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

Welcome to the 3P Learning FY '23 Results Call. Today, you'll hear from Mr. Matthew Sandblom, Executive Chairman; Mr. Jose Palmero, CEO; and Mr. Anton Clowes, CFO, as they present to you 3P Learning's 2023 full year financial results. [Operator Instructions] I'll now hand over the presentation to Mr. Matthew, Jose and Anton from 3P Learning. Please go ahead.

Hello. My name is Matthew Sandblom, Executive Chairman of 3P Learning. Welcome to the 3P Learning investor presentation. First, I will give an overview of the company's performance and our prospects in the year ahead, followed by Jose Palmero, our CEO, who will give a more detailed insights into our performance and where we're heading in the next year, and then that will be followed by Anton Clowes giving a more detailed financial presentation. I'm pleased with the performance of 3P Learning for the '22-'23 financial year. As I mentioned in previous presentations, this was a year where the focus was on building out a full suite of programs as part of our strategy of having the best possible offering for the key academic skills of reading, writing and maths, the 3Rs. We have managed to further increase our investment in these new programs while also maintaining a good level of profitability and cash flow. This was due to strong cost discipline and some modest increase in sales in both the school and consumer markets. Over the next 12 months, we will release some major new programs and program enhancements that we expect to be the foundations for growth for the next several years. In particular, we are excited to be releasing the first part of our Writing Legends program, which will help students significantly improve their writing skills. We have also launched a maths component to our assessment program, Brightpath Progress, and we will progressively release a major upgrade of the Mathletics program over the next 12 months. Our sales focus will now shift from selling schools, individual -- instead of selling schools individual programs to selling them a full suite of programs for all core subjects. We should start seeing the revenue effects of this in the second half of the '23 to '24 financial year, although the full impact won't be seen until the '24-'25 financial year due to how revenue is recognized only when the service is delivered each month. To judge the success of the new programs, the key metric to follow will be the increase in ARR, annual recurring revenue. 3P is entering an exciting new growth phase based on having a top-class suite of programs that we think schools will love, and our sales and marketing teams are highly energized by all the opportunities they have available to them. I'll now hand you over to Jose Palmero to continue this presentation.

Thank you, Matthew, and good morning, everyone. It's been a productive year for 3P Learning, developing and investing in our programs, building stronger sales and marketing capabilities and introducing a new strategic revenue stream with the acquisition of Brightpath Assessment. I'll cover financial results and product releases in more detail, but let's start with a recap of our products and strategy. Our existing hero programs, Reading Eggs, Mathletics and Mathseeds, are now complemented by Mathseeds Prime and by our recently acquired programs, Writing Legends and Brightpath Progress. Together, they round up our content solution for the 3Rs of learning for pre-K to year 10 students, teachers, parents and educators. Strategically, they combine to form a comprehensive product suite designed to significantly improve learning across reading, writing and maths. We operate in the consumer and the school markets that is B2B and B2C across 3 regions: APAC, AMER and EMEA. We also offer, in a smaller scale, teacher professional development services for B2B and are exploring other value-added options for our B2C content offering. We believe this combination of trusted programs, market segments and global presence makes 3P Learning a compelling proposition in the edtech market. Let's now look at the highlights from the FY '23 results. Although we faced some headwinds from the macro environment, particularly in the U.K., we still achieved $107.4 million in revenue, which is 10% higher than last year. Importantly, in FY '23, the revenue recognition variances stemming from the acquisition of Blake eLearning have washed through. So accounting revenue and annual billings are now closely aligned. B2C billings were 5% higher than last year at $40.7 million, whilst annual recurring revenue for B2B was $65.4 million, which was 2% higher than last year. On the profitability side, disciplined cost control allowed us to deliver underlying EBITDA of $15.9 million, which was 21% higher than last year, and underlying cash flow from operations before tax of $10.8 million, to finish the year with cash balances of $27 million and no debt. The closing cash balance includes the acquisition of Brightpath and product development costs of $28.2 million, of which $25.6 million was expensed in FY '23. So overall, a good year. We have exceeded the $100 million revenue milestone for 3PL for the first time with strong business fundamentals, investing in our product suite for the future and serving more than 5 million customers globally. Looking at segment performance. In the consumer market, that is B2C, billings grew 5% across all platforms to $40.7 million. Billings also grew in the APAC and AMER regions, but EMEA, mostly affected by performance in the U.K., was steady compared to financial year '22. ARPU in FY '23 was $134.80, that is 9% higher than last year, with net billings contribution margin of 51%, including direct sales, marketing and platform commission costs. We introduced a price increase for new customers in January '23 and separated our literacy and numeracy offering, which gives customers more subscription options. This also gives us more options to upsell and cross-sell individual and bundled products. In the schools market, or B2B, revenue was $66.4 million, which was 15% higher than last year, but this was mostly due to the revenue recognition changes I mentioned earlier that affected financial year '22 and which have now washed through. More meaningful was the increase in annual recurring revenue to $65.4 million, which was 2% higher than last year's $64.4 million. Mathletics revenue declined about 7%, but this was compensated by a 25% increase in Mathseeds from a lower base. So in dollar terms, the decline in numeracy was minimal. Brightpath is now contributing $1.6 million in revenue, and overall exit ARPU increased 1% to $12.50 despite Brightpath having a lower ARPU. In terms of product releases, in the second half of financial year '23, we launched a new maths module for Brightpath Progress and Mathseeds Prime for year 4, both in Australia. We also released new features for Reading Eggs, including the new reading journal, teacher library controls, awards and certificates, while Mathletics now features a new avatar system and M-coin to help motivation and engagement. In financial year '24, we will launch Writing Legends and Mathseeds Prime for year 5 in APAC, new student center, Teacher Assign and Review and the first new courses for Mathletics and the Read Aloud feature for Reading Eggs. Brightpath Progress will also start being rolled out in AMER and EMEA. So the next 12 months will be full of releases, new programs and new and improved learning experiences, all with our tried and tested better ways to learn approach. I will now pass on to Anton for more details on the financials.

Good morning, everyone. Thank you, Matthew. Thank you, Jose, and welcome to 3P Learning's FY '23 results. I'm going to go through in a little bit more detail our results for FY '23 and some cash flow information. Looking at the P&L for FY '23, a record revenue year, $107.4 million, up 10% on FY '22. Split broadly, B2B, $66.4 million, up 15%, which is primarily owed to the change in revenue recognition, which has washed through now; B2C, $40.5 million, up 3%. Good disciplined cost control with total expenses up 9% and an underlying EBITDA of $15.9 million, up 21% on FY '22. Sales and marketing costs up $5.1 million, partly due to increased investment in digital marketing to drive B2C retention and growth and additional B2B new product marketing costs. Product and technology costs of $3.5 million with additional investments in employee costs and software. Moving to the B2C performance metrics slide. Gross billings improved 5% in FY '23 driven by strong parent subscriber base while increasing ARPU. Net billings have grown 5% after commission deducted by Apple and Google. B2C ARPU increased 9%, while licenses declined 4% on the prior corresponding period. Our net billings contribution margin remained steady and strong at 51%. From an accounting revenue perspective, revenue is up 3% to $40.5 million, and our contribution margin is steady at 43% compared to 44% in FY '22. Moving on to B2B performance. ARR up 2% to $65.4 million. The Brightpath acquisition contributing $1.4 million of ARR. Exit ARPU increased to $12.50 despite Brightpath having a lower ARPU, and churn is steady at 14%. From an accounting perspective, B2B revenue, up 15% to $66.4 million. This is primarily owing to the change in revenue recognition in the prior corresponding period. This has now washed through. Moving to the cash balance bridge. We started FY '23 with about $31.7 million in cash. We generated underlying cash flow from operations before tax of $10.8 million. We spent $4.1 million on plants and equipment and intangibles. Just under $1 million was spent on net rent, refund of deposits and foreign exchange impacts. And merger-related VAT payments and Brightpath acquisition costs, net of cash, amounted to $10.6 million, finishing the year at $27 million in cash, which is made up of $14 million statutory cash, $7 million in short-term deposits and $6 million in restricted cash, all outlined in the financial statements. We have no debt. Looking at our EBITDA cash flow bridge. Underlying EBITDA in FY '23 was $15.9 million. And after working capital adjustments of $5.1 million, our underlying cash flow from operations generated before tax was $10.8 million. Significantly, $10.6 million was spent through the year on merger-related VAT payments and the Brightpath acquisition, net of cash. In total, we utilized $4.7 million of cash, leaving us with $27 million at the end of the period. I will now hand you back to Jose.

Thank you, Anton. So to wrap up, we provide market guidance for FY '24 as follows: Revenue range, $112 million to $115 million, including growing annual recurring revenue with the new B2B product launches; underlying EBITDA range, $15 million to $17 million; and we aim to generate cash from operations before tax and investments at levels higher than financial year '23. As we have shown today, we have invested significantly in our product suite for the past 2 years. So our focus now turns to implementing our go-to-market sales and marketing strategies. The key metric to gauge the success of our product investment will be annual recurring revenue. So we will keep the market updated on our progress. Thank you to our shareholders, our customers and the 3P Board for supporting our efforts. Special mention, of course, goes to our talented and dedicated team for all their hard work during the year. That concludes the presentation today. So I'll now invite questions from the audience. Thank you.

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

Just a couple for me. Firstly, just on the product development and how we should think about that in FY '24. So you sort of spent $22 million -- or expensed $22 million in FY '22 and then $26 million in '23. So how should we think about that profile in '24?

I'll take that, Piers. So for us, the key thing to remember is that we've achieved peak product development costs in '23. So we shouldn't expect that growth to grow. We'll probably keep it steady for '24. And the key thing to note then is the increase in annual recurring revenue because for us, it's all about increasing the margins and the profitability and getting a return on that investment. Now most of that will start showing in the last quarter of financial '24 because when we sell to Australia, for example, the sales get recognized from February to June. So there's just an accounting recognition thing there. So you won't see the full effect in '24, but we should see it from '25 and beyond. But the key things to note then, peak product development costs reached, accounts steady and then focusing on profitability.

And then maybe just on that and looking at '25, and I think there was the comment talking at sort of a Rule of 40 in the annual report. Just are you able to sort of break out how you're thinking about the composition then maybe on the longer term view around just revenue growth and margin expansion?

So in general, I think for '24, up until now, B2C has increased faster and higher than B2B. I think in '24, we'll see a flip of that because -- in '25 because the intention is to start releasing the products now. We've already started releasing some in B2B in the schools market. So we should start seeing a bigger growth from B2B than B2C. For contribution margin, in general, so we kept headcount steady. Our salary increases have been modest this year around the 3.6% mark. So it's all about increasing revenue and increasing margin, yes.

And then just a final one just on B2C. And I think you'd called out previously just some of the headwinds in the U.K. Can you maybe just talk through what they were and just how trading conditions have been over July and August?

Look, in general, as we all know, around the world, we've seen cost of living expenses increase. In the U.K. specifically, we saw a little bit more of that earlier in the piece with the geopolitical situation as well. So my sense, in general, is that the U.K. was probably more affected than other countries. I just recently came back from our sales conference there, and it's still palpable, the cost of living increasing effect on spending power. Overall, we've kept revenue at the same. So I still think -- I don't think anyone has a precise answer to this, but I still think there's a few months of that uncertainty, economic uncertainty in the different regions, but a little bit more in the U.K. I don't know whether that's going to be 6 months or 12 months. But we've -- in our forecast, we've sort of put a steady increase. In B2C, we see the price increases washing through quite well for us for new customers, but that will take a little time to fully realize because we just need to turn all the existing customers and the new customers to realize that price increase that we've put in place in January this year, yes.

Your next question comes from James Bales with Morgan Stanley.

I just wanted to start with a really simple question. The balance sheet doesn't appear balanced now for FY '22 or '23 in the annual report. Can you maybe help us understand the restatements for FY '22 and how we should think about that reconciliation into '23?

Sorry, James. So what's -- what was the question in relation to the balance sheet?

Well, the net assets isn't the same value as the equity.

I'm going to have to take that offline. I'm just looking at it now. What's going on here? Can I come back to that, James? Sorry.

Okay, sure. And then I guess, is -- the other sort of item that we used to struggle a bit with was -- it seems to be related to the deferred tax balance, is the best that we can gather. Is that related to the income tax benefit in the P&L for FY '23? And what should we extrapolate in terms of tax rate into FY '24?

So yes, there was -- there is a bit of a large credit to the P&L in relation to the tax benefits. That essentially has come from the unwinding. We've changed our transfer pricing policy, and it was an unwinding from the old policy into the new policy in FY '23. But it's -- the unwind has created a sort of significant one-off benefit, but we don't expect that to -- that's not going to carry on into FY '24. So I think a normalized effective tax rate for the group is anywhere between 5% and 15%. What helps us from a tax perspective is the R&D credits, which we obviously -- we spend a significant amount in product development. So that generally helps us lower our -- the tax we pay.

Okay. Got it. And then it does seem to appear that if things go to plan in FY '24, you are able to drive an accelerated growth rate in ARR in the second half. Can you maybe help us understand what to expect in terms of revenue and profitability split between first and second half for FY '24? Whether that creates a bigger second half skew in '24? Or the real revenue and earnings impact is basically a '25 phenomenon rather than feeling the impact in '24?

James, I think you should see some skew in the second half of financial '24. Effectively, our biggest market is still Australia. We invoice schools around February. That means that we start recognizing revenue. So typically, we invoice for a calendar year, calendar year '24, and we'll recognize revenue from February to June. So you should see a higher skew in second half '24. Now of course, in '25, when you get the full effect of that for the full year, yes. So a bit of that in '24, more of that in '25. If that helps?

Yes. No, that is -- that's helpful color. And then I guess one more for me. The $5 million in working capital movement in FY '23, can you help us understand what drove that? And the guidance seemed to allude that, that sort of normalizes or at least goes away in FY '24. How should we sort of think about those movements?

I think essentially, we had a little bit of headwind from a working capital perspective. I think the 2 sort of callouts in relation to receivables. As set out in the financial statements, there's a $1.1 million receivable from a third-party distributor, Apple, which we received on the 6th of July. We should have received it before the 30th of June, but that's had a headwind effect from a working capital perspective. And then I think from a payables perspective, we paid FY '22 bonuses of about $2.5 million in August last year, which wasn't in the comparative. And that's created, I guess, a timing difference from a working capital perspective.

And is that something that is going to be repeated again this year? Or was that a one-off?

Well, the bonus is not -- certainly not at that level. But I think rather than pick individual cash items each period, we'll either -- the working capital headwind should normalize. I think if you took those sort of exceptional items into account, you're looking at an underlying cash flow from operations, more like sort of $13 million to $14 million.

Okay. And then on ARR, you basically called that out as the metric that the market should be most focused on in the next 12 months for the B2B division. On an organic constant currency basis, that declined by $1.4 million in FY '23. How -- what sort of magnitude should we be expecting the improvement for FY '24 to be?

I think that's a little bit harder to predict given that we've got new product launches starting this month. So we just -- the key question here is how well have we invested in our product development, yes? And to know that, we need some more data points from the market. That's why we'll keep updating the market on any progress on annual recurring revenue because one thing is to say, yes, we've got this wonderful product. Initial feedback from the people that have tried it, and the features that we have released, and I'm happy to cover that later on when we present to you guys. It's very positive. But of course, that needs to translate into invoicing, yes? And there'll always be a bit of a free trial period in term 3 before we actually start going a bit harder. When I want to say term 3, I mean, school term 3, which is between September and October, yes, august to October, before we start actually selling and then invoicing in February, yes? So that's sort of the way to think about it, yes. I don't think we have any more phone calls, but we have some web calls. So the first one is, are you expecting stronger ARR growth versus revenue, which seems to be mid digits given the second half weighted benefit of the new product launches. I think that's similar to what we just answered with James. The answer is yes. And typically, because we invoice in our biggest market, which is still Australia in around February when the school -- when it's back-to-school period, and then we recognize the revenue from February to June, even though we're actually invoicing for a full calendar year 2024, yes. Next question was, can you provide a geographical outlook? Which regions you think have the most opportunity and which regions have tougher market conditions? So I'll answer that in 2 parts. For B2B, I think the biggest opportunity for us is in APAC because most of the product launches will happen in APAC first. And so typically, we started launching already and more launches from next week here in APAC. In AMER and EMEA, we'll start seeing that from January next year. So from a B2B perspective, the biggest opportunity will be APAC, without a doubt. Then for B2C, I think it's still pretty steady. I still think we'll do well in APAC and AMER, especially because we're focusing more on the homeschooler market in the U.S. in which we tend to do very well. I still think EMEA still has some more headwinds to go through. So if I were to rank it, I would think EMEA still has some more challenges. But overall, I think we'll do okay. Next question is, are there any M&A considerations for the near future? So in general terms, as you know, we've made 2 acquisitions in the past 2 years, Writing Legends and Brightpath Progress. That pretty much completes our product suite. So when I think about the company and our products and services, we have reading, writing and maths, and now that's well covered in terms of content, and most of that will now be organic because the acquisitions need a bit more work, but all that will be done with our resources. If I look at anywhere in terms of acquisitions will be the great other areas where we show our strategy on a page, and that will be in the teacher professional development areas for B2B. We do some of that already with Brightpath here in Australia and in the U.S. with all our products, except for Reading Eggs, which, as you know, it's still distributed by Edmentum. So in that sense, I think there's some opportunity there to expand on teacher development services, professional development services. For B2C, we have experimented with some more paid premium type value-added solutions, and we're still exploring that. Now whether we continue to develop that organically or we look at acquisitions, I haven't seen anything yet in the market, but that's pretty much the 2 areas where we would focus on B2B and B2C, yes. Next question was further on the price increases. Do you expect further price increases in '24? I think given the current economic climate, price increases that we put through in January are pretty much as far as will go for this financial year. Obviously, we'll have to see how the market responds. So far, we haven't had much pushback on the price increase from the new customers for B2C. So that's been okay. For B2B, there's always small price increases in the different regions. But the key thing is that because we are now focusing more on solution selling, i.e., instead of selling you an individual product, we sell you the bundle for reading. For example, maths will be Mathletics and Mathseeds. That's the most popular package we have at the moment, and that is a bundled price. Typically, that means a higher ARPU because you're selling 2 products for higher than you would sell the individual products, right, but it's not quite the value of the 2 products, yes. Hopefully, that answers that question. I don't think we have any more questions, but happy to answer any more if you guys have.

If there are no other questions, we thank you for attending 3P Learning's 2023 Full Year Results, and we'll now conclude the event. Thank you for your attendance.