Pathos Communications (LSE:NEWS) — Interim Results

0:00 Good morning, and welcome to the PATHOS COMMUNICATIONS PLC Interim Results Investor Presentation. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Just simply type in your question 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 questions submitted and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll.

0:27 I'd now like to hand you over to the PATHOS COMMUNICATIONS team. Good morning. Hi, everyone. Good to be speaking to everyone again. For those who aren't familiar with us, we're PATHOS. We connect the world's SMEs, the world's SMEs, to press using technology, and we're looking forward to telling you more about our overall mission, as well as what we've achieved in the first half of the year. Start with some introductions. I'm Omar Hamdi,

0:58 founder and CEO. Started PATHOS seven years ago. PATHOS came out of two parts of my life, my experience, spent the best part of a decade working in the media. But also, just as much as I love the media, I love technology. And graduated

1:16 in computing, been studying technology, studying AI for two decades. So quite a deep seated love affair on on both the media and the tech. And we have our CFO, Adam Hurst. Morning, everybody. Yes, Adam. I'm the CFO. I've had career in a long career in the industry as in senior financial roles, qualified as a chartered accountant way back. And most recently, one of my most recent roles was the CFO of Yelp, the digital marketing business. So pleased to be here, and I've I've now finished my first year at PATHOS, and it's great to be sitting here presenting the the interest. Okay. So we've got a really differentiated solution to a large underserved market. If you think about the PR universe, it's it's quite a big industry. It's a 100 and but we believe it could be a lot bigger because it hasn't really penetrated through to SMEs, small and medium sized businesses.

2:18 And it's easy to forget sometimes that when we say SME, we are talking about 99% of all businesses. So we are very much human led, but at the same time, AI fed. And we're seeing technology allow us to scale faster and to really virtualize all of the functions of the business. So if you think back to 2019 when PATHOS was a a one person business, what we've done over the last seven years is virtualize all the things that Omar used to do, virtualize those across now 80 employees. What we're now doing is virtualizing all of the tasks and the processes of those 80 employees across technology to give us even more scale.

3:04 We've got a pay on results business model, which is really important. Growing businesses want to make sure they're getting value for money. We've got our two AI tools, Presella, the virtual publicist. So this is really a a a virtual employee, a full time AI publicist that businesses can use, so that's outward facing, and then PATHOS MIND, which is our internal stack of AI agents. One of the things I really admire about what the team at PATHOS has built over the years is how global the business is. We've got clients in over 80 countries, and we're continuing to develop our offerings to make sure that the lifetime value of clients keeps going up. This is quite an important mission, I think, that we have because if 99% of businesses are invisible in the media, that's quite a big problem.

3:58 And it's also quite a big opportunity. Even in the most developed markets like The US, less than 1% of SMEs have access to external PR. So it's a big opportunity, and we're excited to be executing. Just a few more notes here. I think one of the things that really excites us about our market is, first of all, how big it is. There is real potential for PATHOS to become a business of some scale. There's 400,000,000 SMEs in the world. And and and if you look at the the PATHOS client roster, it's a it's a real mix. You know, we've got everything from, you know, solopreneurs, you know, life coaches in Korea through to, you know, quite you know, more sort of medium rather than small businesses.

4:51 One of the things we like about that market is that it's self replenishing. You're never gonna run out of customers because you've got that that list of 400,000,000 SMEs in the world. Every year, some people leave that list, unfortunately. But every year, a lot of people join that list with funding, with business plans, with ambitions. Very proud of our news publisher relationships. We have quite a unique model where we can help news publishers create really newsworthy journalism, but at the same time creating revenue opportunities for them. And anyone who's who's following the the fortunes of of news publishers know that it's a time when, really, we need to be creative and we need to support news publishers. And we're very focused on ROI, return on investment, like I said earlier. Entrepreneurs, growing businesses, SMEs, these are people who want value, and we're very focused on delivering that value and having long term relationships.

5:52 First half of this year has been great really across every area of the business. I'll start with repeat business. This is really, really important to us, because it's easy to think, right, you know, a small business might sort of try PR once. But realistically, you know, how how how much PR is is an SME or a growing business going to do? Well, in many cases, quite a lot, is the answer. And that's really important for the quality of our revenue and also our visibility and our increasing confidence that we can execute over the coming years. So almost 40% of our revenue in the first half of the year was from repeat customers. So that's repeat and reoccurring revenue that's flowing into the business in a relatively predictable way.

6:38 And that's really important and really improves the strength of the business. If you look at the the run rate of contracts that the just the repeat business team. So we're not talking about first time customers. Just the repeat business team, if you look at the run rate of the contracts that they are signing, that takes us to about 75 of of next year's revenue forecast. It gives us a lot of confidence in in in next year and and and ultimately following years.

7:08 Continuing to innovate in the products. When I say that, mean the offerings that we actually give to customers. So, you know, not so long ago, really, all we did was news articles. Now we have 15 product lines. So we've got different types of podcasts. We have a book publishing arm. We have TV relationships, and we're just continuing to innovate there to make sure that we can scratch every itch that a customer has, keep them engaged, hopefully, forever, and keep that lifetime value of that customer increasing. Recently made a a twenty four month agreement with one of the big three US news periodicals. So that's the the the quality of publishers that we're working with.

7:55 And and the GEO, generative engine optimization. So this is one of the reasons why PR is quite an exciting area at the moment. Gartner recently predicted that PR spend will double over the next year, and that's because if you go to chat GPT or or your favorite LLM question, if you look at the sites that it's actually time, it's news sites really objective value to being in the news. So that's the product innovation part. Technology is a really, really big one for us. We've got a CTO, who came on board, earlier in the year,

8:37 supported with a really top quality team of developers. We continue to see the value of Presello and PATHOS MIND. This is not a sort of black box, and hopefully one day we'll open it and we'll like what's inside. Quite the opposite. There was an RNS a couple of months ago, with some early results from Priscilla showing that she is seven times better or seven times as good, as her human colleagues when it comes to booking meetings with potential clients. Since then, we've had more examples like that. You know, she's just as good in email follow ups. She's just as good in finding news hooks. So we we know the value there, and it's just about getting the technology to a robust enough place that we can actually release that to general availability and say to, frankly, everyone watching this, if you've got a business, if you aspire to have a business, here's your publicist. Have a chat with her, and you don't have to pay her a salary.

9:38 And really powering towards general availability in the first half of next year. Investment in the workforce, we're a technology business, but we are also a people business. I think one of the things that I'm really proud of is the entrepreneurial culture that we have in PATHOS, at various levels of the company, and, and we're seeing the results of that. So we've got a new sales team structure that we brought in earlier in the year, led to a 30% increase in new client sign ups, and we've got record breaking figures of new clients coming into the business as well as the first point on this slide, which is the repeat business. So, you know, the funnel keeps widening, but then people are staying in the system for longer and longer, spending more and more because we keep delivering.

10:24 Continuing to further diversify geographically as well, recently launched a dedicated APAC Asia Pacific team, and that is projected to grow by 50% probably between now and the end of the year. The demand is there, and the results are pretty reliable. Just some high level numbers from me before we we hand over to Adam for the for the really, really detailed numbers. 14% revenue growth, which is which is good. 36% adjusted EBITDA growth. One of my favorite numbers is the cash receipts. So cash receipts almost doubled, plus 80% year on year, and we're sitting on quite a lot of cash, almost $6,000,000.

11:15 So this is quality of revenue getting better and better, the sustainability, the visibility of the business getting better and better, and we're starting to see that operational gearing come into the business.

11:29 So we're happy with the first six months of the year. Over to you, Adam. So just peeling the onion, peeling the layer one layer back from those headlines. The first thing to flag is the detailed effects of the trading part of the the income statement. The first thing to flag is that we've split the the the performance over the last three halves. Just we think it's helpful to show that trend as the as the business has evolved. So taking it from the top, you can see that 14% year on year strong revenue performance and, you know, on an in in in increasing trend. As it translates down into gross profit, you'll see that the gross profit was very high in the first half last year, but you'll recall that we improved quality control of customers coming into the business and and collections in as well as improving the the the caliber and quality of the the publications that we've been we've been using.

12:35 So that that had an impact you can see in the second half last year. The trend though on gross margin into this year is that it's gradually starting to increase through scale, through improved publisher relationships, etcetera. And also, we're seeing an exit from h one and into h two this year, where that number we expect to continue to climb into the second half. We're we're pretty confident about that. The admin expenses year on year obviously have have increased. Firstly, we've now got the costs of of being a public company. But also, as Omar mentioned, we we we're investing in in people. We've grown, we were just around 60 heads at the beginning of the year. We're now over 80 heads. So that's feeding through into the admin expenses line. And then, I think we're we're we're pretty proud to to look at that bad debt right offline where, you know, historically, we've talked about the issues that we've had in the past and that they were fixed last year and that's really coming through strongly now.

13:36 And you can see in the first half this year, only around $300,000 of bad debt write off, which is less than 5%. And that's made obviously a very positive impact to the bottom line with adjusted EBITDA year on year up 36%. So that's the the the trading elements of the the income statements. If you if you flow that all the way through, a small increase in in amortization, and I'll come on to that in the balance sheet to explain why that is.

14:06 No adjusting items in the first half this year other than the the share based payment charge, which will now be settled for the next two or three years. And the way that the business is structured means that the tax the tax charge is very low, all resulting in a strong double digit 24% increase in our reported profit after tax.

14:30 Moving on to the balance sheet. Again, I'll take it from the top. Property, plant and equipment is our right of use asset, which is actually our our main office lease under our under under the accounting standards which we have to capitalize. The the jump you'll see is in intangible assets, and that's where we've been really ramping up our investments in Preseller and PATHOS MIND since the appointments of our CTO at the end of March. But also we've been investing in acquiring data customer databases, which have a long life and really underpin will underpin the future growth of the business as well. So it's a combination of those two factors. Trade and other receivables is up from last year and and last year. That's partly as the business is growing and there's a lot of kind of prepayments to some of our suppliers in there.

15:19 Very pleasingly, the the at the end of June, our net trade receivables balance was down, as I said before, to about 300,000. So it demonstrates we've completely derisked the balance sheet from from from the issues of the past. I guess the the the final thing I just wanted to flag in here was that within our trade and other payables number, again, seems to have jumped quite a bit since December and and last year. But that's for a very good reason. We we have now over a million dollars of deferred income and that's where customers are paying us in advance for for product for for products that we'll set live in the future. And it's really a demonstration of the pipeline that we're starting to build. That was very, very small when we came into this year, and it's been building through this year.

16:08 And not only have we got this deferred revenue now, but we are also contracting with customers where we haven't had cash yet. So that's giving us increased confidence that our contract pipeline and our deferred revenue pipeline will support the rest of this year and of course into next year. So that's our balance sheet. And to wrap up with the cash flow,

16:31 really the only things to flag here, you can see the increase in the amortization as I've mentioned before when we were talking about the P and L just as we start to amortize some of our customer databases. We haven't started amortizing our technology yet until it goes live. And then further down, you'll see the

16:50 cost of the the amount that we've spent on the IP and the customer databases in the first half of about $1,700,000, which is broadly in line with our expectations. We'll be continuing to spend particularly on the IP through the second half as we lead up to general availability and all of that leaving us with $5,900,000 of cash in the balance sheet at the end of June. And with that, back to Omar. Thank you, Adam. So continued pursuit of growth across the business, we really look at four growth levers, and we're pulling them all relentlessly. It's important to start with organic. We've built a machine over the years. We've honed the machine, and we continue to scale the machine step by step.

17:41 And that's people, that's marketing, that's business development links in, obviously, with points here. Geography is worth splitting out on its own. Very proud of being in eighty, ninety countries. But in a lot of these countries, we might just have a handful of customers. So going into APAC, by the way, in quite an efficient way, you know, no one's setting up shiny offices in Shanghai or anything. But going into APAC and seeing how far we can go into that market, we've also run some tests in Latin America. The demand seemed very, very strong. And

18:23 going more global than we already are. I think that's a really, really important thing, for us to continue to push on with. M and a is important to mention. We've got $6,000,000 in the bank, and one of the really interesting things that has happened over the last nine months is there are lots of really, really high quality complementary businesses. These are people who may be suppliers to us, partners to us, referrers to us, people who businesses that we've worked with for several months or, in some cases, years, and they are quite open to joining our platform at very, very reasonable terms. So some really, really interesting conversations happening there, and that can accelerate things even more. And then the big one for me personally is technology powering towards that general availability moment in the first half of next year. And we're already seeing sort of mini transformations just as we test that technology.

19:29 But once it actually goes live, that's going to be a really big one. And if you see these four things working together, you know, the the for example, if you think of M and A, we acquire a customer, a population of customers through an M and A transaction. Those customers are then leads for our sales team. They might have referrals that then some of those referrals might be in different geographies, and the technology makes all of this happen a lot faster and a lot easier and a lot smoother. So it really works together really well. And then the outlook, I think just to finish on, great momentum and pretty solid execution first half of this year.

20:16 And if you compare what we've done even in July and August to the prior year, we're doing what we need to do. The tech rollout, which is continuing at a really, really good speed, and then the opportunity for scalable growth. So very, very confident in what's ahead and happy with what we've done so far. I think we are now going to check for some questions. Fantastic. Thank you very much indeed for the presentation. Ladies and gentlemen, do please continue to submit your questions just using the Q and A tab situated in the right hand corner of your screen. Just while the team take a few moments to review those questions that submitted today, I'd like to remind you that recording of the presentation, along with a copy of the slides and the published Q and A, can be accessed via your investor dashboard.

21:07 As you can see, we've had a number of questions that have come through throughout today's presentation. Thank you for the investors submitting those. Omar, if I may just ask you to read out the question where appropriate to do so, and I'll pick up from you at the end. Yes, absolutely. Thanks, Paul. I'll probably do them in reverse order. Does the current balance sheet give you scope to pursue acquisitions alongside continued investment in organic growth? And are there particular areas or capabilities you would look to acquire? Yes is the answer, I think. Good question. The answer is yes. And it's not our job to earn a few percent interest on cash.

21:53 That's not what the business exists for. The business exists to allocate resources as effectively as possible to grow the business as quickly as possible. So obviously, strong balance sheet and lots of acquisitions or acquisition opportunities in the pipeline, particular areas or capabilities. I think the closest thing to a no brainer acquisition for us is something where we have a population of existing custom that can be brought into the PATHOS universe and cross sold the whole range of PATHOS products over a period of months and years.

22:47 That's a pretty it's difficult to not like a deal like that, So just really accelerated customer acquisition. The other thing that I'm quite open to is bringing top quality entrepreneurs into the PATHOS family. Very, very proud of the entrepreneurial team that we have, key people in the business who've been with the business between two and four years. Let's expand that team. Let's bring in more rock stars and more people who can drive the business forward and get results. So thank you for that question. How scalable is the model, and can revenue grow materially faster than headcount? It's very, very scalable. I mean, even if we have even if you look at what we have now with limited technology, forget about general availability, the big wow moment for Prosella and PATHOS MIND next year, everything we do in the business is very, very process driven, very, very rules based, and very, very tech enabled.

23:58 And there isn't a single person in the business who has worked in PR before. And I think that's a really interesting point, because I think that gives everyone a sense of just how scalable the model is. Can revenue grow materially faster than headcount? I think absolutely. As lifetime values of customers keep increasing, that has, I wouldn't say, zero acquisition costs because there's still a little bit of selling going on to keep the customer happy. Don't take your customers for granted even if they've been with you for years. But the costs are a lot lower and a lot less labor intensive. I don't know if there's anything to add on that last No, no, that's absolutely right. Thank you.

24:43 And we've got a couple more. How should we think about the balance between organic growth from the existing business and growth from new products and geographies over the next twelve to twenty four months? I think we need to be balanced. I think we need to be balanced. And it's always pushing the frontiers of the business. Let's go into APAC. Let's to Latin America. New products. We weren't in the book business this time last year. Now, we are in the book business, and lots of demand for books. It's keeping the core strong whilst continuing to push at the boundaries. This is a bit of a financial question.

25:30 How are average contract values and customer retention developing, particularly as the business moves larger and more recurring customer relationships? Can you read the question? Guess read out loudly. Yeah. There's a couple two or three different parts to that. Yep. Yep. How are average contract values and customer retention developing, particularly as the business moves towards larger and more recurring customer relationships? So it's a really good question. I think a key metric that we are looking at and we're obviously showing now publicly as well is is the amount of repeat business that we've got. And that's for us is showing how we are, you know, converting and keeping customers.

26:27 Average contract values, you know, we we know and it's clear, you know, our entry level is $5,000 for a contract. And then when you've come into the business, we'll give people access to to articles and other deliverables at $3,500 largely. But as we grow the the product portfolio, which is still very much only available to repeat customers, that can that can cover a whole variety of different products at at different price points. More more twelve months deals. Longer deals. Exactly. And larger contracts. So we're still learning, I think. It's you know, we're we're obviously wanting to maximize the lifetime values, etcetera, maximize the number of customers that we bring into the repeat business. But it's it's it's also probably sensible not to forget that we given the the fast growth trajectory, you know, a year ago, the repeat business was only 16% of our our business and was was a very nascent part of the business. So we we're growing very fast and we're learning all the time, but these are all areas that we're obviously keeping on the on the on the close scrutiny, if you like.

27:32 And, you know, as we grow the product range and we grow the types of deals we're doing, it can only be positive for the future. Thank you. And this is an interesting one. How are AI and automation likely to change your margins and competitive position? I think you would expect them to help with margins. Much more exciting is what it does to the competitive position. We've got a couple of moats in our business, and there's still the sort of the physical universe element of our business, which is the proprietary relationships with news publishers, which I don't think technology can or should or will touch.

28:20 The other moat we have is the data, and that's what allows us to develop the technology that we're developing. It's quite interesting to me that probably most of the conversations I have with our developers is about data ingestion and data analysis. It's not about writing the code, because that's what enables PATHOS MIND and Prosella to be built, is the seven years of real world data, real world experience, transcripts of phone calls, transcripts of Zoom meetings. And that's what allows Prosella to be there with seven years of experience and a perfect memory and knowing how to do her job. So I think those things will further reinforce our competitive position.

29:07 Got an interesting question around how we feel about The US capital markets generally. I I can understand why people ask this question because we've got majority of our revenue from The US. We've got US publishing partners, US clients, US resellers, and we're a very, very global business with our sort of nexus in The US. I think we're open to all possibilities as the business grows over the coming years. But at the same time, we're very proud to be a British business and to be listed in London. I think those are all of our questions.

29:57 Fantastic. Yes, indeed. Thank you very much indeed for answering all those questions you can from investors. And of course, the company can review any further questions that come through, and we'll publish those responses in the Investor Meet company platform. Just before redirecting investors to provide you their feedback, and it's particularly important to the team, Omar, if I may just ask you for a few closing comments, please. The most important thing is to execute. And it's completely understandable that some people I've spent a bit of time talking to private investors and retail investors, different types of investors. Completely understandable why some people don't like IPOs, because you don't know someone until you live with them, and you don't really know a company until it actually goes public. So you've lived with us for six months now, and very, very proud of the team.

30:47 It hasn't been an easy year. It's absolutely not an it's not a straightforward transition from high growth private company to sustainably growing public company. I think we've been quite elegant in that transition and very, very proud to have a really, really solid six months. And as we see further acceleration in the business, I think it's going to get better and better. And very happy to continue the conversation with anyone who's watching. Thank you very much indeed. For updating investors today, could I please ask investors not to close the session? Should be automatically redirected to provide your feedback, and all of the team can better understand your views and expectations.

31:33 This will only take a few moments to complete and is greatly valued by the company. On behalf of the management team of PATHOS COMMUNICATIONS PLC, we'd like to thank you for attending today's presentation. That concludes today's session and give