Straker Limited (STG) Earnings Call Transcript & Summary

Good afternoon or good morning, everybody, and welcome to this full year presentation update. Today, you have myself, Grant Straker, the Co-Founder and CEO; and David Ingram, our Chief Financial Officer. So look, we're going to try and keep this reasonably shortened, sort of 20, 25 minutes, and then move on to the Q&A straight after that. But if you have any questions along the way, please feel free to use the Q&A function on Zoom, and we see some questions as we go through it, we will try and answer them. But ideally we'll review them at the end of the session. So first of all, I just want to talk a little bit about market opportunity alignment. So this is really just saying that the market right now is actually aligning to our value proposition, where we're starting to get a really good fit for our technology, years of technology that we've built and where the market is going. We were the original pioneers of productivity-based translation, and that is all based around the fact that AI will advance and humans will become more productive. And so our systems are actually very aligned to where the world is heading at the moment in terms of technology. But also, we're in the right part of the industry. It's a significant industry, and when you look at all the data, it's saying that the bigger getting bigger, and it's much harder, everybody always says it's way to have an industry where there's 20,000 small [ language ] industry types and 1 that's getting an avalanche of technology coming through. So this is starting to again also impact the opportunities in terms of bringing more on board. And so us being in that top 100 is quite critical. And we also -- we have the ability to deliver secure AI-enhanced human-in-the-loop platform at Straker. So I'll talk a little bit about that as we go through. So just some of the highlights from the year. So when I look at these highlights, I do believe the team have done a great job of adjusting the direction of travelers, the global economies sort of hit some headwinds. And you can see that 1 of the first big focuses that we had was on free cash. And so you can see that starting to come through, particularly in H2. A lot of the decisions we made in H1 came to pay off in H2. Second thing is around profit. So our business model is generating profit, which has flown on to that cash. Gross margins, record gross margins. So again, our technology is starting to play its part -- who has been a great believer that gross margins are the single best way to influence your cash position after having a really efficient OpEx line. Look, our cash balance is very strong. So we're in a great position to both invest in technology and also look at how we might use that cash down the track in terms of things like acquisitions at some point. Significantly, reduced OpEx. So compared to H1, so H2, we really started to see some of that work that we did around streamlining and making the business more efficient. Our revenue up 6%. Obviously, we had a very strong H1. Overall, the global economy started to play an impact. The global economic trends started to play an impact in the second half. But despite that, we have got some growth in there. And so fundamentally we're cash generating stable revenue, and we're investing in new and significant opportunities to really look to grow that revenue. And as that grows, we would hope that, that would start to really deliver some strong cash to the bottom line. So efficiency improvements. I'll just talk about them. Now we talked about them at our 4C, but you can see that we've significantly reduced our OpEx, started running efficiency programs right through from Q2 when we thought that global conditions would worsen. It is worth saying that ultimately, a lot of our revenue, whilst it's underpinned by technology, that technology enables the service. And when we have lots of customers that just actually do a lot less and these sorts of downturns, it has an effect. So in the same way that when it comes back and we saw this in COVID, when everything comes back and these customers get busy again, we see a real big flow through. And I guess that correlation of the 2 is that -- once we get flowback, but we've streamlined the business very effectively, then again, you'll start to see us delivering some really good outcomes in terms of EBITDA. Again, just to reiterate that this is an industry that has 20,000 small players, and there is an avalanche of technology coming down the pipe created by companies like Straker that I don't believe that these companies can withstand just the sheer volume of innovation and technology that is going to start to really change the way in which customers make decisions around who they use as vendors. And I don't believe that they will be choosing a small, localized player. They're going to be choosing a global top 100-type player as their solution provider because they're going to want to access all of this technology. And to do that, you need to have innovation and you need to be investing in R&D in the way that we are. Just to go back on another slide. Again, it was on the 4C. It was only a few weeks ago, but I will just say that the market for us is actually forecast to be a growth market, okay? So it's going through, again, a bit of a transition at the moment as everybody figures out exactly what -- where the opportunities are in here. But for us, this is the area that we focus on, the human and machine, and enhanced machine translation, and we see this as being something that, again, it's going to start to really get some legs now that we can see customers have had their eyes open to the way that AI can provide efficiencies in the translation process. So again, it's just pointing to the fact for us that AI is something that can enhance our business model and enhance our growth opportunities as the market starts to become more and more aware and look for these solutions. And we are seeing that out there. We do believe that there are many customers looking out and going what solution is the right 1 for us that can give us all these benefits, but also give us all of the other things that we need around process and security, et cetera. The AI market opportunity. So we see it, as I just said, it's been something that really is going to enhance our opportunities for growth. Now if there's anything that could take us from sort of around $60 million to, say, $600 million, they get a number. It is this opportunity that we have in front of us. And I'll just talk a little bit about that now. Now one of our core jobs is validating things that machines can't do. We're making humans more productive because machines are generating content. We're validating that content. We're doing it in a secure way. We've got technology that speeds up as you'll see in the demo that we'll do in a bit, it speeds up this process. And it needs to be done in a secure human in the loop. So you need secured technology and you need a secured pool and a validated pool of humans. So this is all the stuff that we have right now out of the box. So there are predictions. And again, these numbers are hard to get a definitive on because they are purely predictions. But there are people saying 90% of online content will be produced using generative AI. And I'd have to say that that's possibly a realistic prediction. So with all of this content being generated, only 10% at the moment is translated. So that's our sort of pull, so this is just the online market. That's our pool of opportunity. But what's happening now is that it's potentially increased our market size and opportunity very significantly because we are seeing that customers don't just want translated content validated. They want generated AI content validated because it doesn't -- it's not factual. It elucidates. There's all sorts of other issues around that technology stack. And that will be the same for whatever language they generated in. So we now have a stack of tools that are capable of really servicing this market. And it's probably not what you'll see so much in the demo today, but I do believe the half year, you'll really start to see some of the technology that we have been working on that's going to open up this huge opportunity that we have in front of us. And this wasn't something that we had 12 months ago because the customers weren't looking for it and they weren't quite aware of it. Now that they are, we feel this is a really huge market opportunity for us going forward. Again, I just want to talk a little bit about the difference between acquisitive and organic growth. See -- this has been a tricky industry. People have really locked into trusting providers, and they haven't gone out of their way to look for new technologies -- providers, because they've just got very secure, and that's not been enough of the OpEx for them to sort of go out and look. But now we're starting to see them go. Am I missing a trick here, I need to find a provider that's got AI-enabled solutions. So because it was hard, we pursued an acquisition strategy, and then we were looking at to get those consolidation benefits. With customers now actively looking, we believe that there's a real cost-effective organic strategy that we can put in play. So it does take a little bit longer with the organic strategy because you have to start building up to that. And hence, we don't see it sort of kick it out until further through the year, but we are starting to see those opportunities come to the fore. So the organic for us is to embed deeply into these vertical channels, things like legal or medical, get our technology out there in the enterprise, start showing what we've done for other enterprises. And as customers are looking, we have had more and more success with RFPs, for example. So we are starting to see that as being something that is coming up as people start to look at what they're going to do. So it doesn't write off the fact that later this year, especially if we're generating cash that we may look at an acquisition because we think there may be some very attractive, very well-priced opportunities for us to accelerate some of that growth as the year goes on. But at the moment, this is where we've got our focus in our R&D and on these organic channels. So -- again, just to talk about where are we in the process of what customers are looking for. Where we sit is in what we call the language cloud solution, so that is the sort of solution that we've provided to IBM. So it's a holistic solution that covers off technology, integration, the services layer, account management, a whole bunch of areas. AI integration, for example. So -- and workplace apps. So making it very easy for customers to access this language. People ultimately don't want to log in to another app that helps manage translations. They just want it to be part of their overall workflow. And that's where we've been focused on going to where the customer is and making it very easy for them to access our services and to manage them without needing to go up into third-party systems because we've all got too many apps as it is. And part of that we'll be bringing in our platform-as-a-service offering, which is going live on July 1. Security is another huge part of the language cloud. We will know that the conversation around large language models, for example, and security around them and the index [ in a ] content. So we have the ability to offer secure in-house large language models for customers and so they can get all the efficiencies out of the AI without any of the security risk. And that's the same for the human-in-the-loop secure process that we already have in place. So those 2 combined, it's a very strong offering that we believe enterprise customers, in particular, will be looking for as this whole large language model industry sort of evolves. So, and the other thing is, you've got to be powerful to get these enterprise customers, you've got to have deep integration, you've got to be able to scale, you've got to have thousands of humans that are validated. So we already have all of that scale in place, and the ability to do -- I think it's more than 150 languages actually currently that we can do. So it's very -- again, Easy, Secure, Powerful is where we see the main pain points for customers that we can solve for them. So again, this is just trying to bring some context to that language cloud, which is to say that you have large translation management systems or technology vendors. You've got your larger language service providers, we're focused on delivery of the service, language cloud where we -- in between all of that, and so you've got to be big enough. You've got to be -- have the technology, but you've also got to have the services layer to be able to deliver. And that is our market category, which we feel is where the market is aligning at the moment as technology evolves. And again, if you're at 1 of these 20,000 vendors under $10 million, I mean, that represents itself something like a $40 billion market opportunity. And that -- that has been talked about for a long time. And it's definitely in play right now that these smaller companies who have got regional relationships to the global corporate, that global corporate is now going to try and -- we certainly feel that -- we'll look for our language cloud-type solution. And so a lot of that revenue is going to start shifting into this space. And so that's a significant opportunity for us and for investors. So now I'm going to go to the Demo. So I'm just going to stop sharing my screen. And I'd like to introduce you to Richard White, who is our Head of Product. And his job is to productize everything we do, make us a product-led company, particularly in the age of generative AI and all the opportunities that we have. And so just to say, we had a bit of debate yesterday where we're going to do a prerecorded where we're going to do bits a video. I don't really believe in that. It's possibly by military training, but I just believe if you're going to do something, you do it live, you have pressure in there, and you don't -- and you get it right because that's how you actually go out. So it's all going to be live. And my pleasure.

Absolutely, all live, all real. I'll take over the screen here.

I'll just stop sharing, and you should be able to share your screen now, right?

On the way. And everyone should be able to see that. So hi, everyone. Yes, as Grant mentioned, the core component of our strategy is being where our customers work. We don't just want to be another portal. So what we've done is build out some of the core workflows for our customers directly into Slack and Teams. That's what you're seeing on the screen here, and I'll take you through our work frozen Slack. So one of the core jobs of our customers day to day is the uploading and the receivable of transloader files. So that's the first work probably showing you here today. So we've got natural language built into the app as well as a command based system. So I can upload new file to lock a new translation job. And what are we doing today is I'll actually be translating our quarterly activities report. So we're commenting here and I can scroll down, get the file. And then source language, of course, being English. And today, I'll translate into German. So we'll have German here and few clicks of a button. I can also select what service I want, if I want just translation or translation and edit layer as well for an extra level of security and validity. And once I had submit here, this is really what's kicking off the workflow. So this kicks off the workflow whereby a quote was created, it's assigned to a vendor. And as that file is being translated by that vendor, it's going to come here back into Slack. So we can see here, my files are ready for download. And the file, this is 1 that we prepared earlier. This is the file here. So you can see it's all translated into German, and the customer has been able to do that without kind of leaving their environment. So that being the first 1 really looking to save time and remove friction in the process. Second 1 is -- second workflow we've built out, rather, is the job update workflow. So again, natural language. So I can easily get a view of all the jobs that I've got in progress. I've got 6 in progress at the moment. And again, this is -- we are hearing from customers that they wanted to stay in the port, where not have to stay in their workplace as not have to move between portals. I can look at and go a bit deeper here. Look at the jobs that I've accepted in this case, they're only in the last 24 hours, but all of my jobs in progress, I'll have a bigger view of those, and there's got a number of those in various different statuses and I can go a little deeper if I need to. And that's really where, as we continue to build this out and save time for our customers and remove friction. We do want to be -- well, we will be engaging directly with them to further iterate and make sure we're getting a speed of release going out the door. So the second section of releases that I want to touch on today are our AI enhancements. So these are really geared, as Grant said, towards productivity. So I'll come back in here and I'll actually use the command line for this one. And we can see here back to these in-progress jobs, I can see here that 2 of my jobs are product to be on time and then a couple have been flagged as caution. So the goal here is that we're allowing users to have a better visibility and view of deliverability and so that they can manage to translation projects and product more effectively. And that's based off a predictive model that we've built off our decades of data and we have used our underlying data as an asset to improve our products for our customers. Second AI initiative that we've worked on -- sits directly into our work bench. So work bench is where our translators live. That's where they do all of the translations from the source language, in this case, being German, into the target language being English. So we're adding in a Straker AI field here. And the goal of this has been to make our translators faster and to help to reduce the turnaround time so that we're getting -- we're completing jobs, we're getting files back faster to our customers. Now again, this is a live demo, and we're training this model. So we will might get some interesting answers here, but we're rephrasing the content here. So you can see from the original, we can rephrase and this helps the translator to get a better idea of what they want to be saying and generate some options. We can also go a more formal time -- shortening, making it more creative as we can see here, as we can see here. And this is the beauty of this is it's going to as we have more people learning and more translators using it, we're going to have better outcomes and we -- the model is going to learn about. So this is what we've got to demo today. And as Grant mentioned, really exciting time for us moving forward and all the opportunities that these AI enhancements have unlocked for us.

Great. Thank you very much, Richard, and excellent. I told you, we do it with a bit of a large GMO. We always get it right. Okay. Let me go back to my -- okay. So now I'm going to hand over to David Ingram, our Chief Financial Officer, who is going to take you through the main financial reports for the full year.

Hi, everybody. Look, I'll give you a bit more color on the financials. So firstly, the income statement. Revenue, this was 6% up on the prior year to $59.4 million. We had a very strong first half, but revenue in the second half was impacted by macroeconomic conditions. APAC had a strong year, growing 10% but Europe and North America were the regions most impacted by the economic conditions with customers, particularly the enterprise customers reducing their budgets. Europe did have 18% growth, and this was helped by a full year of IDEST, our acquisition that we did the prior year -- late in the prior year. North America declined 6%, but had a solid year in subscriptions, growing this 15%. Further to the positive, we had no significant client losses, and we continue to pick up some good client wins. Gross margins showed a large improvement. We increased from 54% last year to 57% this year. The margin improvement was helped by product improvements, increased automation, price increases and acquisition synergies. Adjusted EBITDA improved from $0.2 million to $1.4 million for the year, with Q4 achieved a profit of $1 million as cost-saving actions taken in Q3 took effect. As part of our restructuring in Q3 reduced -- we reduced headcount and associated salary costs by approximately 15%. The restructuring reflected synergies in our recent acquisitions and rightsizing the business in light of the economic times. It's important to note that we continued our level of investment in R&D as we continue our product strategy. On to the balance sheet. So look, we've got a very healthy balance sheet. There's not too much to say about it. One thing I would point out is the accounts receivable that they were down. And this reflects both improved cash collections and a drop in sales in H2. Our cash balance sits at $12.5 million, and we have no debt. On to the cash flow. This was a big improvement on the prior year. So operating cash flow was positive $2 million for the second half, and $1.4 million for the year. We met our goal of being free cash flow positive in the second half being $1 million positive. So free cash flow is our operating [indiscernible]. Our production and costs and the strong collections were drivers in the performance. Our $1.7 million was paid on earn-outs during the year to our prior acquisitions. So we're always pleased when we pay out earnouts and that the acquisitions are performing. And I'll pass it back to Grant.