Straker Limited (STG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Straker Translations Limited 2020 Annual Meeting. I would now like to hand the conference over to Mr. Phil Norman, Chairman. Please go ahead.

Thank you. Good afternoon to everybody who's joined us online. My name is Phil Norman, and it's my pleasure as Chairman to welcome you all to this annual meeting of Straker Translations Limited, our second as a publicly listed company. Thanks for your attendance. It being 2:00 Australian Eastern standard time and 4:00 New Zealand standard time, the nominated time for the meeting, and having been informed that a quorum is present, I now declare the meeting open. There's some housekeeping which I'd now like to deal with. I'll take a few moments to explain how the meeting and voting procedures which we'll be using today work. My fellow director Paul Wilson will act as Deputy Chair for the purposes of this meeting and would continue to run proceeding should there be any issues with the connection here in New Zealand. I'd also like to remind you that, if anybody experiences issues with connectivity to the online platform for this meeting, please revisit the instructions provided on the web page for the meeting. And please also refer to Link's online guide attached to the notice of meeting, as that will assist you with the processes for voting and asking questions. Voting. All resolutions will be decided by an electronic poll. You will have received an online voting card when you registered to vote. And to cast your vote, scroll to the bottom of the voting card and click the blue button cast vote or cast partial vote. If you change your mind, simply select the edit button. You can change your vote as many times as you wish up until the close of the poll at the end of the meeting. Please ensure you submit your votes before the conclusion of the meeting, as once voting closes, all voting cards, whether submitted or not, are automatically submitted and cannot be changed. You can vote at any time during the proceedings. At the conclusion of the meeting, you will see a red bar with a countdown timer at the top of the webcast and slide windows advising the remaining time left for you to submit your votes. Please note that only shareholders, proxy holders or shareholder representatives may vote. Voting is now open. Questions. We will provide shareholders with the opportunity to ask questions as we consider each resolution before the meeting. [Operator Instructions] And if your question has been answered and you'd like to exercise your [ right to reply ], you can do so by submitting another question. So with the housekeeping finished, I'd like to begin the meeting by introducing my fellow directors and executives who are present today. We have Steve Donovan, a nonexecutive director and Chair of our Audit and Risk Management Committee; Mr. Paul Wilson, a nonexecutive director; Ms. Amanda Cribb, an independent nonexecutive director; Tim Williams, an independent nonexecutive director and Chair of our Nominations and Remuneration Committee; Grant Straker, our Chief Executive Officer; David Ingram, our Chief Financial Officer; and Ms. Laura Newell, our company Secretary. And I'd also like to acknowledge the attendance of Mr. Chris Neves, who's representing our auditors, BDO; Ms. Louisa Di Bella from Talbot Sayer, our Australian lawyers; and Dean Oppenhuis from Bell Gully, our New Zealand lawyers. Thanks for your attendance. The agenda. Today's agenda will include a short address from me, followed by a presentation from Grant Straker, during which he'll provide an update on the business. At the conclusion of Grant's presentation, we will have an opportunity to respond to shareholders' questions which you have been submitting on the online platform. Following the question-response session, we will deal with the formal business of the meeting, including considering the resolutions as set out in the notice of meeting. Each resolution will be considered in turn, and we'll allow time to respond to questions submitted online regarding each resolution. And the meeting will conclude at the end of the formal business. So now my address. I'll start proceedings with my comments as Chairman and commence by saying that I'm delighted to have this opportunity to address shareholders at the company's second annual meeting since listing on the ASX in October 2018. Straker has developed a language translation platform that's evolved over many years to become a world leader, using sophisticated artificial intelligence technology to deliver translation services in multiple languages. The company now has a global footprint in a large and growing market. The financial year ended 31 March was another successful year for Straker with solid revenue growth, an improved gross profit and a stable EBITDA even as we continued to increase our investment in technology development and sales activity to drive further growth. The company successfully concluded 2 strategic acquisitions, grew its Enterprise and Media business and accelerated investment in its technology platform given the substantial growth opportunities available. Financial performance. Revenue in FY '20 was up 13% to $27.7 million and, pre COVID-19, was tracking to achieve a run rate of $40 million if an acquisition had not been paused. Importantly, repeat revenues increased 18% during FY '20 to $23.9 million and represented 86% of overall revenue. Reflecting the company's strategy to focus on its Enterprise and business segments, average project revenue continued to increase and, as at 31 March 2020, was up 18%. The number of business customers using our proprietary AI-powered RAY translation platform was up 23% to 2,650. Not only does the RAY platform increase the speed at which customers can translate projects and deliver substantial savings to them. It also delivers increased gross margin as more work is moved onto the platform from acquired companies. Gross margin on the RAY platform currently sits at 56% and underpinned an overall 55% gross margin of $15.2 million. On a non-IFRS financial performance basis, the company produced an adjusted EBITDA loss of $0.58 million, an increase of $0.4 million on FY '19. The change reflected our shift in focus to attract enterprise customers, continued R&D investment to expand our footprint in the media industry and the costs of being a listed company, offset by the effects of the new IFRS 16 lease standard. The reported operating loss of $2.4 million was an increase on the FY '19 comparable loss of $0.8 million. The FY '20 result included $0.8 million related to increases in depreciation and amortization and restructuring costs from rightsizing to respond to COVID-19. In addition, a one-off noncash expense of $0.8 million was incurred in FY '20 in relation to the impairment of goodwill of the group's subsidiary Elanex as a result of a long-standing banking customer closing its investment banking arm which we provided translation services for, as well as the impacts of COVID-19 on the business. The loss after income tax was $2.5 million, which was an improvement of $1.8 million on FY '19. Operating net cash outflow of $1.6 million was up $0.5 million on last year, as the company continued to progress its strategy to focus on the Enterprise and Media segments, invest in R&D and restructure the business to achieve cost synergies. While larger in size, Enterprise and Media projects have longer sales duration times. The company continues to have a strong capital position with $11.2 million cash at bank at the 31st of March 2020 and no debt, other than deferred and contingent consideration in respect of acquisitions and lease liabilities recognized under IFRS 16. Business strategy. Straker's goal is to be a world leader -- a world-leading AI data-driven translation business. And we will achieve this ambition through a combination of organic growth and the acquisition of other translation companies that add revenue scale and key customer relationships in strategically important categories, support geographic diversity and provide operating leverage through the use of Straker's proprietary RAY technology platform and additional human capital. Over the last 12 months, the company has increased its focus on larger enterprise customers and grew the number of such customers by 70% to 56 at year-end. This focus will remain a key element of the company's growth strategy going forward, and as we enter FY '21, the pipeline of enterprise opportunities is strong. Our Media business is rapidly gaining momentum, increasing 55% on FY '19. And we now have several important customer relationships with U.S.-based global media organizations that we service both directly via our Burbank, California office and with key technology partners such as AppTek. We expect these media relationships to be a major area of growth for Straker, and we will continue to invest in our specialized AI-powered RAY media platform to support this growth. The COVID-19 pandemic. During Q1 FY '21, customer sales orders were up 24% on Q1 FY '20, while revenue for the quarter was only down slightly on the previously comparable period on a pro forma basis. Repeat revenues from large enterprise customers underpinned the stability in revenues through the COVID-19 crisis. And the pipeline of enterprise deals is increasing as large global businesses look to use AI-driven platforms like RAY to produce -- to reduce costs post COVID-19. Our response to COVID-19 was swift, seeing us act -- seeing us quickly shift all staff to a working-from-home mode without affecting our excellent customer service levels. We've also taken a number of steps to reduce costs across the business, including, for a period, temporary salary cuts for staff, management and Board members. We also temporarily paused M&A activity following the onset of the pandemic. This impacted one European acquisition opportunity that was at an advanced stage of negotiations, but our team has maintained contact with the owners of that business and expect to reengage once the impact of COVID-19 is clearer in Europe. Our pipeline of M&A prospects remained strong; and we're confident that, as the pandemic subsides, more attractive opportunities will emerge. Management and governance. We're fortunate to have a talented and committed management team, which has remained unchanged during FY '20. Led by Grant, our CEO and Co-founder, this team has delivered a strong FY '20 result, secured another 2 acquisitions, reacted quickly and positively to an unexpected global pandemic and positioned the business for further organic and acquired growth in FY '21 in what is expected to be a challenging market environment. The Board of Directors also remained unchanged during the year. However, after year-end, on 14 April 2020, Katrina Johnson resigned as a director. And I thank her for her input -- or for the input she provided during her tenure and wish her well in her future endeavors. On the 20th of July, the Board appointed Amanda Cribb to fill the vacancy created by Katrina's resignation, and we welcome her to the team. Amanda has a finance and strategy background, fuller details of which are set out in the explanatory statement included in the notice of meeting. On behalf of the Board, I would like to thank the company's senior leadership team and all our staff across the globe for their hard work during FY '20. I'd also like to express my thanks to my fellow directors for their support over a very busy FY '20. Outlook. The company has weathered the global COVID-19 pandemic well; and continues to experience strong demand for its products and services, particularly in the enterprise and media sectors. During the last year, our core RAY technology platform has been significantly enhanced; and we've added automated speech recognition and advanced subtitling capability to our RAY media platform, making it best in class. As we grow, we will accelerate investment in our platforms and the innovative products that reside on them, all of which will leverage our strong AI know-how and experience. Our world-leading technology capability will remain a defining point of difference for the company and set Straker apart from its competitors. Based on the company's performance over the first quarter of FY '21 and what we can see ahead, we believe revenue will be stable over FY '21 relative to FY '20. We are also looking forward to reengaging with some of the previously identified acquisition targets as we now better understand the extraordinary market conditions we're operating under. We have an objective of securing at least one more acquisition before the end of FY '21. Lastly, I would like to thank all our shareholders for their ongoing support over the last year. We're looking forward to delivering on the attractive opportunities we see for the business moving forward and growing shareholder value. I'll now ask Grant to give us a presentation on the business. And at the end of Grant's presentation, we will again allow some time to respond to questions submitted online that are relevant to his presentation. Grant?

Thank you very much, Phil. And welcome, everybody. Welcome, shareholders. So it's my pleasure to give you an update on how we went last year, if we could just move to Slide 7, please, yes. So I'll just [ see first ] on Slide 7. That's really how we responded to COVID. So our focus, first of all, in the response to COVID was assuring our workforce was safe. We're meeting all the legal requirements in all of the markets we operate in while continuing to operate effectively. This is a very successful process for us. And the use of RAY as a one-platform, one-team global framework for doing this was a major factor in our ability to do it quickly and without issue in terms of moving to an online environment out of the office. We went about implementing cost-saving strategies given the unknown forward-looking global business environment. We came up with 3 scenarios, and we adjusted our planning and the business as the pandemic developed. To be fair: Growth was not one of the scenarios we initially envisaged in Q1 as COVID hit, but we did see some growth in Q1, and we balanced our resources accordingly and adapted very quickly to what was happening and did this very successfully. We're still working through the full extent of some of those changes, but we have certainly made a range of permanent savings and, as a result, have some significant cost consolidations completed. COVID changed the global business environment around how we operate and how we engage with our customers. We found this has opened up opportunities for us, especially in Media where we have been able to utilize our investments in this space to take advantage of new opportunities. Next slide, please, in terms of data. Data continues to drive the efficiency of AI platforms globally, and we are seeing an exponential growth in our data. And it's been proven that data assets in AI-driven companies are a key precursor to value creation, so we see this as quite a significant milestone. We've released version 4 of our RAY translation workbench and again seen a lift in productivity of translators, meaning we can produce industry-high gross margins and simplify the translation process for our customers. Next slide, please. In terms of our strategic priorities, we continue to execute on our strategic priorities and remain focused on our aspiration to be a $100 million revenue company across the 3 key points and strategic priorities that we have. Next slide, please. Should be moving to Slide 10. So one of the first priorities is organic growth. So we have focused our organic growth activities on the enterprise customer segment and have seen a number of strategies play out successfully or were seeing a number of strategies play out successfully in Q4. As Phil alluded to, it does take longer for these larger enterprise customers to come through, but we are seeing positive momentum in our ability to engage with large corporate global organizations who are looking for a centralized, AI-driven translation platform and also a company that can provide the level of service on a global basis for these large companies, so it's a very promising sector for us. Next slide, please. In terms of M&A, we continued our growth through M&A and successfully acquired 2 excellent companies in FY '20. On Global is a highly -- is based in the highly industrial Basque region of Spain; has some significant, large enterprise customers; and has performed above expectations since acquisition in June last -- since being acquired in June last year. And NZTC, a Wellington-based language service provider with mainly enterprise and government customers. Both of these acquisitions were the fastest for us to integrate to date, showing we had learned a lot in the first 5 acquisitions that we did. And that enables us to get faster gains on gross margin and shows we've been able to build integration tools and processes that have now become very mature in our M&A integration setup and allow us to further accelerate our M&A activities going forward. And Slide 12, please. So our M&A pipeline is significant and we have a range of options at various stages of the M&A process. COVID depending, we still have the aim to make at least 1 more M&A transaction this year and are seeing some good targets come to market in terms of the assets. And we believe that COVID may benefit our M&A strategy going forward as more companies do come on the market and the industry changes. Next slide, please. Media continues to be a major focus. And we've continued to invest in our media platform, releasing the first version of our RAY media platform, which has proven to be a world-leading approach to media localization. We've won a number of new projects around media. And our focus in -- on our supply chain and technology to enable higher-throughput margins and to have a compelling option for customers in the media space is working very well. So Slide 14, please, so next slide. So in summary: Technology continues to deliver strong margins and a compelling solution for enterprise customers looking for a technology-focused translation solution backed with a world-class services infrastructure and team. We've got a growth focus through both organic and M&A channels. We have successfully restructured to provide a leaner organization in a very dynamic business environment. And we still have a very strong focus on R&D and our technology to continue to be one of the most advanced companies in the space. Repeat revenue is 86% of our business, providing a "close to SaaS-like" revenue stream. That positions us very well for the future. And again, I would like to thank all of the Straker staff and team around the world who have worked incredibly hard through this COVID period to deliver what I consider excellent results for shareholders in a very challenging environment. So I would like to now hand back to Phil Norman to continue the presentation.

Thank you, Grant. Could we go to Slide 15, please? This is now an opportunity for shareholders to ask questions about our business, including the content of my address and Grant's presentation. [Operator Instructions]

And I note now that there is a question, which I will read out. The question is, "Why $100 million revenue company? Why not something on profitable growth?" I think, Grant that might be a question you're best positioned to answer.

Certainly, Phil. Yes, it's a very good question. So the way that we see this industry is that you have some challenges, some technology-based challenges, such as Straker who are trying to disrupt this industry. And it is a $50 billion industry. And then you also have some large -- and these tech companies are trying to find scale. And you have some large -- larger LSPs, say, above $50 million of revenue trying to find technology as an advantage. So what we believe is that with our technology, if we can add scale, we would be in a very unique position. And that will be far more value accretive for shareholders, if we're aggressive in getting into what we would call the optimal zone, which is a zone where we've got both scale and technology. So back to you, Phil.

Thank you, Grant. Are there other questions? I do not see any other questions on the screen, so that being the case, thank you for that question. We'll move now to the formal business of the meeting.

I'm informed that the notice of meeting was appropriately sent to all registered shareholders within the requisite time period. I also note that both the notice of meeting and the annual report are available for shareholders to download in accordance with the instructions given for attendance at this online meeting. I now table the notice of meeting, and unless there are any objections, I will take the notice convening this meeting as read. Voting on resolutions. During the course of the meeting, I'll put each resolution to the meeting. May I ask shareholders who wish to lodge questions related to the resolution at hand that they keep those questions as succinct as possible? Note I will be voting all undirected proxies in favor of the resolutions. I will disclose proxy votes on the screen prior to the votes being taken for each resolution. These figures are as of the closing time for receipt of proxies, which was 2:00 Australian Eastern standard time, 4:00 New Zealand standard time on Monday, the 24th of August. I've been advised that all proxies received for the meeting have been checked, and I declare them valid for voting. There are voting exclusions that apply to the resolutions being put to today's meeting, and these are outlined in the notice of meeting. Slide 17, item 1, the financial statements and reports. The first item of notified business is to receive and consider the financial statements and auditor's report for the year ended the 31st of March 2020, all of which are set out in the company's 2020 annual report. This was published on the 26th of June and is also available to download on the online portal for the meeting. There is no formal resolution required for this item, but I invite shareholders to raise questions or comments online on the financial statements or on the auditor's report or for the auditor. So I'll just pause for a moment to see if there are any questions. Okay. Well, I see no questions have come up on my screen, so I'll move on, if I could have Slide 18 up, please. And I now deal with resolution 1, the auditor's remuneration. BDO is the existing auditor of the company and has indicated its willingness to continue in office. Pursuant to Section 207T of the New Zealand Companies Act 1993, BDO is automatically reappointed at the annual meeting as auditor of the company. The proposed resolution is to authorize the directors to fix the auditor's remuneration for the following year for the purposes of Section 207S of the Companies Act 1993. Resolution 1 is on the screen, and I put the resolution to the meeting: to record that BDO Auckland continue in office as the company's auditor and to authorize the directors to fix the remuneration of BDO Auckland as the company's auditor for the ensuing year. Are there any questions? I see none, so I will move on. Resolution 2 relates to the election of a director, Ms. Amanda Cribb. This item of notified business concerns the election of Amanda as a director as required by the company's constitution and the ASX listing rules. I'm delighted to introduce Amanda to our shareholders. Amanda was appointed to the Board on the 20th of July 2020 as an independent nonexecutive director and brings her extensive and relevant experience, as detailed in the explanatory statement to the notice of meeting. Amanda, I'd now like to invite you to say a few words.