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

Good morning, and welcome to the Ai-Media Technologies Limited Half Year FY '23 results webinar for the period ending 31 December 2022. Presenting today is Ai-Media's Chief Executive Officer, Tony Abrahams; and Chief Financial Officer, John Bird. [Operator Instructions]. I'll now pass to Tony.

Thanks, Mel, and thanks, everyone, for joining us. I'd like to begin by paying my respects to the traditional custodians of the land on which we're all joined. For JB and I, it's for the Cammeraygal people of the Eora nation. I'm paying my respects to their elders past, present and emerging. Ai-Media is very well positioned to benefit from the fast emerging improvements in AI. We are deploying the latest AI to make quality automatic live captioning and translational reality with our global, scalable and secure iCap Cloud platform. This is a strategy we've been undertaking since the acquisition of EEG Enterprises 2 years ago. And I think you'll see we've made some -- continue to make some great progress. The product suite is effectively a turnkey solution, and that turnkey solution has a number of elements. Delivering the greatest automatic captioning, transcription and translation requires a number of other elements in addition to the automatic speech recognition. The most important element is actually getting the audio into the system so that you can apply the technology to it. And that is done with our encoding technology layer. This core IP has been built upon for over 40 years with the team at EEG and our factory in Long Island. And getting that audio into the system is really important because it ensures the best possible quality to go into the automatic speech recognition, and it also allows us to apply artificial intelligence at many, many stages of the process. Once that audio is encoded, we then have the iCap Cloud platform infrastructure, which ensures that we can deliver the greatest AI technologies as appropriate to each particular piece of content for our customers. And then, of course, we add and deliver those AI-powered captions back to the viewer, and that can be customized for any kind of display, be it a mobile, an iPad or on screen, on TV as people are traditionally used to viewing captions. We have unpicked that pyramid this presentation to really demonstrate where the AI technology inputs really sit, but also where the core intellectual property of Ai-Media is. And you can see, we take that video, that live video. It comes in first through the encoders. Now those encoders are physical and in terms of the AI Encode series, these are the physical devices that have been produced for 40 years. But then we also have the virtual and the cloud-based encoding technology, the virtual being Alta and the Falcon being the cloud streaming technology. Important to note here is that as customers migrate from a traditional broadcasting environment to an IP broadcasting environment, they swap out the physical encoding devices with the virtual Alta and the cloud-based Falcon devices. A quirk of how we report is that our devices revenue actually only includes the encoders, whereas Alta and Falcon are included in the SaaS number. And so we are seeing more and more of our customers deploy the Alta technology, which is really future-proof for all of the explosion in IP video that we are seeing. Connecting all of this is the iCap Cloud platform with 3 9s uptime, encrypted data that can ensure that our customers' information is completely safe. And then the AI technology inputs that have improved the overall outcome of the automatic speech recognition. We've also been working on our own AI layer that continues to add further improvements through the smart Lexi process and deliver them the best captions for all of our customers around the world. In terms of the financial highlights for the year, total revenue was flat. As we go through this technology transformation, we are cycling out of higher revenue, lower margin services, revenue towards the lower price but higher gross margin Lexi revenue. Now we are using Lexi in capitals now to include the entire family of Lexi, whether it's basic Lexi, Smart Lexi or Lexi Translate. Importantly, because of this transition, our gross profit, notwithstanding that revenue was flat, the gross profit increased by 13% and EBITDA was a solid $1.4 million, up from 0. A solid cash balance of $14.6 million ending the year. But really importantly, I think that flagship Lexi product grew over 105%. And importantly, also, the revenue increased by 120%, which demonstrates pricing power and customer value for this very, very valuable product that really is taking off in the same way that people are seeing other things take off in the AI landscape at the moment. The technology sales portion of our total revenue increased strongly from 28% of the total to 38% of the total. And really importantly, our gross margin hit 60%, which I think was ahead of schedule, certainly for a lot of what the analysts had put in, and that reflects both improvements in the revenue mix, but also improved gross margins in each of the product lines. Our key global sales wins from existing iCap customers transitioning across to Lexi, in many cases, we have won these customers from competitors who were otherwise providing the premium services. Our new premium services customers, we renewed our Foxtel contract, which is a new announcement. The -- we've renewed our Al Jazeera contract, also new news. And we've won further business from SBS and our Google contract was won in that half as well. New iCap customers are transitioning towards Lexi. Those bottom logos are really interesting. They are the city of Austin, Texas, Baltimore and San Francisco. And this is about installing the iCap infrastructure inside of city halls. And of course, there's many more of them, which is why it's so interesting. Channel 7 is probably the big one to call out there with our renewal last year. We are in the process of a transition with 7 from the premium to the technology service and some great new partnerships announced as well, including with event companies, with large broadcast suppliers and dynamic captioning, which is one of the largest third parties on the iCap network. In terms of Lexi growth and iCap growth, when we acquired EEG, the volume of Lexi that was going through the iCap network was 16%. 18 months later, it's more than doubled to 35%. And actually, at the end of January, I can report that it's 37%. We are seeing a big acceleration at the moment in customers adopting this product. It's a transition that we are actively encouraging them to do because the artificial intelligence algorithms have just got so much better in the last couple of years that where customers may have tried a competitor's ASR solution in the past, when we give them the opportunity to trial Lexi, we are seeing incredibly strong growth. In terms of that SaaS growth from 100% 2 years ago of our revenue being services. It's now 62% with devices, as I said, just referring to the physical encoders being relatively flat, but very strong growth in the SaaS and support line, which includes Lexi, but it also includes Alta, Falcon and support contracts. We won a couple of awards through the half. This one was the Creative Tech awards at the InnovationAus awards in November. And just recently, we won the APAC Insider award for the best captioning and translation provider in 2023. In terms of the financial performance, I have to talk first about the macro conditions. Obviously, a challenging environment out there for many of our customers who are driving this value-based approach. So it's using AI to lower cost for existing customers, like Major League Baseball who can now capture everything for a fraction of the cost that was quoted previously. We're enabling customers to get more and more out of their data. And that's what there's always on Lexi offering really offers into the future, right, which is the power for customers not just to get that data live, but then to have access to that data and interrogate that data after the fact, and the U.K. Parliament has been a great test case for that. And then technology that is delivering better results and better uptime than humans can deliver, and that's part of the transition that we are undertaking for Channel 7. This is, I think, the great slide that notwithstanding the relatively flat performance of revenue. The breakout improvements in gross margin have seen a fantastic turnaround in EBITDA. So a solid result of $1.4 million. Notwithstanding, we are investing significantly in the future growth of the business. But as we've said many times, we intend to remain cash flow and -- cash flow positive and EBITDA profitable. I'll hand over now to JB for a more detailed look at the P&L balance sheet and cash flow.

Sorry about that. Thank you, Tony. I think you've covered off much of the positive news in the P&L. We actually saw flat revenue, but not forgetting as we represented at the full year, that part of the activity was to have good revenue. And I think that's what's driving the gross margin is that we've actually got revenue that is now improving margins, so the services revenue. We've had a real focus on the costs and we're, of course, increasing the amount of revenue that's associated with SaaS. One of the interesting things is that we have been investing in the future growth of the business in the sales side. This has taken the form of additional staff, sales teams but it's also taken the form of attending those conferences that we had to abstain from for a number of years, courtesy of COVID. At each of these conferences, there's a number of very large conferences in Europe and the U.S. They have been -- they've paid back more than the contribution that they've cost us to go there. So we're expecting that this will further improve the pipeline and will continue the growth cycle. The next slide, Tony. In improving the business and getting hold of better customers, one of the things that, that represents is an improvement in debtors. So we have freed up the working capital. We have taken the opportunity. We had a number of COVID-related benefits in Australia. They were PayG deferrals. We've actually tidied up the liability side of the business. And what that's resulted in is a very unleveraged balance sheet. So we're in a great position. So whilst it hasn't all flowed through to cash, improving the debtors and things like that, it has given us a very strong balance sheet. And indeed, there's one significant liability. And of course, that's $4.6 million to the vendor of EEG, which is due quarter 1 next financial year. And of course, we'll be determining how that comes out with the vendor. But at this point, retaining $950 million of cash, for us, is very important. Tony will certainly talk about some of the opportunities that we can use that cash for. But how did we get there? I think the important thing is that even to see some of the payments that we had to make, there was some payments to -- on the ACS acquisition, which was an acquisition we undertook 3 years ago and the final payments that have been made. The working capital itself improve the operating cash flow. But we did have some tax -- minor tax payments that we had to make in the U.S., where we keep on making significant profits. So we'll seek to improve that. But at the end of the day, the cash flow was very good, and the working capital side of it is going to continue to improve that cash flow.

Thanks, JB. And so just in terms of outlook, no surprise to anyone about the breakthrough moment of ChatGPT. And as such, Satya Nadella said, last month, the age of AI is upon us. We are witnessing nonlinear, that is step change improvements in the capability of the foundation model, which we are making available as platforms. And I will drive everyone's attention. I won't go through it during this presentation, but we have put in an appendix slide, which actually details a lot more of the AI improvements that Satya Nadella is talking about, but also that help unpack this slide a bit. So this slide is designed to sort of answer the question of how does AI and ChatGPT and all this stuff actually affect Ai-Media's strategic position? And what ChatGPT has been, for us, has been a major awakening for our customers. The core underlying technology that's gone into automatic speech recognition includes the core technology of GPT, which is generative pretrained transformative models. So you can imagine, GPT, as everyone's experienced is very good at writing sentences. It can write your poem. And because it kind of knows how to construct sentences, it's no surprise that it actually helps with automatic speech recognition, which is how to construct sentences. There are, of course, though, many other types of AI algorithms that have gone into improving the automatic speech recognition systems. And they include something reasonably similar to GPT, which is called BERT, which was developed out of Google; NLP, which is Natural Language Processing; and APM, which is Acoustic and Pronunciation Modeling. The important part here is just to recognize that those same step change improvements that have powered the breakout success of ChatGPT, and it has been a breakout success. I mean, it achieved 100 million monthly active users 4x faster than TikTok, which held the previous record. Now is this technology particularly new or revolutionary from an Ai-Media perspective? No. It's exactly the same technology that we've known about since we developed our own ASR project back in 2017 and since EEG, which was back then a separate company, independently developed theirs in 2017 and 2018. And the really important point there, and this was the part of the technology and the strategy that was completely aligned between Ai-Media and EEG, which is we don't want to or need to compete in the space of the things that are in the funnel because there are tens of billions of dollars a year going into those investments across dozens of different companies. It's a competitive market. The rising tide literally is floating all boats, but then how do we add value in that environment. And the way we add value in that environment, first is with the encoding technology. So how do we actually get the audio into the system? How do we ensure that, that audio, it comes with all of the metadata that you could possibly collect, i.e., do you have an isolated microphone for each commentator in a commentary booth? Do you know what accent each commentator is going to be saying? Do you know what the script is for the news report that someone is going to be reading? All of this technology is brought in through the encoding side. And of course, we then need to apply our own AI layer once we get the out-of-the-box results from the speech -- one of the many speech recognition engines that we can pull in. The thing I did want to highlight as well because a number of people have asked me, is ChatGPT, itself, a threat to Ai-Media? And the short answer to that is no. It is not designed as a transcription engine. In fact, PAT is a consumer application of GPT where you effectively ask it questions in a sort of natural language environment but the core underlying GPT improvements absolutely helped to improve the outcomes of Lexi. And that has -- frankly, has since this doubling of our Lexi volume and more than doubling of the Lexi revenue and why we're very encouraged about seeing this continue. And why we're also encouraged that new markets that have never tried automatic live captioning are going to do it now that there's always on accurate technology is available and for which they can then look to get the benefits. And of course, the parliaments have been a big one in the last couple of years, and there are obviously related industries that we are looking at. And I mentioned earlier that, in fact, the AI is strengthening Ai-Media's moat in a number of different areas. The first, as I said, is on the iCap encoders where we are future-proofing these connected devices. Those best-of-breed AI algorithms impact directly on the quality of Lexi, further AI algorithms improve the Smart Lexi, the AI-capable products that are available on the iCap Cloud can be delivered instantaneously to any device, be it one of the physical encoders, Alta or Falcon nodes. And of course, our AI premium service has been using artificial intelligence for many, many years to improve the accuracy of the re-speaker and the stenographers' output. So all of that helps to ensure that the quality continues to improve for a lower cost for customers, which is what's driving this volume increase. These are nonlinear improvements in AI, will absolutely be powering our future growth. The product suite continues to benefit directly from any of these improvements. And this AI inflection point that we're seeing now has really increased customer -- well, I'd say it's probably open customers' minds as to what's actually possible. And their experience with ChatGPT is probably -- that's been probably the biggest single impact on Ai-Media's business. So key takeaways, and I'll pause now for questions, is that our SaaS transformation is continuing, although we've got flat revenue growth, we've got improving margins and EBITDA. Our multiyear growth strategy is well underway. And I think that the experience that people are having with AI outside of Ai-Media is giving them further confidence to continue to go with us through this transition. In particular, I will call out live sports because we are seeing a particular momentum in the live sport area. And what's interesting about live sport, in particular is that this is a nut that has been cracked by AI just in the last 18 months. So 18 months ago, when I was talking with Phil McLoughlin, the EEG vendor, sports was actually something that the AI was not yet good enough at doing. And then just a few months later, some new releases and some further tweaks and we were able to handle that first for the Tokyo Olympics. And off the back of that success, we're now seeing continued near-term momentum building in that space, in particular. So absolutely, just wanted to call that out. Strong cash position, as JB has said. The iCap platform is growing. And when that grows, so to do the Lexi minutes. And the business model as a whole is very well placed given our sustainable competitive advantage or our competitive moat, really driven by these physical iCap encoders, the virtual iCap encoders and the iCap platform that helps us to get the most out of the improvements in automatic speech recognition technology. And I might just pause there and take some questions.

Thanks, Tony. [Operator Instructions] Tony, our first question is, do you see a particular region as a growth area that you will be focusing on in the near term?

It's a very good question because priority is a singular thing. But we have sales teams all over the world. And so for each individual, they have a priority, which is to extend and deliver the technology services in their particular region. At the moment, I would say the U.S. is probably our strongest near-term market just because we have the most compelling proposition for them, which is you already have the encoders. You're already on the iCap network. You're already with one of Ai-Media's competitors. We can save you money and give you more captioning and you can get more out of it if you transition to Lexi. But at the same time, we're also seeing strong growth from new broadcasters in the EMEA region, in Australia and also in Asia, beIN Sports out of Singapore is a customer that we've been trying to win for about 4 or 5 years. And they're a great example of one of those sports broadcasters that had never before been prepared to take the leap into automatic captioning that have in the last few months. They are an early adopter. They are a leader in this space, and we are expecting further customers to follow. So the short answer to that is, no. There's not one region in particular that we're focused on. We've invested considerably since 2017 on global sales and marketing teams with local teams and local knowledge in each of the regions, and we'll be making sure that we're very well set up in each of those regions to take advantage of this moment to sell, sell, sell.

Thanks, Tony. And our next question comes from Christian Angelis from CCZ Equities. Congrats on the results. Just one question, Q2 operating cash was negative for the first time in a couple of quarters, could you highlight what drove this?

Tony, maybe I should take this one. Yes. Look, it's a good question, Christian, and thank heaven's that we don't have to do 4 Cs. But the reality is that we've taken some proactive approach to things, like creditors and we paid out about $1 million of creditors that we've been delaying and delaying. So we're actually getting a lot better at the housekeeping. When you actually look at the 2 cash flow periods, quarter 1 versus quarter 2, and you exclude things like taxes and some of those other things, the change is literally about $150,000 negative. And we had a catch-up on sales tax in the U.S. because we've made some voluntary disclosures over there, and that was a couple of hundred thousand dollars. So between the improvement in how we pay our creditors and taking more discounts and things like this, the improvement in the sales tax position and the fact that we actually paid our PayG and other things that had COVID benefits, if you like, that's meant that this -- I'll say it's, a one-off. But this quarter, yes, it was breakeven. It was backwards $100,000. It might be worth also taking the next question at the same time because it's somewhat related to $457,000. There is a question, excuse me, I've missed the comment, but what's the $457,000 of other revenue? And that relates to a number of provisions that we've taken on acquisitions. And we took them at the purchase time of these various acquisitions we've done over the last 2 years. And when you get to reverse them, they were other income in the circumstances. Well, Mel, do you want me to answer the next one?

Sure. John, no problem.

Intangible CapEx reduced a lot prior corresponding period to $443,000. Were their large projects finished? And is this a run rate we should expect to continue? Look, we have been capitalizing some development costs that we're incurring and it was material. A lot of what we're doing now is product enhancements. It's not making a significant change to some of the products. It's making them work far more functionally. It's versions. So we work in conjunction with our auditors to make sure that we're capitalizing what is an appropriate amount. So yes, it has gone down. We are very focused now on unifying the product range. So what we've acquired through the acquisitions, including EEG, and what have been built in the old Ai-Media days, we've actually unified those product offerings. So we expect that we'll continue to develop new products and in fact, significant changes, but we're hoping to maintain a lower run rate than we previously had.

Thanks, John. Moving on to the next question. Can you please talk to how the company is navigating sales headwinds such as, one, competitors continuing to innovate their AI-driven captioning offerings, example, ENCO with enCaption5; two, some clients such as Google facing their own challenges and cutting workforces, potentially reducing their usage of Ai-Media service?

Thanks, Mel, and thanks, that's actually a really insightful question. So thank you to anonymous attendee for that. The competitors such as ENCO is a really interesting one because what we are finding is that there are a lot of competitors that just what, I'd describe as, the very shallow end of the pool. So ENCO effectively don't provide a network. They don't provide the ability for human premium captioning. And they don't actually integrate with a further level of AI that relates to the metadata and the smarts that we put on it. It is a lower-priced service, and there are many lower-priced services out there. We would argue, and we do argue that for the customer base that we serve who need both regulatory and commercial certainty for ensuring that their best content, if you think about it of the half-time show at the Grammy's, if you don't put really, really good captioning on, on a program like that or ensure that you've got the right metadata, it can turn out very embarrassingly as that did for one of our competitors. In terms of, say, the large enterprise customers, the big tech customers laying off their staff, we haven't seen any drop off in volume in regards to that, but obviously, a good question because a lot of them are shedding tens of thousands of employees. But so far, our services, for those customers, are holding up well.

Thanks, Tony. And our next question is, in December '22, what percentage of total gross profit dollar was services gross profit? And also what percentage of total revenue was services revenue in December '22?

As in the exit rate. We'd have to take that on notice. We can get back. I think, JB, unless you've got that detail to hand.

No, Tony, I don't. And it's also very seasonal. So we've got to be very careful in giving -- the services business does have seasonality. It's one part of our business that does and providing exit numbers. We're -- we would do it with a lot of caution. You've got to look at a quarter as a minimum, but the half year is what we really are focused on.

Look, I think what I can say is that we are expecting -- so the services margin is north of 40%. The SaaS and devices margins, taken together, is north of 80%. The devices we've said, by themselves, are north of 75%, whereas SaaS is north of 85%. Those margins are pretty consistent. I mean they move around a point or 2, but not that much. And so you can expect the trends that we've been on to continue is probably the best way to say that.

Thanks, Tony. Our next question is from Chris Cahill. Can you outline further the trade-off between lower revenue and margin in reference to the Channel 7 and Al Jazeera negotiations?

Yes, a good question as well. So we are providing, obviously, benefits to these customers by providing them with more captioning than they had before for a lower total price. But the total gross profit that Ai-Media is receiving is higher. And of course, the margin as a percentage is much higher, but the total gross profit in terms of dollars is higher. So it's good for Ai-Media shareholders. It's also good for our customers. And in the current macro conditions, it's a particularly good conversation for us to be having.

Okay. Thanks, Tony. Someone has asked, as a language service provider translation, how could I be involved with Ai-Media? Do you run any training?

Great question. Get in touch with us through the website, through the partnerships paid. Yes, we've got considerable training and more than that, we'll have a discussion with you about how best to integrate with Lexi.

Great. Thanks, Tony. Our next question is from Olivia at Bell's. Are you expecting second half FY '23 revenue to continue to be flat on the PCP?

So we're not giving any forward-looking particular statements here, except to say what we have said in the ASX release in that we are expecting revenue to continue to be relatively flat as we go through the transition. Keep in mind what this means is we are growing our SaaS revenue much, much more strongly than we are setting the services revenue, but we certainly do intend to at least maintain that revenue during that transition period. So although we haven't put a forward-looking statement, there certainly is something that could make you think that in the ASX release.

Our next question comes from Ash Barn. Are you considering share buybacks given the low price and high cash position?

Well, we -- so we haven't in this particular release decided on a buy back. And to be fair, that doesn't mean that we don't see the shares as being undervalued. I bought 3 million shares at $0.355 for just in November and feeling very good about that. But we are seeing a lot of opportunity for further investments in the product, technology and market space now to take advantage of some pretty well-priced opportunity, not just Ai-Media shares that achieve at the moment. And so as JB alluded to, we are keeping our powder dry and looking at a few opportunities now. And I'd say that there's probably a few more opportunities now that we capable of looking at than in the year following the EEG acquisition when we were focused on really betting down that asset and integrating it into the overall business. That work is complete. We are humming as one team now. And I think we're definitely also looking out for some pretty neat sort of add-on technology. So keeping that cash balance, as JB said, is pretty strategically important for us at the moment.

Great. Thanks, Tony. And our final question for today comes from Leo Partridge. To see service revenue drop to less than 50% of total revenue by June '23, do we need to see a significant change in revenue trends over the next 6 months?

No, we're on track.

Okay. So, we just had one last question come in. How many iCap units were sold in the 6 months?

So there are -- so an iCap unit can be either a physical device. It can be an Alta license or it can be a Falcon license. In terms of the number of physical devices that are out there in -- and switched on, there are 3,000 of those. Those are the physical devices. In terms of Alta licenses, there's a few hundred of those, and similarly for Falcon. The Alta and the Falcon licenses are live. The encoders have a useful life of about -- and a replacement cycle of about 5 to 7 years. And that's as far as we kind of break out those numbers.

Thanks, Tony. And that completes the Q&A portion of our webinar. I'll pass back to you for final comments.

Thanks, Mel, and thanks, everyone, for joining. Appreciate it. And feel free to reach out if you have any further questions.