Serko Ltd

Good day, ladies and gentlemen. Welcome to the CIRCO half-year results announcement. Today's program is being recorded. At this time, I would like to hand things over to Mr. Darren Grafton. Please go ahead, sir.

Good morning, and welcome to today's interim results presentation for the six-month period ending 30 September 2018. My name is Darren Grafton, and I'm CIRCO's CEO, and I'm here with Susan Putts, CIRCO's CFO. On the back of delivering our maiden full year profit I'm pleased to report that we remain profitable. During the half year we increased our investment into our travel and expense platforms as we pursue further growth opportunities both within our home markets and in new territories. We achieved a 25% increase in operating revenue as we continue to grow market share in our home markets of Australia and New Zealand. We've made good progress in our Northern Hemisphere expansion. We'll cover off more detail around the Northern Hemisphere expansion and provide an update on our upcoming activities over the next 20 minutes. You should have the presentation that we released for the stock exchanges earlier this morning in front of you, and we'll start on slide four. Susan is going to kick off shortly with an overview of the financial results for the six-month period. I'll then give you an update on the key strategic developments and then cover the outlook for the second half. We will then have time for questions at the end. For now, I will pass you over to Susan to cover the financial highlights, and she will start on slide six.

Thanks, Darren. I'm going to cover off our key measures of financial performance that we report every six months. I will then go into more detail in some items on the following slides. As Darren mentioned, we continue to be profitable. Net profit before tax of $1 million was slightly below the prior year of $1.2 million. This is primarily related to the net effect of exchange rate movements against our heads position as the increase in income matched the increase in operating expenses. EBITDA of $1.5 million was up 12% over the prior period of $1.3 million. This is consistent with our guidance that EBITDA would largely be in line with the prior year. Our operating revenue was up 25% at $11.4 million for the half, with 85% of revenue representing reoccurring product revenue sources. While the proportion of reoccurring revenue is lower than prior periods, it should be noted that customer demand for customization has resulted in new contractual arrangements, which include an element of committed annual development spend. Core product revenue. excluding service revenue was $9.6 million. Total income, including grants, was $11.8 million, up 23% over the prior period. Annualized transactional monthly revenue, or ATMR, which provides an indicator of future growth potential of CIRCL's annual reoccurring revenue, reached a peak during the six-month period at $11.4 million in August, up 15% against prior year comparative. August is a peak month reached a peak during the six-month period at $19.4 million in August, up 15% against the prior year comparative. August is a peak month because September can be seasonally affected by the holidays in Australia. Transactions across our travel platforms grew 21% over the same period last year and contributed to the 25% increase in operating revenue. R&D spend was $3.8 million for the period was up 50% over the prior period. Operating costs increased 25% over the prior period. Moving to slide seven. This slide shows the summary profit statement and the reconciliation of net profit to EBITDA. The graph on the left shows EBITDA over time for our financial years. In the half year to 30 September, we generated EBITDA of 1.5 million, which was an EBITDA margin of 13% on operating revenue of 11.4 million. During the first half, to carefully manage our cash position, we aimed to balance increases in cost with increases in revenue. Operating revenue and operating expenses were both up 25%. I'm now moving to slide eight. Slide 8 shows revenue breakdown by type of revenue and by geography. Total operating revenue is 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 then services revenue. Travel platform revenue grew 18%, slightly less than the 21% increase in transactional volumes. This reflects discounting for additional volumes. This first half does not have material Zeno volumes contributing to the results. However, as announced in August, Flight Center's contract extension will result in increased revenue across both platforms and will contribute to growth in the second half. Expense platform revenue continued to grow strongly at 31% for the half. Content revenue from commissions earned beyond the basic booking fee grew strongly at 24%. Content commissions are part of the circle strategy to provide customers with complete suite of end-to-end journey offerings and is accordingly expected to lift average revenue per booking over time. Total services revenue was up 68% due to demand to customize our platforms as well as introducing paid content. As I mentioned, an element of this development revenue is now subject to multi-year commitments. Services revenue tends to foreshadow growth in future reoccurring revenue. In relation to the movement in earnings in various geographies, you can see that the growth is primarily related to Australia and New Zealand. The growth in the USA is primarily related to US source commission incomes as Zeno transaction revenue from the US had not commenced in the half. I now turn to slide nine, product investment. This slide outlines the development spend, both the portion capitalized and the expense during the period. During the period, both research and development spend was $3.8 million, up 58% over the prior half year, and represents 34% of operating revenue. The portion of capitalized spend at $1.9 million is slightly over the prior period and represents 50% of total spend. These capitalized costs are reflective of the investment we are making in developing our product to cater to new territories. The benefit of this investment will come in future periods. The R&D costs which were not capitalized during the period amounted to $1.9 million, slightly less than the $2.2 million expense in the prior corresponding period. Net of government grants and after amortization of previously capitalized development, the product development cost expense in the profit for the period was $1.7 million and represented 15% of operating revenue. Moving to slide 10 and a summary of other financial highlights. Circle completed a foreign exempt listing on the ASX in June 2018. One-off listing and associated professional fees were $0.3 million. In August 2018, Circle completed a capital raise of $5.5 million shares for $15 million. The net funds raised after associated costs were $14.3 million. Closing cash balances at the 30th of September 2018 were $19 million. The net cash movement in the six-month period, excluding the funds raised, was a $0.5 million decrease. Including the listing costs, this was a decrease of $0.2 million. Headcount has increased from 106 at 31st of March to 160, including contract staff of 20, at the end of October. It is primarily reflective of the extra development and project resources added to integrate content, develop new features, and enhance core system resilience. It has been a pleasing half year to be able to achieve revenue growth and remain profitable as we balance expenditure to growth. We have the funding and the flexibility to now invest to accelerate future growth in the 2020 financial year. We end the period in a positive position. I am now going to pass you back to Darren to cover our strategic update starting on slide 11.

Thanks, Susan. As you're no doubt aware, Circo is a three-pronged strategy of growing our customer base, increasing our average revenue per booking, and delivering sustainability. market-leading technological innovations that underpin our platform for global expansion. I'll cover up updates in each of these areas, firstly starting with the updates on growing our customer base in our home markets on slide 12. Integral to our growth strategy during the period was Circo Xeno, our new premium service offered for the first time to customers in our home markets in October 2017 and then launched wider in May 2018. We're offering Xeno alongside our existing platform, Circonline, with a number of leading edge features. Travel management companies, or TMCs, that have signed agreements to sell Xeno account for two-thirds of our Australasian transaction volume. In addition, we're bringing new travel management companies' customers to Circo that have signed on to work with us based on the Xeno product. Tandem Travel, Air New Zealand's TMC, which signed last year, has now fully migrated its corporate customer base to Zeno. Serco now has over 350 corporates who have transacted through Zeno, including large corporates who transact more than 1,000 bookings per month. In July 2018, Orbit Travel signed with Serco to bring our Zeno offering to its corporate customers. Orbit started their rollout in Australia, and their New Zealand offices will start their trial customers this month. We expect that significant volume will begin to transition in the second half and into the next financial year, as Orbit's previous booking tool is end of life. Within our home markets, we are now in a strong position and have Zeno agreements in place with most of the large and mid-sized travel management companies. Flight Center have launched SAVI in September, which is powered by the Xeno technology. With additional features customized for them, this is part of an agreement to extend the current contract for a further four years. The agreement includes the commitment of ongoing development spend and price increase across all transactions, including those transacting through Circle Online. We expect additional customers to transition to Xeno in the second half of the financial year. Carlton Wagonley or CWT Australasia has extended its contract to incorporate Zeno within Australia and New Zealand. Their first customer will transition to Zeno shortly. Moving to slide 13 and our progress in expanding into these new markets. We're at the beginning of a journey into the new markets, however I'm pleased with the progress today. We've signed opportunities to expand within our target market as well as being in commercial discussions with other customers. We have a global rollout agreement with ACPI and North American Rollout with Flight Centre, plus other local American travel agents who have signed contracts. These travel management companies are actively looking for an alternative to their current toolset. to give them a competitive edge and a partnering with Serco to bring Zeno to the UK, Europe, Canada and the USA. After signing agreements, we build the features and integrate the content. Meanwhile, we train the travel management companies who then trial with their customers as a precursor to the full rollout across their customer base. Demand has exceeded our capacity as our product vision resonates with the new market. So this is a period of scaling and market activation through building content for multiple markets with the transactional growth off the back of these initiatives expected to ramp up in FY20. We expect investment into our platforms to accelerate in the second half. We're utilising both in-house contracts and contract resource to ensure we have the right product and content set to be successful in the market uptake. The UK is now live and transaction volume is expected to build with active marketing from ACTI. We expect customer trials in Canada and then the US in the second half and in the meantime we are building for the ACTI in Europe to meet opportunities in the continental Europe. market. And Xena has been recognized as an innovative product in these new markets. And I'll now move on to slide 14. Firstly, revisiting our vision for Xena, our vision for the future for customers to book all their business services. So not only how they get to the destination, but to where they fly, stay, move, eat, work, play, and rest. Through one interface, which is at their fingertips. And we want our customers to be able to make these bookings easily and in compliance with the employer's travel policies, with a minimum of stress and a minimum of administration. With enhancements to our solutions we have planned over the next few years, we are confident the evolution from the standard online booking tool to the new connection platform that powers all aspects of corporate travel and expense will become the backbone of corporate travel around the world. Xeno is the accumulation of several years of strategic investment, and we continue to invest in this development. We've sought to future-proof our platform by ensuring it can integrate with the content no matter the source, whether it's through the traditional global distribution system, Direct Connect via APIs, or through the airline NDC standards. We've been able to integrate rail bookings in the UK into our system. We've connected to Air Canada via the CETA NDC exchange connection for our Canadian TNC customers, and this was activated this month. We've also connected directly with Qantas via the Qantas QDP platform, as previously announced. We're also assisting our travel management companies to finalise NDC connections for those customers who also wish to access that content. It's heartening to see our innovation now being recognized internationally as well as locally. At the BCN or Business Travel Network Group Innovate Conference held in October 2018 in the US, Serco was awarded the People's Choice Award as Business Travel Innovator 2018. Also in early November, Serco was awarded Excellence in Innovation at the New Zealand Business Awards by New Zealand Trade and Enterprise for 2018. And further to that, ZS Associates, a top U.S. advisory firm, conducted a market evaluation which was recently published in the November issue of the company Dimes. They rated Serco Xeno the most robust, and consumer-friendly solutions, beating the market incumbent, Concur, GetThere, and Amadeus site tracks. So moving to slide 15 and the third leg of our strategy of increasing the average revenue per booking. The third leg of our strategy and driver to increasing reoccurring revenue is to generate alternative sources of income in addition to the base transaction fees. We're achieving this by continuing to add content to our travel offering. Content commission, with a 24% increase for the half year over the prior period, grew at a faster rate than the transactional growth at 21%. Attachment rate has also increased to over 6% up from 5.4% at the same time a year ago. Over the last six months, we have completed integration with Hinterland, sounds, air, air chatting, and we've also integrated through the Carlton Wagonly Group room at hotels. We've also completed the integration of automatic receipting into our expense system for Uber, with this being released shortly. As the uptake of Serco solutions increases, we are being sought out by travel-related suppliers to link into our ecosystem. Our new platform Zeno provides the basis to gather these services into one hub to make booking more convenient for the traveller. We expect future services offered through Zeno to include more ground transportation options, more rail options and other travel related content such as dining. And we do expect this content to deliver value, add services to the traveller and increase our average revenue per booking beyond the base booking fee. I now move to our outlook on turn to slide 16. So we're very full work program underway as we integrate content. Develop additional functionality for the Northern Hemisphere and increase our infrastructure to support this global growth. So Serco retains its operating revenue growth guidance of 20% to 30% for the full financial year ending 31st of March 2019. Currency fluctuations and the timing of customers onboarding will be key factors in determining the final results as usual. Our second half is also affected by the holiday business travel slowdown in late December to early January. We anticipate that the majority of the costs associated with the development work for the Northern Hemisphere will be capitalised, resulting in our EBITDA remaining consistent with the prior period. This will mean that we will increase cash burn in the short term but will do so with prudent management and remain profitable. We are excited by the interest we have received in the Northern Hemisphere. We are preparing the business to maximise the return on this customer demand. through into the next financial year. Moving forward as outlined at the time of our capital raising in August 2018, we continue to assess acquisition opportunities to support our growth objectives. That completes our presentation and I turn to the Q&A as to slide 17. I draw your attention to our appendix slides after slide 17 for further information. I'll now hand back The motor right is a little tight for the Q&A.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Once again, please press star 1 if you would like to ask a question, and we'll pause for just a moment. We do have a question. It comes from Chris Byrne, Craig's IP.

Good morning, Darren and Susan. How are you?

Good, thanks. Good, thanks.

Hi, Chris.

Can you hear me? Yes, we can.

Cool. I was wondering whether, in terms of Zeno, you talked a bit about the uptake in Australasia. I just wonder whether you can give us a feel for the trend of this take-up. I mean, Is it accelerating? Is it just sort of a steady flow? I mean, I know two-thirds have sort of signed up, but in terms of usage of Xeno, can you sort of give us a feel for the trend of take-up?

Yeah, it's just a steady sort of take-up as people migrate from the Cirque Online product up. Some of the new ones, such as Orbit, you know, they go straight onto that. So as their business will come online, that will spike it up onto that side of it. Yep. and the likes of globally, because they're rolling out solely on the Xeno platform. The existing customers, so some of the new ones, they're going straight onto the Xeno platform, and then there's programs underway over the next X months where they migrate those customers across. And in some cases, they still pay regardless of that migration timeframe. back to transaction line.

And in terms of offshore revenues, I mean, can we sort of look at it and think that an FY20 will start to see some meaningful sort of revenue in transactions, or is it more likely to be an FY21 story?

We should start to see revenue coming in through those US and European markets into the FY20s. probably more so into the second half, but yes, definitely. Okay.

And on acquisitions, are there any discussions?

Sorry, because I was going to say that we're in that position of the customers ready to do trials now in those regions, so we should, you know, in the next few months have a lot of customers going live as well. Live is actually a trial.

Just on acquisitions. On acquisitions, you talk about the fact that you're investigating potential acquisitions. I mean, are you in discussions with various different parties or are you just sort of assessing from far where are you sort of at with that process? You sort of mentioned over the last two or three results.

Yeah, and that's one of the assessments that the board considers all the time is, is which things are the right things to focus on. And so although we look from afar at the stage of which ones can actually have the right meaning to our strategic goals, you know, that's where we sit at this point.

Okay. So is there a couple that you think would be really good for Serco at the moment? You know, have you sort of identified two or three that you think, yeah, okay, we might not get it, but That's something that we're interested in.

Probably not wanting to comment too deep on that at this point, but just probably more to say that we keep an active lookout of those ones that we think could accelerate our average both client acquisition and growing our customer base and technology as well.

Great, okay, thanks very much. Nice result. Thank you.

Thanks. Once again, ladies and gentlemen, it is star one. If you have a question, up next is Ian Graham, Woodward Partners.

Yeah, hi, guys. Yep, again, good result. Nice and steady, well done. Just a couple of... Just a question, probably elaborate on Chris's a little more, but I... TPI, obviously the trial, it's a trial situation. Can you share sort of any key findings that they found using during that process? Anything that sort of surprised them or disappointed them or during that process?

So their customers have gone live now on that platform and in the UK market and normally during the trial market you're trying to work out whether your product that you've taken to market which might be what we call a minimal marketable product into that market sufficiently meets all of the content or all of the parts for those businesses using it. sometimes you might have to then add additional content in or change some of the policies or functionality around that to then enable that to go wider from those first set of clients and to go deeper. So ATPI are happy to, and they've set up a marketing campaign now to push that deeper through their organisation. And so that assessment has to go on with every new market that ATPI takes our technology to and making sure that we're solving some of those business issues as well. So one of the things that is unique to Serco is our ability to also solve those problems that have existed within that market for a long period of time. So we don't accept the status quo. We try and actually come in there and create a point of difference at the same time and solve some of those legacy market issues that the companies and travel management companies have had to suffer with as well. And that's that little X factor of what we do as well.

Okay, so I guess the content, getting the appropriate content theory rail and those sort of allows carriers were sort of teething points.

Yeah, that's exactly right. Look, rail was brand new for us to bring into space, and we're now bringing in secondary rail providers such as Evolvi into the market as well. So we're now strengthening up the rail offering, and we'll do more of those during the next six months as well. So we're boosting up to do those connections differently than they've done to date. and bring them in so that they actually add real benefit to those customers actually using the likes of Evolving in a corporate booking tool space.

Okay. And just the phrase you've used here, demand has exceeded our capacity. Can you just expand on that? I mean, in a software situation, where's the bottleneck?

And that's a really good point. So we're getting a lot of interest out of North America. So we started with the Canadian market, and we've had a lot of interest out of North America, and it's really the compression on base. So people wanting the technology today rather than when we're ready to actually go live with those sort of customers as well. And so the demand... People are really excited to see the technology and use it and trial it like you've heard from the companies of ZS Associates. We're just trying to manage the client's expectations through to our delivery capacity to get all of those things done right into those markets as well. It is a great position to be in, to have that level of demand, but you really want to make sure you're producing quality and that out to the market as well.

Okay. And just in terms of the price point, again, this would be a fairly delicate issue to talk about, but how have you found a TTI and other sort of initial customers, how have they found that price point that you've gone to market with? Is it competitive? with the incumbent providers? You know, are you getting much pushback there? Because obviously you're going in with a higher price point with Xeno rather to Circle Online. So just some of your initial impressions on price point.

It's actually... So if we take the UK market, for instance, the current pricing for the UK market was actually at our higher level to... So we could come in and actually match the competition straight on. And that's just because of the currency fluctuation between the pound and the NZD and what they were charging in that market. So that made it a lot easier for those markets. And then in some of the other markets, they buy both travel and expense together. So you're able to mix around the pricing on the two products to get the right mix in place. So that's been quite an interesting learning because each market buys slightly different and uses the technology stack slightly differently as well. And so we've been able to work with that to work out how we get to those key figures through those deals. So definitely the currency is played probably in our favour with the US and the UK markets.

And lastly, any fallout from Lightning and all the problems I saw? I guess, you know, much more at a corporate level with travel management, but have you noticed any fallouts at a customer level with their Lightning software locally?

No. No. Not at this point. And, you know, corporate travel management remains a strong partner of Serco. And, yeah, so that's probably all we have to comment on that. No impact on that side.

Thanks, guys. Well done. Cheers.

Thank you.

And once again, it is Star 1 if you have a question at this time. And there are no further questions. Everyone, there are no further questions. Do you have any closing remarks?

Yes, I do. Thank you, everybody, for joining us on the call. We look forward to talking with you over the next few days and for those who have scheduled an investor meeting. In the meantime, if you have any questions, please do not hesitate to come back for either Susan or myself. And thank you once again.

Thank you, sir. Once again, ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.