Swoop Holdings Limited (SWP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Swoop Holdings Half Year Results Investor Briefing. I would now like to turn the call over to Alex West, CEO. Please go ahead.

Hello, everyone. My name is Alex West, and I am the CEO of Swoop. And with me on the call is Patricia Jones, our CFO.

Hi, everyone.

That's -- got it. Thank you for joining us today. This morning, we'll be running through our half year FY '23 investor briefing that was uploaded to the platform this morning. All right, on Slide 2. We continue to see the growth of our core business as a fixed wireless infrastructure provider servicing the underserved [ outer metro ] and regional centers of Australia. And our expanded products from acquisitions, being a voice platform and a high-margin dark fiber infrastructure, are tracking well since the start of the year. We have expanding organic growth opportunities. The acquisitions are integrating well and growing better under Swoop. We have a strong customer brand in our regions and are well below industry churn. We own -- with our own infrastructure, we have a good mix of high-margin products. And the scale and acquisition synergies have exceeded our original targets and are continuing to deliver benefits into FY '23 and beyond. And finally, we have one of the most experienced and capable management and Board teams ready to build the next large-scale national telecommunications company. Now let's get into the results. On Slide 3, I'm delighted to report that the first half was a great start to the financial year, which saw strong growth in revenues, underlying EBITDA and cash flow. The growth has been consistent over the last 3 years with a compound annual growth rate in revenues of 122%. And we have grown EBITDA from 0 to $7.3 million from the 31st of December 2019 to the 31st of December 2022. We've also seen significant growth to our subscriber numbers with 279% increase since the end of 2021. And this includes the acquisition of Moose, but we've also seen an 11% increase in the nonmobile subscriber numbers over the same period. We have seen significant improvements in net operating cash flow since the first half of '22, growing 155%. And we have also improved our free cash flows by 56%, as we are on track to achieve a free cash flow neutral position exiting FY '23. We still have significant firepower on our balance sheet with $21 million in cash combined with $13 million in undrawn debt available to capitalize on any potential opportunities. And finally, we completed our most significant acquisition to date, being the MVNO provider Moose Mobile, which adds a strong growth engine and free cash flow generator to the business. Moving on to the financial highlights on Slide 4. We saw a 55% increase to $37 million, up from $23.9 million in first half FY '22; a gross margin increase of 15% to $15.7 million for the half. Underlying EBITDA grew 38% to $7.3 million as a result of both the contributions from acquisitions completed during the year as well as the organic growth and efficiencies of the combined businesses. These efficiencies can be demonstrated in the 12% improvement of our OpEx compared to revenue, which is now at 23%, down from 35% in the last half year. Now continuing on to the financials on Slide 5. We have seen strong growth in our net operating cash flow, now $7.4 million for the half, increasing 155% from last half. And our free cash flow has improved 56%, as we are again on track to deliver a free cash flow neutral position as we exit FY '23. And as mentioned, we -- previously, we have $20.9 million in cash and $13 million undrawn debt to provide firepower for any potential opportunities. Moving on to Slide 7 and our key operating metrics, looking now into our business update and key operating metrics at the end of December of 2022. We had 512 fixed wireless towers; a slight decrease in staff to 163 as we improved efficiencies in the business. The total services in operation, which is over 142,000 which includes the Moose acquisition, made up from just over 7,000 wholesale services driven up by organic growth; 6,787 business services, increasing as we target business customers in our key regional areas. And we have 128,581 residential services, with growth coming from the addition of the Moose customers as well as our focus in [ outer metro ] and key regional centers. And focusing more on our SIO growth on Slide 8. Overall, we saw a 279% increase compared to the last half, increasing to 142,441, which included the Moose acquisition; as well as an 11% increase in nonmobile services. On a per-sector basis, our residential services with nonmobile grew by 9% to just shy of 28,000 throughout the year. Our business subscribers grew by 18% to 6,787, up from 5,747. And our wholesale SIOs grew to just over 7,000, which equates to 16% on the previous year. Then on Slide 9 and focusing on infrastructure expansion. We continue to focus on infrastructure, with over -- sorry, with over 50% of our services still considered on-net delivering higher margins. We also saw our tower numbers increase by 6% to 512 sites, [ up from 477 ] through targeted organic growth, with the majority of towers in our [ outer metro ] and regional areas of VIC, SA, WA and New South Wales. I will now hand over to Patricia Jones to run through the financial highlights in more details.

Thanks, Alex. So the first half of FY '23 was a strong start to the year, bolstered by both the successful acquisition of Moose and strong organic growth in the underlying business. [ Filling down ] into the financial results further on Page 11 of the presentation. Revenue was up 55% to $37 million from $23.9 million in the prior corresponding period. Gross margin is up 15% to $15.7 million from $13.6 million, and underlying EBITDA is up 38% to $7.3 million from a previous $5.3 million. Underlying EBITDA is an important metric for our business, as it reflects the underlying operational earnings. It excludes noncash items such as share-based payment expenses and other one-off items such as acquisition and integration costs and corporate restructuring costs. And the large increase in the first half of FY '23 reflects our solid growth strategy in terms of both the accretive acquisition and integration of well-performing businesses and the organic growth of the existing business. Looking at our gross margin for the period. While the gross margin percentage is lower in the first half of FY '23 when compared to the first half of FY '22, this is largely driven by the acquisition of Moose. While Moose is a lower-gross-margin business when compared to the remainder of the Swoop business, it is a highly profitable revenue stream and a strong free cash flow generator. Pleasingly, we have been able to hold our operating expenses and overheads at relatively flat levels given the significant jump in revenue. We continue to focus on both strong cost control and the realization of synergies and scale as we consolidate our numerous acquisitions. Cost control and securing further efficiencies will be a key feature of our strategy throughout the remainder of FY '23 and into FY '24. Finally, while both the underlying net loss after tax and statutory net loss after tax have increased on the prior comparative period, this has largely been driven by the amortization of intangibles acquired as part of the Moose acquisition. Looking at our segment revenues on Page 12 of the presentation. Business revenue is $5.8 million, up 74% from $3.3 million in the prior corresponding period. And wholesale revenue is $10.6 million, up 24% from $8.5 million. Our business and wholesale revenues continue to be driven by organic IP transit and nbn EE growth; as well as full 6 months of VoiceHub, with VoiceHub being acquired in November '21. Residential revenue is $19.8 million, up 85% from $10.7 million in the first half of '22. The increase is reflecting the Moose acquisition and organic SIO growth of circa 10% on an annualized basis. Finally, we report other revenue of $0.9 million for the half year. This largely represents revenue earned on the state and federal government regional connectivity programs in Western Australia and Victoria. While other revenue was down on the prior corresponding period, this solely reflects the timing of large projects and the stage of completion. Over to our cash flow position on Page 13 of the presentation. We finished the half year with a strong cash position of $21 million. Our operating cash flow continues to improve, from $2.9 million in the first half of FY '22 to $7.4 million in the first half of FY '23, led by a 65% increase in cash receipts. And our free cash flow continues to head toward a neutral position, which we are on target to achieve as we exit this financial year. Included in our free cash flow is $9.8 million CapEx for the half year, which largely consists of network expansion and supporting customer and network systems. The $24.3 million spent on other investing activities, which excludes CapEx, is largely driven by the Moose acquisition which completed in November '22. In addition to this, we completed the deferred consideration and retention components of previous acquisitions during this half. There are no further deferred consideration amounts payable in relation to previous acquisitions and all amounts have been settled. Net cash flow [ employed in ] financing activities was $15.6 million. This is made up of the approximately $19 million drawdown to fund the Moose acquisition, less $3.4 million spent on our on-market share buyback during the half year. Turning to our balance sheet on Page 14 of the presentation. We finished the half year with a strong balance sheet that is positioned for continued growth. Combined with our strong cash position of $21 million at December '22, we also have $13 million remaining in unused debt facilities, providing significant firepower for acquisitive and organic growth. Our intangible assets increased $29 million during the year. This was largely driven by the Moose acquisition; and the values ascribed to its customer base, the Moose brand, contractual agreements in place and goodwill. Total borrowings were $19.2 million at 31 December, following partial draft -- sorry, following partial drawdown of our Westpac facility for the Moose acquisition in November. The $4.5 million deferred consideration on the balance sheet at 31 December largely relates to Moose and represents the discounted value of the currently estimated value of the earnout. This estimate will be reassessed as we approach the June '23 reporting period. And finally, our net current -- sorry. Our net asset position is healthy at $95.3 million at 13 -- 31 December. Back to you, Alex.

Thank you, Patricia. All right, now moving on to Slide 16, just a recap of our acquisitions. And so far, we have completed in the last 18 months 8 accretive acquisitions to date, with Moose being completed in the half. There still remains a significant pipeline of potential acquisitions in our core product areas that we are in discussions with. However, we would not be looking to target completion of these into next financial year as we continue to target integration and organic growth within our existing businesses. And then on Slide 17, we look at the acquisitions themselves that show a number of high-quality infrastructure assets in our core expertise as well as strong growth engines that contribute to our free cash flow. Overall, we have spent $52 million on acquisitions that have contributed $9.13 million in EBITDA at the time of the announcement. And we've been buying well at about 5.7x multiples. And then on Slide 18, we take a further look at our most recent and indeed significant acquisition to date, the Moose Mobile that was completed in November 2022. Moose Mobile is a Queensland-based national mobile virtual network operator, an MVNO. And now Moose provides -- Moose now provides over 100,000 mobile services on the Optus network to customers across Australia. There are significant cross-sell opportunities with over 100,000 Moose customers potentially targeted for Swoop fixed wireless and nbn services as well as 28,000 Swoop residential broadband customers that we can target for Moose Mobile services. It has been a strong customer growth engine, growing 7% since we announced the transaction in July; and a strong cash generation, with very high proportion of EBITDA converting to cash. Now looking at our outlook on slide -- sorry, looking at outlook on Slide 20. Turning to the future, we see a massive opportunity to capitalize on our existing infrastructure by growing our market share in the areas where we already have existing fixed wireless and fiber infrastructure. The key area for us in the near future will be Perth, where we have a coverage of over 80% of the addressable premises within our fixed wireless footprint, which themselves are currently being serviced by nonfiber-based legacy technologies. We'll also be targeting [ outer metro and ] Geelong areas, where we cover up to 80% of the 1.9 million addressable premises that also have currently been serviced by 84% legacy technologies. And one of the new areas for us will be Newcastle, where we will start brand marketing and building on our Countrytell asset and customer base and increase our market share. Now on Slide 21. The focus remains on maintaining our strong customer obsession, where we continue to have strong brand and customer review scores compared to our peers, which is reflected on our -- in our low churn rate now 0.8% across our customer base compared with an industry average of about 2%. And we see a growing number of channel partners coming onboard to sell our services. On Slide 22. We will continue to build our next-generation platforms and turn off legacy systems and networks to drive efficiencies, which is demonstrated by our massive overachievement in the delivery of annualized synergies from acquisitions, achieving over 190% of our original 500,000 target, with a further 20% to be delivered in the remainder of this financial year. And then again, moving to Slide 23. We are still focused and starting to see the growth in our higher-margin products, with new 5G fixed wireless infrastructure rolled out in Victoria and WA; delivering higher speeds of 250 megabits to 1-gig services, which deliver greater customer takeup and higher ARPUs across our customer base. And the fiber continues to be rolled out on the back of customer demand and to ensuring that we get sufficient payback on our deployed capital. And then moving to Slide 24. The outlook for the remainder of the year looks extremely positive with our quarter-on-quarter improvement on free cash flow, has us on track to deliver a free cash flow neutral position as we exit FY '23; this along with our significant improvement in our operating cash flow, up 155% year-on-year. And finally, we are expecting growth in our underlying EBITDA as we continue to see the contribution from acquisitions we completed in FY '22, along with the Moose completed this year; as well as the continued growth in the underlying business and improved efficiencies from bringing these businesses together. So as I conclude, on Slide 25. We have expanding growth -- organic growth opportunities both in our underlying businesses as well as our new acquisitions, with the previous acquisitions integrating well and growing well under Swoop. We have a strong customer brand in our regions and well-below-industry churn. With our own infrastructure, we have a good mix of high-margin products. The scale and synergies have exceeded original targets and are continuing to deliver benefits in FY '23 and beyond. And we have one of the most experienced and capable management and Board teams ready to build the next large-scale national telecommunications company, so along with the Board and the executives and the entire Swoop team, we are looking forward to the continued success in serving our customers for the remainder of FY '23 and beyond. And that concludes my presentation.

[Operator Instructions] Our first question comes from the line of Sam Horner from Georgeson.

Yes. I'm not sure if this line is -- the quality is good, but I'm just keen to hear the Board's thoughts on the last quarterly. I appreciate the Moose acquisition has reduced cash flow, but it does appear the cash -- the equity balance sheet of the company has been substituted by debt. Does the company have any capital-raising plans in the future? Is it going to use that existing loan? I'm just keen to hear a bit more commentary on that.

Sure. I can take that one. As we mentioned during the presentation, we still have significant cash on balance sheet. So we have just under $21 million, as well as another $13 million in undrawn debt. At this stage, we would be using that to fund any potential acquisitions or organic growth opportunities. Obviously, as opportunities come up [indiscernible], we will [ revisit ], but at this stage, we don't see capital raising on the cards.

[Operator Instructions] We do have a question from the line of [ Lee Philip Lipovic ] from Morgans Financial.

Just a question on Slide 24 and to the references of exiting FY '23 free cash flow positive. Just wanted to check your definition of free cash flow. And does that include interest or not?

Sure. [ Easily ], I think, just at the bottom, there's a footnote. Free cash flow is defined as operating cash flow, so net cash flow from operating activities, less interest on finance facility and less CapEx.

And just a follow-up then, if I could -- sorry. I missed that footnote. Could you make an argument that the business in its current form doesn't exist as it does with debt? So -- [ and interest ], I mean, should be included in that calculation.

You could -- the reason why we treat it that way is we didn't previously have the interest. So doing a quarter-on-quarter comparison by putting it in is potentially [indiscernible]. I will hand to Patricia to see if there's any more to add to that.

No, Alex. I mean I think you can look at it either way, but yes, for the purposes of our calculations, to maintain that comparability, we'll exclude, yes. But we've been quite clear on [ can they be not excluded ]. You can see on slide -- cash flow slide we actually -- you can see the amount we have excluded in the first half '23 -- it's on Slide 13. Sorry. We make it quite clear, what that amount is, the $73,000, for the first half.

It appears there are no more questions. I would now like to turn the call over to Alex West, CEO, for closing remarks.

Thank you, everybody. And again thank you for joining us on the call. It has been a great first half of the year. And we're looking forward to what's to come, so along with again -- or along with the Board, the executives and the entire Swoop team, we are looking forward to delivering the results for the remainder of FY '23 and beyond. Thank you, everybody.

Thank you, everyone.

Thank you. Ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect.