Eagle Eye Solutions Group PLC (EYE) Earnings Call Transcript & Summary

Welcome to our interim results presentation for the 6 months ended the 31st of December 2019. Hi, hello. So we're Eagle Eye. Welcome to our lockdown results presentation. Just as a reminder about the Eagle Eye business. Our role in this new and rapidly changing digital world is to transform marketing. That's the area of focus. And we do that by having 1 platform which enables companies to digitally connect to their customers. And we do that through things like promotions, loyalty, app, subscriptions and gift services. I'll talk more to that during this course of the presentation. What we are seeking to do is to enable businesses that have physical presence in the parlance omnichannel businesses to be digitally enabled and data-driven, like their pure-play rivals. I'm pleased to report that in the period, we have increased sales by 26% and made good progress on moving to positive adjusted EBITDA. I'm also pleased to report our first client win in the United States and in Australia, New Zealand. We've enjoyed significant volume growth in the period as clients have moved from development phase or trialing phase to going live on the platform. We've continued to invest in and develop the product. The pipeline of the business is growing with the big benefit that, that is now growing across multiple geographies. Half 2 has started in line with Board expectations. Clearly, we are impacted by COVID-19, not least the way we're doing this presentation. But we are a digital business. We are able to continue the business working from home, and that is what we are doing. We're well set up to facilitate remote working. And as yet, we have seen some, but minimal impact with regards to the virus, and we'll talk about that more in the presentation. I think it's worth reminding everybody of the enormous size of the market that we operate in. And of course, the new news is that we are now able to address that in more places. The industry is principally analog and needs and wants to go digital. In the time period that the business has remained analog, advertising has gone principally digital, more than half of advertising is now digital and over 1/3 of advertising is actually now by the mobile phone. Similarly, there's been a development in recent times of what are called audience networks. These are things which enable online businesses to, in a performance marketing way, target consumers and pay on the basis of the clients that they win. So a pure performance marketing model. The thing about all these developments in digital marketing is that they are really accessing consumers online and then driving them to online businesses. What that, of course, ignores is that 90% of sales is still completed in physical stores, and so there's a big gap. And one of the things, the major contribution that we make is to enable that sort of online to online marketing to now be brought to off-line businesses. And that really is Eagle Eye's unique contribution in improving the world of marketing. You can see from the slide there, the enormous size of these markets that we are operating in, and it's worth noting that a significant chunk of those values are actually contributed by the United States, which is far and away the largest market in these areas. I'm now going to move on to Lucy, who's going to talk through the financial performance.

Thank you, Tim. Good morning, everybody. I think in summary, we've had a strong first half. We've made good progress on all our KPIs, and I'll just take you through them now. So we've had revenue growth of 26%, going from GBP 10.1 million, delivering on our customer strategy, but also underpinning that growth, we've had AIR growth of 28%, which is now 95% of the business. Recurring revenue remains high at 73%, and we've had a fundamental shift in our adjusted EBITDA position. Half 1 '19 experienced an EBITDA loss of GBP 0.3 million. And for this half, we've reported GBP 1.3 million profit. Our churn remains very low, 0.3% of value. And if you couple that with our contract renewals, we're really demonstrating the stickiness of the Eagle Eye AIR platform. Our net debt was at GBP 2.2 million of a GBP 5 million facility. I'll take you through all the details of that in a couple of slides' time. And we also have shown good growth in the redemptions and volumes going through the platform at 81%. GBP 0.8 billion of transactions going through the platform at this stage. Okay. So the next slide is really a reminder of the business model, but also I wanted to demonstrate how it's moved Half 1 '19 to Half 1 '20. So one-off implementation fees remain around about 27% of the overall value, but has grown in value. And that really represents both new customer wins, but also our existing clients who have gone live still retaining us to do more services with them, which will open up sticky licensing transaction fees in future periods, which is good. The license and transactional fees have gone up a couple of percentage points, and have grown in value. And that really speaks to both the impact of new customers coming on to the platform and sort of stepping up both in terms of license and transaction, but also the existing clients that are on the platform, moving to the next stage of their contracts, particularly the Tier 1s where we're seeing that growth as well. SMS fees now is more proportion with the business, just 5%, have retained their value and therefore, are a lower percentage overall of the total value.

I think it's important to understand that. Because, in effect, that slide explains our COVID resiliency. If you can see the most immediately variable piece of the revenue is actually the transaction fees and the vast majority of those are actually with Tier 1 grocers. So the bit that is vulnerable is the bit that is with restaurants and brands trying to drive customers into on-trade facilities, which is about GBP 1 million of that GBP 3 million, probably slightly less. So you can see why we're saying that, clearly, the world is uncertain. But I think for the Eagle Eye business it's actually rather less uncertain than for many.

The next slide gives a little bit more color around interaction and redemption volumes. I explained upfront that we've had 81% growth in volumes, and this half demonstrating 0.8 billion transactions going through the platform. The graph on the right is giving you the color of that growth. So broken down by the different components of our revenue, gift, promotions, loyalty you can see the real growth in volumes come from our loyalty business, and that has been driven by big Tier 1 customers going live with their contracts in the period. So as we go forward in terms of Half 2, I'm expecting volume growth again, both from the annualization of these contracts that went live in the period, but also deepening of our contracts and also the new wins impacts as well. The Half 1 FY '20 income statement, we talked a lot about the top line. If we move down to gross margin, 94% gross margin, slightly ahead of where we were in Half 1 '19, impacted by the AIR percentage of revenue through the platform. Net operating expenses were GBP 8.2 million compared to GBP 7.7 million in Half 1 '19. That growth has been driven by 2 things predominantly: GBP 0.4 million coming from staff costs and GBP 0.2 million coming from infrastructure costs. And infrastructure costs being linked to increased volumes through the platform, which I've just shown on the previous slide, but also going into new territories. We continue to invest in the product. We invested GBP 2.3 million into the product in Half 1 of which just over GBP 1 million worth was capitalized in the period. So the adjusted EBITDA profit was GBP 1.3 million, as I said before, a significant shift from a loss of GBP 0.3 million in Half 1 '19. And then if you move down to the bottom line, what we're seeing there, again, is a reduction in the last. So GBP 0.6 million of last Half 1 '20 compared to GBP 1.5 million last Half 1 '19. So all stats moving in the right direction. The next slide gives us a little bit more color in terms of the half-on-half revenue analysis. I reiterate the point that we have 73% revenue coming from a sticky license and transactional revenue. What you can see in those bottom blocks is the implementation revenue element. And really, it's showing us retaining the value of implementation revenue, both from new wins, but also these existing customers that are taking our platform, going live, but also retaining people to make sure that they can have the best value from the platform and taking more services from us. So that should open up sticky revenue in future periods. 31% growth in the U.K. Tier 1 as contracts are moving to the next stage. You can see that there in the white blocks. And then again, 11% growth in transactional other AIR revenue, which is a good sign, and that's really been driven by deepening of our accounts and also sort of seasonal promotions, which also is a sticky part of the revenue as well. This illustrates in a little bit more detail where we sort of ended up from a net debt position. So we started the period with GBP 1.2 million into our GBP 5 million facility. We had added on to that GBP 0.9 million of operating cash inflow, which breaks down the GBP 1.3 million of EBITDA I talked about before, GBP 0.3 million working capital outflow and then GBP 0.2 million of an overseas corporate tax payment. Taking off of that the capitalized element of cost, that represents GBP 1.6 million. The majority is coming from capitalized expenditure predominantly from the development side, which gives us GBP 2.2 million into our GBP 5 million facility at the end of December. I think it's worth reiterating the point around the seasonality of our cash flow in the period. First half of '20, we burned GBP 0.9 million of cash but what would that is for that to not be as big in the second half because we have bonus payments going up first half, and we have an R&D tax credit coming in second half. And if you compare where we were in Half 1 '19, we've had a significant drop in the comparable period for 2019. So that was an outflow of GBP 2.1 million. And also, the last point, Barclays facility of GBP 5 million is extended out to May '21 stage. So we've got enough cash to deliver on our existing plan. I'll hand back over to Tim to do the strategy.

Okay. So just to remind you then, we have a 4-part strategy. The first part is that our aim is to win new customers to get them transacting on the platform and then to deepen that with additional products from our portfolio. Basically, what we have is we have 1 platform and then many products that can be operated off that once the platform is installed. We continue to develop new products to provide further opportunities of that sort, and to really reflect what our clients want to do in terms of strategically improving their marketing. The third element of our strategy is to take those 2 things to new geographies. And the fourth element is to run our business in a prudent, as we describe it, a better, simpler, cheaper way in order to put ourselves firmly on this road to EBITDA improvement and cash neutrality. Looking at each of those in turn, so we've increased our win rate, and there are more people using the platform. In terms of transaction, there's been a big increase driven by some companies that were in development or in trial going live. In addition, we've had a big step-up of albeit GBP 0.3 million, but a big step-up in brands using the platform to drive consumers in -- this is mainly drinks brands driving consumers into the on-trade. And we've also launched our first partnership with an affiliate network, Tradedoubler. This enables -- Tradedoubler is a device to improve online-to-online marketing and is a commission-based model where when they drive traffic and sales to our clients' e-commerce business, they get commissioned. What we're doing here by partnering with them is enabling them to open up their offer to the offline as well as online, so to drive people into stores. And bearing in mind that 90% of commerce still takes place in stores, this is a significant opportunity for Tradedoubler and their clients. And in terms of deepen, we continue to deepen, as we've described in the past, our relationship with existing clients, which is back to this one platform, many products point and we are successful with existing clients in 2 ways; either they do more transactions and/or they buy more use cases from us in order to drive transactions through those use cases. Our customer retention remains extremely high. Our churn is 0.3%. In terms of innovation, I mean the first thing to say is, you will remember from a couple of years ago, maybe 3 years ago, we were talking about the development of the Digital Wallet and how that was central to what we were doing for Loblaws. That is now being used by 21 clients. So you can see how that innovation has been widely adopted. But also, you can see from the loyalty transactions, those are all going through wallets of some sort. The app business has gone forward well. We've got users up 76% to over 4 million, and the capabilities of the app have been improved. We've been improving the product further really in line with client aspirations. I think there are 2 particular things that we're seeing: one, is people wishing to broaden their loyalty schemes to be broader than just their own business, to allow other merchants, other businesses to be part of a broadened loyalty scheme and to allow points to move around that broader network. That is something that we are uniquely placed to help facilitate. And we're doing that in a number of geographies. And then the second area where we are seeing increased interest is actually being able to ally -- businesses wanting to ally their loyalty scheme to charities and to enable consumers to donate as they shop. And so those are 2 sort of broadening and enriching of the core loyalty scheme that we've been working on, plus quite a lot of other sort of rather more functional stuff but it just means loyalty schemes can run better, the customer care can be handled better and things like that. We've also offered Connected Campaigns, which is a light integration for merchants, particularly bars, pub chains, hotel chains to take advantage of brands who are looking to drive consumers in a measurable way into the on-trade for sampling of their brands. And the other thing that we've been doing is we've been expanding the functionality of the program so that it's particularly well-designed and well suited to grocery. We've got some clients who wish us to enable them to do some things other than grocery, and we've been developing functionality for them. Those are the sorts of things that we've been spending the GBP 2.3 million on in order to secure future revenue down the road. In terms of North America, I thought because it was such a -- so this is about new geographies. And I thought it -- because it's such an important milestone for the business, I thought I'd talk you through that in a little bit more detail. So we have one, Southeastern Grocers. They have 550 stores, headquartered in Jacksonville, Florida, operating in the Southeastern states. It's a roll-up of preexisting brands like BI-LO and Winn-Dixie. And also there has been the development of a format called Fresco, which is particularly targeted at Hispanics, Latinos and certainly in Miami, particularly at Cubans. It's on a 5-year contract, solid phase rollout and the first activity will start within the next 6 months, and then it will be built out in functionality in probably a year, maybe a little bit more after that. And I can talk to that on the next slide. Southeastern Grocers have launched to their supplier base a product which they have called SEG Connects. That is a partnership between News America, Eagle Eye, dunnhumby and SEG and basically, what it does is it creates products, both digital and nondigital, which their supplier partners can invest in, in order to do performance marketing and access SEG consumers for their marketing objectives. What it's about doing is it's about bringing together all the pieces of data and all the schemes for an individual customer and capturing them in one place under SEG Connects. That one place is an Eagle Eye digital wallet, which clearly, in this case, would be an SEG wallet. But all these elements here that you can see on this slide get brought together so that all this information is known about a single consumer and then can be accessed and passed to dunnhumby to do analytics, to work out what is the next best message for a brand to be sending this consumer or indeed, what is the next best message for SEG themselves to be sending this consumer. So it's not that they don't do some of these things now, but they are disrupting silos. And what we are enabling them to do is we are enabling them to bring them into one place and then to apply world-class analytics through dunnhumby, to improve their understanding of customers and what the next best offer and the next best message is. That then manifests itself in these -- there are more than 9 products, by the way, in the SEG Connects program, but these 9 are the specifically digital products, which we help with and we help them to access. So what News America will be doing is going to SEG's suppliers, the fast-moving consumer goods companies, and saying there's this targeted e-mail opportunity, who do you want to direct? There's this direct mail opportunity, and they will sell these 9 things, which we then facilitate through offer issuance, tracking and redemption. It's a big step forward for SEG in the sense that what they are able to do is they're able to create a world-class Kroger matching, marketing insights and marketing platform. But at the same time, they're able to raise revenue from their suppliers to fund that development and to create a revenue stream for themselves. It's a great reflection of what the partnership offers, and it's very in tune with the way American retailers do business. It enables them to improve their capability and to generate revenue at the same time. And I think it will have application for many other American retailers going forward. So in terms of Australia and New Zealand, here we haven't needed to develop a partnership as yet because this market actually looks to the U.K. for leadership. We won a New Zealand client in September 2019 for a 3-year contract. That has now moved from the development stage to the pilot launch stage, and that will be rolled out over the next 12 months. They have other features within their stable, so there's opportunity to develop that. And we have a particularly healthy pipeline in Australia. And so I am hopeful that we will add other banners to this 1 retailer in New Zealand in order to create a good and profitable business down in that new region. So moving on to better, simpler, cheaper. I mean, first of all, to report on the move to Google Cloud. That is now all completed. And we are enjoying the benefits, as Lucy mentioned, of that approach, particularly our ability to spin up at much lower costs than historically and much faster in new geographies. What we are now doing is working within the business to create a more agile and flexible approach so that we basically have created an advanced guard that brings new client wins into the business, whilst we, during that period, recruit people to manage those people into our business. And we've made -- we've created within the business, a very clear distinction between the spine of our operations, which is the 24/7/365 ability uptime of the platform, robustness of the platform, speed of transactions. And then this flexible workforce, which I've said, some of which we describe as an advanced guard who are enabling us to handle the new work and the new opportunities that become available. The important point is we don't confuse the 2. The operation has to be completely robust. That's what our clients look for. And then we need this ability on the other side to be flexible in terms of bringing on new clients. So just then on the outlook. So the Board looks to the long-term success with confidence. I mean I think we absolutely believe that. Clearly, there are some short-term issues, which I'll return to. But trading has started well. We have seen some impact upon transactions from the restaurant and bar elements of what we do. That represents, in total, about 10% of our revenue, and it hasn't gone away to nothing. So it indicates, I think, to some extent, going back to that point that we made earlier on, the COVID resiliency of our business. The EBITDA is progressing well and in line with our stated objectives. Our funding, as Lucy has described, is comfortable. And our focus remains bringing new people on the platform, particularly in these new geographies, and then converting them so that they go live and start transacting. Because once people transact, they understand the benefit of digital performance marketing and then seek to implement more of our product suite. I've talked about long-term success. We have to help our clients over the immediate shock that we're experiencing at the moment. Some of them will want to advertise and promote the fact that they're doing takeaway rather than people visiting the restaurant stuff. The grocers are very busy. And so their loyalty programs are running hot because of them being beneficiaries to the situation we find ourselves in at the moment. And I think that clearly, what we need to do, once things have settled a bit is to make sure that with our clients we are making sure that we help them to be in a position to win the recovery. And I think we're in a very good place to do that with our direct contact with their consumers and being able to hit the ground running when the situation changes and becomes more favorable. So that's the end of our presentation. Thank you for your attention.

It's Bob Liao from Zeus Capital. I had a couple of questions. One is just to let me understand how the profile of each additional customer looks? Just so I can understand how the revenue might build over time based on the 3 major revenue lines that you have. Maybe if you can just sort of explain what percentage of revenue you expect in the beginning with respect to implementation fees, how much transaction -- how the transaction revenues built -- I'm sorry, in between those 2, of course, what sort of basic license fee is typical based on the customers you've had so far? Maybe we could start with that.

So I might have taken you through this before, Bob, I thought I had. But let's just -- so to remind people. So this is a typical contract life cycle. And it's sort of the same, whether you're a big Tier 1 or actually you're a multisite or actually you're a smaller customer. It's just the value use. So the first thing to note is we charge an implementation fee to get on to the platform. The time which that lasts will vary depending on how complex the implementation is. So if you're doing a replatforming of your loyalty program, like we did for Loblaws, for example, we were doing that for 2 years, for example. Actually, if you're talking about a smaller sort of gift claim or app delivery, we get those customers up and running in sort of a couple of months basically. So it just is in terms of the complexity. We charge time and materials of people during that phase. That's what we're classifying as the implementation fees, the purple block. During that time also, we do charge your license fee. So a license fee is, though at a lower level, we usually charge half license fees during that period to access the platform because as we work on an agile basis, customers access or their testing because we're releasing code to them every 2 weeks. So their accessing the platform. So that's the logic there. And then when they go live, license fees step up. So you can sort of see that happening in this example in year 2. And at that same point, we expect transactions to grow as well. And what we see on average is after the second year that our customers are taking sort of a second service from us. So I think what we see compared to typical SaaS businesses is that because our breadth and depth of product offerings is that we can deepen our account, call it deepening. And more services from us. So what you're seeing therefore in terms of from year 3, that's when we think transaction is growing over time because of digital adoption and people liking it, getting it, doing more stuff. And also taking new services from us. So that's the dotted line at the top. And the interesting thing, this is taken from our top 20 customers this data, what we're trying to demonstrate here is GBP 1 of win in year 1 translates to GBP 4 of transaction deepened by that fourth year, which we believe is slightly different to other typical SaaS businesses that are more plug and play.