ActiveOps Plc (AOM) Earnings Call Transcript & Summary

Good morning, and welcome to the ActiveOps Plc Final Results Investor Presentation. [Operator Instructions] before we begin, I would like to submit the following poll. I would now like to hand you over to Executive Chair, Richard Jeffery. Good morning to you.

Good morning. Thank you, and good morning. Welcome to everyone on this webinar. I look forward to taking you through what has been by any stretch a really strong year. So Emma and I, hopefully, between us and describe some of that and perhaps there'll be some questions at the end. So let's get started. So firstly, for those of you who don't know ActiveOps, a very brief overview of the company. We're a SaaS software company. We provide decision intelligence software for enterprises, particularly banks, insurance companies and organizations who have large numbers of people doing, let's call it, administrative tasks, processing paperwork in its myriad and a variety of forms. We're very global. We operate around the world with 3 regions, EMEA, North America and APAC. And essentially, as we're primarily a SaaS company, which brings all sorts of virtuous things we can talk about around recurring revenue. But associated with it, we do the services for installation, and that varies from sort of project-to-project and profile-to-profile. So we have 3 products, which you see on the screen there. We have a desktop analytics product, which essentially sits on people's desktops seeing the applications they use. And then we have our ControliQ product, which helps people manage work and time is the core system that is used globally for balancing work and resources across teams. And then in this increasingly complicated world with more and more automation, we have CaseWorkiQ, which provides a similar sort of control system, if you will, over the complexity of exception handling and complaint handling and the things that don't lend themselves to easy [counting] of which we will talk more. So what's ActiveOps about? We want to -- we are all about enabling organizations to deliver more successfully, ultimately managing within the constraints they have, their investments in resources, technologies and systems and play their particular piano really, really well. We help them with the information it takes to make the allocation of work and resources. And historically, that's not necessarily been done terribly well. It tends to be very localized. ActiveOps brings a level of system and structure to how that's done with all sorts of virtues that arises from that. Your managers operate, if you like, to a common rhythm. Your metrics are more consistent, so you can have conversations about this. And in this increasing world of agents, robots and other forms of sort of automation coming through, it's not just about how you do it, it's the precision with which you do it. And ActiveOps is I think we can justifiably claim be world leaders in this particular space in this sort of complex world operations, where processes and systems are so myriad and diverse at the same time, we have to better optimize the whole thing. And on the screen there, you can see some of the featured ways in which we present it. Now the ActiveOps products essentially is now moving from, if you like, that balancing of human capital against work to -- in an increasingly an agent AI world to there's a new game in town, which, of course, is it's not the use of AI per se, which is the challenge. It's the blending. It's the balance between the allocation and use of AI amongst human activities. And of course, whilst every organization is rushing towards AI, it's a transformation journey. It's not an end state. You can't wish it that way. You have to manage it. And so for ActiveOps, it's a very exciting time right now because what organizations, I think, are really beginning to appreciate, and I'll talk more about this, is that the control they have over those human processes and systems doesn't really cut it in terms of actually being able to give the precision of control that they need to be able to really exploit AI. So we are presenting ourselves very much in that kind of 3-step journey you see on the right there, which is the ability to make the right choices. There's so much to go at, where do you go first, and I'll talk a bit about that. It's about actually then executing, actually, if you like, delivering the processes to plan. I mean a transformation that goes to plan would be unusual in most of our client bases. So you're actually releasing that full potential of what you think you can achieve. And then, of course, securing it. So many programs at the end of the day when changes occur, history reinvents itself and some of those benefits get sort of lost. And so ActiveOps is all about helping you secure and sustain that release of potential. So it's a very exciting time for us at the moment. And in the results in a moment, Emma will talk through some of the figures. But we've got a couple of case studies here of examples, which have been well publicized and there's much more detail on the web about this. One of our big customers in Canada is a fund administrator. And they are a really good example of they introduced ActiveOps to help them run their operations better, delivered all the productivity gain that we would normally expect because so much time does get lost. But what they particularly has been transformational to them is that as part of their automation journey, they are able to use the ActiveOps data to direct what processes were changed and ultimately cash that check. So that's a whole choose release protect cycle is in that case study. And Catherine Thacker and the management team there would tell anybody who wants to hear about it that it has been such a fantastic success in their professional experience actually delivering on what they thought they could do. The second one is well-established customer of ours. We talked about it before in these meetings at our conference in Nedbank. But again, it's the same sort of context of the support for transformation. So Brinsley here was an operations leader, but the data he had in his system to actually focus on the areas of change that could make the greatest impact through the use of robots automation and other levers he had was for him absolutely foundational to the progress they've made. Much more information on our website. I'd direct anybody to some of the super video clips and talking to leaders there to get a flavor at different levels of what ActiveOps does. But I just wanted to kick off a little bit context. So let's talk about the year. Essentially, it by any stretch has been the best year for ActiveOps ever. We have the growth, the fundamental growth of the business has been outstanding. New customers. We sustained 9 new logos in last year, which, again, is just enterprise customer level, that's a lot of work and a lot of sales activity. But more importantly, the underlying growth. I mean, yes, we've made an acquisition, which has added to it, but I want to be a clear distinction between the sort of mergers and acquisitions growth, but from the organic growth. The fact that we're growing at the rate we are from the core business we have is fantastic. That NRR statistic. So the amount of revenue we get from our existing customers year-on-year going up to 119%, and that's a massive growth driver. And we'll talk later about our target addressable. But again, that just expands in front of us. There's so much more with the power of the product to do it -- and to do more with our software as our customers appreciate the value of it. So we're really using our functionality to extend the use of ActiveOps across expanding our TAM. And then as has been a really important part of the year's success, that acquisition Enlighten in July last year or beginning of August, obviously, we're well down the track now and effectively, it's fully assimilated into the business. Behind that, and Emma will have us talk about this, the success, let's say, of incorporating into the portfolio, but also achieving the savings, I think, is another notable achievement. Along the bottom there, you can see how it's distributed across our different regions. The key point is it's consistent across the regions. Canada, South Africa all stand out. But fundamentally, this is a symptom of a problem we provide a solution to a problem that's a global one for our type of customers, which speaks to the growth and consistency. So all in all, a year that I think we've got a lot to be pleased with, but also is incredibly foundational for the momentum we're already enjoying in the current year. So enough for me, Emma, change your voice. Over to you.

Perfect. Thank you very much, Richard. So this year, I'm very proud to report another set of strong results for ActiveOps. So on this slide, we've got a number of just the key highlights from a finance point of view. So in terms of organic growth on SaaS, we delivered a 23% uplift on SaaS revenues on an organic basis. We've closed the year with GBP 41.5 million of ARR, of which GBP 4.9 million of that has been derived from the acquisition of Enlighten. We've seen an improvement on the adjusted EBITDA margin. So last year, we reported an EBITDA margin of 8%. This year, that's increased up to 10%. That does exclude exceptional items for the acquisition of Enlighten, which were GBP 3 million. And then from a cash point of view, we ended the year with GBP 23.8 million of cash, which gives us a healthy cash conversion of 295%. Just going into the P&L performance in a little bit more detail. So the total full year revenue recognized is GBP 45 million. The split between SaaS revenue and training and implementation services is an 85% weighting towards SaaS and a 15% weighting towards training and implementation. In terms of the definition of training and implementation, that is very much just going on site and implementing the licenses to customers. In terms of the gross margin, we've maintained a stable gross margin of 84% that rate has been reported, and we've delivered that for a number of years now. And from an operating cost point of view, you'll see on here that there is a significant increase. The main driver behind that is now the inclusion of the Enlighten OpEx. So around GBP 6 million of additional OpEx was recognized in the year directly related to 9 months of trading for Enlighten. And in terms of adjusted EBITDA, we reported GBP 4.3 million versus GBP 2.5 million in the previous year. And in terms of capitalization, so we do capitalize R&D. So we've capitalized GBP 2.2 million in the year. That was an increase to the prior year where we capitalized GBP 1 million. And the main drivers behind that is we actually ran 2 significant developments during the year. So the first one was the next in the series called Series 5 and then also the WorkiQ convergence as well. In terms of the SaaS model, so one of the key metrics around SaaS that we report is our NRR, so our net revenue retention rate. So we have historically reported a rate anywhere between 108% and 110%. This year, we had an exceptional year. We reported a net revenue retention of 119%. And it is worth just flagging that does not include the Enlighten net revenue retention. We've excluded that. So this is purely an organic NRR rate. And as you can see from the chart in the middle, the column on the very far right, you'll see a breakdown. So the total annual recurring revenue increased by 46%, of which you can see the orange box at the top represents Enlighten. And then the other 2 boxes represent what has come from existing customers and then also what the growth has come from the new logos that we've acquired during the year. So as you can see, 19% of that came from existing customers. Just on this next slide, this is the ARR walk across. So to give just a little bit more flavor around where the growth came from. So if you look at the 19% of growth that came from the existing, so the first box on here, that has come from a mixture of a number of things. So firstly, annual price increase. We've also got the upsell to the multiple series that we have. We've also have cross-sell. And then also we will have the more traditional just standard seat expansion. In the pink box, what we've got here is the growth in ARR that we have got from new logos during the year. We reported 9 new customer wins during the year, which is consistent with the year before and was quite a significant step-up from the year before that where we had 3. So we've made -- so we've delivered a consistent result there. And then finally, in the blue box, you'll see the uplift that we've had from the Enlighten acquisition. In terms of to give you a real-life case study from a finance point of view around one of our North America Tier 1 banking customers. And what you can see here is how the ARR, the blue bars on this chart, how that has changed over the last 10 years. And what you can see is a real pivotal change in the last 5. So in FY '22, we actually introduced WorkiQ and we cross-sold WorkiQ within this existing customer. And you can see quite a significant expansion. And then the following year, we actually did an expansion to a new country in which this customer operated within. So we saw an expansion of ControliQ. And then over the next 2 years, we also cross-sell CaseWorkiQ. So really what this story here is showing you is our ability within an existing customer to cross-sell and upsell within the existing customer base. We've got some statistics across the bottom. So very much I've talked about what this means to us financially, what this customer means to us. What we've got across the bottom is what do the customers gain from using our software. So within this particular customer, they've seen an increase in productivity of around 18%. They've identified annual savings in one particular area that we've looked at of around $2 million per year. They see a reduction in the case backlogs, and they also see a reduction in the cost to serve. We've also included another case study this year. So this is one of our U.K. Tier 1 banks. And with this particular customer, we reported 2 years ago that they gave us notice of a partial termination. So what we wanted to do this year was sort of show you how this customer has evolved since that announcement. And so as you can see over the last 4 years, we had the large expansion across multiple areas and geographies within this particular customer. And then last, in FY '25, they gave us a partial termination. And that didn't work out. And what we have seen is we're able to reverse that termination. And actually, the real success in this account is actually they are now that's been a growth customer with us. And over the last 2 years, their NRR rate exceeds 110%. Richard has already touched on how the integration has been going with Enlighten. And so where we are at the end of the financial year, we've already taken out GBP 3 million of annualized costs. That cost have come out at different parts during that financial year. So when you do look at our OpEx cost at the end of FY '26, it will be overinflated, and depending on at which point we execute. But most of that cost saving actually happened towards the back end of the financial year. And we've already identified and actually executed a further GBP 1 million of savings that will be coming out in this financial year. We now operate as an overall group. So -- and what I mean by that is Enlighten is very much integrated in the operations of ActiveOps, there is no distinction between the 2. We completed a formal review of the software platform and the outcome is that ControliQ was the strongest fit. So there are a number of features that we had within the Enlighten software that we're in the process of building within ControliQ. So the plan very much is to migrate the Enlighten customer base across our ControliQ software. And I will give a bit of an update just on the deal financials. And so we did announce as part of the trading update that one of the customers of Enlighten has terminated. When we scoped the deal and when we shut the deal initially, there was always a particular risk around this customer. So the deal was structured that if that customer did terminate the earn-out would reduce such that we actually wouldn't pay for that canceled contract. So we have seen a reduction in the deferred consideration that we currently have in the accounts by GBP 3.5 million. And in terms of the post-synergy EPS accretion, we're very much on track with where we thought we would be at the time of the acquisition. Just to touch upon the updated numbers of the TAM that we report. So when we did the Capital Markets Day at the back end of the last calendar year, we very much talked around our ambition to be a GBP 100 million ARR business in the medium term. What gives us comfort and reassurance around how achievable that number is, is the TAM. If you look at the existing customers that we have today and you look at the growth potential within the existing, we believe that there is GBP 150 million of incremental ARR from where we are today within that existing customer portfolio. That has increased from GBP 130 million last year, directly driven by the inclusion of the Enlighten customer base. If we then look at the TAM across the top 250 target accounts, that actually increases our TAM to GBP 1.4 billion. So that is looking at just purely the target 250 accounts within the sectors in which we currently already operate into the financial services, health care and BPO sectors. In terms of the cash and capital allocation, so here, we have a chart that shows you the movement from a cash point of view in the year. So as I already mentioned, we've had a really healthy cash conversion of 295% in the year, and we also paid out GBP 6.4 million for the initial consideration of Enlighten. We are due to pay part of the earn-out, the first stage of the contingent consideration in August. So that will be GBP 5.4 million. And then we are due to pay the remaining balance, which will be around GBP 700,000 in August next year, all of which we will be funded within our cash current reserves. We did also flag as part of the trading update that we've sold our trademark WorkiQ to Microsoft for USD 10 million. That completed at the very start of April. So that cash inflow hasn't -- is not represented in these numbers and will be part of this year's cash position. In terms of where we are from a capital allocation, so -- and this is in order of priority. So our first priority is to use our -- the capital that we have as a business on organic growth. So that's investing in our current sales and marketing strategies, looking at the partner channel and continuing to invest in the product. And then secondly, the second priority is M&A. So very much looking at businesses that would be EPS accretive to us as an organization. And then finally, would be return to shareholders and looking at different options around share buybacks or a change to dividend policy. But that's also the order of preference as it stands at the moment. So what are the key takeaways from my point of view. So we are expecting ARR to grow in line with the current market forecast that we have out there. We have an incredibly strong balance sheet, and we've got no debt. As a business, we'll continue to be strongly cash generative. And our vision to be GBP 100 million ARR and 25% EBITDA margin business still very much remains in our sights and in our ambitions and expectations for the group. And that is all from me. So back to you, Richard.

Thank you very much for that. So I really want to pick up the story, because obviously it's about where we go from here as much as where we are, and picking up the picture that we used before. So we now have this kind of what we call the HAT framework, which is effectively the way in which we support our customers to manage that human automation and increasingly token-based pricing. Just to give some color on this many people on this call may well have had the same experience of a slightly sticker shock in the last couple of months as firstly, the Anthropic and then now Microsoft as well have moved away from that kind of flat fee to a variable consumption-based charging model. And suddenly, that's a huge new issue that has to manage. So suddenly, if you like, the management of this type of input resource is like an acute problem, how do I manage that? So ActiveOps is positioned to apply basically the standard we already have to help our customers manage what and potentially lots of new customers as well, manage a really burning issue is very exciting. So what that means in practice is configuring our product. So firstly, to operate on an enterprise platform basis so that we can actually provide support for all sorts of work across the organization. Interesting example last year that came out was using our WorkiQ program to help have visibility of the sales agency within a large organization. They have a lot of relationship directors in this particular organization. And they used our information system to be able to work out just how much time was being consumed, if you like, in the non-value-adding activities and what we would call diverse activities, not customer-facing. And just by having visible data across the whole data set, the number of people, had a hugely positive effect on firstly, identifying where time should be spent and then focusing attention to the right places to have it. And of course, that came through not in productivity, but in sales effectiveness. So it's a really nice example of use of ActiveOps in a broadening way. I think that speaks to that expansion in the TAM that Emma has mentioned already. We're looking at how we change our pricing model, reflecting the variability of human and AI. Increasingly, I think we'll be moving to more of a platform-based fee, but with elements of the sort of variability associated with size. I mean we've mentioned about Series 5 coming out. Series 5 is aimed very much at that transformation agenda. It's helping customers to firstly plan, manage and then execute the combination of things they need to move and change all the time because that is the challenge for our organizations that we serve. They are such complicated multi-threaded activity organizations with simultaneous change happening. And the kind of data and the process we provide does give them such improved level of granularity and visibility of how to make those changes work rather than, if you like, travel and hope. So there's a lot of really good market drivers for us, which is stimulating the interest in the need for better control at an operational level, which when we're market-leading in gives some traffic towards us. We spoke a lot last year, and I've given some feedback here on -- we've been growing our sales team. So part of the investment that we're seeing in the last year is in this. This slide just gives you some scale on that, 12 new senior sales hired and just reflecting the broad growth in the business of how that's distributed across the world. Now ActiveOps as a sell to enterprise is long lead times. But in terms of the sort of symptoms of success, when we measure our sales cycle, certainly in multiple months or years and so on, we've had sales and this new cadre of professional sales we've had some conspicuous success in accelerating some deals through. So deals that we already had that have moved more quickly. And in one case, a nice project that came in that scale remarkably quickly that we probably wouldn't have got before. So I think that cadre is really making an impact. But really, the real difference is now in the pipeline and seeing that pipeline, both in size and volume build around the block. So it's a journey. I mean I'm reporting on results of revenue we earned last year on deals that were probably -- actually it worked the year before that and probably sold the year before that. So it's very important to understand that dynamic. And ActiveOps is a massive flywheel in terms of that recurring revenue and the new projects coming on to that flywheel, the lead time to get them into revenue is lagged. So this investment will pay off, and it is already paying off, but it really will come through in the next 2 to 3 years. What we're now doing and where the focus is for the current year is building out and addressing that TAM in our customer base. So what the note there says we're investing in our customer success function. And that, again, is raising the caliber more executive level speakers to represent us and be contributing to our clients' transformation journeys because we want that NRR, we want that growth, we want to expand to regions where we know we can add value, but you've got to be at the right table to have the right conversation. So as a company, we're really investing in that customer success function. And that's a great example where to Emma's point earlier on, our use of capital, we're just being very deliberate about where we do spend. I mean there's an element of our business as it grows, obviously, that scales proportionately, but also making those deliberate investments in areas where we know there'll be a payoff. That investment in customer success improves the outcomes of the projects, but it also builds that relationship to farming and growing the NRR over years to come. The other thing I spoke about at the Capital Markets Day, and it's well underway now is our moving more towards working through partners. And again, this is a payoff that will happen. And this is the thing that will not only to support us towards GBP 100 million, but frankly, it is the thing that will accelerate way beyond that because obviously, what we want to be able to do is distribute with other parties and not rely on our own sales capacity. So we appointed a group head of partners earlier in this year. And I think where we are today is exactly where I want to be. We've got some really strong developing relationships with some Tier 1 and Tier 2 consultancies who are specialists in this field who can take us to markets we've just never been to. It's a co-sell function. We just -- it's not a wholesale-resale arrangement. We are with them at the table, and that takes an education process to join, and there's lots of really good progress there. So that represents newer projects in the pipeline, and it represents new entries into areas we probably wouldn't have done before. I think another exciting area for me is also in software-related partners. So we have a number of customers of ours who also sell their software, so business process outsourcers, where they're, alongside delivering with people and technology products to customers, they sell the platform technologies that they use themselves to other people who self-administer. And we've got 2 particular examples developing where they've already wrapped ActiveOps around that production system and now their software arm is taking ActiveOps to go to market in conjunction as part of the bundle. And I think those sorts of things are really interesting because that's organization set up to sell software. And that makes a lot of things sort of aligned with our business model very well. So I think where we're getting to with our plan for the '27 is let's keep going and do what we're currently doing very well indeed. So we're really making sure we're at the heart of automation. We're really trying to think about the problems our enterprise customers have in terms of not only using and exploiting AI, but controlling the -- this business about metering it. Just because you meter something, they'll get the bill, but it's too late. We've got to -- we're helping our customers manage the problem. How do they allocate AI resources? How do they make the [indiscernible] is it actually worth having [flaw] do something? Or is it still worth doing that project, that work activity in Manila. So providing the instrumentation to have that kind of choice, whether it's what we're going to do today and do we have a token budget through to what is the right place to do that work, even at that operational, tactical and strategic level is a really, really burning issue for so many organizations right now. We're scaling our demand engine, which is the marketing support because if we have got that kind of external driven demand of a problem that needs solving, our marketing function actually changes quite significantly because we've got to manage and support and attract that potential. It's a very different sort of opportunity. And clearly building on the scalable foundation of the business because I don't want ActiveOps reputation to depend on single heroic activities of a particularly good implementation team. This is a global company that's operating very successfully internationally. And we've restructured internally to create a kind of delivery function now, which I think is both efficient, interacts with partners very well, so we build their capability and ultimately deliver some -- capable of delivering some very, very large projects indeed. We've had a sound first quarter. Momentum continues to build. I think there's been another sale in the course of the time since we went to print on this, which is a U.K. but globally operating insurance broker and just the sort of momentum of the business is continuing. I mean the global context for the world is not making decision-making in our customers any easier, but there's nothing like having a burning problem to make people focus. And so to some extent, I think that the control and the relevance to helping people manage something that they know they need to get on with in terms of use of AI, safe use of AI, meeting constraints, meeting the expectations of their shareholders and keeping the lights on, because at the end of the day, if you run an ATM network, you can't afford for it to go down. And so they always have that sort of paradox of sort of 6 impossible constraints, all of which have to be done simultaneously. So overall, we're trading in line with expectations. I think there's one point Emma alluded to and it's worth noting, our exit, if you like, overhead cost had all the overhead of Enlighten and other things as well in train. I think the half year will be a much better guide to, if you like, the underlying operational gearing that's flowing through the business right now. Emma told you we'd sold -- we've already saved GBP 3 million and coming on to the GBP 4 million of the Enlighten cost. But by context, that's on the original cost base when we took it on the GBP 8 million. So that's the scale of difference in the absorption and ultimately, the gearing will flow through to the business. So a lot to be excited about. The fundamentals of the business, and for those of you who've seen me before talk about ActiveOps on the screen now are the things that we absolutely are cornerstones of our success. We sell to blue-chip customers with a large problem an ongoing chronic issue around productivity management, which they always need help with. The market is expanding. The fundamentals of the business model are pretty simple. Recurrent software revenue on an annual advanced basis is with a high gross margin. But the nice thing is with the headroom and the cash we have on hand, we are making these selective investments to really accelerate. And as the Enlighten opportunity demonstrated this year, we have the opportunity and we can take the opportunity to -- the business is strong and resilient enough to take on something like Enlighten and effectively not miss a beat. So this isn't easy. It's a lot of times to be complacent. I think it's just absolutely a great place to be right now as well as, frankly, being on the -- being a U.K. tech company listed on the London stock market. I think it's been the right place for us. And as ActiveOps as an organization, I think we're going from strength-to-strength. So that's it. Happily take any questions if there are any on the chat. Over to you. That's great guys. ordpledb. And Richard, I may now hand back to you to take us through the Q&A, and I'll pick up from you at the end. Thank you.

That's great, guys. Thank you very much indeed for your presentation. [Operator Instructions] While the company take a few moments to view those questions submitted today, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via Investor Dashboard. Richard, Emma, if I may now hand back to you to take us through the Q&A, and I'll pick up from you at the end. Thank you.