IDP Education Limited (IEL) Earnings Call Transcript & Summary

Great. Thank you, operator, and good morning, everyone. Thank you for joining IDP Education's FY '21 Financial Results Presentation. I'm joined today by Murray Walton, our CFO; and Craig Mackey, Head of Business Development and Investor Relations. I will take you through the presentation, and then we'll open up for your questions. Firstly, the business update. Despite the challenges of a pandemic impacted year, IDP's diverse business model, our exceptional people and long-term strategy enabled us to decisively navigate the disruptions and deliver a solid result. Customer intent and demand to study work and migrate abroad remains resilient. Strategically, IDP is now focused on rebounding and accelerating our leadership position in the year ahead. If we move to Page 4 and just go through some of the key performance indicators. Revenue at $529 million was down 10%, down 5% on a constant currency basis and within that, we saw IELTS revenue up 8% on a constant currency basis. EBIT came in at $71.8 million, down 35%; NPAT at $45 million, down 36%; cash balance of $307 million, remains essentially unchanged over the prior year. In student placement, our APFs came in at 38,100, that was down 25%. And within that number, we saw growth in the U.K., up 4%. Canada was down 12%, primarily due to some of the supply chain challenges customers face in getting their visas approved and getting into the market through the year. Australia was hardest hit, down 40%, and that really reflects the closed borders that we have in Australia at the moment. From an English language testing perspective, our tests came in at 1.15 million, that was up 5% on the prior year. Some great results in the top 5 contributing markets with Canada up 6% and Nigeria, up 37%. India was flat year-on-year, primarily due to the impact of the second wave of the pandemic that hit us primarily in the fourth quarter of the year. English language teaching at 74,000 was down 22%, reflecting primarily that most of the courses delivered both in Vietnam and Cambodia were delivered online during the year and the impact then of that. Digital marketing, $30 million is -- revenue is up 8%, 13% on a constant currency basis. And increasingly, our university, college clients are reliant on IDP for data insights to really replan and set their strategies for rebound. In fact, we had 168 clients signed up through the year to our new IQ data subscription services. Moving to Page 5. I mean clearly, the recovery is underway. IDP is emerging from FY '21 with strong balance sheet, financial position, and we are seeing rising demand in particular for rather Northern Hemisphere. The business clearly has shown its resilience through this period. And I think most importantly, customers, as you see in the presentation, are still keen to reconnect with their study and migration ambitions and are only challenged really by the restrictions in place and some of the difficulties in being able to connect to that opportunity. I mean IELTS being a great leading indicator of study and migration demand being up 5% year-on-year in terms of volume, suggests that our customers are preparing to go as soon as they can. From an industry leadership perspective through the year, we continued on our transformational programs, focused very much on improving customer experience. And you can see noted there is our NPS score of 58, an extremely high score with 9 out of 10 students recommending IDP to their peers. Moving to Slide 6. IDP is strategically positioned to grow IELTS market share. Throughout the year, we completed our rollout of new computer-delivered test centers, and we completed that target that we mentioned previously of 100 new centers. We rolled out 50 new multi-language websites and the preparation hub to support our test takers. Recently, we announced a highly strategic acquisition where we acquired the sole distribution rights for the Indian market from BC. As you may recall, this market from a BC or from a volume perspective has had very strong growth, 21% compound annual growth from calendar year '10 to calendar year '19, and there's clearly scope for material synergies here. With our partners, we continue to innovate the underlying architecture around IELTS to ensure that we can bring new products in an expedient way to market in the coming period. And I think importantly, again, IELTS reflected in the result of now having 11,000 accepting organizations shows clearly that it is the world's leading high-stakes English language test founded on integrity and trust. Moving to Slide 7 in the pack. Again, here's a great indication really of the real resilience of demand across our markets in the face of significant disruption caused by COVID. IELTS volumes are continuing their upward trend in particular, as test centers open. And if we look at the paper-based chart on this slide, you can see there the dip on the right-hand side, and that primarily reflects the second wave impact of closures within India. And then very quickly as things started to improve, and again, restrictions ease, the rebound. Indeed, that rebound has continued through July and into early August. The smaller computer-delivered test centers, as you can see, are somewhat less impacted by the restrictions imposed by various governments. And we are, therefore, able to continue to test through some of those lockdown periods in those test centers. So that's giving us further resilience in our testing model. And we now have over 284 centers, computer-delivered centers around the world. Moving to Slide 8. I think critically, through this disrupted period, student intentions have remained very strong. And this just reflects the stage of life students are at and their ambition to connect to an international education and international experience. We still see across our surveyed student cohort that 79% of students with current offers are holding on to their plans. I think what's interesting as we look to the right-hand side of the slide under the heading preference of delivery mode you can see an increasing acceptance of online and the transition to face-to-face. I think this just is a pragmatic view that students and families are taking that they may indeed need to begin their study journey online, but clearly have ultimately a desire to go to face-to-face learning. Looking at the middle component of that chart, I think it's equally interesting to see that students are less likely to defer to study face-to-face. So again, pragmatically, they're looking to begin their journey. They're leaning in to start their study, whether that means they have to start online with the expectation to ultimately travel to the market when they can. And the number of undecided students has reduced significantly. Moving on to Slide 9. As I said, desire for study abroad remains very strong. And the structural growth drivers we can see, as I mentioned in the IELTS numbers in particular. But here, we're having a look at a number of different components. I mean, firstly, organic traffic, which is reflecting the interest on our websites to study abroad. And you can see that continues to be strong with organic traffic up 45% versus FY '20. Interestingly, I mean, you can see the blip in and around April, and that reflects the Canadian government's announcements of over 90,000 opportunities for students and these are holders to begin their path to permanent residency. So it has big swing factor in terms of the interest in Canada. I think on summary on this slide, as we look to the chart on the right, you can see strong preference at the moment for the Northern Hemisphere. And I think that's a reflection, clearly, of the openness of the borders and the opportunity to begin studying back in classroom. Moving on to Slide 10, and this is providing you with an insight into our qualified student placement pipeline. So we're looking at not just the top of the funnel in terms of total inquiries or website searches, but we're looking at a qualified hot and warm leads here. I think clearly, on the right-hand side, you can see that preference for the Northern Hemisphere is very strong. In fact, the volume of qualified leads within our funnel at the moment has now surpassed where it was pre-COVID. So again, reflecting a strong rebound in the desire for students to begin their studies in the Northern Hemisphere. Whilst on the left-hand side, you can see Australia, whilst down certainly since pre-COVID somewhat stabilized. And I think we will continue to see that being the case. We've seen a high acceptance of online learning into Australia. But at this point, one that's fairly stable, and I think it will remain that way until we get real clarity as to when borders will open up for international students to return to Australia. Moving on to Slide 11. I've really summarized in all respects the way that we've transformed our business and built a digital platform to complement trusted human connections, with our people, our customers and our institutions now on one platform. We really are in a stronger position to deliver great customer experiences across all stages of our customer journey. And this does reflect in many respects, the unique and the significant position we hold in our market, being able to leverage a leading technology set of innovation community platforms. And most importantly, the human connections that are required to assist our customers in these most important decisions. Moving to Slide 12 and our innovation agenda. We've had an extensive amount of transformational work delivered through FY '21. And we have maintained strong ambition and investments to be made in FY '22. From a student's perspective, we began our journey with IDP Live, and we'll launch that much more formally in the October time frame. But through the year, as we integrated all touch points across our platforms and launched a student app, which has over 300,000 downloads. We also integrated in very sophisticated unique matching tools to provide our students with real-time guidance in support or with support of the counselors. But in FY '22, we're very focused on an innovative new model, which will combine data and our human-centered expertise. And I do believe differentiate us from all competitors in the marketplace. From a client perspective and the IDP Connect team that support them, we've expanded our digital offerings. And as I mentioned, we now have a significant uptake, 168 clients uptaking our IQ data services. The majority of the Go8 are customers and a large proportion of the Russell Group clients are now on subscription services to our data insights and using those, as I said, to assist in their own rebound strategies. Moving forward, we will be providing our clients greater access to early-stage connections within our high-quality funnel of students to drive not just their volume objectives, but also their diversity objectives. From an IELTS perspective, we completed the delivery mechanisms across CD IELTS, as I said, 100 new centers in the year. We released and delivered IELTS indicator, an online test during the year to assist in markets where our physical testing was unavailable. And we integrated in video call speaking to enable our examiners to participate in an online way to give us better scalability across our in-house distribution network. And we have some clear priorities for FY '22 to deliver more test types and delivery mechanisms on the platform that Cambridge and IDP and BC will be delivering on in the year ahead. So putting us really in a unique competitive position to accelerate our market share. I'm now going to hand over to Murray to take you through our financial results. Murray?

Thanks, Andrew. So I'm going to start on Slide 14, the FY '21 overview. Revenue for the year was $529 million, 5% below last year on a constant currency basis. Our IELTS testing revenue was flat year-on-year at actually fixed but it's 8% higher on a constant currency basis. We had good momentum in testing volume through the middle of April, but COVID-19 lockdowns, particularly in India in May and June had a significant impact on the fourth quarter volumes, limiting our year-on-year growth to 5%. Student placement revenue was down 22% on a constant currency basis with our multi-destination student placement revenue down 11%. U.K. student placement was the highlight, with revenue up 3% on a constant currency basis, while New Zealand was down 84% and the U.S.A. down 45%, contributing the majority of the decline in multi-destination revenue. Canada student placement revenue was down 9% on a constant currency basis. Australian student placement revenue was down 34%, with most students commencing new courses online due to the border closure. Our digital marketing business was another highlight with revenue up 13% on a constant currency basis. EBIT is $64.1 million, down 36% on a constant currency basis. But if we add back the M&A costs of $6 million related to the acquisition of the British Council's IELTS business in India and the $1.8 million related to the amortization of acquired intangibles, adjusted EBIT is $71.8 million, down 31% versus pcp on a constant currency basis. Net profit after tax adjusted for M&A costs and amortization of acquired intangibles is $45 million, and is also 31% below last year on a constant currency basis. I'll move on to Slide 15, the operating metrics. So the key operating picture shows a strong rebound in IELTS volumes in the second half versus FY '20. IELTS volumes were 1.149 million and were at pre-pandemic levels for Q3, getting towards 10% year-on-year growth before the second wave of infection, particularly in India, hit. The impact in Q4 was material, limiting our full year growth to 5%. Student placement volumes declined to 38,100, down 25% versus pcp, with multi-destination volumes down 12% to 23,600 and now making up 62% of our total volume. The U.K. was up by 4%, as the borders remained open and students were able to travel to commence their courses even though classes were mostly online. Canada was down by 12%, the U.S.A. down by 43% and New Zealand down by 80%, and they contributed similar declines in volume. Australian student placement volume of 14,500 was a decline of 40% with India contributing 41% of the total decline. Most students commenced their courses online and students from China were more willing to do that with our decline from China well below our average at 16%. Moving on to average fee performance. The average test fee for IELTS increased by 3% on a constant currency with the stronger Australian dollar having a 7% unfavorable impact. Price increases were implied in many markets, including India and Australia, and the British Council China license fee was 27% higher than last year, improving our average price for the year on a constant currency basis. The average student placement application processing fee has increased to $3,760 a 4% increase versus pcp on a constant currency basis. The Australian average fee increased 10% with a favorable steady mix, an increase in commissions from clients, a reduction in credit note provision and an increase in client bonuses contributing. The multi-destination average fee increased 1% on a constant currency basis with a favorable study sector mix and a favorable destination mix offsetting a higher credit note provision, lower client bonuses and lower student fees revenue from China. I'm going to move on to Slide 16 and cover the overheads. Our increase in overheads in the second half reflected the investments being made following 2 periods of disciplined cost control. Our cost control measures were wound back in the second half as salary sacrificing ended in December and increases in marketing spend were made with a focus on building the student placement pipeline for future intakes. Broad-based hiring for frontline staff was recommenced to ensure we fill vacancies and added new positions early enough in the year to build the student pipeline. In April, we commenced the repayment of voluntary wage reductions that commenced in Q4 FY '20 with 50% of the voluntary wage reductions paid to all staff, excluding senior management. And our teams in India in May receiving the balance of the repayment during the second wave of infections. Our run rate overheads on a pre-AASB 16 basis and excluding the M&A costs, to ensure like-for-like comparison is at $18 million per month in the second half of '21, up from the $16 million per month in the first half of FY '21 and $15 million per month in the second half of FY '20. So I'll move on to Slide 17 and the balance sheet. The balance sheet remains strong with a cash balance at the close of $307 million at the same level as the close in FY '20. Significant movements during the year included the payment of the interim dividend of $42 million that was deferred in March 2020 and the increase in trade payables of $36 million as the volume of IELTS test increased in the last quarter versus pcp and the corresponding increase in the quarterly fee we pay Cambridge is reflected. We put in place a new 3-year debt facility in June 2021 with our banking syndicate to provide the $100 million for the acquisition of the BC IELTS business in India and reduce our working capital facility to $75 million. I'm going to hand back to Andrew now.

Yes. Thanks, Murray. I'd just like to summarize the presentation, and then we'll move into questions. Clearly, IDP is in a strong financial position. And the FY '20 results highlight the resilient nature of our diversified business model. That, in my view, certainly has got us to the other side of the worst of the pandemic. Most importantly, we've held our talent together, so our capability and our capacity remains in place. And we've done this clearly to ensure that we take the opportunity of the demand that's presented and the restrictions easing to drive market share in this period of rebound. The recovery is underway. Clearly, that's reflected in the IELTS data, albeit, as you can see, it can be disrupted from time to time, but it really responds very quickly to the easing of restrictions, and that reflects the strong kind of through the cycle demand that we have with our customers and their desire to reconnect the study, work and migration. Very promising to see the growth in qualified leads, in particular, for the Northern Hemisphere. And we do believe from speaking to our leadership across the network, but as we get clarity on Australia, we equally should see a strong rebound when students feel confident that they can get into the country to study their degrees. We're very strategically positioned to drive very strong IELTS growth and the strategic insert or acquisition that we made with India being the largest IELTS market in the world, will become a core engine of growth for the business. From an industry leadership perspective, as I've mentioned, we've continued to drive innovation and transformation in our student placement area as we've brought data, AI, but primarily a focus on a greater customer experience and connection between our customer and our institutions together on our platform. And in the year ahead, we'll be delivering on our modernization objectives and the platform to bring new innovative tests and ways of delivering tests to market with IELTS. So let me pause there, and that completes the presentation. I'd now like to open up to Q&A, please.

[Operator Instructions] Our first question is from Michael Peet from Goldman Sachs.

Andrew, Murray, Craig. Just the first one, could you just give us a sense of that Indian disruption on IELTS in May, June. Maybe just how the first quarter of this year started off and what sort of pent-up demand you're seeing in India coming through?

Yes. I think on the -- thanks, Michael. On the slide, which reflects the IELTS volumes in the pack, then we take it up to June 30, of course, that rebound has continued through both July and August. So we're seeing a very -- we've seen a strong steep upswing in India testing. I think that's a reflection of 2 things. One, as we said before, just that through the cycle demand. But again, what happens when we have a lockdown or the inability to test as soon as we stand up capacity, we have a backlog to get through. And clearly, that's reflected in the uptick on the chart there continuing into first quarter.

And just on student placement. Canada was down heavily in the first half, it seems to have been down modestly, more modestly down 4 years. So it seems to have recovered second half. But I'm also interested in what was actually kicked into probably fiscal '22 with issues of getting into the country for the May intake? Is that the way to think about it, but maybe even Canada could have been a lot better. I'm just interested in the momentum there coming into FY '22.

No, there's plenty of demand for Canada. The issue for Canada through, I mean, FY '21, I mean, yes, you right. Firstly, there are 3 intakes. So the opportunity to continue to get volume into Canada was available to us in the second half. But there were supply chain challenges, in particular, quarantine requirements and a lack of flights. We're now going into the full intake where fully vaccinated student visa holders can get into Canada without quarantine. And only as recently as the last couple of weeks, the Middle East has opened up as a flight corridor for Canada. So it's a significant easing of supply chain restrictions in the second half of last year, the Canadian students out of India who did attempt to make it and take advantage of the opportunity. I mean many of them were finding ways to fly through Eastern European countries was almost the only option they had to get into Canada. So I think as we continue to see those restrictions ease and the channels open up, the Canadian throughput will be very strong.

Just a final one for me. Just on student placement with your cost base and your people, I guess, pre-pandemic, you're very more balanced with Southern Hemisphere, Northern Hemisphere expertise, I guess, thinking about those student placement people that are focused on getting students into Australia. Have you been able to repivot your cost base? How have you actually managed those people? And have you repivoted to a Northern Hemisphere sort of allocation of resources in the current environment?

Great question. Yes, great question. I mean we very quickly rolled out a set of training across our counselor base, to ensure that all Australian-based counselors were certified in another destination that either Canada or the U.K. so that we could do 2 things: one, hold on to our Australian expertise but, two, pivot that resource to be able to support the opportunity we could see opening up in the U.K. and Canada. And I think that will hold us in good stead when Australia does open up, and it will open up. We won't be caught off guard like our competitors who have lost or retrenched most of their Australian counseling base.

Our next question is from James Bales of Morgan Stanley.

Thanks, guys. I'd like to just follow up on the question of IELTS and what you've seen in July and August, especially the relative performance in the bounce back from your own operations versus the acquired British Council volumes?

James, you're referring, in particular, to India in that respect?

Yes, that's correct.

Yes. Well, we were -- I mean, firstly, from an India perspective, I think as you're aware, we were the majority share holder in India. We -- if anything, we've worked on ensuring that really the acquisition as it related to impact on volumes was seamless. So we literally shifted all of the BC bookings through a 2-week period and loaded up their backlog and their bookings into our system. So we really didn't -- we really haven't skipped a beat in terms of being able to service that demand for IELTS in aggregate in India. So that opportunity, if you like, that demand that we're seeing is now being harvested by us on a total India basis as of end of July or August -- first week of August.

Got it. And then maybe just on student placement into Australia. How do you see that run rate shaping up when obviously intent shifting dramatically away from Australia on a relative basis, but you've seen stabilization in qualified leads and an intent to study more remotely.

Yes, I think we've seen a couple of things. One, if we look at semester 2, which we've just been through compared to semester 2 last year, we can see that it has stabilized. So the volumes are stable, and that's fundamentally reflecting people's acceptance of online. We continue to run Australian events across the network. And in fact, we're ramping up the Australian marketing and the Australian events in this first half of FY '22. And we're doing that on the assumption that we will be beginning to place students back into Australia in the second half of our financial year. Now the assumption that I've built into, if you like, our own expectations is that we shouldn't expect a semester 1. We should expect students to start coming back and then go into a strong semester 2. All indications are from the network, and this is, in particular, direct engagements and the ramp-up plans for markets like China and India is that Australia will rebound quickly. Its preference as a study destination has dropped off but that's fundamentally because of the impact of closed borders not a view that Australia is not a good place to study and does not have good institutions. So we think it's really just a matter of getting clarity on when the border will open. And we are prepared and we're doing the work this half to ensure we build up that pipeline for readiness as we go into the second half.

Got it. And the other sort of moving parts on Australian SP was the commission rates that you mentioned had gone up. Can you give us some color on the quantum and how durable those increases are?

I mean, Murray can maybe touch on the quantum. But every year, we work across, as you guys know, across the other client base to increase terms of trade where we can. In Australia, yes, commission rates, I guess, are not -- there's not downward pressure. There's continued upward pressure, and that's a reflection of the universities getting prepared, if you like, to position themselves for taking the largest amount of pie that they possibly can as the rebound opens up. I think through the [ units ] of the Australian numbers, I know in aggregate, we probably negotiated close to $8 million annualized of commission increases across the client base. And when I say annualized, once those commission increases are negotiated, they're generally into perpetuity unless there's a specific bonus on a volume target. And we don't tend to focus on that. We look to raise commission base rates, which are then contracted into perpetuity unless they're renegotiated. I mean, Murray, did you want to make a comment on that?

Yes, sure. Thanks, Andrew. James, the commission increases that we negotiated is 4.8% of the 10%, [ such as ] the mix is favorable, 1.4%. But obviously, we've seen a big drop off in pathway programs and English language programs. And I think that is -- that will come back once students start to travel again. So I think that's the long term. Incentives was almost 1%. And then I reduced our drop-off provision for Australia because our volumes [indiscernible] to be that much of a drop-off provision. So I reduced drop-off provision by 2.5%. So that's the majority of the 10%.

Okay. Got it. And maybe just one final one for you again, Murray, is that you have flagged that the cost base run rate was $18 million per month through the second half. What sort of run rate should we be expecting in FY '22?

In the -- obviously, all of the cost-saving initiatives are now behind us, we're investing. So on the basis pre-AASB 16, it's -- for the first half, it should be around $22.5 million a month. So that sort of run rate for the full year, it will be higher in the second half. So for the full year, it will be certainly around $23 million to $23.5 million.

Our next question is from Philip Pepe of Blue Ocean Equities.

I thought it's a pretty solid result in some challenging circumstances. Just a couple of quick ones. Obviously, U.K. benefited from keeping their borders open while others was shut. And I did notice early week that Canada has closed the borders to direct from India flights, so that you can still get there indirectly. I'm just wondering to what extent has some of the U.K. line been switching from Australia? And does the U.K. go backwards at some stage when Australia, New Zealand reopens, do you have a feel for that? That's the first question.