Serko Ltd

Good day, everyone, and welcome to the CIRCO conference call. Today's conference is being recorded. At any point during the conference, if you would like to place your line in the queue, you may press the star key followed by the digit 1. Again, that'll be star 1 if you want to ask a question or have a comment. At this time, I would like to turn the conference over to host Darren Grafton. Please go ahead.

Thank you for joining this morning. I'm joined today by our CFO, Shane Sampson, and also our Chief Revenue Officer, Liz Fraser. Liz joined Serco at the beginning of this year. Liz has extensive experience, including five years with Air New Zealand, where she was General Manager of Customer, and prior to that, Regional General Manager of the Americas, based in the US. The first part of our presentation, we will use the investor presentation titled Building a Globally Competitive Business at Scale. The second part will use the financial results presentation. We will then answer questions. I draw your attention to the important notice on slide two, and I'll begin on slide three.

The size of the opportunity ahead of us is significant.

Today's announcement sets out the most compelling path for Serco to achieve its ambition of being a globally competitive business at scale and creating long-term value for our shareholders. Our North American plans announced today expand on our existing operations and are underpinned by the partnership with Sabre and the acquisition of Sabre's Get There. The announcement follows extensive engagement with Sabre and the Get There business including detailed due diligence. In addition, today we're announcing a target investment to deliver innovation and global scale to maximize the opportunities presented by a changing travel market. This will be via development of an open platform that seamlessly integrates diverse content and services with built-in data and AI at the heart of its capabilities. We enter into this new phase of our growth in a strong position with sound financials, a track record of successful partnerships, and increased efficiency and capability. Today's announcement will be explored further at our Investor Day on the 10th of December.

I'm now on slide five.

We've achieved strong market success in Australasia with our managed travel business, and in April this year, signed a five-year partnership renewal with Booking.com, a key driver of growth for Serco. The next logical step for us is to accelerate the delivery of our managed travel solutions in North America, a New Zealand $400 billion business travel market. For some time, we have closely considered how we scale in this market. The combination of Serco, GetThere, and Sabre increases our market presence, and at acquisition, Serco will become the number two online booking tool provider in North America by volume. Sabre is a market leader in the U.S. for corporate travel segments. They are well-connected to the wider local and global travel management ecosystem, along with direct corporate relationships. Sabre entering into this partnership with Serco shows the continued strength of our technology and strategic vision in business travel technology. We will continue to take measured approach to the North American market aligned with our strategic priorities and the opportunity. We are well placed to successfully execute on this expansion. We have a strong global leadership team in place. with international expertise, including in North America. And we have strengthened capabilities and efficiencies across our business. I will now hand to Liz to speak more about the North American market and the opportunities for Serco.

Thanks, Darren, and good morning, everyone. I'm on slide six. Serco operates in a growing business travel market expected to be worth a record 2.4%. trillion NZ dollars by the end of this year and more than 3.3 trillion NZ dollars by 2028. As Darren mentioned, the US part of this is substantial at 400 billion NZ dollars. The business travel market is evenly split between bookers who book according to a company policy on a dedicated platform and bookers described as independents. The trend remains towards tech-supported travel, whether managed or independent. We expect the terms managed and unmanaged travel will be less relevant over time, with blurring underway between these. As you can see on the slide, the target markets in the US are aligned to Zeno and Booking.com for Business, as well as GetBear. Through market research, we have identified the specific customers and prospects that will benefit from the unique capabilities of GetBear and Zeno. We plan to provide further information on the North American market and our plans at Investor Day. Turning to slide seven, Serco is uniquely placed to succeed in the US market with the foundations we have laid and today's announcement. Serco spans both managed and unmanaged travel, which are increasingly blurring. This means as companies grow and their needs change, we can support them as they scale up and their needs change. We're building and deploying dynamic solutions across both managed and unmanaged travel, supported by our partnerships with Booking.com and the announced partnership with Sabre. This includes unified travel experiences, data and AI-driven insights and efficiency, and consumer-grade traveler experiences. We are well positioned for success in this market to continue to deliver value to our partners, customers, and shareholders. Thank you, and I'll hand back to Darren.

Thanks, Liz. And now turning to slide eight.

Sabre is a major player in the global travel industry today. with Sabre's solutions such as Sabre's GDS forming a critical part of our offering to many partners and customers across our managed and unmanaged business. Sabre also owns business travel management solution GetThere, which supports some of the world's largest travel programs. Sabre and GetThere have a number of customers in common. Sabre and Serco will be working closely together on mutual product innovation for the benefit of our partners and customers globally. This includes drawing on Sabre's capabilities, including disciplines such as AI. In 2020, Sabre and Google announced a multi-year partnership to build the future of travel. Our partnership with Sabre will enable us to collaborate within the Sabre and Google co-innovation frameworks to drive innovation in our travel solutions. Sabre and Serco have a number of initiatives in planning to help fast-track delivery of a more connected, frictionless trip benefit to travel management companies and travelers. These partnerships, along with our existing partnership with Booking.com, provide us with increased access to resources and knowledge to produce advanced technology, expand market reach, and deliver market leading innovation. I'm now on slide nine. The partnership defines a joint approach to commercial sales and marketing initiatives to facilitate growth in North America and beyond. The partnership has an initial term of five years commencing upon the closing of the get there acquisition. which is expected to occur on about the 6th of January next year. The performance bonus payments strongly align Sabre's incentives for selling and marketing Serco's products to outcomes which drive long-term value for Serco and its shareholders. The performance payments of up to US $12.75 million will be made on Sabre achieving contracted annual revenue on a one-to-one ratio from co-selling in the first two calendar years.

I'm on slide 10.

The acquisition of the Get There business provides Serco with a broad and blue-chip customer base, and its mention includes incentivized selling by Sabre's North American sales team under the partnership. The purchase includes the Get There solution and intellectual property, the substantial expertise and deep domain knowledge of the Get There team members, as well as a strong global customer base that includes many blue chip companies in North America, including Deloitte, Oracle, and Marsh McLennan. US $10 million will be payable at close, with a further $2 million payable in cash and shares in late 2025. A multi-year hosting services agreement and 12-month transitional services agreement will support the smooth transition of the Get There business operations to Serco.

Slide 11.

Serco will continue to operate and sell under the Get There brand. Get Their's customer base is diversified with details of key industries represented in its customer base on the slide. We've been impressed with the quality of Get Their's senior leadership and we are delighted that Brett Dowling and Sanjit Patel will both join Serco along with other senior leaders. Get Their employees will be an important and welcome addition to the Serco team. bringing extensive expertise and market knowledge to complement our existing North American business. I'm on slide 12. The strategic partnership with Booking.com and Sabre are significant for Serco as we target further growth at scale. Following the acquisition of Get There, our solutions and our channel strategy mean we will reach business travelers from the small and medium-sized businesses powered by Booking.com for Business through to mid-market and global enterprise customers on the Xeno and Get Their Brands. Through these strategic partnerships, the opportunity will exist for Serco to open up Booking.com content to Sabre-powered customers. This would allow TMC partners to access Booking.com's vast inventory of accommodations, enhancing choice and flexibility that help transfer the leakage of spend back into the managed travel programs. Additionally, the advanced e-commerce experience developed for Booking.com for Business will enrich the entire Serco platform and our offerings, while also creating additional value for our TMC partners. There will be opportunity to provide managed travelers booking through TMCs with the same seamless and user-friendly interface, simplifying travel planning and driving adoption. By bringing together Booking.com's accommodation expertise with Serco's business travel focus and Sabre's positioning as a leading GDS, this new partnership enables Serco to create more comprehensive travel solutions for businesses. whether they want to be served by digital platforms or through a travel management company, and whether they are small businesses or the largest corporates. As the managed and unmanaged segments become more interconnected, Turco's position as a provider through both digital and the TMC channels and as partners with two of the most influential players in travel means we are uniquely positioned

to succeed. Slide 14.

Serco will accelerate investment in its product and technology to support our growth plans and remain at the forefront of business travel. Additional investment to accelerate delivery of Serco's product and technology will allow us to support growth plans globally, benefiting partners and customers. This will be targeted investment to deliver innovation and global scale and maximize the opportunities presented by a changing travel market. It will see development in an open cloud-native platform that seamlessly integrates diverse content and services with built-in data and AI capabilities. Serco's current product and technology platform already powers key components of Booking.com for Business, including search, shop, dashboard, insights, and search engagement. Accelerating the evolution of our product and technology will allow us to maximize the opportunities available to us in the chosen markets, while also positioning us to respond to increasing demands for automation, data, and AI tools. More details, again, will be shared on our Investor Day. I'll now hand to Shane to cover some of the additional financial information.

Thanks, Darren. I'm now on slide 15. Serco has a successful track record with partnerships, and we are strongly positioned as we scale our technology solution to a bigger market. Investment levels outlined are structured to maximize these opportunities, as well as retaining flexibility and appropriate cash reserves. The $250 million FY30 total income aspiration reflects Serco's current growth trajectory and our assessment of the size of the opportunities ahead. Accelerated product and technology investments are anticipated to be approximately $40 million over the next four years. Funding for the North American expansion, together with product and technology investments, will be sourced from our existing cash balance and operating income. Turning to slide 16, we expect to incur transaction costs related to the Sabre partnership and the acquisition of GetDare of approximately $3 million New Zealand dollars. One-off integration costs associated with the acquisition, including IT equipment, setting up offices in the US and India, staff integration with vendor and third-party applications, and financial and legal controls are also anticipated to be approximately $3 million New Zealand dollars, spread across FY25 and FY26. Gross annual revenue for the GetDare business for the 12 months from acquisition is estimated to be 18 million New Zealand dollars from the existing revenue base. The acquired business was integrated within SABRE and does not include support functions. We intend to make additional investments to drive revenue growth, including additional sales and marketing resources. Combining the costs of the acquired business and these additional costs, we anticipate total annual spend for Get There Within Serco to be approximately $36 million in the first year, with the resulting contribution being earnings dilutive. We will maintain our focus on generating operational leverage through scaling revenue while ensuring efficient spend. Performance payments of up to 12.75 million US dollars, that's approximately 21 million New Zealand dollars, will be made on SABRE achieving contracted annual revenue on approximately a one-to-one ratio from co-selling in the first two years. Payments for the US $2 million deferred payment and the up to $12.75 million US performance bonus can be made in cash or shares subject to Serco's discretion and certain cash balance conditions. We're happy to take questions on any of these points at the end of the presentation. Thank you, and I'll hand back to Darren.

Thanks, Shane. We'll now cover the interim financial results we released this morning. We'll then take questions on both presentations.

I'll just give you a... pause to switch presentations.

Our first half result demonstrates our ability to deliver on our commitments and achieve our goals. Total income was $42.7 million for the half, up 18% on the first half of 2024 and 23% on the second half. We achieved positive EBITDAF and positive free cash flow, in the first half of 24, an important milestone for Serco, reflecting the disciplines in place to achieve material improvements in revenue without growing our underlying total spend. We're particularly pleased with the positive trajectory of Booking.com for Business under our long-term partnership with Acceleration in the second quarter. This follows the successful execution of plans to drive higher volumes, including increased customer acquisition. Looking at slide four, we're delivering on our objective of scaled growth and operational efficiency. Consistent improvements in operational efficiency saw total spend as a percentage of total income decrease further from 116% to 104. Volume and inflation-related costs were successfully offset by efficiency initiatives. A 5% increase in total spend primarily reflected acquisition-related costs. The increase in operating expenses was driven by the acquisition-related costs, lower capitalization, and higher amortization. We maintain a strong balance sheet with $82 million of cash on hand and a cash-generative core business. Turning to slide five. At the half year, we set out our areas of focus for growth in Booking.com for business across customer acquisition, active customer growth, and volume growth. The results demonstrate we are successfully delivering on these plans with close collaboration with Booking.com on scaling initiatives to drive higher volumes. This includes increased customer acquisition. Completed room nights on booking.com were 1.6 million, up 17% on the first half of 2024, and up 29% on the second half. Average revenue per completed night was 10 euros, down 1% on the first half of 2024, and up 7% on the second half. Active customers increased to 187,000, up on both the first and second halves of 2024. On slide six, In the second quarter, there was an acceleration in growth versus PCP in the September quarter. As highlighted, this percentage lift was 27% in the second quarter of FY25 on FY24 versus 9% in the first quarter. In May, we outlined we had achieved our FY25 growth objectives as mentioned in the presentation today. The successful execution against these plans in Q1 and Q2 has not only delivered growth for the half, but has positively shifted our growth trajectory for future periods. We've continued to see an acceleration of growth year over year in October, with completed room nights running at around 36% higher, with the lead metric of bookings at over 40% higher. On slide seven, we've seen continued strengthening of our market position in Australasia with online bookings up 8% in Australia and New Zealand. Online bookings were up 8% on the first half 24 in Australia and New Zealand to 2.1 million. The combination of increased volume and higher average revenue per booking drove travel revenue for Australia and New Zealand up 18%. Average revenue per booking also increased 13%. On slide 8, we have provided more details on achieving positive free cash flow for the period. This achievement reflects disciplined execution delivering continued operating leverage. With total income growth far outpacing total spend growth. The graph shows our adjusted free cash flow accounting for the exceptional items which Shane will cover in more detail.

And on slide nine, we have shared the trajectory over time of total spend and operating expenses.

This reflects the growth trajectory of the business as well as the successful focus we have had on cost and efficiency. These trends and our continued commitment to scaled growth and operational efficiency demonstrate our readiness to pursue new growth horizons. I'll now hand to Shane for some comments on the selected financial slides.

Thanks, Darren. Starting with slide 11, please note that all references are to the prior comparable period to 30 September 2024, unless otherwise specified. As Darren noted earlier, we had total income growth of 18% to $42.7 million. Operating expenses grew by 12%. However, as noted earlier, total spend was flat if the acquisition-related costs are excluded. I will talk to that in more detail on subsequent slides. Despite the lower levels of capitalization in the HART and the acquisition-related costs, we delivered a positive EBITDA of $1 million, an improvement of $1.6 million. On slide 12, Darren has talked to the strong and accelerating growth in Booking.com for business revenues, which is reflected in the Europe and other geographic segment growth of 17% to $26.3 million, and the supplier commission's revenue growth of 16% to $26.4 million. Travel platform revenue grew by 23% to $11.7 million, reflecting increased volumes and an increase in the average revenue per booking, or ARPB, We did see a reduction in NZ revenues reflecting lower volumes as a result of the weaker New Zealand economy. I'm on slide 13. Total spend increased by 5% or $2.2 million to $44.3 million. Of the $2.2 million growth in total spend, $1.9 million related to acquisition-related costs. Over the last five halves, Serco has grown revenue strongly while largely holding total spend. In the six months to 30 September, we offset the growth in volumes by improving the efficiency of our hosting costs. We were also able to hold personnel costs despite wage inflation. As noted in May, we undertook a realignment of our product and technology functions to increase efficiency and effectiveness early in the half, and we've seen our teams continue to deliver strong outcomes despite the lower headcount. Looking at slide 14, Zerco continues to take a conservative approach to capitalization, and this, combined with a change in the mix of development work undertaken, and in particular, increased investment in experimentation initiatives, reduced capitalization to 13% of total product design and development costs from 24% in the prior comparable period. The core operating costs, savings and third-party costs, offset the small net growth in other expense lines. Jumping ahead to slide 18, We achieved positive free cash flow of $1.3 million, a $4.7 million improvement. Our underlying business requires investment in product and technology to support growth, but has strong unit economics, allowing us to reach the benefits of scale. We've used the term free cash flow in this report rather than the previous term of underlying cash flow, but the concept is the same. We're seeking to present the real economic cash flows of the business by removing some technical accounting movements and cash flow such as the net amount invested in term deposits or returned from term deposits maturing. We've also continued to present an adjusted free cash flow, which excludes items which are exceptional in timing or nature. In the current period, we've excluded the cash outflows related to the acquisition. Shown in the table is the transaction costs to provide a clear view of the free cash flow of the business. Finally, turning to the next slide, we have a strong balance sheet with $82 million of cash in short-term investments, and no debt. Thanks, and I'll hand back to Darren.

Thanks, Shane. Serco affirms its total income guidance from its FY24 results announced in May 2024, anticipating total income to be in the range of $85 to $92 million for FY25. This does not take into account any expected revenue from the acquisition of Get There as announced today. Based on current growth trends and ongoing execution of plans, Serco anticipates continued acceleration of Booking.com for business revenues in the second half. Serco's current business is on track to deliver positive free cash flow for FY25. However, Serco no longer expects to be cash flow positive for the FY25 when including the acquisition and accelerated investments announced today. Risks to the achievement of Serco's FY25 goals include the timing of delivery of initiatives and the timing and scale of subsequent benefits, currency, and ARPCRN movements, and any geopolitical and macroeconomic factors. Shane, Liz, and I are now happy to take any questions you may have.