Connexion Mobility Ltd (CXZ) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to our Q1 FY '27 quarterly update. Thanks for joining us today. We are joined by our CFO, Ben Stanyer. And today, we'll step you through our quarterly earnings report, some of the key changes in our -- the sources of our revenue and earnings, key financials, and of course, take time for Q&A at the end of the session. [Operator Instructions] So turning to our first slide. In the quarter, we achieved record revenue as a group, and it was our first full quarter from Connexion Automotive. So total group revenue was USD 3.8 million, which was an increase of 14% on the quarter. And we achieved net profit before tax of $1.2 million and ended with net cash investments of USD 4 million. Post quarter end, we also announced to the ASX, our appointment as the exclusive software supplier to Hyundai's dealer lot management platform. Here we can see a recent historical trend on a quarterly basis and you can see more clearly from this chart, the recent contribution of the Connexion Automotive business, which was seeded by our acquisition in May of Hallam Road Automotive. And so you can also see the slight improvement in the net cash investments performance. So in aggregate, operating revenue rose 14% on the quarter. And $3.16 million of this was Software and the balance was Automotive and Investment Income. So looking at that revenue mix in a little more detail. We can see 19% of our revenue came from our Connexion Automotive business with the balance from Software with a typical split that you will be familiar with from quarters' past between Software services, fixed dollar SaaS revenue, and subscription-based SaaS revenue. I'll hand over to Ben to comment on our earnings and key financial metrics.

Thank you, Aaryn, and hi, everyone. For those of you that don't know me, my name is Ben Stanyer, and I'm the CFO at Connexion Mobility. Thank you all for joining the call today. As always, all figures are in U.S. dollars and remain unaudited. As Aaryn mentioned, this was our first full quarter as a diversified automotive software and automotive services company with Connexion Automotive for all 3 months, which is slightly different to the Q4 quarterly update. So I'll start my finance section a little bit different or a little bit unusual as quarterly reports have gone in the past and instead highlight the 3 earnings streams and how the contribution of each impacts our net profit before tax. So Connexion Software, our core, contributed $0.78 million. Connexion Automotive contributed $0.25 million in its first whole quarter, a 33% gross margin on $0.75 million of revenue. And as Aaryn mentioned, our net cash and investments contributed $0.14 million impact to our earnings. So as previously mentioned, our long-term objective remains the same. So it is to improve the size, sustainability, and diversification of our earnings per share. So this quarter is the clearest illustration of that to-date. So with all 3 streams contributing to profit with the Automotive part of the business, adding a meaningful source of Australian dollar earnings alongside our U.S. dollar Software business. So this really adds into the diversification, not only from a customer but also from an FX perspective as well. And then moving on, looking at our 5 quarters of key metrics. So the growth in revenue, the growth in net profit before tax, both are mainly attributable to the first full quarter of the Automotive earnings from Hallam Road Automotive alongside the continued growth in our Software business. A couple of the main metrics to touch on in this quarter. So diluted EPS for the quarter was USD 0.117, so up 20% on the previous quarter. So as a reminder, this calculation takes our quarterly net profit before tax, applies an assumed effective tax rate to estimate our net profit after tax, and then divide that by the time weighted average diluted share count for the period. So the 20% increase in our EPS relates to the 9% increase to our net profit before tax, but also benefiting from the meaningful shares that were purchased and canceled in FY '26. So we will continue to see those positive effects go through while they were meaningful last year. We've really seen a benefit in FY '27 and beyond. The next metric, just to touch on, is the operating cash flow. So for the quarter, it was $0.1 million for the quarter, down from $0.9 million in Q4. And this primarily relates just due to timing. A portion of that was due to some GM receipts, which is a standard, ordinary part of business, which no invoices remain outstanding as of today. It was just a timing issue and a Q4 R&D tax credit, which is not recurring. And this happens every year in Q4, we see a bit of a spike with that R&D tax credit. So both the operating cash flow and the diluted EPS, they are in line with our expectations. So our -- and then touching on our Software only recurring metrics. So the AMRR and customer diversification, AMRR. So that is just a software business only. So AMRR grew 1% to $11.8 million, while customer diversification held at $1.3 million. So that is it from my finance update. So as always, happy to answer any questions in the Q&A section. But for now I will pass it back to Aaryn.

Thank you very much, Ben. Looking at our Software business. So it's business as usual there, we continue to deepen our relationship with GM. And we recently were able to announce our second major OEM appointment. So regarding General Motors U.S., as we've mentioned before, we're in the renewal period. So our current agreement runs through to 31 December as their contract renewal process is underway. In Canada, our operations there's in a steady state. So we managing their EEP, which is -- stands for Enhanced Exposure Program, which is their equivalent of the Courtesy Transportation Program that runs in the U.S. and we've received some good feedback on a couple of new features that we've launched recently there with Hyundai Motor America, pleased to make that announcement. So work is underway, and we're targeting a launch early next year. And of course, we are also in other discussions with OEMs. However, nothing can be shared at this stage. On the product side, continuing to deliver product capabilities. So this is a steady stream of product capabilities that are released each quarter, pleasingly, with no production rollbacks, so good quality operation there and marketplace subscriptions continued to grow through the quarter. On the Automotive side of the business, so we enjoyed the first full quarter of performance. Trading was generally in line with our expectation, although softer late in the quarter. The weakness in revenue, we see as being the function of the market. So in Automotive services in Australia, we have seen recent weakness. Hallam Road has also been weaker towards the end of the quarter, nothing we're particularly concerned by given it appears to be in line with market. Margins remain strong. So we're pleased with that. And ultimately, at this very early stage, we are really focused on the quality of the business and continuing that transition. So working closely with the founder, Elie Chakkour, as he continues his transition with us. Capital management. So we ended the quarter in a strong position, so USD 4 million of net cash and investments at the end of the quarter. So that takes into account cash less any debt and also includes our portfolio of managed funds and our Covertrue stake. It does not include Hallam Road Automotive stake. The earnings from that balance sheet were stronger this quarter than they have been in the past couple of quarters and much of that was driven by our equity stake in Covertrue, which has seen a resumption in positive performance. We did not repurchase any shares during the quarter. We've been in blackout for that period. So in total, since inception, we've repurchased $352 million shares at an average of AUD 0.022 per share, but no shares repurchased during the quarter. We are continuing to source and assess M&A targets, particularly in that Connexion Automotive side of our business. And to our outlook. So we now have clear 3 sources of earnings contributing to our group profitability. So on the Software side, naturally, we're laser-focused on the GM U.S. renewal period. And, of course, executing for Hyundai's lot management program. On the Automotive side, very much focused on improving the quality of the business and with a particular focus on the customer experience. So working on ways that we can accelerate Hallam Road's adoption of technology in pursuit of an improved customer experience. And then on the capital management side of things, continued with that disciplined capital allocation strategy that we've executed in the past. So no changes there. And again, actively sourcing and assessing M&A targets. So with that, we will turn to Q&A.

Let's have a look. We have a few questions here. So the first one, what is your level of confidence regarding the renewal of the GM contract in the U.S? Again, we faced this question each quarter, unfortunately, due to the significance of the contract, the materiality to Connexion, it's really not one that we can give any indication or commentary on all that we can say is our working relationship with GM continues. It's a relationship that we've been very pleased with to-date, and we're proceeding through the standard renewal process. The second question, how are we approaching the Hyundai contract in terms of the conversion process? Do we need to increase our sales team to facilitate the growth? So our contract with Hyundai for dealer lot management involves a fee to Connexion for the design, build, and maintenance of the software. There is a separate fee that aligns us with dealer adoption. However, we are not responsible for the sale of the product to the dealer. So we won't be resourcing field team to sell the product. That will be on to Hyundai to execute that go-to-market, but we do face adoption risk. So we're paid for the design, build, delivery of the product. But ultimately, the success of the program will depend upon dealership adoption, which is Hyundai's responsibility to deliver. So we'll be doing everything we can to support Hyundai's efforts in that regard. Next question, can we outline how we are thinking of the Hallam Road Automotive acquisition? And is there likely to be similar acquisitions of this type assuming the metrics meet your milestones? So yes, Hallam Road was executed with a plan to build an automotive services business. So the intention is not to have a single location, but to have multiple locations. We are cognizant that this is the very beginning of our journey in this area. So we need to take a measured approach. We've begun with Hallam Road Automotive and it's really incumbent upon us to learn the business and to demonstrate that we are a safe custodian for this type of business and that we can execute on, essentially, the theory that we've developed as to why we would be a good operator for these businesses. So the summary there is that the end customer for an Automotive service business is substantially the same as the end customer in our Connexion Software business. So it's an individual who is looking after their vehicle, taking their vehicle in for service. And they do so through a workshop. So on the Software side of our business, we work with the workshops within a franchise dealer. And with Connexion Automotive, we own the workshop [ coverage ]. So we do have a preexisting familiarity with this type of business and the belief that we'll be a better operator by being a supplier to the industry and a better supplier to the industry by being an operator. We are actively looking at M&A targets. Of course, we can't promise that we will find any that that meet our criteria or that we'll be able to execute, but of course, we'll be doing our best. Any comments on the moats to your customer relationships and the risk of in-house AI-generated software being implemented by those customers? Okay. So question refers to the Connexion Software business and the risk of being disrupted by AI. So short answer is yes, every software company is at risk of being disrupted by in-house use of AI. What we can say is that so far, we have not seen any evidence of the business units that we deal with, having the capability of building software. So regardless of having access to agentic AI tooling, we have not seen any indication of an ability or risk appetite for these business units to undertake that initiative themselves. We also see with this type of customer being enterprise-level automotive and generally conservative approach to risk management, which also plays in our favor. But, yes. Certainly, it's -- as a software company in general, we face the same risks as every other software company in that regard. It also goes without saying that we are heavy users of AI internally as well. So that would be the other consideration, is do we have a better ability of using AI ourselves compared with and, in this case, automotive business using AI. So our contention is that our software engineers are better positioned to leverage AI than our customers. Next question, can we briefly describe the typical seasonality for Hallam Road and also explain what you believes to be the driver behind Hallam Road typical revenue per store? So regarding seasonality, that's a good question. We had some thoughts on what that seasonality should be. We haven't seen clear evidence that we can sort of rely upon. So we can't actually -- we can't give you any reliable seasonality response. What we can say is that businesses of this nature do experience fluctuations in their revenue. Some of those fluctuations can be significant. But it's just part and parcel of operating these businesses. For example, we also, on the Covertrue side, so that the fleet wrapping business that we own, we saw 6 months ago, a severe reduction in revenue for a brief period of time that was largely unexplained and has since bounced back. So it's certainly something for shareholders to be mindful of, is the stability of revenue that we enjoy on the software side of the business will not be replicated on the Connexion Automotive side of the business. In terms of Hallam Road's typical revenue, it's driven by a fairly even split of retail and fleet automotive service repair. So Hallam Road services, local fleet owners. So there's local businesses for the most part that have fleets of vehicles that need to be service. So it's a mechanical service and repair as opposed to body shop. We are not in the business of panel repairs or body shop work. So we have a split between retail customers and fleet customers. Some of those fleet customers or commercial customers include local franchise dealers as well. Does the political cycle ad campaign impact revenue for Covertrue? How do you market the services of Liberty Signs to potential customers? What is the length of the sales cycle for this business? Interesting question. So a few questions in one. Regarding political cycle campaigns, don't believe that has an impact or a direct impact on the Covertrue Group. We certainly haven't had any discussion within that business regarding political ad cycle. The business is exposed to marketing, to commercial marketing budgets. It is exposed to the broader economy. So where there is general weakness in the economy, there will be weakness in the Covertrue business. So it has that exposure there. Just not directly tied to political cycle. As for how we market the services of Liberty Signs. So to be clear Connexion is not operating that business. So we are a passive equity owner. Covertrue has its -- Covertrue itself as a group and Liberty Signs is its own operating business with its own team. Liberty Signs markets to customers in a handful of different ways. So Liberty Signs has commercial fleet customers. And so these are marketed to trade events, marketed to directly. So there's typically longer sales cycles where fleet manager might put out an RFP request for proposal and they might do that every year or every few years. So there's a longer cycle there, and that's handled by account executives. Liberty Signs also owns a business called 1daywraps and has recently acquired another business called Sign Up Fleet, and that's more of a direct to retail business. So Facebook ads, for example, for 1daywraps. So a little like Hallam Road in that they have both retail and commercial customers. But Liberty Signs' bread and butter is national fleets that typically have a longer sales cycle. Next question, what is the financial incentive for Hyundai dealers adopting the lot management software product. So Hyundai dealer, I mean, the short answer is this is being worked out. It's not actually set. It's certainly not public. So there's really not much at all that we can comment on at this early stage. What we can shares is it's a paid software product. So it is expected that the dealer will be paying for the product as opposed to being paid to use it. There are a number of benefits that will be marketed to the dealers as to why they should purchase the product from an OEM standpoint. One of the benefits to the OEM is quality control. So ensuring that customers are not put into vehicles that have pre-existing issues. So for example, if you have a vehicle on a lot and you're showing a customer around, perhaps putting them in for a test drive, you don't want to put the customer into a vehicle that has a flat battery or flat tires or a check engine light, for example. So that quality control is important to the OEM. It's also important to the dealership. The software also allows sales staff to accurately locate -- by visual management, to locate the vehicle on the lot. Keep in mind that a lot of these dealerships are quite large. So certainly, on average, dealerships in America are physically a lot larger than the dealerships we're used to in Australia. So locating a vehicle is not necessarily an easy task. They can then also make use of the remote commands that come with Hyundai's connected car technology. So the lot attendants can remotely access the vehicles. Lock, unlock, flash the lights, turn the vehicle on, get the aircon going, get the heating going in summer and winter. They can issue bulk commands for the vehicle so they can lock all the vehicles at night, disable all the engines, open them up in the morning, that sort of thing. But I'm sure we'll have plenty of marketing material that we can hand, that we can share with you early next year. Next question, when do we expect Hyundai revenue to begin first billing? That's a good question for Ben.

Yes. Thank you, Aaryn, and great question. So as we mentioned previously, the Hyundai lot management essentially has 2 parts. One is the build aspect and the second being the usage, which is the typical subscription as the launch is expected in the early 2027. The build would naturally happen before the launch. So that is the aim, to launch in early 2027, but there are quite a few moving pieces around the exact timing of which month, but that's as much insight as we have today.

Thank you, Ben. Next question. Our software business is primarily U.S.-focused and optimized for the U.S. as new car makers enter Australia, is there scope long-term to target dealers in Australia? Or is it too different of a market to target? Good question. One that we have given some thought to, naturally, as you would hope. We don't have any short-term plans, that's for sure. I'd border on saying we probably don't have any medium-term plans either. Long term, yes, that's -- that would be an ideal situation for us, but no imminent plan. So one thing to keep in mind, in Australia, the market is very different to the U.S. as many of us would have seen, we've had a surge in increase in a number of OEMs in Australia. So Australia actually has considerably more OEMs participating than the U.S. does. So the U.S., total size of their consumer market is 10x that of Australia. But despite that, in the U.S., there are a fewer OEMs than they are -- not sure if I said that right. In the U.S., there are a fewer OEMs than there are in Australia. And the number of OEMs entering Australia is continuing to rise. Clearly, it's not sustainable long term. So it's going to be considerable churn of OEMs in Australia. The dealership market is also not as fragmented in Australia as it is in the U.S. So in Australia, there are 2 or 3 very large groups as a percentage of the market and a large number of small OEMs. So the balance of power really sits more with the dealer in Australia relative to where the balance of power sits in the U.S. Our business model is more OEM-focused than dealer-focused. So we do not have a field team or a sales team that's out there knocking on doors at a dealership level. Our sales are really direct to OEM. But we currently don't see an opportunity for us targeting OEMs in Australia in the short term. Naturally, we are focused on growing our sales in the U.S. So it's -- a lot of it's about focus for us as well. I believe that's all the questions at this stage. Just double check. Okay. So without further ado, we'll leave it there for today. You have my e-mail address, so if any further questions come to mind, please, and I'm happy to address any questions as they come. Thanks again for your time, and we look forward to seeing you at the next quarterly update. Thanks again. Take care, everyone.

The last question for those still here. Thanks, guys, really appreciate these presentations. No worries. Thank you, everyone. Bye.