Next 15 Group (LSE:NFG) — Results for the six months to 31 July 2021

0:01 Good afternoon, ladies and gentlemen. Welcome to the NEXT fifteen Communications Group PLC Investor Presentation for the Results for the Six Months Ended 07/31/2021. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and could be submitted any time via the Q and A tab situated on the right hand corner of your screen. Just click Q and A, scroll to the bottom, type your question and press send. Company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. These will be available via investment company dashboard, and you'll be notified once they're ready

0:33 for your review. I'd also like to remind you this presentation is being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Tim Dyson, CEO and Peter Harris, CFO of NEXT fifteen Communications Group PLC. Thank you. Thank you. Hello, everybody. Tim Dyson, CEO of NEXT fifteen. Quite a lot to get covered today. I wanted to give you a brief introduction to the company and also summarize the results, walk you through the progress that we've made, give you some understanding of how we see the market and how that's affecting us, then sort of touch on our product strategy, segmental strategy, and an update on what we're doing from an ESG perspective before I hand you over to Peter who can cover off the numbers in a bit more detail.

1:20 Firstly, for those of you who are not familiar with NEXT fifteen, you know, we are a tech and data driven growth consultancy, which really means we sit really in the space that sits between the traditional marketing consultancy groups and the management consultancy groups. You know, what we are particularly focused on is high growth organizations or growth companies that want to be high growth organizations. You know, our heritage in the b to b tech era era has has really helped us sort of create an organization that is exactly designed for that. We also just believe that it is a very interesting place to to try and offer a set of products and services with the growth in technology enabled services that we're seeing come to market at this time.

2:09 Our business is spread into four different areas or segments. The first is in relation to insight, helping customers understand the problems that they face, the opportunities that sit in front of them, where their competition is succeeding and they're not, etcetera. Secondly is in customer engagement, which is really around building long term relationships with our customers typically through the development of digital assets. The third is in relation to customer delivery, really otherwise known as sales or sales engagement, which is making sure that the types of programs that companies are running from a typically from a marketing perspective are actually driving sales because if they're not, then why are we doing it? The last area is business transformation, which is where we help companies really maximize the value of their business through a whole range of different things, helping them, in some cases, redesign those companies, create new ventures, but obviously maximizing their corporate positioning as well.

3:10 Our customers include the great and the good of the technology industry, but also some pretty major corporations outside that. We are very global in nature, although the vast majority of our operations are in The UK and The US, and I'm based in California. In terms of a quick summary of our results, revenue up 23% organically, 32%. If you don't if you take into account also that FX was a bit of a headwind, it would have been even higher. Profits up a more impressive 65%. EPS up 51%. EPS up slightly slower than PBT just really because of a higher tax charge because more of our profits coming out of The US and in part because we also have some bigger minorities in this time just because of the performance of some of our businesses that have bigger minorities, but still a very impressive performance.

4:10 A very strong balance sheet, you know, net cash, on the balance sheet. Certainly no net debt at this point. Big facilities, though, if we do need to go and do things. Having said that, you know, the history of our company is not one where we we do take on a lot of debt. The dividend here is the only number that really is a forward looking indicator. This would be a 20% improvement. We didn't pay an interim dividend this time last year. But if we had, it would have been a three p. So read into that that we're actually very confident about the outlook of the company, but we also have uses for our cash. In terms of, you know, where we are growing, we continue to add good customers.

4:56 The largest here is Boots, but, you know, some pretty good names there. Certainly, largest financially for us is Boots. The vast majority of our growth, though, in this period has come from expanding the relationships we already have. You know, we have a track record of keeping customers, but we also have we do have a very good track record of growing them, And it's certainly been more an area of focus in the last sort of twelve, eighteen months is to to really try and not just expand them within the areas of business that we have historically done work with them, but take them into new areas as well. We do continue to acquire companies. We seem to acquire sort of roughly, I don't know, five to eight business per year. Certainly, six seems like a fairly normal average. We did three investments in this period.

5:45 You know, I wouldn't be surprised if we we do more in the second half. For a product perspective, you know, this has been another big area of focus for us, and you saw us roll out a series of, you know, technology related products that that automate different aspects of the tasks that we do for customers and create a more self-service option for them. Again, you'll see more of that from us in the future. In terms of what we're gleaning from the market, I don't think there's any real huge surprises here. You know, virtually every customer is on some form of digital transformation journey. We are seeing more, you know, customer shift towards buying based on subscription based services, product based pricing.

6:34 That's in part because we're pushing it, but partly because also the market is is waking up to that not being necessarily a bad way to operate. We also see that specialism does beat scale every time. Increasingly, where we are bidding for larger contracts, we're we're coming up against larger global organizations, but we're seeing that our deep sort of domain expertise in certainly, in areas in technology is proving very valuable in that regard. Product life cycles are rapidly increasing, which is actually a good thing for our business. Customer loyalty is being decimated with everybody shopping online. No real shock there, but it is changing the nature of the work that we do. The last point on here, work from anywhere is very much the new norm and is definitely helping us find new pools of talent.

7:26 You know, we have staff in The US in 30 states. Pre pandemic, we only had them in 10. In The UK, we, you know, increasingly employ people outside of the London area, whereas historically, you know, 95% plus of our employees were sort of within the m 25, if you like. So, you know, I whilst it's definitely a challenging market from a recruitment point of view, you know, this sort of expanded view of where we can recruit from has helped us. In terms of product strategy and how that's sort of evolving as we evolve as an organization. Where we currently do a lot of our work is where you would describe it as custom. In other words, it's in some way derived by how much time did that task take, and therefore, it's sort of a build by the hour notion of pricing.

8:25 You know, over 50% of our revenues come from that type of work at this point. We're long term looking to really shift that away from that to a more packaged and what we're describing as TAPaaS solution, so technology and people as a service, with a small percentage also though being firmly in the SaaS bucket. We think there are a number of benefits if we can make this transition. One being that we we sort of move ourselves away from certain dependencies on key individuals or for the availability of key individuals at certain times. We also think it it leads to a more profitable profile for the business. We're selling IP as opposed to selling ours.

9:12 We also just think it's an infinitely more scalable business, in lots of different ways. In terms of how, you know, the insights that I talked about earlier are impacting our world and how this product strategy is shaping up things. We are seeing substantial growth in our business transformation services. Companies are really coming to us with some fascinating innovation challenges. We're seeing large scale growth in anything to do with d to c and industrial e commerce. We're seeing, as I've mentioned, this shift away from hourly based pricing towards, you know, another way other ways of pricing. The, you know, the the volatility that we have seen in some areas of our business due to shortages of staff as as if anything only increased that desire to move towards a more product based approach.

10:10 In terms of how the individual segments have performed, what you've seen here is very good growth across all of the segments. But, obviously, these segments on the right of delivery and transform have been really quite stunning. We don't see that type of growth slowing. It may slow a little bit, you know, just simply as those businesses scale. But, you know, both of those areas of business have got way more opportunity, in front of them than they can typically handle. The inside business has also been showing very good growth. Its margins were a little softened this period just simply because of some investments that we made. We expect that to bounce back up to the 20% level, we already have in this particular quarter, and I expect next year to be solidly around 20%.

11:02 Engage has been a very good area for business. It's where the sort of the older area of our business came from, but it has had a pretty good performance in this period. I think that growth will moderate into next year. We it is it is doing better than I think we would normally expect, in these conditions, but its margins, I think, will remain very much where they are. Looking at each of those segments and sort of trying to give you an understanding of of how big those businesses could be and and also sort of where our focus is within each of these segments, you can see in Insight, you know, the the future really lies by us driving product sales. You know, just one of these products could become quite easily a £20,000,000 business for us, you know, sort of roughly the size of the whole division for this six month period.

12:01 But we have quite a number of self-service products that are coming to market in the next sort of twelve to eighteen months. So I think we should still still see some pretty substantial growth. The growth will also really accelerate in The US. That business is roughly a $20,000,000 business at this stage. You know, we're looking to get that up to sort of north of 50,000,000 by 2025. Very much a first party data business, though. If any of you have concerns about third party cookies, do not be worried. That's not the business that we're in. And if I look now at the engage area, this, as I've mentioned, is the more traditional area of our business. It is the most hourly build area of our business. If we can shift more of our revenues into packaged and tapas, that will inevitably help us to drive better growth.

12:55 I think margins could also nudge up a tiny amount as well. It is the area where we could build our first $100,000,000 individual business through Ambooth, and they're certainly well on track for that. In delivery, you know, where we've probably seen some of our strongest growth, there is scope to build three pretty large businesses. The first in ABM, account based marketing. We're seeing huge opportunities and and lots of growth in that area. Industrial or commerce or ecommerce in general is rapidly expanding part of our business in part through acquisition, but also through organic. The emergence of composable commerce, is essentially rather than relying on a particular platform like Magento or Shopify or Adobe, you're able to literally sort of plug and play a whole bunch of different areas of technology to create, ecommerce solutions for customers. We think we'll drive another level of growth in the mid market, and we're certainly excited to see that happen.

14:01 The last area of growth for us is really around demand general lead gen. That has been a very high growth area of our business in this particularly in this period, but certainly over the last eighteen months to two years, we don't see that slowing down, and that could easily add another $100,000,000 revenue business alongside that. In terms of the last of our areas, transform, we said a while ago that we wanted to build a business in the $100,000,000 range. We were a little slow in actually finding the right ways to do that, but, you know, with MAC 49 and Palladium, in particular, we're making remarkably good progress. That'll be certainly over a £40,000,000 business this year. And, you know, with very high growth, I think we may actually beat that target if if things continue.

14:53 If anything, the only real thing that we need to focus on in this space is making sure that we take full advantage of the relationships that we're building with major corporations. You know, if we can, then, you know, this this business will not only generate high growth as a segment, but will drive growth across the other segments. In terms of an update on ESG, this is a hugely important area for us as a business, not just because we know that it's an area of interest for our shareholders, but to be honest, it's an area of massive interest for our employees and for our customers. In fact, customers like Google, you know, pay enormous amount of attention to things like what our diversity, equity, and inclusion programs are and and what our metrics are and even look at the output of our work in relation to that and make sure that not only have we got a diverse work for workforce, but that the work that they are producing on Google's behalf is is is equally diverse.

15:57 In terms of carbon footprint, we're not just measuring the footprint of our operations in terms of travel, the facilities that we operate around the world, etcetera, but we're also looking at the impact our work has on carbon footprint. So even down to things like which products we choose to help our clients promote, you know, the packaging of that product, the, you know, the efficiency of any technology. You know, if it was a car, for example, we work with Toyota and Honda in different ways. Are we promoting their more clean energy products, or are we promoting their, traditional combustion engine products? Obviously, if we choose the clean energy ones, then we will increase the sales of those more, and therefore, that will have a a better impact on the climate.

16:47 And and very often, it's, you know, sometimes left to us as to which of those products appears in a piece of digital content, for example. Lastly, on that slide, you know, we do have an ethics group that looks very closely at who we work with. If we are to become a b corp, then that is a requirement. And we have let go a number of clients because they don't meet our ethics standards, or value standards or have simply chosen not to work with people who've approached us, and that will be a feature going forward. The good news is it's clearly not hurting our ability to grow. And ironically, if anything, within b corp, you get points for working with other b corp companies.

17:32 So at a certain level, we we hope to also see revenue come just by virtue of being a b corp. And at that point, I'm gonna hand over to Peter, and he can walk you through the financials in detail. Thank you, Tim. I think you've covered off quite a few of the the points I was gonna make, but, it's been a pretty stunning performance for us with total revenue up 32%. We had a record margin of 21.1%, which is obviously over 400 basis points more than last year. I think there's sort of couple of reasons for that. One,

18:06 you know, we we've actually had very strong revenue growth to our high margin businesses, particularly in that delivery segment. So we have a couple of businesses where the drop through of revenue to profit is above 75% because it's very much on technology and product based rather than people based, and and we see that continuing. And, also, we have benefited from, you know, some some COVID related savings, particularly around property where we're very focused in London, New York, and San Francisco, and we we had a quite a big review three months of COVID when we realized that people would be going back to the office in in a similar way. We ended up taking 5,000,000 out of our property cost base, which, you know, when when your revenues say $350,000,000 were were to be this year, obviously, that's had quite a big margin impact. Going forward, we we think the scope to, you know, further increase in margins as we have more growth to our high margin sort of businesses and segments, but also I think there's more economies of scale, particularly in in some of our back office areas like property where I think I think there's probably more to come. So I think I think you should see us sort of continuing to increase our margin, maybe not quite the rate because of the sort of think I think the pandemic did have a step change in our margin, but, you know, we think there's sort of further to come.

19:17 Our tax rate last six months was 22%, which is slightly higher. I think Tim mentioned that we have having a higher proportion of our revenue net and profit coming out of The US and and tax rates are slightly higher. Also, minorities, we have a couple of our very fast growing businesses where management still own quite a big you know, slug of the equity, and so that minority has increased quite materially. But we've had quite a nice increase in dividend. I think you shouldn't view us as a dividend stock per se or income stock per se, but we think it's a good discipline on business to pay a dividend, and and it is a sign of confidence in the future. In terms of a a revenue bridge, if we hadn't had a strengthening of sterling in the six month period, we would have grown our revenues at 40%.

20:04 I think we have an aspiration to double the size of of the group every every three years. So, of course, that 40%, you know, is above average and but, you know, going certainly going into our second half, we're not seeing any slowdown, and we've got quite a quite a good pipeline of of m and a. In terms of details, our buy segments, the customer insights, Tim described what it is. I mean, I mean, we really should think of it as as more of a YouGov challenger brand. We acquired this business five years ago when it was literally sort of 1,000,000 of revenue and and through a series of acquisitions plus fairly strong organic growth, it's turned now to 40,000,000 revenue business. So all 40,000,000 run rates with with sort of four years as opposed to recent acquisitions. The margin should be capable of getting 20%, which I think is a benefit of of scale, but also as some some of the investments they made in in their platform and technologies sort work their way through.

20:58 And so I'd like to think that organic growth wise should be in the sort of 15% plus range once we sort of get into a sort of post pandemic world. Custard Engage, we have a lot of the key client relationships there. So Google, Facebook, Amazon relationships started there and have migrated into other segments. So it's still a critical part of the group, albeit it'll probably grow at a slightly slower rate in the other segments, but, you know, very well run businesses above industry margins. You know, 22% is is it's a great margin for us at a people based business. And I think our challenge is is to really get more technology, more products into that segment and less dependency on people. Delivery has been an incredible sort of growth story for us in the last sort of twelve, eighteen months, and and I can see that continuing. It's the highest margin business. So if you got your highest growth segment being also your high margin business, then that should lead to a a very good future for the next sort of twelve months and beyond.

21:54 And business transformation is our newest segment. We didn't really have anything in that segment eighteen months ago. And as you can see here, some some very strong growth, and we think that's gonna continue. On cash flow, it was a very strong period for for for cash generation. We had a very strong working capital inflow last year, which was partly because the government really helped all companies in that initial stage of the pandemic. So we deferred a lot of VAT, and and, actually, we we used the furlough scheme quite a bit. All that's now unwound. So so VAT, we've normalized, and and also we repaid the furlough money because, know, we we we actually performed a lot better than expected, and we we thought it was an appropriate thing to do. So I think for, you know, some of that 9,200,000 working capital outflow is is a sort of unwind of of an amazing performance this time last year.

22:45 CapEx is relatively small for us. We we do invest in property, not so much these days, and also some sort of software products. Our biggest cash outflow, as you can see, is is on acquisitions, and I think that'll continue at the similar rate. But as you can see, we've, you know, got net cash at the end of July. And together with a 100,000,000 facility, you know, we've actually got a lot of headroom and and ability to make acquisitions. Final slide for me. We the way we tend to do acquisitions is that we effectively buy a business. You know, we we value some acquisition, but only pay for 50% upfront. And then we lock management in over the next five years through an earn out where they can hopefully earn a lot more over that five year period as the business grows. So we we typically have maybe one year's worth of profit in, you know, potential future capital payments.

23:38 Now the the we have to do that calculation every six months, you know, to fit fitting with our reporting cycle. And we tend to be fairly aggressive in terms of our expectations to businesses. And and if you were to look at our analyst forecasts, they've actually been much more modest in terms of our expectations. So so all of these payments here are based on very aggressive assumptions for growth and, you know, typically sort of 15 to 20 per annum, which is above what the market expect us. So these are all very sort of fundable and and probably more on the aggressive side of life. So I'll hand you on to take that. Yeah. I mean, in terms of outlook, you know, we don't really see the business changing that dramatically. Certainly, this quarter, we're seeing the performance very much continue from where it left off in in q one and q two.

24:29 You know, we are seeing a very strong acquisition pipeline, and I think we'll continue to to do that. We don't tend to approach acquisitions in the sense of we want to acquire a certain amount of revenue, that type of thing. And I did notice a question come through on the q and a about, you know, in terms of other gaps we're looking to specifically fill. You know, I think there are there are some gaps in our inside business that, you know, some of them are geography, some of them are vertical markets, and you'll see us just continue to sort of edge away at those those sorts of gaps. And and this to some degree, you could apply a similar strategy for the other areas.

25:11 But in particular, in customer delivery, you know, I think we see so much opportunity there that it's it's really just further investments in, you know, a whole set of products that fit into that particular space. For Engage, it you know, we have a a job to do to digital, you know, digitalize or whatever the right word would be for that particular area of the business. The investments there, there will be much, much smaller relative to the other areas. In terms of product progress, you know, you'll see us continue to just invest, invest, invest. You know, if our margins don't radically improve in the next two years, I won't be surprised even though it's clear that higher margins are coming out of higher growth areas of our business, and that ought to drive higher margins in the short term.

26:07 I think we're just simply gonna reinvest that margin gain, if you like, in more products so that we drive actually more high long term growth for the business. And, you know, once that starts to unwind a bit, it will also then just yield even higher margins for the group on a an overall basis. Operationally, you know, we are still running the business very, very tightly. You know, the hybrid working model is is definitely creating a benefit from us, from our perspective in terms of you know, we have seen this step change in office costs, a step down being in office costs, and I don't see that reversing. If anything, it could actually continue to improve. But, you know, I think you will see some modest return to costs in h two as a little bit more travel happens, as a little bit more in person work in the office happens as well, but nothing that material.

27:06 At that point, I'll I'll sort of dive into any additional questions that people have. Fantastic. Tim, Peter, thank you very much for the presentation. Ladies and gentlemen, do please continue to submit your questions using the Q and A tab situated on the right hand corner of the screen. But just wanted the team to take a few moments to review those investor questions submitted already. I'd like to remind you that recording of the presentation, along with a copy of the slides and the published Q and A, can be accessed via investor dashboard and the investor meet company platform. I'd also like to remind you that your feedback is important to the company. And immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback in order that the company can better understand your views and expectations. Tim Peter, as you said, Tim, we've had a number of questions through, some of which you picked up on already in the presentation. But if I may just hand back to you to to read out the question where appropriate to do so and give you a response, please.

27:53 Sure. So one of the first questions was, you know, how much of our business is repeat and how much of our business is moving to tapas and SaaS? What I'd probably do is refer back to that slide that that had the product strategy on it. Just quickly try I'm sorry. Get us yeah. You get us there. Sorry. Just to navigate this a little slowly. Here we are. Oops. Sorry. I'm too far. The numbers in the middle of those shapes are what we're trying to get to is essentially only around 10% coming out to build by the hour, roughly 50% being product pricing, the remainder, you know, in Tapas and SaaS. We don't ever think that we'll be a pure SaaS player in in real massive scale.

28:43 Just under 3% of our revenues comes from SaaS at the moment. You know, a much higher percent already comes from Tapas. And certainly in areas like customer delivery, you know, it's it's a very big proportion of our revenues. So to some degree, the shift will happen just by the natural growth of the higher growth areas of our current business. As they become a bigger share, the fact that so much of their revenue comes from these areas will just naturally shift our revenues in that direction. But I think the the biggest opportunity for us is to take areas, such as Engage, which at this point is virtually all in the custom, area when it's in other words, it's related to build by the hour work and shift as much as we can with that into certainly at least the packaged area, if not the tapas area.

29:35 So I, you know, I think you'll see us undergo kind of one of those kind of, like, hopefully, the swan gliding across the lake where it it looks relatively calm, but an awful lot is going on underneath. But it, you know, it is one of these where the opportunity is ours. We're not really seeing any resistance from customers. It's simply a question of can we get the work done? You know, can we put all the the work that we do into a form that works from a product perspective? Can we price it right and so on? In terms of other questions, you know, what's the competition like for acquisitions and are valuations realistic? We have seen some slight edging up in some areas on acquisitions.

30:23 Private equity will always compete in our space and will always offer much, much higher initial consideration multiples than we will. And we are quite happy to let them win those if if they want to. You know, we just simply don't want to get into a place where we are loading the company up with lots of debt, that is very risky in our minds. We would much rather have a deal structure where, you know, essentially, we reward people very well if their business grows and is delivering good margins. If it is, we're very happy to pay them good multiples on the back end, but those tend to be relatively self funding deals. So the only part of the deal that, you know, if if we if you wanna call it out of pocket on in the short term is the initial consideration.

31:11 So you'll always see us try and keep that much more modest than a PE house would. You know, we typically you know, I think the highest we would go in initial consideration is probably on a nine times multiple, and that would have to be for a very digital, very high growth, high margin business. You know? And and that's probably up from a a multiple that we may have paid pre pandemic somewhere like seven and a half, eight. So not a huge inflation on that multiple, and certainly not problematic when it comes to in relation to our own multiple. What we haven't seen is inflation on the back end where, you know, we use a matrix typically to, you know, the multiples that it relates to the growth and the profitability of the business.

32:02 I think if we saw inflation there, that would be more concerning. In terms of competition for acquisitions, I don't it it's not it's never been uncompetitive, but I don't think it has become more competitive. The last of the questions that I can see here is, you know, could you give a geographical breakdown? I think that's what Peter is trying to navigate to as I as I speak. Here we go. So, you know, what this shows you is, you know, we actually deliver good margins across pretty much all of our segments. APAC does tend to be the the weaker from that perspective. It's also the the most geographically diverse.

32:48 In some ways, APAC is a it's a bit of a misnomer when it comes to being a region. It's so geographically spread out, and so you don't quite get the same efficiencies that you do with markets that are on much narrower geographic footprints and time zones and the rest of it. But having said that, you know, it's a it's been a very reliable area for us from a from a business perspective. You know, the growth has also been it's been pretty solid, very comparable, obviously, to to Mainland Europe. But, you know, the bulk of our business clearly still comes from The UK and The US. And, you know, during certainly during this period, the the type of growth that we're delivering in The UK and The US and the margins that we're delivering in those markets are are clearly much stronger.

33:37 The US has always been a higher margin area of our business. You know, it's you just get tremendous economies of scale in that market, and therefore, I don't see that changing. That's fantastic. I think, Tim, Peter, you've covered all the questions we've had through. And if any further questions do come through from investors, of course, you will be able to review those, and we can publish responses where appropriate to do so. Tim, perhaps I could just ask to, get a closing snapshot from you before we redirect the, investors to give you some feedback, please. You know, hopefully, what you've picked up from the presentation today is that, you know, our business is increasingly product driven, data driven, tech driven. You know, that was a direction of travel pre pandemic, but it has clearly accelerated as we've worked through the last twelve to eighteen months.

34:26 You know, I feel very confident about the outlook for the business. You know, our customer base remains incredibly high quality. You know, they are companies that are trying to grow if they are not already growing very rapidly. That naturally creates tremendous opportunities for a business like ours. If anything, really, the only challenge that we're facing is is making sure that we execute well. I think if we do execute well, then we'll continue to deliver very strong performance in the next year or two without really much of a headwind. That's fantastic. Tim, Peter, thank you indeed for updating investors today. Please ask investors not to close the session as you'll be automatically redirected for the opportunity to provide your feedback nor does the management team can better understand their views and expectations.

35:13 This will only take a few moments to complete and is greatly valued by the company. On behalf of the management team of NEXT fifteen Communications Group PLC, we'd like to thank you for attending today's presentation. That concludes today's session. Thank you.