Straker Translations Ltd

ASX:STG

Earnings Call Transcript 2023-Q4

[Grant Straker, executive]

Hello, everybody. Good morning, good afternoon, depending on whereabouts you are in the world. So I'd just like to welcome you all to this quarterly update. This should only take 10 to 15 minutes with a bit of luck in terms of getting through the presentation. If you have any questions, you can use the Q&A chat feature, and we will look to answer them towards the end of the Q&A section. [Operator Instructions]

So I was just getting a little message saying to unmute myself, but hopefully, everybody can hear me. So let's move to the next slide. So today, you've got myself, Grant Straker, the CEO; and David Ingram, our CFO, on the call. So I just wanted to start off with a couple of points. So Straker, we're the original pioneers of productivity-based translations. So that's always been based on the theory that, at some point, AI will advance, but you'll need human in the loop, and that will make this whole process of translation far more effective. And that's starting to become a reality. And at the same time, we're also in the right part of the industry to really leverage this change in technology. It's been the thesis of our business model for a decade, and we're big enough to actually leverage it. So through this presentation, hopefully, I can demonstrate how we can go about doing that. I guess the first part of winning in a changing world is to have the balance sheet to support the innovation and growth that you need to be able to capture the opportunity. So the first thing is that we're cash generating. We've got stable revenues and significant growth opportunities in front of us, so a great quarter in terms of positive free cash flow; adjusted EBITDA, also very strong; record high gross margin, so again, our technology advantage coming through to -- so that we can leverage that tech actually in the process and the translation process. We've got a very strong bank balance, which has gone up by the same amount as a positive free cash flow, so again, given us that backbone that we need to support our innovation and growth. We've had significant reduction in our OpEx over the last 4 quarters and $62 million year-to-date in receipts from customers. So again, well-managed, well-run business is how I would categorize where we're at, at the moment. Yes. And we're also investing in significant new opportunities, which I will show you. So just a little bit about the OpEx reductions. We could see in the middle of last year, as with many other businesses, what was happening in general in the macroeconomic conditions. We could see customers starting to pause and slow down a little bit. We could see the whole tech sector -- changes that were going on. So we started this OpEx reduction reasonably early. Some of it was already planned because we do get consolidation benefits from the acquisitions that we make, and we also get gains in our technology. So over the last 4 quarters, we have been steadily consolidating and reducing our OpEx. And as you can see here, the revenue per employee from FY '22 to FY '23 has also substantially increased. So again, I'd categorize this as we have a very efficient business model. We have a management team that make the right decisions that can foresee where things are going and have done all the right things. It was obvious that to be -- to really succeed going forward into FY '24, that cash was going to be king, and that was the focus on the business but without compromising our ability to innovate or to fund and drive our growth. So just a little bit now about the industry itself and how we're positioned and how we see it aligning with us being a successful growth company. So the industry has started to consolidate. So this is from the Nimdzi Industry Reports, the sort of leading analysts in this -- in the sector. And if you look at the last 5 years reports, the top 100 were making up 15% of the industry roughly, and the rest of the industry was made up of many small players, making up 85%. But this year, it did significantly change. And I think if you look at what's happening and what we are seeing happening in the industry is that many larger companies now are consolidating vendors similar to what IBM did when they selected us as a provider. They consolidated a number of vendors. And so we're seeing RFPs come out to the market where these larger companies are looking to consolidate. And when these bigger RFPs come out, you have to be a certain size to be in the game to win them. And I don't think that the 80% on here, which represents about $40 billion in revenue, are going to get into those tender lists because they're not big enough to provide a global service. Often, they're regional providers. So again, we're in the right part of the industry with the right technology and the right approach to really start to win.

So good question everybody's talked about is how will generative AI affect us as a business. Is it going to replace us? Is it going to -- what's actually going to happen? So if you look at this chart, this was by one of the leading analysts around machine translation, Konstantin, who we've actually used in the past as a consultant on various projects. So he publicly put out some information there around how he sees it happening and has run a number of tests comparing the current large language models with what's currently available in machine translation. And so this -- for me, it passes the sniff test of being a fairly accurate assumptions on how the industry will change. And if you start at the top, he's going to go, well, raw machine translation is going to change. It's already changing. We can -- you've had Google Translate for the last 15 years. So that's going to continue to grow. The part of the market that we play in, which is the enhanced machine translation and human-plus-machine translation is also set to grow. So if you look at this, there's the best part of an estimated 10% growth in this part of the market. And if you look at the industry size, that's a $7 billion growth in the sector that we really are very strong in, but the impact is around sustained innovation. There's going to be all sorts of new and exciting opportunities that will come out about how you can now provide this type of translation and how you can make it more efficient. And I think that it will continue to grow. And what you will also see is customers just doing more languages. And I guess an analogy is a bit like telephone calls now are a lot cheaper than they were 20 years ago, but people make far more of them, and there's a lot more communication done through those channels. And that's what I think will happen with the industry. People will make it easier for people to be able to do 10, 20, 30 languages.

So it will continue to grow. One thing about, I think, with the generative AI is changing the way people interact with content, and that is also going to open up some exciting new opportunities because there's still going to be this human-in-the-loop validation required.

So traditionally, for us, it's been difficult to get large customers switched to more efficient translation methods. It's been quite frustrating often where you will be engaging with a large corporate and will get through a process. And they know that there is a more efficient way of doing it. They know that there are more cost-effective way of doing translations, but they're sort of locked in with this trust relationship and some of the systems that they have. But what we are starting to see is customers really starting to consider now what they must do. And so traditionally, what we have done to grow the business is we have had an acquisition strategy. We've made 9 acquisitions. And then we've got the consolidation and benefits from that, and we've got the customer base that we've been able to grow with those acquisitions. But now customers are actively looking for different solutions. Generative AI has opened their eyes to what is possible, and it is the backbone of our business model and our offering to customers. So we believe that the cost-effective organic strategy now is very much -- the door is open to that opportunity and that is what we will be pursuing. So that organic strategy in terms of execution will mean embedding deeply into vertical channels. So you'll hear us talk about things like Slack and Teams, for example, that's technology verticals. We're certainly looking at verticals around medical, around legal. So again, we see that this channel approach of the back of base -- platform as a service offering, combined with some of these new workplace apps, has been a very strong go-to-market strategy. And that go-to-market strategy in terms of what customers will interact with and see is around us been very easy. I'm still very strongly of the opinion that successful businesses make it very easy for customers to do business with you, and you solve a lot of problems for customers by consolidating complex processes into a simple, easy process. And so that's why we've had such a big focus on these workplace apps. [Audio Gap] People want a one-stop shop. So they want translations, transcreation, interpreting, media localization. So making it very easy and basically frictionless for the customer by building gateways to their systems and having prebuilt connectors is a big part of this offering. We know that security is now going to be front center of mind. We know that there are already issues, and you've seen it with some of the news that are coming out around how governments are treating generative AI, for example, but we know that customers are going to want to have [indiscernible] and we know this from feedback from the enterprise customers that we work with. They [indiscernible] to have check [indiscernible] of content. They're going to want the same type of functionality. They're going to want to do it in an [ ancillary ] system, which they can offer. They're going to want an overarching security. Again, most tenders would say you've got to have a certain [ nice asset ]. We have now. And you're going to want to secure human-in-the-loop validation process. Some of these things I think outperformed incredibly well. So again, it's another big tick in the box of what we see as being -- our market is going. And the third thing is scalability and [indiscernible], so deep integration of systems, having technology teams that can help their integration, dozens of translators, basically unlimited ability in what we can offer. So again, if we can work for IBM on a global scale, we can work for pretty much any customer. So these 3 things, I think, are the things that the market are looking for and things that we will -- you will see us pushing out through FY '24.

So this is -- it's a reasonably busy slide. But the point here is, when you categorize the market segment that we play in, we are really a language cloud vendor. And that is that we're not a translation management system. We're not just a language service provider. We do a whole range of functions for customers, so we have technology. We manage the translation process. We are integrating AI. We're a strategic vendor for them because we deal with the languages, and we're a one-stop shop. We offer the security, and we have a global services infrastructure, which is needed often on these bigger projects. The other thing about our language cloud interest is that there's this slowing down here, which is, again, I'd say that 80% of customers, where 80% of the industry, which are not big enough to compete in any of these areas, and they're going to come under pressure. We know from our acquisition strategy how many of those companies do reach out to us and that sort of accelerated process where founders of these smaller companies do want to exit. So again, it's a massive market opportunity for us, where we see a lot of revenue moving from that zone. And I do remember some of the industry analysts giving me, yes, a bit of a hard time over this sort of slide. But I think if you follow the industry or you just got an ounce of sort of understanding of what's going on, this is clearly what's going to happen over time. I might have got the timing wrong when I predicted it would move a little quicker a few years ago. But I think right now with the change and the awareness of technology evolving, that will accelerate. So this is just an example of our workplace app. I hope that you can hear it. If you can't, I'll try and talk through. So this is our Microsoft Teams app. [Presentation]

[Grant Straker, executive]

So hopefully, you could hear that. But again, this is just part of the evolution of workplace apps. So our workplace apps for both Slack and for Teams are currently just awaiting approval through the app stores. It's been months of development getting into that stage. There is a process you go through. It's not a simple process, but we do have strong partnerships with both Slack and with Microsoft. Indy Nagpal, our CTO, is presenting a range of Slack events in India at the moment, and I'm presenting at the Auckland one in a few weeks' time. So we do see that, that channel of using these workplace apps is a great way for us to grow the business.

Now this is just a little bit of an example of sort of the way we're using AI-enhanced tools in our workbench. So what you can see here is that there's sort of an English phrase. There's a Spanish phrase. Traditionally, a translator might go in there and sort of have to figure out and use their skills to look at different suggestions. But now what we can do with generative AI embedded in this -- and this could be some of the internal AI engines that we use as well as external ones. But you can say make that more creative, shorten that string. And it's just going to do it rather than having to have a human do it. You can say make it more formal, less formal, get the femininely, muscularly sort of phrases all sorted out. So it can do all sorts of things now. And the upshot from that is it makes it more effective that makes it -- productivity improves. The translators go faster. Our margins stayed really strong. So this is how we're using AI embedded. And you'll see a range of these new features come out on our platform over the next few months as we start to release new systems. Putting into context, we have started to -- or continue to win new business and some reasonably good ones. Again, some estimates in here. But the team are out there. And again, if I look to the driver over the last 6 months for us winning new customers, it's definitely been around the workplace apps and the simplicity and the easy part of what we do, combined with the productivity-based angle that we have. But it is just -- if we make it easy for customers, it's very easy for them to become a customer. And so some good wins and we've got a steady pipeline of potential new business coming forward, too. So now I'll just hand you over to David Ingram, who's just going to give you the financial side of the 4C.

[David Ingram, executive]

Hi, everybody. I'm the CFO of Straker Translations, and I'll try and give a bit more color on the financials, noting that these are unaudited numbers and will be released in our audited year-end numbers at the end of May. Firstly, revenue, this was 6% up on the prior year to $59.4 million. Our fourth quarter, which is traditionally quieter with holidays in February being a short month, was further impacted by macroeconomic conditions. On the positive, we have no significant client losses and continue to get good enterprise wins, while March revenue showed a good rebound, up 23% on the previous 2 months.

Gross margins also showed a large improvement, increasing from 54% last year to 57% this year with Q4 having a record 61%. The margin improvement was helped by product improvements, increased automation, price increases and acquisition synergies. Adjusted EBITDA improved from $0.2 million to $1.4 million for the year, with Q4 achieving a profit of $1 million as cost-saving actions taken in Q3 took effect. As part of our restructuring in Q3, reduced headcount and associated salary costs by approximately 15%, the restructuring reflected synergies and our recent acquisitions and rightsizing the business in light of challenging macroeconomic times. It's important to note that we continue our level of investment in R&D as we continue our product-led strategy. Cash flow was also a big improvement. We met our goal of being free cash flow positive in the quarter and $1.7 million up. Operating cash flow was positive $2.1 million for the quarter and $1.4 million for the year. A reduction in costs and a strong collection quarter were the driver in this performance.

And finally, our cash balance sits at $12.5 million, and we have no debt. Thanks, Grant.

[Grant Straker, executive]

Thanks, David. So look, so just on to last couple of slides. So growth and profitability strategy, pretty critical slide. So the way that we look at the business and the way that I sort of get the team to run it is we have a maximizing strategy. So what do we do with our existing business to maximize everything that we've got? And then we have some growth initiatives around how we grow. So in terms of that maximizing, which really comes down to profitability, there's a focus on OpEx. It's things like price increases and inflation hits. There's alternative business models we're looking at around our Platform-as-a-Service model, expanding customer wallets as we win a division in a company, and we increase that, technology that can increase margins. And also, I've put down the switch to the LanguageCloud, sort of the RAY LanguageCloud option, which is where customers might work in a certain way, and we can move them into that model, and that can offer benefits to us. In terms of the growth initiatives, as I've already talked about, we're doing a lot of R&D, we have done around Slack and Teams. And those are now ready to go live, and we're into that sort of release cycle, where that's going to be live, and we're doing -- we're working with both Microsoft and Slack around how we get out and push these solutions out. There's vertical market solutions that we are looking at very strongly, particularly off the back of some of our new technology. There's corporate media market, which has been strong.

AI validation opportunities. So one of the things that has happened with the likes of generative AI is it's producing content, but some of that content isn't factual. Everybody's seen it sort of hallucinate and stuff. And we obviously have a huge platform that can do closed-loop human-in-the-loop validation. It's already part of our process. So we do see some big opportunities around that as a growing sector of -- segment of some of the technology that we have and an intelligent platform that starts to give lots of feedback and dashboards to customers around content and [ how it will get nearer ]. So we do have a range of growth initiatives and a range of maximizing our business initiatives ongoing. And so look, just some key takeaways. Again, this is a 4C update because we've often done them in the fourth quarter because of that lag before we do our end year results -- our full year results. So key takeaways, introduction of a PaaS base in Q1, which is, again, well underway and at a meeting with the team yesterday, and we can see that starting to be released out this quarter, focus on enhanced R&D. And again, it's just reinforcing what we have been doing for a long time. Our stable free cash generating company, organic over acquisitive growth is our focus at the moment, we see those opportunities; significantly reduced OpEx run rate going forward; and $62 million year-to-date in receipts from customers. But look, in summary, we believe we present a pretty solid -- represent a pretty solid opportunity for investors. We're well positioned in a key market segment that is changing, and we have a strong balance sheet. We're generating cash. We've got no debt. We're funding innovation in a space that's just enormous with lots of opportunities of our platform. We've got key partnerships with the likes of Slack and Microsoft. So yes, we really feel it's quite strong. In terms of outlook, we're not really giving an outlook here. We'll do a little bit more as we get into our full year and start to assess where the market's at. There's no doubt that the macro conditions at the moment have their moments, I guess. For example, we have a customer that had a regular cadence of ordering. In the last sort of 3 to 4 months, they hadn't done that.

And I was worried about that customer. Yet this morning, they put in a $300,000 order, which is bigger than what they normally do. So this is the sort of behavior we're seeing. It's quite difficult to predict. The customers are kind of pausing, waiting to see what's happening. And then you go do a project, and then you're sort of getting this flow-on effect.

[Grant Straker, executive]

So from there, we'll go into Q&A. So if you want to put any Q&A into the Q&A chat box, can answer. We've got one from [ Reece ], which is what is revenue going to look like over the next year? Can we just quadruple this quarter? Or do you think the quarter is going to be a low point? I mean, certainly, again, we'll give some guidance on the full year, so we're not going to say that we will give some indication of what we're up to at the full year. But yes, I mean, it's an interesting time. We think Q1 for us will -- is -- it's just like I said with that customer before. Lots of stuff hanging around. It depends what drops as to how that quarter goes. But yes, so I don't want to give too much really until we get to our full year numbers. Another one here from [ Gareth ], thanks for being informative update. Could you talk a bit about the Agropor contract, when and how the opportunity came about and what set us apart? With your margin expansion continuing, how do you think they could go -- feasibly go? So Agropor was RFP. So we are seeing more RFPs, which I think just plays into the commentary I made around the market looking for a sort of global rather than a local solution. And yes, we got into an RFP. We were actually not initially in with that because we were quite late to the party, I guess, in terms of getting notified of that one. But once they saw the workplace apps, that was really what changed that opportunity. So again, I think that's what -- that got it there and then also, again, all the boxes that we check. We've got the technology. We've got AI solutions that they can understand. We've got integration tools that are solving problems for them. So yes, that was that. And then margin expansion it's -- I guess, at the moment, it's an interesting one in margin. We are building some pretty amazing technology right now, and I guess it's about how much of that we keep at the maximizing side of our business and how much we use that for the growth side of our business in terms of the efficiencies that we're gaining. So I think I'd just say, at the moment, probably steady and roughly where it's at, but obviously, it is a focus for us.

So we've got another question from [ Chingman ]. So this is -- thanks for the Q1 update. How do you value the generative AI potential benefits in the Straker business?

Well, I guess I'd value it already in terms of it's opening doors that were quite difficult to open in this industry. So I have no doubt that the reason there has been 20,000 players in this industry is because it has been difficult to open doors. But we've had customers come back to us straightaway, talking to us about what does it mean, what technology is going to change, how we leverage in that. And to date, they have been quite impressed with what we've been able to show them. So it does open the potential for some real big changes in this industry. And again, I'll come back to this fact that it is an enormous industry, and if there's big changes, we are well positioned with the right channels in place to really take advantage of them. We're only just releasing our past and the Slack and the Teams and stuff this quarter, so it certainly won't kick in, in Q1. But going forward for the rest of the year, I think it's a really exciting opportunity for us. So that's all the questions we have there. As always, Dave and I are available to take one-on-one calls or to engage with anybody. We'll be over in Australia at the beginning of June for a road show after our full year and certainly happy to come and visit people in person. Thanks very much for attending and look forward to an update in 4 or 5 weeks with our full year results. Thank you very much.

[David Ingram, executive]

Thank you.