Serko Ltd

Good day, everyone, and welcome to the Serco full year 2021 results call. Today's call is being recorded. At this time, I would like to turn the conference over to Darren Grafton. Please go ahead.

Good morning and welcome to today's results presentation for the year ending 31 March 2021. My name is Darren Grafton. I'm Serco's CEO, and I'm here with Susan Putts, Serco's CFO. FY21 has been a significant year for Serco, from near zero travel revenue in April 2020, when the full impact of COVID-19 affected travel bookings, to today where we are living in a state of uncertainty with travel restrictions still affecting a large part of the world. Serco quickly adjusted to the crisis, introducing cost savings in the first half of the year to manage cash burns to a target of less than $2 million per month. Mid-year, the decision was made to continue to invest for the opportunities that would still be significant once the travel industry recovered and we increased our monthly average cash burn target to between $2 and $4 million. Serco achieved an oversubscribed capital raise of $67.5 million in October 2020 to support this. And combined with the raise in the prior year, Serco ended the year with $80 million of cash reserves on hand. The company is well positioned to participate in the recovery of the corporate travel markets around the world. Our medium-term goal of $100 million of revenue is still valid, but has been delayed during the COVID-19 impacted year. We decided in conjunction with Booking Holdings to accelerate the development of Booking.com platform, and in March 2021 announced that we are now undertaking the migration of customers to the upgraded Xeno experience. for Booking.com's small and medium enterprise solution, Booking.com for Business. We continue to be supported by our investors, and in June 2020, Serco was included in the NZX 50 Index. I'd also like to thank our employees for their continuing dedication to Serco, and in the spirit, saw Serco named as the PWC High Tech Company of the Year in June 2020. Unfortunately, that celebration was virtual due to the lockdowns in place at the time, but it still was a highlight for the year and was a personal long-term goal. Our results were released to the stock exchanges earlier this morning, which included a copy of the presentation, and we'll start on slide four. Susan will start with an overview of the financial results for the year, starting on slide six, and I'll come back to cover the strategic developments and the outlook. prior to taking any questions you may have at the end of the presentation.

Thanks, Darren. Before I start, I want to congratulate Darren on winning the Infants Leadership Award last night, and we're very proud of our CEO. Slide 6 shows our performance dashboard that we report every six months. I will provide an overview and then go into more detail on some items in the following slides. With our expansion plans, and the corresponding increase in operating costs as well as reduced revenue, Circle declined to an overall net loss after tax of $29.4 million from a loss of $9.4 million in the prior year. EBITDAF was a loss of $22.3 million from a loss of $6.1 million in the prior year. Our operating revenue was down 52% at $12.4 million for the year, with 91% representing reoccurring product revenue sources. reoccurring core product revenues were down 53% to $11.3 million. Total income, including grants, was $16.9 million, down 37% over the prior period. Annualized transactional monthly revenue, or ATMR, historically a forward-looking indicator of reoccurring revenues, was $17.2 million as of the 31st of March, 2021. This was down 37% of the pre-COVID peak in February 2020 at $27.5 million. Total transactions across our travel platforms were down 63% over the last year. These increased from a low of 11% in April 2020 to a high of 73% in March 2021, achieving the high end of guidance that volumes would return to between 40% and 70% by March 2021. R&D spend was $10.6 million for the period and was down 22% from the prior year. Operating costs, including foreign exchange, increased 21% over the prior year to $44.9 million. As noted by Darren earlier, we ended the year with cash balances of $80 million. Excluding the capital raise net funds of $65 million, this was an average cash burn of $2.3 million for the year, well within the targeted cash burn of $2 to $4 million per month. The first half burn was an average of $1.8 million, and the second half burn, which includes the seasonal months of December and January, where corporate bookings are historically low due to the holiday season, was $2.8 million. Now moving to slide seven. This slide shows the summary profit statement and the reconciliation of net loss after tax to EBITDAF. The reconciliation includes depreciation and amortization of $5.6 million. Foreign exchange losses were $1.3 million versus the gain of $0.7 million in the prior year, and there were no fair value adjustments related to contingent consideration for the Interplex acquisition related to the current year. Now, slide 8 shows the revenue breakdown by type of revenue and geography. Recurring product revenue, which excludes services revenue at $11.3 million, was down 53% on the prior year. Travel platform revenue fell 61% in line with the 63% decrease in total transaction volumes of $4.2 million in the prior year to $1.6 million in the current year. Online transactions fell from $3.72 million to $1.3 million. The difference between total and online bookings being offline and custom bookings were higher than previous years. This was due to complex bookings performed by travel agents directly rather than a traveler-led system booking during this COVID-impacted year. Travel platform revenue was mainly derived from the Australian and New Zealand sources, with revenue from new Northern Hemisphere expansion not significant in the year. New Zealand source income was only down 13%, as this benefited from continuing onboarding of new corporate customers. Circo expense revenue at $4 million was down 31%. and this benefited from the fixed components to pricing. Supplier commission revenue declined against the prior year to $0.5 million from $1.4 million, and other revenue remained in line with the prior year at $0.4 million. ARPB, or average price per booking, on reoccurring revenue was $8.76 for the year, and this is calculated as total reoccurring revenue divided by total online travel bookings of $1.3 million. This was up 36% from the prior year, comparative of $6.46, primarily attributable to the level of fixed charges from Circo expense. ARPB on travel-related revenue was up 12% to $5.36. Global services revenue at $1.1 million was down 37% from the one due to development resources focused on North American activation and booking.com for business platform. I now turn to slide nine, operating expenses. This slide outlines the categories of expenditure. Operating costs increased to $44.9 million for the year, up 21%. This was mainly as a result of increased headcount. The most significant cost is remuneration and benefits at 66% of total operating expenses and increased 52% to $29.5 million. This included $3.2 million of share-based payments which was an increase of $2.2 million over the prior year. Rotation of shares, while other cash-based remuneration was down due to staff salary reductions for a period of three months and no short-term incentives for the FY20 year as part of cost savings initiatives implemented in the first quarter of the year. Costs also increased with the number of employees. The number of Full-time equivalence at the 31st of March 2021 was 287, representing a net increase of 54 FTEs since 31st of March 2020. Last year, we increased by 60, and the previous year, 67. And similar to prior year, the increase was in product development staff at 47 of the 54, and last year it was 46. We have 172 staff based in New Zealand, 20 in Australia, 54 in China, and 43 in the U.S. as of the 31st of March, 2021. Subsequent to year-end, the staff numbers were increased to 292, and Circle is planning on continuing to expand, but the rate of hiring will be relative to the rate of travel revenue increases. Selling and marketing costs decreased 31% and hosting costs 19%, with the drop in volume and cost savings initiatives put in place at the beginning of the year. Administration costs decreased 31%. While computer licenses increased $0.2 million with increased headcount, other administration costs decreased due to cost savings initiatives through reduction in discretionary spending. Depreciation and amortization increased $2.5 million to $5.6 million. And the fair value adjustment I have already spoken to. Slide 10, Research and Development, outlines the development spend, both capitalized development and expensed research during the period. During the year, total R&D spend was $10.6 million, down 22% over the prior year, and represents 86% of operating revenue. Proportion capitalized spend at $7.2 million is down over the prior year and represents 68% of total spend. These capitalized costs are reflective of the investment we are making in developing our product to cater to new territories in North America, as well as the Booking.com platform. The research costs, which were not capitalized during the period, amounted to $3.4 million. Development resources were reprioritized with the onset of COVID-19 and the acceleration of the global release of Booking.com platform powered by Xeno. Development resources were also focused on the management of the platform costs due to the reduced bookings and the subsequent scale-up with the return of bookings in the Australasian region and in preparation for the Booking.com migration. Net of government grants for research and after amortization of previously capitalized development, the product development cost expense for the period was $6.4 million and represents 51% of operating revenues. I'm turning to slide 11 now. I'm going to pass you back to Darren who will start on slide 12.

Thank you, Susan. I'll cover how each of the markets are faring in our plans as the travel restrictions ease in each market. I'll start with the Australasian region where we occupy a strong market position with most of our transactions being domestic. As the pandemic has been contained and these markets have recovered from the near standstill experience at the beginning of the year, During this COVID period, we have seen over 6,000 customers making bookings. Although this is a reduction of our peak in 2019 of 7,000, the numbers are in line with our expectations as companies plan their return to travel in our home markets. Xeno is now being used by 58% of all transacting customers, with transaction volumes at 45% of total bookings for the month of March 2021. up from 25% for the month of March 2020. Expense revenue for the region, while initially impacted by COVID-19, has continued to underpin monthly revenues, benefiting from the return to travel and growth in the Australasian region. Booking volumes are steadily recovering each month from former peaks in February 2020 prior to the impacts of COVID-19 and the lows experienced in April 2020. Our new peak day was over 13,000 in May 2021, down from a peak of 24,000 in February 2020. On slide 13, this shows the improvement over the year as well as the difference between the New Zealand recovery and the Australian recovery. Travel volumes have recovered from a low in April of 11% of the prior year month to 73% as of March 2021. compared to March 2019, which was unaffected by COVID-19. This has further improved to 84% in April 21 compared to April 2019. New Zealand has improved to 149% as of March 2021 and reflects the continued onboarding of corporate customers during the year. Australia has moved to 62% as of March 21 And these have subsequently increased to 158% and 72% respectively for April 21. Moving to slide 14, we've continued to invest heavily into the North American market with transactions now flowing across our resellers, largely from the Canadian reseller and corporates, who are able to onboard during the year and travel more than our U.S. corporates. The USA has remained in lockdowns for most of the year. However, the market is predicted to start recovering from July, where business travel is expected to increase following summer holiday period and the rollout of vaccination programs currently underway. Our investment is primed to take advantage of this opportunity. Serco implemented a North American COVID program to educate the business travel buyers on how to manage through the change ahead. This program followed with key features that were needed to support the recovery in the Zeno platform. We also backed up the COVID program with a TMC community program that wrapped our team around our partners, enabled them to work with launch customers to fast-track Zeno to their customer base. These programs saw five new TMC resellers sign customer agreements in the financial year. With the Frosh Travel Group, the largest travel management company buying group, signing in April 2021, we expect this momentum of new sign-ups to continue. Serco's brand has become more widely known throughout the North American market within the travel buyers. Serco's brand leaders engaged with media and networks to establish brand leadership. And our chair, Claudia Batten, was also featured in North America's Women in Travel and Technology. Serco has pivoted to support a direct to corporate program for the North American customers, supported by our fulfillment with our travel management company partners. This has seen an increasing pipeline of global RFPs worked on by our team. And as mentioned previously, we secured a large global account and we've commenced the rollout of this customer in Australia and New Zealand. However, due to the global turmoil still present, we have not yet finalized the rollout across the other markets as yet. A key development milestone in the year was the completion of work to align the user experience of Interplex's expense management platform with that of Zeno. And we launched this new Zeno expense offering in October 2020. We also established partnerships with the buying group Omnia Partners, and join the Oracle NetSuite Suite App Partner Program. And turning to slide 15, Booking.com. In October 2019, Booking Holdings made a cornerstone investment in Serco, and Booking.com expanded its existing agreement with Serco, enabling Booking.com to offer and promote Xeno to its business travel customers. Booking Holdings has continued to support Serco and participated in the October 2020 capital reign. As announced in March 21, following successful pilots undertaken during the financial year, Serco has commenced the migration of customers to the upgraded Booking.com for Business platform exclusively powered by Xeno. The migration phase is progressively ramping up as we head towards the final migration date in July. We are currently seeing over 1,300 small business customers per day activate on the new platform during this current phase of migration, and Serco expects this activation rate to significantly increase as we move through the further phases of migration. The new Booking for Business platform is a global platform available in multiple languages and countries. the platform connects the Booking Holdings brands together to enable the connected trip. The objective was a clear vision that the team at Booking.com had for what Serco could bring to the partnership, and we're pleased to confirm that we are now achieving some bookings based on the connected trip in multiple markets. As indicated previously, this is anticipated to have a material impact on Serco's revenue for FY22 year. However, Subject to travel recovery, this could fluctuate, and as such, we're unable to forecast the currently with any accuracy. We also know that small business businesses booking behaviors will be different from our enterprise customers. So now moving to the outlook statement on slide 17. A year on from the widespread imposition of global travel restrictions, the timing and extent of the travel recovery remains uncertain. The rate of return to business travel will vary by region, the type of traveler, small versus enterprise, and the type of trip, domestic, regional, long haul, and international. The combination of multiple factors makes predicting the rate of recovery very difficult. Nevertheless, we are seeing trends that favor the adoption of Serco's travel and expense management solutions. Travel management resellers are operating with fewer people and this is creating opportunities for automation and technology solutions. Corporations are increasingly focused on the cost and administration of their travel and expense budgets and at the time are focused on traveler well-being and their duty of care obligations. We are actively assessing these changes to ensure that we can support the market, our customers and our growth as the industry recovers. We are cautiously optimistic that our global vaccination programs will enable widespread travel to resume, and we are continuously looking for new ways to lead the industry in this recovery. Indeed, we believe our target of achieving $100 million of revenue in the mid-term remains achievable, but has been delayed during the COVID-affected year. As noted above, the Booking.com for Business customer migration anticipated to have a materially positive impact on our revenue for FY22 financial year. However, as we're only partway through the migration process and in light of the uncertainty that remains around the global travel trends, it is not possible to guide the market with any certainty as to the expected revenue uplift at this time. And as at the 30th of April 2021, Serco had cash and short-term deposits of $77.7 million. We're still planning to increase the number of employees as we continue to scale to capture growth opportunities, but we continue to target an average monthly cash burn of between $2 and $4 million per month to conserve cash reserves. And we believe these cash reserves at the current rate of cash burn will be sufficient to see the company through to cash flow break-evens based on our current strategy. However, we will maintain our rigorous focus on cash flow throughout the remainder of the year and ongoing investment continuously assessed alongside developments in international travel markets. We continue to consider inorganic growth opportunities aligned to strategy as and when they arise. We'll also continue to keep the investors appraised of the material developments in the market and the impacts on Serco, including when we complete the migration of Booking.com for business customers. On to the executive changes. As announced at the time of the interim earnings announcement, Susan Putt will be leaving us on the 31st of May. Susan has played a critical role in the business over the four years at Serco, and I do sincerely thank her for the guidance and contribution she has brought to me and Serco during this time with us. Our process for identifying Susan's replacement is progressing well, and we will update the market in due course when a permanent appointment is made. In the meantime, we have appointed an interim, Susan Nemeth, to oversee the financial function during the transition period. Susan Nemeth is an experienced CFO, having worked in both permanent and interim roles across various industries and sectors over her career, and welcome here to Serco. As a company with strong growth ambitions, we've been continuing to strengthen and build diversity across our executive leadership team, appointing Sarah Miller as general counsel and appointing Rachel Satterley as chief people officer during the year. And now turning to slide 18. So that completes our presentation, and before I turn to Q&A, I draw your attention to the appendix slides after slide 18. For further information on Serco, its nine-year performance trends, and the definitions of our key measures, I'll now hand back to the moderator to facilitate the Q&A.

Thank you. If you'd like to ask a question, please press star followed by the number one on your telephone keypad. If you're calling from a speakerphone, please make sure your mute function is off to ensure your signal can reach our equipment. A voice prompt on your phone line will indicate when your line is open, and please state your name and company name before posting your question. Again, star 1. And we'll go to our first caller. Your line is open.

Good morning, Darren. This is Wasim Kisilani from Jarden here. Can I just start with a question on the ANZ bookings? ARPB, obviously, on the travel-specific spend has gone up significantly. How much of that is, you know, mixed with casino and how much is it sort of the competition of what's being booked? And maybe sort of could you comment on sort of attachment rates there in terms of hotels as well?

Hi, Wes. The attachment rate kind of almost remained steady with the prior year. So most of that price, the ARPB increase was through contractual price changes. and minimums, I guess, that underpinned the contracts with reduced volume.

Because most of the New Zealand customers have been using Zeno from day one, so we're seeing the uplift in price points on the transaction side as we roll through that full period as well. So the natural travel ARP increase.

Great. And then can I just ask a question on the bookings? Can you maybe just perhaps elaborate on what those activity levels look like? Understandably, volumes are very slow in terms of travel, but in terms of what you're seeing, how many customers are actually booking on the platform and what the platform is performing in terms of functionality at this stage?

Yeah, so we've kind of indicated that around 1,300 customers sign up, and a percentage of those make bookings as they go through. So 1,300 per day, by the way, and that's increasing every day. And that should really accelerate to quite large numbers as we go through the migration phase through to the end of July. We expect that to ramp significantly. And yeah, a percentage of those set up. So we see a different trend with small businesses who may make between three and 12 bookings a year. So they have different patterns to enterprise. And so that pattern remains true from that perspective.

Great. And in terms of the functionality of the platform in the languages that it's been rolled out to and you know, hotel and across rail and all the different components of travel. Where is that at at the moment?

Yeah, so as we roll across the... So it's in a global rollout at the moment in different markets as booking support different content in each of those markets. We roll a combined of either rail, air and hotel out or in some markets just hotel while any legislative requirements for... air and packages have to be put in place. So it's just a progressive rollout and activation of that program. And we're seeing people book a connected trip on the platform now in multiple markets.

Okay, great. And just finally from me, just on North America, you've called out the direct enterprise pipeline. Can you sort of maybe just elaborate on that and give us a sense of the materiality of some of those RFPs?

Yeah, well, the part that we can sort of talk about is that as our brand matured and our scale is now global with Boccam, of course, that enables us to take on probably two years ahead of where we plan larger global accounts like the one... Unfortunately, we haven't been able to release the name of the one that we'd Previously, even though we have actually rolled it out in New Zealand and Australia, we're still waiting on the North American and other market schedules to come through to announce that fully. But similar to that one, we've built quite a significant pipeline of customers wanting to use our technology at a global level, and that's incredibly exciting. So we've been included in a lot of North American Fortune 100 to 500 companies

Great, thank you very much.

You're welcome.

And again, if you have a question, please press star followed by the number one on your telephone keypad. I'll pause for just a moment and give everyone a chance to signal. And we'll take our next caller.

Your line is open. Good morning. That's Chris Burney from Craig's.

Can you hear me?

Yes.

Hi, Chris. I was just wondering what opportunities would open up from here that would see you look to increase your cash burn for sort of a $2 to $4 million range a month? I mean, what would the opportunities look like and what would you be targeting that would entice you to spend more than that in the sort of short to medium term?

We're pretty... I mean, in the short term, of course, we're pretty tight on what we need to actually do. But I guess as we start to, if we secure some of the global RFPs, which may require some full capital expenditure to roll out into their global program, which may include even the support of new travel management partners we haven't yet signed up as well. Those are always things that could occur. We'll treat them as their own business case and the right capital and capital return that we run into our models into there. So, yeah, I mean, that would be the part that would do that. And at the moment, it could be, you know, what we're trying to do is produce, of course, the world's first business travel marketplace powered by, you know, our technology and And of course, in doing that, we've sort of become like the Intel inside of this technology platform. And we can white label it under booking for business, but we can do that for other parties and for travel management companies like we've done with Flight Center Savvy and Orbit Online. And we want to do more of that. And sometimes they may require us to spend a little bit of capital up front to get it established and then roll out and monetize that over the future period. And those would be the only reasons why we would look to spend ahead. But again, that would go through all the right governance processes at our board level.

Okay. And just secondly, in terms of going direct to corporates, I mean, have you got an agreement with someone that would do potentially the TMC role when things are required? I mean, is that something you've teed up with someone at CWT or...?

Yeah, it's like most of the global travel management companies, whether it's flight centers, EWT, American Express, BCD, most of them are pretty used to supporting the technology, having a direct relationship with the tech provider, and they process the fulfillment. So we kind of partner with anybody. We don't actually mind who does that sort of side of it. our technology is flexible enough to support that model. So we would sign up a direct agreement with a large multinational who would have a technology arrangement with us and the fulfillment and the ticketing and the actual travel content side would be sort of managed by that travel management company who work in conjunction with them. And we do that today. So Queensland State Government is an example of how we run that today with corporate travel management.

That's not an uncommon model for us. Okay, great. Great, that's exciting. Thanks, that's it for me. Yeah. And we'll take our next caller. Your line is open. Good morning. Morning.

Yes, Nicholas Suns from Stockett here. My question was relating to the current trend we appear to be seeing in companies such as yours. I've noticed in the last few weeks, there seems to be a bit of gloomy sentiment by investors about the whole travel sector. I mean, most particularly Australia's announced that they might not be up until mid-2022, and I believe Justin and Arjun made similar comments earlier in the year. Perhaps you might have answered some of this already, but what would you say to investors who say there could be no sort of, that these companies such as yourselves can never be the same again unless we essentially have fully open borders and travel again?

Yeah, I think so. We see a different set of data being in New Zealand, which is pretty cool. You're seeing our numbers are 158% up on 2019 numbers in New Zealand. And I think the real advantage for Serco in this global recovery is how fast New Zealand recovered last year. And we operate about four to five months ahead of that view of Australia. and especially the rest of the world. And so we get to see the companies and sectors and how that recovery model actually looks. And we're seeing new patterns emerge. So we're seeing patterns where I was just having a conversation on Monday with one of the largest travel management groups out of New Zealand, and they're seeing, for the first time, having to manage a different section of travel. And that's the travel where... people are now working from home and moving and teams to do on-site events in Queenstown and Wellington and that never occurred and of course as the model of work from home has changed it's opened up a whole new section of business travel where companies that are foregoing commercial premise are now looking at different ways of getting their teams together and Serco could be a good case of that. We have 172 people and employed in Auckland and we only have a space for 110. So this model which was active before is now at scale for work from home models. That gives us a lot of insights into how the markets will recover in Australia and around the world and new ways of travel as well. And when you think about it, it's really, it's almost near impossible to manage travel the compliance and the way of, you know, contact tracing manually for a business and meet all the health and safety requirements. So it puts a focus on our technology. So we do, you know, we're going to see a different travel makeup, but our business is predominantly domestic and interregional and really only 1% of our volume is international. And the international side doesn't really impact us that much. And that's why we're seeing such a high volume recovery at this stage. So we do have a different view than a lot of the people that are leisure focused or international focused. We see that the transactions will still flow. They may not be at the high dollar value that they were before, but that doesn't affect us as much.

All right. Thank you.

And again, if you'd like to ask a question, please press star 1, and I'll give everyone a final chance to signal star 1.

And we have no further questions in the queue.

I'll turn it back to Darren Grafton for closing remarks.

Thank you, everybody, for joining us on the call today. We look forward to talking with you over the next few days and for those that are scheduled at investor meetings. If in the meantime you have any questions, then please don't hesitate to come back to either Susan or myself. And thank you once again.

And that does conclude our call for today. Thank you for your participation. You may now disconnect.