Made Tech Group Plc (MTEC) Earnings Call Transcript & Summary

Welcome to the Made Tech Half Year Results Webinar. [Operator Instructions] This webinar is being recorded. I now hand over to Rory MacDonald, CEO; and Debbie Lovegrove, CFO. Rory, over to you.

Fantastic. Thank you, and good afternoon, everyone. Welcome to the Made Tech interim results presentation for the period ended, 30th of November 2022. If we could jump along to the next slide, I'm Rory MacDonald, Founder and Chief Executive at Made Tech, joined by Debbie Lovegrove, our CFO. We thank you for your time today. We're looking forward to taking you through the progress we've made over the last 6 months, and talking through our business. Moving over to the next slide. Presentation to take about 25 to 30 minutes. I'm going to run through the business overview, financial results. So I'm going to run through the business overview. Debbie is going to talk you through the financial results, and I'll talk a little bit about our strategic plan and outlook, for the rate remainder of this year and into FY '24. We'll then hand over for questions following that. In terms of the business overview, it's been kind of a really kind of strong first half of FY '23. The business growth has continued to continue. So strong revenue growth, 76% growth on the equivalent period last year. I'm really pleased with that. I think it's turned out slightly ahead of what we were expecting in terms of we're expecting from a stronger 40-60 split. And the revenue came in stronger in the first half than we were somewhat expecting. Gross profit margin has unfortunately reduced, and we'll talk a little bit more about that later, but this is related to the transition from a higher number of contractors and transitioning a number of employees into contractor roles from the end of FY '22, and some related to our utilization as well. So we'll talk a little bit more about that as we move forward. Our sales bookings were very strong. So we're ahead of where we were expecting to be on sales booking numbers. We also kind of closed GBP 27 million in new contracts following the post period end, which was really, really good to see. So our contracted backlog figures are now stronger than they ever have been really put us in a strong position going into the tail end of FY '23 and forward into FY '24. So we feel we're in a really good position. Client numbers have increased. We've gone from 19 to 23 clients with contract sizes continuing to grow materially. We continue to invest strongly into the development of our own IP. So, well a number of products, which will be targeting the local government market. And we've got a first client who signed up in that space. And we'll be sharing a little more detail on that at the end of the year, when we'll come back to everyone on that later in the year. Headcount continues to expand. The headcount growth in the first half of this year hasn't been as aggressive as it was in the second half of last year. But continue to grow the headcount and looking at really good progress on that. If we could jump on to the next slide. I just want to kind of provide a kind of overview of some of our key KPIs, as we feel we made good progress on these. So yes, revenue up 76%, GBP 20.6 million, up from GBP 11.7 million in the equivalent period last year. Gross profit, up to GBP 6.8 million, grown from GBP 4.6 million in the first half of last year. Adjusted EBITDA is down on last year, and that's related to what touched on earlier around utilization and the transition from contractors to more permanent employees. Sales bookings, yes, very strong at GBP 32.6 million, up on the GBP 26.5 million last year. Contracted backlog at GBP 47.8 million, which is good, up 54% in the period last year. And overall, I guess the key message here is that the business continues to perform well, got a strong balance sheet. Cash position is strong, though it has reduced on the equivalent part period last year due to investment into various areas to drive the long-term growth of the business. But overall, our KPIs are very strong, and we're very happy with them. If we move along to the next slide, please. So I wanted to provide a bit of an overview of kind of what Made Tech do the kind of core offerings and kind of how we are developing on those offerings. So Made Tech business is broadly based around these sort of 3 areas. So Transform, Deliver, Run. Transform is really the early stage of where we get involved in helping to shape clients, thinking on their digital transformation journey. So we work well with clients to help them figure out what are their plans around how they're going to transform. We've got a relatively kind of small team specialized in this within the organization. The deliver area is really the bulk of where our team are based. So these are the people in our organization who deliver the sort of transformation initiatives to build the software, build the services for the government organizations to help them on their transformation journeys. So we got these broken out into Cloud & Engineering, digital delivery, User Center Design, Data & AI, Cyber Security. And then the third area is run. So this is when we take on the responsibility from running the technology and the services for our clients, for our client organizations. So this is a really important part, kind of like running the ongoing services that citizens use. And these are the sort of 3 core cards of our organization. The areas in the lighter green on the slide here are areas where we've continued to invest into. So we've been continuing to build our teams in each of these spaces. And really kind of what we're doing there is looking to expand our capabilities, expanding the capabilities enables us to win larger contracts with our clients. In years come by, we'll be winning kind of GBP 2 million, GBP 3 million, GBP 4 million contract. And now we're looking at contracts over GBP 10 million. And what we see is that as the contracts get larger, the requirement on us as an organization to have a broader set of capabilities increases. So we're deliberately expanding out these capabilities to meet the client needs, and to win larger and larger contracts. Jump on to the next slide, please. Just turning to clients. Our client base is broad. It's diversified. It continues to grow it all 3 of the markets that we're operating in. So central government, local government and health and social care. We won 9 new clients in the period. So in the first period of this half year. And we have, as you can see here, really kind of fantastic client base. So really, really high-quality clients who we can work with, over the long term to support them on their transformation initiatives. Quite to the top, we've got the central government departments. And the buying profile of central government departments tends to be larger contracts which get delivered over a number of years, and we're supporting them on a number of different initiatives. So people at the Home Office, DVLA, the Department for International Trade. These clients raise into support them on a number of different things, and they're all kind of tied back into their sort of longer-term transformation plans. Local government has a different type of buying profile and built by buyers and looks to kind of transform in a slightly different way. There is more commonly looking to kind of buy solutions off the shelf that will solve particular problems for them like service line problems. So we've been working a lot with local authorities on the transformation journeys and some of the products that we've been developing are target, and the service lines where we have identified opportunities, and we'll continue to build those out in the years ahead. The health and social care area for us is another important area. There's a mixture of kind of larger government bodies like NHS [indiscernible] NHS Digital, which have recently kind of come together and kind of other organizations, which don't have a significant budget. We're currently mostly working closely with the larger NHS bodies, supporting them on pretty large-scale transformation initiatives. I think about a year ago, we announced a big contract with one of those NHS organizations. And we expect this to be an area that we continue to invest in to continue to build out moving forward. If we jump on to the next slide, please. So just wanted to touch it on the market opportunity. So really, the sort of market opportunity we're looking at here is fundamentally underpinned by the wider digital transformation shift that's happening across the world. Within government, within public services, there's a lot of kind of legacy, a lot of kind of old school paper-based technology -- paper-based processes and kind of ways of doing things that are not fit for purpose. And there's a big shift to operate government more and more efficiently. There's also a lot of suppliers who have been serving the government for a long time, who have not necessarily done the best job. And there's a big shift to move away from some of the sort of the incumbent suppliers to more modern more digital suppliers, who really kind of understand how kind of technology works and how you can really use technology to make a big difference in public services. So that's really important, really important for us. And as we are taking, what we find is the market is growing very quickly were at 22% annual growth rate over the last few years. The market is increasing in size. So the latest data on this content market view shows the market size increasing by about GBP 3 billion over the next 3 years. So the tailwind here, really really strong the market is growing, and we're also taking market share from some of the larger IT outsourced-type providers, as government moves away from them. So it's a really good time for us to be building our business. And you can see that in the numbers in terms of the rate of growth we're achieving because we were able to kind of really kind of push forward and that's helped by the kind of the wider market opportunity. If we jump to the next slide, please. Spoken about the U.K. opportunity and particularly the opportunities in central government, local government and health. But there is also a very significant global opportunity that we're very aware of. It's not an opportunity that we are actively pursuing at this point in time, but it is an opportunity that we think we can capture in the medium term and move forward on. The global opportunity is really, really rooted in the U.K. has done somethings around digital government that are really highly regarded on a global stage. So there's lots of other countries, governments who are looking to things that happened in the U.K. to -- and sharing, try to share learnings and ways of doing things. So we think we can capture some of the opportunity from that and kind of in future years, start to expand our business into international markets. But let's say, this is a medium-term plan. It's not something that's immediately on our agenda. There is also opportunities within adjacent markets, security services, default governments, law and police. These areas where we have done small amounts of work, but we haven't currently got real focus on these parts of the market. And we think there's a really good opportunity for us, if we can kind of focus on expanding out into those areas. So we expect to continue kind of making progress on this when we see the right opportunity. And I think it's a really exciting time to be in the public service space and building the business of our nature. And I guess, the kind of thing I really talking about some and touching on this is we see an opportunity that's not short term. The opportunity we're going after here is a 20-year opportunity, something that we can grow into over a very significant period of time. And we're really excited about that and we're really excited to build our business to capture these opportunities over the long term. We jump to the next slide. Yes, in terms of -- I just wanted to kind of touch on the people side of organization. Obviously, the people in our business are absolutely critical. All of the work we do is done through kind of really talented individuals and work closely with our clients to deliver great things and people are really passionate about the work they do. Over the last 12 months, we've increased our headcount significantly. The first half of this year was the increase in headcount wasn't as significant as it was in the second half of '22, but there's been a lot of sort of bedding in and sort of transition from new people to in the business that we've been doing. So we spent a lot of time in working on that over the first half of the year. We also, unfortunately, had to say goodbye to 18 individuals that we made redundant during this period. And that was finding to us that we're more closely managing our cost base as we scale. And it's a difficult thing we had to do, but it felt was the right thing to do for the business, for clients. So it was really important that we do that. Attrition rate in the period has increased -- sorry, retention rate increased by 85% to improve slightly. We expect in the second half of this year, it will decrease slightly as some of the changes we made in the organization are driving a slight uptick in attrition. Well, that's all within the sort of boundaries we would expect for a professional services business like ours. We continue to hire people up and down the country. So we've got Made Techers working in London, Southeast, Bristol, Swansea, the Midlands around Birmingham, the Northwest around Manchester and Leeds. And in Newcastle, Glasgow and Edinburgh. So we've got team members and colleagues up and down the country. Some of the locations we're based in don't yet have office space, and we're going to kind of see over the coming months how our team grows and out at a certain point in time will then expand out decides to kind of put Made Tech offices in some of these locations. But given the sort of hybrid nature of work at the moment, it's not some we've been prioritizing over the last 12 months. So yes, all really, really kind of exciting period of kind of great to the organization and really, really excited about how the progress we're making, and we'll hand over to Debbie, to talk through the finances.

Thank you, Rory. Can I have the next slide, please? Thank you. So just touch on the sort of key financial highlights. So revenue of GBP 20.6 million, so that's up 76% versus the previous year. Gross profit of GBP 6.8 million, so up 48%. The gross profit margin was 33%, that was down versus the previous year, which was 39%. And really, there's a couple of reasons as to why our gross profit margin was lower. The first one is utilization. So our utilization rate during this period was 68%. That compares against 85% in the previous year. The other reason is contractors. So our contractor usage coming into H1 FY '23. At the beginning of the year, we had roughly about 16% contractors. We round that number down. So we replaced those contractors with permanent employees. So by the end of November, the contract usage was 10%. But there was a duplication in cost because we have the contract in the permanent employee. Utilization was also impacted by changes in government and the political turmoil that we saw during this period. So we started the year expecting revenue to land sooner. But because of the changes in government, those projects are pushed out. They look push out to the right. They weren't lost. They have not lost revenue opportunities, they just started later. I think what's pleasing us, is our sales bookings number was higher during this period, so GBP 32.6 million, up 24%. And most pleasing have always been the contracted backlog. So our contracted back -- backlog at the end of November was GBP 47.8 million. That doesn't include the 3 new contract wins that we announced in January of the -- roughly about GBP 27 million. So that contracted backlog is much higher now than it was at the end of November. Adjusted EBITDA, so that was GBP 0.5 million in the first half of the year. And I think finally, the cash balance, the cash balance was GBP 9 million. So that cash balance is really a timing difference that will improve once we drive profit in the second half of the year. Can I have the next slide, please? Thank you. So I think we have very resilient revenues. And you can see from this slide that our strategy to land and expand clients is working very well for us, and it's very successful. You can see that we are diversifying. So we're derisking the business. Also, the client wins. So we are winning new clients all the time. we've always talked about the 9 new clients that we've won in FY '23. Those client sizes, we're seeing them grow. So our average contract size rose by nearly -- well, just under 70% to 69% to GBP 1.5 million. Can I have the next slide, please? Thank you. So we have very strong revenue visibility. So as this is the highest contracted backlog that we've ever had. So the end of H1, it was GBP 47.8 million. That has obviously increased with the 3 new contract wins, where bidding for contracts all the time and winning contracts. So that pipeline is growing. What that means is it gives us very strong revenue visibility for the second half of this year and also moving into FY '24. That coupled with the fact that we've got a more fixed cost base moving forward. So we rightsized the business with those 18 head count reductions. So our cost base is more fixed moving forward. What that means is we can actually drive gross profit and moving forward, which will drop through to EBITDA. Can I have the next slide, please? Thank you. So just walking through we've seen these numbers already. So the revenue of GBP 20.6 million, the gross profit of GBP 6.8 million. Ultimate expenses of GBP 8.6 million. So that does include a share-based payment charge and GBP 0.5 million in severance payments, those 18 people that sadly we have to take a bite through in November. Just one thing I wanted to touch on is we did announcement this week that Rory and Chris, who's our COO, have waived their LTIP. So the LTIPs that were announced pre-IPO have waived. This gives Chris and Rory the opportunity to capture shares in the market between of GBP 1.2 million. it will impact our share-based payment charge. So because we are canceling those shares in the market, it accelerates the share-based payment charge for those LTIPs. So the share-based payment charge will increase by roughly about 300,000 in this particular year. It's a noncash item, so we adjust it out through the adjusted EBITDA. It won't materialize. It's just a cancellation. Next slide, please. Thank you. So balance sheet. So I'll just touch on a few things on the balance sheet. It's fairly simple straightforward. Intangible assets of GBP 3.4 million. So that is our investment in IP that is continuing, and that drive future recurring revenue streams. Our working capital has been tightly managed. So our debtor days have improved. So then our 37 versus previous year of 58 and a healthy cash balance, and we've got a healthy cash balance of GBP 9 million. There's no debt in the business. So it's all cash, and that will improve as we drive profits. Next slide, please. Cash flow from operations was negative of GBP 1.8 million. So that's a timing difference, that will improve in the second half year once we drive profits. We're also investing, so you can see the IP investments of GBP 1.5 million during this period. Now I'm going to hand over to Rory, who's talk through our strategic plan.

Super. If we go to the next side. So just going to give you kind of a quick overview of the sort of key components of the strategic plan, and strategic priorities we're working towards. So the first -- I guess the first thing to say is kind of growth is a really, really important part of how we're looking for it. We're looking to continue growing the business significantly in the years ahead. And we're looking to grow that business through sort of these 3 areas. So increasing our offerings and capabilities. So continuing to build out the offerings and service rights that we can provide to our customers to enable us to win larger and larger contracts. And to better serve the industries that we operate with it. So that's a really important part of what we've been doing and a lot of time over the last 6 months in building out the rights and the capabilities and the right people in our business to do that. Deepen our industry expertise is a really important part how we expect over time to increase the size of the health, the local government and other industries that we focus on. So becoming experts in those industries, so we can provide higher and higher value to our clients and increase kind of rates and things within that market really important. The area is around geographic coverage. So continuing to expand out the places that Made Tech is based, so we can service our customers effectively. So there is a big push in government to continue -- sort of continue kind of leveling up to deliver more and more outside of London. It's really important for our organization based in close proximity to those [indiscernible] of the government is delivering a thing. So for us, we'll continue to push on that, continue to kind of measure we've got strong coverage across the U.K. And then over time, make sure we're putting offices in place and making sure we're working with the local communities to kind of really have on a strong presence. And we see 3 of those things having a really, really positive impact on the growth of the business. Operational excellence, it's really, really key for us to run a smoother and more and more optimized business and really see all the hardwork we're doing in growing clients talking through to both gross margin and bottom line. So doing a lot of work around kind of iteratively improving our systems, our processes and our enabling functions. So when I say enabling function we're talking about the way we enable our teams who are working with clients, to work with them really effectively. So this is a really big and important part from how we streamline the organization to deliver for clients effectively. And then the fifth area is around our employee experience. So our employees are the absolute core of our organization, the core of everything we do for our clients. So for us, really important that we're building out an employee experience is really leading, is really kind of forward thinking and enables our people to kind of join us and kind of really build their career at Made Tech. There's more and more work we need to do on this, but it's a really important part of how we see the business moving forward over the years ahead. If we jump on to the next slide. So yes, I just wanted to provide some outlook in terms of kind of how we're looking at things moving forward. So we're trading in line with management expectations, and we're reiterating guidance for the full year. We're confident as our backlog is stronger than it's ever been. We -- at this point in time, we've got kind of stronger revenue visibility on H2 and FY '24 than we ever have done. So we feel in a really, really strong position. We continue to see a really, really buoyant demand environment in public sector. There's lots and lots of contract opportunities out there, and we're really, really well positioned to continue winning new contracts. And we've seen the momentum continue in the second half of the year. Overall, we're really excited about what we can achieve over '23, '24, and '25 and ongoing, and really excited to just push the business forward and continue to deliver great growth results and also bottom line results, too. So, I think that's it from us. I think, can we hand over to Q&A?

[Operator Instructions] And we've got a first question here. Are your contracts with clients, time and materials or fixed cost?

Yes. All of our contracts or certainly 99% of our contracts are time and material space.

I note that Made Tech held back on announcing the recent significant contracts until the trading update. Is this a new trend? Or can we still expect to hear about larger contracts as and when they're secured?

So we did announce the contracts, as soon as they were secured. So it was just a coincidence that they were all -- the contracts will find literally at the same time as each other. But as soon as we are able to announce, and we've signed those contracts, we will issue RNSs.

And what are the team's expectations for the initial revenue impact from the new in-house IP solutions being released in full year '24? For instance, do you already have specific projects that you'll be targeting existing clients with?

Yes. So we've got a strong pipeline of clients that are lined up. We've got one customer who is using one of the IP solutions. But we haven't provided any guidance on revenue for FY 2024, we expect to do that full year results.

And question here about revenue growth. Full year '24 forecast revenue growth as per Singer's is to add 16%. It's a big step down from the near 50% growth forecast for May '23, Should we expect mid-teens revenue growth at the best for the medium to long term? Or do you envisage your pickup again? And at what rate will -- while Made Tech is still small enough to grow rapidly?

Yes, sure. So the revenue growth in FY '24 that we're forecasting is conservative. We're trying to put numbers out there that we're very, very confident about. We're also conscious of FY '24 starting to come an election period and the impact that may have on things as governments potentially change at the tail end of that period. So we put those numbers out based on that. We will continue to kind of revise guidance, as we see kind of changes in the market. I think it's worth saying that we do expect to continue to be a high-growth business over the medium term.

Great. And what percentage of the breaker forecasted full year '24 revenues of GBP 50 million were already secured at this stage?

So we've got, as you can see, very, very strong and contracted backlog. So that the number that is in the presentation was the backlog at the end of November. That's obviously grown and since then. So we are seeing extremely high percentages of the FY '24 revenue being delivered from the contracted backlog number.

Tremendous. And how high a priority is reducing the discrepancy between statutory and adjusted earnings figures?

Well, one of our key KPIs is the adjusted EBITDA. So how we look at the business, the key KPIs are the ones that we've included in the presentation. So revenue and revenue growth is obviously important. Adjusted EBITDA is important because that's how we're managing the business internally.

And are any of the 23 active clients and sectors outside of central government, local government or health and social care?

No, they're all within those sectors.

And expanding your capabilities, is this driven by direct client demand or by your view of the gaps that you need to fill in order to win large contracts?