Half Year 2020 GB Group PLC Earnings Call
Chester, Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of GB Group PLC earnings conference call or presentation Tuesday, November 26, 2019 at 9:00:00am GMT
TEXT version of Transcript
* Christopher Graham Clark
GB Group plc - CEO & Executive Director
* David John Wilson
GB Group plc - CFO, COO & Executive Director
Christopher Graham Clark, GB Group plc - CEO & Executive Director 
So good morning, everyone, and thank you very much for joining us for our GBG first half results announcement. For those who don't know me, which I think is not many, I'm Chris Clark, I'm Chief Exec, and delighted to be joined today by Dave, Dave Wilson, our CFO and COO.
We're also broadcasting live on the webinar. So a very warm welcome to those on the webinar. And in terms of the agenda, very straightforward. I'll do a brief overview of the progress we made in the first half. Dave will then do a deep dive on the numbers. I'll come back and talk a bit about our strategy in the market in which we're operating in all markets. And then, of course, we'll leave plenty of time for Q&A.
I guess, in summary, I think, we're pleased with the strategic progress we've made in the first half of the year, and we believe, we delivered strong financial results for the period.
Ultimately, we win new customers and grow with our existing customers through our data and our products, our technology and our people. We now serve over 19,000 customers around the world in over 70 countries. And really, we see increased diversification of our customer base, both geographically across our core plot areas of location, identity and fraud and actually increasingly sectorally as well. But a few examples. When we look at our location business, we've seen strong growth in our chosen geographies of the U.K., North America, Germany and one of our first client actually in China. A little bit of evidence in the U.S. towards the end of the half, we secured Nike as a customer. Nike, using our services to ensure that they have the best checkout experience. And actually, one of the core reasons Nike chose us to provide those services is the simpleness -- simplicity is the word I was looking for, of our technology and our global data, particularly, and I'll come on to it shortly, the access to premise level data in Mainland China.
If I look here in the U.K., delighted that we've won John Lewis as a customer. Again, for their checkout for all of John Lewis' entities. So that's John Lewis and Waitrose. And actually, whilst this one is important, not only, it's obviously a very important retailer here in the U.K., actually John Lewis have been a long-term Canexus or trace and investigate customer of ours for a number of years, and it was actually a competitive displacement. And we've been trying to get a hold -- win John Lewis for a number of -- quite a long period of time. So that's really positive. So good progress in terms of winning new customers, but also growing with existing and across the core geographies.
If you look at our identity business, we've seen very strong growth of existing customer base, particularly in financial services and in gaming. Gaming, particularly as a result of the regulation that happened in the first couple of months of this financial year here in the U.K., where the gaming regulator changed where gaming operators have to verify, and that did drive a spike of business for us. So a positive tailwind. So good growth in financial services and gaming and some great new wins.
I'll talk about some of the IDology and VIX wins later. But actually, if I look at core GBG from historical reasons, a great example, I think, is we relatively recently won Tote with our acquisition of Betfred, and we're providing them a bundled proposition of document verification, address validation and identity checks. So good progress in our identity business.
And then last but not least, our fraud business, we continue to grow well with our large multinational clients deploying services in new countries, for example, BNP, further deployments in Europe or Citi, further deployments in Taiwan as well as selling further services to a number of our existing customers, AmBank, a good example, where we provided them increased fraud capabilities. As well as we're winning new financial services clients, both here in Europe and in Asia Pacific.
So I think that just hopefully gives evidence to the further -- the greater diversification that we're gaining as a business. As I've already mentioned, we win business and grow with clients because of our people, our data, and products and our technology. We now have just over 1,000 team members around the world, and we've been building capabilities across all core functions in core geographies in terms of sales, product technology. And actually, we are deeply proud, that as a number of you know, we run engagement surveys twice a year in March and September and actually in September, we scored record results with 92% response rate and 91% of our team, which is just over 900 people recommending GBG as a great place to work. So we are very pleased and proud of that, particularly with our growth, both inorganically and organically.
In terms of products and data, we continue to invest in our product road map because our clients increasingly want further enhancements and features to address this fundamental issue that they all have, which is helping the good and stopping the bad to be succinct. And that we continue to enhance our data capabilities, 3 examples, IDs, I've already mentioned, we're now the only non-Chinese organization through NavInfo have access to over 1 billion Chinese level premises, which is incredibly important for western retailers actually selling and delivering into Mainland China.
Here in the U.K., we're proud to have got hold of U.K. education data, actually on an exclusive basis for a period of time, and that has given our clients a very clear step-up in match rates for ID verification.
And then last but not least, we've enhanced our capability for India. And again, a market that more and more of our customers want good data, keep that simple through access to Indian driving licenses.
And from a technology perspective, a number of you know, our technology strategy is really around allowing our platforms to talk to each other through micro services, moving increasingly onto the cloud to provide more scalability as well as making it easier for our customers to consume through RESTful APIs. And I think I'd summarize by saying we're making good progress in doing that. And that's evidenced that we have launched our first joined up proposition this quarter actually connecting our -- in the U.K., our identity services with our location services, and I'll come on to it, but we are pleased that both our 2 acquisitions of H2 last year, VIX Verify and IDology are progressing well.
And as Dave will talk about in a lot more detail, that's delivered a strong financial performance. I think probably most notably is it's been a long-term ambition of GBG's to expand our capabilities internationally. And for the first time at the end of September, international revenue now accounts for 57% of group. That's broken down, actually, North America 28%; Asia Pacific 16% and Mainland Europe 11% and I guess, what we're seeing is what we expect, which is strong constant currency organic growth internationally, 33% and 8% in the half for the U.K., which is slightly above our mid -- sort of mid-single digit guidance, predominantly, actually driven by 1 large multi-license deal in fraud. So good progress internationally.
Looking at where the growth has come from. So 62% total growth, 17% constant currency organic growth, but we were helped in the half by 3 multiyear deals, which adds about 4% of growth. But also, as I mentioned, when you look at some of the gaming regulation in the U.K., that definitely provided a positive tailwind during the period. And so we think about it more at the top end of our guidance in terms of what the underlying organic growth rate is.
In terms of where the growth came from, I've covered it geographically, about 2/3 of our growth came from existing customers, and about 1/3 of the growth came from new customers in period.
And then looking closer at our 3 core areas of location, identity and fraud. Location grew at 14%, identity at 15% and fraud at 34%, but if you strip out the 3 multiyear deals, that comes to 17%. And I guess, a bit of context in terms of market growth rates. We believe that the sort of location is high single-digit globally, so we think we well outperformed that, which I guess it does reflect things like John Lewis, taking share. Identity, we tend to refer to the McKinsey study, which talks about the market growing at 7% to 15% globally. So we think we're at the top end of that, particularly as we're -- our biggest presence in identity is actually in the more -- slightly more saturated markets of the U.S. and the U.K. And if you look at fraud, we tend to guide to about a mid-teens growth rate. So again, at the top end of that.
And that revenue performance has delivered a very strong profit performance of GBP 21.5 million operating profit and 23% margin. The point I'd make here is that we are investing, and we'll continue to invest for that 23%. And actually, a lot of the investment in this fiscal, as Dave will talk about, will actually hit into H2 just because of the timing of the major programs that we started. So overall, I think a positive set of numbers.
In terms of the acquisitions, I think people are well aware that we made 2 acquisitions in the second half of last fiscal year, VIX Verify group in Australia and New Zealand and IDology in Atlanta, Georgia. Both acquisitions performed well. If I look at IDology, which we actually achieved a 20% growth rate from strong growth from existing customers as well as good new wins, particularly as we diversify from a vertical perspective in places like health care and insurance and National Life to give an example, an increasing number of combined deals between IDology and GBG, whether that's with Uber. And by the way, that's Uber Money. We've got nothing to do with the Uber news here in London. Uber, Citi and actually Nike. And I've already mentioned Nike was a Loqate win. And now we're involved with conversations with Nike about fraud triggers on the back of the Loqate data, which IDology can help Nike with. And anyone who's read any media over the last few days about the instances of fraud as a result of Black Friday, will see that this as an increasing problem for the large retailers.
From a product perspective, bang on track with our integration plans, the Loqate data is on the platform and being used. And we're in process of integrating identity data at both the IDology data into our core global platforms and vice versa. So good progress there.
And from a people perspective, firstly, since we all last met, we've actually made good progress on sales hiring. We're now at 17 people. And I was delighted that -- I talked about the GBG figure being 91% recommend GBG as a place to work. For IDology, that's 90%. So it's bang in line with group.
Turning to VIX. Good progress, I guess, probably the highlight -- as a number of you will be aware, for VIX, our real primary focus was to drive synergy and improve the profit, which we've done well. But actually, 2 weeks ago today, I was fortunate enough to fight fires in Sydney as we launched to customers and potential customers an integrated GBG. So the VIX name has now come out from a customer perspective. And I think really positive engagement with customers. And 2 examples I'll use. TabCorp, who are a very substantial Australian gaming company, actually now take services. They take off all of our full capabilities. They take international ID verification and they take our domestic verification. And certainly at Melbourne Cup Day 3 weeks ago, that went -- all went very well.
And if I turn to FlexiGroup. For those who don't know, Flexi is a challenger card provider, a bunch of card provider in Australia, looking to expand actually here into the U.K. as well. Flexi were long-standing VIX greenID Company, and they've now just taken our IDscan capability. So it's starting to get momentum in terms of combining our capabilities for our customers.
And from a people perspective, I guess, probably the stand out outside of the fact that we've integrated the teams and now have a general manager of GBG Australia who joined us 4 months ago, is -- we've actually seen they recommend GBG as a place to work go up 10 points from March to September from 82% to 92%. So a huge credit to the team locally for that.
So overall, I think it's been a good half. We're pleased with progress. And on that note, I'll hand to Dave to talk a little bit more about the detail.
David John Wilson, GB Group plc - CFO, COO & Executive Director 
Thanks, Chris. So first of all, I'd like to talk about the growth of the business. We're pleased that the overall performance in the key financial metrics, total growth, constant currency organic, the operating margins and the cash flow. Our largest acquisition, as Chris talked about, was ahead of where we expected. Probably more importantly, our cross-platform connectivity, linking in the GBG software with the IDology and vice versa, was ahead to where we wanted to be at this stage. That's really good for the future part of the business.
I would also caution at this stage due to the second half and I know we typically take a prudent view on it, both the global economy, the U.S., China and European GDP challenges and the FX risk associated with that. So we've had a very good first half. But the full year position is probably as we stand. We're confident of the consensus expectations, but not a lot more.
So moving on to the key dynamics in there. Total growth of 62%, 17% constant currency organic. And we had 4% of good headwinds with the multiyear deals included in there.
We also realigned our last year numbers with the IFRS 15, where we -- in our first half this year, we moved GBP 1 million worth of revenue from the second to the first half. We pro forma that back into last year, so the comparables are okay. All of the core divisions have gone well. As Chris said, the location business was ahead of where we thought it would be. Identity at the top end of where we thought, and the market is showing and in our fraud, 17%. If you take out the multiyear deals, we're slightly ahead of our guidance of 15%. So all of the core businesses are working well.
In the others category that you see there, the minus 11% is our marketing services business, and that is in decline, has been for a while. We also lost a key customer in that, which is Thomas Cook, who had a bad debt in the first half of that, and it's taken about GBP 600,000 of revenue out in the second half.
As Chris said, the geographic growth, 33% growth outside of the U.K., about 8% growth in the U.K. We're very pleased with the 8% growth in the U.K. because it's slightly higher than last year's position and obviously delighted with the 33%.
Moving on to the profit and loss account further down. So as you can see from there, our gross profit moved down and operating profit percentage moved up. That's a direct result of the mix of IDology and VIX Verify Global.
Our gross profit percentage is expected to remain in the low 70s percent and the key reason for this is the data costs in IDology and in VIX Verify are significantly higher than the traditional GBG data costs. So the first half data costs about 22% of revenue, whereas the traditional GBG, it's been 17%. So the mix of the lower margins in IDology and higher operating profit causes our gross profit to come down but the operating margins to increase.
The OpEx, you can see on there, increased by 35%. And that includes, obviously, the higher OpEx associated with IDology and VIX on there. The organic OpEx increase was about 15%. And in addition to the normal organic cost increase and OpEx increase, we spent an extra GBP 1.5 million in the first half on our key technology projects.
Share-based payments increased due to the long-term incentive plans that we released last year. And obviously, the increase in share price.
And as discussed in the last 2 presentations later on in the day, you'll see our segments being reported by location, identity and fraud is on Page 30. And in those businesses, we -- the first time we're showing operating margins, which are the controllable margins that those business heads look after. In addition to those, we have group central costs and plc costs that represent about 6% of revenue. So we show those business units, and when Chris himself look at them, we take off 6% to get to the naturalized operating profits.
In terms of the cash flow, I'm delighted with the performance of getting over 100% EBITDA to cash conversion. We had very good receivables, collections in the period. Overall, the DSOs, day sales outstanding, moved from 70 down to 60 days. Two key reasons for that, both our acquisitions have good receivable days or DSOs, IDology and VIX, but also, we had a significant improvement in our Asia Pacific fraud collections. We've worked for a while on improving that they came down considerably. So it showed an improvement in working capital of GBP 1 million there. And the other key thing, as a consequence of both raising money for the acquisition of IDology, so we said to the market that we would delever and the deleveraging position has moved down really fast. So you can see from there, our leverage was just above 1x at the end of September. And obviously, for the full year, it will be significantly under 1x leverage.
The net cash at the end of September, just shy of GBP 54 million overdraft position. And we've got a current borrowing capacity of GBP 86 million. The other key thing to point out there, our deferred income balance has increased by 16%. The organic element of that was 13%. So some of the deferred income was used in the first half and the deferred income, organic part growth in our first half has been consistent with our organic growth.
So moving on to the capital allocation. We're obviously situating in a good market with good structural trends there with low double-digit long-term guidance and adjusted operating margins at 20%. And EBITDA to cash conversion of 100% were a good cash generation business. So our priority on cash usage is reinvestment in technology and sales and marketing for sustainable long-term organic growth, pay down the debt as quickly as we can, and that will release capacity for our next acquisitions.
And just by way of background, we're looking for businesses in the global marketplace with great technology and good locations that we wanted to have feet on the ground and move into countries where we can increase our growth in.
We are very experienced in acquisitions. We've done 12 over the past 8 years, and our integrations are always bespoke. And as Chris talked about, the integrations on IDology and VIX, they've gone to plan and gone to strategy. We're very rigorous on following the disciplines on the bespoke integrations that we determined for each one we're looking up.
We've got many on the acquisitions watch list. And our ongoing strategy is to grow organically and with bolt-on acquisitions. And we're in ongoing discussions with a handful of these.
So that's the update on -- from my perspective, I'd just like to hand back to Chris to cover the strategic areas in the future.
Christopher Graham Clark, GB Group plc - CEO & Executive Director 
Thank you, Dave. I think I'll start by saying we are fortunate that structurally, over the long term, a lot of the dynamics that help our business grow remained positive, and I'll give you a bit of evidence. But it's equally fair to say, and I think Thomas Cook is a very good example of it, that we're not immune to all of the current noise, albeit and certainly prefer it to be in doing what we do than many other companies. But if you actually look, I think the structural growth drivers are well known, increasing our digital commerce, fraud, increasing compliance and increasing focus by B2C organizations on making it simple, safe and secure for their interactions with their consumers. But a little bit -- a few data points. If you look at the growth in digital commerce, we're all aware of some of the challenges that the retail marketplace is experiencing, particularly here in the U.K., but not just the U.K.
Last week, an organization called the Internet Retailer produced figures that said that digital commerce has -- will grow in 2019 by 18% compared to bricks-and-mortar commerce globally about 3%. And actually, a stat that I think still surprises many, specifically in this environment is that the penetration of e-commerce versus bricks-and-mortar is -- will be in 2019 globally, 16%. And that's growing about 2% per annum. And that's where we see absolute -- absolutely the focus of our location business. And actually, that takes me nicely to the increased focus on frictionless onboarding. And what I -- what we really mean by this and we talked about it before, is a number of B2C, or lots of -- most B2C organizations in multiple sectors are really facing a dilemma of how do I make it really attractive and simple for our consumers to start their journey with me. And actually taking milliseconds improvement in that can make a significant difference, whilst at the same time, stopping bad actors. And actually, the Nike example is a good example of that. I'm sure a number of you are aware, that Nike announced just 2 weeks ago, they were not going to sell through Amazon. There is no -- it is absolutely no coincidence that we've been engaged with Nike for 6 months and struck a deal with them late in the half to help make sure that their global platform is a fantastic experience for their customers. It is not coincidental. And of course, they have increasing fraud. Just a few statistics, and I can throw lots out, but Cifas, not-for-profit organization here in the U.K. that monitors fraud, have recently announced figures that mules -- money muling is up 26% year-on-year. And actually, identity fraud, in its own right, is up 8%. So an increasing amount of fraud, and you don't need me to talk about a number of data breaches that we all hear and read about every day. So there's no doubt.
And then in terms of compliance, I've already talked about a specific example of the gaming regulation here in the U.K. that provided us a positive tailwind in the first half and that's called LCCP. And we would absolutely expect regulation to continue across the set -- compliance sectors we serve, particularly financial services and gaming, whether that's PST 2, for example. So we have got good, strong structural growth drivers to our business, exactly what happens when is always very difficult to know. But when we look ahead, as Dave said, we're very much looking at how can we generate long-term, sustainable organic growth over the years and years ahead.
Our strategy is simple and clear. We have a vision, which is to be the global leader in identity data intelligence. But actually, in terms of where we're focused, it is about rolling out our core platforms of location, identity and fraud into our key geographies and we talk about that being U.K., Western Europe, North America and parts of Asia Pacific, Southeast Asia, Australasia and China. And we're making good progress rolling those platforms out and creating the interconnection between the platforms to serve the ever-increasing need of an end-to-end journey for online organizations. This allows us equally then to start to look into new geographies. And I've already mentioned, for example, providing Citi in Taiwan. So we are looking to expand out from, for example, in Southeast Asia, some of our core geographies in Malaysia, Indonesia. We started winning customers in Vietnam, Thailand, Taiwan, as I mentioned. And it also starts to allow us to look into further differentiation sectorally, as I'll come on to shortly.
And then it is all about enhancing our product. And we have a long-term product road map, and that is about enhancing the features and enhancing the data that underpins that. So it really is deployment of our global platforms internationally into more geographies into new sectors and linking that together and continuing to invest in the future of product road maps.
In terms of just a brief update, I think the summary would be, we made good strategic progress. If I look at a little bit more detail across the 3 core areas. If you look at location, I've already mentioned geographical focus being Germany, Western Europe, North America and starting in China. I guess the headlines on location, really good progress on continuing to differentiate our data through the relationship with NavInfo for the Chinese premise level data and really good progress with our international expansion. Good growth in the U.S., good growth in Germany and at very early stages in China as we begin to explore the capabilities in broader Asia.
If I look at identity, the focus in the last 12 months has been about integrating capabilities between core, what Dave and I loosely call Core GBG and VIX and IDology, that's gone well as well as integrating the identity and location capabilities. And I already mentioned, we've launched a product to market this quarter.
In terms of looking forward, it's continuing to do that investment and create those joined up capabilities as well as starting again to look slightly broader than just compliance sectors. And because if you take, for example, retail is a great example, they don't have quite the regulatory drivers that, say, financial or gaming institution will -- to use unnecessary services. But the growing and the growing problem with retail fraud means that we can start to expand some of our capabilities with some of the assets we have today in location and IDology, for example. I already mentioned Nike as an example.
And then in terms of our fraud capabilities, our core fraud capabilities. We've been very focused on retail banking, Tiers 1, 2, 3 in Asia and Europe. We're starting -- and we made very good progress there. We're starting now to look into adjacent segments. For example, auto finance had a very big customer event actually in China just last week. And so some adjacent marketplaces there as well, as I've already mentioned, some adjacent geographies as well. And we have a number of interesting opportunities in places like the Middle East.
So I think good strategic progress. We remain very disciplined on where we make the investments and how we look to make the next stages because actually, as a number of people have heard, probably one of our biggest challenges is we're like a kid in a candy store. Everywhere we turn there's opportunity, but we have to be disciplined on how we go after that. And this strategy and this progress leads to further differentiation. I could spend hours on this slide because it's where it gets really exciting. But really, in summary, we differentiate because of our broad data capabilities and the products on top of that data capabilities giving insight. But if you actually look at it from a customer perspective, which perhaps an easier way to digest this. Our location services really do 2 things for retailers and other verticals to help drive up conversion by reducing time to dwell on website. Hush, one of the up and coming U.K. retailers actually talked about how using our geolocation service knocked 4 seconds off their conversion journey. That is significant for a retailer. So it's about driving up conversion rates, and it's about reducing failed deliveries, which is, I think, especially this time of year, everyone knows is a very significant problem, not least because of fraud as well.
If you look at it from a identity perspective, as we talked about the Capital Markets Day, which many of you attended, it's really about match rates and our secret sauce is the data and the triangulation of this data, meaning that we never trust 1 data source. And what does that -- what does increased match rates mean? It means that if you're a financial services organization, you can be more certain of the customers you bring on board and actually accelerate your process of conversion as well. And if you look at the core fraud services, of course, it's actually, again, a similar dilemma, reducing fraud very simple thing to say, very, very difficult to do. But actually, one of the biggest challenges for our financial services organizations, what we call force positives where you actually have so much data there's always a risk. So the risk department wins and you can't onboard a customer. So the more you can reduce force positives, the better it is for all parts of the financial services organization for a customer acquisition to the risk department. So I guess that's a way strongest in color about what this differentiation really means from a customer perspective.
And pictorially, it all comes together with our business model. And just to spend a couple of minutes. I know this is familiar to many, but it really is about the broad breadth of data and further diversifying the data sets. We talked about a few examples. And it's about continued and increased investment in our products to give greater insight to our customers. And a key point is it actually look at routes to market. We have 3 core routes to market: face-to-face, which is our traditional route-to-market and where we really started; self-serve, which, particularly with the acquisition a couple of years ago of PCA gave us real capability and allows us to enter new markets at speed, a greater speed, and becoming increasingly important across all of our portfolio, actually, not just our Loqate portfolio; and then channels. And again, historically, a number of you will know that historically, our Loqate business has been -- had a very strong channel capability. But increasingly, we're seeing channels become an important part of the other parts of our business as well. And actually, really, in order of priority for channel is location, identity and then fraud just because of the ease of sale. But increasingly, we're focused on channel as a way of helping us scale and grow, particularly as we look to enter new markets. And it's actually cyclical as well because fundamental, as we said a few times to us, is continuing to invest in our products and our data capability to meet the ever-increasing needs of our customers. And we very much develop our products with our customer base. And therefore, have long-term road maps that's built around our customers because it is really important in this space in which we operate. No one organization can guarantee that you can help customers quickly, simply, safely and onboard new or verify existing. So there's always looking at ways of new user cases for using the capability set.
So in the interest of time, in summary, we're pleased with the progress we've made in the first half year. Delighted with how we've gone with the acquisitions and pleased with the organic progress as well. And we look forward to -- we look forward with confidence that good macros, which certainly makes us feel slightly better, given the market where we're all living and working right now. And we will remain absolutely committed to investing in enhancing our products to better -- to increasingly meet more stringent customer requirements over time.
So on that note, thanks all very much for your time. And Dave, and I'll be very happy to take any questions.