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

Good morning, and welcome to the Oxford Metrics plc preliminary results 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 the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Imogen O'Connor. Good morning.

Good morning, everyone, and thank you, Alessandro. So welcome to Oxford Metrics Fiscal Year '24 Preliminary Results. And thank you for taking the time today to join us at this IMC meeting. Firstly, for those of you who are new to Oxford Metrics, I will take you through who we are and what we do in the applications and markets we are in. Zoe, our CFO, will then take you through the financials and the factors influencing the performance. And then it's back to me for an update on where we are today, our progress and how we're well positioned to capitalize on the growth opportunities ahead. And then lastly, our outlook and priorities for fiscal year '25. I'll take it as read that you've read this safe harbor statement. Thank you. So Oxford Metrics is a global smart sensing and software business that uses vision and other sensing technologies to derive insights into real-world applications. We're listed on the AIM market in April 2001, originally established in 1984 as a management buyout from Oxford Instruments. Oxford Metrics has several subsidiaries, Vicon Motion Systems, the original business that was established in 1984, our motion capture company; and lately, Industrial Vision Systems, a smart manufacturing company; and more recently post period end, we acquired the Sempre Group to strengthen our smart manufacturing offering. And here are just some of our customers, the first 3 columns, mainly the Vicon customers that we've had for over 40 years. And then lately, the smart manufacturing companies that have joined our portfolio since the acquisition of IVS and Sempre. Across the markets we serve, customers include our major sportswear manufacturers, automotive, aviation and aerospace companies, research institutes, hospitals, global tech brands, medical device manufacturers, games companies, digital effects, houses and location-based entertainment providers. And some recent customer stories include: Saucony Shoes. The Vicon technology has been used to improve sports performance and reduce injury since the early 1990s. The Saucony Human Performance and Innovation Lab uses their Vicon system to analyze and improve athlete performance and their shoe development with Olympians such as elite marathon runner, Malindi Elmore. PING is one of the world's leading golf club manufacturers and has been using motion capture for over 14 years to help improve golfers' performance. Vicon technology aids the club fitting process by carrying out a full analysis of the golf swing at high speed, looking at how the golfer interacts with the club. Worcester Polytechnic Institute in the United States is helping to unlock the next wave of research innovation in small autonomous drones and robots. The robotics engineering department used their Vicon system to track tiny robots who are learning to navigate complex environments at speed and scale to tackle real-world challenges from pollination to autonomous search and rescue. Next slide. Moving to IVS. This is a well-placed inspection system delivered by IVS. The system here is automatically checking for inclusions, cracks, gray level, colored particulates and surface inspection in the final inspection process of blood sampling well plates. In this example, each individual tablet, and by tablet we mean a pain killer, it's being inspected by 8 cameras on all sides to confirm it is complete, ensuring there are no chips, surface damage, inclusions or other defects. Any issues are automatically captured and the faulty tablet is rejected ensuring right first-time products. Next slide, please. And now I'd like to introduce Sempre, our post-period-end acquisition strengthening our smart manufacturing offering. The Sempre Group, are metrology specialists who sell a portfolio of products to help manufacturers with measurement, lean efficiency and quality control. Using a range of sensing technologies, software and services, Sempre improve customers' production processes, yields and efficiency. They provide customized solutions in the automotive, aerospace, precision engineering and medical device markets. I will take you through how Sempre and IVS work together a little later in the presentation. Okay. I will now hand over to Zoe to take us through the financials and factors influencing the performance.

Good morning, everybody, and thank you for joining us. On next slide, you'll see the high-level financials. And then we will go through the revenue split by market and geographical distribution. So you can see the trends year-on-year and over a longer period of time as well. Just looking at the financial headlines for the business. The group had a very strong H1, starting the year with a large order book of GBP 11.5 million, which was utilized through in the first half of the year. We start to see a growing pipeline. And as we move to the end of the year through the last couple of months of the year, we started to see that globally customers were exercising more caution. Purchasing decisions were taking longer and the academic market slowdown across the U.K., North America and Europe with some funding delays. That resulted in a GBP 41.5 million revenue. That's about 6% down on last year and a gross profit of GBP 27.6 million. Gross margins stayed resilient through the year and actually increased year-on-year by 1.6%. Now that is reflecting the cost of goods returning back to more normalized costs with -- following the supply chain constraints for the previous years, there were higher price components that came out of scarce components that were purchased. They've all now being utilized, so we've returned back to a more normalized cost base. In addition, we also managed to increase some customer pricing over the year and some price increases went through. So that gives us a good margin of just 67%, just shy of 67%. statutory PBT is obviously lower sales at GBP 2.8 million and the adjusted PBT is at GBP 3.7 million versus prior year of GBP 7.5 million. Now the items that go through on the adjusted level are amortization for acquisitions, share-based payment and M&A acquisition costs. So they are all on a like-for-like basis of previous year's adjusted PBT as well. Earnings per share is down to GBP 2.96. The balance sheet remains resilient with a large cash balance of just over GBP 50 million. Capitalization of R&D in the year was GBP 3.1 million, that is up GBP 1 million on the previous year, reflecting that GBP 2 million of that number is market [indiscernible] so that's new technology that gets launched later in financial year '25. The balance of that capitalization costs, there's other products that will come through in financial year '25 as well to add growth into the business. Inventory at half year was at GBP 9 million. So there's been lots of work around inventory to bring that number down to GBP 7.7 million, and we will continue looking at working capital and our inventory to optimize through financial year '25. We've remained with a progressive dividend policy increasing it by 18% to GBP 3.25. So just taking you through that profit number in a little bit more detail, working across some left to right from the screen. You've got the adjusted PBT of GBP 7.5 million the previous year, working through to the GBP 3.7 million of this year. Obviously, that reduction in that sales volume that we've just seen of that 6% down giving us a sales volume, profit decreased GBP 1.5 million. We see that GBP 0.4 million increase due to the gross margin increase. Operational costs, they did increase year-on-year. GBP 2 million of that though is associated to the IVS operating cost. That's the new acquisition made November 2023. And then we've got GBP 1.6 million additional operating costs. That can be broke down into GBP 0.8 million relating to our new facilities in Oxford for markerless. GBP 300,000 was for the new IT system, that's the new ERP system to help improve efficiencies within the business. And as it's a client-based system, it is expensed rather than capitalized. There was also some additional increase for inventory provision of about GBP 300,000 as well. So -- and then we have the increase in the profitability because of additional R&D capitalization, GBP 700,000 impact from FX, that's dominantly U.S. dollar to sterling. And then with the high cash balance, we've received more interest with the higher interest rates that were in last year.

Okay. Thanks, Zoe. So what I'd like to take you through now is the sort of recent history of Vicon, put some context around the recent results. If we look at this slide here, and the fiscal year '17, '18 and '19, the Vicon business was trading under normal operating, normal trading patterns and customer buying behaviors. Our general lead time for our products, somewhere between ex stock and it's an outlier 10 weeks, but ex stock 4, 6 weeks or so. So customers buying behavior was on a fairly quick cycle at that time. Then as we entered into COVID in 2020, you can see the contraction there, and that was very much affected by the U.S. going into contraction very quickly after lockdown. And at that point, we weren't seeing any particular supply chain issues. However, during '21 to '23, Vicon was severely affected by supply chain challenges. And therefore, we had to ask for the first time for our customers to change their buying behaviors and effectively ask them to get into a queue. We were unable to confirm delivery dates in the vast majority of cases. And in order for them to secure their products down the line, they did enter into this with us and placed orders. And the effect of this was the group built a significant order book for the first time in its history at its peak, GBP 24 million (sic) [GBP 44 million] which was then followed the following month by landing the largest order in the group's history of just under $7 million. So during that period of time, we were fulfilling orders as we were receiving components from the field. And in a lot of cases, those components were at a premium price. And then we come in to '24. The supply chain situation is easing. We have -- still have an order book, and we start to return to the trading patterns observed in '17, '18 and '19, where customers lead times have come down, and we returned to a pipeline operation or an opportunity forecast situation. The other thing to note about the Vicon business is that it's a very Q4-weighted business. And in fact, September historically, over a number of years has proved to contribute significant levels to the year's performance. So the -- this trend of the customer's buying behavior returning to pre-COVID behaviors continued. As we went through H2, we saw coverage of our sales pipeline at the end of the year as we were a inevident in August, but really, those extended buying cycles and pipeline timing shifts and delayed decision-making really developed into September. And then unfortunately, the conversion rate of pipeline into revenue during September was not seen at the required levels to deliver the full year number.

So just taking the revenue numbers, looking at that across our different markets. As you can see there, from an engineering and an entertainment point of view, they were both down on previous years. We were seeing that academic slowdown. I referred to in the previous slide, in the engineering market and it was resulted in about 7% decrease on the year. From an entertainment point of view, that was a larger decrease 73% -- sorry, 23%, impacted by the ongoing slowdown of the global games industry and content creation contraction. We -- from a life sciences point of view, that is really flat year-on-year even though we had that slowdown in particular in the U.S. on the academic front. And the smart manufacturing, our new division. So that had IVS for 11 months in it, GBP 2.9 million of revenue was earned through IVS. The end of the year number was slightly behind where we were expecting, but it's mainly due to customer delays then some orders got pushed out to Q1 of FY '25. I mean one of examples of one of the customers' delay is that the customer just pushed out the delivery in the in-store, it was a Spanish customer and the factory was -- So we are expecting most of those delayed orders to be shipped in Q1. What we're very reassuring with IVS was a healthy order book at the end of the year and the growing pipeline, and we have received a further GBP 1.3 million worth of orders in this financial year-to-date. Splitting the Vicon revenue only, across the geographical destinations, you can see that both U.K. and Europe saw increases year-on-year. U.K. having the largest ever state-of-the-art virtual production studio complex and that order did span both years. And then Europe also having success with the Gran Canaria Studios, one of Europe's largest virtual production stages. When we look at North America and Asia Pacific, both were down year-on-year. North America, 7% down. And Asia Pacific, the large gap at 35% down, predominantly due to the ongoing games contraction. And also 2023 was a very large comparative, which you'll see in more details on the next slide. There was success stories in Asia Pacific, still with the Thailand University upgrade to our new Valkyrie camera. So taking that in data, but looking at it over a longer period of time. So we've looked at it from 2017 to 2024. You can see the purple and pink is that North America and the Asia geography. And as we look across all of those different territories, we did have a positive CAGR over this period, that is from 6% up to about 13%. When we look at the business overall, it's an 8% CAGR over this time period. The one other question we get a lot is around the cash balance at just shy of GBP 47 million as at the end of November. That balance now reflecting the Sempre acquisition and the share buyback being -- the share buyback program was launched in the middle of October and is up to GBP 6 million. To date, we've now expensed that GBP 1.3 million through that, and we would expect that to continue over the next few months, and we do review it regularly. As previously said, we continue our progressive dividend policy with an 18% increase this year. That will cost the business in cash GBP 4.2 million. We'll continue with R&D investment. There will be some further investment in markerless before it's launched and some more new products, all to generate growth in that Vicon business. And then we look at our M&A program, and we've allocated at a minimum GBP 15 million to GBP 20 million to progress through with the M&A. And all of those will ensure that the company remains debt-free at the next period. I joined the business in the 1st of July, and one -- I've worked across the business -- across the divisions. I worked with IVS, worked for Sempre now they're on board, but also across Vicon and the different departments within there and of course, alongside Imogen looking at what costs we can save within the business, how we can be more efficient and how we can get the business more agile and invest into the business for growth. We've executed GBP 1.2 million worth of cost savings in the last probably 6 weeks, maybe 8. Predominantly that is head count, but there is no overheads as well. We are streamlining our operations. We've introduced a new IT system, which will really help with our efficiencies. We're ensuring that we have tied to cost control measures in place. And looking at our working capital, as I already said that inventory was higher at half year. We've got it down for the year-end, and we're looking at how we can just use our working capital more efficient and optimize that inventory. Some of those cost savings, we will reinvest into the business for growth. One of those areas is restructuring with the group. So we have created a smart manufacturing division. And across the Vicon division and the smart manufacturing division, we will change the management structure and restructure so that we have senior managers in those divisions that are really geared to the growth on both. One of the other areas we're looking at is the revenue models. As we've seen on the previous slide, the Vicon business historically is fairly bumpy on occasions and a lot of the business comes in that last quarter. So looking to how we derisk that and different revenue models, both IVS and Sempre Group will provide some of that, but also in markerless, the new technology of markerless launching. That will be partially CapEx deposits upfront, but also moving to that annual recurring revenue over a 3-year period.

So as we scale, we've now with the period end of fiscal year '24, we've reviewed our forecasting methodology also. So we need to make sure that our forecasting is reliable. So as the business scales and we draw more companies into the group for the M&A program, also, we have consistency above all. So we now have a lot of historical performance in phasing, which is valuable data, which we'll continue to use. But the biggest change that we've moved to the evidence-based MEDICC system. That means the salespeople, must evidence why they assert and opportunities at a certain stage and a close date, which gives us a lot more robustness to the forecast. And in addition, lead generation contribution from our growth manufacturing system, which is now fully in place in Vicon. And then very importantly, for the revenue target visibility, the coverage is obviously provided by the invoice sales we have and then the order book or orders in hand and also the visibility from that weighted pipeline from the MEDICC methodology and then very importantly, tracking the conversion rate of opportunity to order out the door. So it was clear that the pre-pandemic historical forecasting method needed to be enhanced, and we have done that already within the business. So Oxford Metrics of today consists now of 2 divisions. The Vicon motion capture company serving those 3 main global markets, where we have the markerless technology ready to launch very soon. And building out this new division in smart manufacturing via IVS and post period end of Sempre. So the Sempre acquisition was enhancing with clear commercial and technical synergies with IVS. And the smart manufacturing division has different customers at different revenue models and markets to the Vicon motion capture division, which is a deliberate move to help to diversify the group's revenues. So with this growing group, as Zoe said, we're in the process of restructuring the management levels to optimize and position for future success. And then the synergies in the smart manufacturing division since bringing Sempre into the group, we're aligning the capabilities of these 2 companies for growth. So in sales, we have more people selling both companies' offerings with dedicated regional resourcing. In products and markets, the expansion of IVS technology to better serve the markets that Sempre has brought into the portfolio. Group Services providing bandwidth and introduction of growth marketing without significant cost increases. And in R&D, we have identified 2 cooperative product opportunities with the IVS IP helping Sempre to win more. And again, in management as part of the group structure already mentioned by Zoe. I'd now like to talk about the opportunity and threat of AI to the technology within the Oxford Metrics Group before we move on to the growth opportunities. And by AI, I mean generative AI, text to video. In this video, I'm showing the latest text to video AI renderings that are possible. And later as the video rolls forward, you'll see Vicon motion capture. And I hope it will be very clear what the difference is. Text to video generative AI tends to be very headshot straightforward, turning left to right, not multiple characters, not complex movement, not things like gymnastics or sports moves. This is now the Vicon section. As you can see, the level of complexity direction, nuance. This is animation and creation at its sort of highest level. This is what Vicon is used for. And text to video, I'll talk a little bit about how we feel it fits into the pipeline in the next slide. But I'm hoping you see from the video that it's the 2 things at the present time look -- and the outputs look very, very different from each other. So how do we see generative AI fitting into the entertainment industry, particularly. To illustrate that video, the video -- the start of the video was at the left-hand side, diamond. And as we went through, we didn't see any markerless in there yet, but towards the end of it, where you saw the Vicon motion capture. That's the diamond -- the dark blue diamond at the very far right. So in the creative process, there's a lot of stuff called ideation or story boarding. And that's where the animator or the creator has an idea. You saw in that video, they even have sketches, the old-fashioned way of doing it, actually drawing the characters out. But generative AI could be used to help speed that process up by just using a text to video tool as we kind of saw in that video. And what we see is that, that will be used very quickly to come up with an idea that then moves along the chain and then uses the Vicon markerless system to then ideate it to a more complex level, more nuance, more intent, more emotion, more like the final product. The thing we need to remember about motion capture is at the stage where the outputs for the games, the films, the TV are being done are usually busy, expensive to use and are not used in the ideation stage at all. So where we see AI fitting is at the beginning of this process and then you advance through the Vicon pipeline as the creative process advances as the project advances. We do keep a very close eye on this technology, and we do talk to our beta program customers in markerless to see how they're using it, and they all see it in the same way as we've discussed here today. And then you have to also talk to the use of generative AI in other markets we serve, certainly life sciences. I think Gen AI may be a difficult to sell there because patients movements are unique to them. And they are related to the underlying pathology and treatment is being prescribed from the motion capture. So I think it will be difficult for a text to video to be able to replace motion capture as it stands today in life sciences, but we do feel it's possible that AI techniques in some form, such as classification, which we use in our IVS IP could be used for classification of movement and movement disorders. So we're positioning the business for future success. Motion capture division, Vicon will be stimulated by new products, and we'll continue to grow through our previous investment in sales, marketing, product to customer success. The commercialization of the markerless technology in the final stages of beta program going well, and we'll be launching the first 2 versions of this technology within fiscal year '25 with revenues to come, including ARR. Our smart manufacturing division continue to work with Sempre and IVS synergies to grow those 2 companies are stronger together, whilst also continuing our M&A program in this exciting and vast area. And then the power up is still there. It's anything that could accelerate the other 3 components to our growth strategy, and that's also keeping an eye on M&A in the -- more in the motion capture space, and there's some interesting IP in the markerless area, particularly. So our outlook. So trading in the first months of the financial year has started in line with expectation and continuation of the normal or the pre-COVID buying patterns seen from our customers in the Vicon business. The group has made clear operational progress in '24, getting markerless ready for launch and establishing our new growth area in smart manufacturing. Our Vicon division has started the year with a good spread of opportunities across all main markets and this pipeline of new products in addition to markerless being released throughout the year. The Vicon pipeline has seen improved activity in the academic area, particularly in the United States. The entertainment market remains mixed at present. Markerless is in its final stages and ready to realize those revenues, and smart manufacturing division has made a strong start to the year with those additional GBP 1.3 million of orders contributing to IVS' healthy order book. Sempre also has a good pipeline, and we are already seeing sales synergies with IVS opportunities. The group enters fiscal '25 with strong balance sheet and a current cash position of just under GBP 47 million, providing us the flexibility to build out our smart manufacturing division by our targeted M&A program as we seek to extend our capabilities in yet more areas and capture more of this important growth market. With a continued focus on cost and efficiency, actively reallocating resources to high-impact areas, we are well positioned to capitalize on the growth opportunities setting the business up for success in 2025 and beyond. Okay. Thank you. That concludes the presentation section of the meeting.

[Operator Instructions] As you can see, we have received a large number of questions throughout today's presentation. Imogen, if I just hand back to you to read out the questions and give response so it's appropriate to do so. I'll pick up from you both at the end.

Yes. Great. Yes, no problem. Just on a quick -- Yes. Alright. Thank you. We have some presubmitted questions, so we'll hit those first. SCI Group, recent acquisition of InspecVision, is this a direct competitor? Well, Sempre actually have the agreement to sell InspecVision in the U.K. and Ireland. And we -- so it's not a direct competitor, it's actually part of the group in terms of Sempre. The acquisition came through, and we made sure that we were communicating with the new owners to ensure everything was going to remaining the same. And thus far, it is. So, so far, no issues there. Will we be affected by the U.S. tariffs? Until we really see the detail of that, we don't know. But we will -- we are already taking action in terms of planning for various scenarios of how that tariff might look. And we obviously have a U.S. operation out there. So we have -- we do have options to be able to mitigate for any U.S. tariffs should they apply to our products and our markets. Why has the administration expense increased by 47%? Zoe?