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Edited Transcript of SKO.NZ earnings conference call or presentation 19-Nov-19 10:30pm GMT

Half Year 2020 Serko Ltd Earnings Call

Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Serko Ltd earnings conference call or presentation Tuesday, November 19, 2019 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darrin John Grafton

Serko Limited - Co-Founder, CEO & Executive Director

* Susan Putt

Serko Limited - CFO

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Conference Call Participants

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* Alexander McLean

Bell Potter Securities Limited, Research Division - Analyst

* Wassim Kisirwani

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Serko Limited Half-year Results Announcement Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Darrin Grafton, CEO. Please go ahead, sir.

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Darrin John Grafton, Serko Limited - Co-Founder, CEO & Executive Director [2]

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Good morning, and welcome to today's half-year results presentation for the 6-month period ending 30 September 2019. My name is Darrin Grafton, I'm Serko's CEO; and I'm here with Susan Putt, Serko's CFO.

On the back of our recent announcement relating to our capital raise and expanded agreement with Booking.com, I'm pleased to report that our half-year results, as reported as part of that announcement, remains substantially unchanged.

During the half year, we continue to increase our investment into our travel and expense platform as demand for our products grew both within our home market and new territories. We achieved a 29% increase in operating revenue as we continue to grow market share in our home markets of Australia and New Zealand as well as growing our average revenue per booking or ARPB, and this is in line with our strategy.

We've made good progress in our Northern Hemisphere expansion, and we'll cover this off in a little bit more detail on the Northern Hemisphere expansion and provide an update on our ongoing activities over the next 20 minutes.

You should have the presentation that we released to the stock exchanges earlier this morning in front of you, and we'll start on Slide 4. Now Susan is going to kick off shortly with an overview of the financial results for the 6-month period. I'll then give you an update on the key strategic developments and cover the outlook for the second half. We will have time for questions at the end of the presentation.

For now I'll pass over to Susan to cover the financial highlights, and she will start on Slide 6.

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Susan Putt, Serko Limited - CFO [3]

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Thanks, Darrin. I'm going to cover off our key financial measures that we report every 6 months. I will then go into more detail on some items in the following slides.

While EBITDAF was positive at $1.4 million overall for the period, Serko had a net loss of $0.9 million after tax with a difference including noncash items, which I'll cover on the next slide.

Our operating revenue is up 29% at $14.7 million for the half, with 91% representing reoccuring product revenue sources. Core product revenues were up 38% to $13.3 million. And total income, including grants, was $15.2 million, up 29% over the prior period.

Annualized transactional monthly revenue or ATMR, which provides an indicator of future growth potential of Serko's annual reoccuring revenue, reached a peak during the 6-month period at $26.2 million, up 35% against the prior year comparative. Total transactions across our platform grew 4.5% over the same period last year. R&D spend was $8.9 million for the period and was up 132% from the prior period, which shows the increased development that has been invested in the product for new territory expansion. Operating costs increased 46% over the prior period.

Now moving to Slide 7. This slide shows a summary profit statement and the reconciliation of net profit to EBITDAF. In the half year to 30 September 2019, we generated EBITDAF of $1.4 million, which was an EBITDAF margin of 10% on operating revenue of $14.7 million. This is largely in line with the prior year at $1.5 million. The reconciliation between EBITDAF and the net loss of $0.9 million primarily relates to the noncash items and includes fair value adjustments of $0.6 million related to contingent consideration due for the InterplX acquisition, depreciation and amortization of $1.3 million as well as unrealized foreign exchange, revaluations included in finance expenses.

The adoption of NZ IFRS 16 related to leases results in a $0.5 million of rental cost being included in depreciation and interest expense from 1st of April 2019. We have made no reinstatements in the calculation of EBITDAF related to this. Information on this change of accounting policy is disclosed in the half-year accounts released today.

Slide 8 now shows revenue breakdown by type of revenue and geography. Total operating revenues made up of various sources: Travel platform revenue, Expense platform revenue, content revenue from commissions and other revenue, which largely represents miscellaneous, license revenue and services revenue.

Travel platform grew 20% to significantly more than the 4.5% increase in transaction volumes of 2.2 million for the period. This reflects the uplift in ARPB that Serko's achieving through transition to Zeno contracts. ARPB on reoccuring revenue was $6.05 for the period calculated as total reoccuring revenue of $13.2 million divided by 2.2 million total travel bookings.

Expense platform revenue at $3 million, which includes revenue from the InterplX acquisition of $1.9 million, continue to grow strongly at 238% for the half. The growth related to Serko Expense was 22%.

Content revenue from commissions earned beyond the basic booking fee remains steady against the prior year as the rollout of Zeno into new markets took priority over the integration of new content sources during the period. While not growing for this period, content commissions remain a core part of Serko's strategy to provide customers with a complete suite of end-to-end journey offerings. Accordingly, content commissions are expected to lift ARPB over time primarily via the increased uptake of Zeno and the additional content available through Booking.com. Darrin will cover more in relation to this under Strategic Updates.

Total services revenue is down 20% due to development resources focused on the NORAM, North American activation. In relation to movements and earnings in the various geographies, you can see that the growth is primarily related to North America and New Zealand. The North American revenue is related to the U.S. source commission incomes and the expense revenue from InterplX. New Zealand growth represents a transition of Orbit customers and the minimum contracts recognized over time in accordance with IFRS 15 revenue recognition criteria. Australian sources grew 10%, representing the high level of market share that Serko has in that market's limited transactional growth. Growth in this segment is expected to come from Zeno pricing uplift.

I now turn to Slide 9, operating expenses. This slide outlines the categories of expenditure. Operating costs increased $15.7 million for the period, up 46%. This is mainly a result of increased headcount and the cost associated with expansion into North American markets and also includes InterplX operating costs post acquisition. The number of full-time equivalent at 30 September was 208, representing a net increase of 35 FTEs or 46% since 31st of March 2019.

Now on Slide 10, research and development. This outlines the development spend, both capitalized, i.e., development; and expense, i.e., research, during the period. During the period, total R&D spend was $8.9 million, up 132% over the prior half year and represent 61% of operating revenue. The portion capitalized at $6.3 million is up significantly over the prior period and represents 71% of total spend.

These capitalized costs are reflective of the investment we are making in the developing our products to cater to new territories. This investment is backed by the increasing demand that Serko is receiving through their signed agreements for global expansion. The research costs, which were not capitalized during the period, amounted to $2.5 million. Net of government grants for research and after amortization of previously capitalized development, the product development costs expense for the period were $2.8 million and represents 19% of operating revenue.

I'm now going to pass you back to Darrin to cover our strategic update.

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Darrin John Grafton, Serko Limited - Co-Founder, CEO & Executive Director [4]

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Thanks, Susan. So now we're turning to Slide 12. As we have presented in the past, Serko has a three-pronged strategy of growing our customer base, increasing our average revenue per booking and of course, delivering market-leading technological innovations to underpin our platform for global expansion. We partner with global Travel Management Companies, or TMCs, who are resellers of our products in Australasia. These partnerships continue to extend to enable the rollout of Zeno and Expense into the Northern Hemisphere geographies.

We recently announced extended agreements with CWT, Flight Centre, ATPI as well as local TMCs in the North American markets. These organizations serve the managed corporate travel market. We're also partnering to target small- and medium-sized enterprise to use our self-onboarding functionality to grow our share of the unmanaged corporate travel market. The Booking.com expanded agreement recently announced as an example of that strategy, which I'll cover in more detail shortly.

Moving to Slide 13. As announced at our 2019 annual meeting in August, Serko has an aspirational goal to achieve $100 million on annualized run rate revenue. This can be achieved through the 5 million transactions per annum in each of the target geographies of Australia, North America and Continental Europe, each at around the average revenue per booking of $7. ARPB was at $6.05 over the current half year. Annualized transactions are approaching 5 million within Australasia. In peak months of both May and October, the monthly transactions that were achieved in those months, if annualized by multiplying by 12, exceeded 5 million.

The pipeline of previously signed business in North America lays a solid foundation upon which to build and achieve this goal in that region. The expanded agreement with Booking.com is expected to add to the North American market and the European pipeline of transaction. And the additional content that Booking.com can bring to Zeno is expected to further increase our average revenue per booking. I believe that Serko is in a strong place to execute on its strategy and its strategic target revenue.

Turning to Slide 14 to explain more detail on Booking.com agreement. As announced in late October, Serko signed an expanded agreement with Booking.com, which was entered into concurrently with a $17.5 million investment into Serko by Bookings Holdings as part of the $40 million primary placement recently undertaken by Serko.

Bookings Holdings is a NASDAQ-listed company with more than 26,500 employees and a current market capitalization of USD 83 billion. It is fantastic to partner with Booking.com, the world leader in online travel and related services. Partnering with Booking.com introduces additional content to advance our aspiration of achieving the unifying traveler experience, which will assist our corporate travelers with the simplicity and compliance while making our travel management resellers more profitable.

The Serko and Booking.com agreements will accelerate our journey towards our vision of a seamless corporate travel and expanding our growth outside of Australasia. Booking.com is the world's leading brand of booking accommodations, which includes home share accommodations that Serko will now gain access, too, for its corporate users to book through Zeno.

Other brands include Priceline, KAYAK, Agoda, Rentalcars.com and OpenTable. Serko will be able to access these through the expanded agreement, adding functionality to Zeno over time.

Booking.com and Serko share the vision of a whole of journey management for the corporate traveler and believe that this will benefit the Travel Management Company as well as the corporate customer. Following the completion of the initial development work, Booking.com is expected to offer and promote Zeno to its business travel customers. As additional development is completed over time, it is expected to include further content and further extend the availability to make rail bookings and provide optionality to offer Zeno in a number of additional languages. Serko has performed a test of translating its product into various language and used the Maori language as an example, which was released as part of the Maori Language Week in September.

While the Booking.com agreement is expected to assist Serko in achieving its medium-term aspirational target of $100 million in annualized run rate revenue, the expanded agreement is not expected to have a material impact on Serko's revenues in the current financial year to 31 March 2020. And this is due to the phased development work required and the performance-based rollout plan for Booking.com's global business travel customers. If achieved, as anticipated, the expanded agreement is expected to result in a material uplift in Serko's revenue via an increased average revenue per booking in the 2021 financial year and beyond.

Turning to Slide 15 and highlighting some of the other achievements over the period. We continue to grow our market share. And as mentioned earlier, we are nearing 5 million transactions in the Australasia market on a run-forward basis. We grew the number of corporations on Serko Online and Zeno by a net 327 over the half-year period. Over 1,300 corporate customers transacted on Zeno in the 6-month period to 30 September 2019. Zeno transactions increased by 200% over the same period last year, and in September, represented 13% of online booking. This has grown again by 15% on October and is expected to continue to grow each month as TMCs complete their planned migration.

We've invested heavily in the Serko Zeno platform for expansion into the North American markets during the period. Serko now has live bookings in North America following the beta release in September. Custom Travel Solutions has commenced using the product and now has 3 corporates making live bookings: FCM, Direct Travel and CWT are in the user acceptance testing phase.

ZS Associates, who reviewed the product last year, were committed to using the product and are now using the system through Luxe Travel. They're a part of the wider Radius buying group. This agreement will allow 100 other TMC resellers of the group to also offer Zeno. Radius group transacts approximately $30 billion in travel spend annually, and we expect transactions to grow in the second half of the financial year with a continued onboarding of new corporates. As signed, Travel Management Companies complete their user acceptance testing and progress to our pilot -- to the pilot customers.

U.K. markets, while not material to the period today, continue to grow. Investment continues in Europe, however, at a slower rate than originally planned due to the prioritization of the North American market rollout. It is intended that a portion of the proceeds of the capital raising will be used to now accelerate that development of the European market.

As disclosed in the capital raise, Serko's also currently in advanced commercial discussions with a global payments provider to provide a similar white label version of Serko Zeno to its small, medium and enterprise customers, initially in Australasia, with the potential to offer in additional geographies in the future.

Commercial arrangements are currently under negotiation and have not yet been finalized. Serko will make an announcement to the market in relation to this white label opportunity if and when discussion results in an executed commercial contract.

Serko also continues to invest in NDC or New Distribution Capability. NDC is a travel industry supported-program launched by IATA for the development and market adoption of the new XML-based data transmission standard that enhances the capability of communications between the airline, our Travel Management Companies and aggregators. The expansion of content and ancillary offerings such as baggage and seat selection, through NDC offers new revenue stream opportunities through Zeno. Serko is committed to support this new distribution capability, both via the direct connection and the global distribution system. And as announced, NDC partnerships with Qantas, Air Canada, Southwest Airlines and ATPCO's NDC Exchange in the past 12 months. Zeno is now live with end-to-end NDC booking capability through Qantas Distribution Platform, or QDP, following a successful pilot with launch partner CT Connections.

I'll now turn to Slide 17 to cover the outlook statement. Serko continues to expect total operating revenue to grow between 20% to 40% for the year ending 31 March 2020. As previously advised, currency fluctuations and timing of customer onboarding will be a key factor in determining our final result.

Growth in the same corporate customers -- or bookings, sorry, in the Australasia has softened over the past few months, which we attribute to a general slowdown on the Australasian and New Zealand economies and a slight decline in business confidence. Nevertheless, we have continued to grow revenue in our home market, thanks in no small means to the uptake of Zeno. And we continue to focus on the global expansion, and this will assist in Serko mitigating any local market slowdown.

Serko continues to invest in its global expansion, particularly in the North America markets. The capital raising and expanded agreement with Booking.com will allow us to accelerate the expansion particularly in Continental Europe.

Cash burn for the 6 month period was $5.5 million. Serko expects continued cash burn for the second half as development work is accelerated to support this new market expansion. Cash balances at the 31st of October 2019, post the primary capital raise was $48.6 million, with a further $5 million expected to be raised from oversubscribed retail share purchase plan, which closed last week.

We expect transactions to continue to grow in the second half of the financial year and with the continued onboarding of new corporates as our Travel Management Company partners complete user acceptance testing of Zeno and progress to pilot customers. The timing and extent of uptake by new corporates in the Northern Hemisphere market is unknown and is subject to variables. Our continued development of additional local content in these markets is expected to further increase booking and support the migration of additional corporates to the platform.

European markets are not expected to contribute materially in the current financial year due to the prioritization of the NORAM rollout. However, a portion of the proceeds of the recent capital raise will be used to accelerate development of the European markets, resulting in an FY '21 revenue gain.

Turning to Slide 18. That completes our presentation. And before I turn to Q&A, as per Slide 18, I draw your attention to our appendix slide after Slide 18 for further information.

I'll now hand back to the moderator to facilitate any of the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Wassim Kisirwani with Jarden.

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Wassim Kisirwani, [2]

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Can I just ask a question on the Bookings relationship and whether you are able to offer any more color around the mechanics of that, the expanded relationship, especially with regards to targeting the SME channel? Maybe sort of outline what that opportunity looks like and the kind of sales strategy and whether the revenue model for that will differ to your existing revenue model.

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Darrin John Grafton, Serko Limited - Co-Founder, CEO & Executive Director [3]

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What we can confirm is that based on our current agreement model, which is a revenue share agreement with Booking.com, and it will be under the Booking business brand rollout, and that the model of how that goes the market is still being worked on with Booking.com. It is envisaged to start rollout in the early calendar year of 2020.

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Wassim Kisirwani, [4]

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Okay. Great. And any sense of sort of the opportunity in terms of the number of SME clients that you think sort of could fall in that target market across some of Booking's existing markets?

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Darrin John Grafton, Serko Limited - Co-Founder, CEO & Executive Director [5]

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Yes. The current range is around 0.5 million to 1 million corporates.

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Wassim Kisirwani, [6]

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Small, medium -- small SMEs? Okay. Great.

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Operator [7]

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(Operator Instructions) It appears we have no further questions in our queue. (Operator Instructions) And we do have another question in our queue from Alex McLean with Bell Potter.

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Alexander McLean, Bell Potter Securities Limited, Research Division - Analyst [8]

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Just have a quick question around the impact of InterplX on the Expense revenues. Can you single out what the impact there was? And then also, coming up along from that, how much success are you having with the Expense platform outside of those clients?

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Darrin John Grafton, Serko Limited - Co-Founder, CEO & Executive Director [9]

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So we disclosed that just on the conversation here, we've got $1.9 million as what InterplX added to the mix and we're seeing growth on the current platform around 20...

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Susan Putt, Serko Limited - CFO [10]

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22%.

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Darrin John Grafton, Serko Limited - Co-Founder, CEO & Executive Director [11]

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22% in there. So it's still growing well on customer attrition. We've got some big brands such as Radius worldwide that are about to come onto the platform as well, which starts in the next month or so as well across there. So -- and the InterplX, for the model, we're bringing together, of course, all the 2 platforms of Serko Expense and InterplX into Zeno Expense as one single platform. So we'll end up early to mid next year with a single platform.

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Alexander McLean, Bell Potter Securities Limited, Research Division - Analyst [12]

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Okay. All right. And in terms of -- average bookings per year, obviously, I would expect that to go up with you guys can earn more from just the Serko platform to Zeno. Are you seeing that in those metrics? I don't think you advise...

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Darrin John Grafton, Serko Limited - Co-Founder, CEO & Executive Director [13]

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And also selling more Expense to our existing customers as well.

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Operator [14]

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It appears we have no further questions in our queue at this time. I'll turn the call back over to Mr. Grafton for any final or additional comments.

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Darrin John Grafton, Serko Limited - Co-Founder, CEO & Executive Director [15]

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Thank you, everyone, for joining us on the call today. We look forward to talking with you over the next few days for those who have scheduled investor meetings. In the meantime, if you have any questions, then please don't hesitate to come back to either myself or Susan. So thank you once again. Thank you.

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Operator [16]

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Thank you, everyone. That does conclude our conference call for today. Thank you all for your participation. You may now disconnect your line.