EROAD Limited (ERD) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the EROAD FY '20 Annual Results Conference Call. [Operator Instructions] On the call today, we have Mr. Steven Newman, CEO; and Mr. Alex Ball, CFO. With that, I would now like to hand the conference over to Mr. Steven Newman. Please go ahead.

Good morning, everybody. It's my pleasure along with Alex to present the full year results for EROAD for FY '20. We will be working through the investor pack we released this morning along with the annual report and NZX announcement. We will start. On Page 2, as we were starting -- during FY '20, we made good progress in delivering strong revenue and EBITDA growth. Revenue grew 32% to $81.2 million, with strong contributions coming from both our U.S. and New Zealand markets. EBITDA growth year-on-year was 73%, going to $27.1 million. The most pleasing was to see EBITDA margin increased year-on-year, 31%, to a margin of 32% (sic) [ 33% ]. This growth in revenue and operational leverage allowed EROAD to make a $1.4 million profit before tax. Future contracted income increased $17 million to $134.4 million. Free cash flow was negative $12.8 million. Alex will explain the shape of this later in the presentation. We refinanced and expanded our debt facility to $60 million in March 2020. $23.9 million of the facility were undrawn. EROAD is in a strong financial position to manage anticipated organic growth. Turning to Page 3. Contracted units grew 21% to 116,488. An asset retention rate of 95.2% reflected the quality of our service and the value of our product offering. The combination of 7 new SaaS services delivered and customer upgrades to the latest in-cab hardware saw monthly ARPU increased 6% to $58.38. We spent $15.6 million on product development, and this is to fuel continued growth. Alex will provide more information on that later in the presentation. $6.9 million was invested in new business systems to allow us to scale as we deliver future growth, improve the customer experience and operational leverage. If we now turn to Page 5. This graph shows the makeup of our subscriber base by market. Total contracted units grew 20,098 year-on-year. The 2 large enterprise accounts we brought home in North America contributed 7,150. If we now move to Page 7. This outlines the 7 new SaaS services we delivered. So if I kind of break them down into themes. In the U.S., we extended our drivers' fleet management solution. In Australia, we got ATO approval for our fuel tax credit solution. And in New Zealand and Australia, we improved our health and safety offering by adding a vehicle collision and rollover protection and monitoring service along with St John Ambulance. We also delivered a solution that allows protection of privacy of employees using company vehicles for private use. Privacy is definitely becoming a major theme, an area of concern, within New Zealand and Australia. We turn to Page 8. New Zealand remains a significant growth opportunity, delivering a 21% growth in revenue year-on-year. Revenue growth came in 2 forms, growth in subscriber base and also growth in monthly ARPU. Contracted units increased 10,256, with 30% of these new customers coming from construction, civil engineering, agriculture and forestry. We renewed contracts for existing customers of 8,136 vehicles. This provided us with an opportunity to offer additional services. 6,283 vehicles were on our original Ehubo1 in-cab hardware. The team were able to upgrade, upsell 42% of these to the latest Ehubo3 (sic) [ Ehubo2 ] hardware. This, combined with the additional SaaS services, saw our monthly ARPU increased $2.04 to $55.78. Asset retention rate remained high at 96.1%. We're going to Page 9. The North American business is now an established market and is contributing at a group level both in terms of revenue and ARPU -- sorry, revenue and EBITDA. Revenue growth was 62% year-on-year to $24.8 million. The deployment of 2 large enterprise customers contributed strongly to the increase of 9,342 contracted units. This represents a 38% growth rate. EBITDA grew significantly year-on-year -- in FY '19, it was $0.4 million, to $7.5 million in FY '20. We continue to add services to our North American product offer to increase the products with -- for our enterprise prospects. We look forward to releasing our EROAD Go Workflow logistics management solution for drivers and our in-cab camera solution towards the end of the calendar year. We turn to Page 10. Australia is a relatively new market for EROAD. We had a very promising enterprise sales pipeline pre-COVID and we're in the final stages of growing supply teams. COVID has seen these opportunities pushed out, but they're not lost. Subject to continued uncertainty, we do expect progress on these during FY '21. We onboarded our first trans-Tasman customer, one in Australia, which was 355 vehicles, and that was rolled out simultaneously across New Zealand and Australia. I'll hand over to Alex, who will go through the financial update.

Thanks, Steven, and good morning, everybody. As Steven has already outlined, EROAD has today delivered another year of strong growth across all of the key metrics represented on Slide 12, financially. So revenue increased 32% from $61.4 million to $81.2 million. Our EBITDA increased by 73% to $27.1 million. And in -- within that, the actual EBITDA margin increased by 31% from 25% to 33%. For future growth, our future contracted income rose 14% to $134.4 million. And our total contracted units rose 21%, as Steven already said, to 116,500 units. We turn to Slide 13 and move to look at the makeup of our EBITDA growth. The continuation of growth in New Zealand and North America on EBITDA is the key highlight here, and we continue to invest in opening up our newest market of Australia. EBITDA for New Zealand increased 25% to $34.9 million. North America EBITDA increased to $7.5 million from $0.4 million in FY '19. And a negative EBITDA of $1.3 million for Australia represents the full year impact of our continuing sales and marketing investment into that market. Our corporate and development segment, which contains our central head office cost as well as the product and engineering activity we undertake around research and development, recorded a negative EBITDA of $14 million, but this included nonrecurring patent disputes of $2 million. We turn to Slide 14 and start to look at the metrics we use to monitor our growth performance. Our annualized monthly recurring revenue or AMRR grew very substantially from $66.5 million at the end of FY '19 to $86 million at the end of FY '20. And this reflects both growth in the level of new contracted units as well as the improvement in group ARPU year-on-year, as Steven has already touched on. As we previously stated, future contracted income grew to $134.4 million, $117.4 million in the prior year, and is really a reflection of the net impact of the growth in contracted units offset by the revenue that we recognized during this year for existing units that we had at the beginning of the year and any units we brought on during FY '20. And then in terms of our investment for aiming to long growth, we continue to ensure that we're making the right investment to keep EROAD on the right side of the investment curve. And accordingly, our investment in our R&D activities remained in the 18% to 22% of revenue range at 19%. And I'll talk about that a little bit more later. If we move to Slide 16 (sic) [ Slide 15 ] to talk about the metrics we look at around building enterprise value from our existing customer base. The 3 key metrics we track are ARPU and asset retention rate. We were pleased to see ARPU continuing to build year-on-year, increased to $58.38 for the group this year, albeit $1.23 of that $3.30 year-on-year increase did relate to the strength of the U.S. dollar against the Kiwi dollar. Once again, we are very happy that our asset retention rates have held up well. You can see that in the 3-year trend on Slide 15. And our group figure was 95.2% for FY '20. And as our connected vehicle and, therefore, unit numbers will continue to grow, these metrics really increase in importance to ensure that we're driving the maximum value from our customers by delivering additional value and providing appropriate customer service. We move to Slide 16 to talk about our profitability metrics. In terms of the efficiency of how we win and service customers, we monitor this through 2 metrics. And as the charts on Slide 16 show, we expect our cost to acquire, or CAC, metric to reduce over time as a percentage of revenue as we continue to scale and grow. And similarly, while our cost to serve metric has been held flat this year as a percentage of revenue, this was due to additional investments that EROAD made into capability in this area during FY '20, and we expect the metric to continue to reduce during FY '21 as further operating leverage is introduced, capitalizing on the investments we've made into new-generation business systems and associated processes. We move on to Slide 17 to take a deeper dive into our operating expenses and look at the movement there. The operating expenses increased by $8.3 million over the year, the biggest movement really relating to an investment we've made in people capability across a range of areas such as customer service and supply chain management as well as further expanding our product and engineering capacity and capability as we make those investments Steven touched on for the next phases of our growth across the market. The other 2 major movements to call out were on increasing our SaaS platform cost at $1.9 million, which increases -- which increased the scale of operations to increase the number of customers; and additionally, we had a net increase in our legal cost of net -- of $1.7 million, as we've already signaled. This was because we incurred during the year nonrecurring patent dispute cost of $2 million, which contributed to that $1.7 million increase. We move along to Slide 18 and look at our investments in capital expenditure. Some of this investment relates specifically to being able to deliver our SaaS services into connected vehicles through the Ehubo hardware units that are deployed. And the level of these additions after adjusting for inventory movements is shown on the top of the slide there, increasing $2.5 million year-on-year and really reflecting the increased number of units installed in the vehicles as well as an increasing proportion of the total units being installed in the U.S. market. Our other major investment in CapEx related to the intangible assets, which are set out on the bottom of Slide 16 (sic) [ Slide 18 ]. These are predominantly our development assets, which represent capitalized R&D costs; and software assets, which are the installation and configuration costs relating to the business systems we use to run EROAD. Additions in this last category increased significantly in FY '20 by $5.5 million year-on-year, and that was really due to the previously signaled deployment of our new generation of IT systems that will set us up to be able to scale more effectively and efficiently through the standardization they introduced as we grow further. We turn next to Slide 19. Again, this is really a further dive into the R&D spend that we've undertaken at EROAD. As you can see from this slide, our overall investment in R&D activities continues to increase, as you expect. And as you expect, a growth company investing for the future and focused on that, the level of our capitalized investment in our development assets continues to exceed the level of amortization of the asset as we earn revenue from the use of the asset in providing SaaS services. We turn again now to Slide 20, which starts to look at our cash flows and how we generated cash -- used cash during the year. With the continuing business growth across our 2 main markets, our operating cash inflows increased strongly to $23.1 million. We continue to make significant investments, as we've discussed in previous slides, noting that a $6.9 million of investment was made in -- that is a cash outflow relating to our new generation of business systems. And while we continue to spend money to crystalize further benefits from these systems, in FY '21, the spend will not be anything like as significant. So accordingly, our free cash flows, which we define as the net of operating cash and investing cash flows, held fairly steady at a net of $12.8 million outflow, noting while we do not expect this to structurally improve -- sorry, noting that we do expect this to structurally improve with continuing growth and further crystallize operating leverage going forward. Slide 21 is a new slide that we've introduced to really break out the use of cash and the generation of cash by our markets, and so you can see across those operating segments. This illustrates that we're now generating positive free cash flows in both New Zealand and in North America and that $16.5 million of that positive cash flow was used in the continuing investment into developments in software assets with the sales and marketing investments into the Australian market accounting for approximately $1.7 million of outflow. And the remaining significant callout around cash flow outflows there is really that $14 million of cash is used to fund our corporate cost, which includes the noncapitalized research and development costs that we incurred as well. We turn to Slide 22. EROAD remains in a solid financial position, as we previously articulated. We believe, given the choppier economic waters we're all heading into, we are well positioned from an economic resilience point of view. We've got significant precontracted on future income. We have a diversity of earning base across both geographic markets and customer segments as well as being diversified well into different customer industries. And we have $23.9 million of ongoing debt facilities to draw on within our overall increased facility of $60 million. And we anticipate this will be able to fund anticipated levels of organic growth. But as we previously indicated, any very significant opportunities, both organic or inorganic, would most likely have to be equity [ partnered ]. We turn to Slide 23. While we are well positioned, we all are, as I said, heading into choppier waters in all 3 of our markets as a result of the economic downturn created by the COVID lockdowns. We've already signaled to the market as soon as the lockdown commenced, we undertook a full review of the potential scenarios of growth in operations in all of our markets and what responses might entail for us in each of these scenarios. So as a prudent first step, we made a number of decisions to curb short-term spending in several areas of cost until we have greater clarity about the potential severity of the economic downturn. And we understood the timing and sequencing of any additional cost levers that we might have to use should macroeconomic conditions deteriorate further. We're now going to move across to the outlook section of the presentation. So I'll hand back at this point to Steven to talk through that.

Thank you, Alex. If we turn to Page 25. During FY '20, we made very good progress strategically extending our platform, investing in our people, products and business systems, all focused on doing a better job for our customers and adding more value. This has resulted in good progress financially also in FY '20, which means we can continue to invest in our growth ambitions. We turn to Page 26. So COVID definitely threw a spanner into the works. We were well placed, based on our sales pipelines, to make a really strong start to the year. [indiscernible], we implemented our global BCP, which allowed us to rapidly move to working from home effectively. During this time, our employees, products and services continued and -- to support our customers that -- to manage their supply chain and business activities. Many of our customers provided essential services to keep the economies going in the markets that we operate in. On this slide, you'll see the severity of the lockdown that occurred in New Zealand and you'll also get to see some of the impacts on the different segments that we support in New Zealand. This information also is very useful to us to understand the market and the customer impact and how we can support our customers to best navigate through these uncertain months ahead. We turn to Page 27. EROAD operates in large addressable markets. The New Zealand and North America market sizes have been updated based on the latest industry information. So there's significant additional addressable market that we're now understanding. Once we get through this period of chaos or uncertainty and each market is in a stable, recessionary mindset, we expect to see the increased adoption of telematics to return and maybe potentially increase. What we have gleaned so far about the impact of COVID is that telematics is a critical component in the need of digitalization of global supply chains and to allow services to be delivered by our customers in a more efficient and contactless way. We turn to Page 28. We had a great opportunity in addition to adding -- additional units to add additional growth in ARPU. We have a number of excellent services that we will deliver over the next 12 months along with an in-cab solution, which has forward and driver-facing cameras to improve driver safety and help our customers manage their insurance cost. We turn to Page 29, outlook for FY '21. Despite economic uncertainty across all of our markets, EROAD remains well placed, reflecting its strong customer value proposition, future contracted income, diverse customer base across regions and industry size as well as the different parts of businesses that we support. Then to Page 30. We are well placed and we're ready. We continue to support our customers, many of which will be critical in rebuilding the global economy. In a global downturn, current and new customers are looking for products and services to help drive efficiencies, and we're building a -- and that's worked out very, very -- quite very, very well. We now have the right systems and processes in place to drive efficiencies in our business, and that will be a key focus over the next 12 months. We have the cash flows and funding facilities to support anticipated annual growth. We continue to look at growth opportunities, both organic and inorganic, and evaluate an ASX listing. So bottom line, we still choose to grow and we continue to invest in our future. I'll hand back to the operator to take questions.

[Operator Instructions] Your first question comes from Owen Humphries from Canaccord.

Congratulations on fantastic results. First, I'd just like to -- it's a clarifying question just on those patent dispute costs. Just what does that relate to? Is that the -- an issue that -- or is that -- are those costs likely to be ongoing into FY '21?

I think we previously disclosed that we were in a dispute around the patent -- use of the patent name in America, as announced in previous set of announcements. We worked through that during the course of FY '20 and got to a point where we settled that dispute. So it will not recur going forward. And the total cost of -- I believe the cost and settlement was the $2 million that we said. So that will not be recurring.

Yes. And the bottom line on that, Owen, is we could not [indiscernible].

Totally.

Okay. Good one. Okay. Good to hear. And maybe just touching on the U.S. on 62% growth rate, it's impressive. You wanted to -- a couple of large customers. Maybe talk about, are you seeing an increase in interest in your product in the U.S.? And are you changing the way you go to market or through partnership agreements or distributors or -- just talk through your ability to scale in that market. And what are you doing about it?

So the thing that we reflect back on those 2 enterprise wins, while it provides a wonderful revenue growth, what it also -- that has basically provided us with the reputation needed to access those larger customers. The focus has been -- last year and into this year, is to provide a better product market set for enterprise customers, and that's kind of reflected in that EROAD Go product being delivered in sort of the next 90-odd days, which allows workflow logistics from the back office through to the driver in the vehicle. So that is a focus as we get a benefit, which is sort of integrating into some of the larger logistics systems out there, which is McLeod and TMW, we improve our ability to access enterprise. Enterprise tends to be a direct sales as opposed to through channel. But we've clearly demonstrated that we can bring on these large enterprise accounts without impacting their operations. So we have 2 very happy customers up there. We did add a smaller enterprise account during the course of the year as well. So it has been an increased focus for us, those enterprise accounts like EROAD, because we are experts in transport regulation and providing SaaS products that help them best manage that. We have great customer service and our products are pretty reliable.

Good one. Okay. And maybe just switching gears to Australia. The team obviously is very large there. Can you just touch on the current adoption rates for both medium, light and heavy vehicles? And what's the likelihood that this could be mandated -- or as they move to RUC-style scenario that you spend in New Zealand into Australia? Or what could step change the acceptance of telematics in this market?

Okay. So telematics is well used in Australia primarily around logistics and service delivery. We entered the Australian market based on the regulatory hook that's around chain of responsibility. It's a normal sort of MO for going into a new market. So that was a change that was brought in about a year ago. And of course, we then added the fringe benefit tax and the fuel tax refund products. Within that Australian regulatory environment, there is a lot of reform proposed in there related to the driver fatigue management, such as the electronic work diary, which is similar to the initiative that was introduced into America. There's also increased focus on the health and safety side as well. There are trials happening in Australia, a small one last year, and they're proposing a larger, national road user charging pilot. So there's a lot of transport regulation that will become open to sort of regulatory telematics SaaS solutions. So that's the interest for us. And I think that will be a major driver of adoption as it was in the U.S. market.

Good one. And of the 4,500 customers you have, just remind me how many of those customers are trans-Tasman.

So trans-Tasman customers, which is -- there is a number of large enterprise accounts. There's about 300 of them, where we have new business in New Zealand. So some of those customers are part of our sales pipeline for Australia.

Okay. Good one. And just lastly from me. I know we have chatted previously about the next-generation hardware solution in -- being released. Is that an FY '21 initiative, hasn't been released already? Is it first half or second half? Just -- and what does that mean for ARPU for your business?

So the camera solution that's currently announced are hitting into beta next month with the release around that sort of October-November time frame. So that is the product. That is in addition to what we currently have. So that will be sort of circa $35 per month. So that will be a significant ARPU add. It is a product that's seen big demand in North America as a result of some really crazy settlements. We have the settlements and some payments made by insurers that's been in the order of $50 million plus. So they're now demanding that operators start putting this equipment into the vehicles to help exonerate and reduce some of these settlements.

[Operator Instructions] Your next question comes from Joshua Dale from Craigs Investment Partners.

Congratulations on the good progress you've made this year. Just one question from me. On Slides 20 and 21, the $16.5 million investment in development and software assets, how much of those costs were more one-off in nature? And how much do you expect to recur going forward?

So I guess what we said was the software assets spend, which is the $6.9 million component of that $16.5 million, is predominantly nonrecurring. So we put a significant amount of investment in new-generation business systems this year. We've deployed a new ERP. We will continue to invest some money in that to get further benefits of it as we get that in, but it would be nothing like close to $7 million that we spent this year. I think it would be in the fairly low-digit $1 million to $2 million sort of spend. In terms of the $9.6 million development assets, I mean that's continuing to link on to next generation of products and the future-focused platforms that we've got. I think we will continue to work on that, albeit the shape of what we're doing would trend over time. Steven, you've got some thoughts on that?

I think one of the things that we are doing in terms of product development is increasing the capability of some of the underlying platforms that will allow us to provide additional services to enterprise. The business platforms that we built 5 years ago was primarily focused at small to medium business. They're very reliable. And we have been able to serve larger enterprise, but that is really the focus as going forward, those platforms need to be enterprise-grade.

[Operator Instructions] Your next question comes from Wassim Kisirwani from Jarden.

Can I just ask you a question on the sales pipeline? You made some comments about slippage there. And then you've obviously given the outlook commentary, expecting lower unit growth. But can you just elaborate on that, sort of the extent of that slippage that you're seeing, whether it's sort of SMB and enterprise. And when you sort of -- and if you're able to sort of quantify the other ones, unit growth, if possible, the decrease that you've seen. Given the momentum that's been built up in the business over the last couple of years, I would have expected that some of that momentum continued especially in the SMB space. So just interested in your comments around that, please.

Yes. It was difficult to hear you, but I can rephrase that question, that you're interested to know what that impact on pipeline is for both SMB and enterprise.

Yes.

So we need to put some contextual thing around it. For 2 months and for this year, New Zealand came out of lockdown not so many weeks ago. So we were significantly impacted while in lockdown, we could only service essential services. We've seen that pipeline unlocked in many cases, and the additional capability what our system can do around contact tracing has also won us business in the short term. So I think SMB flows will come back, but will they sustain? We're expecting some recessionary impacts and maybe a W kind of -- shaped recovery in New Zealand. America, I mean that's a very chaotic market at the moment and really difficult for us to project. So we just need to be very agile when you've got a presidential election, you've got the civil protesting, which seems to become more intense, and you've got a spike in COVID. Some of the things that we're looking at from a North American perspective is so how do you build a large-scale rollout when all your customer support staff is at home. So I think we're not losing opportunity but they are getting pushed out. So I think we just need to roll with the punches should there be more of that. Does that answer your question?

Yes. No, that's good color. I appreciate that. And then maybe just a follow-up to that then. On the cost measures that have been undertaken in the business on the back of the cautious outlook, is that having an impact on the sales pipeline as well, the sort of cutback on marketing events and hiring and adding salespeople? Just interested in your thoughts around whether the business is getting that balance right now between pushing on the opportunity at hand and then also being cautious given the outlook for...

I mean I think predominantly, a lot of the cost levers we called in the short term that I talked about were actually very easy cost levers to pull. So you can't do any travel during lockdown and therefore, associated costs of doing that dried up, which was good. As you indicated, some of our marketing activities center around events. And again, large-scale events have been problematic under all the different types of lockdowns we've had in the 3 markets. Obviously, we're looking at what we can do now in coming out and there's some loosening in some of the markets, and we will continue to make sure that we are investing. So we deferred some of our marketing spend rather than pulled it back, but we maintain a strong focus on making sure we are spending as effectively and efficiently in our marketing space, particularly the digital marketing space, to look at results. And I think in terms of our sales pipeline, we've got good visibility from the new systems now, and we will add and prioritize adding resource when it is appropriate in terms of expanding that market out. We're continuing to build the Australian market. We've only got less than 6 people on the ground in Australia, and they're continuing to build momentum there in the SMB space. And we're working in the enterprise pipeline in Australia, for example, using our enterprise sales folks from New Zealand remotely in combination with the on-the-ground folks as necessary. So we haven't seen any issues to date. But as Steven said, it's going to be a long haul when we're only a couple of months in. So we are dynamically managing the business. We're making decisions monthly and re-forecasting quarterly around what the business needs to invest and capitalize on the growth and pipeline activity. So we will make sure we prioritize accordingly. But we are making sure we're aware of what levers we might need to pull should the macroeconomic conditions deteriorate.

And with the number of pilots which were about to be undertaken, they've got deferred. And we've received in recent weeks that those pilots will begin again, say, in that sort of August time frame. I think when you get from this very chaotic period of uncertainty, the customers and prospects really kind of work out which way is up for their businesses. We're not particularly open for selling -- for buying. When we get into a recessionary mindset and most probably still not have great control of the top line, we may become incredibly focused on how they can reduce their costs. So that is something that EROAD, with its products and services, can help them with a lot. And so we're expecting, as we move out of the chaos and into recession, that we will do well.

[Operator Instructions] Your next question comes from Blair Cooper from ACC.

Just in relation to April and May collections and thinking about that $80-odd million of annualized recurring revenue that you start the year with effectively, I just wondered whether you've had to give any relief to any of the customers.

Yes. Thanks, Blair. We -- I mean clearly during lockdown, there was a number of things occurring. A bunch of our customers couldn't even get into the office to make payments. So there were some logistical issues a number of them had. And obviously, there were others that were economically very significantly impacted by lockdown. We have had a series of conversations with a number of customers. And we had some customers in America with similar issues, and we have worked with them to get to a situation which work both from us -- for us and for them in terms of deferral of those April payments and those being paid over the remaining few months in the rest of FY '21 financial year. It's, I think, really to do with -- predominantly to do with April invoice amounts. May, as Steven outlined, an awful lot of our customers got back significantly on track in terms of vehicle movement, which is a proxy for generation of economic revenue. So we have had much less of impact on that in May through the -- April. And we're seeing -- and again, it was kept to an amount because it was only a certain amount of our customers that were impacted. Clearly, tourism is probably the sector that's had the most issues in New Zealand, and we've worked through that with the limited number of tourism customers that we do have on to make sure that we provide the support that we could during that period. And we continue to work with the customers in that segment. But a lot of our customers are now back on track, and we're working on maybe more of those debtors along into collected areas. So small impact but not significant. It would be in a different group.

There are no further questions at this time. I'll now hand back to Mr. Newman for closing remarks.

Thank you, everyone, for attending the call, and we look forward to catching up with many of you over the next peak or so. Good morning.

That does conclude our conference for today. Thank you for participating. You may now disconnect.