Bango (LSE:BGO) — Interim Results

0:00 Good morning, ladies and gentlemen. Welcome to the BANGO PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so and these will be available via your investor meet company dashboard.

0:32 Before we begin, I would like to submit the following poll. I would now like to hand you over to CEO Paul Laby. Good morning, sir. Good morning. Good morning, everybody, and thank you, for joining us first, first time on a Monday morning, but, good way to start the week. We're pleased to hear to present you our first half twenty three results, which we published this morning. In the room you've got myself, Matt, Anil, as well as Rebecca who will be managing all the different questions and again do encourage everybody to please engage. It's much better to have an engaged Q and A session than us just to sit here and listen to our own voices, so please, do engage via the Q and A tab. Before we start we'll do some brief introduction highlights, Matt will then go through the financial results, and then we'll spend really a lot of time talking about strategic focus centered particularly around the digital lending chain, that's really where we see the growth opportunity, So we're really going to zoom in on that this time and then give a little bit about what we see in the future moving forward.

1:33 So with that hopefully you've had time to look at the RNS that was published this morning. For us I think one of the highlights of the half is basically it's not reflected in the numbers and that's the footprint that we're getting from a digital vending machine perspective, particularly in The US. We now have three out of the top five US telcos that gives us access to over 60% of US consumers from a super bundling perspective. So really exciting sort of market traction and you know very quickly BANGO is becoming the de facto platform for super bundling, and you can see that we continue to add you know over 20 new merchants in the first half of the year, so really great traction from a digital vending machine perspective. The Dokomo digital integration is almost complete, and we executed on 19 out of the 21,000,000 synergies, you'll see some of those cost benefits deliver in the second half and through into 24.

2:26 And then, you know, really good revenue growth, 88% revenue growth, of our organic growth, as well as our inorganic, and maintain the high gross margin and that normal sort of forty-sixty revenue split that we have first half, second half, coupled with the synergies from the Dokomo digital integration, which will be realized from an EBITDA perspective in the second half, means we're on track to meet the consensus expectations for the full year 2023. So with that, let me turn you over to Matt to walk through some of the numbers. Thanks Paul, good morning all. Just like to run you through some of our first half twenty twenty three numbers, starting obviously with the revenues. Another period of increased revenues,

3:07 up 88% from last year's first half in 2022, but also up on second half of twenty twenty two. So that's giving us a 42% CAGR over the last five years on the ARCs, So again, really good revenue growth being experienced through BANGO. Again, as a measure of that, introduced the ARR as a measure at the end of last year and that one you can see is up 63% from last year as a result of the DBM growth that we've seen. Paul will talk more about that increase later on during the slides. This growth is driven by the payments and subscription revenues, the DBM contracts that we spoke about including the Tier one US telco that came on during this period, but also the contribution from the Doctor.

3:56 Mo Digital acquisition that happened last year. All of this revenue again still continuing to be at a good gross profit margin at 90%, so it's then helping us to drop those increased revenues down to the bottom line. Obviously with that one, our EBITDA for this first period was a slight negative at minus 200,000, but this is obviously reflecting a lot of the costs that we had acquired as part of the Dokomo Digital acquisition, which we expected to have. It was in our acquisition plan and we continue to reduce those once and have reduced those during the period, as we'll speak to in the next slide. Obviously just an obvious point that H1 twenty twenty two had no document costs, the acquisition didn't start to complete until the end of August of last year.

4:47 On top of that, we're also continuing to invest in R and D support the DBM growth and that's been a continuing factor and will continue during the course of the second half of the year. And that brings us to the operating losses again affected by those increased personnel costs and the costs associated effectively with bringing in quite a largely over inflated company in Docker Mail, we're trimming those cost areas down. Paul referenced those cost reductions a little bit earlier, so now if we go to the next slide we'll see where we're getting those £21,000,000 of cost synergies from. Obviously one of the main items is we're moving all of the contracts that have been migrated across to BANGO, so all of those are now sitting with BANGO.

5:33 We've already done some exits from various countries and from offices, so reducing the fixed cost spend that we have and that's a continuing action. We've had several other countries where we'll be exiting and where we'll be reducing costs in those ones. We've also taken on board and reviewed a lot of the other low value complex routes that we're on with Docomo, which we indicated that if they weren't contributing sufficient revenue, we'd close those ones down. We've started reducing those already. One of the main items is obviously headcount reduction. We identified that acquired Docomo business had quite a lot of additional headcount that we didn't feel was essential for the combined operations that moved forward. And again, as we start to reduce the offices and the countryside, that headcount reduces further.

6:25 Also another item of those ones is business simplification. So we were taking two companies which had different systems operating together and different ways of working and we brought them together to unify them into the BANGO way of working. A key example, obviously from my areas, we've had a couple of different account systems that we've brought together into one system now, which enables us to just be a lot quicker and reduces our costs as well. And the other item is the actual full route migration to the BANGO PLC platform. So that one's on an ongoing basis. We said it would be eighteen to twenty four months from the acquisition and that continues in line with our expectations of those items. We still expect to complete that one next year. Down there you'll see those movements on of the executed and identified but not yet executed costs coming up to £21,000,000 for the end of December.

7:19 In relation to cash, you can see there obviously our intangibles billed through our R and D capitalization is one of the main sources of use of cash for this period and again bolstered by the loan proceeds from the MHN loan, is something that was indicated when we first did the acquisition of the business that we would be potentially looking at a loan to come through to resources during that period, and so that must help to keep our cash at a good level coming in at 13.3 at the end of the period, obviously including that loan. A bit of an indication of the last four years of income statements for the first half, again 49% CAGR over that period. Gross profit margin gross profit margins dropped down slightly from previous periods but this is as we have the two platforms, the Docmo platform and the BANGO platform. As those move across to just purely the BANGO platform, we expect our gross profit margin to build back up again.

8:19 Administrative expenses in that first half obviously reflecting the combined operations that came through with Docomo costs that were still in existence that we've reduced to the synergy actions, so we're expecting to see those ones drop down and that obviously impacted the EBITDA.

8:37 With that I'll pass back to Paul for a review of the strategy. Thanks Matt. So I said we'll focus very much on the digital vending machine, before we get into sort of the digital vending machine itself which is the BANGO product that addresses this sort of super bundling market, we wanted to step back a little bit and look at the broader subscription market. You know, if you there's all sorts of reports, and you'll have seen us sponsor reports along with Juniper and Omnia and Omnia and a few other companies over the past sort of six months, but I don't think there's any doubt that the subscription market is really growing. If look at the Juniper forecast, that's going to grow to around $600,000,000,000 just for digital subscriptions by 2026. So a real fast growth market from a market that was, you know, around only 100,000,000,000 back in back in 2018.

9:26 And one of the drivers for that is that those users were taking even more subscription services. If you just look at the top 10 countries and look at the average number of subscriptions we all have, it's jumped dramatically between back in 2018 and 2026, we expect to have between four or five services per person, and that's an average. So that means the number of people have much higher than that. And again, this is not total subscriptions, these are just streaming services, which tend to be the higher value, higher price subscription offerings. And an increasing portion of that is certainly being delivered via through telcos. And that's where we're going to focus on a lot in the rest of this section is really why telcos are really good at bundling. But you can see already this year they do a big chunk of bundling of subscriptions, right 25,000,000,000 worth, and again this is just on the SBOB, the subscription video on demand services, but that's set to almost double by 2027.

10:20 So in a market where the subscription market is growing and it's been increasingly delivered through channels, and that's really the combination of these two markets where we're operating with and where the digital vending machine really sits at the intersection of those two. If we step back and look at sort of bundling, from a telco perspective, we've been around long enough you would have remembered when voice at home was separate from your broadband at home and telcos looked to bundle those two together, then some of them that had a mobile operator look to put your mobile plan along with your voice plan at home, along with your data plan at home, creating what was the time called triple play, and that was one of the big discussions in the industry, we've been around long enough, this this telco bundling all these different first party services together to provide you all your connectivity, be it home on the move, be it voice, sort of be it data.

11:13 Douglas then naturally moved to sort of almost this sort of what was a time called sort of quad play, where they started to bundle third party services together, but in effect on a set top box. They would go out buy content rights, buy the wholesale rights, put that together and deliver you a TV service on a set top box. Again, you could bundle with that voice and the data and the mobile services. So we went from a sort of a triple play to sort of a quad play services very much by telcos buying to the wholesale rights. We saw the likes of BT Sport and other telcos start to launch content channels and sports channels really to capture that growth and to enhance their broadband proposition at a time when fiber was being rolled out really quite aggressively. We've gone a few years and emergence of Netflix and Amazon and all over the top streaming services, we started to see telcos look to take one or two of those services and connect it with some of their subscription tiers.

12:09 Quite often you would get if you were on a very high subscription tier, would get a very high value subscription bundle, or maybe if you're on a lower tier, they would use a bundle to try and walk you up to the next tier. But it was sort of very much targeted connection of one subscription service with one particular either mobile or sort of fixed broadband tier. That takes us to where we really believe we are today, which is where Telco is increasingly taking more and more subscription services. We're not taking one or two, we're taking tens of third party services and making those available to you in a single place. So example there obviously being Optus Soho, Verizon plus Play being another good example, and we've got the term super bundling for that, and that super bundling is really telcos in particular, but basically anybody offering a subscription marketplace where you can get all your subscription services in one place, not just the video on demand, not just the gaming, not just the music, but the lifestyle services, the shopping delivery services, e reader services, etc. All those different subscription services within a single portal.

13:16 So why are Telco's really well positioned for super bundling? Well firstly is, as I've just spoken about, they've been bundling for many many years. They've always bundled different services together. It's part of their DNA, it's part of their ongoing business plan to put multiples first party services together to differentiate the fundamental connectivity that they provide. They also have a really strong payment relationship, so a very trusted billing relationship with all those customers and an ability to market to all those customers. And they already spend significant marketing dollars marketing to their customers to be able to bundle into that marketing for third party content is a very small step. And finally they have the funding to do this if you ever rung up your telco provider and say you're ready to leave, get all sorts of free things thrown in on top. And so they have the funding and the budgeting from a consumer acquisition and consumer retention to be able to entice you with new services and these exciting third party services. It makes them a very strong bumbler and very attractive to the merchant perspective.

14:19 And why do they do this? They do this because it's a great way of attracting or retaining new customers, it's a great way of reducing churn, helps them drive up revenue. Don't forget, and all of these subscription services, they're taking a margin on all these subscription services, so they're generating more revenue, more margin, increasing their lifetime value, and fundamentally getting more engagement with you as a customer. So it's really what Telco has been doing for many years, and really with super bundling, just supercharging that, to be moved from a few services to tens of different services.

14:52 So why the merchants, why are sort of Netflix and everybody else and all the other merchants you see listed on this slide, why are they looking to really bundle those services particularly through telcos? Well, they're all looking for access to new markets, they're looking for new customers, they're looking for access to more customers, looking for customers who don't churn as much. You give your credit card to a streaming service, much harder to get access in the first place, so there's a bigger barrier to sign up, but also there's then it makes it easier to cancel and a lot of the banks etc have services that allow you to find things around your credit cards and automatically cancel. So what really merchants are looking for is more customers and stickier customers, and somebody who help promote their services. And that's exactly what the telcos do is as we saw before, have a trusted billing relationship, they're bundling multiple services together to create that stickiness, and they're investing in the marketing of those different third party services to their own customer base.

15:47 The advantage for merchants of using BANGO is they immediately get access to all these benefits through hundreds of channel partners worldwide. Very much it's connect once, access many that we've talked about many times before. You add on to that the ability to use the data insights we have to help them better target their marketing, so they can target their marketing and get a better return on any marketing investment that they want to do directly. Tools to help them increase conversion, so it's not just people signing up, it's people signing up and driving it to completion and taking that subscription all the way through to activation. And it gives them the ability to manage their subscription services through all these channels in a very simple way. We want to increase the price, we want add a new product, we want to add a super tier where you get HD and 10 devices that can stream that service. They can do all that, you know, in effect through a single click and make that access to all those channel partners worldwide. So again, that BANGO platform benefit of ConnectOne's access many really evident to the merchants.

16:46 So why are we winning in this market? Think fundamentally if you look at the technology we have in the platform, some of which I just touched on regarding the benefits to merchants, we'll look at a bit more of that on the next couple of slides, it's really the key features to help launch a super bundling business and not just launch it, but actually make it successful. It's not just about the connectivity, it's about launching it and then once it's launched, how can you make sure it's going to be successful. That time to market, that's where the connectivity really comes in. If you look at the number of merchants that we have on the platform, an additional 22 in the first half, that in effect that malt of that barrier to entry of anybody else wanting to join the circle, it gets harder and harder because we have more and more of the merchants connected. And there's a network effect with those merchants as well because more and more of those merchants are recommending BANGO to telcos. We've had a number of inbound leads this year where telcos have approached us having been referred by a merchant.

17:40 So the merchants don't want to do this work multiple times, they want to do it as few times as possible and take advantage of this connect once, access many, and as a result they almost act as an extended business development team and an extended marketing reach for BANGO because they are referring telcos to us. And it works in reverse as well, likewise we get telcos referring merchants. It works very much in both directions. We look at the sort of the SaaS model that we have, it very much makes it a lower cost solution than telco trying to do it themselves. While the telcos, the default is still to look to do everything themselves. In every telco we've engaged with, in every telco we want, everyone has done a business case to look at building it themselves versus buying, so they've all done that build versus buy and they've all ended up buying.

18:26 The build is very very complex, not just to get started but actually to maintain and you have the complexity of engaging with merchants, many of whom don't want to engage directly, so you end up connecting your self build solution to probably to BANGO anyway. So what's the point? Why do it quicker, get to market faster, get more merchants, and launch more quickly using the BANGO solution than really try to build it yourself.

18:55 And our sort of capital markets day back in September 21, I shared this slide which basically talked about if you look at payments, we look at sort of single service bundling, we look at the digital vending machine, where are we live and where are we in active discussions. And these are the top 30 telcos outside of China. So that was a position back in September 21. If we look where we are today, can see that position is dramatically different. Much more active discussions, many more payments routes live, much more single bundling services launched or about to launch, but look at the DVM tab, you see the additional big wins in the top 30, you see now good stretch of that top 30 where we have really active discussions and one of the questions in the Q and A is about the prospect of getting the other two US telcos as customers.

19:45 Both of those other top two US telcos have a pink pink yellow highlighted, certain oval or rectangle I guess, on this particular slide, dedicated to them. So really we are a really strong footprint across that sort of telco base, and that's where our focus is. There's a lot of runway ahead of us, we're in that point where we're getting coverage, we're bringing new logos onto the system in the years to come as those customers launch services, as you start to add more and more customers onto those services and they start to increase through subscription tiers, that's when that next phase of growth really comes from and we call that that sort of capacity growth phase. We're looking straight nicely into this, so how do we make money? Some of this we may have talked about before, but we thought this is maybe a useful refresher in terms of how we charge for this and how we make money. When we sign a digital vending machine deal, there's normally an integration fee, that's normally somewhere, you know, 6 figures, that's to do the exact integration and to do the connectivity and to get to give that operator everything they need to get them set up, ready to launch. There's then usually a delay, that delay varies widely depending on the particular operator, and it's largely outside of our control.

21:00 And the point then they decide to launch the services, the recurring revenue starts. You see it here in sort of period eight, we get that license starting, that license continues to start. Then you can see in a couple of periods later in between period nine and ten, that license revenue increases, that license revenue increases because they've crossed through that threshold, the number of entitlements has grown, so it's taken them through a threshold and they've moved into that second license tier. At that point the quarterly charge increases and the annual recurring revenue increases. Increasingly what we're starting to do is deliver value add features on top and we sort of term those as optional features. An example might be dynamic offer management to allow offers to be automatically created and customized to individual subscribers. It could be using some of the BANGO audiences to help the telcos of the market and the service. And really what we see there is we sort of generally again charge a bit of a setup fee for that actual feature and then there's an incremental license fee moving forward which is that sort of gold bar on the top of the purple in periods eleven and twelve, that's the additional license fee from those optional features. And it might not have to one optional feature, it could be two, it could be three, it could be four, but increasingly we're using the investment from an R and D to create these optional features to not just add value to the platform but to increase the recurring revenue potential over time as well.

22:24 Fundamentally, you sort of zoom back into the digital vending machine and sort of look under the cover, you see a really feature rich platform. It's not just about having all the merchants' connectivity, it's about how we manage entitlements, it's about being able to pause an entitlement and to resume that entitlement, be able to create these offers, so that when I walk up to a digital vending machine, I see a different set of merchants presented to me than Matt does. We're also going to make sure we can charge all those onto a bill and really look at the data in the platform to make sure that we're really optimizing that subscription flows to make people who are eligible for offers are aware of the offers, they click on the offer and they follow it through to activating that offer. So there's really a whole host of intelligence really under the hood to really make sure again it's not just about launching, it's about launching a successful Superbulk in service.

23:18 Much of our ongoing R and D investment is centered around the sort of features sort of under the hood, but there are actually a number of features we've been developing and are now available. You can see screenshots here on the right, where it's actually more front and center and more readily visible in front of the consumer itself. The big one being a user interface, so the ability for a customer to log on on the actual platform that they see on the subscriptions, they see the offers, they're able to click through and launch, they're able to see what their total subscription spend is, they're able to see when it's being charged to their bill, when subscriptions renew, what other offers they could have, could they save more by adding another subscription because it would give them a discount of all those existing ones? This sort of consumer access to this digital vending machine is something I think historically we'd always imagined a number of telcos to build themselves and that's what Optus with Sohub have done, that's what Verizon have done with PlusPlay.

24:08 See increasingly even some of the larger operators really looking to us to provide that sort of out of the box solution so they can brand, they can put their logo on, can change the colors, maybe move some of the panels around, but they wanted a solution that allowed them to get up and running quickly. Because again they realize that if it relies on them building that, that's firstly very costly, but also importantly it delays their launch. It delays their launch delays our recurring revenue, so it's very much in our interest to provide those features because these don't just attract that optional payment fee, that optional feature fee, they also allow us to launch more quickly and to get that recurring revenue, launched quickly. So you see here the sort of the standard view, of our sort of default user interface. This is something we've launched internally within BANGO. We actually launched our sort of internal BANGO digital vending machine for employees to be able to please log in and add different subscription services.

25:00 And that's sort of our way of sort of testing our user interface and being able to bring new features and as employees of the company being able to actually use the digital vending machine, which start to sort of eat our own dog food so to speak, then it allows us to test new features and to do AP testing very quickly on a very friendly audience. So this is a product that's already in active use very much internally and we have a number of teleports who are looking at this at the moment. So in summary, it's all really about digital vending machines, it's all really about execution, our focus is on dominating that telco market, you know, the significant revenue available tools, not just from connecting more and more telcos, those telcos start to grow. Merchant growth continues.

25:46 Each new DVM deal brings a whole host of new BANGO merchants to the platform, which are then available immediately for everybody else who's already connected. We're going to try and reduce that sales cycle and that time to revenue with these new features such as the user interface to help telcos get up and running more quickly. And as we move into sort of 2024, you'll really see as the Dokomo synergies are all done and dusted, as you get a full twelve months benefit of those, you'll start to see significant free cash flow generation, significant profit in 2024, and really we're in a good place to meet the consensus expectations that are out in the market. So thanks again for your time this morning, thanks to your shareholder, thanks for your continued support, and hopefully you're excited about, the future as we are.