Spacetalk Limited (SPA) Earnings Call Transcript & Summary

Great. Well, thank you, everybody. Thanks for coming along to the business update we're presenting today. We've got myself, Saurabh, the acting CEO. We've got Georg on the line as well, our Chairman. So basically, we will take you through a presentation, probably 15, 20 minutes, but we'll have plenty of time at the end to our questions as well. So basically, what we're going to talk about today is really the first phase of Spacetalk turnaround. We've delivered record positive cash flow and cash flow growth for the second quarter disclaimer. I'll take that as read. Let me run through what the highlights were. So there has been a $3.3 million improvement in cash compared to the first quarter and that obviously excludes the proceeds of the rights issue that we're currently undertaking. The first time have had a cash flow positive quarter since the third quarter FY '21 and we've increased our cash count by about $400,000 during the quarter. A couple of ways we did that. One of the things we did is we exited 1 of our low product -- our profitable our product line, the budget watch, and I'll talk through that in implications of that today as well. We focus a lot more on our higher-margin business, but a lot of strong growth in that area. We've completed the first round of our cost reduction that has gone down with an annualized production of about $2 million from our cost base. And we've done various things to improve our working capital that I'll talk through today. So as of 31st December, we had a $4.2 million of cash in the bank. That includes the rights issue. We've renegotiated the PURE loan agreement that's with lower interest rates that we've pushed out the payment terms of bonds, and that was as announced in the AGM a couple of months ago. Bigger story here probably the growth in the ARR have increased that by 44% (sic) [ 43% ] in the wearables business. So the total ARR across both wearables and schools is now $7.4 million. And we're trying to replace a phased-out budget watch I mentioned above. So as we phase out the budget watch, are we going to fill up that gap with our revenue from some higher margin businesses, especially around Jumpy, which I'll talk through today. Now going into the future. Look, we're in the final stages of the CEO search, so we hope to announce some people in the market shortly. The first phase of the capital raise is complete and the second phase has been completed by the March 22. And we are looking at that and looking at our capital requirement. I'll talk through that in the presentation. And we have initiated a second phase of cost reduction that will actually beat our cost by another $2 million annualized, taking the total cost production by about $4 million. Let's talk through the probably the greatest thing for me is the cash flow. So we're cash flow positive, as I said, so we're up $400,000 in our bank account. That's an improvement of $3.3 million from the year before -- from the quarter before, which was minus $2.9 million. Cash in the bank is $4.1 million (sic) [ $4.2 million ]. It would have been $3.1 million if we excluded the cap raise of 55% on the quarter and up 15% excluding the cap raise. So obviously, cash balance was previously $2.7 million. The big story here is the ARR. The ARR moved up 43% on the wearable. And that's in your figure to actually look at how many watches are we getting on KIDS fit. Because obviously, to come out of various retailers and if you go in someone buys the watch or if they activate it and they start paying our very subscription fees. The school business is still a very good steady performer, very, very cash flow positive, and that grew by 10% in the quarter, compared to PCP, which was $5.71 million, we're really, really excited about the growth there. The cash flow, just a quick action of how the cash flow has gone over the prior quarter. Quarter 2 is actually traditionally quite a difficult cash flow for because that's the biggest revenue quarter of the year. But what invariably happens is a lot of those retailers that actually pay the invoice, 45 to 60 days later, that will be cash now that we get in the third quarter. And obviously, this chart excludes any cap raises, any borrowings control. So it's actually free cash flows. We'll go through the financial highlights. So revenue that ended up at $6.9 million, so that was actually down 17%. But if we take out the contribution by the budget watch, that would have been up about 8% to $8.95 million versus PCP. And then we have a graph here that kind of shows the growth in the ARR, which is what we've been very, very focused on this quarter along with cash. As I said, it's a cash flow positive quarter, a weak quarter. December orders are paid in Q3. So we exited out of the budget watch. So we've got 3 different watches that we take out to market. We've got a Kids watch that we sold for $179, another premium ADVENTURE watch that we sell for $349. The budget watch we're traditionally 28% of revenue and about 40% of ARR. Now, we will reenter that market, as we mentioned in our strategy update that would be probably late last year. We will reenter that market in Q4, but that will be done with a profitable offering along with an update where premium watches will be, which is imminent now. So combining that altogether, ARR -- PCP increased by 31%. And that was out the focus on growth have done quite a few things now to really start driving up our ARPU, average revenue per user. As I said, initial cost optimization, positive $2 million is being done. That was done mostly through centralizing functions within Spacetalk and consolidating roles and really having a finer and narrower focus for the organization. The great contributor to growth was Jumpy. So Jumpy is a SIM card that we package in our boxes that had very, very strong growth. And the great thing about Jumpy is that how the customers pay annually in advance. So it ends up being $17.99, if you pay monthly, $165 if you pay annually. So when people do that and let that, that actually gives a great negative working capital boost into our bank account. It really increases the average revenue per user. So instead of paying $6 for ARPU, which we get $3 or $4 for various app charges. We end up getting a lot more. So part of that for Jumpy we actually don't care yet that around customers to come to ourselves. So Samsung, the Google and the Android app. So Android and the Apple AppStore fees. Now what we're looking at is are we just looking to opportunities to upsell to existing customers. So how do we remarket our existing customer base that might have a SIM card from another provider, let them know that a free FRP and get them to migrate over to Jumpy as well. Little bit about the right issue. So we raised $1.38 million before costs with $230,000 still subject to EGM approval. That was the director's takeup of the shortfall. Obviously, $1.15 is -- bank account with the $230,000 still being held in trust until the EGM approval happen. But probably critical strength now, we'll keep reviewing our capital requirements now and whether to keep the cap raise open for the full period as the business has financially changed its cost base, changed its working capital and changed its revenue profile. So we'll keep wondering to see how much additional capital do we need to take out from the market. A little bit around the stock optimization. So as I said, I mean, the real focus here has been more on the back office, but we don't really want to affect our sales and marketing. And if you drop off the revenue, like nothing else really matters. The $2 million is being done, that exceeded that run rate has all occurred. Now that will flow into benefit mostly in this quarter. But we have an additional target of additional $2 million that will be done over the next 6 months. And the idea here is to really set us up for profitable growth. So just to make sure that the revenue line is not added to the cost line tightly and certainly entering to more and more markets, we can do at a much lower cost base. A bit around what we have focused now for the next quarter. So -- the CEO appointment as I said, we've got some really good candidates to announce something to the market that fairly shortly. Next one is profitable growth. So I want to kind of keep pushing on our revenues up, keep our costs under control to make sure we can turn a profit, continue on the strong cost management culture. So again, we're trying to be like a high-quality, low-cost operator. But wherever we can we do things economically, obviously, focused on positive cash flow, make sure this business can really [ self depend ]. And I'm going to talk about this before, but just to touch on the growth opportunity I mean, there's a lot of growth opportunity in the Europe market and in the North American market. And that's our focus for the next quarter to really make sure that we can exploit them. So what have we done over the last 3 months. So we've got ourselves to cash flow positive because we're there. So we are very, very comfortable with our capital balance right now. We're going to reenter the budget watch in Q4, so that will frankly make up some of the lost revenue that we had this year. We had the 44% -- 42% ARR increase in the watches business. Still very, very focused on growth. It isn't very much growth story. So more strong opportunity in North America and Europe that we are chasing down. Continue on the cost optimization, just to make sure that we manage our cash and make sure that as we grow, but in fact, in a more and more free cash flow. We've done renegotiating with PURE within a very [indiscernible]. So renegotiated the covenants, reduced interest rate and extended the term of the debt just to give the business a bit more capital space. And lastly, it's the appointment of the CEO, which is what we're focused on now. Look, I do have quite a short presentation just to kind of hit on the main point. What I might do now is ask you guys a question. [Operator Instructions]

I think we've got James Tracey with a question. So I'll just call you in James. And you'll probably just need to unmute.

It's James Tracey from Veritas Securities. Just the question just around, I suppose, the -- the most surprising thing for me was the free cash flow improvement. If you look at the last financial year, I think the free cash flow was around minus $9 million, i.e., the operating cash flow minus, the CapEx, which we saw in those charts there. Obviously, there's been a big improvement. Is that something that you see as sustainable going forward? I know you made the point that traditionally, the second quarter has been sort of a more negative cash flow quarter because of the timing of working capital payments with regards to Christmas, selling the stock, but not necessarily receiving the money from your customers. So is there a one-off benefit in terms of working capital that's caused you to go positive? Or is it really a sustainable cost improvement that we should see some improvements in future quarters with more favorable working capital and things like that?

Look, I mean it's something that's sustainable. There wasn't any major one-off that cause this. I mean even with the cash flow positive quarter, we took a large inventory payment for the next [indiscernible] this quarter. So there wasn't any kind of one-off major events there. Look, the biggest thing was, as I mentioned, it's getting out of the budget watch. So now all of our watches that we sell, they are all profitable. Jumpy had a huge contribution as well. So that really, really helped kind of push the cash flow up. As I said, people prepay up front. And look, it is for a growth story. So this is a company that's going to keep growing and growing very, very fast, but it will just do it within the cash in work that it already has. Does that answer your question, James?

Yes. And obviously, you mentioned about the revenue. The revenue is negatively impacted by the discontinuation of the budget watch. And you also flagged the 43% growth in the recurring revenue. If you strip out, I suppose, the budget watch from historic revenues and I think about the future growth profile, I mean what will -- do you see that growth in ARR as a reasonable proxy for the growth rate in the group revenues going forward?

Yes. Look, I mean, if you take out the budget watch, it was about 8% up excluding budget watch. And the 43%, that's the real metric, I think, for us. That's the ARR growth. That's kids with watches on wrist. What also happens with sell in and sell out, they sell in supply by our watches, they'll invest put them on wrists and pay the retailer, then we get paid a bit later. So the underlying growth figure I always look at from this business is ARR because, because people paying subscription fees using our devices. Group revenue will go up and down as you get large retailers coming on board as you change the product mix. For example, when we refresh ADVENTURER and we launched some of We'd expect the revenue uplift as retailers refill their stock, you get a whole bunch of filling orders. ARR might not grow as quickly in that quarter, but then when people get those watches on their wrists, that's when ARR will catch up. To answer your question, look, ARR what I focus on in that 43%, that's the key number.

Yes. That's again, can you just -- you talk -- you mentioned in the -- I think the final slide, the growth opportunities in the North America and Europe. Could you give a bit of an update on those geographies? I mean a lot of the markets sort of relatively for instance in America, Best Buy, I understand they've recently gone into stores and the Nordics previously there's been some indications that Nordics are doing well for you. So could you just give an update there, please?

Yes, absolutely. Look, Best Buy has gone really well for us. So Best Buy we started off with 2 colors and now we're talking to them about expanding our range. We've already got our first bit of orders as they come in to refresh their shelves for the Christmas and Black Friday sale. So I'm quite excited there. And invariably, what you generally want if you want 1 strong retail in intriguing. Are we kind of hoping Best Buy will almost be like [indiscernible] in North America. In terms of Europe, we are actually actively looking at probably opening up in a few more countries. And we're just in kind of negotiations with major retailers there and major telcos. And once that happens, we'll announce that to the market. But I mean, look, Europe has been quite a good market for us as well. I think the next step that we want to do there is probably we'll try Jumpy there as well, so we can actually start driving up some of our revenue from our watches there as well.

Saurabh, we also received questions from Richard Morrow, the geographic spread, you've kind of answered right now. But the other question is whether there's an inventory write-off through discontinued -- through the discontinued budget watch?

Thanks Georg. Yes. So it was quite a bit about the inventory. In terms of the -- I think the other question now is the impact of Jumpy. So Jumpy had a hedge impact in the quarter of about $1 million. So that's people are buying it, ARR being generated and people prepaying. So I think give us a really good uplift there. In terms of inventory note, we didn't do any inventory write-offs. And generally, what you try to do is with the older watches, we ended up selling the Kids ones with a bit of a discount just to get rid of them. And then when we do transition to ADVENTURER 2, we'll try to do that as the ADVENTURER 1 on stock go run that as well. Now I can see I've got a hand up by [ Stephen ]. So James, I'll just push you back into the lobby. [ Stephen ] go ahead and introduce yourself.

[ Stephen Dale ] Can you guys hear me?

Yes, we can.

Yes. Cheers for the update. Just a couple of operational questions. What's the plan for Spacetalk LIFE. Firstly, Secondly, what's the plan for the schools business? And thirdly, how do you see the U.S. business operating in the future? Are you looking to build out the team there as it becomes a sort of biggest market over the next few years and potentially a CEO based in the U.S. or is the operation is going to be still focused in Australia? And sorry for 3 questions at once. So maybe and we can go back through them.

No, no. All good. All good. So I start up with a large product. So I generally think there's a real market there. I think there's a market for the KIDS car to the market for the [indiscernible] business as well. The challenge I think we've found a moments are very different sale. We've got a consumer that is more of an enterprise sales for aged care facilities and value provided. And that's why LIFE hasn't been too good great and like in a JV HiFi stores, but that's just not where those people go to buy that kind of hardware. So what we're looking to do, we've been advertising for a few months, I've been quite founded right candidate, but we're looking for someone just to be dedicated for the LIFE product. The dedicated sells rep, just to kind of run that down for us. And help us figure out what's the right pricing, what's the right form factor. We still have a bunch of inventory, how do we kind of move that inventory. The great thing as I'm sure noting life product is viewing on the there's actually no cost per watch and there's no cost from subscription or covered by the government rebate. We're kind of hoping in the next quarter or so once we get the right person on board, they will be able to focus just on that and nothing else and figure out how to make money out of that. And I think your second question was about North America.

Second question was the schools business, whether we...

Schools business. Yes. Look, quite we're still growing at 10%. It generates a hell of a lot of free cash flow for us. We've renewed the WA school contract. So we've got that extended term as well. I think what we're trying to figure out, we got our head completely around it is how do we get the synergies between the pace of watch business and schools business. That's one of the things that the head of school is working on for us. Is there any kind of [indiscernible] that we can achieve there as well. Yes. So look, I don't completely figure that out, but I think that's one of the things we'll have to figure out over the next 6 to 12 months. And then lastly, on North America, look, it is the biggest market. It's the greatest opportunity. But I think what we want to do is we want to kind of build that team out right. So we're right now, we look at aggressive recruiting for another sales rep for North America. So focus a lot more on the consumer electronics retailers. That seems to be a better path to market rather than the telcos. I mean all the LIFE telcos, I think they're just being mean and asked people someone like Spacetalk to kind of work with right now. Therefore, the scale that we just can't provide. So I think that's the general opportunity. That's probably our greatest opportunity. I think North America and Germany, they're probably the 2 greatest -- by the way the reason I say Germany is our greatest competitor for where they sell -- they sold about 0.5 million watches in Germany, which is great. Could you have a lot of consumer awareness about our devices and how that kind of education cost on the front. Yes. So that's probably a big market will focus on the next little while. In terms of North America, probably not looking to put a CEO there or build up the team in a lot of very expected way there right now when we really grow out the revenue. And the cloud as being that we can kind of have like a -- almost a global share services, which is out of Adelaide right now. And in each local region, we can just have an ops person that does on the hardware returns on what notable and how many sales people we need. So then as we do at reenter that market with a lot more people, it won't be able at such a high cost base. Did I cover your question?

Yes. I think you did. I mean what do you mean by shared service center in Adelaide, does that mean in terms of -- I don't really get that aspect?

Yes. So for example, if you're a North American customer and you call our support line right now, you actually get transferred to somebody in Adelaide. So just kind of means I don't need a call center in North America and 1 in Glasgow in the U.K. and 1 in Adelaide what we've done is to combine that into a single call center with some stuff likely where we need to for time down reason.

Yes. Got it. And presumably, they'd still send the watch back to a local market or...