ActiveOps Plc (AOM) Earnings Call Transcript & Summary

Good morning, everyone. Just to kick off our results presentation, we have 2 of us on the call, including our brand-new, welcome, Ken, CFO. So between the 2 of us, we will give you a brief overview of our results. And for those of you're new, I will kick off with an introduction to the business. ActiveOps is a SaaS-based global enterprise software provider. We have clients in 3 regions around the world, and we operate working to blue chip customers in the financial services sector and their associated BPO, business process outsourcing suppliers. We provide decision intelligence essentially to enable them to run their back offices and administration more efficiently. You can see some metrics on the screen here around the nature of the business. But the key feature is in current times, clearly being in control is such a critical requirement, whether it's the impact of hybrid working, concerns over efficiency, concerns over service levels and the general presentation of sort of customer offers, control is critical and it's only becoming more so, which is underpinning the strength of this business. We have ARR, our recurrent revenue is around 87%, 90% of our gross revenue. We have some services around that, and we're very geographically spread as well. We operate an annual advanced billing model, which also means our cash grows year-on-year. A number of features on the screen there showing you the sort of outcomes our customers enjoy as a result of using ActiveOps, as we've described it typically drives productivity but also service level improvements. There's a variety of ways, if you like, what our customers cash to check. But as you can see from the screen there, it's all very relevant to the current agenda. In terms of our products, we operate in a number of sort of processes on the left there. The great point is that it's essentially generic to types of operations. So our customers like Nationwide or Mercer or Atos or TD use us across their back offices independently of the process to control operations. We provide 3 products. We have a workiQ decision intelligence system, which sits on laptops and effectively provides information on how people are using software and what they're doing on their day-to-day activities. We have a very powerful CaseworkiQ product, which is new to the system this year, and I'll speak more about that. And we have ControliQ, which is our core planning control system. So just to move into the results for the year. Effectively, this has been a really strong year for the business. You can see from the key metrics there. We are growing steadily. We're enjoying increase in our EBIT. We're seeing an increase in our revenue and increase in our cash. And that reflects, if you like, the take-up of our product across the board in all regions. In terms of the key features I'd like to highlight, I mean, there's the core strength of business in terms of our existing relationship. Our net revenue retention has returned to what's effectively in our historic rates at 110%. So just to put that in context, every year from 90% of our revenue, which is recurrent, we grow it by 10%. Last year was a dip year for a variety of reasons. This year, we've actually enjoyed a significant recovery. And with the cross-selling and upselling available to us through our new products, we've got every anticipation of our NRR continuing to improve. I think the fact that we've got the growth in our SaaS revenue speaks to the increased uptake. And probably just as reassuringly, we're picking up new logo growth in each region. So we operate in 3 regions: Asia Pacific, EMEA and North America, and the businesses are seeing sort of consistent performance in all 3 of those areas. So the big thing for us at the moment is the platform. What we're doing is embedding more and more capability into our platform so that our users who are typically our operational leaders, are finding it easier and easier to succeed more. If you think about the world of work, it's getting harder all the time. And so the investment we're making into the AI-driven decision intelligence is really starting to come through. So I'll return to that in the outlook and strategy. But we've seen the benefit of that come through in the course of this year with CaseworkiQ, a number of add-ons to the restructuring of the product pricing, all of which are going to be significant for driving our revenue. And also important in the past year is the expansion of our strategic partnerships, particularly with Microsoft, which we are receiving significant support with a lot of our major customers in terms of their sort of positioning of us and how we work with them. So that's a quick overview. I will then hand over to Ken just to pick up the financials.

So good morning, everybody, and welcome to my bit. I joined ActiveOps 10 weeks ago, so I can't claim to know everything about all the numbers, but I must say the numbers to a larger sense, speak for themselves. Richard has alluded to some of these in his introduction. But the 4 key points are the annual recurring revenue. It's gone up 13% year-on-year, which is a pretty chunky increase. Some of that was currency influenced, but even so it was a double-digit growth. Net revenue retention, as Richard mentioned, that's a very strong measure of stickiness in the client base and obviously improved on last year. And the highlight really is the move to positive EBITDA. Some of that was helped by exchange differences. But in fact, the second half was quite positive and has given us a good springboard into the now current financial year and beyond to stay EBITDA positive. And last but not least, as the finance guy, GBP 15 million in the bank helps you to sleep at night. It's a nice stable position as a business, and we are very happy to have that balance sitting there. So as Richard said, 87% of the revenues are from SaaS. So they're very predictable, very steady, and they're growing, which is obviously the features you want to have. The other element of the revenue stream is training and implementation, which is quite profitable for us. It's more lumpy. But you'll see from the numbers, it moves around a bit. So as Richard said, customers build in advance, typically annually in ActiveOps' case. So we had a very strong year in cash position. In fact, post year-end, that went up further. In terms of the detail of the numbers, you can see there how they actually work in practice. So the SaaS revenue of GBP 22 million and the T&I revenue of GBP 3.4 million. It gave us GBP 25 million. So the first time we've reached GBP 25 million plus of revenues. Nice healthy gross margin, slightly up on the previous year, and the OpEx gone up by just under GBP 1 million, giving a nice adjusted EBITDA plus GBP 0.7 million. I guess the key thing to note there is the operating leverage. If you can maintain double-digit revenue growth and single-digit operating cost growth, then you don't need to be a mathematical genius to work out that that's going to give you an increasingly positive contribution to the bottom line. So once if we can keep the cost base steady and keep the revenues growing positively as they have been, then we should produce a good profit over the next 2 or 3 years. And that's in fact being described in some of the analyst forecasts that are out this morning. The EBITDA bridge, just to show this more graphically, this is all about movement on the previous year. So it starts off with last year's minus GBP 0.3 million and this year's plus GBP 0.7 million. This really describes how you get there. I guess the one standout there is the customer delivery and relationship management. Spend increase is probably partly to do with the increase in NRR that we've shown in the year. So that's connected our customers to have become even more sticky, although they were so pretty good already. We did capitalize some labor. We don't love doing it, but we have to. That's the rule. And so we did capitalize [ 700 ] this year, and that was an increase from last year, but it's still a fairly modest amount compared with our peers. And we obviously spent a lot more on R&D than we capitalized. So that's, I think, a healthy place to be. And the cash flow bridge, one of my favorites, obviously, started life out with GBP 13.8 million. So it was a pretty good start to the year. And the main thing is the continuing operations contribution, GBP 2.7 million, which with the other bits evolved, allowed us to end the year with GBP 15.4 million sitting in the bank. And as we speak today, that's pretty much unchanged. It is a second half loaded billing cycle. So the cash does tend to rise towards the year-end. But there's no reason why that cash shouldn't continue to grow in the coming years. And just in summary, so 10 weeks in the job, but I think these are my observations. The balance sheet is very healthy and a very strong platform to build from. Recurring revenue, I think, is a very nice place to live, where you can start off in the first of the month, knowing that the month's revenue was pretty much done apart from just top-ups here and there from new business, very cash generative as we can see, lots of expansion opportunities, which Richard will describe further, but there's plenty of opportunity there. So I think we're in a very strong place from a financial point of view. And I think the exit run rate just -- shows just the potential for the coming years in terms of keeping that all doing. I'll pass you back to Richard.

Thank you, Ken. So I think what I'll just focus on is where I started a moment ago, which is just the world of work is not getting any simpler. The combination of our customers being set by operational risk challenges. I mean, look at Silicon Valley Bank, for example, we imagined that the practicalities of what happened totally external to the running of the business in terms of dealing with that changeover. Skills development, the fact of hybrid working and the realities of that means that it's harder to have people sitting by other people, which means skills and the complexity of having the right people in the right place. As you can imagine, it's only getting harder. We're all reading in the press, plenty of commentary by usually Chief Executives suffering because of productivity paranoia or they're worrying their people aren't working as hard as they can and how do you get people back to the office, the mechanics of hybrid working, getting the right work and so on to the right people at the right time. And then now there's this looming discussion around the world of work in the context of the impact of AI, for example, how are organizations going to mobilize and how is that going to impact their delivery models, their customer expectations and so on. That's a big complicated picture. And against that, in the immediate sort of risk generally, sort of whether you call it recessionary or not, but the pressures on enterprises to reduce cost is getting stronger. So there's a real sort of vice in the center of these sort of businesses by that requirement to be more agile and do more whilst at the same time, the well-being and keeping the staff happy, which creates a very, very complicated world. Now interestingly, it's coming through in our metrics because we have universal data across the world in a standardized format and I'll return to that. But one of the interesting things we published is a tracker of how well in control organizations are and generally, we do see that the European markets lead other sectors. And we're seeing in the U.K. and EMEA, that downward trend of the solid white graph there that essentially, what that tells us is that operations are becoming less controlled. The complexities over time are really challenging organizations in terms of running with the teams and the processes they have. And I think it speaks to the fact that it's getting harder, which, of course, does mean organizations need better tooling, better control and better structure to how they do these things. So ActiveOps, what we are now really starting to leverage is that universal data set and deploying with the benefit of access to the [indiscernible] Azure, Microsoft environments now, our own, if you like, unique understanding of the business of operations to bring advanced decision intelligence to our customers. Now there's the sort of analytical data, finding things in a big pools of data. There's predictive data, which is -- this is the thing that might likely happen based on evidence, I can tell you or -- and this is the really powerful piece. This is what you could do because that works in other times that these situations are risen. And put more and more ActiveOps' tooling, it's not just supporting you as an individual with information that you can make your own decisions on, it's actually moving to prescriptive AI, where it says on the basis of -- you should know that Sally in accounts is having a bad week. But if you did the following things, that's likely to change or Sarah over there has had the best week she's ever had and giving her some recognition as a good time to do it. And all that is doing is systemically, when you've got 10,000 people in your back office, raising the bar hugely in terms of your capacity to run your operation better. And this is the kind of tooling that ActiveOps is bringing to our customers in the immediate term, both in our releases, and I'll talk more. One aspect of that is CaseworkiQ. So for those of you I've spoken to with before, forgive me, but one of the challenges is the world of work is getting more complicated. It's less transactional and Casework was our response to that in terms of giving our customers a way of managing complex activities happening across multiple teams in some kind of sequence but not necessarily in the same software. There's plenty of workflow tools out there, probably too many workflow tools even in one customer. And the problem they have is aggregating that information and we solved that problem by providing that overview. And CaseworkiQ is absolutely going gangbusters with our customers in terms of 7 out of the top 10 now have got active trials or being paying for it. We've got GBP 1 million of ARR that's growing nicely. And it just provides that kind of complexity. The case -- standout case is in anti-money laundering and KYC processing at one of our customers, but it's also being used for mortgage processing between branches in the middle and back offices. And there's a whole variety of other use cases that are now growing. So we're very excited about CaseworkiQ. And as we've spoken about what that does is extend the footprint of addressable work in our customers for ActiveOps software. So that's a significant expand opportunity that we're working quite well. On the other way around, we've also got our WorkiQ product. And now we've actually got customers, TDs highlighted here, who have now got all 3 products. One of the things with new products is the extent to which you are going to suffer cannibalization of one to the other. And what we're really pleased with is the extent to which that is not the case. In fact, if anything, they're actually reinforcing each other. There's a nice video on the Internet of one of our customers in TD talking about how the impact of having WorkiQ and ControliQ, where WorkiQ is showing the desktop intelligence and ControliQ is the planning and control intelligence between the 2 of those acting together to really support and in TD's case, they've now got CaseworkiQ as well. So all of these products acting in tandem or expands the authority of ActiveOps' software to be the kind of central pin around how organizations are managing their work and their capacity. And I think that speaks to my point earlier on about the net revenue retention, the expansion within our existing customers is at an excellent level, but I think we've got a lot of potential to go with that. So for example, we're releasing service indicators at the moment in the latest package, which is a way of predicting not just are you in service and/or did you fail, but more importantly, on the basis of your current organization of your teams or work, you are likely to pass or fail your service. So it's predicting around service level. We have been [indiscernible] testing about to launch smart planning. Now that, just to give you a little flavor, the process of producing a plan is critical to being in control, knowing what you think is going to happen and acting accordingly. But clearly, if I can bring AI to that so that I don't have to do that work, like Google Maps, it just tells me where I'm going to be, I can act on that more easily, and that's what we're doing with smart planning. And clients so far have seen about a 4% uplift in productivity on the back of that improved performance in their planning systems where they've had ActiveOps for some time. And that is, again, a hugely compelling financial ROI for jacking up the price. Smart skills, a conundrum for organizations as individuals are individuals, and therefore, their skills vary. What the challenge has always been mapping and understanding those or with our technology, we can effectively deduce and infer skills from people's actual performance, develop learning curve, so it becomes predictive when new people join whether they're on the right learning curve or indeed falling off. And back to my point about prescriptive giving team managers the opportunity to say what they could do to respond to that skills. I mean this is really leveraging both the processing capacity of the -- of the AI systems, but applying ActiveOps' unique data sets which are proprietary to us and our deep subject matter expertise on the business of Ops management. You overlay those 3 elements together and suddenly we have a unique offer, which really is becoming more and more -- effectively the central hub of any organization. And the final one there is employee experience. We're putting a lot of work into making it such that people -- essentially the biggest cause of stress at work, AKA well-being is uncertainty. And the way in which we present data so that individuals know what's expected of them, it has a massive impact on attrition, on learning and ultimately, the retention of the business. So a big part of our push in marketing is now making sure the HR functions of organizations are also leveraging the full potential of this data set, which they would not have had access to before. So there's a huge amount of excitement in the business about that. But how does that translate into revenue? Well, what we've recently been doing is quite a detailed study of our pricing and reducing some external expense on this. And that's been really quite interesting. Firstly, the ability to make sure the value is well articulated. Now what we're doing is packaging our software into series, where you had the other base levels of functionality designed to take people more quickly onto our platform, to reduce the barriers to entry. But then introducing those road map features I'm talking about [indiscernible] Series 3 and the Series 4, both of which have quite a different price point. But proportionally, it is still outstanding in terms of their ROI for our customers. And these are all opportunities then to leverage and actually drive up revenue proportionally to the value we're creating. So this is a process we have been deploying. It's a 3-year program in effect with some of the contracts we have. But again, it's all part of taking that historic user base, getting everyone on to a current model of pricing. But also as we now have technology which can drop in these new advanced features, we can fully monetize those in the way that we know is appropriate. Quick commentary on the business from an ESG perspective. We previously said when we came to the market, we would be implementing a global reporting initiative, and we continue on that journey. It's only recently that we've had effectively got the data to do the baselining. So, for example, on the carbon reduction, we have to develop some baselines, but we're on that. ActiveOps is an incredibly globally diverse organization. We're a 190, 200 people, but we are spread across a lot of different countries. And so we've always taken a lot of pride. I personally have a lot of pride in the, if you like, the diversity inherent in the business. But clearly, as companies evolve, you've got to be very progressive about making sure not make too many assumptions. And particularly, COVID, whilst we were always a hybrid working company post COVID, again, we need to -- we don't convene in our offices as much as we used to. We, like every other company, is to pay more attention to giving people the time and the business to feel part of ActiveOps, and we were doing an awful lot of work with our -- sort of on the culture side to make sure the integrity of the business and the values we hold are sustained. Worth noting because it is nontrivial is the SOC 2. A lot of companies now from a customer side require the SOC 2 compliance, and it's a combination of standards associated with data security, but also operational business processes. And we -- our KPMG led audit the other day, we were absolutely clean on that, very good result from that perspective. And that all adds up to our kind of enterprise authority when we are dealing with some of the biggest organizations in the world. Looking at full year '24, you'll see a continuation of themes. There's nothing in here that essentially is new news other than we need to keep on doing them and do them better. So our turn towards growth and profitability is continuing. Ken's alluded to, but the second half of this year, the underlying profitability of the business continues to get better all the time. So we're very positive about that and associated with that is just the revenue and cash as well. But I think really, the long-term value of the company comes from our ability to leverage our unique knowledge of back-office operations and the challenges of running in the modern environment, and I've spoken a bit about that. I think one of the things that ActiveOps has always been -- we've been sort of slightly humble on occasions with what we do and one of the things I've been doing over the last year is focusing a lot on our marketing messaging. And for those of you who track us, you'll see a big change in tone over the next 3 to 6 months as we go out with quite a different message around how we position ourselves based on, frankly, a real level of confidence in the value we add and the innovation we bring. But I think behind that, that has always been driven by our results in terms of our customer loyalty and our customer sort of almost enthusiasm, and I certainly don't -- we are investing in our customer service management and our customer relationships to sustain that. And ultimately, our organization requires and needs to be efficient in that sense. So we are holding our ops cost pretty tightly. We're -- the main focus of growth is to drive revenue to the bottom line. So we are continuing to work on our internal systems such that we can be more effective without necessarily raising our delivery costs. Just to give you a quick update on the first quarter. I said the headline is in line with expectations. The world of enterprise selling is never going to get easy. The processes of organizations put in place, especially in economic times when costs are under scrutiny is ever more sort of rigorous. That said, we have the benefit of being [indiscernible] a type of product, which does well in recessionary times. We absolutely hit the sweet spot of gaining more from what you already have. And that's our -- I mean if you look back at the sort of recessionary times in 2008 to 2011, that was our period of stellar growth historically. And so I think the context for our software has never been better. We've got a lot of good expansion in existing accounts, 2 new logos already this year. Our pipeline in multiple dimensions of both regional and also product is as healthy as it's ever been and quite a lot of superscale type opportunities that need developing there. And so I think in general terms, as we sort of sit at the end of the first quarter, looking at the half, we're as confident as we ever are about our sort of [indiscernible] offer. I suppose the overall tone though, I'm seeing is just a potential for [ Rx ] ARR. I think we've got a lot of interesting opportunities that could scale quite strongly, particularly in the U.S., which gives me a less impact on the current sort of revenues in this year. But as I look forward to next year, I can see some exciting opportunities that we will look forward to taking forward. So that's the quick summary. The business is as strong as it's ever been with some really excited and differentiated products. Thank you very much, as ever for attending.