Gamma Communications plc (GAMA) Earnings Call Transcript & Summary

[Audio Gap] So with that, so in terms of business update, listen, I think overall, we are very happy with our performance through the year. Andrew will go into a bit more detail in terms of the specific results. But I mean given the circumstances, I think an excellent financial performance through the year. Again, very happy with how our business units performed. And again, we'll go into a bit more detail on that in a second. By all means, it wasn't perfect. But I think in context of what was quite a challenging year in terms of the economic and the business market implications, I think we've delivered a strong set of results across all of our channels. We've made really good progress in terms of the execution, not just in terms of our shorter-term operational commitments, but also around the execution of our sort of long-term strategic objectives. So really good progress on that, and I'll touch on that in a bit more detail in terms of specifically what we've been doing on the technology and product side of things. Overall, in terms of the marketplace, I think we've seen normal low levels of churn. We've seen robust ARPU. And we have seen a really positive contribution from those new products and services that we took to market. So they are beginning to be quite a meaningful contribution to our performance, both on the product side and in the financial side. And we're not -- we haven't really seen any change in terms of price attrition in the market either. So certain normal types of levels based on what we talked about at the half year. So I think that's generally sort of positive news. And just as a final point, I mean, we've just been getting on and executing, I think, really well at pace against each of those objectives, something that we will talk about later. So a very consistent message in terms of what we talked about at the half year. Overall, just to touch on the business unit performance, and Andrew will go into this in a bit more detail. So overall, good growth across the piece. Direct is slightly flat up because -- and we witnessed this at the half year. There's some inorganic growth within our Direct business. And at the half year, we talked about how in the second half of 2020, with a slower sales performance during that period because of lockdowns, frankly. So if you can't go and meet customers and you can't talk to them about buying stuff, then the offers are generally a bit slower. So we suffered from that through 2021. So that means that the growth in Direct organic growth was a bit lower. I think it was around 2% or 3%, basically what we would normally have expected. On a positive point, as we came out of that period through '21, we had a very strong sales performance, not just in Direct but also Indirect. So I've got a couple of slides to touch on that. So I think going into '22, we entered '22 with a very robust contraction [ backlog ] based on sales performance through H1 and H2 in '22. We had a particularly strong performance on direct sales in the second half of '21 actually. So we'll touch on that. I'm sure Andrew will get to that in a bit more detail. And as I say, sort of low levels of price, especially low levels of churn, and a very positive product attachment rates. I'll touch on that in the next couple of slides. Andrew, just flip over. And in terms of our overall product performance, but looking specifically at UCaaS. Listen, I think when you look at this period-on-period and year-on-year, we think it's an excellent performance. We're either growing with or I would suggest, ahead of the market. In the U.K., we just continue to churn out very strong gross adds, very strong net adds, churn is at normal level. So we just manage around that. So net adds across our Cloud products was very strong at 15% growth. If you remember back to the half year, what we do is we combine our U.K. Collaborate, U.K. Horizon numbers together to provide an overall U.K. Cloud number. So the actual Horizon net adds to about 12%, 13%, and Collaboration grew at [ 36% ] overall sub 15% growth. And in Europe, so a consistent, I think, with the first half performance, we delivered a strong second half at 12.6% growth. So Andrew will touch on the overall performance of our European businesses. But what's really pleasing is that what that we'll be doing on our Cloud growth strategies that sort of partner proposition that we're taking across the European markets. That's certainly sort of delivering results. And similar to what we talked about at the half year on SIP, our SIP performance really strong. It's a bit lumpier based on previous years because we're selling Microsoft Teams as part of our SIP product. We're sharing more SIP, more voice infrastructure to some of the voice -- some of the -- sorry, the cloud players that come into the U.K. market. Some of our customers are in Vonage and 8x8 [indiscernible] providing higher levels of sort of voice SIP to some of those customers. And we're doing slightly less SIP into on-premise PBX is because there's more companies and more partners move things to the cloud, they're doing less on-premise. So it's a bit lumpier than what we'll be used to, but notwithstanding that, so a very, very strong position. And on the Microsoft Teams direct routing side, I think we have carved out a very strong position in the U.K. marketplace, but definitely in a leadership position and as well as bringing in a very predictable level of run rate SIP trunks every week, every month, every quarter, but also bringing in some very large sort of strategic deals on the Microsoft Teams direct routing side. I think one of the ones that we quoted in [ RNS ] was around a major thing we won with central government. It was for the Department of Work and Pensions, and that was unmanaged Microsoft Teams deployment of over 100,000. It was about 110,000 seats. So that's -- it's actually significant. And that's not included in these numbers, I should say. That was one just at the back end of Q4. So very happy with how things are going across the Cloud side and across SIP in Microsoft teams. And just if you can see that at bottom right-hand box, I mean, I'm struggling to see here, attachment rates for Collaborate against new Horizon sales was 20%. I think that's pretty good in anybody's book. And actually, the Horizon contract CCaaS products that we took to market in Q1, that is performing very well. We've got a steady run rate of new business coming through there on a weekly, monthly basis. And we're seeing an attachment rate of about 10%. So we've got 4,000 agents sort of year-to-date using contact, but the attachment rate on new business is 10%. And I don't think we've seen that type of success in any product, any other product that we've taken to market through the channel. So I think we're at a pretty good place there. And I should say, I haven't mentioned the details here, but our mobile broadband and Ethernet products all grew quite well during the period. So there was net-net growth across every product in the portfolio. So overall, really pleased with the product performance. And as you know, this is a leading indicator for us in terms of how the markets do, how the channel is performing and it's a leading indicator, I suppose, to our financial performance as well. And just to touch for a second on the market side of things. So in previous calls, I've talked a bit about the impact of the pandemic and those structural changes that we saw happening in the market that we believe were real indicators for future long-term growth. I think what we now acknowledge is that this acceleration of growth towards the Cloud is now solidified into what we see as long-term sustainable trends. And that's driven by the move towards more flexible and hybrid working, both in terms of homeworking, but also how organizations need to organize themselves to provide cloud services to their employees and then how they will use them when they're working in the office and at home, but also driven by the connectivity, whether it's the fixed or the mobile connectivity that enables those solutions. So we think these are now long-term, well-established and solidified trends in the marketplace. And this piece around how users are going to use those applications and those services, whether they're in the office, whether they're at home, whether they're on the move, it's been a big focus area for us now. So what I would say is that the demands that come from end users and customers we've seen increasing over the last sort of 2, 2.5 years as a result of the COVID and they're now sort of here to stay, which I think is a good sort of positive statement. And I apologize if it's stating the obvious because we're all sort of living and breathing this ourselves. And just to touch on some of the core foundations that I actually talked about this when I joined Gamma over 4 years ago, and I just wanted to sort of reinforce the point that there are some good reasons why Gamma has won in the market and will continue to win in a market which is going to continue to grow. We've always had a big focus on product and technology. Historically, we've sort of became famous in the U.K. channel for pulling all that together and delivering it in a way that's really efficient and really easy for both our channel partners and for end users to consume. So that continues to be a main reason why we win and why we will continue to win. Our network quality, it's not -- it's very much by choice that in the U.K. and in Europe, when we've acquired businesses in Europe, we've actually acquired businesses that have got a clear perspective of the Cloud and a shift to the Cloud, but also they all have networks because we believe that, that network element being able to provide good, high quality of service when a customer, when an end user uses our applications is really important. So having that reputation for network quality, we think, is a key reason why we win. And then I've talked a lot in the past about the digital platforms, the digital enablement, whether it's how we enable partners to consumer products or how we enable direct customers to deal with us and do self-serve. This is a big part of why we are successful and also how we enable partners and end customers to be more competitive through the training that we do around our products and whether it's the salespeople or their operational people. So there's a lot of effort and a lot of capability around those digital platforms that drive a key reason why partners and end customers use us. And then that commercial agility in the people side of things, I think, continue to be very important, how we go about doing a job, how we go to market and how we're very flexible, open around how we do deals, both with end customers and with channel partners. And as you know, we've talked a lot in the past about how Gamma's focus on margin is really important, and that just has continued in the 4 years that I've been here, and that is a big focus for us. So although we're flexible and agile commercially, we're one of those few Cloud businesses on the planet actually that's worked out how to do this and how to make money while we're doing it. So I think all of these are the reasons why we continue and will continue to win in the market. And just to highlight -- not to go into any detail, but just to highlight some of the key customer wins that we've had in '21 and on the left-hand column, just split across Direct and Indirect in Europe, what some of our partners and key customers look like. So we've had a really strong year, as I said earlier in terms of some key wins that we've had across all 3 segments. And it's actually also been a very strong year for the recognition that we received both within the wholesale and direct channel, but also on the direct side. And I've just highlighted some of the awards that we achieved through 2021. So overall, a pretty good performance on the sales side and really happy with how we're entering 2022 in terms of contracted backlog and sort of perspective on sort of normal run rates on the product side into Q1. So with that, and I'm sure you've probably got some questions, we can just hold them and we can deal with them at back end. I will hand over to Andrew.

[ Andrew, ] thank you very much indeed. Right. Let's go through the 2021 financial highlights. The slide that by now is familiar to you, and it's probably time for a new slide. It's probably time for a new CFO. So obviously, this is the last time I'll be doing the financial highlights. But I'm not going anywhere. I will be back. I will be back at the half year and all future results presentations, probably taking tea and coffee orders from you or something like that. I don't know, but I'm sure they'll find me something useful for me. So the 2021 financial highlights. Firstly, we quoted the adjusted metrics. It's worth saying because we had the profit from the Loop in last year's sort of statutory numbers, things like PBT, EPS, they all seem to have gone down a lot, and that does seem to be panicking a few retail investors as far as I can tell first thing this morning. But when you take the Loop profit out from last year and you look at the adjusted numbers, everything is looking pretty good. We'll break it down a little bit more in a moment. Obviously, you've got a full year of Spain and Germany that we bought kind of partway through the year, but revenue up 14%, [indiscernible] around 6%, 7%, that is organic. Adjusted EBITDA, 21% EPS 25%. It's all looking pretty good. So we're very, very proud of those numbers. Let's dive into the detail a little bit more. So recurring revenues still around 89%. That's a little bit lower than it's been historically. But you'll remember, we've got the German mobile business that's not recurring, and we'll talk about that in a moment. It's called Epsilon. It's all kind of spot commissions that we get from selling mobile deals, and that just pulls the recurring revenue piece down a little bit. What to say about COVID? People tell me COVID was so last year, and we should stop talking about it. But equally, it is still affecting us. So Direct had a particularly slow H2. And I think we guided to that because we sort of said during 2020, what was happening is we weren't out doing an awful lot of sales activity. We weren't winning business at that point, and that was the business that should have been coming on in 2021. So actually, Direct had a relatively slow second half of '21. Also, we managed to keep the overheads under control in '21. I'd love to say that's fantastic overhead management from the CFO, and it probably is. But also, there was a lot of stuff we just couldn't spend. So travel was very low. We weren't going to conferences, so that meant partly travel, but also we weren't kind of paying for large stands at trade fairs and all that sort of stuff. That's going to come back in 2022. So we do anticipate seeing some of that kind of overhead coming back, so most of the OpEx growth is really just share-based payments and development spend and the rest of the OpEx was pretty static. Whatelse to say, probably just kind of going forward, it's worth just sort of saying a few things on OpEx. As you know, 3/4 of our overhead is people. That's a big number. And wage inflation is becoming a bit of a thing in a way it sort of hasn't been for the last 4, 5 years. I know you know this, and I know everybody else is talking about it. I'm not quite sure what that means for us going forward. I think what it does mean is we probably see more pressure on our overheads. And I've spoken to many of you individually this morning. Revenue and GP, I'm very comfortable with going forward. Overhead, I can just see a few headwinds on that, not because we're going to spend more in the sense of doing more, but the people that we employ and particularly in the software development area, we are seeing a bit of wage inflation in that area, really, really difficult to quantify quite early in the year. I don't know if it's going to get better or if it's going to get worse, who knows. But just to flag that. The other thing to flag going forward is probably tax. As you're well aware, we get out into 2024, that tax rate is going to go up from sort of 19% to 20% up to sort of 24%, 25% just because the U.K. headline tax rate is increasing. So when we're modeling out over the next sort of 2 to 3 years, you just need to bear in mind, unless Rishi says something tomorrow, to the contrary, which he may do, but I doubt, the U.K. tax rate is going up. So let's get into each of the individual business units. Indirect, probably not an awful lot to say. The Indirect channel, as we sort of said at the time, apart from at the very beginning of COVID, wasn't hugely affected. You can see there all the graphs kind of just nicely go up half-on-half. Revenue grew 9%. That's entirely organic. We didn't buy anything that's added to the Indirect revenue channel. And it's SIP and Cloud PBX. And as Andrew said, it's all of the new things where we're getting things like Collaborate and Cloud [ Contact ] we've got decent attachment rates, and that's driving the revenue in those areas quite nicely. And the recurring revenue in Indirect stays around sort of 93%, 94%. Margins, again, we've been guiding that margins will flatten in this business just as the mix flattens, and that's happening. And if you look over the last 12, 18 months, margins have been around sort of 52%, 53%, 54% and we would anticipate that carrying on. Direct, as I've always said, so we no longer sort of split out the SME part of Direct. It's not really that material. But Direct is all driven by enterprise and public sector and a lot of the new logo wins that Andrew highlighted on the slide a few moments ago. This isn't entirely organic. Mission Labs is in here. It's not desperately material. But the organic revenue growth in Direct is only around sort of 2% to 3% when you correct it for the Loop that was in last year. It's not in this year. Mission Labs wasn't in last year, is in this year. As I said, I think the growth is around 2% to 3%. And the reason that's a little bit lower, as we say, is that sales effort in 2020 that meant we weren't kind of winning new business in '20 and then we didn't put it on in '21. But as we go into '22, back end of '21, moving into '22, the pipeline has grown and grown again and we're expecting a very good '22. What could stop that? Well, again, we do need to just kind of call out this business to do with hardware in Direct. So one of the first things that we often do, particularly if it's a data deal or data form as part of the deal is we need to go and install hardware routers on customer premises. Depending on the make and model of router that we need to install, they can be quite hard to get hold of, purely because of the global chip shortage. So what you end up doing is probably paying a little bit more for slightly better routers that we can get hold of because it's better for us to do that and let stuff drift to the right. If we really can't get hold of routers that do the job for us, projects drift to the right. So Direct, as we sit here, we're comfortable and we're confident, but there is just that sort of risk that we can't get hold of hardware and some of the deals that we've won, they just begin to drift to the right, and that means we obviously can't start billing until everything has been installed. Again, margins sort of high 40s, and we don't sort of see that particularly changing going forward. Europe, I'll say a little bit more about Europe, and I've got another slide. I'll just kind of flash this up. Obviously, the -- all of the European growth is largely inorganic. As I said before, we had a full year of Spain and Germany in 2021. Trading EBITDA for the year was GBP 9.4 million. That grew quite a lot in the second half for reasons that I'll come on to. And I wouldn't take that second half, GBP 5.3 million as necessarily the run rate going into H1. Why is that? Well, let's just have a look at the next slide where we tried to split down the European revenue and break down a little bit more what's actually going on in Europe. Now hopefully, you can see that. It's relatively small on my screen, I should say I've just had new glasses. I've got my varifocals in because I'm now of that age where I need varifocals, and I'm struggling to see it. So if I keep looking down at my notes, that's just an eyesight issue. So what would I say about European revenue? Well, probably the first point to pull out is actually that line about halfway down the slide where it says Epsilon, just underneath traditional. Epsilon is our mobile business in Germany, and we earn revenue by going out selling a mobile deal. We take commission from the MNO and then we pay the vast majority of that commission to the partner that's done the deal with us, and we make about sort of 15, 20 points margin on it. As you can see, because it's spot revenue, it's gone 14.7% second half of last year, 12.1% back up to 15.2%. I wouldn't say it's seasonal. I wouldn't necessarily say it's all sort of driven towards the second half of the year. I think it just fluctuates depending on when people are buying mobile phones and that means it's actually quite difficult to model. Now as I say, the margins on that are quite low, but actually, that sort of GBP 12 million in the first half going up to GBP 15 million in the second half, that's obviously another GBP 3 million. You can do that in your head, 15%, 20% margin. It's about GBP 600,000 of GP, and that just goes straight to the bottom line. There's no overhead associated with that. So going back to why I sort of said on the earlier slide, maybe the second half run rate for EBITDA for Europe isn't what we'll see in the first half this year, GBP 600,000 of the EBITDA we had in the second half of '21 was just driven by that sort of super normal revenue or possibly super normal revenue in Epsilon. So we'll probably split that out going forward. It makes life a little bit harder to model. So that's the sort of first thing to pull out. Second thing to pull out is UCaaS revenue in Europe is slightly different to the U.K. So in the U.K., as you know, we bundle calls. So we go out, we sell a seat, that's the revenue. It's pretty easy to model. In Europe, they go out, they sell a seat, that's great. They get the revenue from the seat, but then also they get call revenue on top of that. And that can fluctuate a lot, particularly in times of COVID when people are in the office, they're out of the office and calling patterns change quite quickly. So what you're seeing actually in all of the European countries to a greater or lesser degree and particularly in the Netherlands, where revenue has kind of gone backwards is we're selling more seats. So as Andrew said earlier on, we sold 13% more seats -- or sorry, at the end of '21, we had 13% more seats than the beginning of '21. So we're getting more seats on. We're getting more seat revenue. What we're not necessarily getting is the core revenue, and that just kind of fluctuates around. And you kind of see over the period, you're getting growth if you compare '21 to '20. But particularly in the Netherlands, as you can see, that revenue where it's GBP 4 million second half '21 was GBP 4.3 million in second half '20. That is core revenue. The actual seat revenue has increased and what's pulled it down is people just making fewer calls. So again, that's another feature. I would just sort of say in passing, Netherlands has actually had a pretty strong year. It's doing very well in mobile. It's a multi-tenanted business. If you remember, we bought a business called NimMSys, that's doing very well. The Schiphol business is beginning to pick up as air travel picks up as well. So the underlying Dutch business is okay. Number of cloud seats is growing, but just optically, you've got that UCaaS revenue kind of coming off. Germany, again, had a very good year. We've talked about Epsilon, number of Cloud seats increasing. SIP trunks is increasing. And over time, we'll see that come through in the revenue. Spain, again, you can see the UCaaS revenue increases and slightly comes off again just because of this call volume. The other thing just to call out in Spain is we had a couple of businesses, so [ Common Media, ] VozTelecom Andalucia that the Spanish guys bought before we acquired the Spanish business. They weren't doing so well throughout '21. Those businesses are now just beginning to pick up again a little bit. So they were a bit of a drag on Spanish growth in '21, but kind of growing into '22. So what does all of that mean? I think it means fundamentally guiding and therefore, modeling Europe is going to be a little bit harder. Epsilon is going to kind of move around a little bit. But as we put more seats on in Europe, and we are putting more seats on in Europe and as that rate of seat growth increases, which it will do in Europe, as we said at the Capital Markets Day may take a little while, but it will increase. you will see that European revenue begin to grow. So hopefully, that's a bit more of a sort of granular look at the revenue. Hopefully, that's helpful just to kind of explain what's going on throughout the European business. Just move on to the balance sheet, and I haven't got very much to say on the balance sheet or the cash flow other than to say our balance sheet remains very strong. Cash just under GBP 53 million, net cash just under GBP 50 million, which is very, very similar numbers to the ones that we had this time last year. If you feel contingent consideration should come off net cash, that's in the bottom right-hand corner of the slide. And if you feel the IFRS 16 liability should come off as well, we give you that number. So -- but I think by the measures I would use, net cash is is around about GBP 50 million. As you know, we keep that on the balance sheet to fund M&A. So cash flow, probably just to sort of talk about a little bit about guidance. So cash conversion, so this is adjusted EBITDA turned into operating cash flow was 94%. I think historically, I'd sort of said that was going to be between 85% and 90% -- sorry, that was between 80% and 85% when we moved to IFRS 15. It's been creeping up to 85% and 90%. I think I've been sort of hinting that we probably changed the guidance to 85% to 90%. I think we have enough data now that clearly that is the sort of level of cash generation. And clearly, in the last year, we've done really well getting it over 90%. So maybe we're guiding it to 85% to 90%, possibly even a little bit higher in some years. So we're pretty happy with cash conversion. Tax is a bit lower in the year just because of the quarterly installments and when they fell and the [ QIS regime ] just changing. CapEx guidance, I'm not changing. We're spending GBP 16 million to GBP 18 million at the moment. I would see that happening for the next few years, barring acquisitions. And just on M&A there, so in the year, we spent GBP 40 million on Mission Labs, paid back another GBP 6.5 million of deferred consideration. And going forward, we've got about GBP 13 million to pay that's undiscounted. Some of the figures you'll see in the accounts are discounted because that's what you have to do these days, but that GBP 13 million is our best guess at cash figure, and we think about GBP 6.1 million of that is payable in '22 and the rest of that is largely payable in '23, tiny bit payable in '24. I think that is me done. So I shall hand you back to Andrew to talk about strategic planning and what we're going to do with all of that cash. I think you might be on mute, Andrew.

Can you hear me?

Yes. When I say I think, I know.

Okay. I just need to get control of the -- I think you still have control, Andrew. I don't have control of the deck.

Can you not take back control? I think if you hit the button at the bottom of the top of the screen.