Straker Limited (STG) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to this H1 FY '22 half year presentation. My name's Grant Straker, I'm the Co-Founder and CEO. And look, it's my pleasure to take everybody through these results. And we're very proud of these results, and we think that they are in line with what we told the market we would deliver. And yes, look, it's just a really exciting time for Straker right now. It's good to see that I had a classic -- one of my typos on the front there saying the presentation will [ be beginning ]. So -- but look, let me just jump straight in to the financial highlights. So look, really, I guess, if I go back 12 months ago, we were being told by investors, look, we needed to get an increase in revenue growth. We needed to show that -- we needed to show that there was some gross profit -- gross margin increases and that we can continue the growth. And look, it's really pleasing to see that all of those things are being achieved. And I think that our growth is on a scale and par with the leading tech stocks on the ASX. So this is a really exciting time for us. So if I just come into the next slide. We're really a business right now that's set to scale. And one of the questions that I've always been asked is, well, as we scale, are our costs going to increase at the same rate as our revenue? Or when will we start to see operating leverage come through in the business? So what we're trying to highlight here to investors is that this is actually starting to happen now. If you use staff-level revenue as a metric, yes, you can see that staff numbers have increased in line roughly with revenue. But I think if you look at the composition of the staff now, we're seeing that for a 60% increase in revenue, we're only getting a 17% increase in the production team size and that the rest of that staff numbers are going into growth activities. So they're going into new salespeople, they're going into a sales team working with IBM. So that's the difference. And also, we've invested well ahead of the curve. So where we have addressed it right now -- where we've invested now is very much around us being able to deliver $75 million of revenue, not $50 million. And that is how we see the investments that we have been making. And the chart on the right was -- it was a chart that I did show at our 4C release, which is really just trying to give some indication of how we see or how our models start to play out as we grow from hereon. And that's to say that our OpEx doesn't increase at the same rate as our revenue and our staff numbers don't increase at the same rate as our revenue and our margins remain constant. And if you play that out, and you start to see that we start -- that you start to drop some solid EBITDA through the business. And I guess that's the opportunity that we see right now, and we're certainly comfortable that's the trajectory that we are heading in. So again, an exciting [ sort of ] time. M&A continues to play a big focus. It has played a big part of our growth. And the M&A has led to both the inclusive growth that we've seen and the scale that we have needed, but it's also driving organic growth through the expansion of customers that we acquire. So again, if you come back and look at from 2016 to where we are today, we wouldn't have won a deal like IBM if we didn't have the scale to deliver globally. So while we've acquired to get revenue to be able to get some margin upsides and to be able to get access to these large global [ WALEs ], it's also given us the scale that we have needed. And overall, when you look at the metrics and the way that they've [ played ] out, the M&A strategy has been very successful for us, and we believe will continue to be a part of our growth. And I'll cover that a little bit in this next slide. So again, the market's very active in the M&A space. We're getting lots and lots of inbound opportunities. We're in some reasonably advanced stages with some M&A opportunities. I'd say that we're right in the sweet spot for us would how I describe some will look at it at the moment. And again, if I just look at the criteria that we are applying -- or the lens that we're applying as we look to buy these companies, we want a profitable company. We want one that's going to be EBITDA and cash flow accretive. And really key for me is that we want companies that are going to give us access into significant global accounts that we can grow. We've now got a dedicated new business sales team, which is again, part of this increase in heads that we've got. And they are there to drive revenue through these opportunities. So things will start to align, and I feel that now that we've got some great opportunities in the M&A space that are in the sweet spot, we've also got the team and the delivery to actually really start to grow those. So again, going back to the start of the year, where we had said or late -- this time last year that we had closed a significant deal with IBM. We told the market at the time that we've started to do some integration that would kick off -- the contract would kick off in January that it would take us a good 6 months to get up to speed in terms of integration, things like that, and we gave a time line of how things would work out. Now I'm very pleased to say that it is tracking as we said it would. I would say, actually, in Q3, the quarter we're in now, it's tracking incredibly well. So we are onboarding a lot of that content. And at the 1st of October, we actually switched over to a new system that basically automated a huge amount of this content from IBM. And so that's when we really started to see the dial shift and the needle move in terms of its throughput of content. Now what we've also seen, which is really exciting is that we've won our first -- and we've got a JV there, but it's really a shared sales approach, I guess, or a joint sales approach, to work with the IBM Consulting division, to win a major contract with them for us to provide that. Now obviously, if you think about the size and scale of that IBM Consulting division, this is an enormous channel for us to have access into. And the fact that we've now got some runs on the board, which is again something that we did talk about earlier in the year, I think, is super exciting. Very low cost of sale on that channel, huge enterprise customers, exactly the ones we want to talk to. And a big brand that we can work with and a solutions team that we've already spent 9 months working with to provide this stuff. So again, a hugely exciting indicator of what's to come down the pipeline, I think, for Straker. And we've also got on our website an interview with Lizzy Ryzebol (sic) [ Lily Ryzebol ] who is the Director of Globalization at IBM along a couple of other roles. Now she talks about why IBM selected Straker, how we've worked with them. And I think it's quite enlightening when you hear what she says how IBM needed to change their approach. They went out, they looked at the market, they found the market had changed. The type of suppliers had changed. It's finding companies like Straker that -- well, they found Straker basically. And they had a very different approach to the way traditionally things have been managed, a lot more technology approach and how we've partnered together. So it's great that we actually got IBM willing to talk about how successful this project has been for them and for us. And obviously, if you think about the investments, I'll go back to the sales team, and what that can mean, it's really, again, another really good indicator of where we're at. SaaS is something that we talked about earlier in the year. And again, we have $5 million of SaaS revenue. The market doesn't sort of seem to appreciate that, I guess, if I wanted a better word, or maybe not understand it enough, but it's there and it's SaaS revenue. And what we're trying to do is grow that SaaS revenue through use of -- through our RAY platform. And we've done a lot of work on this. We've got a -- we want to use a usage-based model for our SaaS. And to do that, we have to do a lot of set up. We've got all these data, all this data, all this storage, and we've got to [indiscernible] it into the right place and we've got to build the systems and integrate with our finances. So we've been busy doing that. And so we think that we'll get through a lot of that this quarter. And we'll be ready for some adoptions, some low-hanging fruit sort of in Q4. I'm not saying there's going to be much revenue attached to that, but we can start to get some runs on the board. And then we really want to start to see how we can grow that SaaS revenue going into H1 next year. And again, we are not going to be 100% SaaS company or even 80% or 50% SaaS company. But if we can get to 20%, 25% of our underlying revenue of SaaS, I think that, that would be really, really successful for us, for our business model and for the shareholders. So what I'm going to do now is just make David, our -- David Ingram, promote him to a panelist. I should have done that at the start, so apologies, David. And he is now going to just come in and talk through the financial slides. So over to you, David.

All right. Good afternoon, everyone. Firstly, on financial performance. We had excellent revenue growth with growth in constant currency at 68%. We had a very strong performance from existing divisions with organic growth of 25% in constant currency, while, Lingotek our acquisition, which we completed in February 21, had nearly 10% growth on a pro forma basis. There was a strong gross margin performance, up 500 basis points, the higher-margin SaaS component of Lingotek's revenue helping us, but also an improvement in our underlying operations. You'll note that there is higher depreciation amortization, and this reflects both the addition of Lingotek and the fact that it has its own SaaS solution, which we continue to invest in and amortize over its useful life. Operating expenses excluding D&A increases $5.2 million, and the vast majority of that being the addition of Lingotek which is not in the comparative. And also our increased investment and growth initiatives, including the onboarding of our major contract with IBM. If we can just go to the next slide, Grant, so financial position. So we have a strong cash position of $18.2 million, which was bolstered by a successful capital raise in June this year. Our trade receivables have increased, which reflects a substantial growth in revenue and timing of customer payments. We are now debt-free following repayment of $8.4 million in loans, which we took out to acquire Lingotek. The net effect is that we doubled net assets to $40.6 million. Next slide. On cash flow, receipts from customers were up 38% to $20.3 million, reflecting revenue growth offset by customer payment timings. We had an increase in other operating cash outflows, which reflects an increased investment in onboarding IBM, and investment in sales and marketing initiatives and the addition of Lingotek to the group. We doubled capital investment, again, reflecting the addition of Lingotek's R&D team. With the capital raise, we were able to repay the 8.5 -- sorry, $8.4 million in loans including $688,000 in associated interest. $649,000 was also paid in deferred consideration following previous acquisitions, achieving earn-out targets. And we ended up with $18.2 million as the final bank balance. So thank you, Grant. Over to you.

Excellent. Thanks, David. Please stay on the line just in case we get any Q&A on the finances. I think you'll be the man to answer those ones. So look, just in summary around our plans and what we're trying to do here. If you look at the slide in the top -- or the diagram on the top left, at the IPO for many of you that were involved in the IPO, we gave an indication that the $25 million raised on our revenues were $24 million that we should be able to get to somewhere close to $50 million run rate. And it was sort of implied that, that would be over a 2- to 3-year period. Now if you look at what we've achieved, we've actually done that. And I think if you look at the green-dotted line, which is sort of actual performance as opposed to the linear pathway that we could have gone, I think a lot of investors think that we're at this part of the curve, that '19 to '21, and we're still there. Whereas actual fact, we've made a very sharp upward trajectory. And that is continuing in this quarter for sure. It's pretty exciting where we're at, at the moment. So that's where I think it's -- we've delivered on what we said we would do, and we're continuing to do that. We have the confidence to give guidance for the year for a growth company that has a lot of dynamics going on. So it's really exciting that we got there. Start of this year and late last year, we also indicated where we would be with IBM, and we've hit those metrics, I believe, almost spot on. So we do have a good handle on what's coming down the line where the revenue is and how we can grow it. And hence, why we've made the significant investments in the sales that we have made over the last few months because we can see the opportunities that we've got. And in 12 months' time, I need to be sitting here talking about how we're much closer to our next sort of revenue milestone. And that's what's going to get us there. So it is proven -- or it has proven that we absolutely have a very strong offering in that space, and it is the leverage we can get now from telling that story to other large companies and having a sales force to go and close those deals. That's putting us in a great place going forward. We also said that the market is very good for M&A, and we've made 4 acquisitions since IPO. So again, we've done what we said we would do, and we have delivered on that. The market's still active. There is going to be a trade-off going forward, I think, as to how much we want to invest organically to grow that as opposed to maybe do an M&A because the market and the story we have now might be more aligned to us investing a bit more in some organic growth. And obviously, we might have done that 6, 12 months ago, except for the fact that COVID has restricted our ability to attend a lot of the conferences and avenues that we might have -- and channels that we might have been able to use to find those customers. And I'll just come back to this aspirational target and a simplistic model of what happens. But as we go forward from here, as I say, OpEx will not increase at the same rate as revenue, margins will stay steady and that will start to produce some bottom line delivery. And on top of that, you've got the fact that we have -- we do have the capital in the bank in terms of -- or on the balance sheet to be able to deliver on that growth and execute on it, and we've got the team in place. So I'm very confident around what the team can do over the next 12, 18 months for sure. And then again, moving forward to that $100 million target that we have. It does focus the team to make all the right decisions. When I set a target like that, what it does is it makes my team come back and say, well, we're not going to get there if I don't get the sales teams in place now to be able to go in and win these enterprise customers because a lot of that growth is going to come from these big customers. And they'll put pressure on the tech team to say, well if we're going to win these big guys, here's what you guys need to build. So if you're thinking about where our capital is getting deployed where our OpEx is getting built up or spent, that's where it's going. And it really is starting to work very well, especially in a market that's starting to align with our trajectory. So look, without sort of further ado, I'll come over to the Q&A.

Now we have a couple of questions in here already. So the first one is from [ Nadine ]. Nice to see a plan where revenue is scaling to COGS. Do you feel the future enterprise contracts will leverage off your development to date and not require customization contract by contract, thus scaling margins further? Yes, we do, absolutely. And that's because even if you look at what we have done with IBM, there has been a lot of integration that's been -- integration into a lot of their internal systems, which are actually platforms and tools where we can reuse a lot of that development. So we've plugged into some of their CMS, some of their common sort of tools. And so there has been a lot of work, but we can reuse it. And that goes right across the whole range of the things that we have been working on. So again, I think that, that is -- because a lot of these large enterprises use the same tool sets, it should give us that. Next one down here from [ Stella ]. One, could you please help me understand 56.8% gross margin mentioned on Page 4. How do we bridge that improvement of gross margin? So David, do you want to just [indiscernible]

Yes. So the 56.8% we mentioned wasn't gross margin. It was the translated margin, which is a little bit different to gross margin. It's -- gross margin's got some additional internal costs involved.