Spacetalk Limited (SPA) Earnings Call Transcript

Good afternoon, all, and welcome to the Spacetalk Limited First Quarter 2023 Business Update Investor Briefing. For your information, please note that this briefing is being recorded and will be posted to our Investor Center website. For those of you who don't know me, my name is Dimitri, and I look after Spacetalk's Investor Relations. And the format for today will be Spacetalk's acting CEO and MD, Saurabh Jain, will be speaking to the slides and the announcement released to the market this morning. From there, we will open for Q&A. In addition to Saurabh, there are other Spacetalk representatives on the line, and Saurabh may call on them to assist should any specific information be required. If that happens, I will introduce them before they speak. We need to have a hard close of discussion at 3 p.m. Eastern Time. So if we do not get to your question or if you'd like to ask something offline, please reach out to me. My e-mail address is on the announcement that went out with the details of this conference. We are also able to take questions on notice, if you'd like. If you would like to ask a question today, can you please indicate via the chat system, you can either flag that you would like to have your microphone opened to ask the question or you can type in the question, I'll ask on your behalf. Questions will be taken in the order they arrive. We have a large number in attendance today, so we need to limit questions 2 per person. If time permits, you can have a second go. If we don't make it to your questions, you can contact me, and I will endeavor to get you a prompt reply. You will also be aware that the company is holding its Annual General Meeting on Wednesday, the 23rd of November. The notice of the meeting was issued last week, and I would encourage all shareholders to review the document and to exercise their vote. I'll just wait 1 more moment before handing over to Saurabh, just allowing few more people into the room and then it's all yours Saurabh. Over to you Saurabh.

Thank you, Dimitri unmuting me. Look -- hello, everybody. Look, just a quick intro from me. I'm Saurabh. I've been on the Spacetalk Board since about the start of the year and earlier this month I stepped in as the acting CEO after a bit of a leadership change. So there's going to be a couple of things we're going to go through today. We're going to take you through our financial results, give you guys a bit of a business update as well as what's been happening and just kind of talk through some of the changes that I'm working on in my role as an acting CEO. Dimitri, if you can take us to the next slide. So I'm starting off with the financials. So for the quarter ending 30 September, Spacetalk achieved a total revenue of $2.6 million. This was a 36% decline on the PCP while Spacetalk's core recurring revenue experienced strong growth. The reason for the decline in group revenue versus PCP is we had a large U.K. customer showing up around this time last year, and they had quite a large lumpy in-fill order that came through in first quarter 2022. The other point I'll probably make as well is, I think, for a business like ours, a quarterly grain is just too fine to have a look at the results as you'll see, historically, as well, there's been some quarters have outperformed and some are not so much as well. Jumping on to the next slide. The wearables revenue, that's the subscription revenue [ Spacetalk ] App plus the JumpySIM as well. They were up $1 million. So that's about a 40% increase on PCP. An interesting thing with this number and why this metric is important is this actually shows the number of active people with using our watch. So someone has bought it from a store. They've put it on a kid's wrist and they've activated the app and they started paying us our license revenue. So phenomenally important kind of metric to look at is almost a bit of a proxy for sell-out to some degree. And this kind of really iterates our strategy to move away from just one-off device sales and build a business that has a really, really strong recurring revenue base. And something we'll talk about today some of the enhancements we have made around JumpySIM to actually try to sell some more premium services to our customers. Next slide, please. The other part I'll just mention as well. So in terms of the schools revenues, that's the legacy MGM business that still had a steady track record of performance. We had 11% growth in that area. We have made some minor investments there just to kind of increase the attractiveness of the offer and make sure it stays nice and sticky. But the real focus of that part of the business is to make sure it generates a lot of free cash flows to help fund some of the high growth areas that we're working on as well. As part of the revenue decline in the one-off revenue. So obviously, the wearables revenue were down 60%. As I mentioned, that was a large in-fill order that we had this time last year, which kind of contributed to that. And as of September 30 the business had $2.7 million of cash in the bank. Next slide please. So some of the things that have happened since -- post the close of the quarter -- sorry, obviously, in the last couple of weeks. So we did a major upgrade to the actual watch system that went out. So we introduced HD video calling, funny sounds and some really clever features and insightful features around mental health for kids. They've been really well received. So I'd implore any of you guys to actually go and try out some of those features. And the way we implemented them is probably a lot better than lot of the stuff out in the market. So it's given our customers a really good experience. We've got the new Adventurer Bonus Edition that's kind of hitting stores as we speak. It's great for us, it does actually obviously increase the average sale price for one of our units and the marginal cost is not that high. We announced as part of this result is now we've launched in the BestBuy stores. So that happened only probably a couple of days ago. So in about 600 BestBuy stores around North America. And as part of that, we had a large in-fill order as well as they buy stock to stores -- all their various stores. And we've had some really good progress with JumpySIM. So what JumpySIM is? Now, we're bundling a SIM card in with our actual watches. So instead of a customer getting a watch than having to go to Telstra or Vodafone or whatnot as well to activate their SIM, they can do it with us and they can activate it quite seamlessly through our entire onboarding process. In North America, where we kind of launched that back in June, the start of this financial year. We're finding about 80% to 90% of devices are actually converting to JumpySIM, and what that means on a practical basis for us in North America, we generate in U.S. dollars about an additional $4 to $5 per user per month. So it's a great revenue uplift for us. We launched JumpySIM in Australia about 3 or 4 weeks ago. And so far, so good. We're finding more than half of our customers are signing up more for the longer term, that's a 12-month agreement, which is great because you kind of get paid upfront out of that process, and we generate about $2 to $3 more per user per month. There's a nice kind of extra value add that we're able to put it into our system and allows us to obviously grow the ARR as part of each customer. Next slide, please Dimitri. Yes. So just a quick kind of flash slide around some of the places that you can get our hardware through. Obviously, we do a lot of direct sales through Amazon and through our own website, but we are pushing to more and more retailers and they're kind of helping us kind of push that into the market. And we're working with a lot of telcos. We kind of find the market varies in Australia. It's a bit more on the retail side, same with North America, in U.K. and EU it's a bit more on the telco side. We've got quite a good strategy as we're kind of busy expanding out into those areas. The next slide. Look, obviously, it's been quite busy over the last couple of weeks, as I've stepped into the acting CEO role. So I want to maybe just talk through some of the things that I'm considering [indiscernible] . So the first thing is, we do our full strategy review. So we really want to make sure in terms of our revenues, in terms of our cost base and capital needs that we have a really good understanding and the management team are quite aligned. So we're right in the midst of that right now. We expect that to be completed by the end of the month, and we'll update the market with any changes or any adjustments that we're making as part of that as well. Look, in terms of our cost base, so we are looking to optimize our cost base. So we're busy implementing a lot of those changes right now. So they will be implemented this month, and there'll be a net benefit to cash flow as part of our Q3 once we kind of experienced some best restructuring costs. And what this is about, it's really setting us up to succeed in the future, just kind of making sure we have a nice manageable cost base, and then as part of that, we want to obviously review our capital need based on a lower cost base. And we're busy working with our development lenders on the various comments. Next slide, please. Look, that was it for the formal part of the presentation today. I want to obviously keep it quite short and quite precise so that we could spend a lot of time on questions. So, Dimitri, I'll actually kind of hand it to you if you want.

Thanks, Saurabh. Thanks all for your patience. We've received a couple of questions, so I'll kick it off. I'm assuming you -- if you want me to open your microphone, please specify your question. But in the meantime, the first question is from [ Sam Skontos ] and I'll just read it. In view of the current data breaches, what is the security position of Spacetalk. Where is the service store?

Yes. Good question. Yes. Look, it's a topic all right. And I think for an organization, especially someone like us who holds data, which is about kids right, because people -- it's like for your 5-year-olds, 10-year-olds. I think in most tech companies job #1 is IT Security. And I think what you'll find in a lot of the companies that have gotten breaches, they tend to be companies that are not tech companies that are doing a lot of tech and haven't actually built in that core culture and core importance of IT security. So for any business, obviously, including us IT security is #1. So as part of that, we do obviously store all our data here in Australia. For most of our processing, we obviously [indiscernible] and this is one of those things that I think all organizations like us just need to continuously improve on and focus on. But it's an area of focus and it's one of those things that companies like us actually bake into our entire data process.

Okay. Next question is from [ Eric Pan ], again I'm reading. Employee costs have risen from $3 million to $7.6 million. Corporate and admin have risen from $3.2 to $4.8 million. Can we do much better than the outlined greater than $2 million cost savings? I'm assuming Eric's referencing the annual report figures?

Yes. So look, I mean, it's always -- you have to be very careful when you cut costs in a business. Could you never want to touch revenue? Because if you actually cut the cost and you drop revenue like -- then nothing else kind of matters that you end up in a much worse position. So look, this is the first iteration of actually doing a bit of an organizational reset, which actually requires some roles changing, some locations changing. So consider this as the first iteration, but my goal and the Board's or the management team's longer-term goal is to get us in a place that we're actually cash flow sustainable, like businesses like ours need to be profitable, and we're busy making the changes that we need to. So to answer your question, look, $2 million is what we're doing immediately, but we are going to continuously look at that. And we want to kind of build that culture that we actually want to be a lean provider of these services. And that's what [indiscernible].

Next question, I've got a couple from Chris, but I'll only start with the first 2, the rest if time permits. [ Chris Cameron ] sorry, if I didn't specify that. Is the company striving to avoid a capital raising prior to the next quarterly business update given the share price?

Look, I think we are obviously reviewing our capital strategy as any organization does on a monthly basis. Look, I don't think we have any specific things that we can reveal to the market. What we're focused on right now is really making sure we have a solid Christmas. So you'll tend to find about 40% -- 42% of our revenue will actually come out of the quarter that we're in right now. So I've got my team heads head but more focused on, let's make sure we get our Black Friday stuff done, make sure we get Cyber Monday done, make sure we get Christmas done really well. So we can actually have a lot of cash come through the door. And like I said with any business, we're also reviewing our capital strategy, but we've got nothing to announce to the market.

Chris' second question is, when will the next generation of the watches be released? And is it likely that this will occur without a capital raising?

So let me talk a bit more generically. Yes, if you look at the organizations that have done well in the world when it comes to consumer electronics and devices like ours and wearable, is you have a steady flow of incremental hardware changes, and that's what we have at Spacetalk. So we are busy working on the next generation of watch. We aren't going to announce the market when it is or what it's going to evolve. We are going to actually wait for it to be released before we say. And as part of the cost optimization, we are touching that part of the business quite yet because it's super important to make sure we have the next hardware piece out bundling with our software because invariably what happens if you kind of get that wrong, the competitor will kind of come over the top with a better device. Because, I think, one of the things we're -- and I don't think it's luck, I think it's probably some very good decisions in the past is we have a pretty cool product. There is a reason that we are the most expensive in the market. We believe we probably have though in terms of revenue perspective, everyone else in the market, in the market that we are, especially in Australia, and we really want to maintain that position as the premium product. And as part of that, we've got to make sure that we keep iterating on our hardware.

A second question from Sam Skontos. How many users -- how many wearables sold overall in total? What is the cost to acquire and retain users?

Yes. So we don't disclose to the market, how many active users or how many hardware devices that we sold. What we do disclose, obviously, the revenue components that we have around. So the kind of figures I'd focused on, it's obviously, was the ARR growth because that is the proxy for the number of active users or how much revenue we generate from our users. And then the wearables sales, as I said, not over a quarterly trend. It's more like a 6- to 12-month trend. Yes, there'll be figures I'd focus on.

Next question is from [ Karen Nicholson ]. What is the proportion of the uplift in subscription revenue that was the result of ForEx movement?

Well, I don't actually know that. Jarred or Jeff, do you want to talk to that one? Might be Jarred?

Jarred is the CFO.

Thanks for the question. We have 2 components, obviously, the Google and the Apple stores. You obviously know that the Apple Store reports in U.S. dollars, there's been around about $0.08 to $0.09 decrease in the 2 periods, which the overall nominal difference would be about 7%, if you were to take into account the foreign exchange.

Next question, if I -- could give me, [ Steven Deeley ] asks -- well states $2 million in cost synergies, please talk us through the parts. Is it mostly head count reduction?

Look, I think it's always a very -- it's a bad habit to cut cost simply through head count in production. Because you've got to assume there's a reason a lot of those heads exist. So we're trying to just be a bit more kind of strategic about it and look at -- actually the way we've structured organization where people are, what their roles are, what level of automation we have in some of the roles that exist. So we aren't going to disclose to the market, what specifically we're doing. But do stay tuned as there will probably be a delta change in our cost base. And there probably be a few delta changes in that over the next little period.

Question from [ Matthew Baldwin ], please forgive me if mispronounced it. The Board recommended voting to keep the former CEO. What changed so dramatically in recent times for the Board to change its view of the previous CEO, Board ructions are worrying.

No, it's a very legitimate question. So if I talk more generically, I think what makes a founder really, really good at the start of a journey often makes them not suitable for the next phase of the journey, unless they actually go through a bit of a mindset change. And, I think, that's one of the things the Board were really working on with the prior CEO. But as you can obviously see, we had some challenges. Some of these challenges were we needed to address the cost base, which we're really working with, but we're unsuccessful with him. We need to improve the governance. We had various conflicts that we struggled to get around. We had related party transactions and probably the salary base for the CEO. And unfortunately, Mark, just wasn't being fully cooperative to make those changes. So we worked with him for quite an obviously extended period of time. But ultimately, we as a Board, in the interest of shareholders had to kind of make that hard decision and that's why we decided to make a leadership change.

Again, there is a question from [ Ian Cameron ]. Sorry, could you please rephrase the question because I'm not sure I understand it, but you'll be the next one in the queue, but in the meantime -- [ Peter Casero ] asks please provide details of all debt facility covenants, including the nature of each covenant, e.g., MynCash, debt-to-equity, serviceability, etc., the reasons for the anticipated breaches, i.e., which covenants are likely to be breached and the expected consequences if breached?

Yes. Look, I mean, so we believe that we're in compliance to our disclosure obligations. So what I might do Dimitri is if you can maybe just point out [ Mr. Costello ] to the release that we did to the market where we took on the pure debt covenants, and we'll obviously make sure we continuously disclose as per our disclosure obligations. Was there anything else we should add to that Dimitri or Jarred, or you'll make comments.

Okay. [ Ian Cameron ] has asked and I'm going to read it 2 parts. Can you please put a dollar figure on the mentioned historical returns accounted for Q1, he is referring to the backlog of device returns.

Yes. Okay. So, look, in terms of historical returns so there was about -- probably about $300,000 worth returns. And some of those things that we offer from a retailer will kind of get it in bulk. And it's a combination of that probably and plus some additional discounts that we push-through. So that gives obviously kind of retard the results for this quarter.

A second question from [ Peter Casero ] , what drove the reduction in cash, e.g., operating loss, additional inventory bills and what has been the movement in the value of inventory since 30 June.

Yes. So, Look, I mean, the changes in cost is probably 2 things. Obviously, inventory has been a huge thing for us right now because we are making sure that we've built up -- and we believe we have enough inventory now to take us through our Christmas period, which, as I said, is going to be 42% of our revenue. The other part as well as probably some of the salary cost, which is, as I said, we're probably a bit higher than I had with, which we're going through a bit of a restructure for right now, but the majority was absolute inventory. In terms of the inventory change, so we don't -- those are inventory deltas as part of the quarterly, but we do. I will ask Dimitri to confirm some new release inventory as part of our half yearly, do we?

We provide balance sheet in the half yearly in the 4D.

4D perfect.

Just circling back to [ Chris Cameron's ] question -- if there is any -- by the way if there is any further questions, please drop them in the chat. And if you'd like to open the mic to ask them yourself, just let me know. Back to [ Chris Cameron's ], wat -- I presume that we should say, how much stock does current company currently have in its inventory? I think Saurabh just answered that one. Next question is what steps are the company -- is the company taking to resolve the debt problem?