3P Learning Limited (3PL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the 3P Learning FY '22 Half Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Matthew Sandblom, Executive Chairman. Please go ahead.

Welcome to the 3P Learning investor presentation of our half yearly results. I'm Matthew Sandblom, Executive Chairman of 3P Learning. Jose Palmero, CEO; and Dimitri Aroney, CFO, will be joining me on this presentation. I'm very pleased with the progress that has been made since I've joined 3P as part of the merger of Blake eLearning in May last year. Bringing these 2 companies together made a lot of sense as each had complementary skills. But we still have to make it work in practice and bring 2 cultures together, while still delivering good financial results. This is today's agenda. First, I will give an outline of our overall progress, followed by more detail provided by our CEO Jose, and then Dimitri will give us more detail about the financial results for the December half. And then there'll be a Q&A session, and there's also some more detail on our finances in the appendices. On this page, we highlight some of our major achievements for the half just finished. We've had a big improvement in underlying EBITDA, up 106%. We've also increased our revenue to $44.3 million, which is obviously a big increase due to the merged companies and also growth in both markets. Our B2C billings, which is to our consumer market, are also up 12% year-on-year. And our annualized sort of recurring revenue rate is now $65 million, which is an improvement from 3% -- up 3% from 12 months ago. We've got a lot better cash flow. And we're increasing our customer numbers quite significantly. And we're also continuing to invest a lot in our product development, both in new product and existing product. New products include Writing Legends, which I'll speak a bit more about in the next couple of slides. Now continued strong growth in our direct-to-consumer business with billings up 12%. The previous year's numbers had already been strongly positively impacted by widespread COVID lockdown. So it's a credit to our marketing team to get good growth off this higher base. Our billings to schools have also managed to grow even as we made some significant cuts to the size of our sales team and stopped actively selling products like Readiwriter and Wordflyers, which we plan to sunset. In January this year, we regained the distribution rights to Reading Eggs in Canada, which we think can grow -- we can grow this into a multimillion dollar market in the next few years. We've also contracted with several large brand names to provide corporate social responsibility programs over the next 12 months. Most of this revenue will be recognized in the next financial year. As previously announced, we've also acquired the Writing Legends program as the foundation for our push into the third part of our 3Rs basic skill strategy: Reading, wRiting and aRithmetic. To ensure the greatest chance of success and that the program matches the quality of our other programs, we have pushed back the release date of this program from the first half of the next financial year to the second half of the 2022-'23 financial year. For Mathletics, we have done most of the minor fixes customers wanted, while we work on some major product enhancements to be released in the second half of '22, '23. These enhancements should deliver good revenue growth in following financial year '23, '24. For the current half, we are confident we will meet revenue and EBITDA guidance and generate strong cash flow. I will now hand you over to Jose Palmero for his update.

Thank you, Matthew, and good morning, everyone. As Matthew mentioned, our focus for the first half of the year has been the operational integration of Blake, including achieving synergy savings, growing B2C revenue and aligning our product offering with our learning fundamentals or 3Rs product strategy. I'm pleased to report that we have completed the integration of the 2 businesses and our next step is to follow that up with work on our combined company purpose, values and culture. As of today, we have achieved annual synergy savings of $9.5 million and we will continue looking for other savings, including options to consolidate software contracts and office premises, for example. On to revenue. I'll provide further details in subsequent slides, but we posted revenue of $18.8 million for B2C, with billings up 12% on the first half fiscal '21 and annual recurring revenue for B2B hero products of $65 million, which was up 3%. We also acquired Canadian school distribution rights back from Edmentum for USD 600,000 with a book of business, which we have started servicing from January 2022 with our existing sales team in Canada. It's important to note that we have a strong relationship with Edmentum and that they will continue distributing Reading Eggs to schools in the United States, but no longer in Canada. We've also made further progress with several major brands for CSR deals to launch in the second half, particularly in the U.K. and continued discussions with MOE in the Middle East, but there are no material changes to our previous updates. So to expand on the B2C results, we show here the billings performance for B2C Reading Eggs and Mathseeds for the past 2 years. Highlights this half with the performance of our direct web channel which grew 20% to $8.9 million this half compared to $7.4 million for the same time last year. This channel accounted for 49% of our B2C billings, which, as you know, is more profitable for us because we don't pay commission fees. iOS continued performing well and steady at $7.6 million this half despite the recent other privacy changes. The remainder of B2C revenue was from Google Play, which grew 31% from a lower base to $1.7 million. In terms of regional segments, APAC was our strongest performer this half with $9.1 million in billings, up 15% on the previous half and accounting for 50% of our revenue. In terms of performance metrics for B2C, gross billings grew 12% this half while maintaining an ARPU of $123.76. Net billings, that is gross billings less the commissions paid to Apple and Google, were up 15%. Our contribution margin on net billings remained strong at 43%, but this was lower than the 46% in the prior comparative period because we have increased our testing and activity in the U.S. and U.K., which are usually more expensive to market for us than Australia. On to the B2B market results. We show here annual recurring revenue for the hero products half-on-half for the past 2 years. At December 2021, annual recurring revenue for the hero products was $65 million, which was a 3% increase. There was an additional $1.2 million from other products combined, including Wordflyers and Readiwriter, but the 3 hero products make up 98% of our annual recurring revenue. Highlights here were Mathseeds growing 13% to $6.9 million across all markets; Reading Eggs growing 6% and to $26.1 million; and Mathletics showing a small decline of less than 1% across all markets, but still our largest B2B contributor at $32 million. As I mentioned earlier, we started selling Reading Eggs directly to schools in Canada from January 2022. Our sales team in Canada is well established, so this is a good opportunity to expand our Reading Eggs presence with existing resources. In terms of performance metrics for B2B, the number of licenses from the core business are steady at 4.7 million with the Reading Eggs and Mathseeds growth offsetting the small decline in Mathletics and the overall churn. To this, we add about 1 million licenses currently distributed by Edmentum. On the product side, as Matthew mentioned earlier, the main development effort has been on new courses and upgrades for Mathletics, Writing Legends and our new stand-alone mobile app, Master Math Island. We also deployed minor releases in January and February 2022, with Skill Quests Reporting, which focuses on understanding, practice and fluency and Meritopia 2.0, which focuses on rewards. This was to help engagement and customer retention for Mathletics. On the people side, we started our people and culture program in January 2022 to update our purpose statement, company values and ESG initiatives. We've also implemented a new long-term incentive structure using share appreciation rights as the instrument. That concludes my part of the presentation. I'll now pass on to Dimitri for the financial update. Thank you.

Thanks, Jose, and good morning, everyone. Before I run you through the profit and loss for the period, I'll take you through our expected half-on-half profile for FY '22. In summary, the profile of revenue and EBITDA will be affected by the transition in revenue recognition approach on the sale of Blake products to schools. You may recall since the merger completed on the 28th of May 2021, that school sales of Blake products have been recognized to contract liabilities on the balance sheet before being released to revenue in the profit and loss over the duration of the subscription period. In contrast, prior to the merger, 3P Learning had been recognizing net commission revenue on these sales upfront. Outside of this transition, you might normally expect revenue in the first half to reflect approximately 1/2 of our B2B annual recurring revenue, plus the first half of B2C revenue. However, as you can see in the chart on the right-hand side, you'll see that our first half FY '22 results of revenue and EBITDA are impacted by this transition. The impact of this transition reduces in the second half of FY '22. And revenue and EBITDA guidance will be achieved by continuing the B2C billings and B2B annual recurring revenue growth trajectory that we are currently on. Now let's turn to the first half FY '22 profit and loss. First half FY '22 revenue was $44.3 million, up 85% on the prior comparative period, and EBITDA was $3.7 million, up 106% on the prior comparative period. B2B revenues increased by 11% to $25.5 million due to a $6.6 million contribution made from Blake. And this increase has been recognized despite the impact from the transition in revenue recognition mentioned on the previous slide. B2C revenue at $18.8 million in the first half FY '22 is now 20x the prior comparative period's performance following the contribution from Blake, which is not included in the first half FY '21 results, which are pre-merger. Gross profit has increased 82% to $42 million. Sales and marketing costs have increased by $10.3 million due to the digital marketing required to drive B2C growth, offset by some synergy savings. Product and technology now includes acquired development teams behind Reading Eggs and Mathletics, complementing our Mathletics team. Expenses are also increased due to the lower capitalization rate, offset by synergies realized. General and administration expenses are steady as we have more economies of scale, and we've realized synergies. It's also worth highlighting that we've made some adjustments for significant items relating to the Blake acquisition in the current year. Let's now turn to the first half FY '22 cash flow. Pleasingly, net cash inflow from operating activities after payments of taxes and significant one-off items such as restructuring retention and integration costs has improved $8 million. The improvement was due to the positive contribution made by the Blake business, the realization of cash synergies on the merger and some small favorable timing benefits on working capital. It's also worth highlighting that receipts from customers were up 95% to $44 million. And even though those receipts from customers increased 95% or $21.4 million, payments to suppliers only increased by $9.6 million. I'll now hand it back to Matthew to provide final comments.

Thank you, Dimitri and Jose. Now that the merger is complete, the 3P Learning team is very focused on creating strong growth drivers for all parts of the business, including B2C, B2B and enterprise sales. We have clear plans on what we need to do to achieve these goals and believe we have the right team to deliver consistent high-level performance. Thank you for your time today, and we're now opening the lines for any questions that you may have of us. And there's also some additional information in the appendices of our balance sheet and some other sector analysis of our business. Thank you for your time.

[Operator Instructions] The first question today comes from Shuo Yang from Microequities.

A few questions for Dimitri first. In the cash flow statement, the $3 million for restructuring integration costs. Does any of that reoccur going forward?

All right. The answer is no.

Okay. Right. In terms of the investing outflows, the $2.3 million for Writing Legends, that's the acquisition payment or the $1 million intangible payment that's just R&D capitalization?

Yes, that's correct. It's the capitalization of both what we've internally generated products that we do through our employees and external vendors.

Okay. Understood. Then in terms of the B2C, I just want to understand what you're seeing in terms of retention rates as we sort of move through the pandemic? I think at this stage, had a lot of customers sign up and I just wanted to understand whether you've retained what the retention rate has been?

Yes. So I think we have a pretty good slide in the appendices that looks at kind of the annual recurring revenue analysis and presents a churn percentage. Overall, I'd say that the retention rates are holding up pretty well. Obviously, we went through a COVID sales funk previously. But yes, we're pleased by how the retention has been going [ during this period ].

Okay. And in terms of the commissions paid to the Google and Apple stores, is there any benefits as they change their commission models going forward for the business?

Google has reduced its commission to 15%. So that's definitely a positive. Although it's a smaller channel for us than obviously, iOS. iOS hasn't made really -- except for the renewals after 12 months, they do go down to 15%. So obviously, the longer we keep customers on, the lower the commission gets. But as yet, we haven't really seen any other major changes to the Apple commission structure.

Yes. And last question, in terms of some of the products in B2C that you are retiring, is there any sort of -- is there any sort of product support costs or R&D costs that come out as part of those product retirements?

We have Readiwriter and Wordflyers, which are both school products, not so much B2C products, but -- and that's -- there is some revenue against them, but there would also be some minor cost of this, we were sort of continuing on with them, we would have to reinvest and just to bring the product up to the level we wanted. But -- so basically, there's fairly minimal support costs for when we -- we're planning on fund setting the, obviously, the Readiwriter by July in the Northern Hemisphere and by December in the Southern Hemisphere. And then that should be -- there should be any minimal cost until then and then, obviously, at virtually no cost after that. Before we finish, I just wanted to clarify my first response on the question of restructuring costs. I just wanted to make clear that I meant from no further restructuring costs are expected from after FY '22. So we do expect a small amount, much smaller in the second half, mostly continuing from arrangements that are in place at the time of the merger.

[Operator Instructions] We have a webcast question from Deana Mitchell. Deana would like to ask, could you please provide some color on the CSR deals that are in the contract stage in terms of size, region and timing? Are these multiyear deals for hero products?

Thanks, Deana. I'll take that one. So basically, there's no material update to the big deal that we had already announced with the Ministry of Education in the Middle East. We are continuing discussions. But as we've said before, we don't want to make proper announcements until we actually start providing the service and receive the cash for that particular contract. For the other ones, the big brand names at the moment, we're just at contract stage. The launches are planned in the next 3 to 6 months. They are exciting deals, but they're one-off deals, the CSR type arrangements that are meant to highlight the benefits of our hero products, particularly Mathletics. The deal size ranges between $200,000 and $2 million depending on the deal. There's several of those at contract stage. But we'll probably see a little bit more of that towards -- between April and June, we'll give further updates. And this is along the lines of -- or consistent with what we said before, but not announcing any of these deals until we've secured the funding, Deana. Hope that helps.

[Operator Instructions] At this time, we're showing no further questions. I'll hand the conference back to Mr. Sandblom.

All right. Thank you all for attending today, and I hope we provide you with some good information, and we're always trying to make it as clear as possible and transparent about what we're up to and what -- how the business is performing. But if you need more information, obviously, contact 3PL, and we will do our best to help you. Thank you.