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Edited Transcript of 3PL.AX earnings conference call or presentation 21-Feb-21 10:30pm GMT

·21 min read

Half Year 2021 3P Learning Ltd Earnings Call Feb 22, 2021 (Thomson StreetEvents) -- Edited Transcript of 3P Learning Ltd earnings conference call or presentation Sunday, February 21, 2021 at 10:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dimitri Aroney 3P Learning Limited - CFO * Rebekah O’Flaherty 3P Learning Limited - CEO, MD & Executive Director * Samuel Scott Weiss 3P Learning Limited - Independent Non-Executive Chairperson ================================================================================ Conference Call Participants ================================================================================ * James Bales Morgan Stanley, Research Division - Equity Analyst * Mark Hancock Precept Investment Actuaries Pty Limited - Director and Actuary ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the 3P Learning HY '21 results presentation. (Operator Instructions) The presentation will now begin. -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [2] -------------------------------------------------------------------------------- Good morning, everyone, and welcome to our H1 FY '21 results presentation. Here's our agenda. And as usual, I'll provide an overview of our results and strategy progress. Dimitri will take you through our financial performance in more detail, and then I'll conclude with an outlook for the full year. So first, an overview of our results. Our annual recurring revenue adjusted for royalties is up 3%; licenses, up 5%; and statutory revenue up 3% when compared to H1 FY '20. Underlying EBITDA is up 26%. And we have $15 million in cash, up 20% half-over-half. And encouragingly, our net dollar churn improved by 4% compared to H1 FY '20. Now an update on our progress against our accelerate growth strategy. You will recall that we announced our 20:22 accelerate growth plan at the beginning of FY '20. And FY '21 marks the second year of this plan, which is premised on 3 key areas for sales growth. I'll now take you through our progress against each of these areas. First, we have accelerated sales growth through a stronger and expanded product portfolio, which has given us the ability to address new customer segments as well as defend our core markets. We've made good progress against this growth lever, as evidenced by: Like-for-like new business Mathletics ARR has grown 32%. Readiwriter ARR has grown 64%, and licenses grew 51% in the second quarter of FY '21. We saw a fourfold increase in trials now that we've implemented an improved auto trial experience. And our lead growth is up 12%, but more importantly, our sales conversion is up 2%. Finally, our enterprise sales opportunity pipeline has continued to grow and we have a sizable pipeline at contract stage. The second growth lever for 3P is accelerated profitable growth in the Americas. Despite uncertain trade conditions, we did see new business ARR growth of 44% and ARR growth overall of 8% in local currency and improved net dollar churn of 15%. Encouragingly, we saw EBITDA grow over 267% when compared to H1 FY '20. Our third growth lever is to improve retention rates through improvements to the product and customer experience. With that in mind, we saw a 4% increase across our product portfolio. And new customer retention improved 7%, indicating our work around improved onboarding for customers in year 1 is paying dividends. Overall, we improved net dollar churn by 4%. And on the usage front, we saw a 25% increase in teacher log-ins and a 13% increase in student log-ins. We continued to improve the B2C acquisition and retention journeys, and we saw a 21% improvement to our B2C ARR. And we see strong potential here as we build out our product portfolio. Encouragingly, customer support case volumes have reduced by 70%, again showing that we have improved the customer experience. So overall, we're pleased with the progress against our plan. Let me hand you now over to Dimitri, who'll provide you more information around our financial performance. -------------------------------------------------------------------------------- Dimitri Aroney, 3P Learning Limited - CFO [3] -------------------------------------------------------------------------------- Thanks, Rebekah. Let's now take a look at our first half results for 2021. Overall performance of the company has been resilient during the COVID-19 pandemic and in the background of corporate activity. License revenue was up 4% on a consolidated basis. Annual recurring revenue adjusted for royalties grew 3%. Expenses were impacted by $0.6 million due to the unrealized FX losses offset by savings on travel and entertainment and tenancy costs. Underlying EBITDA was up $0.9 million or 26%. And NPAT improved by $0.4 million despite corporate advisory costs, after tax, of $0.7 million being recognized in relation to the recent corporate activity. Now looking at the performance in the APAC region. Annual recurring revenue adjusted for royalties was up 5% due to retention improvements from improved product and customer experience. License revenue included an additional $0.6 million of revenue generated from early bird renewals when compared to the prior year. After removing this timing benefit, revenue was up $0.2 million due to the retention improvements. EBITDA margin has improved 2 percentage points to 73%. ARPU has increased due to the additional $0.6 million of revenue generated from early bird renewals. Full time equivalents increased mainly due to the prior comparison period having 4 vacant head count as well as an additional head count brought on in the current year to support increased sales volume and sales administration. Now turning to the focus and outlook for the APAC region for the remainder of financial year 2021. We expect to see retention improvements from improved product and customer experience. Improvements to retention, upsell and new business will be supported by releases of our new assessments platform; additional understanding, practice and fluency content for extra year groups in Australia; and the release of Meritopia, a new student engagement platform across Mathletics and Readiwriter supporting mastery. In addition to these product improvements, we expect an emerging pipeline of new enterprise sales opportunities outside the ANZ. We also expect a decline in copyright income. Now on to the EMEA region performance. Annual recurring revenue adjusted for royalties was up 3%, or 7% after adjusting for the impact of foreign exchange. This is due to the improved retention rates during the key back-to-school period and a 100% improvement in new business annual recurring revenue versus the prior comparative period. Despite the royalty adjusted annual recurring revenue growth, license revenue only grew 2%, as it was impacted by a lower opening annual recurring revenue balance than the prior comparative period and also due to our accounting policy which requires revenue on first-party products to be straight-lined over the service period. Contributing to H1 '21's performance was Readiwriter, which performed well during the period. Expenses were impacted by unfavorable foreign exchange of $0.4 million and improved new business sales generating increased commission expense. Now turning to the focus and outlook for EMEA. To date, COVID-19 has had a sustained positive impact on the EMEA region's performance. However, the recent lockdowns in the U.K. and other European and Middle Eastern countries introduces inherent uncertainty. FY '20 and H1 '21 new product releases such as Fast Phonics and Readiwriter Spelling; as well as product improvements such as problem solving and reasoning and understanding, practice and fluency; and Meritopia; and our new assessments platform will continue to provide annual recurring revenue growth. We also expect to continue to build and close our enterprise sales pipeline focused on ministry of educations, multi-academy trusts and corporate social responsibility programs. Now looking at the performance in the Americas region. License revenue was up 3% in U.S. dollars or flat in Aussie dollars despite challenging conditions in the U.S.A. due to funding uncertainty caused by COVID-19. Royalty-adjusted annual recurring revenue declined 1%. However, after adjusting for the impacts of foreign exchange, it showed 9% growth. New business annual recurring revenue was up 44% on the prior comparative period despite lower head count and lower customer acquisition costs. This reflects the successful execution of the go-to-market optimizations we made at the end of FY '20. Net dollar churn percentage improved 15 percentage points on the prior year. EBITDA grew AUD 0.8 million to AUD 1.1 million, reflecting an increase in -- to EBITDA margin of 16%. ARPU has declined due to the product mix. Now turning to the H2 focus and outlook for the Americas region. We expect continued sales growth momentum from our North American direct sales teams who are ready to capitalize as any additional U.S.A. federal funding is made available. We also expect an expansion of our indirect partners into Lat Am to distribute our Spanish version of Mathletics. Moving on to the consolidated income statement for the first half of FY '21. Employee expenses have increased by $0.2 million as a result of improved new business sales generating increased commission expense. Head count increased from 269 at December 2019 to 272 full-time equivalents at December 2020. Technology and occupancy costs have decreased by $0.4 million due to a decrease in short-term office rental costs and decreased operating expenses related to the office premises as a result of COVID-19. Other expenses include a $0.6 million increase in foreign currency loss offset by a $0.4 million decrease in travel costs as a result of COVID-19. Increased amortization of $0.3 million due to the increased investment into product development. The effective tax rate in the prior year was impacted by 2019 tax adjustments. The current year effective tax rate includes tax benefit from R&D of 8.5% and tax benefit from adjustments on the prior year tax return of approximately 10%. There are $0.7 million of corporate advisory costs after tax which have been excluded from the underlying EBITDA, underlying EBIT and underlying NPAT. Moving on to H1 '21 cash flows. During the period, we saw a $2.2 million improvement to operating free cash flows before intangibles. This was generated from improved performance with annual recurring revenue adjusted for royalties increasing 3% from the prior comparative period. FX and other noncash items improved as unfavorable FX movements of $0.6 million were recorded in the P&L. The change in working capital is mainly due to COVID-19 VAT deferral in the U.K., higher employee benefits and accrued corporate advisory costs. As indicated in the FY '20 investor and analyst briefing on the 14th of August 2020, we have increased investment into product development during FY '21 to accelerate the development of features which open up new markets or expand opportunities within existing markets. Now looking at the balance sheet. Trade receivables and contract liabilities have increased from 31 December 2019 due to improved new business and renewals and as more customers in APAC elected to be invoiced for next school year's renewals during Q2 '21. Lease receivable, right-of-use assets and lease liabilities have decreased due to the passage of time. Additionally, during the period, we subleased our office premises in Bristol, U.K., resulting in a derecognition of the right-to-use asset of $0.3 million, offset by a recognition of the lease receivable of $0.3 million. Property, plant and equipment have decreased $0.4 million due to the sublease of the Bristol office premises. We have seen an increase in intangibles due to continued investment in product development. Trade and other payables have increased from 31 December 2019, as the U.K. government has deferred payment terms on VAT due to COVID-19. No dividend has been declared, with cash being retained to support working capital and growth opportunities. Let's now take a look at investments in products and technology assets. During the period, we enhanced Mathletics with the release of a new assessments platform; new understanding, practice and fluency content for additional grades in our key markets; Meritopia, and -- our new student engagement platform across Mathletics and Readiwriter supporting mastery. Literacy capitalization has accelerated, as we've started to build our Readiwriter writing in addition to enhancing Readiwriter Spelling, with features to measure and demonstrate student growth; and [Readiracer], our new selling game based on personalized revision and which improves student engagement. From H2 '20, 3P Learning has been engaged in exploring strategic alternatives to realize greater value for our shareholders. As part of this process, we've been engaging corporate advisers, legal consultants; as well as incurring other fees and services related to this activity. This has included costs incurred in relation to IXL's offer and the proposal to merge with Blake. Additional costs month to month are expected to be incurred during H2 '21 as the process with Blake eLearning continues. A success fee would become payable in the event the group has acquired or in the event the group acquires 100% of Blake eLearning for the terms set out in the announcement released to the market on the 21st of January 2021. Now I'll hand it back to Rebekah. -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [4] -------------------------------------------------------------------------------- Thanks, Dimitri. Let me now close with our full year outlook before we open it up for questions. We expect low single-digit revenue and EBITDA growth for the full year in APAC. In EMEA, we expect low single-digit revenue and EBITDA growth. However, this could change if we deliver on our MOE agreement as well as other enterprise opportunities in the funnel. In the Americas, we expect double-digit revenue growth, driving significant EBITDA growth from our core business. Revenue and EBITDA could further be significantly enhanced with closure of one of the many enterprise opportunities in the pipeline. Despite the improvements we have made across the group in local currency, we expect foreign currency movements since prior year to impact revenue and EBITDA performance. Our cost base is now set. Our mix of cost is optimized. And we expect to deliver revenue growth with increased operating leverage, allowing our existing head count to drive significant revenue growth at high margins similar to other SaaS businesses. On that note, we'll now open it up for questions. Thanks. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from James Bales from Morgan Stanley. -------------------------------------------------------------------------------- James Bales, Morgan Stanley, Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- Firstly, I wanted to understand the progress on the MOE contract. Can you tell us your latest thinking on the contract timing? And what are the key factors that will influence that going live? -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [3] -------------------------------------------------------------------------------- Yes. And I'll get -- Dimitri will respond to that, but just to let all the folks on the line know: that we've got Chairman Sam here as well, Sam Weiss, if there's any questions around corporate activity and specifically the Blake eLearning [DD]. Dimitri? -------------------------------------------------------------------------------- Dimitri Aroney, 3P Learning Limited - CFO [4] -------------------------------------------------------------------------------- Thanks, James. And thanks, Rebekah. So maybe it's worth me just giving a brief update, for all the listeners on the call, that -- so late in FY '20, we signed an agreement with the ministry of education from a Middle Eastern country for USD 10 million. The agreement was to run a pilot which included delivering Mathletics and a portion of professional development, and at the time, we expected the services [and excess] cash to occur during FY '21. Due to the impact of COVID-19 and periodic government-mandated school lockdowns in this country throughout the first half of the financial period, we've seen the contract -- sorry. The contractual obligations under the agreement have been deferred, and so we've agreed with the ministry to extend the term of the agreement to reflect this. And accordingly, no payments have been received to date. The services to the ministry are now expected to be delivered and a -- and collection of agreement proceeds to occur during FY '21 and FY '22. And ultimately, I guess, the company recognizes that this continued uncertainty driven by COVID-19 could impact the timing of delivery of services under this agreement. -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [5] -------------------------------------------------------------------------------- So -- and James -- so schools were meant to go back end of Jan, and it got pushed to end of Feb. We'll see if they do go back, but yes, it's really COVID and certainly continued commitment from the ministry. We both mutually agreed to that amendment to the delivery of the services, so we feel really confident about it, high levels of engagement, but unfortunately, COVID is deferring back-to-school and in turn the implementation. -------------------------------------------------------------------------------- James Bales, Morgan Stanley, Research Division - Equity Analyst [6] -------------------------------------------------------------------------------- And I remember that you were talking about if -- in a pre-COVID world, you'd have made the decision on whether you're well positioned to extend that contract and would have -- if that was the case, would have started development on an Arabic version of the product. Can you give us an update on your thinking there? And where are you on that Arabic version? -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [7] -------------------------------------------------------------------------------- Yes. There's no impact to the pilot potentially turning into a whole of country, James, because we've kind of reset the time line. So it will be now still a 12-month pilot when we commence, and it's still allows to prove that this is a great solution for the broader country. So you should just think about it in terms of the time line has changed, but the potential of that opportunity hasn't. -------------------------------------------------------------------------------- James Bales, Morgan Stanley, Research Division - Equity Analyst [8] -------------------------------------------------------------------------------- And then I guess the other sort of feature of this result is that sort COVID's worked both ways for you here. Why hasn't COVID been an accelerator with much more remote learning and a sort of forced migration to digital solutions? -------------------------------------------------------------------------------- Dimitri Aroney, 3P Learning Limited - CFO [9] -------------------------------------------------------------------------------- Well, James, Dimitri here. I might just have a quick response to that, and Rebekah might add some words. I would kind of argue that it has been an accelerator. I think some of the things, key features of our business is the new business has kind of increased dramatically, very high double digits, in the business. So I think that's a clear result. The other thing I'd mention is we have quite sticky customers. And so as an industry segment, retention rates would be relatively high, and now they're obviously very high in that industry. And so I think that's kind of a factor that might keep the perception that -- a slower growth than what you might otherwise have expected. -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [10] -------------------------------------------------------------------------------- The other thing I would say, James, is I think B2C businesses have got a sugar hit from COVID because it's discretionary spend from parents. In B2B, where you've got districts and schools, they unfortunately haven't enjoyed big funding hits, so our business has not enjoyed that sugar hit in our B2B. Our B2C has actually grown nicely. And I think our one wish is that we had a bigger B2C portfolio to enjoy that opportunity. And if you talk to folks, particularly in the U.S., they are seeing COVID as kind of a seminal moment for ed tech in terms of really solidifying digital education in the classroom. So I don't think you'll get the sugar hit, but I think, if you talk to industry pundits, it's really the tailwinds that the industry has enjoyed will have an accelerant as a result of COVID, but it won't necessarily show up in a sugar hit [which is] what a lot of B2C-oriented businesses have enjoyed. -------------------------------------------------------------------------------- James Bales, Morgan Stanley, Research Division - Equity Analyst [11] -------------------------------------------------------------------------------- Are you saying that acceleration in activity come through in pipelines that haven't hit the numbers yet? -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [12] -------------------------------------------------------------------------------- When you say haven't hit the numbers yet, what do you mean? -------------------------------------------------------------------------------- James Bales, Morgan Stanley, Research Division - Equity Analyst [13] -------------------------------------------------------------------------------- So if revenue hasn't accelerated as a result of this or even ARR hasn't accelerated, has -- are you seeing it in expanded opportunities that are available to you in the second half so that ARR grows at a faster rate? -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [14] -------------------------------------------------------------------------------- I think we're seeing the new business growth that Dimitri described. And then if you look at our enterprise funnel, some of those opportunities are really around a very purposeful shift from more analog to much more digital. So I think that, that digital shift is present in the enterprise, where you've got large districts or ministries saying, "Hey, we really want to pivot now to digital and do this in a really systemic way," but I think our new business growth has also evidenced the COVID improvements to B2B. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- (Operator Instructions) The next question comes from Mark Hancock from Precept Investment. -------------------------------------------------------------------------------- Mark Hancock, Precept Investment Actuaries Pty Limited - Director and Actuary [16] -------------------------------------------------------------------------------- I'd just like to understand a bit better the difference in the model, the business model, between Blake and yourselves, you could just so of give me a quick 1-minute overview of how the 2 businesses differ and where they overlap. -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [17] -------------------------------------------------------------------------------- Well, let me have a crack. And then maybe -- because there might be something more specific that you want answered, but 3P has enjoyed a very, very long relationship with Blake and being the distributor of Reading Eggs and Mathseeds. So Blake create that product; and we leverage our go to market to sell that product in B2B, not in B2C. So we don't have the rights to distribute. Our distribution rights are largely global, except for some geographies like China and particularly the North American region. We don't have those. Another distributor has those. I'm just trying to think what else: So yes, I would... -------------------------------------------------------------------------------- Unidentified Company Representative, [18] -------------------------------------------------------------------------------- (inaudible) B2C. -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [19] -------------------------------------------------------------------------------- Yes. I would kind of characterize Blake as being the producers of Reading Eggs and Mathseeds and having a B2C business, and we're the distributor of Reading Eggs and Mathseeds products in B2B. Did that answer the questions? -------------------------------------------------------------------------------- Mark Hancock, Precept Investment Actuaries Pty Limited - Director and Actuary [20] -------------------------------------------------------------------------------- Yes, yes. That's helpful. And what -- could you sort of put a figure on roughly what percentage of your ARR would be in Blake products? -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [21] -------------------------------------------------------------------------------- Well, I'm going to defer to Dimitri. I don't even know, Dimitri, if... -------------------------------------------------------------------------------- Dimitri Aroney, 3P Learning Limited - CFO [22] -------------------------------------------------------------------------------- I think the way I look at it is -- probably with the information available, is realistically the literacy portfolio of our business probably is substantially from Blake products, whereas the mathematics is substantially from our products. And that's probably the best kind of indicator of that split. -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [23] -------------------------------------------------------------------------------- And importantly, we have been growing the sales of Blake's products through our distribution channels... -------------------------------------------------------------------------------- Mark Hancock, Precept Investment Actuaries Pty Limited - Director and Actuary [24] -------------------------------------------------------------------------------- And roughly how significant are you to Blake? Are you their biggest single distributor? -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [25] -------------------------------------------------------------------------------- I don't want to disclose that because they're a private company. And I don't really know -- I don't want to comment on us versus North America, but I would suffice to say that, well, we're really important to each other. I think that's the right [end]], yes. -------------------------------------------------------------------------------- Dimitri Aroney, 3P Learning Limited - CFO [26] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Mark Hancock, Precept Investment Actuaries Pty Limited - Director and Actuary [27] -------------------------------------------------------------------------------- And would the Chairman be able to just comment on the status of due diligence and where the -- what's the Board current attitude to the proposed merger? -------------------------------------------------------------------------------- Samuel Scott Weiss, 3P Learning Limited - Independent Non-Executive Chairperson [28] -------------------------------------------------------------------------------- Yes, I'll comment as much as I can, Mark. The Board is very supportive of the engagement between the 2 companies, which has been at quite an active level with management meetings both for 3P Learning due diligence on Blake, which is the more substantial activity, but also Blake due diligence on 3P Learning. We have employed KPMG to conduct a financial due diligence on Blake. And we had an update on Friday, and they are a day or 2 ahead of what was a very aggressive 3-week work plan. Gadens is conducting legal due diligence in consultation with Holding Redlich, who are the lawyers for Blake. And we're, I would say, hopeful within 2 or 3 weeks of having largely completed the due diligence, at which point we can then review our assumptions that were made early this calendar year that this was a positive transaction for both companies. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- (Operator Instructions) At this time, we're showing no further questions. I'll hand back to the presenters. -------------------------------------------------------------------------------- Rebekah O’Flaherty, 3P Learning Limited - CEO, MD & Executive Director [30] -------------------------------------------------------------------------------- Okay, well, on that note, we might call it a wrap. Thanks, everyone, for joining us this morning. And I think we're going to see many of you in the next couple of days ahead. Thank you. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.