Kooth (LSE:KOO) — Investor Presentation

0:00 Good morning and welcome to the KOOTH PLC investor presentation. Throughout this recorded presentation, will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself however the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin I'd like to submit the following poll. I'd now like to hand you over to Tim Barker, CEO. Good morning to you sir. Thanks for joining our session today. We're going

0:32 walk you through the full year results for KOOTH last year. So we'll give you an overview of the organization if you're not familiar, talk about the financial results for last year and then go into each of their growth pillars in a bit more detail. So for those of you that don't know about KOOTH, look we're tackling one of the defining health public crises of our time. Poor mental health affects one in five of the population every year and in addition to the devastating impact it has on individuals the global cost of it is spiraling at an incredible rate. By the end of this decade it will be a $6,000,000,000,000 problem and The UK today is 118,000,000,000 a year in terms of the impact of the economy.

1:20 And the challenge is while budgets every year go up in the NHS and also globally, demand continues to outstrip it. So last year budgets went up about 7% in the NHS to tackle poor mental health. It's in fact about 8% of their total budget, yet referrals went up by 15%. So the only way to sustainably tackle this huge challenge is to move from a treatment focused approach to move upstream to tackle issues early before things escalate. So that means you provide a proactive support. Digital is a fantastic way to do that. And in addition to the support it gives to individuals, we have achieved incredible economic ROIs that have been validated externally. So in The UK, for example, our service provides a £3 return for every £1 spent. We estimate it to be up to 12 to one in The US.

2:24 KOOTH was founded over twenty years ago to tackle this problem with a focus on three key things. Firstly, to grow access so it's available to the population. Two, to then provide this early and responsive support to tackle issues early. And thirdly, to then innovate in new outcomes for both that demonstrate both the therapeutic, social and economic impact.

2:47 We are a B2B2C model. We do not sell to end users. We sell to businesses and government organizations and they provide the service free at the point of use for end users. And we're over four sixty employees now and the service is available to nearly 17,000,000 people. What we offer is an integrated platform for personalized mental health care, spanning self help, content and communities so you can hear from people that have been through similar challenges that you have. And with one click in KOOTH you can get access to professional support through one of our two fifty plus practitioners that work as part of KOOTH service.

3:32 Our services and also our growth is really focused in these three areas initially and primarily children and young people. That's where KOOTH got started over twenty years ago. Then a few years ago we expanded our service to support adults and we have a small product line focused on supporting the workforce and employees. All of this is powered by the common technology platform that we've built over many years, but of course different content, different counsellors, and different communities in each of those.

4:07 Great, thanks Tim. So just turning to look at the financial highlights for 2022. We've been delighted with progress since the start of last year. Revenue grew by 21 to $20,100,000 That was bang in line with market expectations. And of that $20,100,000 we were pretty pleased that $1,500,000 of that revenue came from The US. That was predominantly the Pennsylvania contract, which we announced in October of last year, but also some smaller revenues from the university contract, as well as California, where we did some pilot studies, research and development work. We're very pleased with the quality of the revenue. 95% of our revenue now comes from contracts that are 12 or longer.

4:55 And a really strong measure for us of how we grow our existing clients is net revenue retention. That's 107%. It was also 107% at the half year, a little bit down on 2021. And just a quick reminder, our business model is very much focused on perhaps initially winning a contract in a region that may cover 10 to 18 year olds, let's say. And the intention is through our engagement team who are active on the streets, visiting schools, GP surgery, youth clubs, to promote the service is very much an ambition to increase the usage of the service in a particular region, as well as perhaps adding new age groups, 19 to 25 year olds or the adult age group, enabling us to very much expand the contract.

5:46 Adults, which from essentially a standing start three years ago when revenues were zero, grew by 76% in terms of ARR to 3,000,000. And our adults contracts now represent around 15% of our revenues. The gross margin is still pretty close to 70%, was down slightly last year, 0.6 percentage points. That was predominantly a result of the employer's National Insurance Social Care Levy last year. That was 1.25%, which was in place for about nine months of the year. We've also seen a couple of COVID related projects come to an end. At the start of COVID, the government put around £500,000,000 of emergency funding aside for mental health support. Some of our clients drew down on that, but those have now all completed.

6:39 And it's fair to say that our initial revenues from The US were at a slightly better gross margin than we would typically see. That's broadly around the way in which we recognize revenue evenly over the period of the contract whilst we're ramping up our costs. EBITDA was down slightly last year from 2,100,000 in 2021 to 1,600,000. And that very much reflects the investment we've been making in The US over the last eighteen months, building out our infrastructure teams covering things like clinical customer success, business development and HR. The balance sheets remain strong £10,500,000 of net assets, 8,500,000 of cash. We have no bad debts on the balance sheets. Last year, we generated cash from operations of over £4,000,000 and around 3,000,000 of that we reinvested back into the platform.

7:36 And we'd like to think that going forward, particularly with finalization of the California contract, that our development spend will probably be a multiple of that in the next couple of years. Finally, in terms of the California contract, which we'll talk a little bit more about in a minute, Once we finalize that, we expect the outlook for 2023 in terms of revenue to be ahead of market expectations.

8:06 Thanks Sanjay. So just to dig a little bit deeper into each of the growth areas and provide you with an update on. Obviously eighteen months ago, we hired our first employee in The US. I think it's fair to say we've been incredibly pleased with the progress we've made since then. Partly, there is an element of, market timing as part of that. As those of you that have been following the news in The US would have seen that over the last year, there's been a growing recognition that there is a crisis in youth mental health. Recent research points to twenty two percent of high school students seriously considered suicide in the last year. Ten percent attempted one or more times. Fifty seven percent of teen girls feel persistently sad or hopeless. And now this is the number one concern for parents in The US.

8:56 So over the last fifteen months, we've seen a growing federal and state, level action plans being, unveiled to really help tackle this crisis. Biden's first state of the union last year unveiled a national strategy for mental health. In June, they announced a bipartisan Safer Communities Act, which puts a billion dollars over five years into school children's mental health. Look in August last year the state of California unveiled a five year $4,700,000,000 master plan for kids mental health. Pennsylvania announced around $180,000,000 last year and selected KOOTH for a $3,000,000 pilot, which is currently running.

9:41 And then, as you may have seen in recent news, California, selected KOOTH for a statewide rollout of its service to support all thirteen to twenty five year olds. So there really is a key imperative and focus on this from a government perspective. And perhaps just to talk a little bit about the work we will be doing in California. The contract which we are finalizing at the moment really comes after probably a nine or ten month engagement cycle with the Department of Health Care Services in California, where they vetted four fifty mental health providers to determine what support would be appropriate for them. And as part of that, I'm humbled to say, we were selected as part of that. That 4,700,000,000, I should say, is one of 15 work streams, and there are two digital platforms that they will be rolling out, KOOTH for 13 to 25 year olds and another vendor for zero to 12 as we do not provide support for those younger years.

10:55 But for KOOTH, that will be a population of 6,000,000 people that we'll be providing support to. We are launching in January next year, and we've got a number of features to build in our platform ahead of go live. One of those, you can see on the right hand side, is a beautiful mobile app designed to meet the high expectations of generation TikTok. And so, we've got some development work to do around a mobile app and then localizing our service into additional languages. Currently, we're available in English and Spanish so that we can go live in January next year. We are still finalizing the contract, and so once that's signed, we will be back to market with an RNS and announcement to give more detail on the

11:45 financials for that. But as we put in the bullet point there, we expect it to have a highly material impact on revenues and ARR from 2024 onwards.

11:59 Coming back to The UK, as we all know, The UK is going through both changes and challenges at the moment. Changes in as much as in June last year, the NHS reorganized from 135 independent clinical commissioning groups into 42 integrated care systems, giving the NHS whole population responsibility not just to treat illness but for early intervention and prevention. Also to tackle health and equity so that, whether it be ethnic minority groups, LGBT groups or other groups within the community, ensuring they've got appropriate services for them. And also to drive transformation through digital and data.

12:47 So we see this as a long term opportunity to then enable KOOTH to become more embedded into ICSs. However, as you'd expect when you reorganise The UK's largest employer of 1,100,000 people, it's going to slow down decision making as, let's say, 10 commissioning regions merge into one, new roles need to be appointed, an inventory needs to be created of what systems and services they have, and then they need to set new strategies. As we're just entering the new NHS year in April, we're starting to see these things loosen up a little bit more, but we still expect this year to really be one where ICSs are really focused on transforming and we are there to support them as they go through that.

13:36 Finally, as we all know and is in the media, the NHS is under quite strain with A and E, GPs, ambulance services. And so one thing that we're seeing is a higher level of need for those that come to our service. And also there are some opportunities here which we'll talk a little bit more about, about how we can support local NHS regions to reduce the pressure off of A and E and GPs. Looking at each of our UK businesses with the NHS, our service for children and young people continues to expand. It's now available to more than 60 of twenty-twenty five year olds across the population. We also had an increase in usage of the service and probably one highlight is a growing usage and number of contracts within Scotland, which was not reorganised last year by the NHS.

14:36 So we've grown from four to nine contracts in that region. We're also continuing to invest in our safeguarding, our clinical team and training to respond to the growing level of need and risk from individuals that come to KOOTH. Our service for adults, which is relatively new, it was a zero product line for us probably four years ago, continues to grow. We, grew, ARR by 76%. We went live in the regions that you can see on the left, and we've got a growing focus on providing a whole population access for this early and responsive support.

15:16 Bear in mind that in England alone there are eight million people, 8,000,000 adults, that would benefit from additional mental health support but do not yet currently qualify for it in the NHS because they do not meet a level of threshold need. So we see that as an opportunity for us to support them and to avoid them joining an NHS waiting list. Perhaps one thing to call out as well is interesting to note that the spring budget announced an investment of £400,000,000 over the next five years to invest in digital mental health support and musculoskeletal support. So there is a real drive to digital innovation that the NHS will be at the forefront of, and a great opportunity for us to then demonstrate what we can do and grow our services within the NHS.

16:15 Finally just to talk for a moment about our technology which underpins our service but it is also a humanised and human powered service. So the work that we will be doing in California this year will really act as a catalyst to deliver on our vision. And we expect once we've delivered this in California to then bring these innovations across to The US and then also to The UK. And they really fall into three areas. Our view for the future of AI is not chat based chatbot counsellors. The experience of it is going to be more of Netflix than an AI chatbot. So a service that understands your wants and needs, recommends to you content or community groups or activities that have been helpful for other people like you, and then learns and personalizes based off of your needs.

17:09 Of course we also want to continue to deliver an incredible experience because that's the way that you engage, retain and help people. And also we plan to build out additional digital therapies. A good example of this is group support where in the traditional sense that would be, you know, perhaps one practitioner in a room of 10 individuals. We can mirror that in an offline setting, and in doing so really help, grow the reach and impact of our practitioners.

17:43 Great, thanks Tim. So to summarize and just think about the outlook for the rest of the year, we've been delighted with progress and clearly Pennsylvania and California were real vindications of that. So with finalization of the California contract, which we expect to complete this quarter, we will be ahead of 2023 market revenue expectations as we start to ramp up in preparation for going live in California with our service in January of next year. I think we've also talked in our announcements about California being transformational for the business from 2024. Not forgetting that we still have a very significant contract in Pennsylvania, and in the next couple of months, we will start to report back to Pennsylvania on clinical efficacy outcomes and usage of that service.

18:39 And we're confident that that will

18:42 renew, if not expand. We're also seeing other opportunities across The US. States like New York, North Carolina, Virginia are starting to put significant funds aside for mental health support across those states. But we're very mindful of making sure that we execute and get the California contract absolutely right. In The UK, as Tim mentioned, we're focusing very much on ICS relationships now, as well as acuity. We did see some headwinds last year in the sort of merger and consolidation of CCGs into ICSs. And we saw a little bit of that in the first quarter of this year as well. But moving into the new NHS financial year, which we're, what, fifteen days into now, we're hoping that'll start some blocks and pipelines.

19:33 And finally, cash remains strong on the balance sheet and subject to the finalization of the California contract should be sufficient to enable us to fund our California expansion over the next eighteen months.

19:47 That concludes the presentation. Back over to IMC. Tim Sanjay, thank you very much for presentation. Ladies and gentlemen please do continue to submit your questions just by using the Q and A tab which is situated on the top right hand corner of your screen. But 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 and A can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation. And Tim, Sanjay, if I could just hand over to you to read out those questions and give responses where it is appropriate to do so, I'll pick up from you both at the end. Great. Happy to. So first one that's come is asking about how the trends are looking for the legacy contracts or The UK business given are we seeing any signs of weakness? Admittedly, The US expansion looks very exciting.

20:33 So as we mentioned, the changes that the NHS is undergoing are not insubstantial when you're reorganizing to 42 integrated care systems and then building a strategy for the long term while dealing with the immediate aftermath of, the pandemic. And so what we tend to hear from our commissioners is mental health is a key strategic area of focus for them. Digital is a key area as well. But right now, they're really sort of formulating and finding their feet, in terms of building out their ICS model and strategy. So as we mentioned earlier, we think this will start to really loosen up, you know, over this NHS year as really people move from preparing and planning into action.

21:20 We're in a great position as a trusted partner and provider to the NHS to really support expansion. Great, thanks Tim. Should I take the next one? In the California contract announcement, stated that once formally agreed it will have a highly material impact on revenues and ARR from 2024 onwards. Can you provide an idea of the impact this contract could potentially have on bottom line profitability?

21:47 We're still finalizing the contract as I think we've mentioned a couple of times in the presentation and the the reason we announced the contract four or five weeks ago was really prior to finalization of the contract was really to enable us to start hiring the staff needed to deliver on the contract. And obviously, that's quite difficult to do so without being able to explain to employees what they're actually going to be working on. So we probably announced a few weeks earlier that might have been normal. And as a result of that, we can't give specific numbers at this point in time. We have indicated that this was part of a $4,700,000,000 budget over the next five years, and we're one of 15 work streams.

22:34 But the numbers will certainly be transformational and material to business from next year onwards. Great, thanks Sanjay. So a couple of the questions that have come in. I'll take the next one. Tom's asked what do you see as the greatest opportunity for the business? Well, think probably if you look at the level of need and demand that there is globally, I think the opportunity for us, there are opportunities everywhere. If I had to really narrow down on one, I think what's really encouraging to see through the work that we're doing in The US is the opportunity that we've got really to be a world leader in youth mental health services. And so that's the area that we've had the longest established product line in. We've been operating services for young adults and children for over fifteen years.

23:22 So I would say in a market which

23:24 is highly competitive, our service for children and young people is clearly one that is resonating with The US as well as our commissioners in The UK. Not to say that the other services don't have a huge opportunity, but I think there are two key things. There's market opportunity is one and your ability to win is the other. So I think as we look to the future, think in The US, we will only be taking our service for children and young people there, given the level of demand that there is and the world class expertise that we have. Thanks, Tim. And John has asked, how easy is it to recruit psychologists, therapists and psychiatrists in The UK and The US?

24:05 The first thing I would add is that we do not hire psychiatrists to provide counseling services. We don't dispense or prescribe drugs. We do have psychiatrists working in the business, but not in context.

24:22 Traditionally, we have found it pretty straightforward to hire therapists. And usually, we are hiring counselors or practitioners who have been perhaps working on their own as face to face as traditional face to face counsellors. And what we offer is that they're not having to go out and find their own clients. We're offering a guaranteed revenue guaranteed hours. We we we offer them you know strong training and safeguarding procedures and a community within which they can work closely with their colleagues. They meet up on a regular basis. So it's not been a challenge for us. I suppose the one thing we did see at the start of last year following the end of COVID and the return to work is that a number of or a small number of counselors who had joined us during COVID, obviously, as we were remote working, decided to go back to more traditional face to face environments.

25:23 But up until now, it's been pretty straightforward. In The US, we also hire counselors with language skills, Spanish, for example.

25:34 California has around 20 official state languages. And sometimes that's a little bit, it takes a little bit longer, but generally pretty straightforward, I'd say. Great. Next questions. There's two related questions. One is about the investments in the platform. So AI, for example, what are we going to do in the world of AI? And then the other related to that is what is the level of investment? So I'll answer the first part and hand it over to you Sanjay. So in terms of AI, obviously there's a lot in the media about chat GBT and the role that AI is going to play. We view it really that, look, counselling is a very humanistic, human to human experience. And that's an important part of what people want as well. In fact, we're often asked for young people that use our service, one of the first questions they're asked is, am I talking to a human?

26:29 And so, we see the opportunity, though, in AI to really act as a co pilot to augment and support our practitioners. A great example of this is we went live recently with, AI support for our moderation team. We, up until now, hand moderate about half a million pieces of content every year from journal entries to comments to articles that people put, post in our service. And so what we've done now is deploy an AI algorithm that will look at every article or every, post and compare that against the previous ones that we've scored against then also approve things that we have an extremely high level of confidence in that they are safe.

27:18 And that means that we can then escalate those where an individual might be at risk or might be disclosing self harm, for example. And we can escalate those to the team quicker. So that kind of thing is a great example of how it can augment our practitioners, not automate them. And so we view that and the co pilot approach to be really the direction of travel for us. In terms of building out California and our CapEx spend on AR, I'll just pass that back to Sanjay. Yeah, thanks Tim. So I think as I indicated earlier, in terms of our existing platform, that probably covers around 70%, 75% of the work needed for California.

28:05 But we will be investing significantly this year in getting, as Tim showed you, a very beautiful app, for example. So we will be investing further into the platform this year to get the platform fully up and running from January of next year. We expect to do that within our existing funds and the funds that will be coming through from California. It will be, as I mentioned, a multiple of what we have spent in the past. And I think from the middle of next year, we'll see development expenditure return to a more normalized level. Great. Thanks, Sanjay. Just finally, perhaps one beyond the typical questions we get from the finance side. But John's asking about how we cope with eating disorders, which typically have a high mortality, and how do we distinguish depression versus bipolar?

28:58 Do we advocate using Symetrix questionnaires? So we do not diagnose, we're not a diagnosis service, we don't use diagnostic tools, and our practitioners are all trained to identify eating disorders, including things like anorexia, and have guidance on what's safe to do at KOOTH, in line with NICE guidance. If someone's suspected to have an eating disorder, we would be recommending them to a specialist face to face service, and we'd refer them with permission. We become an integral part of their health care within a region. We're not a digital island. And the same is true of bipolar and other major depression. Our practitioners have guidance on how this may present in a digital environment and what we can do helpfully as per NICE versus what may not be helpful. So thanks for the question.

29:45 Think just one question, Tim, on gross margin. I'll quickly go ahead. Yeah. Your question was about gross margin profitability. So our direct costs are the costs of our counselors and practitioners, over two fifty of them. They're all employed directly by us. We're not running a sort of uber gig economy, which means that we're very responsible for their training, safeguarding and auditing of the work they do. So we will never be a business that has 85%, 90% SaaS type margins. There'll always be that human element to the work we do. And as Tim said, we're not looking for chatbots to replace our counselors. But we would be disappointed if our gross margin didn't settle or stay at around the 70% mark as we start to build a bit more operational efficiency into the business.

30:43 Thanks, Tim. I think that's Great. Main That concludes the questions. Tim and Sanjay, thank very much for that. I think you actually addressed all those questions for investors and of course the company will review all the questions submitted today and we'll publish those responses on the Investor Meet company platform. But just before redirecting investors to provide you with their feedback which I know is particularly important to the company, Tim could I just ask you for a few closing comments? Yes. So look. First, thank you for your interest in KOOTH and what we're doing. We are a public company with social impact. And to tackle the world's biggest challenges, we need we need more companies like KOOTH. So I think ones that really have focused on, you know, mental health, whether it be the environment or the aging population, that's what we need is is for innovators to work together with, the state. And so, I look forward to reporting back to you and speaking to you next when we've announced more details about California, and thanks for being on the journey with us.

31:38 Thank you. Tim, Sanjay, thanks 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, but I'm sure be greatly valued by the company. On behalf of the management team of KOOTH PLC, we'd like to thank you for attending today's presentation, and good morning to you all.