Microlise Group plc (2DI.F) Earnings Call Transcript & Summary

Good morning, and welcome to the Microlise Group plc Investor Presentation. [Operator Instructions] I'd now like to hand over to Nadeem Raza, CEO. Good morning, sir.

Good morning, and thank you for joining us this morning. A quick introduction. My name is Nadeem Raza. I'm the CEO for Microlise Group. With me, I have Nick Wightman, who is our Chief Financial Officer. We're going to skip over quite a lot of the introductory slides explaining what we do as a business and how we operate and the market segments that we operate in. They are -- all those slides are available in the appendix section of this presentation. So moving on to the key highlights of our FY 2024. So revenue was up 13% to GBP 81 million. We have adjusted recurring revenue of GBP 54.7 million to 21%. Adjusted EBITDA at 11.3%, up 20%. And our ARR stands at GBP 56.6 million, again, up 19%. A big increase in subscriptions. And again, that's mainly down to the onboarding of all of the customers for ESS, the acquisition that we did in January 2024. We're still maintaining that really low churn rate, well below 1% at 0.7%. And cash is down 32%, again, mainly down to the completion of the ESS acquisition as of January 2024. Some of the operational highlights. We completed our fourth acquisition, which was ESS. We were pretty pleased with how that's gone and integrated into the business. We've had a lot of success in selling the transport management solution offering that we were able to bring on board through that acquisition. And we've had a number of successful wins in existing customers, as well as quite a few new wins with new customers through our TMS solution. We also have a new Chief Revenue Officer, who joined us in August and has made several enhancements and improvements to our go-to-market strategy. And we're pretty pleased with how that's going at the end of Q1 in 2025 as we are now, very positive results as a consequence of those changes that we made towards the end of last year. Overall, we brought on board 375 new customers. The vast majority of those were in the 100 to 500 vehicle fleet segment, which is an area that we are particularly targeting given that we still got a lot of market penetration that we can do in that space. Also to note, the JCV contract, JCV being our largest customer was extended through to 2029. So again, another 4 years still to go on that particular contract. And as well as that, we had over 50 large significant contract renewals, again, all contributing to that very, very low churn rate of 0.7%. Overall EBITDA was ahead of market expectations, and we had several significant wins in the U.K. as well as our international businesses in France and in Australia continue to do well with some well-known brands in those regions, STAF in France and FoodStuffs in New Zealand. It's worth mentioning that the items on reported revenue and recurring revenue, we're going to cover on this next slide in just a moment. So as part of the cyber incident we had in October and November, we wanted to give you an update. One was that we didn't lose any customers as a consequence of it. Our sales pipeline is ahead of the levels that it was at before the incident. In terms of spending on security, as a consequence of the incident, we're going to be spending about GBP 250,000 more than we had originally planned to spend in 2025 with further enhancements that we're doing. And we have various service credits and customer claims that we are very confident will be covered by our cyber insurance. And just to explain a little bit more on that and how that impacts some of the revenue numbers, I'm going to hand across to Nick to explain the adjustments on the revenue and the EBITDA.

Thank you, Nadeem. So in the reported numbers for 2024, we have reported a GBP 1.5 million adjustment to revenue. So that takes us from the underlying revenue of GBP 81 million to GBP 79.5 million. That reduction relates to contracted service SLA breaches that we need to pay to our customers because of the outage. Obviously, we were out for circa 2 weeks. So we've adjusted revenue to reflect that number. Obviously, that's treated as exceptional because it's obviously onetime, and we wanted to strip down specifically to not distort the underlying performance of the business. In addition to the GBP 1.5 million of revenue, there's also a GBP 2.9 million cost provision that we put through -- sorry, the GBP 2.4 million cost provision that we've put through for customer claims and there's also a cost provision that we've put through for GBP 400,000. So the GBP 2.4 million and the circa GBP 400,000 amounts to GBP 2.9 million of which when added to the GBP 1.5 million revenue adjustment is a GBP 4.4 million impact to EBITDA. As Nadeem said, we are expecting our insurance policies to fully cover that. So essentially, what we will see is in 2025 is a reversal of the exceptional items that we booked in 2024. For the purpose of this presentation, we will be referring to the adjusted numbers to obviously present the underlying business performance to give everybody a truer view of how we've performed in the year. The statutory numbers are recorded in the appendices of this presentation.

Yes. So it's important just to reemphasize that fact that we'll be talking about adjusted numbers because the adjustments we are expecting to be fully netted out by our insurance cover. So that will be done in 2025. So just to talk a bit about what other investments we have been making and will obviously continue to be making in 2025. We've launched our MicroliseOne offering as part of our conference last week. So it's really an integration of all of the products that we've acquired and developed over the last few years to provide a seamless, integrated solution suite to our customer base. It's launched as of last week. Obviously, there will be continuing enhancements and further integration coming along. It's available to all of our customers. And we think that, that will provide significant, more value to our customer base and also help us win more customers going forward. Of course, we continue to invest in security. We have several products already that use AI and machine learning have them for a few years. But again, that's expanding with recent updates and enhancements to technology. We're also continuing with our support for a variety of third-party hardware solutions. We've had a lot of success with this, particularly in our support with third-party AI camera solutions, as well as temperature monitoring solutions, and we're going to continue to expand on that throughout 2025. I'm going to hand across to Nick now to give you some more color on the financial numbers.

Thank you, Nadeem. So what this overview slide aims to illustrate is obviously a lot of our financial KPIs are improving consistently year-on-year. I won't go through each of those in turn. I'll cover some of in more detail as we go through the rest of the deck. But I think what we're trying to illustrate is that we do have positive performance in all of our key metrics consistently. If you could just move on to the next slide, please, Nadeem. What this slide is just a breakdown of our revenue may know, [indiscernible] as well. on the right-hand side represents the 3 main sections of revenue that we have. The first one being the recurring revenue, which is represented by the black bar. So that is currently at GBP 54.7 million. So that's an increase year-on-year of 21.4%. So obviously, that's been driven by strong organic growth from order intake that we've seen at the back end of '23 that's rolled out into '24, as well as new contract wins in 2024. The blue bar is the hardware. So we've seen a reduction year-on-year, which was anticipated, which is really down to sales of hardware to our OEM customers, which was really driven by slowdown in the construction and the automotive industries. We're expecting that hopefully to level out moving forward. So -- but what we have an impact of that is if we look at the services line, we've increased from GBP 7 million to GBP 7 million from GBP 6.1 million. Now the services line is split broadly into 3 main sections. So we have professional services, which is effectively project management, largely relating to our direct customers, although there is some project management for our OEM customers as well. We have engineering and installation, which is exclusively for our direct customers because when we roll out a project, the hardware tends to be retrofitted to the fleet. And the third main aspect is integration services that we provide to both direct and OEM customers. So what that has driven is because we've seen an increase in the rollout of our direct customer projects that we won over the year. We have seen an increase in both professional -- in the categories within professional services, which has also had a positive margin impact in the year as well, which I'll come on to on the next slide. So overall revenue has increased. Adjusted revenue has increased 13% from GBP 71.7 million to GBP 81 million in the period. If we just move on to the next slide, please, Nadeem. This is a slide that we introduced at the half year, and we wanted to kind of come back and revisit this to tell you about some of the things that we're continuing to do to drive our margins up. The gross margin and EBITDA graph on the right-hand side illustrate that we are able to consistently deliver increases in both gross margin and EBITDA. So EBITDA margins have gone up from 13.2% to 14% in the year. Gross margins have gone up from 61% to 66% in the year. And there's various reasons for the performance in the year, which I'll come on to on the next slide. But in terms of some of the things that we're looking at to help drive margin enhancement moving forward, we've looked at our go-to-market strategy, as Nadine referenced earlier with the new CRO. We are really focusing on our direct sales. We've got a very, very healthy pipeline in the U.K. in all territories, it is building very strongly. So as we deliver and win those deals and roll those out naturally, the margins will enhance because generally margins tend to be a lot higher with our direct customer base. We've done quite a lot of work in the year, and there's ongoing programs regarding integration to third-party products. So you may recall that we had particular success with the Woolworths rollout that we won that deal early in 2024. We did a pilot with mid-2023 with the Lytx AI camera. So our plan moving forward is to integrate more into third-party products for a number of reasons, one of which is to best-in-class technology, which we've been doing for some time, but also it helps remove barriers to entry when we're in a competitive situation with tender. If there's third-party hardware that we can integrate into, then it doesn't -- it helps us in the respect that the customer won't have to raise a purchase order for CapEx, et cetera, we can integrate straight into that. What that also means is that, that could benefit the mix of sale as well, but it would remove the third-party hardware margin, which tends to be lower than the recurring subscription revenue and margin. We're obviously focusing on the sales of our acquired companies. So Vita and ESS. So obviously, we've done a lot of integration work there. We'll discuss the MicroliseOne work that we've been doing to help unify platform and give customers kind of one pane of glass to see the product reap through. And finally, we've got various cost reduction programs going on across the business. So this will include the rationalization and consolidation of our hosting environments. But in addition to that, there are also a number of internal projects around various types of cost savings and efficiency initiatives, so utilizing more third-party software such as Salesforce and ServiceNow and other applications that we use to streamline our processes and give us a good base to help scale the business more efficiently and profitably. If you could just move on to the next slide, please. So this is our adjusted profit and loss account. So as discussed, revenue has gone up by 13%. Gross margins have gone up nearly 23% year-on-year. So that's seen gross margins increase from 61% to 66%. We've seen improvements in both nonrecurring margins and recurring margins. So we have seen improved hardware margins in the year. We've also benefited from mix as well from OEM to direct customers. We've also seen improvements in our recurring revenue -- recurring margins as well. They have been impacted to some degree by the acquisition of ESS because they had a very bespoke hosting solution, which is done on a customer-by-customer basis, which isn't particularly easy to scale. So there is plans in place, and we're working on transitioning that through Microlise hosted solution, which will be a lot more cost effective and easy to scale. In terms of operating expenses, they've gone up to GBP 43 million in the year. So the main drivers there are employment costs. So we've seen that increase 20% and 21% in the year. And the main drivers for that are the acquisition of ESS. So obviously, with the business came a significant workforce around 45 people. We've also continued to invest in our graduate program in various different functional areas of the business that is working extremely well for us. And we've also continued to invest and will continue to invest in our sales and marketing operations both in the U.K. and globally. We've also seen an increase in legal professional IT costs. So part of that is the increase in security spend that we've referred to earlier. And there's also increases in license costs, so Salesforce, ServiceNow, et cetera, that I mentioned previously, to help us leverage efficiencies in our business processes. Adjusted EBITDA increased by 20% to GBP 11.3 million, with EBITDA margin growing from 13.2% to GBP 14 million. And the final point really to call out on the profit and loss account is you can obviously see an increase in the depreciation and amortization line to GBP 7.9 million in the year. The 2 main factors are -- sorry, the 3 main factors are because of the increase investment in PPE, so fixed assets essentially relating to our data center. We've seen that depreciation charge increase over the last 12 months. One considerable factor is the acquisition of ESS. So the amortization relating to the business combinations is also pulling through there. And as we have continued to increase, although it has plateaued now and will continue at the same levels of investment in internally generated software since we've IPO-ed that has built up over the last 3 to 4 years. So we are seeing that the amortization charge relating to that increasing as well. If you can just move on to the cash flow slide, please. Thank you. So cash conversion remains very strong at 91%. Our adjusted cash flow from operations increased 12%. As I mentioned, CapEx investment reflects investment in plant, property and equipment, which has reduced predominantly because of the activity in Q4 and the restoration from the cyberattack. Our technical resources were really focused on making sure that the estate was recovered from that suitably rather than rolling out on our investment plan. We do expect that our fixed asset investment will be around GBP 2 million mark moving forward in 2025. The other key points from a cash flow perspective to reference are from an M&A perspective, obviously, there was circa GBP 7.3 million that went out of the business in relation to acquisitions. So that was effective and the deferred consideration from Vita, the acquisition that we made in March 2023. We also paid our maiden dividend in 2024 of GBP 2 million we paid an interim dividend of GBP 0.7 million in November as well last year. And the final point to reference is the fact that we've obviously got a healthy cash balance of GBP 11.4 million, but we do have a committed RCF of GBP 10 million, an accordion facility of GBP 30 million with HSBC. So we do have access to another GBP 30 million of funds to support our growth via M&A, further investment elsewhere.

Okay. So thanks, Nick. I'll cover off market and strategy. So just to give you a view of what we're seeing in terms of market conditions in our customer base and also what we're seeing internally ourselves. So within our customer base, we're seeing consolidation continuing to happen. I think it's usually the larger customers that we have buying smaller customers. And so we're seeing good structural growth drivers there. We're also seeing that the focus on sustainability and reducing emissions has taken a bit of a backseat within our customer base, and it's more focused on trying to improve utilization and efficiency, and driving that bottom line growth and profit. So again, both of those things are good for us because our software that helps to drive that utilization and efficiency. So no -- nothing but positive impact on us in terms of sales of our products and further product sales into our existing customer base as well. Internally, a few minor supply chain issues, nothing compared to what we were seeing in 2023 or the early part of 2024. A few lead time issues on some components and on some IT equipment, but really nothing material to report on that. And of course, talent and skills acquisition, particularly in certain tech roles continues to be a challenge. There, we are running a lot of training internally and looking at how we develop those skills ourselves rather than trying to find them in a scarce market externally. We wanted to give you an example of how we increase customer share of wallet over a period of time and give you that by way of a case study. So this is an example of a typical customer. In this case, it's LF&E, which operates refrigerated transport for pharmaceutical, medical and health care industries. First became a customer in 2023. They bought a couple of our products, fleet performance and journey management. Primary focus was in temperature monitoring. Then in 2024, they purchased more products, driver license checking and our compliance suite with analysis. And now in 2025, they're looking to expand further with more additional products that we're working with them on. So not only have our footprint and our sales of our products grown within that customer, but the customer themselves have also grown over that period through increased utilization, and increased efficiency that they've been able to pass value on to their end customer. Overall, we've achieved a 450% revenue growth since 2023. And so this illustrates how we grow our footprint within a customer as well as the fact that the customer win in 1 year often leads to greater revenue appearing in future years as a consequence of that. Our growth strategy essentially remains the same. We are selling more into our existing customer base and cross-selling some of our new products, particularly our PMS and P&O solutions into those existing customers. We're also growing support for third-party hardware. And again, that helps to sell more solutions into the existing customers, but also reduces barriers into onboarding new customers that have already invested in the hardware. Just a reminder that if everybody bought -- if all of our existing customers bought all of our product suite, we would see almost a sixfold increase in our recurring revenue. So there's a lot of white space for us to go at within our existing customer base. We've also continued to renew contracts and have very long relationships with our customers, which again contributes to that really low churn rate of 0.7%. As a reminder, the JCV contract through our largest customer, that's been renewed through to 2029. In terms of new customer acquisitions, again, we've had positive growth in U.K. as well as our international markets in France and in Australia, several new customer wins across all those geographies. And of course, we are continuing with our M&A journey. We've done 4 acquisitions so far, but by no means the end of our ambitions in terms of acquiring further. So the strategic priorities as far as the business is concerned is that we are consolidating our acquisitions, moving them all into our own data centers. We are also, at the same time, integrating those products into a single suite called MicroliseOne. More value that we think we can provide to customers by doing further integration on that in 2025 and onwards. So you'll be seeing more of that appearing through our products, and we'll continue to upgrade customers on a regular basis to introduce those new features. We're looking at greater efficiencies internally, and that will continue to help grow our margins. We're working more closely with product partners, and that's on the hardware side as well as other software services. And again, that will help grow top line and bottom line. We are continuing to invest in our security infrastructure together with our customers and international expansion will continue, not just growing our current footprint in Australia, New Zealand and France, but there is a lot of future international expansion that we have ambitions on as well as M&A. So just a reminder about the investment case. So the vast majority of our contracts are 5-year contracts, which gives us very great long-term visibility of contracted revenue. We have a very low customer churn rate. We've got lots of opportunity with selling multiple products into our existing customers, and that makes us very sticky, again, reinforcing that low churn rate. There is a lot of activity in margin enhancement and various new products that will show further growth in that margin figure, significant international opportunity. And of course, as demonstrated by the graph on the right-hand side, even through COVID years and supply chain issues, we've shown good consistent growth over the last 7 years. And we're confident that, that growth will continue over the coming years as well. And then from an outlook perspective, we had a strong order book last year, and the order book continues to grow through Q1. So we're very confident in delivering our full year numbers. We're very pleased with how we've managed to cross-sell solutions from our acquisitions, particularly on the CMS front. And of course, we have lots of cash available to us to do further M&A, and that's something that we are also actively working on. And at that point, I will stop and hand across back and then some questions.

Nadeem, thank you very much for the presentation. [Operator Instructions] And if I could hand back to you to read out the questions, give responses where appropriate to do so, and I'll pick up at the end.

Great. Thank you. So first question is from Lee, which says with recurring revenue at 7%, how do you anticipate trending? And what are your targets for the future mix? So I think we will continue to see this going upwards, driven by 2 factors: one, selling higher value, higher-margin parts of our portfolio. So our TMS solution is much higher value and much higher margins than some of our other products in fleet performance and compliance, for example. And so the more of that we sell, the more that will increase the overall percentage of recurring revenue that we see. Secondly, the support for more third-party hardware means that we'll be able to sell our software without having to sell additional hardware. And again, that will change the mix favorably for higher margins and also more for recurring revenue, too. So we are looking to see that increase. We don't -- I couldn't give you a view of where that's going to end up, but certainly, I think it's going to continue on growing over the coming years. The next question is also from Lee. How much of your growth and potential is international? And will you look to expand it -- expand into new markets? So I think it's fair to say that we're continuing to see really good growth in the U.K., but we are seeing double-digit growth in our international markets, particularly in Australia. And at this point, the pipeline looks very strong. And we think that, that growth in Australia particularly will continue over the coming years. And so there's a lot of ambition certainly for continuing that in our existing markets. And we will be looking at other international markets as well, but more likely through an acquisition rather than starting from scratch ourselves in any new international market. Next question is from James. To what extent is product integration driving cross-selling wins across the acquired customer base? I can't give you an exact metric on this, but I think it's fair to say that from the responses that we've had from customers, it's been very, very well received. We showed the MicroliseOne product launch at our conference last week. We had nearly 2,000 customer registrations for that conference, and the feedback was overwhelmingly positive regarding our strategy with our MicroliseOne solution. And certainly from the customers that are already using it, we had several customers using that product prior to launch. Again, the feedback has been overwhelmingly positive. So we think it will absolutely contribute to doing more upselling in our existing customer base. And also, it's a really strong contributor to winning new customers because they get the story. They get the fact that they can buy a solution that meets their current problem needs today. But over time, they can expand very, very easily with new products and new solutions from us that integrate with those existing solutions that they have without having to pay lots of money or having lots of issues with integration if it was a third-party product. So it's been very well received, and we're very confident that it's going to continue to help us sell more into our existing customer base and also help us win new business as well.

Nadeem, thank you for answering all those questions you can from investors. And of course, the company can review all questions submitted today and we'll publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide you their feedback, which is particularly important to the company, Nadeem can we just ask you for a few closing comments?

Thank you. So I think really, I would like to leave you with this investment case slide. If you do have any questions, as I said, please feel free. We're very open to respond on any further questions that you have. And I think we're very excited about 2025 and looking forward to continuing on the growth trend. So thank you very much for your time this morning.

Thank you for updating investors today. [Operator Instructions] On behalf of the management team of Microlise Group plc, we'd like to thank you for attending today's presentation, and good morning to you all.