dotDigital Group PLC

LSE:DOTD

Earnings Call Transcript 2022-Q2

[Unverified Participant]

Welcome to the Dotdigital Group plc Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and could be furnished at any time by the Q&A tab situated in the right-hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so.

Before we begin, I would like to submit the following poll. I'd now like to hand you over to Paraag Amin, CFO; and Milan Patel, CEO. Good afternoon to you both.

[Milan Patel]

Good afternoon, [ph] Alexander (00:38). Thank you very much for handing over to us, and welcome, all, to our Dotdigital Group plc first half interim results presentation. For some of you, this will be a recap. But for some of the newer investors or looking to invest, I'll take you through from history to what we do and our growth strategy.

Originally formed in 1999, was a very simple marketing tool made for the marketing department, but they were able to send bulk messages to people on their subscriber list. So today, where the market has evolved and the platform has evolved, it's a very sophisticated platform that captures data into the platform, allows the marketing teams to understand who they're communicating to and gives them the full complete toolset in order to use that data to be highly relevant and personalized and gives them all of the different channels that they can communicate to. It's about sending the right message at the right time to the right person through the right channels.

In terms of the business, center that to three main global hubs. UK is a hub into EMEA. Our New York offices is a hub [ph] into (01:50) America. And our Sydney offices is a hub into APAC. We have over 340 employees globally, predominantly in sales and marketing, IT and development, small amount of people in professional services and the back office, have eight offices across the world, very strong network of tech and solution partners around our strategic partners within the integrations that we have within e-commerce, and also within the CRM space as well. As we look forward, we will talk about some of the new strategic partnerships that are coming on. We're very much focused in that mid-market and upper mid-market where we know the cost of acquisition to lifetime value makes sense.

In terms of some of the KPIs that we look at, the organic growth strategy is centered around three main pillars, whether it's around geographic expansion, whether it's around our strategic partnerships, or product innovation. We talk about not only our domestic market, which is around EMEA, predominantly in the UK, expansion into the US, and further into LATAM. And in terms of APAC, further push into Far East Asia and also some of the newer where we're dipping our toe in the water into areas like Japan.

In terms of what we measure from a strategic partnerships perspective is the number of our customers that are using the integration within – whether it's our e-commerce platforms like Magento, which is now owned by Adobe, or Adobe Commerce. In terms of some of the partnerships that we have with Shopify and BigCommerce in the e-commerce space or Microsoft Dynamics and Salesforce in the CRM space. What we've continued to do is really expand on the recurring revenues we have from the business, predominantly in two main forms, whether it's what we describe as our functionality recurring revenues, and that's based on licenses, and additional functionality our customers are buying, or data that they're bringing in, which in turn increases our license fees that we charge our customers.

In terms of messaging, there's two main parts what we describe as premium messaging, which is around our SMS and [ph] WhatsApp (04:06) messaging or/and our core e-mail and other 90% plus gross margin message charges. In terms of what we continued to do over the last 10 years is we talk about profitable growth. Over the last 10 years, CAGR, from a revenue perspective, is in that 19%. In terms of profitability, around the 20%. And we continuously increase the cash from a conversion perspective. You can see some of the customers we help. We also help mid-market companies that you may not recognize. The part of what we are seeing as we look at new business that is coming on board, we're seeing higher value mid-market companies as they're getting more sophisticated, but also larger enterprises that are using our platform, whether they're deploying it on multiple territories or multiple brands as they expand out.

In terms of last half, saw a 10% organic growth, strong profitability. We were – if we look at the financial results for the full year, there was some one-off spike in SMS from the pandemic. But, effectively, as we go through the presentation, we'll talk about that and the unwinding of that. We continue to win larger value business complemented from our existing customers in terms of expanding the product adoption, very much focused on our people and continuing to invest behind our people. For us, it's the successful ingredients of not only platform, but also the people that really gives it the value proposition and the success that we've had in the business.

In terms of – if anybody attended my last presentation, we were talking about building a customer data platform. That proposition is out and have – has beta customers now on that. And our product managers are now working out the monetization strategy from the CDP side of things and as we look forward and building out those use cases and how we're generating return on investment for our marketeers. For us, we continue to [ph] see kind of (06:07) strategic partnerships, but also broaden on our existing partnerships that we have, both from the ecommerce and CRM, and some of the newer strategic partnerships that we have with the sales and service clouds. For us, our pipeline is underpinned by a recurring SaaS business model.

We look at some of the statistics. We're seeing strong growth in the half. We're seeing strong profitability. Recurring revenues as a total revenue from a group perspective is continuing to increase. So, 94% of our group revenues is now recurring. Functionality recurring revenue continues to grow very strongly, 22% in the period. That's a combination of existing customers adding more, but also newer customers buying more functionality from when they start with us. Strong cash position, no debt within the organization, of £40 million.

So if we cover some of the evolving backdrop and some of the headwinds we've seen in the first half, a lot of companies have seen headwinds from a people perspective, whether it's salary inflation, whether it's around retention. We have seen a slight increase in employee attrition. However, we've done quite a lot around the attrition and reducing this as we look forward.

In terms of salary, benchmark analysis has already started. We've implemented recommendations. We've increased our benefits packages in our international regions. We're using share options as a way of retaining from an overall remunerations package. More importantly, we look at how much of the staff are engaged with the business. Three main metrics I look at or we look at is around employee engagement. We see over 90% there. 97% of our employees are proud to work for the business. And 92% would recommend us to their friends or other people that they may know. So very strong engagement of our staff within the business.

In terms of the US, it is a competitive labor market. All businesses are facing that. What we did see in the first half was a slightly higher attrition in our management in that region and customer success and salespeople. What we've done, we've got new management in place now. They are from industry who are making a difference in that business unit. We've added a VP of Growth. We've added a Head of Customer Success in the region. We've now got back to the same levels we had from a customer success perspective. And in between, we are now starting to increase the salespeople that we have in region as the demand has been created. We've increased the resourcing we have from an in-house recruitment perspective. We've added people in these regions to continue hiring and building a pipeline of great talent that we can bring into the business.

In terms of the other factor, compounding the US – sorry, compounding is, in this year, now that the UK has opened up from the COVID perspective and also quarantining elements have come out, effectively, we are seeing some of the one-off pandemic-related messages diluting our marketing SMS growth. We've seen over 100% growth in the last six-month period in customers from a marketing perspective adopting more of the SMS. We continue to see newer omni-channels like in that push as more and more brands build applications on Android or iOS so that they can provide that single consistent message across all channels and that single content and personalization across every touchpoint that they have with their end customer, regardless of whether it's a transaction message, whether it's a marketing message, and we continue to see that adoption increasing as we look into the future.

So what is the marketeers' challenge now? And I guess, as more and more marketeers are engaging with their end customer, whether it's using e-mail, whether it's using all digital forms, it's the battle into inboxes. It's about being very personalized. It's about understanding who you're talking to and using that data that they have on the recipient to be very highly targeted. In terms of more and more marketeers are now trying to create customer journeys at every touchpoint that they have, effectively, what we have is a platform that is not only able to personalize at each of these different touchpoints, we give them all of the different channels to communicate on. We give them the data to really understand who they're speaking to, which allows them to have those real-time optimizations as well as all of the data integrations off the shelf that they are using today. And we continue to invest in our R&D to build out integrations into other business systems.

If we look at the platform, it's about bringing data into the platform. We take all of the heavy lifting in terms of data hygiene. We give them the information to really get personalized from a marketing automation perspective, allows them to action the data that they have. It allows them to learn through AI and machine learning capabilities that we have. It allows them to predict to build a higher return on investment, but also have more of their recipients engage with their brand, and really analyze the campaign effectiveness to reaction the marketing automation from an efficiency perspective. Lots and lots of functionality around empowering our customers to drive better marketing models or enhance their marketing strategies, give them all the tools to communicate, and build on the outcomes that they're looking to, whether it's around growing customers, whether it's around driving people to event, whether it's about disseminating information, and it's about retaining.

What we have seen in the marketplace from the marketing department perspective is not only about customer acquisition. Retention marketing is coming higher up the priority from a strategy perspective. Effectively, with the tools that we provide, they can continue the influential side of things and build on the influences that they are building, and continue that brand awareness as they use the platform in the territories that they operate in.

So what does the competitive landscape look like? We all have a target segment that we build our platform for. You've got some of the competitors like MailChimp and Constant Contact, which are really building their platform for the small business market. You've got platforms that work and build functionality in that mid-market, as well as you've got players that really go after the large enterprise. As I mentioned at the start of the presentation, for us, it's been very focused in that mid-market, upper mid-market, and we continue to see an increase in larger enterprises deploying our platforms between different brands that they may have or even different territories that they're using our platform in.

In terms of our growth strategy, as I mentioned earlier in the presentation, our organic growth is focused around three main pillars, whether it's around product innovation, whether it's around our strategic partnerships and geographic expansion from the hubs that we have. When we describe a hub for our geographic territory, it's scaling from the foundations that we have. It's having every single department in that territory to really scale from, understanding the customer and making sure that we're delivering on the needs and the reason they choose Dotdigital as a platform of choice.

We continue to expand our product suite. We can see that coming through in our functionality recurring revenues. Platform adoption is increasing, which really provides us for organic growth into the future, very much deepening our relationships, focused on cross-selling, upselling, as well as allowing our customers to unlock more value out the platform through adoption, but working with them on their strategies to drive a higher return on investment.

We continue to grow our customer base globally, increasing our global market presence. The platform is well-received in different territories. But we also see demand as we piggyback on the coattails of our global partnerships that we have. In terms of deepening our strategic partnerships, it's about building integrations, making it very easy for our marketeers to bring data into the platform, but as well as working out the areas that mid-market find challenges in the data silos that they may have and making it easy to remove those silos. For us, it's also important to continue globalizing our talent, making sure we're onboarding, building that culture that we have within our business and expanding that out, which really makes us successful as we look forward.

So we're very much focused on organic growth, but we also look at acquisitions that really makes sense for the business, not just from an arbitrage perspective, but real synergies that our marketeers could have in having additional functionality from adjacent technology perspective, whether it's building foundations from a people or from a business perspective in territories that are strategic to us through consolidation, or deeper functionality that we may be missing today that would take us multiple years to really build.

So if we look at what's happening from a product innovation perspective, we saw revenue growth of over 22% in the period from a recurring perspective continuing to increase as platform adoption is being increased, or customers bringing in more contacts into the database, as well as increasing the level of data that is being brought into the platform. We've continued to enhance our user experience end-to-end, whether it's the customer journeys we have with our end customers from the start point, they start using Dotdigital, and we handhold them all the way through to their more sophisticated marketing strategies. In the year, or in the last six months, we've launched our customer data platform, as I mentioned earlier. We're working with customers in driving user case studies, how they can use that data to really get hyper-personalized on a one-to-one basis with their end recipients or their customers.

If we look at what's happening from a metrics perspective, we're seeing more and more customers using more than one channel. Over 20% of our customers are increasing the channel usage within their own marketing strategies. You're seeing more and more product data continuing to come into the platform, and we continue to see that rise in e-mail volumes of over 18% in the last six months. But that continues to accelerate into the second half and as we look into the future.

In terms of building pipeline for us and continuing our market reach, we have a very strong foothold in the UK. We are the largest for what we do. Most marketing departments would have heard of us or know of us. And effectively, we have a blue print of international expansion through strategic partners, whether it's in our North American market, whether it's in our APAC market, where they help drive brand awareness within their user base. We continue to add value from a proposition perspective and see those clients seeing real value from the platform that they are using and effectively continue to build on that. We've seen strong growth across all of the integrations that we have, whether it's in the e-commerce space, in Magento, some of the newer connectors that we have that is continuing to increase from a compounding perspective. We've seen an increase in customers using our Shopify integration. That continues to feature and accelerate.

In terms of some of the other areas, Microsoft Dynamics, and some of our new integrations that we've been doing with our strategic partners, we're now starting to build connectors within the sales and service clouds as more and more customers are storing conversations using those keywords in those conversations to really drive marketing automation. So one of the newer strategic partners that we are excited about and we see real opportunity for is around our integrations with Zendesk, and that will continue to feature as we look forward.

In terms of our growth in the different regions, all three regions grew. APAC, very strong growth of 27%. And we continue to push further not only into the Australian and New Zealand market, whether it's through our own direct marketing efforts or our strategic partners, further into Far East Asia through our Singapore office, and we've now started to [indiscernible] (19:41) as we've seen stronger demand coming from Japan and work with the likes of Shopify to push further from a go-to market perspective as we look forwards into that market with some feet on the ground.

In terms of the US growth, we saw 3%. As I talked about some of the headwinds we've seen, we've continued to solidify the foundations that we have within the North American region. We started to accelerate some of the investments that we've been doing from a marketing perspective as we've got the people. In terms of that growth coming through into the future years, as we're an annuity business, for us, customer success teams and sales take about three to six months to ramp up in getting to that full target or hitting those full targets and that starts to come through into the future years in terms of revenue growth in that region. Whenever, from an annuity revenue-based perspective, you start to add the clients through the period, you see the full impact of the revenue growth in the following periods and that will continue to build.

In terms of EMEA, very strong growth in the EMEA market, predominantly led by the UK. But as we start to develop more brand awareness outside of the UK, we continue to see a strong demand for our platform in these regions.

I'll pass you over to Paraag to go through the financial details.

[Paraag Shashikant Amin]

Yes. So, good afternoon, everyone. So looking at the first half and in terms of the numbers and what we've seen, so group revenue grew 10% to £30.9 million in the half. And then the monthly average revenue per customer increased 19% to now £1,422 per month per customer. Now, in our business, we have a broad range of monthly spend, those contracted customer by customer, so that could be anywhere from sort of the lower end, our customers paying us around £250 a month. And then there are customers at the much sort of higher end paying tens of thousands of pounds a month, so £30,000, £40,000, £50,000 a month at the very high-end.

So the average revenue per customer isn't measurable as to how many customers we have. So in a subscription business like, say, a Netflix or a Sky, you can take average revenue per customer or ARPU and multiply that by number of customers, which gives you the overall revenue. In our case, because we have such a broad range of that average revenue per customer and what we're also talking about here is the contracted revenue, so it's not the total revenue of the business. What we do see, therefore, is our customer numbers have actually increased over time. And those customers are spending more than the existing customer base that have come through and our existing customers over time also spend more.

So the ARPC is just more of an indicative trend of the new customer wins and the growth in the existing customer base that's coming through. It's not going to drive into a one-to-one correlation with revenue. It absolutely helps because, of course, your customer base is spending more and your new customer is coming in. But there's not a kind of one-to-one correlation as you would have with a pure subscription model.

Now, Milan has talked about the three pillars of growth. So, international revenue grew 4% in the period. The US was the principal area of weakness, as Milan talked about. But functionality revenue growing 22% is very much key to the R&D spend that we do. It does show that as we're spending more on R&D, and we spent £3.5 million in the first half, that leads to not only the growth in the functionality of revenue, but also that's where that average revenue per customer also goes up. So as customers take on and adopt some of that functionality that we're building, they will then be spending more with us as well. So the – from an R&D and a return on investment perspective, that's going very well.

In terms of the partnerships, as Milan has also talked about, the revenue grew 9%. Again, that's indicative of the investment that we put into our partnership team over the past 12 months. We have revamped our partnership model to be more scalable. We've added new people or partner managers into the teams. So that number, over time, we'd expect to increase and drive that topline further.

From a profitability point of view, we've seen both adjusted EBITDA and adjusted operating profit, both up 17% in the first half. Now, I'll talk a little bit more in detail about that on the next slide, because there are some anomalies, I suppose, or trends that have led to a higher margin than maybe we would have anticipated at the start of the year.

The chart on the right-hand side of the slide just shows the revenue progression and how that revenue half-on-half continues to increase. And, of course, we had a pandemic-related spike last year, which drove the first half of fiscal 2021 probably to a higher level of growth than we've seen historically. But the normal trend has continued as we've moved into the second half of last year and into the first half of this year.

So just looking in more detail at the P&L. So I talked about the overall revenue, the average revenue per customer, and then the strategic pillars. So I won't go too much more into the detail on revenue. But when it comes to our margins and costs, so the gross profit, that increased broadly in line with the growth in revenue, so 9%. So our cost of sale has remained at sort of similar growth levels to the revenue levels, and the margin therefore has remained relatively stable. And then what that's also done, therefore, is, in theory, the operating profit margin and the EBITDA margins would have also been similar kinds of growth levels in a normalized year, but, instead, obviously, they grew 17% rather than the sort of 9%, 10%.

And the reason for that is very simple. Milan talked about people earlier, but it's taken longer than we would have anticipated to fill a lot of the new hires that we wanted to make at the start of the year. And also, in terms of some of the people that have left the business during the first half of the year, we've – again, it's taken a little bit longer to backfill, and therefore, there might be a gap for a month or two as we are back filling those roles. And so what that's meant is that the – in the first half, we just didn't spend as much as we would have anticipated on head count. Now, that has reversed and we now have all of the head count in place that was anticipated. The backfills have reduced, so the level of people leaving in the last couple of months has been lower than it was in the first half.

So, at this moment in time, the total number of employees we have has increased over 350 from being 340 at the end of the period, we're talking about the first half. So, with the investment that's gone in into those people, and some of those are key hires, as Milan has mentioned, such as the VP of Growth and the Head of Customer Success in the US. Those costs, you see the full impact in the second half of this year. So our full-year margin, operating margin, will be closer to the normalized long-term guidance that we gave of 20% to 25%. In fact, it will be closer to that 20% mark. So around the 21% level is what we're anticipating, so long as there's nothing else that changes in the next few months. So we'll see that second half impact when it comes to the actual margin within the half. But for the year, it's very much within that guidance.

Two other just points on that to note. We also will be having a higher level of marketing spend in the first half – sorry, in the second half versus the first half because we've now got that full team in place in the US. In the first half where there wasn't a full team in place, it didn't make sense to ramp up the marketing budget. And so that'll be very much second half-weighted. Again, that's influencing the overall margin for the half and the year.

So, as we look forward – this is the sort of final point on this. As we look forward, the margins, operating margins, will be around the 20% to 22% level for the next couple of years because you'll see the full-year impact of all that hiring that we've done this year. But also from a marketing budget perspective, there won't be – it won't be so lumpy as it has been this year because of the recruitment needs and the people churn that we've seen in the first half, particularly in the US. So next year becomes a much smoother year in terms of from the start to what we expect to happen by the end.

That's probably the key things to highlight when it comes to the P&L. I'll move over to the balance sheet. So the balance sheet is very similar to, I suppose, what we've reported in the past in terms of the health of it. Strong cash position continues to grow. We've got no debt. It does give us opportunities to invest as we look forward. But again, with the balance sheet, it's a very strong balance sheet, which gives us [ph] a bandwidth of (29:40) strategic investments. And then the cash flows, which of course, help that is we've got strong cash flow, with the adjusted free cash flow of £8.6 million, total cash balance at the end of the period, so the end of December, was £40 million. That has grown from £27.6 million a year prior to that. So there's been a strong level of cash conversion and then cash collection as well as – continues to improve. So a healthy cash balance for the business, very much underpinning the long-term future of the business. There's no issues, therefore, when it comes to potentially having – running out of cash or anything like that. We've got enough for a long, long time. The health of the balance sheet is very healthy. The businesses are in an extremely strong position financially from that perspective. So we're all set for making sure that we can invest as we go forward for the future years.

With that, I know there are questions in the chat, which we'll address during the Q&A, but I'll hand it back over to Milan.

[Milan Patel]

Thanks, Paraag. So I guess from an outlook perspective, we've talked about some of the headwinds that we've had and what we're actually doing about it. In regards to the US, we've now got the management in place to really take that growth to that next level that we are looking for. We've got a strong team in that region where we are going through the onboarding process and you'll start to see the benefits of the newer staff as they are fully trained and optimized.

In terms of there is slightly slower growth in – from the previous expectations in the current year, we are looking to not only see that unraveling [ph] of (31:34) some of the pandemic messages, but optically that covers up some of the increase that we're getting from marketing messages that are going out, which has expanded significantly and growth through the period has been significant.

In terms of – for us, the operating margins remain over 20%. Continuing to look into the future, it will continue to see the levels of investment that we require in the business, the investment that we are making in our people from a learning and development, but also new talent that we're bringing into the business. From a cultural perspective, we'll continue to expand now as we move to more of a flexi-working scenario.

In terms of other elements, return to more convention in sales process, that helps win some of the upper tier, mid-market companies and large enterprise, but also it helps with the strengthening of our partnerships that we have across the different regions, which in turn means additional lead flow that comes in from demand [audio gap] (32:33).

In terms of, Paraag mentioned, in our financial strength, really gives us sort of flexibility to invest in both organic and inorganic growth opportunities we look forward. For us, we've continued to strengthen our foundations across all of our different regions, whether it's around the products and whether it's around our people to really scale for that future growth as we look forward.

So, in summary, in terms of the industry itself, that continues to grow between 10% and 14%. You're seeing marketing – from a marketing budget perspective, digital marketing continued to increase as a percentage of overall marketing budgets. You're seeing more of the traditional marketing budgets being put into digital, which is a lot more cost effective and you can measure the return on investment. We have high visibility in our recurring revenues. Over 94% of our – sorry. 94% of our group revenues is recurring, very much agile business structure which makes quick decisions. And that allows us to empower our culture and our people to really push the business forward in the visions that we're achieving. A very focused growth strategy around geographic, around strategic partnerships and product innovation. From a fundamentals perspective, the long term vision and the value proposition remains unchanged. [ph]

Alexander (33:59), I'll hand back to you in terms of taking some of the questions.

Thank you very much. And thank you very much for your presentation. Ladies and gentlemen, please, do continue to submit your questions using the Q&A tab situated on the top right hand corner of your screen. But just while the company take a few months to review those questions submitted today, I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed by via your investor dashboard.

As you can see, we've received a number of questions throughout today's presentation, and thank you to all the investors for submitting their questions. But I'd ask you to read out the questions and give responses where it's appropriate for you to do so, and I'll pick up from you at the end.

[Milan Patel]

No problem at all. So first question from [ph] Henry (34:42). Quite a lot of cash on the balance sheet, what you intend to use it for?

So part of what I am doing, [ph] Henry (34:48), is really focused on getting my management team. So we are in the process of replacing our CFO. That's quite a long down the process in terms of getting a short list. Once I've got the new CFO and the Chairman, we will then take stock in terms of whether we invest that more for organic growth or whether we look at M&A from a strategic standpoint, whether it's around the synergy technology or more consolidation in strategic territories that we're looking at.

Paraag, there's a question from [ph] Andrew (35:26). In terms of [indiscernible] (35:27), please, if you could talk about the basis on which you capitalize and amortize R&D. CapEx seems to run consistently ahead of amortization.

[Paraag Shashikant Amin]

Yeah. So we obviously do the capitalization in line with the guidelines where we look to capitalize anything that is for future development. But the key here is that when we made the acquisition of Comapi, there was a one-off spike in that level of capitalization that took place.

Since then, the increase you'll see in R&D over the last three, four years has been at a constant level. The amortization is catching up to the point where probably in two years' time, assuming we continue to increase R&D by a couple hundred thousand, say, £300,000 to £400,000 a year, which is what we've been doing for the last few years, the amortization will actually catch up in about two years' time when they'll be equal and net each other off on the P&L.

[Milan Patel]

Thank you, Paraag. Another question I have. How do you plan to respond to recent share price drop? Will you buy back shares?

Effectively, we don't comment on the share price movements. But effectively, in terms of answering your question in regards to buyback of shares, we'll be talking to our advisors. Myself and the board will also look at – once the roadshow is over, look at where we are and what we do next, whether we do buy back shares, whether we invest the money organically, or whether we look at acquisitions as a way forward to complement our growth rates that we have from an organic standpoint. [indiscernible]

[Paraag Shashikant Amin]

(37:13) the question from [ph] Will (37:13) on the margin, just to clarify a little bit. The question is, you say the margin should be in the 20% to 22% range for the next couple of years. But if you annualize the second half, the implied guidance shows that margins for the next year would be a lot lower. Are you saying that there's a lot of one-off spend in the second half OpEx?

So there's two elements to it. So there is a second half weighting thing when it comes to some of that budget. So as I mentioned earlier, marketing spend is very much second half weighted. There's a lot more in the second half than there was in the first. There's two reasons for that. One is partly the US and the – having the US team in place. The second part is that if you take the UK as an example, we still had lockdown and the pandemic. Now, events have opened up, travelers opened up. There's a lot of marketing-related activity. There's a lot of partnership team-related activity. And then general business travel between offices and – so therefore, marketing spend, travel and subsistence spend, and a lot of those kinds of things are very much now back to normalized levels in the second half where they weren't in the first half.

Now, when we look forward, we set these budgets based on the full year what we're expecting in terms of revenue and, therefore, a cost base, with a little bit of flex if needed. And so what the budgeting for next year is is based on the revenue we anticipate, we have a cost base that is able to be within that 20% to 22% range. Now, if we don't quite spend enough, that percentage will be higher. If the revenue is higher, that percentage will probably be at the lower end of that 20% to 22% range. But ultimately, we have a plan on a three-year basis of the cost that we expect to be within the business. So you can't just annualize the second half and take that as your run rate for next year.

And then I think there's a few more parts to that question. But I think the – do you anticipate similar top-line growth next year as this year? Well, the numbers in the market that you can see from the analysts and consensus show that, at this moment in time, we expect growth to be slightly higher next year than it is this year when it comes to topline. So topline this year is roughly 7.5% is the sort of midpoint of the guidance. Next year, that should be over 8% based on what we're seeing today. So growth should accelerate next year. And then you can look at analyst notes for years beyond that. But, essentially, next year should be an increase on the growth that we've seen this year.

I'm trying to get through these questions to see which other ones we haven't gone through in the actual presentation. So, Milan, maybe you want to take the one from [ph] JP (40:19) around – I'll read the question out. So there's been a lot of consolidation in your market. As one of the last independent players, does this put Dotdigital at a competitive disadvantage compared to larger/piggybacked firms who can deploy more resources? Please comment on the general state of competition as perceived by ourselves.

[Milan Patel]

Yeah. In terms of consolidation, what we've seen from a historic standpoint is when they go through that consolidation, there's a change in strategy. There's disruption initially that happens when you go through any corporate activity. So, for us, we are laser-focused on working with our sales teams to really pinpoint the company or competitor and differentiate our product against them with a very focused approach of winning or displacing that provider.

You also see cultural differences when any company is either consolidated through private equity or a trade buyer. And at that point, we pick up quite a lot of the talent from the business. In terms of does it disadvantage us from a competitive advantage perspective, there is a lot of private equity and VC-backed money going into some of the competitors from the landscape that I provided, but we're very focused in the niches that we play in. We work with a strategic partners in the international regions. As I mentioned earlier, we are the largest in the UK, so most of the marketing teams have already heard of us.

But from the international region's perspective, we focused on ecommerce. We've increased the addressable market or opportunity we can go after in the CRM space and we're increasing that market opportunity now with integrations or strategic partners in the sales and service clouds. In terms of them spending a lot more of their marketing dollars, they're looking for general [ph] marketeers (42:27). We're very focused in our approach on how we win our customers for future growth.

[Paraag Shashikant Amin]

There's a question of customer concentration. So our top 100 customers make up about 31% of revenue, so it's about a third of revenue from the top 100. There's no customer from a contracted perspective that is over 1%. I think our largest customers just under that. So it's a pretty sort of long list when it comes to the concentration of customers.

[Milan Patel]

A question from [ph] Andrew (43:12). Please, could you be more explicit about the issues of management staff in the US? How many people are involved? How has it affected customer service? Will it affect renewals?

So there was a couple of moving parts there. What we saw was some private equity-backed businesses or VC-backed competitors that took a couple of our management teams, which, effectively, while I couldn't get out to the US in terms of stabilizing some of our employees in that region, we did see some of our customer success and go-to-market employees leave the business for higher levels of salary.

In terms of where we are now, we've replaced the management team there with people from industry who really know that region, who can really drive that growth forward. We've also added in terms of our customer success teams. We've increased the amount we're going to be recruiting. There was some level of higher attrition while we were going through [indiscernible] (44:26) period.

What we have seen is that customer attrition in that North America market now stabilized. And we're now seeing the positive impacts that we've put in terms of investment in our customer success staff in that region and our Head of Customer Success that will lead the charge in terms of our retention strategies and expansion strategies has just started with us last week. So we're working with her and the rest of the team in terms of onboarding and training to really look at what we're seeing going forward.

Most of the renewals that were affected by the customer service level is dropping, [ph] avoid (45:07) the churn during that last four-month period. And we feel we're in a better place now with the deployment of our customers with the right level of skills from our customer success teams to really move forward and the renewal rate increasing as we look forward into the future year.

[Paraag Shashikant Amin]

So there's one more question from [ph] Rosemarie (45:30) here. Over how much of your revenues does the ARPC apply? So I think I mentioned earlier that we do it over our contracted recurring revenue, and that's around 82% of the total revenue. So that's the element. The other piece just to sort of finish off the breakdown of revenue, so we have 6% that is one-off services. Those are when new customers come on board and there's training and custom-designed templates that are created and working with our services teams on getting that smooth up and running through the process. And then there's the SMS revenue and even, I suppose, WhatsApp will fit into that as that starts to grow, which is typically not contracted and is a pay-as-you-go. But we're buying [ph] service (46:19) rate, we're buying the actual supply from aggregators and then reselling that to our customer base. So the average revenue per customer, we're talking about purely just the contracted recurring revenue, which is just over 80% of the total.

So I think that's pretty much all the questions.

[Unverified Participant]

Yeah. Thank you, Milan, Paraag. I think you've addressed those questions you can for the investors. And of course, the company will review all questions submitted today and will publish those responses on the Investor Meet Company platform. Just before redirecting investor to provide you with their feedback, which I know is particularly important to the company, Milan, can I ask for a few closing comments?

[Milan Patel]

Yeah. No problem at all. In terms of the fundamentals of the business, that continues to – that hasn't changed. We continue to see strong, profitable growth that is coming through. We see some of the newer changes that we've made, whether it's in North America, whether we've addressed some of the headwinds from a people perspective. That will continue to pay dividends. In terms of our opportunities, we continue to see strong opportunities within APAC, further into EMEA and also into the North American market as we push forward.

In terms of product innovation, we've done lots of new functionality deployment. We've carried out our customer data platform. We're looking at the analysis. Our customers continue to drive a higher return and investment from the product and research and development that we're doing. And we can continue to see that coming through in the functionality recurring revenues that have been growing in the last six months, but also will be growing into the future.

In terms of strategic partnerships, that continue to go from strength to strength, whether it's in our e-commerce integrations that we have or whether it's in our CRM. We're now looking at newer partnerships within sales and service clouds. Some of the exciting opportunities that we have are with the newer integrations with people like Zendesk as we look forward. And I think what we have today is a business that continues to deliver on cash generation, very profitable, strong growth. And as we look forward, that will continue. Thank you very much.

[Unverified Participant]

Milan, Paraag, thank you very much for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order for the management team can better understand your views and expectations? This'll only take a few moments to complete and I'm sure will be greatly valued by the company. On behalf of the management team of Dotdigital Group plc, we'd like to thank you for attending today's presentation and good afternoon to you all.