Earnings Call: H2 2021

May 19, 2021

Good day, everyone, and welcome to the Circa Full Year 2021 Results Call. Today's call is being recorded. At this time, I would like to turn the conference over to Darren Grafton. Please go ahead. Good morning, and welcome to today's results presentation for the year ending 31 March 2021. My name is Aaron Braxton. I'm Serco's CEO, and I'm here with Susan Putz, Serco's CFO. FY 'twenty one has been a significant year for Serco. From near 0 travel revenue in April 2020 when the full on tax of COVID-nineteen affected travel bookings. To today, we are living in a state of uncertainty with travel restrictions still affecting a large part of the world. CSI quickly adjusted to the crisis, introducing cost savings in the first half of the year to manage cash burns with target of less than $2,000,000 per month. Midyear, the decision was made to continue to invest for the opportunities That would still be significant once the travel industry recovered and we increased our monthly average cash burn target to between $2,000,000 $4,000,000 Serco achieved an oversubscribed capital raise of $67,500,000 in October 2020 to support this. And combined with the raise in the prior year, Serco ended the year with $80,000,000 of cash reserves on hand. The company is well positioned to participate in the recovery of the corporate travel markets around the world. Our mergersian goal of 100,000,000 Revenue is still valid, but it's been delayed during the COVID-nineteen impacted year. We decided in conjunction We're Booking Holdings to accelerate the development of Booking.com platform. In March 2021, announced that we are now under Taking the migration of customers to the upgraded Zeno experience for Booking.com's small and medium enterprise solution, booking.com for business. We continue to be supported by our investors. And in June 2020, Circa was included in the NZX I'd also like to thank our employees for their continuing dedication to Serco And in the spirit, so Serco named as the PwC High-tech Company of the Year in June 2020. Unfortunately, that celebration was virtual due to the lockdowns in place at the time, but it still was a highlight for the year End of the Personal Long Term Goal. Our results were released to the stock exchanges earlier this morning, which included a copy of the presentation, and we'll Start on Slide 4. Susan will start with an overview of the financial results for the year, starting on Slide 6, And I'll come back to cover the strategic developments and the outlook prior to taking any questions you may have at the end of the presentation. Thanks, Darren. Before I start, I want to congratulate Darren on winning the Infant Leadership Award last night, And we're very proud of our CEO. Slide 6 shows our performance dashboard that we report every 6 months. I will provide an overview and then go into more detail on some items in the following slides. With our expansion plans And the corresponding increase in operating costs as well as reduced revenue, Circle declined to an overall net loss after tax of $29,400,000 from a loss of $9,400,000 in the prior year. EBITDA was a loss of $22,300,000 from a loss of $6,100,000 in the prior year. Our operating revenue was down 52 percent at $12,400,000 for the year, with 91% representing reoccurring product revenue sources. Recurring core product revenues were down 53 percent to $11,300,000 Total income, including grants, was $16,900,000 Down 37% over the prior period. Annualized transactional monthly revenue, or ATMR, historically a forward looking indicator of Earnings revenue was $17,200,000 as of the 31st March 2021. This was down 37% of the pre COVID peak in February 2020 at $27,500,000 Total transactions across our travel platforms were down 63% over the last year. These increased from the low of 11% in April 2020 to a high of 73% in March 2021, Achieving the high end of guidance that volumes will return to between 40% 70% by March 2021. R and D spend was $10,600,000 for the period and was down 22% from the prior year. Operating costs, including foreign exchange, increased 21% Over the prior year to $44,900,000 As noted by Darren earlier, we ended the year with cash balances of $80,000,000 Excluding the capital raised net funds of $65,000,000 this was an average cash burn of $2,300,000 for the year, well within the targeted cash burn of $2,000,000 to $4,000,000 per month. The first half burn was an average of $1,800,000 and the second half burn, which includes the seasonal months of December January, Where corporate bookings are historically low due to the holiday season was $2,800,000 Now moving to Slide 7. This slide shows the summary process statement and the reconciliation of net loss after tax to EBITDA. The reconciliation includes depreciation and amortization of $5,600,000 Foreign exchange losses were $1,300,000 versus a gain of $700,000 in the prior year, and there were no fair value adjustments related to contingent consideration for the IntePlex acquisition related to the current year. Now Slide 8 shows the revenue breakdown by type of revenue and geography. Recurring product revenue, which excludes services revenue at $11,300,000 was down 53% on the prior year. Travel platform revenue fell 61%, in line with the 63% decrease in total transaction volumes of $4,200,000 in the prior year to $1,600,000 in the current year. Online transactions fell from 3 point $17,000,000 to $1,300,000 The difference between total and online bookings being offline and custom bookings were higher than previous years. This was due to complex bookings performed by travel agents directly rather than a traveler led system booking during this COVID impacted year. Travel platform revenue was mainly derived from the Australian and New Zealand sources with revenue from new Northern Hemisphere expansion not significant in the year. New Zealand source income was only down 13% as this benefited from continuing on boarding of new corporate customers. Circa expense revenue at $4,000,000 was down 31%, and this benefited from the fixed components to pricing. Supplier commission revenue declined against the prior year to $500,000 from $1,400,000 and other revenue remained in line with the prior year at $400,000 ARPB, our average price per booking on reoccurring revenue was $8.76 for the year. This is calculated as total reoccurring revenue divided by total online book travel bookings of 1,300,000 This was up 36% from the prior year compared to $6.46 primarily attributable to the level of fixed charges from Circa Expense. ARPB on travel related revenue was up 12% to 5.36 Total services revenue at $1,100,000 was down 37% from the one thing due to development resources focused on North American Activation and Booking dot com for business platform. I now turn to Slide 9, operating expenses. This slide outlines the categories of expenditure. Operating costs increased to $44,900,000 for the year, up 21%. This was mainly as a result of increased headcount. The most significant cost of the remuneration of benefits at 66% of total operating expenses And increased 52 percent to $29,500,000 This included $3,200,000 of share based payments, which was an increase of $2,200,000 over the prior year. The reconciliation of shares, while other cash based remuneration was down due to GAAP salary reductions for a period of 3 months and no short term incentives for the FY 'twenty year as part of cost savings initiatives implemented in the Q1 Costs also increased with the number of employees. The number of full time equivalents at the 31st March 2021 was 287 representing a net increase of 54 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es since 31st March 2020. Last year, we increased by 60 and the previous year, 67. And similar to prior year, the increase Product Development staff at 47 of the 54. Last year, it was 46. We have 172 Staff based in New Zealand, 20 in Australia, 54 in China and 43 in the U. S. As of the 31st March 2021. Subsequent to year end, the staff numbers were increased to 292 and Circle is planning on continuing to expand, but the rate will be relative to the rate of travel revenue increases. Selling and marketing costs decreased 31% and hosting costs 19% with the drop And volume and cost savings initiatives put in place at the beginning of the year. Administration costs decreased 31%, While computer licenses increased $200,000 with increased headcount, other administration costs decreased due to cost savings initiatives Through reduction in discretionary spending, depreciation and amortization increased $2,500,000 to $5,600,000 The fair value adjustment I have already spoken to. Slide 10, research and development, outlines the development spend, both capitalized development and During the year, total R and D spend was $10,600,000 down 22% over the prior year And represents 80 6 percent of operating revenue. Proportion capitalized spend at $7,200,000 is down over the prior year And represent 68% of total expense. These capitalized costs are reflective of the investment we are making in developing our product to cater to new territories in North America as well as the Booking.com platform. The research costs, which were not capitalized during the period amounted to $3,400,000 Development results were reprioritized with the onset of COVID-nineteen and the acceleration of the global release of booking.com platform powered by Xeno. Development resources were also focused on the management of the platform costs due to the reduced bookings and then the subsequent scale up with the return of bookings in the For For amortization of previously capitalized development, the product development costs expensed for the period were 6,400,000 And represents 51 percent of operating revenue. I'm turning to Slide 11 now. I'm going to pass you back to Darren, who will start on Slide 12. Thank you, Susan. I'll cover how each of the markets are faring and our plans as the travel restriction ease in each market. I'll start with the Australasian region where we occupy a strong market position with most of our transactions being domestic. As the pandemic has been contained and these markets have recovered from the near standstill experience at the beginning of the year. During this COVID period, we have seen over 6,000 customers making bookings. Although this is a reduction of our peak in 2019 of 7,000, The numbers are in line with our expectations as companies plan their return to travel in our home markets. Zeno is now being used by 58% of all transacting customers with transaction volumes at 45% Our total bookings for the month of March 2021, up from 25% for the month of March 2020. Expense revenue for the region, while initially impacted by COVID-nineteen, has continued to underpin monthly revenues, Benefiting from the return to travel and growth in the Australasian region. Booking volumes are steadily recovering each month From former peaks in February 2020 prior to the impacts of COVID-nineteen and the lows experienced in April 2020, Our new peak day was over 13,000 in May 2021, down from a peak of 24,000 in February 2020. On Slide 13, this shows the improvement over the year as well as the difference between the New Zealand recovery Travel volumes have recovered from a low in April of 11% of the prior year month to 73% as of March 2021 compared to March 2019, which was unaffected by COVID-nineteen. This has further improved to 84% in April 'twenty one compared to April 2019. New Zealand has improved to 149% as of March 2021 and reflects the continued onboarding of corporate customers during the year. Australia has moved to 62% as of March 21, and these have subsequently increased to 158% And 72%, respectively, for April 21. Moving to Slide 14. And we've continued to invest heavily into the North American market with transactions now flowing across our resellers, largely from the Canadian reseller and corporates, We were able to onboard during the year and travel more than our U. S. Corporates. The USA has remained in lockdowns for most of the year. However, the market It's predicted to start recovering from July, where business travel is expected to increase following summer holiday period And the rollout of vaccination programs currently underway. Our investment is primed to take advantage of this opportunity. Serco implemented a North American COVID program to educate the business travel buyers on how to manage through the change ahead. This program followed the key features that were needed to support the recovery in the Xeno platform. We also backed up the COVID program with the TMC community program that wraps our team around our partners, enable them to work with launch customers To fast track Zeno to their customer base. These programs saw 5 new TMC resellers Signed customer agreements in the financial year. With the Frosh Travel Group, the largest travel management company buying group signing in April 2021, We expect this momentum of new sign ups to continue. Serco's brand has become more widely known throughout the North American market Within the travel buyers, Serco's brand leaders engage with media and networks to establish brand leadership. And our Chair, Claudia Baden, was also featured in North America's Women in Travel and Technology. Serco is pivoted to support a direct to corporate program for the North American customers, supported by our Fulfillment with our travel management company partners. This has seen an increasing pipeline of global IRF fees worked on And as mentioned previously, we secured a large global account and we've commenced the rollout of this customer in Australia and New Zealand. However, due to the global turmoil still present, we have not yet finalized the rollout across the other markets as yet. A key development milestone in the year was the completion of work to align the user experience of InterPlex's And we launched this new Reno expense offering in October 2020, we also established partnerships with the buying group on their partners and joined the Oracle NetSuite SuiteApp Partner Program. And turning to Slide 15, Booking.com. In October 2019, Booking Holdings made a cornerstone investment in Serco, and Booking dotcom expanded its existing agreement with Serco, enabling booking.com to offer and promote Xeno to its business travel customers. Booking Holdings has continued to support Circa and participated in the October 2020 capital range. As announced in March 21, following successful pilots undertaken during the financial year, Serco has commenced the migration of Customers to the upgraded booking.com for business platform exclusively powered by Zeno. The migration phase is progressively ramping up As we head towards the final migration date in July, we are currently seeing over 1300 small business Customers per day activate on the new platform during this current phase of migration, and we Serco Speaks this activation rate to significantly increase as we move through the further phases of migration. The new Booking for Business platform is a global platform available in multiple languages and countries. The platform connects the Booking Holdings brands together to enable the connected trip. The objective was Confirm that we are now achieving some bookings based on the Connected Trif in multiple markets. As indicated previously, This is anticipated to have a material impact on SIRFA's revenue for FY 'twenty two year. However, Subject to travel recovery, this could fluctuate. And as such, we're unable to forecast that currently with any accuracy. We also know that Small business businesses booking behaviors will be different from our enterprise customers. So now moving to the outlook Segment on Slide 17. A year on from the widespread imposition of global travel restrictions, The timing and extent of the travel recovery remains uncertain. The rate of return to business travel will vary by region, The type of traveler, small versus enterprise and the type of trip, domestic, regional, long haul and international. The combination of multiple factors makes predicting the rate of recovery very difficult. Nevertheless, We are seeing trends that favor the adoption of Serco's travel and expense management solutions. Travel management resellers are Operating with fewer people and this is creating opportunities for automation and technology solutions. Corporations are increasingly focused on the cost and administration of their travel and expense budgets and at the Time are focused on traveler well-being and their duty of care obligations. We are actively assessing these changes to ensure that we can support the market, Customers and our growth as the industry recovers. We are cautiously optimistic Looking for new ways to lead the industry in this recovering. Indeed, we believe our target of achieving $100,000,000 of revenue in the midterm remains achievable, but has been delayed during the COVID affected year. As noted above, the Booking.com's business customer migration is Anticipated to have a materially positive impact on our revenue for FY 'twenty two financial year. However, as we're only partway through the migration process and in light of the uncertainty that remains around the global travel trends, It is not possible to guide the market with any certainty as to the expected revenue outlook at this time. And as of the 30th April 2021, Serco had cash and short term deposits of 77,700,000 We're still planning to increase the number of employees as we continue to scale to capture growth opportunities, Well, we continue to target an average monthly cash burn of between $2,000,000 $4,000,000 per month to conserve cash reserves. And we believe these cash reserves at the current rate of cash burn will be sufficient to see the company through to cash flow breakeven based on our current strategy. However, we will maintain our rigorous focus on cash flow throughout the remainder of the year and ongoing investment continuously Alongside developments in international travel markets, we continue to consider inorganic growth opportunities aligned to strategy And the impacts on Serco, including when we complete the migration of booking.com for business customers. On to the executive changes. As announced at the time of the interim earnings announcement, Susan Puck will be leaving us on the 31st May. Susan has played a critical role in the business over the 4 years at Serco. And I do sincerely thank her For the guidance and contribution she has brought to me and Serco during this time with us. Our process for identifying Susan's replacement is progressing well, and we'll update the market in due course when a permanent appointment is made. In the meantime, we have appointed an interim, Susan Nemeth, to oversee the financial function during the transition period. Susan Nemeth is an experienced CFO, having worked in both permanent and interim roles across various industries and sectors over her career, And welcome here to Serco. As a company with strong growth ambitions, we've been continuing to strengthen and build Diversity across our executive leadership team, appointing Sarah Miller as General Counsel and appointing Rachel Federle as Now turning to Slide 18. So that completes our presentation. And before I turn to Q and A, I draw your attention to the appendix slides after Slide 18. For further information on Serco, its 9 year performance trends and the definitions of our key measures, I'll now hand back to the moderator If you're calling from a speakerphone, please make sure your mute function is off to ensure your signal can reach our equipment. A voice prompt on your phone line will indicate when your line is open and please state your name And we'll go to our first caller. Your line is open. Good morning, Darren Toussaint Gosilani from Jan and Healy. Can I just start with a question on the ANZ Booking ARPB, obviously, on the travel specific spend has gone up? How much of that is Next shift to Dino and how much is it sort of the composition of what's being booked? And maybe sort of could you comment on sort of attachment rates there The tax rate Almost remained steady with the prior year. So most of that price ARPV increase was through contractual price changes And minimums, I guess, that underpinned the contracts with reduced volume Most of the New Zealand customers have been using Xeno from day 1. So we're seeing the uplift in price points On the transaction side, as we roll through that full period of the natural travel ARP increase. Great. And then can I just ask a question on the bookings.com transition? Can you maybe just elaborate on what sort of those activity levels Look like I understand that the volumes are very slow in terms of travel. But in terms of what you're seeing, how many customers have You know, are actually booking on the platform and what the platform is performing in terms of functionality at this stage. Yes. So we've kind of indicated that around 1300 customers sign up and a percentage of those make bookings As they go through, so 1300 per day, by the way, and that's an increase in every day. And that should really accelerate So quite large numbers as we go through the migration phase through to the end of July, and we expect that to ramp significantly. And yes, percentage of those set up, so we see a different trend with small businesses who may make between 312 bookings a year. So they have And so that pattern remains true from that perspective. Right. And in terms of the functionality of the platform in the languages that it's been rolled out to and in hotel and across rail and For all the different components of travel, where is that at the moment? Yes. As we roll across the so we it's in a global rollout at the moment in different markets. As bookings support And in each of those markets, we roll a combined of either rail, air and hotel out or in some markets just Hotel, while any legislative requirements for air and packages have to be put in place. So it's Just a progressive rollout and activation of that program. And we're seeing people book I have committed a trip on the platform now in multiple markets. Okay, great. And just finally for me, just on North America. You called out the direct Enterprise pipeline, can you sort of maybe just elaborate on that, give us a sense of the materiality of some of those RFPs? Yes. Well, the part that we can sort of talk about is that as our brands matured And now scale is now global with booking. Of course, that enables us to take on probably 2 years ahead of where we plan Large and global accounts, that's the one. Unfortunately, we haven't been able to release the name of the one that we'd Previously, it's fine even though we have actually rolled it out in New Zealand and Australia, so we're still waiting on the North American and other markets scheduled to come through to announce that fully. But similar to that one, we've built quite a significant pipeline of customers wanting to use our technology at a global level, And that's incredibly exciting. So we've been included in a lot of North American Fortune 100 to 500 companies. And we'll take our next caller. Your line is open. Good morning. It's Chris Boody from Craig's. Can you hear me? Yes. Hi, Chris. I was just wondering what opportunities would open up from here that would see you look To increase your cash burn for sort of the $2,000,000 to $4,000,000 range a month, I mean, what would the auction fees look like? And what would you be paying? And what would Entire you to spend more than that in the sort of short- to medium term? We're pretty I mean, in the short term, of course, we're pretty on what we need to actually do. But I guess as we start to if we secure some of the global RFPs, which may require some full capital expenditure So roll out into their global programs, which may include even the support of new travel management partners. We haven't yet signed up as well. So Those are always things that could occur. We'll treat them as their own business case and the right capital and capital return That we run into our models into there. So yes, I mean, that would be the path that would do that. And at the moment, it Could be what we're trying to do is produce, of course, the world's first business travel marketplace, powered by our technology. And of course, in doing that, we've sort of become like the in selling side of this technology platform, and we can white label booking for business, but we can do that for other parties and for travel management companies like with Summit Flight Centre Savvy and Orbit Online, And we want to do more of that. And sometimes they may require us to spend a little bit of capital upfront to get it established and then roll out and monetize over the future period. And those would be the only reasons why we would look to spend ahead. But again, that would go through all the right governance process Okay. And just secondly, in terms of going direct To corporates, I mean, have you got an agreement with someone that would do the potential TMC role when things required? I mean, is that Yes. And it's like most of the global travel management companies, whether Most of them are pretty used to supporting the technology having a direct relationship With the tech provider and they process the fulfillment. So we're kind of partnering with anybody. We don't actually mine who does that sort of side of it. Our technology is flexible enough to support that model. So we would sign up a direct agreement with a large multinational We have a technology arrangement with us and the fulfillment and the ticketing and the actual travel content side We'd be sort of managed by that travel management company and we work in conjunction with them. And we do that today. So Queensland State government is an example of how we run that today with corporate travel management. And we'll take our next caller. Your line is open. Good morning. Good morning. Yes. Nicholas Sundsch from Socket here. My question was relating to the How it's going to be seeing in companies such as yours, I've noted in the last few weeks, it's seeing We see a bit of gloomy sentiment behind Brexit about the whole travel sector. I mean, like, particularly at travel, the asset plan, why not we're up till The 2022 and I'm just and I just had similar comments earlier in the year. You might have answered some of this already, but what would you say to investors who say there can be no sort of That these companies such as yourselves can't they can literally be the same again unless there we basically have Yes. I think We see a different set of data being in New Zealand, which is pretty cool. Like you've seen, our numbers are 158% up on 2019 numbers in New Zealand. And I think the real advantage for Serco in this global recovery is how fast New Zealand recovered last year. And we operate about 4 to 5 months ahead of that view of Australia and especially the rest of the world. So we get to see the companies and sectors and how that recovery model actually looks. And We're seeing new patterns emerge. So we're seeing patterns where I was just having a conversation on Monday with 1 of the largest Travel management works out of New Zealand, and they're seeing for the first time having to manage a different section of travel. And that's The travel where people are now working from home and moving in teams to do on-site events in Queenstown and Wellington, And that never occurred. And of course, as the model of work from home has changed, it's opened up a whole new section of business travel, where Companies that are foregoing commercial premise are now looking at different ways of getting their Together and Serco could be a good case of that. We have 172 people employed in Auckland and we only have a Space for 110. So this model, which was active before, is now at Scale for work from home models, that gives us a lot of insights into how the markets will recover in Australia and around the world and new ways of travel as well. When you think about it, it's really it's almost near impossible to manage travel and The compliance and the way of contact tracing manually for a business And meet all the health and safety requirements that might put the focus on our technology. So we do we're going to see a different travel makeup, but Our business is predominantly domestic and interregional, and really only 1% of our volume is international. And the international side doesn't really impact us that much, and that's why we're seeing such a high volume recovery At this stage, so we do have a different view than a lot of the people that are leisure focused or international focused. We see that the transactions will still flow. They may not be at the high dollar value that they were before, but that doesn't affect us And we have no further questions in the queue. I'll turn it back to Darren Grafton for closing remarks. Thank you, everybody, for joining us on the call today. We look forward to talking with you over the next few days and for those that have scheduled investor meetings. If in the meantime, you have any questions, then please don't hesitate to come back to either Susan or myself. And thank you once again. And that does conclude our call for today. Thank you for your participation. You may now disconnect.