Microlise Group plc (SAAS) Earnings Call Transcript & Summary

Good morning, and welcome to the Microlise Group plc Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to the management team. Nadeem, good morning, sir.

Good morning. Welcome, everybody. Thank you for joining us this morning. You've got myself, Nadeem Raza, CEO of Microlise; and Nick Wightman, CFO of Microlise. We're going to cover 4 items today. So give you some highlights of FY 2025 results. Nick is going to do more of a deep dive into the financials for 2025. And then I'm going to give you some updates on market and strategy, and finish off with outlook before going on to Q&A. So just to recap on FY 2025, we have really, really good, strong cash flow through 2025. And as well as that, we saw some significant growth in our direct customer recurring revenue, 16% growth there. It was offset by lower revenues from OEMs, and we'll cover that in more detail in a later slide. We also delivered GBP 5 million of cost -- annualized cost savings through a restructuring program that we did in December '25. And that's really set us up for doing the investments that we're planning on doing in 2026, that's going to drive margin expansion through '26 and '27. We also onboarded a new CTO as of the beginning of this year, and that's really helping us drive some of those product investments as well as continuing our growth with AI deployments internally for operational efficiency and also within our product set. I'm going to hand across now to Nick to give you more color on the financial side of 2025.

Thanks, Nadeem. Good morning, everyone. So highlights for 2025. Adjusted revenue was up 4% to GBP 84 million year-on-year. Recurring revenue grew 8% to GBP 58.8 million. And importantly, direct customer revenue growth was 16%, which remains the core engine of the business. We also saw continued strength in the SaaS model. So net revenue retention, we've got a later slide on that, was 108%. And we continue to have a low churn of just over 1%, reflecting the stickiness of the products and services that we provide to our customers. From a financial discipline perspective, the Group generated GBP 13.3 million of operating cash flow, so up materially on last year. And that ended us with GBP 16.7 million of cash, providing us a strong balance sheet and flexibility to make necessary investments that we want to initiate in 2026. Finally, we completed a restructuring program in December 2025, delivering approximately 5% -- sorry, GBP 5 million of annualized cost savings, which positions the business for improved efficiency moving forward. So the key headlines here are strong underlying progress in revenue quality and cash generation alongside the strategic repositioning for the business. So just moving on to revenue composition, which is where the underlying quality of the model becomes clearer. As I mentioned on the previous slide, total revenue is GBP 84 million, with recurring revenue growing significantly. We did see a contraction in the nonrecurring revenues, which really down to lower OEM volumes and timing delays on small number of projects, which we're expecting to recover in 2026. I think the key takeaway here is the ongoing mix towards higher-margin recurring revenues, particularly with our direct customers. So what this does for us is it gives us really good, visible revenue. So these contracts are -- tend to be 5 years in nature. We are very successful with retaining customers. As the previous slide showed, we have very little churn, so it gives us really good visibility and reliability of the revenue coming through. And obviously, just from a margin perspective, the transition that we're driving towards is we want to sell more recurring services to direct customers because the margin profile is just significantly better. And we've started to see that over recent years. And as we go through this step, we'll see from the investment that we are making that this will help drive that forward. Thank you. Yes, next slide. Thank you. So this slide walks through the movement on ARR over the period. So we've moved from GBP 56.6 million to GBP 59.2 million, representing steady growth despite the external environment headwinds that we've had. So breaking that down into the individual steps, there was a modest reduction in OEM, so GBP 2.3 million. We expect that to continue into 2026. That will start to recover probably back end of '27 and into '28. We had some churn of GBP 0.9 million, slightly up on previous period. So I think we were at about GBP 0.7 million. The change really reflects the conscious cessation of a legacy hosting contract that we had when we -- it came when we bought ESS. So it's effectively a throughput cost, so very low margin. So it's obviously something that was planned, and it's part of the ongoing transition that we are kind of making to get -- revise the hosting provision that we've got with some of the legacy systems that we've inherited through acquisition. So offsetting those 2 points is strong growth from existing customers. And then obviously, we've had some pretty positive wins with new customers that added GBP 1.7 million. So I think the important thing to kind of call out here is that the ARR growth is coming from our direct customer segment, which delivers high-quality, predictable revenues. So it really hopefully underscores the resilience of the recurring revenue base and showcases the importance of the growth from direct customers moving forward. So just moving on to net revenue retention or NRR. So obviously, this is a key metric and obviously shows how we are growing revenues within the existing customer base. That expansion is driven by cross-sell, upsell, increasing the adoption of multiple products within a single platform. The One CMS platform is particularly important here as it will enable us deeper integration and a lot more opportunities for expansion over time. So we also expect further improvement opportunity as we expand into the mid-market segment and scale the multi-module adoption that we've seen improve over 2026. So that's another area of focus for us. So the key message is that growth is increasingly coming from our existing installed base, with -- as we're launching more products and services through the investment that we're making, this will make the quality and the predictability and the margin accretion greater over time. So just on to the cash bridge, please. Thank you. So we had a very, very strong year from a cash generation perspective in 2025. So we moved from GBP 11.4 million to GBP 16.7 million, which reflects operational performance and very disciplined cash management in the period. The principal drivers with the adjusted EBITDA and strong working capital performance. So obviously, we've deployed that into ongoing investment. So there's a continued program of tangible investment that we make, so GBP 3.9 million, which is a combination of leased and acquired assets, so mainly around the ongoing upgrade program that we do in our data centers. And then there's a further GBP 2.8 million of internally generated software. So the key takeaway is that the business remains very highly cash generative with a strong balance sheet to support future growth and shareholder returns. We also have a committed facility with HSBC, which consists of an RCF facility of GBP 10 million and a further accordion of GBP 20 million. So overall, we've got well in excess of GBP 40 million available to us to deploy to drive the business forward.

Okay. I'm just going to talk a little bit about market and strategy, and particularly in the context of AI and the impact of that on SaaS businesses. We actually see AI as an important opportunity for us and an exciting opportunity not only to enhance our operational efficiencies within the business, but also to incorporate more into our products. We've got AI in our products for many, many years, but we have also recently launched more AI technologies within our products over recent months. But the key thing here is why we're in a great place to exploit AI as opposed to new entrants in the market. We have deep industry experience. We have 40 years' experience in the logistics and transport space. We also have integrated hardware, and we also provide consultancy services, again, something that a new entrant with AI isn't able to easily do. We have market-leading partnerships with other hardware vendors, software vendors and OEMs. And we have an extensive data moat. We have over 25 years' worth of data across our customer base, both in terms of telemetry data, but also on assets, inventory, people, workflows, et cetera. And I think that puts us in a fantastic place to exploit AI and gives us a significant moat against any new entrants as well. Several growth levers, so to give you an idea of some of the things that we've already seen through 2025 and will continue in 2026. Our investment in growth and marketing is generating more campaigns and more leads and more qualified leads. We're seeing particular growth in our digital product sales, that's particularly in our compliance and camera sales. We've seen good growth in cross-sell opportunities. And although we have 8 different product sets, our average customer has approximately 4. So we still see lots of white space in our existing customer base for us to do upsells and further growth of share of wallet. The other area that we're focusing on is velocity. So how we compress that cycle time from first contact to contract win through to deployment and invoicing and cash generation. We're working hard to reduce those time frames across all of our different products. Our digital products, that cycle time is measured in a few days, but with our more complicated transport management system products, those can be months. And we've already had good success in reducing that time frame down, which allows us to deliver more of those higher-value products much, much faster. And thirdly, in terms of the quality of leads and lead generation, we've done a lot of work there to better qualify leads, better target particular sales opportunities, particularly in our high-value, higher-margin product sets, and also an external consultancy that we've used to provide better packaging options, again, to put together certain products in a format that allows us to increase margins in those areas as well. So that's also intending to deliver margin expansion. So just looking back on 2025, key takeaways are that we have strong direct customer momentum. Again, very low churn and really good growth in our recurring revenues with those existing customers and onboarding of new customers. We did see our EBITDA impacted by OEM headwinds and some deployment timings on some customers that were impacted by a cyber instance last year. We did do GBP 5 million of annualized cost savings through a restructuring program. And it was a restructuring program where we've reduced headcount in particular areas through efficiencies, but also increased headcount in other areas really building in 2026 for further margin expansion. In FY '26, it's really a build year where we are investing in several projects. The 3 key ones are that we are growing our TMS product and really focusing on expanding that and delivering it faster. So we have already this year contracted more TMS customer contract wins than we did in all of last year. So a significant increase in velocity in selling that TMS product. We've also seen good expansion in that mid-market space, so that's the 100 to 500-vehicle fleet segment. There's still a lot of penetration to happen in that space. And we are investing in improving our products in that area to really exploit that opportunity. And thirdly, we are changing some of our architecture and our hybrid cloud infrastructure really to allow us to scale more cost effectively. And that will also return in cost savings in '26 and '27. Where else we're making the investments in terms of actual headcount is in our go-to-market team. We are increasing our quota-carrying heads by 20%. And that is again to drive further expansion in those product sales in TMS and mid-market space. And that expansion is international. It's not just in the U.K., it also covers increased quota-carrying heads in Australia and also in France. We're continuing to grow our EBITDA margins, and that will come about because of revenue mix shift. So again, we make more margin on direct customers compared to OEMs. So that shift to more direct recurring revenues will have an impact on EBITDA margins. We're investing in our Microlise One product, and particularly the TMS product in that portfolio, enabling faster deployment and higher adoption and cross-sell. In terms of operating leverage, we're scaling our platform and our customer base and utilizing AI tooling internally and within our products to gain efficiencies there. We're growing our go-to-market team, as I mentioned, significantly increasing the quota-carrying heads. And we're continuing to see benefits from the restructuring and further changes that we're making as we implement process reengineering and our lean program across the entire organization. We target 3 particular markets. So the telematics space, which is an $89 billion market; the fleet management space, which is a $38 billion market; and the transport management space, which is a $19 billion market. And effectively, our Microlise One product actually unifies these 3 product categories into one operating system that allows customers to use our tools across this entire market segment. And our long-term strategy is to create that transport operating system. It's to unify fleet operations, transport operations and telematics into one platform. Now what that gives us is, in the fleet management space, ability to manage assets, maintenance, compliance and utilization of those assets. In the transport management space, it's management of orders, planning, the execution of those deliveries, quotations, rate cards, invoicing, et cetera. And in the telematics space, it's sensor data on vehicles, drivers, journeys, health and safety issues, cameras, temperature data, et cetera. And we're bringing all of that together into one platform, which is our Microlise One platform and layering all of that data with AI capability. So enabling our customers to predict, giving them recommendations and allowing them to automate a lot of the key functions that they have. All of our tools are moving from just providing data and information and dashboards, to actually providing value-driven decision support that allows customers to really make decisions that's going to drive more benefits for their business. And here, just to give you an example of how we grow with our customers. This is an example of a large U.K. supermarket. We've had an over 15-year relationship with this particular supermarket. They operate 2,500 trucks, over 4,000 trailers and a few thousand vans as well. And over that period, we've rolled out different products and expanded that footprint within that customer, and really driving them their on-time delivery rates to 99% and really making sure that their on-shelf availability is at that maximum level. For us that's meant that we've had a 244% revenue growth with that customer over that period. So really showing you how we are very, very sticky with our customer base and how we continue to grow into that white space that we have in that customer base. There's a link to the case study for this customer, should you want to see that, towards the end of the slide deck. Now moving on to outlook, a bit of insight into market conditions. So we haven't seen that much supply chain disruption due to the Middle East conflict. However, there has been supply chain disruption through the growth in -- and the investments that large companies are making in their AI data centers, that's hoovering up a lot of the supply of RAM chips and memory chips, and we've seen a tenfold price increase in memory chips. Now fortunately, we don't have lots of memory in our hardware, and as such, we're not expecting pricing to be impacted significantly on there. However, the availability is something that we are having to constantly keep on top of. The other impact that we're seeing from the Middle East conflict is higher fuel pricing. Now for our third-party logistics customers, those people that transport goods on behalf of other customers, for them, they already have fuel escalators in their contracts. And so they are just able to pass that cost straight on through their existing contracts. So the higher fuel costs are not really impacting them and their businesses. The other side of it, where we have customers who own and operate their own fleet, particularly that's the retailers, several companies in the pharma space, et cetera. For them, those higher fuel costs are impacting their bottom lines. And that is something that they will inevitably have to pass on to consumers depending on how long the issue lasts. And then the other thing that we're really excited about is AI adoption, that is helping us with our operational efficiencies within the business. We've already deployed tooling to -- and training across our staff base. We've deployed agents within our organization, and we are soon deploying agents for our customers as well over the coming weeks. It's really caused a shift in upskilling staff, but we see this as a great opportunity to really be able to do more with the staff and the people that we have. Our strategic priorities are, we are increasing our investment to grow that direct customer revenue and higher quality recurring revenue that we get from direct customers. That will drive improved margins as well as improving margins through efficiency gains internally within the business. We're going to continue our development of Microlise One platform because that overarching software solution that covers all 3 of those market segments that we talked about earlier means that we are highly competitive. We don't have any other players that cover and span those 3 segments, and it makes us very sticky within our customer base. We're also continuing with market-leading partnerships with OEMs, with other hardware providers and with other software providers. And we continue on with our international expansion and M&A as well. A reminder of the investment case. So we typically have 5-year contracts with our customers, and that explains the low churn rate and the consistent performance that we've seen. We're also selling multiple products into our customer base, which again drives that stickiness and continues to grow our share of wallet with customers as we expand and sell them more products. We have margin expansion programs going on. And again, we'll see those coming through in '26 and '27. We also have significant market opportunity internationally, and we're working through that with Australia being our fastest growth region. And we have a track record of growing our annual recurring revenue, as you can see from that graph on the right-hand side of the slide. So to summarize, we expect OEM revenues to be subdued through to 2027. We are investing and growing our investments to accelerate that growth in our direct customer market, particularly focusing on our Microlise One TMS product and the mid-market segment. And then by using AI tooling in our operations and further also in our products, we expect strong growth in our direct customer market, together with cost reductions and increases in margins through 2027 and beyond. And at that point, I'm going to hand back to Charlie to orchestrate any questions that he wants to cover off. Charlie?

Thank you both for updating investors today. [Operator Instructions] For your reference, a recording of today's presentation will be available in the Investor Meet Company platform shortly after the meeting has ended. Guys, as you can see, we've received a number of questions during today's presentation. If I could just hand back to the team to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Thank you. So first question was from Charlie. How are system integration improvements affecting customer onboarding times and implementation costs? So for some of our products, we can obviously onboard customers very, very quickly. But the more complicated the product, then obviously, the longer it takes to -- for that customer to onboard it, integrate it to other systems, train people, et cetera. So a prime example of that is our TMS product. The contracts that we did last year were averaging 9 to 12 months for deployment. The contracts that we're doing this year are averaging around 6 months. Our expectation is that by the end of this year, we'll be able to bring that time line for integrations and onboarding down to 2 months. And we're not stopping there either. So what that will allow us to do is onboard more customers more quickly and reduce that cycle time from first contact to invoicing and cash generation. You also asked how this is expected to drive professional services and margins. Well, it's going to drive margins up. But in terms of professional services, what we see is a shift from things like training and project management, because there's lots of other tools available for training and project management time becomes shorter because things get implemented faster. So we will see a shift from professional services for those types of activities, to professional services that actually help our customers drive benefits. Because our customers don't buy software. What they're actually looking to buy is the benefit that that software delivers. And so given our extensive expertise in logistics and transport, what we're seeing is deploying our professional service resources to help those customers actually deliver the benefits and the value from our software, not just deliver the software. The next question, from Andrew. How much of ARR growth is coming from pricing versus expansion within existing customers? And is pricing power strengthening or becoming more competitive? So we do have clauses within our contracts to increase pricing for inflationary reasons. I don't know, Wight, whether you want to give more specific data on that.

Yes. It'd be around GBP 1 million of the GBP 4.1 million that we saw on the bridge. So obviously, from a direct customers perspective, as Nadeem refers to, we have the clauses that we can increase on an annual basis. And that's been the case probably for the last 3 or 4 years. As you would expect, these things are probably one of the consistent points that are always a challenge with customers, is the inflationary clauses. And obviously, they're generally negotiated fairly hard on both sides, as you can imagine. It's right to point out that we don't have inflationary clauses on the contract terms on OEM customers, purely because they pay for multiple years upfront. So with our biggest customer, for example, they pay for 5 years in advance. So the price is effectively locked for that particular service contract. However, we do review pricing both on the software subscriptions and the hardware on a routine basis.

So the other question was, is pricing power strengthening or becoming more competitive? I think it's -- I don't think we're seeing it vary that much, to be honest. So I think that we're not expecting pricing increases, et cetera, to change that much over the coming year. Next question was from Stephen. What are the OEM headwinds you allude to? And why do you think that it will reverse in late 2027, early 2028? So I think there's a number of factors there. One, what we saw last year was shortfalls in volumes. But I think there are 2 other factors that are worth pointing out. One, with several of our OEMs, the new contracts coming on versus old contracts that are coming off contract, new contracts are lower pricing. So there is some price erosion after 5 years, not -- I don't think that should be a surprise. So I think that has some impact on it. But I think the bigger impact is that what we saw in '25 was that there are a certain proportion of contracts with customers that, after the first initial period, whether it's 3 years or 5 years or 6 years, after that initial period, a certain proportion of end customers have contract renewals. And what we've seen is that that contract renewal rate is far lower than it has been. Now we suspect that that's down to economic conditions, et cetera, but that was having an impact on overall OEM revenues. Now why do we expect this to change in the next 18 months? Twofold. One, we're seeing -- forecasting revenues to go up through, one, increases in volumes, changes in pricing. And secondly, we expect that the renewal rates will also plateau out. And I think the combination of those things will mean that there will be a leveling out and a small increase in OEM revenues. And that's probably a pessimistic view, but that's how we've modeled it at this point in time. I think that really the focus should be on the growth in direct customer base because we're seeing that at 16% last year, and we still expect that to be in double-digit growth over '26 and '27 as well. The next question, can you provide an indication of respective margins between direct and indirect sales? So I'm assuming you mean direct and OEM sales. So direct, I think it's not something we disclose, but I think it's fair to say that direct sales tend to be significantly higher margin than OEM sales. OEMs will generally take a small proportion of our product set as well as hardware, given the volumes that they shift. That tends to be higher volumes, but lower margins. Whereas direct customers will be taking far more software than hardware, and that tends to drive far bigger margins on our direct sales. The next question, from Michael. Please comment on respective growth rates between U.K. -- large U.K., mid, Australasia and France. So U.K., large market segment, so vehicle fleets above 500. I think there aren't that many more big fleets in that space given that we already have about 60% market share in that segment. But what we are seeing is growth occurring through upselling and selling new modules into those existing customers. The mid-market space, we're onboarding lots of new customers. So the growth rate there is a lot, lot faster. And then Australia is probably our fastest-growing market by far, but we are obviously starting from a much smaller base there. But Australia is definitely double-digit growth and growing much faster than France. Next question was what a target run rate, indirect CapEx and development costs. So I don't know if you want to answer that, for '26 and '27.