Aconex : FY17 Results teleconference transcript Opens in a new Window

Rachel Cooper: Good morning, this is Rachel Cooper, Head of Investor Relations at Aconex. I would like to welcome you to our FY17 full year financial results teleconference and webcast. With me here are Aconex Chief Executive Officer, Leigh Jasper and Chief Financial Officer Paul Koppelman.

We have released our FY17 results and presentation materials to the market earlier this morning.‌‌

Today Leigh will provide a summary of our business performance, as well as an update on our strategy and outlook for the coming financial year. Paul will provide a snapshot of our financial performance. After that, we will open the floor for your questions.

Before we start, I would like to call your attention to our important notice regarding forward-looking information and other matters related to today's discussion.‌

I would now like to introduce our CEO, Leigh Jasper.‌‌

Leigh Jasper: Thanks Rachel and welcome to all investors on the call. Firstly, I would like to start by touching on the highlights for the financial year. During the year, Aconex further strengthened its global leadership position across ANZ and our international markets of Europe, the Middle East, Asia and the Americas. While we had a softer than expected start to the year, we delivered solid financial results in line with our revised guidance from January. Delivering this strong second half sets us up well for continued growth into next year.

We completed the Conject integration, creating a clear market leader in Europe and we launched our Connected Cost product, significantly increasing the long term addressable market for Aconex. Connected Cost is unique in the market and a big differentiator for the Company, helping us win customers looking to control their project financials. Finally, we continue to invest for long term growth, given our multi-billion-dollar market opportunity and low penetration, investing particularly in product, sales and marketing and in scaling our corporate functions and systems.

We delivered revenue of $161.2 million in FY17 in line with our guidance from January of this year, an increase of 31% year-over-year. Based on constant exchange rates from when we provided guidance, this equates to $163 million and is above the mid-point of the range that we provided to the market. On a constant currency basis, the Company grew 36.4% from FY16 to FY17. We saw a step up in our EBITDA to $15 million, a 10% increase year-over-year. This strong revenue growth has doubled the size of the Company over the last two years and further extended Aconex's global leadership position. The digitisation of the construction industry continues to accelerate and Aconex is in the box seat to realise this significant opportunity.‌‌‌

I'd now like to hand over to our CFO, Paul Koppelman, to run through our financial results. Paul Koppelman: Thank you Leigh.‌‌

The financial results summary shows a high-level summary of the Group's FY17 financial results. A detailed half-on-half analysis is included in the appendix. Focus should be on revenue and EBITDA from core operations. As mentioned by Leigh, Aconex delivered headline revenue and EBITDA results in line with guidance provided to the market on 30 January 2017 and reiterated in May. Revenue for FY17 was $161.2 million, an increase of 31% on the prior corresponding period, or 36% on constant currency. The uplift was driven by 16% growth from the underlying business, particularly international growth and a 20% increase from the Conject acquisition.

Costs of revenue, namely hosting and servicing costs, grew 35%, broadly in line with revenue growth. The Group maintained a strong gross margin of 74%. The slight decline on the 75% achieved in FY16, was due to Conject's mix of business and slightly higher implementation costs to support new customers in the Americas. The Group's contribution margin totalled $60.3 million, up 30%. All regions had positive contributions.

Operating expenses increased 38% because of the ongoing, deliberate investment in product and sales and marketing to support growth. EBITDA from core operations and excluding FX increased 10% or $1.4 million to $15 million, reflecting the Group's growing revenue base. The Company's EBITDA margin reduced slightly due to a higher mix of offshore business which is still early in its investment cycle, and had significant investment for growth during the year and thus contracted 1.7% to 9.3%.

EBIT from core operations in FY17 was $4.5 million, compared to $8.2 million in the year ending 30 June 2016. The reduction is a result of $3.6 million increase in product amortisation. This reflects increased investment in product over the past couple of years. It should be noted that the impact would have been less if we had an amortisation policy of a longer period than the current three years. A full reconciliation of statutory results to NPAT and core operations is included in the appendix at the back of the presentation lodged with the ASX this morning.

On to slide 8. Aconex has established a good history of strong revenue growth over a sustained period. Revenue for FY17 is double that of the $82.4 million achieved in FY15. Taking into consideration adverse currency movements of

$7.1 million, revenue grew 16% year-over-year on an underlying basis. This is lower than the long-term growth rate we achieved and we have previously stated the mid-term outlook is for 20%-plus growth again. Conject contributed $32.8 million to FY17 revenue, slightly lower than expected, due mainly to currency and lower-than-expected UK growth.

On to slide 9. Aconex continues to grow revenue in a disciplined manner, which has seen a pickup in profitability over time. The graph on the left-hand side shows revenue by half over the past five years. In FY17, revenue was stronger in the second half than the first, in line with the underlying trend over the past five years. This trend should continue into FY18, with back ended growth particularly from Connected Cost revenues. As mentioned earlier, EBITDA from core operations increased 10% from $13.6 million in FY16 to $15 million in FY17. The improvement reflects the ongoing growth in the Group's revenue base over the last five years.

The acquisition of Conject further extended Aconex as a truly global player. Aconex continues to grow revenue outside of Australia, reflecting the success of our targeted regional strategies, underpinned by the Company's investment in product, sales, marketing and customer support. The graph on the left-hand side shows revenue derived outside of Australia and New Zealand which was $107.9 million or 67% of total revenue, a 45% increase year-over-year. The lion's share of the uplift can be attributed to the Conject acquisition, which contributed $32.8 million. This year's underlying international revenue grew 20% and going forward, offshore revenue will become a larger percentage of the overall revenue, in line with the significant market opportunity and ongoing investment.

ANZ revenue increased 9% from $48.8 million in FY16 to $53.3 million in FY17 due to new business and growth of existing accounts. The ongoing conversion of customers to enterprise agreements, which now represents more than two-thirds of the region's revenue, is an extremely high recurring revenue base and has almost zero lapse [churn]. Leigh will provide a more detailed breakdown of regional performance later in the presentation.

This slide provides a detailed breakdown of the Group's revenue, contribution margin and EBITDA by region. Aconex invests profits earned in well-penetrated markets, such as Australia and New Zealand, into those that have high growth potential. Margins improve as service delivery and sales productivity improves over time. In FY17, revenue in all regions increased and all regions had positive operating contributions. That is, each region's revenue more than covered their incremental expenses. It should be noted that most sales, marketing and product spend is for future revenue and thus margins are not reflective of the existing revenue base.

EBITDA margins are indicative of market penetration. Our most penetrated market, ANZ, is highly profitable. In FY17, the region's EBITDA margin was 39%. International margins will improve with further penetration. High adoption markets, such as the Middle East at 18% and Europe at 11%, have positive margins reflecting scale achieved in these markets to date. In the high growth markets of Americas and Asia, EBITDA margins are negative, reflecting the significant upfront investment made by the Company to leverage growing adoption, building awareness and supporting future growth in these large markets. Margins in offshore markets will become more positive as operating leverage improves. All regional margins will trend up over time towards those of the ANZ business.

Aconex has a high recurring revenue base and forward visibility, with more than 75% of FY18 revenue contracted or 90% of the revenue as at 30 June 2017. There are three key components that make up the existing portion of our revenue. Firstly, our existing business, which includes both ongoing projects and enterprise agreements. In FY17 close to 50% of our overall revenue was derived from enterprise agreements.

Our revenue visibility increases as our enterprise revenue increases. This portion of our revenue has negligible churn and can essentially be viewed as an annuity stream. Existing business makes up just over 70% of future revenue. In making up the remainder of the 75% of existing revenue are upcoming renewals of enterprise agreements, the Conject evergreen accounts and base revenue from our user-based contracts. The remaining 25% is new business, made up of new subscription contracts including the sale of new products such as Connected Cost or packages to new or existing customers and a small portion of professional services, particularly in the Americas, as well as the projected ramp up of user-based contracts.

FY17 was a year of significant investment for Aconex. It should be noted a significant proportion of this investment was for future sales. Expenses, excluding D&A, in FY17 grew $25.7 million or 33%, to $104.5 million, up from $78.8 million in FY16. The addition of Conject and Connected Cost products, together with continued enhancements to the core product, contributed to the 60% increase in engineering and product costs expensed through the P&L which rose from

$12.7 million in FY16, to $20.3 million in the financial year ended 30 June 2017.

Sales and marketing grew 29% in line with revenue growth, driven by increased commissions and additional expenditure in high growth markets of Asia and the Americas, to leverage growing adoption and building awareness. G&A grew 24% to $25 million, primarily driven by additional head office and operational staff, supporting the business growth and investment in systems and an increase in share option expenses of $0.9 million to $2.4 million during the year. The G&A cost as a percentage of revenue will reduce over time.

During the year, we deliberately increased expenditure on engineering and product development to drive future growth and maintain and extend our competitive advantage. Aconex has invested profits and free cash into product development at an accelerated rate over the past two years. In FY17, total cash expenses, including capitalised software development costs, increased 63% to $35.7 million, or 22.1% of revenue, following an uplift of 85% from FY16. We expect the level of cash investment in R&D to return within the 15% to 20% of revenue in the future.

The uplift in FY17 was driven by an investment in new products, including Connected Cost and packages, as well as the ongoing enhancements including design management and mail routing. Just over 40% of R&D spend has been capitalised in each of the last two years and amortised over a three-year period. This is conservative relative to peers who tend to capitalise more and amortise over longer periods of time.

Total cash balance at 30 June 2017 was $33.9 million, including $2.9 million of restricted cash. This is an $18.6 million reduction on the prior corresponding period's cash balance of $52.5 million. Several investment activities impacted the results, including the one-off costs relating to the acquisition, restructure and integration of the Conject business, totalling $7.9 million and net cash outlays of $1.4 million relating to business acquisition. A 52% increase in product investment from $9.2 million to $15.4 million year-over-year also occurred.

$7.2 million of capex related to business growth. This included new office fitouts, IT hardware and other improvements to support the growth of the business. This is at a high point of the investment cycle and will come down. Next financial year we expect cash flows to be positive because of higher EBITDA, lower one-time cash outlays and an increase in deferred revenue.

A breakdown of the Company's invoicing profile over the past five years shows an unwind of the upfront cash received which was a funding source prior to listing. The current operating cash flow result includes the impact of a reduced level of upfront invoicing, which fell from 24% in FY16 to 21% in FY17. This should stabilise just below 20%, therefore as the business grows in future, the absolute dollars of deferred revenue will increase again, assisting working capital management.

Gross cash receipts from customers were $168 million, up 35% on the prior corresponding period's number of $124.5 million, broadly in line with revenue growth. As a percentage of revenue, gross cash receipts were 104%. Cash collections have been higher than revenue and are forecast to remain that way.

The Group's net asset position was $102.6 million at 30 June 2017. As mentioned, cash fell $18.6 million in FY17, largely driven by the investment in R&D and one-time investments. The Group's intangible asset balance of $140.5 million includes $119 million of goodwill and intangible assets acquired as a result of the Conject acquisition. The remaining $21 million relates to capitalised software development costs incurred to develop the Aconex and Conject platforms. Deferred revenue has fallen from $89.7 million to $83 million. Deferred revenue should increase in the future, assisting cash management as I said earlier. We only have $1 million of debt, which came from the Conject acquisition.

I'll now hand over to Leigh who will provide more detail on regional performance, strategy and our outlook for the coming year.

Leigh Jasper: Thanks Paul. Before I go around the grounds in the different regions, I'd like to highlight the tremendous growth we have seen in our global network. Aconex is proud to serve many of the leading companies in the global construction market. Working with these leaders ensures Aconex is developing the world's best digital project delivery platform, serving the highest profile and most complex projects around the world. Our customers include Multiplex, CIMIC, John Holland and Lend Lease here in Australia; Chiyoda and Sumitomo in Japan; Bechtel, CH2M Hill and Fluor in the US; Dubai and the Government of Dubai; Vinci in France and Siemens in Germany, to name a few.

Aconex serves over 30,000 projects worth well over $1 trillion across 70 countries. We have 5.3 million project users, managing 2.4 billion documents, a data set several orders of magnitude than any other provider in the world. We have delivered more successful projects, controlling more data than any other platform. We will continue to invest in these customer relationships through our product and customer service team, helping them manage their project data to deliver insights to improve their performance.

Starting with the Australia and New Zealand region, our customers continue to standardise on the Aconex platform, with ongoing conversion of project customers to enterprise agreements. We signed 36 new enterprise agreements in FY17, including many first-time customers. 68% of revenue and growing is now in enterprise agreements and we had a 100% renewal rate. We are winning customers on our Connected Cost product and starting to roll out the Project Claims