Newmark Security plc (NWT.L) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Newmark Security plc Interim Results Investor Presentation. [Operator Instructions]. The company may not be in a position to answer every question it receives during the meeting itself, but the company can review all questions submitted today, and will publish those responses where it's appropriate to do so. Before we begin, as usual, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Newmark Security plc, Marie-Claire, good morning.

Good morning. Thank you very much. So I am Marie-Claire Dwek, CEO of Newmark Security, and I'm joined here by our CFO, Paul. Today, we'll present a handful of slides that will give you a preview of how we are framing our plan to accelerate growth over the next 5 years, together with our interim results at the end of 2025 half year. Just want to start with, despite the first half loss that we certainly anticipated due to ourselves being second half weighted and investment in strategic initiatives, we are looking forward to a very positive EBITDA for the year. Well, for those of you who don't know us, a good place to begin is in the context of what we do. So let me describe the problem we solve. The common challenge for our primary clients, both human capital management, HCM software partners and enterprise is to manage their resources more effectively. As you're aware, HCM software partners is a major growth category that we're investing heavily in putting technology at the heart of this opportunity, increasingly with the help of AI to turn managerial bureaucracy into machine-driven autonomy. But there's a data gap that exists between the physical world occupied by real people in an organization and a digital world where AI needs to operate. This is the gap we fill, taking care of identity credentials of employees and colleagues, managing them securely and in accordance with strict compliance regulations and controlling access and timekeeping recording, so our clients' HCM systems can be optimized. It's where the AI data gap meets the reality that HCM needs in order to operate more effectively. So we introduce ourselves as follows; Newmark is a technology innovator that focuses on people's data and device management. Through time clocks, software and services, we link the digital and the physical world, connecting enterprise with its people to enable the future of autonomous HCM operations. This includes biometric identity and security, time and workforce management and employee data compliance. We've been operating in this space for over 30 years, and we've grown to a team of over 100 specialists who spend all their time obsessing about innovations in people's data and devices, especially the ones we can make available to HCM software partners and end users clients. That obsession has created a market leadership with the best all-round proposition that includes the highest quality devices, software and services, all of which we can quickly connect and make available to our clients so they can develop an increasingly autonomous future of the HCM operations that they try to create. Operating in headquarters in the U.K. and in the U.S., Newmark has a strong presence across North America, the U.K. and Europe. And with the acceleration of AI adoption across every enterprise, it's a very exciting time for our customers. We need a responsive partner that can offer the highest quality, well-architected products that enable their advanced strategies. Crucially, this is enabling us to target full share wallet, which includes replacing low-end device manufacturers from China. Put simply, our task is to scale innovation. Newmark's primary market and growth focus is through its growth technology brand, Grosvenor Technology. Here, our model is enterprise platform driven with GT Connect being at the center of everything we do. GT Connect is enabling platform that connects devices, data, services and people to enterprise, and with the HCM system they run. Our service model can be seen as a stack, shown from the bottom to the top that enables HCM operations. Firstly, we deploy a complete range of devices, our time clocks from entry level to premium, giving clients a sliding scale of pricing to suit their needs and budget. All of our devices come with services attached, meaning they're all connected using GT Connect to bring their devices, data and services together onto one secure cloud platform from where everything can be remotely controlled. Our remote services fall into 2 categories, device management and data management with over 35,000 monthly subscriptions generating over 12 million monthly clock-ins, a number that is fast rising through our growing partnerships. Crucially, at a touch of a button, we can see the status of every connected device, quickly diagnose issues and securely and manage their configuration in the cloud. Data management brings the power and the protection of secure cloud protocols onto your enterprise data from highly sensitive biometric identities and templates for every one of your employees to audible data collection and analytics over people's physical and engagements such as time clocks and in and out, together with system management of security, storage and data backup. All of this data is maintained with strict security and compliance. This removes a major headache for organizations investing in advancing HCM operations, where their HCM operation software partners need our specialist expertise in linking the digital and the physical world safely and effectively. As I mentioned at the time of reporting in our previous full year results, in 2025, we are excited to have embarked on our new 5-year strategic growth plan. Our strategy for growth can be understood in 3 layers with key initiatives aimed at accelerating growth at each level. The first is revenue growth, which is entirely focused on expanding our existing and new HCM partnerships. Here, we continue to seek and onboard traditional HCM partners as well as actively working to displace other incumbents, such as low-cost manufacturers by offering sliding scale pricing to high-quality devices with differentiated services. This drives maximum competitive advantage right across the market from end-to-end. It allows us to target full shared wallet for the larger national and global partners, who themselves want to serve the broadest range possible to the market. The second is margin growth, which continues to pursue our strategy of increasingly high margin recurring revenue by attaching services to all new business. This also includes pushing services to every existing partner where they might not currently be taking advantage of the latest enhancements made possible by constantly advancing software and services. The third layer is all about scaling quality innovation, where we're currently investing further to take our exciting offer direct to end users by leveraging existing marketplaces and emerging alliances with the world-leading HCM brands, Oracle, Workday and SAP. We've already started work on this, adapting our per employee monthly subscription model, signing our first partnership agreement with Oracle, integrating our hardware and software and have now begun the early stage of market testing led by a well-connected domain specialist in this area. As this opportunity develops, our intention is to continue to invest to scale in this space, giving us additional resilience in our direct market channel. We've continued to execute the strategy of building a hardware-enabled software and services business and selling customers a wrapped subscription to build stronger recurring revenues. This division delivered revenue of GBP 6.5 million, up 8% during the period with subscription-based annual recurring revenues increasing by 30% year-on-year to GBP 3 million in October 2024. GT's HCM growth was driven by a strong performance in North America, where sales were up 16%, with one of our largest North American partners experiencing a robust start to the year in terms of demand for GT10 devices. We're also in advanced discussions with partners to introduce our next-generation [ GT10 Mark-2 ] to replace the existing [indiscernible] in this fiscal year. Demand for GT4 and low-cost GT4-Lite devices has been particularly strong with orders in the latter helping to displace its main low-cost competitor in the North American market. Sales in the Rest of the World was slightly lower year-on-year after our largest Rest of the World partner completed a series of acquisitions, which impacted the business. Since this period, sales have been much stronger and new contracts won with 2 new major retailers, and we expect the full year performance to be up on last year. Our partners' acquisitions have led to expansion in new European territories and such as we stand to benefit directly from this expansion as a sole provider of Timeclock software and hardware solutions to them. To provide a little more detail on what I said about Oracle on the previous slide, earlier in the year, we announced the pending launch of GT Time in partnership with Oracle to target direct-to-enterprise market and the expansion of data security and compliance. A senior U.S. consultant with specific experience on working in the global HCM marketplaces has been hired to accelerate the rollout of GT Time and to gain further momentum for this key strategic initiative. We are pleased to report the Clock and Cloud-based Oracle software integration has been completed and certified with Oracle. We're also pleased to report there has been already progress with early business development, creating sales opportunity and pipeline. In addition to Timeclocks and software, Grosvenor also designs and makes class-leading access control hardware that is easy to scale and extend so it can deliver much more than just access control. In transition to our newest products has continued to use, delivering growth and demand for Janus C4 and future products with significant and a well-qualified pipeline targeted for conversion this year and beyond. We are still working hard on the development of Janus C4 Ultra, an advanced new hybrid cloud product with substantial potential being jointly developed with our partners, Gamanet. Access control did experience a slower start to the period than it was initially anticipated, with sales being impacted by delays to upgrades, projects and our software partner for the new Janus C4 Ultra taking longer to have the product ready for launch. However, these delays have been resolved, and the sales pipeline for the second half is much stronger, positioning the business for a much better into the year. Whilst access control continues to make a meaningful contribution, Management will, in due course, be reviewing the division's longer-term strategy to access how it can deliver better value to the group. In the immediate term, Management has taken a strategic decision to focus on Grosvenor's investment resource on HCM to take advantage of the growing market demand for data security and compliance and accelerate the development of its sales pipeline. Safetell has been providing innovative physical solutions for over 25 years, creating safe spaces for employees and colleagues where overall demand is strong and growing, including door services, entrance control, screens, encounters and bespoke projects. The highlight in H1 was the continued growth of services and maintenance, revenue up by 38% in accordance with the long-term strategy providing increased forward visibility that adds significant value and reflects the advantage of our high-quality operations in this space. As previously disclosed in our group's AGM statement, the timing of 4 significant contracts being delayed until H2 will see Safetell generate the majority of its revenue through the latter part of the year. Consequently, H1's revenue decreased by 13% to GBP 2.4 million compared with the corresponding period prior. In terms of operations and building its sales pipeline, Safetell has performed well in accordance with the strategic long-term plan, which includes growing share of services and maintenance work in auto-door servicing market. It's also invested in talent to strengthen its support services and installation teams and made a senior hire to optimize its operations, all of which is already helping to make the division more efficient and deliver on contracts more profitably. Reflecting on some of the projects and contract highlights in the period, Safetell successfully extended existing contracts with 2 large banking customers, a major petrol retailer and completed the installation of physical security in a new major football stadium. In terms of growing its revenue pipeline for H2 and beyond, the division won a series of new automatic door services and contracts with blue-chip organizations, including a national retailer, a train operator and a major pharmaceutical business as well as contracts with a major housing trust, U.K. charity and a large university in the North of England. I'm going to hand over to Paul now to run through some of the group's key financials for the half year.

Thanks, Marie-Claire. As usual, all of our results announcements are published on our website at newmarksecurity.com. So let me now take you through a brief summary of our half year performance. The highlight was undoubtedly the continued growth in annual recurring revenues in accordance with our stated long-term strategy. Notably, the core HCM business is enjoying a sustained period of growth that is set to deliver full year success at higher margins. This strong performance is somewhat masked by delayed in access control project upgrades and the timing of large contracts in Safetell. This is why it is worth understanding the business unit detail as explained by Marie-Claire earlier. Our consolidated group reporting shows the following headline results. Revenue of GBP 10.2 million compared to GBP 10.4 million in the prior year, but with normal H2 weighted cyclicality and a number of known opportunities, I feel confident about achieving growth at the full year. As already mentioned, but worth repeating, we achieved an ARR of GBP 3 million at October 2024, up 30% on the prior year. We delivered gross profit of GBP 3.9 million, which is flat year-on-year. Gross profit margin increased by 0.9 percentage points to 38.1% due to a combination of high-margin HCM recurring revenues and improved HCM product margins as component prices have slightly reduced. The EBITDA decreased by [indiscernible] year-on-year to GBP 0.5 million as a result of the 10% increase in overheads, driven by inflationary cost rises and investment in strategic initiatives following the approval of the new 5-year strategic growth plan in June 2024. Business investment includes increases in the headcount, marketing and professional fees. This increase in overheads resulted in a GBP 0.4 million loss after tax in the period and the 4.6p loss per share. As Marie-Claire has previously stated, this loss was anticipated and we expect it to reverse in H2. We maintained our investment in research and development period of GBP 0.2 million as we continue to develop our products. The group's cash at bank at 31st of October 2024 was GBP 0.3 million, up GBP 0.3 million on the prior year. Whilst this is GBP 0.8 million lower than the 30th of April 2024 cash balance, the year-end figure was artificially higher due to timing of large receipts. Net debt, excluding leases, was down 40% to GBP 2.2 million at 31st of October as a result of an increase in cash, CBILS loan repayments and a reduction in the use of invoicing finance facilities year-on-year.

Thank you so much, Paul. So in summary, it's been a strong first half, driving further growth in services with high product margins and growth in annualized recurring revenues, strengthening our cash flow and our balance sheet. Our operations remain focused on continuing that performance with strong execution in building divisional sales pipelines, developing new partnerships and extending existing relationships. Our increased investment is reflected in the lower EBITDA number at the half year, but we believe we will deliver a net positive impact by investing in the people and the systems to both enhance customer services and efficiencies. I'm delighted that we continue to win and extend contracts with blue-chip customers, which is a great testament to our people and our service offering. And like last year, our sales pipeline [indiscernible] is weighted to the second half, and at this stage, I fully expect to surpass our previous full year's performance. And I said at the end of last year, with the offering, team and platform we have now built, the future is extremely exciting for Newmark. And that is the end of our presentation, and we look forward to your questions.

Perfect. Marie-Claire, Paul, if I may just jump back in there. Thank you very much indeed for your presentation this morning. And I'll just bring back up your cameras for the Q&A. [Operator Instructions] I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can all be accessed via your investor dashboard. Marie-Claire, Paul, as you can see there, we have received a number of questions, and thank you to all of those on the call for taking the time to submit their questions. But guys, at this point, if I may, just hand back to you just to read out those questions and give your responses where it's appropriate to do so. And if I pick up from you at the end, that would be great. Thank you.

Thank you very much. I will start with the first question, which is a pre-submitted question. Are there any more threats or opportunities with the recent acquisitions of your customers, Workforce or Paycor? So we were not aware of these 2 acquisitions, and I'm sure their staff weren't aware at all. But in essence, both acquisitions deliver huge opportunities for us because Workforce was purchased by ADP, and we're speaking to ADP. And that just enlarges the Workforce sales team, and we will have much more reach with that. So even those sales from Workforce might have slowed down for the first half, while things were settling in, we anticipate a stronger second half and this going forward to be very positive for us. And Paycor was purchased by Paychex and the same thing. We don't anticipate any downside on this and no negatives and anticipate this being a good thing for us. But forward looking, I don't see, and we possibly wouldn't know about any of these going forward. How is new customer acquisition developing in the Rest of the World? Are there any major customers apart from Protime. And are there any contacts with ATOSS software in AG? So we are working on Rest of the World. We have a team doing that. We have a number of customers. So Protime, we might talk about the most, because they're our largest, but we probably have 15 other European customers based in the U.K. and the rest of Europe. And we're constantly working on new partners in the U.S. and Europe. So that's a prime focus of ours and part one of our strategy. And we spoken to -- we sort of looked at ATOSS software, and I don't think they could be a customer because they don't have hardware, but we're looking to speak to them. And they came across our desk 2, 3 weeks ago as well as an executive team. The third pre-submitted question. If the share price still does not reflect the value of the company, are there measures such as share buyback or redemptions of dividend payout plan? Well, thank you for that question. No, because we continue to make strategic investments in our DTE platform and other areas. So we're not looking at sort of returning and dividends at the moment. But as the share price grows and as profit grows, that will something we will look to in the future. Why has the performance? This is from Benedict. Why has the performance and profitability deteriorated compared so much in H2 of '24. What are the prospects of access control? Sales have been stagnated or declining for years. So as we said in the presentation, very much second half weighted, a couple of these acquisitions did take a bearing on H1, we're looking to recover in H2. So we're looking for H2, and we're always for some unusual reason second half weighted, and anticipate this being the same. And we see -- we've got the pipeline with a lot of the sales coming through, and we're already more positive in the second half. What are the prospects for Access Control? And as I said in the presentation, we're looking at other strategic options. We're looking at sort of other products we can deliver, and we thought as an executive team and as a Board, focusing on HCM where we're going to see a lot more growth. But as we sort of time goes on, we're looking at Access Control as well. David, thank you for your question. The team in Safetell has done a fantastic job to turn around the business. It must be frustrating during this period to have gone backwards. Given a strong pipeline, how can we better manage the delivery of the pipeline and make money when moves to initiatives disrupt our plan? We must be left and fix the cost to cover -- that hurts the business. Where we're looking at this? We're constantly looking at our costs. But we did have to make some investment as we've grown the business, as you're saying, David, and sales have grown. Second half weighted again. We have invested in operations. We bought someone to help us for delivery and efficient in gross margins, which has already seen fruits. And a lot of these projects move from the first half to the second half and we'll move to '25, '26, but we're always looking at this. I agree with you. The team have done a great job delivering sales and it sort of refining operational margins, and I believe we've now done this. And so as sales come in, we'll be delivering better margins and better profits for the years ahead. Tom, there's quite a few questions. I'll just keep going. Tom, your reference to Oracle GT partnership is progressing with software integration completing. How significant is this partnership in future revenues and what's the next step? It's hugely significant. This DTE platform is very significant. So we talk about Oracle being one of the partners. We have now working with Workday as well and will be a direct partner with them, and we bought forward the SAP, which we were going to do in a couple of years and going to do that integration and complete that this year. We look to deliver a lot more revenue through these 2 platforms with other partners, and it's a very exciting opportunity and probably one of the most exciting opportunities we've seen for a while. So we're onboarding new partners as we go forward, selling services, but this is a sort of key strategic development for us. David. Revenues for GT over second half '24 gone backwards. Can you explain more on this GT revenue position and the risk we need to manage? We're constantly managing the risk. And the sales team are looking to drive revenues as hard as they can for H2. We're sort of halfway through H2. I see this as positive. But it's a key focus while looking at all the other strategic deliverables that we're working on. Benedict. What is Newmark's expected EBIT margin at the end of a strategic plan or in the current financial year? Paul, I'll hand you on that one.