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

Thank you for standing by, and welcome to the 3P Learning FY 2022 Full Year Results Webcast Call. [Operator Instructions] I would now like to hand the conference over to Mr. Matthew Sandblom. Go ahead. Please continue to hold, and the conference will begin shortly. [Technical Difficulty] This is the operator. I would now like to hand the conference over to Mr. Matthew Sandblom, Chairman. Please go ahead.

Welcome to 3P Learning's presentation of the annual results for the year '21/'22. My name is Matthew Sandblom, Executive Chairman of 3P Learning. Overall, we've had a good strong year after the significant event of the merger with Blake eLearning back in May 2021. This was quite a transformative event for the business, as we can see by some of these numbers in front of us with the highlights for '22, including the increase of the underlying EBITDA to $13.8 million. That's including taking account of some significant costs that we had with the transaction and retention payments and some other one-off costs. Revenue obviously grew a lot with this transaction to $97.2 million, and that would have been higher except for we had to stretch out and defer some revenue due to accounting policies to do with the delivery of service over a longer period of time, and also highlight was a B2C, the consumer market, which is parents with children. We have increased revenue 13% to $38.8 million, and that was already coming off a fairly higher base of sales during the period -- previous period, which was very positively affected by a lot of the COVID lockdowns and people learning from home. In the school space, the B2B space, we held our sales levels, which we're quite happy with as we restructured and reduced some of the footprint of the sales team and also discontinued the promotion and selling of some of the less popular products like Readiwriter and Spellodrome. So we think that's a good strong result as we build out the new product offering for growth, what we expect to be stronger, particularly from the '23 financial year '23/'24 financial year onwards. The business is generating good underlying cash at 22.6. This is before we make investments in things like buying the Writing Legends program and also investing quite a lot in building on that program and some other significant investments in product that we're still actually writing off the vast bulk of our product development costs, which has been a significant change from before. The business merged with Blake eLearning, where a lot more is being capitalized. And while we are only really capitalizing things which are actually produced generating revenue, pretty much anything that's generating revenue for us, we then start writing up pretty quickly. But a brand-new products like Writing Legends, we capitalize it cost until they actually start generating revenue. So overall, customer base has also been fairly stable, growing in the consumer space with some slight reduction in the B2B space because of the discontinued product, but strong overall result and a good platform to grow on in future years. And now I'll just move on to the overall strategy of the business that we've been doing a bit of work on. I thought before we get into more detail about all of our financial performance and looking ahead to the next financial year, I thought I'd like to share with you some of the key strategic initiatives that we've been focusing on in the last year or so to really work out where we want to go as a business and what's the big picture. And so big picture, we've outlined some of this before, but I think we've certainly flushed out in more detail, and this slide here shows some of this thinking. So what we're really about is helping school, students learn the basics of reading, writing, arithmetic, all these key subject areas which you need to succeed with all the other academic subject areas. If you can't read, do math and write, you're going to struggle at school. So our focus is on those foundational skills. So currently, we have some great products in those areas, but we think we can do a lot more because we want to be part of the reading journey. We're all the way along. And whatever we can do, which we think can actually make a difference to learning outcomes, we are going to get involved in that area. So currently, we have all our reading programs under the Reading Eggs banner, which are quite comprehensive. So reading really express, fast phonics, the library, Journal World flies. We have quite a big range of programs there. In math, we have Mathletics and Mathseeds. Mathseeds prime that's a bit at the bottom there, which is under development, is going to take math into higher grade levels. Then with writing that we are planning this writing legends program for release next year. That also includes some of the grammar elements as well. They will also then transition over into the consumer market as well, and we are planning on swapping our Mathseeds from being part of the reading eggs consumer offering into a separate offering with the aim of increasing lifetime value per home customer. Now we've also, in those sort of dotted boxes underneath those main areas, put in some areas that we'd like to grow into such as assessment and reporting because I think if you don't really -- I think you don't have assessment they can trust, they don't know which adjustments to make to their teaching both on a student basis -- on a class basis to better improve learning outcomes. So we think assessment is a key part of helping people across the board, be it reading, math or writing become better at teaching and using the resources of time and their effort and the student's learning time more effectively. And as part of that, too, we also think that professional development is a key, too. And we've all heard about the shortage of teachers and a lot of experienced teachers leaving the field. So we think that to help people improve their skills in teaching the foundation, teachers learn all these key skills about how to teach better, what the latest theories are, how they work and proving it with the assessment. This is a winning combination for us and really feeds into our mission of helping people establish those foundational skills, which will lead to long-term success. I will now hand you over to our CEO, Jose Palmero; and our CFO, Anton Clowes, to further elaborate on our financial performance for the financial year just finished. Thank you.

Thank you, Matthew, and good morning, everyone. It's been a great team effort to bring the 3P Learning and Blake eLearning businesses together, so I'm happy to present these results for our first full financial year as the combined and stronger entity. As Matthew mentioned, we had a solid year, delivering revenue of $97.2 million, which was at the top end of our revenue guidance. Underlying EBITDA was $13.8 million at the midpoint of market guidance. I'll start with an update for revenue, operations, product and people and pass on to Anton for further financial details. I will then provide our market guidance for financial year '23 and invite questions. Starting with revenue. B2C achieved double-digit growth with revenue of $39.3 million. Gross billings were $38.8 million this year which was 13% higher than last year. B2B posted single-digit growth with revenue of $57.9 million, which was 8% higher than last year. Annual recurring revenue was steady at $64.4 million, which was a good result given the more focused product strategy, sunsetting of Readiwriter and Spellodrome and the smaller sales team in the U.S. We have not been successful, however, with enterprise sales, including the previously announced Middle East Ministry of Education deal. We will continue seeking opportunities but we'll redirect our efforts towards CSR-related deals aligned with 3P events such as Worldmark Day and, of course, continue our focus on product development for our core markets. On to operations. As announced in our February update, the operational integration of the 2 businesses is now complete, creating a strong vision for our products and people and achieving synergy savings of about $10 million. Also announced in February was the acquisition of Writing Legends to complete our product offering in reading, writing and math and find the core distribution writes for Canada from Momentum to allow us to sell and market our full product suite in Canada. In terms of product, we're continuing our pace for the bigger build of Mathletics and Writing Legends. This will be our main priority for our fiscal '23 product road map and include new courses, student center and the new Avatar system for Mathletics Australia, years 3 to 7 and new lessons for Writing Legends for years 1 to 6. We expect to release some of these in the second half of financial year '23. Math will get on stand-alone apps as part of our strategy to offer it as a separate service for B2C and new Mathseeds prime content will be added to the app in financial year '23. During the year, we also expect to release our B2C casual gaming app, Master Math Island. For Reading Eggs and Reading Express, we're improving reports, adding more motivation and engagement features and the new reading journal to boost reading for pleasure. [indiscernible] to product place alongside product this year with a range of activities, including updating our purpose statement, better ways to learn, our company values and the first page of our new ESG program focused on education activities and educational impact. So a bit a year for our teams across the company, but great results all around. B2C was again our star performer in the consumer market. Gross billings were $38.8 million this year, 13% higher than last year. The net billings performance was even better, delivering a 17% improvement on last year and the contribution margin of 53%. This reflects the fact that our direct website channel now makes up 50% of our billings and improved 18% on last year, selling on commission fees and growing our customer base. Fastest-growing markets were the America, 24% and APAC, 17% higher than last year. Key focus areas for B2C in fiscal '23 are increasing revenue and market share by offering separate literacy and numeracy solutions, increasing lifetime value by enhancing product features such as rewards, certificates and payment reports. In the schools market, B2B delivered good revenue growth of 8% at $57.9 million, with Reading Eggs and Mathseeds increases, offsetting a small decline in Mathletics takeup. Exit ARPU also increased 6% to $12.14. Math is still our largest B2B earner with annual recurring revenue of $30.3 million, and we expect that to continue this year while we build the later threshold. Other focus areas for fiscal '23 are further increasing upwards through half score deals, upsell, cross-sell, implementing our math solution selling approach through our new sales team structure with dedicated new business, retention and customer success specialists. I will now pass to Anton for further financial details for fiscal '22. Thank you.

Thank you, Matthew. Thank you, Jose. Good morning, everyone. My name is Anton Clowes. I'm 3P's CFO. This morning, I'm going to take you through some of the results and cash flow, some key P&L drivers and B2C and B2B performance metrics, plus some cash flow bridges and an EBITDA bridge. Turning to Slide 14, P&L key drivers. B2B revenues increased 8% to $57.9 million while ARR remained flat on PCP despite the U.S. sales team and sunsetting Readiwriter and Spellodrome. Record FY '22 B2C revenue of $39.3 million. Sales and marketing costs increased by $19 million, primarily due to digital marketing campaigns to drive B2C growth, partially offset by B2B synergies realized. Product and technology now includes merged development teams, and expenses have primarily increased due to significantly lower capitalization rate, partially offset by synergies realized. Underlying EBITDA, $13.8 million, up 46% on the prior corresponding period, driven by B2C growth combined with realized merger synergies, significant one-off items relating to the Blake acquisition, depreciation and amortization of acquired products and restructure costs, retention bonuses and consolidating the entities. We'll now turn to Slide 15 and the B2C performance metrics, a good year, FY '22 in this part of the business. Gross billings up 13% to $38.8 million, licenses up 11% to approximately $313,000, and net billings growing 17% to $34.6 million. Our net billings contribution margin improved on last year at 53%. From a revenue perspective, record revenue, $39.3 million, expenses of $22.1 million, meeting a contribution margin of $17.2 million and a contribution margin percentage of 44%. Turning to Slide 16, B2B performance metrics. Our closing ARR, flat on opening at $64.4 million, churn steady at 14% and exit ARPU improved to $12.40. From a revenue perspective, we reported revenue in FY '22 of $57.9 million, expenses of $26.9 million and a contribution margin of $31 million and a contribution margin percentage of 54%, which has improved from 52% at FY '21. While revenues increased by 8% to $57.9 million, ARR remained flat on PCP despite the sunsetting of Readiwriter and Spellodrome. Turning to Slide 17, a cash balance bridge, a good story. We had opening cash balances of $24.9 million last year, and we've closed FY '22 with an improvement of $6.2 million to $31.1 million. Underlying cash flow is healthy before tax of $22.6 million. We had underlying tax paid of $4 million. This excludes the $1.8 million paid in relation to the Blake stub period. We've got net intangible addition of $5.4 million, which includes $3.1 million of Writing Legends and $0.9 million Edmentum Canada rights we reacquired. Merger-related cash flows include the Blake stub period tax paid of $1.8 million and $3.3 million one-off integration and retention payments. We have no external debt. And finally, on Slide 18, we provide an EBITDA cash flow bridge. Underlying EBITDA of $13.8 million and after taking into account the accounting normalization as a result of the merger with Blake of $10.2 million, a normalized $24 million underlying EBITDA adjusted for working capital, our underlying cash flows from operations before tax of $22.6 million. We paid underlying back of $4 million. We had net PP&E additions of $400,000, net intangible additions of $5.4 million, which includes $3.1 million relating to Writing Legends and $0.9 million relating to the Edmentum Canada rights reacquisition. We paid net rents and some FX of $1.4 million and the merger-related cash flow is similar to the cash balance bridge, $1.8 million relating to the Blake stub period and $3.3 million one-off integration and retention payments, matching the net cash generated in FY '22 of $6.2 million, a pretty healthy story. Thank you for your time. I'd like to now pass back to Jose.

Thank you, Anton, and congratulations on your first year-end with us. We now look at fiscal '23 guidance. For financial year '23, our market guidance is as follows: revenue range $111 million to $115 million; underlying EBITDA range, $15 million to $18 million; cash flow generation, excluding acquisitions of at least the same amount as underlying EBITDA range. As Matthew said earlier, this was a transformative event for the company, so thank you to our shareholders, our customers and the 3P Board for supporting our efforts. Special mention, of course, go to our talented and dedicated team for all the hard work during the year. This concludes our presentation today, so I'll now invite questions from the audience.

[Operator Instructions] Your first question comes from Piers Flanagan from Barrenjoey.

Just a couple for me, if I can. Maybe just firstly, on the accounting impacts or changes with Blake. I mean, you talked about the underlying EBITDA impact in one of the slides. Maybe give us a bit of color on the revenue impact as well in FY '22?

Yes, sure. So the basic effect on -- of the accounting changes in fiscal '22 was something like $10.2 million, so that you could effectively add that on to what we've reported to get a feel for what revenue would have been like without the accounting changes. For EBITDA, it's $13.8 million as reported. There was another EUR 4 million in what was previously reported as amortization of deferred contract costs which is about -- last year, it was about $1 million, this year was $4 million. We decided to just take that -- that amount relates to deferred contract costs from our distributors. So it's effectively a commission expense in our view. Even though it is technically treated as an amortization cost, we decided in line with our spirit of keeping accounts clean and simple and having as little items being the difference between EBITDA and underlying EBITDA, we decided to cross that off to report the lower number because next year, that number is going to grow in more commitment that we pay our distributors. If they're increasing revenue, those commissions increase. And in our view, that should just be treated as part of EBITDA. So that number next year would have increased to $6.5 million. So we decided to just strip that out from our underlying EBITDA calculation. So if you said this year was $13.8 million, we got up easily added another $4 million and reported $17.8 million, but that's not the spirit of how we do things. We like full transparency on our numbers and simple numbers. So that's how we ended up being $13.8 million. But on the revenue, the number is $10.2 million.

Great. And then just on the guidance and maybe the EBITDA, I mean looking at the tech spend or the product spend or development you had in FY '22 sort of expensed $22-odd million. I mean how should we think about that number going into '23 and sort of how far along are you in terms of this tech build over the product road map for the next few years?

Yes. Look, I think we're investing heavily in products, as you know. So we're doing Writing Legends. We're doing a lot on Mathletics, a lot of improvements to reading eggs and express. So I would be -- in our view, we're adding about $3.5 million on expense product development. For capitalized, we're trying to keep that to a minimum, just to a new product. That's going to be around $4.5 million to $5 million mark similar to FY '22. So the general effect that I should expect on expenditure is another [ $2.5 million to $4 million ] expense for the full product suite.

Sure. And then just finally on the B2C and some of the good traction you're getting in terms of the other billings by platform from website. Are you able to talk about sort of what's driving that and some of the initiatives you've done during the year to increase that as an overall percentage?