Envirosuite Limited (EVS) Earnings Call Transcript & Summary

All right. We'll make a start. So welcome to FY '23 Q2 sales update. I'm joined here today with Justin. Thank you very much for coming, Justin. What we'll do is we'll go through a short discussion and talk about the key highlights from Q2 sales, a little bit on the business and some of the financials that you would have seen included in, and then we'll take questions at the end. So let's begin. Look, really happy with Q2 continuing on the strong momentum that we've -- that we're seeing in the business. It's a great track record of consistently growing on this quarter-on-quarter. So I think that's a really good result there. So strong momentum, 11% growth on prior corresponding period or from an ARR perspective, $1 million in project sales as well. It's important to note, though, that Q2 did have some procurement delays, particularly out of Europe. So it's not necessarily losses of deals. It's actually just a couple of deals have slipped from Q2 into Q3, and some of those have already closed to start ourself on a good sitting on Q3. We've actually been building out a strong pipeline for the second half. And more on that a little bit later on. Look, Europe was slower but exceptional growth there, again, in the Americas and solid contribution from APAC. And what we're seeing in Europe is a changing landscape. But there's not necessarily a lack of confidence there, it was just more of the delays that was coming through from procurement. So we now have achieved a $56.9 million ARR, which is up 16% on this point last year, which is great. What was really encouraging for this quarter was the strong growth in Aviation, and that was across the board, very strong growth in all 3 areas. So Aviation has really started to show signs of strong investment flow coming through from our customers. Certainly, a strong driver around carbon emissions and airspace change as well. So that's really encouraging. If you look at the last 12 months from a trailing average there, we've actually added $4.1 million in new ARR within the Aviation business. So that's exceptional growth within that and really strong outlook actually for the rest of the year and moving forward. So we're certainly buoyant on that part. From a financials perspective, Justin will go into that a little bit later on, but we put there our cash position. So certainly very comfortable with the cash position that we ended up in December 31, and that gives us and I think reconfirms the strong path for adjusted EBITDA during FY '23. But I'll let you cover that one through, Justin.

Good.

So look, for those of you who are new to the EVS story, I feel it's important just to take the moment to really reflect back on who we are and what we do. So we have got 3 product suites, which we've spoken about, our Aviation, Omnis and Water. We're the global leader in aviation with around 170 airports. We're looking at providing compliance and regulatory requirements around noise but now also broadening out more broadly into carbon emissions at green airspace. And you will see that airports around the world have got a significant opportunity in front of them, and we're working with many of our customers to tackle that. Omnis is our broad horizontal platform. It's the most advanced environmental intelligence platform on the market today, very strong capability around predictive insights, really driving an operational improvement for our customers. We focus on 4 key segments: mining, industrial, waste and wastewater. And that has been growing above 25% over the last couple of years. So we're really excited by that. Omnis in itself this quarter didn't necessarily have the strongest quarter in isolation, but certainly, the pipeline for Omnis now for the second half is exceptionally strong. Mining though, again, a very strong contributor, a little bit more on that later on. Water, we have 2 key products, both SeweX and Optimiser in there, very unique technology, still early stage within our business. And we're working through with our customers, and we're focused heavily in the second quarter around getting the reference cases up and going for South Australia Water for Watercorp and also into Europe and North America. We have successfully executed on our strategy, and we are continuing to do that. So certainly, this is in line once again with what we said we would do, and we're executing through that. We've got very strong tailwinds now from ESG around the world, and that's becoming stronger quarter-on-quarter. We have got a product-led organization, and we've got strong products there that we've put into the marketplace, and we know that we've got that product market fit, and we're executing to that. But we're also executing to our financial plan around that, getting back to profitability and making that sustainable as well. One key thing I do want to hit on is our land, expand and scale part, which is -- we really have focused on that. And that is going to be a cornerstone for us moving forward and giving additional insights into that. But working with customers, we have some of the greatest customers that you could possibly ask for in the industrial and aviation space. And so our opportunity here is to work with our customers and make sure that we're helping them achieve their goals and expanding out both on to different sites for them, but also different offerings coming through. In aviation, we want to call out the strong performance there with a customer who we're not going to name in isolation at the moment, but it's a strong customer in North America, which we're working through with changing air space. Now what this is, is very new technology that we're able to use our existing offerings, blend it together and so a new problem. And so we can see this now being replicated in many of the regions that we operate around the world. Mining continues to be the strongest demand for us with quite a few additional sites being added this quarter. So the call out there is $1.4 million new ARR in aviation, $0.6 million in Omnis for this quarter, giving us a total of $2 million. So moving into Omnis. 5 of the top 10 deals that were signed were in mining operations. And so that gives us confidence. Certainly, the pipeline supports that as well for the second half. Strong market acceptance, we're really building out now to having the noise and the vibration capability in the platform, and that's opening up new opportunities for us. Air traffic is continuing to see a return to normal service with further capacity returning. And so that's certainly encouraging us. A lot of the flight statistics that we'll start to see come through as most of the regions around the world are starting to show a significant increase, which is growing for our customers and great for us as well because we're able to work with our customers to achieve their goals. As I have mentioned, it's a record growth for us in aviation with $1.4 million, and I think it's a really strong number for us. We also added some new airports, so Boca Raton and Philadelphia International Airport in the U.S. So it shows that we're also winning from our competitors in that space. Carbon emissions module represents an exciting opportunity for us. So this is the most advanced carbon emissions tool that's available in the market. And our airports around the world are really starting to see the strong solution that this provides our customers. And certainly from them, it is a strong driver, I think, to get to this net 0 position and airports are investing a lot of money and time into doing that. From a water perspective, we've got very strong customer feedback, which has been exciting to work with. Watercorp and SA Water in the last few months, I had the opportunity to meet with Watercorp myself towards the end of last year. And they're really excited about what this technology can do for Watercorp. So we're expecting some really exciting news to come through in this calendar year. Also an important point now is Evoqua Water in the U.S. So we've signed a proof of concept with Evoqua Water on SeweX, which is the first foray now into certainly what represents a large-scale expansion opportunity for us. It's also important to note the importance of water in the macro environment. So Xylem actually bought Evoqua in a deal that was USD 7.5 billion recently. And water we see is becoming such an important resource and commodity so we're excited to work with companies like Evoqua to prove out the strong value proposition that it does have. It's also now at the pivot point for us and an exciting chapter in the EVS Water story, where we have appointed global water lead in Sada. So he's going to be based in the Middle East. Sada comes with a huge amount of expertise, contacts now in helping companies scale and grow. And Sada has come onboard, both from the technology that we've got at our disposal, the future vision of where we want the product to go but also the significant market opportunity that we have. I'll close a little bit on the outlook and then pass to Justin on this one, but look really excited by how it started in 1H, but probably more excited now about the strong pipeline that we've built across all 3 regions and in all 3 product suites, really excited on that one. Pathway to profitability is important. And I think it's an important point to call out here, we are actively monitoring the levers that we've got at our disposal and making sure that all the resources are contributing in the right direction. And so we're able to make decisions on regions, on certain segments where we're getting traction to invest into areas that we're seeing greater expansion capabilities. And so we're monitoring that and making micro decisions on that to optimize that outcome. Reiterate the strong results that we're getting through plant optimizer and the impact that we had from the desalination association where many leads have now started to come through and filter through. And so we've got some exciting opportunities, which we hope we can share with you in the second half some really significant landmark opportunities that have come out of that desalination event. Mining is absolutely a strong point for Omnis, and that is evident. Now I've had the great opportunity of meeting some of our strong mining customers around the world recently. And you can see the strong impact that they've got there. So we have worked quite aggressively in the first half to build out a strong pipeline of growth opportunities, which will be both strong project revenue and also the important part of that annual recurring revenue from the software. Our Philippines office is now up and going in full swing. We've got people onboard, and we've really utilized that really impressively the quality of the team that we've got there and the impact that, that team has been able to have in a short space of time. We've, as I've said, on the key hires, both from Sada and also an aviation lead here in Australia with Neil coming onboard, that's quite exciting for us. So we feel we're continuing to invest into talent. And as we know, although we're a technology company some of these high-quality individuals that can come into the organization and make a really strong impact, so we're excited on that one. So H2 is well set up. We've got line of sight of that. We've got confidence in the pipeline, and we know that we're going to finish the year strongly. We're really happy with the results of first half, particularly in resurgence of aviation. As always, strong focus on cash, and that's a really important one. And that's the key part to the fiscal management that we've brought in a very strong discipline that we have inside the business. So Justin, over to you.

Yes, sure. Thanks, Jason. In terms of profitability and cash flow updates, we'll certainly be providing more information when we do -- when we provide our H1 results update scheduled for the 22nd of February, so please look out for that one. But certainly, in the meantime, happy to give this certain commentary on where we finished up on the half and comments on the quarter. As Jason mentioned, we finished the half year till December with just under $12 million in cash. And as we've previously stated, we are on our pathway to profitability, and we are on track on our transition to adjusted EBITDA positive in FY '23. In terms of the focus of the organization and focus of the various teams, certainly, sales growth has been a key piece, and Jason spoke into that. But also in our -- maybe my old terminology contract to cash is very important for us, ensuring that we can transition our customers from their contract into operational readiness. We're certainly seeing some improvements in that area, particularly with EVS Water, where we're seeing the ability to turn on revenue in that product set improving significantly. But likewise, across all products sets, Aviation and Omnis, we're seeing that transition coming through and improving. We've always -- we've spoken in the past regarding project sales and the leading that, that provides to ARR. And of course, we see that again in this quarter. What we're also seeing on the product side is some additional investments that our customers continue to make in both Omnis and Aviation in product and project-related sales. So good to see that the investments coming through with a particularly strong quarter in our revenue recognized in that space. Cost management, as Jason said, we continue to be focused on cost management and how we support the growth of the business. As again stated, Philippines has now been up and operational for the last 6 months with our finance and customer one support -- sorry, customer support, level 1 support, in that region. And again, giving us the opportunity to support our growing customer base through our Philippines and other locations of labor as we deem appropriate for the growth that we're experiencing. With regards to the broader technology and our technology base, we've spoken about our transition to AWS, and that continues with the move out of our data centers. And of course, we'll be looking to close those data centers as that transition completes. Likewise, our tech team structures are really looking to address the opportunities that are presented and the road map that's defined in each of our service -- I mean, in each of our customer lines, and we're able to shift resources as needed to focus on a particular product or development requirement out of the product road map. So that flexibility remains in the business. As we've said on the revenue, our recurring revenue growth and whatever we're achieving there is in line with where we're seeing things. And again, we'll provide more information on our half year update in terms of recurring revenue, but again, quite positive there. On the project side, a very strong quarter in revenue in that regard. Again, reiterating that we are on our pathway to profitability and our shift to adjusted EBITDA positive during FY '23. And of course, our position remains consistent, and based on our current strategy, we have no need to go back to the market through for a capital raise. That's a summary of the finance. And again, we'll provide more color on that in detail when we release our half year results on the 22nd of February. So Jason?

Thank you very much for that. So look, we've gotten time now for some questions. So please raise your virtual hands and unmute, and we'll listen for question and answer.

Jason, I see one in here from Chris Savage. Chris, I will unmute your microphone. Please go ahead, Chris.

Can you hear me?

Yes.

Yes.

Yes.

Yes, it worked. So first question, Jason, probably more for you. Can you just explain why procurement delays have negatively affected new ARR in Q2?

Yes. So a couple of things and a sort of there's depth both for region and product offerings. So certainly within the water space, you'll see that we didn't actually add any new ARR in this quarter, but that was because of some of the lengthy procurement challenge with new customers coming on board. And so there's a certain part there with just understanding the water utilities and that engagement model. So it's not to say that they're not going to move forward. It just took longer than what we first anticipated to close in that quarter. There was also a bit within Europe, where there was probably a little bit of pause in the start of November, just to see what would happen with the energy prices, certainly in the industrial space. But by the end, probably by the middle of December, actually, that confidence has come back. And now in January, that started out to really motor ahead. So they're probably the 2 key parts, Chris, just on water and then in Europe.

Okay. And just this new carbon emission module in Aviation. So is that now effectively launched and you basically go back to your 170 airports and say how about it?

It's exactly what we're doing, Chris. We do it a little bit more eloquently than that. But we -- what we've done is like all of our new product introduction, right? You get your reference customers that we know want to push the boundaries of innovation and will adopt new technology. We have put it in, we've demonstrated the impact that it's having, and then we roll that further out. But what's exciting in this particular release is this is your nontraditional customer. And so therefore, it's unfortunate we can't name them, but we'll work towards doing that in the shorter term. But this is airspace change, Chris. So this is really significant, big impact, really significant impact to global aviation. So we can say that this has got some real legs to grow.

And is -- like, if the airport has your noise vibration module, which obviously they do, is it a similar dollar value if they take on the carbon emissions module?

It's not, it's an easy transition. If they've got ANOMS put in place, right? it's a bolt-on to ANOMS. So all of our customers has obviously got ANOMS, so it's an easy bolt-on to that one. But it's a good incremental increase on the ARR per customer.

Sure. And is there...

And it's also worth pointing out, Chris, the [ talk ] software. So again, it's margin improvement.

Sure. Good point. And is there anyone else providing that sort of module at this stage?

Well, not to the accuracy and the depth of what we do. It's [ all equal things ] Chris. Our niche in the marketplace is a scientific differentiation. So the airports that want to tackle and address climate change, their impact to net 0, then this is the -- certainly the most advanced on the market and having the biggest impact. There are, let's say, cheaper alternatives that don't address the real goal, but we're focused on scientific differentiation.

And last question, this proof of concept with Evoqua Water on SeweX, is it going to be similar to Watercorp [ intake ] a few months to work through that?

Yes. So the -- I mean we're doing our best to accelerate that, obviously. But yes, I would suggest give ourselves a bit of comfort with that one that you'd go through a full quarter, have a look at it. They're certainly excited to be working with us and the impact. As we've said before, there's nothing like SeweX on the market. This is a brand-new offering. The customer segment that Evoqua serves, a lot more than I can say here is a huge return on investment and on significant savings for their operational business.