitry? Thanks, James, and thanks, Rebecca. So maybe it's worth me just giving a brief update for all the listeners on the call. So in late '20, we signed an agreement with the Ministry of Education from a Middle Eastern country for US10 $1,000,000 The agreement was to run a pilot, which included delivering some athletic and a portion of professional development. And at the time, we expected the services and exceeded cash to occur during FY 2021. Due to the impact of COVID-nineteen and periodic government mandated school school lockdowns in this country throughout the first half of the financial period, we've seen the contract sorry, the contractual obligations under the agreement have been deferred. And so we've agreed with the ministry to extend the term of the agreement to reflect this and accordingly no payment has been received to date. The services to the ministry are now expected to be delivered and collection of the agreement proceeds to occur during FY 2021 FY 2022. And ultimately, I guess, the company recognizes that this continued uncertainty driven by COVID-nineteen could impact the timing of delivery of services under this agreement. So and James, the schools were meant to go back end of Jan. It got pushed to end of Feb. We'll see if they do go back. But yes, it's really COVID uncertainty. Continued commitment from the ministry. We both mutually agreed to that amendment to the delivery of the services. So we feel really confident about it, high levels of engagement. But unfortunately, COVID is deferring back to school and in turn the implementation. And I remember that you were talking about if in a pre COVID world, you'd have made a decision on whether you're well positioned to extend that contract and would have if that was the case, would have started development on an Arabic version of the product. Can you give us an update on your thinking there? And where are you on that Arabic version? There's no impact to the pilot potentially turning into whole of country, James, because we've kind of reset the time line. So it will be now still a 12 month pilot when we commence and it's still ours to prove that this is a great solution for the broader country. So you should just think about it in terms of the time line has changed, but the potential of that opportunity hasn't. And then I guess the other sort of feature of this result is that COVID's worked both ways for you here. Why hasn't COVID been an accelerator with much more remote learning and a forced migration to digital solutions? James, it's Dimitri. I might just have a quick response to that and Rebecca might add some words. I would kind of argue that it has been an accelerator. I think some of the things key features of our business is the new business has kind of increased dramatically very high double digits in the business. So I think that's a clear result. The other thing I'd mention is we have quite sticky customers. And so as an industry segment, retention rates would be relatively high and ours are obviously very high in that industry. And so I think that's kind of a factor that might give the perception that a slower growth than what you might otherwise have expected. The other thing I would say James is I think B2C businesses have got a sugar hit from COVID because it's discretionary spend from parents. In B2B, where you've got districts and schools, they unfortunately haven't enjoyed big funding hits. So our business has not enjoyed that sugar hit in our B2B. Our B2C is actually growing nicely. And I think our one wish is that we had a bigger B2C portfolio to enjoy that opportunity. If you talk to folks, particularly in the U. S, they are seeing COVID as kind of a seminal moment for EdTech in terms of really solidifying digital education in the classroom. So I don't think you'll get the sugar hit, but I think if you talk to industry pundits, it's really the tailwinds that the industry has enjoyed will have an accelerant as a result of COVID, but it won't necessarily show up in a sugar hit, which is what a lot of B2C oriented businesses have enjoyed. So are you saying that acceleration in activity come through in pipelines that haven't hit the numbers yet? When you say haven't hit the numbers yet, what do you mean? So if revenue hasn't accelerated as a result of this or even IRR hasn't accelerated, has are you seeing it in expanded opportunities that are available to you in the second half so that IRR grows at a faster rate? I think we're seeing the new business growth that Dmitry described. And then if you look at our enterprise funnel, some of those opportunities are really around a very purposeful shift from more analog to much more digital. So I think that, that digital shift is present in the enterprise where you've got large districts or ministries saying, hey, we really want to pivot now to digital and do this in a really systemic way. But I think our new business growth has also evidenced the COVID improvements to B2B. Got it. Thanks guys. I appreciate the help. Thanks, James. Thanks. Thank you. The next question comes from Mark Hancock from Precept Investment. Please go ahead. Can you hear me okay, Rebecca? Yes. Hi, Mark. Yes. Thanks for your time. I just like to understand a bit better the difference in the model, the business model between Blake and yourselves? If you could just sort of give me a quick one minute overview of how the two businesses differ and where they overlap? Well, let me have a crack and then maybe because it might be something more specific that you want answered. But 3P has enjoyed a very, very long relationship with Blake and been the distributor of Reading Eggs and MathSeed. So Blake create that product and we leverage our go to market to sell that product in B2B, not in B2C. So we don't have the rights to distribute. Our distribution rights are largely global except for some geographies like China and particularly the North American region. We don't have those. Another distributor has those. I'm just trying to think what else. So yes, I would yes, I would kind of characterize Blake as being the producers of Reading Eggs and Mass Seeds and having a B2C business. And we're the distributor of the Reading Eggs and Mass Seeds products in B2B. Does that answer the question? Yes, that's helpful. And what could you sort of put a figure on roughly what percentage of your ARR would be in like products? Well, I'm going to defer to Dmitry. I don't even know if Dmitry can answer. The way I look at it is probably with the information available is realistically not into the portfolio of our business probably is substantially from Blake Products, whereas the mathematics is substantially from our products and that's probably the best kind of indicator of that split. And importantly, we have been growing the sales of Blake's products through our distribution channels. And roughly how significant are you to Blake? Are you their biggest single distributor? I don't want to disclose that because they're a private company and I don't really know I don't want to comment on us versus North America. But I would suffice to say that, well, we're really important to each other. I think that's the right answer. And would the Chairman be able to just comment on the status of the due diligence and where the what's the Board's current attitude to the proposed merger? I'll comment as much as I can, Mark. The board is very supportive of the engagement between the two companies, which has been at quite an active level with management meetings both for 3P Learning due diligence on Blake, which is the more substantial activity, but also Blake due diligence on 3P learning. We have employed KPMG to conduct financial due diligence on Blake, and we had an update on Friday, and they are a day or 2 ahead of what was a very aggressive 3 week work plan. Gaiden is conducting legal due diligence in consultation with Holding Redlich, who are the lawyers for Blake. And we're, I would say, hopeful within 2 or 3 weeks of having largely completed the due diligence, at which point we can then review our assumptions that were made early this calendar year that this was a positive transaction for both companies. Thanks very much. You're welcome. Thanks, Mark. Thank you. At this time, we're showing no further questions. I'll hand back to the presenters. Okay. Well, on that note, we might call it a wrap. Thanks everyone for joining us this morning and I think we're going to see many of you in the next couple of days ahead. Thank you. Thank you. That does conclude our conference for today. Thank you for participating. You may now