Serko Ltd

Good day and welcome to the 2024 SERCO full year results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Darren Grafton, Chief Executive Officer of SERCO. Please go ahead, sir.

Thank you for joining this morning. I'm Darren Grafton, the CEO of SERCO, and I'm with Shane Sampson, our CFO. Before we get underway, I draw your attention to the important information on slide two. We're going to give a short presentation on the results, and then we're happy to take questions. I'll begin on slide five. At Serco, we've had an increased focus on successful execution, and in FY24, this delivered material progress on our priorities and, in turn, strong financial outcomes. This took place in an often complex and uncertain external environment. In FY24, we continued to realize the growth opportunity. Our renewed partnership with Booking.com for a further five years, as we announced on the 30th of April, is a major milestone, providing a strong foundation for future global growth and scale. We've already commenced the plans in place for the next phase of our growth under the partnership, and I'll provide more detail on this later in the presentation. We've also seen new growth in Australasia and have strengthened our market position. Underpinning Serco's progress has been a deliberate and sustained shift in how we operate. We are seeing benefits from a strengthened leadership and expertise, a scalable operating model, and targeted investment to support innovation and growth. Today, Serco is a more robust and dynamic business as we pursue the next phase of our strategy. Turning to slide six, with the financial outcomes from our FY24 delivery, total income was $71.2 million, the same as the unaudited result released on the 30th of April. This was up 48% on FY23. There were small percentage increases in operating expenses and total spend, reflecting work in the early periods informing a more scaled cost base. Total spend was $83.9 million below the 2024 guidance range of $86 million to $90 million, with total spend continuing to significantly decrease as a percentage of total income. Increased operational leverage has delivered significant improvements in both our net loss after tax and EBITDA. We're on track to be cash flow positive for the FY25 Our balance sheet remains strong and we have no debt. Finally, our average underlying monthly cash burn has fallen to $600,000. I'm now on slide seven. We disclosed total income and total online bookings and completed room nights as part of our trading update at the end of April. The growth in total income is driven by the increases in online bookings and completed room nights. which were up 19% and 65% respectively. Over a three-year period, we have seen strong growth as illustrated in all three graphs. Now on slide eight. In FY24, annual growth was supported by a stronger than expected first half. The first half benefited from higher average revenue per booking, favorable foreign exchange rates, and higher-than-expected business travel volumes in Australasia. Second-half revenue was lower-than-expected, mainly driven by slower growth in completed room nights than projected, unanticipated seasonality in the ARPCRN, and a decline in the euro-NZD exchange rate since guidance was updated in November 2023. Half-on-half growth rates are not neatly upwards, moving and we have experienced these half-on-half shifts in many prior periods. Looking at now at slide 9, we're seeing the ongoing benefits of operational leverage in the business. The total income growth of 48% has been delivered on total spend, which was just 1%, up just 1%. The operational leverage has been the result of significant work over many periods to ensure we have both a high-performing team and the right cost base in place for scale. Sustainable and efficient growth remains a critical focus. This includes continuing to optimize and fine-tune our teams to ensure we are driving the best outcome for our people, our partners, and our business. For example, in recent weeks, we've put in place new ways of working across our product, design, and technology teams. This has been part of enabling a high-performance team setup to deliver on our goals, including growth and scale. We've looked carefully at the levels of operating complexity within teams, along with the workflows, layers, and spans of control. Changes made have led to better clarity on accountabilities and alignment to customer values. Slide 10, looking at the graphs on slide 10, over the past three years, we have materially improved our cash flow position from 39.6 million of cash burn in FY22 to 7.1 million in FY24. Turning to slide 12, we've built strong foundations with our current strategy, which covers FY23 to FY25. And we're now turning our minds to our plans beyond FY25. We anticipate sharing this work with you as part of our Investor Day, most likely in the first quarter, the final quarter, sorry, of the calendar year. Looking at the first highlight, experimentation. Delivering products through experimentation is very normal for technology companies, enabling us to test new features to optimize our product performance for revenue maximization based on our customer response. We've advanced our practices with our deep working partnership with Booking.com and are seeing the benefits. We've been tracking the value of this experimentation work and have seen direct positive impact of $4.3 million in annualized net revenue following successful product experimentations. The benefit from Experimentation work is not only in the upside of high-quality feature development, but in avoiding the downside of time invested into features that do not receive the level of desired take-up. We expect the value of this work to increase in the coming periods, especially as we drive our new ways of working and expand our data team. I'll speak to the next three highlights as part of the following slides. And finally, on this slide, we are pleased with the increase in employee engagement, which has risen from 72 to 78%. Two of the key metrics determining the employee engagement score were 84% of employees were proud to work for Serco, and 81% would recommend Serco as a great place to work. Turning to slide 13, we've continued to see Overall growth in Booking.com for business partnership, underpinned by completed room nights rising 65%. This reflects the successful execution of the partnership to date and the strength of the opportunities ahead. Completed room nights on Booking.com for business grew 65% to $2.5 million from $1.5 million in FY23. reflecting strong first-half growth combined with higher average revenue per completed room nights and a favorable FX rate. Active customers using the Booking.com for Business platform increased 10% across the year to approximately $172,000, and average revenue per completed room night was up 4% on FY23. The number of registered companies increased to just under 650,000. Slide 14, during the year, we supported a number of feature releases for Booking.com for business, including completing 150 experiments. Improvements delivered increased usability and enhanced the performance of the platform in both acquiring and converting customers and driving repeat bookings. We had some major releases during the financial year, and some highlights included the servicing and content provided by CWT and the loyalty rates from the hotel chains. We also delivered the first of our policy features from our Zeno platform into B4B with the hotel budgets functionality going live in December, allowing the easy creation and communication of any spending limits. As previously noted, we will be continuing both our experimentation and feature delivery through FY25 and expect this to assist in directly driving revenue growth. Turning to slide 15, now the foundation is built, the priority for the next 12 months is to expand the feature set, to service the needs of a wider target market, and to increase activation and usage in registered companies. The three key areas Serco is focused on are scaling customer acquisition, increasing activation and supporting larger customers and companies, Firstly, the features we develop over the next year will be directly related to how we can acquire more customers. We'll also be looking on the strategic partnerships that have customer bases relevant to Booking.com for Business, and our platform has been designed to support this at scale. Secondly, we are working to maximize usage within the platform with simplified administration features to support the expansion of use within customers to support this. Customer activation growth will be driven through a combination of experimentally developed improvements to the B4B user interface and development of new features that help business efficiently administer their travel spend and safeguard their travelers. Thirdly, we are scaling the platform for larger customers with more complex needs by activating features from our Zeno Enterprise platform in the booking for business platform and tailoring to this type of customer and size of company. Key milestones will come from the progressive delivery of new services, including a booking for business dashboard, hotel checkout page, and customer onboarding, which we believe will bring material gains to the key metrics like customer rate, customer active rate, and help accelerate delivery velocity going forward. The team at both Serco and Booking meet regularly to decide on the next feature set needed to drive customer growth. It is a truly collaborative approach using the data and insights to inform the best way to build the platform and generate the best possible experience for businesses. Moving to slide 16. Online bookings increased 13% in Australasia from 3.4 million to 3.9 million, the result of continued strong growth from existing and new customers. RioCinto, one of the largest corporate travel accounts in Australia, went live on Zeno during the first half via American Express Global Business Travel. We continue to see future growth in Australasia, underpinned by high rates of customer retention and new growth. We've continued to deliver strong product improvements to our partners in the past year through a strengthened Zeno offering. Serco is repositioning its pricing to reflect the value it brings to its managed customers, including introducing value-based price pricing for new features such as complex online changes. In North America, we continue to see strategic opportunity in this market. While we are making progress, this has been slower than we desired. We have been investing appropriately in our platform alongside our key customers in this market, balancing the opportunity in front of us with the focus on other growth priorities. Slide 17 sets out our continued investment in Zeno to meet the needs of our current and future partners. In FY24 year, we introduced a breadth of functionality from specific functionality for industry verticals through to integrations to deliver content more efficiently to the end user. Examples from what is on the slide is we have extended our NDC support with new aggregators and recently launched the capability of NDC on the Sabre global distribution system. Slide 18. Looking now at slide 18, we are pleased to have released our 2024 ESG report and climate-related disclosures today. We are committed to doing what is right for our business, our people, customers, and communities. Ultimately, we believe robust ESG practices create long-term value for our business. We are committed to continually improving our practices and reporting. This year we undertook a materiality assessment to enable us to better understand and prioritize the environmental, social, governance, and commercial areas that matter most to our stakeholders and the business. I encourage you to review the report. Thank you. That concludes my overview, and I'll hand to Shane for some details on the financials.

Thanks, Darren, and good morning, everyone. Darren has already called out the highlights for the year. I will go into a little more detail. Unless explicitly stated otherwise, all comparisons are against the prior comparable period, being the year to 31 March 2023. Turning to slide 20 for the high level profit and loss. Total income grew by 48% or $23.2 million to $71.2 million. I'll talk about revenue in more detail on the next slide. Operating expenses increased by 8% or $6.9 million. I will talk to operating expenses in more detail on a later slide, but note that we considered the more useful measure to be total spend, which I will also talk to on a subsequent slide. Net finance income grew by 52% to $3.9 million from $2.6 million, reflecting stronger interest rates partially offset by lower cash balances. We incurred a foreign exchange loss of $1.1 million, a change from a $1.7 million gain in the prior year primarily reflecting losses on forward exchange contracts as the New Zealand dollar weakened. The forward exchange contracts are used as an economic hedge against the risk of FX rates impacting our cash receipts from sales. We do not undertake hedge accounting, so the weaker New Zealand dollar drove higher revenues, as mentioned earlier in the presentation. Our net loss after tax reduced by 14.7 million, or 48%, to 15.9 million, reflecting the operating leverage Serco has achieved. as revenue grew strongly against a much lower growth in operating expenses. The EBITDAF loss reduced by 93%, or $20.2 million, to $1.6 million. And as a percentage of revenue, the EBITDAF loss fell to 2%. Looking at revenue in more detail on slide 21, the key highlights are travel platform revenue, which grew by $2.9 million, or 18%, to $19.2 million, primarily reflecting increased travel volumes in ANZ, and net of consideration payable to customers, supplier commissions revenue grew by 19.6 million, or 84%, primarily driven by increased booking.com for business completed room nights. Looking at revenue by geography, ANZ revenue grew by 14%, reflecting the partial recovery of travel and increased services revenue. The strong growth in Europe and other geography was driven by increased supply commissions and booking.com for business. Average revenue per booking, or ARPB, for travel-related, that's travel platform and supply commissions, increased by 33% to $12.71. The growth in the ARPB is driven by the increase in the number of booking.com for business bookings as a proportion of total bookings and by a stronger euro relative to the New Zealand dollar. The average revenue per completed room night, or ARPCRN, in Euro terms was up by 4%, reflecting slightly higher hotel prices. Turning to slide 22, operating expenses grew by 6.9 million, or 8%, to 89.7 million. As a percentage of revenue, operating expenses fell to 130% from 178%, a decrease of 48 percentage points, reflecting operating leverage as revenue has grown. partially offset by lower capitalization of product design and development costs. Remuneration and other benefits were essentially flat at $49.4 million. This reflected a $1 million reduction in employee share scheme costs and planned reductions in contractors being partially offset by wage growth and capitalization of internally developed software being $2 million lower. Third-party direct costs are external costs driven by activity in our platforms, and these increased by 17% to $12.2 million broadly in line with a 19% increase in online booking volumes. Amortization and depreciation increased by 3.9 million or 30% to 17 million. The increase relates to higher amortization as the value of capitalized software has grown and as most new assets capitalized since early 2022 have been depreciated over three years rather than five years. Looking at slide 23, this is a reconciliation of total spend to operating expenses Total spend is a non-gap measure which Serco uses internally to measure spend before the impacts of capitalization and amortization. In software businesses, the nature of the projects being worked on can result in significant differences in the proportion of product design and delivery costs capitalized. We consider that total spend is a more useful measure of the cost base of the business as it removes the volatility which can occur as a result of capitalization decisions driven by international financial reporting standards and focuses management on managing the real costs of the business, remuneration and benefits, and external spend. Note total spend is not exactly the same as cash costs. In addition to timing differences in working capital, Zirco's employee share scheme drove $5 million of total spend, but does not have any cash impact. Total spend grew by 1% to $83.9 million, and as a percentage of revenue, fell 57 percentage points to 122%. Growth in total spend was primarily driven by increased third-party costs as a result of the increase in online booking volumes and an increase in other operating expenses, partially offset by lower remuneration and benefits before capitalization. Headcount declined to 347 from 364 at 31 March 2023. The reductions primarily related to lower contractor numbers, In the prior financial year, we chose to add contractors to provide additional capacity for key projects, while giving ourselves the ability to scale resourcing back once those projects finished. Turning to slide 25, total product design and development spend decreased by 2% to $40.7 million, primarily reflecting lower contractors. Capitalization of product design and development costs reduced by 17%, to $11.2 million, reflecting the nature of the projects worked on in the period and Serco's conservative approach to capitalisation. Amortisation of capitalised development costs was 37% higher at $15.3 million, $4.2 million below the amount capitalised in the previous period. Product design cost net of capitalisation and inclusives of amortisation increased by 14% to $44.8 million. Slide 26 is a reconciliation of underlying cash flow. a non-GAAP term used earlier in the presentation. Underlying cash flow is intended to provide a clearer view of the business's cash flow trajectory. Underlying cash flow adjusts out some of the noise in the GAAP cash flow statement. In particular, net movement in short-term investments is shown as a cash inflow or cash outflow in the GAAP cash flow statement. However, from an economic perspective, those net movements should not be seen as part of the cash burn. Underlying cash flow improved by 78%, or $25.5 million, to an underlying cash outflow of $7.1 million. This was driven by operating cash flows improving from a cash outflow of $19.2 million to a positive operating cash flow of $4.7 million, an improvement of $23.9 million, primarily driven by operating leverage being achieved as revenues increased. Our balance sheet remains strong, with cash and short-term deposits of $80.6 million and no debt. Intangibles declined by 11% to $31.1 million, reflecting the lower capitalization and higher amortization discussed earlier in the presentation. Thank you. I'll hand back to Darren for the outlook.