Servcorp Limited (SRV) Earnings Call Transcript & Summary

So what are we talking about today? We've got a subject? Somebody showed a couple of videos. Can we do that, seeing we've got an audience. Do I need a -- I've got a microphone, everything. Wow. Okay. Are we ready?

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Okay. This shows security. And now we're just going to show you -- because we're starting to do a few videos. There are a few videos we're doing that shows how powerful our IT systems are. And we've got so many amazing people in Servcorp across 23 countries, but we're starting to do a couple of videos on the amazing people. The first one actually just comes out of Sydney, and it's just a young lady that is in North Sydney. Can we show that?

My name is [ Maybelle Valerio ]. I'm from Sydney, Australia. I am the manager here at Servcorp, North Sydney, and I've been the manager here for just over a year and 3 months. Every day is different here at Servcorp. Every day is a new challenge, whether it's from team management, client and account management, new sales, setting up new offices, and that's what I like most about the variety of your day and what can happen. There are so many benefits that a lot of people might not know when they do come on board to Servcorp, whether it's the technology on your phone where we can contact you wherever you want [indiscernible] global IT network and all of our IT who are in-house. There are so many things and I just think the main thing is the team support. So we're an extension to your business. And when I meet clients and tell them that they can use the secretary at this time to help with any [indiscernible] during a busy time, they're really surprised that we offer so many different things to assist with their business. And the best thing as well is seeing a start-up come to me and start with maybe a virtual office, just having their [indiscernible] address. And then as their team grows, then they start coming in and they now want a desk and then turns into 10 to 20 office spaces. And so I really enjoy seeing the growth of the business from the beginning and being a part of that journey. And Servcorp can definitely assist with every part of it. I think the biggest learning from the pandemic was seeing how people pivoted their business with working from home. We were getting so many people wanting a virtual office to run their business anywhere they were safely and securely. We also had, in terms of changes in the industry, a lot of huge companies now with their staff of over 100, 200 now or working from home or they just wanted a hybrid solution where they still have a place that they can go to and work from on a part-time basis as well. So we offer everything here. So that's why I really love Servcorp. There is a solution, whether you're working from home, whether you need to get out in-house full time, whether you just want a desk, office, anything. We can support you. So I really believe in what we have to offer and it's another reason why I love working here.

I'm just very grateful -- I'm very grateful person. So I love coming here to not just work, but when you hear and you see people [indiscernible] when they do that or when I have some new clients and they're really admiring the feed out, the office, the views, the balcony as well as the team I work with. I just think, yes, I'm just very lucky. There's another thing that people don't know about Servcorp is that they see...

Well. So it seems like every 6 months I have to sit here. But if we're starting to look at what happens every 6 months. For every 6 months for 22 years, we paid a dividend. And so we have a market cap this morning of $334 million, take off the $110 million we've got in unencumbered cash. That comes in at $224 million. And over 22 years, we've paid out $328 million in dividends. So we paid out the $328 million. We've still about $110 million in the bank and we've got a business that is probably worth more than the current mark -- it costs a lot more to replace it at the current market cap. So if you take $110 million added to the $328 million that we paid in dividends, you get $438 million, which is payouts or putting more cash in the bank of about $20 million a year since the day we started, which is not brilliant, but it's not a disaster. So this year, we're projecting free cash of $50 million, we should hit that. And that's about 20% of our current market cap. So I look at our global business, and I look at that young lady in North Sydney and I think, well, she's one of 700, 800 people that control 50,000 clients across the globe. And we talk about our per dollar income per square meter, it's not because we get more for our shelf space or we charge more. We don't. We just support more remote workers because of this IT stuff that we've been developing over the years than anybody else. And so that if you look at that website, it says that's just a shot of the Japanese main web page. It says a receptionist will answer your calls. I mean, small business relies a lot on perception. And a lot of these guys will buy themselves a Ferrari to park in their drive so that their neighbors, their business partners, everybody else has the perception that they're successful. Well, a really successful person has his own receptionist, which is costing about $5,000 a month and Servcorp costs less than $200 and you've got a receptionist that answers your phone. You've got a secretarial team which is there. You've got 100 IT guys spattered across the globe that can take care of your IT problems. And all you have to do is dial *1 on your telephone and you get IT help. And you've got a great address for your letterheads and business cards. And when we built Servcorp, it was so my little business, which was quite successful before we had [indiscernible] service offices, could have a great address. And I needed to sublet space, which I did, which is why we were the first guys to do this in the middle of the sea. But that will cost, I mean, I have to execute a lease signed for 4 years, personally guaranteed. And so that if you take the rent here at this moment, $160,000, $170,000 a month, a couple of million dollars a year [indiscernible] $800,000 deposit to pay the first month's rent, figured out our receptionists to today's money for $5,000. These guys get a receptionist granting their funds and address they can work from home. And so long as they check out [indiscernible] small businesses, a custom about $250 to $300 a month. We have competition, but everybody takes it short term -- everybody takes it short term. The communication systems and a Cisco telephone is just a dumb piece of f****** hardware unless it's connected. It sounds like he is sick sometimes when I call him, you think he's going to die and sometimes I hope for the day, I mean how low, $100. Again, I wonder on whole alone. I did get half of those dividends [indiscernible]. And they are not very smart with money. We -- shut up, Mr. Chairman, the -- so we spent $100 million [indiscernible] on building the network in Sky. And so all of that is now [indiscernible]. So that everybody off takes a short time. We work industrial so most of these co-working places don't even have a switchboard. Let alone all the IT solutions that you need to put in to operate a new business center. Regus build their business center at an average of just under GBP 600,000, call it, $1 million. It costs us without any exaggeration more than $500,000 to put the IT solutions into every floor before we start to build it. And then if you look at the last call that we've done, the one in [indiscernible] called in Riyadh -- in Saudi, it's costing $6 million to build it, $1 million rent -- sorry, we've got to pay 1 year's rent in advance, which is over $1 million. And the $6 million includes all the IT stuff and all the things we need to put into a smart Servcorp operation. The return on investment in some of these places is not so good, which is why we don't sign any now before we really seriously look at them and put the feasibility. David, if you're listening, that's why I need to [indiscernible] prices. And it happens in a month. So the [indiscernible] will be our sixth, I think, in Riyadh. And so we're pretty large in that city. And so nobody else runs the team. Nobody else runs the IT solutions. And they all impact costs, whereas I think that if you're a small business, you do -- it's great if you got somebody to answer your phone. I mean I get absolutely amazed. I was transferring $1 million the other day. And I got a call from [indiscernible] person on mobile phone. I said I'm not going to give you all my -- so you've got to identify some [indiscernible] I say. No. But if you're talking about [indiscernible] transfer, I'm not going to give you any numbers over the phone. I'm not going to give you the questions you ask me, tick my bonafide [indiscernible] to make sure who I am [indiscernible] mother's maiden name you wish that correct. And so the problem is that the people that work from home on the mobile phone can be working for anybody. They've got the client base on the bloody mobile phone. Their clients ring that number. And when they move jobs, they take the clients with them. Well, we have 1 phone, so that even if you work within the Servcorp environment, your desk phone goes on your mobile phone, so [indiscernible]. You take it home. You've got security on that phone. When you make a telephone call, it [indiscernible] it up. So you know who had the guys called on the corporate front, the same way you [indiscernible]. The receptionist is going to answer it and put it through if he is working remotely. And your clients are given a commercial number, not a mobile number. So that's great for hybrid, but it's also great for the small corporation. So go and tell those people to shut up, they've got to work to Servcorp, please. Nicely. I keep remembering on motivating the team. So -- and then I look at -- well, I don't know when you think about it. Doesn't [indiscernible] a little bit scared and I was watching [indiscernible] on TV and the little guys that work around him, were all hiding in the corner. Anyway, it seems to work if you want to take out for another country. I lost the track again. That's old age. So actually, as I look to do all the stuff and read all these articles on hybrids, I don't think anybody's got the better idea what a hybrid office is and I would say that some of the people from KPMG and family, Ernst & Young, and the amount of trouble they go to, to change the desk, to move the telephones to allow 3 people to use 1 desk because if you think about hybrid, it's only the effective -- financially effective way to use your space. And if you understand hybrid and you have -- I wrote down is, hybrid space cannot operate effectively without a specifically designed software platform that should allow normal commercial enterprises to halve this base cost, it's fact. But to develop that software, it takes a lot of years, and we have -- must have thrown over the years, I don't know, the number I don't know exactly. I have $30 million we've thrown in the bin as we've developed our software solutions. The new solution that's being rolled out in Japan looks good, sounds good, works. And by July, we'll be able to provision desk so that a person will be able to contact their corporation remotely. They will be able to book the desk that they normally use so that if there's 3 people using the same desk, they know who's going to use them on that day. Telephones would be set up. They'll be on their VLAN. They'll have their own independent WiFi identification number. And so that will allow the corporations the ability to maximize the square meter usage cost effectively. Now everybody wants to make it look pretty, feel cool. But at the end of the day, if it's not cost effective, it's not going to work. And if you don't have a platform you put under it, it won't work. And you need your phone to work too. So I've talked very briefly about the phones, but it happens to be a critical part because if you give a team member or your client contacts and your clients only have a calling on mobile phone, then whenever that person leaves the team, you will lose the business. So it's kind of a rollercoaster. It's pretty interesting. I mean, our revenue was at $30 million a month when covering it and it dropped from $30 million to $20 million in pretty smart timing. So we cut our costs. Given [indiscernible] most of crisis, we closed a lot of centers in The U.S. I might add The U.S. is now making money, not a lot, makes about the lunch, but that's better than losing $9 million a year. So it's no longer a disaster, and I can see some future there finally. And so our revenue dropped to $20 million. That was a bit of a shock. And in some places like the Middle East it dropped more than 30%. And when it drops more than 30%, it's got to get back up 50% to get you back to where you're starting from. The -- now it's back up about 15%. So it's a $23 million and rising. It's -- but it's not an even nice. And I keep hearing all of these guys talk about the future of the hybrid workspace. There is a massive future. There is no doubt about that. But I'm not sure that [indiscernible] working is yet moving. And when you look at their results, WeWork was talking about the improved -- improvement. It was last year that, I mean, lost 3 million a day. And [indiscernible] lost 1 million quite a day. That -- and what happened this year, I don't know. But if this -- I can turn that around and turn it into profits, which I doubt, I would be very surprised. So the only operator that has any site that's profitable is circled. And now we're 6% to 8% off the bottom. And I think we should continue to slowly improve. If I look at the verticals for this financial year [indiscernible], even though co-working [indiscernible] a bit. We haven't dropped in revenue. In fact, it's slowly increasing. We haven't dropped in numbers of clients and in the offices, we're out pretty stable. That's all. We're not [indiscernible] burning. We're not [indiscernible]. We're stable. The biggest signal problem has moved from -- and the amazing thing about the world is if you talk to 5 or 10 countries today, which I do, if every single country thinks that they have handled the coronavirus pandemic better than any other country, all that's happened is you've got the same problem and you've got 20 different solutions, and none of them have done it correctly. So the world is a little bit topsy turvy and we probably aren't in the right business in this planet. But I am more than heartened by what I see because the more I see the competitors and the people that are opening space, the less likely they are to be there for the long term. And then I look at the building owners because there is a lot of building owners now putting out [indiscernible] because I think it works. But one, they don't have a software; two, they're only in their own buildings; three, they all copied WeWork. Now I thought -- I'd say f****** gain the respect. Why would you to want to copy somebody, I would not. Take someone who was losing $3 million a day and copy their formula. I mean that sounds brilliant. So I would like to congratulate Dexus and there are a few others, but they're one that just happened to come to mind, Mitsubishi [indiscernible] several of my landlords. But it doesn't work, you need geographic spread. You need income to be able to market it. You need to understand churn because you are going to lose 60% of your clients if you're good. You need to understand that this is an industry and the barrier to entry is knowledge, be about picking the sites, the amount of money you spend at the beginning and your ability to help small businesses grow to live businesses. And every big business starts to build business. If you don't provide a service that allows them to grow, then you shouldn't be in this business. And most of the building owners I'm looking at it because they say, "Hey, we can charge price as much, we can cap it up at a multiple of 30 or 40." So one way to go. We raised the cap value of our building. We do all of those wonderful things, the only problem is they lose money. And it's a bit like the rent freeze, they give -- They have been improved their base rent, they just cheat on the cap value. But that's [indiscernible]. Okay. I'm finished. Can we go for a break? I bought a bottle of grapevine because my ex-Chairman wanted me to. No questions?

We have questions.

You got questions. Okay. Ask.

Yes. So we have [indiscernible]. Financial results throughout the pandemic and the [indiscernible] resilience, yet the share price does not seem elevated, particularly in recent months. As the company considers taking advantage of what seems a relatively low share price to launch a further small buyback given its strong cash balance.

Yes and no. Yes, I've thought about it, but no, I'm not going to do a buyback.

We have more questions from Brendan from Harrington Partners. We'll go through really quick because he has a lot of questions.

It's got a lot of quick -- but I have [indiscernible] a lot of shares. If he gets 1 question for each 100,000 I have gotten far away.

Can you explain the significance of the new hybrid software model?

I already did.

Is this intellectual property going to be utilized...

Yes. We will sell it to other people. And that was the question I know he's going to ask. The answer is that we would like to house it in the cloud and license it at a very low cost on a per head basis because it now costs around $2,000 ahead for each of the major corporations to house somebody in an office, we reckon we can bring it back to between 800 and 1,000 for them and let's call it 1,000 after full license fees. So we can make a massive difference with our software. But I've got to get to a point where I want to share it, and I've got to be sure that it's secure. So it can't be reversing [indiscernible].

Okay. Next question, why continue to hold so much net cash when the resilience of Servcorp's free cash flow has been comprehensively tested over the previous 24 months, and underlying operating conditions appear to be improving, not implement a...

Well, I tell you something. When you get to this age, you've got to have something to snuggle up to at night and I love the $100 million. And so there's 100 billion reasons why I get a good night sleep. Secondly, I -- our hindsight is wonderful. So that's a great question for somebody that can look in hindsight because the day the pandemic hit, everybody will say, "Hey, what a smart guy and that he's got $100 million in the bank and he's not going to pop with it so Servcorp should survive." And thirdly, if you want to really expand it and one day, we do want to expand in the software cost of [indiscernible] when you want money, [indiscernible] wants to give it to you. So I'd rather have it so that I can use it myself. Fourthly, and last, if we did pay out, we need about $1 million in free float because we're in 15 currencies across 23 countries, and we don't run over [indiscernible]. So -- and then if we do pay it out, it just gives me another headache in my private companies. Well, what else?

Next question. How much annualized capital investment is required to maintain the earnings potential of current portfolio? And how much do you expect to spend on growth initiatives in the next coming 12 months?

Got no idea. The market will tell me what we should spend. That's why I've got $100 million so that I can make the decisions when I see the opportunities.

Another question for me. What is the plan for Anton succession?

We need the CFO. And so I think Anton is a great guy, and we wish him well and I understand that he will stay close to Servcorp. And he and I talk today, and he was at the Board meeting yesterday. Thoughtfully, we had a few differences, but he has confidence and he will have our support, and I hope we'll have his.

Question from [indiscernible]. How is this hybrid workspace different from existing flexible service office products? How much percent of capacity is expected to be on the hybrid product in 1 year's time. Will some existing enterprise customers -- will some existing enterprise customers switch to lower-cost hybrid offering, which reduces Servcorp's revenue. Meantime, Servcorp attracts new enterprise customers that more than offset this reduction.

That's what's like asking what the price of gold is going to be next year, and well, I wish I knew. So the expectation for hybrid is that it will take up 30% of all office space. My personal view is that the value if the software works, we will be in the software and we [indiscernible] and we've been working on it for a long time. My personal experience has been over the years, but with software, there's many a slip twixt the cup and lip so that we may fall, not in Servcorp, because I think it will drive Servcorp at the last hurdle, but I hope not. From a Servcorp perspective, our hybrid just gives us the ability to manage for each of us about 10 remote workers. And within the environment where we have a space, we can give people their own operational space at a reasonable price so that they can actually maintain a team 2x to 3x the normal size. So that if you look at this space, you could use the desk 3x, and you can do it effectively because I've already explained the way how the software works. And we're going to do a test in Sydney, and it will be the first place we'll test it, and then we'll decide. So I would think at this time next year we'll have some of it. Any other questions? I think I have -- maybe else any questions? So like bring in an auction. [indiscernible] cash?

[indiscernible].

Somebody's giving $300 [indiscernible] I switch this off.