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

Welcome to the 3P Learning 2024 Full Year Results Investor and Analyst Presentation. Today, you will hear from Matthew Sandblom, Executive Chairman; Jose Palmero, CEO; and Anton Clowes, CFO, as they present to you the 3P Learning's full year financial results. [Operator Instructions]. I will now hand over to the presentation by Matthew, Jose and Anton from 3P Learning. Please go ahead.

Welcome to 3PL's Full Year Results presentation for the financial year 2024. I'm Matthew Sandblom, Executive Chairman, and for today's presentation, I'm joined by CEO, Jose Palmero; and CFO, Anton Clowes. Reviewing the 2023/'24 financial year overall, I'm pleased to report that we delivered some significant product releases that will position us well for future growth, while at the same time, we maintain tight cost control. However, sales growth in the schools market was hard to achieve, especially in North America. So we have delivered $110 million in sales and $12 million in EBITDA. These results are just under the lower end of our previous guidance of $112 million to $115 million for revenue and $13 million to $15 million for underlying EBITDA. We achieved modest growth in the direct-to-consumer B2C part of the business in '23/'24. And as well as a good increase in the gross margins due to very tight cost control. This is a good result in face of a very tight consumer spending as parents were buffeted by high mortgage rent increases and utility costs. We see further modest growth in the '24/'25 financial year in this market, which could be boosted further in the second half by some joint marketing efforts with partners selling related services such as tutoring. Over the last 3 years, we have invested a considerable amount in new products like Writing Legends and Brightpath Progress. We have also invested in significant improvements in Mathletics and Reading Eggs. The '23/'24 years saw some major releases for Writing Legends and new Mathletics. However, these releases come in only part of the curriculum, and many schools want to see full curriculum coverage before making buying commitments. Most of the remaining curriculum releases for these programs will happen during the '24/'25 financial year, which will put us in a much better position to convince decision makers to adopt our programs. We also decided that with a bigger range of programs to sell to each school, we needed to rethink our sales model and sales team structure. The strategy that we have been working towards as been to have the best programs to help students learn the essential academic skills of reading, maths and writing for students aged 4 to 12 year old. Previously, our sales team focused on individual program sales to schools, but now we need to focus on selling them the complete package of programs. To do this, we need to make -- using our programs as a suite as easy as possible with simple sign-on navigation and integrated reporting for the student and teacher. We also need to move away from focusing on ARPU or average revenue per user and instead target the total sales that we are getting from each school. What matters is not if we have increased Mathletics ARPU from $16 to $18, but whether the school has increased their total spend with us from, say, $4,000 to $6,000 totaled for all of our programs. In July, we launched the 3 Essentials suite of programs to Australian and New Zealand schools, with plans to roll out similar suites of programs in the United Kingdom and North America over the next 12 months. We have also restructured our APAC sales teams to greatly increase the number of frontline sales positions who are responsible for both renewal and new business. These were previously separate teams, but the reality is the biggest new business opportunity are selling existing customers a bigger suite of programs. We believe that the 3 Essentials strategy gives us the best chance of achieving significant growth in the school markets in the coming years. Our sales to schools in the last few years have hardly grown. This is not an acceptable outcome considering the significant product investment we have made in these areas. We expect these changes to show good growth in the rate of annual recurring revenue in the second half of '24/'25 financial year, and then in the actual recognized revenue in the '25/'26 financial year. With the implementation of the 3 Essentials product suite and the new sales model, we have decided not to release guidance for the '24/'25 financial year. We believe this approach is the best way to achieve significant growth in the schools market. But until we fully tested in the APAC market over the next 12 months, we won't know what level of growth is likely. And even if this new suite is well received by schools, only a few months of extra revenue will be recognized in the '24/'25 financial year, mainly from February 2025 onwards when schools return from holidays. The '24/'25 financial year is a pivotal one for the 3PL business. We need to demonstrate that the considerable investment in new and improved programs has been justified by a significant increase in sales. Otherwise, we need to invest less and push for a greater level of profitability. It is also the first full year where we will directly selling the Reading Eggs program into the U.S. market. After buying the rights back from our distributor Edmentum at the start of the '24 calendar year. Again, we need to demonstrate to that the investment that we have made in buying these rights back can pay off by increasing sales beyond what the distributor was achieving and in a cost-effective way. As a significant shareholder, I want to see the 3PL business move from an investment stage to a growth stage, and I'm impatient to make this happen. The key to this is growing the schools business by making our programs the go-to solution for all the key academic skills for primary school students. The 3PL team is very focused on delivering on this strategy over the next '24 months. I'll now hand you over to Jose Palmero to continue this presentation.

Thank you, Matthew, and good morning, everyone. We will begin with the highlights for the year. But in today's presentation, I will also cover in more detail our plans for the schools market, starting with APAC and how we view the broader B2B opportunity. As Matthew mentioned, executing well on these plans in APAC first, followed by EMEA and EMA is fundamental for us to get a good return on the substantial product investment we have made over the past 3 years. . So let's look at the full year results and work our way from there. The main highlights this year included achieving strategic milestones with product releases and first sales from new programs Writing Legends and Brightpath Progress. The acquisition of Reading Eggs U.S. Schools Distribution rise from Momentum and the performance of our B2C segment. Revenue for the year was $110 million, which was 2% higher than the prior corresponding period, but about 2% lower than expected. B2C performed well despite the tougher economic environment in the consumer market to deliver $43.3 million in billings, which was 6% higher than last year while B2B revenue increased only marginally by about $200,000 to $66.9 million. Disappointingly, annual recurring revenue for B2B was 5% lower than the prior corresponding period at $62.1 million, which I will explain in a subsequent slide. On the expenditure front, we reviewed and reduced cost in lower priority areas in the second half of the year to achieve annualized savings of $5 million from March 2024 with full effect from financial year '25. This helped us to deliver underlying EBITDA for financial year '24 of $12 million, which was $1 million lower than we expected. Underlying cash flow from operations before tax was closely aligned at $11 million. During the year, we invested $27.5 million in product development and $20.5 million in reacquiring the Reading Eggs U.S. Schools Distribution Rights. We also invested $4.5 million in our share buyback program. It is important to note that we have funded all product development and the U.S. investments entirely from cash generated by the business. that we have expensed most of that already and that we are at a point where we have reached peak development costs. We still need to complete the product rollout for the 3 regions, but the focus now moves from product build to sales and marketing execution. Looking at segment performance in more detail. B2C billings increased 6% in financial year '24, improving across all key markets and all channels with new subscription options for Google Play and the App Store contributing to the positive result. We also continue to be disciplined with the marketing spend and achieved net billings contribution margin of 52%, which was 1 percentage point higher than the prior corresponding period. This was a good result, considering that most of our B2C customers are young families who have been affected by higher mortgage rates and cost of living pressures. As I mentioned earlier, in the schools market, revenue was marginally higher than last year at $66.9 million but we saw a 5% decline in annual recurring revenue to $62.1 million, which was disappointing. We had good billings performance from new business in all regions, but lower-than-expected retention rate from Mathletics, particularly in EMEA and EMA as we have not yet released Mathletics new courses in all regions. We also had lower performance from our third-party distributors in the U.S. for Reading Eggs in the first half prior to us taking over. This reinforced our timeliness in reacquiring the Reading Eggs' U.S. schools business. The operational transition from Edmentum went well and was completed in early February 2024. So we are now servicing Reading Eggs customers from about 4,300 schools in the U.S. directly. Early response from customers is positive with a bulk of renewals still by the end of September. So we will have a better update at the end of quarter 1. Market feedback from new products launched in APAC and EMEA was also positive, but we still need to complete the product rollout during financial year '25 to realize more of this potential. I will now go through the changes we're making to our B2B model and our view of the broader market potential. For the past 3 years, we've been putting together a comprehensive content and assessment suite, covering the fundamental skills of reading, writing and maths. Most of the focus has been on the schools market, and it's taken considerable investment and hard work, but it has enabled us to offer our best value proposition yet the 3 Essentials package. 3 Essentials combines and presents our content offering on a unified landing page with single sign-on, simplified rostering system and usage and progress reports across all programs. This gives us the opportunity to cement our leading market position in APAC and to increase our chances of success in other markets. Product sales and marketing have worked together to launch this compelling offer to existing APAC customers from July 2024 with EMEA to follow from November 2024. To put some color to this, we'll look at the potential opportunity of this offer in the Australian market, which is still our largest for B2B. In Australia, 70% of primary schools have a paid subscription to at least one of our programs, but that only covers 46% of students in K to 6. This large installed customer base will be our focus to expand our presence in existing schools with a 3 Essentials package and win new customers. Similarly, of those costs in Australia, 45% already subscribed to 2 of our programs and only 1% use 3 programs. That leaves 54% of customers using one reading or maths program which presents a clear cross-selling opportunity to increase revenue per school. We also know that customers using 2 or more of our products renew at a higher rate, so a successful implementation of the 3 Essentials model would also benefit our retention rate and reduce churn. Our aim is, therefore, to progressively increase our average billings per school rather than focusing on average revenue per user or per product. This offers greater value to our customers and increases our billings and revenue potential. In our view, the biggest opportunity in APAC is with existing customers who know and love our programs as they can now upgrade to the 3 Essentials to get the best value from our content. For 3PL, we think this represents a significant opportunity to achieve growth in the schools market, but we won't know the actual level of growth until we fully test it in APAC over the next 12 months. We have covered the 3 Essentials package as a key priority to drive our B2B content model alongside our increased presence in the U.S. schools market with direct distribution of Reading Eggs. But as a reminder, Brad path continues, of course, to complement the offering as our assessment solution. The aim is to establish a stronger footprint with content and then use that base to achieve further growth with assessment and reporting. But our overall corporate strategy for B2B remains the same. So to wrap up, our focus areas for B2B in financial year '25 are to implement our 3 Essential strategy in APAC and EMEA, expand our Reading Eggs user base in the U.S. and improved B2B customer retention and profitability. For B2C, we expect similar market dynamics in financial year '25 to those we experienced in financial year '24, but we will focus on growing the home school or market in the U.S. exploring partnerships with relevant associations, online schools and tutoring services and then extend that to other markets were possible. We will also refresh and improve user experience, the parent dashboard and reporting and continue to look for ways to increase lifetime value. For product, the upcoming releases in financial year '25 support our B2B strategy for the 3 Essentials and U.S. market requirements as well as starting to develop Brightpath reading to complete and align our assessment programs with our content offering for reading, writing and mats. This concludes my presentation on the key themes and priorities, so I will now hand over to Anton for the financial and statutory report update.

Thank you, Matthew. Thank you, Jose. Good morning, everyone. I'll be moving through in more detail our results and cash flow for the financial year '24. . Turning to the P&L key drivers slide. Total revenue of $110 million, up $2.6 million or 2%. Split B2B, $66.9 million, which was relatively flat on FY '23, disappointing results. B2C, $43.1 million, up 6%, given the current market and macroeconomic factors and the general cost of living pressures, not a bad result. Expenses up 7%, principally driven by our sales and marketing investments in people and the B2B go-to-market costs, which was to facilitate direct selling in the U.S. Schools Market, stemming from the acquisition of distribution rights for Reading Eggs from Edmentum. Underlying EBITDA for FY '24, $12 million, down from $15.9 million in FY '23. Again, largely driven by the additional investment in people as a result of the Edmentum transaction. Significant other items include the noncash goodwill impairment expense of $44.5 million relating to the B2C segment, refer to the consolidated financial statements, Note 14 for more detailed information on this. And we had to expense the Edmentum acquisition of $20.5 million or $14.4 million after tax, owing to the Australian Accounting Standards, which required us to do so. Moving on to B2C performance metrics. Revenue, up $2.4 million at $43.1 million or 6%, steady contribution margin of 43%. Gross billings also up $6 million and ARPU up to $149. Net billings contribution margin, up 1 percentage point to 52%. Moving on to B2B performance metrics. A disappointing results from the B2B business, revenue largely flat at $66.9 million in FY '24. Contribution margin also down to 46%. License is also down by 8%. However, our exit ARPU is up to $12.94 and this is largely due to price increases combined with a lower number of licenses. Closing ARR, $62.1 million, down 5% from $65.4 million. ARR decrease driven by slow Edmentum performance as well as a higher-than-expected Mathletics churn in the U.K. We've had positive market feedback in response to new product launches, but no material impact on FY '24 billings and revenue. Moving on to the pro forma cost slide, where we set out these costs in more detail relating to FY '24. The first is the noncash goodwill impairment expense of $44.5 million, which relates to the B2C segment. We had marginal headroom at the start of FY '24. And moving into FY '24, we had to adjust the cash flow projections downwards and discount rates changed to 11.5% as well as a marginal reduction in the terminal growth rate. The consolidated financial statements contain more detailed information that can be found in Note 14. We would like to add these impairments are driven by accounting rules and accounting standards and do not necessarily reflect the commercial aspirations that the business has for the B2C business. Also in the pro forma costs was the impairment to Master Math Island of $0.6 million, $0.7 million of integration, retention and merger costs, purchase price D&A of $7.4 million, the after-tax rights purchased from Edmentum of $14.4 million and restructure costs relating to cost-saving initiatives executed in the second half amounting to $1 million. Moving on to the cash bridge slide. We started the year with $27 million and ended the year with $5.1 million. We utilized just under $22 million in FY '24. And principally, the big spend was around the buyback of the U.S. Distributor Rights for $20.5 million. as well as the investments in the share buyback program for $4.5 million. We also paid $4.2 million in relation to property, plant, equipment and intangibles, including $1.9 million relating to the Writing Legends investment. We had pro forma payments of $2.8 million, which included $1 million relating to the Brightpath earn-out amount. Our underlying cash flow from operations was $11 million, which is up 8% and is closely aligned to the underlying EBITDA for the same period of $12 million. Our net cash is calculated as statutory cash of $2 million plus restricted cash of $4.1 million, less $1 million of external borrowings. At 30 June 2024, we have $9 million available to draw on the loan facility. I will now hand back to Jose to provide the outlook. Thank you for your attention.

Thank you, Anton. At 3PL, we have commenced our B2B business model shift to 3 Essentials, increased focus on our U.S. strategy and identified the key factors that we believe will contribute to a positive financial outlook in the coming year and beyond. Some of these factors, however, net tube market tested and proven so we can better understand future billings and revenue potential. While we are not issuing specific earnings guidance at this time, we expect both revenue and underlying EBITDA to be better than what we have delivered in financial year '24. We will continue to update the market on our progress and key milestones as they occur through the year. It's been a busy year at 3PL. So thank you to our team, our Board, shareholders, customers and everyone join us today for our financial 204 results presentation. We will now invite questions from those attending.

[Operator Instructions] The first phone question comes from James Bales from Morgan Stanley. .

I'd just like to understand a bit more about the change in sales trajectory that you saw in the second half versus expectations. .

So the main thing, James, is, the churn was a bit higher than we expected, mostly from athletics in the U.K., specifically and in Canada. In Australia, we also saw a bit of a drop in Mathletics retention which was higher than expected overall, yes. The other bit was the Edmentum performance in the U.S. for Reading Eggs. So that of the drop that we saw in the second half was in the U.S. Reading Egg retention, and the remainder was mostly in Mathletics U.K., Canada and Australia. . Now before the year-end -- sorry, before -- by 31 December, we started releasing new product features for Mathletics and the signs that we're seeing were a bit more positive. But by the time it came to the billings and invoicing in March and April in APAC and EMEA, there was a big gap there, yes.

Yes. So that timing well. I was just trying to understand what, if any, sort of signs that you referred to has been positive for a signal inflection. Can you talk to us about what you're seeing and what gives you confidence that you will see improvement in FY '25? .

So generally, in a take, when you launch a bad product, you know immediately because the feedback you start getting is pretty bad and people don't buy the product. We saw that with Master Math Island, for example, that was not a good release. It was a small investment, but the market response was not very good, and we knew that immediately in the first 3 months since release. For all the releases we've done since July '23 until now, we've had very positive response, usage data has increased substantially, very strong double-digit growth on all the usage data we're seeing from Mathletics, from Writing Legends and from Brightpath. So typically, when you get that kind of response, that's usually a very good sign of how people will respond to it when it comes to actually paying for the subscription and being invoiced for that, yes. Now in Australia, as you know, we probably launched from August to December. That's right in the middle of the buying season. For Writing Legends, for example, we only launched with 2 products, but we've already sold to about 200 schools. So to me, that's a pretty good result. Similarly for Brightpath Progress, we've got another 120 new schools. So given the amount of time, the time in the selling season when we started selling and the overall market factors and school budgets and things that we've seen reduced in Australia in the past 6 months. They are the kind of things that give me confidence that the product is going to be well received. When we do releases that are not that popular you start getting a lot of feedback very quickly about it, yes? So from what I've seen so far, that's all positive.

Got it. And maybe just last one on OpEx. I think you called out a $5 million improvement expected for FY '25. It seems like you've made a bit of progress towards that already with OpEx being $44.5 million for the second half. Is the improvement -- has the improvement already been made reflected in that second half result or partially and the annualization gets you to a number that's $5 million better than '24. Is that the way to think about it? .

Yes. I think we implemented most of the changes in March 2024. So you will get a partial improvement in the second half of '24. Full impact should be on financial '25. As we talked about at the half year results, our aim now is to keep our expenditure level at similar levels, total expense, yes, for the business at the same level while we're growing revenue. So that's the operational leverage that we need to exploit from now on. Obviously, we have reached peak development costs now, so we don't expect big increases there. But the idea with implementing the cost early in the calendar year in February 2024 for March 2024 was that we would benefit for that in the full financial year '25. So our general expectation is to keep total expenses are very close to where we are and always grow revenue higher than expenditure from now, yes. .

[Operator Instructions] The next question comes from the webcast. Could you please provide an update on the U.S. distribution strategy? What is the momentum since acquiring rights? .

Thanks. I'll take that one. Right, so the main thing, it was a big challenge, right? We closed the deal just before Christmas with Edmentum and the transition happened on the February 2. So within the 6 weeks, we had to hand over close to 4,500 customers, which in itself was a big challenge. But the team did very well with that. As of the February 2, we've now managed those customers directly. The first thing we needed to do for the first 4 to 6 weeks, was to contact those customers, reestablish their relationship, letting them know about the handover. And as we were talking to them, most of the responses were about. I'm fantastic to hear from you guys directly. We haven't heard from Edmentum for a little while. So, the feedback that we were getting on the product end of the direct relationship was very positive. What we've seen since then, so say about March until now, it's pretty good retention rate on those customers. But we probably won't know the full extent of the retention until the end of September, end of quarter 1 for us, which is when all the invoicing gets done. But from what we've seen on the retention -- the first 4 months of retention were pretty small numbers. The bigger numbers July, August and September, yes. But so far, we're positive, we're happy with what we're seeing in retention and upsell and on establishing that direct relationship with customers because obviously, it gives us a bit of opportunity to also upsell maths suites and a bit of Mathletics, yes. So all those are positive signs. I will give a better update at the end of quarter 1 because by then, we'll know exactly how many of those customers will be invoiced in.

The next question is from the webcast. Why is there only $200,000 difference between EBITDA and NPAT, when you have around $10 million in D&A. .

I'll take that one, Jose. So I think looking at Slide 22 of the investor presentation, the detailed profit and loss statements. The delta is between underlying EBITDA of $12 million and underlying net profit after tax of $11.8 million. So we do have some pro forma costs which sit below underlying net profit after tax, including the historical purchase price accounting, depreciation and amortization of $7.4 million. So the statutory loss for the period was $57 million. .

[Operator Instructions] As there are no further questions at this time, we thank you for attending the 3P Learning 2024 Full Year Results Investor and Analyst Briefing. A recording of the presentation will become available on the 3P Learning website. Thank you.