Straker Limited (STG) Earnings Call Transcript & Summary

Good afternoon, everybody, or good morning, if you're in Australia, and welcome to this Straker STG half year results presentation. So on the call today, you will have myself, Grant Straker, the CEO and Founder; and then David Ingram, who is our Chief Financial Officer. So just for clarity, one thing I do like to always confirm is that we are actually a New Zealand financial year. So we're a March year-end. So our half year is at the end of September. So just so that it's not aligned with the usual Australian financial year. So I'll start off with the financial highlights. So look, it was a very strong year sorry, I'll just move a couple of things on my screen. If you don't mind for a second. So a very strong year with significant growth as well as operating leverage starting to come through in our business model, which comes through an improved EBITDA and operating cash as the year has gone on. So our margins have remained really strong, and we have been running an OpEx reduction program as we started to see gains from our technology leading to an enhanced productivity and some consolidation benefits that we get as we run our acquisition strategy over the years. And as you can see, we have a strong balance sheet with no debt and cash of more than $12 million to support our growth initiatives going forward. In terms of the operating highlights, we've been actually really significant over this -- over the first half of the year. So the biggest one being that we re-signed the strategic translation agreement with IBM for further 3 years. It's in total, then 5-year agreement, very significant. And it's not just the revenue that we get through that agreement. It's actually the partnership that we get with IBM around technology, around adjacencies that we see in the industry and around working with them on innovation. So it is a really significant deal for the business. And what we're also -- you can see across these bullet points is that we're actually building up some long-term contracts with a number of major customers, and that brings some really strategic value to shareholders. I think it's a long-term value as well as we're investing in R&D initiatives as we see the world changing in the way that people work post COVID, in particular, and that is around Super Apps, such as Slack and Microsoft Teams becoming a default and even so, to be honest, and I'm not saying we're working with Zoom, but just you see the trend in technology change in the workplace. We've also won a major new EU contract as we started to explore how we can grow the revenue in the EU, OECD EU type marketplace, which has come around through our acquisition of IDEST at the end of last year. We re-signed the Nike SaaS contract, quite significant deal. But we were named New Zealand's fastest-growing tech company last week for FY '22. And while I understand that investors are far more interested in the future than what we did in the last financial year, it does show just how easily our business can scale and how quickly we can actually onboard revenue. And we've got a very strong model where our gross margins and a huge part of what we do is done through a Crowdsourced Resource Pool that we could turn off as we scale. So look, some great initiatives as well as some great investments. So one of them, again, around the European data center. So when I talk about consolidation on costs, for a while, we've had to run 2 lots of cost centers as we have -- in terms of 2 data centers to cover this load. And then as we released the one in the EU, we've been able to drop that down. So we normally have slides -- sorry, there's been ones going on in the background. So we normally run some slides on the economy in terms of the industry. And this is, I think, more important than normal at the moment because the industry is changing and that is having an effect on what we're doing. So if you look at it, this industry has been incredibly resilient to change. So as economies slow down, the industry has actually gone really well through this period. And that's because the nature of translation work changes. And so this slide is just really to show that while the global economies are experiencing a downturn, we see that the industry could be very resilient through this period. Another key point for us is around the fragmented nature of the industry. We've talked about this multiple times in the past. But actually, we are starting to see and getting hard data on how this industry is starting to consolidate. And again, I think if you look at each percentage point given the size of the industry, it's around about $500 million. So a 3- or 4-point percentage change and that consolidation is a couple of billion dollars. And I think if you look at the number of small translation companies that's affected, it's in the hundreds. So what you're seeing here is at the top end, there is some M&A that's driving that top -- that growth and that sort of top 10%. And then what's happening below that is between -- sorry, top 10 players and between the next sort of 10 and 90, you're starting to see that consolidate where those companies are growing or they're starting to also aid into that market that is those small translation players. So it's a massive opportunity, and there is a huge range of investment going into this industry because people do see that there's a $50 billion consolidation opportunity. And I would argue that we are one of the best placed companies out there to capitalize on that opportunity. A quick bit about again, just a refresher on our business strategy. It's very simple, and it is fundamentally driven by the investments that we originally make in R&D that drive the rest of this chain for us. So we invest in R&D. We were the first to look at how you did a per-hour translation model. We use that. We then saw that to get to some of those customers, we needed to have some organic -- an organic channels to get there. We successfully do that. We buy a company. We get a bigger relationship with parent or a group. We use those regional relationships to grow the size of the business because they like the R&D that we offer them for their group, and then we use the economies of scale to get productivity benefits and technology to deliver higher margins. And that's exactly what we have seen playing out and why we have had such significant growth. And so again, what we want to do is make sure that we see the cycle repeat, and we are investing in those R&Ds. As I said, in terms of we see a changing workplace, we see change in the way that people use content, and we want to capitalize on that and then use, again, a similar model for growth. So how does that work out? So IBM, we acquired a small translation company in Barcelona. We're able to push that up because they like the appeal of the productivity from our technology and move that into a global contract in 2020. Fuel50, one of New Zealand's leading technology startups. Again, we won that organically because of our technology could help start up get global a lot quicker than they could otherwise. So we've been able to grow that relationship significantly. ECFMG is a certifying Board for medical practitioners in the U.S. We've built some technology to enable them to easily handle the translation and validation of medical professionals that come into the U.S., it's quite a significant business. And again, there's a big moat when you've got this technology embedded into these systems. So that has been very successful for us. And then if you look at our last acquisition, IDEST, very big in global organizations, the EU and EUN. That company only had a couple of languages that they really offered into that area, and now we're winning contracts with up 15 languages. And these -- each language is roughly worth the same amount of money. So you can see the size that we can start to get as we use the strategy. So back to the previous slide, we really want to see the cycle continue, and we want to make sure that we're investing in enough technology to really get people on board as we want to win these global contracts, but also taking the right bets in terms of acquiring companies and going down the right verticals, et cetera. So again, a big range of customers just showing that we have a really good customer spread across a wide range of customers and a lot of different verticals, a significant untapped customer wallet. And as people start to look at -- customers start to look at consolidating costs and how they make their businesses more efficient in the same way that IBM have done with us. I don't know if any of you have watched the video that we put up of Doug from IBM talking about the benefits that, that organization have received. We feel that we're really well placed to increase the customer wallet and a huge range of opportunity. Repeating revenue, something that we probably just need to focus, I think, on is just how much of our revenue comes from -- and again, this is not recurring all SaaS type revenue, but this is customers who have used us for a number of years or these are customers who have used us for a number of years. We have some kind of agreement with them. So you get -- from a SaaS contract, the likes that we have with Nike to master services agreements, which don't have revenue attached to them per se, but we are the default provider for that customer, and there's a number of terms of service and reference that we use to engage with them. So we have the default to contracted revenue, the likes that we have with the EU and EUN. And then we still have a large base of -- what I'd call transactional customers. But the vast majority of those transactional customers are also repeat customers. So they're not under a contract, but they come and buy through our platform, and they use the automated tools that we have to -- for ordering, et cetera. So a big chunk of our revenue. Yes, as economies and projects go up and down, that can vary our revenue, but it doesn't actually change the significant portion of our revenue percentage that is actually driven by repeat customers. So investment in innovation, and I'll just come back again, the slide. Innovation has driven everything that we've done in our business as a technology company. So if you look at the spend we've done $5 million in R&D across H1, and that's a big investment in these new opportunities that we have, the likes of Slack and Teams. And I won't demo the slate today, but we will probably do an online demo possibly in the next couple of weeks for anybody that's interested to show you how by Slack and Teams work and practice just to bring it to life for you. And I think that would give hopefully some -- a lot of investors, a lot of insight into how we see this working and how our technology is actually working at the moment. We're just about to release the Slack app into the IBM environment. They are just about to use it. I believe their legal teams possibly this week starting to look at using that platform as a way that they manage their translation process. So it's really exciting. And certainly, we see it as a big opportunity for growth as more and more companies use Microsoft Teams and Slack, in particular. But there's also other ways that we can integrate into technology, the likes of the Microsoft Power automation tools that we see sitting at the heart of many systems now, our validation platform. And many of these, we are looking at a SaaS model for an underlying payment on them. So that is, again, something we've talked about for a while, but it's starting to hit fruition now. And whilst we haven't put any numbers around that, I think going into the new year, we will actually start to look at how we specify what we think this means to the business. And again, we're not capitalizing all of our R&D spend. So there's a big portion of it. And even though it's going into work that can lead to future revenue, we do not capitalize. So I'll now hand over to our CFO, David Ingram, to talk about our financials. So just over to you, David.

Thanks, Grant. Hi, everyone. I'll talk you through the financial statements on the next 3 slides. Firstly, starting off with the profit and loss. We had a 42% growth in revenue. A very pleasing result, particularly given the strong growth last year for the full year of 89%. And also that we had growth in all 3 regions, APAC, EMEA and U.S.A. The APAC growth, we had 74%, and that was led by a strong first quarter out of IBM and EMEA growth of 50% led by the acquisition of IDEST. Even pleasingly, the organic growth was 29% and inorganic was 13%, which was the acquisition of IDEST. We have had a focus on costs and that will be most apparent in Q4. But noting that the cost growth in H1 of 31%, which sort of costs, I'm talking about the OpEx and the cost of sales that trailed the revenue growth of 42%. So we had operating expense growth of 23%, and the majority of that reflects the addition of IDEST. It's important to note that the net profit of $2.1 million was positively impacted by a foreign currency gain of $4.4 million and $4 million of that was an unrealized gain and that gain resulted from the revaluation of intercompany loans, which obviously we do every month, every period. And it was because we had a very large movement in the U.S. against the NCD. Next is our consolidated financial position. Look, it's all positive metrics on this page. Our trade receivables were up 20%, and that's really reflecting the strong trading conditions we had in H1. So working capital increased 9% to $12.7 million, and net assets were up $3 million. Really important to note, we've still got a very strong cash balance, and we've got no debt. On to the next page, cash flows. Yes. So again, a strong result. Our receipts from customers were up 58% to $32 million. So that closely reflecting the revenue of $33 million. And the operating cash outflow was significantly reduced by 83% and very close to breakeven. We also paid $1.7 million to prior acquisitions. So $1.2 million of that was an earn-out. So we always like paying earn-outs. It means that the acquisitions are meeting their targets. And there was also a $0.5 million payout to IDEST for our working capital adjustment. Thank you, Grant.

I'm here myself. Thank you, David. So look, just going to jump in, it's great to have all these numbers, but just to put this into some context and something that's nice and simple to understand around our business. We did show earlier in the year that these jaws were opening that we were starting to see operating leverage flowing through in our business. Probably the biggest change probably from the last time that we spoke is around how we are getting more leverage out of our OpEx in terms of reducing the OpEx and how that's changing the profile. And again, a lot of these changes have been ongoing over the last few months and will probably be ongoing until December. And what that means is that you'll start to see the benefit of these coming into Q4 and certainly the exit run rate from Q4. Our OpEx will be lower than probably what was modeled a lot earlier in the year. So that's going to have a really positive effect, I think, on the business going into FY '23. So that's what this is really to show. And again, it is an uncertain macro environment that we're operating in, but we are being prudent and we're making sure that we are running a tight ship and that it is well placed as sort of the global economies change. And so just on that note, coming into the outlook. So there is some macroeconomic uncertainty. It is obviously some volatility in the New Zealand dollar and a softening outlook that we see in Q3, but with a huge range of opportunities in Q4. And yes, the one thing I would say at the moment is from running the business viewpoint, it's just mixed signals everywhere. I just heard the other day that Europe is actually looking quite promising, but Europe has been down for us a bit. So it's that sort of uncertainty, economic sort of, I guess, trends that are happening that are hard for us to pick because what traditionally happens is customers can hold back on projects, but it doesn't mean they're never going to do those projects. It just means the timing of when they kick in changes. And that is something that we have seen, people tighten their belt. They don't start a project. But then when that project starts in, it all sort of arrives at once. And so it has been a common trend with the business, and so it just makes forecasting quite typical for us. Look, we've got a strong pipeline of R&D initiatives. We ran a strategy session with the Board and executive a month or so ago. We've recognized some really big growth opportunities and where we should focus our R&D. And a number of these are going live. And as I said, we may run a technology showcase Zoom in a couple of weeks. It shows some -- showcases some of the stuff that we are doing with the likes of Slack. It's also starting to become a good environment for M&A, which we do see is something that will play out in the next calendar year, I would say. As things change, we haven't had last year was definitely probably a seller's market in the industry in terms of M&A, and it's now switched across to a buyer's market. So let's say, we have some good cash. We have some good options around how we can competitively price and structure deals. So we do see that as something that can add some value, particularly if they're in a space that we feel is open for exploiting in terms of that -- our new revenue stream that we find interest in a vertical that we like in the industry. As I already said, it's uncertain. So we've got an element of caution. I don't want to stand here and just go ra, ra, ra the world is great when clearly, if I just look at the New Zealand papers today, the outlook across a lot of -- the world isn't that positive, but we feel we're well placed. OpEx reduction and rightsizing just ensures that we are in a strong cash position. So I'll go back. And again, I'll come back to the fact that we've always run a reasonably tight ship on this. We've never been too far away from that sort of breakeven cash position if we needed to get there. And I think that right now, caution is a good place to be and that ensuring that we're going to have some positive cash flows going into next year is really important. And look, there's significant value and other opportunities in the long-term IBM contract. And you can't write off that for the next 3 years, we've got this great platform to work with one of the world's largest technology companies and to really engage with them and as a safety others in the video of Doug talking about how successful that project has been for IBM. It's worth going back and having a look. So I'm just going to pause here and then open it up for questions.

So if you could just use a Q&A function on the chat, David and I are very happy to answer any questions. And I see we already have one from Stella, which I'll dig straight into. So that question is -- 2 questions. One, for over a year now Straker has been invested in winning material enterprise deals, IBM and the like, how is that pipeline going? Have we lost any big enterprise tenders in the last 12 months. I mean we run tender processes all the time. We certainly don't win all of them, if I answer the second one first. But look, our pipeline is strong. One of the things we've needed to do is really have IBM back and they are our best salespeople, if you like, telling the story. And so localization world last month was our first chance to get IBM to talk about our business. And from that, we did see a number of engagements happening with some large enterprises. So these processes are not quick and simple to go through, as I'm sure you're aware, but we do have a good pipeline of enterprise deals. Can we confirm whether the 20% FY '23 revenue growth includes any acquisitions to come in H2? At the moment, it doesn't include any, as I say, this is an environment for M&A, and it could go into next calendar year, we certainly see some M&A opportunities in there. One from Milo, Grant and David, do you foresee any significant costs in order to achieve your future growth initiatives? Or are you well placed following the ramp-up for the IBM contract. We don't see -- well, I'll answer for us, and I'll get David, the CFO to take that. I don't see any significant costs. I think our growth initiative costs are certainly around the R&D that we put and that's already factored into our P&L. So -- but yes, let David answer that as well.

Yes. No. No, we don't see any significant costs, yes.

Yes. Okay. Cool. And then one from Garrett. It's a topical one, this one because we get asked this a fair bit. Do you feel confident about the ability to continue being cash generative through some volatility in revenues in coming quarters or so? Yes, we do have confidence, I think, particularly in Q4, as things start to pick up, our cash in Q3 to be honest, is looking good in terms of the way that things flow. But look, we have done a reasonable amount of going through every line of our P&L in terms of OpEx and what we needed to do to ensure that we get that -- to that free cash flow position into FY '23. And I think that we are doing a lot of things to drive that. And I say, yes, I'm very comfortable. And as you know, half of our revenue are a little under -- sorry, half of our expenses is related to translators who are a Crowdsourced revenue cost center that flows with our revenue. So yes, very confident around that at the moment. Yes. So look, we have no further questions. So I will now close the meeting. David and I are available for one-on-ones if anybody does wish to catch up with us, more than happy to talk to investors, and we will be over in Sydney, the week after next, should anybody wish to catch up with us. So thank you very much for attending, and I look forward to giving another update in the new year. Thank you.