Vianet Group plc (VNET) Earnings Call Transcript & Summary

Good morning, and welcome to the Vianet Group plc investor presentation. [Operator Instructions] Before we begin, I'd like to let the following poll. And I'd now like to hand you over to James Dickson, Chairman and CEO. Good morning, sir.

Yes. Good morning, and thank you, Lily, and thank you for joining us. I've got Mark Foster, CFO; and Sarah Bentham, Finance Director with me today. We've got a strong set of results and we're seeing good momentum growing into full year '26. Unattended Retail division, device -- we got absolute focus on driving device footprint to create strategic market share of recurring income. Our retain and gain strategy with the 3G switch-off initiative is delivering results. And in forecourts, we're seeing excellent progress and the prospects are really strong for the next couple of years and beyond. And in the Hospitality division, again, continued delivery of growth. The team have done a great job there and the prospects in the U.K. and U.S.A. are looking really encouraging. So really a strong foundation in building to deliver our growth ambitions. Turning over the page, and this is for benefit of anyone on the call who is new to Vianet. Bottom line is we generate value and we generate our own growth on the back of transforming -- helping customers to transform their business performance. Basically helping them get it right first time and enabling them to do more with less. In both divisions, hardware is simply an enabler that allows us to harvest data and then we'll produce dashboards, alerts alarms, and it also feeds our PCI-compliant payment processes as well. Helping customers reduce waste, reduce shrinkage, increased positivity and consumer experience and thereby driving sales. Two divisions. We've got the Unattended Retail division, which is primarily at this time, vending and forecourts, but any remote assets would fall within that division. The other division is our Hospitality division, which is really all about beverage management. We have a comprehensive beverage management solution that is -- primary focus historically has been the U.K. pub sector, but we've got seen some good growth opportunities in the United States and looking forward to share -- seeing a bit more of that as we go through the presentation. In terms of our revenue model, basically, as I said, the hardware is an enabler. So we're happy to make a little margin selling hardware, or renting hardware to our customers. But what we're really after is the subscription income from -- recurring subscription income that is basically is part of the 3- to 5-year contracts that we signed up with blue chip clients, all focused on driving growing recurring income and that's what makes us valuable. Turning to the results. I'm not going to steal Sarah, Mark's thunder. But strong set of results, particularly given the economic uncertainty that is a backdrop to every business at this moment in time, ahead in all the key financial metrics. Top line, marginally ahead. But against the background of 3G swap-outs, vending machine estate rationalization by our customers as part of the 3G investment process and our own pivot from ERP, vending management software to being -- drive real absolutely focus on expanding our device footprint and the pricing strategy that went with that. We're pretty darn pleased with the top line performance as well, and we're going to see that rebound in the current year. Just pick up on a couple of points here. Really delighted with the strong cash and net debt performance and the ability to announce a dividend of 1p per share for the final dividend, which together with the interim dividend, that takes us to 1.3p. We understand we have a number of investors who appreciate the value of the dividend and indeed I'm one of them myself. Well, moving on to the Unattended Retail performance. The 3G switch-off was a risk, and it was also an opportunity. We chose for it to be an opportunity. We're amongst our competitive set. We're first out of the blocks to explain to the sector, vending sector, what they -- why government was shutting down the 3G networks? How the mobile network operators were going to respond to that? What that meant for the sector? What that meant for individual customers? And what the bespoke solution that we are proposing for each individual customer that we had? And that really fed into a really strong retain and gain strategy, allowed us to secure all existing customers on new long-term contracts as part of the upgrade to 4G, and also allowed us to gain new customers as well because we're first out of the blocks, and we are giving innovative new packages to our customers. I guess with the absolute focus on footprint expansion, the required pricing strategy, we took a decision that we would actually have absolute focus on -- it's not about making short-term hardware margin. It's really about getting the hardware out there and having the subscription income from the devices out in the field. We also chose to pivot from ERP vended management solution to really being about device management. We recognize that out there in the field, customers were experiencing poor device uptime and consumer user experiences with the competitive set, and we put absolute focus on ensuring that we have the best device up time and the best user experience, and that's paid a massive dividends for us, and we will probably share a couple of examples during this presentation. So existing customers secure real progress in buying groups. There's probably about 40,000 vending machines in buying groups. And we've never historically have been strong in buying groups. But as part of this retain and gain strategy, we've secured 16 new customers within buying groups, which bodes well for the future. I think the key for us, if we look at where our revenues are coming from within the Unattended Retail sector over the next 2 years, something, like 90% of our revenues, are going to come from existing customers who are already secured where we expect to extend our coverage within their existing states. A big win for us in addition to secure an additional -- and making that -- those inroads into buying groups, against the competitive set, we won [indiscernible], and that was fantastic news for us. Demonstrating close to an 18% uplift on sales versus the competitive set during pilots. Again, we've really focused on driving market share because by driving that market share, getting the long-term contracts, it gives us really valuable strategic footprint that has real value to the competitive set out there. So absolute focus on that. As part of that process, we foregoing ERP vendor management platform revenues for the sake of securing future device recurrent income, and we've foregone hardware margins, again, to get the device recurring income. And we experience and expect to see further rebound on those revenues in the current year. Moving on to the forecourt sector. We partnered with a business called Attenda, formerly called Suresite. There originally a fuel card business and they recognize an opportunity to get into payment processing for fuel transactions. As you might imagine, fuel transactions are -- they're high value. So there have considerable volume of -- pound volume of transactions, which allows them to negotiate a fantastic transaction rates with the likes of Worldpay, et cetera. They partnered with us because they recognize that beyond fuel, there's an opportunity to actually tie in other forecourt assets. In fracs, vacuums, carwashes and air machines. But they didn't have a cashless payment solution for those and they recognized that we had a really good solution. We had to work on that solution for the best part of -- probably started a couple of years ago. It's probably the best part of 12 months' worth of work to ensure that the hardware was robust enough to cope with the harsh environment of petrol forecourt. But we achieved that and we managed to sort of really drive that business forward. As I imagine, as I said, forecourts are high ticket versus snacking can. So the -- they operate -- I guess, the customers, be that TESCO, ASDA, Sainbury's, Morrisons or oil companies, or independents, they want to know that they're maximizing their device uptime and they have excellent user experience because that's going to have a direct impact on their ability to drive transactions. And we've helped them achieve that. If you just look at that example, down the bottom left-hand side. That's Wilcomatic with one particular supermarket chain. There was one site in particular by introducing our hardware and payment processing. They experienced a 32% uplift in sales. Now that's quite dramatic. With the tender we're in a TESCOs, ASDA, Sainbury's, Morrisons, all the major supermarkets. And again, a lot of our progress is being built around the fact that we have absolute focus on customer experience, customer support, great transaction rates, robust hardware and we basically look after our customers ensure they get maximum device uptime. Just in terms of the value of -- we're in 2,000 plus -- we've got 2,000 devices in forecourts as we speak. That's across the rollover carwashes, jet washes, air machines and vacuums. And we make decent revenue off that. It is probably worth about the best part of GBP 10 a month. So there's probably about GBP 240,000 worth of turnover in there. I thought it will be useful to actually give you the opportunity to look at how our device footprint has grown over the years since COVID. It's been a tough ride out there. Basically, we've had COVID. And we came out of COVID. Everyone felt good, then realized that work from home meant that there was probably about 20%, 30%, even 40% of traffic that we normally have going past vending machines was no longer there. So vending operators had some loss-making contracts. So they basically exit the contracts. So it wasn't about looking at individual machines. It was about actually looking at the contracts themselves and the profitability. So that was brakes on the population growth. And then we move into the 3G, 4G upgrade. Now that's a different scenario altogether. That's where the vending operators had to make a decision on where to invest. It's not about taking the machine out of the markets. It's about what machines do we invest in and take the others out of the market. And that's impacted us as well. The good news about that is that what we have at the moment is a vending partner there across the U.K. and Europe, that has gone through COVID, that's gone through 3G to 4G upgrade, and it should be a pretty clean partner, which positions us really well for growth going forward. Particularly as we have the -- secured the long-term contracts with our customers. The other interesting thing here is that we continue to drive the mix towards cashless payment -- in favor of cashless payment versus telemetry only. Cashless payment is higher value in term of -- drive higher value subscription revenue for us. So that's good news. As again, that growth that you see in full year '26 and full year '27, 90% of that is coming from existing customers. So what we're doing is driving valuable device market share. Moving on to the Hospitality division. Basically, we have a very stable base. The lease and tenanted sector has strong resilience. And we're even seeing that with the increase in national insurance and the reduction in the national insurance threshold, coupled with the removal of rate relief and all other costs going up. The hurdle rate to run a successful profitable managed house has got higher, which is resulting in a number of managed houses being converted back to lease and tenanted. So we're benefiting from that, and that's allowing us to retain a very resilient and stable lease and tenanted base. In addition, the progress we're making with the introduction of Beverage Metrics has been really positive in terms of being able to take that to our existing customer base and effectively give them an upgrade, sort of really positive. Key financial metrics across the Hospitality division are really positive. We've got a solid base of 9,600 pubs. Again, similar to Unattended division, we continue to secure, renewed long-term agreements and new agreements with customers. So that really underpins our recurring income stream from hospitality. Renewals with Heineken, Greene King in the period and a new deal with Budweiser Brewing Group. Bottom line is that we're an essential tool. We help improve sales. We help reduce costs, and we help improve the consumer experience. And that's all important with the economic background that our customers in hospitality sector are facing. On Beverage Metrics, it really simplifies what they do. Significant savings available. It's an intuitive tool. A couple of minutes a day, looking the dashboard tells they operator where we need to focus, and it pays for itself if you can have one extra pint a day through the tail. Ongoing opportunities within our U.K. footprint expansion. Bottom line on the key drivers are cost for operators are increasing, whether that's wages, utilities or cost of goods come in, whether that's beer or whether that's electricity, you name it. Consumer pricing elasticity is at breaking point, has been for the 6, 12 months, which means that the pub operator has got limited options. They've got to find a way of doing more with less, and that involves getting it right first time, and that's exactly what we help them do. If we look at the U.K. pub market and the growth that's available to us. If we look at lease and tenanted, there's probably about 12,000 lease and tenanted out there. We estimate that there's probably a further 1,000 sites within lease and tenanted that we can access in the next 12, 18 months which will deliver the growth that we require. And that's before we look at the managed pilots that we have in place that are delivering really encouraging results. And then we look at the ability to learn on FastScan perpetual inventory and automated ordering in the U.K. Basically helps the top operator run a more efficient business. And the other thing that the Beverage Metrics brings to us is it gives us greater relevance in the wider hospitality market, which allowed us to actually put a development road map in place that is particularly focused on the U.S.A. because it's a major opportunity, especially with our relationship with fintech. Moving on to the U.S.A. itself. Really encouraging progress and levels of engagement with an increasing number of customers. Really foundations are in place to deliver against a significant opportunity. Of that 382,000 licenses across 4 key segments, our focus is really on change, existing business with Chili's, Margaritaville, Marriott franchisees. We got pilots in place with Outback, Darden, and we're doing some really good news with -- good work with World of Beer, so really positive. I think what sets this opportunity apart is really the relationship we have with Fintech. Basically, they have a payment reconciliation service, 50 million alcohol invoices processed annually worth in excess of $50 billion. Fintech was born of the 3-tier system in the States. That was post prohibition, where the government wanted to put in place a processing system and structure that would allow them to ensure the government regulations were being followed, taxes were being paid and that no monopolies were being created -- vertical monopolies were being created. And those regulations differ by state and sometimes by county. But Fintech's secret sauce is the fact that they have all these regulations in their algorithms, and they can actually oversee the payment processing and reconciliation. Fintech gives us fantastic access to the decision-makers in chains. And our integration with them, that really enables that full-cycle P2P system, which allows operators to significantly reduce labor costs and improve productivity across ordering, receiving, invoicing and also inventory in stock with our FastScan inventory solution. Basically, if you look at our stand-alone proposition, it's pretty strong. That comprehensive beverage management solution by itself shifts point of sale loss. Addressing that gives the return on investment, and that's what will drive us going forward. Bottom line is that the product that we've got in these customers, as we speak, is it's intuitive. It's user friendly. It's drilled down. There's no data overload. Everything has got to be simple. We cannot overload the operators with additional data and information. It's got to be simple and be in your face. The commercial prospects with several pilots in place are really, really strong, and we're in advanced stage of conversations at this moment in time. Bottom line is that we're allowing customers to hit the right quality. We get it right first time, and that drives productivity. And that's -- we're expecting strong commercial traction, and we expect to have significant loss reduction by the year-end. And we've got a high level of engagement that's really driving that, both with Fintech but also across a number of clients within the U.S. chains. I'll hand over to Mark and Sarah now or Sarah and Mark.

Thanks very much, James. Okay. Good morning, everybody. I'll take you through the profit and loss. What we see here is a strong set of results for the year ahead of last year and also meeting market expectations, with turnover being up marginally 0.5% for all the reasons that James has already been through. We also have recurring revenue increasing at 1.8% year-on-year, being 86% of turnover with a 300,000 growth year-on-year. Our gross margin held strong at 68%, despite the hardware sales that were going out at lower margin to win those recurring revenues. There was an increase in operating profit year-on-year. This went from GBP 3.47 million to GBP 3.6 million given a 3.6% year-on-year growth. And adjusted EBITDA also grew at 3.1%, taking us to GBP 4.14 million versus last year's GBP 4 million. Earnings per share increased for the period at 61%, to 2.92p, so all in all, a pleasing set of results for the year ended March '25 as we head into '26. In terms of our segmental reporting, within the Hospitality division, we saw a 4.7% growth in turnover, which is GBP 400,000. And this was with 323 new systems installed versus last year's 260, so very positive. Recurring revenues remain robust at 94%. And in absolute terms, that's a GBP 400,000 growth, 4.5% year-on-year. We had 4 new contracts for the period and 5 major contract re-signs. And gross margin was up GBP 330,000, 4.8%. The disposals for this organization were 361 versus last year's 454.So they are slowing, all in all, good results for Hospitality. In terms of our Unattended Retail division, device sales were 8,956 for the period, ahead of last year. And recurring revenues remained strong at 75% versus last year's 74%. Despite the 3G and the economic mix that we've got that James has already alluded to, we did re-sign 7 contracts in that period, and we had 120 new contracts within that period also. Our estate remains strong at 36,000 device connections. And we did have some 3G swaps totaling 2,500 within that period, so all in all, really good set of results to move forward into financial year '26 to build upon.

Thanks, Sarah. Good morning, everybody. I'll take you through the cash and the balance sheet. The business continues to be a strong cash generator. Operating cash inflow pre working capital was up to GBP 3.975 million, just over 1% from last year. This is 102.9% of net EBITDA or 96% of pre-exceptional EBITDA, so a very strong cash conversion metric. The movement in working capital was a positive GBP 636,000 from reduced stock, reduced debtors slightly offset by some reduced creditors but much better than last year's draw. Generally, we see GBP 0.5 million out of the way in working capital movement, but this year has been a pleasing positive movement. Post working capital cash generation was up to GBP 4.6 million from last year's GBP 3.6 million. That's nearly GBP 1 million in growth, 26%, 119% of normalized EBITDA. Overall, we had a complete inflow of GBP 955,000, ahead of last year like for like when you remove last year's refinancing with HSBC and the one-off tax rebate we had. That is after increased dividends and share buybacks in the year. So overall, we had a very healthy cash generation, and there's no reason why that should not continue. In terms of the balance sheet, it remains a strong balance sheet. We've covered the movements in working capital. Net debt reduced by GBP 1.1 million, 75% down to GBP 381,000 at the year-end from GBP 1.52 million last year. Cash in the bank increased to GBP 2.78 million from GBP 1.82 million last year. That's again nearly a GBP 1 million growth, 52%. The bank facilities with HSBC remain, and we have indeed extended the RCF to April 2028 on improved terms at 2.2% above base from what was 2.62% above base. And we expect to be net cash at some point in this financial year, so all in all, a very healthy balance sheet to fulfill the ambition that Jim's been talking about. Over to you, Jim.

Thanks, Sarah. Thanks, Mark. Bottom line is we're in a very exciting position. The commercial, financial and strategic prospects are really strong. We have a really strong financial engine, driven by the fact that we've got very high recurring incomes, and we've got 2 divisions that are going to be continuing to deliver growth over the coming years. If you look at the hospitality sector and Beverage Metrics, in particular, we're going to have a period of sustained growth. And that's before you start to look at what we -- the potential that we have in the United States. Then the Unattended Retail division, Smart Machines, 90% of the growth in the next 2 years is going to come from existing contracts that we have in place. And what we're building is a really valuable strategic market share there of long-term, recurring subscription income. And then the forecourts bottom line is that our absolute focus on device uptime, user experience, transaction rates, customer support and having taken that 2, 2.5 years to build trust and maintain that trust and deliver for our customers is only going to continue to actually give us more opportunities within the forecourt sector. The -- I think as everyone is aware, the bottom line is that every business wants more data, and they want the ability to handle the data. All sectors want to be able to do more with less because the cost pressures are mounting and the pricing pressures are on them as well. So it's about how do we handle that. It's not just about harvesting lots of data. It's about what you do with the data, and that's where AI can help us going forward. And then we look at -- overall, very well positioned to accelerate growth. We ticked the boxes in terms of markets and the market drivers, the solutions that we have, the people that we have in our business. And also the reputation that we've built over the years. And we've guarded that previously, and we're trusted advisers. And the bottom line is that we win when our customers win, so we're absolutely focused on making sure our customers are winners. That concludes the presentation. We're going to move on to questions now.

[Operator Instructions] Just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboard. As you can see, we have received a number of questions throughout today's presentation. I please ask you to read out the questions and give response where appropriate to do so, and I'll pick up from you at the end.

Okay. We'll kick straight in. Question one, pre-submitted. What is the management stock, Board stock ownership? Will you be buying more given the current share price levels? Well, I haven't set the share price in the last half hour or so. But bottom line is that management and Board hold excess of 20% of the business as we speak. And we'll take a look at the share price when we finish the meeting and figure out what next. How are you using AI in the business? Well, at a very simplistic level, everyone in the business has access to copilot to help them actually do the day-to-day job like e-mails, et cetera, et cetera. But we have -- sort of got a knowledge transfer partnership grant from the government, and we're working with Keysight University. And that's really about developing an AI-enabled model, which includes a large language model, and that's to help us automate our processes and really have our people doing the real value added, getting rid of the menial tasks and allowing them to really add value and actually get them fired up. And it's also to empower our customers by giving them deeper, real-time insights that allows them to be more proactive and be more strategic as well. And again, all gets back to helping them transform the business performance so that they win and we win with them. There's -- can you expand on the cloud-based platform development? Well, bottom line is, I guess, we don't see that as a competitive advantage. We see that as a minimum requirement to compete. I think every business should be feeling the same way. So it's not really a point of competitive advantage, but you're at a disadvantage if you don't do it. Question from [ Martin H ]. Also, are you seeing customer concentration risks in either division? How diversified is your client base by geography and sector? Well, we're pretty reliant on the U.K. because probably as things speak, probably 98% -- 97%, 98% of our business is U.K.-based. But if you look at each division, within those divisions, I'm pretty sure that there's not 1 customer that has more than 20% in either of the divisions, which is a fantastic situation to be in. When you think back probably 10 years or so ago, probably 60% of our business overall was either -- it was a mixture of Punch and enterprise. So we are significantly more diversified than we ever have been. Is it possible to get -- sorry, I'm going to have to take a closer look at that.

I can read that.

Is it possible to get an idea of the value of existing contracts in the U.S. with Chili's Margaritaville and Marriott? Also, is it possible to provide more detail and timing of current trial projects? What are the forecast revenues for the U.S. market for the end of this year and next? Okay. Well, I'm not going to tell you when -- what the timing is on any of it. But in the coming year, we expect to make substantial progress on 2, 3, possibly even 4 of the current pilots that we're working on. I'm not going to share the existing revenues with Chili's, either any of those customers because, for me, individual customer revenue is privileged information, and that's not something that I'd ever share. Well, we can share the forecast revenues for the year.

$1 million.

$1 million for the year, yes. What is the expected time line to profitability in the U.S.A.? And what are the main hurdles to achieving this? Well, the main hurdles to achieving it is really -- it's really about when the customers are ready. I think anyone who's ever run a business or run sales understands that you've only got the contract when the customer is ready to sign it, and they'll do it at their pace, not your pace. So whilst we're ready, it's a case of ensuring that the customer is ready.

Is breakeven.

Yes. So we're probably looking at -- looking sort of breakeven in the second half, towards the end of the second half but on a monthly basis. Great. Is that all the questions?

Guys, thank you for answering all those questions you can from investors. And of course, the company can review all questions submitted today and will publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide you their feedback, which I know is particularly important to the company, James, can I please just ask you for a few closing comments?

Yes. Number one, thank you for joining us and taking time out to be with us today, and I hope you found it useful. I think if you do have further questions, please go ahead and ask them. We can't always answer questions, but we try. The bottom line is that Vianet has never been in such good shape with such good prospects, and the team are really excited about the opportunities that's ahead of us, and we're ready to break out. Thank you very much indeed.

Thank you all for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, and I'm sure it will be greatly valued by the company. On behalf of the management team of Vianet Group plc, we'd like to thank you for attending today's presentation, and good morning to you.