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

Thanks for joining, everybody. Good to meet with you, and you'll be hearing from Lucy a bit later on. So we'll do a bit of an introduction. I'll talk a little bit about the market. Lucy will then review the numbers. We'll talk about how we're going to deliver against our ambition of $100 million of revenue and 30% EBITDA, summarize, take questions. It's a very, very big market. That's the starting point, $10.2 billion and projected to grow significantly and keep growing in the near term. The reason why it's growing is because people are wanting to do more personalized marketing. And they're wanting to do personalized marketing for 2 reasons. One, consumers like it. They become more loyal, they spend more. And secondly, because it's much -- what's being demonstrated is an ability to control the profitability from personalized marketing. We're big in that space, 1 billion of offers executed per week, and we manage a lot of wallets, wallets that effect a person or a family. And we're doing it for an increasing number of household names around the world. Some new people are meeting us this time. And so we thought we'd start off with just a couple of examples of what we do, which would sort of help to contextualize everything that we're going to say. So Morrisons became a customer in 2023. And in October, launched their more points on the AIR platform. So we were the master for the points going in there. We then -- they then in January, launched challenges from our Eagle AI subsidiary based in Paris. They then went into the Air toolkit and added more and different sorts of promotions in April. They then broadened the earning network in September by enabling people to earn Morrisons -- more points on Morrisons shopping at Amazon. More use cases in the run-up to Christmas and savings schemes in the run-up to Christmas. And then most recently now, a continuity promotion for physical product where we're managing the stamps in the account. So it's gone from a go-live ARR to actually the ARR that we're earning from Morrisons in just over a year is up more than 5x from where we started. Tesco, probably the best personalized and loyalty retailer in the world, have -- in '24 taken up Eagle AI's challenges. They started -- they then expanded the audience during '24 and then at Christmas made it one of their key pushes for the Christmas trading period, extending to 10 million customers. Now that Tesco doesn't put things out to 10 million people unless, a, they're confident in it; and b, consumers like it. So Challenges has done very well for Tesco. And since then, we have agreed that they will start doing it in Tesco Ireland. Again, you see the increasing ARR as the contract develops and matures. At each results presentation since they've been doing it Ken Murphy has mentioned Clubcard challenges as being a new digital innovation and something that gives more value from Clubcard and that people are enjoying. The other new thing that sort of happened in the period is that we are now -- we have announced -- SAP have announced that we are collaborating with them on next-generation loyalty programs, promotion programs and AI strategies. So that's a very significant move for us as a business. And I think, as we say on the slide, our market-leading technology is catching the attention of people around the world. So half 1 wasn't everything that we wanted it to be, but there was some good underlying progress, not least around the profitability, and Lucy will take you through that. And also the renewals, tens of millions of renewals in the year. So Lucy will talk to you a bit about that going forward. We need to go faster. We want to go faster. And really, the balance of this presentation will be -- a lot of it will be about that. How do we get more routes to market? How can we double down on the huge opportunity in the U.S.A. and also further opportunity for innovation around the Eagle AI product. Since the start of half 2, we've had the OEM partnership announced, that's transformational for us. We've also had some exciting new wins, particularly the subsidiary of a leading global retailer in Mexico, which I think has the opportunity to be very significant. And we've hired a CRO, an American CRO to be based in the U.S., and I think that will help us with the American opportunity. So it's a big market. And it's all about -- it's being driven by personalization. And personalization is our DNA. It's why we were founded, and it's what we do. We have a best-in-class product, all those logos that you saw at the front, all those big grocers. They pick us because we are the best at enabling personalization in real time at scale in the world. Lucy will show you how our platform is getting [ SaaSier ] and the economics of becoming [ SaaSier ] as we go forward. I will then demonstrate to you the opportunities that we have for revenue growth. We put those 2 things together and what we hope to do is to leave you confident that we will achieve the GBP 100 million revenue and 30% EBITDA in the medium term. Thanks very much. I'm going to hand over to Lucy.

Thanks, Tim. So just to start with the KPIs, as sort of Tim said upfront, we've had flat revenue in the period, but there's been some strong KPIs underneath. So SaaS revenue growing at double digits, had maintained the margin at an EBITDA level, had a tick up in EBITDA margin and ended the period with a strong cash position. And I'll take you through those points in a little bit more detail as we go through. So first of all, starting with the revenue. We've had good momentum on the winning, particularly post period end. So that figure there of GBP 2.5 million of ARR. That is the year-to-date position. So picking up some of those that have happened post period end. As Tim said, we've won a pilot with a Mexican subsidiary of one of the world's biggest retailers. And we think that, that in its own right can be a very significant thing. There is opportunities to grow that specific account. We're already in talks with other subsidiaries in the group and extension overall around the world. So a significant opportunity for us going forward. Tim gave the case study of Tesco's for Challenges, and we've recently signed an extension with Tesco's Ireland. That will start generating revenue in this period as we know, AI revenue can come along pretty quickly after signing. Transurban is a new signing in Australia. They're a toll station provider, also have subsidiaries in New Zealand and in Canada. But that offers a significant opportunity. It's a big business in its own right, and I think it's got a market cap of roughly the same as Woolworths. Rite Aid, the last one really to pull out here, signing post period end. We started with Challenges and now we've rolled that out to a loyalty program for them for one of the biggest pharmacy providers in the U.S. So some nice new wins with significant opportunity for growth for all of them. The renewals were pretty impressive in the period, GBP 18.7 million of our ARR, nearly half of our ARR renewing in the period. The majority of those contracts having a tick up in SaaS revenue, which I'm very encouraged by and all of those contracts extending by at least 2 years. The last point to highlight really, I think, just on the table has been the growth in Eagle AI growing at 38% in the period. And I sign posted that 6 months ago, saying that I was confident that, that was going to take a step up going forward, and they've delivered on that in this period. And some of those new wins that we've just talked about will hopefully continue to see that momentum going forward as well. So I think the momentum we've had and the renewals gives me real confidence in delivering the number of revenue for FY '25. So we take a little bit more time to look at the ARR growth. As we said, ARR growth of 16%, giving us GBP 41 million at the end of the half. But actually, if we look in a little bit more detail, the top 10 customers in the period delivered growth of 23%. Morrisons and Tesco being a key driver of that. And that really supports still our story of the GBP 1 to GBP 3. So GBP win in year 1 can transform to GBP 3 of transacting by that third year. And in some cases, we showed by that Morrisons example, even faster than that when customers get it, they use it, see more opportunities for it and take more of our toolkit going forward. So the key, as always, is bringing more wins in and the engine consistently is delivering this nice growth model. Just a few stats to pull out on top of that. The value of ARR won post period was GBP 1 million. We're pretty conservative with our estimation of ARR, as you remember, that the transaction element is low. So we just take the minimum level. So once the customer starts getting live, we quite quickly see a tick up in that number as we go forward. And of the GBP 41 million, GBP 1.6 million of that was not yet live. And so if you take those 2 figures of the GBP 1 million and the GBP 1.6 million, those numbers are not represented in our revenue today. So that's giving me more confidence about the future number, particularly flowing into FY '26. So taking a moment on the income statement. We've had a tick up in gross margin at the last percentage of SMS. Our net operating costs are higher, up 4%. So staff costs down due to lower bonuses and commissions due to the lower revenue performance. Our infrastructure costs are up a little bit, but that represents the investment in security, an area that clearly a lot of tech businesses are looking at, at the moment. But we've created some efficiencies, particularly in Google Cloud in relation to the Eagle AI business, where we continue to look for progress in that area. We've managed the cost that you would expect us to do. And therefore, overall, we've delivered a stable 24% EBITDA margin in the period. And going down the P&L, a tick up in adjusted EBITDA, which is now the measure that we're demonstrating to shareholders a better proxy for the generation of cash because it's after our trading amortization. And the bottom line, our EPS has ticked up. It's 5.6p compared to a loss last period. And the performance of the share-based payments, the reduced charge is really the big influence on that number. Moving on to cash. We've had a strong cash performance in the period, GBP 1.3 million inflow this time last year was an outflow of GBP 0.9 million. Key variances are a lower bonus paid in this period compared to last year, a higher net tax receipt due to the R&D, particularly in France and lower capitalized costs and the move towards SaaS has reduced the cost there by GBP 0.7 million. So we end the period with net cash of GBP 11.7 million, a strong number. And as we've stated, we wanted to continue to improve our cash flow conversion. We're reporting now free cash flow against the EBITDA -- EBITA number, and that's moved from 50% to 70%. So we take our net cash plus our new facility with HSBC of GBP 10 million and our accordion of GBP 10 million as well. We feel we're in a good place and a strong balance sheet to give us optionality as we go forward, particularly given the market conditions as they are at the moment. So a moment to talk about the improvement of sort of the EBITDA. I thought it was worth just highlighting the journey that we've been on the EBITDA since we've turned profitable at that level in FY '19. We've been consistently making improvements on the margin performance, and we want to do more going forward. So how are we going to do that? We've recently started reporting a direct profit number, which is more akin to what you're used to seeing at a gross margin level. There are several areas that we have to make improvements in this as we go forward. So first of all, if you take the actual SaaS margin, that's delivering direct profit of 73%. So I started talking to you 6 months ago that actually, if you break that SaaS margin out across the different geographies, less mature regions have got a much lower direct margin. When we get scale, that drives the profitability of a geography due to the infrastructure we have to invest upfront. So as we get bigger, that will naturally improve. The platform enhancements that we are doing at the moment due to the partnerships will mean that we're having to move the infrastructure to do proper auto scaling. So in that world, we won't be paying for redundant costs effectively on the platform. So again, that would drive an improved performance in each of the geographies as a direct profit level of the SaaS margin itself. The next point is around the move towards being more SaaS, so doing less professional services work, which we stated in this next -- in this recent statement. You can see there that professional services is delivering 58% direct profit by just shifting a higher percentage towards SaaS, the overall margin, which is currently at 70%, we will see improve. And then the last point, as you would expect, as we get bigger, those more fixed cost elements will get natural operational leverage as we grow. It's worth saying though that the areas that we do need to continue to invest in sales and marketing, currently 13% of our top line. And from a product perspective, I would expect to continue to invest in the area. This area is important for our innovation so long as we can see the return on investment. But I would expect it to stay at a similar level as a percentage of revenue. So overall, I hope you get a flavor there that I've got several levers to pull in terms of improving that profitability and areas I can pull back in terms of investment areas, if I want to, to make sure that we continue on this journey to an improved EBITDA margin of 30%. So just to summarize where we find ourselves on the financial level. The fundamentals of the business model that we have today are a strong one. It's a license and a transaction model that as you can see on the numbers that I've just shown is a good, strong profitable line of business. The partnership model that we've just signed will replicate that. We will not have to take a hit, and therefore, the margins will maintain -- be maintained, if not improve as we get scale in that area. We've traditionally always had very low churn and a really strong ability to deepen accounts as we demonstrated there upfront with some of those examples. Our model of GBP 1 of win in year 1 translating to GBP 3 of transacting deeper and even in some cases, going beyond that remains true and strong. Therefore, it's about bringing new accounts in and continuing on that model. We've got a building cash position and a facility to support that. And we've got an improved cash conversion rate, which is just giving us more optionality as we go forward to make sure we focus on, first of all, our growth and building this to be a much bigger business. I hope I've demonstrated to you that we have a track record of delivering on the margin and giving you confidence that we've got other levers to pull to continue on that journey of improvement there. So therefore, hopefully, you come away thinking that our journey towards the 30% EBITDA margin should be very achievable. So it's now all about how can we demonstrate to you how we're going to deliver on that win number. So I'm going to hand over to Tim now to demonstrate that.

Thanks, Lucy. So I'm going to talk to you about 4 avenues for growth, OEM, partnerships, North America and productization and innovation. And what I hope to demonstrate is that you add that lot together, and there's more than enough firepower to achieve $100 million. Starting with the OEM. It was signed in January, and the product build is underway to become OEM ready. The early adopters, clients who are interested in this program will be announced this month. Then in May, and that's called -- they call that a [ Lighthouse ] program. Then in May, we there will be a product launch. Customers start to go live from financial year 2026 and material revenue generation from financial year '27. It's one of the largest software providers in the world. I think important to note, they deal with about 8x the number of grocers that we do. And then, of course, they have businesses in new sectors as well. They're in different geographies to us. Obviously, there's overlap, but they're in different geographies to us. What we're enabling is their shift, their move to the cloud. What they're helping us to do is to become [ SaaSier ] faster. So by that, I mean that it's easier to install our product, which is very important for work with systems integrators. And it's also easier to auto scale our product as volumes ebb and flow, which will not only -- is not only essential for the OEM product, but will help us with the profitability of our own customers as well. Looking at partnerships. Partnerships are already starting to account for a significant chunk of the win ARR. Google has been the lead in that. We've worked closely and hard with Google, and they've rewarded us by making us a premier partner. That means we move up a team in terms of who sells and represents us. And I think the case study of how we work in partnership with Google, we're certainly very proud of it, and they show it to other people. We are integrating with other technology partners that involves us in more conversations, and they are starting to bring forward opportunities. But most significantly, systems integrators, that's where the real pipeline is coming from. And we've list here the systems integrators who we've signed an agreement with. And then there are others who we are working with as well. You add all this together, it's starting to deliver with new customers. And I'm confident that, that will accelerate as we've just had a bit longer to work on the opportunities. So North America is a very significant opportunity. If you look at all the retailers over $1 billion in revenue, there's about 440 of them. There's 130 in the enterprise grocery space. So -- and as I showed you on the slide earlier on, it accounts for about 40% of the global market of loyalty and promotions. It's already over half our ARR. The contract sizes are bigger because the businesses are bigger. And it's currently quite significantly more than half our pipeline. We have got -- we've decided that in order to help us focus on this opportunity, we're going to appoint a Chief Revenue Officer, who is an American based in America. Jeff is that. He lives in Washington. He's worked in SaaS his whole career and SaaS related to grocery. So he's known in the grocery industry and has scaled a couple of businesses at least in his past. With Jeff able to concentrate on revenue with a particular focus on North America and Al Henderson, the previous CRO focusing on partnerships, particularly the OEM arrangement, we are significantly upweighting our senior experienced resources in the selling area. Eagle AI has done -- is doing really well, growth increasing. And in addition to the core challenges product, they now have a personalized flyer product, which will, I think, have significant opportunities. In North America and Europe, retailers spend tens of millions on paper flyers. They're harder to distribute as the paper -- newspaper distribution industry dries up. They're anachronistic in a green world. Digital has the opportunity of addressing those issues, enable you to get it to consumers, enable you to overcome the waste that is associated with it. But perhaps the most important thing of all is it can take the several hundred promotions that you've got in store next week, and it can headline and signpost the ones that are most relevant to you as a consumer. It's a pretty obvious thing to do really. I'm not going to talk to this customer about pet food because they don't have a pet. And I'm not going to talk about this to this customer about baby cares because they don't have a baby. But I am going to talk to this customer about food ingredients because they clearly cook, et cetera. So that is being trialed and developed with LeClerc and then we also have an audience builder product. This enables the retailer in their retail media business to create audiences that have a particular fit with a product that wants to be advertised. So it's building audiences for advertising, and we're doing that with Carrefour. And we are in the process of working up the ability to personalize prices. And you'll have seen that Tesco have announced that they're going to be doing personalized digital checkout with Clubcard prices and other retailers are doing the same. We keep innovating in this area, and we have just introduced a transformer neural network, which is what ChatGPT and others run on. What that's demonstrating is that we can actually make the recommendations of 5% more attractive because we can find stronger affinities using this new tech, and we're doing it all faster. So it's a significant investment in this product to keep it leading edge and keep us able to develop these new products. So if you add all of that together, you come out at the end of this year, GBP 47.7 million. You get an ongoing level of sales growth from AIR like we're seeing at the moment. You then add to that grocer a year coming out of the U.S.A. You add to that a couple of large businesses coming out of the OEM agreement. You keep Eagle AI growing broadly at 30%, and you pretty quickly get to in excess of GBP 100 million. In my experience, the thing that you're always looking for in business is growth drivers. And I think what you're seeing here is that Eagle Eye has 3 significant growth drivers on top of a good base business, which will enable us to go forward. So we've commenced half 2 with momentum, some new wins. I'm particularly encouraged by the win in Mexico. I think that has a really significant opportunity. The OEM partnership is an absolute game changer. It can be as big as the existing Eagle Eye business. We're accelerating our win rate and partnerships will help with that. And we are confident that in the medium term, we will achieve $100 million in revenue. And I think Lucy showed you why we can be confident that we will do that at 30% EBITDA. So we are positive about the outlook for Eagle Eye.