U.S. Markets closed

Edited Transcript of ELO.AX earnings conference call or presentation 11-Feb-20 11:30pm GMT

Half Year 2020 ELMO Software Ltd Earnings Call

Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of ELMO Software Ltd earnings conference call or presentation Tuesday, February 11, 2020 at 11:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Danny Isaac Lessem

Elmo Software Limited - Co-Founder, CEO & Executive Director

* James Haslam

Elmo Software Limited - CFO & Joint Company Secretary

================================================================================

Conference Call Participants

================================================================================

* Brendon Kelly

Moelis Australia Securities Pty Ltd, Research Division - Analyst

* Garry Sherriff

RBC Capital Markets, Research Division - Executive Director of Equity Research & Head of Australian Technology and Small-Mid Caps

* Mark Bryan

Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research

* Owen Humphries

Canaccord Genuity Corp., Research Division - Senior Industrials Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [1]

--------------------------------------------------------------------------------

Good morning, and welcome to our half year results presentation. I will be referring to the pack released to the ASX this morning.

The key messages for today are: one, we have delivered a strong set of results and a firm full year guidance; two, we are still early in our growth journey and continue to execute on our organic growth strategy complemented with strategic acquisition; and three, we continue to invest in people and product to sustain our high-growth rate into FY '21 and beyond.

Let me get straight into it. On Page 2, here is the performance dashboard, which shows the health of the business. The most important number on this page is annualized recurring revenue, which is 42.8%, up on pcp to $52 million, of this 34.5% related to organic growth through both new customer wins and the cross-sell to existing customers. ARR is a key lead indicator for future revenue.

Revenue increased 33.9% on pcp to $23.6 million. The average ARR per customer increased by circa $2,800 from December '18 to $35,200 in December '19.

Moving over to the operational column. Our GP margin was slightly down 0.5% on pcp. Reduction reflects increased investment in client services, our product implementation and support team early in the first half. Client services forms the bulk of Elmo's cost of sale. We expect this margin to increase in the second half of FY '20, mirroring the first half/second half trends in FY '19.

Net dollar retention reflecting incremental ARR to existing customers' net of churn was 110.7%. Customer retention has come in at 92.9%, 0.7% down on pcp. The addition of new customers has driven an increase in the lifetime value of customer base to $645 million, reflecting growth of $137 million on pcp.

Moving across to the customer column. We continue to attract new customers, securing 298 new customers, which drove a 30.9% increase on pcp, reaching 1,478 customers by 31 December '19. Total modules per customer increased to 2.6 in the first half, up from 2.2 on pcp. The growth was driven by both new customers taking an average of 3.9 modules each and existing customers increasing their module count. Elmo has a well-diversified customer base across all sectors, with the largest customer accounting for less than 1% of ARR and the top 10 less than 6%.

Moving to Page #3. Elmo's convergent solution provides customers with an all-in-one platform to manage people, process and pay. Our ONE vendor, ONE dashboard and ONE user-experience solution has been well embraced by the market.

Moving on to Page #4. I'll outline some of our key achievements in the half. With an additional 135 product enhancements, our solution is evolving according to customer needs. We are also well placed in terms of capitalization as a result of our capital raise of $70 million in September of last year. We have invested an additional R&D capability with the investment in Hero Brands, and we've been very successful in attracting high-quality, high-caliber employees with our employee number up to 368. We've also picked up some handy awards in the half.

Let's turn to Page #5. By increasing the scope of our solution, we have become the widest convergent solution in the region. And this is resonating with the market.

Let's turn to Page #6. As I said in the introduction, we are very early into this growth opportunity. Of the roughly 24,000 organizations in our addressable market, we've only touched 6.2%, and we've only penetrated an average of 2.6 out of 13 modules. This means we've got heaps of headroom to take on new customers and also facilitate cross-sell to existing customers.

Let's turn to Page #7. Elmo has a broad and diversified customer base. There is no undue concentration in any one industry or any one group of customers.

I'll now turn over to James Haslam to go through the financial slides.

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [2]

--------------------------------------------------------------------------------

Thanks, Dan. I will now take you through our financial performance in a bit more detail.

Firstly, on Page #9, our annual recurring revenue. Annual recurring revenue, as outlined earlier, is our key anchor metric and provides the lead indicator to forecast revenue. ARR grew strongly through the period to 42.8% compared to 31st December 2018, up to $52 million. At this level, we are well positioned to deliver on our organic ARR guidance of between $61 million and $63 million.

Turning over to look at the ARR growth in a little bit more detail. Of the 42.8% growth, 34.5% was generated organically through both new customer wins and the cross-sell and increased usage by our existing customer base.

Turning over to look at our summary financial results in further detail. On a statutory basis, our revenue grew 33.9% to $23.6 million compared to the first half of FY '19. Through this period, we have maintained a high gross profit margin of 84.6%. The growth rate of our revenue was at a slightly higher rate when compared to the growth rate of our cost base. The result for the first half leaves us well placed to deliver both our organic revenue and pro forma EBITDA guidance for the full year FY '20.

Turning over to look at our statutory revenue growth broken out. The majority of our revenue growth comparing the first half FY '20 to first half FY '19 was generated organically, complemented with the FY '19 acquisition.

Turning to Page 13, we can look at the lifetime value of our customer base. The lifetime value of our customers has continued to increase now to an estimated $645 million as at 31 December 2019. This growth has primarily been driven by the expansion of the customer base. Through this period, we have maintained a high lifetime value to cost of acquisition ratio of 9.3x.

Turning over now to look at our cash flow for the period. At 31st December 2019, we have $78 million and remain well capitalized for funding continued investment in the organic business and are able to take advantage of M&A opportunities as they arise. Pleasingly, the cash receipts for the half of $27.4 million are a record for Elmo for any half.

Turning to Page 15, we can look at how we're investing to continue to support the ongoing growth. We've continued to invest in head count through the last 12 months, with the most significant focus being on sales and marketing and research and development. With research and development, in particular, the investment in the product suite and development of new modules has been a key area of focus, and the cash spend in this last 6 months represents 44.9% of revenue.

I will now hand back to Danny to talk through strategy and outlook.

--------------------------------------------------------------------------------

Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, James.

Let's turn to Page 17. We continue to execute on our organic growth strategy, supplemented with complementary acquisitions. One, we continue to take on new customers in existing markets. Our average module investment per new customer has risen to 3.9 in the first half. Two, we are experiencing greater uptake from our existing customers. 42% of gross incremental ARR in the first half came from existing customers. Three, we continue to expand and enhance our product line with the increased focus on R&D investments. And four, we continue to grow through selective acquisitions.

Speaking of which, let's turn to Page 18. I am pleased to announce the acquisition of Vocam, which is the leader in HR and safety video e-learning content with offices in Australia and the United Kingdom. With over 150 customers, Vocam offers Elmo the opportunity to cross-sell its extensive suite of modules to Vocam customers, who are situated in Australia, New Zealand and the United Kingdom. Vocam also offers Elmo an additional revenue stream. We are now able to cross-sell its cutting-edge e-learning video library to Elmo's extensive client base across the region.

Finally, let's turn to Page #19. I'd like to reaffirm our organic guidance and upgrade our FY '20 outlook to include the Vocam acquisition.

In conclusion, I'd like to reiterate our 3 key messages. One, we have delivered a strong set of results. Two, we are still early in our growth journey and continue to execute on our organic growth strategy, complemented with selective acquisitions. And three, we continue to invest in people and product to sustain our high-growth rate into FY '21 and beyond.

Thanks so much for your time today. I'll now hand back to the operator.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Owen Humphries from Canaccord Genuity.

--------------------------------------------------------------------------------

Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [2]

--------------------------------------------------------------------------------

And well done on the results today. It's all coming through. So just touch on just the level of investment that's undertaken in the last 6 months. You've added, call it, 100-odd FTEs across the R&D and sales and marketing organically. Is it your expectation now that, that investment has been sunk? And do you expect that to taper off into calendar year '20?

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [3]

--------------------------------------------------------------------------------

So that's correct. So, yes, we've invested heavily in especially R&D and sales and marketing in the first half of the year. We -- that's in line with our plans. We will continue to invest in the second half as well, not the same level as the first half. But look, going forward, we'll continue to invest to take advantage of the opportunity. We need to remember, we're still early in the growth phase. There's a lot of headroom in the market for additional new customers. There's a lot of room to cross-sell to our existing customer base. And so we'll continue to invest to take advantage of that.

--------------------------------------------------------------------------------

Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [4]

--------------------------------------------------------------------------------

Right. So from 100 in the first half, I mean, from a modeling perspective, we're talking about more of a 20 to 30 or so head count increase in the second half. Is that correct?

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [5]

--------------------------------------------------------------------------------

It will be a reduced level compared to the first half, yes.

--------------------------------------------------------------------------------

Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [6]

--------------------------------------------------------------------------------

Okay, good one. And I noticed the acquisitions. Can you just maybe touch on how many customers in the U.K. Vocam has?

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [7]

--------------------------------------------------------------------------------

So we haven't segmented the customer base between Australia and the U.K. There is obviously in the U.K. and the -- and obviously, an active customer base there as well. So that is something that we'll be looking at very carefully over these next 12 months.

--------------------------------------------------------------------------------

Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [8]

--------------------------------------------------------------------------------

Okay. You have been kind of answering it there. So there's expectation that you will be increasing the resource in that region. This is the first foray into a foreign market, is that right?

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [9]

--------------------------------------------------------------------------------

Okay. As we've talked to before around our M&A strategy and geographic expansion, it was always the case that we're focused on ANZ. But if an opportunity came up that made sense for us to enter another region, then we would look at this. And I would say this acquisition does have operations in the U.K. It is an area that we will investigate and look whether it makes sense to invest in there.

--------------------------------------------------------------------------------

Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [10]

--------------------------------------------------------------------------------

And I know you highlighted about $25 million in the past for acquisitions at the time of the capital raising. It looks like you spent about, call it, $5 million, $6 million of that at Hero Brands in this acquisition, but -- so it sounds like we've got an active pipeline. Is the $20 million earmark for acquisitions still an expectation? And are we thinking cross-border?

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [11]

--------------------------------------------------------------------------------

Yes, absolutely. There's -- yes, you're right. So the amount of sort of acquisition level we've had is spent on our acquisition-deferred consideration. Yes, we're not capped by the $25 million. That is what was ring-fenced as a part of our raise. We also have the $15 million from the SPP that we raised as well. But look, I think that we have a very active M&A pipeline and we'll continue to look at acquisitions and, yes, in other regions if it makes sense, if the opportunity arises.

--------------------------------------------------------------------------------

Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [12]

--------------------------------------------------------------------------------

Okay. And just maybe just on that churn figure that just popped up, obviously, spending 45% of sales and R&D is high, and -- but the churn crept up a little bit. Can you just maybe touch on, is that within expectations? Or what's the expectations for next -- obviously, there's a big second half skew, but what's the expectations around the churn going forward?

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [13]

--------------------------------------------------------------------------------

The churn rate of between 6.5% and 7% is in line with our expectations. That's been our trend that we've had for the last couple of years. Now I see that as being a benchmark going forward as well. But look, I think in talking about churn, I think what you need to also focus on is our net dollar retention, which is our cross-sell and increased usage from our existing customer base, which is coming at 110.7% net of churn. So 117.6% gross of churn.

--------------------------------------------------------------------------------

Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [14]

--------------------------------------------------------------------------------

Okay. Good one. And just how many modules do you guys have now? I thought it was 13, but I can count 14 in the slide deck there. And just given that level of investment, where do you expect it to end in calendar year '20? You were talking of a few more modules in the market in the next 6 to 12 months.

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [15]

--------------------------------------------------------------------------------

So yes. It's 13. 13 is the actual number of modules. And then also Vocam will be an additional revenue stream as well, additional module going forward. But yes -- and we're continuing to invest in our R&D as well in development of new modules. And you would have seen last year that we announced the initiative with UTS Sydney as well, which is around development of a new module around predictive analytics and AI.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question is from Brendon Kelly from Moelis Australia.

--------------------------------------------------------------------------------

Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [17]

--------------------------------------------------------------------------------

James, Danny, thanks for the update. Good to see the cross-selling dynamic play out. Firstly, just from a -- just on the employee head count, it looks like the head count's increased by about 60-odd percent during -- from the pcp, but the OpEx has only increased by about 30-odd percent during -- over the same period. Just wondering if you can help us understand that dynamic a little bit better.

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [18]

--------------------------------------------------------------------------------

Look, the majority of the increase in spend, yes, is related to head count in employees. I mean, in terms of the general infrastructure around the business, that -- a lot of that investment have been previously undertaken.

--------------------------------------------------------------------------------

Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [19]

--------------------------------------------------------------------------------

Okay. Sure. And just in terms of those head counts, are they coming in at a lower -- at a more junior sale -- salary level than the existing employees? Or is that just more of a timing impact?

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [20]

--------------------------------------------------------------------------------

A combination of timing. And it's across all levels. So that volume of employees that we bring on, it goes all the way from junior to senior roles as well.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Your next question is from Mark Bryan from Wilsons.

--------------------------------------------------------------------------------

Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [22]

--------------------------------------------------------------------------------

Wanted to dig in, if we can, to the distribution of the business sales team and the productivity there. Firstly, you made a pivot or a tilt in the business to think more about building share in the lower mid-market. So I'm keen to understand how those 2 segments of the customer base are faring. You added, I think, around about 137 or so clients through the first half. Keen to understand where they're coming from, the success rates in the lower mid-market. And secondly, within that, the same theme, your sales number -- your head count number is sort of in the -- sort of around about 130 by the looks of it. Obviously, you added 130 through the period in terms of clients. I appreciate a lot of those people would have been on-boarded through the half. But what do you perceive as a realistic sort of quota for each salesperson so we can get a grip on what customer numbers might look like over the next few years for the business?

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [23]

--------------------------------------------------------------------------------

Well, there's a few layers there. So let me try and unpack that. And Dan, just jump in for the extra pieces. So look, generally, in our budgeting, each salesperson has a quota that's designed for them. And obviously, that quota will go at any point in time. In terms of what's the steady state, look, given we're so early in the growth phase, that we will continue to invest in sales and marketing to take advantage of the market opportunity. Remember, we've got a 6.2% penetration of the available customer base in the ANZ region, and then -- and also just a 2.6 module penetration against 13 modules. So we'll continue to invest across that function of business development managers.

I think the key thing to always go back to in this case is our LTV and LTV to CAC ratio. So LTV is driven up with the addition of those new customers to now about $645 million. Our LTV/CAC ratio is coming at 9.3x, and that still maintained a very high ratio that's justifying our investment thesis to continue to put on head count to grow.

--------------------------------------------------------------------------------

Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [24]

--------------------------------------------------------------------------------

Okay. And just the split between lower -- the traction, if you like, that you're getting in that lower mid-market space.

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [25]

--------------------------------------------------------------------------------

So the -- yes. So the traction in the lower mid-market space is very encouraging. It's not going to be a material aspect of our results for the full year, but we are seeing good growth coming through that -- far into that segment of the market and expect that to evolve to be more significant through FY '21 and beyond.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question is from Garry Sherriff from the Royal Bank of Canada.

--------------------------------------------------------------------------------

Garry Sherriff, RBC Capital Markets, Research Division - Executive Director of Equity Research & Head of Australian Technology and Small-Mid Caps [27]

--------------------------------------------------------------------------------

Just a quick question again. Just on that competitive landscape, over the last 6 months or so, you appeared to be seeing an increase in the larger international players coming into the Aussie market, and I noticed there was also some press a week or 2 ago about the Ascender IPO again, that, that business appears to be, if the numbers are right, quoted in the press about 2x the sales of you guys and is also profitable. I'd just be interested to hear what you're seeing over the last 6 months or so. Are you seeing increased competition at the larger end of the mid-market? And also I guess also are you seeing increased competition at that lower end of the market as well?

--------------------------------------------------------------------------------

Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [28]

--------------------------------------------------------------------------------

Yes, Garry. Just in terms of the competitive landscape, there are a couple more players up in the enterprise space. So that's not really our focus. And so we do have enterprise-size clients, is -- the real growth is still in the mid-market and lower mid-market. So the entrance of larger players at that end of the market does not really have a material effect on our revenue potential.

Looking at the smaller sort of VC-backed players coming in, they are narrower solutions where we have the competitive advantages, the scale, the size and the breadth of our solution, as well as the investment we're making into the product basically as a result of feedback from our client base. So we are very well poised just in terms of winning deals, and we do have peak brand equity amongst HR stakeholders and certainly in the mid-market and lower mid-market. So we are very well placed to win a good portion of the new business that is available.

--------------------------------------------------------------------------------

Garry Sherriff, RBC Capital Markets, Research Division - Executive Director of Equity Research & Head of Australian Technology and Small-Mid Caps [29]

--------------------------------------------------------------------------------

And so you haven't, I guess, seen any material increase in competition?

--------------------------------------------------------------------------------

Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [30]

--------------------------------------------------------------------------------

Just the converse. As our solution's growth and breadth just moving beyond HR into payroll and rostering and time and attendance, we're actually having a greater view of the market. Obviously, we're competing with different point solution vendors as we adopt new products. But the appetite for a broad convergent solution is working well. And we are competing really well across the broad scope of products.

--------------------------------------------------------------------------------

Garry Sherriff, RBC Capital Markets, Research Division - Executive Director of Equity Research & Head of Australian Technology and Small-Mid Caps [31]

--------------------------------------------------------------------------------

Just the last question on gross margins. Yes, you flagged that it did fall. Remind us what we should be thinking into the second half and into FY '21. It sounds as though they might start eking north again. Just wanted to clarify that.

--------------------------------------------------------------------------------

James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [32]

--------------------------------------------------------------------------------

Yes. Thanks, Garry. So in the second half, I'd expect it to creep up with -- really, as a function of our revenue. The second half of our revenue is higher than our first half, and -- given our particular revenue stream. So I expect that to go north slightly. And then going forward, again, I reckon you're looking at that mid-80s going out beyond then.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [34]

--------------------------------------------------------------------------------

I want to thank you once again for your time today. We are pleased to deliver a strong set of results and are well placed to execute on our high-growth strategy into FY '21 and beyond.