Straker Translations Ltd

ASX:STG

Q4-2024 Earnings Call

[Grant Straker, executive]

Hello, everybody. I'd like to welcome you to the Straker full year investor presentation for FY '24. I'll firstly just move through disclosure statement and onto the agenda.So today, you will have myself, Grant Straker, Co-Founder and CEO and our Chief Financial Officer, David Ingram presenting. We're going to try and keep this reasonably compact, 15 minutes for my presentation, 5 minutes for David, and then we can jump into Q&A.So before I go through the highlights, I would like to give you a few themes for the presentation around what this year has been about for Straker. So, firstly, the industry remains a very large TAM and there is more opportunity in it for tech players than there's ever been before. Second, we have had a clear strategy for the year given the macro environment, ensure we are in a strong financial position and invest heavily in our R&D around AI to leverage our platform and assets and build partnerships around AI. And third, our core strategy in technology was around AI verification, not translation, and focused on Workplace Apps, eventually replacing complex translation management systems. And if we could leave you with 1 point through this presentation, [ it said ], every time you see large language model translation getting plugged into a platform we see this as an opportunity and not a threat. And this is where we've focused our R&D.So now I'd like to give you the highlights for FY '24. So we delivered strong financial performance, achieved $4.5 million in adjusted EBITDA, generated $50 million of revenue despite challenging macroeconomic conditions, we reduced our operating expenses by $5 million, and we achieved positive free cash flow of $2.3 million.Over to our innovation and future growth. We launched the AI Verify product. It's an industry- leading AI approach to translation. We released our AI cloud, integrated Workplace Apps, removing the need for a TMS. We built a platform to capitalize on AI opportunities and to shift as the industry shifts towards translation as a utility. Our mainstream AI is a very positive development for Straker as I've just said earlier. And really importantly, we matured key alliances and built out some new ones. So we strengthened our strategic partnerships with IBM, Microsoft, Salesforce, and have brought on some new ones with the likes of Foxit.So now on to the financial highlights. So, without repeating what it was on the last slide, there are 3 key financial highlights for me. Free cash flow generated well above forecast, very strong result there. Revenue was down, but it's now steady and we're expecting to return to top line growth and at higher margins. And so finally, we have a strong balance sheet with no debt and $12 million of cash. So, yes, a very strong financial position going into FY '25.So now I just want to talk about some of our strategic achievements and what we have focused on over the years. So cost efficiency and cash generation, as I've already said, was a key consideration for us. And the thing to think about in this is that for myself and Merryn as Founders, we -- for 10 years, we ran the company by focusing on cash and paying our bills and paying our staff on the cash we generated from our customers.So this is very much a return to our roots, focusing on how you run a good solid business. And I would say there are a lot of probably tech companies and a younger generation maybe that just know how to spend and raise, but we do know how to really focus and get things sorted to allow us to get the cash to invest for our future growth. And that comes over to the digital transformation and AI investment.Again, a big focus, making sure that we're at the forefront of AI, building out a SaaS platform that's relevant for the new age of AI and looking at Workplace Apps, where we've had a lot of feedback from customers around -- that's the way that they would like to work and that they would like to manage their translation services. So when customers are telling you this, we've been investing very heavily into that area. And finally, building these partnerships and key alliances.We want to have a model that is infinitely scalable, not one where we have to go out and build a 1,000-person sales team around the world and all of the associated costs and time delays that go with that. IBM already have a global sales team, Microsoft have a global sales team, Salesforce have a global sales team. We are really focused on having very strong partnerships with those types of organizations and building solutions that are win-win for both of us. They have a big AI focus, all 3 organizations. We use their technology. So it's been a very exciting time and probably the best outcome of all of the things that we've looked at in terms of growth is how well the team have matured these relationships.So then on to the industry. So one of the most common questions I have had over the last 12 months is probably how are we relevant in the world of Gen AI? So, Gen AI can do translation? What does it mean for you as a business? And it's a very fair question given how much it has advanced into the public consciousness, especially in the last 12 months. So to start with, I'd say there's going to be no lack of customers in the industry. The industry is still forecast to grow and there is no doubt there will be a mix of a change of type of work as this industry grows. We pointed out at our half-year presentation that we believe the current translation processes have peaked that as you post edit, you sort of Google translate, tidy up. We think that that model has peaked and it's new methods of AI translation like our Verify product that are going to drive new levels of growth.Like every other industry, I'm sure many investors are looking at there is an AI arms race and a land grab of some sort taking place. Straker is very well positioned for this, given our technology, our global reach and our partnerships.So onto our product market fit. In terms of the AI cloud, we've got a strong product market fit. Now we have our Orchestrate engine, which was built out of our RAY platform. So this is automating content. It's managing the thousands of translators, experts, humans in the loop that we work with. It's managing scale, it's integrating with large language models, it's reducing the internal trans, it's managing the internal translator teams. So that engine is really the base for everything that we do.Then we have our AI innovation play with Verify. I'll show you a couple of slides on Verify in a minute and how that works. And then we have our platform for dealing with customers, which is around our Workplace Apps. So we believe that having customers working in the likes of Slack and Teams is really the future for this industry.So if you have a look at Verify, just to give you some context on what our technology actually does. So in the traditional process I spoke about a while ago, you would do a post edit translation, you would do a machine translation followed by a human tidying that up and we've built many tools and workbenches over the years to make that very easy for transhuman experts in the loop to work with. With Verify what's happening is you're doing an AI translation, you're then breaking that down into segments, and the AI is then -- another AI engine is then scoring that translation on each segment. And it's giving you an understanding from a block of content, what we know to be very, very good content, and what we know may need some work. And depending on the settings that you set up inside of AI cloud, for your translations, you can decide that it's an internal document and you're happy with 78% -- or 70% to 80% quality. If it's an external legal document for a contract, you may need 100% quality. So you can set your parameters and decide if you want to send this for human expert verification or not. And so this process can reduce the translation cost by 30% to 40%. And this is a really strong strategic advantage for us right now that we have this technology built and ready to go.So again, this is just looking at how that breaks down content and how you can see each segment inside of this block of content, the bits that might need some review, and the bits that we know don't need any review because of the algorithms and the testing we've already done to show that it's a perfectly good content.So when you talk about Workplace Apps, I guess, the one way to just highlight to you how this works is this is inside Slack, a couple of screenshots. But what we've built is the ability for you to just be inside of our Slack app or our Teams app, drop a video straight in there. That video is automatically transcribed. You then have the option to go and get that transcription translated. So you could say, I want this in 10 different languages. It would transcribe it. You could also say, can you give me 10 different videos with subtitling put back into the video? And then you also get the option to go, would you like to get this human expert verified? Or would you like your subtitles to be perfectly aligned and not just done by the machine? So this whole process is taking something that would have been 30 steps in a traditional translation management process into something that somebody is sitting at their desktop just dropping and working with.And if there's one thing I've learned about tech over the years is that simplicity always wins. The easier you make it for somebody, the more value you have to them and the more likely they are to use it, and the easier it is to get organic growth through that tool, because it's just so much easier than any other way that people can solve the problem. So that's just giving you an idea about why we see the future of translations being around Workplace Apps.Now on to just to our go-to-market strategy. So I don't want to spend too much time on this slide as hopefully it's self-explanatory. But I do think that the Verify toolkit is worth expanding on. So you would have seen that we recently did a deal with Foxit, and this is where you've got a platform and they want to embed a verification expert human in the loop layer with large language model translation into their platform. Something that we see many customers doing in terms of plug-in and translation.So what the Verify toolkit is an API that enables them to connect in. It enables them to possibly white label what they want to do. And this was really exciting. So at the moment, it's a toolkit that's rapidly expanding as we get more customer use cases and examples of how people actually want to work with it inside their platforms. But if you just look at the volume of companies that are currently looking to plug-in translations, and there was a good example of the CEO of Reddit at their annual full year presentation recently saying that large language model translations are going to drive the growth of their business. Now, yes, a lot of that is just going to be machine driven, but there is going to be a lot of content around that that will need some sort of expert human in the loop or verification or quality assessment. So we do see a significant opportunity around having a very strong AI verification tool kit.Now, on to -- sorry, I just went a bit too quick there -- on to the team. So we have a very experienced, stable and invested team. So across the team, holding around about 13% of STG stock, average of 14 years' experience. Yes, Merryn and I have about 48 of that, but the rest of the team have a very, very strong tenure over a decade or so across most of them. And if I just come back to my earlier point around how that experience plays out. We have over the years had several playbooks.Our first -- our last playbook was really our M&A playbook, which the market, when we listed, very easy for the market to understand, executed very well. Significant growth from our IPO to today, executed by the same team you see here. Then, obviously, with COVID, last couple of years, the market dynamics, and we have had a paused playbook. I don't -- the numbers tell us that that's what's happened. And now we're entering into a new AI playbook, where we've got very clear strategy, very clear idea, and we've got some very strong individuals to execute on that playbook. So we're very comfortable and confident in the team that are going to deliver for shareholders over FY '25 and beyond.So just last couple of slides, just onto our strategic focus and targets. So again, very similar to what we had in the last year with 1 big change, which is our focus on growth and go-to-market execution. We have a product we're offering with a strong product market fit, and we now need to drive new business. And this means faster cycles of R&D, more focus on new products, and also packing up everything to make sure it's easy for customers to use. As I say, simplicity will win the day.And for investors, I think key metrics around how to look at what we're doing going forward is around these partnerships. It's around the AI cloud sales and Verify at its core and how that is tracking through the year and obviously yes. But bringing on these new partnerships is critical. We do have some really exciting projects in the mix. We're doing one with IBM up in Japan at the moment, which is a partnership with them around some products. We've talked about in some of our releases that we just went to IBM Think and presented this in conjunction with IBM. We're also presenting next month at the IBM Partner partnership event, a very big one in Tokyo. So, yes, we are seeing some really significant opportunities that were not opportunities that existed 12 months ago. It's the change in this large language model and the Verify that's enabling all of these new opportunities for us. So that's very much our strategic focus. We're still working on the nuts and bolts of profit and cash generation.So as a significant shareholder myself, I certainly feel we're not getting valued where we should be, which from a Gen AI perspective, I think over the -- perception over the last year for a lot of people, I do understand. But this slide, I guess, is just to show from a -- certainly from a qualitative factor, [ we mark ] very highly. We're global, we're in a strong position, we've got tech, got a strong balance sheet, we deliver a great product, we've got a quality management team. From the quantitative factors, we're there or thereabouts. Obviously CAGR, we aren't there in the last year or 2. And that being said, we are forecasting in our outlook to return to growth and with higher margins. So I do think we are still creating a significant amount of value and it's not been recognized yet, but I think as things start to play out, hopefully the market comes with us on this journey and provides some real upside for shareholders.So finally, just to the outlook statement before we move on to the financials. Now, revenue, we expect to return to top line growth. Gross margins, we expect to maintain those mid-60s. We'll continue to be adjusted EBITDA profitable and generate free cash flow. And our new AI product suite is going to contribute to our [ AI ] base. So we think that it's an exciting time to be at Straker and we think that we're in a very good position to deliver for shareholders.So I'll now hand over to David Ingram to go through the financial results.

[David Ingram, executive]

Hi, everyone. Let me provide a bit more color on the financials and I'll talk through the 3 statements, starting off with the income statement.So the very positive story in FY '24 is both our increase in profitability measured by our adjusted EBITDA and strong cash flow. The significant increase in EBITDA and cash flow was achieved despite the drop in revenues. And let me spend just a bit of time explaining that drop. We encountered, like everybody else, really, macroeconomic conditions which impacted the industry. And this was evident in all our regions. We also had some existing clients take a hard line on expenditure and they held off on localization projects.The advent of Generative AI created an uncertainty in spend and deal flow as prospects and clients alike took a wait-and-see approach. The onboarding of our largest customer, IBM, during FY '22 and '23 had a significant impact on our revenue results, which impacted our FY '24 revenue comparison.While also not immune from cost-saving pressures, IBM benefited from our platform efficiencies where translation memory is stored for future use. We also saw our institutional contract finish which resulted in IDEST acquisition in January '22, not achieving their remaining earnout. We do, however, have several significant tenders and are currently under evaluation and this strong pipeline positions us well for potential upside in the IDEST business.The upside to our sales year was threefold. We added a new business arm in August with managed services contributing $4.2 million to our portfolio. We significantly increased gross margins, expanding the gross margin percentage by 680 basis points to 63.8% and that was done through improved automation, price increases and the mix of customer and business lines while the release of our AI apps creates momentum and differentiation for the year ahead.Just on overheads and excluding D&A and impairment losses, these dropped $5 million, and that reflects our restructuring that commenced in quarter 3 FY '23. And the restructuring inflected synergies from the more recent acquisitions and rightsizing the business in light of the challenging economics. We continue to focus on operational efficiency. Included in overheads is a non-cash goodwill impairment of $2.7 million against the IDEST during the year as they did not meet their earn-out targets. The full earn-out was included in the original purchase price valuation and therefore not meeting this target in full impacts on their valuation. This resulted in an adjusted EBITDA improving 215% going from $1.4 million to $4.5 million and -- which is a 9% margin on revenue. And this strong performance reflects our commitment to improving gross margin and operational efficiency and fuels our ability to invest in future growth.And finally, just pointing out the large net finance income in FY '24 includes a gain of $2 million on earn-out write-back, while the remainder is predominantly unrealized FX gains from intercompany loans.On to the next slide, so the balance sheet. So we continue to have a very healthy balance sheet with our cash balance of $12.2 million, which was an excellent result considering we completed a $2 million buyback during the year. And as we said before, we have no debt. Our trade receivables was down 11%, which reflected both an improved cash collections and lower revenue. And this leaves working capital at $11.1 million, a 4% reduction on FY '23. Intangible assets decreased by $6 million, which includes $4.3 million of scheduled amortization for our acquired assets.In FY '24, contingent consideration is [ 0 ] as we have no additional payments due under contingent consideration clauses relating to past acquisitions while share capital decreased by $2 million as the company completed an on-market share buyback of 3.5 million Straker shares completed in February '24, which reduced our issued capital by 5.2%. As we noted at the time, the buyback was designed to take into account the trading liquidity of Straker shares, establish a share price floor, and the Board's determination to maintain the company's strong financial position.Onto the next slide, cash flow. So cash flow was a real highlight. Operating cash flow was positive $5 million, which compares to $1.4 million in FY '23. Receipts were 104% of revenue, the same as last year, and we continued to invest in R&D with $2.7 million capitalized, up 21% on last year. This reflects an increasing spend on new initiatives in the AI space compared to legacy maintenance programs.Financing activities included the $2 million outflow related to the share buyback. And this results in an inaugural free cash flow inflow of $2.3 million versus a $0.9 million outflow in the prior year.Thank you. I'm going to now pass you back to Grant.

[Grant Straker, executive]

Okay, everybody, that's really the presentation. We're on to the Q&A now. So if I just stop sharing this. So we do have the Q&A box up there. So if anybody would like to have any questions, please feel free to put them in the Q&A box and we're happy to answer them now. Not too many questions at the moment and no hands are up. We'll give it a couple of minutes. If we don't get any questions, we'll end the session.A question from [ Gareth ]. Straker has a decent cash balance. Are you thinking about capital management or potential acquisitions?Yes. So in terms of acquisitions at the moment, there is really a little bit of uncertainty about what you would buy with an acquisition. We certainly don't write off some technology-based acquisitions where there's a mixture of technology and services. But in terms of the playbook that we had, which was to buy smaller language service providers, integrate them, that playbook is not one that we want to execute at the moment. We think that the partnership channel model will deliver far more significant growth without the sort of -- the drag you get from trying to implement a partnership model like that. But there may be some technology that we look at.So another one here. What is gross margin by product segment? Do we have that?

[David Ingram, executive]

Yes. No, we do. So the SaaS side is high 80s, whereas the translation localization side is more the high 50s.

[Grant Straker, executive]

Yes. Then another one, has acquisitions been suspended? So again, I'll just say that acquisitions are something that we will look at and it's an interesting market at the moment.From [ Milo ], can you talk broadly to the pricing of an AI only translation versus one with a human in the loop? Have you benchmarked your AI only translations versus peers or, say, an LLM output?Yes, absolutely. Like, in terms of that latter part of that question, yes, we are benchmarking how we see things. At the moment, I would say it's a 30% to 40% gain for customers. And if it's a common language, if it's a European-centric language, for example, where we have a lot of data and it's not too much of a tricky subject domain, so it's general content. It depends on the language and obviously, it's advancing quickly.I saw something that the R&D team had worked on this morning, which was quite amazing. It's the first time I've seen what they have been working on around new advances in the way that we can verify content. So, yes, so it is exciting.And again, I'll just come back to the TAM. This TAM is 20,000 small language service providers, and they are not investing at the rate that we are in this technology. And their customers are looking for a different provider. And so I do think that these -- the larger global technology providers in this space are going to be the ones that can really win.So, just another one here. What gives you confidence on the outlook for top line revenue growth, and how much of that is driven by new versus legacy products and managed services? There's a few things on top line growth. Obviously, we've invested heavily in the Verify product. We have had strong demand and similar area with what we're seeing around our Verify as a plug-in in terms of platforms. So that gives us a lot of confidence. In terms of timing and stuff, there is a lot of development around the edges as you integrate with customers and then there are all these significant projects.So David spoke about the one with IDEST with some of the contracts that we have there. So these contracts last 3 or 4 years and then they cycle, sometimes 5 years. There is a new range of new ones coming up that will begin later in this financial year. We've put bids in 4 and we're in a reasonably good place to see how they play out. And then there are these projects that we're doing with the likes of IBM, working in conjunction with them into new markets, particularly the one that we are working with them on in Japan. So there is a whole range of initiatives. It's not one thing. And obviously, you could get an upturn, hopefully, in the global macroeconomic conditions as well, which means that customers start to come back on board and do projects. There is obviously -- our revenue can be related to how many projects customers are doing at any one time.One from [ Michael ]. Can you talk more about the improvement in gross margins? Is it mainly less people involved and more AI? Well, more technology involved, absolutely. So it's a range of factors. I mean, we are continually working to become more efficient. And AI is based on how do we become more efficient and increase our margins. So there's a whole range of things there.Another question, is there any intention for another buyback program? No, there's not. No, we are not looking at a buyback. It achieved what we needed it to do at the time. And we have -- and we're certainly not going to do that anytime soon.Another question. What are some of the underlying AI services do you leverage? Do you use translation AI service from hyperscalers like Microsoft, Google and Amazon?We use a range of translation services. We use -- [ DPal ] is one company that we work with around this. We have our own engines that we work with. IBM has models. So there are a range of those hyperscalers that we do work with.How has trading been year-to-date in FY '25? It's been good. Solid. Yes, we certainly feel we're in a good place as we head into this financial year.So look, that's 32 minutes. I think doesn't seem to be any other questions. David and I -- we're on a roadshow in Sydney next Tuesday and Wednesday. If anybody would like to reach out or would like to have an in-person meeting, more than happy to do that if we haven't already organized one. So please feel free to just e-mail us. And, yes, look forward to giving you an update at the half year. Thank you very much for attending.