EROAD Limited (ERD) Earnings Call Transcript & Summary

Firstly, welcome, and good morning to everyone joining EROAD's half year results announcement for 30 September '22. I want to acknowledge Margaret's appointment as our permanent CFO. I've been working with Margaret closely in her role as Acting CFO since April and then, of course, in her role as the Group Financial Controller since September 2020. She brings a huge amount of professionalism and drive to the role. She's been instrumental in the work we're doing on the strategic review at the moment and also along our drive to profitable growth. So it's great to see her being appointed. I'd also like to acknowledge, I did get a lot of feedback from analysts and investors who reached out to me to talk about how great Margaret was in her acting capacity, so I'm really happy who admitted for their role as well. So I'm really happy that we brought her into that role. We did go through a process where we looked at candidates in New Zealand, the U.S. and Australia. Margaret certainly was a standout candidate as part of that process. In terms of the format today, we'll -- Margaret and I'll go through the presentation, and we'll certainly leave time for questions at the end. [Operator Instructions] Just kicking off. Now it's fair to say we've recognize it's been a tough year, both for our shareholders and also for EROADers, genuinely. And we know the world has changed when it comes to technology stocks. Given this, we have been decisive when it's come about looking at our cost base as a company and what we need to do for next steps going forward. We are focused on profitable growth. And for us, that means we need to look and address our cost base to make sure that, that's appropriate for the company that we are and also appropriate for the growth that we're going to seek to achieve going forward. And so today, we've been looking at our product suite and been rationalizing where it makes sense around what products do we develop and what products we bring to the market. So we've been focusing on that. As you have a more rationalized product set, you do increase the velocity of your engineering team, and it also decreases the spend that you have put in to -- and invest into R&D platform. We've also, for the last number of months, had a cost program underway. We still headroom emerging for technology stocks and we knew that we needed to take steps on there. We will be seeing those steps materialize in the second half of the year and beyond. Intentionally, what we'll be looking at there is reducing our headcount so around circa 40 headcount reduction in the teams and that takes accounts -- cuts across the teams that we have but also increasing additional resources into R&D. We've been consolidating our footprint when it comes to leasing as well, just making sure as we sort of transition to hybrid lease, then, we've got the rights to offer set up to support our staff. We've also been looking into our SaaS cost and our data cost and discretionary spend as well just to make sure that we are really targeted and focused on what our spend is going forward. And we do anticipate that's going to flow into improving our operating cash flow. Obviously, over time, we've been progressing our integration work and had about $6 million spent this half year on integration. Over time, it's going to reduce. So we expect that to also help improve our operating cash flow. It's fair to say, we also had a really strong year when it comes to growth. New Zealand continues to perform really strongly, and we'll touch on that a bit later in today's presentation around ongoing growth as seen from new and existing customers. We're also really excited to have announced a couple of weeks ago the Cisco opportunity, which does prove the product market fit that we have with the Coretex products in North America. And we won that account against very strong competition from the incumbent supplier as well as some of the strongest other companies operating in the North American market. We've got a really robust pipeline ahead of us of over 22 pilots underway, which represents 32,000 of potential contracted units as well. And we are progressing well in our strategic review, which is focused on profitable growth. We've got to look at a broader range of commercial models that have been unlocked with the Coretex merger as well. So turning to the operational update. What I'd like to focus on here is our growth in our annualized monthly recurring revenue. This is how we measure ourselves as a company. And what we've seen over the half year is we've grown by about 18% in AMRR up to $158 million. When you miss out the growth from -- due to the USD FX rate conversion, so $13.6 million there, we're still growing at around 8% when it comes to AMRR. That's consistent with what we're seeing in North America generally around growth, so North American growth is around 8% to 10% in that market. This does not include the Cisco opportunity that we've recently signed up as we've not yet commenced rollout units for that opportunity, but we anticipate to do so shortly and before May of next year. We're also focusing on adding products and services to our customers' plans. So we had about 1,000 customers who upgraded and added products and services around 7,000 during the half year and almost 500 customers upgraded their plan as well, seeing greater value out of the investment we put into our product set. And that's accounted for about 3,000 units of additional upgraded there. When we look at our contracted units, we continue to see good growth there. So we had around almost 9,000 growth in our total contracted units for the half year. So we're seeing strong growth reemerge in that market there. If we look at North America, in particular, our net growth was around almost 3,000. But when we look at our gross sales in that market, there's about 7,500. So we're seeing strong growth occurring in the market but some churn being caused by the SMB segment there. In New Zealand, we continue to grow strong with 5,000 contracted units growth in the half year alone, up 5%. In Australia, our growth is more, we're looking at there as around supporting our in-price customers that we sort of brought on as part of the merger and focusing on kind of right customer support structure in place in relation to what we're doing with EROAD and other markets and building good engagement with those customers. I'd like to talk about our asset retention rate. We continue to see really strong asset retention rate in the markets that we operate. So if you look at the EROAD stand-alone, that's about 94.2%. Could we measure this on an annual basis? We still break these out. And for Coretex, which has more been towards some of the large enterprise fleet, that asset retention rate is about 95%. What we see is once we're in with the customer, it's very hard for us to be removed, and that's for a few reasons. Our strong product market fit that we have with a number of our customers and the fact that we can continue to upsell them onto new value-adding products is really important, and our customers see that journey with us. Also a really good customer support model as well as we get really engaged with our customers who see us as a strong partner to the business. Indeed, we actually win customers back. We're seeing in certain markets. Now customers have gone over to other vendors and now come back to us off the strength of our customer service model that we have in those markets. And during the course of the half year, we renewed around 918 customers for about circa 21,000 connected units. That includes ABC Supply, which is one of the leading North American customers for 6,000 subscriptions in that market. On this slide, I just want to talk through how we sort of grow with our customers through account expansion. So you'll see on the left-hand side of the slide how we have our core units in the market. So we have a -- we supply that in New Zealand, Australia and in North America. We saw continued growth with Ehubo in the markets we operate in. Our Corehub, we see growth there, particularly in North America. Australia also brought that product to as well. And over time, we could be adding additional functionality and services to Corehub in Australia to sort of build momentum for that product there as well. And equally, Clarity Solo, which is the all-in-one telematic device and camera solution as sort of a core part of our offering [ in terms of ] growth there. We then have added value products or services that we supply as well. So you know we've talked about our Clarity Connect Dashcam in the past. That connects with our Ehubo product and so it's going to connect then with our Corehub solution as well. And what that does is it provides the camera in the vehicle for our customers to sort of look through from a health and safety sort of action and we saw that grow by about 1,500 units during the half year. We also have our Phillips Connect product, which connects with our customers in North America for their trailer solution too. And we're seeing growth in that market as well. Then we have our SaaS products. So we enjoy continued growth in Logbook, Inspect and primarily in the New Zealand markets as well as our Enterprise Data Connector. That's quite a high-value solution that we provide to our customers, and it gives them control of the data for what we collect on their behalf. And that makes us more sticky as they can then process [ intimate ] the data with other data sources that they have to get greater granularity, visibility and insights of what our solutions are doing for their businesses. And when we look at those SaaS solutions, we get a higher margin of those versus the hardware. So we're looking at continuing to invest in those SaaS solutions going forward. If I look at and go through the next 3 slides, each of the segments or end market. In North America, what we're seeing is, we continue to see growth across a range of product solutions that we have there. Our Corehub and Ehubo regrew, from a gross perspective, of 700,000 units in that market. We need to net out some churn, and as I mentioned before, principally driven by SMB customer base. And that's for the reasons that they're still facing headwind when it comes to the economy in North America. And whether that's due to high inflation or consolidation that they've seen in the industry as well as driver shortages, we may talk to those customers, they renew and store for fewer units. But on a positive note, we are growing at the enterprise accounts, and we are seeing our sales engine really start to convert opportunities up in that market. We continue to see growth around our Dashcam products as well. So we added about 500 Dashcams in North America over the half year, 156 of which was for Clarity Solos, that's all-in-one telematics solution as well as around 380 Connected Dashcams as well. And we're seeing the trailer tracking product in that Phillips Connect is still been a strong offering in the market, sold around [ above 700 ]. Here we go. So if we move into the New Zealand result for the half year. We grew by 5,000 units in that market, and it just demonstrates the continuous strength of the offering that we have here in New Zealand. That growth was about 3/4 driven by existing customers. So has seen the value of the Ehubo solution principally for the heavy vehicles and they wanted to roll out in lighter, more medium-duty vehicles that they might have in their fleet as well to give them a total fleet perspective of how they're performing. We also see growth around our camera solution in New Zealand, too. So we added over 1,000 connected Dashcams so they're not counted as part of 5,000 vehicles because they are connected to an Ehubo unit. And we start to push more the all-in-one Clarity Solo solution so we expect to see greater growth driven from New Zealand after sort of up in our campaigns for the Clarity Solo. In terms of our SaaS products, as I mentioned before, we're seeing a good performance of those of selling over 1,000 Logbook subscriptions and Inspect subscriptions during the half year. And we also continue to see growth around enterprise data in the market. We are sort of getting into converting some of our customers from 3G units to 4G units, but we were still maintaining high asset retention rate and market there of about 96% when you look at EROAD on a stand-alone basis. Now looking at our Australia performance for the half year. We've had a slight amount of growth. There's been a bit of a mix in terms of some account expansion for enterprise accounts, also the SMB space. But our focus very much in Australia is really build in our support structure around the Enterprise vehicle fleets that we brought over from the Coretex merger. We also are focusing on our Dashcam product in the market and trying to build up some great momentum there, and we expect to see that picking up over the next week while. And finally, we've bought our Corehub solution to Australia, but we're going to start building out the features and functionality there into the 2023 calendar year, then we'll see greater momentum come up back of that. I hand over to Margaret now to talk through the financial results.

I'm going to head over and do some of the more detailed financial results. Before we start, I just wanted to acknowledge that it's a tricky result in terms of comparability, so we've had a lot of change in EROAD Group over the last 18 months. So what you're seeing is part of this is H1 and FY '22 had no Coretex. H2 and FY '22 had 4 months of Coretex and now with H1 FY '23, we've got 6 months of Coretex. So comparability is difficult for some of the metrics. Alongside that, we've got some technical accounting adjustments and one-off costs. We've tried to indicate wherever they are and give you some more information through the slide deck, and I'll try and highlight those when we need to. In terms of revenue, revenue has grown 28% to the gross level. One of those accounting adjustments, there was a $7 million revenue. So if we normalize for that, you see revenue growing 17% in the half. That's partly to do with the extra 2 months of Coretex but also the underlying growth that Mark has just referred to. In terms of EBIT, EBIT for the 6-month period was a profit of $1 million. Again, those one-off items, if we normalize for those, we end up with a loss of $3.4 million. We need to focus on profitable growth. We need to respond to market conditions, so we've been taking costs out early. We've been focusing on our cash burn and we're enabling profitable growth in the markets. What you're seeing here is a picture of transition. And the numbers we have at the beginning of taking out our costs and we've got some one-off impacts. Free cash flow was negative $23.4 million. It's an improvement of $8.7 million in H2 last year. I've got another slide we come to on that one, so I'll talk to you more about that at that point. EBITDA has grown in all of the regions, which is really pleasing. In terms of the North American growth, which you can see on this slide, is the largest at $6.2 million, is a combination of 3 factors sitting in there. There's the underlying growth in our units. There's the extra 2 months of Coretex and there's also the strong U.S. dollar that supported growth in that market at a New Zealand dollar level. Normalized EBITDA margin is sitting at 19%, which is consistent over the 2 periods since we acquired Coretex. It's to do with the mix of the selling models we're using and also final sales of the legacy products that will wind off over time. Alongside our growth in recurring revenue, we've seen a [ 15% ] growth in our future contracted income, which is now $215.7 million. R&D spending is in line with what we signaled to the market. It includes one-off spending on integration of $4.6 million. And that's the work we're doing to combine our products and platforms really for our customers. We've realigned the R&D team, and given the market conditions, we're focusing on improving efficiency in the area, increasing our speed to market and targeting investments that give us the greatest return. As mentioned in the full year, we were expecting ARPU to decrease as we had the full 6 months of Coretex and the metrics. Coretex has a different selling model so we had quite different ARPUs as separate groups. Bringing that together, we have actually seen that grow slightly, but it's been underpinned by the strong U.S. dollar, which has driven that growth, along with our selling to our customers. So during the period, we had almost 1,500 customers do upgrades or increase their mix of products that they take from EROAD. Mark has covered asset retention so I won't worry about that one. Carry on. Cost to acquire. This is a lumpy metric for us. There's a lag time when you look at cost to acquire. What you're seeing in here is an increased investment in the North American selling and marketing and alongside a situation where the units haven't yet rolled in. So what I'd be expecting to see in cost to acquire is that will come down as we roll out units and go live with units in the vehicles, particularly for those large enterprise wins that we're doing. Cost to serve, our main focus in the area of cost to serve is trying to move the low-value engagement with customers online and move it to lower-cost mechanisms. So it has come down. We're hoping to keep working on those and keep driving that through into different channels. The operating bridge. This gives you some details on what the changes in the cost base between H2 FY '22 and H1 FY '23. We've used H2 for the spreads because we felt that was more comparable in terms of 6 months on 6 months. What is really pleasing in this is what it shows is even given the extra 2 months of Coretex into the cost profile, we're still showing we're holding costs flat in many situations and in many instances and we're growing the business. As with most businesses, we're seeing inflationary pressure, particularly in the labor market area. So we are pressured to attract people in price pressure as all our staff fairly impacts on inflation in their own world. We also have, in the personnel costs, the impact of the strong FX rate for U.S. dollar, which is about -- we see in the [ period ] about $1.2 million. SaaS costs primarily reflect the inclusion of Coretex for the extra 2 months. We are working with our suppliers to -- now that we're a larger group, working with our suppliers to make sure that we get efficiencies and economies of scale in there as much as we can. In terms of this slide, it provides you with details of the assets we've added during the period. Probably the key point to note in here is the elevated levels of inventory. I think at full year, we indicated that we're expecting to continue to see pressure in inventory and have been through inventory build. It's to do with global supply chain pressures, ensuring up our supply and making sure we've got product for our customers. So during this period, we had growth in inventory of $3.6 million and we've got a further $3.1 million in our prepayments that relate to inventory as well. With the market conditions looking like they're going to deteriorate, we're hoping -- not hoping, we're expecting to see global supply chain pressure ease over the next 6 to 12 months. It will take a little bit of time to wind back into EROAD's results. Clearly, we have to make forward commitments around inventory, but we are expecting that we'll be able to shorten the cycle of inventory. R&D. I've already talked about this a bit, but there's $20.5 million spend in R&D, and as I mentioned, $4.6 million that's related to integration. In the second half, we expect to complete most of the integration activity that relates to our customer platforms, and we remain on track for the [ $38 million ] that we indicated. Free cash flow. The highlight for me on this slide is for the first time, we've got each of the regions either cash flow positive or neutral, which is great. In terms of the half year, as I've just mentioned, our free cash flow was impacted by our inventory growth, the additional $3.6 million and the $3.1 million in prepayments. We've also had the integration investment, which as a total business is more like $6-odd million, as Mark mentioned. And there are a few one-off costs that hit this period as well. As a business, we need to continue to focus on revenue growth, but we need to do that in a way that helps us reduce our cash burn. The debt and cash facilities are about $47 million, and we believe that provides us with enough time to make the changes we need to make. This slide just provides some more detail but really talks to what I've just described previously, so I'm going to skip through to the next one. This slide gives you some examples of where we are taking cost out and what we have done already. Our focus is on cost reductions in areas that won't jeopardize our future growth, and our target is to have profitable growth and reduced cash burn. With that, I'm going to pass to Mark.

Thanks, Margaret. So in this section, we're going to look at the growth opportunities and look at outlook for the next half year. And you may recall the full year, there's sort of 3 key areas of focus that EROAD had in terms of half year. First was around delivering progress on the product and platform integration with the merger of EROAD and Coretex. Secondly was very much around the revenue growth momentum that we're building in North America and New Zealand. And finally, around our maintaining and engaged culture if we bring the 2 teams together. So I'll speak to each of those points to the section of the investor presentation. So first, looking at our product and platform, we're really excited that during the course of this month, we'll be rolling out our integrated platform. So that's a huge achievement from the team on that front. And that platform going live, we're now going to be moving towards getting the right products and features being built on top of that platform. And that involves migration of products that we've been building, either historically on the MyEROAD platform or historically on the 360 platform, which was what Coretex was running prior to the merger. So during the course of this month, we should also be rolling out our Clarity dashcam which we integrated to be able to sell to Coretex customers, and they've got to view those on the legacy 360 platform they are used to using. And that's a major achievement. And again, it helps back up dashcam strategy that we have, which has been credit momentum on all the markets that customers want a dashcam, whether it's from a generation perspective to sort of show that they were the cause of the accident or to manage just more generally health and safety responsibilities and that's the key driver that we're seeing in ANZ. We'll be rolling out the EROAD North American tax features into Coretex platform in the first quarter of next calendar year, so before April. And again, it has a very exciting development. As many of you know, EROAD has always prided itself on having a market-leading test product in the North American market. And we have to extend that Coretex's reported platform's great win. And we continue to work on certification of the Corehub device and bringing that into New Zealand market, which is hugely exciting. I mean, that was the key reason for why we won this core engagement, it was very much around the strength of that Corehub technology and hardware, and to be able to sort of roll it down to New Zealand with a bit of work being done to make it RUC-compliance, a reducing charge of compliance in New Zealand to enable our enterprise customers will be really excited to development during the course of next year. But we also continue to work on other parts integration too. The key 1 there is making sure from a customer-facing perspective, they get 1 single driving platform and that's a good focus in the half of the year and also continue to enable our sales team to cross-sell products into customers in North America as a major focus of the team. Looking at building revenue growth momentum in North America, I just want to talk to some of the graphs on this slide. But first, if you look at the revenue perspective, we've grown around [ 30% ] in terms of revenue in North America over the half year. And when you look at the unit growth, which is the middle slide, as I touched on earlier, about 7,500 units or so in the half year, which is a little bit ahead of what we did in the second half of FY '22, but a significant step-up from what we're doing previously in the market -- in the North American market. We still do see some underlying churn happening there but we expect that to reduce over time. They're still principally driven from the SMB segment of the market who are still going to last part of the switching campaign from 3G to 4G. All those smaller customers are more exposed to the economic challenges that we've seen in that market. But it's great to see the customer team, as the sales team, sorry, really driving growth and sales in that market. If we look at our pipeline compared to what we've talked about at full year, as you may recall, at full year, we had 8 pilots of motion for about 26,000 units. Since then, we've converted through those pilots. One of which was the one for Cisco, which is above [ 9,000 ], and we still see potential upside for that customer as well. We've had a couple of pilots store generally in half year. And the reason for that is customers just decided further on their buying decision and just want to think further a bit more before progressing with pilots. We've also added another 10 pilots in the markets as well for an additional 14,000 units. So we are still seeing opportunities there to grow. Question will be very much around the timing of land-based pilots depending on the size. Some can take quite some time. As we've mentioned previously, Cisco took about 18 months, given its size to land. Some of the more smaller pilots take a shorter duration of time. But we are certainly seeing strong growth in the pipeline in the market as our product market sort of continues to grow here. If we then look at our revenue growth momentum in ANZ. In New Zealand, as we know, we've got a very strong performance, particularly enterprise accounts in New Zealand market. So as such, there's not a huge number of enterprise accounts out there that we don't have already. But not withstanding that there are 5 enterprise partners underway over 5,000 units, we also continue to expect that we'll be able to get growth in other segments of the market. We have been performing quite strong in the light commercial vehicles and seeing a lot of traction with our ESG and our health and safety offerings in those areas. So we are seeing good traction there. And we still believe we'll be growing by over 9,000 vehicles in New Zealand again for this year. For Australia, we have been looking at some growth in pilot opportunities there. So we've got 4 ongoing in-priced customer pilots around 2,000 units and also around our Clarity Solo cameras in our [indiscernible]. We've also seen some pilots sort of come off in sort of store in that market as well -- we're not sort of going to hit. And that's been due to sort of customer buying decisions and wanted to sort of look at different opportunities out in the market. But we have also been focused on as with our existing customers in that space, making sure we've got the right customer support model and then looking at further opportunities to grow them going forward as well. Sort of touch on ESG for a bit, because this is getting far more momentum in the market as we sort of talk more and more with customers. Initially, we saw New Zealand as being the key area to focus on ESG, but I've been up in North America 4 times now during the course of the year, talking to our customers up there and ESG as at the tip of their tongue in all conversations. So we are focusing on how do we bring our ESG offering to the market quicker. And there's various offerings that we've been working on, one of which is very much focused on heavy vehicle fleets and around how they can understand the fuel consumption and what their vehicles are doing there and how that can sort of transition those vehicles from being internal combustion engines to EVs. We're also looking at rollout of product over the course of next year, focusing on carbon emissions and how customers can measure those, more and more of them have been asked to understand what the thought points are. And as we understand, fuel burn of vehicles and how we can help reduce customers around the burn as well as asset utilization and productivity for their staff. We can give a good reck around what the carbon footprint is going to be for their vehicles. [ EROAD's half year ] is also down in crises where we launched our trial with EECA. EECA is New Zealand Energy Efficiency and Conservation Authority, and they are working with us and others to help customers who may have range in IT around being on EV trucks to understand what needs they have and how EVs can help ourself solution for them. So EROAD's playing a key part to play there. And what we have to do is help measure what is a typical day looking like for a vehicle and how that -- how those jobs to be done by an EV. So we've got a number of customers down there trailing that, ever cautious. We've also rolled 1 out in Auckland too. So it's a really exciting development. And it's helping from a customer perspective to see that they can actually transition from internal promotion engines into EVs. And they can still maintain the productivity that they need to complete their contracts and jobs for their customers. We've also been really focused on building a shared culture and working around merging the 2 entities during the half year as well. So focus on that front is, as we return people back to the office, we do see a strong focus around hybrid working. So asking the right mix of people in the office, working with teams as well as working at home and giving that work well. So we're focused on that through the last 6 months as many companies have. Our workforce is highly motivated in that regard. I mean, they certainly see how they're going to drive growth and productivity, and we've been working with different teams on how that looks. We've also been facing quite a competitive labor market. So we had a focus on our employee value proposition as well and roll out things such as health care to all teams across all the markets we're in and limited supply have been key there and also around how we can help our start around greater lead policies and principal work as well. So we've been focusing on building that engagement with our team too as the labor market gets more and more competitive. We've also seen a really shared culture being built between the teams. Coretex had very much a focus as a start up in [indiscernible] and we've been bringing that thinking and approach back into EROAD to help drive more efficiency and velocity in the teams. And we rolled out a new structure around our product design and engineering team. And the focus there is, as Margaret talked about before, is how to get more efficiency out of the team and drive more velocity. So we've rolled out new structure back in June on that front, and we've seen some good wins around teams have been more productive with the new structure that we put into place, which is great because that means we can get product to market quicker for our customer at a lower cost. I'll turn to our outlook for the rest of the half year. We reconfirmed in our guidance both at a revenue level and at EBIT as we updated market a couple of weeks ago when we announced Cisco. So between $154 million to $164 million on the top line revenue, that's obviously subject to FX movement as we see with the U.S. dollar and the changing in that front. We also remain on track in terms of our normalized EBIT of between negative 5 and breakeven. And even despite the inflation pressures we're seeing across the company, the focus on cash and profitable growth has helped enable us to reconfirm that guidance. We do have a strong pipeline ahead of us of 22 enterprise accounts, which are at the pilot stage of around 32,000 contracted units. And of that, we've seen in North America, as I touched before, about 25,000 units there in the pipeline as well, which we're working to convert to. During the second half year, we're also focused on retaining some of our large North American and Australian enterprise customers and look forward to continued engagement with those customers. I've been up in North America meeting with customers around how EROAD can continue to support their journey and building strong relationships with customers there and equally in Australia as well. We also see the benefit of cost cut initiatives in H2 coming through from what we talked about earlier. And finally, the last slide I want to talk to is about the strategic review that we've talked to the market about. We're very much focused working with third-party on how we can enable profitable growth in the markets that we're in. As Margaret and I talked about earlier, we did start looking at our cost base earlier this year to make sure that we are really focused on our spend, and we're going to continue to do so. But what we are seeing is in the current economic climate, the timing of our $250 million revenue target for FY '25, we expect that to push out to be a bit long year. We still see a good pipeline of opportunity up there, particularly in North America and as well as the New Zealand market so it's just taking longer to convert. We are seeing the improved benefits of the product market by team on the Coretex team. We've seen high gross sales in North America, and we are converting our opportunities in Cisco as a key proof point for that. [ And basically ], renewing ABC, which is continues to be on our Ehubo platform shows that we're still able to support in-price customers both at Corehub and Ehubo technology in those markets. And talking to customers, we're seeing an increase in demand for solutions focusing on sustainability, on data and managing the assets. When we look at the strategic review, we're going to look to build on our cost-out initiatives, how we can drive more efficiency in the company. We've also taken a more disciplined approach around North America to see where can we see greater growth sooner and how we can bring that forward. We're going to focus continually on rationalizing our product set. And as I talked about earlier, it helps us in our velocity around product development but also as a more cost-effective way of doing R&D as well. And we try to say, we're forecast high revenue and continued cash return as we still do have some outright staff with customers, particularly for those who come through from the Coretex model. We look forward to talking with our investors around our commercial strategic review before the end of FY '23 and provide more information to the market then. So we might now turn to questions. I'll open up both the chats and also see those hands up. So I believe Guy, just going to find you and then take you off mute. So please bear with me. Hi Guy, should be off mute now, so please ask your questions.

Yes. Maybe first, I can just start, basically, just if I could start on integration costs, $5.5 million in the first half. I think you previously talked about a range for the full year of $5 million to $10 million. Given there's still, I guess, ongoing integration projects, do you now expect to be at the top end of that or is that range still relevant?

Yes, that range is still relevant. We will be within that range at year-end. I think we signaled at full year, we had deferred the integration of some of our back-office systems so that integration is primarily focused on our customers and the tools we need to look after our customers from an internal business system perspective. But the internal business system stuff is almost complete in terms of that part of it. And I think for a second, help me out, Mark, kind of late this year, early next calendar year, that we will have the platform stood up for the integration to enable us to integrate the products across.

Yes. In fact, from a product perspective, customer-facing, that platform comes live during December. Clarity Dashcams is the first 1 we've got to that platform and [indiscernible] then come in first 3 months of next year.

Great. And just on -- I guess on increasing debt loan, I know I think you previously talked to, I guess, an expected peak in debt of first half '24. I mean, given the change in operating environment and, I guess, pushing out of some of those medium-term targets, is that still relevant? At what point do you expect to be kind of cash flow positive?

I think to your point, in terms of -- we talked at the time about what would happen with our large enterprise profile and what funding would require for units and how we do that. And you see that proof point in Cisco. And so some of our inventory builders around that really what will determine ultimately will be what we can do about managing that inventory level down from the -- it's about $30 million at the moment between the prepayments and the inventory. So when we expect to be cash flow positive, it would be beyond FY '24, but I'd certainly expect to see a large reduction in our cash burn through into FY '24.

Great. That's helpful. I guess just as a little bit further on that in terms of the -- can you just remind us what your banking covenants are?

So we've got 3 covenants. We've got a debt to EBITDA leverage covenant. We've got an interest cover ratio and we've got an asset cover. So -- and we're forecasting to be compliant with those -- all 3 of them for the foreseeable future.

Great. Are you able to tell us what -- exactly what those levels are?

We generally don't disclose the target levels as part of our banking covenants.

Yes, okay. And then just, I guess, on broader customer discussions, what sort of product pricing discussions and conversations are you having with customers? Are you able to get increased prices, just given the inflation? Or are customers looking to try and find areas to cut off, particularly as you go on to this high renewal phase?

Yes. So we look at the products there, Guy, at sort of different conversations with customers. So certainly at a high end, they see the value that we bring. And not only do we look from a revenue model, our rental model of obviously ongoing revenue from them but also look at new ways of getting revenue from [indiscernible] around integration, particularly the larger customers. There's almost a professional service model that's been developed there. So they kind of see us, from a value perspective, actually bringing real value to the business. So we're seeing positive discussions when it comes to what we're charging for solutions there. We've got an ability to, in certain contracts when we come to renewal, to increase or charge and we have in conversations with our customers with inflation environment that we're in, that we can increase those. At SMB, end of the market, they are cash constrained and we've seen that particularly in North America. And that's where we lose potential customers there who are looking at it from a more of a cost perspective and go into a lower-cost, lower feature solutions, that does add a bit of churn on that side. But we're very much focused on the enterprise level and larger customers who do value and how we do take costs out of the business and that willing to pay for it. If you remember, particularly the rental model, it's a very small upfront cost, which marginally takes cost out of the business. So they understand that, and we have good discussions on that front.

Guy, we have changed some of our pricing around stuff where we've been able to. So as an example, the transaction costs on road user charging in New Zealand or with customers that roll off a contract when we roll in to recommended retail and our installation review. So where we can, we have. I just wanted to add to your other question about cash, I should have added that the strategic review clearly will have an impact on where we land with our cash burn. So what I'm talking to you about is kind of the current model. When we finish strategic review, we'll be reviewing and working through what that means for the business.

Josh, I might open it over to you now, Josh. You should be off mute now for any questions you might have.

Just first question is on contingent consideration for Coretex. Can you help us understand what you expect the cash portion to be? And am I right in thinking that will be paid next week?

Well, just I'll touch on the second point, and Margaret can talk through the accounting on the first point. So the way that it works is, we measure from a merger perspective, at the end of November, how that looks. But then over the next bit while, there's quite a few different elements around the technology platform and so that we've got to work our way through. So setting up something has been paid within next week or so, there's a couple of month process we go through with their Coretex vendors around measuring against those outcomes of the purchase agreement.

In terms of what we've put in the accounts, you should treat it as an accounting estimate as you would with anything else like that. We ultimately have to do -- meet the standards and what they require us to do and that requires us to make some assumptions and revalue the shares ultimately. So I treat that as it's articulated as an accounting estimate.

Okay. But do you have an estimate of the cash portion, just ignoring the shares for now?

As we sort of work our way through it, Josh, the deliveries against that will be better informed -- the market will be updated in due course.

Just on the cost cutting net reduction of 40 roles, has it been concentrated in a certain division?

No, we've sort of looked across the business around -- we're going to drive greater efficiencies. So we've been removing headcount where it might seems to do so while still enabling growth. We've also, at the same time -- if you look at that sort of net -- that's a net number. So if you look across the board, it's around 10% fewer staff than what they were back when I joined as CEO back in April. So we have reduced some headcount, but then also in certain areas, particularly around R&D and some of the specialist engineers who need to sort of accelerate sort of product development, we've also recruited some as well. So that's a net number but it's been across the business. From an R&D perspective, we're very much focused on enabling fast velocity there so we get the right engineers supporting that.

And just turning to sort of churn and retention. I noticed your Coretex retention rate was sort of subdued in New Zealand. Just sort of interested to know who your -- whether customers are reducing their asset bases or you're actually losing customers to a competitor? Or perhaps you've been losing to EROAD?

Yes, Josh, you're on the money there. A lot of them are converting to EROAD. And the way the metric is measured currently is that you'll see it go down in 1 and it won't come into the other 1 until the next reporting period. Once we have full year, we'll be able to move that metric and you won't get that noise on it.

And just to pick up that point, part of -- we're talking about product rationalization is for as we're moving legacy Coretex customers from their old hardware onto the newer platform that EROAD has as part of a switching campaign, 3G to 4G. So they're having better technology as we sort of sit that they're getting now as well. So that have embedded -- of our [ impairment ] numbers, too.

Got it. And last question just on hiring an external consultant for the strategy review. Obviously, that's a process to work through. But can you just sort of help us understand what expertise do you think that will bring that you don't necessarily have internally?

So when do you sort of team up with an external firm and we're working with McKenzie in this instance as about helping to drive velocity around change as well. So we've got, obviously, a lot of good knowledge in the markets we operate in. They're providing also really good knowledge, particularly in the North American market around telematics, just helping to supplement that to make sure we get the right rigor and challenge around where we can believe we can grow there. Equally, from a cost perspective to the helps sort of give us an additional angle and viewpoint around how we can be more efficient too. And we also look at it how from a customer perspective, we can better service the customers to sort of help provide us insights on that level. So they've been a great partner working with us and helping to supplement the talent that we have internally, Josh. Thank you for your questions. So I might move on to Clyde. I'll unmute you. Can you just [Technical Difficulty]?

One of the outcomes of the strategic review, could it be that you will see impairments on costs that are being capitalized for IT development in the past?

It could, Clyde. I wouldn't expect it to. We generally try and make sure we align the useful life of those assets with what we expect them to have. The reason I said it could -- would be if we decided to stop using a particular product or a platform and there was still a value sitting in the box [indiscernible]. But at this stage, I think they're lined up with our expectations.

No, I was thinking more development because if you are looking to shorten your payback period on product or development expectations, you might discontinue lines that you previously invested in and capitalized.

Yes. I'm agreeing with you, Clyde, yes. Until we work through a strategic review, we think the useful life reflected that most of the stuff will continue to be used. But that is a test we have to do when we finish that strategic review and work out what products and platforms we're using moving forward. So there is a potential there, but we haven't yet finished that work to determine whether it's going to happen or not.

Any other questions, Clyde?

No.

Okay, thank you. I think the next question is from Sean Church. You should be unmuted now Sean, if you've got a question. Sean, are you off mute? You need to take yourself from mute as well. I think taking the hand down, Sean, maybe [ in accident ]. We've also got the chat. There's no question so far in the chat that I can see. Guy and Josh, I still see your hand up. I don't know if that's new questions or you just haven't taken your hand down. Guy, do you have a follow-up question?

Sorry. Just, I guess, 1 quick 1 just on the headcount reduction. I'm just wondering if you could put it in context with, I guess, aim to drive sales growth and also the comments made at the full year around expecting to increase the engineering headcount. And just as a part of that, could you give us an idea or a steer on what proportion of engineering costs do [indiscernible] contract move?

So I'll touch on the first few parts, and I'll pass to Margaret around the contracting side and proportion. So from an engineering perspective and also from a SaaS perspective, we've been very much focused on getting the right talent in the organization to drive the velocity with us from engineering into development or also from SaaS. So from a SaaS perspective, they haven't really been touched on any cost down when it comes to headcount reductions only on the margins, and that's very much around getting the right sales talent into the team to enable that. From an engineering perspective, we've reviewed roles and what we've done is, we've reduced some skill sets that we've had, which we had more talent and more expertise. And we've gone out there to hire skills that we need to help support our platform going forward. So it's a bit of a readjustment there. But it does -- it's not incongruent with what we're trying to do in terms of sales because we're trying to get the right salespeople in. [ In terms of ] engineer and having the right [indiscernible] engineers across different skill set because you have developers who write code in different languages. You need to make sure you've got the right mix to actually get that philosophy. So it's consistent with that. In terms of the contract point, I might pass over to Margaret there.

Sorry, Guy, was your contract a point about the proportions of the 40?

No. More on the existing cost base.

Ask me that question again, Guy.

Yes. So I guess I was just trying to understand the flexibility and some of the engineering costs, how much of engineering cost base is third-party contract labor?

Yes. So there is a little bit of flexibility that was more at the beginning of the year than there is now because obviously, part of that cost-out program has been to reduce contractors where we felt we could. But we do -- we are still supported in some specific areas. And where we have a shortage in skills and we're out in the market trying to recruit, but it's taking time because sometimes it is, we often supplement with contractors. So that kind of gives a sense. So it's a little bit but not a huge amount in terms of the contractor space and engineering.

We're still on track to run the investment R&D of [ $300 million ] including integration so that's still on track, Guy. So are there any further questions for today? Well, thank you so much for taking the time to go through the investor presentation with us. Look forward to having follow-up conversations with anyone as well and look forward to, in a new year, sitting down with all our investors to talk about our strategic review and the outcomes for the business. Thank you so much.

Thank you.