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

Good morning, everybody, and thank you for attending today's presentation. Today, I'll be presenting the introduction, followed by Matteo Trinca, one of our joint CEOs, will be talking you through the detailed KPIs and performance update on the business. And then I'll hand over to Greg Fordred, our CFO, who will walk you through the capital raise that was announced recently. So, let's get straight into it. And obviously, feel free to post any questions in the chat box, and we'll try and deal with those either as the presentation goes or straight after the presentation, we'll open up the Q&A. So today, what we'll be doing is covering off a brief recap of the progress we've made over the last 18 months in the business. We'll spend quite a bit of time talking about where the business is at and what -- where it's headed and what -- where it needs to be and why the business is now ready to start the process of rescaling as we move closer and closer to profitability. And then we'll cross over to the recent capital raise and the deployment of the capital to fund the growth of the business. I thought it would be a good idea for me to just take you through a recap of where the business has come from and where we find ourselves today. And please note, this is done in calendar years rather than in financial years. It's easier to understand that narrative given that the calendar years correlate to the academic years and the cycle -- the natural cycle of the business. So, if we go back to calendar year 2022, up until that point, we were in hyper-growth mode. We were seeing the business grow exponentially. And there was a clear plan to continue to scale the business through to the point where we reach profitability. And in mid-2022, there was a shift in sentiment, certainly a shift in the capital markets where there was this need for us to pivot the business from hyper growth to becoming profitable. And this meant that we need to be direct how we're growing the business, where we had to reduce our overheads, look at cutting back on our investments in marketing and sales, trying to get all our key metrics to perform better to increase our customer yield and really the essence of it was to reduce our cash burn. So in calendar year 2023, we started the first phase of our business restructure. And we moved from a peak of around 236 full-time employees in July 2022, down to 128 full-time employees in December '23. We did a lot of work to reduce our head office costs and overheads. We reduced our marketing spend by 21%. And most importantly, we released a whole range of new products and tech improvements that were designed to enable full sale service across our tutor and student parent interactions, which meant that we could reduce the number of full-time employees that were required to support the business in a pure support function by customer support and tutor support. That enabled us to reduce our cash burn down to $14.9 million, which was a 21% improvement and we reduced our EBITDA loss down by 35%. At the beginning of 2024, we embarked on the second phase of our business restructure. We reduced our FTEs further from 128 down to 111. We reduced our marketing spend further from $10.3 million down to [ $3.9 million ] run rate at the moment for calendar year '24. We reduced our total expenses by 27%. And as a result, in Q4, FY '24, the most recent quarter, we achieved the lowest ever quarterly cash burn down to $1.3 million, which was a 68% improvement on the prior corresponding period and our EBITDA loss -- underlying EBITDA loss was reduced to $0.9 million, a 65% improvement on the prior corresponding period. As we now focus on FY '25, we have got the business to the point where all our key performance indicators and our important metrics are all headed in the right direction. Every new student we add to our business adds a significant percentage to profitability and we are ready to grow again. And in fact, that shift back to growth has already commenced off a much lower cost base with a significantly reduced customer acquisition cost. So, we've established the right strategy for the business to grow again and achieve profitability. We've put in place a new organizational structure to support that. And as a result of that, we decided to bring in an additional $4.5 million of additional headroom on our balance sheet to support that clear pathway to profitability. I'm going to hand over to Matteo, who will take you through some of the key performance indicators, so you can see exactly where the business is at and how we're tracking. Over to you, Matteo.

Thank you, Mark, and good morning, everybody. So, I'm going to go through the details of our performance. The framing that I'm going to be using is the one the Mark set up at the beginning of the introduction, which is over the course of the 6 years since inception, we really worked through 2 phases, the upper growth phase, which ended around the FY '23 financial year. And then the last 18 months, which have been more focused on driving the business to profitability. So, I'll provide the details in that context. So, what you see on this slide now, it is the group FTEs. In -- around the July '22, we reached an all-time high for our revenue performance, but also an all-time high from a cost performance and FTE performance. So, the number of FTEs that we had in July '22 was just above 230. And if you exclude the U.K., which is a new business for us, it wasn't there in 2022, the reduction that has taken place on a like-for-like basis, it is around the 60% mark. The reduction of FTEs has happened throughout the organization. Main drivers of that have enabled us to do this reduction without sacrificing the customer experience, without sacrificing our performance has been enabled by a decent investment in product and tech over the last 2, 3 years that have introduced a complete new customer hub for our customers to control their service and to have more self-service features and optionalities as well as a reduction in the executive team as well as a large optimization within our processes and also within functions that are now fully shared across all our distribution channels and business units. This view shows you the 2 phases of the business very clearly. The first phase from inception to FY '23 with the increase in cost, both from a head office point of view, but also direct cost. This growth is very much in line with the revenue growth that we have experienced throughout those 5 financial years. But in the last financial year, we've been working very hard to reduce our total overheads. The net reduction that you can see there from FY '23 to FY '24, it is roughly $14 million, but some restructure has taken place during the course of FY '24. And our run rate forward on total overheads, it is now down to $21 million. So, from our all-time high of almost $41 million, we have shaved $20 million of cost. A large contributor to the reduction of costs, especially when it comes to the component of direct costs, it is how much we're spending in marketing. And what you see on this graph is the group marketing CAC. This is how much we spend in media and sales to acquire a single new student into any of our business unit. The improvements that we made in the last 3 months -- in the last 3 quarters, sorry, are very important to drive the direct costs down to the levels that you've seen earlier in the previous slide. We've reduced it by 50% relative to the performance, the average performance that we were experiencing in the FY '23 year, even at the beginning of FY '24. The largest contributor to the reduction is the Cluey Learning business. The restructuring of the marketing team within the Cluey Learning business as well as leveraging cross-sell opportunities across all our different products has enabled us to really tap into larger efficiencies that are now coming through in a solid and consistent manner. This focus, the CAC remains absolutely our priority in terms of continuing to work to reduce it or to maintain it at that level and trying to make it around $100, $150 on an ongoing basis. The result of the group CAC improvement, it is this chart here that you can see, which shows the variable CAC as a percentage of revenue. When the business was in upper growth mode, we were investing up to 60% -- up to 70% of total net revenue as a percentage of the business in marketing and sales. Obviously, that will enable us to grow extremely fast with unbelievable growth rates in the first 5 financial years of our lifetime, but it was not sustainable and it needed to be addressed. And in the last 18 months, that's what we've been focusing on. The optimization in group marketing CAC has driven down the overall variable CAC as a percentage of revenue to where we believe is our sweet spot of 20% to 25% of net revenue. One thing to note on this is that the May '24 and June '24 periods have been inflated by the timing of the variable CAC for the winter holiday camps. The spend is incurred in the May and June periods, but the revenue are recognized in July. So, as we roll over into the following year, the CAC will benefit from spend that has incurred in this financial year. As well as the CAC, what we are also noticing and we can show here, it is the improvements in the LTV. So, the LTV is an estimate of future gross profit contribution that all of our students will make into the business and it is measured at a per student level. The improvements that you can see on that chart, especially in the last 3, 4, 5 quarters, have been driven by mainly 2 factors. The first one, the investment in product and tech that I mentioned earlier around introducing automations in introducing a new customer hub, introducing a new to the hub and a lot more controls and features for customers to have direct management of their service with Cluey. Have also enabled the service to be a lot smoother and less friction and has resolved a lot of the customer experience issues that we were experiencing way back in FY '22. The second reason is last year, around this time, we introduced new pricing plans, which incentivize customers to commit to the business for the longer term. That has benefits that drive more consistency to the relationship of the student and the tutors, which ultimately drive a better learning experience for the customer and ultimately drive a much better retention that is behind these numbers that you can see here in terms of LTV growing up. We're also noticing an increased session frequency also driven by the newly launched pricing plans. What you see here is our attempt to show you that the business is now in growth mode. Cutting cost, what we have done in the last 18 months would not be enough if we don't go back into positive growth. And we believe the business is on the verge of the next phase of growth. What you see on this chart is a new concept that we're introducing here in terms of data point, which is called the forward order book. This order book shows you -- this chart shows you the changes in net gains or net losses in that order book. The order book to give you an example on how it's calculated is, if I'm a new student and I joined Cluey and I sign up to a weekly enrollment, I will count as a plus 1. If I'm an existing student and I cancel my enrollment, that will be a minus 0.5. The net gain on that calculation would be a plus 0.5. So, what you see on this chart is the aggregate calculations across all our active customers, ins and outs that are coming in -- are going out of our Cluey active database in terms of sessions and their commitment to weekly sessions. So, as you can see on the chart, 2022 was a growth year. The net gain in weekly session was very positive, all the way from the beginning of Jan '22, and even the last few months of the year, like July and October '22 were very positive. That was our peak revenue year that's when also we were spending a large amount of money in marketing and sales to drive that growth. In 2023, as we initiated the restructure of the business from a -- not only from an internal processes point of view but also from an FTE point of view and as you've seen earlier in the reduction of marketing and sales investment, we have been going through a difficult year when it comes to growth. We've been declining. You can see in terms of net loss in weekly session that we've been experiencing throughout the year. However, since the beginning of this calendar year, January '24, we are consistently exceeding having a positive net gain in weekly sessions. We're building and growing the forward order book for the tutoring business. And in the July period, they were in, our growth continues to gain momentum and is above any of the numbers that you can see for the Jan to June period. The result of all of those changes that I've shown you just now in terms of the reduction in overheads, in terms of the improvements in group marketing CAC as well as the momentum that we can see in the top line revenue, the underlying EBITDA and the cash burn for the group have dramatically improved. What you see here on the left-hand side, the underlying EBITDA, on the right-hand side is the cash burn. We're showing you quarterly performance on either of those metrics for the last 3 financial years. It's quite separate territory, but you can see that the last quarter that we just finished in FY '24, our underlying EBITDA was less than minus $1 million, which is a drastic improvement not only to FY '23, but also to FY '22. So, now that we've done all the work to restructure the business and to really gear it towards the right path, profitability, we are starting to pay more time and more attention to the future. And some of the changes that we implemented to get the business to be more sustainable and geared towards the next phase of growth have come down to really understanding our core strategic levers and why we're well positioned to compete in this market and other markets outside of Australia. So, one of those changes has been a reframing of the business, moving away from the Cluey Learning and Code Camp frame to one that focuses on what we believe is our key advantage in the market, which is the ability to access our customers through different channels. The way we organize the business is around these different distribution channels. So, we have the online distribution channels, school and partnerships and events and experiences. Each one of those distribution channels allow us to access customers in a different way. And as you can see from the bottom of the slide, we're playing these distribution channels in a different way in the different markets that we're playing. So, Australia is benefiting from all 3, while New Zealand is only benefiting from the online distribution channel. We are in the U.K. with the schools and events and experiences channels. And we are in the process of finalizing an equity JV with a commercial partner that we had in Switzerland to expand the remit of the partner to go after and expand into Austria and Germany. The changes that we've just described in terms of the business units had to come through a different organization, a different look. So as I mentioned earlier, we have a much leaner executive team now with myself, Trevor and Greg, with the part-time support from Mark, especially dedicated to business development. All of the functions that we have in the business are now shared functions across all of our business units. There was a necessity to streamline our processes to create a consistent experience for our customers but also to reduce our overheads. Each one of the business units have a leader that is in there on a day-to-day basis to make sure that the functions that are dedicated to do the work for the their channel are aligned and synchronized for the right execution. The core opportunity when it comes to what we call internally Cluey 2.0, it is about creating a new and unified brand strategy that brings together the Code Camp and Cluey Learning into one new brand architecture. We're also keen to build a complete new digital experience that it will be a single experience for all our customers. And the opportunity also relies on our ability to expand the product offering to provide more to customers. The commercial opportunity here is that right now, today, we have a large number of active customers on a yearly basis that can only see through their experience one side of our product offering. They cannot come in, for example, if I'm a tutoring customer and I come into the customer hub, I do not have an easy access to where we're running our school programs or what kind of holiday camps we're running and it limits our ability to upsell and cross-sell. So, the opportunity here is that the 30,000 to 40,000 active customers that we serve every year across all of our Australian market and the New Zealand market can benefit from that unifying brand architecture, that single digital experience and that expanded product offering in order to find more opportunities to buy and fulfill their needs from us. The other channel that we are considering to introduce it is the retail. We would like to launch a retail learning center as part of the strategy. We believe that we're well positioned to take advantage of our existing infrastructure, especially when it comes to leveraging an hybrid teaching and learning model that can benefit from what we already built with the online business, but also what we can benefit from by having an offline present in a learning center. More details will follow here when we crystallize our plans. But as we discuss later, the raise that we gone to market with has a component that is going to fund this initiative. When it comes to where Cluey Ltd is playing globally, you can see it, obviously, we are well present in Australia and New Zealand, but we are also growing extremely fast in the U.K. with more than 100% growth year-on-year. And as I mentioned earlier, we're in the process of finalizing an equity JV with an existing partner that we had in Switzerland to give them the opportunity to launch our products into Germany and Austria. When it comes to AI, we've been very quick in adopting AI in the business as soon as December '22 happened with the latest -- the first release to the market of ChatGPT. We've really adopted AI in 3 phases. So, the first phase was very much focused on improving the productivity of our employees, enabling them to do things faster and better, but also taking advantage of an amazing technology that was enabling alignment and consistency across an organization that at the time was probably working remodeling. The second phase was about improving our services. So, we used to have experienced gaps that we work very hard through personnel deployment, but also, through manual work to fill in the best possible way. But this technology has made it possible to do it in a way that wasn't possible before. 6, 7 months ago, we released our first application using the right connection to OpenAI, which is when customer call us and have a conversation with a learning adviser to understand how Cluey can help whatever requirements they have for their children, they give us a lot of information that back in the days, the learning adviser used to take note and make available through the system to our tutors. And as you can imagine that process was extremely inconsistent because when you have 20 to 30 learning adviser, the ability to detect the important piece of information was challenging, but also from a total consumption point of view, this information would come in a consistent manner. It will come at a time of the enrollment, it will come after the enrollment and the tutors were doing their best to really be on top of those requirements. So, what we have introduced in November-December last year was the ability to record the calls, convert them into a transcript through prompt engineering and benefit of accessing the technology of OpenAI. We've been able to [ materialize ] this process to continuously and consistently extract the key pieces of information out of the conversation that parents have with learning advisers and make this information, these key elements of the conversation available to the tutors on their entry screen before any tutoring session. So, what that obtained for us was a lot better synchronization of the learning adviser conversation and the first session with the tutors meeting the students for the first time, but also has improved the handover from one tutor to the next in terms of understanding what the objective of the students based on the conversation that we have had with the parent are. And in the future, we are currently working on an upgrade to that feature, which is the ability for the parent to continuously give us inputs into the direction of the learning program that we are delivering for them through the customer hub. So, without talking to any agent, they can go into the hub. They will be able to go into the hub to provide details and all of that information will flow through into these consistent and concise screen with the key information per student that the tutors can access. The third phase is the one that we're about to enter, we have a beta version of a new product -- of new features that we're going to introduce within our customer hub. This new feature, it is dedicated to help senior students, year 10, 11, 12 in New South Wales towards their HSC exam prep. The features that we built will allow students as they work on their work book through their problems to take a screenshot, a picture of the workings. They can load it up on to our Cluey Virtual Tutor and they can be guided by our virtual tutor through the problem. Now, the question at this time would be what is the difference between the Cluey Virtual Tutor that we're going to offer to the version of ChatGPT or any other version that you can find out there. I think the main differences are 2. We have a lot of information about the students through the engagement that their student has across all our sessions and other touch points that can enrich the information that is given to the virtual tutor. But secondly, the instructions that we have given to the virtual tutor are instructions that will make the virtual tutor guide the students through the problem as opposed to dump the answer on to the students like, for example, ChatGPT would do. So, we're trying to use a different approach, which is very much like to the one of a real tutor. So, as you work through a problem, the tutor might not give you the full answer and give you the full details of the answer, but it would prompt the student to think about the next step in a way that the students can take advantage of and really have learning through that experience. So the product, as I mentioned, is currently in beta. We are projecting to release it in the next 2 months. So, more details will follow once we go to market with that. And finally, on to the question around how much AI will be present on our product. Our view internally is that there's benefits in having a combined approach of real tutors are people that work every day that meet our students every day powered by these amazing technology that's currently in market in the last 2 years, which is the ChatGPT, the OpenAI and all the other different similar LLMs that you can find in the market today. So, we believe that a combined approach is the best way for us to bring to life a highly personalized learning experience that our students are looking for. So, it's an exciting opportunity. And for us, our product which broadly happens online, it is an amazing ability to improve the experience that we can offer to our customers because we have so much data that we can then feed into this technology for the purpose of driving the personalization that it will be harder and more difficult to do if we were exclusively offline. Now, I'll hand it over to Greg to go through the capital raising details.

Thanks, Matteo, and good morning, everyone. As you've already heard from Mark and Matteo, implementing cost-saving initiatives in FY '23 and FY '24 and focusing on driving profitability has resulted in a significant improvement in group cash burn over the last 12 months or so as illustrated in the chart on this slide. In the most recent quarter, our cash burn reduced to $1.3 million, down from $2.2 million in the previous quarter and $4.1 million in the same quarter last financial year. With the cost-saving initiatives behind us, we are now focused on resuming revenue growth as the primary driver to achieving profitability and cash flow sustainability. Subject to achieving ongoing operating improvements, we expect to achieve breakeven during the second half of FY '25 and to be profitable thereafter. As at 30 June '24, we had $4.5 million cash in the bank, which using the ASX methodology equates to 4 quarters of cash available to fund the future operations. So, why the need to raise capital? The short answer is to strengthen our balance sheet, provide working capital and growth capital to invest in initiatives to accelerate our return to revenue growth. We're also impacted by intra-quarter working capital variances of around $1.5 million. This is primarily driven by seasonality and the impact of school holidays. As we approach the end of the academic year, we experienced year 12 students completing their tutoring with us ahead of their final exams in October. Other students will pause after the year-end exams and leading into the summer school holiday break. We therefore, thought it was prudent to raise around $4.5 million to fund our working capital and to invest in some growth initiatives as outlined by Matteo. The $4.5 million capital raise is fully underwritten with management and founders committing to $1.65 million of the raise. The capital raise is being undertaken as a fully underwritten 3 for 4 non-renounceable entitlement offer. This provides the opportunity for all shareholders as at the record date of Monday, the 29th of July to participate in the pro rata Entitlement Offer. Our share registry, Automic, will provide application forms to eligible shareholders shortly after the record date. The offer price of the Entitlement Offer is $0.03 per new share, representing a 15% discount to the 30-day volume-weighted average price. As already mentioned, the proceeds of this capital raise will be used to support working capital and targeted growth initiatives. Gleneagle is the lead underwriter of this offer. Gleneagle's underwriting commitment when combined with the firm in relief commitments from existing shareholders effectively results in the Entitlement Offer being fully underwritten. The record date for the Entitlement Offer is 7:00 p.m. on Monday, the 29th of July. Eligible shareholders will be sent an application form by Automic, Cluey share registry shortly after the record date. These application forms will also be available online by the Automic investor portal. You will also be able to accept your entitlement simply by transferring funds to be received before the offer closing time to Automic per the instructions in the application form. The Entitlement Offer opens on the 1st of August and closes on the 14th of August. Trading of the new shares is expected on the 22nd of August.

Thanks, Greg. Thanks, Matteo. I'm happy to open up for any questions.

At this stage, there's no questions that have come through yet. We'll wait a few seconds. If anybody would like to ask a question, please post it. Okay. I think there are no further questions. So thank you, everybody, for attending today's session. Thanks Matteo and Trevor -- Matteo and Greg and we look forward to catching up in due course. Thanks. Bye.

Thanks.