Earnings Call: H1 2021

Oct 28, 2020

Good day, everyone, and welcome to the Serco Interim Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Darren Grafton, CEO. Please go ahead, sir. Good morning, and welcome to today's half year results presentation for the 6 month period ending 3 September 2020. My name is Darren Grafton. I'm Serco's CEO, and I'm here with Susan Puth, Serco's CFO. On the back of our recent announcement relating to our oversubscribed capital raise, I'm pleased to report that our half year results as reported as part of that announcement remains substantially unchanged. During the half year, we continue to see a progressive recovery in travel in the Australasian region and significant interest in the North American region and resellers preparing to offer Zeno as an alternative for when travel recommences. In addition, we have made good progress in launching pilots for booking.com in the UK, Ireland and Germany. We'll cover off more detailed updates on activities over the next 20 minutes. You should have the presentation that we released to the stock exchanges earlier this morning in front of you, and we'll start on Slide 4. Susan is going to start with an overview of the financial results for the 6 month period. I will then provide you with an update on the key strategic developments and cover the outlook for the second half. We'll have time for questions at the end of the presentation, and I will now pass you over Susan, and she will start you on Slide 6. Thanks, Dan. Slide 6 shows our performance dashboard. As you can see, Circle has felt the effects of the pandemic with performance materially declining across the board when measured against the first half of last year. EBITDA was a loss of $6,700,000 for the period with a net loss of $10,100,000 after tax. In our capital raise documentation, we forecast our operating revenues to be in the range of $4,000,000 to $5,000,000 I am pleased to report that our operating revenue for the period was $5,100,000 for the half, albeit 66 down 56% compared to the prior year. Recurring product revenues were $4,600,000 which represents 91% of operating revenue. Total income including grants and government COVID related payments was $8,500,000 which was 44% decrease over the comparative period. Annualized transactional monthly revenue, ATMR, stood at $10,400,000 as of 30 September. This non GAAP measure has historically been used as an indicator of future growth potential of Circle's annual reoccurring revenue. However, the variability of travel as a result of the impact of COVID-nineteen make this a less reliable indicator than it has been historically. Total transactions across our travel platforms were down 77% for the 6 month period at 23% of the prior period volumes. R and D spend at $5,900,000 was down 34% from the prior period. Operating costs increased 14% over the prior period. Now moving to Slide 7. This slide shows the summary profit statement and the reconciliation of net profit to EBITDAF. In the half year to 30 September 2020, we generated EBITDAF loss of $6,700,000 compared to a profit of $1,400,000 in the prior year. The reconciliation between EBITDA and the net loss of $10,100,000 primarily relates to non cash items and includes depreciation and amortization of $2,600,000 and net finance losses of $700,000 primarily related to unrealized foreign exchange revaluations. I'll cover off operating revenue in more detail on the next Slide 8. This slide shows revenue breakdown by type of revenue and by geography. Travel platform revenue was down 77%, primarily due to the decrease in travel booking volumes from $2,200,000 to $500,000 for the period, also a 77% decrease. Similarly, content revenue generated from our commissions were down 75% mainly due to the reduced bookings. Expense platform revenue at $2,000,000 however, was not as adversely affected as travel platform revenue and was down 33% for the period. This reflected contractual minimums as well as continued expense filings for non travel related reimbursements. Expense revenue then underpins a 49% increase in average revenue per booking to $8.81 for the period from $5.93 calculated as total reoccurring product revenue of $4,600,000 divided by total travel bookings. Total services revenue was down 67% with the prior year revenues higher due to work completed last year for Flight Centre for their customized version of XenoCult Servi. Slide 8 also outlines movement in earnings in the various geographies. Now turning to Slide 9. The graph presented shows the monthly travel recovery relative to the prior year volumes for the whole of Australasia and also broken down by market. Total transactions as a percentage of prior year for the Australasian region has reached a high of 35% for the month of October, up from the low experienced in April of 9%. Transactions for the 6 month period were 23% over the prior period. The New Zealand business travel market recovered quickly to over 70% of prior year transactions from almost a 0 starting point following the lifting of domestic travel restrictions. As you can see, volumes in August when travel restrictions were reintroduced temporarily. In October, New Zealand reached a high of 76% of transactions compared to the same month last year. Australia, due to ongoing travel restrictions, has only had a slow progressive recovery to 20 6% as of October. We are hopeful, however, that the gradual lifting of interstate restrictions will result in a meaningful uplift of transactions in the Australasian market. I'll now turn to Slide 10, operating expenses. This slide outlines the categories of expenditure. Operating costs increased to $17,900,000 for the period, up 14%. The increase is primarily as a result of increased remuneration and benefits, up 46 percent to $11,720,000 from $7,700,000 for the 6 month period. When comparing to the second half of FY 'twenty to the first half of FY 'twenty one, remuneration declined from $11,700,000 to $11,200,000 Employee headcount increased from 208 at September 2019 to 235 at September 2020 and was 233 at March 2020. During the period, a number of contractors reduced with some converted to permanent employees at a reduced cost. Remuneration also included non cash based share payments of $1,400,000 during the period. Administration costs included $2,600,000 of non cash amortization and depreciation, which was up $1,200,000 from the prior year. Cost savings across most categories were achieved as a result of COVID cost saving initiatives introduced to reduce cash burn to under $2,000,000 per month for the period. A further breakdown of operating costs can be found in Note 3 of the financial statements. Now turning to Slide 11, Research and Development. This slide outlines developments and spends, both capitalized development and expensed research. During the period, total R and D spend was CAD5,900,000 down 34.4% over the prior half year and represented 117 percent of operating revenue. The overall amount invested relative to the prior year was down due to an increased proportion of maintenance work completed during the period. The portion of capitalized spend at $4,900,000 is also down over the prior year period and represents 83 percent of total spend. The capitalized costs are reflective of the investment we are still making to tailor our product for new international markets. The research costs, which were not capitalized during the period, amounted to 1,000,000 dollars Net of government grants for research and after amortization of previously capitalized development, the product development cost expense for the period were $2,300,000 and represented 45 percent of operating revenue. I'm now going to pass you back to Darren to provide a strategic update. Thanks, Susan. And now turning to Slide 13. As we have presented in the past, Serco has been targeting a medium term revenue target of $100,000,000 Although the pandemic has likely to slow the timing of achieving this goal, we consider that the market opportunity remains under diminished. Serco continues to position its platform at the forefront of change, scaling the business to meet the commercial demand that has arisen from the impacts of the pandemic. To further realize this goal, we are investing in content and capability to capitalize on the return to travel to sustain and grow our ANZ stronghold. We are presently activating the North American through multiple channels and we are bringing the power of Zeno to the global market in partnership with booking.com. Serco's brand continues to strengthen as a result of the investments made to date and the recent award wins. This year, Serco was awarded New Zealand High-tech Company of the Year. And just this week, Serco received the Best Business Travel Innovation awarded by SCIF in the USA, a reflection of the investment we have made into our technology and the progress we are making in becoming a major global player. Turning to Slide 14. CIRCO's recent $67,500,000 oversubscribed capital raise was completed to accelerate these growth opportunities and continue to strengthen our balance sheet during an uncertain period with net cash balances forecasted over $90,000,000 at the end of November. Serco is well placed for the future. Net proceeds from the raise were $65,000,000 The COVID-nineteen pandemic is an event that is reshaping parts of the business travel industry, impacting both suppliers of business travel content and services and the needs of the business traveler. In recent months, we have received inbound demand from our travel management company retailers and partners considering planning and requesting accelerated timetables to onboard new customers, deliver new features and expand on these existing partnerships. This demand has exceeded our expectations and has highlighted increased opportunities from a changing travel industry. CUPO's priority is to ensure it has the resource and capacity to execute on the strategic priorities, positioning the company for growth when travel normalizes and to capitalize on the opportunities arising from changes to the travel industry. We will consider small acquisitions and or investments to assist us to accelerate the execution of these strategies and strategic priorities where it makes sense to do so. I believe Serco is in a strong place to execute on its strategy as travel resumes. Turning to Slide 15 to update on the Australasian market. Serco occupies a strong market position in Australasia with the majority of Serco's revenue coming from domestic bookings in Australia and New Zealand, which is approximately 93%. We are hopeful that Australia will see a similar uplift in domestic bookings as that experienced in New Zealand now that the inter interstate travel restrictions are progressively lifting within Australia. We continue to onboard new customers from our travel management company resellers, including Flight Centre and Orbit. The number of corporates transacting in September 2020 was 3,800, and we are pleased to see the number of corporates transacting in October increase to over 4,000. Prior to COVID-nineteen, over 6,800 corporates were transacting on Serco's platform. And the percentage of transactions occurring on our premium zenite platform was 38 percent of the total transactions for September 2020, up from 25% total transactions at the end of March 2020. And on Slide 16, I'm highlighting the activity now in the North American market. During FY 'twenty, Serco invested heavily into the Serco Xeni platform for expansion into the North American market and had its first live bookings following the beta release in last September 2019. Travel within the North American market remains very subdued as a result of the pandemic. However, this market provides a significant growth opportunity over time. And Serco has continued to expand its retail bank in this market in anticipation of the resumption of travel. And Serco has recently added tailored North American content and integrations that helped Serco win its largest customer to date in this market, ZS Associates. We've signed Zeno expense reseller partnerships with the buying group, Omnia Partners, and we've added 4 new travel management company resellers since the 31st March, bringing the total to 9 resellers and is in the process of activating these partners now. At the time of the capital raise, Circa also announced that it's in advanced stages of negotiation for a live direct contract with a Fortune 500 company. No further update is able to be provided at this point in time, but we'll keep the market updated when this deal is agreed. Turning to Slide 17 and highlighting activity in relation to Booking.com partnership. In October 2019, Booking.com expanded its existing agreement with Serco so that Booking.com can offer and promote a white label of the Xena platform to its business travel customers. This partnership continues to offer exciting growth opportunities for Serco. Notwithstanding the COVID-nineteen pandemic and the potential large scale rollout gives Serco the opportunity to access to a much larger addressable market as travel activity recovers over time. The new Zenobooking.comforbusiness platform went live in May 2020 with pilot programs implemented across the United Kingdom, Ireland. A pilot was also launched in Germany in early September 2020. It is now expected that new customers wishing to set up a business account on the booking.com website will be directed to the new xenobooking.comforbusinessplatform and select Northern Hemisphere Markets imminently. Circa anticipates customers will be able to sign up to the booking.com for business platform powered by Zeno as the product is progressively made available in these additional markets. Circa and Booking.com continue to have a collaborative partnership with both parties working to bring a best in class business travel tool to customers globally. So Circo is progressively scaling up to achieve this. I'll now turn to Slide 19 to cover the outlook statement. Circa is well positioned for growth when trading conditions improve and business the business travel industry starts to recover. The profile and timing of that recovery, however, remains uncertain. As a result, we're unable to forecast our likely operating revenue for the 2021 financial year with any certainty. Circa has included assumptions in its forecast that travel will be in the range of 40% to 70% of pre COVID levels by March 2021 and based on the trends noted on Slide 9. However, the extent of travel restrictions in place within Australia and New Zealand will determine where and within this range actual travel volumes will fall. Cash balances at 30 September were 31,500,000 dollars And following the recent capital raising, Serco presently has over $90,000,000 of cash in the bank. Positioning Serco well for an anticipated travel market recovering. Serco is targeting an average monthly cash burn off between $2,000,000 $4,000,000 during the remainder of FY 'twenty one and into FY 'twenty two. Depending on the travel resumption and the achievement of key performance metrics, including the Booking dotcom opportunity and the NORAM customer onboarding as we continue to invest in growing our viable footprint. And an executive update. As you've seen, we've also announced today that our Chief Financial Officer, Susan Putt, has signaled her intention to transition out of the company no later than the end of May 2021. We will shortly commence a comprehensive search for a successor and will utilize her notice period to ensure an orderly succession plan. Susan has played a critical role in the business over the last 4 years of Cirque. She feels it's time to open a new chapter of her career, and we are sorry to see her go, but wish her well. I sincerely thank Susan for the guidance and the contribution that she has brought to me and Circo over her time with us. That completes our presentation. And before I turn to the Q and A, as per Slide 20, I draw your attention to our appendix slides up Slide 21 for further information. I will now hand back to the moderator to facilitate the Q and A. Thank We'll take our first question right now. And that will be from John O'Shea. Please go ahead. Good morning, Darren and Susan. Just a couple of things from me. Firstly, in relation to the I noticed you had any income there, obviously, COVID related revenue, meaning, obviously, government support, I suspect, from and obviously, the pandemic. First question is, will that continue into the second half? And what should we expect there? Maybe we'll start with that one. In some countries, I guess. Frankly, there is subject to, I guess, any further government announcements, but the only one currently is the Australian one which goes through the 31st March. So it's very minimal amounts and most comments not anymore. Sure. In the second half, we should expect that to scale back quite a bit? Yes, correct. The second one, look, I just wanted to get a bit more, making sure I understood what you're saying about the Booking.com deal. Obviously, you've mentioned the pilots and the new customers going on to the Zeno platform over time. Do you have a frame is there any change in terms of the time frame in terms of the official kind of launch of the new product, Darren? And what can you just reiterate what your expectations there are at this particular point in time? Yes. So imminently, we will see a progression of organic sign ups in the Northern Hemisphere markets being activated. So that's the current progress update point that we're at, at the moment, of booking.com. So we should see new sign ups from those regions now coming into our platform. And what does that mean in terms of when it actually starts to transition across in terms of that those bookings and you actually then participating in the deal in terms of the revenue arrangements? When does that at this particular point when you're expecting that to lift off? At this point, we're still working through with booking on the time frames as we get all of the globalized development completed. We've just had the 40 odd staff that we've added into the team over the last 6 to 7 weeks to help go through and hit those milestones as well in there. And once we have confirmation, we will put produce those dates out into the market. Sure. No problem. Thanks very much. That's all from me. You're welcome. Good morning, Darren. Good morning, Susan. Thanks for taking the questions and congrats on a reasonably robust result and circumstances. Just two questions for me morning. Firstly, just on the Zeno and Toxtion numbers, obviously, pretty good uplift there. Just wondering how that's come about? Has there been a natural increase in the number resellers or direct corporates shifting on Xeno? Or has there been some market share gains from some of the current users of Xeno end market? Yes, a little bit of both. So we're seeing Orbit and Flight Centre put on some new customers. We're seeing one of our competitors in the life one of their platforms. But we're also seeing our resellers take the opportunity to continue their migrations of their customers of Surf Online onto Zeno. So we are seeing a multiple combination effect of migration and our teams assisting with that. So we have a definite focus on assisting new markets to put everybody on to the new generation platform, which helps them manage the COVID criteria visually a lot better in there. So everyone's sort of working collectively together. The impact of going, we would like to go a lot faster, but also retailers that have teams that are furloughed at this point as well. So we're just looking for given the constraints, I guess, is the easiest way to sum it up. That's helpful. And second one from me, surround, sorry. Sorry, sorry, I didn't run that. The second question for me was just around expense management. Just noting that the delta on PCT in the step 21 was negative 33%. Just wondering what the key drivers for the decrease there. Yes, it's mostly the active users. So when you've got such high volume of travel expense users, it naturally balances that down slightly. So that's predominantly we charge on an active user basis. So if those users are furloughed or are reduced, then we do see a slight impact on that of a 33%. You've seen probably the launch of Omnia Partners and then the new extension solution that just gets now activated into the North American market, which is our investment with the Interflex acquisition. We just click online and product platform to the market as well. So we're still focused on driving that, and we've already picked up some funds on that platform as well. Thanks. That's really helpful. Appreciate your time. You're welcome. Next, we'll take Chris Byrne with Craig's Investment Partners. Hi, please go ahead. Hi, can you hear me guys? Hi, it's Chris Davies from Decaturities and Partners. Can you hear me there? Yes, all good. Okay. I just on the S and P company that you're sort of in negotiations with, you used the word direct. Is that sort of are you envisioning that being without a TMC or are you partnering with a TMC? I just it's obviously a novel way of going about it in terms of you've normally gone by the TMC, so. Yes. So some customers prefer to have a technology agreement. We've done this previously with the Queensland State Government, and we do use a travel management company in partnership. It's actually quite common in North America for the larger organizations to want to have, especially if they're doing a global agreement because they may use more than 1 regional travel management company to service their global account but want a technology partnership with a company like ourselves. So it becomes a lot more common out of the U. S. For those sort of size companies. Okay. And can you give us a sort of basic time frame? And you've obviously negotiated some of these agreements before. Is this something that could be still 6 months away? Or is it something that you could potentially expect in the next 6 weeks? We are hoping to complete by the end of the year, but these things do take their own life, I guess, on there. And we're working to their time frames around when they want to actually go live as well. So it will we hope that it will be complete in that timeframe, but it's just the commercial sides normally do take a lot longer for these larger types of transactions. Okay. No, that's great. That's it for me. Thanks. We'll move next to Wasson Sarsilani. Please go ahead. Good morning. Darren, Susan. Just a question on the what you're seeing in Australia in terms of forward bookings. Obviously, with the borders set to reopen between Melbourne and Sydney, just interested in what you're seeing from customers at this stage and what you're seeing in terms of capacity on that route as well. I mean, it's still quite early as the airlines scale up. And I think that's one of the things that you see that we saw within New Zealand, the big rush to get aircraft on and then to start to see how the forward bookings sort of lie and then how they can put new aircraft on those specific routes where they have high demand. And we've sort of seen we're pretty close now to that bottom end of that recovery range that we thought we'd be in from March, that 40% to 70%. And we're consistently seeing that we're heading towards that very close to that bottom end and then some days getting hitting that 40%. But we're getting to that sort of level. So we are seeing those early signs of advanced bookings, everyone getting ready for transacting between especially Sydney, Melbourne. Sydney, Melbourne is one of the busiest routes in Australia. Great. And then maybe just looking at the New Zealand experience and given that reopening, it's some months ahead of what we're experiencing in OZ. But just in terms of any trends that you've observed, has anything stood out in terms of how customers are transacting in terms of attachment rates? Or have you seen sort of any noticeable trends around market shares through the TMC channel as the market sort of opened back up in NZ? Yes. I mean, it's always I think government leads the way. So a lot of the governments do they have a high engagement across that sort of area. Of course, around 8% to 10% of our volume stayed pretty constant, which was to do with frontline team that a lot of them are government related. So definitely, travel management companies that had a high presence in the government sector have definitely had a steady revenue stream flowing through them as well. What we did see on the trends is that within 2 or 3 days after a lockdown, really it spikes straight up to in that 60%, 70% -plus recovery. And we're seeing that pretty consistent now in New Zealand. So it gives us a pretty good model to go when people feel safe. We've got multiple vaccines now. Now we've got to look at how the governments will distribute vaccines and get that out to the public and how do we actually start to see a recovery for the future in those sort of models. And so had there been no vaccines and we're still going in and out of lockdowns, but we are starting to see a different type of trend occur. So it does give us hope that there will be a recovery a lot quicker than what probably was first thought. But our models, as you know, we've sort of seen between 40% 70%, between $2,000,000 $4,000,000 in burn. And that does really depend on where the transactions actually sit and how the revenue comes through, and that will adjust our burn model within those ranges. Sure. And just on attachment rates, have you noticed any changes here in terms of customers sort of more have they been more or less likely to sort of book overnight and hotels? Yes. And it kind of gets merged together like you saw our average revenue per booking has skyrocketed up to over $8 because of the volume compared to expense and other sort of things. So there is a it's probably slightly a little bit distorted at the moment being that there's a smaller volume going through it. So it's quite hard to know because the governments have a lot of net rates and a few things like that. So we're just still working through what that actually means. But definitely, the customers that we're seeing on Reno definitely driving different behaviors in the ground. Great. Thanks, Darren. No worries. It appears we have no further questions in our queue at this time. Okay. Thank you. And Mr. Grafton, please open your closing remarks. Yes. Thank you, everybody, for joining us on the call today. We look forward to talking with you over the next few days for those who have scheduled an investor meeting. In the meantime, if you have any questions, then please do not hesitate to come back to either Susan or myself. And thank you once again. Thank you, everyone. That concludes our conference call for today. Thank you all for your participation. You may now disconnect.