Microlise Group (LSE:SAAS) — Interim Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the MICROLISE GROUP PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the q and a tab that's just situated on the top 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

0:33 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. I'd now like to hand you over to CEO, Nadim Raza. Good afternoon, sir. Thank you, Jake, and thank you everyone for joining us today. I'm just gonna introduce myself and, then, let Bill introduce himself as well. So my name is Nadim Raza. I'm the chief executive officer for MICROLISE GROUP. I've been with the business for quite a long time. My background is tech. So I started life as a software engineer, but then moved on to running research development, became technical director, and then CEO when we, did a MBO in 2008. Bill, would you like to introduce yourself? Thanks, Soutine. Good afternoon, everybody. My name is Bill Wynn. I joined MICROLISE in 2007 initially to help Nadim complete a management buyout, which we did in early two thousand and eight.

1:35 I've got a lot of board experience. I've been spent most of my life in primarily IT companies and a fair chunk of them in software companies. I've also done roles for private equity on behalf of private equity organizations. So I'm used to operate, a, in that environment, b, in the whole m and a space where we've delivered value through that route as well. And Nick Whiteman is our finance director, but he's not actually presenting on this call today.

2:08 So just a few slides to give you a background on on who we are. We are a leading provider of transport management solutions to large enterprise organizations. So what we mean by large enterprise organizations are are companies that have vehicle fleets of over 500 vehicles. We deal with lots of smaller customers as well, but that large enterprise space is really our sweet spot. A few bullet points and and highlights about what we do. So we help those customers with their complex needs, and we do that by providing them with some of our proprietary software and also hardware.

2:53 We supply design and manufacturing hardware, but we are actually a software business. That's how we we classify ourselves. And we

3:02 our business model is software as a service, so lots of recurring revenue. Our typical contracts are five years. So, again, really good future visibility of revenue and contracted revenue with our customer base. What our software does, it allows us it allows our customers to automate a lot of their critical processes. It provides very real time information across their operation, and it helps them save money, reduce their emissions, and other efficiencies. We've been around since 1982, so we're a well established business.

3:47 We have over 570,000 active subscriptions, an extremely low churn rate. It does say here, less than 1%, but over the last twelve months, that churn rate has been less than naught point 1%, so we are very sticky with our customers. We have over 600 staff, five offices around the world, and about 400 of those large enterprise customers. I'd say lots of smaller customers as well, but that's our sweet spot in that in that enterprise space. Our revenue for FY 2021 was just over 60,000,000, of which about 40,200,000 of that is annual recurring revenue.

4:36 And in that large fleet space over 500 vehicles, we really dominate that in The UK. We have a 58% market share. And in particular, industry sectors like retail, we have a 90% market share. So all of the top 15 retailers in The UK use our products and services for their transport and distribution operations. We are a global company in the sense that we have deployments in all of the countries around the world apart from North Korea. We even have assets that we monitor and manage in Antarctica. So, again, you know, truly a global organization, and we win lots of awards. So we have three queens awards for enterprise over the last few years. Two of those were for innovation, and one of those is for international exports.

5:38 So bit of background, more detail on our products and solutions. So we we have a very modular offering. So lots and lots of modules for different problems that customers have, but we group them into these six categories. So I'll start off on the left hand side with fleet performance. So this is vehicle tracking and telematics, which you're probably very familiar with. So it's monitoring where vehicles are and what they're doing by GPS. So that's easy. Lots of organizations do that, but we also collect lots of other information as well. So everything from how the the asset is being used as well as engine diagnostic information as well as other information from other sensors onboard such as weight, temperature if you're moving temperature controlled goods, door opening, door closing sensors to contend with theft and security as well as, you know, power takeoff and a whole variety of other sensors that can tell you about how that asset is is operating.

6:48 Our next module group is fleet compliance. So if you operate one or more trucks, you have a whole load of regulation and compliance that you have to adhere to. And that means you have to collect information on how you're maintaining that vehicle as well as information about the drivers that are using that vehicle and ensuring that they're operating within their driving hours regulations as well. And all of that information needs to be available historically for audit purposes when you are audited by the DVSA. So it's easy if you've got three, four, five drivers or three or four, five vehicles. But if you have 10,000 drivers in the case of one of our customers, DHL, then, you know, there's an awful lot of information that you have to gather and be able to show that you're compliant to all of those regulations.

7:43 Next group is fleet safety. This is all concerning how to make sure that drivers and vehicles are operating in a in a safe way. And so we provide a whole series of different modules here, including cameras, which are compliant to the new DVS standard, which is to do with having left and right cameras for trucks operating in London, ensuring that they don't hit cyclists when they're doing left or right turns. So we have cameras that are linked to our black box recorder, very much like a black box that you have in an aircraft that records everything that happens before, during, and after any kind of incident and allows you to view all of that footage remotely.

8:31 And we also have applications like panic alarms, should there be any kind of hijacking, and things like bridge strike avoidance. So we know knowing the height of a particular vehicle or trailer, we can automatically warn a driver to ensure he doesn't try going under a bridge that is too low. Next next group is planning and optimization. So if you're trying to plan the workload for five vehicles, that's that's pretty easy. Working out what orders are gonna get delivered by which vehicle and what driver is gonna operate each one and what route they're gonna take. You could do that with some mapping tools in our spreadsheet. It's not very difficult. If you have 5,000 vehicles, that's an enormously more complicated task to do.

9:23 And, also, to then optimize that so that you're using the least number of vehicles driving the least number of hours, it is really adding more complexity on top of it. So we have a suite of software here that does exactly that. It allows you to plan those deliveries, plan those goods, plan those drivers, and then optimize it so that you're using the least amount of time and the least amount of fuel to make all of those deliveries. Of course, once you have a plan, you then have to execute it. And, again, lots of things can go wrong here. Drivers may not turn up because they're sick. Vehicles get stuck in traffic. Deliveries are delayed.

10:11 Customers reject orders because they may be damaged in transit somewhere along the supply chain. So you need, again, a suite of software here that allows you to automate all of those reactive processes so that you can provide a a really great customer service to your end client and ensure that you can fix those delivery issues very, very quickly without having to throw lots of manpower at it. And that's what our journey management group modules allows you to do. Of course, to be able to do that, you need to be able to communicate with drivers. And so we have a range of hardware and software that allows you to do exactly that, including our tablets that you can see a picture of here on the screen.

10:57 So we can manage the entire daily shift for a driver right from when he starts to the end of his shift. So that includes communicating to the driver, going through and explaining to him his workload, providing satellite navigation to aid him in his travels, and, of course, doing all of the risk assessments and goods in checking, etcetera, that they may have to do when entering particular sites or delivering to particular customers. So we have a whole range of solutions that we can provide to customers to help them run those logistics and transport operations. It's quite common that customers do not buy all of these things in one go.

11:47 Generally, customers buy two to three of these modules or groups of modules at at the beginning of their journey with us. And then we have a dedicated team of salespeople and account managers that help to upsell and cross sell other modules into those customers. And we genuinely see significant growth in customer revenue over multiple years. And, again, every time customers implement a new module or a new pro a new suite of modules here, they tend to extend their contract with us. So we have a rolling five year terms with many customers. And, again, that that helps to provide that naught point 1% churn and very sticky relationships that we have with our customers.

12:39 How do we help our customers? Well, this slide gives you an indicate a view of that. So by planning those journeys and those deliveries, we help reduce the mileage that's traveled. Because we collect a lot of information about how how an asset is being used, we can tailor training online electronic the provided training to each individual driver and focus on their specific driving skills and bad habits. All of those things help to reduce the fuel use, and that helps to reduce the emissions that are generated by that operation. And those four things really is what helps us earn that green economy mark from the London Stock Exchange. Of course, if you're traveling less miles in a vehicle, you reduce the wear and tear.

13:29 You have fewer accidents, and it's not uncommon for our customers to see 25% reduction in their insurance premiums.

13:38 But the key thing that we are trying to deliver and help our customers with is improve their fleet efficiency utilization. That ability to do more orders, deliver more orders with the same or less numbers of vehicles, trailers, drivers. We eliminate all of that paperwork because everything is done in real time. And that real time visibility is not just within the transport operation itself, but that visibility goes out to their suppliers, their supply chain partners, and, of course, the end customer giving them a really enhanced customer experience. As I mentioned, we operate all around the world. We but we have five offices. Two of those are in The UK, which is our headquarters in Nottingham.

14:27 And then we have sales and implementation support offices in France and in Australia, and we have a large development group in Pune in India. Just some highlights from our most recent interim results. So for the six month to June 22, like for like revenue was 30,700,000, up 5%. Recurring revenue was up 10%, and ARR was also up 10%. Again, we maintain that very low churn rate of naught point 1%. Certain highlights, cash. Cash was up 19% to 15,800,000.

15:17 Just to give you a view of our customers' market and what's going on in that logistics space, still lots of disruption in the wider transport sector. Fuel costs going up, the the macro environment whereby we're seeing the growth of ecommerce and the demand from consumers to deliver more lower value orders and lower value goods, but in a far quicker and more efficient way. All of that is driving lots of complexity and competition in that transport segment. There continue to be driver shortages. It is getting better, but there are still definitely driver shortages in the marketplace.

16:08 And, of course, the microchip shortage is impacting the availability of new, more efficient vehicles. So lead times earlier on in the year were as high as twelve to fourteen months. We are seeing them improve now to things like six to eight months, but that's still a far cry from the the six to eight weeks

16:31 that was a typical lead time pre pandemic. All of these challenges that our customers face are things that our products and solutions are geared towards helping them with. So helping them do more with fewer vehicles, fewer drivers, and also helping them with deal with those complexities of delivering large volumes of low value orders.

17:01 For MICROLISE itself, our challenge has continued to be component shortages. We came to the market a few months ago and said that we expected q two q two this calendar year to be the worst in that in that cycle and that q three and q four based on our discussions with our suppliers and other industry groups. Q three and q four was going to be better, but normality wasn't really gonna return until the latter half of twenty twenty three. And we still stand by those those statements, and, you know, we are seeing light at the end of the tunnel. We're still seeing improvements in q three and q four.

17:49 So our expectations remain the same in terms of component shortages.

17:56 That lack of new vehicle availability has impacted in terms of new projects that we're doing with customers because they haven't been able to to get hold of vehicles, and therefore, that's delayed implementation of our products onto those new vehicle fleets. But we are still seeing strong demand because the whole market in general is under pressure to continue to show further efficiencies. So there is not a shortage of demand for our products and services, but there are problems in delivering and supplying that demand. Inflation, something that's appeared more recently and and probably front of mind for a lot of people.

18:43 We are seeing some inflationary pressure coming through from suppliers, and we've been able to largely pass that through onto customers through increasing pricing. However, we don't we don't think that this is the end of that cycle. We believe there's still six to nine months more of inflationary pressure coming through, and we continue to monitor that and deal with it in various ways and looking at how we can either negate that or or have to pass that on to our customer base.

19:25 I'm gonna hand across to Bill now just to cover some of the the financial highlights. Thank you, Nadim. This slide just illustrates how we measure and dissect revenue within the business. We divide our revenue into nonrecurring and recurring. The recurring is the the larger blue line at the bottom. For nonrecurring, which essentially are onboarding revenues, things like the hardware and services, professional services, installation, that sort of thing. And our revenue year on year increased 5%, as Nadim mentioned. Our recurring revenue was 10.5%, 11%, up to just shy of 20,000,000, and that's primarily a lot of the growth through our OEM as well as our direct customers.

20:21 Hardware revenue increased 10%, again, through that large demand with OEMs, which compensated a little bit for some of the new vehicle issues that Nadeem mentioned in his last slide, which actually translated for us to a reduction in services revenue from 3.2 to 2.1, primarily due to that reduced availability of new vehicles, which impacted on new installations.

20:49 Thanks, Nadim. Our P and L saw us grow our total gross margin slightly from 59% to 60%, but that represented a 7% year on year improvement. And that is the trajectory which we're really penetrating going forward as we've got a number of new initiatives, new products, higher value products that we'll bring into market. One of the margin enhancements was new hardware, which we've introduced, And our mod that's resulted year on year in our hardware margins increasing from 17% to 27% year on year. And as I say, real strong OEM volumes that support some increased numbers there. As I mentioned, some of our service revenue reduced, and that led also to a margin reduction slightly from 51% to 50%. That's because of the kind of delay rather than decline I've put there in high margin professional services that would ordinarily be linked to new product.

22:02 In line with with our market expectations, we've delivered a relatively flat EBITDA performance because our growth's gonna come in the second year. That was because our admin expenses, as you can see there, grew 8%. But that included approximately £900,000 of cost that would not have been in the comparative period last year, and that's things like which Nadim's got a slide on our conference, which is the largest of its type in Europe. That has been postponed for the last three years because of COVID. But that got reintroduced this year with tremendous conference. That costs us net of a £500,000 a year, but it's hugely positive in terms of sales opportunities.

22:53 We also included in our figure. We now incur about £400,000 of costs simply just being a listed business. So I say, the those numbers are in line with what we expected. Thank you, Nadim. From balance sheet point of view, really strong balance sheet as you'd expect. Just wanted to pull out one or two numbers just to just explain that further so it doesn't concern you. You'll see both current and noncurrent. We have quite significant trade and other payables. Just to confirm that that's noncash, they those numbers are primarily deferred income because a number of our customers and OEMs pay us upfront for contracts they add each month.

23:45 And also at the bottom, one of the things I wanted to do when we IPO ed was increase our retained earnings because we have a major reserve at the time, which data back to a a restructure we did in 2018

24:03 as part of the preparation for the IPO. We've made that distributable. So we've got quite significant distributable reserves. Not that we're planning to issue any dividends or anything anytime soon because we're concentrating on m and a. But certainly, when we're in a position to do so because we are very cash generative, I'll certainly have have our chest to be able to do so. Thanks, Nadim. As Nadim mentioned, cash flow was very positive. We increased our cash flow to 15.8, which year on year comparative, which is is a very good in this instance because we did raise some money as part of the IPO, increased 62%. We did pay down all the debt in the business.

24:50 And just to remind people that have been on previous shows with us, we do also have a revolving cash flow facility with our bank, which is HSBC, which we can draw down on at any time of 20,000,000. So combined, we've got just shy of 36,000,000 of which we we are earmarking to deploy in some m and a projects, which Nadim will pick up on in a second. Thank you, Nadim. So some key points about us as a business. We have a great track record of success as a business and also in helping our customers achieve success as well. We're financially sound, and and we're continuing to grow even given the the background of the last two, three years.

25:44 We've continued to grow through COVID and also more recently through whatever's going on in the marketplace. We're trusted by lots of leading hauliers and transport operations, and in fact, some of our relationships go back decades. And that also includes our relationships with OEMs and other truck manufacturers. So our relationship with JCB goes back fourteen years. Our relationship with MAN trucks goes back sixteen years. So we have a very long term and and sticky relationships. We invest heavily in product innovation. We have over a 150 people. So over a quarter of our staff geared towards product development and innovation.

26:32 And, of course, we operate 24 by seven as our customers do, and also because we're a global business. And we have a lot of people focused on helping our customers succeed because we know that through their success, we also have success as well. In terms of our growth strategy, I'll cover the right hand side of this slide first. So we have, you know, we have a a dedicated sales team, as I mentioned earlier, that that upsells and cross sells into our existing customers. And we're continually developing new products, again that we can sell into our large existing customer base. So that really grows revenues, and we've got a long history of growing revenue with existing customers through expanding our footprint within their operations.

27:28 When it comes to new customers, again, we're continuing to grow that both UK and internationally. And, also, we're gearing more of our products onto that mid fleet space. Now what we mean by mid fleet is customers that have fleets of between fifty and five hundred vehicles. So as I mentioned earlier, we have a, you know, a 58% market share in fleets greater than 500 vehicles. But in that mid fleet, we have between a 22 and a 28% market share. So we've still got lots of room to to grow in that area in The UK. And and and that's an area that we've had a particular focus on over the last eighteen months, and we've shown good growth in The UK in that segment.

28:20 Our French and ANZ, Australia, New Zealand markets have have both grown. ANZ is slightly ahead and more advanced than our French space, but that's mainly down to the way that they've come out of lockdown. And our OEM and reseller growth has continued as well. So with MAN, we've introduced new brand vehicles in Dubai, Australia, New Zealand, Malaysia, and a number and a number of the African countries. And, of course, our products and solutions are on their new range of EV fleets. And in the case of JCB, our product is also on their latest hydrogen powered construction equipment as well.

29:07 And a couple of key things, particularly in the retail segment where we have a nearly 90% market share in The UK, in the last few months, we've renewed multimillion, multiyear contracts with Tesco and ASDA in The UK and also Kohl's, which is a large supermarket chain with about two and a half thousand supermarkets in Australia. So, again, it emphasizes our strength and and footprint in that retail space. So just a general summary on Outlook. Now we've we've continued to grow, and we expect that growth to carry on in the rest in the second half of the year.

29:55 We've introduced a number of new products, including a new compliance software solution for the light commercial vehicles and vans. We expect more compliance and regulation to come in into that space, in that market segment. We brought back our transport conference after a bit of a hiatus, and I'll have another slide on that in a moment. And, you know, despite the market headwinds that we are seeing, we're still seeing strong demand. It's just impacting our ability to deliver in the short term. The transport sector and industry sector is growing. It's the fastest growing segment of the industry in The UK, and we're confident that we are going to hit our end of year market expectations.

30:49 Just a few of the slides. Our our transport conference that we ran in May at the Country Building Society Arena, largest of its type in Europe, over a thousand delegates. We're fortunate enough to have her all highness, princess Anne, presenting and also giving some awards. But just to give you an idea of how respected that conference is, we've had we had speakers from Microsoft. We flew in from The The US to speak. We had a number of government people from the Department of Transport. We had the CEO of the DVSA, the CEO of Network Rail, and also Mercedes Benz and a number of other OEMs use it as a platform for making new product announcements.

31:41 The reason I'm highlighting this is that next year's event in 2023, again, which will be held in May, we're also going to incorporate some segments for investors and analysts. So please look out for that. Probably in q one, we'll make some announcements regarding what we're planning on on doing for investors on on during that conference. Again, will allow you to learn a lot more about the business and the marketplace as well. Just a few points on ESG. As a business, we support a number of charities, TransAid being the largest one of those, but a number of others that we that we support as well listed there.

32:30 We do a lot of work in bringing in graduates and apprentices. Again, that's our way of trying to deal with that talent gap that we see out out there and that difficulty in recruiting the right kind of skills. And, of course, we're doing lots of things in terms of trying to reach reach net zero in terms of our carbon footprint. So we we're moving a lot of our company vehicles over to fully electric vehicles, introducing solar panels. We've changed a lot of our lighting. So there's a whole variety of of things that we're doing on that ESG front. And there'll be a more detailed report showing our plans and our targets and goals for the coming years. We'll hope to product provide that report before the end of the year.

33:20 And that essentially come brings us to the end of the presentation, and I'm gonna hand back over to Jake to say a few words. Nadim, that's great. And Bill as well, thank you very much indeed for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab that's situated in the top 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 recording of this presentation, along with a copy of the slides and the published q and a can be accessed via your investor dashboard. Bill, Nadim, as you can see in the q and a tab, 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.

34:05 And if I could just hand back to you to respond to those questions where it's appropriate to do so, and then I'll pick up from you at the end. Thank you. Okay. Great. Thank you. So first question is about who do we typically displace in the market and other competition global. It's it's fair to say that, you know, because that slide that I showed you earlier listed a number of different modules and areas that we that we sell products and services in, whether it's tech tracking telematics or whether it's journey execution or planning and optimization. We tend to displace different companies because there there really isn't anybody out there that does all of those different things.

34:53 So what we find is that is that customers really like the fact that they can buy a very holistic, totally integrated solution from one company, I e us, that does all of their operational needs. And they can buy that, and they can implement it in stages, and they don't have to do it all at once. And when they're ready for a new module or ready for implementing something different, they can just turn it on very easily, and it requires very little integration to be able to use it. And that generally means that we are displacing different organizations with different aspects of our product portfolio. So there isn't one common company that we pitch against. You know, we we pitch against different companies depending on which part of our portfolio that you're looking at.

35:43 A lot of those are international businesses that that, again, specialize in a particular slice of that product portfolio, but on a on a larger scale. However, we still, you know, continue to win against those those companies because of the the breadth of our portfolio. The next question, more general question about sterling and dollar dollar parity and how that might impact the business. We as a business are fairly naturally hedged when it comes to dollars and euros. We buy products in dollars, but we also sell products in dollars. So, generally, the currency change doesn't have a hugely significant impact on us.

36:33 And so, you know, generally, that's that's it's not gonna impact us as much. What it will do, however, is obviously drive inflation in the market in general. So we do expect, as I said, to see more inflationary costs coming through from suppliers that we will have to we'll have to deal with, but that's true of everybody. Next question is on focusing on new products and product innovation and our growth strategy and expanding our geographic footprint. So the the question is regarding what geographies are we focusing on. What we we're particularly focused on Europe and our Australia and New Zealand business.

37:20 We're not doing anything in North America, South America, or any of those other any of the other continents directly. That may well change through a through acquisition. As I mentioned earlier, our ambition and our key things that we're looking for for target acquisitions is companies that can either expand our product portfolio further by adding new new modules, new technology into our product set, and increase our geographic footprint. So it's quite likely that we will expand our geographic footprint into other regions beyond Europe and ANZ through acquisition. How will a strong Indian rupee versus sterling impact the operations in India?

38:12 Again, it will have an impact, but we also sell product in rupees in in that space as well. So there is a bit of natural hedging that goes on there. So there will be some impact, but it won't can be significant. Online delivery, how does this fit in with acquisitions and the likes of Amazon? Are they clients? We we do some work with companies that work for that are suppliers into Amazon. So a number of our third party logistics companies are run some of the distribution and transport operations for Amazon.

39:00 So we deal with Amazon through those mechanisms. And secondly, the true van product is about compliance, and we see some of those regulations regarding compliance as we see them on trucks, which is all to do with how you maintain vehicles and how you manage driving hours, I how many hours a person is allowed to drive a vehicle before they have to take a break and rest periods and so on. We see some of those regulations and compliance issues coming down into those smaller vehicles, particularly vans. And there is some new legislation that is going to be going live in Europe regarding vans and particularly regarding vans that do cross border activities.

39:50 So we're getting our product set ready for those those legislation and regulations coming online. Next question was from an m and a perspective, have you looked at or considered an opportunity in The US and or Canada? The short answer to that is yes. Our m and a is not just looking at UK businesses. We're also looking at businesses in other regions. And, also, a number of the businesses that we're looking at have operations in multiple countries as well and across multiple continents. So inevitably, through acquisition, we will end up growing our geographic footprint.

40:41 And I think that was the the last question. So thank you. Nadim, absolutely. And Bill as well. Thank you very much indeed for addressing all those questions that came in from investors this afternoon. 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. Nadim, perhaps before redirecting those on the call to provide you with 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'd be great. Thank you. So a few close comments. We, you know, we are a business that operates in a market that is the fastest growing market segment in The UK, transport and logistics.

41:28 We are a SAAS business, so we tend to be very stable and have lots of recurring revenue. And the other important thing there is is that our standard contracts with our customers are five years. So, generally, we have very good future visibility of revenues coming in. So, hopefully, those are key points that should should should make you think about us as a business and comparing us to other businesses that you may be looking at in your portfolio. Nadim, that's great. And, Bill, once again, thank you 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 the management team can better understand your views and expectations?

42:21 This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of MICROLISE GROUP PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.