GB Group plc (GBG) Earnings Call Transcript & Summary

Hello, and welcome to the GB Group Half Year Results 2020 Call. I will shortly be handing you over to Chris Clark, who will introduce the call. Chris, please begin.

Thank you, Georgia, and a very good morning to you all. On behalf of myself, Chris Clark, Chief Executive, GBG; and Dave Wilson, our CFO. We hope you're all safe and well during these most extraordinary times. Today, I'll start by giving some explanation of the trends we've seen during the first half of the year and the strategic and operational progress we've made. And then I'll touch on the short-term priorities going forward. I'll then hand to Dave who will talk in a great -- more detail about the overall financial results. And then, of course, at the end, we'll take any questions you may have. But as a gentle reminder, if you do have questions, you do need to dial in on a separate number. GBG's purpose is to help create trust in a digital world. I couldn't be prouder of the over 1,000 GBG team members around the world who have shown incredible resilience and flexibility in operating in these unprecedented times. That dedication and focus has helped us deliver good financial results and significant operational and strategic progress. We delivered revenue of GBP 103.5 million, which is 10.4% constant currency organic growth, and we delivered an operating profit of GBP 26.8 million, which is a 24.5% growth, as Dave will talk about in more depth. But it isn't just the financial results, we've continued to deliver against our prior road maps, and we've actually achieved record customer and people engagement scores. GBG's a diverse business with over 20,000 customers across multiple geographies, multiple sectors and taking a number of our core solutions. What this means is that this is a strategic strength. However, we have seen very different trends, both on a geographic sector solution and timing basis over the course of the first half. Overall, the growth has been driven by great growth with a number of our existing customers, whilst at the same time, seeing some declines from COVID-challenged sectors, strong renewal rates across the business, slightly softer new business, particularly in the Ford area and helped by a one-off project that Dave and I will talk about in the United States. Looking at it in a little bit more detail, if I look at the 3 solution areas, starting with Loqate. Loqate accounts for about 25% of the business and is approximately 60% license driven and 40% transactional. Overall, Loqate drove -- delivered a 9% organic growth at constant currency. And we saw good growth across all of our target geographies of U.K., Western Europe and North America. We saw exceptional growth from a number of our retail customers with the acceleration of online shopping, whilst at the same time, being held back by a number of sectors that we serve that have had demand challenges, and that's about 16% within the Loqate sector, people such as travel companies, leisure, hospitality and parts of retail. The Loqate team has continued to make good strategic progress in our cloud deployments, allowing us to cope with peaks in capacity as well as improving response times. And we continue to do exceptional work with further integration into technology partners such as Salesforce and Magento. And last but not least, we've seen good new business across Loqate such as Levi Strauss in Europe, Samsung, who've taken us the service where they've used us in the U.K., into Western Europe. And Fanatics, one of the U.S.'s largest sports apparel companies in the U.S. Turning to Identity. Identity is -- accounts for just over 60% of GBG and grew at an exceptional 27%. Virtually all of the Identity revenues are transaction based. However, we did see different trends in different geographies, so I'll talk about the 3 core geographies. I'll start with North America where we saw an outstanding performance driven both by this one-off, where we were involved in helping verify the distribution of U.S. stimulus packages to small [Audio Gap]. But it wasn't just the one-off that drove strong growth, it was also growth from a number of our existing customers. We've also continued to win new business with customers such as Goldman Sachs, Citigroup, aided by our relationship with Citi in Asia Pacific, and Yahoo!. And we've continued to innovate around the product, delivering what's called decision builder during the half, which allows each individual customer to actually completely develop their own rules, which is so important in these rapidly changing times. Looking at Australia and New Zealand, we saw modest single-digit growth in Australia and New Zealand, which I think reflects well both the economic conditions in Australia and New Zealand and actually the diverse nature of our customer set in those geographies, from public sector, telecommunications, financial services. We've made good progress, continuing to integrate our international identity technologies into the local offering, whether that's data or our scanning technologies. And we've won some good new clients such as Grant Thornton in Australia and the New Zealand government in New Zealand. Last but not least, U.K., Europe, we did see a modest revenue decline across the U.K. and Europe. As a result, really of our historical sector exposure, where sports betting plays a large part of our Identity revenues, and we did see a drop, and that has picked up slightly, but not yet back to the levels it was. But in addition, we also account for our background checking business in our Identity U.K. and Europe numbers. And unsurprisingly, in our background checking, we did see at its peak, a 50% decline. The team has continued to innovate, though, to meet the ever-changing requirements and delivering an affordability solutions in the U.K. for our gaming customers that help meet increasingly stringent regulations and additional data sources, such as U.K. mobile checks and data in South America in both Argentina and Brazil. And we've continued to win new business most notably probably Tottenham Hotspur, the scanning technology for people entering the stadium, which was used for the first time in hanger at the weekend. Turning to Fraud. Fraud accounted for 12% of the business in the half and is basically 100% license based. There's 3 core products that make up the full portfolio. Our application and transaction software and our investigation software, tracing software in the U.K. Fraud did post a 26% decline on a constant currency basis, and that was driven by a number of factors. Firstly, we were lapping a very tough comp from H1 last year. As a number of you recall, we posted very strong growth as a result of a number of multiyear deals. Secondly, we have seen a noticeable slowdown in decision-making across geographies as companies have paused about making decisions on large software on-site implementations. And last but not least, we have across a number of geographies seen actually a slowdown in implementations because for our Fraud software, it does involve customers being on-site. And our customers, particularly in financial services, which is our core geography sector for Fraud have prioritized, ensuring that they can work in a virtual basis as opposed to installing new software. That said, the pipelines are healthy. Albeit we are cautious about how quickly things move. And we've continued to innovate in the full portfolio, offering further machine learning capabilities and extending our partnership programs, including an investment stake in a small Singaporean fintech called Credolabs. What this all means is that the U.S. now becomes our largest single geography from very strong growth, both in Identity and Location, at 44%. But overall, our geographic strategy does not change. It's just that we are seeing implications vary by geography. Looking forward, there is no doubt that the pandemic has amplified and accelerated a number of the trends that drive GBG's long-term growth. We can be positive and look forward with confidence because of that, but we are uncertain at this moment exactly how those -- the speed of those developments, given the way the pandemic has impacted different individuals and businesses in different places around the world. Let's give you a little bit of insight. In a recent survey we've undertaken in the U.K., 54% of organizations surveyed indicated that they're finding it more complicated today than prepandemic to get the balance right between a frictionless consumer experience for digital onboarding, whilst preventing Fraud. And noticeable, 1/3 of U.K. consumers in the same survey said that they are now worried about Identity Fraud, that's considerably prepandemic. What we have learned as a result of the last 6 to 9 months has given us confidence that we can say that we expect to post marginal growth for the remainder of the fiscal year on an underlying basis. But equally, we know where and when to install to up investment, and we've started doing that around sales and marketing, where we know that there's real demand because we can help customers digitalize and around technology and product innovations, such as cloud solutions underpinning our Fraud capabilities and next-generation location services. And last but not least, looking forward, we continue to work hard on looking at M&A opportunities to accelerate our strategic ambitions. And whilst no one can never be certain of timing, we have a strong pipeline, and we do believe M&A will continue to form a critical part of the GBG story. On that note, I will pause and hand the virtual microphone to Dave.

Many thanks, Chris. Hope you all around the world are safe and well. I tend to cover a little more on the income statement, cash generation and key points behind the first half performance. So our revenues were GBP 103.5 million, as Chris talked about, constant currency growth of just over 10%. Strong growth in the U.S. dampened by the COVID exposed sectors in U.K. and Europe. Our gross profit percentage moved from 72% down to 70%. This was due to our Identity business in the U.S., which has a naturally lower gross profit percentage. Our OpEx reflected a number of key actions taken, naturally lower cost due to the COVID environment, lower travel, people working from home, the reduction in discretionary spend and are delaying larger scale strategic investments that we normally start at the beginning of each financial year. This resulted in OpEx being GBP 90,000 lower, moving from GBP 46.7 million down to GBP 45.8 million. Moving further down the income statement. The amortization intangibles that was largely due to the currency change as we translate our investment in IDology. The tax rate -- effective tax rate was 21%. Ongoing, the guidance for that will be 24%, and there's a slide later on in the deck probably last. Moving on to the segmental reporting. Location, strong constant currency organic growth at 9%. This should continue to strengthen over time as we continue to grow outside of the U.K. as well as our exposure to good long-term growth sectors like online retail and technology businesses. Our Identity business had a constant currency organic growth of 27%. This is a balance of the high-growth, U.S. still 20%, growing outside of the one-off projects. And this is offset by our employee screening business in the U.K. and the effect of the COVID-challenged sectors aside on the business. Fraud, as Chris said, took comparators last year, alongside slow decision-making and the on-site nature of the implementation. In the second half, we still expect these to be in decline, although the comparators are less influential remiss. And we will -- we have and we'll continue to increase our investments in the Fraud software over the next few years in cloud services and orchestration layer. So for the foreseeable future, the margins will be on the lower side. Moving on to the sector performance. As discussed in the full year, we had the historic group revenues exposed to COVID-challenged sectors. The year-end last year, this was 16%, but probably it's the reason, this was reduced in the first half, and it now represents 14% of the group revenues. Gaming has recovered slightly from the initial reduction. But not to the same levels as last year. We think this is linked to the supporters being at grounds are in bars and of course, watching the particular sporting events. And moving through the -- looking through the GEO lens. As we continue to expand down in the U.K., we've had additional geographies into the slide for Europe and Asia Pacific. The U.S. obviously includes the one-off projects. Outside of this, U.K., was just still the largest territory where the U.S. is growing much faster over the medium to long term. The U.K. decline was due to the COVID-challenged sectors and the Asia Pacific decline there is to the negative growth position in the Fraud business. Looking at cash. Our top line operating cash conversion was 135% of EBITDA. Adjusting for the U.K. back deferral of payments and the exact bonus, this was still a very strong 132%. This was helped by good receivable collections and overall and the beneficial effect of the revenue mix having lower receivable days in the U.S. with high-growth and a lower growth in Asia Pacific where receivable days are naturally longer. The strong cash conversion, even in the current environment has enabled us to deleverage the balance sheet to a near 0 level after being 2x leverage when we bought IDology in February '19. In addition to this, we'll be paying an interim dividend of 3p per share in January '21, which will be a cash cost of around GBP 6 million. We will pay in the second half, the U.K. [indiscernible] and also the executive bonuses after the dividend is paid Moving to my final slide, which is the capital allocation. We're still cautious about the timing of economic recovery for many businesses and customers around the world. We have very good long-term structural growth trend aided by increased digitization. And as you know, we have a proven cash generation model, and felt confident enough to pay an interim dividend and which was deferred from last year. In addition, at the end of the first half, we started accelerating much investments, demonstrated our confidence in the long term. And we will be dealing and building cash for future M&A. And as you know, we are taking an active and prudent approach in our own M&A activities. And that's it from my side. I'd just like to hand back to Chris to close up.

Many thanks, Dave. So we feel incredibly fortunate and grateful that the implications for GBG of the pandemic is that the long-term market opportunity has been brought forward. So we do look forward with confidence, albeit we do expect the short-term to continue to be bumpy as whilst, of course, there's a great deal of optimism with the vaccine rollout exactly how the different sectors, different geographies of our -- and therefore, our customers are affected is still unknown. In summary, I couldn't be proud of the way our team have responded to the pandemic. And that dedication has allowed us to deliver what we feel relatively are good results. But equally, have continued to deliver against our product road maps and our strategic priorities. We'll continue to tread cautiously over the next number of months, ensuring we maximize the opportunities in the short-term but continue to build a long-term -- our potential for long-term. On that note, I'd like to thank you all for your time and hand back to Georgia to see what questions we might have.

[Operator Instructions] And our first question is from Kai from Canaccord.

Congratulations on the very resilient performance. I had a quick question on the, I guess, second half outlook and implied full year guidance, which I think calls for around flat revenues. And I think that implies a sort of high single-digit decline year-on-year in the second half. So I'm just wondering what are the, I guess, puts and takes in terms of that could swing your top line sort of either way, I guess, relative to your guidance? That's the first question. And then the second question, in terms of the margins in the second half, similar, I think you're just lagging some sort of additional investments on the Fraud side and, perhaps, other areas. Could you just give a bit more color and quantify for us roughly what the sort of magnitude of that is? And also what is the certainty, I guess, of these investment plans at this stage?

Thanks, Kai. And possibly, I'll take the first question, and then I'll hand to Dave on the second part of the question, and I hope you're well Kai. So in terms of guidance, you're absolutely right, we're saying that we expect in the full year to deliver marginal growth on an underlying basis, which given a relatively strong H1 does imply softer H2. A number of factors for that. Firstly, I'd say that in all reality, none of us know exactly what's going to happen around the world in the short term. And certainly, what we have observed and learned in the first half is, whilst there are macro trends, the implication of short -- the short-term implication that changes the various local and national government policy has quite a different impact. So first up is we generally don't know and can't be as precise as we normally want to be, albeit we have learned a lot and that gives us the confidence to give some guidance. Secondly, clearly, in the first half, we were aided by the one-off projects that both Dave and I referred to, and we don't expect that to continue. And then in addition, Kai, we've got a number of things that we don't talk so much about, which have a negative impact on H2. For example, our marketing services business, which -- we lost Thomas Cook. Ikea took the services in-house, plus we are naturally rolling off contracts. And so that will actually drive quite a significant decline in the second half. And then, I guess, probably, are the key factors because there's a number of factors at play. We -- as both Dave and I have commented on, we're uncertain on the timing of some of the Fraud contracts. We are pleased with the pipeline. In fact, it's at record levels, but the timing is very uncertain. And what we have seen is in countries where there's that perhaps you could argue further advanced around the pandemic things are starting to move but equally in other countries, that's really not the case. So we can be very uncertain on some of the larger contracts, which, as you all know, Kai, does have a material impact on our revenue growth. So I hope that answers the first question. Dave, I'll pass to you on the margins, but you also might want to add to the first.

Yes. Thanks, Chris. I think the first one was very well thinking. On the [indiscernible] increase we talked about is the second half OpEx we expect to be between GBP 5 million and GBP 6 million higher than the first half OpEx. We are continuing and accelerating our investments in our Fraud capabilities with -- in addition to the cloud service orchestration layer developments. In the Location service, we've got a big new product release coming out next year, which we call our Capture product, the large amount of go-to-market resource that we want to recruit and are actively recruiting in various geographies, U.S., Asia Pacific, in particular. So all of those total up to between GBP 5 million and GBP 6 million second half OpEx being higher than the first half. The timing of that, we're actually underway. We started after the end of August and the key is to try and get the resources on board, so we can accelerate our strategic development.

[Operator Instructions] So Chris, there are no further questions registered.

Okay. Well, that's good to know. And -- so look, in closing, on behalf of both Dave and myself, and actually the entire GBG team, thank you very much for your time and your ongoing support. And we're pleased with the progress. We're confident about the long term. But meanwhile, in the short term I hope you and your families are all safe and well and please have a fabulous Christmas when it comes. Thanks for joining us and look forward to catching up very soon.