Damstra Holdings Ltd

ASX:DTC

Earnings Call Transcript 2023-Q4

[Christian Damstra, executive]

Good morning, everyone. We'll just give it a couple of minutes, so everyone to join looking at those participant numbers increasing there. So just bear with us for a moment and we'll get stuck straight into it. All right, looks like those numbers settled down there. Thank you very much, and welcome to the Damstra Technology 4C Update. Paul Burrows, our Chief Financial Officer; and myself, Christian Damstra, will be presenting this morning. We'll run through the release and then open up the floor for any questions. [Operator Instructions]

So yeah look really strong fourth quarter financial technology this year, very pleasing. So cash highlights. Free cash flow of $0.5 million versus PCP negative of $1.6 million. Operating cash flow of $3 million versus the PCP -- sorry, up from 131% on a PCP basis of $1.3 million. It was our fifth consecutive quarter of positive operating cash flow. Extremely pleasing to see that, and we've certainly got that cost base heading in the right direction and certainly doing more in that area as we speak. Financial highlights. Quarterly revenue of $7.4 million, same as the prior quarter. EBITDA of $2.7 million, up 145% on a PCP basis of $1.1 million. EBITDA margin of 37%, up 164% of PCP of 14%. Q4 gross margin of 79%, client churn of 1.8%. We, of course, successfully refinanced those existing debt facilities, providing more investor certainty in the future viability of the organization. We had a lot of support from our lending provider there, and they're pleased to be part of the organization moving forward.

Certainly, from my perspective, it has been a turnaround year. It's a real milestone for the company in achieving that free cash flow of $0.5 million. The turnaround in performance is something all of us are extremely proud of. And as I said in my comments, to reflect only a short time ago, our FY '22 annual cash flow was negative $13.6 million, to go from $13.6 million negative to $0.5 million positive shows the magnitude of the business transformation we have undertaken in the last 12 months.

We'd also like to acknowledge in recent times that investor views about the performance of the business, questioning if we could deliver our cost out program and turnaround plan. We are, of course, delighted to rule a line in the sand and move forward with a fundamentally stronger structural position. We have and will continue to focus on that accelerating growth while continuing to generate positive cash flow. That's already evidenced by our recent contract successes and pipeline we have in front of us. On the cash flow. Q4 cash outcomes have been extremely strong. Free cash flow of $0.5 million, as mentioned, operating cash flow of $3 million for the quarter, both materially up on the prior quarter and on a PCP basis. Free cash flow margin was 7% for Q4 to show the true underlying results if financing costs were removed, free cash flow would have been $1.4 million, delivering an FCF margin of 19%, so free cash flow margin is the metric of the company's free cash flow as a percentage of revenue. The cash flow profile delivered in Q4 is now sustainable, underpinned by current revenue, sales pipeline improving, gross margins and reducing our cost base. In Q4 FY '23, we did generate that free cash flow of $0.5 million, which is a $2.1 million improvement on PCP, which was negative $1.6 million. The magnitude of the change in free cash flow can be seen by the comparisons with the average quarterly FY '22 cash outflow position, which was negative $3.4 million, so certainly got some graphs and some information there right in the tables in that release. We've now achieved those five consecutive quarters of positive operating cash flow. During FY '22, the average quarterly operating cash was negative $0.9 million. Q4 FY '23 operating cash was $3 million. So really is a fundamental structural change in the business that we're really pleased with and continuing to drive forward in the organization. I'll hand over to Paul, our CFO, to run us through the financial details a little bit more now. Thank you, Paul.

[Paul Burrows, executive]

Yes. Thank you, Christian. If we just look at the financial highlights, we can see that we've had an EBITDA margin of 37%. This is showing continued improvement in that margin. And I guess that's basically illustrated from comparison to the half 1 result, which was 13.4%, and it's 164% improvement on a PCP basis. That EBITDA result at a dollar level was $2.7 million versus the whole first half result of $2 million, so that's a $700,000 improvement on the first half result with the last quarter. The key driver of this is our continued improvement in gross margin, which is sitting at 79%. When that compares to the FY '22 result, an average of around 70%, so we are continuing to increase our gross margin. So you can see there is the step improvement in EBITDA percent and EBITDA gross dollars from the tables we've outlined in the release. These results have been achieved by careful review of client profitability and some of our churn has been directed towards the high-cost sale of our cost base -- our client base. We've implemented various pricing programs that are starting to flow through into the business and most notably, our cost management program, which commenced in FY '22 and has now delivered $9 million of annualized savings, which is embedded now into our cost base. Again, these are all contributing to our gross margin and EBITDA margin and the underlying results of becoming cash flow positive. Importantly to note, we're not seeing CPI cost pressures within the business, just by the nature of the business that we are continuing to be able to manage cost effectively. We were -- completed the refinancing of our debt facilities, which is providing certainty to our investor base, and that now has a period of 3.5 years to run until November 2026, and we've got a very close working relationship with Partners for Growth through that process. I'll hand back to you, Christian, to talk about some client activities.

[Christian Damstra, executive]

Absolutely. Thank you, Paul. So we have had some recent client success across the global business, which is extremely positive and the impact of recent client success will be seen in FY '24 revenue as we implement those new agreements. These announced contract wins will give the business approximately $1 million of additional ARR, which demonstrates the future opportunity in front of the business. Recent client success and our sales pipeline is a testament to the business model and our focus on the core verticals.

What has also been pleasing is our client churn rate of 1.8%, which in past quarters was materially higher as we focused on those more profitable customers moving forward. We, of course, signed that 3-year agreement with Barrick, covering the rest of their mine sites in Africa, commencing Phase 3 of the global rollout. We're now selling contracts with Barrick with total contract value of USD 1.8 million. We've signed agreements with Foxleigh Mine and Stanwell Corporation. Both clients will implement EPP for their employees and contractor management. We did that 3-year extension plus three 1-year options with Coronado Global Resources with a significant uptick in revenue from that organization.

We've got our continuing expansion of our facilities management vertical with our clients, including global Tier 1 facility management companies such as CBRE, Cushman Wakefield and BGIS. And we have our strong out performance in our civil construction vertical with progressive implementation of larger long-dated civil projects such as Sydney Children's Hospital, the North East Link project in Victoria and of course, the Waterfront project in Brisbane.

We have a large pipeline of opportunities. Some of the more material ones in the final stages listed out in the release. But to call a couple of them out, we have a new international mining client with operations in Queensland and New South Wales, where we've gone through a competitive tender process and are presently in final contract negotiations, a major construction company in Australia, that tender process is down to the last two providers, and we started negotiating final rates. We have an international facilities management company ready to sign a global SaaS agreement with us. An Australian iron ore company is starting a trial for 500 workers over a 6-month period, and if successful, the rollout is over 20,000 people in Australia. Of course, Capstone, which is fully operational and using all parts of our platform are looking to finalize new plans to roll out into Latin America including Mexico and Chile. And we have an Australian mining customer, expanding EPP to all locations with expanded scope in the final stages of contract negotiations, and a building materials company and an existing client looking for an extremely long-term contract extension with expanded scope. So lots of great things happening on the business development front. Client churn down, as I said before, and of course, we're still strategically positioning the EPP, and we're seeing a lot of success from doing that. It's certainly that shift of we want one platform, not multiple platforms. We find that as we're going into these organizations and as we have these contract wins, it's about shutting down 2, 3, 4 other minor systems and moving to the one EPP that is really exciting our customers and our customer opportunities in front of us.

We, of course, have a couple of our case study there we threw in with the rollout of our digitizing classroom learning digitizing incidents and assets and prestart and all of those things within the EPP system for a major mining company, that's been going extremely well, and they're certainly seeing the cost benefits from that, which is they're happy to talk publicly about, which is helping us to sell and get that pipeline up there where it needs to be. As part of continual cost discipline for FY '24, we are implementing further annualized cost saving initiatives of approximately $3 million. These will be implemented by the end of Q1, so we're moving rapidly on that to achieve these savings will require a one-off charge of about $500,000. This initiative will further underpin sustainable free cash flow generation of the business. At an aggregate level, this is a 10% reduction on the FY '23 cost base. These savings are driven by retirement of legacy systems, reduction of R&D resources, further reduction of R&D as a percentage of revenue, offshoring of certain nonclient-facing roles, closure of two offices, more rationalization of third-party software and reduction of business support costs due to a variety of tender processes being run, i.e., our recent share registry change and various advisory services. We have not reduced any business development or account management resources as these are essential client-facing functions. Our outlook. The company's guidance for FY '23 provided on the 24th of April is shown in the document, and we can confirm that we will meet or exceed the four guidance measures provided on an unaudited basis, so these will be confirmed at the full year results release later in August. Q4 free cash flow guidance, this has been exceeded coming at $0.5 million versus a guidance of negative $0.4 million to positive $0.2 million. So once again, a great result there. So overall, extremely happy with the Q4 results, positive way to enter into FY '24 continuing to grow and focus on those opportunities.

[Christian Damstra, executive]

I will open up for some questions. We do have a couple of questions here. The first one being, can I talk about the future pipeline mix between existing client upsells versus net new clients and whether this mix has changed. It hasn't really changed. We still have a lot of new wins out there and a lot of new wins coming through. However, part of our strategy for the next 12 months is to really focus on existing customers in Australia and New Zealand. And to get those people upsold to the EPP where we believe we have the ability to really grow that revenue rapidly and get everybody on that one platform methodology. Of course, in the U.S., we'll continue to support the new customer growth because we don't have the big customer base we have there that we have in Australia and New Zealand, but haven't really seen a change to the mix, but certainly, the upsells are occurring, and we want to see more of that in the next 12 months. Have you done all the contract repricing and shedding of the tail clients? Or is there more to come? We're still working through that. It's certainly not a done and dusted thing. So we've repriced a lot of our contracts, and those are going extremely well. We have that annualized revenue coming through now. There are some tail clients. We're still shedding and moving and up-selling and we'll continue to focus on that in the coming periods.

Annualized cash receipts is about $35.5 million, which is above your revenue run rate. Can you advise if there is seasonal uplift or one-off benefit that has positively impacted the cash flows in Q4. Paul, I might hand that question over to you, if that's okay.

[Paul Burrows, executive]

Yes, there's an element of working capital management that has had some benefit in Q4, but we expect that to continue on. We would have achieved positive cash flow in Q4 regardless. So we did have some debt as we talked about last quarter that did drop into this quarter, but again, that's -- it's not a material amount. It's just normal.

[Christian Damstra, executive]

Yes. Thank you very much, Paul. That's all the questions we have there at the moment. Has anyone got any other questions they'd like to ask on the 4C before we close the meeting out today?

I just got a question. What's your people strategy to support employee happiness and retention alongside the efforts in client and business growth? Really good question from Will. Look, we continue to work with our employee base. Our Net Promoter Score across the business is actually staying flat and in the positive, which is fantastic considering the changes we've had to make across the business. We keep our employee base informed and involved with all the decisions we make and what we're seeing is that's really working for us.

Now of course, we continue to reward our employees and work closely with those employees to make sure flexible work arrangements and all of those things are working with them to maintain them in the right part of our business, so quite happy with how our employees are handling the mass changes we're making at this point in time. Not sure what anonymous attendee's asking with just typing FY '23, so not sure how to answer that one. Another one, am I correct to interpret the language in the 4C that you are committed to profitable growth from here? Given all the hard work to get to FCF positive, it will be a shame to slip backwards.

No, you are reading it correctly. We are committed to profitable growth, and that is what we're aiming to be doing in the organization. It's not about slipping backwards. It's about going forward, remaining profitable and growing the business. Not an easy task for anyone to achieve in current economic conditions. But certainly, with the opportunities in front of us in the pipeline, that is exactly what we're going after. Robert asked, are you dropping R&D costs? What impact will this have on product development going forward? Actually, it won't have much negative impact at all, Robert. And the reason for that is a couple of things we called out in the release, and we have mentioned previously is we are shutting down some legacy systems. And that's where some of those customers like Coronado, for example, and a few of those other customers we released are actually moving off Legacy Systems and moving to the Enterprise Protection Program. And because of that, we're able to reduce R&D cost because we don't have to maintain those Legacy Systems, and that's been our goal all along. It took us a little bit of extra time yet there because we had to make sure EPP had all the functionality of those customers needed, which it does today, and therefore, we are able to make that change without affecting our ability to grow the platform as we move forward. Alan wrote, no question, great work, much appreciated. I appreciate the great feedback, Alan. Certainly hasn't been easy and everybody is dedicated to take the company to the right position of profitable growth moving forward, so thank you very much for your support. FY '23 cash cost is about $34 million. Are we expecting a further 10% reduction on that amount in FY '24? Paul, would you like to answer that one, please?

[Paul Burrows, executive]

Yes, I think that's what we've announced in the 4C. That we've got a further $3 million target that we're going after, and that's certainly 10% of our -- that aligns broadly to the numbers there.

[Christian Damstra, executive]

Excellent. Anonymous asked, is the pipeline of opportunities listed in addition to the $1 million of ARR that you have mentioned? And if you win these, what's the size of additional revenue available through the pipeline? It is in addition to the $1 million, it's not in that $1 million, so it is on top of that. The size of the prize, look, it's hard to put a number on it right now because we do have our full year coming out soon and some of these are releasable very soon, but it is certainly substantial. It is over $1 million, if you add all those together, of course, quite drastically. So we're looking forward to bringing that to the market as soon as we can. Robert said, thank you for that. Appreciate your support, Robert. Anonymous attendee, do we expect to be able to resume growth revenue ARR in FY '24? Can you give us an idea of what the pipeline of new clients could deliver us? I think I sort of answered that before. The new clients are well over $1 million when you put them all together. We are working to bring those to the market as soon as we can. We will announce them at the appropriate time, but it's difficult for me to talk about that in any more detail right now.

Will there be any strategies around lowering finance cost in FY '24? I'll certainly answer that at a high level and ask Paul to chime in as well. Absolutely, there will be. We're always looking at lowering our finance costs. We take each day as it comes. Paul, is there anything you want to add to that?

[Paul Burrows, executive]

Look, just that we announced the deal -- the conditions around our extension, the 3.5-year extension with PFG, there's some elements are related to the BBSW sort of interest rate fluctuations. So depending on what happens there, they could reduce and just overall, there is -- we are starting to amortize that debt facility over that 3.5-year period, which will also bring it down over time.

[Christian Damstra, executive]

Thank you, Paul. Will, asked, what else are you seeing or hearing that customers need that Damstra can't do now but might be looking to serve with future product development? We're actually not coming into any hurdles where a customer is saying, you don't have a product that we need. I think if we looked at a couple of areas and said, strategically, what could we add to the platform as we move forward, there may be something in there around rostering and scheduling and there may be something around remote camp management, but there are really two areas that we don't get asked for every day of the week. They come up every now and then they're not road blockers or show stoppers, but they are things that we see in the platform in the future. So watch this space as that becomes more important as we move forward. Outside of that, the feedback we're getting on EPP is that it is a really well built rounded system that allows us to cover [ off part ] and really serve our customers instead of them having to use 4, 5, 6 different systems to achieve the same result which has been absolutely fantastic feedback. So we're continuing to drive that strategy moving forward.

Anonymous attendee, given where we are trading on an EV sales basis, are we vulnerable to M&A and PE interest? I mean vulnerable is an interesting word. I mean, there's always people out there sniffing around. There's always people who want to have conversations and ultimately, it comes down to making sure we get the right shareholder value and we look after the interest of all shareholders through this process if people come along and knock on our door. I think every organization that's on the public market is vulnerable for one of another term, if there's somebody out there who wants to spend the right amount of money on it. Certainly, people come along and talk. There's no deals pending, so thank you for the question from that Anonymous Attendee. No other questions there. Is there any other questions before we close out today? Just give it a couple of seconds. All right. It doesn't appear to be any other questions. I'd just like to say, once again, pleasing set of results from our organization. The entire team has worked extremely hard to get to where we are today. We do understand the shareholder sentiment out there. We feel that pain with you every single day, and we've worked extremely hard to turn this business around, get those costs under control and get us back into a growth methodology where we are profitable.

So I want to thank every one of you for your support over the difficult times we've gone through and continue to watch this space, and we'll continue to drive this business forward and bring that shareholder value. So thank you once again to everyone, and thank you, Paul, for presenting with me today.

[Paul Burrows, executive]

Thank you.

[Christian Damstra, executive]

Thank you, everyone. We're closing the meeting down now.