Alfa Financial Software Holdings PLC (ALFA) Earnings Call Transcript & Summary

[Audio Gap] you over to your host, Andrew, to begin. Andrew, please go ahead.

Thank you. Hopefully, everybody can hear me, and the technology will bear with us. And a warm welcome from myself and Duncan on behalf of the Alfa Board to Alfa's 2020 interim results presentation. We'll have some time with Duncan and myself going through some slides and trying to help with some voiceover. And then hopefully, we'll have some time for coordinated Q&A at the end. So if you wouldn't mind, please, if you're following on the -- on an offline version, moving to Slide 5, and I'm going to try to get the audience view to move to Slide 5 as well. Our overview of the year or the half year is as follows. As you all have read from the results already, our revenue and our profit are significantly ahead of our original expectations and indeed performance for the period last year. Our level of disruption was minimal from the perspective of COVID-19. And in particular, we were keen to pick out that our best-in-class performance around delivery has continued. We'll talk about the 4 customer go-lives later on. But actually, since publishing these results or finalizing these results, and today, we've also had another go-live, so that brings us to 5 customer go-lives for the year-to-date. We've had strong support from our people and our product for our customers, and again, I'll touch later on, on Alfa coming into its own in supporting COVID. Part of that strong performance from our people is based on our culture, which remains strong, I'm pleased to say, and our employee engagement scores have remained high through this period as we have focused hard on making sure that our people's well-being was in a good place, allowing their productivity to be as well. We have a lot of faith in our future, our markets and our strategy, which I'll come on to. And we are continuing to invest both in our people and our product for that anticipated future growth. And finally, we ended the half with a robust balance sheet. At the time, we had GBP 69 million of cash and no debt. And since then, we have generated further cash reserves. Looking forward, tech leadership is key in how we see the future. We've launched Alfa 5.6 at the same time roughly as these half year results. 5.6 comes with some very eye-catching new products and features. At summary level, a new presentation based around our design thinking methodology, and based on genuine customer use cases, a cash accounts module, which allows money to be kept on deposit, particularly useful for wholesale finance customers. And I'll note that we had our first version 5 wholesale auto finance go-live in the period. And then finally, pay-per-use product support, which moves Alfa even further into the world of mobility, products and servitization. And I'd note that, that product is already in use with a North American customer. The eye-catching part of tech leadership, which I will go through on a separate slide, is the launch of Alfa iQ, and I will talk in a bit about our vision for that, and the transformative approach we see that will have for our future and for our customers' future. Duncan will cover capital allocation in more detail. But the strength of our balance sheet and our strategy as we see it means that we have no intention of doing major acquisition activity in the near future, and therefore, we've declared a special dividend of 15p per share. Our underlying markets are resilient. Asset finance always does well in this kind of downturn and has a track record of that. But we are not immune to the current macro impact. That, despite strong progress in the late-stage pipeline, we are seeing limited contract commitments for early-stage projects. So in general, that has us remain cautious for 2021 based on our visibility. But as a consequence of that late-stage pipeline conversion record during the period, we expect 2020 to be 5% ahead of the current revenue expectations, and that all flows down into EBIT. I'll try and coordinate myself to come to Slide 6, but that's Slide 6, if you're following. So Slide 6 gives the first half at a glance. Revenue of GBP 38.2 million. We note that, that was in comparison to 2019, slightly flattered by license write-backs during 2019, and Duncan will give the details on how people taking holidays affects that. But obviously, for our financial performance, we're very pleased with the progress we've made there. A 22% revenue uptick at constant currency and an operating profit of GBP 10.4 million during the period compared to GBP 5.4 million this time last year, giving us the 27% operating profit margin, which is good progress. As I said, Alfa's best-in-class delivery is still going strong. Implementation projects in train at the half were 6. As I said, we've had 5 deliveries year-to-date. But I think it's important to note that, in particular, the tendency for minimum-viable-product-type implementations and a staged-implementation approach means that the vast majority of those go-lives are still going and the 6 implementation projects carries over. 16 ODS customers. We have a fair few of those reflecting also early-stage projects. And together, one thing we've been very pleased on is progress on reducing customer concentration, which gives us more robust revenues. Headcount is up to 340 and staff retention at 85%. Duncan, can I hand the controls over to you for the financials, please?

Great. Thanks, Andy. And it's certainly really good that I have such a strong set of figures for my first Alfa results presentation. So we're now on Slide 8, hopefully, for those following it through. We've seen strong growth in revenue and profit in the first half, with revenue up 24% to GBP 38.2 million and operating profit up 24% (sic) [ 92% ] to GBP 10.4 million. We'll go into the detail of these on the next slides, but I just wanted to point out 2 things here before we do that. Firstly, we have commented in previous announcements that we have benefited in the first half from our people taking fewer holidays than normal as a result of the COVID-19 lockdown. This has increased the number of chargeable days, and we estimated the impact to be GBP 2.7 million of additional revenue in the first half. Offsetting this, we had to increase the accrual for holiday pay of about GBP 0.8 million, and so the net impact is to have increased our EBIT in the first half by circa GBP 2 million. We expect this impact to reverse in the second half. The second item that's worth bearing in mind is that in the first half of 2019, we had some write-backs in license income, which totaled GBP 2.8 million, and reduced the figures reported last year, as Andy just mentioned. This year, our first half has seen no equivalent adjustments. Turning now to the first of our 3 segments, implementation revenues. Implementation revenues is where we show the revenue we generate from implementing Alfa systems and also where we recognize the license fee income. Revenues increased to GBP 16.2 million in the period. We've seen an increase in our software implementation revenues with GBP 3.6 million arising from one customer, by a customer that we did not have in the first half of 2019 in implementation, although it was actually in ODS. We also had 3 completed customers in the period, one of which was canceled as a result of COVID-19, with the other 2 completing their implementations. In ongoing implementations, we saw one customer complete the first phase of their project, going live early in the period and with the subsequent go-live work now being shown in ODS. This reduction was offset by the increase in one customer where we saw good progress in the period. So moving on to our second segment, ODS revenues. ODS is the segment in which we show ongoing development and services. It includes not only post-go-live work for customers, but also where we are doing pre-implementation work for the customers. Pre-implementation work is where we are paid for work we do with the customer to evaluate more thoroughly their implementation requirements and match for our system. Once the client has made a decision to choose Alfa and contracts are agreed and signed, then further work will be shown in implementation revenues as opposed to here in ODS. Not all customers move from pre-implementation to full implementation, and this is what we've seen recently, where we could not agree terms with one customer we were doing pre-implementation work for. Overall, ODS revenues increased to GBP 13.8 million, of which GBP 2.9 million came from these pre-implementation revenues, principally from 2 large customers, one of which, as noted above, we will not move into implementation and one of which we expect will. New ODS customers included one large customer that went live at the start of the period on the first phase of its project, and the follow-on work has been included here within ODS. In addition, we have 2 small additional smaller customers. The ongoing customers revenue remained at a relatively consistent level, with 11 customers contributing revenue of more than GBP 100,000 in the period. Turning now to our final segment, maintenance revenues. The maintenance revenue segment is where we disclose revenue we get from maintenance activities, along with our growing Cloud Hosting business. We have seen steady growth in our maintenance revenues and good growth in our Cloud Hosting revenues. We actually have 8 clients that we are cloud hosting for at the moment, 2 of those are in live production, 2 are for temporary testing environments and 4 are being deployed but not yet live. In total, revenues increased from GBP 7.2 million in the first half last year to GBP 8.2 million in the first half this year. So turning now to expenses. We are seeing 2 trends in the period, with total headcount and personnel costs increasing in the period as we continue to invest for growth in the business, offset to some extent by a reduction in some costs due to the COVID-19 lockdown. Total expenses increased from GBP 25.7 million to GBP 28 million. Average headcount increased from 310 to 322. And this, combined with the full impact of the November '19 pay rises, along with the costs of our partners, increased our personnel-related expenses to GBP 21.8 million in the period. The most significant reduction in expenses was in travel costs, which were down GBP 0.7 million versus last year, although the bottom line impact of this was pretty neutral, as these were costs that would largely been chargeable to customers, and so we have lost the equivalent revenue. We did see a small increase in IT costs as a result of higher hosting fees, but this was more than offset by the increase in the Cloud Hosting revenues I mentioned earlier. There was also an FX gain of GBP 0.4 million in the period, principally due to the weakening of the pound versus the dollar and the conversion of the U.S.-dollar cash deposits into sterling. So turning to cash flow. We have seen good cash flow in the first half with a cash conversion of 108%. As you know, we do a significant part of our annual maintenance billing in the first half, and so this improves our cash, and as you will see on the next slide, it increases our deferred income. In the period, we had 2 significant factors, one positive and one negative. The cash flow was boosted by the receipt of GBP 3.6 million of contractual nonrecurring revenues that we booked in 2019 but only received the cash in 2020. This however was offset by some delays in setting up registrations and bank accounts, which we needed to do before we could build some overseas customers. This can be a bit bureaucratic and painful at the best of times, but was particularly slow due to the impacts of lockdown. I am pleased to say though that this has now been resolved and all amounts due to us have been invoiced and the cash collected in H2. In the period, we benefited by a reduction in tax payments and we also made the GBP 0.4 million investment into Alfa iQ, our joint venture, which Andy will talk about in more detail later. All of this resulted in our net cash position increasing by GBP 9.8 million in the period to stand at GBP 68.6 million at the end of June. So turning now to the balance sheet. We continue to retain a very robust balance sheet. And fourth line down on this rather busy slide, you can see that the cash balance at the end of June of GBP 68.6 million. The balance sheet is relatively straightforward, and I will quickly touch on the key movements. As I just mentioned, we did have a delay in invoicing some overseas customers. And this, combined with the higher revenue than at the end of last year, meant that our total receivables increased to GBP 17.4 million. In total, across the whole of the business, we had GBP 2.6 million of receivables more than 30 days overdue. And at the end of August, GBP 2.3 million of this has been collected. So we continue to have a very clean receivables ledger. The annual maintenance billing in May resulted in higher VAT payable than at the year-end, and this is as usual. And in addition, the delayed overseas billing added to this. Also, as noted earlier, we had an increase in the holiday pay accrual of GBP 0.8 million. So overall, trade and other payables increased from GBP 5.9 million at the year-end to GBP 8.7 million. As I just mentioned, the annual maintenance billing resulted in an increase in contract liabilities of GBP 4.9 million from year-end as we've invoiced the annual charge but only recognize the income month-by-month during the next 12 months. So coming back to the significant net cash balance. As you're seeing, the business continues to be very cash-generative, with net cash of GBP 69 million at the period end, and it has continued to increase since then. We are confident that we can continue to grow the business naturally without the need for significant M&A. We are conscious of the fact that we live in very uncertain times. So we have looked at a range of downside scenarios. And even in severe downside scenarios, we clearly have significantly more cash than we need. As such, the Board has declared a special dividend of 15p per share, which amounts to a return of capital of circa GBP 44 million. I'll now hand back to Andy for him to give you a business update.

Thanks very much, Duncan. I'll endeavor to move to Slide 17 for those following by hand. And starting with the market overviews, which gives us a short-term view of the target asset finance market that Alfa serves globally. The asset finance market, we note, has been more resilient in the U.S., slightly weaker in the U.K. and Europe. But underneath there, there are secular trends as well in individual asset types. I won't go through all of the recent performance metrics from ELFA, FLA and Leaseurope, and in particular, noting that the ELFA figures won't include that all-important U.S. auto finance market. But largely, we are seeing our late-stage pipeline is robust. And I think this, as I've said before, is highly indicative of the characteristics of asset finance and also the characteristics of the market for systems within asset finance. We're seeing a little bit of contraction in those markets, which makes us cautious about that short- to medium-term future. But as we move to medium to long term, we know that asset finance do comparatively well during downturns because they get a greater share of the finance that's provided out there, simply because there is more security around the asset itself. Those who have heard about the company before will know about the secular drivers for systems change within that market. We talk about the push and pull factors. The push factors, in particular, that see older monolithic mainframe and legacy systems, which still make up a large part of the installed market, driving change. And actually, COVID accelerates the driving of change around the regulatory and structural parts of the market, with new regulations coming into force as well as new products and techniques that have to be supported, such as CBILS in the U.K. and forbearance and end-customer support requirements around the world. From a pull perspective, we've often talked about things like digital in the past. And actually, digital is the third thing that COVID shines a light very strongly upon in addition to changing product sets and the regulatory environment. Digital has now moved from a highly desirable, almost necessary to an absolutely necessary way of doing business in a COVID and post-COVID asset finance market. So the idea of digital Darwinism is very much enhanced. Digital is something that people absolutely have to have. All of that put together, drivers for change and drivers for customers requiring flexible modern systems to cope with those changes and to improve their efficiency going forward, and in a post-COVID world, sees us being very assured about the medium- to long-term demand coming from our market. I did want to give special mention as well to Cloud Hosting. Duncan mentioned it in his financial roundup, but it's worth talking about as well. Cloud Hosting has been particularly strong for us during this period, with now a total of 8 customers and 2 new customers coming on board, which I'll pick up, that are really good part of Alfa's armory in serving the market and a very good boost to spinning up new implementations faster than we have been able to in the past. So in summary, Alfa is well-placed to benefit from medium- to long-term demand in secular trends. Moving to Slide 18 to put a little bit more meat on those bones and to talk about total contract value. Overall, we have seen implementation total contract value increase. This, as I've said, and I'll come to in a bit, includes the good development of our pipeline, license and additional phases of our current implementation projects. I will note though that customers are tending to issue shorter statements of work, which is the key mechanism for contract visibility and one of the drivers for that caution as we move towards 2021 in our visibility. I think Duncan noted that our biggest increase in the maintenance line, and therefore, maintenance contract value is that Cloud Hosting capability and 2 new clients in that area. So good development of the pipeline. As I said, we're cautious with our forecasting because we're aware of the short-term nature of some of these commitments and we're also very aware that we live in somewhat uncertain times. Overall, we can see a total of GBP 93.4 million in total contract value. But this time around, we have split out the next 12 months of TCV, which is at GBP 43.4 million. So as I said, optimistic in terms of what we can see coming through. But in terms of contract commitments, there's still work to do for the first half and going through into 2021. Moving then to pre-implementation and the implementation update. That's Slide 19, again, for those that are following manually. Highlights there, as I've already said before, 5 go-lives in the year-to-date, 4 during the period. Our best-in-class delivery capability absolutely continues to differentiate us, and in particular, now differentiates us against the competition. As also mentioned, the tendency towards a minimum-viable-product implementation and rolling go-lives means that the vast majority of these are carrying on past that go-live. And within the detail, a couple to pick out. I think Duncan mentioned the organization that we did not get to contract with. I think he said that we could not agree terms. I would recharacterize that as we would not agree terms. And I think in any environment, it's exceptionally important that Alfa continues to protect its contractual position and only takes on work with a risk profile and the deliverability that we are comfortable with, which is why we're not going forward with that organization. That notwithstanding, some real highlights amongst the rest, including a new large auto finance player in that important North American market coming through, increasing our footprint there. And in ongoing implementations, Duncan's mentioned quite a few of them. But at the bottom there, Auto OEM C, the imminent go-live. And of course, I mentioned for Retail Bank D, Hampshire Trust, which has been a fantastic flag-plant customer for us for Alfa Start in the U.K. market, giving a great foundation to take it further within the U.K. market and into other markets, as I will discuss in due course. Moving to Slide 20. Late-stage pipeline and update from the last time we spoke as at the end of 2019. We have seen some significant traction there. One customer dropping out due to COVID as well as the customer that we didn't continue with that I've just mentioned. But that gives us still some excellent progress within the late-stage pipeline that, as I said, we remain confident in. And it's hugely gratifying that the majority of the customers within the late-stage pipeline are doing paid work with us even though some of that is pre that full contract set that Duncan mentioned, which sees them pop up in our ODS segment. Retail Bank E is very mentionable because that has moved through to won, a very large U.S. equipment finance player that we now have a full set of contracts for and we're going forward at good speed with. And Auto Fin. F in the U.K. is a hosting relationship that is added to an existing customer relationship that we are very excited about. Finally, moving to the new additions in the late-stage pipeline. And again, we've seen some -- that's -- apologies, that is Slide 21 for those trying to follow. Again, we see some really good traction in there. We've seen 3 awards within that late-stage pipeline new additions set, including one within the highly strategic Alfa U.K. start sector as well as some good traction in other geographical areas, including one rest of the world within the Asia-Pac region for Alfa. Noting again that a lot of these coming through are expected to initially contract up in short-term statements of work and also noting that the fast movement into late-stage pipeline from early-stage pipeline is leaving early-stage pipeline in a position where we would like it to be larger. And we will want that to increase to give us greater confidence for the second half of 2021 and into 2022. So as I said a couple of slides ago, there's still some work to do there. We remain optimistic in the -- for the outlook of the business. But in terms of contractual visibility, and of course, the trading environment, we are guiding cautiously for 2021. Moving to Slide 22. Again, seasoned Alfa watchers and people that have spoken with us before will be familiar with the idea of our growth accelerators. Alfa has a fantastic and reliable core business, but there are areas where we believe that we can apply operational gearing and get greater market penetration, and these we talk about as accelerators. Partnering is a key one of those. We were pleased to support some -- report, rather, some real progress at the end of 2019 within this key area for Alfa. At the halfway mark in 2020, we have engaged and announced Accenture. And across our 5 partners, we're working with 4 different customers in 4 different geographies using customer resource -- sorry, partner resource for augmenting Alfa resource. To remind you, partnerships gives us an additional sales channel because they've got greater, in general, global footprint than Alfa, particularly with the large ones. And that allows us to access new opportunities in markets. And as we said before, it gives us flexible and fungible resources that we can make use of. And we've seen that recently actually in the way that we've reacted to changing customer demands in the face of COVID. We talked a bit about Alfa Start already during this presentation, so I'll be quite light-touch on it. Alfa Start is allowing us to address the volume segment, providing a very quick solution for our clients. A pure Alfa Start implantation, we expect to be under 20 weeks in duration. We've made a lot of progress. We announced Arkle in the last period -- sorry, we announced Hampshire Trust in the last period, and we've gone live with them. We've started work with Arkle Finance in the U.K., having been awarded that contract. We've launched in U.S. auto. And in general, you'll have seen a lot of press around Alfa Start, making it very clear to people what it is, which is a no-compromise way for smaller growing organizations to make full use of the Alfa product. The intellectual property behind Alfa is absolutely the same, whether it's Alfa Start or an enterprise implementation. Speaking of leveraging our intellectual property, we have Alfa Digital. I've talked about it, again, before. The key things to bear in mind around Alfa Digital are that all of Alfa's functionality is available through that digital interface, and that digital interface is true omnichannel. We say a lot in these conversations that one of Alfa's huge strengths, and I would say one that perhaps we don't get the credit for within the public market, is the -- our amazing intellectual property. And Alfa Digital, like Alfa Start, demonstrates us leveraging that incredible intellectual property that we have within Alfa and delivering it through new digital channels. We've seen digital being super helpful for clients through COVID-19, and demand going up there. We've been working on demos, rolling out digital solutions as part of a new user interface, which I spoke about earlier. And we have 1 OEM live and going forward with Alfa Digital in Germany, Spain and the U.K. for its origination channel. The final one there is Cloud Hosting, which is really a new accelerator for us. I've spoken about it. Duncan has spoken about it. But it does merit the focus that it's had within this presentation. It's a great new revenue stream for us. It's a subscription revenue stream. It's an incremental sell for our existing customers. It increases our share of the implementation landscape for new customers. And for all of these opportunities, it gives us a more secure, simpler, lower-friction approach to implementation. And as we've noted, we've seen strong take-up for Cloud Hosting. Moving on to Slide 23, which -- we talk about the iQ joint venture, which Duncan and I have both mentioned. Some background on it. It's part of the technology leadership accelerator. Within Alfa's statement of purpose, actually, is to give our customers leading-edge technology to solve real-world problems. And we are tremendously excited about the potential of Alfa iQ in this area. Alfa iQ is a joint venture between Alfa and Bitfount, which is a company founded by Blaise Thomson, most recently of Apple, where he led the engineering office in Cambridge and was one of the key players within Alfa's -- Apple, rather's, Siri product. Alfa has already got some great AI expertise, and you've seen that, I hope, on some of the position papers that we put out there. But clearly, Bitfount's artificial intelligence and machine-learning knowledge accelerates that. We add that to Alfa's asset finance expertise and customer base, and we have a tremendous opportunity. The joint venture structure, I would note, is great in that it provides for an addressable market that's greater than Alfa's existing customer base. And I'm pleased to say we've already started our first customer engagement. We have a good idea of the use cases that we might look at. Examples are predictive delinquency, credit decisioning, viability analysis, and there are a few more. And the structure of Alfa means that Alfa iQ product is easily integratable into Alfa's decisioning and workflow, which will allow Alfa's customers to avail themselves of proactive, fast decision-making. As I said, we believe that this could have a truly transformational effect not only on Alfa, but also on our end market. We're hoping that we will be launching new products in this area in 2021, but I'll note that we won't see meaningful revenue impacts until 2022. Moving to Slide 25, which is the summary. And then I'll hand it back to [ our operator ] to structure the questions. From our perspective, we're very, very pleased with the first half performance. We've coped well with the challenges we've faced. That's due in no small part to amazing Alfa people and the technology infrastructure that we already had within the business. And that notwithstanding, as I said, we're very happy with the progress we've made from the prior year and the prior period and in relation to market expectations. Importantly, everything that's fundamental and great about Alfa continues to be great. We've been winning new work, developing our late-stage pipeline. That best-in-class delivery record has continued. And we continue not only to be a technology leader, but in my opinion, to widen our technology leadership with the advent of Alfa 5.6 and the launch of Alfa iQ. So we expect 2020 to be around 5% ahead of our current expectations. And as we've noted a couple of times, that flows into our EBIT line as well. Looking longer term, we're positive about our prospects. This, along with that cash-generative nature of the business, our strong cash conversion, our strong balance sheet, and the ability to grow into our addressable market organically, that's enabled us to return GBP 44 million to shareholders, still leaving a very robust balance sheet with net cash at an increasing level. Business is building momentum. We believe very strongly in our strategy. But again, noting the macro environment and customer behavior in the form of our people coming to market in that early pipeline, short-term contractual nature and just that general bit of COVID-induced instability means that there's some caution next to the optimism for 2021 in the way we are guiding. [Audio Gap]