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

Good morning and welcome to the Oxford Metrics plc investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives in the meeting itself. However, the company can review all the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll. I would now like to hand you over to Imogen Moorhouse, CEO. Good morning, to you.

Good morning, everybody, and thank you for joining us for our Interim Results 2024. We're now in year 3 and just over halfway into delivering our 5-year plan, and I'm pleased to report that we are on track. So what this presentation will cover this morning is: firstly, David, who will take you through the financial performance highlights; I will then update you on our progress of a 5-year plan and there are opportunities for growth; and then lastly, we look forward to the outlook for the business. So over to you, David.

Thank you, Imogen. And I'd also like to add my own warm welcome to this morning's presentation. So, turning first to the financial headlines, starting top left, overall reported revenues at GBP 23.5 million. We're up 10.5% year-on-year. Within that, Vicon on a stand-alone basis was up 2%. And IVS, our new acquisition contributed GBP 1.8 million to revenues. The order book as at the end of March stood at GBP 3 million, down from GBP 21.9 million a year ago and down from GBP 11.3 million at the end of FY '23. As described in the statement, the order book now reflects the normalization of customer buying behavior in Vicon. And what we mean by this is worthy of some further explanation. So pre-pandemic, Vicon was always a sell, make and ship business, and the order book was typically 0. To provide some guidance around what revenues might be in the future, we relied on the sales pipeline, basically a long list of opportunities that are ranked appropriately to arrive at a list of qualified opportunities that could be closed by a given time. This process was established back in 2006 and has served as well as a means of predicting revenues. So just hold that thought for a moment. So we then had the pandemic and we saw order intake soar as customers got into queue to secure systems, given the supply chain challenges we faced. And consequently, the order book went well north of GBP 20 million. Order intake then subsided. In other words, we experienced a lull whilst we fulfilled the order book. So fast forward to today, the order book has been largely depleted and we have now reverted to operating the business as we did pre-pandemic, meaning we now rely on the sales pipeline once again to determine what future revenues will look like. Today, the sales pipeline compared to 12 months ago is 2.5x bigger, which confirms we have passed through the low point in order intake, and so expect this to be considerably higher in the second half. At this point in time, the sum of revenues recognized, plus the modest order book that we do have, plus the qualified pipeline means we have visibility in excess of 90% of full year revenues as we described in the statement. So there is still some work to be done, and it is fair to say the execution risk is slightly higher given we are converting pipeline rather than order book. But it's also fair to say the business has simply reverted to the pre-pandemic state and it's very much now business as usual. So returning to the headlines, we're reporting a statutory PAT of GBP 2.8 million, down from GBP 3.4 million a year ago. Middle left on an adjusted basis, which excludes noncash-related items and exceptional costs, we report an adjusted profit of GBP 4 million, which is down from GBP 4.5 million a year ago. And later on in the presentation, I will explain the bridge between last year and this. So that translated into an adjusted EPS of 2.63p, down from 2.94p, and the cash position at the end of March stood at GBP 54.8 million, which is after the payment of the final dividend equating to an outflow of GBP 3.6 million, and after the purchase of IVS of GBP 6.2 million. So during the first half, we also invested GBP 1.4 million in new IP, which represents an increase compared to last year from GBP 0.9 million. And finally, bottom right, the inventory position at GBP 9 million is higher than we would typically expect to see, and is for current operational reasons. That reason is the implementation of a new ERP system, Oracle NetSuite. Given the implementation of a critical system to the business, I know from bitter experience, could be quite a disruptive event. So we took the decision to have more cameras on the shelf whilst we went through that phase, which is now complete. And I'm pleased to say Imogen now has a shiny new dashboard with live information and speedo dials. Moving forward, the system will deliver operational benefits and we expect inventory to reduce to a more appropriate level of around GBP 7 million by the year-end. So now I'll take a look at the H1 trading performance in a little more detail, starting with revenues, which I'll look at in 3 ways. Firstly, historical. So the first half reported performance at GBP 23.5 million is pleasing to see, but of course what matters is the full year. And as discussed earlier, we currently have visibility on over 90% of the full-year revenue target. Secondly, we'll look at revenues geographically. So compared to last year, we have seen quite a significant change in mix. After several years of buoyant demand in Asia Pacific, this year contributed 27% compared to 43% last year. And this market is largely driven by the entertainment side. On the positive side, the North American market reported strong revenues and contributed 44% of revenues compared with [ 35% ] last year, and the U.S. is driven largely by Life Sciences. This illustrates once again that the geographical reach of Vicon provides some overall resilience to revenues. So looking at the revenue picture by market segment, it's just worth remembering, this is just a snapshot and we typically see segments ebb and flow from half to half, so it is advisable to look at performance over a longer arc. That said, the events that colored the performance in the first half were as follows: So in Engineering, at GBP 4.8 million that was up 56.6% year-on-year the segment had a good half. Contracts were secured from Automotive, Aerospace and Metrology sectors and one deal of note is the work being carried out by the Satellite Applications Catapult and Imogen will have a little video for you a little later. In Entertainment, revenues at GBP 8.5 million were down 22.8% year-on-year. As I said, after a good run-in recent years in Asia Pacific, we are now beginning to see the effects from the global games industry contraction where decisions are currently being delayed. But despite the decline, the first half also included some notable deals including our customer and partner, Lux Machina. Valkyrie Solutions were also delivered to London College of Fashion and Bristol University Vision Institute called MyWorld, which is set to be a new global center of creative technology. Most recently, Paper Games in China added an additional large Valkyrie system to their existing solutions to add realism to their female-focused games and their VTuber, Nikki who lives -- who streams live on a weekly basis. And then in Life Sciences, at GBP 8 million, this was up 38.3% year-on-year. Of note in the first half was Valkyrie successfully achieved the U.K. Conformity Assessment medical device mark accreditation or more simply put, we could put the UKCA sticker on the camera, which is now globally recognized. The accreditation enabled Valkyrie systems to be delivered to hospitals around the world, including new customers in Hong Kong, in the Yamagata University Hospital in Japan and Vinmec International Hospital in Vietnam; along with the University of Sydney who invested in a Valkyrie solution for research into head injuries in Rugby League and Rugby Union. And back here in the U.K., Guy's & St Thomas' also bought a system along with Shriners Children's Hospital in the USA. And then finally, Location-based Entertainment segment revenues at GBP 0.4 million was slower than we would have liked, but does simply reflect the pace of customer rollouts of existing optical-based systems. On a more positive note, our partner Sandbox VR is now operating in 46 locations in multiple countries. Sandbox also recently announced its partnering with the Apparel Group and plans on opening 25 new locations across the UAE, Kingdom of Saudi Arabia, Qatar, Kuwait, Bahrain and Oman by 2028. Elsewhere, our partner, Immersive Gamebox, is trailing experiences across the Merlin Entertainment [ estate ] following multi-million pound and multi-territory agreement we spoke about at the prelims. And in the case of Dreamscape, their rollout is pending the commercial launch of our markerless solution. So in this market there is still a lot of promise, but as yet is not quite reflected in the reported numbers. And finally, in terms of the segmental analysis, smart manufacturing a.k.a. IVS, performed as expected, delivering, as I said earlier, GBP 1.8 million revenues. So the focus so far has been on revenue and order book. So next I will explain the P&L. Turning to the adjusted PBT for continuing operations, I prepared the following bridge. So on the left hand side you've got last year's adjusted PBT of GBP 4.5 million, which has been restated to adjust out our loss-making IMeasureU operations in New Zealand that have been discontinued in the first half. Moving across well, the FX effects year-on-year were relatively negligible and from a gross margin perspective we generated an additional GBP 1.9 million, which I trimmed by around GBP 0.1 million, just to reflect a very slightly lower gross margin percentage arising from the mix of direct and indirect revenues year-on-year. One of the big changes compared to last year is the cost base, which is up GBP 2.8 million due to our planned organic investments described in the 5-year plan. It also includes investment in Vicon sales and marketing activity and a more general increase in property costs, including our new facility in [ Berkeley ] near Oxford. In addition, there are some general inflationary increases as well. And of course, we now have the addition of the IVS cost base. As I mentioned earlier, R&D capital -- capitalization was up compared to last year by GBP 0.6 million. So that's helped. And also amortization was slightly lower, adding another GBP 0.1 million. And finally, our interest received year-on-year adds another GBP 0.7 million. So adding all of those various puts and takes together, we arrive at the reported adjusted PBT of GBP 4 million, which is very much in line with expectations for the year. So in summary, the strong reported revenue performance is backed up by a GBP 3 million paying order book going into the second half and a healthy sales pipeline that I explained earlier. The adjusted PBT performance is in line with achieving expectations for the year, and our cash position remains strong at GBP 54.8 million. In this regard, we expect to deploy through the cash and are actively pursuing a number of M&A opportunities in smart manufacturing that will build out our presence in this market. We are having sensible conversations around valuation, and there are numbers on the table. These opportunities are established and viable businesses, which will deliver further earnings attrition in the future. So in summary, the business is in a good place to move forward into the second half and onward with the 5-year plan. Back to you, Imogen.

Great. Thank you, David. Just to let you guys know on the call that this next section has a number of videos. As the videos play, the camera views will disappear, my audio will stay on. And then when we go back to slides, the cameras will come back on again. So don't worry, if you see me disappearing and coming back in, it's deliberate. So let's move on to the strategic progress section of the presentation. So our 5-year plan, as a reminder, is to increase revenues 2.5x and deliver an adjusted profit before tax margin of 15% exiting the fiscal year '26, which ends at the end of September of 2026. Okay. So I could have the first video, please, [ Alexandre ]? So since the plan was announced in 2021, we sold Yotta to Causeway for GBP 52 million cash in May 2022, which is an over 6x ARR and premium valuation, providing a very strong cash balance to pursue our growth ambitions. In 2022, July, we launched Vicon's new premium camera Valkyrie to stimulate organic growth and upgrades, and then pioneered our new Markerless technology platform in the summer of 2023. And then finally, in November of 2023, we acquired Industrial Vision Systems and earnings enhancing acquisition in smart manufacturing. Okay, can we come out of that? Thank you. Back to the slide for a moment. So Oxford Metrics consist of 2 main companies now by Vicon Motion Systems, a motion capture company specializing in the capture and analysis of humans, animals and robots in Life Sciences, Visual Effects, Engineering and Location-based Entertainment markets. We have an Oxford HQ and offices around the world, including Harwell, which is where IVS, Industrial Vision Systems are based. They are a smart vision company established in 2000, working in quality and compliance for smart manufacturing. And indeed, Vicon are celebrating our 40th anniversary as a business this year. Turning to our customer base, we enjoy across the 5 markets we serve major sportswear manufacturers, automotive, aviation, aerospace companies, research institutes, hospitals, global tech brands, medical device manufacturers, games companies, visual effects houses and location-based entertainment providers, these are just some of the customers that we can talk about on this slide. Okay, moving to the next video please. [Presentation]

The study here is in collaboration with the ECB to research cricket biomechanics to enhance player performance and reduce injuries. Satellite Applications Catapult uses motion capture to help them simulate orbital environments to prepare for servicing, refueling and assembly operations in space. Their in-orbit service and manufacturing yard seen here is a room used to simulate orbital environments using robots. The Vicon system is used for close proximity operations, including flying information in orbit. The Vicon system tracks exactly where the robots are positioned in the environment and Vicon has been bringing realism to video games characters for over 20 years. Here's the BAFTA award-winning Baldur's Gate 3 and Game of the Year. In Far Cry 6, Giancarlo Esposito from Breaking Bad. It's one of the main characters seen here. Electronic Arts FC 24 captured Cristiano Ronaldo scene here and other famous footballers to add realism to the game. Here's another very famous Hollywood actor, Keanu Reeves, being mocapped as Johnny Silverhand in Cyberpunk 2077, a forthcoming [ ION Lands' ] game coming out this year. And finally, Hogwarts Legacy, a 24 million sale game and counting, using Vicon mocap to power the characters there. Move to the next slide, please. Moving to IVS, smart [ workbench ] application using a mixed AR headset smart tooling machine vision, a 7-axis collaborative robot and automation. This combination provides a step-by-step process for a technician to follow. The instructions are being projected into his eyes through the HoloLens glasses, and the workbench provides traceability and stores data. This robot cell is an automotive application. The 2 robots are fitted with IVS vision technologies and move through a preprogrammed movement pattern to take multiple images of the automotive assembly. These images are compared with the source CAD by the direct -- the factory information system to ensure the assembly is correct. Vision technology is essential for guiding robots in the evolution of manufacturing automation. The solution shown here is provided to a leading manufacturer of touchscreen displays. From welding small screens to large format multi touch units, the vision system observes minute details and delivers precise automated computations. This in-process inspection solution was provided to a bearings manufacturer to conduct comprehensive compliance checks throughout the production cycle to improve product quality. The vision technology scans the surface of every bearing to detect faults and continuous development of this AI-based inspection enables the system to spot patterns and anomalies in surface deviation. In this example, IVS technology is being used by a Blue Chip global medical device manufacturer in the manufacture and inspection of implantable orthopaedic joint parts. The trays are loaded with knee replacement parts with the capability to load and inspect multiple trays without operator intervention, and automatically conduct this critical quality inspection. Okay, can we go back to the slides please? So let's talk about the traditional motion capture market, a.k.a. Vicon. This slide shows our closest competitor's most recently reported or estimated revenues compared to Vicon's fiscal year '23 performance of GBP 44.2 million. With a sum of over GBP 130 million and a CAGR of around 10%, Vicon's performance was only 34% of this market. So even in our well-established business, we still see plenty of growth opportunities to capitalize upon. As David referred to earlier in the presentation, we have made investment in our sales and marketing machines. In our sales investment, we have analysed our geographic performance and looked at particular areas of the world where our distribution network perhaps needs support through direct salespeople. We started in India and the Eastern Europe and are extending that to Latin America and the Middle East, presently. We've also added a sales enablement team to our sales machine. This is a presales function, so that we are the best we possibly can be in competitive situations. And then conversely, customer success is all around customer retention, cross sell and upsell. And as David mentioned, we were successful in gaining the UKCA mark for Valkyrie, a 2-year project and the only camera in mocap to have this mark. And then, excitingly, in marketing investment, we now have a growth marketing engine, so we have a pre-pipeline pipeline in the business. So a lead generation, SDR, MQL, SQL and marketing campaigns. Can we move to the next video please? So moving to the Markerless Technology that we unveiled in 2023, what's the progress? So after 40 years of tracking markets, why is Markerless important development for Vicon. Well, Markerless is a complementary technology to the market-based tracking, and it uses machine learning to improve. We believe most of Vicon's 10,000 existing customers will add this modality to their existing systems. Markerless enables new markets to use motion capture where markers are not desirable. For example, in LBE, the Dreamscape partnership needs a market solution to be economically and operationally viable. Moving to the next video, please. This is from the recent Capital Markets Day. And what you see here is the Dreamscape LBE pod before you put your head-mounted display on, and go off and have an amazing 3D experience. So as we work towards commercializing Markerless Vicon has now partnered with 7 cornerstone customers to further develop and test the technology. These partners include some of the leading brands in game and film and have been selected for their groundbreaking innovations in animation, visual effects and virtual production. We intend to be the gold standard in markerless as we are in marker-based, winning more market share alongside our existing customer base and building a quality software and services revenue stream on top of the marker-based business moving into fiscal year '25. Back to the slides, thank you. So, moving to the opportunity in Markerless, for completeness, we show a TAM which includes both 2D and 3D markets, but we'll focus primarily on the 3D opportunity as the 2D market is lower tech and more consumer focused. This TAM shows the main markets we are aiming for with our first 2 launches, and both show CAGR in excess of 15%, which is higher than the marker based CAGR. So our largest immediate opportunities are in VR, LBE and visual effects, which aligns with our strategy. Can we go to the next video please? I'd like to explain how we use machine learning in our markerless tracking technology. So firstly, let's be clear that machine learning is an application of AI, and we've been using AI in Vicon for over 10 years now. It's the process of using a mathematical model or models of data to help a computer learn without direct instruction. This enables a computer system to continue learning and improving on its own based on experience, and this is how Vicon uses it in our markerless project. What you see here is the same set of data on the left and the right. On the left, the data is being processed through version 0.6, and on the right through version 0.16. So it's the same source file in both. And as you can see, in the left-hand video, the character to the far right is not tracking and solving very successfully at all. But in the right-hand video, the problem is resolved. How? We use our machine learning algorithms to continually train the model, whilst adding to our growing vision model data set. The outcome being improvements in accuracy and realism. Can you go back to the slides please? So, turning to market opportunities in smart manufacturing inspection. In machine vision inspection, we will concentrate on 2 submarkets that IVS do serve which Contact Lens Inspection and Automated Metrology for Implantable Orthopaedic Medical Devices which you saw in one of the videos earlier. In Contact Lens Inspection, the TAM includes manual, semi-automatic and fully-automatic inspection technologies with a CAGR of around 4.5%. The manual market being almost half of the TAM, so a significant future opportunity with a technology move to semi- and fully-automated inspection over time. There are definite acquisition opportunities in this area. The competitors in the market include the companies that you can see on the right. And why do IVS win? Because they're a focused provider of tailored smart industry specific solutions. They are specialists, not generalists. And then turning to Medical Devices. Another very, very large TAM, where parts inspection is not a choice and currently uses many different measurement modalities including touch probes and coordinate measurement machines. But in medical device inspection, for I hope, very obvious reasons, noncontact measurement is preferred. So the case to move to vision inspection is well understood. The TAM shown here include dental, upper and lower extremity implants and spinal implants. New total knee replacement surgery in the U.S. alone is over 800,000 procedures, followed closely behind by hip replacement at 540,000 per annum. And the competitors shown here are very, very large organizations, whereas who mainly use probe and CMM measurement and are not directly selling to the end user. We have chosen to show the U.K., Ireland and U.S. TAMs here, because these are where IVS is currently focused, and these show a considerable growth opportunity by both organic and inorganic activity. Our investment in the commercial activities of IVS is to grow sales, it's well underway with a focus on the U.S. medical device market and contact lens opportunity. Can we move to the next video please? So, turning to our quadrants of growth. So firstly, we must build a synergistic group. It's important we build a coherent, scalable and cost manageable group. The motion capture quadrant is the Vicon core marker-based business which we will grow through investment in sales, customer success, sales enablement, product and marketing efforts. Markerless is our new technology platform, which will be commercialized through the motion capture division to existing and new markets. In smart manufacturing, we will grow IVS and also seek to acquire other businesses in this space to grow this division. And then, the power up is anything organic or inorganic that can accelerate the other 3 quadrants, making sure that we keep an open mind around technology development in this space. Next video, please? So how will we get there? The progress on our 5-year plan is that we started in fiscal year '21, where we backed [ Yotta ] out of the figures and we received GBP 27.5 million from the Vicon marker-based business. Nothing from Markerless and nothing from Smart Manufacturing as we exit '26. At GBP 70 million, we expect around GBP 52 million to come from the core Vicon business. If we look back and project forward with a CAGR of 10%, we feel that, that number is well within reach. Markerless being a reality, with revenue starting from fiscal year '25, we expect to build a business of around GBP 8 million and hoping to add a subscription model to that business. And then in smart manufacturing to build a division of around GBP 10 million. Next video, please? And moving to M&A. Our goal is to add earnings enhancing acquisitions with a target size shown here of between GBP 3 million and GBP 9 million of revenues, with a focus on measurement in smart manufacturing, with the aim of building out from IVS to develop a meaningful presence in this space. To that end, we are actively working on several opportunities that will deliver on this goal. We have discovered there is a broad and diverse range of opportunities in this area that fit well. And when we look at opportunities, we use trusted criteria. They should have rich IP, good cash flow metrics and be earnings accretive, have good to high revenue visibility or a strong position in its niche. They must have able management teams that will be a good cultural fit and have a latent growth opportunity which could benefit from being part of Oxford Metrics. Okay. Can we come out of the videos please? Just scoot forward. So, in conclusion, our outlook is that we have resources allocated for our targeted M&A program. IVS is performing well and opening up smart manufacturing opportunities. The 7 cornerstone customers secured for our Markerless rollout. Zoe Fox will be appointed Group CFO on the 1st July. We have over 90% visibility of orders for H2 with a growing sales pipeline from our Motion Capture division. So we're well placed to deliver on our full-year market expectations. Thank you.

Perfect. Imogen, David, thank you very much for your presentation. [Operator Instructions] But just while the company take a few moments to read the questions that have been submitted today, 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 by your investor dashboard. As you can see, we have received a number of questions throughout today's presentation. And Imogen, perhaps I'd just ask you to read out those questions and give responses where it's appropriate to do so. I'll pick up from you both at the end.

Thank you. Right. I think, David, are you going to take the first one?

Yes. Well, there's a number of questions in here that are kind of similar, so the answer to this one will help some of the others. I mean, a common theme, there's several questions around the fact that we have the cash, should we be considering a share buyback or tender offer or special dividends and so forth? So I'd just like to cover that off. I mean, what we said at the Capital Markets Day was that right now, the M&A opportunity in front of us in basic terms, can more than justify the cash that we have on the balance sheet. So our first priority is to deploy that cash. And we are seeking those targets that Imo talked about from GBP 3 million to GBP 9 million, and on the assumption that we do achieve a few of those in the immediate short term, then the division will grow in size and then we'll be in a position to perhaps take on slightly more ambitious targets, going forward. The only comfort I can offer to some of the questions is that the topic of cash and whether we should return it is a topic that is considered at every single Board meeting. But right now, the M&A side more than justifies it. So on the first question, there's also an interesting one about, given that we're cash rich, potential sellers of their businesses will always be asking the top price? Well, they can ask. But that's not going to change the rigorous assessment that we make of an acquisition. And I would go as far as to say, yes, cash or the price is important, but I think people sell to you for many other reasons as well; along with cultural fit, the future, the logic and so forth. So, as I said, they can ask for the top price, but, yes, they won't get it just because we've got cash. Do you want me to take the second one as well, Imo?

Yes, if you like.