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

Welcome to the Made Tech Full Year 2023 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.

Thank you, and good afternoon, everyone. Welcome to the Made Tech results presentation, the year ending 31st of May 2023. Most of you will know me. I'm Rory MacDonald, Founder, Chief Executive at Made Tech, joined this morning by Debbie Lovegrove, our CFO. Thank you all for your time today. Really looking forward to kind of talking through the progress that we've made in the business over the last 12 months. We've got about a 30-minute presentation to talk through. I'll give you a bit of an update on business progress. Debbie is going to talk through the financial results and then I'm going to give a bit of an overview on the strategic plan and then cover off the outlook. And of course, we'll have some time for questions at the end. Talking about kind of business update. First of all, let me say that FY '23 has been a really challenging year for Made Tech. Quite possibly the most challenging year since I founded the business in 2010. There was a lot going on within the sort of macroeconomic environment. It's had a massive impact on society. Lots going on politically, which has impacted our clients. And there've been a lot of changes at Made Tech, which has impacted our business. So overall, it's been a tough year. But amidst these challenges, I feel we've made some really, really good progress in a number of different areas. Our sales bookings hit an all-time high of GBP 70 million. That's a really significant number and something we're really pleased with. That number comes on the back of a number of kind of contract renewals and really kind of deepening relationships with key clients, really goes without saying that, and it really speaks volumes for the quality of the com-services we're offering to clients and the relationships our team have built with clients over the last few years. So we're really pleased with the GBP 70 million booking number this year. Diving a bit deeper into our contracts. There's been a real trend this year of winning bigger deals. We signed two contracts over GBP 10 million, seven over GBP 5 million and 10 over GBP 2 million, really this isn't just growth, it's really kind of showing a significant increase in the significance we as an organization are playing in the market. And really, that's something we're expecting to continue moving forward. We've been investing into the development of some Software-as-a-Service products. And we've continued the investment in development of those products this year, these products are really designed specifically for local government. If we look at that market, that market is full of software providers, providing kind of antiquated technology, which frankly really isn't fit for purpose. And a lot of the transformation that's happening in that market is to try and move away from those software providers. So really kind of what we've been doing in that space is trying to use the insights that we've got from the local government market and our expertise in modern software delivery to take transformative kind of products out to this market. We've launched 3 SaaS products last year. We've got now got kind of a handful of clients that are signed up to it and a really kind of a nice healthy pipeline that's starting to build as we move into this year. I'll talk a little bit more about that later, but kind of we're -- we're excited about some of the future and the opportunity in that space. On the capabilities front, we've made some really good progress. So capabilities are really kind of the services and the things we provide to customers, the core of our business. And really since launching -- since launching our design capability in 2021, we've really grown that significantly to nearly 100 people in the organization now that are part of that design capability, and we're really pleased with that. Recently hired a new design leader into the business to look after that area of organization moving forward. Follow back to 2022, we launched a dedicated data and AI practice, and we've been seeing that kind of grow nicely, approximately 20 people in that team now. I'm not going to talk too much about AI today. I know there's probably a million different organization talking about it, but we do genuinely see a significant opportunity in that space for us within the public sector in the years ahead. And we see kind of lots of demand in that space moving forward. So we're interested in seeing how that progresses and moves forward in the months and years ahead. Overall, kind of '23 -- FY '23, we spent about GBP 1.6 million in helping to build out our capabilities, so across kind of data, design, managed services. And really, all of the investments in these spaces are all about driving future kind of revenue streams and new areas of growth for the organization and are strategically important for us as a business. Alongside introducing these new capabilities, we've also been doing a lot of work around kind of expanding our senior team. So kind of really delighted to have Tim Bardell join us as Chief Delivery and Transformation Officer; and Wayne Searle, joined us as Chief People Officer. Really importantly, we kind of bring the right people into the business to kind of help take us on the next phase of our growth journey and both of those have got fantastic experience and that will help kind of progress the business forward. So really pleased to have them on the team. So despite a challenging macro environment and political landscape, we've come a long way. We've made good progress in a number of areas. But of course, there are things that we need to improve in FY '24. I think we could have done better in FY '23 and really sort of talk a little bit about a couple of those now. So we jump on to the next slide. So I think for those of you who followed the Made Tech story, you'll know we really had no problems in delivering growth, right? We've been driving a market-leading organic growth figure for a number of years now. And whilst we continue to kind of push hard on growth, our current focus has really shifted to be more about the fundamentals and driving profit, margin and cash generation. So over the last 6 months, we've really put an emphasis on this, particularly emphasis on the fundamentals around kind of the margin and profitable performance and improving cash conversion and cash flow from operations. Debbie is going to talk a little bit about the numbers shortly. But you'll see from these that our H2 FY '23 performance was significantly improved on our H1 performance. And we're seeing that performance trend continue into H1 of FY '24. And for me, as I look out over the next few years, I'm going to be really kind of pushing the business to grow from a GBP 40 million business to GBP 100 million business. I really kind of -- before we really make this push, I want to ensure the fundamentals are solid and the next phase of growth delivers for shareholders. So our focus for this -- our focus is on this for the rest of this financial year. If we move on to the next slide. I'm going to hand over now to Debbie to talk about the numbers.

Thanks, Rory. So if we look at the financial performance of the business, and looking at the key highlights, we can see that we continue to see strong top line revenue growth. So our revenue has grown by 37% to GBP 40.2 million. That's a combination of growth from existing clients and also winning new clients and winning new contracts with new clients. Our gross profit was GBP 14.4 million, which was up 28%. However, disappointingly, our gross profit margin was lower than the previous year. So our gross profit margin was just under 36%, previous year was 38%. The reason it was lower is because it was impacted by some delays that we saw in some project revenues particularly in the last quarter of FY '23. This impacted our utilization levels and it has an impact in terms of our gross profit margin and our EBITDA, and our average utilization was roughly about 70%, prior year was 81%, so it was significantly lower. The thing to highlight is that the utilization level at H1 was 2 percentage points lower than H2 for FY '23. So some of those improvements that Rory was talking about, we can see that in the second half of FY '23, and that is continuing moving into FY '24. We have done some significant improvements in profit margin. So we've done an awful lot of work to improve our profit margins and improve our cash flow balances and built on what Rory was already talking about, we're seeing the results of that leading into FY '24. Adjusted EBITDA, so adjusted EBITDA was lower, so it's GBP 1.5 million, so it's down 43%. That is a direct result of the delays in those revenues coming through mainly at the last quarter of FY '23. We are dependent on clients when those contracts kick off. But I think what is pleasing is that our Sales Bookings number was GBP 69.9 million. So as Rory just talked about, is up 37%. Also, our Contracted Backlog was the highest at 67.9% (sic) [ GBP 67.9 million], so up 78%. Cash flow. So you can see that our Cash Flow from operations was down GBP 0.5 million and our cash balance at the end of the year was GBP 8.5 million. And I'll walk through the cash flow a bit later. The majority of that cash outflow was due to the investments in capabilities and products. It is important for us to invest in our products and development. It's a part of our ambition to continue to grow and scale the business and growing that product offering diversifies our revenue streams, but more to follow in this a bit later. If we look through the Summary P&L, so we've covered most of the kind of revenue and gross profit. And overheads, you can see that our overheads increased to GBP 15.9 million so up 38%. That number doesn't include the share-based payment charge. It also [ includes ] some exceptional costs. So we had about GBP 0.5 million of exceptional costs related to some headcount reductions that I'll talk to in a minute. We have been increasing our investment in sales and marketing, which is the majority of that spend, and that's the growth due to revenue streams. If we look through the cash flow. So if you look at the graph on the left, that is the bridge between our EBITDA and our cash flow. So our adjusted EBITDA was GBP 1.5 million. But you can see on the bar on the right that our cash outflow was GBP 3.9 million. The majority of that cash outflow is tied into the exceptionals of the GBP 0.5 million, which is severance costs. GBP 1.6 million in investments and capabilities and GBP 1.5 million in investment in the product -- in the 3 products that Rory was talking about earlier. I think what's pleasing is, if you look at the graph on the right, you can see that there's a real difference between the cash outflows in H1 and H2. So the cash burn in H2 is significantly lower than H1. We're seeing that trend continue due to the improvements that we've made in the business, that's going to continue into FY '24. If we look at the people side of our business. So our headcount has reduced. So our head count at the end of the year was 430 compared to the number of 478 in previous year, it's down 10%. We did do some headcount reductions. We talked about those when we were doing our interims in H1. So that was a deliberate effort to make sure that we right size our business to make sure that we have the right starting mix to ensure that we can improve things like our utilization, our gross profit margins and our profitability. So that work was done in the year, sort of around February, March time, we're seeing those improvements in terms of utilization. We saw that towards the end of FY '23, and we're seeing that those improvements in FY '24. Contractors, as you can see that we have reduced the number of contractors. So we're replacing contractors and third-party suppliers with employees and that trend is continuing, and that is ensuring that we're delivering a higher gross profit margin and that's dropping through to adjusted EBITDA. What's disappointing is our Retention Rate is lower. So the retention rate -- the average retention rate during the year was 71%, that was down versus the previous year, which was 73% and also down at the interims, we were reporting a number of 85%. There's a couple of reasons as to why our retention rate was lower. The first one is the business was impacted by the headcount reductions that we did during the year. Also, whilst there has been sort of well-publicized headcount reductions in the tech industry as a whole, our employee still have options. So there are still some companies employing people in quite high salaries that obviously we can't match. So we did see a bit of churn during the year. This is a key area of focus for the business. So churn does cause the business. So this is a focus that we have been deliberately looking at and we've seen that retention rate improve as we move into certainly Q1 of FY '24, but we're seeing that retention rate definitely improve for the business. Utilization, the utilization, as I just referred to was lower at 70%. Again, this is a key focus area for the business to make sure that's improved. We're seeing those improvements in the first quarter of FY '24, but it was impacted by those project delays, particularly in the last quarter of FY '23. With that, I'm going to hand over to Rory, who's going to talk about the strategic plan.

Super, thank you. Thank you, Debbie. So I'm just going to give a quick overview of kind of the overall kind of strategic plan. I'm not going to go into kind of a huge amount of detail on it at this point, but I just want to kind of provide a bit of an overview for those who are new to the organization. So we jump on to the next slide. So really, the market opportunity that has been underpinning the growth of Made Tech is really driven by the sort of the broader digital transformation shift that we're seeing across a whole bunch of different sectors. Within government and public sector, there is a lot of legacy technology. There's a lot of paper-based processes. There's a lot of old ways of working, they're really not fit for purpose anymore. And the market really -- there's a lot of antiquated suppliers, suppliers who have been working with government organizations for decades and frankly, doing a pretty old job. And really across government, there's a real drive and desire to kind of -- to use digital, to use more automation, to streamline government services to make them much more agile, more efficient and generally kind of try and make government a more efficient place to run. And really, that's the sort of the opportunity that we're going after. The immediately addressable market, the area that we operate in is approximately GBP 2 billion to GBP 3 billion in size. And really, that's calculated using the digital spend that's existed over the last few years. Now there's a bit of kind of change is happening in the market over the next sort of 12 to 18 months due to the election. So the market has been growing very, very quickly, but obviously, there's an election coming up at some point over the next sort of 12 to 18 months. So that's creating a bit of uncertainty in the market over the kind of forward period. So the annual growth rate of the market is expected to slow over the sort of next year to 2 years as the election plays out and kind of new priorities move forward. But all -- the underlying trend within the market will continue. There's all the signs are pointed towards continued investment into driving kind of transformation and for a change and to move things forward. So I think it's a really kind of strong market to be operating within and kind of really provides a really great foundation for us to kind of grow our business with them. We jump on to the next slide. I think some of you will be new to the Made Tech story. So I just wanted to kind of talk a little bit about kind of what it is we do, some of the services that we offer. So we are digital transformation provider to the government in the U.K. public sector. we help them to move from paper-based processes to digital processes. And to give you some examples of the type of things we're involved in, we work with HMRC on the tax platforms, something that underpins VAT and PAYE. We work with people like the Ministry of Justice on the electronic monitoring. We work with Ofgem on Green Gas Support Schemes. We work with DVLA on provisional driving licenses. So we're involved in delivering the sort of core technology that's involved in kind of running and operating government on a sort of day-to-day basis. The business is really kind of organized around these sort of 3 areas. So you transform, deliver, deliver and run. So we're in the transform space. Really, this is about kind of supporting clients in the early stages of their transformation journey, giving, providing advice, helping them kind of design and think about kind of change that is required and kind of really kind of shape up what that kind of transformation looks like for a government organization. So that might be a new policy, priority that's coming in, how might we test that policy product and then go on to deliver it. It could be -- we're trying to move away from a legacy contract. How do we do that? How do we kind of split up the different services that exist within a legacy contract and deliver those in a more modern way. So the transformal area of our organization is focused on those types of things. We then sort of move into the Deliver side of things. So really, this is about the delivery of the core kind of transformation initiatives. So that is going to developing bespoke services for government departments, it's designing those services, it's building on the data platforms that underpin, them supporting on the cyber-security initiatives. So all the services in and around delivering on those government transformation initiatives are within this area. And really, this is where the bulk of our team are based, 90-plus percent within this area here. And on the right-hand side, we've got the Run side of things. So that's more about kind of running the ongoing operations for our clients or supporting into to kind of run and operate things moving forward. And that's a smaller part of our business at this point in time, but we expect it to grow and develop over time as we get kind of more and more contracts in that space. And this has been kind of one of the areas, we've been investing in over the last few years. So I just want to give a bit of color around the kind of services and capabilities we offer. If you could move on to the next slide. I also just want to touch a little bit on the product side of things. So as touched on earlier, we've been developing some new products, specifically for the local government market. The first product is a thing called Housing Repairs and really that's about supporting local authorities and residents of local authorities to manage housing repairs for their area. Second product is around Voids and managing the Voids period within sort of housing stock within local authorities. And the third product is called ID evidence, that's enabling local authorities to verify individuals, identities and enabling to issue things like licenses and different kind of things to citizens who work -- who live within a particular local authority vicinity. So these are sort of 3 products that we've been working on over the last the last 12 months. And really, all of these products are tied back into really the transformation of local authorities and government. So it's about how do you deliver things more effectively and more efficiently. And really, that sort of efficiency and driving efficiency is really, really important. We all know there's a lot of strain on local authorities at the moment and tools like these and products like these, which help to free up people's time to deliver things more effectively will ultimately help to find savings within authorities. So we've been developing these products and taking these products out to market. We've made some nice progress. We signed up a few clients into the kind of product space today. We've got a really nice pipeline that is building. And it's kind of important to mention that the commercial model around these products is different to our core kind of services. So these products have been sold on a -- more on a sort of an annual recurring basis. So it's more of a license model and with much more significant gross margins for the business. And over time, we'd expect to see these products grow and kind of gain market penetration and start to contribute kind of nicely to the business's gross margin and then ultimately kind of bottom line. So we're quite excited about the work we're doing in the product space, and we think it's an important area for the business moving forward. If we jump on to the next slide. Yes, just want to quickly just touch on customer base. So we've got a great selection of customers, across central government, this is kind of really where our large customers are, and we work with the law team in the Home Office, Ministry of Justice, Ministry of Defense, Met Office, organizations that spend and build billions on technology and change every year and we're kind of in really fortunate position to have, I think, 8 of the top 10 central government bodies as active clients, and we're supporting them on their transformation journeys. What we typically see in this space is these clients signing sort of very large contracts, so multimillion pound contracts that get drawn down over a number of years on a sort of time and materials basis against a range of different services and capabilities. So I touched on earlier, kind of the expansion of our services and capabilities. That is important because it enables the customers who are awarding these contracts to deliver more, for us to deliver more value to those customers as we build out those capabilities. Our Healthcare clients, we've got a bunch of clients in the healthcare space, organizations like NHS England. These bodies also spend lots and lots of money on technology and change. So we've been kind of building out our clients in that space, and we'll continue to do that over the coming years. Certainly been a bit of a challenging period in the healthcare space for the last sort of 12 to 18 months as there's been a lot of change within kind of government around kind of how healthcare is structured. But it's looking quite positive moving forward. So we're quite excited to kind of build and grow within the healthcare space in the years ahead. If we jump on to the next slide. I just wanted to touch just quickly on the ESG. So we're really proud of the work we've been doing around ESG, [indiscernible] the organization. Over the last sort of 12 months, you significantly...

Rory, could you just -- your hands going over your mic. So could you just keep it off that. Thank you.

We've reduced our carbon impact and significantly reduced our carbon impact over the last year, on track to achieve net zero by 2030. We've made -- ethnic diversities remains sort of the same, FY '23 as it was in FY 2022 at 20%. Our gender balance has declined slightly year-on-year, so 30% of the workforce are women has declined slightly but it's still kind of significantly ahead of the sort of industry average for women in IT. So lots of work for us to do, but really kind of focus on this as an area for the organization over the year ahead. If we jump on to the next slide, yes, just wanted to talk a little bit about outlook. So moving forward, we're continuing to deliver on the strategies that we've set out. From a revenue perspective, FY '24 has started a little more slowly than kind of last year, but we expected that given the sort of the dip in revenue that we saw in April and May. Then we've seen the recovery in June, July and August. So overall, we're expecting our revenue to be flat in kind of H1 FY '24. However, despite this, profits have grown and really that's been driven by the operational improvements that we've made and that we touched on earlier. We've seen significant improvements in utilization, margin and profits. So we're positive about that. We've just secured a place on the DALAS framework. So the DALAS framework is a significant new framework that has just been launched. There's a relatively small number of suppliers on that framework. And the lot that we've been awarded a place on has got a GBP 750 million spend over a 4-year period. So if we manage to have an equal share of that GBP 750 million, which there's no reason why we will not, that will make a significant contribution to the business in the years ahead. So we're pretty excited about that. I think overall, the demand environment still remains positive. So there's a lot of contracts coming out to market. There's lots of opportunities that exist in the market, but we do know customers are just being a bit more cautious. There's a bit of an unknown around timings on the election. There's some question marks around that, and that's correct -- a bit of caution with customers. But there's still a lot of contracts in the market. So we're pretty excited about the year ahead. We think we can make good progress. And really, we're going to focus on delivering short-term performance and then capturing the long-term opportunity and we've got the kind of whole team focused on that. So yes, that was everything from me.

Great, thank you very much. Indeed, Rory. So, if anyone has any questions, click on the Q&A button and type your question in, and we've got quite a few questions. You've said that the revenue is likely to be flat, so similar to full year '23 and full year '24. But what percentage do you expect to be SaaS sales during full year '24?

So we haven't released any of those figures to the market. And we are expecting some SaaS revenue in FY '24. It won't be a significant percentage of our total revenues and really, we're expecting those SaaS revenues to drop through in FY '25 and FY '26.

Great. And how many new clients have you signed up this year in full year '23? Sorry to date?

In FY '23 or '24, I've not got the data to hand, but I would expect it somewhere in the region of 5, 10, I would have thought. There will be some larger customers and then some smaller customers as well.

Great. And who are your competitors? And what are your differentiating factors that help you win new deals?

Yes, sure. So yes, the way we kind of look at competitors is it's quite complex, because the competitors vary based on every industry and in some cases every account that we're operating in. So from a public markets point of view, I think probably the obvious one would be Kainos and TPXimpact being the 2 that we would see from a public market perspective. But on sort of private markets, in the private sector, we'd look at organizations like BJSS, Version 1, organizations like that, who we will compete with. In terms of kind of how we differentiate, really for us to -- the key thing for the market we're operating in is our absolute focus on public services and aligning everyone in our organization around delivering kind of technology into the public service space and deeply, deeply understanding sort of the challenges that exist in that world. So that's everything from the specific security requirements to the existing government, to the assurance standards, to the way kind of government is trying to operate and the kind of challenges that exist. And there's not many organizations who've got kind of a focus as strong as ours in one area or -- in one particular market. And really, that's been a kind of -- that's really helped us to differentiate today. I'd also say that for us, we've got -- we're known and we've got a reputation for delivering value very, very quickly. So that's rooted in our heritage as a company that's working a lot with start-ups and taking that sort of really fast lead model into government, into public sector. And that's kind of stayed with us. It's been a really important part of how we differentiate the market.

Tremendous. And can you explain what happened with the cancellation of work streams at the end of full year '23. Can you add some color?