Eleco (LSE:ELCO) — Interim Results

0:01 Good morning, ladies and gentlemen, and welcome to the ELECO PUBLIC LIMITED COMPANY Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time via the Q and A tab It's just situated on the right hand corner of your screen. Please just simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, all questions submitted today will be reviewed with responses published on the Investor Meet company platform where it is appropriate to do so. Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand you over to CEO, Jonathan Hunter. Good morning, sir. Good morning, ladies and gentlemen.

0:47 Thank you for joining us today for our, interim 2022 results. I'm the, chief executive of ELECO, Jonathan Hunter, and I'm joined by Rose Clark, who's been with us since January as interim chief financial officer. Rose is Rose is you would have seen on the previous roadshow, and, we will be joined by Neil Pritchard, next month. We're currently having a handover, as we speak. To tell you a little bit about ELCO, ELCO is a AIM listed, innovative, resilient and growing business.

1:32 We specialize in world class software and services to the blue chip customers in the construction and built environment. We made shift to becoming a software business in 2014 following the divestment of our building products businesses and we've been cash generative and growing organically and through acquisitions since. Our core markets include The UK, Sweden, Germany, and The Netherlands where we sell primarily to, direct to customers and we also offer support services. And we sell through a reseller network internationally, including The US. Our product lines are divided into two groups, the building life cycle and visualization in CAD.

2:25 We accordingly segment and report our performance and conduct our business within these two groups. Our building life cycle accounts for 65% of our revenues and, comprises best of breed solutions with synergistic traits. And our visualization and CAD, businesses offer niche services and solutions within their target segments. They operate with leading technologies and a good market presence. So in the first half of twenty twenty two, ELECO delivered a robust performance despite the economic challenges that all companies are facing. At the end of the first half, with marks eight months into our SaaS journey, and we're pleased to have grown our recurring revenues during this period.

3:20 We've done that through maintaining our loyal customers and also adding new customers. And we continue to generate cash, and as a result, we're enhancing our customer lifetime value, which means each customer is contributing more. The results for the first half are in line with market expectations and our strategy. Pleased to report again and highlight that our recurring revenue has grown by 9%. But I shall hand over to Rose to take you through more detail on the financials. Thank you, Jonathan. So you will have seen on the on the highlights slide, there's a really positive growth there from our recurring revenue, and the other indicators looks like they're going in the other direction.

4:07 That's really because we're on a SaaS journey. So I'll talk through a lot more about that in in the coming slides. Our overall revenue is, is level if you ignore, the foreign currency impact of the Swedish krona. And our recurring revenue has grown to 61% of our total. We have really strong deferred income, which is growing year on year. And, another thing you can see from this, this slide here is you can see the dark blue is the recurring revenue growth, but you can also see the light blue growth, which is our perpetual licenses. That's where we put our perpetual licenses, and you can see that's reducing year on year. So that's all part of the story, which we'll we'll talk a little bit more about.

4:54 Because of moving from perpetual licenses to subscription revenue, our gross margin is falling as well. If you think about a perpetual license, it goes immediately into the bottom line, and that enhances a margin in any one year. So that's why our gross margin is falling slightly. Our cost of sales remain the same. So this is a slide I added quite a bit of feedback after the last round of investor presentations. It's showing what's in our recurring revenue. We had quite a lot of questions around that, so we've tried to sort of give a really good illustration of of what that's made up of. So we have an underlying base shown here in the dark blue, which is our maintenance revenue. We have a really loyal group of customers that have been buying our traditional products and for a long time, really, really keen and and continue with us. And we have renewals of of over 90% with that customer base. So that's a really good part of our recurring revenue. We also get hosting revenue income, recurring revenue from customers on certain products. And then most importantly, the areas highlight is our our gray on here, which is our SaaS and subscription revenues. So some of our products already fully on SaaS, and so we've we've been having that revenue all the way through the period shown.

6:20 But where we've really focused our growth in our in our move to SaaS for other products is is really showing through here is subscription revenues and growing by 59% in total. And I'll talk a little bit more about the impact of moving from perpetual to subscription on a later slide. So this slide is showing our revenues across the geographies and also by product type. So you can see we're very strong in The UK and in Scandinavia and Germany is our third largest region. And that's where we've struggled a bit over the the last six months really from the impact in, the economy in Germany. It's really, really, impacted new sales. We still have retained clients that, are are staying with us, and and we're not losing them, that which is really strong, but we are not really seeing a lot of new business coming through in Germany.

7:19 And that's because of the energy crisis and the sort of decisions people are having to make in Germany much much more impacted than in The UK. You can also see on here that, we've got the building life cycle. This is how we report our revenue now, building life cycle, which Jonathan talked about earlier with the different. And we've got CAD and visualization, and we've got other third party software. So our building life cycle level year on year on year as was expected in the markets, and that is due to the to the move from perpetual to subscription in in some of the key products there. You can see our CAD and visualization. We have a a reduction of just over 11%. And that's because the majority of that business where we sell through CAD and visualization products is based in Germany, and that's the area where we've seen, the most economic impact from what's going on.

8:12 We also sell other third party software. We've got good growth in that. That relates to, our own software. We don't sell it separate software. We just sell software that relates to our own software. So, you know, it's a really good picture there. You can see all the different aspects that are affecting our revenue. We also have, as Jonathan mentioned, we sell through resellers in The US, and we've seen good growth, albeit quite a small part of our our revenue at the moment. And we've just hired a new US sales lead in July, who's really, really focused on building and supporting that reseller community for us in in The USA, which we think is a really good market for growth. So this slide I introduced, it's it's it's to explain for those who who don't necessarily understand the sort of the moves from perpetual subscription.

9:05 It's purely a commercial pricing move for us at this stage. And this example is looking at the typical pattern. So if you sell a perpetual license in this one, it's priced at a £100 with a £20 maintenance contract. So in year one, you'll take or in year in month one, I should say, you'll take a £100 of that perpetual license revenue to income. And the contract for the £20 maintenance is spread over the months, the twelve months for that contract. And then in subsequent years of that contract, if if the client renews, you get a further £20 maintenance. So that's the pattern that we've worked with in the past. And we've priced our subscription revenues based on a three year payback.

9:54 So if you add up the price or the money and revenues coming in for the first three years on a a maintenance, a perpetual maintenance license, divide that by three, that's broadly how we we're pricing our our subscription contracts. So you can see in subsequent years, the revenue and cash flow coming into the business is higher than in year one. So in year one of this move, that's why we're seeing an impact on our on our revenues. And we're doing it in phases. So we have we're on phase two at the moment. So phase one was, just to remind you, was that we introduced subscription pricing for the sale of new licenses to new customers, and that was towards the end of 2021.

10:41 And then in early in 2022, we introduced the sale of subscription licenses to existing customers that want to buy more licenses, you know, and a lot of our customers do upgrade and buy more seats. So that's that's a big source of revenue for us. So at the moment, we have a proportion of those customers buying by subscription, some are still able to buy by perpetual. So we've got a mix of that business going through our p and l. And then, ultimately, we'll need to move to, we need to move to moving and migrating our maintenance contract base over to subscription, and that's phase three. We've done, some initial tests on that, which Jonathan will talk about later, but that's not something we're really focused, on in the immediate future. That's the next stage.

11:32 So just focusing on, our profits. So all our profit measures declined year on year and that is because of this move from perpetual to subscription, not for any other reason. We are impacted to a certain extent by the wage inflation as all businesses are at the moment. We are able to pass that on through price increases on UK business and our Swedish business, our German business. It's different depending on the contracts in the regions you're in, but we are able to pass that that up that cost on over a phase time as renewals come in and as clients buy new licenses. We're not really impacted by the energy crisis, because we it's just offices. So not not not significant impact for us.

12:20 So you can see that, again, that that impact on our profits year on year because of the phase we're in is impacting earnings per share as the other metrics. And then we do we do have a number of retail clients very interested in dividend, and so we are continuing to propose a dividend, an interim dividend for the business. Our development spend is maintained at over 12% of revenue. We have a a a prudent basis for capitalization. We only capitalize those development costs that are really relating to future revenue generation or future customer retention. There has to be an economic benefit in the future for doing that. So that's, that's what we capitalize.

13:09 We've, recently brought on a CTO into our business, a chief technology officer, and he's now managing the whole of the development spend across the business. Previously, it was separate development budgets in The UK and in Sweden predominantly. Now he's managing the whole thing, and that's bringing us increased efficiency and good for the future. We have strong cash flow as a business. Jonathan mentioned, touched on earlier. We paid off all of our bank facility bank debt towards the end of last year. We have 11,300,000 in the business at the moment. That's grown from 10,000,000 at the end of the year held across multiple trading currencies. And you can see on the cash flow generation during the year, it's lower than the prior year. And that is because again of the last year had a lot more perpetual licenses that comes in as higher cash in year one as you've seen earlier in the slide that I talked through.

14:10 So just to summarize on the financial highlights, really robust and and growing recurring revenue. That's our real focus at the moment as we move on the journey to SaaS. Very strong cash position, very high customer retention over 90%, which we're very proud of. We have strong customer loyalty. We're growing the shareholder value on our SaaS journey as we move through from to subscription contracts, you can see the future growth. And we are also continuing to streamline our product portfolio, which Jonathan will touch on on a later slide. I now hand back over to Jonathan. Thank you. Thank you. So I'd like to take, the next part of the presentation, to take you through our strategy and the progress we're making.

14:59 Our key, strategic pillars are innovate, strengthen and grow. An investment in the building life cycle and construction technology remains at a high, there still is demand. And our strategy has defended our position by focusing on our customer segments and what we do well to leverage our customer relationships. Our customer focus has resulted in continued high customer attention, which is fundamental factor of being a SaaS business and while we're on our SaaS journey. And therefore, we also innovate with customer needs in mind. We continue to transition to SaaS because it will add more value for our customers and our shareholders.

15:45 But it's also important to remember that our SaaS journey impacts all areas of our business from organizational design, product strategy, technology roadmap, performance incentives, and also our financial reporting. So through all of this change and transformation, our people strategy has been key. And our people who are delivering and driving growth in our business. So we continue to, align our portfolio with our customer needs and our customer segments. We continue to maintain by adding, maintaining our customers and adding new customers through our direct sales focus and also customer success capabilities.

16:36 Our strategic progress. Our customer centric approach, is driving us to continue to develop new innovation. We've also, continued to focus on enhancing our core products. But with new innovation, we've been focusing on modules that allow us to upsell more value to our existing customers and alongside our core products. Some examples of these are Permit to Work, which has been developed in the first half of this year and went to market at the beginning of September. Permit to Work is a module for Shire Systems and it's a key component with assisting customers in managing safety and compliance procedures.

17:22 Last planner, it enables on-site and final stage planning for customers. This will link back to the master project plan in our power Shire project software, which is our core scheduling software. This is going through customer feedback rounds at the moment, and we expect to release that to market in the first half of twenty twenty three. As we're on this SaaS journey, it was also important for us to migrate all of our data and our customer data from from on premise and managed hosting services to the cloud. We're also moving to a single cloud provider which will allow better interrogation of data in the future because it will all be in one place. We expect to complete that work, in the beginning of next year, but we we have now all shifted to cloud.

18:13 We also enhanced and developed our wall artificial intelligence tool within our views visualization business. Previously, we had released a floor visualization tool and what that allows our customers to offer their customers is a visualization tool that allows a consumer to photograph their room, any room, and change the floor and walls. It's important to remember that our customers in our visualization business are interior surface manufacturers. So they're manufacturing flooring, tiles, wallpapers, paints. It's a great tool in in that sector because there's a need for better visualization tools. The way we're pricing this all AI tool is on the number of uploads that consumers carry out.

19:07 So certainly scalable as as the adoption grows and we're seeing that grow month on month. We said we would focus and strengthen it as a business. We put significant effort into implementing our people strategy in the period. We launched a number of initiatives including an employee well-being program. We're offered training and volunteering days to all employees. We reviewed benefits packages and developed an onboarding program to invite new colleagues to the business and get up to speed much quicker. We also listened to our employees and we received feedback which was analyzed by a third party and allowed us to be certified as a great place to work in The UK and Sweden. And what we also heard from colleagues is that they show a high level of trust so that the trust score was very high in support of management and the direction of the business.

20:04 We mentioned in, last week's, announcement that we have committed to divest, one of our CAD software businesses as it no longer fits with our core customer offering. This will allow our management to focus on what is core for our growth. And, I'm pleased to say that when it was announced to colleagues in the business, they're very welcoming of the news. We've talked about SaaS. We are committed to the SaaS journey. This has taken significant transformation and education of our customers, and our customers are invested in the in the future of ELCO as they're also expanding and and adopting technology. So we've seen, good support from our customers and good adoption rates when it comes to, subscription.

20:56 In the market, our reputation is important and it continues to attract new customers. We provide services and support to ensure that our solutions are successfully implemented in our customers businesses. And we're finding this is a key driver for our customers as they are adopting technology to meet the demands of the industry, and it's important that that technology is adopted internally in their businesses and it's successfully implemented. Therefore, we're really proud of the progress we're making on this journey that we're on. Let's give you insight into some of the drivers in the building life cycle.

21:42 There continues to be investment in in construction and infrastructure. It's the market that's quite exciting for for companies like ELCO. There's a lot of investment going into technology in order to meet the demands of the industry. But we continue to see a lower level of adoption or digitalization compared to other sectors. There's continued focus on cost reductions in the industry, productivity, and delivering projects on time, really our sweet spot when it comes to planning and scheduling. Any overruns, of course, leads to overruns in budgets and costs and also impacts the community. We're seeing new development new construction techniques being used.

22:33 During COVID, there was a slowdown in modular construction. Now we're seeing that pick up and research should suggest that there's going to be a 12% year on year growth in modular construction over the next five years. So we're saying that with our customers that they're looking at modular for residential buildings and designing buildings for manufacturing in a controlled environment and assembly on-site in safe and sustainable way. What's driving this is sustainable building practices, being able to have certainty around construction materials, lead times, etcetera so that we can construct in an environmentally friendly way and be able to calculate those emissions and the impact on the environment.

23:26 So certainly a driver for new construction techniques is environmental concerns. And we continue to also see ongoing technology development and adoption. So we're seeing artificial intelligence, I mentioned earlier, cloud, Internet of Things, billing information modeling, etcetera. I'd like to just talk through two examples of where ELCO is solving the challenges and creating certainty in the built environment. We have one example with a customer Morgan Sindle Construction. Morgan Sindle is a UK construction business. This project in particular is a school development of a school which took thirty three weeks to develop.

24:19 Many of you would have heard of the benefits of modular construction especially with the environmental demands in place. And for modular construction to be successful, there's many critical parts that need to align on-site. So you could imagine that building components are manufactured off-site in controlled environment, but then they need to be delivered at the right time in order for the project to be successful. And that's really where our software plays a key part. Power project is very good at calculating and visualizing critical parts. One one task has to be completed before we move on to the next. And if there's any delay in in any task, Power Project can reschedule and and rephase accordingly so that the project manager can identify the the delays and and address those delays to ensure that there's no knock on impact on the project.

25:20 So James Wood, the project manager at Morgan Sendle for this project was kind enough to endorse Power Project. At the UK Construction Manager of the Year Awards, he actually won the gold medal for schools under £20,000,000. So where we're helping in terms of collaboration and better visibility across a portfolio of locations, We worked with ADI Group to modernize their approach to managing services and moving them to a cloud offering. ADI Group has over 30 divisions providing a one stop shop for engineering and construction focused solutions.

26:10 They work in the aerospace, food and beverage and manufacturing and petrochemical sectors. ADI's facility engineering division, provide planned reactive and corrective maintenance services across multiple sites for their clients. And previously they had managed these through, separate installations of Shire Systems and other, products. But what we helped, AVI do was standardize across all of their customer locations, create single logins so that they, no longer had to log into each site separately to to to see progress and manage those sites. We did that through centralizing all of the data in the cloud and which is as a result has all so provided them with better visibility of what's happening on each of the locations, I. E. Better performance indicators and also better management and collaboration and communication.

27:20 So to summarize, we've had a robust performance despite the pressures in the market. We're making excellent progress on our strategy as we transform to becoming a SaaS business. We continue to expand and retain a loyal customer base and that will continue to drive recurring revenues. Therefore, we're really confident with the outlook for the remainder of 2022. That concludes the presentation. We'd be happy to take your questions. Jonathan, Rose, that's great. And thank you very much indeed for your presentation this morning. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab that situated on the right hand corner of your screen. But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard.

28:15 Jonathan, Rose, as you can see we have received a number of questions throughout today's presentation. So thank you to all of those on the call for taking the time to submit their questions. And Rose, Jonathan, if I could just hand back to you to run through that Q and A tab to respond to those where it's appropriate to do so. And then I'll pick up from you at the end. Thank you. Okay. So first question is from Steve K. Given the level of share price, would you look at a share buyback rather than a dividend? Rose, would you like to answer that? Yeah. It's it's definitely one we can consider, I think, is probably the best way to to say. Yeah. Yeah. Definitely look at it. I think we really you know, our focus with our cash, and we have got quite a lot of cash in the business, is to have that ready for a a future m and a opportunity.

29:08 And and, Jonathan, I'm sure, will talk about that because a couple of the next next questions are are on that topic. Yeah. Thank you. Thank you. So, yeah, probably best to take David. Question from David S. From an M and A viewpoint, what would you look for in a potential acquisition to support your growth ambitions? So ELECO has been built through M and A, and we've been quite successful at integrating and and providing the portfolio. Therefore, you know, what we're looking for is technology or capability that allows us to deliver our product and strategic roadmap quicker. We're focused on our customers, our core customer segments, and therefore, you know, when it comes to m and a, we're we're looking at technologies that will provide added value to our customers.

30:09 Another question here is from Ryan N. What do you look for in partnerships and which component of your current business model do you believe will be enhanced by such partnerships? I think the the built environment is made up of many different parties coming together and aligning on a project. And therefore, you know, it's important for companies like ELECO to partner and be open when it comes to working on projects or allowing our customers to to work across projects. We have our sweet spots, you know, we we have, you know, scheduling, estimating, data management, and that's where we play. But but in terms of, you know, partnerships, we we need to add more value on the data side, so connecting through data links.

31:06 Hope that answers your question, Ryan, is is that, you know, it's adding more value and and partnering is important to to, to ensure that our customers have this sort of seamless data flow. Just reading the next question. When will the so this is from Ben. When will the transition to SaaS from perpetual license be materially complete? And will you be purchasing the perpetual licenses back from current holders? Good question, Ben. I think it's important to remember we're eight months in on our SaaS journey and it is a journey that impacts all areas of the business and our customers, of course, are on this journey with us.

31:59 We're we've done a lot of studies and spoken to a lot of businesses that have gone through the transition. Some have done it really well and others haven't. Those that haven't have forced a switch to subscription upon their customers. And it's important to remember that under the perpetual model, the customer purchases a license and can use that software perpetually. They pay an optional maintenance fee which is which is taken up by the majority of our customers. That's that's paid annually. And but that is optional. Therefore, you know, we've seen some businesses switch and customers have have ceased paying maintenance and just use the software until it's absolutely needed to be updated.

32:48 We're not doing that. We're on a we're on a journey with our customers. We're we're very supported by our customers. Therefore, we're pulling our customers along or taking our customers on this journey with us. Therefore, it it will be multi year as renewals come in. We have seen a good uptake. It's been ahead of what where we thought we would be, which is excellent. And and developing more features, more modules that I spoke of, they're all subscription and and SaaS based. And therefore, you know, customers are seeing more value in our products, which is encouraging them to to move across. We won't be buying back licenses. So your second part of your question is will we be purchasing licenses licenses back from current holders? No. We plan to transition customers across with a marginal uplift fees for the added value that we're providing.

33:53 There's one last question from Steve Kay. Do you expect business to return to normal levels in Germany? So it's not a time related question, but we certainly do. Business business in Germany, there's been disruptions which has been reported. But we have excellent products that proven in the market, and and we have businesses based in Germany. So that we expect, you know, we're still focusing and and providing investment in in people there to sell and support our products. And also, we have customer base there that we're supporting. So, yeah. We we we continue to to be based in Germany.

34:41 But in terms of timings, we we will see. Jonathan, Rose, if I may just jump back in there. Thank you very much indeed for taking the time to address all of those questions that came in from investors this morning. And of course, if there are any further questions that are submitted today, we'll make these available to you immediately after the presentation has ended for you to review and then add any additional responses where it's appropriate to do so. Jonathan, perhaps before redirecting those on the call to provide you their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great. Yeah. Thank you, ladies and gentlemen, for all questions. Of Really enjoyed answering those and thank you for your time today. Really look forward to your feedback and look forward to seeing you at our year end results.

35:31 Jonathan, that's great. And Rose as well, thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity 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, but I'm sure it will be greatly valued by the company. On behalf of the management team of ELECO PUBLIC LIMITED COMPANY, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.