EROAD Limited (ERD) Earnings Call Transcript

Good morning, everybody. Welcome to EROAD's Half Year Results for FY '21. Here with me, Steven Newman, is Alex Ball, our CFO. So together, we'll go through the presentation, which we have on the screen. We've allotted an hour for this. We will try and get through it in 30 minutes and then open up to questions. There's the opportunity to ask questions as we go through this, and we'll answer them when we get to the end of the presentation or when we get into the Q&A session. [Operator Instructions] So if we begin by going to Page 4, I'll begin. So really pleased with our half year results based on the difficult macroeconomic conditions that we faced. In all 3 markets, we were significantly impacted by COVID. That said, our half-year-on-half-year revenue grew 19%. And compared to FY '20 second half year, we grew 7%. EBITDA grew but was flat half-year-on-half-year. That really reflects the additional increase in operating expenditure as a result of accelerating both product development and also some of the spend-to-save opportunities. So while some of those get capitalized, there's still a reasonable amount that hits the P&L. So as you can see there in the middle bottom, investment in R&D increased from last year from 18% to 20%, produced a small profit before tax. And in terms of AMRR, there was only moderate progress from where we ended at the full year for FY '20. That was as a result of $2.8 million of ForEx impact with the strengthening of the New Zealand dollar against the U.S. If we go to the next page. So I'll only refer to a few things on this slide because we will refer to them later in the presentation. As many of you know, we successfully completed our September dual listing on the Australian Stock Exchange and raised $53 million. And on the time since then, we've been very focused on accelerating parts of our 5-year growth plans. So this slide here on Page 7 shows 5% growth over the prior year that we've had to date. So some growth in each market. The next slide shows more of a breakdown quarter-on-quarter. So you can see significant impact from COVID, but we did continue to grow. The most resilient of the markets has been New Zealand. But when you look at the slide, you can see Q1 on Q2 in North America that there has been a lot more progress made in the second quarter of the half year. From a New Zealand perspective, as I mentioned, this has been our most resilient market, even though there was about half the time, there was some level of impact from COVID, either complete lockdown or lockdowns related to the Auckland region. Asset retention rate remained stable, which was good. And there was some improvement in ARPU. I think that reflects customers upgrading to Ehubo2s from Ehubo1s, of which you can see here that renewals during the period, there was 4,142 of those, of which 1,300 of them upgraded to Ehubo2 that would have improved ARPU. Also the addition of the Logbook launched during this half year, we've seen strong uptake of that with 1,373 subscribers through to the 30th of September. We'd expect that number to continue growing. That seems to be an incredibly well-received product. It has a list price of $7. And the kind of ARPUs we're achieving on that sort of around that $3 to $4 at this point as there are a number of customers which are moving across to this product from an older version of the Logbook. So good improvement in EBITDA, so really a good result for the half year. And we expect that the run rate that we have seen in prior years of around about 9,000 additional connected vehicles will continue going forward. In America, very heavy lockdowns, and much of our pipeline has been locked with prospects back in starts that would be doing an implementation or trialing operating from home. As you saw from the prior slides, there was definitely some improvement in sales quarter-on-quarter. We'd expect that to continue going forward as people there are starting to work out that they can't just keep kicking the can down the road, they need to start making some decisions. One of the things that occurred recently was EROAD's ELD which has been highly rated, assumed the #1 spot, and that was as a result of the release we did in September, which was introducing all of the regulators' new regulations. We're one of the first who have achieved that. In addition, we introduced the short-haul rule set with some pretty innovative solutions in there. So it's nice to have that #1 slot for ELD, which is really a foundation product for any interstate vehicle. We also had the launch of EROAD Go and EROAD Go+, which has the navigation in it as well. So that is being well piloted at the moment, slightly longer sales cycles than we typically used to, but bodes well, very well for FY '22. Also, there was the release of the EROAD Dashcam at the recent User Summit, again, very well received. So good prospects of growth going forward. Australia was a market that was absolutely shut down in terms of our enterprise pipeline. Enterprise customers are trialing the product, and we look forward to reporting progress there in the next quarter or so. I'll hand over to Alex to go through the financials in more detail.

Thanks, Steven, good morning, everybody. As Steven said, we've had growth and progress in each one of our financial metrics this year. And importantly, we continue to grow half-on-half. So as the left-hand side of the slide shows, we not only were a 19% increase on the first half of FY '20, we also grew 7% on the second half of FY '20, up to $45.8 million, helped in part by a one-off revenue item, which was related to the forgiveness of a U.S. government loan for our U.S. business of NZD 1.6 million. But even with adjusting for that, we were still up to $44.2 million from $42.7 million of the previous half. EBITDA has increased period-on-period in terms of the total figure, a 29% increase on the first half of FY '20 and relatively flat at only $0.1 million increase in the second half. As I said, there are one-offs in that $15.3 million to a net amount of $0.8 million. The EBITDA figure also includes an increase in the level of doubtful debt provisioning that we've made because of the challenging economic conditions that we've been facing into in each of the 3 markets due to the COVID-19 lockdowns and consequent economic recessions in those markets. We are seeing an aging of some of our debtors. And as a result, we've increased our provision. So that provision was for an additional $0.9 million half-on-half. So again, that result is reflecting that as well. And all up, our EBITDA margin, therefore, has increased from 31% to 33% for the half-on-half. Against the first half, was off a little bit around the high level we managed to achieve in the second half of FY '20. A lot of that, as Steven's already outlined, is because we are now accelerating our product development and some work on our spend-to-save projects, where we are looking to drive future improvements in operating leverage through investments now. And so that work commenced in this half, and that's reflecting of that outcome from an EBITDA margin point of view. In terms of our profit before tax, we again made a profit, which is the second half in a row. And again, that amount was slightly off just because of the additional investments that we are starting to make for future growth and that aged debt provision, the doubtful debt provision that I talked to earlier. Our free cash flow, we were free cash flow positive for the first half of FY '21, which is really the first time for a while that the business has been free cash flow positive. Some of that, however, is really being driven by the lower levels of growth. Given our business model, we have upfront cash outflows before we then, through our contractual model, contractual subscription model, we earn cash inflows. So we're not expecting that to build as an ongoing trend as we invest over the course of the remainder of FY '21 and '22 for future growth. Turning to the sort of statement of income in more detail. I've talked to the revenue amounts and OpEx. The only other thing I would really draw attention to on this slide is that we are continuing to invest in R&D for the future growth and in building on the investment we made at the back end of FY '20 around the new generation of business systems. And that will continue into the remainder of FY '21 and '22. And we do call out that we will be spending an amount of between 24% and 27% of revenue for the remainder of '21 and '22 on accelerating our R&D. We turn to the next slide, just talking to the EBITDA results across the 3 markets. As Steven's outlined, we've made good progress. So New Zealand is up significantly on the first half of FY '20 through the continuation of growth through attracting both new customers but also expanding into existing customer fleets, backed up by a continuing high level of asset retention. And whilst we were slightly down period-on-period from the second half, again, that is reflective of that increase in our doubtful debt provision that we put through in both New Zealand and North America during this first half. And the North American result was pleasingly up. And even if you adjust for the $1.6 million of the loan forgiveness that's included within total revenue, EBITDA grew 34% on the first half of FY '20, which again is great. Australia, we're continuing to make progress. It has been a tough market in terms of getting growth out there. And as Steven's outlined, a lot of the enterprise segment was closed the business for much of the half. But we're making progress, and we're making progress with our pipeline of growth. And we are anticipating some movement there before the end of the year. Our corporate segment EBITDA reduced down to $8.9 million from $6.7 million, but that's really just a reflection of the increased investment in both the R&D, product acceleration but also the spend-to-save initiatives that we have on, again, for future growth. And if we then turn to the growth in the metrics. So AMRR has moved and increased period-on-period. It's a fairly modest increase, as Steve has outlined earlier, from the second half of FY '20. But that small increase of $0.8 million was really a net result after a negative $2.8 million impact of the FX rate between the U.S. dollar and the Kiwi dollar. So it's not really reflective of the growth in underlying currencies. Our future contracted income, which is our future growth indicator, grew up to $140 million from $134.4 million at the end of FY '20, really reflecting continuing work on renewing customers, including some significant enterprise-level customers that have renewed. And the research and development spend as a percentage of revenue metric, which we talk to being in a range of between 18% and 22% typically, as we outlined during the capital raise that we did a couple of months ago, we are now going to accelerate that to being within the 24% to 27% range. And as a result, you'll see that kick up. And so that's an anticipation of that happening moving up to 20% for the half. ARPU, it's pleasingly held up well and increased, albeit, again, there's been some slight negative impacts of the FX movements from the second half of FY '20 to FY '21. But that's, again, really reflective of ongoing work within all 3 markets as we make new sales and renew customers in our existing customer base. Our asset retention rate, which again has been very high, it was maintained in all markets, which, again, is reflective of a lot of work that the team has done. Given the economic conditions we face into all 3 markets, that's a good result. As we grow, our cost to acquire customers will reduce, and it has continued to reduce period-on-period. So down now to a total of 13% as a percentage of revenue, down from 17% at the end of FY '20. And we would look to continue that trend going forward. And our cost to serve and support our customers as a percentage of revenue, again, dipped down from the 4.7% at the end of FY '20 down to 4.4%. And over time, as we make more investments into those spend-to-save projects I talked about, we would look to see that percentage reduce as well. The next slide is just an analysis of that $3.9 million of increase in operating expenditure from the first half of FY '20 to the first half of FY '21. As you can see, the majority of that is in relation to either platform costs, which is reflective of growth, or personnel expenses as we increase our spend on the teams that are active in the product development space and in the operational excellence space, which is our spend-to-save range of projects. Moving just to quickly touch on our movements in our -- on our key assets on the balance sheet. Our property, plant and equipment assets, which are really our hardware assets, the in-cab Ehubos, again, our spend on those obviously dropped half-on-half, really reflecting the lower levels of growth. We spend the money upfront before then renting those out. So that's reflective of really the economic conditions that we're in. And if we look at the intangibles assets, however, we've continued to invest, as we've outlined earlier, in developing new products and services and new generations of products and services for future growth. And this slide really just reflects the movement on that balance in the balance sheet. So I'll move quickly on to the free cash flow analysis by segment. Again, what we've done here, as we've done in the last few presentations, is analyze out the cash flows by market. So again, very pleasing to see that New Zealand moved to a net cash inflow of $15.4 million from $11.2 million in the previous first half of FY '20. North America, similarly, much, much stronger position on cash to a position of $5 million cash inflow from $1.5 million in the previous first half of FY '20. And Australia, given even with the challenges that we've had in terms of growing, we've narrowed that net outflow down to $0.3 million. And on the corporate and development side, where we do make a lot of investments for future growth, as you can see, $5.6 million of the outflows is directly attributable to scaling the business and developing assets for future growth. Again, we've reduced the net outflow from $17.4 million to $15.4 million, which, as a result, has driven that free cash flow result of $4.7 million that I talked to earlier. So I don't think there's anything else to add on to the balance sheet and cash flow statement. We'll now turn to talk to the outlook and Steven.

Thank you, Alex. So in terms of the global trends with respect to the adoption of telematics that we talked about during the capital raise, they remain unchanged and definitely further evidence that COVID is accelerating the digital transformation that is happening with our transportation and logistics customers. We've seen good growth in our EROAD Where product with more than 3,000 additional tags being put on in the half year in New Zealand, which is really proving up that point that as the cost to track comes down, our customers want to track all of their remote and mobile assets. In terms of the recessionary forces, that is starting to happen across all markets. And our customers are very focused on reducing their costs and inefficiencies in the business. So that will continue to be a significant growth driver for us. Also further interest from government regs as they try to improve their ESG, shape of what they're doing as well as getting further efficiencies there. In terms of other things we're seeing with the lower use of the roads pretty well in every market due to lockdown, that is really exacerbating significant reduction in taxes as a result of lower fuel tax and fuel consumption. So I think, again, that is likely to accelerate the debates around road user charging. The pilot in North America is well underway, starting in October. There have been delays around the anticipated pilot in Australia, but we have been shortlisted in terms of being involved in that pilot. So expect the progress to happen in the second half of the year. When we look at it from a market-by-market perspective, in New Zealand, the major growth driver around health and safety is very much there. And the adoption of cameras to further enhance that is also showing itself as being a growth driver. In North America, we're coming up in the next 12 months to the 3-year anniversary from December '17, which was when the first mandate came in as it related to ELD. So the re-signing of small to medium customers will occur. What they're looking for is additional functionality, which we have. Their first-time purchases was to buy the cheapest ELD they could because they were very unhappy with having that imposed on them. So that will be a positive growth trend for the next 12 to 18 months. Also, February '22, the 3G network on AT&T will be shut down. There's circa 1 million telematics-enabled vehicles that need to have their hardware upgraded. So that is a good growth opportunity for us. As we previously mentioned, insurers putting up premiums for transport operators unless they put video telematics into their vehicles is also a trend. And that is really driving the pipeline that we have in North America. And as I've previously mentioned, the national mileage-based user pilot, which is road user charges, has begun in October and continues to attract more and more attention across regulatory and policymakers in North America. And in Australia, the main growth drivers there, the Chain of Responsibility obligations and using telematics to help meet the obligations there, which is very similar to health and safety. In New Zealand, similar trends around video telematics. Electronic work diary, which is similar type of product to the American ELD and the New Zealand Logbook, continues to be a key area for future growth. And of course, the pipeline of customers we have in Australia where we have won the business in New Zealand. And those customers continue to see the Australian and New Zealand market really as one market. So we've been through the capital raise. We are very much focused on accelerating our growth plans. And really, these are the key areas of focus for us. One is to upgrade our platform so it can support larger enterprise accounts. We enjoined 3 fleets which are over 6,000 units. And there is the potential for some of those to break through 10,000 in the coming years. So we need to make sure we have the platforms to support them. We also have potential prospects in our pipeline of the same size. In terms of the data that is being collected, being able to provide insights in the context of our customers' business is a big area of focus and also where they want to provide their own insights and merge with other data they may have, they're looking to us to provide the data environment where they can host all that data securely and present those insights themselves. So a lot of work going on with Snowflake at the moment. So if we look at the R&D investment, you can see how the spend, where the spend has been made over the last 6 months. And you can see there's been a huge focus on what we call customer-facing products, which is the EROAD Go and the Dashcam and the Logbook. So you can see that we'd expect during this next period of time there'll be further investment in the reliability and scalability as we strengthen those platforms. And as Alex has mentioned, that level of R&D investment over the next 2 years increasing to 24% to 27%, I think the key thing to note is the investment that we make in products this year create revenue opportunities in the latter 2 years. So this coming 18 months period will be a huge investment period for us, and we'll see the benefits and the growth of that some during that period, but most of it beyond that period. But based on the global and end-market opportunities on the 2 previous slides, it is a very wise investment for us to be making at the moment to maximize those growth drivers. On the remaining 4 slides here, we've introduced these. So in your own time, you can better understand some of the key products that we've released. So we briefly explain what it is, what markets we've launched it into, what the customer benefit is and what is the benefit for EROAD and then what has that uptake been. So featured products is EROAD Logbook, EROAD Go, the Clarity Dashcam and MyEROAD Fleet Maintenance. So in terms of the outlook for the balance of FY '21 and '22, where we see the second half of the current financial year as being better than the first half but will be still a level of COVID impact. We anticipate that EBITDA will be similar to the first half of the year. So essentially, the revenue growth we do occur during the second half of the year. The related EBITDA will be consumed with accelerated R&D and marketing costs as we launch these key products. When we look at FY '22, we think that we will be less impacted by COVID and our customers and prospects will be very much in a recessionary mindset, which has always supported good growth and interest in our products. So we would expect a much better level of growth compared to FY '21, but maybe not quite at the level of FY '20, which was around that 30%. In New Zealand, we would expect similar unit growth that we have over the last 4 years, and we expect to see some good growth in the U.S. market as we deliver the Dashcams and EROAD Go. In Australia, there has been some good progress during the first half of this year with customers that have been piloted. So we would expect to see some good progress in that space. We note that the sales cycle for enterprise in Australia is definitely quite a bit longer than we have experienced in either New Zealand or North America. So we are very much accelerating our investment in product development in FY '21. And as mentioned, will result in future growth in FY '23 and '24. We anticipate that EBITDA margin will be maintained during FY '22 and may improve towards the back end of '22 as we start to get the benefit of the new products. So with that, we will open up to questions.

So should we go to Hamish?

Yes. Hamish has got a question. And we can come back to the other questions. So Hamish, you've raised your hand. So perhaps we'll go to you first, and then we can come back to the others on the list.

Are you there, Hamish? We can't hear Hamish. Sorry, Hamish, can you talk now?

Yes. Can you hear me?

Yes. Absolutely. Thank you. Sorry, some technology issues there.

We actually use this product for a webinar so I apologize everyone.

I mean with COVID in the way, everyone's learning on the fly with all of this. We're all accelerated. Could you just step us through just the additional part of the guidance where you just talk about FY '22 growth and your expectation for, I guess, that to normalize but not normalize to that FY '20 run rate. But then you stepped us through, I guess, the regional expectations and all of them look quite solid plus the product launches. Could you just, I guess, give a little bit more granular detail on what's driving those expectations forward and where that sits?

Maybe I'll start. So I mean, I guess, if you look at the run rate unit growth that we've achieved in New Zealand, I think we've previously said it's circa 9,000 at least units a year. And we don't see any reason for that not to continue into FY '22. That will give you a certain level of growth for the New Zealand market. The U.S. market should, and we're heavily anticipating it improving, not just in terms of people getting used to living with COVID and coming out through it, but also because we are opening up that addressable market. So our sales will be coming from effectively the value proposition we've now got to where we will have video telematics integrated, logistics management and the best-in-class ELD in the market. And as a result, we will be targeting that segment, which is between circa 200 vehicles up to several thousand vehicles, that sort of lower end of the enterprise segment. And that is where we will get that growth from. And the Australian pipeline, as we said, is 15,000 to 20,000 that's in there. We've been working that pipeline throughout the last financial year. And this financial year, we have 1 or 2 opportunities that are certainly more progressed than others. And one we were very hopeful we would lock in this half, but we may yet do that into the second half of FY '21. They're quite lumpy, though, of course. So you can only factor in a certain number of those within a period to derive that growth. So as I said, we've been experiencing growth in revenue of 7% half-on-half from the second half of '20 onwards. We certainly wouldn't anticipate getting up to the 30% growth that we achieved in FY '20 on FY 2019. But I think we'll be back into some healthy double-digit territory, and we'd anticipate getting significantly into double-digit territory around that. And it really just depend on the momentum that we come out of FY '21 with in those markets to get into FY '22.

Yes. Okay. So maybe that's where I was a little bit confused reading it. So you guys are talking in terms of percentage growth, not an absolute figure?

Correct. Percentage revenue growth, yes.

Yes. Because, I mean, I appreciate that you guys have got your crystal ball and given us a lot of guidance on FY '22, which a lot of companies aren't doing. But if all things with COVID going well, am I correct in thinking that if the run rate, I mean, if you continue the growth in New Zealand and then you can execute in North America and expand that addressable market and the ARPU with the launch of Dashcam and COVID sort of headwinds alleviate, we could be looking at quite a strong second half '22?

That's certainly the plan and that's certainly the signaling that we're providing through the guidance is that the back end of '22, we'll be starting to see the benefits of the acceleration of the investments that we're making in product development. We will start to see some of the benefits at an EBITDA level in terms of some of the spend-to-save initiatives that we're working through in the next 18 months. And we should get the momentum reintroduced into those 3 markets with COVID alleviation, coupled with the product market fit that we will have, where we believe we'll be sufficiently disruptive in Australia and the U.S. to grab some good growth.

Yes. I mean, thank you, Hamish, for acknowledging the outlook. I mean that's something that, as the Board and management, we thought about a lot based on our business model being primarily SaaS with 36-month contracts. And now we've traveled to nearly 11 months with some level of COVID impact, we understand where data sit. So we can actually really project better than most. So we've been able to provide the guidance that we have.

Yes. Thank you. We're just going to the second question who got their hand up, and then we can come back to the questions through the Q&A function.

So Wilson, welcome.

Alex, Steven, I've just got a question on the sales footprint in the U.S. Can you maybe just talk about how you're feeling about that at the moment and where sort of additional investment is needed in terms of your distribution capability from a sales perspective in the U.S.? And then as part of that, maybe just flesh out how much visibility you're seeing over that enterprise pipeline in the U.S. at the moment. What sort of prospects you are getting a look in at, please?