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Edited Transcript of 3PL.AX earnings conference call or presentation 22-Aug-19 12:30am GMT

Full Year 2019 3P Learning Ltd Earnings Call

Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of 3P Learning Ltd earnings conference call or presentation Thursday, August 22, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Deepak Karandikar

3P Learning Limited - Head of Sales & Marketing Americas

* Rebekah O’Flaherty

3P Learning Limited - CEO, MD & Executive Director

* Simon Yeandle

3P Learning Limited - CFO

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Conference Call Participants

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* Deana Mitchell

Australian Ethical Investment Ltd - Equities Analyst

* Nicolas West

Sterling Equity Pty Ltd. - Founder

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Presentation

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Operator [1]

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Thank you for standing by and welcome to the 3P Learning Limited FY '19 Full Year Results Briefing. (Operator Instructions)

I would now like to hand the conference over to Ms. Rebekah O'Flaherty, CEO. Please go ahead.

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Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [2]

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Hey, good morning, everyone, and welcome to our FY '19 full year results. This is a particularly important set of results because the end of FY '19 marked the end of our 3-year strategic plan, which was set way back in July 2017, and I'll touch on that in a moment. But first, let's look at the agenda.

Okay. So the agenda for today, I will provide you a financial summary of our results before Simon takes you through a more detailed look at the financial performance, including our 3 regions: APAC, EMEA and the Americas. And after that, I will unveil to you our 20:22 Accelerate Growth strategy and then give you a quick outlook for FY '20 before opening it up for questions.

Okay. So first, a quick recap of our strategy across 2017 to 2019. And as you know, our unwavering focus over the past 3 years was on 3 strategic priorities: one, strengthen the product portfolio around math and literacy; two, create a scalable sales and marketing model; and three, globalize the business. We have now successfully completed that plan and have the foundations in place for 3P to accelerate growth and realize our ambition to be a leading global SaaS K-12 education brand and business, and that foundation, that more solid foundation, now includes a stronger balance sheet as well as a team able to execute upon our growth ambition. And later in the presentation, we'll show you a video which outlines our '20 to '22 accelerate growth strategy. And it starts with a quick recap of the work that we've done over the past 3 years to build a foundation for 3P to now accelerate growth and scale the business in a multi-product and multi-country setting. But before that, a summary of our financial performance.

While group revenue declined 2%, it was largely due to external market factors and, more importantly, licenses revenue was up 1%, with APAC, up 3%, and the Americas up 7% in Australian dollar terms. The external factors impacting group revenue included Brexit, which continued to impact buying decisions and budgets in our core U.K. market, which saw our license revenue down by 7%.

In addition, revenue was impacted by an industry-wide reduction in the level of copyright revenue being disbursed, and we expect this decline to continue. This isn't a reflection of a change in our product usage and instead a reflection of a change in the copyright remuneration scheme. Finally, revenue performance was also impacted by the full year elimination of IntoScience and sponsorship revenues. Importantly, though, we delivered strong green shoots of growth in the Americas, with 10% license growth year-over-year and license revenue up 14% in H2 over H1. School numbers in that region were up 39% and retention increased 14 percentage points for new or first year customers. Globally, first year customer retention was up 11% in all regions and school numbers increased 6% globally. Expenses were up 1% and underlying core EBITDA was $17.7 million, down $1.3 million, driven by the decline in other income and our investment in salespeople to support our Americas growth plan.

Underlying core NPAT was $5.9 million, down $1.2 million after increased amortization expenses, and it was also impacted by the decline in other income. We exited FY '19 with $25.8 million in cash on hand and no debt.

Okay. I'll now hand it over to Simon to give you more color and texture around our financial performance. Thanks, Simon.

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Simon Yeandle, 3P Learning Limited - CFO [3]

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Thanks, Rebekah, and good morning, everyone. We will start by looking at APAC. While license revenue grew 3%, and we did meet our commitment to grow it faster than costs versus FY '18, we were disappointed with our retention performance. The less-than-expected result was attributable to execution rather than market conditions. Specifically in FY '19, we decentralized our retention organization and moved to team-based commissions. We have addressed this and enter FY '20 returning to a centralized retention team on individual targets. We expect this change, coupled with the range of improvements we have made to our products and our customer on-boarding processes, to improve retention in APAC and all regions in FY '20. Encouragingly, we saw new business grow 22% year-on-year and retention for first year customers, up 10 percentage points. This improvement in new customer retention is a good indication of how our products resonate with new customers as well as how we have improved customer onboarding, teacher training and nurturing new customers throughout their first year.

As Rebekah mentioned, nontrading income was down $1.5 million, impacted by the exit last year of IntoScience, a decrease in copyright revenue and event sponsorship income. And this has led to a $1.1 million decrease in EBITDA for the region.

So we have centralized our retention activities under a head of retention, we continue to improve our new customer on-boarding processes and how we use product usage data, all of which we expect to lead to improved retention in FY '20. Our expanded product portfolio will enable us to cross sell STEMscopes into our existing base of schools, and we expect the expanded Mathseeds and Reading Eggs distribution agreements outside Australia and New Zealand to grow sales also. Our new B2C website has just gone live, and we have a number of exciting product launches, including Readiwriter, planned for FY '20, that we will have a look at shortly. We are also focusing on selling into secondary schools with an improved Mathletics 7 to 10 offering and STEMscopes and workflows. With over 1,700 secondary schools in Australia alone, we are confident of new business in this area.

Given the churn we saw this year that will impact FY '20 revenue as it did in FY '19, we expect to see modest license revenue and EBITDA growth and a flat EBITDA to sales percentage margin in FY '20. With the process and product improvements we have made both last year and this year, however, we do expect to see these deliver additional revenue growth into FY '21 as well.

Next, on to Europe, the Middle East and Africa. Revenue was down at GBP 0.8 million or 11%, and year-end license numbers were similarly down 13% due to continued economic stagnation in the U.K. because of Brexit. There appears to be an increasing likelihood of the U.K. leaving Europe, which is predicted to cause short-term inflation and could continue to impact school spending in the U.K. Secondly, the remnants of the ADEC contract in FY '18, which terminated in October 2017, contributed AUD 300,000 to the year-on-year decline. As we have done all year, we have reduced costs where we can, including head count, without impacting revenue generation. With some foreign exchange gains from the weakening of the British pound, EBITDA was down 1% year-on-year. In FY '20, we will focus on retention and sales efficiency through automation and product usage data, which improves customer onboarding, customer success and less retention. As in APAC, there are exciting cross-sell opportunities for STEMscopes into our school base and new math and literacy product offerings in both primary and secondary schools to deliver license and revenue growth.

We will pursue opportunities outside the U.K., both from our existing products and now also into international schools for Reading Eggs and Mathseeds through our expanded Blake distribution agreement. So in summary, despite uncertain economic conditions in the U.K., we have opportunities to deliver growth for the region.

Looking at the Americas. At the half year, we said we would see improvements from the new sales model in the second half of the year. While H1 has impacted full year revenue in U.S. dollars, we have delivered green shoots of growth, with H2 license revenue over H1 up 7% and 14% with FX gains. End-of-year licenses were up 10% year-on-year and first year customer retention improvements are particularly encouraging, up 14 percentage points to 88%, evidence that our sales model is effective and our products are resonating with customers. We have and will continue to invest in sales staff as we grow on pay on performance. This is the driver behind the local currency expense increase of 9%.

We have augmented our Mathletics growth in the Americas with Mathseeds in North America, Mathseeds and Reading Eggs in Latin America and STEMscopes in Canada, which give our sales teams increasingly more cross-sell leads and opportunities. Mathseeds being a K-2 product is complementary to Mathletics.

As we move to a more digitally focused marketing model and data-driven sales territory coverage, we will focus on selling multi-product solutions as well as cross-sell and professional services. Because of our combination of selling to districts as well as individual schools, there is a different scale of deals in North America. District-level deals are often much larger than we would routinely see in APAC and we're taking advantage of this structural difference in the markets to, over time, grow licenses faster than in other regions.

A full year of last year's sales hires, with 6 more already planned in FY '20, means costs will rise, but we are confident of double-digit revenue growth in excess of these cost increases. In summary, we have the right people, the right model and the right mindset to accelerate profitable growth, and we expect to deliver double-digit year-on-year license and revenue growth in FY '20.

We will look at the income statement in more detail now. Employee costs have increased $1.4 million, which is mostly the increase in Americas' sales staff and the higher proportion of employee-related corporate product development spend expensed through the P&L, offset by head count-related savings in EMEA. Marketing costs are down $0.2 million as we pivot more to targeted lead generation. Other expenses are down $1 million due to lower doubtful debt provisions, third-party selling costs and $0.5 million of FX gains. Depreciation and amortization has increased $0.8 million: $0.5 million due to higher opening carrying values of product development intangibles and $0.3 million in higher amortization of capitalized third-party commissions, which are disclosed as customer contract intangible assets. With no debt during the year, our net interest expense of $0.6 million last year is now a net income of $0.1 million. Our effective tax rate is lower at 32% versus 34% last year. We continue not to recognize U.S. and Canadian tax losses, which raises the overall effective tax rate. However, our Australian R&D tax credits are higher this year.

On the cash flow, operating cash flow is down $1.3 million year-on-year, in line with underlying core EBITDA, and cash conversion is steady with last year. Total product and system development spend is comparable with the prior year. However, as mentioned on the previous slide, the capitalized portion is down $0.8 million at $9 million. This is because we have a higher proportion of spend on early-stage research and development from Mathletics, and that type of spend is expensed through the P&L. Net interest is a positive this year due to no debt, and tax payments have increased due to a variety of timing reasons, which do not, of themselves, give rise to increased tax charges.

Our balance sheet has strengthened this year with cash up $2.8 million on the prior year. Trade and other receivables are up $4.2 million due to a $2 million timing difference in billings in America last year, of which there was no revenue impact, and a higher level of multiyear deals and May and June billings in APAC and the Americas, which will help customer retention for next year. The higher trade and other payables balance is due to increases in third-party product royalties on sales and general working capital increases.

Looking at product investment. Our investment in products and digital systems was slightly down at $12.8 million compared to $13 million last year. We exit FY '19 with a stronger product portfolio, having completed the HTML migration from Flash, strengthened Mathletics, delivered efficacy reporting for the Americas with the District Dashboard and embarked on our own literacy brand, Readiwriter, to complement Reading Eggs. A higher proportion of total spend was expensed to the P&L this year, 30% versus 25% last year. As mentioned already, this is because we have a higher proportion spent on early-stage research and development for Mathletics. We have built up an intangible asset of $2.6 million in our Readiwriter literacy build, the amortization for this will commence in FY '20 once Readiwriter is launched. Software and curriculum content is amortized over 3 years, and FY '20 will see an increase of approximately $1 million in amortization once the Readiwriter amortization starts.

I will wrap up by talking a little bit about capital management. Given our expectations of license and revenue growth, we are increasingly confident we can grow the core business globally and profitably in FY '20 and beyond. We do not need to raise capital or acquire any businesses to do this. We will continue to invest approximately AUD 12 million to AUD 13 million per year to continue to modernize Mathletics and build out Readiwriter. And we will continue to invest in the Americas, in line with growth and our working capital requirement will grow as the business expands.

No dividend has been declared in this reporting period, with cash being retained to support working capital and growth opportunities. We will continue to review this dividend policy and provide an update each reporting period.

And with that, I will hand back to Rebekah.

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Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [4]

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Okay. So now on to our 20:22 Accelerate Growth strategy. And as I said earlier, the end of FY '19 marks the end of our 3-year strategic plan, which was about laying a foundation for 3P to grow upon in a scalable and sustainable way. FY '20 marks year 1 of our next 3-year plan now focused entirely on accelerating sales growth. And to achieve our growth ambition, we will execute 4 strategic priorities: number one, leverage our expanded product portfolio and customer base; number two, accelerate profitable sales growth in the Americas; number three, improve customer retention; and number four, build a growth-focused, high-performance culture. And we enter FY '20 with an expanded math, literacy and science portfolio, through which we will see both our installed base and revenue per customer growth.

So to bring all of that to life, here's a quick video, which recaps the first 3 years and, more importantly, brings our 20:22 Accelerate Growth plan to life.

(presentation)

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Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [5]

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And just a reminder that you should have by now received an invitation to our 20:22 Accelerate Growth strategy session at our headquarters here in North Sydney on September 20. We'd love to see you. And at that session, you'll get to see in more detail our plan and our early progress and meet members of the leadership team who are executing the plan. I really hope you can make it.

Okay. So now to conclude, before we open it up for questions, our FY '20 outlook. So 2017 to 2019, the strategic plan is complete, and it really enables us to now profitably scale the business in a multi-product environment across a diverse array of country and market settings. We have a stronger balance sheet with $25.8 million of cash and no debt that will allow us to continue to support our growth agenda. And growth will come from all 3 regions, and all 3 regions will benefit from an expanded product portfolio and customer base as well as improvements in retention following the enhancements to our product and customer experience. And growth will also come for 3P as we accelerate profitable growth in the Americas.

On a regional basis, our outlook for FY '20 for APAC is growth from an improved retention and increased product portfolio across our large installed base. In EMEA, we will see growth despite tough market conditions from improved retention and increased product portfolio across an installed base as well as growth outside of the core U.K. market. In the Americas, we have delivered green shoots, and we expect accelerated profitable sales growth to continue. And these growth drivers will all be underpinned by growth-focused and high-performance culture.

Okay. I'll conclude it there, and let's open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) There are no questions at this time. I'll hand back to Rebekah for closing remarks. Sorry, I apologize, we do have questions coming up now. Your first question comes from Dea Mitchell with AEI.

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Deana Mitchell, Australian Ethical Investment Ltd - Equities Analyst [2]

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Just wanted to get some more color around the green shoots in America in terms of regions and a little bit more information about kind of on the pilots, et cetera, that you're -- and the conversion rates that you're -- conversion you're getting of those -- from Mathletics perspective?

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Simon Yeandle, 3P Learning Limited - CFO [3]

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Deana, it's Simon here. I'll jump in. We, at the half year, gave a few numbers around the pipeline and pilots. We decided that, that information is probably not something we'll continue to share simply because, in terms of sales pipeline, it does change almost on a weekly basis. And the way we sell into districts result in our licenses and school numbers being recorded, and we are starting to share a lot more detail around schools and licenses. So the outcome of the district sales really reflects -- is reflected in those license numbers. So it's probably more meaningful if we look at the sort of base school and license growth rather than the actual district. We are continuing to see great conversion rates on those. And we have a big, big pipeline of professional development work that we need to deliver to teachers in order to secure some of those pilots, but they are certainly in line with expectations and should set us up well for next year.

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Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [4]

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And hey, we've actually got Deepak on the line. Deepak, are you there? Hey, Deepak, you might want to just add some color and texture to kind of how you closed FY '19 and outlook.

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Deepak Karandikar, 3P Learning Limited - Head of Sales & Marketing Americas [5]

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Yes, absolutely. So as we closed FY '19, I think there was just this really all-hands-on-deck mentality by the new sales team that we brought together of about almost 40 people and really just some amazing momentum as we closed out FY '19. And then as we're rolling into FY '20, it's just more of the same. We've had just really positive green shoots, and we're still with the same strategy of proof of concepts and just very positive leadership team in place in the Americas. And we're feeling quite good about what will happen in FY '20.

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Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [6]

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Thanks. And we can talk more when we see you later today.

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Operator [7]

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Your next question comes from Nic West from Sterling Equity.

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Nicolas West, Sterling Equity Pty Ltd. - Founder [8]

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Just checking if STEMscope features in the results or has that started yet?

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Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [9]

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No, it really hasn't, Nick, and I'll let Simon add some comments. We got it onboard in APAC in really the late June, we started demoing it. We did a teaser campaign in the run-up to that launch, really strong lead and interest from customers, so the product is really landing, but the results don't show up at all in FY '19. We're on track to launch it in the Northern Hemisphere, both U.K. and Canada, in the kind of late September time frame. And it was a bit of a quirky time that we landed STEMscopes in Australia because it was really out of season because not much is happening, but it certainly is being picked up well by schools in terms of interest. And we're expecting it to feature in kind of the next buying cycle, October to February, in Australia and New Zealand. Thanks, Nic, and looking forward to talking to you tomorrow.

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Operator [10]

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(Operator Instructions) Your next question comes from [Tim McArthur with Asset Management].

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Unidentified Analyst, [11]

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Just hoping to hear a bit more about the competitive landscape. Could you perhaps talk about your competitors in each region? And also, when you are trying to sell into the U.S., how does that normally play out? Do the districts go out and you sort of go head-to-head with your competitors and the districts are looking for a solution? Or do you sort of approach the schools and then further show your wares?

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Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [12]

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Yes. And I'll let Deepak answer your second question. So Deepak, I'll let you do that one in a moment. In terms of the competitive environment, it has not changed in APAC. Let's talk about our core markets, Australia and New Zealand. There's been really no change in the competitive landscape. We had aggressive competition from another math provider, Matific, but we've continued to really retain customers, win them back and so on. So I'd say APAC, static. In EMEA, and again, largely competitive landscape is unchanged, except there were some point solutions around the multiplication offering that we did feel competitive pressure from, and that's because they're implementing a mandatory multiplication test, and it was a point solution and it was a cheaper solution. So couple that with Brexit and all the pressure on budgets, that was -- that certainly buoyed that competitor. But we're a comprehensive math solution, so it didn't -- it was really more Brexit impacts in EMEA. And in the Americas, really no change to the competitive environment, usual suspects. But Deepak, why don't you talk a little bit about competitors? And then also just the go to market, if you like, for both the district and transactional business?

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Deepak Karandikar, 3P Learning Limited - Head of Sales & Marketing Americas [13]

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Absolutely. So I'll start with the latter, first. So really, our strategy is to focus more on the small to medium-size districts. We find that those districts have just less layers, less red tape, competitors tend to stick to those larger districts. So we're focused in the small to medium. We have a top-down prioritization and then a bottom-up approach. So the bottom-up approach is, obviously, starting at the teacher, then going to the school, then rounding up enough consensus and then really going in with a district-level proof of concept where we're getting some skin in the game from a training standpoint and then we lay out a very comprehensive solution throughout the school year where we agree to train both teachers, site-level leaders as well as administrators really on how to get those positive student outcomes and achieve student growth. So that's really the model that we use. As far as competitors, we definitely compete with the usual suspects. However, our top-down prioritization and bottom-up approach is one that we've seen success at the end of FY '19 and will continue to see success in FY '20.

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Operator [14]

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There are no further questions at this time. I'll now hand back to Rebekah for closing remarks.

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Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [15]

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Okay. I just wanted to say on a very personal note, a very sincere and heartfelt thank you to investors who have now been on this 3-year journey, and I say that very personally and just to really reinforce that I am feeling very committed, accountable and excited about the next 3 years and really committed to delivering growth and looking forward to seeing you all over the next couple of days. Thanks so much, everyone.