Urbanise.com Limited (UBN) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for the presentation of Urbanise's H1 FY 2024 results. With me today is Michelle Garlick, our interim CFO, who joined Urbanise a couple of weeks ago. I'd like to thank our outgoing CFO, David Goldbach, for his contribution to the company, and I wish him all the best for the future. I look forward to working with Michelle and thank them both for [ delivering ] a smooth handover. As we announced 2 weeks ago, the Board and I will be seeking to appoint a permanent CFO in due course. Urbanise is a leading provider of cloud-based platform to strata and facilities managers in Australia, New Zealand and parts of the Middle East and Asia. As of January 2024, the business had AUD 12.8 million in contracted annual recurring revenue or CARR, and 92% of total revenue came from recurring license fees. Both our strata and FM platforms are extremely sticky, with a combined customer retention rate of over 99%. We have an extensive global footprint with a presence in 17 countries, with our core market being APAC and the Middle East. In the first half of FY '22 -- '24, we made good progress on our key priorities as we laid the foundations for future growth. Our sales strategy has delivered AUD 0.8 million in additional license revenue through a growing portfolio of reference customers and product improvements. We continue to focus on conversion of our strong pipeline, organic growth and retention of existing customers. The Colliers project went live in April 2023, and we continue to roll out our FM platform across a national portfolio in the first half. It is now live in all states, except New South Wales, and we expect to complete in the current half. We continue to focus on conversion of sales pipeline and on initiatives to reduce conversion lead time. Following a comprehensive operational review, we identified AUD 2.4 million in cash flow improvements, which we expect to deliver by September 2024. 95% of this target was achieved by 31 December, and we are on track to meet or exceed this target. Contract extension discussions with a large APAC strata customer continued, with a new fee structure expected to be finalized in Q3 FY 2024. As part of our program with renewal, we made further changes at Board level with the appointment of Darc Rasmussen as Chair, and James Hourn as Nonexecutive Director. They both bring significant SaaS technology and sales expertise to the Board. Slide 4 provides a summary of the key metrics for H1 FY 2024 against pcp. License revenue increased by 3.7%, with underlying license fee growth of AUD 0.8 million coming from new wins and backlog implementations as well as organic growth. Total revenue of AUD 6.27 million was marginally lower on pcp as license fee growth was offset by a 3.4% decrease in professional fees. Professional fees were lower compared to pcp due to the successful completion of complex development projects for key customers in the prior comparative period. Professional fees for H1 FY 2024 are primarily related to new contract implementations. ARR was 6.3% higher versus pcp and totaled AUD 11.99 million. New customer and organic growth across strata and FM more than offset the loss of customers and license reductions. Contracted ARR was 4% higher on pcp at AUD 12.8 million, with backlog relating to part of the Colliers portfolio as well as new wins across strata and FM. The closing cash position was AUD 3.76 million, and Urbanise has no material debt. Underlying average monthly cash used, which excludes one-off items and late receipts, were AUD 77,000 compared to AUD 98, 000 in H1 FY 2023. The customer retention rate for the half was 99%. This is based on the number of unique customers using our FM and strata platforms. The ARR retention rate was 96.7% for strata and 100% for FM. The average contract value of the customers locked was AUD 83,000. Before I come to the H1 FY 2024 results in more detail, I will provide a brief overview of Urbanise's products and markets. Urbanise Strata delivers a critical solution for strata managers to operate under strata legislation and deliver services through property owners. Strata managers would generally require a technology solution once they achieve scale, perhaps to 10 buildings or more as building -- as managing buildings within legislative requirements, banking transactions and boarding can become onerous without software. Urbanise delivers a cloud-based platform, which is the result of significant development over the past 6 years. We've designed a modern user interface and experience with strata managers. Urbanise FM deliveries critical functionality to facilities managers. Facilities managers are generally responsible for the maintenance of property assets and the coordination of skilled placement. Our platform can help reduce the administration costs of work order management and eliminate manual paper processes. Compliance reporting is critical for facilities managers to ensure maintenance is completed on time. Slide 9 shows our current footprint with our strata and FM platforms very much focused on APAC and MENA. We'll consider other geographical markets, but we believe we can achieve profitability from operating primarily in these markets. Our software is considered mission-critical to our markets due to the compliance aspect, their scalability through deployment to multiple users, how integration-ready they are, and of course, the cost savings and efficiencies they bring to customer P&Ls. I'll now address our results for the half year. The financial summary shows the headline figures for H1 FY 2024, most of which we have already covered. A couple of we haven't addressed yet include operating expenses of AUD 7.8 million, which showed an 8% improvement on pcp due to head count savings and reduction in nonwage overheads following the operational review in Q1. This contributed to a significant contraction in the EBITDA loss, which, at AUD 1.5 million, showed a 29.1% improvement on pcp. Slide 12. Those are contracted ARR growth on the first graph and the relationship between ARR and the license revenue on the second graph. CARR increased by 4% versus pcp to AUD 12.8 million at December 2023. The business has consistently carried backlog since this metric was first reported in June 2019. The value of the backlog process period includes large projects that take time to implement, such is PICA and Colliers. The 6.3% increase in ARR in December 2023 compared to December 2022 is largely driven by the partial implementation in Colliers Australia in Q4 FY 2023, other new and backlog contracts and organic growth. Slide 13 provides a breakdown of ARR between strata and facilities management. Strata ARR increased by 5.8% versus pcp and FM ARR by 7.2%. The strata backlog include strata lots acquired by our largest APAC customer and new wins across Australia and the Middle East. The FM backlog includes the remainder of the Colliers contract, which is expected to complete the stage rollout of the FM platform in H2 FY 2024. We are focused on implementing our backlog with revenue recognition, dependent on reaching project milestones and customer readiness. Slide 14 shows our ARR mix by product, region, size and type of customer across our FM and product portfolios as at December 2023. Strata is currently the larger part of our business, with Australia our biggest revenue base. The Urbanise Strata platform is used by a broad range of strata managers in terms of size and geography. Within our FM portfolio, FM Outsourcers contributed almost 60% of our revenues. Urbanise continues to expand its presence with asset owners, Middle East owners association and aged care providers. Slide 15 shows the performance of the facilities management platform for H1 FY 2024. FM revenue was 7.9% higher on pcp. License fees increased by 11.6% with growth in new and existing customers, including Colliers, offset by a reduction in license fees from an APAC customer due to contract loss and other license fee reductions. The decrease in professional fees reflects the inclusion of significant development in pcp. There were around 2,900 facilities users billed for the month of December 2023. The backlog at 1 January 2024 includes 7 new contracts and is valued at around AUD 400,000. It includes the remainder of the Colliers Australia project, which is expected to complete the rollout in H2 FY 2024. The strata revenue was 5.5% lower, largely due to the temporary reduction in license fees from an APAC customer, and a 53% decline in professional fees, which reflected the completion of the development projects for a major Middle Eastern customer, which were included in pcp. Strata license fees were flat on pcp as the implementation of new and backlog customers and organic growth from existing customer was offset by the temporary license reduction mentioned above and some small customer loss. The number of lots billed was around AUD 688,000 for the month of December 2023. The backlog of AUD 400,000 reflects additional strata lots from our largest APAC customer and recent wins in Australia and the Middle East. Slide 17 shows the cash used over the past 4 years on the first graph and the net of debtors and deferred revenue on the second graph. Net cash used reduced from AUD 1.2 million in H1 FY 2023 to AUD 439,000 in H1 FY 2024. Net working capital remains negative and continues to progress due to sales growth and advanced billing. We completed an operational review in Q1 FY 2024, which is expected to deliver AUD 2.4 million cash flow improvements, 95% of which were realized in the first half. Managing cash flow remains a key priority, and the Board believes that Urbanise remains on track to achieve cash flow breakeven in FY 2025. The waterfall bridge on Slide 18 shows the growth in license fees between H1 FY 2023, H1 2024. Underlying license fee growth of AUD 0.8 million versus pcp came from new wins, the implementation of the 1st January 2023 backlog and organic growth. AUD 0.6 reduction -- AUD 0.6 million reduction in license revenue was due to the temporary reduction in license fees from an APAC strata customer, some small customer losses and license fee reductions from FM customers. FM license fees grew by 11.6% versus pcp due to backlog conversion between Colliers, new contracts and growth from existing customers. This was offset by 1 APAC customer who lost a contract, other reductions in license fees and small customer churn. Strata license fees were flat on pcp as a temporary reduction in license fees from an APAC strata customer offset growth from new wins and backlog implementation. Excluding this license fee reduction, strata license fees increased by 8.2% from pcp. The waterfall bridge on Slide 19 shows the decline in expenses between H1 FY 2023 and H1 FY 2024. The AUD 670,000 decline in operating expenses, which were largely due to head count savings and nonwage overhead reductions following the operational review. The 8% cost improvement reflected the following: employee and contractor cost savings of AUD 358,000; IT subscription and license cost savings of AUD 94,000; cost reductions across travel, marketing and third-party costs. These were partially offset by employee severance costs of AUD 196,000. Our cash flow statement shows our closing cash position of AUD 3.76 million at 31 December 2023. Underlying average cash -- monthly cash used was AUD 77,000, adjusted for the R&D rebates and offset by employee severance costs and net material late receipts from Middle East customers. Cash receipts were AUD 8.34 million, an increase of 16.9% compared to pcp, driven by advanced billing strategy and cash collections. Slide 21 shows our progress in managing cash over the past 6 years, and the bottom line depicting the average monthly cash used, excluding capital raises. The balance sheet is on Slide 22, it shows a closing cash position of AUD 3.76 million with no material debt. Debt has decreased by AUD 746,000 since last December, largely due to an improved rate of cash collection across the portfolio of debtors. Urbanise continues to closely -- to work closely with our Middle East customers on cash collection strategies. Finally, a look -- turning to the outlook for the business during the second half of FY 2024. We expect to complete the rollout of our FM platform across Colliers Australia and the national portfolio. Our contract discussion process with a key APAC strata customer to realize the AUD 2.4 million cash flow improvements following our operational review. And we will continue to further -- drive further improvement in working capital. And we'll work closely to monetize cash requirements as we progress towards our target, again, into cash flow breakeven in FY 2025. I'll now hand back to Francoise to open it up for questions.

Thank you, Simon. We received a couple of questions in advance via e-mail, and I think we'll start with those. And if anyone else would like to ask a question via the live chat, please put your question in now. Our first question comes from [ John Lacey ]. Simon, can you please talk to the ongoing contract discussions with a large APAC customer and what is involved in that process?

It's -- what's involved? It's a -- the fee reductions that we've seen through our license fees over the last 2 or 3 quarters are in relation to this large APAC customer. It's related to our recognition of license fees and cost escalations. We don't expect there will be an ongoing reduction in license fees due to 2 things. One is the agreement of a cost escalation, a mechanism for us to invoice at a higher rate. We're progressing well in that discussion. And secondly, on out-of-scope functionality we're delivering to this customer, which is critical to the functionality of the platform. On both ends, we're quite confident that we'll get conclusion in this quarter. And to the extent that we need to update the market, we'll do that over the next couple of weeks. But we're getting close on concluding that discussion. The reason why it's taken some time is that the contract is complex. And for both parties to work through that, that's taken some time. And there's been some review of the technical aspects of the out-of-scope items. That's progressed quite well now. So again, I'd say, by the end of this quarter, we'll be able to update the markets on the conclusion of that temporary reduction in license fees.

Thank you, Simon. A follow-up question from the same person. Do you still expect to reach cash flow breakeven in FY '25?

Yes. The Board reviews our cash flow forecasts, in conjunction with the CFO, myself and parts of our management team. There are a few key components for which we review that cash flow in order to determine that FY 2025 is when we'll reach capital breakeven. Number one is our cost base. So after the review of the operations in Q1, we have a good view on our cost base and the composition of our team going forward, our existing customers with some reasonable assumptions around churn. We have a view around our professional fees and our run rates. And we have a view on our gaps, that they need to be closed by new sales. We take a fairly conservative view on all that. The final component there also comes from working capital, reviewing our working capital management, which includes some opportunities to increase our runway with cash in advance, which is a part of a normal billing approach anyway. And also with a management who write debtors generally. We review that every 4 weeks with the Board, which is prudent for a business that is using cash as opposed to generating cash. And so that is forecast on a month-by-month basis. And we do take that conservative view that we will reduce the cash use by the end of -- certainly by the end of this year, with a view of hitting cash flow breakeven in FY 2025. So that is still our view.

Thank you, Simon. Our next question comes from Sam Pittman at Taylor Collison. Simon, could you talk to the Middle East debtor book? Revenue was up, but debtors is down.

Thanks, Sam. So revenue is up. That's, I suppose, more generally due to our FM and strata customers growing with some existing customers and also new customers. The debtor book, generally, I think, while we're not reporting on debtors on a regional basis, but our debtors are down. We still have some large outstanding debt in the Middle East, which then tells you that the rest of the portfolio has had actually come down quite substantially, which is a good thing. Those -- we have 1 or 2 customers that have -- we always expect we'll have an outstanding element for the Middle East, largely because the amount that we billed, and they're quite substantial ARR contracts. But there are some improvements we are working on. We've got line of sight of the customers' internal processes. Certainly, Michelle's -- I know Michelle's first priority is to work quite closely with those customers to clear those over the next couple of weeks. So look, there's certainly improvement there on the working capital side. But the revenue growth is following our strategy around FM and strata, which is across the UAE. We have facilities management requirements coming from large infrastructure, customers managing all sorts of, I guess, oil and gas. I think we also have the strata managers who use the platform to manage the residential side of their obligations. And of course, we got the strata -- demand for strata platform coming out of the UAE having very similar legislation to Australia.

Thank you, Simon. Our next question comes from [ Anthony McDonald ]. Are you happy with the pace of contract wins in strata and FM?

I'm pleased with the improvements we've made over the last 12 to 18 months on the back of a number of things, better engagement on go-to markets, so our marketing and trade events and the appointment of some goods sales, SMEs in our key regions. So in terms of the sales pipeline converted. I'm pleased we're making progress there. But there are absolutely improvements we can do to, one, the conversion times, so building a good pipeline. And I'll come on to what we're doing about trying to reduce the conversion times. And I think in terms of getting the right focus on our key markets. Now Strata's fairly straightforward. It's the community managers and strata managers in UAE and Australia. For FM, we have got -- we got good focus now on our key verticals where we know the platform can work quite well. So that's the sales focus. In terms of the pipeline, we have got a good strong pipeline, which is similar to the type of customers we're delivering to today. So I think we've got a very good concentration in those verticals. In terms of the lead time, it's actually making it a lot clearer for our customers as to what our pricing and our scope is because we made quite a few improvements. So even in the last 3 to 4 months in our contracts that we're offering out to customers, putting it out there from day 1, from the demo that we provide to customers around functionality, what do you get? How much is it going to cost you for the implementation? And what are the time lines we can work to? So there has been some simple things like that, that we've introduced. I expect that will potentially result in an improvement in sales conversion lead times. So the real -- so from my perspective on the sales wins is there's an improvement we can make to the overall ARR wins we see each half. Broadly speaking, we look at it quarter-by-quarter to see, relatively, are we doing better than the last quarter?

We have no further questions at this time. So I'll now hand back to you, Simon, for closing remarks.

Okay. Well, thanks, Francoise. I'd like to thank you all again for your time this morning. I believe Urbanise is well placed to deliver longer-term growth, which reflects our highly recurring revenue base, innovative platforms and growing sales pipeline. The Board and management team worked hard to execute my strategies and progress towards a cash flow breakeven position. We look forward to updating you on the business at the next quarterly results. So thanks again, and good morning.