Essensys (LSE:ESYS) — Half Year Results

0:01 Good morning, and welcome to the ESSENSYS PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be dismissed at any time by the Q and A tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Mark Furness, CEO. Good morning, sir.

0:29 Good morning, Alessandro. Thank you, everyone, and welcome to today's half year results presentation for the period up to January 2024. Alongside it alongside me, I have Sarah Harvey, our chief financial officer. Okay. So let's dive into h twin h one twenty four. The story of that period for us is really about our our pathway to profitability, and we've made significant progress, as we've improved our operating losses and our adjusted EBITDA loss, which has narrowed from naught 500,000 in the previous period to 4,200,000 in in sorry. The other way around, 4,200,000 to naught 500,000 in this period. That's really driven by a focus on simplification, operational improvements, and a real determined focus on improving our cash generation in the near term.

1:25 Underpinning, our our progress in the period is really the two major contract expansions we've signed, both with global real estate, brands. We'll talk a little bit about those further, in in the presentation, but the headlines being a mini a minimum of 1,500,000 of committed ARR, which we expect to be delivered by September 2025.

1:49 Notwithstanding that, we've seen some downgrades with our largest customer as they've downsized. We expect to see that result in 90 sites not renew with us in September this year. Underpinning everything we've been doing is really our focus on product innovation and investment, and there's still key priorities. And we've announced recently the launch of a ESSENSYS platform's intelligence engine, which is really a response to significant demand from customers for a better insight capability around office utilization and occupancy. I'll come back in a few slides to talk through our the evolution of our product and proposition in the market. But for now, I'll hand over to Sarah who'll take us through our financial overview and operational highlights.

2:38 Thank you, Mark. Hi, everyone. I'll start with the financial review. So if we look at the highlights for the half year, total revenue came in to 11,700,000. That was down 9% year over year, and that really is the impact of adverse foreign exchange movements and a decrease in our nonrecurring revenue. That's the the revenue that customers spend with us to take a site live. We saw a lot of activity last year and and less in the current year. What that meant is that we saw a 300 k reduction in our gross profit, but actually our gross margin showed significant improvement. So overall, we're up at 60% gross margin, and that is driven both by the higher mix of recurring revenue, which is higher margin, and a higher recurring margin, which also improved by three percentage points in the period year over year.

3:29 Recurring is still the majority of our revenues at 10.2 of the 11.7 was a recurring basis with our customers. That's 87% of the total. And as as we've discussed previously, two thirds of our revenue comes from North America. That's our biggest market with the remainder coming from The UK and Europe. And APAC remains a growth market for us, particularly Australia there, which is growing nicely. As Mark touched on, the progression in our adjusted EBITDA loss has shown significant improvement year over year, so nearly 90% improvement in that number from a 4,200,000 loss to a 500,000 loss. And that's reflective of the specific cost saving activity we undertook over the last year, which we've spoken to the market about previously.

4:15 And we closed the business we closed the period with 3,500,000 of cash. So looking at the income statement, you can see how the revenue is made up there across the regions. You can also see the gross profit margin piece there with that with that improvement. We'll call out the improvement in the overheads there, so you can see the reduction coming through. Last year, below EBITDA, we also had a 500,000 exceptional cost that was related to the global restructuring that we announced this time last year and completed through half two. And that was actually completed during the first month of f y twenty four. So in the periods results we have now, there was a small amount of cost in there as well. Moving on to look at our annual recurring revenue and what's happened since we last reported that in July 23.

5:04 We have effectively remained flat and we but what what we are seeing is an improvement in our expansion revenue with new sites with existing customers less of an offset with the lost sites there. Last time we were talking to you about our ARR movements, we were seeing a significant drag from our operation marketplace revenue. So those are our non core revenues. But in the second half of last year, that was a significant drag on ARR, and what we're now seeing is a far more stable position with those two streams. In terms of the adjusted EBITDA, we talked about that year over year improvement. So if we take the small decrease in the gross profit number, we see a significant improvement in the staff costs line, and that was specific to the restructuring that we did in the last year.

5:52 You can see an improvement in other overheads, and that is a continuing improvement position as we continue to realize those cost savings through this year. So there is more to come there. And as we mentioned, closing at a $05,000,000 loss is significantly improved year over year. Okay. The cash flow statement is here for reference. You can see there in terms of the bigger numbers, working capital, 1,000,000 of that was the unwind of the exceptional re reorganization costs that we booked as a provision in f y twenty three. And below below sorry. We can still also see that the intangible cost, that's our capitalized development cost, that is lower year over year. And again, that's the impact of the decisions we made last year. So our cash outflow has reduced significantly year over year, thanks to our restructure.

6:44 So looking at where those cash flows went, pounds $05,000,000 of the EBITDA loss, as we've discussed before, pounds 1,000,000 of the provision. And then we have other working capital, 1,200,000, 1,000,000 of capitalized development costs and 800 ks of lease payments. Moving on to our operational review. We closed the period with four seventy four sites. That's an increase of eight on the July year end. And so we're continuing that net growth trajectory after the period post COVID of decline. We we took live seven new customers in the period of which six were strategic. And as a reminder, we classify strategic customers as those with the ability to bring us at least a million dollars of ARR.

7:29 And the reason we look for those customers is that it it ties in with our strategy of land, expand, and grow. So we sign a customer, we expand with them into their portfolio and and then grow further. Customer numbers reduced by two. One of those was actually a consolidation of customers, so we didn't lose any sites from it. So it merger of customers. You can see that the people numbers, a 114 people at the end of January significantly reduced from the July number because of the restructuring we previously announced. Our net revenue retention went backwards slightly, but still strong at 95%, and that's really reflective of the activity and the lower recurring revenues in that first half of the year. Our LTV to CAC metric improved over the period because our margins are improving for those contracts and our customer acquisition costs are also lower.

8:22 And you can see there the split of sites by region and as with the revenue, the majority are in North America. Touching on the customer base, I mentioned we took we had seven new customers live in the period. We lost nine, one of which was a strategic customer that represented five sites. The remainder was small. And as we've said before, we do continue to see that churn at the low end of the customer base, and that is continuing, but that has stabilized significantly. So particularly in The UK, we've seen a reduction in that level of decline both in customer churn and revenue. Our strategic customers now represent 84% of our total sites, 81% of our total revenue, which is up from 77% last time we spoke, and the net revenue retention metric for our strategic customers is a 103% comparing with 95% for the wider base.

9:17 As I said, we continue to have site growth in the period, and you can see on the right hand side there that we saw some good growth in The UK and Europe, which is particularly positive after a period of decline in that region. The US is in a slight negative decline, that is where the the single strategic customer loss was with the five sites associated. And APAC continues with all new, no churn in that region. Okay. I'll hand back to Mark for proposition and market evolution. Thanks, Sarah. As we spoke spoke at the start of this session, we're seeing a significant progression with major customers, those big global landlords that offer significant expansion opportunity.

10:03 And that's really demonstrated by the two MSAs that we signed in the period. Historically, we've worked on a site by site basis as we look to expand with the customer, but these are examples of that move to work on a portfolio basis where, actually, we complete a contractual agreement that commits to a minimum level of ARR. The first is with one of the world's largest privately owned commercial real estate companies. There's the the challenges were really they were trying to solve the problem of how do they digitally enable a network of connected spaces for their whole tenant community across their portfolio of buildings. That initially will see a minimum of $1,000,000 US of committed ARR. We expect that to be delivered by September 2025.

10:54 And the total opportunity with that organization is well in excess of 350 sites. The second one is with an Australian listed REIT. That's a five year term. Again, that commits to a million of minimum, ARR, that's US dollars, by July 2025. Initial sites that we see identified in the phase one rollout is 30 locations. But these are real milestone customer wins for us as we move from the land to expand phase. And that's been offset by the news, recently of an expected downsizing of our largest customer, which is, could result in up to 90 sites not renewing in September 2024.

11:41 So just want to cover a little bit of the evolution of our business and our products to really the pure play SaaS offering that we're seeing, exist with our business today. When we started in 2006, we were in a world where IT services were mostly delivered on premise. And it was a world where for the flexible real estate industry and the commercial real estate industry we serve, so serviced officers and coworking back in 2006. But, actually, ESSENSYS Cloud was a primary driver of our solution. It was our private network solution that allowed us to deliver phones, Internet access, network services, on a centralized cloud based model, and we started to develop software that controls that way back in 2006.

12:31 That's evolved over time, to where we are today, which is really we've moved from an IT tool to a SENSYS path platform being a full business tool, which is really now driving to solve for how do I manage and and onboard tenants in these spaces and off board tenants? How do I manage these spaces, the bookings of meeting rooms, the inventory? How do I understand how utilization happens in a building? Who's in when, where, and how they're using the spaces? And that transition of value has really resulted in a in a decline in applicability of a census card. Now that's quite important because two thirds of the revenues attributed, to the downgrade that we've just talked about are attributed to a census cloud.

13:20 And that customer is actually not an ESSENSYS platform customer. They're on our legacy product in The US of a ESSENSYS Connect. So what is a ESSENSYS platform as a pure play SaaS offer? Well, really, we've worked hard to simplify the proposition in the last two years, sim simplify the onboarding journey because as Sarah mentioned, nonrecurring revenues, CapEx budgets remain under pressure. And so we want to try and, disrupt that and and mitigate against that and make the onboarding journey easier. We And also wanna offer in product upgrades to really use the platform itself as a distribution engine for new capability. So what does the ESSENSYS platform do? Well, in multi tenant real estate, one of the major challenges is how do you onboard and offboard occupiers tenants? How do you give them access to the spaces and the digital services they need when they need them? And so our orchestration engine within ESSENSYS platform deals with that complexity and automates a lot of those workflows to make the onboard and offboard of clients very simple and efficient.

14:23 Recently, we've seen a big move by the commercial real estate industry to get to focus on insights. That's understanding how occupiers are using spaces, how those environments are being utilized, and also what's the experience like within. We've recently launched a ESSENSYS platform intelligence engine, which I'll talk about shortly. And finally, it's how do we enable a frictionless experience, a mobile first experience, in these buildings, in these spaces? How do you simply use your phone to open a door, to tap to book a meeting room? And and we've been working hard, on a mobile first approach, and we're developing some hardware that we've talked about previously, to really transform that experience in the building. And, obviously, our platform is an API first approach, which is makes it very interoperable with many of the best in class solutions for the commercial real estate industry.

15:19 So just touching on ESSENSYS platform intelligence engine, because this is an evolution of our product and a new capability that we're really excited about and we launched only a couple of weeks ago. What's really the problem that we're solving here? Well, the commercial real estate industry and office quite often reports on occupancy. So we've seen lots of datasets referring to contracted occupancy. So that really talks to the amount of space that is contracted by any customer. What that story doesn't tell is whether that space is being utilized. And in the world of hybrid and flex, and flex working, that is really critical information. And the information that's available today is very low resolution and low quality.

16:05 It's really driven by turnstiles and ID badge swipes, which is basically all of the datasets come from that source. That means that the quality of that data, the picture quality is very low fidelity and very low resolution. It's siloed across sort of different systems, so it might be some turnstiles, it might be some Wi Fi data, it might be some sensor data. And it really doesn't give the insights that the commercial real estate landlord needs to optimize their products and their portfolios for their users. And so we launched the SENSYS intelligence engine

16:38 that's really using the proprietary datasets and the patterns that we can see to surface that data in a unique and compelling way, to help our customers increase and drive occupancy, improve yield and around utilization in these spaces, and reduce operating costs. And that's been since our our soft launch a couple of weeks ago, it has been the number one driver of conversation demand that we've seen over the last few years, so a significant improvement in inbound inquiries and activity following the launch of intelligence engine.

17:14 And I just wanna touch then on having talked about intelligence engine or census platform being pure play SaaS offers. What that really means, that transition from the value of a census cloud to a census platform, what it means in terms of overall margin progression over time. So on the left hand side, you can see how the margin of a census cloud is delivered. If we deliver a pound of ARR, $6.60 pence of that cost of that revenue has cost associated to the delivery of or the connectivity to the building, connecting our data centers to those buildings on our private network. We normally third party wholesale load services from a BT or an AT and T in The US. After the fiber costs, we see the core network costs, the operation of our private data centers. Now we see some of that, costs going through cost of sale, but we see some of that actually with regards to our data center leases go below EBITDA.

18:15 Actually, that's an IFRS 16 adjustment. So our cash contribution, if you think, of it on that 10, in terms of margin, the contribution margin, somewhere between 1015% from the end ESSENSYS Cloud product. Now ESSENSYS Cloud and the ESSENSYS platform were tightly bundled for many years. Two years ago, we announced decoupling of ESSENSYS Cloud from a ESSENSYS platform so we could deliver a ESSENSYS platform as a pure play SaaS solution. That is our focus. That is our, our whole investment activity is all around a census platform. And the underlying COGS for the census platform are hosting costs with AWS. That runs at about 7% of revenue. That means that our contribution

19:01 margin for after cost of goods sold is really a mid 90, so 90 to 93% in terms of our our gross margin. So our focus on ESSENSYS platform will continue to lead to improvements in our gross margin performance, which will deliver net margin and cash flow performance improvements as we look out. And finally, just like to touch on the commercial real estate markets. Undoubtedly, we're seeing significant headwinds in the office market globally. The market, though, is beginning to clearly bifurcate into two types of product set. There is the functionally obsolete products, which are older assets and office buildings that are very low function in terms of, occupier amenities and services, and they're not really designed for the future of the way companies work and want to operate. And at the top of the market, where we're seeing significant outperformance in terms of rent, in terms of occupancy, and utilization is really the premium products. So those premium products can be those that have better amenities, shared services and spaces, so meeting rooms and coworking spaces bookable resources that are for the benefits of the whole tenant community in assets.

20:23 Undoubtedly, though, we still see budgets are tight. Sarah's reflected on how that's impacted our nonrecurring revenues. And nonrecurring revenues is something we're trying to mitigate. By moving our our our proposition to a pure play SaaS offer, it really reduces the onboarding cost and the installation and setup costs that are traditionally, under pressure, because of tightened budgets. And so we can see as the office market starts to stabilize, we can see those big customers, those strategic customers we're working with deliver significant long term opportunity as evidenced by those two MSAs that we talked to earlier. So as a brief outlook as to where we are, our discipline around cost control and cash management has resulted in a significant reduction in our EBITDA loss, delivering over 8,000,000 in annualized cost savings so far, and we believe there are further cost savings we can identify in the months and years ahead.

21:27 That's really around our focus on strategic customers. As we focus on those high value long term and and significant expansion opportunity, strategic landlords and global players, actually, we see the focus of our product prop and our proposition to those specific customers really starting to deliver an improvement in our operating environment and the customer penetration.

21:56 That has to be focused, as our business is, on on efficiency. That that focus on strategic customers actually allows us to simplify our business. It allows us to improve the adoption journey for our customers. We can be much more focused with our customers on how do we get you to value, so why do we reduce time to value, which lowers sales cycles, improves return on investment for our customers. And finally, underpinning all of this is our focus on innovation. We developed a unique and compelling solution in the ESSENSYS platform, which believe we believe with the addition of intelligence engine and some future road map items, it mean that we remain very compelling for the world's largest commercial real estate organizations as they move to deliver a more flexible, more hybrid workspace and office answer to the market. And our vision is unchanged. We we focus on powering the world's largest community of flexible tech driven spaces.

22:58 With that, I'll briefly hand it back to Alessandro, who who can perhaps take us towards q and a. Perfect. Mark, Sarah, thanks very much for your presentation. What I'll do is I'll just bring your cameras back up for the q and a. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab, which is situated in the top right hand corner of your screen. But just while the company take a few moments for you those questions that have been submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides on the published q and a can be accessed via your investor dashboard. As you can see, we have received questions throughout today's presentation. And Mark, Sarah, if I could just hand back to you just to read those questions out and give responses, and I'll pick up from you both at the end. Thank you, Alessandro. So I'll take the the first couple I can see there. So Andrew, thank you. You say you referenced achieving over 8,000,000 in annualized cost savings. Can you please elaborate on the specific measures taken to streamline operations and reduce cash burn? How sustainable are these cost saving initiatives over the long term? And what further initiatives are you considering?

23:56 So taking the first piece of that question first, the the most significant element of the cost saving came through headcount reduction, and that was done in a phased approach. So the piece we started at the beginning of half two last year was to move to a centralized structure rather than the regionalized structure we'd built up. So previously, we had three separate regions with the separate staffing that went with it across North America, UK, and Europe, and APAC. The business is now run and supported in a central way, which enabled us to streamline the teams and do things more efficiently. And that's how the knock on impact of speeding up decision making and increasing the level of collaboration. There were also various non headcount costs that went with that. So that would be things like offices in those regions.

24:42 And towards the end of the year, that's when we announced the final part of that restructuring, which impacted some of the support functions and product and development, and that related to the stage that with the business was at at that time. So that that was the bulk of the 8,000,000. There are cost savings to come over time because clearly when you take that level of headcount out of a business, you don't need the same spaces and you don't need the same volume of software. So there are more coming through that. Okay. The next question from Simon. Thank you. With eighty percent of revenue from strategic customers, how do you define these, and what is the concentration of revenue from them? So our definition of a strategic customer is one that has the ability to bring us a million dollars of ARR. So we've been focusing on those because it gives us the ability to sign an initial site with them and land into their portfolio and expand quite rapidly.

25:37 And as Mark referred to during the presentation, we're moving much more to a portfolio way of discussing those customers' needs. In terms of the concentration of revenue from them, our financial information discloses that our our only customer that represents more than 10% of our revenue. So our largest customer in the half year was 26% of revenue, and that's the one that Mark was referring to earlier on. K. I can probably take the next two. So again from Sam, what initiatives are in place to increase the recurring revenue, and what are your short term targets and strategies to grow this? Well, Simon, we've actually been focused on this now for some time, I think, in 2019, when we IPO ed the business. The mix of our customers looked very different.

26:22 We had a very large long tail of smaller single site flexible workspace operators and coworking operators. Our belief then and increasingly our belief now is that actually the commercial real estate industry at large, I. The landlords and asset owners that we all recognize the people who want buildings like Rockefeller Center and the Gherkin, these big global landlords. We believe they are responding now to the change in demand from occupiers and tenants for better quality spaces that enable flexible and hybrid working, more shared spaces, more higher quality amenities. And so our focus on strategics has been there for some time. We've seen that include improve our customer concentration and revenue mix. We've seen that improve our sales efficiency.

27:14 So if you think about how our our opportunity to grow, as we talked about earlier, one of those customers, those male major milestone expansion contracts is with a commercial real estate company that controls hundreds of assets globally and operates them now on a looking to be more flexible and more future focused. The opportunity to grow with them is to around 350 of those assets we see as identifiable that we can help them solve some problems there. And so we expect over time that that account will grow significantly past that 1,000,000 of committed ARR through you know, as we expand with them over time and and further penetration into their portfolio. But it's important to note that that will come on the back of our continued push into product and innovations that meet their changing requirements.

28:10 Because this market's evolving and has been doing significantly and most probably most importantly to note since the pandemic. Okay. Moving on. From Colin, how can we get the share price back to the level seen in January, and what catalyst do we have? You know, I'm clearly disappointed with share price performance, in the recent times and particularly, since the pandemic. Our job is really to focus on our long term, creation of shareholder value. That really is all about efficiency, the right customers, prosecuting the opportunity, delivering long term value to our clients. What that will do is that will drive the expansion opportunity, account penetration, and therefore future cash flows. And it will be really that moment in time as we move to profitability, and I think people get very, very comfortable with the outlook in terms of cash generation, I think that will be one of the major catalysts for for our share price to move. But, again, you know, I'm sure you see many, many companies. You you'll understand that the dynamics work differently across many organizations. But I think they're the key things that will start us moving, and hopefully, we see them soon.

29:27 Okay. I'm not sure I can see any more questions, Alessandro, so maybe I can hand back to you. Yeah, Mark. Sarah, thanks for answering those questions from investors. And, of course, the company can review all the questions submitted today, and we'll publish those responses on the company platform. But just before redirecting investors to provide you with their feedback, which is particularly important to you both, Mark, could I just ask you for a few closing comments? Absolutely. Sorry. So I just pushed the slides through to it. Thank you. Well, listen. We continue to focus on the long term opportunity. We are absolutely determined in delivering for our customers and delivering long term shareholder value. So thank you for your time today, and wish you the best for the rest of the day.

30:13 Perfect. Mark, Sarah, thank you once again for updating investors today. Could I please ask investors not to close this session? As you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will then take a few moments to complete, but I'm sure we'll be greatly valued by the company. On behalf of the management team of ESSENSYS PLC, we'd like to thank you for attending today's presentation, and good morning to you all.