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

Good morning, ladies and gentlemen, 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 during today's meeting. However, the company can review all questions and will publish any responses on the platform in due course. Before we begin, we'd like to submit the following poll, and please do give that your kind attention. I'd now like to hand over to CEO, Imogen O’Connor. Good morning.

Good morning, everybody, and thank you for taking the time to join us for our interim results '24-'25. I'm Imogen O’Connor, CEO; and Zoe Fox, our CFO, seated here. Next slide, please. So today, we'll take you through an overview of how our H1 has gone from an operational and execution perspective. I'll then hand over to Zoe, who will take you through the financials. Back to me for a divisional update on the Motion Capture and Smart Manufacturing divisions. I'll then cover off where we're sitting currently on the AI opportunity and market dynamics. Closing off with some strategy thoughts and an outlook section as well. So next slide, please. This is our safe harbor statement. This will be available to read on our website when the presentation is put up there later on. But this obviously is a standard safe harbor statement. So please do take the time to read it in the following -- when you look at the presentation. So okay, Oxford Metrics. Who are we? Well, we are a smart sensing and software group with a global reach, which was done through 8 offices and over 40 distributors that you can see located there on the world map. The group consists of 3 main companies, Vicon, Motion Systems, IVS and the Sempre Group. We use vision and other sensing technologies to derive value insights into real-world applications with a combination of hardware and software products. The original founding company was started in „ and we floated on AIM in 2001. We've won a few awards along the way, and have over 10,000 customers globally. Next slide, please. If you attended our prelims Investor Meet Company meeting, we talked about our intention for the year ahead, and I'd like to take you through some of the things that we've managed to tick off the list during that period of time. In our Motion Capture division, we were delighted finally to launch our Markerless technology in March at the Game Developer Conference in San Francisco. It's the best launch the company has ever done in its history, very proud of it. And the initial feedback continues to be extremely positive with a series of global demos underway. We've done demos in 3 days here in the United Kingdom, 2 days in the United States and a 3-day event in Tokyo to over 250 prospects for the technology. And furthermore, in March, Dreamscape Immersive, our location-based VR partner, their latest experience alongside Audemars Piguet, the watch manufacturer, is already using Vicon's Markerless technology. We also won new contracts and new customers for our marker-based systems across all main markets and geographies. And then post period end, building that Markerless opportunity pipeline with some revenues expected in fiscal year '25. We launched our first of the H2 products that we signaled at the prelims, which is the Active Crown. This is an accessory used on virtual production stages, and we have further product launches in the pipeline for the rest of H2. Moving to Smart Manufacturing. We secured multiple contracts across aerospace, medical, pharma and auto. We strengthened the division with two acquisitions, the first in October last year of the Sempre Group and then post period end, Amber Optix Limited. We appointed our divisional Managing Director to focus and grow that division, strengthened our product portfolios and have good H2 visibility with a building order book and pipeline beyond the current financial year. Next slide, please. So I'll now hand you over to Zoe to take you through the financial reports. Zoe?

Good morning, everybody, and thank you for joining us. As Imogen said, over the next few slides, I will take you through the financial performance for the first half of financial year '25. You may remember that H1 2024 benefited from a very large and unusual and not expected to repeat opening order book of circa GBP 11 million. This has given us a strong comparative on the half. We are seeing revenues of GBP 20.1 million compared to last year of GBP 23.5 million. Overall, the financials are in line with our management expectations and our internal targets, although they are against, as I said, that strong comparative. The revenue decline just reflects that expected slower start to the year because of that large order book being fulfilled in the [indiscernible]. Gross margin remained solid at 65.5%, demonstrating our continued strength and resilience in our core business lines in Motion Capture and our IVS company. The margin is slightly down on last year, which was 66.8%. This decline is due to the growth in our Smart Manufacturing division, which the new acquisition of Sempre purchased in October of last year and has a different business model. It is more a distribution and sales model and therefore, has slightly lower margins. On the profitability, our adjusted EBIT is a negative GBP 400,000 versus last year of GBP 3 million. Again, reflecting that drop in volume on sales in Motion Capture and also being offset with some of the cost savings that we implemented at the beginning of the financial year. Whilst the strong performance -- whilst it is offset against the strong performance of H1 of last year, the profitability of the business is consistent with our anticipated phasing of revenues and profit through the first half of the year. Importantly, our balance sheet remains robust. We're just shy of GBP 40 million at the end of the period, providing us with significant headroom and flexibility to support our ongoing investment in growth, our M&A strategy and navigate any short-term variability in our demand. We also maintain commitment to shareholders to return -- to shareholders returns for that progressive dividend policy, paying out GBP 4.2 million in the period versus prior year of GBP 3.6 million. We saw a good generation of cash in the half despite that lower profitability with the cash on an operational basis up to GBP 2.8 million from previous year of GBP 2.2 million. This is really driven by stronger working capital management within the business. We've reduced our inventory levels and working to optimize our inventory in the business. In summary, whilst H1 performance is below prior year, prior year was that strong comparative. Encouragingly, we are seeing our gross margins remain high. Financial performance is in line with our management expectations and good cash generation in the period. Next slide, please. Just before I take you through the revenues by markets in more detail, I just thought it would be useful to talk about that H1, H2 revenue weighting in a little bit more detail and looking at our historics. So, if you take this graph and look at the left-hand side, we can see pre-COVID in 2018 and 2019. Our H1 revenues were about mid-40% of the total full year revenue. We consider this the more normalized revenue weighting for the business. You then have the COVID years of lots of disruption. And as we move to the right of the graph, that is really when we started to see the supply chain challenges that followed COVID that many other businesses also suffered with certain components being very sourced. What that led to was difficulty in supply to customers and the building of that order book I talked about on the previous slide, meaning that as we exited financial year '23 and into financial year '24, we have GBP 11 million of an order book, which generated 56% of our revenues last year. Next slide, please. So when you're looking at the three different markets, which we have in the Motion Capture division, the Engineering and Entertainment and Life Sciences. We do need to remember that large GBP 11 million order book fulfillment in the previous year's numbers. So engineering down 59% on previous year. That was also compounded by the company having the largest ever order in the history of the company, also being fulfilled in H1 financial year '24. Moving more on to this year, we are seeing in all of our territories, excluding the U.S., an increase on prior year. And we're starting to see -- we've had some good upgrades on the Valkyrie system, one of those being in one of the top U.K. universities. The U.S. territory across our Engineering and Life Sciences has slowed down. We are seeing an impact and the softening of the sales due to the funding cuts and policy change in the U.S. So when we're looking at the Life Sciences, that's also been impacted by that as well as the large order book with that decline of 31% from previous year. We have, however, in H1 seen new business and new customers. We have a group of hospitals based in Brazil who are now purchasing Valkyrie systems. But as I said, we just remain quite cautious about the U.S. with some delays and cancellations in pipeline opportunities impacted by that academic funding change. When we move into the entertainment, we are seeing an increase in all territories, including the U.S. And again, we're seeing some systems and upgrades coming through in different areas outside the U.S. as well. Smart Manufacturing, we've had a good start to building out that division. We've purchased -- there's been 2 acquisitions, one in the period, so one in October, as I previously talked about, which is Sempre and then one just post period in April, which is a smaller business that has been hived up into the IVS business, which you may remember was bought a couple of years ago, that also sits within Smart Manufacturing. Sempre has had GBP 3.6 million of sales in the first half, and that is in line and tracking in line with where we expect. IVS is a little bit down. It is 3% down on previous year. This is due to contract delays and customer delays. The business is contracts over a long period of time, and there was a couple of slippages on deliveries at the end of the year, some of those customer driven. But all of those contracts, which did slip have now been invoiced and recognized in H2. So overall, this half reflects a decline, but it is against a very strong comparative overall. Next slide, please. Just taking on our profitability and looking at those key drivers from that adjusted EBIT of GBP 3 million last year to the loss of GBP 400,000 for this year. The main driver of that is that sales volume reduction at GBP 2.6 million on a profit point of view. We do have some increase in gross margins. That is the IVS and the Motion Capture business, which I talked about on the first slide. We have got a reduction in -- sorry, an increase in sales support and marketing of GBP 900,000. That is predominantly the Sempre acquisition, but it is also where we have continued investing in more customer-facing operations within the businesses. R&D is a reduction of GBP 300,000 year-on-year, reflecting more efficient product development, but also the [indiscernible] R&D costs within the period. We've capitalized GBP 1.8 million versus previous year of GBP 1.4 million. That is Markerless a product, which we launched in March and also development on some new products that are due for release in H2. Admin costs are up on year-on-year, again, reflecting that acquisition, but also seeing some offset there of those cost efficiencies that -- and cost cuts that we made at the start of the year. And then finally, that last block is GBP 400,000, which is FX and others. FX is circa GBP 300,000 of that, and that brings us to that loss of GBP 400,000 for the year. In summary, while the first half reflects that decline in profitability, it is driven mainly from that volume. We have maintained the margin discipline during the period. We've continued investing in strategic areas and have benefited from that -- those early cost actions. As a business, we continue to acutely focus on our cost savings and efficiencies across the business. Next slide, please. Now turning to our capital allocation and the priorities. We do continue to follow a disciplined capital allocation framework that balances investment in the growth and returning value to shareholders. Following that recent acquisition of Sempre, we have GBP 39.9 million on the balance sheet, which gives us significant flexibility to execute on our strategy whilst preserving that balance sheet strength. We have continued to invest in our products and R&D. That's about 12% of revenues and really does reflect our ongoing commitment to innovation and maintaining our technology leadership across our core markets. We've got a GBP 20 million M&A program in place. We are actively assessing strategic opportunities that are complementary to our core business, earnings accretive and aligned with our long-term vision. And Imogen will talk more to this in slides that follow. Our M&A program is concentrating more around our Smart Manufacturing division currently. At the same time, we remain debt-free. This is a key part of our current financial resilience. And in line with our commitment to shareholder returns, we've continued that progressive dividend policy at 3.25p. And we've also executed on a GBP 6 million share buyback at the start of the financial year, which we've announced a GBP 4 million extension last week on. In summary, our capital allocation approach remains focused on supporting our growth, maintaining our financial strength and delivering a sustainable return for the shareholders. Thank you, and I'll hand you back to Imogen.

Okay. Great. So the first part of this section is just to introduce Vicon to those of you who perhaps are new to Oxford Metrics. For those who are very familiar with Vicon, I'm sorry, but there's some new case studies in there, but if you could move the slide on, please. So Motion Capture division consists of Vicon Motion Systems, established in '84. We have specialized camera and integrated software, which is all our own, operating in 3 main markets. And our customer type split is generally in Life Sciences and Engineering, more academic than commercial. But in entertainment, it kind of flips the other way, 70-30. We are direct in the U.K., Ireland and North America and then indirect through a team of over 45 territory distributors worldwide. We can see that we enjoy over 80% repeat business annually. And the little graphic that you can see at the bottom is the generations of cameras that we've made over the years, starting at the left of 1984, so right back at the very, very beginning, right through to the right-hand side, which is the Valkyrie, which is our latest premier camera. Next slide, please. We have a very -- we enjoy a very strong customer base with some very famous names on there. Those are just some of the ones we can actually talk about. But that's something where we see repeat business. You can see we've got games, visual effects customers, household name, blue-chip technology providers, health providers, universities and research institutes and hospitals. Next slide, please. And I just wanted to just break down the main vertical markets and use cases, entertainment. We're generally used in content creation for games and vTubing, visual effects used in episodic TV, films and so forth and also location-based entertainment, which interactive experiences, e-learning, luxury goods training, interactive gaming and so forth. In life sciences, which was the originating market for that entire technology, we're still used in the base use case, which is clinical data analysis, biomechanics sport research and more laterally as we got more commercial customers, product design, sports manufacturers, Nike, adidas and so forth. And then in engineering, it's much more back into the research mode, but product design and testing in the commercial areas, robots and drones, control system design, validation, what we call human factors engineering where a human interacts with the machine or robots. Next slide, please. Okay. So this video will actually show you a few of those use cases and customers that I've just talked to in the previous 2 slides. [Presentation]

Great. Okay. So the case study here that you could see in the video there of the lady running is the Elite Marathon Runner, Malindi Elmore. So Saucony shoes, high-performance running shoes have been using Vicon to help this in product design. Next slide, please. But now we have markerless. So we spent 41 years tracking markers and now we don't need them anymore. Well, that's not strictly true, but we'll get to that. Just go back in time a little bit. We have been working on this project in a very fledgling form since 2017 and then really started to invest in the team to build it from 2022 onwards. The R&D brains that you need to design and build a markerless technology, which is machine learning are slightly different than those that do the marker-based technology. So we have been talking about the markerless program for a while. We entered the beta program with 10 customers. Some of the names that you can logo, you can see there on the right. And this culmination was -- of this program ended at the GDC conference in March in San Francisco, where we launched the first version of this technology. This is a technology that will be iterated over time and its capabilities will grow. Next slide, please. We like to -- we prefer our customers to tell the story about how they use our products and how they add value to them rather than ourselves. So I'll let this video play through, Dimension Studios tell you how they're using it. [Presentation]

Okay, and there is this little case study in the deck to around how Dimension are using the markerless solution. Next slide, please. What we achieved in the last 6 months and what's our 6- to 12-month plan for Vicon in terms of the capitalization of growth. So we launched the markerless technology with modest revenues expected. We're building that pipeline of opportunities for the markerless technology and conducting these white glove demos. We obviously secured new marker-based contracts and launched a visual effects product post period end with more to come. So obviously, we -- we were able to kick off the divisional Managing Director hire for the Smart Manufacturing division in the first half, but not yet in the Vicon area. So that's still work to be done. We have talked in the past about the fact we've implemented more of the RevOps discipline within the business. That includes hunters or sales development representatives and more on-the-ground salespeople globally. So we will expand that program because the fledgling program has worked very, very well for us. We need to expand our capability in markerless quickly. Markerless is a rapidly evolving technology. It's machine learning. You train models quickly, you update, you improve. We need to expand its capability in entertainment, but in parallel, then start to address the life sciences market who can also take advantage of the markerless technology, and I will talk to how this will be done later in the deck. But we mustn't forget our market-based customers. And in fact, our markerless and marker-based solutions work together. They don't work separately. We can operate them separately, if you want, but they all work on the same platform. So we need to improve -- continue to improve our capabilities in the market-based world as well. And then operationally, across the whole of this time, continuing that inventory optimization, which obviously helps with the working capital and cash generation, constant process and ERP improvements and that continued focus on the cost management, the cost base of the business. Next slide, please. So moving to Smart Manufacturing. Next slide, please. So we now have two companies in the group with the post period end little company was obviously hived up into IVS at the point of acquisition. So we acquired IVS in 2023. They're a vision system IP-based business and in Sempre '24, much more of a sales commercial metrology business. The logos that you can see in the middle are the customers that the companies enjoy. We have over 75% repeat business across the division as well. And to the right, some of the typical use cases that this division talks to and the products and technologies have solutions for. Next slide, please. So here's a video of an IVS contact lens inspection machine. So you can see how the technology kind of works, and I'll talk to you a little bit about the level of value and where this sits once the video ends. [Presentation]

Thank you. Next slide, please. So in the deck, you have that video turned into a case study to read about later. This is all about inspecting contact lenses at speed for micron level faults and defects completely hands off and automated in the production line. Next slide, please. This is more on the medical device side. This is actually a Sempre case study. Again, critical tolerance inspections, adding value to the machine that they've sold with fixtures -- custom fixtures programming, validation, installation and training. This is, again, a precision measurement to improve cycle times and increase throughput on this particular component. Next slide, please. So overall, this is where our technologies are adding value to manufacturing. And what we have to start with is what is the arbiter here, and this is compliance. Our companies, our technologies address highly regulated markets where this inspection and validation is not a choice. They must do it. This is -- so we're in medical, we're in pharma, it's customer patient safety, health and safety, legal, purity and so on and so forth. So how we then address that is our technologies help with precision. And by precision, I mean impeccable appearance. There are standards for things like even the paracetamol that you buy from the supermarket as a visual standard. Precision tolerances in engineering, as you can imagine, aerospace, automotive and so forth, very, very important. So this is then feeding into the quality control that's required. If you can do sample to 100% testing and then automate it, that speeds up your operation. You can automate repetitive processes. There still are processes where human beings are used to inspect these parts, but it's a repetitive and boring process that, you can feed human error into it. So these solutions take the place of that. One of the interesting things is in operational side is a growing market of traceability, and that is actually image archiving. So if you are a manufacturer in automotive or aerospace, for example, and your component leaves the factory, it's very common for that component to be photographed from many angles to prove the condition of the component before it leaves the factory. And there is a definite need for that archiving and retrieval to be done in an automated way. And somewhere, where we're just starting to look at and be involved in is on the software side. Again, talking about that data collection, storage and orchestration, but data really helps drive decision-making back in the production line. So perhaps the yield of the part going through is not at the level it should be. So the data will then tell you, you have a repeatable problem, let's go back in the production line and find what it is correct it, the yield goes up, the yield goes up, the profitability of the component goes up. But there's a lot of opportunity in that software side, guidance systems for training operators and operator support and then, of course, using AI, not only in the vision solution, but in advanced analytics. Next slide, please. So how are we building this division together from its constituent components. So what we're doing is we're going to turn projects to products. And this is a strategy that we've employed over the history of the group because that's how Vicon started in 1984. Vicon was not a product company. It was a project company. And over time, it became a product company. The same with 2d3, which was a company that was built from internal IP and then exited to Boeing in situ for cash, $25 million in cash in 2014. And the same with Yotta, which was the last sale we made, that started as a project business, became a product business as it matured and then was exited. So what we're saying here is that at the moment, there's a lot of projects in this division, and we want to turn them into products because you then get a nonlinear growth. In a project-based company, you get more projects, you just tend to need more people to fulfill them and project deliveries are subject to time slippage, delays in contracts. What we want to be able to do is optimize that order to revenue cycle by turning one of the best of these projects that have the best chance in the market to products. If we take the contact lens inspection as an example, IVS have already gone through this. So they identified in sort of 2014, '15 in the contact lens work they were doing that there was a product here. So when we talk about IVS securing contact lens business, which we did with an RNS in March, that's not a project, that's a product. So they just build the same thing. So what we want to do is identify more of those and build more products to get that nonlinear growth. We've identified two further examples here, just to talk about there is more than that, the high-performance bore inspection systems in vehicles. And then in defense, which, of course, is getting a lot of funding, inspection of nonconforming parts. Next slide, please. So again, this is what we achieved in the first half with those contracts and the 2 acquisitions and the appointment of the new MD to lead and grow the division. So over time, you'll start to see probably we'll not be talking about Sempre and IVS as 2 different things. There could be brand names, but in terms of the actual company, we'll have teams of sales, teams of operation, team in engineering and so on and so forth. So we're drawing the strengths of both organizations together. We need to define those sales strategies around the products that we're offering. We're also already cross-selling and upselling between the two. So the Sempre sales organization are already proposing and quoting IVS solutions into their customers. We need to be able to deliver the projects that we do have in a reliable and visible way, whilst generating these best chance products. And then operationally, you've got to be able to deliver all these things. So build that operation engine and deliver those efficient order to revenue cycles for the visibility. And as we're building this nonlinear growth energy and scaling this business, from an M&A perspective, we want to focus now potentially on customers who have already gone through this journey. So less of what we've done and maybe slightly different, slightly bigger, more mature from an operational and product perspective in the M&A program that we're executing upon. Next slide, please. So now I'd like to talk to AI. It's an important part of the business. Let's start with the market dynamics around generative AI and Vicon in content creation specifically because I feel this is where we get the most questions around, how do you view GenAI as a potential threat to the technology. So if we start to the left, this is a classic output from generative AI tool and used to quickly articulate vision. Perhaps in the past, this would have been a pen and paper storyboard, pencil and paper, in fact. But now there's an ability to perhaps get something slightly more rich creatively from a GenAI tool. And this slide is how our customers are using things too as well, not just our view of it. So the idea is you -- you storyboard something quickly in GenAI, but that GenAI has no -- you can't ask that character in that image there to touch their toes or spin around on the spot or do a forward role or hook someone else or get 3 people in the space. That part of the technology does not quite yet exist. So you then move to the Vicon markerless solution, because it's a friction-free environment as our customer explained in the video. It's very quick to iterate. Eventually, it's effectively a 3-dimensional storyboard. But then if you're really going to go to the high-value production content, you really need to start to be moving still to the right-hand side because the markerless technologies are also not able to currently replicate the level of control, nuance, direction, multiple characters that a performance capture stage, which is what you can see on the right-hand side can do. So you straddle the two with a hybrid system. So this is -- with Vicon allows our customers to use a markerless and marker-based system together. So you can use markerless to help you with tricky situations as the markerless technology iterates and get trained and gets better and better and better. So this is how GenAI sits in the content creation space with Vicon technology. Next slide, please. But we also have to address the fact that there's a lot of these tools out there. There's motion creation tools. There's even GitHub repos with code that you can just download and lots of start-ups. This quality is improving. But again, that complexity control and nuance is lacking. We're now in the point of the first litigation around copyright concerns with Disney and Universal suing MidJourney AI for scraping images from them and movements from copyrighted images. But the opportunities for us are that we continue to enhance our technology with AI. We've been using AI since 2013 in the market-based solution. We also feel that you have to look at GenAI as it's coming. And if you don't embrace it and use it and work with it, that's probably the wrong call. So we have a view that there's a combination of mocap and AI-generated motion could be the way forward there. And we have a lot of data at Vicon. So we could leverage that and create our own motion generation tool that could be used with generative AI. That's kind of forward-looking idea, but something that we are looking into with my head of ML. Next slide, please. But then moving to the other markets. I mean, we're using AI in them, but I'm really talking about GenAI. In our engineering markets, as you saw from that drone tracking, it's -- they require the highest accuracy and lowest latency because in effect, they're using our technology to make control loops. So it's going to be very, very difficult for a GenAI product to do that, but it does help with the data analysis and the simulations that go alongside the measurement part. And then in Life Sciences, while human movement is an individual, very complex biological process to replicate that is a very significant technical challenge. And we, therefore, believe that deterministic systems, i.e., markers and specialized AI, i.e., markerless, will still be needed, but then the AI can be used for diagnosis assistant number crunching and simulation. And then in smart manufacturing, of course, you still have to measure the actual part in situ. We already use AI to enhance the vision solution. So the contact lens video that you saw where we were detecting those very, very tiny faults in those contact lenses does use AI to assist with that. Again, the AI enhances the integration, the downstream data analysis and the bringing together of the data. So we see that it's a kind of complementary technology to those markets. Next slide, please. So turning to strategy. So our focus is that we want to be able to report in every 6 months and set out a all of what we want to achieve and then report back in the 6-month period. So our Motion Capture division to be a core business to be profitable and reliably cash generative with an agile execution of the markerless opportunity with that pivot into Life Sciences. So recall that we talked a little bit about the commercial model for markerless being having an ARR element. That is now live and is part of the commercial model that we are quoting through that pipeline of opportunities that I talked about earlier. We want to optimize that working capital by continuing to focus on core costs and inventory reduction. In Smart Manufacturing, as discussed, we want to show that growth engine to scale, show clear progress of projects to products, show clear progress on upsell and cross-sell of opportunities on the current sector with that optimized revenue cycle with that selective M&A, and that's to accelerate the ambition with one to two deals. And then at the top level, we are formulating the new group 3-year plan, which we expect to launch at our full year results later in the year. Next slide, please. Next slide, please. So closing out with our outlook. That's it. So to close out, we have an H2 trading that started in line with previous years. We have a typical motion capture pipeline across majority of our geographies. Talking to the U.S. policy change relating to academic funding, we enjoy usually a seasonal uptick in activity in September. What we are signaling here is that we are uncertain that seasonality will happen this year due to the U.S. policy change. We have the markerless global demos underway and expected to release those modest revenues into '25 rolling into '26. Our Smart Manufacturing division has good visibility, a building order book and a pipeline that extends beyond our current fiscal year. Long-term drivers of our business remain strong. We've announced our additional GBP 4 million extension of the buyback to close out and anticipate a full year adjusted EBIT to be in line with Board expectations. So thank you very much, and then we'll just move to the questions now.