Felix Group Holdings Ltd (FLX.AX) Earnings Call Transcript & Summary

Thanks, everyone, for joining, and welcome to Felix's half 1 results for FY '25. I'm obviously Mike, CEO, joined by James, the CFO at Felix. I'm going to spin us through a quick presentation. We're open for Q&A. If you use the chat panel or the Q&A panel, we'll pick up those questions and come to Q&A at the end that James and I are available to answer through. Having looked through the list of attendees, I think everyone is pretty familiar with the Felix story. So I'm going to do it around the benefit of going quite light on the 101, and we'll just focus on results and progress and hopefully get some time back in your day. Okay. So without further ado, let's get going. I'll start at the some of the half 1 highlights. Headline by clocking $8.3 million of group ARR. So getting within striking distance of that $10 million ARR catalyst, which we've had on the radar for a while now. So that's exciting to close in on that sort of landmark number. And that's obviously being driven primarily by the high-growth contractor ARR segment of the revenue. And pleasing progress on that to date, which we will unpack further as we get going. The net revenue retention has remained strong. That number is still sort of fairly volatile with the -- depending on the large customer expansions that have happened or not within the previous 12 months. We've got some exciting expansion sort of near-term horizon unfolding. So we expect upside in that number over the coming quarters. Strong growth on that sort of new logo contractor additions number, which is really the sort of primary driver of the overall growth engine, which again we will get into. And that has led in terms of strong growth again in the vendors in the marketplace number, which is a big part of the medium-term commercialization strategy. And we understand the big opportunity that's on the vendor side of the market. Okay. Moving into just unpacking the group ARR. I mentioned that number getting -- closing in towards the $10 million ARR catalyst. We can see the strong growth on the contractor side. If you know the story, you understand we've deliberately been keeping that vendor ARR stable while the focus has been on the contractor growth strategy. And we look forward to moving in the medium term towards delivering on the modules and functionality on the vendor side to transition that to a high-growth segment of the overall and what that can do for the group. ARR group growth rate, I think, is quite exciting. On to the contractor ARR and unpacking that. We've started reporting on the gross margin publicly. We can see that remained stable, 4 halves in a row now on 76%, which is quite uncanny. But just shows that we've been keeping the sort of the top line growth and the supporting costs of those gross margin buckets in line. James and I had a view that we've got upside to moving that gross margin for contractors into the mid-80s as we continue to scale, but that may be lumpy as we moved around -- moving into new regions, et cetera, may bump around a little bit. But upside to come on that front. We've spoken about the number of contractors being the primary growth engine. And we're seeing that trend come up -- come through of slightly smaller initial use cases leading to a slightly reduced initial ARR per customer. Having said that, the enterprise agreements include the growth ratchets as those customers expand. And we're supportive of that trend as it serves to shorten the sales cycle, reduces the barriers to entry, allows us to get in quicker, prove demonstrable value to the customer and then hopefully quickly expand their accounts. So we're expecting and look forward to that number sort of getting back up over 6 figures as some of those key accounts from the cohort over the last 18 months that we've brought on continue to expand their accounts from their initial use cases as we get embedded -- as Felix gets embedded in their organizations. Continuing momentum in some of those adjacent sectors, particularly mining and resources, which we'll talk about shortly, are driving that overall uptake of number of contractors. And if we can get in, continue to get embedded quickly in the organization after signing up -- executing the enterprise contract, expanding their accounts at a sort of adequate velocity over time, continuing to retain and renew at a really strong level. So churn numbers are minimal. I think if we -- that acceleration and accelerating uptake and momentum of number of contractors signing on is that, that primary then becomes that primary driver of the growth engine. So good to see that in healthy areas, and we expect that to continue. That's reflected in the contractor MRR numbers here. I don't think I need to unpack that in much more detail, fairly self-explanatory. What's been really pleasing for the business over the past sort of -- I guess, going back 24 months, has been the really disciplined focus of maintaining strong growth and top line momentum while being really disciplined around the cost base, capitalizing on that operating leverage, which has been in the business to support higher revenues with the established cost base that we've got. Understand sort of the business narrative to date, we really invested post IPO to be fit-for-purpose and ready to scale for global Tier 1 customers to be a Tier 1 solution. We've done that in terms of platform security, scalability, our team structure and organizational posture and just the international readiness of the platform. So having made all of those investments, really pleasing to see the strong -- I guess, fast track momentum come through to hit our cash flow breakeven on schedule as communicated in advance to the market. And we expect if things come through on track, to continue that cash flow positive momentum moving forward. So that's been really pleasing. And I think as we get into the summary of the P&L, you can see pcp that total operating expenditure actually reducing 40% -- 40% would be nice -- 4% year-on-year while we've been able to drive the continued top line momentum. And that continues to trend over the past 3 financial years or so. So that's been, I think, really pleasing and demonstrable of the disciplined performance in terms of cost base by the business while driving really, I guess, pleasing top line growth, while we've been really lean on capital and investment for growth. So that's just working with what we've got, which has been really pleasing. So in terms of our progress against our FY '25 priorities -- and I'm going to just zip around to some other slides in this to provide context and reference, which will sort of capture a little bit of the 101 I guess without going through the exhaustive page turn. Primarily -- and we've spoken about it, that accelerated contractor uptake being the primary growth driver. And you can see that 10 new contractors landed in H1 '25. And just to speak to that and I guess what contributing factors -- and we talk about these perfect storm of critical issues. And what we're seeing in the industry across the sectors that we're targeting and think sort of Felix's ideal customer profile, large, potentially multidisciplinary capital asset-intensive business that either constructs or maintains large physical capital asset. And by virtue of that fact, they've got a supply chain -- a complex supply chain with a high prevalence of services or subcontractor trades executing on that. Often these organizations are decentralized geographically. So -- and project or asset teams are actually leading the procurement engagement of supply chain. So all of those factors, I guess. And in the external operating environment for these type of businesses, it's now nonnegotiable to really have an adequate system or platform to ensure strong management and visibility of their third-party supply chain. The way that Felix connects that supply chain management piece with the procurement workflows and contracting workflows and the way that Felix has been built from the ground up to be suited to that operating model of the sectors, businesses in the sectors that we're targeting makes us perfect, a right platform, right time, right place to capitalize on that wave of opportunity coming through. And we're certainly seeing that with pipeline growth, pipeline momentum and obviously -- ultimately, sorry, customer conversions coming through. So those structural tailwinds that we speak about when we talk about the accelerating uptake of the contractors coming on, I think that just gives a flavor of that. We very much see that as a global thematic. We've cut our teeth in the domestic customer base to date, but now that inflection point of being dragged out into -- dragged upstream into international opportunities by incumbent customer base and organic opportunities coming through elsewhere. So once we get those contractors landed and in the business, our focus is on quick and lean implementations and getting Felix sustainably embedded in their organizations and delivering value. And then as they then, I guess, go through their own change management piece, it's about -- and I'll zip this down to -- it's about sort of expanding their uptake towards maturity of Felix within the business. So often that initial use case that we speak about has a specific -- it might be a specific geography or business unit within the business, or it might be one or a few projects that, that organization gets going with. And then ultimately -- given that Felix is at its essence about standardizing the way that third parties are engaged with and their compliance and prequalification is managed and project teams engage, procure and award -- source and award contracts, it's more -- almost exclusively through the lens of ultimately enterprise uptake of the platform. But generally, there's a ramp-up over 1, 2 or 3 years to get to that point. And that may be just organic users that are added. As the use of Felix expands, they license additional modules that they may not have taken out in their initial use case, or geographies are added, business units are added. So all of those vectors combining to drive expansion and increasing maturity and uptake of Felix throughout the business. So we've got a really strong disciplined focus with our customer success teams. And then sales account executives working in unison to drive the expansion revenue within the business -- within customers' organizations. And we're seeing that share of expansion ARR as sort of a weighting of overall ARR added increasing. I think we're probably about 33% over the past 12 months. We expect that to continue to grow to circa 50% share. I think that will be really indicative and reflective of the demonstrable and sustainable value that Felix is adding into our customers' businesses. Okay. Zipping back up to where we were on that slide. International penetration of Felix. And I've spoken a little bit about -- I'm sorry for the herky-jerky slides up and down. I've spoken a little bit about the work that's been done, preliminary work around Felix' platform readiness for proper international rollout. Some of that includes our international standards, compliance and security certifications as a business, splitting up of the database so that AWS data can be localized for large international contractors. We've just delivered our multilingual capability and will be piloting that with a Tier 1 domestic customer before wider rollout. That pilot will be happening this quarter. So given that platform readiness in combination with some of, I guess, the scale of our domestic customers and profile of our domestic customer base and larger international parent companies they have or they exist in a large global group, the green shoots of upstream opportunities, of Felix being dragged upstream, we're seeing in flight in a number of cases. I think that's a really exciting entry model in terms of our international expansion in terms of how capital light and efficient that we can be along that path. And it's really akin to expansion revenue if we can get that right rather than going into new markets, dropping a bomb on sales and marketing, and that being a bit of a capital black hole as well. We've got our first permanent boots on the ground in Canada. We see that as a likely next target geography following ANZ given the sort of synergies between the markets. And we've got a growing pipeline there. So some really exciting stuff happening. Ultimately, we're in this to be a global market leader in our space. We've certainly proven that track record domestically, but it's time -- we're at that inflection point of getting out of the ANZ sandpit and getting on to the global stage and franking our growth track record to date there. Okay. Heading back up. Vendor monetization, something that we're really excited about internally in the business. I know a number of investors and stakeholders. Just given the scale of opportunity that's growing with the sheer numbers that are in the vendor marketplace and the -- and I guess that secret sauce of vendor adoption and engagement being driven by the contractors and their mandated use of Felix, combine that with what we see as low-hanging fruit in terms of our ability to deliver real cost savings and productivity enhancing features to the vendor side, it all combines to make a really compelling opportunity. Having said that, our clear focus to date has been on sustainable cash flow breakeven and getting through that catalyst for the business. And we remain focused on that as our #1 priority. So as we begin to generate cash flows to sustain investment into new opportunities, we're now transitioning to look at that as being an internal project on our validation and business case for what we'll be going after in Phase 1 and vendor monetization, which has been in flight now, getting towards the final stages. It will be ongoing for a number of months, which is really positive. So yes, it's taking our time to get to, but that's, I guess, a necessity with our focus. Our bandwidth of engineering resources available and our focus on cash flow breakeven, but we're getting closer and we remain -- our conviction on the opportunity at large remains as strong as it's ever been on the vendor side. And then lastly, just in terms of sustainable growth. I think that point around that positive operating cash flow position and our ability to make incremental investments in new opportunities is led by that. Yes. Obviously, we've got sort of annual anniversary dates and upfront payments with our customers, which is great for cash flow. So I think this first 12 months of kind of crossing the route, the chasm on that cash flow breakeven. And when we get to a -- sort of the years following that step change in sort of annual kind of anniversaries with another year stacked on, we'll start to get into really healthy territory on that. So I think a pleasing year just in summary. Let's get back to that progress page. Pleasing half in summary. And we look the growth pcp and the progress against our FY '25 priorities. But again, to frank that, we remain at sort of the -- the kind of almost starting point and the inflection point in a number of these really exciting kind of step change initiatives in the business, as well as kind of taking those really important steps forward in our business life cycle such as sustainable cash flow, positive and breakeven, to really stand on our own 2 feet. So we think it's a really exciting time for Felix and for investors and a really kind of exciting opportunity to sort of get in on that journey right now. So I think that we'll do in terms of just a summary of where we're at. James, I don't know if you've been keeping an eye on Q&A as we've been going.

Yes. We've got 2 questions that have come through from the update so far. I'm sure people probably are typing some answers away now -- some questions away now. But the first one is regarding our cost profile. And it mentions that our costs have been stable for a while now. Do we need to spend more to reinvest in the platform? Or is the expense run rate sustainable? So I might take first go at that one, Mike, and then you can build on anything there. I think what's been really pleasing from the quarter is we've been able to show that the business -- that we've been able to operate the business in a leaner environment and that we've got the ability to generate -- every dollar increase on the revenue side, on the contractor revenue side, we've been able to flow through to improvements on that adjusted EBITDA level. In terms of the expense run rate profile moving forward, Mike's articulated a couple of those initiatives that we're looking to focus on more into the future. What we're pleased to be able to report on is that the progress we've been able to initially make in terms of the internationalization capabilities of the platform and those -- that initial progress in vendor monetization, we've been able to achieve while we've been focused on this inefficient environment and derisk any future sort of investment hypothesis that we have about going into those international markets or about generating further returns from that vendor monetization piece. So in terms of more meaningful impact, once we start to turn on revenue from those different line items, we'd expect that we'd be able to report to the market different, I guess, buckets of costs around those initiatives, and we'll be continuing to generate positive cash flows out of that core business, that contracted growth, contract value expansion buckets. Mike, did you have anything to add on that one? Or you're happy to move on to the next question?

Succinctly put, James. And you can take the next one.

And the next question is, are you expecting to stay operating cash flow positive each quarter from now on? Or do you expect operating cash flow to turn negative in weaker quarters? That's a good question. Our cash profile, as Mike touched on, has seasonality to it. The historic anniversary dates of -- or the historic sign-up dates of customers and when their anniversary falls dictates to what quarters will be better or sort of not as strong. We are expecting to be cash flow positive each quarter moving forward. We have the ability to -- we have the ability with the visibility on the pipeline for the near-term quarters that we're forecasting the ability to close the gap between the new ARR required to remain cash flow positive moving forward. And then on top of that, we have the ability to look at other initiatives, whether that's the timing of when customers' payments fall, if we're able to bring any of those forward as well.

Thanks, James. I'll take the next one. Are we seeing mining customers in Canada as a driver of pipeline or mainly within construction? That's a good question. Yes, I mentioned the synergies in the sort of Canadian market, and I think the big resources presence is one of those variables. Our focus to date in sort of dipping a toe in the market there has been really probably primarily focused on infrastructure contractors. We've got a sprinkling of mining and resources in there as well. So we see that as sort of plenty of upside to come in greenfields there in terms of pipeline growth in the region. It was more like, just as we got going, having a more just defined focus for the first phase. Do you see the vendor monetization initiative being implemented this financial year? I think that there's -- I'll sort of distinguish implemented from sort of commencing the initiative. I think that we're very hopeful and optimistic that we sort of commence that initiative formally. As I mentioned in my summary, it's sort of internal sort of validation and formal business case planning stage at this point, and we're hopeful of commencing that. Then once we commence that initiative formally, that would have a dedicated sort of product and engineering team associated with the build out of those features and the go-to-market strategy, which would have a nominal sort of time frame period attached to it, and then just the beta launches and we'll ultimately launch to the market following that. So it won't be sort of [ involving ] -- kind of commercially generating a return this financial year, but we're hopeful of having the initiative formally underway and sort of holding ourselves to account against those time lines within the financial year. And James, you might want to take the next one.

Yes. So we've got a question from the floor that says that the year-on-year growth rate in new logos has been accelerating and is now in the low 20s annually. Is the 4 to 5 new logos per quarter a base case from here for the business subject to lumpiness? I think it will be a mix that will be dependent on the intensity of the expansion customers that we have as well. We have seen in periods -- historic periods that we've been able to materially expand some customers, which might be in the realm of 1 to 2 new logos when talking about the whole of ARR that, that's bringing on. So we do have some significant deals that we're working on in terms of our sort of allocating our bandwidth to materially uplift some ARR of some customers. But I think 4 to 5 new logos at that new rate that we've been bringing on and then expanding from there, I think that's a good rough guide.

Yes. Without providing forward-looking forecast statements, we're going to put our neck on the line for something. And I think that sounds like a reasonable base case, and as mentioned, subject to lumpiness there. But I think that would be the expectation of a base case moving forward. Well, I think that's all in the queue today. So we're sort of just on the half now today. Again, thanks everyone for joining. We look forward to reporting on our upcoming 4C over within the next month or so, and, yes, finishing off FY '25 on a really strong note and reporting on that progress in August and September. So thanks, everyone, for your interest and support of the business. We look forward to sort of continuing the exciting news flow. Thanks, everyone.

Thanks, everyone.