Cluey Ltd (CLU.AX) Earnings Call Transcript & Summary

Good morning, and welcome to Cluey's Half Year FY '22 Results Webinar for the period ending 31 December 2021. Presenting today is Cluey's Chief Executive Officer, Mark Rohald; and Chief Financial Officer, Greg Fordred. Today's format will have Mark run through the results presentation followed by a Q&A session, whereby investors can submit questions via the Q&A function on the bottom of the screen. I'll now pass to you, Mark.

Good morning or good afternoon, everybody, and thanks for making the time to meet with us. I'll do a brief intro, hand over to Greg on the key financials, and then I'll talk through some of the other really exciting initiatives that we're currently working on. In the first half of financial year 2022, we delivered revenue of $15.8 million versus $6.4 million in the prior corresponding period, and that's an increase of around 145%. The growth in revenue reflects continuous strong demand for Cluey Learning support services, and I'll talk about that further on in the slide deck. The growth in our core business continues to demonstrate strong and improving unit economics. Our continued investment in technology, systems and platforms is also enabling us to scale the business and harness data and learning analytics to constantly optimize and improve our service offerings. And as we expand our offerings via subject expansion, geographic expansion and new service options, we are continuing to build a portfolio of services that drive scale and the opportunity to access a larger and larger share of wallet in our addressable market. It's also noteworthy that we completed our first acquisition in October 2021, and we are continuing to consider further strategic M&A opportunities. Now for those of you who are not familiar with Cluey, in summary, Cluey augments traditional school-based learning for students across Australia and now, more recently, in New Zealand. We deliver core academic learning support services in the form of online one-to-one and small group tutoring and test preparation. And now we also deliver code and extracurricular learning via our Code Camp subsidiary, primarily in the form of holiday camps, after-school and online learning programs in the areas of coding and digital skills. I'll now hand over to Greg, who'll talk us through the key financial snapshot.

Thanks, Mark. Good afternoon, everyone. It gives me great pleasure to present the Cluey Group financial results for the first half of financial year 2022. I'll start off by focusing on Cluey Learning, our core online learning support business. During the first half of FY '22, Cluey Learning continued to benefit from the accelerated take-up of online tutoring and test preparation, delivering revenue of $15 million and revenue growth of 132% on the prior corresponding period. This slide provides a snapshot of Cluey Learning's performance in the first half of the financial year. This snapshot does not include Code Camp, which is the coding and digital skills, holiday camp and after-school business we acquired during the period. In the first half, Cluey Learning contributed around 95% of the group's revenue of $15.8 million. And in the 3 months since acquisition, Code Camp delivered around $800,000 in revenue. Starting at the bottom left-hand side of this slide. Variable CAC is the customer acquisition cost to acquire a new student. This includes digital media spend, brand spend and the cost of our sales team. In the first half of FY '22, CAC per new student reduced by 14% on the prior corresponding period to $491, whilst at the same time, we increased new students by 1.9x. Included in the CAC calculation is brand spend of around $800,000 in the first half of FY '22 compared to only $300,000 in the prior corresponding period. Whilst average lifetime revenue of $2,181 per student and lifetime value of $1,145 per student remains stable, the improvement in the CAC per new student this half results in an improvement to the ratio of lifetime value to CAC. This ratio has increased by 26% to 2.3x. This means that for each new student recruited in the first half of FY '22, on average, the difference between lifetime value and CAC will deliver around $650 contribution to overhead and profit, an increase of around 35% on the prior corresponding period. The current number of active tutors at the end of December was over 1,700. With the commencement of the new academic year, Cluey now has over 2,000 active tutors. This increase in new tutors is required to service the step change in the volume of students we enroll in January through to March and the increase in sessions we experience from March onwards. In the first half of FY '22, Cluey delivered over 233,000 student sessions, an increase of 130% on the prior corresponding period. To give you a sense of the continuing growth in the business, we expect to deliver around 55,000 student sessions next month. The 4 metrics on the right-hand side of the slide demonstrate the growth achieved in the first half of FY '22 against the prior corresponding period. As you can see, the unit economics continue to improve. An increase in new students of 1.9x delivered a 2.3x increase in the number of student sessions and revenue, which in turn delivered 2.4x increase in gross profit. Next slide, please, Mark. This slide contains a summary of the consolidated financial results for the first half of FY '22 compared to the prior corresponding period. Noting that Code Camp was only acquired on the 1st of October and contribute around $800,000 of revenue in that period. As you can see, the Cluey Group experienced strong growth in revenue and gross profit. Revenue increased by 145% to $15.8 million in the first half. To put this in perspective, the amount of revenue generated by Cluey in the first half is almost the same revenue of $15.9 million generated in the entire previous financial year. Gross profit increased by 150% to $8.5 million and is almost -- is also almost the same gross profit of $8.6 million achieved in the entire previous financial year. Marketing expenses increased by 70% to $4.5 million, delivering an increase of 88% in new students. It is important to note that in the last half, we invested significantly more in brand, spending $800,000 compared to only $300,000 in the previous -- prior corresponding period. From a timing perspective, it is also important to note that the investment in marketing is incurred upfront to acquire new students, whilst the revenue from those students flows over time as they consume Cluey's services. Employee benefit expenses increased by 37% to $8.5 million. $600,000 of this increase relates to the inclusion of Code Camp from the date of acquisition. In Cluey Learning, full-time equivalent employees increased 15% from 93.6% in December 2020 to 107.6% in December 2021. Around 12 full-time equivalents were added to the sales team to support continued growth in demand, 2 are added to the customer support team to manage and support the increase in forecast student enrollments and 2 were added to product and technology to support and drive product development. Casual and offshore customer support costs increased by 40% from $500,000 in the prior corresponding period to $700,000 in the first half of FY '22. Administration expenses increased 106% from $1.2 million in the prior corresponding period to $2.4 million in the first half of FY '22. This increase was primarily due to a $600,000 increase in IT and licensing costs, $300,000 of Code Camp acquisition and associated integration costs and an increase of $300,000 in public company and compliance costs compared to the prior corresponding period, in which only 1 month of these costs were incurred. Total operating expenses increased by 54%, whilst the underlying EBITDA result remained at similar levels to the prior corresponding period. On this slide, we include a number of our key operating metrics. These are for both Cluey Learning, our core online learning support business; and Code Camp, our recently acquired coding and digital skills, holiday camp and after-school business. It's important to note that the metrics for Code Camp are for -- only for the 3-month period from the date of acquisition, which was October 1, 2021. In Cluey Learning, new students increased 88% on the prior corresponding period to 11,701. Total variable acquisition expenditure, also referred to as CAC, increased by 62% to $5.7 million. Included in this is all the marketing, media and brand costs and the employment -- sales employment-related costs. CAC per new student decreased 14% to $491 as the growth in new students exceeded the increase in overall variable acquisition expenditure. Student sessions, which is Cluey Learning's primary revenue driver, increased by 130% to over 233,000 sessions. In the 3 months since the acquisition of Code Camp, we acquired 2,554 new students at a variable CAC of $77. 4,545 attendance days at Code Camp school holiday and after-school programs were achieved. This is despite the COVID disruption in this period that resulted in school closures in New South Wales and Victoria and increased cancelations of school holiday programs. It is pleasing to note that with the reopening of schools at the beginning of the 2022 calendar year, we are seeing a resumption of demand for these services. Next slide, please. As previously noted, Cluey produced $15.8 million in revenue and $8.5 million of gross profit for the first half of FY '22. The charts here illustrate the exceptional growth in revenue and gross profit since FY '19 and the continued improvement in the gross profit margin. The gross profit margin for the first half of FY '22 was 54%. The chart on the left here illustrates the growth in active students since FY '19. In the last half, Cluey had 19,787 active students whilst Code Camp had 3,952 active students. That's a total of over 23,000 active students for the group. The opportunity to cross-sell and upsell services to students across Cluey Learning and Code Camp programs is significant, and going forward, will be a key focus area as we continue to integrate these business units. The chart on the right illustrates student sessions, or in the case of Code Camp, attendance days at school holiday or after-school programs. The majority of Code Camp active students in the last half attended school holiday programs. It's pleasing to see the exceptional growth in students, sessions and revenue we have achieved in a reasonably short period of time since Cluey commenced operations. And I personally remain very excited about the future growth prospects for the group. I will now hand back to you, Mark.

Thanks, Greg. I'll provide you with a short update on the Code Camp acquisition and the status of our New Zealand rollout. We completed the acquisition of Code Camp on the 1st of October 2021, and we've been working hard to integrate Code Camp into the group and achieved a lot in a very short space of time. We've merged our marketing teams, consolidated our sales teams. We started deploying integrated sales and marketing activities. We're now also using real-time performance reporting in Code Camp that better enables data-driven decision-making. And probably most importantly, our management and leadership teams across the businesses are working well together, and we're now starting to direct resources to deliver on our strategic priorities and core expansion plans. Running the holiday camps and after-school programs during the most recent COVID-related school closures was challenging. There is no doubt that. As a result of COVID, approximately 29% of our Code Camp student sessions were canceled and the number of camps could not take place. Even adjusting for COVID, we were on track to achieve 10% more revenue than the last holiday season before COVID. That is in some of 2019, 2020. So even though we faced this challenge with COVID, we're delighted with our performance and we still managed to achieve solid outcome. On to New Zealand. In 2021, we completed our research into the New Zealand market opportunity. And based on our findings, we decided to go full steam ahead with the launch into New Zealand. And in order to do this, we commenced the development and repurposing of our content to ensure that it was fully in line with the New Zealand curriculum. And we also started preparing our processes and systems to enable the offshore expansion. In October last year, we launched an MVP version of our service for New Zealand school years 4 to 8 formats and English. And then in January this year, 2022, we extended our service offerings to include New Zealand years 9 to 11. By March, next month, we will be on track to deliver a fully integrated service. To date, the results are promising, and we're seeing strong demand, noting that this is still based on very low levels of marketing and sales investments that will then pick up once we have the full range of our services lining markets during March. Let's talk a little bit about the growth outlook for the second half. So a key question that I've been asked, and I'm asked this regularly, is whether we're likely to see a reduction in demand for our services as the impact of COVID subsides. It's important to note that the consumption of online learning support services by school children started long before COVID. And our view has always been that the transformational shift to online learning by school children will continue after COVID. I'm really pleased to say that as of the -- that as we look at the 2022 academic year commencement in February right now, we are continuing to see strong and increasing demand for our core services. We are moving to complete our rollout in New Zealand. The repurposing of our content to align to New Zealand curriculum was achieved on time. As part of this process, we also made a number of changes to our operating capital and systems that enable us to deliver across multiple geographies with multiple currencies. And this will stand us in good stead as we consider other international opportunities. The acquisition of Code Camp takes us into the very large code and extracurricular space with extensive opportunities for further product and service expansion. We are also focusing on building out our relationships with schools and our B2B and B2B2C sales and marketing capabilities. Thus, we do believe we'll be extremely valuable over time as we consider multiple go-to-market channels. We have always viewed technology, data and learning analytics as being a core competitive advantage, and we're going to continue to invest in these areas in order to optimize our customer and learner experiences and as a key driver to help us reduce costs. Finally, on to M&A. We're finalizing the integration of Code Camp, and we continue to consider further M&A opportunities. Most recently, we've added a corporate development function to the organization and additional resource to assist with helping to drive strategic M&A. We've looked at a lot of opportunities, and we continue to consider many of these. We have bold ambitions in terms of scaling our services to be able to deliver the right learning support to the right learners at the right point in their learning journey. And we know tutoring and test prep is a big part of this but it is not the only part. We also know we need to remain very focused and there is a limit to how much we can build and how fast we can build it. Therefore, M&A is a key part of our growth strategy, but we know there is no room for error. So we continue to consider these opportunities that we're trading carefully. I think that brings us to the end of today's presentation. Thank you for your time. We're now happy to hand over to take some questions from the attendees. Mel, are there questions?

[Operator Instructions] Mark, I believe we have a question here from Owen Humphries at Canaccord. I'll just pass to Owen.

Can you hear me?

Hi, Owen.

Team, well done. Great results. Just looking through that statement on the third quarter, indicating sustained significant demand for our services. Can you maybe just -- obviously, Jan, Feb is a very important period for you guys. Can you maybe talk about the pickup in brand marketing you're expecting in the second half? How that's been tracking because you've been at it now for, call it, 6 or 7 weeks? And maybe just talk through how you've seen enrollments for February with the back-to-school.

Greg, do you want to kick off, or would you prefer me to kick off there?

I'm happy for you to kick off and then I can add.

So I think there are 2 components to thinking about our enrollments and active students and then sessions and revenue in this quarter. The first component are our students from last year, all our active students from last year, some of whom completed academic year, the year 12th students and off. And then we have all the remaining students that recommenced during Feb 1 of this year. So Jan, Feb, and March are big re-enrollment periods. We are seeing the same as, if not better, flow through from the students from last year to this year as we saw the year before in terms of percentages. So we're seeing, as good, if not better, continuation of demand for our services by our prior active students. Noting that it's only 21st of February, and that still needs another 6 weeks, 5 weeks to play out before the end of March where we know the full extent of those students that have come back. So that's looking very promising. In terms of new students, we are seeing very significant demand for our services in the market. There is nothing to indicate any reduction. If anything, there's been a further acceleration in the demand. Greg, anything you'd like to add?

The only thing I would add is what we're seeing in the current quarter 2 is that the CAC metric to acquire an increasing number of students is holding or, if not, better, than where it's been in the past. So not only is the market bigger, we can still recruit those students at the same CAC or lower.

And then is that inclusive of a higher brand marketing spend?

Yes, it is.

This quarter is a strong brand quarter for us because we do strong in TV advertising at the moment.

And in the first half, it kind of averaged around that 20% range-ish. Is it expected to pick up in that second half now?

We've been maintaining at around the 20%, 25%. There was obviously a big push on brand in the lead up to the peak enrollment period in Jan, Feb, March. I think we'll pull back somewhat in April, May and June, but then it will likely pick up again in the lead up to the second half of the academic year, so July, August.

Which is again a peak in enrollment.

Yes. I don't think we'll see it exceeding 25% of our overall investment there in media spend.

One. And just thinking about in the past, you guys have disclosed the guidance around free cash flow breakeven on a monthly basis in FY '23 on a full year basis in FY '24. I couldn't see that in today's announcement. Has that been -- has that changed? Or is that still the expectation within the company?

Look, that's still the expectation. As you're aware, one of the things we're constantly weighing up is the rate of growth in the business versus cash flow breakeven. So what I mean by that is we can invest more money in acquisition of students and we incur that cost in month 1. On average, it takes us 6 to 9 months to earn that cash back. So what we've always done is we've looked at what the -- what we can recruit students for at what CAC? And if there's an opportunity to get that at a lower CAC, we will go after it. But if we see strong growth, it will push out that cash flow breakeven. So at the moment, no change to what we've previously said. We are focused on achieving -- we will get some months of cash flow positive in FY '23 and on track to get full year cash flow breakeven for FY '24.

And sorry, just a last one for me. Just around the entrance into New Zealand. As a market I don't know too well. It sounds like it's going -- early doors are going pretty well. Can you just maybe give, if we fast forward 12 months, what's the revenue expectation from that region?

So our sense is that ultimately, New Zealand will represent proportionately to the population in Australia. So likely over the next year or 18 months, we will get up to 12%, 15%, 18% of our enrollments -- new enrollments coming from New Zealand. It will take time for them to obviously to constitute that percentage of our active students because we started with a very large active base of Australian students. But our sense is it's going to be 15%, 16%, 17%. That's what it's going to come as we scale it up.

How many shoes do you have? What's the CAC? Is the CAC more favorable in New Zealand? Or is it broadly same?

It's as good, if not, better. But we just need to be aware that we're still in early stage testing. So our pricing hasn't been finalized in New Zealand. We're running a number of pricing tests. So it's interesting, the challenge, if you bring a price down, your CAC tends to drop. And if you bring the price back, the CAC continues to rise. So we're currently selling in New Zealand at $70 for the one-to-one service. We need to bring that price up and see what happens. So -- but the CAC at $70 is marginally better than it is in Australia, which is great because when you enter a new market, you normally tend to find a higher CAC as you work your way through optimization. But we hit the ground running pretty strong in New Zealand. We just haven't accelerated yet on volume until the final changes to our currency billing system is complete in the first 10 days of March. Then we can go hard. Mel, are there any other questions?

Mark, there are no other questions at this moment. [Operator Instructions] Mark, that is likely the end of the questions being asked today. I'll pass back to you.

Thank you, everybody, and thank you for your time. Greg and I will be busy most of this week doing investor presentations to our shareholders. And thank you to those of you who are shareholders for your continued support of the company. We're now going to leave because we are in a very busy enrollment period, and we have to go back and run the business for the next 3 or 4 hours before our next session. So thank you very much.