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

Good morning, and welcome to the Microlise Group plc Interim Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Nadeem Raza. Good morning to you.

Good morning, everyone, and thanks for joining us today. My name is Nadeem Raza, I'm the Chief Executive Officer for Microlise Group. And joining me today is Nick Wightman, our CFO. I think we'll kick off and really cover highlights. So you have seen these numbers from the RNS this morning. So I'm pretty happy with the results for H1 with all of our key metrics upwards in a very positive direction. A couple of key points to point out. Churn still remains very low at 0.5%. And obviously, we have a positive momentum in cash. And just to also note on that cash front, there was a post-period addition of another GBP 2.2 million from the sale of the Trakm8 shareholding and convertible loan notes, which all completed in July. Moving on and just talking about H1. We have 216 new customers welcomed on to our customer base. We're pleased to report that we haven't lost any customer [Technical Difficulty] since last year. And on that cyber incident, a couple of the points. One, we are continuing well with our security plan for 2025. That's well on track. We've also had an external NIST 800-53 audit, which is kind of gold standard for cybersecurity, and we've had a very good outcome on that audit as well. So we're pretty pleased with the progress that we're making there. In terms of the actual cyber incident, financially, it's pretty much been clear from our finals in -- that we reported in April. As to the impact, we're not really expecting any further financial impact. All the claims are being settled through the insurance company. About 1/3 have been settled so far. The other 2/3 are being dealt with by the insurance company. And obviously, we're assisting through that process. We're obviously continuing to invest in product security as well as just infrastructure security and head office security. And we've also done quite a lot of work in localizations for our international markets. So we've added TCA and EWD support in Australia and ECMR support in France. Now sorry for the acronyms, et cetera. But essentially, what these are standards and partner relationships that we've implemented that allow us to go into the long-haul markets in Australia and also in France. ECMR is really to do with cross-border trading in Europe. So again, it opens up more of the market to us in Europe and in Australia. Of course, we're continuing to innovate with more AI and machine learning in our products. And the final point there, third-party hardware integration support. Again, we're continuing to integrate more and more into third-party hardware. That's telematics devices, it's handhelds, it's cameras and so on. And it's quite a key point in that, that enables us to have a much larger market to go out where customers have already invested in somebody else's hardware, then that isn't an obstacle to buying our software. They don't have to replace all of that capital investment and replace all that hardware with new hardware from us. We can actually just go and support their existing hardware investment and just sell our software, which, a, reduces that a lot of barriers to customers buying our software. It means that there's a faster time to delivery because we don't have to go and install the hardware. And it also means that the margins are impacted positively because margin on software is obviously greater than margin on hardware. So that's some of the highlights for H1. I'm going to hand across to Nick to go a bit more of a deeper dive into the financials.

Thank you, Nadeem. Good morning, everybody. So this is just an overview of some of our key performance drivers. And obviously, they're all showing a positive upward trend across all of those. So that's obviously very positive. I won't dwell on all of them individually, but I'll touch on a number of them as I go through the rest of the financial section in this presentation. If you could just move on to the next slide, please, Nadeem? So what this slide shows is the split of our revenue. So we do consider ourselves a software business, but there are other revenue streams that we do have, and I'll go through those in turn in one moment. But at an overall level, we've seen our total revenue increase by 12.6% to GBP 44.1 million. If you just look at the graph on the right-hand side, the colored bars represent the main segments of revenue that we have. Recurring revenue is represented by the dark blue bar at the bottom, which is currently at GBP 29.5 million, which is an increase of 11.1% on the previous year, which reflects organic growth, and we've seen particularly strong growth in our direct customer base in H1. The next section, which is hardware. So that's currently at GBP 10.1 million, and that's increased around 15% year-on-year. Obviously, what you can see if you refer back to the previous period in H1 '23 is that we actually saw a reduction when you look at H1 '24. So that's really due to the timing of some -- rollouts of some large projects that I'll come on to in a little bit more detail shortly. The final section to call out is services, which is currently sitting at GBP 4.4 million. Services is -- there's a number of different activities contained within there, and I'll just run through those briefly. The first one is installation revenue. So this is engineering and installation. So this is normally attributable to our direct customer base because we tend to retrofit to customers' vehicles rather than in contrast to the OEMs that tend to -- the hardware tends to be fitted either line side or predelivery inspection. So installations activity is one aspect to it. Professional services, which relates to project management. So we have a number of project managers within the organization that do various different things, amongst which is help coordinating these large direct customer projects that we have. We also have a number of project managers assigned to some of our key OEMs, namely JCB and MAN. And the final one to call out from a services point of view is we have integration services, which is obviously where we're integrating our systems into customers' back-office systems. So it could be their ERP system, could be their billing system, et cetera. So again, we've seen an increase year-on-year in that, which is driven really by the increase that we've seen in direct customer hardware shipments. ARR has increased by 8.7% to GBP 58.7 million, all of which is organic. If you can just move on to the next slide, please, Nadeem? A key theme that we really want to call out that we've spoken about before is our drive on margin enhancement. The graph on the right-hand side shows the progression that we've seen over the last four periods. Gross margin remains around 65%, 66%. I'll comment on that in a little bit more detail when we look at the P&L. But EBITDA has grown to 14.1% from 13.4% in the comparative period. On the left-hand side, that lists a number of the activities that we are pursuing to help drive margin enhancement. I won't go through them all in detail, but I'll pull out a few key ones to emphasize some of the activities that we are undertaking. This list isn't exhaustive, there are a number of other things that we are doing in addition to these. But some of the things that we're looking at are the growth in direct sales versus our OEM clients. So we recently recruited a new Chief Revenue Officer in back end of 2024. So he's made a number of changes within the sales and marketing organizations that is helping drive direct sales further. So the reason why that drive margin enhancement is the margins with our direct clients tends to be significantly more than with OEM clients, mainly because one from a volume point of view. Volumes with the OEMs tends to be significantly higher. And the features and functions tend to be much higher and much more higher priced in terms of our direct customers' requirements. So where OEMs would tend to focus on fleet performance, as we call it, which is tracking telematics and engineering data. Our direct customers tend to require a lot more deeper and richer functionality to help run their operations rather than just engineering data. We've done a number of things around our products -- our hardware products. So this will be introduce newer low-cost units that we manufacture and design ourselves and also increase margins with our existing products. So that's looking at the bills of material, engineering changes that we can do to reduce bill of material costs, et cetera, as well as commercial negotiations with our supply base. I think the other two kind of key things I'd like to call out is cost reduction programs across the business. So we are looking at every area of the business in terms of how we can drive cost to make us more efficient. So this is about, obviously, as I've mentioned, driving cost out of products, driving cost out of back-office operations. So this will be utilizing third-party systems. So for example, our ERP system, which is IFS. We use a sales system called Salesforce, CRM system called ServiceNow. And these are all things that we can drive more efficiency out by using the enhanced functionality that they offer to us that we are investing in and rolling out as a business. We also have a number of lean programs going on. So this is really to focus on how we deliver solutions to our customers. So we've done a number of things in terms of changes in the designs of some of the hardware, particularly some of the consumables that accompany the hardware. So we've made a significant change in the cabling solutions as one example, whereby there would have been a number of different part numbers that would support the multiple different variants that the vehicle manufacturers have. We've really consolidated that down to a very small number of variants. And why that benefits us is because when you're planning a big rollout with a customer, so they may have 1,000 vehicles. Customers surprisingly don't actually know what vehicles they have. So it's quite difficult to plan and schedule the rollout for those large projects, which means the time taken to plan them in and schedule them can be quite elongated. What we've managed to do with this is really streamline that process and taken an awful lot of time out of that process to roll projects out, which effectively means that we can consume the order book much quicker, deploy the projects quicker, which mean that we can recognize both nonrecurring and recurring revenues a lot quicker. If you could just move to the next slide, please, Nadeem? So this is the adjusted profit and loss account for the first half of 2025. So as I called out in the previous slide, we've seen revenue -- total revenue growth of 12.6% year-on-year. Gross margin has increased nearly 13%. And just on the gross margins, what we have seen is increases in recurring gross margins by circa 1%. So numerous activities going on there to increase that margin. So that will obviously reflect the increased revenue, but there's also been a number of cost-saving activities that have gone into that. On the previous slide, we did call out specifically focus on hosting environments. So the company that we acquired last year, Enterprise Software Systems that we bought in 2024, they have their own hosting provider via a third party. That is significantly different to the legacy Microlise hosting systems, which we host ourselves in our own data centers. There's a significant amount of cost saving that we can leverage from that point of view. So there's been an ongoing project, which unfortunately has been delayed due to availability of IT hardware. So you'll see that in the cash flow statement that our expenditure on property, plant and equipment, et cetera, is behind budget and behind where we were last year because of these delays. So that's something that we should see flushing through into future periods as we see those costs reducing. Operating expenses increased 9.5% to GBP 22.9 million. So the main drivers in there are employment costs and back-office costs. I'll just touch on employment costs to start with. So currently 8.4% to nearly GBP 19 million. That does include the increase that we've seen in National Insurance contributions, and there's also restructuring costs coming in there, as well as there has been an increase in headcount much slower than we've seen in previous years, where we're continuing to increase in headcount is around in-house engineering resource, which again is linked to margin enhancement. We haven't got to buy in more expensive third-party engineering resources, particularly relevant for Australia. So we've put more people on the ground there, which is driving an increase in installations margin, but also sales and marketing. So we do believe that there is a significant amount of white space to go at moving forward, which is why that we're investing more in these quota-carrying people in the go-to-market team. On a like-for-like basis, our employment costs of when we take out the NI contributions and restructuring costs, the increase is 6.6% year-on-year, which was reduced from around 12% in the previous half year. The other point just to mention is around legal, professional and IT costs. So that has increased, which is really reflecting our planned road map on security measures. So we're continuing to roll that out successfully. So obviously, as you all know, the ongoing changing threat that we see from a cybersecurity point of view is something that is going to need constant review, refinement, et cetera. So unfortunately, that's an necessary evil that we're going to see moving forward as time goes on. The other area just to call out is that, I kind of referenced on the previous slide, is the investment into business systems. So this is really to help drive and increase back-office efficiencies. Overall, what we have seen is a 19% increase in EBITDA to GBP 6.2 million, and that is also reflecting an increase in the EBITDA margin from 13.4% to 14.1%. I think the other kind of major point to touch on is just the depreciation and amortization charges, which is really a reflection of the cumulative buildup that we've seen on our investment in internally generated software. And the final point on margin enhancements, I touched on those on the previous slides, but we're confident that these are starting to drop through now. We've seen the green shoots of that in H1 '25. There is a lot more to go at, and we'll see that dropping through in future years. If you could just move on to the cash flow statement, please, Nadeem? So in terms of our cash flow, so our adjusted cash flow from operations has increased 6% year-on-year. As I previously touched on, the investment in plant, property and equipment is behind where it was last year. We had hoped that, that would be more as we can implement the changes that we want to do in the data centers to drive increased margins from a hosting perspective. CapEx on intangibles, as previously mentioned, relates to the internal software development. So that's static. We don't really envisage that to grow on an organic basis significantly year-on-year. So from a capital allocation perspective, we do think that our investment in CapEx is going to remain stable for the foreseeable. The other things to kind of call out is obviously dividend that was paid pre-half year, GBP 1.4 million. There will be an interim dividend paid for the 2025 results in November. As Nadeem mentioned in one of the first slides, we have seen or received rather GBP 2.2 million cash proceeds for the Trakm8 sale of the convertible loan notes and the equity stake that we had in that business. That isn't reflected in these numbers because it's post period end. And I think the final point really to call out is that the -- we have GBP 11.2 million in the bank as at the half year. We have an undrawn facility with HSBC that we renewed in April 2024 that gives us access to a committed RCF and accordion facility, meaning that we've got over GBP 40 million of investment funds available to us to deploy in M&A and internal growth.

Thanks, Nick. Just covering a few bit about -- a few slides on market conditions. So just to give you an insight of what we are seeing. So externally, we're obviously seeing consolidation still happening in the space. Some recent announcements there were the DHL and Evri deal, and also the GXO and Wincanton deal. Again, we see those as positive things. They are all existing customers. And it just means that some of those customers just get bigger and can deploy more of our solutions. We are seeing, and I think we reported this in April, there's a shift in people's focus on sustainability. The move to more efficient vehicles, electric vehicles, et cetera, does seem to have slowed down and people are far more focused on driving efficiencies and driving profits. Again, it's what our software and solutions are there for. So we don't see that as a particular problem. Cyber attacks, obviously, in the news over the last few months, M&S, Co-op, Harrods and of course, more recently, JLR, all of which are customers of ours. And that has caused some disruption with projects that we have been working on with those customers and some of those have been delayed. M&S, particularly, there's a large project there that's delayed currently because of the continuing recovery from the earlier cyber attack. And then in the automotive sector, we've seen recovery in the automotive sector compared to the second half of 2024. However, overall, we're expecting sales in automotive and into OEMs to be flat against last year. Internally, I think Nick's already mentioned that we've had lead time issues on IT equipment, mainly larger players who bring a lot of that up for their own AI projects, which has extended lead times on a lot of the equipment that we normally purchase. And of course, there's still a skill shortage in certain technical roles as well. This slide just to give you an example of customer growth and how we increase customer share of wallet. So this particular example, again, we highlighted this in April and talked about how that customer had grown and bought more of our products over a couple of years. I'm pleased to say that we were indicating that they were going to buy some more of our products, and they have. We've signed a contract to supply our recently acquired TMS product in telephony. And that's, again, meant that the revenue growth in this account has grown at 450% since first implemented. And in terms of our growth strategy, well, we're continuing to execute on that, three main areas, growing existing customers. So there's a lot of white space for us to sell more of our solutions into existing customers. Again, if we sold everything to every one of our existing customers, our recurring revenue would go from current sort of GBP 57 million, 58 million figure to over GBP 300 million. So there's a large amount of white space there. Obviously, not everyone is going to buy everything from us, but clearly, there's a significant opportunity there in our existing customer base, which we continue to exploit. New customer acquisition. So again, we've seen positive new wins in all of our geographies: the U.K., Australia and also in France. And layered upon that organic growth is M&A. And as Nick mentioned, we have GBP 11 million as of the end of June, plus another GBP 2.2 million from the Trakm8 sale, plus GBP 30 million of facilities available to us for M&A, and we're continuing to evaluate targets for that. And I can't really say an awful lot more about that, but to say that it's M&A on an international level is really what we're targeting and looking at. In terms of our strategic priorities, we've talked about MicroliseOne, which is, again, providing more integration across our product suite so that we have more frictionless upsell into our existing customers. And also we can tell that story to new potential customers to show how we can grow with them over a period of time and how they can turn on different aspects of our portfolio and purchase and consume that very, very easily as we do more and more integration across the portfolio. Improving margins is something that we spend a lot of time and attention on. You've seen some of that coming through in H1. That product integration also applies to partners as well. We've launched a new developer portal to make it easier to integrate some of our products, and we also now have someone specifically in that role for managing partners. And that's partners that we can collaborate with to deliver projects, but also is looking at more resellers as well for our core products. We continue to invest in security, both at a product level and infrastructure level. And we've grown our sales teams internationally as well. So international growth is something that we continue to work on. And of course, we've mentioned M&A already. Just a reminder on the investment case. So typically, our contracts are 5 years. So we have really good long-term visibility of contracted revenue. We maintain a very low customer churn rate, 0.5%. So again, that continues to be the same at the end of H1. There's a lot of opportunity to sell more products into existing customers. Again, that helps us be more sticky with those and more difficult to substitute. We've got a lot of activity on margin enhancement, as we mentioned, and a really big opportunity in terms of international growth. And I think from the graph on the right, you can see the track record that we have of consistently growing our recurring revenues. And then just to summarize, we remain pretty positive and optimistic in terms of the outlook. We are seeing some impacts on the automotive sector with a slow recovery and being impacted by the tariffs announced earlier this year. The cyber incidents are causing a bit of delay, but we're keeping a close eye on things. And I think we can show from our performance in H1 that we continue to be a fairly resilient business and fairly optimistic going forward. I think that said, I think we can go across to look at some questions now.

That's great. Nadeem, Nick, thank you very much indeed for your presentation. [Operator Instructions] Nadeem, Nick, as you can see, we have received a number of questions throughout today's presentation. If I may now hand back to you and kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you both at the end. Thank you.

Thank you. So the first question asks what proportion of new customer wins in H1 were mid-market versus large fleets, and how does that shift impact ARR trajectory? So the vast majority of the 216 customers were in that mid-market space. There were one or two larger fleets. Obviously, Müller, Brolos and a couple of others are much larger fleets. It doesn't really have an impact on ARR trajectory. I think it's fair to say that smaller fleets tend to be able to implement and get things implemented and implement change within the organization faster than a lot of larger organizations can. But whether it's a big deal or a small deal doesn't really vary in terms of how it impacts ARR. I think it's fair to say. The next question is also from John. To what extent is Microlise looking to bundle products into tiered packages versus selling point solutions? We already sell tiered packages in quite a few places. We are conducting a review to look at if there is a better way of bundling some of our products. But we already do that, and we already offer tiers, but I think we can do more to improve that and make it easier for customers to consume. So there is work in progress on that, that we'll be implementing early part of next year. David is the next question. Why is ARR growth below recurring revenue growth? Nick, I don't know if you want to answer that question.

So ARR growth was 8.7% versus recurring revenue growth of 11.1%, and that is really down to a couple of main factors. I think the first one is around the timing of some of the renewals that we've got with our OEM clients. So some contracts have expired that we believe will be renewed that we haven't had the orders for. So we really think that that's a timing issue. And one of the points that we have seen is we have seen a delay in a large project rollout with a customer that's unfortunately been subject to a cyber attack. So that's caused a fairly lengthy delay on a large project. Had both those previous two points not happened, our ARR growth would have been much closer to our recurring revenue growth.

Okay. So fundamentally, it's a timing issue, I think, is the point we're making there. Next question also from David. How much of the ARR growth benefit from price increases? Do these price increases also apply to larger OEM customers? So I'll try and answer that question first, and Nick can help me out on that. But I think most of that increase is not actually down to price increases. It's additional product sales or new customer wins. I think with larger OEMs -- it's important to say that larger OEMs tend to buy and consume in advance. So in some cases, they pay for 3 or 5 years in advance. And so there isn't really a price increase applicable because they've already paid it and we've already had cash. Nick, I don't know if there's anything else you want to add to that.

Yes. I think you're right, Nadeem. I think obviously, the counterpoint to the inflationary -- the lack of inflationary impact that we have on the OEMs is we get a significant amount of cash upfront, which is obviously very, very helpful. Just in terms of price increases, we do routinely apply price increases annually, which most of our contracts now have clauses to allow us to do that. And obviously, that tends to be in line with inflation. So in terms of the number, you're probably looking around 1%, considering that probably 35% of our revenue is paid upfront. So the remainder is with our direct customers and it's a reflection of the kind of underlying inflation rate that we tend to apply on a routine basis.

Yes. Next question, are you comfortable with future growth expectations given more cautious outlook? Yes, I think we are. We're still positive and optimistic in terms of our future growth. I think there was a buoyant market out there. I think we're highlighting a couple of challenges and a couple of things that we're seeing in the market. But overall, I think we remain very positive and very optimistic in terms of the continued growth of the business. What is your exposure, both direct and indirect to JLR disruption? Well, JLR is a customer through DHL. There is some exposure there. I think there is also exposure to wider supply chain as well. We have some customers who obviously are responsible for parts, deliveries, in and out and also for moving vehicles, which obviously aren't being manufactured at the moment as well. So there is some disruption there. I wouldn't say it's significant. They're not in our top 10 customers by any means. And so we continue to monitor that and doing what we can to help our customers who are probably feeling a lot more pain on that than we are. What is your largest customer forecasted -- sorry, what is your largest customer forecasting going forward? Can Microlise still grow meaningfully if volumes from this customer decline? I think our largest customer is in the OEM space. I think it's fair to say the forecast is flat for 2025 compared to 2024. And so that's what we've built into our forecasting models. How do you approach the valuation of M&A targets? So obviously, each deal is unique. I think that we're not looking at paying over the odds of what would be considered market norms there. And I think that we are continuing to be very selective in a deal that we want to do and making sure that it's accretive. We're not looking at buying a loss-making business and doing any kind of turnaround. That's not the game we're in. Are there any plans to develop software products through quantum computing applications to help customers with distribution logistics, here with FedEx and DHL are going down this route? We are looking -- we're not looking at any kind of quantum computing-based solutions. However, there is more AI technologies that we can bring to some of our products. And we have already announced some of those. There are AI and machine learning solutions in some of our products already. Some that we've announced this year, and there is more to come on that next year as well. And it's really all to do with the data that we have, particularly given our larger customers and our market share in the U.K. We have an enormous amount of data that we can feed into AI models and help with forecasting, planning and scheduling. And that's really the areas that we're spending a lot of time on, looking at solutions that we can implement to benefit our customers. So history legacy question. I've always been intrigued by the SAAS ticker symbol that the company issues is the reason it was chosen. Yes, partly, it was because people often thought of us as a hardware telematics business, and we wanted to emphasize that we are very much focused on being a Software-as-a-Service business, although we did sell hardware as well, and we're still continuing to sell hardware, but that's not the core of what we do. The core of what we do is we are a Software-as-a-Service business and particularly was chosen to really reinforce and emphasize that. In France or Australia, would you be more interested in acquiring product functionality or the customer base? I think it's fair to say that we've seen several examples in this industry sector of companies doing acquisitions to acquire customer base. And they've, in almost every case, tended to not be successful in comparison to acquiring new technology or acquiring new products to add to the portfolio. And so we're reflecting on that history that we've seen in the market over the last 15 to 20 years of the type of acquisitions that we've seen work and the type of acquisitions that we've seen fail. And hence, we're very much more focused on acquiring that increase -- our geographic footprint and add more products into our portfolio to provide more cross-sell and upsell opportunities. So those are the key things that we're after. I know in other markets that acquiring for growing the customer base does work, but we haven't seen it work in this space and hence, that's not the way that we are evaluating targets. Could you access additional international markets through local partners or reseller models? Yes, and we already have resellers that do that internationally. And as I said, we've got somebody in role now that's focusing more on that. And so we expect to do more through the partner channel and through the reseller channel, particularly in international markets. So yes, is the answer to that. And I think that's the end of the questions.

That's correct. Nadeem, Nick, thank you for addressing all those questions from investors today. And of course, the company can review all questions submitted today, and we will publish those responses on the Investor Meet Company platform. But Nadeem, before I redirect investors to provide you with their feedback, which is particularly important to the company, could I please just ask you for a few closing comments?

Sure. Thank you. So firstly, thank you all for attending today. If you have any follow-up questions, please feel free to submit those. I think I'd like to summarize by saying I think we've had a good set of results for H1. We are living in some uncertain times in the macroeconomic environment, but we are a very resilient business, and we've shown that over the last 4 years of being listed, and we remain very optimistic and positive looking forward, and continue to focus on our growth and focusing on increasing our margins. Thank you.

Thank you.

Fantastic, Nadeem, Nick. Thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations? This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Microlise Group plc, we would like to thank you for attending today's presentation, and good morning to you all.