Superloop Limited (SLC) Earnings Call Transcript

Welcome, everyone, to the Superloop Half Year 2024 Results Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Paul Tyler, Chief Executive Officer. Please go ahead.

Thanks very much, and welcome all to Superloop's first half FY '24 results. I'm Paul Tyler. And with me, I have Dean Tognella, our CFO. It was a very eventful half and we've got a lot to cover. So I'll jump straight in. We move to Slide 3 and we'll start with some highlights for the half. So I'd remind everyone that FY '24 represents the first year of our new 3-year plan, which we creatively named our Double Down strategy. Delighted to report that we started with clear momentum in that first year. So at greater than 32% year-on-year growth, our revenue growth remains well above market. Encouragingly, we saw that growth coming from all 3 segments. Also pleasing was the fact that this revenue growth was predominantly organic. The revenue growth obviously stemmed from customer additions, with net customer numbers up 38% with total customer numbers across all 3 segments, just passing the 400,000 customer mark. Our investments in our Infrastructure-on-Demand platform, encompassing network and systems is now showing strong operating leverage, which is evident in the significant growth of EBITDA at over 80% year-on-year. We also delivered another very strong result in operating cash flow with greater than 100% conversion from underlying EBITDA. As we continue to grow, we maintain our view that this conversion rate will settle at around the 80% to 90% conversion over the midterm. Then go to Slide 4. And digging into these highlights a little further. Obviously, the momentum we are showing with the organic revenue growth across all 3 segments, together with the expanding margins is very encouraging for the company's operating model. In the Consumer segment, we had a blockbuster half with record organic net adds of over 34,000 and revenue growth of over 50%. Our positioning as a high-performance yet value product is resonating with customers as cost-of-living pressures are felt ever greater. The Business segment has added valuable, profitable long-term contracted revenues. And pleasingly, this segment continues to maintain its 40% midterm gross margin ambition. In the Wholesale segment, we had stellar results in sales. In fact, our best ever half for new sales orders. A key Wholesale client win being that of the 5-year exclusive deal with AGL, adding in excess of $31 million of TCV. We've discussed many times our expectation of the growth of the [ Challengers ] segment, in particular, that of the nontraditional brands and our expectation that this Challengers segment would expand to in the order of 30% collective market share. In first half '24, we saw this Challengers segment continue to take share, which now collectively represents in the order of 17% of the market. Our progress in Consumer, together with wins in Business and Wholesale provide great proof points for our ambition to be the leading enabler of this Challengers segment. Strong revenue growth is, of course, encouraging. But just as importantly, though, we've made good strides in reducing our cost to acquire and our cost to serve. Revenue growth, operating leverage and disciplined cost control are all evident in our underlying EBITDA, which increased by 83% year-on-year. And as mentioned, our strong focus on cash flow delivered a net operating cash flow of $23.7 million in the first half. And pleasingly, we've been able to maintain our net free cash flow positive position for the half as well. Our cash flow generation and our conservative debt levels leave us with ample capacity to continue growing the business in the future. Slide 5, please. So in putting the half's revenue and EBITDA performance in the context of multiple periods, a consistent and encouraging trend momentum is evident. As mentioned, in contrast to some previous periods, where growth was supported through M&A, the momentum evident in today's result is predominantly organic. [ Move to ] Slide 6 please. That trend is also evident when broken into our 3 operating segments. Whilst Consumer was particularly strong at greater than 50% versus PCP, there has been consistent revenue growth across all segments. Perhaps even more importantly, though, is this growth has been delivered without sacrificing gross margins in any of the segments. Slide 7. Revenue growth was, of course, underpinned by customer growth. In the first half, we added over 40,000 new customers, all organic and representing our best-ever quarter for organic growth. The Consumer segment added more than 34,000 new customers and our share of new nbn orders or our share of nbn new orders was 7.9% in the half, which results in a market share gain for the Superloop Group of around about 0.4%, taking us to 3.5% in total. Business also had a good half, with a net increase of 6,800 customers, increasing the total to an excess of 95,000 customers for that segment. Slide 8. So sustained investment in our brand has been a key focus of the business in recent times. We're now starting to reap the rewards of that investment with growing awareness of the group in the market. That investment has seen the refreshed Superloop brand appearing in digital, print, radio, TV and elsewhere. In tracking the outcomes from that investment, we've seen that we've doubled our brand awareness over the last 12 months. We're seeing a strong conversion of brand awareness to consideration and then on to preference. And finally, we're getting cut through in the market as an ISP that is different to other Internet providers, has competitive rates and is value for money. Slide 9. As I said, FY '24 represents the first year of our new 3-year Double Down strategy. That's a strategy where we have the ambition to double our revenue to over $700 million with a balanced contribution from all 3 segments. The 3 pillars of this strategy are centered on organic growth, cost leadership and disciplined M&A. This slide represents a bit of a scorecard on how we're performing against that plan or how we performed against that plan in the first half of '24. As you can see, we're happy the plan is tracking to or even slightly ahead of expectation. Slide 10. This slide is not new. It does, however, serve as a reminder of our portfolio and our operating model. We have 3 distinct operating segments, and underpinning that is our great infrastructure, which remains significantly underutilized. We've been able to profitably extend our offerings across all 3 segments through the extensive use of digitization and automation, delivering one of the most compelling product sets in the industry for our chosen market segments. And looking at Slide 11, again, at the risk of repetition, one of our major points of difference remains our extensive investment in the underlying infrastructure that supports all 3 of our segments. Connectivity and bandwidth requirements continue to grow, and we're very well placed to deliver high-quality value-for-money services for our customers. And with that, I'll hand to Dean to dig a bit more into the financial performance.

Thank you, Paul. Slide 13. It's great to be presenting Superloop's financial results for the first time. I will step you through our high-level results before going into more detail. As previously noted by Paul, the Superloop Group revenue and EBITDA results demonstrate we are progressing well on our 3-year strategy. Revenue growth has been strong with 32.7% growth. This revenue growth was achieved with contributions across all segments. However, Consumer is worth highlighting. The organic revenue growth in the Consumer segment contributed significantly to the group revenue growth. Overall, the group delivered gross margin of $68.7 million. And this represents an increase of $19.2 million or 38.9%. The group GM percentage increased by 1.9% to 35.3%. The pleasing group revenue and margin expansion demonstrates we are successfully scaling our business. Operating expenses increased by 21.7%, including a 31.4% increase in marketing. This increase of 21.7%, being below the 32.7% increase in revenue and other income. Operating expenses, excluding marketing and doubtful debts has declined as a percentage of revenue, which is pleasing and highlights our increasing efficiency. Underlying EBITDA increased by $10.5 million to $23 million, an 83.3% increase. The EBITDA margin also increased to 11.8%. Our ambition for group EBITDA margin is to achieve mid- to high teens within the 3-year strategy, and we are progressing well. Before we move from EBITDA, I would like to confirm there's a detailed explanation between underlying and statutory EBITDA at Page 26 in the group income statement. Notably, the underlying EBITDA excludes Symbio transaction costs of $1.8 million and noncash expense associated with the accounting treatment of the VostroNet acquisition of $5.6 million. The VostroNet adjustment was also disclosed in the second half '23 results. I would also like to highlight the positive NPATA in the half of $1.2 million. The company has been NPATA positive in the last 2 half-year results. Further details are provided in the appendix. At the bottom line level, the net loss after income tax reduced by $3 million to $18.7 million, reflecting the improving company results. Lastly, I'd like to highlight the $9.1 million improvement in free cash flow. In the half, Superloop generated free cash flow of $12.5 million. I'll now move to the next slide and provide some further commentary around gross margins. Overall, the group delivered gross margin of $68.7 million, and this represents an increase of $19.2 million or 38.7%. The group GM percentage increased by 1.9% to 35.3%. The pleasing thing is that the group continues to enjoy a well-diversified split of gross margin across the 3 customer segments. The overall increase reflects good profit growth in the Consumer and Business segments. The wholesale margin growth has been more subdued, but we expect this to be a timing issue as the first half exceptional new order performance begins to deliver revenue contribution in the second half and beyond. Turning to Slide 15. In the left graph, you will see that OpEx, excluding doubtful debts and marketing as a percentage of revenue has dropped from 21% to 18.2%. In achieving this, you can now see we have more than 50% of the Superloop team offshore. We have been able to meet market conditions for Australian-based staff and blend our average cost per employee down through increased utilization of our offshore teams, but it's not simply about offshoring. We are continuing to focus on a number of initiatives that are designed to press home our competitive advantage as a low-cost provider, not least of which is the digital transformation program that continues to improve our buying journeys and reduce inbound call volumes. We have an operating model that can enable our growth and which is delivering operating cost leverage. Turning to Slide 16. In the half, cash flow from operations was $23.7 million and Superloop was free cash flow positive with $12.5 million of free cash flow. I know that underlying EBITDA to operating cash conversion has been a key focus for many investors. During the half, our conversion was strong, just over 100%. In the past, we have commented that we would expect operating cash flow to EBITDA conversion rate to be in the 80% to 90% range moving forward. This remains our view. In the half, our cash outflow from investing activities was $11.2 million. For the full year, our CapEx remains on track to between $20 million to $22 million for the financial year '24. From a debt perspective, the business is very conservatively geared. Our current leverage ratio is 0.2x, and we will continue to operate at disciplined debt levels. We have a net debt of $8.1 million and have sufficient debt capacity to continue our impressive disciplined growth strategy. I'll now hand back to Paul to provide more details on our segment performance.

Thanks, Dean. So on Slide 18. So if I just touch on some of the segment highlights. As we've mentioned already, we had a cracking result in Consumer in both subscribers and in revenue. Consumer revenue was up 50% -- greater than 50% to $119 million as we continued to grow our nbn market share, which now is 3.5% and increasing. Gross margin was 28.4%, comfortably above our midterm 25% target for the segment. We're getting great results with the high speed, greater than -- or 100 [ megs ] and above market, which drives up our ARPU and increases our margins. Our overall share of new nbn orders for the half was 7.9%, which helped drive our market share increase from 3.1% to 3.5% by the end of the half, and we expect these market share gains to continue into the second half. Slide 19. So highlighting 3 particular trends in Consumer. We saw 58% of our new activations were on those high-speed plans, that being 100 megs and above, which far exceeds the mix in our base of 44% and obviously well above the broader nbn market of just 28%. This is driving increased revenue and gross margin per user. So we're not just adding customers, we're successfully adding the high-value customers. Marketing investment is delivering volume growth and improved unit cost to acquire, which was about 1/3 lower than in the prior comparable period. And finally, we've been talking for several years about the trend of Challengers taking market share. As I said, this is now currently sitting around a collective 17%, but we maintain our vision of this Challengers segment continuing to grow towards the 30% vision that we believe is its natural share. Slide 20. Whilst perhaps a bit overshadowed by the Consumer segment, the performance of the Business segment was also very credible for the half. Revenue was up 9.2% and gross margins maintained above the 40% target for the second consecutive quarter. We saw some marquee customer wins, particularly -- particular call out to our Smart Communities team where we've established ourselves as a leading provider, perhaps the leading provider in the build to rent space, having on large opportunities with Mirvac and Investa. This area continues to be -- this area continues to build strongly and our growing pipeline will support growth in future years. And Slide 21. Wholesale also had a record sales half with new sales orders worth greater than $9 million of recurring revenue annually, which is all expected to be live by the start of FY '25. The half included Superloop's largest ever win being AGL, and we're thrilled to be working with AGL as they deliver broadband to their large and growing customer base. Revenue for the half was up 5% or 5.3% and margins just slightly below our 60% midterm target. We're really at an inflection point in Wholesale with the half 1 sales performance setting us up strongly for growth in FY '25 and beyond. Slide 22. I just want to highlight the AGL deal specifically. It was truly a fantastic win, the largest ever sales win for Superloop. We estimate it will contribute between $4 million and $5 million of revenue in FY '25 at our typical wholesale gross margins with volumes growing over the 5-year term. There's limited additional CapEx or OpEx required to deliver the deal, and it should positively impact overall margins for the segment. That's all I was going to say on the segments. So if I move to Slide 24, we'll touch on the outlook. So building on a great first half, we're encouraged to see those strong trading conditions continuing as we move into the second half of FY '24. The company added around 9,000 net additions in consumer in January alone. We're seeing a strong pipeline of opportunities across Business and Wholesale as well. With that, we're affirming our FY '24 guidance for underlying EBITDA of between $49 million and $53 million. We're affirming our CapEx range of between $20 million and $22 million, including spend on realizing AGL deal. We are continuing to also take an active but disciplined approach to exploring M&A opportunities. So with that, we will hand over to questions.

[Operator Instructions] And your first question comes from the line of Nick Harris from Morgans.

Congratulations. Very impressive free cash flow growth there. So to call it out well done. I've got a few questions. I might just shoot them one at a time, if that's all right. Just the first one. There's some restructuring costs in Business. Could you just elaborate? I think it might relate to moving some stuff offshore. But could you just talk about, I guess, what that relates to? And does that give us some cost savings in the second half or just [ so that I can ] unpack it a little bit? And then I'll ask the next one after you've answered that, it's probably the easiest.

Yes. Thank you for the question. Yes, in November, December, we had a look at continuing to drive our efficiency. So there was around about 20 to 25 heads left in second quarter, and it was just a continuing program of driving efficiency. It wasn't necessarily all as resources going offshore. Combination of that and just being more efficient in terms of spans and layers and driving a better performance.

Got you. So some of that system refresh that you did as well helping do things more efficiently. Got it. Excellent. And just the nbn net adds just keep getting better and better, so well done on that. Just a couple of questions. Is it mostly in the Superloop brand? I know you've called out the high-speed plans where you're clearly massively over indexing. But just curious, are you seeing some growth in Exetel brand as well. And then, I guess, the next 2 parts to the nbn side as well. Just the churn, has that moved at all in the last 12 months? And then the final bit was just, obviously, you've added 9,000 subs in January, which is another record. How are you thinking about your sales and marketing spend in the second half? Like if you can keep adding more customers at a lower cost to acquire, I would have thought you'd be bidding [ trying to ] want to chase some more because it's clearly a good spend. So just your thoughts around that, please.

Well, I've got a lot of thoughts around that, Nick. Firstly, the 2 brands. So we maintain a 2-brand strategy deliberately and both brands are growing. Of course, Superloop is growing faster, where we spend the vast bulk of our marketing investment in supporting the Superloop brand. But Exetel continues to perform in its particular segment. That was one part of the question. You asked about ongoing investment plans. Yes, I mean we're a growth business, and we generate cash. We have a very under levered balance sheet. So we have the capacity to continue to invest for growth. You can see that our marketing investment is increasing year-on-year. And we -- whilst we get the return that we're currently getting, we will continue to invest. So you can expect that our kind of elevated level of marketing investment that you saw in the first half will continue during the second half when we -- whilst we're maintaining the return that we're getting.

The other question was churn. So we're happy with our churn levels. We continue to work on programs to reduce the churn, but we're happy with them. We also believe we're acquiring higher ARPU customers, so the ones going on the higher speed tiers. So we're hopeful also we'll see better churn associated with those particular types of families that we're targeting.

And again, congratulations on the free cash flow. It's great to see.

Thanks.

Your next question comes from the line of Bob Chen from JPMorgan.

Just a couple of questions from me. The build to rent opportunity, can you sort of give us a little bit more color on how big that opportunity could be and financially, what that could potentially look like going forward?

Well, built to rent is part of our broader on-net access strategy. So within that space, we provide managed Wi-Fi historically for quite some time, as you know, into that sort of the tertiary accommodation sector. We've been moving more recently into the world of FTTP or fiber to the premises and that can cover build to rent or build for sale, can be MDUs -- sorry, multi-dwelling units or broad acre. So build to rent is just one part of that broader market opportunity that we see as significant. And we believe we really have a leading -- I actually think the leading portfolio to address that opportunity in the future. In terms of the market size for build to rent specifically, I don't have that data at hand. We'll come back to you because I know we do have it in the business. But it's a rapidly growing part of the market as build to rent becomes much more a vogue part of the real estate market, as you know. I haven't given you a specific answer on that, Bob, but I will come back to you directly with that.

Yes. No, that's fine. And maybe just that whole segment, the FTTP segment in general then. Any color on how that's playing out? Because it's obviously a relatively competitive space, I imagine as well.

Look, it's competitive in that there are established players such as NBN and the Uniti Group being the 2 largest, and there are some small players as well. We see ourselves as the clear #3 in that space. We think we will be growing faster than pretty much anyone in that space. And again, I come back to the portfolio, the unique parts of our portfolio that are a result of internal development, but also strategic M&A. As you remember, we purchased VostroNet, which gave us a great set of skills in FTTP in particular, and some of the building management elements. But we also made acquisitions of Acurus, which gave us a very strong white label capability, which is quite attractive to a number of build to rent operators, particularly. And we tie all that together with an approach around IoT and various other things. So it's hard to get that portfolio right, and we think we've built a bit of a moat around that portfolio.

Fantastic. And then just on the Wholesale segment. Obviously, the AGL deal and that's a really good deal. Can you talk a little bit about how long could it take to get one of these deals completed and signed? And what does the pipeline look like for maybe similar-size deals as well?

Yes. Look, these are large B2B deals, and you can imagine that they have the same sort of gestation time you would expect for any of those sort of large deals. It could be 6 months or it could even be longer to go through the wholesale cycle. They're professional organizations that have a very sophisticated buying process. So we're good at that. That's very much part of our DNA. It doesn't just apply in the Wholesale segment. Exactly the same approach applies to our Business segment, including things like the build to rent space I just spoke before. It's a very different customer journey than the sort of the digitally led mass market business that we have in the consumer space. So fairly long sales cycles. The pipeline is strong. I won't give much more color than we are very encouraged by some of the opportunities that are in the pipe.

Okay. Cool. And then just a final one on that. I mean, who would you typically sort of be coming up against competition wise for those deals? And what sort of led AGL, I guess, to choose Superloop over your competitors?

So that deal is a backhaul deal. Well, there are some smart elements to the backhaul. It's not traditional backhaul. It's a new product we call hosted backhaul. It's a product that doesn't exist in the market by anyone else or offered by anyone else. It's a product that we really did build for AGL specifically, but it has broad application beyond AGL. The competitors in the space are all the traditional larger telcos. But one thing that's happened in this backhaul space or this nbn space in general is the onset of the new SAU from NBN, and that changes the way that backhaul is impacted. Things like the CVC going away and various other elements of that SAU change. We've moved very quickly to build a product set -- a wholesale product set, which is optimized for the new SAU from NBN. Again, I would, with all due humbleness, say that we believe we have the best portfolio in the market to address that new need.