Celebrus Technologies plc (CLBS.L) Earnings Call Transcript & Summary

Good afternoon, and welcome to the D4t4 Solutions plc post-AGM Q&A session. [Operator Instructions] The company may not be in a position to answer every question it receives in the meeting itself. However, the company will review your questions for today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Peter Simmonds, Chairman. Good afternoon to you, sir.

Thanks very much, Alex, and thank you, everybody, for joining this Q&A session this afternoon. And I think probably everybody is aware, we did the formal AGM at 9 a.m. this morning, and I'm pleased to announce that all the resolutions were passed with over 99% majority. So that's already been put out via RNS, I believe. I think most people will also be aware, we put a brief update out this morning via RNS. So for the benefit of anybody who didn't read that, I'll just read that out now. It read as follows: AGM trading update and contract win. D4t4 Solutions, the AIM-listed data solutions provider, is pleased to announce a contract win with an existing banking customer. The contract was 1 of the 2 contracts previously mentioned, which were expected to have closed in the last financial year. This contract includes a high proportion of low-margin hardware and is expected to be substantially delivered in the first half of the current financial year. This contract win accounts for a large proportion of the revenue shortfall from the last financial year. At the AGM this morning, the Chairman confirmed that the group has a strong pipeline and is very confident in the group's strategy to deliver growth and create significant shareholder value in the coming years. So that was the AGM statement this morning. So before we move on to the Q&A, I thought one of the things that would be appropriate to cover in this session was Board changes. There are 2 effectively that we just, I guess, need to bring everybody up to date on. The first one is the appointment of Helen Gilder, who you can see on the call there. Helen, wave maybe. Helen joined us a few months ago and has joined as Audit Committee Chair and Non-Exec Director. And for those of you that aren't aware, in my role as an NED and Chair, I was also Chair of the Audit Committee. So as part of the succession planning for finding a new Chair replacement and for those that don't know, I'm coming up to 9 years early next year and, therefore, under the Corporate Governance rules have to retire. So as part of that succession planning process, we sought via a professional headhunting process a new non-exec who could take on the Audit Committee Chair role, and I'm delighted to welcome Helen who brings a lot of relevant experience both in business as well as an NED. And Helen will be -- has now already, in fact, taken over the Audit Committee Chair from me. So welcome, Helen. And yes, just to confirm, we are also in the process at the moment, as part of the sort of orderly succession, of running a process to find a new experienced Chair to take over my role, which will -- I guess, the process is reasonably well advanced already. We're down to a long list, I think the headhunters like to call it, and we'll be starting the interview processes once the world is back from holiday, probably early September. And watch this space for further announcements, I guess. But anyway, that's the Board changes. So moving on to Q&A. Obviously, if anybody who's on the call has got questions that they'd like to submit, please feel free to do so using the platform. What we tend to do is if we get duplicate questions, we'll aggregate them rather than reading them all out individually. And we've had a number of pre-submitted questions, so I'm going to kick off with some of those.

So the first one, I think, possibly is already covered by this morning's RNS. But the first question was, and I guess it was the one that was sort of top priority for a lot of people was, what happened to those deals that slipped at the end of last year? So Bill, can I hand over to you? And you can give everybody an update on that.

Yes, sure, Peter. So as you read out in the RNS, the one that was the sort of lion's share of the revenue that we announced on the 3rd of April, RNS has now closed, with the majority of that, the hardware revenue on that sort of falling in this first half, as you outlined. The second deal is with an entertainment company for a Celebrus license. Conversations are still very active, but candidly, it's on their side because they've had quite a few changes on their side, and they've had some business stuff that they're sorting through. It's probably about all I can say, but we've agreed legals and we've agreed a contract, and we're just waiting for them to have the appropriate staffing to proceed.

Excellent, Bill. Thank you for that. And I guess the next question here kind of follows on from that, really, which is a question about pipeline. And are you seeing improvements in both the pipeline and the overall sales cycle? So I thought, I guess, that's another one for you.

Yes, I'm quite happy with where the pipeline is growing and the conversations that we're having. From a direct standpoint, we've alluded in the road show, which was only about a month ago, but for those of you that weren't in some of those meetings, about 65%, 70% of our pipeline is now direct sales opportunities, which is putting us in the driver's seat and giving us better control over how we move those deals to closure. So we are seeing a shortened sales cycle. We've also learned a lot throughout that process. And I also see that we've got some questions in the -- or a question around some of the Salesforce deal flow as well. So I might as well just tack that on to this one, Peter, because it all kind of comes together. With Salesforce, those of you that have been following Salesforce, you might actually have seen that they were in the news for some unfortunate reasons on their part the other day with regards to a lawsuit around the lack of realtime ability of their CDP, which is something we run into around the globe with everyone's CDP and a key differentiator for our platform in making those better. With Salesforce, there's a -- several clients are already using the integration, which is good news now. We have actually 2 sales meetings this week with existing customers to add the Salesforce CDI integration to their platform. And we have 4 or 5 deals that we're working actively with Salesforce with the new one that entered the pipeline yesterday. So pretty thrilled across the board with how the pipeline is building with Salesforce. We've had some conversations with their Data Cloud team as well. And I suspect, given some of the news that has hit the Wire that, that might get escalated a bit faster because we can add a lot of value there to solve for some of their lack of realtime that they allegedly have according to the paperwork that was filed this week.

Great. Thank you, Bill. So you mentioned there in your sort of response to the first question about direct sales. Give us a bit more color on how it's working out to have a direct sales channel.

Yes. So it's interesting, we're sort of in the process of building a machine, for lack of a better word. It puts a different focus on how we market and the types of things that we market, and you'll see some of that actually coming in the next few weeks with some additional product launch and features that we're bringing to the market. But then that carries through into how we're developing business. So we have sort of people doing the old-school pick up the phone and calling, business development reps out finding leads, basically working for the sales staff. We have the sales staff holistically focused and incentivized on selling licenses. And then we have the Customer Success team that we've stood up who now is solely focused on hitting a year-over-year target of growth in their respective markets for existing customers. And all of that is designed to, in essence, continue to advance our land-and-expand model where the sales team is focused on identifying the pain point and, as quickly as we can, selling them a portion of Celebrus to solve that pain with the Customer Success coming in to pick that up and expand that customer and get them to start using all the other features and functionality that we offer them across the platform.

Okay. Great. I just noticed another question popped up, which is a supplementary question about the RNS. And it says, can you expand on this morning's comment about a high proportion of low-margin hardware? Bill, are you happy to take that? Or do you want Ash to cover that one?

Well, I can talk about the deal structure, and then I think it would be helpful for Ash to give an overview of just the margins that we've put in place because we've also changed our hardware margins a bit as well. But the deal structure, so this is an on-premise analytic environment that we manage for one of our banking customers. Our focus going forward has been cloud first as the Celebrus platform is fully cloud-enabled across AWS, Azure and Google. And so that's our desired approach. It brings benefits to us. It brings benefits to the customers. And frankly, it allows us to get our features out to customers much more quickly than an on-premise environment where we're working through internal client IT teams and security teams. That particular deal is a mix of hardware as well as software. And the margins in all of those categories, whether it's hardware, software, services, et cetera, all vary. And I'll throw that over to Ash to sort of talk through sort of how we view those margins, if you don't mind, sir.

Yes. Thanks, Bill. So let me just explain sort of our revenue stream and the margins within each of the revenue streams. So we've got 4 different revenue streams effectively that we disclosed in our results. The most important one of those is our license revenues, and that's most important because it's the highest margin. So typically, in the industry, software industry, you'd see license revenue having a margin of somewhere around 85% to 90%. The one below that in terms of profitability is our support and maintenance, and that includes now also our Celebrus cloud offering as well. And typically, with the support and maintenance in the software industry, you'd be looking at somewhere between 70% and 75%. And then below that, you've got services. And those might be services which are kind of additional to actually implementing the product or doing upgrades or all those things for a customer. It also includes some elements of long-standing customers that we have for whom we provide services, perhaps around data installations or web services and things like that. So web services -- the services in general, probably around 40%. And as Bill said, we have this element of hardware, which is very lumpy year-to-year. That typically, historically, has had a margin of 10%, and we've recently increased that up to 15%. So those are the different margins. Now in terms of understanding what the blended is, historically, it's been quite difficult to understand the margin because of the degree of lumpiness of hardware year-to-year, which sort of depresses or flatters the margin. So this year, for the first time, we've split out the hardware. So what we're disclosing as a key metric is software revenues. And that also provides a better underlying trend of where the revenues are going without the lumpiness of the hardware revenues. But in addition to that, we've also shown the software revenue gross profit percentage. We think that's a better metric in terms of understanding where the business is going and certainly better to understand how the margin might increase in the future. And so on that point, so in future years, as we sell more new logos, as we have more sort of upsell with existing customers, typically, in those scenarios, you'll have a breakdown of 80% of license and 20% of support and maintenance or services. And so what you'll see then is as we get more new customers on, the proportion of revenue, which is license revenue, will increase. And so we expect the overall software gross profit percentage to increase over time as well.

Okay. Thanks, Ash. Another one that's just popped in, Ash, which is kind of definitely one for you. It says, for a typical contract, when you sign a contract for 5 years, how do you recognize the revenue year-by-year?

Sure. Well, let's say the most typical scenario, so it's a 3-year contract, either a new logo or a renewal. And within that, we'll have the license, we'll have the support and maintenance or the Celebrus Cloud, and we'll have an element of services. So with the license, what we do is we recognize the annual license in one lump sum, so at the point of sale and then 1 year later for year 2 and then 2 years later for year 3. And that's a requirement under IFRS because once we've delivered the license, our obligations essentially are fulfilled, and so we have to recognize the whole of it in that month. As for the maintenance and the service cloud, well, that's a service which is offered month by month, of course, and so we recognize those revenues to each month proportionately. And then as for the third item, the services, well, that's typically either a T&M, so time and maintenance, and we'll be recognizing that as we deliver the services. And in some cases, it might be on a percentage complete basis. So if it's a 3-month project, for example, we'll estimate the percentage complete month by month, and we'll recognize the revenue on that sort of time reported basis.

Okay. Thanks, Ash. Bill, there's one just popped in, which is probably aimed at you, I think, which is when you're building up a direct sales team, what are the limitations to scaling? And how is it helping give you better visibility of future new wins?

Yes, no, it's a good question. And also just harking back to the revenue one, hardware, by the way, we recognize on delivery of hardware to the client's data center as kind of the final point. So that's why it's so lumpy as well because it can be a pretty large number or amount of hardware that we deliver. From a sales team perspective, I think the key point that I'll highlight is in our financial year results from this previous period compared to the last, the OpEx stayed flat. We did that while standing up the direct sales business, while standing up Customer Success, et cetera. So we've managed the cost within the business quite well through our restructuring to make way for this, which was part of the plan that Ash and I and the management team had put in place. From a visibility perspective, having direct deals gives us much more control. In a reseller channel, we're sitting, in many cases, behind a partner. We don't even always have direct access to the customer, and we don't necessarily know all the levers that can be pulled to get a deal done. So when it comes to sort of building out the direct sales pipeline, I'd like to think of it just like all of you with diversifying your investment portfolio. For me, it's all about how do we diversify all of our revenue streams so that we're not holistically dependent on a single one. And so that in a given quarter or a given year, we can be looking at all the deals like we do now at the start of the quarter, and we look and see which ones can we get over the line potentially this quarter, and that's where our focus goes. So it does give us quite a bit more flexibility. There really haven't been any limitations. We've stood up the team that we intended to stand up. We added Customer Success like we intended to. And we made way for those costs by making efficiencies elsewhere in the business as a result of the different platforms we've put in place or some of the restructuring that we've done across the business.

Great. Thank you, Bill. Ash, this is probably one for you. But you've talked, I think, in some of the previous communications about improving internal processes and creating efficiencies, which leads on from what Bill was just talking about. Do you want to just give a quick flavor of some of the things that have helped with the making the business more scalable?