Swoop Holdings Limited (SWP) Earnings Call Transcript & Summary

Good day, and welcome to the Swoop Holdings Half Year Results Investor Briefing. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Alex West, CEO, to begin the conference. Alex, over to you.

Hello. My name is Alex West. I'm the CEO of Swoop. With me on the call is Patricia Jones, our CFO. Thank you for joining us today for the results from our first half of FY '24. This morning, we'll be running through the investor briefing that was uploaded to the platform. Starting on Slide 3, who is Swoop? For those that are new to the story, Swoop is a premium provider of residential and SMB broadband, delivering over our own high-margin fixed lies infrastructure in underserved regional and also metro areas of Australia as well as via NBN for national coverage. We now also operate under the Moose Mobile brand, supplying residential mobile telephony for price-conscious consumers via national MVNO on the office network. And it's through this go-to-market strategy that we have achieved fantastic results that we'll now run through. Now, on Slide 4, the half year highlights. I'm delighted to report for the first half was a great start to the financial year, which saw strong organic growth in revenues, underlying EBITDA and cash flow. This growth has delivered a first half revenue of $43.5 million, up 17% on last year. Our underlying EBITDA was $8.2 million, up 13% on first half FY '23. And this growth has been consistent since listing with a 44% compound annual growth rate in revenues since first half FY '21, and we have increased EBITDA by $5.9 million for the half over the same period. We have also seen significant growth in our subscriber numbers with a 16% increase since the 31 versus 22, all from organic growth. Our mobile SIOs were over 118,000 or 818, which represents an increase of 17% since December '22. And our none-mobile SIOs have increased by over 5,000 to 43,269, which represents a 13% increase. But more importantly, we maintained an on-net percentage of 51%. We saw continued improvements in free cash flow for the half, improving by $1.3 million to a negative $1.1 million for the half. And when excluding the impact of once-off co-build funded projects, this was negative $700,000. And at the same time, our operating cash flow remained strong with $7.2 million delivered for the first half in FY '24. And we still have significant firepower on our balance sheet with a $16.2 million in cash combined with $9.4 million in undrawn debt available to capitalize on potential growth or strategic opportunities. Now, moving on to Slide 5, the first half FY '24 financial highlights. Again, as I said, we saw a 17% increase in revenues to $43.5 million in the first half, which also represents a 44% compound annual growth rate since the first half of '21. Gross margin also increased by 9% to $17.2 million. Underlying EBITDA grew 13% to $8.2 million as a result of organic growth and efficiencies of the combined businesses. These efficiencies can be demonstrated in the improvement of our OpEx compared to revenue, which is now 21%, down from 23% in the last half year. Essentially, we've been able to achieve strong revenue growth without increasing our operating expenses, and we expect it to continue for the foreseeable future. We have also seen positive results in free cash flow, delivering a $1.3 million improvement on the previous corresponding period, providing for a negative 1.1%, which improved further with the impact of one-off cobalt projects are removed, resulting in a free cash flow of negative 700, showing that the business is tracking well to cash generation from its core businesses as revenues continue to grow loss cost demand in comparisons. Now, expanding this further on Slide 6. We take a look at our core business results. Swoop has been involved in various public funded programs that increase the expansion of our fixed wireless infrastructure into regional Australia for the last few years. These programs deliver increased infrastructure and Swoop assets that provide stock on the shelf or continued growth in our residential fixed wireless broadband products. However, there is no guarantee that new funding programs continue once the existing projects are depleted. So, reporting on the core business removes these one-off impacts from our results. With these impacts removed, we still see a 17% increase in our core business revenues to $42.2 million in the first half of FY '24, a 9% increase in gross margin to $16.2 million and a 13% increase in EBITDA to $7.2 million. But there are significant improvements in the core business free cash flow, improving by $2.2 million to provide a negative $700,000 results, as mentioned previously. Moving to Slide 7. It has also proved to be a very successful year for Swoop in other areas, winning several customer awards as well as being recognized for our growth and transformation efforts. Whilst you can see them on the page, I am very proud and also very thankful to the entire team for their efforts, Dialist a few of them. We are awarded the 2023 Service Champion Award by the Customer Service Institute of Australia. We were named as one of the Australian Financial Review digital transformation leaders for FY 2023. We were 1 of 3 finalists in the technology growth Company of the Year in the Australian Growth Company awards. And for our Moose team out of all the awards we have received in the last few years, the most prominent are our 7 years of product review rewards and winning both the most satisfied customers and outstanding Canstar Blue Awards for 2 years in a row for the both the 7-year PR Street and the double Canstar Bill Awards for 2 years running has never been achieved before. And on Slide 8, we're also smashing it as we head into the full year. We are proving to be an efficient organic sales and marketing machine with a 20% reduction in the customer acquisition costs driven by more online sales with our marketing efforts driving more customers to our website and with improved UI/UX experience seeing a greater conversion into sales. Along with other improvements, this has resulted in sales being up by 55% in monthly recurring revenue terms half-on-half that will flow into improved revenues on the back end of FY '24 as well as into FY '25. We are focused on improving our customer service, delivering 90% of our products by fully automated workflows with a significant number of our NBN orders now being processed from sales and delivered it on to billing in less than 10 minutes. I will now hand over to Patricia Jones to run through the financial results in more detail. Thank you. Patricia?

Thanks, Alex. So, on Slide 10 of the presentation. So, the first half of '24 has set another period of solid performance, bolstered by both store organic growth across key products and tight cost control as we look to achieve scale. Drilling down into the half year financial results further on Page 10. Revenue is up 17% to $43.5 million from $37 million in the December '22 half year. Gross margin is up 9% to $7.2 million from $15.7 million, and underlying EBITDA is up 13% to $8.2 million from $7.3 million, reflecting an additional 1 month contribution from Moose as well as strong organic growth. 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 nonoperating items such as acquisition and integration costs and corporate restructuring costs and the 38% increase in the December '23 half reflects our solid growth strategy in terms of both the accretive acquisition of Moose, the integration of well-performing businesses and strong organic growth. Looking at our gross margin for the period, the gross margin percentage is lower in the December '23 half when compared to the December '22 half being at 40% versus 42%. This is partly driven by an additional month of Moose in the current half versus the previous half. While Moose has a lower gross margin business when compared to the remainder of the Street business, it is a strong growth engine of free cash flow generator. We continue to be vigilant and proactive in managing costs. Operating expenses and overheads as a proportion of revenue at 21% in the first half of FY '24, down from 23% in the first half of FY '23. Through tight cost control and the continued realization of synergies and scale as we consolidate our numerous acquisitions, we have been able to hold our operating expenses and overheads at relatively flat levels while generating a solid increase in revenue. This strategy has continued measured cost control and identifying and securing further efficiencies will again be a key feature of our strategy heading into the second half of the year. Our underlying net loss before tax has improved significantly and is only a loss of $114,000 in the December '23 half, coming back from a loss of $2.4 million in the prior corresponding period. Finally, our statutory net loss after tax for the December '23 half is $1 million, an improvement of $3.2 million from the loss of $4.2 million in the December '22 half. This is attributable to the strong results in the underlying business, continued tight cost control and lower depreciation and amortization following the June '23 impairment charges, which are recognized. Talking now to Slide 11 of the investor briefing pack. As we referred to previously, revenue is up a solid 17% on the December '22 half, which is a very pleasing result. The revenue growth reflects an organic growth of 11% plus the contribution from co-build income. Total organic growth of 11% includes Moose Mobile and the growth derived from this business since coming under the control of Swoop. The current half year result includes 6 months of Moose mobile results versus 5 months in the December '22 period. So, while a contributor to revenue growth has been the acquisition of Moose, the very strong growth in residential nonmobile SIO has also been a key driver. Over to our cash flow position on Page 12 of the investor briefing pack. We finished the half year with a strong cash position of $16.2 million and a 6-month free cash flow of minus $1.1 million. The half year free cash flows improved $1.3 million from the December '22 half year free cash flow of negative $2.4 million. If we exclude the cash flow impact of the regional connectivity programs, i.e., to look at cash flow from our core business, we have a free cash flow of minus $700,000 for the December '23 half, which is up $3.4 million from the negative $3.1 million in the December '22 half. While there will be swings due to timing differences in working capital requirements, we continue to target moving to a position where our future growth is fully funded by our operational cash flows. CapEx was $8.2 million for the half year, with the majority of these through expansion of networks and the continued investment in systems to support customer growth. The $2.8 million spent on other investing activities is largely driven by the earn-out payment for the first performance period to the vendors of Moose, which was based on EBITDA and SIO performance in the year to 30 June '23. There is a second earn-out payment for the second performance period, which will be paid in November '24. Net cash inflows from financing activities were $1.5 million. This is made up of a $2.5 million drawdown to fund the most earn-out payment, less required monthly repayment of the loan facility. Turning to our balance sheet on Slide 13 of the investor briefing pack. We finished the half year with a solid balance sheet that continues to be positioned for future organic and acquisitive growth. In addition to cash of $16.2 million, we also have $9.4 million remaining in unused debt facilities, providing a continued runway for potential strategic opportunities. Total borrowings at 31 December $20.2 million and net debt is $4 million. While there is a net current asset deficiency at 31 December '23 of $3.3 million, down from $0.4 million surplus in June. This has been driven by the move earnout for the second performance period moving from a noncurrent to a current liability as well as the funding of CapEx in cash. Coming back to that net current asset efficiency. As noted, we have $9.4 million remaining in our used debt facilities, which are available to fund this working capital position as required. The $2.1 million deferred consideration on the balance sheet at 31 December relates to Moose and represents a discounted value of the currently estimated value of the earnout for the second performance period. As noted, the earn-out for the first performance period was paid during the half. Finally, at 31 December '23, we have total assets of $125 million and our net assets of $62 million. And handing back to you, Alex.

Thank you, Patricia. All right. Now, looking further at our product performance and future focus on Slide 15, focusing on our mobile products. With the acquisition of Moose Mobile in 2022, we have seen solid growth in customers and revenues with this product, with Moose customers growing 28% since the acquisition of 17% since the end of the first half FY '20. And it now has over 118,000 services. The success of Moose is driven by customers looking for value while still getting a quality experience with Moose being the only telco to win both the most satisfied customer and outstanding value can start awards in the same year. In this last half, we also launched our Swoop mobile products, targeting our existing customer base of approximately 30,000 households, and we are seeing steady sales with limited marketing spend. With additional features like data banking, unlimited talk and text, local support and no looking contracts, there is a slightly higher ARPU on the Swoop brand. And now on Slide 16. For our fixed wireless broadband product, we are focused on simplifying the offers and aligning the pricing across our brand, which is also in line with market trends. This has resulted in an increased ARPU and margins for the product, whilst churn remains under 1% of the revenue book. We have seen consistent growth across the product with 5% growth in SIOs, with sales anticipated to increase in the second half of FY '24 as we complete more co-build coverage areas to provide more fixed wireless stock on the shelf that customers are demanding better Internet. Our coverage areas are increasing under a number of government programs, as mentioned previously, but the focus for us in the gift land region of Moe and Morwell, where a product consisting of 23 new and upgraded sites will offer Swoop's fast and reliable Internet to over 20,000 premises. And at the same time, we are also expanding our coverage in regional Western Australia areas of Harvey and Busselton under the government's regional connectivity program, which will see Swoop's improved fixed will offerings available to 25,000 premises. What is also key for this project is that over 58% of these sites will be powered by solar. And moving to Slide 17. We are also seeing significant wins in our national NBN offerings with 123% increase in orders half-on-half in calendar year '23 with a 197% increase in orders for the fiber Connect product that was made possible by the speed to market from our nimble marketing teams being able to offer sweep partners access to high-speed business plans. We still remain one of the top 10 enterprise Ethernet providers with its slightly higher margins and improved ARPU. And the collaboration with our partners makes us a leader in e-learning across valuer. We also saw over the period that 22% of new sales are on higher speed plans, which drives a higher ARPU for us. And this product continues to provide us scale with massive growth opportunities, and we take market share from the laser incumbents with each new order providing improved margins overall. And on Page 18, we move to our final care product. We are pleased to announce in the last half, the launch of our Swoop voice, building a whole of business offering designed to achieve dominance in the business segment. These products target both our existing base of 5,000 business customers as well as opening up opportunities to take the small home office and SMB market of over 700,000 potential customers. Our product delivered over our national voice network delivers a better user experience through lower latency and redundancy with simpler self-service offerings that improve the experience with our channel partners looking for flexible, cost-effective, and scalable business voice services and our new direct products launched this month target businesses with unlimited fit trunks and unified communications offerings with great value while still providing good margins for us. So, moving on to Slide 19. Look, at Swoop, we believe that everyone deserves a better telco experience and delivering on this mission starts and focusing on our team as an engaged workforce delivers great outcomes to our customers. We have the vision to become one of Australia's employees of choice, not just in our own industry but across all industries, and we are proud of the culture we are building that is driving improved employee engagement through the organization. And this is why we are proud to share our values with you. We are customer delighters, helping people want exceptional experience at a time. We are excellent mavericks, raising the bar with innovating innovative outcomes. We are integrity warriors standing strong with honesty, transparency, and respect. We are collaboration champions joining forces to achieve more, and we are lifeline earners, embracing a culture of continuous growth and learning. Now, turning to Slide 20. Swoop submitted its first report on extender quality profile covering the period 1st of April 2022 to the 30th of March 2023, and the results are well ahead of our industry. For context, the gender pay gap is the difference in average earnings between women and men in the workforce. It is not to be confused with women and men being paid the same or comparable job. This is equal pay, and our results on this are as follows. In terms of the average total remuneration, there was a gap in Swoop of 7.8%, which is significantly better than the industry average of 23.5%. And for our average base salary, there is only a small gap of 1.9% compared with an industry average of 20.1%. So, when compared with industry benchmarks, Swoop performance and closing the gender pay gap is commendable. The industry average total remuneration gender pay gap is significantly higher, indicating that Swoop is well ahead in ensuring more equitable pay practices. We acknowledge that there remains room for improvement, but we are invigorated by the process we've already made and the strategy that we have in place. And on Slide 21, we have continued our focus on improving the customer experience with an onshore focus on our OpEx wireless network, a dedicated local team in competency provisioning customer service, field operations is the backbone of our fixed wireless network, managing construction upkeeping installation for both business and residential customers. And in NBN Internet, we've delivered service efficiency. Our NBN Internet service for both high automation level for sales and provisioning facilitated by our partnership with NBN, and any manual tasks are efficiently handled by our diligent offshore swept. By synergizing and hosting our onshore and offshore teams, we have achieved market enhancements and service quality and provisioning speed, benefiting all of our customers in all of our consumer and business customers, resulting in extremely low inducer of 0.9% on a monthly basis across our customer base, well ahead of the industry standards. We've done this by delivering better support and training for better customer outcomes, the overhaul of our training material and implementation of structured onboarding programs. We have launched Live Chat for digital accessibility reducing foam support lines. This underpins future self-help initiatives, human support for complex and nonroutine challenges. Our original pilot is focused on NBN support ramping up this channel in this half with more products to be supported and wider website placement. We've also launched an offshore operation to scale the support teams. We've onboarded multiple roles covering Level 1 support in consumer and business, back office, and IT development. We're seeing an immediate impact to assist clearing backlog and improving response turnaround times. And we also implemented a new contact center and phone system with the replacement of legacy systems and a platform for the whole of business, which delivers enhanced analytics, scalability and flexible customer response and future AI options. And then with Slide 22, we have continued to invest in our systems and integration. The consolidation of data product overflows by a standard service sweep systems has now resulted in 90% of orders flowing through automated workflows. The automation of NBN end-to-end for order processing across our group enables our customers to enjoy our Swoop service within 8 minutes of water placement via reside. And this has allowed us to triple our NBN order volume by investing in process automation. We've launched a series of new products with NBN Fiber Connect and business bundles, Swoop mile by products, unified communications, the Swoop Voice, and IP Transit and white product. We've streamlined the back-end billing and cancellation process. We've standardized the assurance platforms across the group, enabling a single view of customer information to our support teams. Our billing platform consolidation is well underway to generate operational efficiencies in the second half of FY '24. And we've invested in our data analytics capabilities, providing centralized access to key operating metrics across all teams. We've also now standardized our customer relationship management under a single platform. And then moving to Slide 23. Whilst there were no acquisitions in the year, we provide the following summary in line with our key products and where our focus may lead to future acquisitions going forward. There is potential opportunities in the MVNO space, in line with our previous acquisition of Moose Mobile that would increase scale and could bolt on to one of our existing brands and offerings. And whilst the acquisitions in regional fixed wireless or some of our earlier targets with speed, speed with country channel and community communications, we now see opportunities in other residential infrastructure, namely, fiber, to increase our assets and product offerings. Now, whilst we haven't specifically targeted NBN resellers in the part with our national network underpinning our own offering, there is the opportunity to increase our scale by the acquisition of other NBN customer basis. And as mentioned before, we have launched an improved voice and voice in communications product into the market for small and medium business customers with the acquisition of 17 services. We see significant growth with Swoop in this area, so, it makes sense to continue to grow both organically and inorganically in this space for the next few years. And finally, once we previously acquired wholesale voice and fiber infrastructure with voice hub, Fiber and Luminate that continue to deliver earnings, we are not currently focused on any acquisitions in this space. So, as I conclude on Slide 24, we are demonstrating strong organic growth in our core business that is continuing through FY '24 and beyond. The focus on our people is building a strong culture in our team with more engaged staff continuing to delight our customers. We have a strong customer brand in our regions, and we are well below industry churn, and our investment in high-margin infrastructure is delivering growth and results. And our previous acquisitions are integrating well and continuing to scale under the Swoop brand. And we still have one of the most experienced and capable management and Board teams ready to build the next large-scale national telecommunications company. Along with the Board, the executive, and the entire Swoop team, we are looking forward to continuing success in FY '24 and onwards. Thank you.

[Operator Instructions] And as there are no questions, I would like to hand back to Alex for closing remarks.

I'd just like to thank you all for taking the time to join us on the call. We are very excited by our results for the first half, but we can definitely see growth in our core business going forward. So, exciting times ahead. And once again, thank you all for joining. We look forward to speaking to you over the coming weeks.

This concludes today's conference call. Thank you all for joining us. You may now disconnect.