Servcorp Limited (SRV) Earnings Call Transcript & Summary

[Presentation] So that Servcorp app is pretty well ready to roll out, and we don't need to do the presentation today, guys, because if you haven't read the presentation, you shouldn't be here. And the presentation was pretty good, and what happened yesterday doesn't count. It's really what happens next year and the year after and whether you build a sustainable business. And I'll talk a little bit about that, but -- well, I had to put that bloody horse in there because this is the year of the horse and happy New Year. So it will be built, which is Marcus' company built the Servcorp app, which sits on the theme we call the wombat, which I talked about at the last meeting, and it's a really s***** name, but [indiscernible] who worked at Servcorp for about more than 30 years and here at the old data system, and it was produced in Japan. And we've got just New Zealand was the only one I wanted to put up because it doesn't count. And that allows us to see in real time sales revenue. The reason I put New Zealand numbers is that doesn't give anybody any idea what we you do in any country because, I guess, someone had to say New Zealand doesn't count. But if you have a look at it, it's got lousy occupancy. It's made 1 sale. Its revenue and it updates every 15 minutes across all of our countries, every location and it updates to sales and the updates -- just go up a bit. The packages that they've sold 8 -- sorry, they've gained 8 so far this year. They got 920. Sales this month, 34. Lost this month, 19, 15. Well, Servcorp is not the same as everybody else in shared space. And finally, our clients are realizing it. And in the market, to a degree is realizing it. We haven't made the inroads we'd like to make. But if you look at Servcorp, we spent over $100 million over the years putting everything in the cloud. So nobody else in this business has everything in 1 place. We've got 200,000 extensions. Let's have a look at speed test. Same thing, we can actually do a Servcorp speed test in real time. This is on the Servcorp system. We want to -- we maintain it 24 hours a day. And this is -- it actually -- I don't know which in Sydney. I don't know which location, but nevertheless, it doesn't make any difference because if you then have a look at your WiFi speed in a Servcorp location compared to -- let's have a look at competition, keep up the data, like 12x the speed, 12, not 1. In fact, or 2, 12x the speed, and it's not just in 1 country. It's in every single country in every global location. There is a massive difference, which is why we don't use aggregators because aggregators are only interested in the price per square foot, but that's not a serviced office. That's not real co-working, where a guy has the same power that you get from a major corporation. That is just making an arbitrage on space, and there is a massive difference. And so we've got 60,000 clients globally. And all you have to do is charge your clients a small margin for what they get. But a guy using a hot desk can walk into a Servcorp location, he's paying $250 per month. He walks past receptionist that you're paying $5,000 or $6,000 a month. He gets out of the plane in New York. He can go to level 85 in the World Trade Center or any other place. And he can take his Sydney phone with him because we've got everything in the cloud, and we can put it on his iPhone. I mean on his -- one of those funny things all you carry in your hands all day, mobile phones. Hey, it's okay. I'm old. And so you've got to get used to it that I could just [indiscernible] off the f****** perch, but I'm not going to at this moment. So as I start to look at Servcorp and I looked at last year and thought, well, everybody thinks we did a pretty good job. But it started 47 or 48 years ago, I can't remember when in '78 till now, 2 years off 50, 48 years ago. And there have been a lot of people that have worked to develop the system. And so finally, now we actually understand the business we were in. When we first started and nobody was in it. Nobody had -- if anybody had shared space, they haven't formalized that they didn't have a system. They didn't have a training session. They didn't have an IT department, and we've slowly but surely put all of that together, so you've got a sustainable business, where you can confidently predict the future. And so I think the future, as we all know, is going to be driven by AI. And because I think that every job every day, every single thing we do is going to be AI-assisted. The problem with everybody else is that whatever they want to do, they've got to do location at a time. With our -- the way we've built Servcorp with our IT team and every client in 1 place in the cloud, we can use AI effectively. So our AI concierge is going to be developed and put within our Cisco system, and we're working on it right now. And that should be able to answer questions and do a lot of the work. We just showed you -- everybody forgets that we're a sort of big coffee shop in some ways, like we sell $1.3 million a month's worth of coffee, just by the way, because you've got 50,000 or 60,000 guys that drink coffee. That be able to order that from the Servcorp at the same time order all other things that they want to buy, whether they want to print to a printer or whatever they want, book a space in another location. And all of that's finished. The other reason that we're better is that we spend money building these centers. It looks they just pop up out of the ground because we build them and our cash pile continues to grow. But we spend because -- mainly because of the infrastructure, we spend about $4 million on center, whereas Regus spends about AUD 1 million on a center. And some of the centers look great, but they don't have the underlying infrastructure that allows you to run and drive them. Once again, they book to make -- to look good and make an [indiscernible] space, whereas I think that the more and more people in the real world are going to need a team to delegate to, and Servcorp the most expensive part of our operation and the most important part are our teams. And we run 10 people per 100 offices. The industry average is below 2 per 100, which means, sure, you might try and implement a training's team, but you've got nobody to train. I walked into one of our competitors in Japan the other day, and I'm at a reception and some guy came out of his office and said, "where the hell is the receptionist?" In Servcorp, [indiscernible] close them. And he said he's going to lunch. That 1 person on 3 floors, it was 120 offices and they had 1 person working there. Servcorp on that would have between 12 and 14. And in fact, in Australia, we run over 12 people per 100 offices. So we spend the money building them, and we put the infrastructure in. We've got 200,000 extensions in the cloud. Our IT team is about 100 strong and Regus got 4,000 centers, makes less than us, and they've got a little less in a number of -- less than 2 people per 100 offices, but they've got less IT guys that we've gotten, and we've got 100 and heading for 140 centers. So now we're got a system. We've got a training school. You've got to discipline it. And I'm a bit of a prick, I think, sometimes because everybody looks at me as if they want me dead. But we have a discipline that says you come to work because if you provide services to 60,000 people across the globe, the teams that are operating the shared space have got to come to work. They just got to be there. And so we operate a training scheme. We've got a library. We've got all of our videos that train our people. We're now starting on our AI training courses, which will go across the globe, and they should be completed and embraced by July. So I guess I could run around the world. London made a profit last month just, but okay. I'm going to London. Well, I'm going everywhere. Actually, I started to look at my travel schedule for the next 6 months, a bit like a novel. But I tend to open some more centers if I can find the space I like in London. I hate the landlords, but London's a critical city to Servcorp. So it's profitable. Paris just sort of washes its face. You're going to put up with the bureaucracy. I might add the bureaucracy in Australia doesn't help. That ility which is Marcus, my son, right? So we spent $300,000, and I've got ASIC or ACCC or one of those -- I'm not allowed to swear people, who are investigating related party transactions. I didn't think they might continue to use them, but I probably -- well, Greg protect me because he does it so that it's totally kosher. That's a word we're allowed to use. So France, well, Brussels makes money. U.S., it's got so many losses. We pay no tax there. So that's something. Unless there's somebody will work out a way to tax you if you're just making up the losses, but they haven't yet, have they? No, they don't. Japan, runs totally with the systems. It's got 2,000 competitors now between Tokyo and Osaka. We've got 32 centers. I don't think any of them lose money. We just opened a new one in Osaka. We opened 3, closed 3. And then in the second half of the financial year, we'll open 6, and I don't think we'll close any. I think we're open Osaka, which is profitable. We closed Chengdu, which was a bit rugged now. And so France, the U.S., Japan, China, still loses money, not as much as last year, but -- and I can't see too much light at the end of the tunnel. Asia, well, David's still working on that. In the Middle East, light across the Middle East. I think we're -- it's a bit like Japan, we're profitable in every location and we'll open probably 4 new ones in the Middle East. We might even have 7. I did write them down. We'll open 2 in Japan, 3 in Saudi and 1 in Australia in the next 6 months. And I think we've closed pretty well everything we need to close. Our earnings per share this year will be between $0.80 and $0.85, which is not bad. Over the last 5 years, it seems to have gone up 25% per annum compounding, which is faster than the share price. Cash is up. We did all that, 25%, and the cash went up $40 million. It's better than robbing banks. Anybody have any questions?

Alf, let's talk a bit more about the Middle East. What's -- what are the underlying factors that are driving such strength for you in that region?

Basically, it's all [indiscernible] in the Middle East. And while you look at your profits in the Middle East, we've got -- a lot of it comes back to management and how you train them so that -- we've been in the UAE for 25 years. We've been in Japan for 30 years. This seems to take a while to get. And we're bringing Saudi for 15 years. And so everybody says, hey, we're pretty smart investing in Saudi. Well, s***, we invested in Saudi and Iran at the same time. So it's [ one and another ] I guess. So we're not geniuses. We just got a system that works. And when they can't head Khashoggi, a lot of people that were international operators moved out into a lot of places. And a lot of businesses move out -- and banks. I just had a view that every government kills somebody sometime. So we stayed there and continue to expand. I think that if you -- the ruler is great. MBS is great. And he has his people at heart. And in particular, the women, they can vote -- no, they can't vote, just kingdom. If there was a vote, they'd give them the vote. They can wear jeans and T-shirts whereas before they had to be fully dressed. They can drive. They can travel without the eldest male member of the family's permission. They can bank, carry credit cards. So if women a drivers license and a credit card and creates a boom on top of the oil boom because Saudi is now spending all their money improving their own country. And so PIF is really spending the majority of its cash in Saudi whereas it didn't used to, and she had made a difference to the economy. And I think that the -- there is quite a substantial boom. I think it's got between 5 and 10 years to run.

Do you expect that boom to attract new competition?

There's already competition there. There's a lot of -- look, competition comes wherever there's margin. So we should have competition in Japan and in UAE, where the UAE is just as competitive as anywhere else in the world. They don't get it yet. I mean a lot of the competition that we see is building owners. And then you got your Regus who's the major with 4,000. They're not going back and put the infrastructure in. They've got to put everything in the cloud. They can't -- it's almost impossible for them to develop the answer that's Servcorp had for a long time, but it's just taken a while to get the critical mass and to be able to discipline them. I think if you ask me about the competition, I don't see anybody yet. And if somebody -- if you put an enterprise value on Servcorp, said if somebody decided to open in competition to us just in the cities we're in, I would -- enterprise value would be between $1.5 billion and $2 billion. And I don't think they could do it for that. Then they'd have to make it work. That makes it all sound too easy. It's not easy. You've got the currencies. You've got the competition. You've got the people who just want to shop on price. I just think that we happen right now to be ahead of the curve. And I think that, that will probably be maintained and we'll continue to grow at a -- I don't know about 25%, but we'll continue to grow at 5% to 15% a year on a compounding basis, I think.

And just on the U.S. market, given that you're profitable over there now, are you going to go harder on expanding in the U.S. going forward?

Yes. The only reason that we closed the U.S. is we didn't manage the problem.

That's all been fixed. It's fixed now?

Well, I mean, actually, when we opened a few more, I mean it couldn't be just [indiscernible]. But I intend to expand in -- over time in the U.S. And we're continuing to expand in Japan and the U.K. And also, I mentioned before that we're looking at some real estate purchases because we've got the cash flow and we've got the money. And I've done the feasibilities that I'm not going to go into the absolute detail, but it stacks up on our business model so long as we've got at least 30 centers so that we've got the marketing capacity to -- for building. You don't have to do too much if you buy a building to get it to work if -- if use [indiscernible] That's me saying it's beer time. Everybody, they haven't another the problem. I mean we spent $2 million a month on market and we're okay on the Internet, and we've got a trip to sale that's pretty well set on a web page that a landing page that seemed to work. That's taken millions of dollars and lots of years to get to a point where it's sort of operates. This isn't something you're just do in a day. I mean if you look at where Servcorp has come from in the last 5 years, you've got to a critical mass, and it's just -- we've just leveraged it and leverage it up. And anything that isn't making money, if I don't think if it's management , if I think it's the market, then it's dead. If it's management, we'll we put up with it for a while and we'll work it out. I mean there's some things that we've still got to do. That's enough question. You had three questions.

Okay. Online question from Stella Wang. Congrats on the great results. Two questions from me. One was a U.S. question, which you already answered. The main question is there has been strong EBIT margin expansion in the last couple of years, particularly in Europe and Middle East. The mature floor revenue percent for the group do not seem to move much in the meantime. So what's the driving margin expansion?

We closed s***** centers.

Was it partly due to increasing service and communication revenues?

We closed the s***** centers. I guess that's a technical explanation. Now you're not allowed have to ask any more questions.

Where's Susie?

Where's who?

Susie.

I can't understand. Where does this guy come from? He's speaking Arabic. Try again.

Susie.

Susie. Oh, she's [ dead ]. So what happened to Susie -- well, that doesn't mean that we've got the concierge at in beta form. One she had access to the LLMs so that she could answer any questions. So this chick was all things to all people. And so I was a bit excited about it for a while and then the company that produces fell over I don't you guys understand -- bankrupt. So Susie fell off the sky. And we've run off against our profits about $300,000 or $500,000, but there are lots of other avatars, and we've done a lot of work that we are using. The thing that, I guess, our shareholders don't realize is that we don't do anything unless we can own the source codes because we want to be the masters of our own destiny. So that using ility which is Marcus' company. So that's related party transaction, we have source codes, whereas a lot of other guys they never going to give it to you. And so that if you do it, they're going to sell it to somebody else anyway. So we have source codes. And if you remember the wombat, which we just looked at, we run the source codes and we are in that development team's biggest customer in Japan. The avatar will reappear when we can get it so that a client or a person would rather ask questions verbally, whereas now it's faster to do it in text. But we're only down the track. I mean you can make bookings and things. But I guess I could touch on one of the new things we're working on, which is the -- within the -- we've got one standard telephone system globally, and we are the only operator that has, which is all part of this in the cloud. And so that the IT team. It's Daniel Kukucka, who's sitting up here can work on any problems. The concierge, which will be generative and interactive will be installed over time within the voicemail system so that you will be able to ask questions, make bookings. It will run to an LLM. All of this is taking time and a lot of money. And I might add that we're expensing -- we'd be capitalizing very little of it, 50. Well, we should be capitalizing somewhat. We're probably making too much money. I won't even get into that. Once upon a time, we used to capitalize a lot of that stuff. Now we don't capitalize it. So if something like Susie falls out of the heavens, it's already expensed. But we're working on it, and we're expensing most of this stuff as we go, so that when we do come up with a winner and we've got a fair few winners already, it's ours. We own it. We don't need to appreciate it. And is that right? Yes. Look at that, I even know what I'm talking about, maybe. Three more questions.

So Alf, the -- so you've got $47 million NPBIT first half. You've only given guidance for $80 million to $84 million. $47 million times 2 is...

That's great. You guys, if you guys can't multiply by 2, then I give up. That's your problem.

What are the negatives likely -- or I know you're very conservative, but the currency -- is currency a concern? What are the negatives that you see?

The currency has got to be a little bit of concern, not a great concern. I mean -- and I don't know where Greg takes this. But I think that even though we've upgraded, we'll be to the upper end, I think. But I'd rather just roll along in my own comfort zone building a business rather than trying to please you guys and producing a profit next year. I mean Servcorp, I think it's sustainable now, but I want to build a sustainable business that continues to grow at its own pace, and we put a bit of real estate under it so that -- because that just makes it a massive difference if you pick pieces of real estate conservatively, and that doesn't mean that I intend to drop the dividend. I don't. Last question. No? Coming. Going. Thank you, guys.