ActiveOps Plc (AOM) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for taking the time to meet Patti and I as all of these things, some people obviously will know a little bit of ActiveOps, but I will kick off with a little bit of introduction to the company for those of you who haven't met us before. And then we'll talk more about the results of the year and then the outlook. So Quickly, a reminder of ActiveOps. We're a global operation. We have 2 revenue streams, SaaS and Services, primarily to support installation and establishment within our client organizations. We're global, spread across primarily an Anglo audience and South Africa, India, Australia, North America as well as EMEA and we operate in out of those 7 offices. Our customer base are banks, institutions, insurance companies and infact anywhere where there's large amount of administration related to transactional work. That's been our [ heartland ] for many, many years. We solve very simple problem, which is incredibly complicated to do in practice, which is with all the complexity variety in large -- overall large back offices, there's a lot of teams doing lots of different things. And while theoretically, there's potential economies of scale, that's very hard for organizations to realize in practice and ActiveOps provides a solution. We provide the metrics, the management such that essentially diverse teams, diverse managers and management operations can integrate together and can ultimately make the best of their capacity. And as such, it's an overlay to many of the other sources of an automation and methods of improving productivity because it gives organizations control. Now I'll come on to why that is turning out to be quite a strong theme for the moment and a little bit later but the combination of our software and embedded operational simple management rhythm provides very large corporations with the power to leverage their capacity in a much more consistent way and the outcome of that is better productivity. But probably more importantly, it's the capability to then execute the other things they want to do. So it's very much a layer within the sort of elements of the things that we need to deliver that digital transformations. So turning to our year. I think clearly excited by the move to the public markets this time last year. It's been a transformational year for the business. Primarily, the underlying strength of the model has come through very, very well. I think our SaaS that continues to be the basis of a very, very secure business. Gross margins as strong as ever, a very healthy revenue margins on the T&I. So it's sort of an operating level cash as we'll come on to, Patti will talk about it, that remains very, very strong in general. But I think more importantly, as I look at the year, we've laid down many of the elements of our strategy, which you will see us well in the future. I mean, logo growth has been strong. We've had significant expansion across the regions. But we've also done many of the other things that essentially will see us true. In particular, on regional development. So we've talked a lot in the past and our model is -- tends to establish within a customer. They then see the value of that consistency of managing their operations, which leads to an expansion phase. So that land and expand model. I think we've seen good success in a number of our customer bases and continue into this year, which our outlooks looking so confident. But we've also got the debt with the work on IQ product now being adopted by some of our existing control IQ customers, so around a particular theme. That's proven to be -- we have the use case that we can use to grow that across the different customers. So that kind of core expansion of our customer base. We've got the new products going through in terms of our core base so that we can build and expand software more effectively, we can respond to customer needs more and more efficiently. And in particular, our machine learning team has been established this year, which is unlocking a new key of revenue for us or a new driver for growth, which is that the machine learning -- with using our -- that the data we have, applying this with machine learning, we are now able to do some very clever things around forecasting work. And forecasting is really the key because essentially, the more in advance, organization can bear about what's going to happen, the more agile and more able they are to respond to their market need. In a slight different dimension on the sales front, we've also been developing our relationship with a number of partners, which is proving to be, I think, both deliver some results in the year, but more importantly, it will deliver a lot of growth, highlighting here the Microsoft one. That has been tactically very useful in terms of sales, we sell support from Microsoft, but also now that the products are on the Azure marketplace, it's also a channel. And so we've got a number of activities in the pipeline here, which are -- have to be driven through that. So all in all, we're very excited about and effectively where we got in the course of this year, not withstanding the broader context. I mean we're a state and secure business with the model. And I think Patti, be good to -- if you pick up on some of the actual financial results.

Thanks, Richard. So good morning, everyone. Firstly, starting with the SaaS model that we have in the annual recurring revenue customer base. So you can see the ARR there has grown by 10% over the same period over March last year. The top 10 customers have grown by 15% and 8 out of those 10 have already expanded. And they're now accounting for just under 60% of our total ARR for the group, which is up 1 point from 59% at the end of last year. Net revenue retention remains positive at 102%, slightly below where we were last year. But as you'll remember, the productivity improvements that we deliver for our customers does, in some cases, result in a lower number of users. So we're going to see a natural small attrition through that. We have lost a couple of customers, one of which was due to an outsource of a customer, and we hope that, that will lead to a positive engagement with that outsourcer in the future as we look to win back that account. Encouragly low, the top 40 accounts for the business at the end of March 22 have expanded by 19% for ARR. There's 5 new entrants into that list showing that the newer customers that we're getting this year are of good size, significant size and also 22 expansions across previous customers that we've had. So really reinforcing the Land and Expand model that we have there and the strength of the SaaS model in the customer base. If I just move on to the P&L. Here, you can see top line growth of 12% for total revenue, with T&I revenues increasing significantly at just over 30% as we move on from the impact of COVID in the first half of year in '21. Gross margins have remained stable at the top level, a 1-point reduction, and that's primarily due to the relative increase of the lower-margin trading and implementation revenue stream that we have. If we break it down into the 2 product streams that we have, you've got the SaaS margins a 2-point reduction in SaaS margin, and that's as we've invested in the customer support area for our business, for our customers and to make sure that they're getting good levels of support. And that investment steps as we grow. So investment in '22, you don't expect to see investment in '23 and the margins coming back to where they were previously. And then very strong T&I margins in the year at 58%. But we were able to use our Indian delivery team on a remote basis. So low-cost delivery team on a remote basis to complete deliveries in some of our higher-cost jurisdictions in the U.K. and the likes, and that gave very, very strong margins in that area as well as the remote delivery model, proving more effective and efficient in terms of getting the best use out of our resources there. As we've previously talked about, the T&I revenues and margins can vary quite a lot depending on the mix of customer, but implementations we have and where we put those. So we don't expect the 58% the same next -- this coming year, which still vary as we move forward. There has been additional investment in operating costs of GBP 2.6 million. I'll talk more about that on the next slide. And that's given us adjusted EBITDA broadly breakeven for the year, which is a very strong result from our perspective. Now being an exceptional cost of GBP 0.5 million relating to a transaction that we were looking at back in March that didn't complete at that time. Obviously, funding from the market was very, very challenging back in March. So we were unable to move that one forward. You can see share-based payments coming into the P&L and those related to the long-term incentive plans that we put in place the IPO with depreciation and amortization remaining broadly flat. If I move on to the EBITDA bridge. And you can see, obviously, as revenues increase the margins from SaaS and T&I revenue streams goes up as well. We put significant investment into the sales and marketing arena. We've got new sales heads in all of our regions, the incremental investment in marketing as well and driving growth going forward. And there's further expansion of the products and technology development team as well, enable us to deploy new features faster. And as Richard mentioned, that new team of data scientists are providing further insight and development for the product road map as well. We have capitalized GBP 0.4 million of R&D spend in the year. As you'll be aware, the requirements from an IFRS perspective look to do that, and we do expect that to increase as we move forward. Looking at our plans going forward, clearly, wage inflation is out there, and we're looking to balance the impact of inflation on our employees as well as on the business and that will be partly offset by inflation clauses that we have in our existing customer base as we will look to pass inflation on to customers as well. As I said, the T&I revenues and margins do remain variable and likely to return to year-end '21 levels and travel as well as picking up to pre-pandemic levels and was moving towards that at the end of last year, and we expect that to continue in year-end '23. Clearly, the full year impact of the headcount we've invested in year-end '22 comes through in year-end '23, and that will -- whilst we don't expect headcount to increase as fast at year end '23, that gives us the operational leverage in the business that we've previously discussed such that by the end of year end '23, we expect to be moving to a positive EBITDA run rate as we exit in March next year. And then if I just move on to the balance sheet. The balance sheet remains very strong. We're debt free. We've got over GBP 13 million of cash in the bank and we have very strong inflows of cash in the second half of the year, which have given us a positive cash flow to EBITDA for the year. The only thing to note in the cash flow is you might remember at IPO, we -- the previous share options were exercised and sold by members of the team that had a cash inflow prior to the year-end, including taxes that were due to the tax authorities of GBP 3.5 million, those taxes were paid out to the authorities in the month of April last year, giving that 1 unusual exceptional item, if you like. But apart from that, a very clean cash flow and balance sheet. And we're -- from a financial perspective, we're in a very strong position and I'm very optimistic about the future. And with that, I'll pass back to Richard to take you through where we are on the strategy.

Thanks, Patti. I wanted to highlight 2 or 3 things, I think, which are the reason why we're sort of maturing at the moment. Firstly, if you think about the context of the world of work, we've always been effectively about how people orchestrate, manage their resources. And the effect of COVID was to break so many of the existing systems organizations had for doing just that because they effectively had they been established for years based on people's presence. We've all been hearing so much about hybrid working and the like. We've heard about wellness and so on. All those things now are absolutely demanding of both data but also capability wanting to have information, but what you do with how do team need is operational leaders, actually look after people and manage their work activities when they are at home. It's a combination of data, but also the mechanics, how? When do we meet? What we talk about? How do we plan ahead? And that, of course, is absolutely speaks to ActiveOp's fundamental offer. And that in itself, if nothing else for our existing customers, it's had a hugely positive confirmatory effect on how valuable our data and our process is for them. But more importantly, it's created a pain point for people who don't have ActiveOps. But there's a second effect what I can see -- which we can see coming up as well, which is the trade of our world or recession. ActiveOps is all about effectively sweating the asset. It's making sure you're capitalizing on the investments you already have to do the best you can within the constraints as it were of your organization. And so in prior periods of pressure, let's say, we've always had a very healthy demand for ActiveOps because it plays to the theme of less simply [indiscernible] as well as they were and do what we can within the constraints of our operational businesses and ActiveOps is got a hugely compelling sort of offer in that respect. So I think that conjunction of 2 things is part of the contribution to the outlook that we're feeling both in terms of pipeline, but also it's the internal dynamics within our customers, which is turning this kind of operational efficiency control agenda to the higher levels of the Board table, and it suddenly becomes more accessible and then it's more exciting perhaps or perhaps just more pragmatic than some of the other issues. And some of that is coming through, I think in things like the Gartner table, you can see on the right there where there's a concern about how to manage people, the well-being and stolen [ agenda ] that is very much inclined to that. And that's part of the reason we're pushing our products tied to our customer around things like the CaseworkiQ, which I'll talk about. So the context for the problem we solve is the pain is increasing, and that has a corresponding improvement to the accessibility of our solution or demand for our solution. Picking up a little bit more then. So take it on the market. This is a picture some of you would have seen before. We're very clear on where we focus not because there isn't a lot more out there. But at the end of the day, we're not constrained by target addressable market. There are plenty of people with large numbers of any organizations with large numbers of people where productivity needs to be managed carefully. We focused on the banks and the related ecosystem around them of business process outsources insurance and health care and so on. But what we're now doing is looking at particular types of issues. So the big one at the moment and for a lot of banks is financial crime, probably all seen reports in the papers about the consequences of getting it right or wrong. But just highlighting at the moment, you imagine the sensitivity in sanctions processing if completely sort of onto -- things that should have got trapped and get trap, the political and financial consequences is very high. So it's an extremely high level of oversight and effort and resource expenditure going into financial crime prevention and administration in the clearing -- in the bank. And that's true across the world. It's not a region issue. So case with IQ in this particular case is suitable to -- we've developed this product, which extends the use of this kind of method and system we have to the knowledge work with the case managers, and in particular, around financial crime. And that's proving firstly, in a very, very effective solution. So we've had some cracking sales in that respect to our existing customer base, but it's a very clearly articulated value proposition to our existing customers to sell on. And so that kind of niche marketing to our existing customer base, where we have an existing relationship is, I think, something that we can see a lot happening in the course of this year. In 30 days, when we launched the product formally last month, but we've been [ tapping ] the market with our customers and leading to that. And as I said, I look forward to be able to report more in the course of the half year in October or November when we talk next time. Looking a little bit more regionally, EMEA has been our very strong region. There's a significant expansion across a number of accounts, particularly on your existing accounts we don't disclose our cash flow customer numbers, but some of our other well-known brands that we've talked about are using ActiveOps, very, very thorough and expanding in a number of areas. And in some interesting different areas. I've touched on financial crime but we've also got pilots running in branch-related activity in some of our banking customers, where there's a real issue around how do we start to present the customer. We need to have staffing and branches, sufficients just cut manage the customer demands or walk-ins, but we can't just put phone calls in to circa the capacity because that's an immediate task for back office work, it can be blended into that kind of customer-facing activity can be put to one side of the customer walks up sounds easy in practice, and really complicated to do when you've got thousands of branches. And that's exactly, again, the sort of problem what ActiveOps consult. So we've got a lot of activity in Europe. That's a real area of growth for us. Then if we look across North America. As you will have seen from Patti's area, it was our highest growing region last year, and we are continuing to be developing that market strongly. We're seeing a lot of demand for the WorkiQ product, which is just more of a sort of data collection device. But of course, the exciting piece then is against that we've talked about [indiscernible] and Gemara and a number of other big health care environments is cross-selling that to ControliQ. Now we've been on this particular agenda for a while, but I think that has been one of the impacts of COVID with the noise and fragmentation, we haven't been able to progress with our ControliQ deployments in the last 2 years, perhaps as we have that made us make progress. But as I see today, we've got 3 major pilots being commissioned, and it's always been the intention. There's never been actually about the value. And so again, I'm looking forward to that for cross-sell of the ControliQ product to our WorkiQ product in the course of this year. On the other side of the fence, WorkiQ into existing ControliQ products has made more progress. On the right there, you can see 1 example of a very strong North American customer of ours, which is now using WorkiQ. And there's some fantastic results. There's a webinar by the TD bank organizer -- owner of the product aren't available on LinkedIn now, which you can see, but she talks very, very clearly about the value to them of having this visibility both of the sort of what people are doing, when they are, but also how it contributes to the must be clear, they introduced on a well-being agenda, making sure their staff, working to home weren't being overloaded. So I think that kind of example is proving extremely valuable. When we go to other parts of the region, South Africa or Australia, with that sort of case study to make it clear about those kind of benefits. So North America remains a key area of growth for us, that scale even in the last quarter. Again, we've seen significant new logo sales coming through. And again, the intrinsic scale of the U.S., I think, makes it a very attractive market for us. Just finally on the strategy piece, just a quick touch on the machine learning. ActiveOps has got extraordinary amount of highly amounts of data, but if it's only transactional but what we're now doing using some of the -- how or the -- Azure -- the Microsoft Azure and machine learning environment is to convert that back into greater and more powerful insights. So the 1 example I've site is, we've introduced this to some of the forecasts. At the moment, a team leader will develop a plan using our software, and that will enable the different managers to integrate their activities for next week much more effectively. But it does rely on the quality of the planning by that team leader with all the value of now with ActiveOps, new machine learning, essentially, all that's taken away. So the system will generate the forecast and plans, which could be moderated by the team leaders. Our pilot in the South Africa seems to suggest that actually increased the bandwidth. It gave them plans of solutions that were done better to a level of that's 20% to 65% improvement in their confidence, which translated into 1.5% of the extra capacity per team per week. So if you extrapolate that across that West or Barclays, that's a phenomenal increase in capacity through that machine learning. So we are very excited about that. I think this has been a area you'll hear me talk more about in the future, but it's essentially building on that resource base we have of now 15 years' worth of real transactional data that's buried in the ActiveOps data set. So we've got lots more to talk about in the future on that one. I think just to turn to the end of presentation, Patti perhaps you might talk a bit about ESG.

Yes. Thanks, Richard. And so eventually, the purpose of simplifying the run of operations that support the ESG agenda not only in how customers manage their operations, but also the positive impact it has on the wellbeing at the team and Richard gave you the TD Bank example in the U.S. where they specifically put in place WorkiQ to help, manage the working patterns of their teams and provide make sure they're doing the right things for their employees. But more specifically, within the business, we've developed a more formal structure to the work that we were doing before in this area. We've adopted the GRI framework and where it's appropriate for the business. Within the environmental section, the single most impactful area, if you like, is our hosting footprint. We host our customer base and our software on the Microsoft Azure platform. And I'm sure you know that is a carbon-neutral platform from the point of view of emissions. And we're also -- and we have also established our baseline for our other key area of travel for a carbon footprint, where we're base lining that so we can understand what we're using in that area to enable us to take positive action as we move forward. In the social area, we've maintained a very solid employee engagement score of 4, and that's despite an increased participant patient rate, which sometimes can lead to a drop off. We'll also be publishing the diversity data of the business in the annual report, which you'll see from now shortly. And from a tariff perspective, for example, in the U.S., we've supported supporting a charity for brighter tomorrow and they're focused on providing a safe shelter for victims of domestic violence in the sort, in EMEA as well as the charitable work that the team has been doing, we've also been directly supporting employees and their families in India and Africa, where COVID had a particularly difficult impact, for example, in India, as you may recall from the news, it was difficult to get hold of oxygen. And we're directly supporting our team members over there with that through financial support and the same in Africa. And then from the governance perspective, we've continued to develop and enhance the policies and procedures that we have and we've embedded the formal audit reversion and nomination subcommittees into the governance structure that we have for the business. So good progress. Clearly, plenty more to do, but the ESG agenda falls one of the cornerstones of the business.

It's worth note on one of the other infrastructure thing in the first quarter is SOC 2, some of you who probably never been enjoyed the benefit of this. As a SaaS company, clearly, data security is critical. In the U.S., we are working for a lot of health care providers and where healthcares are very, very stringent around protection of personal data. And I'm really pleased with this year when we've got our SOC 2 process enabled and that is something which frankly not a lot of companies do. It's a lot of things, we will work to get that a bit like [indiscernible] and the like. And that, I think, is a testament to the integrity of the ActiveOps because of the customers we deal with demand. So again, when I talk about the sort of layers of the platform of different elements that we've got in place I think succeeding with that is just 1 other example of some of those transactional elements that's perhaps not that visible, but it makes a massive difference when it comes to the trading activities and the ability to sell. So then looking at the outlook. I hope you're picking up from the turn of this conversation, we are very, very bullish. I think combination and market context is creating more pain to the issue we've sold, the context for the outcomes we deliver, again, it's very strong. And we're seeing that in Q1. So Q1 trading has been very strong. It's been against our expectations. There's a sort of nuance to that. Our revenues are multicurrency. Our costs are also in currency. So essentially, it's the margin that we make in regions that comes back to the U.K. P&L. And with the weakness of the pound, that's contributed in a positive way to -- when we've got a lot of dollar earnings that helps the P&L. But at an underlying level, trading has been very strong. So the teams are busy. The revenues are strong and grabbing up -- we've had a healthy first quarter against our expectations. So Patti's talked a bit about our expectations for the year, but we're certainly on track in terms of our EBIT target. And then as I alluded to the launch of CaseworkiQ, I think we've got a tracking pipeline of customers coming through that way. So on a running basis, the effects of the last year and as the market context, I would say, ActiveOps as a trading company has never been stronger, and it's looking really good. to where we're at, despite, if you like, the broader ups and downs of the share price market and the reception of tax stocks, for us to meet the choice, but we certainly internally are very excited. We're just feeling confident about where we're at now.