1Spatial Plc (SPA) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to 1Spatial's Interim results to July 2024, our half year. So for the next 20, 25 minutes or so, we're going to cover the following. So first of all, quick overview and highlights from me, then over to Stuart for the financial review. Coming back, looking ahead, and then we'll just summarize. So most of you are familiar as to what we do but just a few minutes on a quick recap. We have 2 parts of our business. First, I'm going to talk about the enterprise part of the business. That's the existing business. And what we do there is, we are leaders in location data management. And we've got some software that we sell that's patented and it helps our customers to make critical decisions from up-to-date accurate location data. We have a broad spread of customers across our geographies. We have over 1,000 customers globally, key markets, government utilities, transportation and Streetworks. Partners are really key to our growth strategy and I'll talk about that more in the second half of the presentation. For this enterprise business, it's all around providing expertise, reputation and financial resources to fund our SaaS businesses, which I'll talk about in a second. But what we've been doing over the last 5 years or so is really trying to grow our recurring revenues from our enterprise business. And as you see now, our recurring revenues are greater than 50%, up to 55% now. And you can see our geographic spread there across our territories. That's really good from a risk perspective. Sometimes some markets are up, some are down but having that spread does sort of mitigate that risk. And a key focus area for us in terms of growth perspective is the U.S. So this is our enterprise business and what we've been doing is using that to fund these 2 high new margin SaaS-based solutions, which we're very excited about. We have our 1Streetworks and there's more news to give you on that in a moment and NG9-1-1. And they've got significant additional markets on top of our sort of enterprise business market. And they've got those real SaaS attributes, SaaS margins of 80% to 90%. And we've invested around [ GBP 5 million ] over the last few years into that investment of those solutions and more generally, our cloud. So that's a brief overview as to what we do. So how has our first half been? Well, it's been a positive financial performance. So we've been growing our recurring revenues and there's some good gross margin and EBITDA margin expansion. So our revenues are up 5%. In terms of the geographies, they're all double-digit growth. The only one that was slightly behind our expectations and last year was the U.K. market and that's due to the changes in government, the general election and the purdah period. But we see that catching up in the second half of the year. We've got some good contracts and some contract expansions happening in the second half of the year. We're also usually quite heavily weighted to the second half of the year but then that's particularly the case this year. Stuart will take you through the rest of the metrics, they're all very positive. So we have some key objectives for FY '25 and we've been executing on those key objectives. So firstly, our 1Streetworks opportunity, setting out the U.S. organization up for success, strengthening the sales leadership team and the general leadership team and our ongoing land and expand momentum. So all really good and we'll cover that during the course of the presentation how we've been doing that. But just to cover some of the key wins and expansion in the period. So from a U.K. perspective, had some good renewals with the likes of HS2 but we won a new client with Welsh Water for our utility network app. From a framework perspective, we won a contract with CGI. They've won a GBP 100 million framework for the cabinet office and we're part of that, we'll be providing the specialist expertise. From a 1Streetworks perspective, we won a contract with UK Power Networks and we've been delivering on that. And I've got more information to provide on how that's been going and it's been going very well. And we have announced this morning in our interim statement that we've won an award with a significant county council. That's for GBP 1 million. That's very exciting and will come back to that again at the end. From a U.S. perspective, one of our focus areas from a strategic perspective, we won 2 new contracts in the period with departments of transport, Virginia, and Georgia. We've won some really good frameworks. Winning frameworks is really key to our strategy, Texas and Tennessee and we recently just won a contract with the forest service, a federal agency. In France, we won some big contracts. We work with some big global blue-chip companies there, as you can see, Airbus. We had a renewal with one of our big government customers, the French Cadastre, which we recently announced. So some really good wins there during the year and post period end. And now I'd like to give you a little bit more information on those 2 Department of Transport wins. So hopefully, most of you will be familiar with the picture on the left-hand side, which is our platform, bringing in data at the lowest level in those yellow cylinders up into our platform. And then we have a solution that with some enhanced data in that we've sold to Virginia and Georgia. So just to summarize the deal, it was 2 departments of transport, both of them in aggregate will give us around GBP 0.5 million of annual recurring revenue, which is good. And it's for our automated Department of Transport conflation solution. So what that is, is taking some existing data they have, if you look back to the diagram on the bottom right-hand side, that represents some existing road data they have. And that's got lots of attributes and features and metadata that they've captured with that data but they want to get it more up to date with some more up-to-date data that's actually readily available commercially. And they've taken some [indiscernible] data, something that might be more familiar to you, could be like [indiscernible] data [indiscernible] but this is [indiscernible] data they're taking. And through our platform, we bring all that together and they have this enhanced data, which comes at the top in the gray app there. So what we're doing there is, we're creating this enhanced dataset for them that's constantly updated through our change [indiscernible] update approach in a matter of weeks versus if they do this with other tools or more manually, it takes around 12 months. So it's a really fast way to get them up and running. It's -- majority is all software. There are some implementation services but as that goes on into future years, there's barely any services. And I said earlier that framework is really important and we won this by our position on the Eastern Transportation Coalition framework that we entered into a number of years ago. So there's 18 East Coast states on that framework. So we have the land and expand strategy. So from an expansion potential, we've got expansions within Virginia and Georgia DOT. So we have additional solutions that we sell to the departments of transport. So with Caltrans, we are implementing a transport asset management system, TAMS. So we could supply that solution to Virginia and DOT. But then also, we've got further expansion with other DOTs across that framework and more broadly with the other 45 departments of transport that there are in the U.S. So a really good win for us and we're now executing on those opportunities. And now I'll hand over to Stuart.

Excellent. Thank you, Claire. Good morning, everyone. First 6 months of the year started positively, as Claire said. So when we spoke to you last at the end of last financial year, we had said that this year would be a year of investment in sales execution primarily and that has been what we've seen. As a result of that sales execution, we've seen increases in recurring revenue to now 55% of the total revenue. So that's up 2 percentage points from this time last year. Additionally, the ARR is also growing with the term licenses ARR, which is an area of particular focus, growing the fastest at 30% period-on-period, which is really pleasing. In spite of some inflationary cost increases due to the increase in the quality of revenue, we've managed to maintain gross margin at about 52%. So it's actually slightly up compared to the same period last year but around about 52%. And that increased quality of revenue has also following through to the EBITDA margin increase. So it's up to 12.3% from 11% last year, which is very encouraging. As Claire mentioned, we're quite back-end weighted as a business, very back-end weighted, I would say, actually in terms of renewals. So the majority of our renewals take place in December, January time. We can see, I guess, an improved performance in the second half of the year versus the first half of the year as we've seen over the last number of years. And we do have a very healthy pipeline going into the second half of the year, which is going to help us deliver our market forecasts for the full year and grow our pipeline for the period beyond. Claire has mentioned the 1Streetworks contract, which we'll talk about separately. So that was a GBP 1 million award subject to contract. We do expect that contract to be signed in the near term and it's going to help us drive some significant SaaS revenue in the second half of the year. Moving on then, just a bit more detail around the profit and loss account. So as I mentioned, the recurring revenue is up about 55% of total revenue, bringing our revenue up from GBP 15.5 million last year to GBP 16.2, almost GBP 16.3 million this year, which is a 5% increase. That's translated through to gross profit. So we've managed to weather the inflationary cost increases that we've seen over the last 12 months or so. And our gross profit has increased by 6%, gross profit percentage increasing by 0.4 percentage points compared to the same period last year, up now to almost GBP 8.5 million. Adjusted EBITDA has also increased. That has increased by about GBP 300,000 on the previous year or 18%. As a percentage of total revenue, that's up to 12.3% from 11% last year. So all encouraging metrics there. What we can see is the increased contribution from EBITDA has been offset in part by the increased depreciation and amortization charge caused mainly by the finalization of the work on the core 1Streetworks product at the end of last financial year. We do anticipate there are going to be higher depreciation and amortization charges. But as we've seen so far, particularly with the 1Streetworks products, there are significant contract wins there and significant pipeline of opportunities that we're currently working through. Operating profit has tipped into a profit this year as there were no restructuring costs this year. The restructuring costs last year related to the slight restructure of the French development business. Moving on then to the cash flow for the first 6 months of the year. So an encouraging performance this year compared to the same period last year. As I mentioned, the first 6 months of the year is always cash consumptive. The second half of the year is always cash generative for us generally due to the timing of the renewals. The significant items that sit within this cash flow statement really relate to the improved cash generation from operations from last year. So we're [indiscernible] of GBP 600,000 compared to last year, a decrease in the amount of capital expenditure. So as we discussed earlier on in the year, we're looking to reduce the amount of CapEx that we've got by rationalizing the products that we have. So that's going to come in at about GBP 4.5 million for the full year. And at the half year, we reported GBP 2.1 million of expenditure. So some work to do on some of the products we're working on but a significant decrease in the amount of expenditure this year compared to last year, we're anticipating. And then also there's a bank guarantee of GBP 400,000 or so that we made in the current year, which is going to be repaid. So it's not cash used in operations per se. It's the amount that we're going to receive over the next 3 years from one of the Belgium contracts. So if you strip out the effect of that, the cash used in operations in the first half of the year was GBP 1.6 million versus GBP 2.5 million or so before exceptionals that we had last year. So a positive performance on that. In terms of the net debt, obviously, we're using money in the first half of the year but we are expecting to generate money in the second half of the year. So the full year forecasts remain in line with what we had published at the end of April when we were with our full year results. And the facilities that we have in place are significant to cover the liabilities as they fall due. We negotiated an additional GBP 2.5 million or GBP 2.4 million on the RCF during the course of the first half of the year. That's committed up until June 2027. So ultimately, we've got sufficient resources to service our liabilities as they fall due and to continue the investment that we need to make in sales until such time as that flips around. Moving on. So as Claire has mentioned, we've experienced double-digit revenue growth in all regions with the exception of the U.K. Just to take the U.K. upfront, there were some delays caused by purdah. There were some delays caused by general inertia in the U.K. government. We do anticipate that the U.K. deals will close in the second half of the year. And actually, the performance in the U.K., we anticipate that, that is going to come into line with what we had last year, so to recover the position in the second half of the year. Europe's double-digit revenue growth is mainly driven by the 2 Belgium contracts that we signed last year. So we can see an increasing level of activity this half year versus last. And actually in the second half of the year, we are anticipating further increased activity in those, which is going to drive revenue growth in the second half of the year and into the next financial year FY '26. In the U.S., we've seen a growth of 10%, so caused in part by the Georgia and Virginia Department of Transport contracts that we signed in the first part of the year and there's a positive quality pipeline out in the U.S. So the second half of the year is looking positive also. Australia, which is mainly a third-party term license sale and service provider has grown significantly but from a lower cost base. But encouragingly, we've seen the renewal a number of times actually of some of our proprietary software out there with one of our significant water customers. So we're looking to expand our footprint in the Australian region with our own proprietary software into next year and beyond. The revenue by region remains largely consistent with the last couple of years. So I mentioned recurring revenue. You can see a split there between the recurring revenue, nonrecurring revenue and the perpetual licenses mainly and how that's moved compared to the same period last year. So the proportion of recurring revenue has obviously increased but we can see a decrease in the amount of perpetual revenue that we're getting from perpetual license sales and that's in line with our strategic objectives. In some circumstances, we need to sell perpetual licenses where our customers don't have the ability to accept term licenses. But for all new term license deals in the U.K. with the larger customers who are technologically advanced, we are selling term licenses and converting some of our older customers from our support and maintenance into term license. So that's encouraging statistic. In terms of gross margin contribution, I think it's important to draw out the improvement in the quality of the revenue we've been generating over the last number of years. The increase in the CAGR from '22 to '23 has been 8.8% in terms of the gross margin that we've generated. But importantly, the gross margin percentage has significantly increased. So as that quality of revenue increases, it increases the amount of EBITDA that we're generating and then increases the amount that we can reinvest into our SaaS product portfolio, which is going to yield margins way in excess of these figures. So where are we now in terms of the quality of revenue and the types of things we're selling? Ultimately, this is a slide that we've been presenting for the last number of period ends. And we can see we're moving steadily up the curve in terms of the amount of revenue that's being generated from SaaS products, which is very encouraging. We do have an ambition to get to a significant proportion of our revenue being generated from our SaaS products offering, so in the region of 50-50. We do accept that there is going to be some term license sales but what we do see is a significant decrease in the amount of perpetual license sales we're generating, yielding higher recurring revenue and more certainty going into each new financial year in terms of revenue generation and margin and cash generation. So I'll just hand back to Claire then for the looking ahead section.

Thanks, Stuart. So now we're going to have a few minutes on the sort of general market overview and then we're going to focus on our 2 key strategic areas, the U.S. and 1Streetworks. So demand for location data has never been greater and I'm sure it will, seeing these extreme weathers, you need to have up-to-date data in order to do planning for things like the nation's flood defenses, hurricanes, et cetera. So more and more need for important, more and more need to have it accurate and in systems so you can do planning and that's what we can help do. And from our enterprise business perspective, we're at the intersection of 2 key global growing markets. On the left-hand side, the Geospatial Information Systems business, where we work with the likes of Esri. And on the right-hand side, there's a more master data management, IT systems integrator market where we work with the likes of sort of Atkins, Atos, et cetera. And being at the intersection of those 2 global growing markets is key for us because our systems are data agnostic, system agnostic and that's where we give our customers the best of both worlds and why we're really winning in the market. And on top of those markets, we have got our SaaS market opportunities as well. So one of those is for NG9-1-1 and we have a GBP 350 million market opportunity for our SaaS offering for NG9-1-1. But if we just now focus on the U.S. in totality, so most of you may remember that we have an objective that we want to get to GBP 1 million of annual recurring revenue per state really from our term licenses. And last year, we were in 18 states and now we're in 21. So we really are growing. So we've been building a strong sales pipeline and converting opportunities. We've been investing in our sales team. So we have our NG9-1-1 specialists on board now and we have further resource direct sales in California. Also key to our sales engine is getting on to those frameworks, as I mentioned earlier and we've now got our Esri add-in. So as I mentioned from that market opportunity on the left-hand side, we work a lot with customers that have their data in the Esri platform. So having that add-in, our customers don't have to leave their ESR system. They can just get their data validated in our technology from the Esri system. So that's really good. And the forest service that we just won was using the Esri add-in. And we're building more and more partner relationships because that's really key to our growth strategy. From an NG9-1-1 perspective, I really think we've hit on a really good opportunity here. There's an absolute need in the market and we're working with our NG9-1-1 specialists, that's really sort of come to the fore. And we're identifying how we're going to market in the NG9-1-1 space, really solidifying that approach. But most deals are likely to include partners as part of that and the Esri add-in. And what we're finding is, through working with the specialists, so she's worked with a number of states being the purchaser of NG9-1-1 technology. In terms of how the deal is structured, it's not sort of one-size-fits-all because sometimes the state will also help engage the cities and the counties and sometimes you might have to go to the city and the county. So all states operate very differently. But I think what's going to be -- we're going to be seeing and what's in our pipeline going forward is really a mix of enterprise and SaaS, which is really good. And as I mentioned there, we really do have a strong pipeline of prospects and opportunities building. Something else that's now come to the fore is there's a new regulatory driver from the 25th of November 2024. So there's going to be a mandatory FCC requirement for NENA adoption, not just by the government but by more the commercial sectors and they have 6 to 12 months to comply. So NENA is the NG9-1-1 standard that our rules engine ensures the data complies with for our customers. So we've obviously been working quite a lot with government and they've done it on the basis it hasn't been mandatory but good practice to do that but it's now going to be mandatory. And we now see another area of focus for us from a commercial perspective. So these would be like the big telcos in the U.S., which will also have to comply with the likes of AT&T. So we've also got an additional market here. So in summary, we're very excited about the U.S., lots of great opportunity across our key sectors of departments of transport but also with our NG9-1-1, where we've got our SaaS solution as well. And then onto 1Streetworks, our other SaaS solution. So just a quick recap on the opportunity, the addressable market, over GBP 400 million of ARR. And we're targeting 25% to 30% market share of that, which is GBP 40 million of ARR over the next 5 years, which is actually only 10% of the market, GBP 40 million. And gross margin on this is 80%, which is excellent from a sort of cash generation perspective. So progress in H1, where we had our sort of first win with UK Power Networks and we've been working with them in the South. And the work has been going really well. We've been working with more teams than we have anticipated and the metrics that we're getting out of the work we're doing with them is really strong. And so what we're doing, if you remember, we did do a sort of deep dive into this with a special Capital Markets Day on this, back in February. It was all about getting the metrics so we can get it into their use case for their budget for FY 2025 and that's going really well. And probably the most significant KPI that we've really helped them on is a 40% reduction in road closures in the departments that we've been working at. And this gives multiple benefits. It gives them cost and time efficiencies because closing a road is very, very expensive. But also on the other hand there is this [indiscernible] metrics all around customer satisfaction. And from a county council and more general impact, it has such -- road closures are a real nightmare for society. So reducing road closures has a big society and governmental impact. And I'll come on to why that's important in a second. And just generally, we are really building a nice number of prospects and pipeline and we're continuing with the trials across our key sectors, utilities, Tier 1 and county councils. And I'm pleased to announce this morning, we put in our interim statement that post period and we've had a notification of GBP 1 million award with a large county council. Now this is subject to contract but we're just in the final part of that. I'm confident that it's going to come through. So that's really exciting for us. And it's the visibility of the work that we've been doing with UK Power Networks. So the things like the 40% reduction in road closures that had a big impact on being able to win that contract with a large county council. So just to give a little bit more information about that win that we've been notified about. So as I mentioned, it's our second significant license. And a really good thing about this is that it's opening the platform, not just to the county council, but works promoters. Now what are works promoters? Well, it's the people that actually submit the traffic management plans. I mean the county council won't do it themselves. They don't have works themselves. But often, it's like Tier 1 contractors that would work for the county council and utilities, like Thames Water, Cadent Gas. And the scope of the license is around traffic-sensitive roads. And these are the roads that are most sensitive to things like road closures. So where there's like lots of traffic, particularly in peak times of the day, could be where there's bus lanes, all of those high priority roads. So that's the scope of the license that we're now giving to this large county council. This is more than just about creating the traffic management plan in 2 minutes, which we can do. This is around collaboration of works. And that's what's really important. So it's not just around the county council seeing all the plans in 1 platform. It's about allowing these other contributors to come in so they can really plan work. So if there's some maintenance work, why dig up the road 1 week with 1 works promoter and then the next week dig up the same piece of road. Why not figure out, as a ecosystem, why don't we close that road because you do have to have road closures but why don't we have multiple operators in there for, say, 1 week. And that's the sort of efficiencies and improvements and why we've landed this contract. And then just on the final bullet there. Now this is really beneficial for us, 1Spatial, because the platform is going to be used by these works promoters which will also, in turn, our end customers. So will be able to -- once they see that, there should be a domino effect whereby they'll be able to take them into their wider organization. So it's -- really is -- I can't say what a fantastic opportunity this is for 1Spatial. So what's the focus for the remainder of the year for 1Streetworks? Well, we are increasing the sales team. We've hired a new business development director that we announced to market. We've also got a number of key new hires underneath him, they're all very good. We're very excited about their addition to the team. And really working with that new major county council, really making sure that they love the platform. It's very sticky. So that's a really important part of our business development activity this year as well as executing on that contract. And we've also got a number of other trials and we're continuing to build pipeline, just a reconfirmation of the areas that we're going after, utilities, Tier 1s and other large county councils. And we've got about 7 trials ongoing. We started the year with about 7. We've won 3, 2 are just deferring, gone out but they will come back. It's just time lines of getting the sufficient resource in place to work with us. And we've sort of added on another -- I think the number -- about another 5 trials that are ongoing. But obviously, we've also got the county council work we need to work on. Now we've got the county council award on the books. We have ARR of around GBP 1.5 million, which is the UK Power Networks, the county council and we've got these other small wins in the period. Just in terms of the platform, we will continue to add features to the platform, particularly through the work we're doing with the county council. We understand there could be some need for integration with other workforce management systems. A lot of systems do this. It's about where do you deploy your workforce teams, sending them out. And we could bring in some other data feeds. But that would be sort of within the budget that Stuart talked about in terms of R&D. And so yes, we're really well placed to deliver on our medium-term objectives, which is our GBP 40 million of ARR in the next 5 years from 1Streetworks. So that's it really. So we're really confident about our outlook. The U.S. is being set up for success. We've got these really good frameworks that we've won. We've got a good team there. We've got our fantastic sort of SaaS solutions for NG9-1-1 and we've got the product integration with Esri, which is already sort of showing benefits. 1Streetworks momentum is increasing the work we're doing with UK Power Networks and obviously, the large county council. We're investing in our sales engine from a people perspective but also our partners' perspective. And we've got some significant near-term sales pipeline. So we really are confident in achieving our FY '25 market forecast and our medium-term objectives.