Oxford Metrics plc (OMG.L) Earnings Call Transcript & Summary

Good morning, and welcome to the Oxford Metrics plc interim results investor presentation. [Operator Instructions] The company may not be in a position to answer every question received in the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to set the following poll. I'd now like to hand over to Nick Bolton, CEO. Good morning, sir.

Good morning. Thanks, Alessandro, and welcome to Oxford Metrics interim results for the period that closed at the end of March 2023. And indeed, when we presented the full year numbers at the back end of 2022, we talked about the year ahead being a year of opportunity and growth. And well 6 months into that process, I'm really pleased to report that's exactly what is coming to pass. There are 3 big headlines in this set of results. Firstly, this is the highest ever revenues, nearly half, first or second, GBP 16.3 million in H2 last year was previous best. And importantly, this proves that we can really scale production to meet the demand that we're seeing. The second big headline is that we've been seeing continuing ongoing strong demand across verticals and also across geographies. And David in a moment will provide a bit more color to that. And then the third big headline is that the M&A pipeline is building well and there are early signs that private business valuations is starting to move towards where public company valuations announce there. So 1.5 years into our 5-year plan, I'm pleased to report we're definitely on track. So in terms of the structure of this presentation, I'm going to hand you over now to David Deacon, our CFO, to take you through the financial performance. And I'll then update you on -- before I take the baton back to update you on progress as to the 5-year plan. And lastly, we'll look forward with the outlook for the business for the rest of the year and the years ahead. So without further ado, over to you, David.

Thank you, Nick. I would also like to add my welcome to this morning's presentation. So kicking off with the financial headlines. Starting top left, overall revenues at GBP 21.3 million were up 69.6% year-on-year. Adjusted for FX, underlying growth was near at 62.5%. The order book as at the end of March stood at GBP 22 million, up from GBP 9 million compared to this time last year. And we reported a statutory PAT of GBP 3.2 million, up from GBP 0.6 million a year ago. Middle left, on an adjusted basis, which excludes noncash-related items and exceptional costs, a profit of GBP 4.1 million is reported, up from GBP 0.3 million last year. During the course of the presentation, I will explain the bridge between last year and this. This represented an adjusted EPS of 2.64p up from 0.41p a year ago. And the cash position at the end of March stood at GBP 63.6 million, which is after payment of the final 2.5p dividend, equating to an outflow of GBP 3.3 million. During the first half, GBP 0.9 million was invested in new IP, which actually represents a decline compared to last year's GBP 1.2 million. This is due in part to last year including Valkyrie, and this year, including slightly more focus on new product research, which does not qualify for capitalization at this time. The inventory position of GBP 6.4 million is more than double this time last year and is also compared up to -- is up compared to last year end at GBP 4.5 million. Given the strength of the order book, we took a proactive decision to carry more inventory to underpin the level of expected second half shipments. This was the primary reason. But the addition of inventory also has a secondary benefit, providing some protection against unforeseen supply chain disruption. That said, compared to last year, the situation is now much improved. The increase in inventory largely accounts for the decline in the GBP 67.7 million cash position compared to last year-end. So now let's take a look at H1 trading performance, starting with revenue, which I'll look at in 3 different ways, first historical. So as Nick said, the first half performance at GBP 21.3 million is the best ever half performance. It is worth noting this did benefit from the carryover of GBP 3.5 million that we were unable to ship in late FY '22 due to supply chain constraints. But ignoring this for a moment, the revenues would still have been a record in any event. So looking briefly at revenues from a geographic perspective. The standout performance is clearly Asia Pacific, accounting for 43% of revenues in the first half. Of this, Japan accounted for nearly half of these revenues, together with strong performances in China and in South Korea. All of these markets reflected a strong appetite for the new Valkyrie camera in the buoyant Entertainment segment. Whilst there's been a change in the overall mix, there has been growth across all the markets when compared in real terms. So on the right-hand corner, U.S.A., up 46.9%; and Europe, up 24.4%. And thirdly, let's look at revenue from a market segment performance. So Entertainment was the strongest segment, nearly tripling revenues year-on-year. And really, this came as no surprise given the entertainment bias in the opening order book. That said, Engineering, Life Sciences and Location-based Entertainment also reported growth. So moving to the right, the order intake during the half was GBP 19.8 million, which after shipments meant the order book as a whole remained at a similar level compared to last year-end. And the order book at GBP 22 million it is perhaps a little more balanced now compared to last year where there was that Entertainment bias. So the Engineering order book includes our largest ever deal. We mentioned at the preliminary results, Entertainment remains buoyant, GBP 8.1 million, and Life Sciences also has a healthy order book of GBP 6.1 million. Looking at some of the segmental highlights in the first half. In Engineering, for example, the University of Manitoba acquired a very large Valkyrie system for both Unmanned Aerial Vehicles and ground robot tracking in their indoor facility. Their studies aim to increase capacity in research and skills training of UAVs and robots to help the local agricultural industry further embrace these technologies. And in Entertainment, Cover Studios in Tokyo implemented a new state-of-the-art studio using 200 Valkyrie cameras, which is being used for a wide range of content production, including VTubing. And in Life Sciences, Victoria University based in Melbourne, added 40 Valkyrie cameras to an already large Vicon system capability. This is an enhanced tracking, means that the university has become the first official FIFA Research Institute for Football Technology. The University first collaborated with FIFA in 2016 when it developed an innovative international standard for FIFA's quality program to assess the accuracy of electronic performance tracking systems. And in the LBE segment, customers have been calling off against existing orders, and many of our customers have ambitious rollout plans over the coming years. But at present, the current order of GBP 0.64 million probably does not reflect the potential and has more to do with ordering patterns in this marketplace. Sandbox VR recently announced the opening of their 37th facility in Kentucky, and Immersive Gamebox is expected to be at 46 active facilities by the end of this year. Based on the future rollout plans, which are publicly available on their respective websites, it does suggest there is promise of meaningful growth in the future. So together with Dreamscape and [ HOLOGATE ], we believe we have all the main runners and riders in this market. So if the segment does take off, we are definitely in a good place to benefit from this. So, so far, the focus has been very much on revenue and order book. So now let's take a look at the adjusted PBT. And to do this, I prepared a waterfall. So on the left-hand side, you can see the adjusted profit of GBP 0.3 million. And then moving to the right, there's a GBP 0.1 million adjustment relating to applying current FX rates to that outcome, so it would have been slightly enhanced. Gross margin generated by additional revenues added GBP 6.1 million to profits, from which I have trimmed around GBP 0.2 million to reflect a slightly lower gross margin percentage arising from the mix of direct and indirect revenues. Compared to last year, the cost base is up, in part due to some inflationary increases arising from payroll changes we made last Christmas to address the [ central ] cost of living crisis, which we did wait in favor of our more junior and lower-paid employees. But for the most part, the increase is all around the planned organic investments described in the 5-year plan. The focus of the team is on product research at the moment, working on new technologies to drive revenues in the future. More of this from Nick in a few moments. This also meant that R&D capitalization in the first half was GBP 0.3 million lower, whilst amortization increased by GBP 0.4 million following the launch of the Valkyrie camera in FY '22. And finally, interest received added another GBP 0.5 million. And taking all of those things together, we arrive at our adjusted PBT of GBP 4.1 million for the first half. So in summary, the strong reported revenue performance is backed up by a healthy GBP 22 million order book going into the second half and a significant adjusted PBT performance of GBP 4.1 million, a strong cash position of GBP 63.6 million and an improved dividend as well. So in summary, the business is in a good place to move forward with the 5-year plan. Before handing back to Nick, I'd just like to take the opportunity to remind retail investors that further information is available on our website, www.oxfordmetrics.com, where you will find some updated research prepared by Progressive Equity Research, which includes forecast numbers for this year and beyond. That's it for me. Back to you, Nick.

Great. Well, thanks very much, David. I'd like to pick up the baton and really talk about the 5-year plan, what that means in organic terms, what progress made on the inorganic side and then really move forward and look at the outlook. So starting, first of all, with just a reminder of the current 5-year plan. This was the new plan that we launched in October of 2021. So we're now 18 months into that. And it really recognize the area of expertise that we have is in this area of integrated smart sensing systems, where if you've seen this presentation before had chance to view some of those videos that David was talking about that's available on our website, what we mean by integrated smart sensing systems is that we look after the data from the moment it's sensed all the way through to delivering actual intelligence when it's applied to the market. So we break that down to these 3 phases of sense, analyze, apply. And our thesis is -- and we've demonstrated this both in the growth of Vicon as well as of Yotta [ 2 of the 3 ], if you look after the data across its full life cycle, you end up with more valuable, more powerful actionable intelligence at the end of that chain. So the 5-year plan recognized, that was our area of expertise. And we then set about through an organic -- I mean inorganic investment plan to drive that growth. And through that combination, really, what we're trying to do there is expand the market applicability of our deep IP, and therefore, the addressable market with the aims that over the 5-year period, it would increase revenues 2.5x and deliver a 15% return on adjusted PBT level. But I really expect that growth to be divided about 50-50 between organic and inorganic. And so we're using 3 specific growth levers to expand that solution applicability that really break down to each of those areas of sense, analyze and apply. So the first of those is about extending our sensing capabilities, adding new and different ways to sense in order to then have that sensed information leveraged by our existing investment in our analysis software. The acquisition we made of IMeasureU a number of years ago, New Zealand business that had expertise in inertial sensing, was exactly from that playbook. So that's the first growth lever. The second then is about enhancing the modes and the capabilities of our analysis phase. What other analyses or analytical tools can we provide to better understand that sense information. And actually on the organic side. There, the acquisition of CONTEMPLAS a couple of summers ago, was exactly that their expertise in being able to sense and measure from playing video is another example of their expanding our analysis capabilities. And then thirdly, it's about seeing our IP embedded in other companies' solutions, and the Location-based Entertainment is the most advanced example of that. And so already across the 5-year plan, our aim was to step up investment to drive those levers across the business. And now we're in year 2. It's a useful time to take checkpoint, where are we with each of those tools. So let's start off, first of all, looking at the organic side of the investment. And really, as David has already pointed out in his waterfall slide, this is fundamentally about a targeted investment in R&D. Sure, we made a few investments in and around sales and marketing as well. But fundamentally, what underpins the plan and driving this increase in TAM expanding capabilities, it's about the careful investment in R&D. And specifically includes continued investment in AI. And given that, that's on everybody's lips at the moment, I think it's worth just taking a side bar on what Oxford Metrics involvement in AI. Well, the first thing to say there, is this not new to us. We've been in AI for many years both at a research level and also in product. In fact, if you're one of our Entertainment customers using our Shogun product, the finger tracking capability that's inside Shogun, which shipped, I don't know, 4 years ago or so, is all driven by a [ net ] that's been trained on more higher-fidelity finger information so that you can now drive a fully articulated finger model with just 3 markers on the hand. So that's the first thing to say is that AI, we've been doing AI for many years. And I think the second thing is really is that we see ourselves as beneficiaries of AI -- the broader AI adoption really for 2 reasons. First of all, it drives sales, especially in the Engineering segment where a lot of our engineering customers are building robots or testing robotic capabilities. It's not just in Engineering, but also in Life Sciences. In fact, the image on the very front cover of the slide deck that was there is actually a picture of Tonal which is -- who are a U.S.-based business who are building an AI-powered home gym. So if you like, a Peloton but for resistance training. And they have a significant investment in a Vicon system in order to really develop their products to build the data sets upon which they can then train their own device in and around their AI system so that it can offer better advice to the athletes who are training using their equipment. And it's not just that example. It's, as I say, it's across a wide variety of robotic implementations. And actually, David's example of the University of Manitoba is exactly one of those. So that's the first thing is that we'll be beneficiaries because it drives sales. The second thing is, to us, it opens up new market opportunities to grow our own application of AI. So putting that then to one side and the side bar on AI, where are we investing in that R&D? Well, mostly, we're working on extending the sensing capabilities enhancing the analysis side. But those are initiatives -- and less so on the applied phase, less so on the embedding. And those initiatives are spread across all of our vertical markets, definitely in Entertainment, in Life Sciences and also in Engineering. And more than that, actually, it's about adding new capabilities that will see us be able to add additional verticals on top of those. We've added -- to give you an idea of the scale of that investment, we stand at just under 170 people today. And we've added 23 new R&D heads since the start of the 5-year plan. And that's really to capture the opportunities that we see ahead of us there. And I think really, it's worth understanding there that the large proportion of those R&D heads are really working on new term expanding capabilities as well as they're adding a few of the heads that are working on enhancing our existing products aimed at our existing markets. And actually, I think the thing about the strong order book and also the strong sales performance in the first half, is it really reflects our historic successful capability to invest in R&D. And this R&D investment on the organic side is really playing -- is coming straight out of that playbook, and we're really looking to drive the business or onwards into years 3, 4, 5 of our 5-year plan. So that's the growth drivers on the organic side. If we turn then to what we're undertaking on the acquisition side, And here, the 3 growth drivers all count, again, the extending, sensing, enhancing, analysis and the embedding IP. Our focus on M&A targets is consistent with where we were 6 months ago. We're looking for businesses that are IP-rich, that have got deep tech, that got large moats based on the technology, that have got attractive cash flow metrics. We tell you the fundamental assessment of valuation perhaps in any business, ones that offer us good to high revenue visibility to augment the strength of our existing revenue streams. And we're also looking for companies that have got able management teams who want to join our project and collectively combined to achieve more than either can achieve alone. Our goal here is to identify latent talent by the fair price and then improve through a combination of innovation, technology synergy and also commercial synergy. Can we bring effectively more technology to sell to our existing market with 10,000 customers in 70-plus different countries? Can we broaden our product catalog to sell to that audience? Or can we leverage our existing sales channel in some way or our back office capability? We have a direct subsidiary in the States. Can we effectively bring products through that existing channel, through that back office. And equally, other areas of technology synergy? Can we bring our capability with dynamic metrology with 3D understanding to have perhaps more static or more 2D capability within there. So through those synergies drive out greater value. We got offered multiple integration choices. So that could be an acquisition that's deeply integrated into the existing subsidiary, partially integrated existing subsidiary, perhaps where we might share an R&D capability or a back office and HR or finance capability or equally sit as a completely stand-alone subsidiary reporting into groups. So I guess there's a bit more flexibility about the targets that we can look at. So we're focused very much on the markets we understand, the Entertainment, Life Sciences, Sports and Engineering marketplace. And over the past 6 months, that's really developed, so we've now gone from filtering hundreds of long-listed opportunities now to a defined target list of around 50 specific companies based in the U.K., Europe and North America. And we've now got ongoing engagements with a number of those targets but at different stages of maturity. I think one of the thing is worth commenting is that private market valuations are starting to normalize with public company multiples, which, of course, is what we need if we want to show -- deliver an earnings-accretive deal, which is very much on our minds. I think it's also worth stressing here is that they've got to be the right deal. David went to a Board meeting recently and coined the phrase that the acquisitions need to be the right ones for the right reasons and at the right price. And so that absolutely underlines what we're looking for here. We're looking for those right businesses, and we've got to make sure that we pay the right price, securing the value at the point of purchase rather than on some sort of mythical plan to drive value that comes out afterwards. So those are the threads then. The organic investment to drive the 5-year plan, the inorganic plans to drive the growth. Now let's move forward then and look at the outlook for the second half. First of all, as David pointed out, with the order book there, we've got full visibility of H2 revenues through that order book. But more than that, and perhaps where David, my focus mostly is, is looking at that sales pipeline. And actually, there, we've got a very encouraging ongoing sales pipeline. And so we expect to enter next financial year with a strong order book position. So the -- what that would then mean with our full order book is that we expect second half revenues to be -- to show growth year-on-year. So last year was GBP 16.3 million. We're expecting a second half to report growth on that. And then looking at the 5-year plan, we're continuing to invest on the organic side to drive that 5-year plan in and around the R&D function. And now valuation metrics are starting to normalize, M&A is the key focus for this management team and for the business more broadly. But underlying the acquisitions need to be the right ones and clearly at the right price. All in all, what that means is that we're well placed to deliver performance ahead of the market expectations. And if you've been following any of the analysts, you can see they will uptick to our numbers for the full year. So in summary, this really was a great first half. It was the best half in the company's history with strong revenues and strong market demand. And it's also one of M&A progress, really, that puts us well on the road to achieving our 5-year plan. So indeed, as we said back at the Christmas set of results, we expect this to be a year of opportunity and growth. And now we've made a great start to fulfilling this promise to be that year. Thanks very much for your attention. Alessandro?

[Operator Instructions] I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Nick, David, as you continue to receive a number of questions throughout today's presentation, if I could just ask you to read out those questions and give response to those appropriate to do so. I'll pick up few at the end.

Okay. Well, there were a great lot of questions there, first of all. Thanks for so much engagement from you all. Let me pick off. There are a few in here that relate to competition. So I'm going to pick off a few of those. And clearly, we're talking here in the context of Vicon's competitors. So the summary really there is that, first of all, we have 2 principal direct competitors, Qualisys of Sweden and OptiTrack in The States. Qualisy, we mostly see in Europe and in the Life Sciences market, OptiTrack mostly in the U.S. and Entertainment market. OptiTrack themselves are actually owned by a Chinese conglomerate called Leyard. And in both of those, we haven't seen -- we've seen a consistent level of competition from them. We like competing because we know that we do head-to-head with our product. We have enough features within our products to be able to differentiate against those. So we've really maintained and grown our market position against those. We also have a series of indirect, just to pick up a question again, came up on the list there, a series of indirect competitors with different or less accurate or lower cost capability. So on that side, someone's mentioned Xsens. They make inertial suits, so you still put like a suit, you have the inertial sensors in there. There's also another business called Rokoko who make those inertial suits. We tend not to see them in our deals, mainly because there has a different characteristic about the noise characteristic and the accuracy characteristic there. But they're valued solutions within the space. And we also -- there are some video sensing [ we see ] smaller start-ups who are also going after that lower end market. But really, it's the direct competitors, Qualisys and OptiTrack that we see most frequently in deals, and we really do feel we have a differentiated solution that means we can compete at that level. So hopefully, that covers a number of the questions that people have been asking on the competition side. David, is there a finance question there you can see you'd like to pick up?

Yes, there are several along similar lines. So we've been asked, could we see a special dividend or a share buyback? And in another question, really relating to the number of deals and the size of deals that we might do. Would there be further returns. As Nick said, our main focus at the moment is finding accretive acquisitions. And of course, doing acquisitions is not always an exact science. We can't predict precisely when those things might happen. But really, the sure answer to the question is that at some point in the future, if we find we're unable to deploy some or all of the cash, then we certainly would consider a return to shareholders. I'd have to say probably more inclined to do it a return by way of a tender offer than a special dividend. But hopefully, that just covers off 2 of those questions.

Great. Let me pick up this. One in the list here that's what are our thoughts on the Apple announcement last week and how does Oxford Metrics benefit from it? Yes, last week was a pretty big week -- news in 3D. And I do think the Vision Pro is a really interesting device. I mean, absolutely laden with technology and leveraging a lot of the things that Apple are amazing at. So because they've got that incredible capability in the silicon side all the way through to the application software, it means that they can actually bring a high degree of innovation into that device. So I think that coupling or processing capability right alongside a sensing capability, which they then tout a very low latency, will be key in solution spatial computing. So I think as 3D professionals, the first thing the R&D team were impressed with the capability of the device, although we don't get invited to such press launches. So we haven't actually had a go with one. I think the thing to say about what it means really for us is that pretty much any expansion of ways to consume 3D content or create 3D content, which clearly the Apple device plays to, is generally of a benefit to Oxford Metrics. We saw that with the VR headsets that were coming out of Oculus, clearly, we saw that out of the headsets that then drove the Location-based Entertainment business. And actually, we're seeing it within some of our industrial customers and also university customers with the existing Vicon business. So I think overall, there's a clear net benefit there to Oxford Metrics. And I know that our development team wants to get a hold of one of those devices as soon as possible. So I hope that covers off your question [ Shankar S ]. Any more finance questions there, David, would you like to...

There's one here from [ Vishal ] thanking me for the financial detail provided, and commenting that over the weekend, various short-term saving rates have been announced approaching 5% so forth for the next 18 months. The question is, are you going to park part of your cash to generate a decent return on that capital as well? Well, that really is my goal, is to try and optimize obviously the amount of income that we can earn on the cash. But at the same time, I'm simply not going to take any risks with that cash. I feel very responsible, and a custodian, if you will, for the money that we've got available. But through our existing arrangements, I'm already getting pretty attractive rates. And the other balancing act that we need to achieve is that, obviously, Nick and I are privy to our M&A objectives and what might or might not happen, and so therefore, structure our deposits in such a way to give us the flexibility and availability of cash so we're in a position to execute and should we need to. So yes, I'm doing my best and looking to optimize rates, at the same time, just trying to give us the flexibility that we need.