Serko Ltd

Stand by, everyone.

We're about to begin. Good day, everyone, and welcome to the CIRCO Interim Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Dan Grafton, CEO. Please go ahead, sir.

Good morning, and welcome to today's half-year results presentation for the six-month period ending 30 September 2020. My name is Darren Grafton. I'm Serco's CEO and I'm here with Susan Putts, Serco's CFO. On the back of our recent announcement relating to our oversubscribed capital raise, I'm pleased to report that our half-year results, as reported as part of that announcement, remain substantially unchanged. During the half-year, we continue to see a progressive recovery in travel in the Australasian region and significant interest in the North American region in resellers preparing to offer Zeno as an alternative for when travel recommences. In addition, we have made good progress in launching pilots for Booking.com in the UK, Ireland, and Germany. We'll cover off more detail on 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 four. Susan is going to start with an overview of the financial results for the six-month period. I will then provide you with an update on the key strategic developments and cover the outlook for the second half. We'll have time for questions at the end of the presentation, and I will now pass you over to Susan, and she will start you on slide six.

Thanks, Darren. Slide six shows our performance dashboard. As you can see, Circle has felt the effects of the pandemic, with performance materially declining across the board when measured against the first half of last year. EBITDA was a loss of $6.7 million for the period, with a net loss of $10.1 million after tax. In our capital raise documentation, we forecast our operating revenues to be in the range of $4 to $5 million. I am pleased to report that our operating revenue for the period was $5.1 million for the half, albeit down 66% compared to the prior year. Reoccurring product revenues were $4.6 million, which represents 91% of operating revenue. Total income, including grants and government COVID-related payments, was $8.5 million, which was 44% decrease over the comparative period. Annualized Transactional Monthly Revenue stood at $10.4 million as of 30 September. This non-GAAP measure has historically been used as an indicator of future growth potential of CIRCL's annual reoccurring revenue. However, the variability of travel as a result of the impacts of COVID-19 make this a less reliable indicator than it has been historically. Total transactions across our travel platforms were down 77% for the six-month period at 23% of the prior period volumes. R&D spend at $5.9 million was down 34% from the prior period. Operating costs increased 14% over the prior period. Now moving to slide seven. This slide shows the summary profit statement and the reconciliation of net profit to EBITDAF. In the half year to 30 September 2020, we generated EBITDAF loss of $6.7 million compared to a profit of $1.4 million in the prior year. The reconciliation between EBITDAF and the net loss of $10.1 million primarily relates to non-cash items and includes depreciation and amortization of $2.6 million and net finance losses of $0.7 million, primarily related to unrealized foreign exchange revaluations. I'll cover operating revenue in more detail on the next slide, 8. This slide shows revenue breakdown by type of revenue and by geography. Travel platform revenue was down 77%, primarily due to the decrease in travel booking volumes from $2.2 million to $0.5 million for the period, also a 77% decrease. Similarly, content revenue generated from our commissions were down 75%, mainly due to the reduced bookings. Expense platform revenue at $2 million, however, was not as adversely affected as travel platform revenue and was down 33% for the period. This reflected contractual minimums as well as continued expense filings for non-travel related reimbursements. Expense revenue then underpinned a 49% increase in average revenue per booking to $8.81 for the period from $5.93 per calculated as total reoccurring product revenue of $4.6 million divided by total travel bookings. Total services revenue was down 67% with the prior year revenues higher due to work completed last year for Flight Center for their customized version of XenoCult Savvy. Slide 8 also outlines movements in earnings in the various geographies. Now turning to slide 9. The graph presented shows the monthly travel recovery relative to the prior year volumes for the whole of Australasia and also broken down by market. Total transactions as a percentage of the prior year for the Australasian region has reached a high of 35% for the month of October, up from the low experienced in April of 9%. Transactions for the six-month period were 23% over the prior period. The New Zealand business travel market recovered quickly to over 70% of prior year transactions from almost a zero starting point following the lifting of domestic travel restrictions. As you can see, there was a reduction in volumes in August when travel restrictions were reintroduced temporarily. In October, New Zealand reached a high of 76% of transactions compared to the same month last year. due to ongoing travel restrictions, has only had a slow progressive recovery to 26% as of October. We are hopeful, however, that the gradual lifting of interstate restrictions will result in a meaningful uplift of transactions in the Australasian market. I now turn to slide 10, operating expenses. This slide outlines the categories of expenditure. Operating costs increased to $17.9 million for the period, up 14%. The increase is primarily as a result of increased remuneration and benefits up 46% to $11.72 million from $7.7 million for the six-month period. When comparing to the second half of FY20 to the first half of FY21, remuneration declined from $11.7 million to $11.2 million. Employee headcount increased from 208 at September 2019 to 235 at September 2020 and was 233 at March 2020. During the period, a number of contractors reduced, with some converted to permanent employees at a reduced cost. Renumeration also included non-cash-based share payments of $1.4 million during the period. Administration costs included $2.6 million of non-cash amortization and depreciation, which was up $1.2 million from the prior year. Cost savings across most categories were achieved as a result of COVID cost-saving initiatives introduced to reduce cash burn to under $2 million per month for the period. A further breakdown of operating costs can be found in Note 3 of the financial statements. Now, turning to slide 11, research and development. This slide outlines development spend, both capitalized development and expensed research. During the period, total R&D spend was $5.9 million, down 34% over the prior half year, and represented 117% of operating revenue. The overall amount invested relative to the prior year was down due to an increased proportion of maintenance work completed during the period. The portion of capitalized spend at $4.9 million is also down over the prior period and represents 83% of total spend. The capitalized costs are reflective of the investment we are still making to tailor our product for new international markets. The research costs which were not capitalized during the period amounted to $1 million. Net of government grants for research and after amortization of previously capitalized developments The product development cost expense for the period were $2.3 million and represented 45% of operating revenue. I'm now going to pass you back to Darren to provide a strategic update.

Thanks, Susan, and now turning to slide 13. As we have presented in the past, Serco has been targeting a medium-term revenue target of $100 million. Although the pandemic is likely to have slowed the timing of achieving this goal, we consider that the market opportunity remains undiminished. Serco continues to position its platform at the forefront of change, scaling the business to meet the commercial demand that has arisen from the impacts of the pandemic. To further realise this goal, we are investing in content and capability to capitalise on the return to travel. to sustain and grow our ANZ stronghold. We are presently activating the North American market through multiple channels and we are bringing the power of Zeno to the global market in partnership with Booking.com. Serco's brand continues to strengthen as a result of the investments made to date and the recent award wins. This year, Serco was awarded New Zealand High Tech Company of the Year And just this week, Serco received the Best Business Travel Innovation awarded by SCIST in the USA, a reflection of the investments we have made into our technology and the progress we are making in becoming a major global player. Turning to slide 14. Serco's recent $67.5 million oversubscribed capital raise was completed to accelerate these growth opportunities. and continue to strengthen our balance sheet during an uncertain period, with net cash balances forecast at over $90 million at the end of November. Serco is well placed for the future. Net proceeds from the raise were $65 million. The COVID-19 pandemic is an event that is reshaping parts of the business travel industry. impacting both suppliers of business travel content and services and the needs of the business traveler. In recent months, we have received inbound demand from our travel management company resellers and partners considering planning and requesting accelerated timetables to onboard new customers, deliver new features, and expand on these existing partnerships. This demand has exceeded our expectations and has highlighted increased opportunities from a changing travel industry. Serco's priority is to ensure it has the resource and capacity to execute on the strategic priorities, positioning the company for growth when travel normalises and to capitalise on the opportunities arising from changes to the travel industry. We will consider small acquisitions and or investments to assist us to accelerate the execution of these strategies and strategic priorities where it makes sense to do so. I believe Serco is in a strong place to execute on its strategy as travel resumes. Turning to slide 15 to update on the Australasian market. Serco occupies a strong market position in Australasia. with the majority of Serco's revenue coming from domestic bookings in Australia and New Zealand, which is approximately 93%. We are hopeful that Australia will see a similar uplift in domestic bookings as that experienced in New Zealand now that the interstate travel restrictions are progressively lifting within Australia. We continue to onboard new customers from our travel management company resellers, including Flight Centre and Orbit. The number of corporates transacting in September 2020 was 3,800, and we are pleased to see the number of corporates transacting in October increased to over 4,000. Prior to COVID-19, over 6,800 corporates were transacting on Serco's platform. And the percentage of transactions occurring on our premium Zeno platform was 38% of the total transactions for September 2020, up from 25% total transactions at the end of March 2020. And on slide 16, I'm highlighting the activity now in the North American market. During FY20, Serco invested heavily into the Serco Xeno platform for expansion into the North American market and had its first live bookings following the beta release in last September 2019. Travel within the North American market remains very subdued as a result of the pandemic. However, this market provides a significant growth opportunity over time. And Serco has continued to expand its reseller base in this market in anticipation of the resumption of travel. And Serco has recently added tailored North American content and integrations that help Serco win its largest customer to date in this market, ZS Associates. We've signed Zeno expense reseller partnerships with the buying group Omnia Partners. And we've added four new travel management company resellers since the 31st of March, bringing the total to nine resellers, and is in the process of activating these partners now. At the time of the capital raise, Serco also announced it is in advanced stages of negotiation for a large direct contract with a Fortune 500 company. No further update is able to be provided at this point, in time, but we'll keep the market updated when this deal is agreed. Turning to slide 17 and highlighting activity in relation to Booking.com partnership. In October 2019, Booking.com expanded its existing agreement with Serco so that Booking.com can offer and promote a white label of the Zeno platform to its business travel customers. This partnership continues to offer exciting growth opportunities for Serco. Notwithstanding the COVID-19 pandemic and the potential large-scale rollout gives Serco the opportunity to access to a much larger addressable market as travel activity recovers over time. The new Xenobooking.com for Business platform went live in May 2020 with pilot programs implemented across the United Kingdom, Ireland. A pilot was also launched in Germany in early September 2020. It is now expected that new customers wishing to set up a business account on the Booking.com website will be directed to the new Zeno Booking.com for Business platform in select Northern Hemisphere markets imminently. Serco anticipates customers will be able to sign up to the Booking.com for Business platform powered by Xeno as the product is progressively made available in these additional markets. Serco and Booking.com continue to have a collaborative partnership with both parties working to bring a best-in-class business travel tool to customers globally. Serco is progressively scaling up to achieve this. I now turn to slide 19 to cover the outlook statement. Serco is well positioned for growth when trading conditions improve and the business travel industry starts to recover. The profile and timing of that recovery, however, remains uncertain. As a result, we're unable to forecast our likely operating revenue for the 2021 financial year with any certainty. Serco has included assumptions in its forecast that travel will be in the range of 40 to 70% of pre-COVID levels by March 2021, and based on the trends noted on slide 9. However, the extent of travel restrictions in place within Australia and New Zealand will determine where, and within this range, actual travel volumes will fall. Cash balances at 30 September were $31.5 million and following the recent capital raising, Serco presently has over $90 million of cash in the bank. Positioning Serco well for an anticipated travel market recovering. Serco is targeting an average monthly cash burn of between $2 and $4 million during the remainder of FY21 and into FY22. depending on the travel resumption and the achievement of key performance metrics, including the booking.com opportunity and the NORAM customer onboarding, as we continue to invest in growing our viable footprint. And an executive update. As you've seen, we've also announced today that our Chief Financial Officer, Susan Putts, has signaled her intention to transition out of the company no later than the end of May 2021. We will shortly commence a comprehensive search for a successor and will utilise her notice period to ensure an orderly succession plan. Susan has played a critical role in the business over the last four years of Serco. She feels it's time to open a new chapter of her career and we're sorry to see her go but wish her well. I sincerely thank Susan for the guidance and the contribution that she has brought to me and Serco over her time with us. That completes our presentation, and before I turn to the Q&A as per slide 20, I draw your attention to our appendix slides after slide 21 for further information. I will now hand back to the moderator to facilitate the Q&A.

Thank you. If you'd like to ask a question at this time, you may signal us by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach us. A voice prompt on the phone line will indicate when your line is open. Please state your name and company before posing your question. Once again, that's star one to ask a question. We'll take our first question right now, and that'll be from John O'Shea. Please go ahead.

Morning, Darren and Susan.

Just a couple of things from me. Firstly, in relation to the – I noticed you had in the income there obviously COVID-related revenue, meaning obviously government support, I suspect, from obviously the pandemic. The first question is, you know, will that continue into the second half or what should we expect there? Nick, maybe we'll start with that one.

In some countries, I guess.

Currently, it's subject to, I guess, any further government announcements, but the only one currently is the one which goes to the 31st of March. So it's very minimal amount unless governments come up with any more.

Sure. In the second arc, we should expect that to scale back quite a bit.

Yes.

Correct. The second one, look, I just wanted to get a bit more making sure I understood what you were saying about the booking.com deal. Obviously, you've mentioned the pilot and, you know, the new customers going on to the Xeno platform over time. Do you have a frame? Is there any change in terms of the timeframe in terms of the official kind of launch of the new product, Darren? And can you just reiterate what your expectations there are at this particular point in time?

Yeah, so imminently we will see progression of organic sign-ups in the northern hemisphere markets being activated. So that's the current progress update point that we're at at the moment with Booking.com. So we should see new sign-ups from those regions now coming into our platform.

And what does that mean in terms of when it actually starts to transition across in terms of those bookings and you actually then participating in the deal in terms of the revenue arrangements? When does that, at this particular point, when you're expecting that to kick off?

At this point, we're still working through with booking on the timeframes as we get all of the globalized development completed. We've just had the 40-odd staff that we've added into the team over the last six to seven weeks to help go through and hit those milestones as well in there. And once we have confirmation, we will produce those dates out into the market.

Sure. No problem. Thanks very much. That's all from me.

You're welcome. Next we'll move to Tom Bacon with Macquarie.

Good morning, Darren. Good morning, Susan. Thanks for taking the questions and congrats on a reasonably robust result given the circumstances. Just two questions for me this morning. Firstly, just on the Zeno adoption numbers, obviously a pretty good uplift there. Just wondering how that's come about. Has there been a natural increase in the number of resellers or direct corporates shifting onto Xeno, or has there been some market share gains from some of the current users of Xeno in market?

Yeah, a little bit of both. So we're seeing Orbit and Flight Centre put on some new customers. We've seen one of our competitors, Enderlife, one of their platforms, But we're also seeing our resellers take the opportunity to continue their migrations of their customers off Surf Online onto Xeno. So we are seeing a multiple combination effect of migration and our teams assisting with that. So we have a definite focus on assisting the market to put everybody onto Xeno. the new generation platform which helps them manage the COVID criteria visually a lot better in there. So everyone's sort of working collectively together. The impact of going, you know, we would like to go a lot faster, but, you know, we're also doing the resales that have teams that have furloughed at this point as well. So we're basically within the constraints, I guess, is the easiest way to sum it up.

Yeah, that's helpful, Darren. Thank you very much. And second one from me is around... Sorry.

No, no, we're making progress.

We're making progress, Darren. Sorry, sorry, don't drive, Darren. The second question from me was just around expense management. Just noting that the Delta on PCP in the first up 21 was sort of negative 33%. Just wondering what the key drivers for the decrease there are.

It's mostly the active users. So when you've got such high volume of travel expense users, it naturally balances that down slightly. So that's predominantly, we charge on an active user basis. So if those users are furloughed or are reduced, then we do see a slight impact on that. It was 33%. You've seen probably the launch of Omnia Partners and then the new XenoXSense solution, which has just now activated into the North American market, which is our investment with the Interplex acquisition. We're just online and that's a product platform out into the market as well. So we're still focused on driving and we've already picked up some ones on that platform as well.

Thanks, guys. That's really helpful. Appreciate your time. You're welcome.

Next, we'll take Chris Byrne with Craig's Investment Partners. Hi, please go ahead.

Hi.

Can you hear me, guys? Hi, I'm Chris from Crank Investment Partners. Can you hear me, Darren?

Yeah, all good.

Okay, in the S&P company that you're sort of in negotiations with, you use the word direct. Are you envisaging that being without a TMC or are you partnering with a TMC? It's obviously a novel way of going about it in terms of you've normally gone via the TMC, so...

Some customers prefer to have a technology agreement. We've done this previously with Queensland State Government and we do use a travel management company in partnership. It's actually quite common in North America for the larger organisations to want to have, especially if they're doing a global agreement because they may use more than one regional travel management company to service their global account but want a a technology partnership with a company like ourselves. So it becomes a lot more common out of the U.S. for those sort of size companies.

Okay. And can you give us a sort of basic timeframe? And you've obviously negotiated some of these agreements before. Is this something that could be still six months away or is it something that you could potentially expect in the next six weeks?

We're hoping to complete by the end of the year, but these things do take their own life, I guess, on there. We're working to their timeframes around when they want to actually go live as well. We hope that it'll be complete in that timeframe, but it's just the commercial sides normally do take a lot longer for these larger types of transactions.

Okay. No, that's great. That's it for me. Thanks.

And just a reminder to our audience, Star 1, if you have a question or comment, we'll move next to Wasson Kersawani. Please go ahead.

Good morning, Darren, Susan. Just a question on what you're seeing in Australia in terms of forward bookings, obviously with the borders set to reopen between Melbourne and Sydney. Just interested in what you're seeing from customers at this stage and what you're seeing in terms of capacity on that route as well.

I mean, it's still quite early as the airlines scale up and I think that's That's one of the things that you see that we saw with Air New Zealand, the big rush to get aircraft on and then to start to see how the forward bookings sort of lie and then how they can put new aircraft on those specific routes where they have high demand. And, you know, we've sort of seen, you know, we're pretty close now to that bottom end of that recovery range that we thought we'd be in from March, that 40 to 70%. And we're consistently seeing that, you know, we're heading towards that very close to that bottom end and in some days getting, you know, hitting that 40%. But we're getting... Getting to that sort of level. So we are seeing those early signs of advanced bookings, everyone getting ready for transacting between especially Sydney, Melbourne, because Sydney, Melbourne is one of the busiest routes in Australia.

Great. And then maybe just looking at the New Zealand experience and given that reopening is some months ahead of what we're experiencing in odds, but just in terms of any trends that you've observed, has anything stood out in terms of how customers are transacting in terms of attachment rates or have you seen sort of any noticeable trends around market shares through the TMC channel as the market sort of opened back up in NZ?

Yeah, I mean, it's always, I think government leads the way. So a lot of the governments do, you know, they have a high engagement across that sort of area. Of course, you know, around 8% to 10% of our volume stayed pretty constant, which was to do with frontline teams, that a lot of them are government related. So definitely travel management companies that had a high engagement presence in the government sector have definitely had a steady revenue stream flowing through them as well. What we did see on the trends is that within two or three days after a lockdown, really it spikes straight up to in that 60, 70 plus percent recovery. And we're seeing that pretty consistent now in New Zealand. So it gives us a pretty good model to go when people feel safe, we've got multiple vaccines. Now we've got to look at how the governments will distribute vaccines and get that out to the public and how do we actually start to see a recovery for the future in those sort of models. And so had there been no vaccines and we're still going in and out of lockdowns, but we are starting to see a different type of trend occur. So it does give us, you know, hope that, you know, that there will be a recovery a lot quicker than what probably was first thought in there. But our models, as you know, we've sort of said, you know, between 40% and 70%, between $2 and $4 million in burn, and that does really depend on where the transactions actually sit. and how revenue comes through, and that will adjust our burn models within those ranges.

Cool. And just on attachment rates, have you noticed any changes here in terms of customers sort of more, have they been more or less likely to book overnight in hotels?

Yeah, and it kind of gets merged together. Like you saw, our average revenue per booking has skyrocketed up to over $8 because of the volume compared to... expense and other sort of things. So it's probably slightly a little bit distorted at the moment, being that there's a smaller volume going through it, so it's quite hard to know because governments have a lot of net rates and a few things like that. So we're just still working through what that actually means. But definitely the customers that we're seeing on Reno definitely drive different behaviours as well.

Great. Thanks, Darren. No worries.

Just an additional reminder, Star 1, if you have a question or comment, that's Star 1. We'll pause a brief moment.

It appears we have no further questions in our queue at this time.

Okay, we can close. Okay, we can close now.

Okay, thank you. Thank you, everybody.

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

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