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Edited Transcript of ELO.AX earnings conference call or presentation 15-Aug-19 12:30am GMT

Full Year 2019 ELMO Software Ltd Earnings Call

Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of ELMO Software Ltd earnings conference call or presentation Thursday, August 15, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Danny Isaac Lessem

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

* James Haslam

Elmo Software Limited - CFO & Joint Company Secretary

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Conference Call Participants

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* Garry Sherriff

RBC Capital Markets, LLC, Research Division - Analyst

* James Bales

Morgan Stanley, Research Division - Equity Analyst

* Robert Bruce

Acorn Capital Limited - Head of Research & Portfolio Manager

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the ELMO Software Limited 2019 Full Year Results. (Operator Instructions)

I would now like to hand the conference over to Mr. Danny Lessem, CEO; and James Haslam, CFO. Please go ahead.

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Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [2]

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Good morning and welcome. James Haslam, our CFO, and I are pleased to deliver a very strong FY '19 result. Today, we are going to focus on 3 areas: one, growth; two, new market opportunity; and three, long-term sustainability.

Let's kick off by turning to Page #2. Financial and operational highlights for FY '19. We experienced strong growth in annualized recurring revenue, consistently high-growth profit margin and increasing lifetime value of our customer cohort. Our key anchor metric is annualized recurring revenue, which came in at $46 million, which is 47.8% growth on pcp. Our FY '19 pro forma revenue came in at $42.6 million, and our FY '19 statutory revenue came in at $40.1 million, which is 51.2% up on pcp. Our GP margin remains strong at 86.6%.

Our customers increased by 30.1% on pcp to 1,341, and our customer retention remains high at 92.1%. The lifetime value of our customer base as of 30 June 2019 was $621 million which is $156 million up from 30 June 2018. That's on a ARR basis.

Let's turn to Page #3. I'll give you a quick snapshot of the company. ELMO is one of Australia and New Zealand's leading provider of integrated cloud HR, payroll and rostering and time and attendance software solutions. We offer our customers a single vendor experience, a single dashboard and a single user experience. We continue to focus on the region that is Australia and New Zealand.

Let's turn to Page #4 and I'll outline some of our key achievements for FY '19. We added rostering and time and attendance to our broad convergent products suite. We continue to invest in R&D by adding 165 product enhancements. We executed on our acquisition mandate by adding HROnboard and BoxSuite, and we grew our workforce to 277 employees. We also picked up some nifty awards along the way.

Let's turn to Page #5. We've continued to expand our product suite. We now span wide across human resources, payroll and rostering and time and attendance. This makes us very attractive to a broad market.

Let's turn to Page #6. We have a large and growing addressable market. ELMO's market opportunity has grown to just under 24,000 organizations with a potential dollar value of $2.4 billion in the region. The reason that the addressable market has grown is because we're now attracting and engaging slightly smaller organizations, organizations that we define as low mid-market, those are between 50 and 200 employees. If we look at the graph in the right-hand side of the page, we can see that we've grown our customer base, had a compounded annual growth rate of 51.6%, again focusing on that growth element.

Let's turn to Page #7. We can see an expanding market opportunity, and this is being achieved by adding payroll and rostering and time and attendance to our platform.

Turning to Page #8. We continue to experience strong growth in the customer base. We added 265 new customers during the year with an average ARR of $34,200. Our average modules per customer came in at 2.4, and we continue to have strong customer retention rates of 92.1%.

Moving to Page #9. We have a broad and diversified client base. Our largest customer contributes less than 1% of our FY '19 subscription revenue and our top 10 customers less than 6%.

I'll hand over to James to give a more in-depth view of our financial results.

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

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Thank you, Danny. We are pleased to report that both our FY '19 pro forma revenue of $42.6 million and our pro forma EBITDA of negative $0.9 million were both ahead of our updated guidance. FY '19 has seen strong growth in subscription revenue, and the contribution of the FY '19 acquisition of HROnboard and BoxSuite have been in line with our expectations.

Turning to Page 12. Our annual recurring revenue, which reflects June's subscription revenue annualized and is a leading indicator for the next 12 months baseline revenue, has increased 47.8% on pcp from $31.1 million to $46 million. As a percent of total revenue, the recurring subscription revenue has also increased to 95.4%, up from 93.6% in FY '18.

Turning to Page 13. A summary of our statutory and pro forma financial results. The growth in ARR has resulted in an increase in subscription revenue by 54% to $38.3 million in FY '19. At a cost level, we have continued to invest across the business particularly in head count to support the ongoing growth. A few highlights to note. We have expanded our sales team to capture additional opportunities in the market. We have continued to invest in R&D. And as a percentage of revenue, we have spent 28.8% on research and development through FY '19 which is an increase from 18.9% in FY '18. We have also began to leverage our G&A, which, as a percentage of revenue, had declined between FY '18 and FY '19.

Turning to Page 14. Our ARR growth. We've continued to focus on growth in ARR through the year, and we're pleased to report the overall growth of 47.8%. Growth has been driven organically by both new customer wins and cross-sell to the existing customer base. These have combined to deliver 38% organic growth rate and which have been further complemented by the acquisition of HROnboard.

Turning to Page 15. Our investment thesis has continued to be underpinned by the high LTV to CAC ratio of 10x. Through FY '19, the LTV of the customer base has increased to $621 million, up from $465 million at 30 June 2018. This increase was driven through winning 265 new customers, plus the additional customers acquired through HROnboard.

Turning to Page 16. At a revenue level, our statutory revenue has grown 51% to $40.1 million in FY '19. The key drivers of growth include organic subscription growth of 29% and a $6.3 million incremental contribution from the FY '18 and FY '19 acquisitions. The pro forma adjustment of $2.5 million primarily relates to the full year impact of the acquisitions.

Turning to Page 17. As outlined earlier, we continue to accelerate our investment to both capitalize on market opportunity and to also market the broader product offering. The key investment areas through the year include: research and development; increase in the interoperability of our modules suite; development of new modules; and improving and increasing the functionality.

Sales and marketing, we've deployed a new sales team to take advantage of the lower mid-market opportunity and expanded our account management team to unlock additional cross-sell opportunities. We've also invested in client services, which is included within our cost of services line, which includes the ramping up of our implementation, training and support to manage anticipated future growth.

Turning to Page 18. We are pleased to report record cash receipts through the year of $45.1 million, which is up from $28.6 million at 30 June 2018. The high cash receipts have helped generate an operating cash -- positive cash flow for the year of $5.5 million. At 30 June 2019, we have $27.7 million on hand and remain well capitalized to continue to take opportunities and invest through FY '20.

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

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Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [4]

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Thank you, James. Turning to Page #20, we continue to experience strong organic growth, and this has been accelerated with selected acquisitions, complementary technology and customer lists.

We are adding new customers in existing markets and new market segments. We've seen an increase in multi-module sales with the average module count for each new customer at 3.7 in FY '19. We also have had an increased penetration and adoption in the lower mid-market.

We are seeing greater usage from existing customers with our incremental annual recurring revenue coming in at $5.3 million from that bunch of existing customers. We are also expanding and enhancing our product line. We spent 28.8% of our FY '19 statutory revenue in R&D, and this has enabled us to increase the interoperability, the functionality and the usability of our existing 13 module and to continue building new modules.

We also committed to growing through acquisitions. In FY '19, we completed the acquisition of HROnboard and BoxSuite, and we're still actively seeking new opportunities that fit within our acquisition mandate.

Turning to Page #21. Our FY '20 guidance. We've experienced strong momentum into FY '20. This is evidenced by that annual recurring revenue of $46 million coming in, in FY '19. We have a larger market opportunity. We experienced more multi-module sales, and we're seeing increasing traction with that lower mid-market segment. Also with our broader suite of products, we're much more attractive to a larger group of businesses.

We're also committed to continue investing in sustainable growth. I've mentioned R&D but this also pertains to sales and marketing and client services in order to accelerate the implementation on onboarding of clients and to maintain that high customer experience. I'm pleased to give our FY '20 guidance. Our annual recurring revenue, $61 million to $63 million; revenue, $53 million to $55 million; and EBITDA, negative $1 million to negative $3 million. Thank you very much.

James and I look forward to answering your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Garry Sherriff with Royal Bank Canada.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Just a quick question in relation to your gross margins contracting. Can you just remind us again why they contracted and what range is broadly sustainable going forward?

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

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Thank you, Garry. I'll take that question. So the gross margin is a reflection of the increased investment in that client services team, so those are people costs largely in there. And going forward, I would expect that to maintain around that 85 to 86 mark.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [4]

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CAC as well was higher than pcp, again, just a little bit more color around the cost of acquisition of customers.

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

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So yes, we continue to invest particularly in our sales and marketing team to take advantage of this wider market opportunity, so the CAC has -- it has increased year-on-year, and that is expected to deliver results in FY '20.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [6]

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And the last couple of questions. Just about the competitive environment, has that changed across any of your products suites that you can talk to?

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Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [7]

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Just in terms of the competitive environment, we are uniquely poised now as we've got the wider solution which now encompasses not only HR modules but also payroll and with our January acquisition, rostering and time and attendance. So just in terms of the marketplace, there is an appetite for a wider convergent solution which removes the friction which is often experienced in dealing with different technologies and different vendors. So just in terms of going into FY '20 and beyond, we are in a very good position to actualize the commercial opportunity.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [8]

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Okay. And I guess have you seen any competitive response out there in the market?

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Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [9]

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Just in terms of our major, I suppose, competitive pressure, it's -- particularly in the low mid-market, it's around manual process. So we're still very early in that engagement of technology, so in terms of our positioning there had been no significant change in terms of competitive pressure.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [10]

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Okay. And the final question just about your EBITDA profitability or I guess the pathway to that, can you give us any high-level time lines that you can outline in terms of that pathway?

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

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So Garry, it's key to remember here that we continue to invest to growth. We're still early in the growth cycle. And while that opportunity is there, we will continue to invest in sales and marketing and R&D in particular. And then operating leverage, we expect will kick in over time as we scale further up.

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Operator [12]

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(Operator Instructions) Your next question comes from James Bales with Morgan Stanley.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [13]

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Firstly, I wanted to ask about the change in dollar expansion rate and the deceleration there. Can you outline what's going on?

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James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [14]

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Thank you, James. I'll take that question. So on the net dollar retention metric that we put out, just to clarify, there has been a change in the basis that we have calculated that number. We base it on the ARR to start with, to show that net dollar retention on that basis. The -- this metric takes a wider -- it's taken kind of a wider customer pool, whereas the demand historically was a smaller pool of customers on like-for-like basis but here we capture a wider pool. So there's not been a deceleration as such, it's more a case of revision to the calculation.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [15]

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Now that's including the acquired customers from the 2 transactions in the first half?

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James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [16]

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That is -- no, that's not the acquired customers. That is the customers that have been with ELMO in both periods, and also net of churn.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [17]

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And then churn did tick up a little, is there anything you can point to that's driving that?

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

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The churn -- the net revenue, the sort of the churn -- net revenue churn percentage is broadly consistent. But again, the churn is driven by 3 main factors. It's driven by the customers being acquired, is driven by customers who're going through a financial hardship and also this change in government, sometimes there's churn there as well.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [19]

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And then finally, just to sort of get some sense on the CapEx that we should expect in FY '20 and the cash burn that's implied by the guidance range.

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

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So from a CapEx perspective, I think from R&D in particular, the cash spend is 28.8% for FY '19. I would expect that to increase through FY '20, and a large portion of that is capitalized for the R&D costs. The actual CapEx for hard assets is a lot smaller number.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [21]

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Right. So the capitalized proportion of that spend should stay the same, and we should expect something similar in terms of percentage of R&D?

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James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [22]

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I would expect the percentage of R&D spend to revenue to be more in the 30s than in the high 20s.

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Operator [23]

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

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Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [24]

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Thank you for joining.

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Operator [25]

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Sorry, I do apologize we have another question from Robert Bruce with Acorn Capital.

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Robert Bruce, Acorn Capital Limited - Head of Research & Portfolio Manager [26]

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I just had a question on the modules per customer broadly. So it was slightly down 2.4 versus 2.6 last year. If you would sort of back out the acquisitions or looking at it on a sort of like-for-like basis, what is the trend in the modules per customer, please?

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James Haslam, Elmo Software Limited - CFO & Joint Company Secretary [27]

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Thanks. So Bruce, I think the easiest reference point to make is if you look back at our December presentation, that module per customer count was 2.2. So you'll see in the last 6 months that has ticked up. And the large driver for that is the new customers who are taking an average 3.7 modules.

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Operator [28]

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Thank you. I'll now hand back to Mr. Lessem for closing remarks.

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Danny Isaac Lessem, Elmo Software Limited - Co-Founder, CEO & Executive Director [29]

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Thank you for joining us today. We are very pleased with our FY '19 results and are well placed to actualize our ongoing growth strategy into FY '20 and beyond with our wider market opportunity. Thank you.