Servcorp Limited (SRV) Earnings Call Transcript & Summary

Okay. Yes, we're not going to have the presentation if we can't get to Page 3. Is that Page 2? No. This way, [indiscernible] market. So you can work from home because you can work with Servcorp community. So you got to obtain -- you delegate. You can do all your mail and all your stuff. So we’re just running a new campaign, which starts tomorrow in Hong Kong. Coming back, what -- Jesus Christ, not the disclaimer. Well, how about the ransom note? You can use all of our IT solutions, you can delegate to a team, a receptionist could answer your phone and put it through to your mobile. And you can even answer this phone on your mobile with this little thing called Onefone, which has been at Servcorp. So you can conquer the world and work from home. You don't have to see anybody. Keep going. Resilient. Oh wow, who wrote this [ much ]?

[indiscernible]

Wow. Revenue, up 9%, but there is [indiscernible]. I started to look at it, and I looked at the market cap of Victory. And sometimes I wonder about analysts, because after the WeWork experience, as we sat and watched it, and they came over the hill with $10 billion and everybody threw Servcorp stock on the fire and decided that we’d get wiped out. And then we were sort of imploded, but they haven't disappeared. I mean they're still the most searched keyword if somebody wants coworking space. But you can only work within a WeWork location, whereas Servcorp’s designed all these IT solutions. So you can work remotely and have all the power of a multinational and actually not be within the operation. Colin, you're allowed in just because you're a regular. And so if you're looking at that, I had a bit of a look at Regus, and we're about 5x the revenue per square meter they do, and they're 30-plus times our size, 5x our profit. And their market cap is about $6 billion, and our market cap sits at $400 million, except that they've got whack of borrowings and close to AUD 1 billion in goodwill. We've got AUD 12 million in goodwill, no borrowings and $90 million in the bank. So that if you have a look at our market cap, even after somebody said, "Geez, your shares [ around ] today." That's good. So our market cap now could take the cash off as $300 million against their $9 billion, and they have got 5x the free cash. It's interesting. And if you guys -- and I've watched all the analysts work on WeWork. So sometimes I have a few doubts. If you actually look at their balance sheet, it's very similar to Servcorp's. In fact, if you took off the goodwill, they're almost [ line board ]. And so at the same time, I have a look at Victory, and I have never looked at Victory because I don't see Victory or Regus as competition, but I thought I should have a bit of a glance. They’ve got 20 floors finished at Building 9. If we're on the same multiples they are today, we'd be worth $600 million net. They've still got to fill 50% of their space, and they haven't shown yet that they can make a profit. I've had a look at their numbers, but they -- it could be real, but they're pretty gung-ho, if I have a look at them. And then I looked at their revenue and thought, well, our coworking and virtual revenue combined is 2.5x their total revenue for everything, and coworking and virtual takes up about 15% of our space and pays 70% of our rent. And I just wonder, when people look at our numbers, why they always think that we're going to go belly up when we paid 198% of the amount that we've raised back in dividends. We've increased our dividend this year. We've got an old guy running, and I guess that I'm out of fashion, but I've never sold a share, and I keep buying them. And so I look at it all and go, "I'm not a buyer, I’m not a seller. So the share price doesn't make any difference to me." My -- I look in amazement because I wonder about the people that either write about us or look at us and think that we're going to fall over. And if I look at the profits or the free cash, I mean, I must say even I was surprised. I don't know where $5 million or $6 million of the $36 million came from. So unless somebody -- maybe it's typo, but it was more than -- well, maybe it is. I got no bloody idea. But well, it's in the bank, too. And so that if we made a typo, the bank made a typo because when I looked at my bank balance -- [ Moira ] looked at my bank balance and go, "S***! Where did the money go?" This time I looked my bank balance, I went "S***! Where did the money come from?" So you got to look at Servcorp and say it's not as well managed as it could be. I mean, I have a look at our overheads and reckon they're probably $8 million or $9 million. That's probably an exaggeration, $5 million or $6 million too high. And so we haven't really looked at head office in detail yet. The U.S. is going to blow about $9 million. Hong Kong and China, well, we made a rod for our own back there, so they weren't red hot. Yet, we still hit our number, and 40-plus of our operations make about 50% of our profit. So I look at it and go on. We've got that, and then 70% of our rent is covered by 15% of our space. What do I think? I think, well, if I was going to be chief executive, I would like to be chief executive of a company like this that’s cash positive. And the disaster that everybody was predicting, an efficiency disaster, I'd like a little more of it. And so I then look at the business we're in and the coronavirus. I mean good name, hey? Just named after -- it's not a bad beer. It’s okay. But what are we in? We're in remote workers. That's the business we're in. Now we haven't worked out how to take advantage of it yet, but I guess we will, given a bit of time because I have this view that if things are good, you should make a buck. And if things are horrible, you should make a buck. And it's a bit like, if you're losing dough, you finish the dough with a beer. And if you're making a dough, you finish the dough with a beer. So my life is pretty boring, I must say. And I'm traveling too much, so I might fall off the perch, and there might be a young guy that's a bit progressive that might kick this place along, keep going. Our strong balance sheet, well, I guess, you guys can read it. Well, now I looked at WeWork and looked at all the people who put money into it, and we were playing around in the Middle East. Everybody had a look at us and our balance sheet, then they had a look at WeWork and its balance sheet and put their money in WeWork. Keep going. Underlying net profit, $21 million, up 47%, yes, all that sort. I didn't write that. That's bit gung-ho. Keep going. Balance sheet. It's a great moving balance sheet. It's been a great moving balance sheet for 20 years. I mean I got nervous in 1987 in October when we were cash negative. That was probably the only month I’ve been cash negative since then. You guys probably weren't born. Keep going. Satisfactory -- it's actually -- that is bull****. It’s a pretty [ piece-weight ] performance, but it suits where we sit in the market right now. Okay. Keep going. Healthy cash flow. Yes, I agree with that. The cash flow is healthy. I mean it just is. Next. Global footprint. Well, we're not allowed to say that we're going to start expanding. But if we ever get this thing under control so that it makes the money that it should make on the business that we've built with the underlying cash flow that we get from coworking and virtual, we will -- and we'll put a few executives on, and we'll start expanding the footprint. Expanding the footprint, your footprint isn't important. At the end of the day, it's your profitability. And if you look at the mistake we made in the United States is we didn't ever have it profitable. And we kept opening new centers with a management team that was used to not making money and still getting paid wages, and so I haven't any -- got anywhere near fixing that. It's just a mess. But when I go there and, once again, as you analyze Regus, over 50% of its profit -- and I think it's got about 30% of its location comes out of the U.S. And yes, Mark Dixon was smarty [indiscernible] with a whack of losses you can eat up. Anyway, it's still a quandary. And while I should take a knife to it, I can't believe that we can't make it work. And the only reason that we don't make it work will be that our management team is so used to losing money and the world not changing that we're in different time zone. Maybe just it's got to change a whole lot of them, I don't know. I guess they're all listening to this, so they want to quit now and plan. Anyway, we couldn't do any worse, I don't think. Keep going. Coworking. Well, coworking is pretty interesting. And I accept that everybody thinks that Adam Neumann or Mark Dixon invented it. But the first virtual program, which was coworking, you've got to remember that we used to have a gym on top of this joint. And we had bike racks downstairs, which they’ve all put in now nice modern bike racks because they're doing up the building. But we put our own bike rack in. And we had a gym and a swimming pool, and we had a great wine list and a place where you cooked your own steak, which -- or fish, whatever, but you have to do everything yourself. You couldn't make a booking. And it was pretty laid back. And there was a community that I was a member of, and this -- it was Servcorp. And this grew in an evolutionary fashion. I mean when we first started coworking, we always believed that we needed phones, but we didn't have phones to start with. And then we had phones that we'd answer that were on -- down the middle of a board table. And we had one red phone that we'd answer for servicing inquiry line. And maybe the guy's name on the top of the phone, so we'd answer whatever was written on the phone when we answer this phone. And then we [indiscernible] had a paging company, so we'd ring the paging company if we got the message right and the right telephone number. They would page the guy. The guy would ring us. If we still have his message, we'd give him the message. So that was -- and they could come in and work. So that's how coworking first started. And then, of course, we built a nonswitching unit because this business doesn't stay still. It seems as if it does. And then you could only take one call. And then we built first switchboard that had a screen on it that NEC then copied at a later date. And then we built the first voicemail system where you could press 1 and go to your mobile, so you could do it independently. And I had that built in wherever Bill Gates -- where is Bill Gates' home? Something on the West Coast? No? Sorry? Seattle, yes. He's in Seattle, where Starbucks come from. And so I went to Seattle and briefed -- put down a specification of what our dream time was and had just read somewhere that these guys could write software. So I went to Seattle and gave them the spec. They wrote the software. And then Cisco took them over. Once they'd written the software, I had an agreement with them. I was buying the s*** off them for $3,000 for a voicemail system. And Cisco took it over and started charging me USD 50,000. I mean that would have -- I could have bought that joint for $0.5 million. Anyway, so we still use that same voicemail system. And then we evolved as competition came along, and we looked at WeWork. And this [ schmear ] you see here was just one of the first iterations. We've now become a lot more sophisticated in the way we develop our coworking. And our coworking cum virtual packages increased, but we're pretty bloody sloppy at the way we do it and the way we sell it on a monthly basis. One would think if we ever mastered the marketing. In other words, if we can actually fix Servcorp, it should make a bomb. If we ever mastered the marketing, there is almost an untapped market out there. And I reckon we're running at half capacity because, you see, we've got 200,000 extensions in the sky, and 60,000 people come to work in Servcorp each day and 60,000 people go home. And they use about 120,000 of the extensions. So I've got about 80,000 spare capacity. And people don't know that we've got 60,000 clients, and nobody else has mastered it. Nobody -- what is critical is you got somebody to answer your phone because that's one of the biggest complaints of prospective customers that you always go to a voicemail. It says press 1 and go to marketing, and press 2 go to accounts, press 3 and go to Frequent Flyers and blah-blah. And then we've got least-cost routing, which -- where everybody is just an extension in the sky. So you can dial 0011 and then 1, you go to our core manager in the States, and we've written all the software so that we can charge it, the telco rate or telco rate discounted. And we run about $3 million worth of stuff a month. And nobody else does any of that. So there are some fundamental differences, which is why Servcorp has hardly blipped. Now Regus hardly blipped because the market was educated by WeWork, and Mark moved pretty rapidly to follow with -- I think it's called Spaces. And he'd done it pretty well, but he still hasn't worked out. Now when you look at the number of locations, he's got how to leverage off the coworking space. And he probably will, I don't know. And then he's got a wonderful business now, I might add. I mean if we're going to make $60 million to $70 million free cash this year, he's going to make $300 million. So it's not bad. Anything else? You got any more pages? Oh, no, that's enough. We’re at Page 11. I only wanted to show these guys up to Page 8. Anybody got any questions? Good. Meeting closed. That's it, really? That's it. Thanks.

[indiscernible] I was thinking if you can practically [indiscernible] have to turn around project [indiscernible]. I mean email, is that possible?

In the U.S.?

Yes.

Man, almost anything is possible. We've got such great addresses there. And when I go there, and the cost of sale there for us is mindbogglingly high. And we -- the consultants that we've been using -- and I mean all you can do is solve the problem. I haven't got the solution to the problem. I'd tell you, I would actually say, "Well, this is the solution." They are also much larger companies than ours, and so we get charged the bomb and get very little traction. And so we're changing our marketing strategy when we're using -- when buying other keywords, and we're, for the first time, starting to run TV ads. A lot of the things that we do in Japan, we run TV animated ads and we run newspaper ads. And so we have a mix, whereas they were only on the Internet. I think that Marcus had a much more upmarket view of where Servcorp was, which today is probably right. Because funnily enough, the market has changed again. It went really down market. And all of a sudden, people want some sort of privacy, a bit of space. And WeWork is just too tight. I mean 4 square meters, and we're at 12. And with all the people they’ve cut, they're down to 2.5 people per 100 offices. We're at 12. But everything is sort of monetized in the U.S. I keep going there, they speak a different language. And everybody thinks they're the same, and they're not. They're bloody different. And they're bigger, too. And I think the Aussies are pretty big, but they're big. I ordered lamb chops the other night when I was in New York, and I had about 8 bloody chops. I took a photo of it. I thought, how can anybody eat 8 lamb chops, for Christ's sake, and all the other stuff that goes with it. And so they're killing all the animals. No, no, sorry. They're killing my profit, too, on my end.

[indiscernible]

I haven't tried. I mean everybody said to me and looked at Chapter 11, thought about it, talked about it, haven't looked at it in detail in any way. I haven't tried to sell it. I haven't fixed it. And I'm not depressed about it. As a matter of interest, I have a look at it and say, "Well, if it's going to lose $6 million to over $9 million this year in cash, it's going to lose $3 million to $4 million." I'm well ahead of where I would have expected to be on cash. I'm at $65-plus million, it might lose 5% on cash. That's likely. I look at the virus and what it says, what are you going to do? Well, I can't do much. I can look at it. So we can work from home. I can scare the landlords by not paying the rent for a week or 2 and see what I can do. A lot of the -- meant to scare them. I've got no idea what to do.

What's the [indiscernible]

Heading for 80%. And so the key markets, it's way up there. And the key markets, in my view, are the ones where you pay a fair bit to the offices, which is -- so I sort of -- I have a look at the Victory team, where they vary at $60 million, or when at risk, $65 million. And they’ve got 20 floors and 500, 600 offices, maybe 700, and we're about 6,000. We've got 5,000, that bloody thing is full. And we're about 40,000, 50,000 virtuals, and they might have 2 or coworkers, I mean, Servcorp. I'm getting old, I think, the business is probably -- been probably good for us because the churn rate in the business match the international. It's between 60% and 70%. In elsewhere, below 60% now because it's last in, first out. So once a person stays for 2 years, they normally stay 10. Whereas if you're just starting a new business like WeWork or Victory, you got this churn, which is 60% to 70%. And you don't have that -- I mean it's a real cost to sell because like in coworking on virtual, we did first month free. In offices, we give probably 3 months free. That's a massive cost. So if you got 50% of your guys, you're seeing clients are there for long term, 5, 6 years. Then you've got a good underlying stable business. And the one thing about coworking is -- or coworking and virtual means the churn rate is lower than offices. And when there is a downturn, the churn rate doesn't move significantly, although we are showing with the virus that people don't want to be in coworking space with other people, right? So to be able to work remotely sort of plays into our hands. We haven't solved the problem as how to sell it to make real money out of it, but we have a massive advantage over the other players that don't have telephone-answering and all those things so that the guy can print it, operation, work remotely. And so I think we've got -- the answer is, I don't think this coronavirus is going to stop us comfortably, making our numbers issue.

[indiscernible]

Hold on. Well, I disagree with that. I mean I think they're aggressive in London because they've got a lot of space and they've got a lot rent to pay. But they're really aggressive and they were paying the agents 70% of their rental income at one stage with some locations where they didn't have occupancy, and they're still paying 30% to 40%. In Japan, they're unbelievably aggressive. And our occupancy has gone up, not down. There's our new Chairman. He -- that's probably what happened. We've got a new Chairman, buddy. Profits went up. I didn't even see him there. Almost invisible. You all know my [indiscernible], so that's it. He wants to get out of here. He's got a plane to catch. So we're going to excuse him when he's ready to go. I think they're aggressive in -- particularly in Japan, where they've got SoftBank, but they've put a lot of SoftBank guys into their premises. And if you deal with SoftBank and you don't go to WeWork if you -- in shared space, they won't deal with you. So a little aggressive. But look, they make -- they are on back to the hard on the space. I mean, I don't think the WeWork model is a long-term sustainable model. So unless they change, which is going to cost them a lot of dough, they may have some problems, I don't know. I mean it's pretty hard to compare WeWork with Servcorp. I mean we have a bloody market cap of $300 million. These guys have got a market cap of -- they're still saying it's worth $8 billion, but I wouldn't swap.

And on the second half guidance [indiscernible]

Well, I'm glad to say there is somebody out there that can actually model [ 12.2 ] in this field. So that's a bloody good change.

[indiscernible]

Well, sorry?

[indiscernible]

Let's just leave that you can multiply by 2, and it comes out at 42. I'll accept that. That's probably the most sensible thing I've ever heard from an analyst. So we're up there.

Alfred?

Yes?

What do you do to preplan the CapEx with certain [indiscernible] healthy balance sheet? You previously said you will improve any [indiscernible] CapEx program starts. Are you looking to expand and [indiscernible]...