Essensys (LSE:ESYS) — Half Year Results

0:00 Good morning, and welcome to the ESSENSYS PLC half year results investor presentation. Throughout this quarter presentation, investors will be in listen only mode. Questions are encouraged, they can be submitted anytime just by using the q and a tab that's situated on the top right corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all the 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 Mark Furness, CEO. Good morning, sir.

0:31 Thank you, and good morning, and welcome everyone to ESSENSYS half year results presentation. Alongside me, as always, I've got our CFO, Greg Price, and joining us today is also our COO, James Lowry. So let's take you through the results as we see them so far.

0:56 So, really, for us, we just wanna reiterate the reason the ESSENSYS exists. So we work with the world's largest real estate brands and company companies to help them meet the evolving needs of their tenants in a world which is much more flexible and much more dynamic, as we're all facing into this, changed environment of hybrid work post pandemic. And our companies are some of the largest, brands and operators of space in the world, people like Legal and General, JLL, Tishman Spire across The US, the most well known and respected brands. Our ambition and our vision is to power the world's largest community of flexible tech driven spaces, and today, we'll share the progress we've made and how we look to meet that ambition.

1:53 So how has the last six months been for us? Well, firstly, I'm delighted to announce that we have returned to profit in h one. And following that, we expect our run rate cash to move into positive territory by the end of f y twenty five. Today, we're on track to meet our full year revenue expectations. And with EBITDA moderating and becoming slightly lower due to a reduction, in profitability based on an extension of our data center decommissioning program. Now that's a legacy part of our business, and the, extended program to decommission those data centers, was taken the decision was taken on the basis that we felt a better commercial outcome could be achieved in the longer term, if we took, those, that program of works, into q three and q four of this financial year.

3:00 We're delighted that we've launched, Illumo, an exciting new pod product, which we believe underpins the growth ambitions of the business over the next five years and even, beyond. And and that's really about delivering against for the requirements and the challenges that our customers are facing today. As our customers meet the changing needs of their clients, really, the real estate industry needs to find ways of better monetizing space, and we'll talk to a Lumo for that later on in the deck, and also to better understand how these spaces are being utilized. And finally, I'm delighted to announce the appointment of James Lowry as CEO, who will be trying will be replacing me as of the May 1.

3:51 And this is really as a culmination of a a long term succession planning initiative we undertook about a year ago. About a year ago, I started to look, the things that the business would need from its CEO in its next phase of its journey. And the all of the things and the routines and the disciplines and the approach to execution that a business like ESSENSYS needs from its CEO. And so it was clear that some of those skills, would be better served by a new CEO. And seeing James operate firsthand in the three years I've been working with him, I've seen him drive the business forward on a day to day basis, seen him gain the trust of our customers and our people meant that there was clearly no better option than James to take the position of CEO. So I'm delighted. And perhaps, James, you could briefly introduce yourself now. Yep. Thanks, Mark. Well, first and foremost, I'm excited to take on the role of CEO and lead the next chapter of ESSENSYS, which as Mark said, is is one of execution.

5:07 A bit about me. My background is a strategy consultant, and prior to joining ESSENSYS, I worked for Bridgeland, one of The UK's largest landlords where I cofounded and scaled their flexible workspace business story. That gave me first time experience of the flexible workspace sector and landlords, which is ultimately the target customer of a SENSYS. I've been at SENSYS now for three years, just over three years, initially joining as the CEO of The UK and European business and since transitioning into a global role of as chief operating officer. This journey has given me a good understanding of all parts of the ESSENSYS business, and I've also been fortunate enough to work with Mark during that time as well. So lots to do, but excited about what's to come.

5:59 Great. Thanks, James. And you'll obviously be hearing more from James, in the future. So moving on, let's just talk about that progress and specifically how we think about our go to market motion. Our strategy is really

6:17 around three pillars. It's about landing the right type of strategic customer. Think of those big blue chip landlords and workspace operators. It's about making sure that our offer can be deployed and adopted across a large portfolio of spaces, and it's about making sure that we have plenty of upsell potential. And so how have we done in a half year to date? Well, we've seen the continued acquisition of those new strategic customers. That really is about our move to a pure play SaaS proposition. So that evolved value proposition is beginning to land with new logos and new customers. So a large landlord in The US is a recent example and and also a very large publicly listed landlord in The UK. Again, it's all about the right type of customers and winning those to build the opportunity to expand and grow with. And we've seen that expansion happening with one of our big UK customers who actually starts out with just one or two locations with us, and they've grown to near 20 locations in the last twelve months as our new offer with the ESSENSYS platform intelligence engine really hitting home and landing, to meet their needs. So we've seen in action, this evolution of our value proposition, delivering results with strategic customers.

7:48 We've seen the same in The US and also across APAC. So we've announced previously a large global landlord based out of The US who signed a big MSA. They've continued to expand across their portfolio as we expected. And in Australia, we've seen a large listed REIT expand rapidly again under the MSA umbrella we previously announced. And finally, we have the products that now meet our customers' needs. They are ESSENSYS platform and are recently, I mean, last week, launched Illumo. They're gonna provide us with further upsell potential. So not only do we see our growth opportunity in terms of our revenues with existing customers, I. More locations, but we see an opportunity to increase yield per location too with a wider capability and more functionality.

8:42 So who are ESSENSYS today? So at ESSENSYS, we see ourselves as a digital experience company for the commercial real estate industry. Now the commercial real estate industry is very well based on how they deliver a physical experience, but increasingly the quality of the digital experience in these environments is key to the success of their offers.

9:06 People want to work in digitally enabled spaces that are not just great physical locations, but also really easy to into operate, sort of, to use on a day to day basis via digital, experiences. And so that breaks us down into three real pillars. We think about physical and digital access, how we can help our customers deliver that and manage that in this dynamic, flexible, hybrid world. We think about using insight and intelligence from our platforms to be able to truly reveal the relationship between tenants in these spaces. You know, we all want to know about space utilization. Are we efficient? Are people using these spaces as we intended?

9:54 And finally, we wanna deliver transformational experiences in these locations, digital first, and mobile wallet activated. So they're the three real driving forces behind how we think about products. And those products that we've developed, you know, we talk a lot historically about ESSENSYS platform. It's really the on ramp to a very powerful intelligence tool helps people understand space utilization with a level of fidelity and resolution that's not yet been

10:24 seen. And secondly is Illumo, which is really about delivering a dynamic bookings and access experience that is designed completely from the ground up to meet the requirements of shared meeting rooms and shared spaces in multitenant environments. So we're excited about where our business is today and what we can see for the future. With that now, I'll pass over to Greg, who'll talk us through the numbers. Thanks, Mark. So when I think about the numbers for the first half of this year, I think the key message that I want to make sure people understand is the return to profit. So our adjusted EBITDA at £800,000 is at near 300% improvement versus the similar period last year where we made a loss of £500,000.

11:12 Now our revenue at £10,400,000 saw a decline of 11%. That was expected as we have been announcing in previous sessions like this following the downsizing of a single strategic customer. And I'll come on to talk about what our numbers look like without that customer and how the growth is still strong, particularly with our strategic customers where we're still growing at about 5%. Our margins at 59% are up compared to the last full year, and our cash balance at 2,200,000 still gives us plenty of runway to make sure that we can grow in the way that we plan to. And I will talk about how our growth journey is going to unfold and how our revenue mix is changing in the next couple of slides.

12:02 So if I focus first on ARR, our ARR, our annual recurring revenue at £16,800,000 is seeing a decline of 16%, which, as I said, is a factor of that one customer. And that's a reduction in our network services business predominantly. So that's at a lower margin business. So the way our revenue mix is changing is that we are seeing a growth in our platform, and we just launched Illumo, as Mark said, and we expect a lot of growth to come from there, but we have declines in some of our more legacy products. When you look at that from a strategic customer basis, our strategic customers represent 80% of our total ARR.

12:53 That's comparative to 81% last year. So even though we lost that one customer, our strategic customers as a whole are still representing the same proportion, which really shows the growth that we've been able to achieve with our other strategic customers, and underlying that represents 5%. Our recurring revenue declined by 9% and our total revenue by

13:16 11, as I said before, and that, again, is is less than the ARR, which reflects the fact that while the ARR is reflecting that customer downsizing, the recurring revenue will have some of it in the second half as well. So when we look at the ARR bridge, you can see the effect of that single customer. I guess the key things to pull out here are new customers coming in, so two new customers representing 200,000, and also new sites from other customers showing growth as well. We have some declines from our legacy products operated marketplace. But overall, as our revenue mix changes, we would expect that ARR to stabilize now and to grow from here.

14:06 Looking at the rest of the p and l, gross profit of £6,100,000 in the first half represents a margin of 59%. That's slightly behind where we were this time last year, but ahead of the full year from last year, which was 57%. And that reflects an increasing proportion of recurring revenues, are higher margin as well as the benefits of our data center decommissioning program that Mark was talking about before. We started the year with 13 data centers. We've already closed four of them. We have a plan to close another six in the second half of the year, and that will really transform our margins that when we look ahead to next year, we'd expect margins to be closer to 70% versus the 60% they are now.

14:55 Operating expenses at £5,300,000 reduced by £2,200,000, that's 29% versus the same period last year. That reflects some of the organizational change that we did last year. We've now got a really strong emphasis on cost management. We see the benefit of our simpler operating model, which which means we can be closer to customers and more nimble. All of that results in adjusted EBITDA returning to profit with a margin of plus 8% compared to minus 4% last year, and we expect that to lead to exit run rate cash generation by the end of this year. So one final slide for me on our cash performance. So we started the year with £3,100,000 of cash. We closed it at 2.2.

15:47 That reflects our profitability with EBITDA of 800 k, as I said. We did incur some restructuring payments at the start of the year. We would expect exceptional items in the second half to increase as part of that data center decommissioning program, but then they shouldn't recur in future years. Working capital was negative by 600 k in the half, but we do expect that to unwind in the second half and to be positive for the full year. Tax reflects r and d tax credits of 900 k. That relates to f y twenty three, and the r and d tax claim for f y twenty four, we'll see a benefit for in the second half. Capital development cost of 1.1, we would expect to continue, but the lease payments of 800 k largely reflect our data centers. So as we decommission the data centers,

16:40 we expect that cost to reduce by at least half, if not closer to two thirds. And all of that will mean that I expect our cash position at the end of the year to be around £2,000,000, So we will be and that will leave us in a good place to be generating cash into next year. On that note, I'll hand back to Mark. Thanks, Greg. I wanna take us through bit of a operational highlights and then dive into the product. So, really, how do we see momentum building? You know, I think Greg's mentioned it, but the key thing for us is to make sure we optimize our organizational structure globally to make sure we can meet the demands of our strategic customers and really underpin the the the core elements of our value proposition, I e, Illumo and the ESSENSYS platform.

17:36 So we've absolutely at every part of our organization optimized to that. So we can absolutely prosecute the opportunity in front of us. And that means that as we've removed ourselves away from some of the legacy parts of our business, the old Connect platform, which, which was related to that single, significant customer downgrade, as they were on legacy product and, again, away from our network services, has allowed us to be much more efficient in our overall organization design. So a great platform as we look out. The data center decision, as Greg again alluded to, was really a response to the changing nature of the requirements of our customers. And so the the decision to decommission the data centers, again, simplifies our business, improves the customer experience, and our ability to deliver for our customers, and obviously will significantly improve our gross margin performance, as those costs come out of our business.

18:41 And finally, if we think about those key things about our strategy, the fact that a Lumo and ESSENSYS platform are are standout products really solve the key industry challenges for the real estate industry as it moves to a more flexible hybrid world. And, we think we have the right products now to really push growth across our existing customers and to new, customers and markets. And so touching on Lumo, if I can, I'd just like to give you a sense of what a Lumo is and how it can help, for your businesses, for our customers' businesses. Oops. Now this is where new world of flexible The most in demand spaces in the office are your meet The most in demand spaces in the office are your meeting rooms.

19:34 But the way they're managed today comes with a compromise, experience, or revenue. It's time to reimagine the meeting room experience to make booking and access effortless, intelligent, and instant. Meet Illumo by ESYS. Created from the ground up, Illumo redefines the meeting room experience designed for a dynamic, multitenant world. Illumo brings together bookings, access, and intelligence into a single converged solution for the first time, Leveraging the power and security of mobile wallet technology to create a unique tap, book, access journey that transforms the user experience and realizes the revenue potential of your bookable spaces. A powerful solution that's solving today and ready for tomorrow.

20:19 It's time to unlock the full potential of meeting space revenue, and Lumo by ESYS. So, hopefully, that gives gives you a sense of what we've been working on for the last five years. And I guess, more importantly, how it solves some really big challenges for our industry. So shared meeting rooms in the world of flexible workspaces or multitenant buildings, they now represent probably the most valuable inventory in any building. And why is that? Well, the rise of flexible and hybrid working means that many companies are you choosing to have a smaller demise space and rely on additional amenities and shared meeting room spaces to deliver for their employees.

21:10 And so we've all seen in our own offices and our own spaces that how we use these meeting rooms is really challenged. You know? We had the doors are left open all day, and we see people squatting in them from morning to night. The doors are always locked, so we can't actually use the spaces. There's really no thought to the user experience, and the choices for the user experience always locked or always open, inevitably lead to very low levels of monetization for the operators of these workspaces and or the landlords. And that's something we really wanted to solve. And so we've solved that with Alimo by firstly converging three different approaches, so access control, the booking system, and and also the experience mobile first.

22:01 And that's a brand delivering a brand new way to manage and monetize these shared meeting spaces. Now we had to create every element and every component from the ground up. We had to reimagine the hardware, the software, the firmware to deliver this solution. And so it's the again, we have very early first mover advantage, but we're solving a big problem, we believe, for our customers. So what is Illumo in terms of the reality of it? Well, as I say, it's the hardware which we've developed and we now produce ourselves because there was no fit for purpose hardware solutions to deal with access control. So the reader, which is mounted outside of the room, allows you to simply tap your phone, on the reader, and it will check your booking status and your availability and your balance and then allow you to enter the room in basically under half a second that'll make that decision. It has a real time availability indicator. You see the light ring to let you know if it's free, how long it's available for.

23:11 The hub which connects to the reader and actually releases the door lock, so it has the the relay in it, is also being enabled for a future that allows us to start integrating things like IoT sensors. So is the room too hot? Are the c o two levels too high for a productive meeting? To allow the room to start making autonomous decisions about whether or not anyone's turned up, let's release the bookings so to allow that room to be reused. And to support that, and perhaps most importantly, we had to think about how the software layer would really deeply integrate here and what it could what it needed to deliver to manage the journey across all of these different buildings with lots of different occupiers in real time, create billing outcomes, and allow people to meter it. And then finally, working with primarily Apple, it's how do we create an app experience that allows simple, easy booking and also the delivery of the wallet credential to the phone so people can just tap in real time.

24:12 So we're so proud of what we've managed to deliver to the market with Illumo, James Shannon, our chief product and technology officer, and the rest of the product team and the development team have done an amazing job bringing this to life over the last five years, and we're excited to see what it can do for our business and our customers more importantly going forward. So where does this leave us, and what does the future look like? We know the office market is continuing to evolve. We know there's clear market bifurcation. Great office products in great buildings are being hugely successful. Rental growth, high levels of occupancy, clear demand.

25:00 And that's it, the the evidence of this idea of a flight to quality. And and, you know, we see the demand drivers continue. The idea of flexible hybrid spaces that allow us as an organization to be most efficient and most productive, and that's a key demand driver for the real estate industry. And underneath that, of course, goes alongside the fact that meeting rooms become the most in demand spaces, collaboration spaces, shared, workspaces become hugely valuable in these amenity rich buildings. And the enablers for those buildings are digital experience. Oh, I need to understand deeply the relationship between my tenants and my, building.

25:50 Are people using the spaces as I expect them? Who's in most often? What's the working day look like? Have we got quiet spots? How do we think about pricing structure and strategy? And, you know, is this product is this building? Does it really have product market fit? And finally, making sure we maximize the space monetization opportunity. And so as we think about, let's assume, ESSENSYS platform and Illumo, we clearly have a huge opportunity across the global real estate industry with all owners and operators of multitenant office space. Utilization's key. We help. Monetization's key. We solve. Premium product with great digital experience outperforms the market. And whilst there are headwinds, as we move to a compelling ROI model for our for our our solutions, so let me give you that in real terms.

26:45 If you deploy a Lumo today, a less than 2% increase in meeting room utilization will translate in a 100% ROI for this solution within twenty six days. We think that's really compelling for our customers. And so to just look forward, a big moment as we move back to profitability. A great customer base, some of the world's largest global real estate brands and companies, but we start the next six months and into the next financial year from a position of profitability and, shortly, run rate cash generation. We have the products to meet the requirements of the industry for the next five and ten years.

27:34 Both Illumo and the ESSENSYS platform are powerful solutions in their own right. But as you converge them, the the benefits of those, is incrementally more for our customers. And most importantly, as I finish this slide deck, is the quality of the people in ESSENSYS. They bring our products to life. They deliver for our customers every day. I'm handing over to James on the May 1 is another example of delivering of our business, having great people, and that can push forward for the next five to ten years. So with that, I'd like to pause there, and perhaps we can handle questions shortly. Perfect. Thanks very much for your presentation. Ladies and gentlemen, please do continue to submit your questions, and you can do so just by using the q and a tab that's situated on the top right hand corner of your screen. But just while the company take a few moments through the questions that have been submitted today, I'd like to remind you the recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard.

28:39 As you can see, we have received questions throughout today's presentation. And if I can hand back to you to read out those questions where appropriate to do so, I'll pick up from you at the end. Great. Thank you. So let me catch up on some of these questions. The first one is great. Thanks, John, for this one. He knows that it's great to see the company return to profit after a big period of investment over the last few years. Any questions whether as profitability grows, would we consider moving the company, the listing from main to main market or even Nasdaq to increase the marketability of your shares? I think we might be getting a little ahead of ourselves there, but I like the ambition. I think our business has huge potential and opportunity. And as its largest shareholder, I am hugely invested in making sure we deliver the best possible outcome for shareholders, and that could take one of many forms.

29:34 And I expect James and Greg and the board over the coming months and years to always be looking at how to maximize the returns for shareholders, whatever that look like. And, you know, NASDAQ, AIM, or main markets should always be in those conversations. Moving on. Thanks, Christopher. With Mark stepping down and James Lowry taking over, will your strategic priorities remain unchanged, or where might we see a shift in focus? I think one of the great things about working alongside James, for the last three years is actually our strategy has been developed collaboratively and to get there. And, again, with Greg in that conversation, we see ourselves for the last year, certainly for the last few months as Greg's joined as as more of a triumvirate.

30:23 We each bring to the table something unique, but we're very clear on the direction and and and the strategy of the business. And the alignment means that the business and our people are really clear on how we push this forward. So you won't see a shift. You'll just see a move to absolute execution, which really plays into James' skill set, and I've seen that firsthand over the last few years. Okay. George. George asks, and I might pass this to Greg. ARR was lower as a large strategic customer downsize. Are there any risks of other customers doing the same, and what strategies are in place to mitigate this happening to other customers? So I think let me just color in what was behind that decision.

31:10 So that customer was actually on our legacy platform, Connect, which was IT services provisioning software, and was deeply integrated to ESSENSYS cloud, so a lower margin, solution for us. So they actually haven't migrated to a ESSENSYS platform when they made that decision. So there is always, and we should always recognize there's risks of other customers making those decisions. But what we are clear on is that a census platform and intelligence engine really meet the challenges for our customers. And, actually, that's been evidenced, as we can see recently, by the renewal of one of our largest other customers on a new three year, agreement. Now that three year agreement actually sees the software revenues increase and the reduction in those network service revenues.

32:01 So we think whilst we're always at risk and we should always be paranoid about customers and market and competition, and we are well placed to mitigate this happening to other customers. And the more we bring in, you know, the conversations such as Illumo, I think the more we can the more we can deal with that. I think that covers that. And the next one is, you know, how does Illumo differentiate from competitors, and what level of revenue contribution do we anticipate over the medium term? So take that in two parts. So Illumo is has been imagined from the ground up. There are no current solutions in the market, and I please, I implore you to go and look and see what you can find. That converts real time bookings and access control into a solution, that meets the needs of dynamic, flexible workspaces.

32:55 We actually had a great example of this. We have been very much operating in stealth mode with Illumo. We only launched last week. And one of our target customers in The US, a huge US landlord, the chief technology officer received one of our teaser emails and actually directly contacted us and said, you know, I've been in the market now for about eighteen months looking for a solution, and I cannot find anything. And I have looked across APAC and across Europe as well as The US. Really excited to see what you're gonna launch. So we think we have first mover advantage. It's really important we prosecute that advantage and make sure that we make the best of it. And so but, again, we're meeting and and we saw the need, we're meeting that at a very innovative innovative and new unique way.

33:50 And how does that impact our revenues longer term? Well, if you think about Illumo, we expect that Illumo can be deployed in every building and every user, every tenant, whether they're flexible tenants or traditional tenants, could be a revenue contributor for us as they use a Lumo in a building. So we think medium term and certainly expected through next year, we we expect to see, a really positive momentum as we look to ramp Illumo revenues, in the next twelve months and beyond. I think I'm just checking. I think that covers all of our questions. Perfect, Mark. Thank you for answering those questions. And, of course, the company can review all the questions for today, and we will publish those responses out on the investor me company platform.

34:40 Just before redirecting investors to provide you with their feedback, which you know is particularly important to the company, Mark, would I just ask you for a few closing comments? Of course. Well, listen. Thank you all for taking the time out of your your day to join us today. But I just want to express my thanks to your support of shareholders and my thanks to James and Greg, and I'm excited for the next phase of the ESSENSYS journey. And as its largest shareholder, who is expected to remain and hoping to remain its largest shareholder, I'm really excited and looking forward to seeing the progress, over the next few months, half years, years, and hopefully even decades. So thanks a lot, everyone. We'll see you next time.

35:29 Mark, Greg, James, thank you once again for updating investors today. Could I please ask investors not to close the session as you 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, so I'm sure it'll be greatly valued by the company. On behalf of management team of ESSENSYS PLC, we'd like to thank you for attending today's presentation, and good morning to you all.