Datalex plc (DLE) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to Datalex' financial results for the first half of 2022. Welcome -- I'd like to welcome you all to the call. Just to note that today's presentation contains forward-looking statements, which reflect management's expectations based on currently available data. Actual results may differ from the projections, and the company undertakes no obligation to update any of these statements. And with that, I'd like to hand over to Sean Corkery, CEO.

Good afternoon, everyone, and thanks for taking the time and your attendance. Three distinct announcements today. One, the one that we're most happy with is the announcement of the acquisition of easyJet as a new customer, very, very large airline, bring this into the low-cost segment, and they're taking a full suite of products, and we're very, very happy as an enterprise software company to be able to deliver our products to such a stellar branded airline. Secondly, we're announcing our H1 results. I think that gives full context in terms of numbers we can talk about. And third, we're giving some guidance on the second half of the year, which is obviously very difficult, as the world continues to live with the aftermath of COVID and some overhang. But we've attempted to do that again to give some balance in terms of numbers and to be able to talk about them. If I could start with the H1 results, they're disappointing in one aspect, understandable. And another, it's suffered from overhang in terms of COVID from a China point of view, on the one hand, where a lot of our transaction revenues come from. And they were pretty much locked down for the first 6 months of the year, continue to be in a full alert form, but we expect it to get a bit better in the second half. In general, today, it probably averaged about 25% in terms of their traffic against 2019 in the first 6 months of the year. Secondly and probably contrastingly, we suffered a little bit from the upside of travel. So in the first 6 months of the year, where clearly in the U.S. and in Europe, in particular, people got back to travel. Despite difficulties, there was an unsalable demand for travel, which, of course, caused many operational issues that we're all very well aware of. And where airlines obviously focus on those operational issues and could not take on really any change beyond trying to bring stability into their operational areas. And obviously, want to do is just around systems and the whole areas of bookings and pricing and offered it to the part of the business that we do, and therefore, that kind of need for stability, I guess, and fixing operational need pushed against, I guess, changes of implementing new software, which affected our services business. So they're kind of the 2 headlines. They are not things that are going to last forever, but it did last during that period of time, which is the 6 months of this year, and we just have to react to it. Despite that, we continue to make very good progress in customer implementations, 2 in the new ones, particularly in terms of Virgin Australia; and the second one in terms of an NDC project that was put on hold during COVID, which we activated during this time frame and we'll [indiscernible] in terms of future quarters. Secondly, we continue to invest in our products, which we got the attention of our customers and potential customers, one of which came to fruition in terms of our easyJet announcement this morning. And specifically, we launched Pricing AI as a product during the 6-month period. We continue to get a lot of traction on it. And we're in the process of completing our second full pilot and having completed one already with a Tier 1 airline. We're now completing a second one with Tier 2 airline. And finally, we did invest from an OpEx point of view in the process of really processing the interest that's out there in terms of our new products, as it turns out in terms of RFPs and general tenders that we have. We continue to have a very strong pipeline, and we invested in that area. And obviously, some of that has come to fruition with the easyJet win. And of course, we're very, very happy with the momentum that the easyJet announcement will give to our existing customers, to ourselves in terms of verification and validation of what we do is in the ballpark of what customers are looking for and validation that in translating our platform into product that we now have something that really is of interest to airlines, who are trying to find a balance between transformation on the one hand and operational stability on the other. And what we offer, which, if you look at easyJet, is bolting on our capability to some of their existing systems, which kind of matches that transformation with stability and not changing everything at one point in time. So that really is an introduction to the last 6 months. I'm going to hand over to Dan Creedon, our CFO, who's going to go through some of the specifics around the numbers.

Thanks, Sean. As Sean said, the first half of the year, we saw some what we believe to be relatively short-term factors affecting our numbers compared to last year. And we saw that, first of all, in terms of revenue, where revenue came in at $10.4 million. That was down over $2 million from last year, down 17%. Two major factors, we'll talk a bit more in a minute, lower services revenue, again driven by the absolute need for airlines to focus on their operational priorities of getting claims back in the air. And then secondly, China and that was severely affected by COVID. Those lower revenues fed through into gross margin, which came in at 30% compared to 53% last year. There were some one-off factors in gross margin and indeed, an operating cost last year that benefited last year. And if I look at the operating cost line, it's 13% up in totality. But if we take out the one-off factors from last year, actually, the cost base was slightly down this year versus last. So what we've tried to do is manage costs very, very carefully while at the same time being confident in first half that we were likely to win a major customer and would need to swing into implementation and delivery very, very quickly. So we struck a very careful balance in terms of protecting the core organizational capability and then being ready when we won the customer, and we're delighted to say that that's come together. And we've welcomed easyJet, and we can now move forward into the second half confidently in terms of our ability to get started on the delivery. So that was a balance that we struck. EBITDA came in at minus $2.1 million. That was down from last year. Again, the $2 million revenue shortfall fed down there. On the positive side, outstanding debt ended up at $1.3 million, very, very low, primarily leasing. This time last year, outstanding debt was $20.2 million. That was just prior to the successful fundraise that we did at that point, and cash came in at $2.7 million. That compares to $2.4 million this time last year but also compares to $8.3 million coming into the year. So let's drill down a bit into revenue and gross margin. We talked about the key factors and the results being a 17% decline, lower services revenues. We saw that quite a lot in terms of airlines focusing on their core knitting. We think that demand is there. The level of interest is still high. The focus on digital remains very high in airlines. So we think this is not necessarily a business loss, but business deferred, and we are reflecting some of that in the second half of the year. Hopefully, as we said, China will continue to improve. And as Sean said, our implementation with Virgin Australia is going well. Gross margin, again, primarily impacted by the decline in revenues. So revenue has been down 2.2%. Our cost base tends to be relatively fixed with the exception of major implementations. Last year did benefit from a couple of big one-off factors, which were about $1.8 million. So we have to bear that in mind in terms of the comparison, the biggest one being the supplier and credit -- the one-off supplier credit that we got in H1 of 2021. And then looking at our cost structure, like I said, on a headline basis, costs grew by 13%, but there were $1.8 million of costs related to the supplier credit and a bit of employee wage subsidy last year. If we exclude that, one-off factor costs are actually slightly down. However, at the same time, what we managed was extra investment in sales and marketing by making savings elsewhere. And our focus in terms of the cost base now over the next 18 to 24 months will be to drive out good scaling in terms of our costs. So as our new implementation start to bear fruit and add to the top line, we'll be looking to scale our cost base very, very effectively. And EBITDA, as I said, minus $2.1 million and those one-off factors benefited last year. And then we'll talk about cash. Like we said, $2.7 million was where we ended the half year, up versus this time last year, but down versus the start of the year. And we knew that this was going to be a year of cash consumption, particularly given by the implementations that we were doing and the investments in terms of Pricing AI. We believe that protecting the organization capability, continuing to invest in products, continuing to invest in sales and marketing would yield significant benefits in the medium to long term, starting with customer wins. And we're delighted that we've got another one now with Virgin Australia in December, easyJet in the last day or so. And there's a good solid pipeline. So we should be in a good shape in terms of continuing to go chase opportunities but also very, very importantly, to deliver against those implementations. And that's a key focus for us. We think we're very well positioned in terms of easyJet. We've done a lot of work upfront. And today, we get started on that journey. So that's basically the story in terms of cash. And then on borrowings, like I said, very, very little borrowings at this point in time. So Sean, I'll hand it back to you in terms of some of the other key factors that we want to talk about.

Yes. Look, let me wrap it up here. But the numbers won't tell the full story. We feel that there was a period of steady progress. We've signed easyJet as a new customer. And we're really, really happy that it's in a new sector, as I mentioned earlier, in the low-cost side, very fast-growing opportunity for them, opportunity for us. We're very happy in terms of the contract brings us into a transaction model, which is important as the airlines industry grow back again. And we're very happy that it covers our full suite of products, not just one but many. And obviously, we can't get into the specifics of the contract, but suffice to say that we're very happy with it and very confident we're going to do a very fine job for easyJet, and we've already started in the execution of that project. And we're very happy with, obviously, customers that we've already signed, including Virgin Australia, in terms of the progress we've made and the execution of where that is at, at this point in time and how it ties into future transactions, likewise with NDC and the work we've done there and with the carrier that we started on that program and the launch in the second half of the year. And we're very happy with Datalex Pricing. We're not announcing a new customer on Datalex Pricing today, but we know we're very close. The complements and the testing more importantly, and the piloting of that product continues to tell us that we're onto something and we have a solution for airlines that they're looking for. And these things take time, particularly in a time of turbulence. There's only so much time for testing and review of new things, but it will have its day. Moving on. That all wraps up to say that we are going to have a much better second half of the year. Particularly from a revenue point of view, you'll see a distinct step-up in the revenue in the second half of the year, up by 50%, nearly off a very low base. Obviously, EBITDA will trail that somewhat as we make investments in new implementation. So we've given the range there. Built into that guidance is obviously some recovery in China, certainly not back to any kind of pre-COVID numbers, but some improvements, which we're expecting in the second half and obviously some new transactions coming on board from some other customers that I talked about in the implementation phase. We're also have been given clear instruction in terms of our Board, in terms of looking at the funding requirements to funds what's in front of us, you can't see it, we can. You can only base your analysis of actual announcements. We have to make some planning based on a pipeline that there's high probability in. And so therefore, it is no question that we're moving to a good phase, and we will need some working capital to do that. And the Board has asked us to look at various alternatives, including, obviously, using some methodologies that have been used in the past and expanding that out to other optionality that we can consider. And we've taken that on board and we've been working on that pronto in the next couple of months. So with that, on a very good day, in terms of future bound, on a reflective day in terms of numbers for the last 6 months, that reminds us that the world is still not back in full order. And I'll pass over to Neil to bring this call to a conclusion. Is it open to questions or not? Okay. So I think we're at the conclusion point. Anything else we want to say?

No. That ends the call. Thanks very much for your attendance.

Thank you.

Thank you.