Webcentral Group (OTCPK:FNGWF) Q2 2022 Results Conference Call February 20, 2022 9:30 PM ET
Company Participants
Joe Demase – CEO
Glen Dymond – CFO
Unidentified Company Representative
Good afternoon, and welcome to Webcentral’s First Half of Financial Year 2022 Investor Results Webinar. From the company today, we have Joe Demase, the CEO; and CFO, Glen Dymond. I’ll hand it over to Joe shortly to go through the presentation with Glen. [Operator Instructions]
I’ll now hand it over to Joe to get started. Thanks very much.
Joe Demase
Thank you. Welcome, everyone, to I guess, our Webcentral’s first investor presentation that we’ve done as a, I guess, a merged entity since completing that merger around late last year. We think I have our CFO, Glen Dymond. And so I think we just — we’ll get started with the presentation.
Look, it’s certainly been interesting if I talk sort of to the landscape of the last 6 months. We’ve Melbourne base, so we sort of looked the I guess, the conditions of COVID 12 months ago. And then in that first 6 months, first 6 months — the first 6 months of this year has obviously been COVID for both Melbourne — Melbourne and Sydney, which the previous year, we’re probably slow in Melbourne, but the rest of the country was still pretty good. Certainly, in the last half it was both — impacted both Melbourne and Sydney and the regional areas, we weren’t seeing much of an impact.
Then I guess we got to November, and things really start to kick off. We started seeing a number of new orders coming through and a lot more activity. And we really, really saw some positive signs, and that’s continued into January, February this year. Where we’ve had the impact, I guess, is lack of orders, certainly around our hardware and our software. But it’s also — we’re rolling out infrastructure and building a fiber network and just getting into buildings to be able to install infrastructure, things like that.
So still a pretty good result. $48 million is just sort of — we thought it would be around $50 million, so slightly down with our hardware and software, which is always lumpy and is a bit seasonal first half second half anyway. EBITDA relatively strong at 7.1 and consistent margin that we’ve been able to maintain across our business, looking — really focusing on cost synergies when it’s hard to grow revenue during those quite a time, certainly for — in a corporate direct space and then increasing our overall GP during that period.
So if we dig into the detail, cloud revenue was up, domains was strong. Network and voice revenue was strong as we’re rolling out — as I’ve said in the past rolling out to about 80 data centers with our own dark fiber network across all the major capital cities in Australia, connecting up those DCs, and we’ll really start to see that take off. That’s helping — been assisting us with some data center sales which we saw was really strong towards the end of the year. They take anywhere from sort of a month to 3 months to provision some of those — some of the DC revenues. So we really expect that to kick off nearly $100,000 a month of new recurring revenue that will flow through and start in the second half of this year.
Managed services is a little bit linked to our hardware and software sales. So we sell a lot of hardware and software, we have a lot of project work, and that’s done by our 90-odd staff around the country in that field services area. So with our hardware sales that you do lose that profitable managed services or installation project work.
Digital marketing, again, it was heavily impacted over the last 2 years by COVID, a lot of retail outlets. So coffee shops and bars in those places that have been closed and been put on pause. So we’re seeing that start to turn around. But again, there’s a bit of work in there to continue to grow that and turn that around. And we’ve actually put on a new marketing — digital marketing manager who will help with our direct parts of our business, our Webcentral brand and the 5GN brand, but also with the digital business as well.
The hardware and software, as I said, it’s lumpy, it’s down. We’re starting to see that recover in the second half. And then our other income is really, these are a lot of transitional services that we’re doing with a number of acquisitions or sales of different parts of the Webcentral business that we’re undertaken prior to us taking control. And those are usually good margin project work separating our systems from those various businesses.
So there sort of — that’s led to a $40 million, $48 million of revenue, 7.1 of EBITDA before the nonoperating items, and I’ll just get Glen to take you through some of those.
Glen Dymond
Yes, sure. So obviously, with the merger between the entities we had to deal with performance rights and options in 5GN. So unfortunately, they all have to be expensed no matter what the treatment whether they’re canceled or exercise early. We also had vesting of several performance rights and options on the WCG side that also require the full expense to be taken in the period, not over the previous extra year or 2 or more. And then we also had some merger, restructuring and other acquisition costs in the period that have come through. But now, obviously, the P&L is clean and the balance sheet is clean going forward with 1 entity.
Joe Demase
And the depreciation and amortization, some of that’s got in there, our lease liabilities for property, and we’re exiting some of those in the next couple of months. So those liability or that amortization will reduce.
So if we just go through the highlights as we said, strong consistent EBITDA and revenue are pretty good based on everything we’re going through in COVID. During the period, we’ve been able to increase our ARPU for the Webcentral base domains and e-mail and hosting. So that’s been really, really strong. And there’s still quite a lot of activity we can do there for customers since we’ve inherited the business nearly 18 months ago, there’s still customers who are running on cloud environments that they probably aren’t performing the best and upsell opportunity. So we’re going through those and we’ve got some plans and strategies around that.
Again, what’s been really positive is the resign of our 5GN customer base over that — certainly, it’s happened in — probably in the second quarter of the financial year, we’ve been able to get an uplift on some of those contracts around $2 million as well with $12 million to the renewed contracted revenue really underpins that annuity revenue that we have in the business.
And then we’ve really ramped up our digital marketing. We’ve seen some great success in the data center rack space. We’ve been able to combine selling racks for infrastructure. We might combine that with a dark fiber to another data center or to another location. So we’re really starting to see the advantage of bundling products across our business and really leveraging the infrastructure footprint that we have. So that’s quite exciting to sort of see that really come to fruition, and that’s really happened in the data center space, where we’re attributing most of that revenue.
And again, we’re consistently focused on customer retention, certainly for the Webcentral customer base. There was quite a lot of churn we took over in issues with customer support. We’ve been able to fix that, we’ve cleaned up some of our back-end systems, which make it easier for our customers to interact with us and cleaned up our billing processes, which again was adding to this — our systems, our poor systems, ot adding to some of that churn or some of it through billing processes. So we’ve been able to — we’ve been able to clean that up.
Fibre installs for the second half of the year. We’ve been out of this release, which is our governing body. So instead of having webcentral.com.au, you can now buy Webcentral.au if you’ve got the eligible .com.au domain. Our revenue for domains is in the vicinity of — it’s significant. It’s $22 million, $24 million a year.
So we think that with the addition of the .au domain that a lot of organizations will go out and buy the .au domain just so they can maintain their trademark and not have someone set up a website that would take over their domain.
We’re seeing in some of the larger corporate enterprises, I guess, think of law firms and some of your consulting firms that they’re actually buying key staff domain names and pointing them back to their domain to again drive more traffic, but also maintain that IP. So we think that that’s a very significant market that will — we’ll move into. Maybe you want to buy the domain names .au for all the football players of your favorite footy team. We don’t know, but we’ll certainly be promoting that.
So you’re talking about $24 million currently from .com.au. We think that we can get, I guess, our internal targets sort of 50%. We’ve gone out to the market and communicated, we’re hoping to get 30% of those — of that market. So that’s significant revenue and margin uplift that we will get, the .au domains become eligible on the 24th of March, both [Outer] and ourselves are doing plenty of promoting around the .au. And then it’s open slather for anyone to buy any domain .au from the 24th of September.
So it’s going to be quite an interesting 6 months. The domain names are certainly becoming just as important or if not more important than trademarks these days. So it’s a really exciting time for the industry and exciting opportunity for us. We’ve launched a — the second part of this is we launched a cloud port product.
So we spoke about — we’ve run dark fiber around fiber network to 80 data centers across Australia. We’re now connecting a cloud product, which allows you to connect from 1 data center to another data center, we’ve lit up with a product called Ciena, automated provisioning for 25 data centers here in Australia, but we can also give you direct connectivity to LA, Singapore, New Zealand, Tokyo from March, and that’s anywhere from 1 gigabit per second capacity up to 100 gigabit per second capacity.
So — and allows for — a lot of content providers are very interested in that, a lot of ISPs or NBN providers would be interested in that direct connectivity and that capacity. If you’ve got a large office and you’re using Microsoft products as we all do, then you want direct connectivity to Microsoft. Microsoft are in the process, I think they’re building about 100 new data centers across the world to accommodate the addition in — the additional growth in data. So we just see this market exploding, owning the infrastructure allows us to be really competitive. And as I said, we might bundle the infrastructure or network connectivity with a rack or some cloud capacity, various other parts of our infrastructure that we can leverage.
In June this year, we’ll launch our first stage 1 of our NBN product. And again, we’re looking for a modest sort of 10% to 20% take-up of the customer base over the first 18 months, 10,000 users would drive about $12 million of revenue, and we think we can do that at about 20 points of margin purely because we already own the infrastructure. We’ve already got international networks. We’ve already got national networks across Australia.
We’re got our own data centers. And so really, it’s a CapEx play and then the your only real cost is the last mile to NBN to purchase the tail.
We’ve surveyed our customer base, and we’ve got a good indication of the percentage that would move across to service from us and what the price points are and some of the drivers for that. So real advantage of having 230,000 existing small businesses on your registry is we can survey and really plan through when we roll out a product and why we would do that. So the drivers are that our customers are saying that they want it, and we know that it’s a good direct margin, 22 points to the bottom line will be handy.
Over the next little while, we’re exiting some data centers. Again, they’ve been in the pipeline for 12 months and they’re coming out of contract. So there’s some significant savings there. And as everyone has seen, we already had in excess of property leases across Sydney, we’ve been able to get out of a large lease in Sydney. And then now we’re getting rid of a couple of floors in Melbourne and there’ll be some more consolidation later in the year. But that’s going to generate about $200,000 per month of cost savings from April. So that’s quite exciting. And as I mentioned before, Jay Salter has joined the team to really reboot our digital marketing and drive some growth. So he’s been on board since February.
So if I just talk through the revenue trajectory and waterfall. We think that we’ll get — we’ll catch up the hardware sales there by towards the end of the year. And then we’re really seeing our growth coming from .au. Again, we can only recognize revenue from the end of March. So we’ll have April, May and June of revenue for .au, although we’ll get the cash usually, we sell those subscriptions 12 monthly or yearly in advance. So we’ll have a distorted cash flow in the state in a positive way from those registrations of those domains.
NBN, some small sales, we expect in this financial year as we presell, we’ve got infrastructure that will launch in April. We’ll sell that and migrate some existing customers across to our network from third parties. So that will all happen before the end of the financial year.
A real driver for us is hosting. So of our domains, 550,000 domains under management, we only host about 8%. The industry average is about 30%. So there’s a real opportunity through helping clients build websites for themselves, whether we do it for them or they do it themselves through applications that we host. We want to really focus and drive our hosting revenue. As I said, catch up on the hardware sales, we think that, that will be strong in the back half of the year. And then the organic growth comes from some pricing and product changes that we’ve done late last — towards the end of the last half, November, December.
We did some pricing and some product changes and rationalized some products which will then give us a strong uplift as well. So that’s the next 6 months. Then we’ve got some considerable growth again continuing across those same product areas. And that’s when our — we’ll factor in and connect up some of our cloud port services, some of our dark fiber and continue to fill our data centers. So it’s our revenue getting to that sort of exit run rate by June ’23, about $64 million, yet on half year — for the half year.
So then on the EBITDA, as I said, at the top of the range is 7.1 for the 6 months, growing to 11.3. And again, those same areas — in those growth areas when we put a customer on to our fiber network or into our data center onto our cloud solutions because we own and operate the infrastructure, we’re talking about 80 or 90 points of incremental margin that we add by putting those for every dollar, it is a significant margin.
So as we can fill up our infrastructure, it quickly adds to EBITDA, and that’s how we’ve been able to maintain that percentage and the growth in EBITDA throughout the last 4 years, we continue to grow EBITDA strongly and cost-saving initiatives. So when you do acquisitions, there’s always cost savings and opportunities there as well. So we’re confident in the forecast. We’ve got a clear strategy that we’re executing and we’re just working towards that.
I’ll let Glen have over — go on the cash flow.
Glen Dymond
Yes. So on cash, the key factor here is a lot of the legacy items have come out of this year. So we’re now seeing a cleaner cash flow, a lot of the nonrecurring costs to come out. So up until June ’22, we should see cash in line with or a little bit ahead of EBITDA, particularly as we start selling .au and other products that have multiyear. So .au we’re selling up to 5-year renewals. So we collect all the cash and then the revenue is either over the period of service. So that’s a very small amount in this year but really FY ’23 is where a fair chunk of the cash and where the revenue really starts to be recognized.
We also have significant rent savings in addition to the 505 or the Melbourne office. We have some other Sydney offices in June coming out, and we have another office in Melbourne as well plus some DC space as well. So that’s a straight cash benefit that doesn’t really impact our EBITDA because it’s all accounted for as a lease. And we also have some other growth initiatives coming in with cash coming in there.
So — it’s certainly something we’ve been focused on the last year or so trying to clean up the Webcentral business and really get to that clean run rate of cash coming in and getting debtors under control and controlling our supplier payments as well.
Joe Demase
So as I spoke about earlier, the — we’re really excited about .au launch in March. And it’s really an opportunity again, for any Instagram — any people who are Instagram with some of these other I guess, web tool applications where they own the content. I think there’s going to be a real push for people to register a domain and actually manage and promote their own domain and therefore, their own content that they control, and they’re not impacted by a centralized — by centralized provider that can shut you out or kick you off the universe i.e. Trump, when they turned off his Twitter account. This is a real issue that’s starting to creep up. And we think that by owning your own domain, there’s a real opportunity there. Just the split between where we think the margins are — significant margins in the Melbourne IT brand versus Webcentral brand, and that’s just Melbourne IT’s — a different product, better service, and it’s certainly been around for a lot longer.
Then if we talk about the increase in average revenue per customer, you can just see there where we’re bundling in and we’re selling more services. So we’ve probably done about 15% of what we should be doing in the last 6 months. So we’re really ramping that up. And again, that comes with system changes, we’re moving with — we’ve had sales force implemented, and it’s got a lot of strong capabilities around managing customer journey and upselling and promoting additional products. So we’re really starting to leverage that technology that we’ve got built into our systems.
Again, this slide is pretty much covered with the — what we’ve seen in resigns and contracted revenue. I’ll just break it down in a little bit more detail for different people to see across those areas. Improved customer retention, you want to talk on it.
Glen Dymond
Yes. So a key focus from management since we took over is really trying to reduce churn. Obviously, customer acquisition is very expensive. So we’ve really worked on the underlying issues. So from onshoring some of our customer service, improving systems and processes, chasing up nonrenewals and reasons why I’m trying to dig into the issues, a lot of work has occurred over the last year. And we’re now, as you can see, seeing that benefit, particularly in the — you can really say in the annual renewals, but also the monthly products are now all up at that high 90s rates as well.
So there’s more work to come here, but it’s very pleasing to try and stabilize revenue and then have the opportunity to upsell new products, which is the growth initiatives that we’ve flagged for.
Joe Demase
And I guess as a part of the merger, we just want to summarize the infrastructure the 2 businesses own or the combined business owns now. So just to reiterate that, it’s 5 data centers across Australia, 1 in Melbourne, 1 in Brisbane, 2 in Sydney. And then we’ve got a third-party data center we leased capacity in Adelaide. So really in that strong national presence. We’ve got multiple 100-gig links connecting all those sites in all those different states fully redundant. We’ve rolled out over 100 kilometers of fiber connecting 50 data centers. We still got more to do in Adelaide and Sydney. And then later this year, once they open Perth we’ll roll out into about 15 DCs over in Perth that we want to connect up.
So — and when we connect up the data centers, we’re also going through the CBDs of these capital cities. So it does give us a lot of opportunity to sell fibre directly into some of these larger corporates as well. DDOS mitigation really is protecting the data packets that come towards hosting providers. So this is very important from anyone who wants to — who is hosting a website that’s important. One of ours is 1 of the McDonald’s sites. And it’s certainly we see it under attack quite often. So we’ve got equipment systems in place to stop that from happening. And our cloud capacities, it’s — we’re up to actually — it’s about 1.2 petabytes now. So excluding our backup capacity. So we’re rolling out some products to backup your Office 365 as well.
This is more of a highly strategic plan of where we’re going, which you would have seen before and really talks to our revenue aspirations and EBITDA margin exit run rates over the next couple of years, which, obviously, the waterfall graphs have given you a breakdown of exactly where that’s coming from.
Just to reiterate some of our products, so domains, which is domain registration and other portfolio services like SSL certificates and certifications for your website, cloud. So we’ve got e-mail, 365, web hosting, and then we’ve got our own private cloud solution, data centers. So our colocation capacity over 1,000 racks, Bare Metal is where we provide a server for you. We’ve got over 500 servers where people put their own applications on there. And then our 5GN cloud product, which is access to — might be access to AWS or Azure or directly connected to Netflix or whatever data content you need to get to.
Data network. So a national NPS network and international links to, as I said, Singapore allay, New Zealand and Tokyo. And then domestically, we’ve got dark fibre through our post CBDs and to those major data centers. Our managed services, so it’s about 90 field staff across 12 offices around Australia, and they’re on-site doing break fix and management of IT infrastructure for a lot about 2,000 mid-market corporates, and there are some of the applications that are services that we provide.
Our digital marketing team, which is going to really feed off the domain name registration and the building of websites and the hosting of websites provide that SEO and search and content creation and then our various software and hardware vendors.
So we’re essentially the third largest domain provider in Australia. We own and operate all our infrastructure. We’re fully in control of that solution. We’re really, really independent of any third-party providers, which is really, really important, which means we can guarantee the quality of service offering customers. Cash flow.
Glen Dymond
Yes. So pleasingly, strong cash receipts growth of $12.6 million half-on-half, which is great. Our underlying operating cash flow was impacted by some FY ’21 deferred payments. So we had obviously a relief in both the businesses from FY ’21, and that’s all been resolved by the end of December, with obviously everywhere — which is coming out of COVID. We also had all the payroll tax relief from FY ’21, which is all obviously been settled this period.
So overall, underlying cash flow reasonably strong, but we’ll obviously revert back to normal from now. We had $3 million of CapEx, a lot of that was the fibre build, but also some incremental cloud infrastructure investment, which is both the Bare Metal and the other compute that we need to continue to offer the services. And pleasingly, we’re seeing that growth in the DC and cloud area with — in the last few months. And then just the Cirrus investment is 5.3 million for the 18% stake.
And just on the balance sheet. Really, this is now a simplified balance sheet following the merger. So very straightforward, we have now to $23 million of debt with CBA and available debt of 2.3 and additional standby facility of 10.5 should we proceed with any Cirrus acquisition. And so just a very straightforward balance sheet all merged from December.
Over to you, Simon.
Joe Demase
And that’s it. Thank you.
Question-and-Answer Session
A – Unidentified Company Representative
[Operator Instructions] But we’ll get started what’s been submitted already. Given your EBITDA margin is around just 15% and hasn’t shown much historical improvement. How confident are you getting to 20% at the end of this financial year?
Joe Demase
Yes, sure. So well, I guess we’re very confident because of the services, the new services we’re selling at that high incremental margin of 80 or 90 points. So — we’ve — some of those initiatives we’ve already undertaken, and we’re waiting for those to flow through. But yes, we’re strong that we’ll get there. It was — there’s also a number of cost savings as cost savings initiatives that we’ve spoken about as well.
So it’s a combination of new revenue at high margin and some of the pricing and structure –products restructuring that we’ve done and also some of the cost savings that we know is flowing through as well.
Unidentified Company Representative
Great. Thanks. Joe, just in terms of your cash balance forecast around June ’22 and June ’23, can you just clarify what your net debt position will be at those dates cash balance of around 14, around 55, is that net cash? Or does that include some debt?
JoeDemase
Yes, that’s the gross cash position. So our debt position, we’re not forecasting to decrease any further. At this stage, obviously, as we have cash, we will retire some debt as we need to. So that 23 will come down, because we do have about — most of that is our market rate loan. So that’s the gross cash position. We’ll manage our debt — obviously, debt really [Indiscernible] at the moment. But obviously, we’ll manage that going forward and reduce it as we need to.
Unidentified Company Representative
Can you just provide an update on your Cirrus investment stage?
Joe Demase
Yes. Currently, we own 18.5% in Cirrus. We have — last year, we did the cash of the takeover. And then we’ve also — we also tried to have a speak with the Board to maintain — gain some seats on the board as we get better insights. Look, we’ve been talking to management and the Board — and really, there’s no new news there. We’re waiting to see what the results are like once they come out to then sort of, I guess, decide the next steps.
Unidentified Company Representative
Great. Thanks, Joe. Next question. Is there any reason why the underlying cash flow shouldn’t be more than 100% of EBITDA given the upfront and the cash nature of domain name renewals?
Glen Dymond
Absolutely. This half was absolutely impacted by payment deferrals Definitely, the COVID impact on some debtors and I’ll put my end up is we didn’t do a good enough job that we should have at the back end of the year. So absolutely, that is our target to get to that cash conversion close to EBITDA 100%. We think a lot of the — well, definitely all the payment deferral stuff has ceased in January, for example, we collected a much bigger debtor balance than we had before, so it was successful.
So that is our target with the cash coming in and infrastructure is in place. A lot of the cost outs and the residual costs of getting out of leases, et cetera, have all gone. So we should now see that improvement coming in from this half.
Unidentified Company Representative
Thanks, Glen. And just reverting back to Slide 9, again with regards to the gross cash flow. Can you work through how you expect to end up with a $50 million plus gross cash position at the end of FY ’23?
Glen Dymond
Yes. So there’s several million dollars of — or $45 million of rental savings, which come through as cash that don’t come through EBITDA. The receipts for not only domain and hosting and e-mail receipts often a 5-year plan, so we collect all the cash upfront and it winds out as revenue over, say, 5 years. And we also have some forecast debtors collection improvement because as we move more to upfront billing and sort of faster billing, if you like.
So that’s where we sort of get to that position going forward. But it is a forecast position based on a lot of growth initiatives going well and collecting the cash that we think we will collect with the take-up that we’ll expect as well.
Unidentified Company Representative
And assuming the WCG share price was higher, how aggressively do you expect to continue our acquisition plans this year?
Joe Demase
Look, it’s — I guess the — bit of a wait and see with Cirrus obviously because it’s a large acquisition from a, I guess, from a management perspective, there is a number of — there’s a number of small targets that we’re looking at, at the moment. But yes, I mean, as opportunities come up, we — I guess we’ve seen increased activity from brokers coming to us with opportunities and with the market the way it is, we think that, that will continue. So we’ve still got available cash — available debt there and cash and — so we’ll still look to do some of the smaller ones.
Unidentified Company Representative
Thanks, Joe. And at the current share price, do you become a target yourselves? And have you received any approaches from 1 of the larger players?
Joe Demase
I guess here at the current price, based on our multiple, whatever it is, 3 or 4x. Yes, absolutely, you become you become a target, I guess. Have we had any approaches? Look, nothing that’s substantial of anything that I’ve had to take to the Board, but I think there’s interest.
Unidentified Company Representative
All right. That concludes the Q&A segment. Joe and Glen, I might hand it back to you for closing remarks.
Joe Demase
Look, I’d just like to thank everyone for their support. And obviously, we’ve cleaned up the balance sheet and the capital structure of the company. So we think that, that should make it easier for people to get an understanding of our business and how it’s operating. But our focus is on growing revenue, growing EBITDA, the things we control and the share price will look after itself though, obviously, we’re a bit concerned about it as well, but it’s — it’s 1 of those things.
Unidentified Company Representative
Great. Thanks, Joe. Thanks, Glen, and thanks all for joining.
Joe Demase
Thank you.
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