Straker Limited (STG) Earnings Call Transcript & Summary

Hello, everybody. Welcome to this Straker Translations H1 FY '21 Results Presentation. Excuse me just a second while I [indiscernible]. This presentation, just for a little bit of housekeeping, relatively short. Just a brief number of slides as over the last month -- at the beginning of the month, we gave out our 4C, which obviously had a lot of this information. We subsequently midmonth released the strategic announcement around IBM and have engaged with the market around that. And so this is really to encapsulate a lot of that information and to give you a really good view of where the business is going. There is a Q&A function enabled, and you will be able to ask a question or raise your hand and we can promote you to be a speaker if you so wish. So without further ado, I will start off. So just some highlights from the half year. So it's hard not to mention COVID in this half year. It obviously had an impact, not so much in the end around some of the results and as things recovered for us, but certainly in the thinking that we put into place in March and April and how it changed what we were going to do for the half. And I think we've mentioned this in previous releases that we were going to acquire a company in March, which we didn't do. And we've since focused our efforts on some cost savings, on ensuring that the business is in a really strong position right across the half, and we've restarted the M&A activities. But a couple of key points for us is that enterprise customers now represent a very large portion of our revenue. Our top 20 customers are 50% of our revenue. That's deliberate. And you'll recall that over the last couple of years, we have had a focus on reducing the smaller type customers, the personal type customers that actually have an impact on our ability to engage with the larger customers. And we've focused our efforts on these much larger customers which do have a larger sales cycle, a longer sales cycle. But that is really starting to pay off for us now. Another really important part of this highlight is that we were EBITDA -- adjusted EBITDA profitable for the half. And again, that just shows that as we are adjusting for changes for the likes of COVID and our forecast on revenue that we might have wanted to hit, we actually made all the right calls, and we're also getting some margin gains and some consolidation benefits. So it's a really good sign that as a business, we know how to operate in an adjusted EBITDA profitable manner. We're in a strong cash position. Again, that gives us the ability to continue to focus on growth in our market that is aligning for our technology. So just a quick recap on our core strategy. And it really is about being world leaders in technology. We believed a decade ago that machines and humans together would be the future of this industry, and that is going to be driven by data assets. And we built a platform to collect all of that data and to actually commercialize its outcome. We've then expanded through organic and acquired growth to capture opportunities and to grow our customer base. And I think it's really important to understand a couple of the things that have happened around this. As we've gone around acquiring customers, that's very much -- and companies that have customers, it's very much around us getting to a point of critical mass. We would never have closed IBM had we not got to the size we are. We wouldn't have closed IBM had we not got media as a core part of our business. So these have been really key factors as we've been growing. And the other part is to grow our repeat revenue, and what we're finding is that we are implementing technology solutions into our customers. They're using more and more of our technology, and that is making these relationships with these large enterprise customers really sticky. And it's a very strong point in our business model that we now have critical mass to deliver for some of the world's largest organizations and we have a model for very sticky repeat revenue at high margins. So if you just look at the industry, there's always going to be 2 winners, or the winners in this industry are going to come from 2 groups: the larger language service providers who have the scale to deliver for a large organization and the [ disruptors they see ], the tech innovation companies. And really, the losers were always going to be the small companies that didn't have scale, that didn't have technology and have relied on a regional relationship as their core business model. And now what we're seeing, and if there is a -- if IBM is teaching us anything, it's that the canary in the coal mine around this is that tech innovation can actually start to win in this huge $57 billion industry because we've got companies starting to view that side of the market. They want newer technology. They know that their current systems are not meeting their customers' demands. And so this is a really, really strong signal about where revenue will flow going forward, and I believe that Straker is right at the forefront of that. And we're now at a level of scale where we give a lot of comfort to these larger organizations, and part of that scale is actually just being a listed company. So really well positioned to get into what we call the optimal zone, which is where you're really a tech disruptor, but you also have scale and high growth. So these are all the decisions that we're making around how we continue the growth to get up here. So just around the IBM partnership, I've just touched on it a little bit. It confirms our strategy of focusing on enterprise customers that took around about 18 months, 2 years really, to complete that deal. It confirms that our strategy of acquiring companies that have strategic customers that we could then go and grow our share of their customer wallet is working. It does take time, and that really has been our focus. And it shows that having IBM go through a whole process of evaluating various solutions and evaluating some of our much larger competitors that they have chosen to go with Straker as having the leading technology and being the company that can deliver for them and as we've said, it will have a material impact. There are people across Straker all around the world working every day with teams from IBM on integration, automation, all sorts of projects that are running. We've hired a number of staff already to work directly with the IBM teams. I just met one outside my office [ before ] who started this morning who's going to be one of the lead project managers. So a really, really exciting time for us and obviously a transformational strategic partnership and as I say, a canary in the coal mine for how larger enterprises are going to view where they're going to get their supplies from. And we believe we are very, very well positioned to take advantage of that. Back to just acquisitions driving enterprise growth. We've always had an acquisition strategy. And as you can see here, this is just a subset of some of the companies that we have acquired as we have acquired companies -- some of the customers, sorry, we have acquired as we've acquired companies. So you've got these big global logistics companies. You've got some world-leading ERP companies. Many of these companies have translation budgets well into the millions, and we don't have all of their customer wallet. We may have a portion of their spend at a regional level, and obviously, what we're trying to do is grow that. And below this is a big range of other customers that we are looking at. And as we start to look more at M&A again and as we are heavily engaged in discussions around the world with different opportunities, we do see that if that company has a strong range of enterprise customers that we believe we can leverage with our technology, then that has a lot of interest for us. And we are seeing more of these come on the market at the moment. We said back in April when we -- March, April when we paused the M&A transaction that we were working on at the time that we believed it was the right decision because in 6 months, many companies would actually be at a discount to where they were pre-COVID for fundamentally the same asset, and that is what we have started to see. So we believe that there are going to be some very good bargains out there where we can buy some fantastic assets at a discount to what we would have paid 6, 8 months ago. And then that can lead to further growth in terms of our overall growth, but also our ability to get our sales teams into these large enterprise customers and leverage the story that we now have around IBM. They have done all of the due diligence for any other large company that wants to use us, and that's a great story. So just over to our results. I have our CFO, Chief Financial Officer, David Ingram, with me. David, I don't know, you want the camera on screen or off-screen? It's really up to you.

Maybe just turn around.

I will turn it around.

Hi, everybody, and thanks, Grant. I'm pleased to be presenting my first interim results, having joined the company 4 months ago. I have 4 slides: one on our results, one on our profit and loss, one on our balance sheet and a final slide on cash flow. So starting off with the results slide. We had strong revenue despite the headwinds of COVID. Our revenue increased 9% to $14.8 million, up from $13.6 million in the prior period. Annualized repeat revenue increased to 28.1% (sic) [ $28.1 million ], which was a 32% increase on the prior comparable period. Our gross margins fell to 51.1%, and 2 factors came into play here. One was the COVID-19 pricing pressure, so we were trying to get revenue in, and also the dilutionary effect of recent acquisitions we'd have yet to transition over to our job work bench. We also had solid cash flows. Cash used in operating activities came close to breakeven at $0.4 million, which was an improvement of $1.1 million. We closed with $7.7 million in the bank and are in a strong position to continue our growth strategy. If we can just turn to the next slide, which is the profit and loss. So as we've said, revenue was up 9% year-on-year. So on a constant currency basis, that was a 7% increase with the strengthening of the New Zealand dollar against the U.S. dollar. Gross margin we've talked about, but EBITDA improved $0.5 million year-on-year, which was a 4.3 percentage increase, a result of expense management and acquisition synergies. Adjusted EBITDA, which excludes nonrecurring costs, was, as we said, breakeven. It's also important to note that there was no impairments recorded in the period. So we looked at the carrying value of our acquisitions in light of the COVID impacts. Just the next slide just on the balance sheet. So really pleased to report a drop in trade receivables and other assets. We had a 6.4% year-on-year decrease despite the 9% revenue increase, and that was against the backdrop of COVID, of course. We did have an increase in trade payables, but this is linked to the decrease in accrued translator costs and as a result of our automation of our vendor invoice processing system. Acquisition-related liabilities have decreased due to revenue targets being met and resulting in earnout payments. An additional $225,000 liability has been recognized through our most recent acquisition, NZTC, which is due to robust revenue performance. Just the final slide for me, cash flow, Page 11. So the key messages here are operating cash flow improved by $1.1 million to near breakeven. Cash inflows continues to be in line with revenues, which is great, and were helped by $0.4 million in government grants and a reduction in acquisition/integration-related costs. We have free cash flow of minus $1 million, and our net cash position was $7.7 million, a strong position to carry forward. Grant, back over to you.

Thank you, David. I'll just use this highly technical method of moving the camera. Thanks very much, David, and well done over the half year. It's certainly an interesting time to join any company, and I think a fantastic job all around. So look, what's the outlook? What are we aiming for? IBM is incredibly important. As I said, we are working very heavily right now to onboard IBM. I think I've had about 3 different IBM existing translation partners around the world contact us, owners of these smaller language service providers, contact us in the last week or so. So the news is definitely right across the ecosystem that the work is coming to us, which is great, and we're focused on getting that onboard. And again, one of the things that they have said to us across all of their meetings is what they didn't want to do was what they've always done. And I think they started every presentation with, "The most dangerous thing you can do is say that's how we've always done it," and hence, they didn't want to use traditional providers. They do want to do it differently. They do want more automation, and our technology fits exactly what they're after to do. Now we will be focusing on M&A. As I say, it's hard to control what comes in or out on M&A or to give absolute certainty of when we may or may not close a deal. But certainly, we are reasonably advanced in a number of conversations, and these M&A deals are probably slightly larger than we have done in the past. So a lot of good signs around that. And then we want to drive our sales and marketing engine to leverage the news that we have out at the moment. Obviously, been difficult in COVID. I think our marketing budgets are probably 90% down on what they were in previous years. So we've been finding new ways to engage with people and big news, I guess, certainly inside the industry helps in that we start to get on everybody's radar within the industry and a lot of the buyers out there and that's leading to some opportunities. And then accelerating our R&D. We are hiring a whole range of developers. I think we're up to about 20 people in our Gisborne office now. So look, onboarding these staff, growing the business and I think at the moment, representing a fantastic opportunity for us to grow.

So we've just got the first question, which was great timing. [ Dia ] was just about to ask around questions. So can you provide -- I'll just read it out and then answer it. So can you provide some color on the decline in GPM in this period? Has there been a change in crowd translation costs? And with your 60% target, what time frame do you think about the target being achieved? Yes. Look, a very fair question. So what really drove down our gross margins were the decisions that we made. If you go back to March or April, we actually had an internal meeting and we went -- we think COVID might mean that we get a 25%, 30% drop in revenue. We just didn't know. And so we've asked the teams, "Look, we need to grab all the revenue we can to make sure that our teams are busy to get through." At the time, we thought maybe it was 3 or 4 months, a maximum of 6 months. And obviously, we're past that now. So we did a number of jobs that weren't kind of right within the slot of what we would normally do. But it kept our teams busy, and our margins have returned to normal. Now again, we still get our 60% gross margins for everything that goes through the RAY platform overall. And importantly, with IBM, we're forecasting similar traditional margins to the ones that we have made. So it really was a COVID-related blip. I don't think everybody -- anybody really got through COVID without taking a compromise somewhere, and that was probably the one for us. And again, it kept all of our teams busy and working and a lot of those core people engaged. So that's really the reason. And I think that going forward, the second half of the year, we would expect our margins to be at our sort of traditional rate. And again, if we acquire a company, you'll see it drop down as we get a blended margin and then jump up as we do more integration. So are there any other questions? If you want to raise a hand at all. Anybody? Just looking, sorry. Got one hand raised there. Alex. I will allow you to talk, Alex, if that's okay? So you're allowed to talk, Alex, if you've got a question.

Grant, can you hear me?

We can, yes.

I just thought, obviously, post the IBM deal transformational -- and then just combining that with the M&A strategy, I mean, the M&A strategy when you started was we're going to buy these revenues that don't generate much cash flow or EBITDA, we'll pull costs out and we'll increase the margins and create value that way. That was sort of what [ we saw ]. I'm just wondering, is that still the case? Or is it more a case of we'll only really create real value if we can sort of turn the existing regional relationships like the IBM one that you acquired into a global agreement? Just sort of wondering where that sits now going forward.