Ai-Media Technologies Limited (AIM) Earnings Call Transcript & Summary

[Audio Gap] FY '22 full year results webinar. From the company today, I'm joined by co-Founder and CEO, Tony Abrahams; and CFO, John Bird. Before I hand it over to Tony to get started on stage presentations, I'll remind you that you can submit a question through the Q&A function at the bottom of the screen. We will address it at the conclusion of the presentation. The presentation will last approximately 20 minutes. We have limited time to answer your questions. A copy of the presentation given today was released to ASX this morning, which investors can access. I'll now hand over to Tony to start the presentation.

Thanks very much, and thanks everyone for being here. I want to start by paying my respects to the traditional custodians of the land on which we're all joining from. Ai-Media is a global technology company. We deliver live and recorded captioning transcription and translation, and it's been a good year. So quick highlights. 22% increase in revenue growth and a 63% increase in gross profit, obviously, due to our improved margins, but also from an improved product mix. That product mix has been driven by our breakout growth in our automated and semi-automated captioning product, Lexi and Smart Lexi, which were up a 125% year-on-year, and it's delivered an almost $10 million turnaround in EBITDA from a loss of almost $9 million to a profit of -- an EBITDA profit of $1.1 million. The gross margin of 55% is higher than the guidance of greater than 50%, a solid cash balance. And importantly, the revenue growth of our automated and semi-automated software business is now exceeding 40% with gross margins on that part of the business well north of 75%. We've completed the buyback of 2 million shares. The really exciting news on EBITDA also flowed through into operating cash flow. So there has been net cash from operating activities, an improvement of $21.8 million over the year from a negative $18 million to $3.8 million. If you then back out some of the nonrecurring transaction costs related to EEG, you get to the statutory operating activities per the annual report. The customer journey is a really important part of what we're embarking on now, new and existing customers with 4 real segments that we're focusing on. Over the top, an IP transition of broadcasters. We're winning the new broadcast installations for these customers often with our IP encoding product Alta. We are tailoring broadcast solutions, which means that any kind of broadcast system anywhere in the world, we can both encode the video and audio and deliver the captions back. Importantly as well, the market fragmentation that we are seeing is providing enormous opportunities for us to actually engage with what would be our competitors to actually resell our services and resell Lexi. And finally, a really important part of the product offering is to work behind customers' firewalls to ensure that all of their meeting rooms can deliver live captioning and translation securely at the touch of a button. And all of this stuff, we've only been able to pull together in the last 12 months, having owned EEG for that period of time. So the full product suite powered by our iCAP network is built on that network infrastructure. And iCAP is a private secure network. There is a version of it that is global and posted on the cloud, but we can also install individual instances of iCAP behind customers' firewalls. And for companies that have immense security requirements, the ability for us to deliver that really is a game changer. And this, I think, also speaks to the win, the customer win that we disclosed a couple of weeks back, winning the global contract for Google, which is delivering secure transcription and translation to all Google employees right around the world. The captioning infrastructure, as I said, that product in the middle Alta is growing the fastest and that's as broadcast customers transition towards IP playout systems, the traditional devices are the iCAP encode products and Falcon is the cloud-based products. And then the captioning solutions range from premium, which is our traditional AI branded captions through to Lexi, which was fully automated. And in the middle is our semi-automated Smart Lexi service, which is delivering exceptional results on TV in Australia and in the U.S. In terms of operational performance, there have been some really key global sales wins and they're shaded different colors based on where those customers are. So APAC is in blue, North America is in green and the rest of the world in red. And you can see there that the existing iCAP customers who are transitioning towards Lexi and Smart Lexi are all in the U.S. And that is a function of taking the legacy EEG customers and then effectively upselling them into Lexi and Smart Lexi. That delivers enormous cost savings to them and simplifies their workflow while maintaining an appropriate level of quality for the viewer. And that's really what's seen those Lexi Minutes take off is in Column 1. Column 2, there is really interesting because this is about new premium customers. I know that a few people have had concerns as to whether this premium model over and above the automated solutions, whether that actually is something that has a long life span, and it is. There are significant forms of content that will continue to require some form of human curation. And this is recognized by none other than Google. And then on the right, what we've got is some really early customer wins for customers that we are transitioning across to iCAP and who will then, in turn, transition across to Lexi and Smart Lexi, which deliver for the customer, captioning and translation at a much lower price point. And for us, it's at a higher margin. So what we have seen in the last 12 months is a real step change in the adoption of the automated Lexi. And that real takeoff has been seen since November of last year when we had our AGM, and we announced this transition in strategy. You can also see that in the bottom graph that the total iCAP network minutes are accelerating as well, and the proportion of those iCAP Minutes that are delivered with Lexi continues to grow as well. In terms of some of the case studies, again, it's a mix of customers that are looking for SaaS services being Major League Baseball and Sky News versus customers who are actually interested in premium quality services, and that's Google and the U.K. Parliament. The really interesting thing about Major League Baseball is that they never captioned anything before. And because they've now got a better rights deal and also there are more channels now available on over-the-top streaming services, we have installed our Alta encoding service with them and they continue to use more and more Lexi as we move on through that contract. For Google, this is about making it really simple for Google employees within the Google infrastructure to have human-curated captioning and translation and this is embedded within Google's internal booking engine. So it's as easy as adding a Zoom or a Teams meeting effectively to book one of our captioners or translators, fully securely hosted behind the Google firewalls. And again, this is -- while it's human curated, there's also significant technology that sits alongside that. Same for the U.K. Parliament in terms of it being very secure, but also in the case of the U.K. Parliament, it's the ability to then search by caption, time coded caption and then jump to whatever media it was right at that second, and that's our product called SubSilo. It's something that's also being used very effectively by Sky News and Channel 7 to really index a lot of their archived content and find it much more easily, therefore, making it much more usable. In terms of where we've seen the growth, a lot of that growth has come out of North America and has come out of live broadcast. And this is largely a result of having the full 12 months of EEG. Last year, we only had 2 months of EEG in the annual results. And what we're also seeing is that continued transition towards software. So this time last year, 94% of our revenue was services. This year, it's 70% with growth in both SaaS and support and the devices, and we are expecting that kind of trend to continue into FY '23. I'll now hand over to JB to provide an overview of the P&L balance sheet and cash flow. JB?

Thanks, Tony. Look, I think it's fair to say that we've improved the business quite dramatically whilst the revenue has grown in excess of 20%. We've managed to keep the cost down. So we're seeing much of that revenue growth go through to the gross margin. And it's really pleasing because we were actually targeting, as Tony mentioned, in excess of 50% gross margin. And we achieved what I thought was a sort of almost an internal goal of 55%. So that was a great achievement. And that's been basically about containing costs in the existing business. We did, as we said in the half year, we took the scalpel to some contracts that just weren't worth doing. And at the same time, we're growing the premium service and we're growing the Software-as-a-Service, all of which is at better margins. And we've continued to see our OpEx increase. But once again, as we mentioned, that's very much driven by the sales strategy. There's been some costs we've incurred in putting on additional people, and they particularly been focused on the sales and technology training and those sorts of areas. So it is all part of growing the business. The pleasing result is that the EBITDA was positive and that's just a phenomenal turnaround. Do you want to go to next slide, Tony? We always do get asked about where we're spending our money. And it's actually a question that I'll preempt that was in our question panel. It doesn't take a lot of technology investment. So we're not seeing large growth in property, plant and equipment. We're fortunate. We own the premises where we do a lot of the manufacturing in the U.S. We actually own those premises. They're valued about $2 million or a little over USD 2 million and then the other thing that is growing is the intangibles where we're actually picking up about a couple of million of capital on those technology costs. So R&D and those sorts of things. The other part of the growth in intangibles, of course, is that many of our assets are domiciled now in the U.S. and so we're seeing the fluctuations of the exchange rate and the effect that has on those. Overall, trade receivables, I'm going to talk about cash, and I'll talk about that again referencing Tony his earlier slide. But the trade receivables are actually disproportionately higher at year-end. It looks like we've grown the business and we've only saved $1 million. We received a very large contract or 3 contracts, in fact, which gave us more than $1.5 million in the July month. So all in all, we're pretty much right on top of most of the near-term cash contributions. And of course, the other big thing is that we have got -- the payment that we owe to the vendor of EEG, we've actually turned into a loan, and that's at a headline simple interest rate of 8% and that does lead us to the question of why do we need all this cash. We've always said that we're going to keep adequate cash. We are going to throw off cash this year. But it's important to us to keep enough cash that opportunistically, if we needed to invest in a technology or some other asset that we thought was profoundly important to the business that we can move quickly and that's very important. The market, there are technology assets out there that are undervalued. We're regularly going to run our rule across those assets. Next slide, Tony. And that just shows the movement in the cash. As I mentioned, the statutory cash flow and just to clear up any confusion, the [ stat accountants are weird mo ]. The first green box is the cash flow from operating activities. Now that is the clear cash flow under a statutory obligation, but that includes about $1.6 million of one-off costs that were costs associated with the AEG purchase. It's things like brokers, it's tax accountants, all of those things. It's the business brokers fees. And all of those costs should be associated with the investment of the EEG, but unfortunately, the accounting standards don't follow the same logic as you and I. So within that is a series of one-off costs. So the business as usual cash out -- sorry, cash inflow was significantly higher. And we, of course, we used a little bit of cash on the share buyback. And I did mention the investing activities, which is predominantly $2 million worth of capitalizing development costs and the like and the financing activities with some cash payback that we had on purchases of small companies, and they are the final segments. So all in all, it's a very positive outcome and having $15 million in the bank is a great place to be.

Thanks, JB. And we'll get to some questions in a sec, so I'll just round this out. There's a competitor analysis slide there, which I think provides a lot more detail than we've ever provided before. So I'll let people review that at their leisure. I guess in the macro environment, just to touch on the items that everyone is seeing in terms of supply chain constraints, we did have some small exposure and risk to those global supply chain impacts, which meant that customers couldn't complete the build on new upgrades as quickly as we might have liked or would have forecast, and that certainly was seen in the fact that our revenue came towards the lower end of the $60 million to $62 million guide. In terms of inflation and economic uncertainty, this actually cuts both ways for us. Certainly, our labor costs have improved -- increased along with everybody else's, particularly in the United States in our development team. But equally, for customers who are actually looking to save money, it's a great opportunity for them to make that shift from premium to Smart Lexi and Lexi. Foreign currency exposure, as JB said, we got a bit of a lift from the depreciating dollar. We don't have a formal currency hedging program, although we do keep cash in different currencies really to kind of match the expenses. And then in terms of regulatory tailwinds, we are seeing that trend for the macro environment continue. The international disability convention is continuing to drive adoption of new captioning in new territories and we're also seeing in the established territories of Australia, U.K., U.S. and Canada, a regulatory approach that's moving away from a kind of strict liability approach on captioning quality towards one that's encouraging, captioning on everything with recognition that therefore, there will be variations in quality, depending on quality of audio, et cetera, et cetera. So everything there is actually looking pretty positive on the regulatory front. In terms of our strategy, it is partnerships which are driving that legacy growth. And we're seeing very, very strong interest from previous competitors to be part of that program, and that's just kicking off at the moment. It is focused on creating mutual value. It does provide a lot of these legacy mom-and-pop shops with an option to introduce automatic captioning while hanging on to their customer relationships. And it does obviously then also help to reinforce the growth of both the iCAP network and Lexi that sits on top of that. And then in terms of the focus for the next 3 years, it's really continuing to establish iCAP as the global standard. We continue to grow and diversify our customer base as we've seen this year, continuing to increase SaaS and devices as a share of revenue and continuing to enhance our product suite and technology. So I guess key takeaways. We've had really significant SaaS revenue growth, which has not only driven a huge increase in volume, but it's also driven an increase in profitability for the business. We are still increasing our premium quality offering and Google and the Parliament are a great example of that. Once we get a customer in with a premium service, we're then looking over time to transition them to the higher-margin automated services, and that's something, for example, that we saw with Sky News. The partnership program, strong cash position to execute on our growth, continuing to grow that iCAP network and then getting, as I said, that partner program really starting to hum. So that's the end of the formal presentation, a couple of minutes over, but I'll throw to questions.

[Operator Instructions] The first question comes from Nick Harris from Morgans. Just comments on the growing premium. Can you please elaborate on the following? Is it revenue, gross profit or minutes are growing in premium? Are you talking quarter-on-quarter or year-on-year growth in percentages. And is it reasonable to expect premium to continue going into FY '23?

Yes. Great question, Nick. Thanks. When we say we're growing premium, what we mean is we are winning new customers with the premium offering. And whether that's U.K. Parliament, New South Wales Parliament, Google, we never would have won those accounts if we only had an automated service. That being said, we are also looking to transition many of our existing legacy customers away from the premium services into the SaaS services. So it's 2 things going on at once. And where they net out. In a sense, what we're trying to do is we're trying to transition as much of the revenue that's possible of being transitioned at this point across the Lexi and Smart Lexi. And that's now currently sitting at 30% on the iCAP network, up from 16%. Is it going to get to 90%? Not in the next couple of years. Could it get to 60% or 70%? Yes. So there's always going to be a role for that premium service. But there's also going to be more and more of a role for the automated and semi-automated services as the technology and as our technology continues to improve.

Just another question from Nick. Just on FY '23 CapEx, should we expect it to change materially versus FY '22?

No. Thanks, Nick. And I think I sort of covered that. We expect a similar investment in CapEx. We are refurbing certain pieces of equipment, but none of it is particularly material. So no, it should stay very constant.

Can you please talk more about the deal you're working on with Google? What is Ai-Media doing for Google and considering Google owns its own ASR tech, why they're using your technology?

Great question. I think that's nailed it. Google obviously has its own ASR tech, and that ASR tech isn't good enough for a lot of circumstances. So Google is using us for those instances where the quality of the information being disclosed is really important. Think about it as engineering meetings inside of Google where an accurate transcript is required and where it has to be completely secure. By the way, this is not a new service for Google. Google has been doing this internally for many, many years. What's new is that we've won this contract, and we've won it off a panel of vendors, and they're now consolidating it to one vendor with both transcription and translation right around the world.

I got a few questions on capital management. Does the company intend to conduct further buybacks in the near term or would you turn to dividends instead?