Vianet Group plc (VNET) Earnings Call Transcript & Summary

Good morning, and welcome to the Vianet Group plc investor presentation [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to James Dickson. Good morning, sir.

Thank you, [ Milly ], and thank you, everyone, for joining Sarah and I today. I'll kick straight into the results. We believe we've made strong progress despite the U.K. and global macro background that's impacting pretty much every sector. We've seen growth in our pipeline and our installed footprint in both divisions. So that's very positive. In Unattended Retail, our exit from ERP provision to focus on device footprint expansion has allowed us to gain some valuable strategic market share. And the retain and gain strategy that we implemented for the 3G exit is also working for the network operators withdrawal of the 2G networks. So we moved in the right direction. And the hospitality division, we had growth in all key metrics. So really good news there. And our investment in innovation and technology is starting to pay dividends. So really strong foundations to deliver sustained growth going forward. I just turn the page to those who are new to Vianet, I'll quickly take you through this slide. Bottom line is that we help customers transform business performance, helping them get it right first time, allowing them to do more with less. Hardware in both divisions is an enabler that allows us to harvest data, thereby we can produce dashboards, alerts, alarms, and it also aids our PCI compliant process for payment processing. Absolute focus on reducing waste and shrinkage in both divisions and focus on increasing productivity and consumer experience, and that allows them to drive sales improvement. As I said, 2 divisions, Unattended Retail, primarily U.K. focused with some presence in the Benelux with Jacobs Douwe Egberts. It's really about capturing data from remote assets and our cashless payment devices. We're in about 37,000 machines across the piece, and that's up 1,000 in the past period. And our Hospitality division, Beverage Metrics, originally focused on the U.K. pub market, leased and tenanted, but now diversifying into the managed sector and making some progress there. And with the acquisition of Beverage Metrics in the United States, that gives us a presence there, and we're starting to make inroads with some contracts there. It's a Software-as-a-Service business model where we have long-term commitments with blue-chip clients, generally 3- to 5-year contracts. It's a subscription model that really allows us to drive valuable recurring incomes. Moving on to the financial highlights. I'm not going to dwell too much on this and still Sarah's thunder, but a strong set of results, especially given the economic uncertainty and the investment climate for our customers. Growth and profitability, the top line and profitability, both impacted by ERP, our decision to withdraw from the ERP market to pivot and focus on to device footprint growth, which really drives our recurring income. Strong cash and net debt performance, and that's after completing share buybacks and increasing our dividend. And we're really pleased to be able to announce a 33% increase in the dividend to 0.4p. And that ties into what we will be our approach going forward and a progressive approach to dividend. Moving on to Unattended Retail. The 3G switch off, that completes at the end of this month. And of course, we've now got the network operators -- we've owed to have withdrawn access to 2G networks for roaming SIMs, and that impacts a number of industries across the piece from alarm and security companies all the way through to unattended retail and hospitality. So again, our retain and gain strategy that we implemented for the 3G shutdown is working well for the 2G access withdrawal. We've seen footprint expansion on the back of our hardware pricing strategy, and it's allowed us to secure increased number of installations and a strong recurring income stream. Our focus on device management is really paying dividends. And that device management approach is really about maximizing device uptime and improving the user experience, and that's where we're making some inroads and creating some clear blue water between ourselves and the competition. We've secured existing customers, and we've gained new business, 52 new contract wins in the half year versus 48 last year. That's given us a really good pipeline. We've seen growth in the core estate from 36,000 to nearly 37,000. So good growth there. Importantly, we've also seen a change in the mix. We've seen our cashless devices generate higher recurring income per unit. And we've seen them grow to over 26,000, and that's a trend that is going to continue. So we're really pleased about that. The focus on device management is really delivering some great testimonials with our customers, typically driving an 18% uplift in customer revenues per machine. And one particular example is Lucozade Ribena Suntory, where we got that 18% uplift and also allowed them to have a 14% reduction in their transaction costs. So a real winner, and that's allowed us to drive new installations through their network. I get -- looking at the adjusted operating profit of GBP 0.91 million versus GBP 980,000 last first half. Basically, the foregone ERP will wash through in the current year, and we'll see that rebound into the next period when we start to see the device footprint in the full year of subscription income per device coming through. In terms of our progress in verticals, forecourts were up from about 1,800 to 2,100 devices on forecourts. We've also completed integration development on supermarket loyalty cards. So that's allowed us to get more market share within the supermarket arena. And again, the forecourt vertical as well our device uptime is super critical there, primarily because the average transaction value is so high. So if your device is down, you can make substantial losses. So that's really allowed us to make a real difference. Moving on to the next slide. I guess my message here is that we've demonstrated real resilience through disruptive periods over the last sort of 8, 9 years. And we've got a really positive trajectory of the device footprint out there and device growth. And that's valuable market share. And it's also strategic market share because at the moment, we're taking share from international competitors. And if we look at the -- I guess, the issues that the sector has had to deal with blanket closures during the COVID lockdowns, then dealing with machine profitability with increased work from home, where you may have 60% of the footfall passing a machine versus what was 100% pre-COVID. That created a lot of uncertainty in the sector. And then you move on to 3G, 2G withdrawals. That means our customers, operators and food service and brand owners are really reviewing investment decisions, and that slowed things down, but we're starting to come through that, and we're seeing the growth again. The good news is that 90% of our growth is going to come from existing customers. So that's pretty positive. And the other thing I want to pick up on there is the mix is increasingly moving towards cashless despite the fact that we're going to be seeing the growth in the telemetry only as well, and that's more valuable. Moving on to hospitality. We're entering a period of sustained growth for the Hospitality division. In the U.K., we've got stable leased and tenanted base, and we're making good progress in terms of entry into the managed pub market. And the U.S.A. is making really good progress as well. All the key financial metrics are positive across the piece. So that's really encouraging. We've seen for the first time in probably 10, 15 years, growth in our installed base, and we expect that to continue going forward. The economic background is unhelpful, both in the U.K. and the U.S. It is tough for pub companies and fast casual dining restaurants here and in the States. And that pretty much makes us an essential tool when the gate around to making a decision because we can help them improve sales, we can help reduce costs, improve the consumer experience. And I think one of the keys as well is that there's going to be winners and losers, both in the U.K. and the States, probably more so in the States where it's very transparent that there are some winners and some losers. And at the moment, we tend to be with the winners. We look at the progress in the United States. The Fintech partnership agreement was signed in late August, and that allows us unique access going forward. We've completed the pilot with World of Beer, and we're about to roll out in World of Beer. And we've got good momentum in other pilots. So bottom line is if you look at hospitality as a whole, we provide significant savings for our customers. It's intuitive. A minute a day is all it takes to actually act -- pick up and identify the issues that need to be resolved on any particular day or week, and it pays for itself if you can save or sell one additional point a day. A bit closer look at the States, encouraging progress and really good engagement. We as I said, we've signed that partnership agreement with Fintech in late August. That gives us unique access to the United States market. And that whole integration with Fintech, integrating our inventory platform with their payment processing and payment reconciliation helps reduce labor costs, improves productivity and helps customers get it right first time. Looking purely at the shift point-of-sale losses, again, 1p per day uplift will pay for the system inside 6 months. Existing contracts include Chili's, Margaritaville and Marriott franchisees and now World of Beer. Bottom line is it's all about hitting the quality benchmarks, helping customers get it right first time, improving the productivity. And if we look at where we are in terms of significant loss reduction in the current year, we will have a loss reduction, won't quite be where I was hoping to be in terms of total revenues, but we're confident that we will secure meaningful contracts in the next several months that are going to make a real difference. With that, I'll hand over to Sarah.

Thank you very much, James. So yes, welcome and for the results this year. Looking at the profit and loss across half 1, what we see is the progress has remained solid. We've improved profitability. Turnover remains stable at GBP 7.67 million and operating profit has increased 10.4% to GBP 1.5 million from last year's GBP 1.43 million. This demonstrating enhanced operational efficiencies across the board and EBITDA is up 20% year-on-year. Earnings per share has increased to GBP 0.79 versus last year's GBP 0.06, all supported by the growth in profit. Importantly, recurring revenues have held strong at 84% of overall turnover, and that provides our visibility for half 2 and beyond and the confidence that goes along with that as we move forward. We turn over to the actual divisions themselves and the highlights within Smart Zones. The turnover has increased 5.6%, reflecting our customer demand of GBP 250,000 in absolute terms with 229 new installs, like James said, our highest for a while and recurring revenues increased slightly to GBP 4.21 million from GBP 4.19 million year-on-year, and this being 90% of overall turnover for the division. Gross profit increased 2.6% or GBP 93,000 in the period. So all in all, Smart Zone is making excellent progress. And when we come to the unattended division, turnover for the period is GBP 2.97 million versus last year's GBP 3.2 million, and this is a direct result of what James has already spoken about and the economic backdrop. However, gross margin profit increased 52% from 48% last year, which shows our resilience in this division and operating profit for the period was GBP 0.91 million, a slight reduction year-on-year due to the pivot away from ERP. And importantly, again, here, recurring revenue remained strong at GBP 2.23 million for the period, 75% of overall turnover, providing really good footprint foundations for moving forward. We take a look at our cash flow. Cash generation remains very solid. Free working capital cash flow strengthened year-on-year to GBP 1.79 million from last year's GBP 1.61 million, representing 10.7% growth and post working capital cash flows of GBP 1.72 million, so very healthy. These were invested in R&D, rental devices as well as paying an increase in dividend and purchased shares back at GBP 250,000 in the year, all while continuing to repay debt and reduce our net debt position, so really self-funding. We move on to our balance sheet. Again, it remains strong. It continues to strengthen and shows resilience within the organization. Refinancing with HSBC took place in the period. The rates have improved and the commitment is there until April 2028. That saw reduced repayments in the period and provides long-term certainty. Cash remains strong at GBP 2.57 million from last year's GBP 2.25 million and net debt stands at GBP 0.5 million versus last year's GBP 1 million at this point. This was even after paying the higher dividends, the purchase of the share buybacks, which without we would have been towards net cash. So all in all, a strong balance sheet to support the future growth of the business as we move forward.

Thank you, Sarah. Bottom line is that we're in an exciting position, strong financial foundations. We've got strong commercial pipeline and some really good prospects, and there's some strategic opportunities for us as well. We look at that strong financial engine that's built on a really strong recurring income base that's only going to grow. And we've continued to invest in our technology and innovation to ensure that we stay relevant going forward because we're not satisfied with where we are. We want to continue to actually drive good growth. We managed to deliver bottom line growth. We expect to see top line growth going forward. If we look at smart machines, for instance, there's a really strong contractual pipeline there. It's really about rate of deployment, 9% of the growth that we're showing in those device footprint growth over the next couple of years comes from existing customers. That's going to deliver a really strong strategic market share that becomes valuable to others. If we look at the demand for data and insights, there's increasing demand for data insights. People need to do more with less. There's more and more utilization of AI and we continue to invest in our technology. We have invested in our databases, our APIs and our reporting suites to ensure that we continue to be intuitive, easy to use and highly relevant. If we look at the whole cashless payments, that continues to grow. Our focus on device uptime and user experience, coupled with very competitive transaction rates and industry-leading customer experience. And then our absolute focus across the piece over the last 4, 5 years has been to become a trusted partner for our customers. And that for me is vital because if you're a trusted partner, they know customers know you're going to do the right thing and they're happy to work with you in partnership going forward. And the testimonials that we're starting to produce and use out there in the marketplace really underline that. Bottom line is that the markets and levers are working in our favor. We have relevant solutions. We continue to innovate, and we're flexible with our customers when events and issues occur. And we know that we're going to win with our customers. That concludes the formal part of the presentation, and we're going to move on to questions now.

[Operator Instructions] 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. Can I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Thanks, Mick. Okay. First question in 2 parts. I'll take them part at a time. Due to general economic constraints, you previously said that a lot of customers were preferring to go with sales rental option on new renewing contracts, thereby spreading total cost over the length of the contract. Can I ask if this trend is continuing and at what levels compared to previous years? Bottom line is that hospitality tends to be CapEx, almost 100%. In unattended retail, we got a mix, and it largely depends on the timing of contracts and the timing of when rollouts are being completed. Foodservice and brand owners tend to go CapEx model and the vending operators tend to go rental model. So that's -- so it's really dependent. But the past 6 months has pretty much been similar trends that we've seen in the past. So nothing new to report on there. The second question -- the second part of the question, at the previous investor presentation, you said you had penciled in for approximately $1 million in sales for Vianet USA in the current year. Is this still the anticipated number for this year? Bottom line is that we're behind where we want to be on that. But what we do have is that we have contracts that we're in the process of getting signed up that are going to move us some way towards that. But we won't hit the USD 1 million. But having said that, it's not factored into our numbers. Those were internal forecasts and ambitions rather than hard baked in forecasts. So we expect to see progress there. Where will the growth come from in a shrinking marketplace? Is the only growth totally offshore? Okay. Well, if we take hospitality first, bottom line is that we're in probably 9,500, 9,600 pubs and bars largely in the U.K. There's a total of 41,000 -- in excess of 41,000 pubs and bars in the U.K., 16,000 independents. There's probably 12,500, 13,000 leased and tenanted and probably 11,000, 12,000 managed operators. We're starting to make inroads. We're starting to see an increase in the number of leased and tenanted. So we're seeing migration from a lower poorer performing managed houses moving into leased and tenanted, that's helping to sustain a stable leased and tenanted base and we're starting to see some real engagement in managed operators, and we're starting to do installations in the managed operators, and we expect that to continue to grow. So we expect to see growth in the U.K. pub sector. That's number one. Number two, we expect to see growth in the vending unattended retail market is not shrinking. It is in growth and our existing contracts will deliver 90% of the growth that we're forecasting going forward. And then we look at the U.S.A. The U.S.A., it may be a shrinking market, but it's a very substantial market. And at this moment in time, we're a small player who are engaging seriously with some seriously big players in the States, and it's just taking time to get that across the line, but we're confident that it will happen in the coming months. Next question. With new wins showing a positive uplift, how aggressively are you pursuing market share capture? And what barriers are there to switching from competitors? If an existing device, if we take unattended retail, if there's an existing device out there that's a competition device and it's currently 2G or the last of 3G waiting to be upgraded, then we feel pretty confident that we can go in there with a compelling offer and testimonials that will allow us to gain that business. If it's an existing 4G outlet that's already been upgraded with -- by the competition, that's slightly more problematic, but we're prepared to be flexible and innovative in terms of our pricing structure to try and swap those 4G out as well. And that happens. That might be that one of our existing customers has acquired another operator that has a competition 4G siding, and we'll work with them to take them out over time. And in the U.K. hospitality, we have -- there is no real competition. Next question. Could you comment on your market share and who are your main competitors? Well, hospitality is easy in the U.K. We are the market and we have no competition in the U.K. In the U.S.A., there are probably about 3 or 4 competitors, but they're scratching the surface of what is a substantial U.S. market. We're taking it slow and steady, but we believe that we're going to be winners in the medium term. When we look at unattended retail, competitors are Nayax would be the real competitor in the U.K. They have a substantial presence across a number of different sectors. And we compete very effectively with them because we focus on device uptime, user experience and superior transaction rates. And that allows us -- the customer experience help desk that we have is industry leading. So that allows us to compete very effectively with them and again, gets back to us being trusted advisers. And then you've got other competitors, Televend trying to get into the U.K. market and I say trying, -- they don't have much in the way of presence in the U.K. at this moment in time. And again, the other one would be Cantaloupe. Cantaloupe bought a business called SPSoft, which was a vending management software, but they've struggled to get any traction in terms of device footprint out in the marketplace. And that gets back to why we -- our focus was on delivering device footprint during the 3G, 2G switch-off to really drive and secure that valuable recurring income. That looks like it's the last question. No. Okay. There is one I missed here. Okay. Is -- you have been in the U.S.A. for some time now. Is it realistic to expect to achieve critical mass there? And is this a distraction core U.K. business? Bottom line, it's not a distraction to core U.K. business. Bottom line is the acquisition of Beverage Metrics has really strengthened our core U.K. business. And the product development that we've been investing in is equally relevant in the U.K. and in the States. That's point number one for me. Point number two is that we are going to be successful in the United States, and it is a case of watch this space, and we will deliver. Just checking the -- I think I've already answered with new wins showing a positive uplift, how aggressively are you pursuing market share? I think I've already answered that one. Yes. That is all the questions for now.

That's great. Thank you for answering all those questions you have from investors. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide with their feedback, which I know is particularly important to the company. James, could I please just ask you for a few closing comments?

Okay. Well, really pleased with the strong progress in the past year or so. Really delighted with the level of customer engagement and the underlying momentum that we have in both divisions. We have a strong pipeline in unattended, it's 90% of our existing customers are going to deliver that future growth. In the U.K., hospitality, leased and tenanted is super stable and showing a little bit of growth with us. And we're making inroads into the managed sector, and that's only going to continue to accelerate. And really looking at the U.S.A. hospitality, making progress in both the what I call top beverage metrics. It's Beverage Metrics' draught beer module, but it's also the fast scanning inventory module that we're making -- starting to make inroads and we'll be able to announce some progress there fairly shortly. Also, when we talked about being trusted advisers for our customers, it's also about having trusted partnerships with people like Fintechs, Govie McIntosh, Attenda. It's about being the sort of people that others want to deal with, and that's important to us. And we continue to invest in our technology and our innovation to ensure we're relevant, and that's only going to pay dividends going forward. Really encouraged with what the technology team have been doing with AI and accelerating development. It's really accelerated our whole product development, move from the stage where developers become a bottleneck to the stage now where it's business analysts and product managers who are the bottleneck to feed the AI development. And really absolute focus on delivering the recurring income growth and allowing the capital returns, therefore, will allow us to keep our shareholders happy. Thank you.

James, Sarah, thank you 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 may take a few moments to complete, and I'm sure 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 all.

Thank you.