Serko Ltd

Good day, everyone, and welcome to the CIRCO Limited Full Year Results Announcement Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Darren Grafton, CEO. Please go ahead, sir.

Good morning, and welcome to today's results presentation for the year ending 31st of March, 2020. My name is Darren Grafton, and I'm CIRCO's CEO, and I'm here with Susan Tuss, CIRCO's CFO. FY20 has been a significant year for Serco, both from an execution standpoint and due to the COVID-19 pandemic and the effect it has had on the world, especially on the travel industry. The first three quarters of the financial year were characterized by an achievement of a number of key milestones and substantial progress towards our strategic goals. We successfully grew both our monthly revenue and our customer base up until the pandemic hit. Zeno reached significant market growth with one in four of Circo's bookings now made on the platform. The big highlight, of course, for FY20, where our successful oversubscribed capital raising completed in late 2019 and the signing of a key agreement with Booking.com to build the new globalbooking.com for business solution based on our Zeno white label platform. However, Circo's performance was impacted in the fourth quarter of the financial year as COVID-19 pandemic became widespread, significantly affecting booking volumes. This resulted in an adverse impact on the full year result. Our results were released to the stock exchanges earlier this morning which included a copy of the presentation and we will start on slide four. I'm going to cover the impacts of COVID-19 has had on our business and our response today. I'll then give you an update on our key strategic developments. Susan will then provide an overview of the financial results for the year and I'll come back to cover the outlook prior to taking any questions you may have at the end of the presentation. So now moving to slide five. On the 11th of March, 2020, the World Health Organization declared a global pandemic as a result of the outbreak and spread of COVID-19. Our China office was forced to close in January with our China-based staff moving to work remotely. Originally, the impacts of COVID-19 appeared to be localized to China. However, in mid to late February, As the pandemic spread globally, we used the inputs from our products in China to prepare plans for our other global offices to transition to remote working. During this time, Serco closely monitored the impacts of COVID-19 on travel bookings, and we announced on the 25th of February 2020 that the company had detected an adverse trend in travel bookings and would likely come in at near the low end of our guidance. It is possible that the initial reduction in travel was masked by the monthly transaction growth that Serco was experiencing and the customer onboarding occurring in February. On Saturday, the 14th of March, the New Zealand government announced it was closing its borders to non-New Zealand residents. And on Monday, the 16th of March, Serco withdrew its guidance. On the 25th of March, the New Zealand government raised its alert level to four, full lockdown, resulting in the cessation of all non-essential travel. COVID-19 related travel restrictions were enacted within Australia across the northern hemisphere where Serco expects to grow its business. New Zealand domestic travel has now been permitted from when the country moved to level two on the 11th of May. However, travel is still restricted in Australia between states. Northern Hemisphere travel is also restricted but varies between regions. Booking transaction volumes on Serco's online travel booking platforms generate the majority of Serco's revenue. Government responses to the pandemic worldwide, including lockdowns and the suspension of all non-essential travel, continues to have a material adverse effect on Serco's booking volumes. For the first 11 months of the financial year, Serco achieved monthly revenue growth over the same month in the prior year. However, in March, transactions fell sharply. December and January are typically the lowest months for travel bookings, which makes February and March really important months for our revenue. This is why the impact of COVID-19 was so material for Serco. In March 2020, daily booking volumes were down in excess of 90% compared to similar days in March 2019. They remained at these levels for April. Travel volumes have gradually started to recover and in May 2020, with the easing of domestic travel restrictions in New Zealand, during the first three weeks of June 2020, over 3,200 corporate customers have now made a travel booking as New Zealand moved down to level one restrictions. This has resulted in daily booking volumes on Circo's platforms increasing in June to around 25% of the daily booking volumes in June 2019. In response to the operational and economic impacts of COVID-19, Serco reduced cash burn and reprioritized the strategic initiatives to reposition the business for the new operating environment. We quickly faced up to the challenge and aligned our initiatives under the three broad strategic imperatives, survive, optimize, and thrive. Our immediate priority after looking after our people was to implement cost reduction programs designed to preserve our strong cash balance. and target an average cash burn rate of no more than $2 million per month through to the end of FY21. This cost reduction program saw the removal of non-essential expenditure, scaled down our operating expenses, such as cost of sales and hosting, as well as the rationalization of our contractor resources, including the conversion of some of this resource to full-time employment. Serco is aimed to keep as many people employed during this period as possible as we recognize the personal impact to employees and the cost to the business of losing skilled people, especially as our ambition to grow in new markets remains undiminished. We've endeavored to balance cost savings with investment into core areas to maintain our capability to deliver on our key growth initiatives and to ensure we are well positioned to participate into the recovery of corporate travel. Following our successful capital raising in 2019, we had cash reserves of $42.4 million as at the 31st of March 2020. Although we did not anticipate an event as catastrophic as the COVID-19, Serco has always maintained a prudent and conservative approach to balance sheet management. By raising more capital than the company's strong cash position has provided a comfortable level of liquidity, which meant we had no requirement to raise capital in distressed circumstances. We believe these cash reserves at the current rate of burn and based on our current assumptions are sufficient to support the business. We've made good progress And despite having to work from home, we were able to adapt quickly and ensure we remain productive. With four offices across three continents, we're used to working geographically dispersed workforce. With our platforms in the cloud, we already had the remote security, collaboration, and connectivity tools and processes in place that scaled relatively easily. In fact, efficiency and productivity that our teams achieved through the period of lockdown has been truly amazing. And we've embraced new ways of working and seen the benefits of a number of process improvements. We have survived, adapted, and now we are looking at optimizing and thriving. COVID-19 has changed the model of business travel. We've worked hard to reposition our business to make sure we're well positioned to participate in the recovery of corporate travel. Now I'll turn to slide six. I'll cover each of our markets of fairing and our plans as the travel restrictions ease in each market. However, I think it's important to firstly remind you of our overall strategy, so please turn to slide seven. More than ever, Serco's three-pronged strategy remains relevant, growing our customer base increasing our average revenue per booking, or ARPB, and delivering market-leading technological innovations to underpin our platform for global expansion. We partner with global travel management companies, TMCs, who are resellers of our products. These partnerships continue to extend to enable the rollout of the Zeno travel and expense. platform into the northern hemisphere geographies. We continue to expand our relationship with TMCs in North America with three new reseller agreements signed since March 2020 as TMCs ready themselves to come out of the travel shutdown period stronger than before. These organizations serve the managed corporate travel market. We're also partnering to target small and medium-sized enterprises to use our self-onboarding functionality to grow our share of the unmanaged corporate travel market. The Booking.com expanded agreement announced in October 2019 is an example of that strategy, which I'll cover in more detail shortly. If we turn to now slide eight, we've put a lot of time and effort into the scalability of our platform, appointing Duane O'Brien as Chief Technology Officer to lead this initiative. Duane brings over 25 years experience in specializing in building global enterprise SaaS platforms. We've also invested in our ability to scale our reseller partners globally. Nick Whitehead was promoted to Chief Marketing Officer to lead these initiatives globally. first an innovative sales enablement program built around a xeno partner portal and learning framework with this program we can now rapidly onboard new travel management resellers and get them to the point of sales effectiveness much more quickly secondly we're also focused on developing a model of community engagement through our existing xeno labs program as a way for us to gain a deeper understanding of the needs of the corporate travel market while giving buyers access to our product development teams. We are leveraging this process to gain learnings on the market changes arising as a result of the COVID-19 pandemic. These types of initiatives, as well as the competitive advantages of the Zeno platform itself, are intended to put our travel management partners in a strong position to retain their customers and to gain market share. This has led to a good year for growth in both new travel management resellers and net new corporate customers. As business travel resumes, factors such as cost, risk, and management will actually be of importance for organizations. As organizations return from a near zero dollar spend on travel, each trip and each dollar proposed to be spent is likely to be reviewed with a greater level of scrutiny than before. Risk management is likely to be of increased importance to ensure traveler well-being and to meet employers' duty of care obligations. Change management is also expected to be a priority not just to support an organization's travelers as they navigate a much more unpredictable landscape of disruptions, but also to ensure that credits are effectively tracked and utilized. The managed travel channel offers a solution to these requirements. Flights or hotels booked directly with suppliers across multiple airlines or hotel websites make it difficult for organizations to effectively address costs risk, or change management. Adoption of all of these factors means a corporate booking tool and the associated corporate travel policy and compliance are likely to become even more important than before. This is the future of business travel that Xena was built for, and it is for these reasons we expect that Serco is well positioned for the global growth when business travel resumes. Now turning to slide nine. As we announced in October, Booking Holdings participated in Serco's capital raise with a $17.5 million investment into Serco. And at the same time, we entered into an agreement that allowed Booking.com to offer Zeno to their corporate customers. This agreement enables Booking.com to leverage the Zeno platform as a white label solution under the Booking.com for Business brand. with a commercial partnership based on a revenue share model between Booking.com and Serco. Serco appointed Jonathan Starkings to lead the Booking.com initiative. Jonathan was the managing director of Groupon Travel and commercial director for Expedia Group. Despite the challenges of COVID-19 and the need to collaborate across the globe, our teams came together and were able to achieve significant progress. We've rapidly brought to the market an initial product, and it's currently being tested in a few key markets. Turning to slide 10. The majority of our travel revenues come from domestic bookings in Australia and New Zealand. And during the financial year, we achieved year-on-year booking growth in each month up until March 2020. As outlined at the 2019 annual meeting, We had a medium term target of reaching $100 million of revenue. As part of achieving this goal, we had a target of achieving 5 million transactions in Australasia at a $7 ARPB. And this was in the medium term. Well, we made good progress during the year with a peak in February of 24,000 bookings per day, up from a peak of 21,000 in the same month in the prior year. and an ARPB increasing to $6.46 on recurring revenue, the impacts of COVID-19 has had on the industry. It's likely to take a little bit longer to achieve this goal than originally planned. Monthly growth occurred despite softer economic conditions in Australia in the first half, followed by the Australian bushfires negatively impacting corporate travel. Over 6,800 corporates now use our booking platforms. We continue to grow customer numbers with the number of corporates transacting through our travel platforms increasing by over 700 when compared February 2020 to February 2019. We still have a pipeline of new customers to onboard through partners like Orbit who haven't yet finalized their migration. We also saw a significant transition to the premium Xeno product from Serco Online during the period. At the end of March, 25% of transactions were occurring on the Xeno platform. In June, this is now 42% of all transacting corporate customers using Xeno. Serco also saw an opportunity with the way expenses needed to be managed during the period of remote working caused by COVID-19 lockdowns. Serco created a light expense product using a direct marketing campaign and activation of a reseller incentive program across our travel management company partners in Australasia, along with the introduction of a rapid implementation program that materially reduces our setup time to onboard new accounts. This resulted in an increased pipeline of expense opportunities. Returning to slide 11, During the period, we had invested heavily into the Xeno platform for expansion into the North American markets as part of that $100 million medium-term goal, with the other part being the UK and European markets. Even though travel activity is extremely subdued, we feel positive because since March, Ovation, Balboa, and Ascendus And last night, Radius Travel Group joined our group of travel management resellers. We also added expense resellers with Omnia Partners and Oracle NetSuite. We added key North American content and integrations that helped us win our first customers in the new market. An example is ZS Associates. And built a pipeline of new channel partners who are now working through pilot programs. However, travel management reseller onboarding slowed materially in the last quarter due to the impact of COVID-19 and we expect further corporate onboarding to be slow until travel resumes in this market. Development work will continue to expand the local air, rail and hotel content as well as completing reseller integrations to support the migration of the additional corporates onto our platform for the North America as well as for Europe to support Booking.com for Business platform rollout. In addition, the development work required to bring Interplex expense platform in line with the Zeno user experience continues and we expect to launch the new Zeno expense offering in Q3 FY21. bringing greater scalability and a richer set of features to our combined travel and expense offering. Now I'll pass you over to Susan to cover the financial summary for the year, and she will start on slide 13.

Thanks, Darren. I'm going to cover off our performance dashboard that we report every six months. I will then go into more detail on some items in the following slides. With our expansion plans and the corresponding increase in operating costs, Circle declined to an overall net loss after tax of $9.4 million. EBITDAF was a loss of $6.1 million down from a profit of $2.6 million in the prior year. Our operating revenue was up 11% at $25.9 million for the year with 93% representing reoccurring product revenue sources. Reoccurring core product revenues were up 16% to $24.1 million. Total income, including grants, was $26.8 million, up 9% over the prior period. Annualized Transactional Monthly Revenue, or ATMR, historically a forward-looking indicator of reoccurring revenues, reached a peak during February at $27.5 million, up 6% against the prior year, compared at $26 million. However, declined to $15 million in March 2020 and subsequently further declined to a low in April and steadily increasing now with the increase in travel transactions since May. Total transactions across our travel platforms grew 2% over last year. R&D spend was $13.6 million for the period and was up 48% from the prior period. which shows the increased development that was being invested in the product for new territory expansion. Operating costs increased 59% over the prior year to $37.1 million. Moving to slide 14. This slide shows the summary profit statement and the reconciliation of net loss after tax to EBITDA. The reconciliation includes foreign exchange revaluations of $0.7 million, including the net finance income, Depreciation and amortization of $3.2 million, with $1 million being related to the IFRS 16 leases adoption from 1 April 2019. Fair value adjustments of $1.1 million related to the contingent consideration for Interplex acquisition with the final tranche of these shares issued in February 2020 when Circles' share price was reaching its all-time highs. Slide 15 now shows a revenue breakdown by type of revenue and by geography. As mentioned earlier, reoccurring revenue was excluded services revenue at $24.1 million, up 6% on the year. Travel platform revenue grew 2% in line with the 2% increase in transaction volumes of $4.2 million for the year and where COVID-19 impacted, as Darren previously covered. Online transactions, i.e. paid transactions or bookings, at 3.72 million, however, were down 1%. More offline bookings took place during the COVID-impacted period. Offline bookings are system-generated bookings which are generally at a reduced cost or bundled into the online booking fee. This is due to complex booking arrangements performed by the travel agent directly rather than the traveler-led system bookings during the heavily impacted period when travelers were trying to return home or cancel arrangements. Volume impacts for the last few months of the year were only part of the reason for the lack of significant revenue growth. There were other adjustments required due to COVID-19 impacts. Under IFRS 15, Revenue from Contracts, CIRCLE records revenue from its portfolio of contracts with reference to actual transactions, minimum contracted commitments, and forecasted future volumes. Due to COVID-19 impacting the entire travel industry, Circle has agreed to a number of changes to contracts, including changes to schedules of contracted minimum revenue. This, along with declining forecasts for the remainder of the term of contracts, has led to the effect of reducing the revenue that Circle expected to record in the current year beyond the impact of the booking shortfalls. Travel platform revenue was mainly derived from Australian and New Zealand sources, with revenue in a new northern hemisphere expansion not significant in the year. Circular expense platform revenue at $5.8 million was up 115% and includes the revenue from the Interplex acquisition of $3.7 million for the full year, compared to $0.9 million included in the prior year for three months. The growth related to circle expense was 16% for the year. Supplier commission revenue declined slightly against the prior year to $1.4 million from $1.5 million, and other revenue remained in line with the prior year at $0.5 million. ARPB, or average revenue per booking, on reoccurring revenue was $6.46 for the year, calculated as the total reoccurring revenue divided by total online travel bookings of $3.7 million. This was up 17% from the prior year competitors of $5.52, primarily attributable to the Interplex income. Total services revenue at $1.8 million was down 33% due to the development resources focused on the North American activation and the Booking.com for Business platform. At $1.8 million, this is at a similar level to the FY18 revenue. FY19 revenue included increased activity in relation to customizing Xeno for Australian resellers, including significant work completed for Flight Center's SAVI platform. In relation to movements in earnings in various geographies, you can see that the growth is primarily related to North America and New Zealand, with Australian sources declining due to COVID-19 impacts, as well as the softer economic conditions and bushfires mentioned before. The North American revenue is primarily related to U.S. source commission incomes and the expense revenue from Interplex. New Zealand growth represents the transition of orbit customers and the minimum of that contracted contract recognized over the term of the contract in accordance with IFRS 15 revenue recognition criteria. I'm now turning to slide 16, operating expenses. This slide outlines the categories of expenditure. Operating costs increased to $37.1 million for the year, up 59%. This was mainly as a result of the increased headcount and costs associated with the expansion to northern hemisphere markets and also includes Interplex operating costs for a full year. The most significant cost is remuneration and benefits at 52% of total operating expenses and increased 48% to $19.4 million. The number of full-time equivalents at the 31st of March 2020 was 233, representing a net increase of 60 FTEs since the 31st of March 2019. Last year we increased by 67. And similar to prior year, the increase was in product development being 46 heads and FY19 it was 46, and customer support of 12 and FY19 it was 13. We had 120 staff based in New Zealand, 23 in Australia, 48 in China, and 48 in the U.S. as of the 31st of March, 2020. Subsequent to year-end, the staff numbers were increased to 240 with the onboarding of hires that were in train when COVID-19 hit and the conversion of key contract staff to permanent employees as part of the cost-saving initiatives introduced. Selling and marketing costs increased 77%, and this was primarily related to an increase in third-party connection costs for technology connection fees, but for content by U.S. global distribution company, Saver, charges which are new to New Zealand and Australia, but common in the U.S. Hosting expenses increased 74% due to volume increases, infrastructure improvements, and to increase the speed and saveability, as well as the expansion of databases into new territories for expansion. Administration costs increased 64%, includes depreciation, amortization, Amortization increases of $2.1 million. Computer licenses increased $0.7 million with increased headcount and increased collaboration tools and system monitoring tools. An increase in professional fees of $0.5 million included $0.4 million related to one-off costs for partnership due diligence activity prior to the share capital raise. An expected credit loss provision of $237,000 was made due to the uncertainty and recoverability of an increased number of debts as a result of the current operating environment, whereas a bad debt provision in prior years has been nominal. The fair value adjustment I have already spoken to. Now turning to slide 17, research and development. This slide outlines the development spend, both capitalized development and expensed research during the period. During the year, total R&D was $13.6 million, up 40% over the prior year and represents 53% of operating revenue. The portion capitalized at $11 million is up significantly over the prior period and represents 81% of total spend. These capitalized costs are reflective of the investment we are making in development of our product to cater for new territories. While significant compared to the prior years, The assessed future benefits substantiate the capitalization of these costs, even in a COVID-19 impacted year with very conservative models. The research costs, which were not capitalized during the period, amounted to $2.6 million. Net of government grants for research and after the amortization of previously capitalized development, the product development cost expense for the period was $3.6 million and represents 14% of operating revenue. As Darren mentioned, Earlier, the development is expected to continue for FY21 for Northern Hemisphere expansion. I'm now going to pass back to Darren to cover off the outlook statement on slide 19.