Team Internet Group (LSE:TIG) — Interim Report for the 3 months ending 31 March 2022

0:01 Good afternoon, and welcome to the Central NET Group PLC interim report investor presentation. Throughout this recorded presentation, investors 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 it receives during the meeting itself. However, 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.

0:29 And I'd now like to hand you over to Ben Crawford, CEO. Good afternoon to you, sir. Thanks very much, Alessandro, and welcome everyone to our q one presentation. So kick off, I guess, with the most important headline, namely that we've achieved a record 53% organic growth rate for q one this year compared to q one last year. And you can see that when you look at the two parts of our business, on the online presence part where we sell subscriptions to domain names and websites and hosting emails and so on. We've got a very healthy 7% growth rate, which means that we're growing faster than that market.

1:20 But then if you look over at the online marketing part of the business, which is where we where we allow companies to use our proprietary tools to acquire new customers and to monetize traffic over the Internet on a rolling contract utility style basis, we've actually got a massively high growth rate north of 80%, namely 83% year on year. And and I guess the key drivers there of of of what that really extraordinary growth level is is firstly, our marketplace model where we have acquired a number of online marketing businesses, and it's by with different each with different customers and different suppliers.

2:11 By combining them together, we can have all the customers able to sell to all the suppliers. But plus, in the middle of that, when we're acquiring these businesses, we get their data, we get their data science expertise, their artificial intelligence expertise, their automation software, and, of course, their staff. And when we group all of those together and connect the dots, we've actually found that that that we add an awful lot more value, and we've been able to drive growth up to much higher than any of those individual companies ever achieved on their own. So, what what are the highlights here? Clearly, one of the key things, and Michael will help you drill down into the numbers shortly, is that

3:02 we are seeing economies of scale. We're seeing operating leverage coming through. In other words, that as a percentage of gross profits, our EBITDA has gone up very considerably, and, and and therefore, that reflects the fact that we're a platform business with relatively fixed costs, able to trans or to to process an ever increasing number of transactions without without increasing the base level of cost significantly, and thus our margins improved with scale. Second highlight is that we made three acquisitions in the first quarter of which one was quite substantial, VGL.

3:48 We successfully raised, £45,000,000 on the equity market. We did that, both through a cash box placement and an open offer. Obviously, always wanna ensure that, all shareholders are able to, participate in in in the raise on an absolutely equal footing. And, happily, to say, the Cashbox placement was oversubscribed and the, open order was fully taken up by by shareholders. We also issued, tapped our bond raising a little bit of debt, £21,000,000, in order to be able to complete that transaction. That was always the plan. And and to be clear, that was part of a bigger plan in which our our debt relative to our EBITDA has actually reduced, and we'll get onto that shortly.

4:50 Now over to Michael to take you through the financial highlights. Thank you, Ben. And let's take a minute to go through these quite exciting figures. Gross revenue increased by 86% to $157,000,000 rounded. And net revenue also increased by 43% to around 40,000,000. What is what really excites us is when you compare the adjusted EBITDA, where now which now stands at $18,500,000 which is 46% of our net revenue, whereas in the prior year quarter, only 36% of our net revenue translated into EBITDA, showing that strong operating leverage is coming through together with the growth.

5:37 When we dive deeper into the P and L, we see that our adjusted EPS is now up by 42% to $4.5 just in the first quarter. Operating profit went from a marginal amount to $10,000,000 and our adjusted cash flow increased also by 44% to almost $24,000,000 in the first three months of this year. If we then go on the next slide and have a look at the at the income statement in some more detail, as already shown on a prior page, net revenue increased slower than revenue, which, of course, implies that the gross margin is lower than in in the prior year.

6:28 However, this is a product mix between the two segments. Online marketing trades at a roughly 10% lower gross margin than the online presence segment. And also within online presence, with online marketing, the media buying business is growing faster than the other businesses. But in each revenue stream in itself, we see very stable margins. When we then look at how adjusted EBITDA translates into operating profit, we see that adjusted EBITDA increased by $8,400,000 and operating profit even by $8,600,000 which is the first time. Normally, there was always a discrepancy, which is triggered by the amortization of intangible assets, a totally noncash item where we simply have to spread out a part of the purchase price of the companies that we bought over future periods through the p and l.

7:26 However, there is never any cash impact neither in the current period nor in any future period because other than physical goods, which undergo wear and tear and must be replaced at some point in time, of course your brand doesn't wear and should only grow over time. The reason why we then have this first time phenomenon of operating profit growing faster than adjusted EBITDA is that we've delivered our promise to get our noncore operating expenses, which is the cost of our M and A strategy, down notably,

8:03 down from $2,900,000 in the first quarter last year to $1,100,000 in the first quarter this year. And still, we've been able to deliver three deals, VGL, Fireball and DotRour.

8:21 When when we then move on to the balance sheet, you will see that our cash balance is constantly increasing, $43,000,000 at the end of the first quarter last year, $56,000,000 at the end of last year, and now north of $90,000,000, which then also makes that our net debt figure is now at the lowest amount in recent memory. And in particular, when put into relation to our much increased EBITDA, we now see levels around 1x EBITDA in the very achievable in the very short term.

9:04 Where does all this cash come from?

9:09 Except for the equity raise that we successfully completed earlier this year, it comes mostly from our operations. Cash flow of operations went up by 70% to now $21,200,000 in the first quarter, which is already almost half the amount of the full year 2021, just showing how, well, our business has grown and still is throwing off cash like a clockwork. Given that given that, our M and A activity also distorts our cash flow statement, so for example, the legal bill for M and A under IFRS still goes into the operating cash flow. However, has nothing to do necessary with the with the operations of our business.

9:59 We have started already back in 2020 to always provide the bridge that strips out all these influx of from from our MLA process. And here you see that in 2020, our cash conversion was 120%, which then increased in 2021 to 121%. And now for the first quarter of this year, we even achieved 128%, a very consistent pattern. And this is very important for us for two reasons, because first of all, it demonstrates that us having ventured from online presence in online marketing has in no way impaired our cash conversion. And also secondly, the vastly accelerated growth rates have also not impaired our cash conversion. And the reason for that is that in both businesses, most customers would actually pay us upfront and we would then later pay the supply chain.

11:00 And this this is why other than many other businesses where normally growth goes hand in hand with reduced cash conversion, we can keep our cash conversion at the same levels even when we accelerated our growth from high single digit to now mid double digit.

11:22 On this slide, which is the last of the financial section, we want to highlight a few key qualities of our P and L. So first of all, we see that the that the growth of the operation expenditure has come down quite notably, only $3,600,000 increase from the first quarter two thousand twenty one to now. The increase is more or less evenly spread between business acquired after Q1 twenty twenty one and some other investment in order to achieve the growth rates that we just celebrated on prior slides. Amortization of intangible assets, we discussed. Again, a noncash item, basically just technically spreading out the purchase price from the past into the future.

12:14 Non core operating expenses, again, we delivered on our promise to get this item under control. And here we are now at only a mid single digit percentage of our reported EBITDA. And last but not least, finance cost has gone up through the small tap issue that we've done as part of the financing mix for our acquisition of PGM. But we we we still pursue the opportunity to refinance the bond at soon as the refinancing window opens, which will be in July this year. Obviously, with everything that's going on in the world, we're vigilantly observing the market for the last time and will then will then communicate with the market closer to us actually raising the new the new funds to replace the existing bond, which would then lead to seven digit interest savings for the years to come.

13:17 With that, I hand back over to Ben, who will run you through our strategic priorities. I mean, clearly, as you've heard and as the numbers show, organic growth is a is a top focus for us, and we're addressing it in all its different forms, new customer wins, growing our existing customers is very important, cross selling our services, we launch new products, contract with new suppliers. Operating leverage is the second focus, and I guess we've been promising this for quite a while, and and now it's really coming through. As you can see that our our EBITDA, is now represents 46% of our of our net revenue, whereas on a year ago, it was only 36%. And this is because these are platform style businesses with relatively fixed costs where the revenues can be cranked up without having to drive the costs up.

14:11 M and A remains a focus for us as well, both on online marketing where clearly, every dollar that we're investing is producing remarkable growth and results, but also online presence, our underlying thesis, original thesis also continues to stand, which is that as we grow that business through acquisitions, we're able to improve margins and thus bring more value than the sum of the parts could possibly be worth. Michael's already addressed the debt issue where the the the effective interest rate paid by the people who bought our bonds most recently has been below 5%. We're confident that we can, when it comes to refinancing our debt, in in July this year, we'll be able to get some good savings, from the coupon rate.

15:08 Our our, net debt to EBITDA ratio, if you look at the number in the market of EBITDA for the year, is still is already below one. So so net debt today versus, EBITDA, projection for the end of the year is below one. And and, again, I think we we we made it very clear two years ago when we, when we first brought that debt in, and our net debt was 2.5 times our our current year EBITDA back then,

15:40 that that number was just gonna come down through the nature of our business. We grow, we throw off a lot of cash, and that number has clearly come down, and that's despite the fact that we have used some of the cash we've generated to make acquisitions. But nonetheless, our interest coverage is now north of five times, and and we expect to continue with that ratio moving forward. ESG is also a very important part of our business. As part of that diversity is is very much the nature of our business that we have a very, very diverse workforce.

16:21 It has been pointed out that it isn't reflected in the current composition of the board, and and we are addressing that that that matter right now. When it comes to inclusivity, that is why we do business. So unlike other tech companies that kind of get into markets and try and make the people there in the passive competitive passive recipients of their content and tech, what we do is actually get the people that live in those different countries, get them the tools to build their own parts of the internet. And so we think that's a very worthy and inclusive

16:59 approach to business and very successful. When it comes to carbon reduction, we're very focused on that. We continue to address it with each new company we buy both through reductions and through offsets. And then lastly, our main fund for supporting worthy projects around the Internet and the community is called the SKINIC Fund. We've already donated over €600,000 for education, cybersecurity, and accessibility for the disabled projects, and and we will be continuing to do so this year and every year moving forward.

17:45 Now looking at the outlook. So the company grew at north of 50% organically over the last year. We're we're and reviewing the the trading since since the end of the quarter, we remain very confident that the numbers that the analysts upgraded to only a month ago, we are very comfortably in line with them.

18:12 Obviously, they don't reflect 50% growth moving forward through the year, and that is not a factor of us believing that that our company's growth will slow down, but rather just building in all of those external risks that we're all very aware of. We'll show you soon how we're addressing each of those risks, but we're not foolish enough to say, hey. We we'll put out a number in the market that assumes we'll be unaffected. We all hope that we won't be very affected, and and and if that is the case, then we'll be happily ahead.

18:50 Our next trading update comes out in July 18, but just a few more points. One is that our marketplace model, where we have acquired different companies with different suppliers, different customers, different technology, AI, and data, and merge them together to create higher growth business is clearly working, paying off demonstrably. The other thing that's been very helpful for us is the advances in privacy, the banning of third party cookies by Google Chrome, the the app tracking transparency in Apple's iOS 14.5, which basically means that you have to opt in to the apps collecting your private data and selling it to other people.

19:39 And the reason that those those measures have helped us is because we don't use any of those technologies. We're all about AI and big data and and contextual advertising. We are not collecting, personal details of individuals and selling them and never have. And happily, that means that the, the the kind of a wave of history is working very much in our favor as we move forward.

20:07 We absolutely have more acquisitions lined up. We've always been clear that a roll up strategy to build marketplaces is our strategy, and it it clearly, now it's really proving itself. We will only continue to do so. And and lastly, just as a reminder, our cash position is better than it's ever been. Our net debt is now less than our projected EBITDA. Interest rate coverage is excellent. So in terms of managing our debt, I think the company has always, managed it very well, but very clearly now, we're seeing the benefits of the advances that we've been making around, managing that debt.

20:59 And so now there's one last slide to add from another deck. Thank you. Just we thought but in order to ramp up, we should just go through the various risks that people are very concerned about and explain a little bit about, how we mitigate those risks at Central Bank. So firstly, obviously, the the Russia and and Ukraine, the Russian invasion of the Ukraine and geopolitics as general. So the Russian and Ukrainian market makes up about 1.5% of our revenues. And, clearly, we do continue to to enjoy revenues from that region in one way or another. Where we are, being paid, or where we are actually paying making any profits out of dealing with Russia, we're dedicate we are we are donating all those profits to the Red Cross and, as well as matching any any donations from our staff.

22:03 Inflation, happily, we already operate in a inflationary market. The prices of domain names have continued to go up over the years whilst maybe many other prices haven't. So all of our contracts have built into them the ability to retain our margins. So if suppliers put their prices up, we pass those prices on to customers, and they're used to getting price rises. So, increased bond yields, clearly, obviously, inflation rates going up is is is something to be concerned about when you have large borrowings. However, happily, we can, refinance our debt very soon in about six weeks from now.

22:50 And we have been in lengthy negotiations with many options, so we are certain that we can get the the best pricing and and all other things being equal today. We certainly expect to be able to make a good saving from the coupon rate we pay at the moment. Energy crunch, supply chain disruptions, again, happily, as you've heard, we're a carbon neutral company, so we're not a big energy user. We don't have big energy bills, and so even if they increase substantially, it's only a small part of our cost base. And our supply chain is is digital and has been completely unaffected for the past few years, and we expect that to continue.

23:38 In terms of central bank policy mistakes or any kind of any any kind of issues relating to a particular geography, happily, we're a global company and our exposure to any particular market is relatively limited. As far as, COVID and changes in demand from China, again, we've suffered those over the years, and we have been able to overcome them. Having a very diverse customer base is very helpful, and also being a digital company where we can work from home, we're not reliant on physical supply chains has also helped us a lot. Then in consumer confidence and income squeeze, I I guess the key point here is that whilst we definitely offer marketing platforms, our our marketing is not like taking Super Bowl ad where we're asking people to risk millions of dollars and then see if they get any customers.

24:41 All of our tools are all about return on investment. So they're not viewed as discretionary. This is essentially the way that shops get the customers into their shops to then spend money and make a profit. So it's not possible for them to just stop spending and expect to continue doing business. So the types of marketing we do, because they're actually directly correlated to to the revenues earned by our customers, tend to be much less affected because they're not viewed as discretionary. And certainly, names aren't you know, a company would really the the the the last saving they would ever make is cutting their email off because, obviously, that means they can't communicate with the outside world. Labor market tightness, it does affect us. There's no there's there's no doubt.

25:33 You know, we're a fast growing company. We need the world's best engineers, and and it's a very competitive market place this at this time. Happily, we do make acquisitions regularly, which brings us a whole new team of talent every time we do it, and we do operate globally, which means that we do we are happy to hire, and we do hire in all corners of the world, and we build out global teams. We're not reliant on the labor pool of any particular place. So with that, I will wrap up, and and happy to move on to the questions now, which I can see. Ben, Michael, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions using the q and a tab situated on the top right hand corner of your screen. But just while Ben and Michael take a few minutes to review those questions submitted today, I'd like to remind you a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard.

26:30 Ben, Michael, as you can see, we received a number of questions throughout today's presentation, and thank you to all the investors for submitting those. Could I just ask you to read out those questions and give responses where it's appropriate to do so, and then I'll pick up from you both at the end. Very good. Well, look, I'll take the first one. Do you have to make larger and larger acquisitions as you grow to make them relevant to numbers? No. We don't have to. We actually made some of the smallest acquisitions we've ever made in this last quarter because they they made strategic sense to us. They were and they were immediately earnings accretive, the things that we look at doing. So what we do, we believe that consolidating markets is very important, improving margins through vertical integration is very helpful. And so, essentially, we kind of have have different teams. We have some that focus on the small acquisitions and others, yeah, led obviously by Michael and myself, focused on the really large strategic ones. So you can expect both work streams to continue.

27:37 Michael, do you wanna take the next one about interest rate savings? Simon l? Sure. Happy happy to. So when when we so currently, we have roughly $130,000,000 equivalent of of gross debt outstanding. From from the latest from the latest tab issues, we would expect that our interest margin can be reduced by 2%, maybe more. So that would then translate into $2,500,000 rounded of annualized interest savings. Very good. Thanks, Michael. Alright. I'll take that then.

28:24 Okay. The next one from Jeremy TEAM. Sorry if you just answered this, but why have you borrowed more debt when you're generating good cash flow? This seems inefficient. Great question. I I think we can go back to the to the earlier question about how we are intending to make more acquisitions, including small ones. And I guess we, in looking at the various small ones we have to make and obviously at preserving the working capital that we need in order to run the business, we decided that it would be prudent to, raise more debt and, particularly as we could, still maintain a a net debt below our one year EBITDA number.

29:10 And, and that the best time to do that was when we were making a significant acquisition so that lenders would be excited by the prospect of us doing this deal and coming into it and and and the enhancements it would bring to the group. So so so, essentially, we decided to do that. Then, also, it it it was a period of a lot of instability. Indeed, we raised the money during the first week of the Russian invasion of the Ukraine, but even before that happened, it was very unstable. So we felt it would be prudent of us to line up debt investors essentially to fill the gap between how much equity we could raise and how much, it cost to buy the company so that if the equity markets were really hurt badly by by by by anything any external, issue, we could still get the deal completed.

30:16 And the, and the €21,000,000 of debt we raised was pretty much was the minimum that that that would would be worthwhile, and so that's why we raised that then. Okay. Next question. Michael, do you wanna take this one, Simon l, in the 2021 annual report? Yes. Obviously. So accrued expenses are expenses which are recognized, but for which no invoice has been received yet. And there's there's quite a number of items below there, for example, suppliers who would only issue sporadic invoices. VAT provisions would also go into that into into that into that item.

31:02 But when we when we look at more at the at the at the bigger picture, when discussing the cash flow, we argued our cash flow is so great because on average, first, the customers pay us, and then we would pay the money down the supply chain. And this is exactly what we're seeing. This is basically the the the the the balance sheet item where where much of this cash flow is coming from. So we've already consumed the service, but we don't have to pay yet. We don't even have a received invoice yet. Obviously, we have as a as a proper copy, we have to record it already. I wouldn't only pay much later. And how however, when you compare that item to our much increased business, if I just take our q one revenue of $157,000,000 on an annualized basis, this item represents, like, twenty three days of of revenue.

31:58 What looks like as an absolute amount compared to the much bigger volumes of revenue that we are now generating, it is just what you would probably find on on on on most companies' balance sheets. Thanks, Mark. And and just for those that I don't think you can read the question. The actual question said, what could you please shed some light on what what what the £39,600,000 in accrued expenses in the in the balance sheet were? And Right. But it's it's it's basic it's basically a a mix of revenue shares being owed to to publishers in online marketing division to to made the domain fees in the online presence segment. V a v a VAT due to the authorities, and so it's base it's basically the amalgamate of of of different again, the general definition is expenses for which no invoice has been received yet, and it's basically aggregate over all our businesses that we operate globally.

33:04 Thanks, Mark. So there's no there's not, like, one one big 30,000,000 item in there. Indeed. So the next question is from Anthony Jay. It says, the share price has done very little over the past six months. What are you doing to sell the growth story of Centrelink to the market? Look, Anthony, what I I think the starting point for an answer is, you know, we all share your pain in this. We would love to see the share price increasing in line with the unprecedented performance of the company, its its profitability, its growth, its cash generation, its improved position, leverage position, and so on. And and I think some people would say, actually, we're doing a pretty good job because the share price has done very little, whereas many other of our tech peers' prices have been mercilessly punished by the markets, including, you know, some of the best known tech companies like Tesla, PayPal, etcetera.

34:15 So it's it's a very adverse situation in terms of people dumping the entire sector, not liking it, not having many buyers, and yet our share price has remained fairly healthy. But all that said, I can assure you that just as we're here today speaking to you, Michael and I are speaking to non holders constantly and, continuously trying to improve the messaging, make it clearer, getting the story out there. And not just in The UK, Michael's actually at an investor event in Frankfurt today. So we're we're we're looking at a whole community of investors.

35:05 And and I've been doing media all day long, so I think you'll find there's quite a lot of coverage around our story in the investor press today. But, look, we're always aware we could do more, and and if anyone has suggestions about, say, places where where investors are, where we're not well known, we're always happy to take any suggestions. We're never shy of doing that work because, I think we all have a common goal of making sure that the investment community knows what a great thing, Central Make is and backs us for our strategy moving forward. So, that was the last question. Unless anyone has any more questions, I think we'll wrap up.

35:57 Ben, Michael, thank you very much for that. I think you have addressed those questions you can from investors. And of course, the company will review all questions submitted today and publish those responses on the investor me company platform. But just before I direct investors to provide you with their feedback, which I know is particularly important to the company, Ben, could I just ask you for a few closing comments? Absolutely. So central nick of late has really, really turned a corner. Our our marketplace model, where we buy companies with different suppliers and different customers and different technology and data, merge them together to make something much faster growing, much more valuable than the the parts, is really proving itself now.

36:47 The Financial Times recognized us as one of the top 50 fastest growing companies in Europe. That was last year. This year, we've just improved our growth up to north of 50%. We and and and maintained our cash conversion of well over a 100% as well. So the company is stronger than ever. The opportunities remain very attractive. We wanna create a UK and and Europe based technology company with European style values around around privacy and online safety and so on, are just as successful as the companies from The United States and China, and we feel like we're we're really on the right path. So thank you very much for listening today, and we we definitely look forward to catching up again before too long.

37:41 Our next our next results come out on July 18, and we look forward to sharing them with you. Thanks very much, everybody. Ben, Michael, thanks once again for updating investors today. Could I please ask investors not to close the session as you'll 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, and I'm sure will be greatly valued by the company. On behalf of the management team at Central NET Group PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.