Edited Transcript of RHP.AX earnings conference call or presentation 24-Aug-20 11:00pm GMT

Cheltenham Victoria Aug 26, 2020 (Thomson StreetEvents) — Edited Transcript of Rhipe Ltd earnings conference

Cheltenham Victoria Aug 26, 2020 (Thomson StreetEvents) — Edited Transcript of Rhipe Ltd earnings conference call or presentation Monday, August 24, 2020 at 11:00:00pm GMT

Thank you for standing by, and welcome to the rhipe Full Year 2020 Investor Briefing Conference Call. (Operator Instructions)

I would now like to hand over the conference to Mr. Dominic O’Hanlon, Chief Executive Officer and Mark McLellan, Chief Financial Officer. Thanks, Dominic.

Thank you, Carl. And Good morning, everybody. We appreciate you taking the time to attend our FY ’20 results presentation and we’re pleased to share with you the results for the full year. We’re going to talk you through the financial highlights for the business, provide you with an operations update. I’ll then hand to Mark McLellan who’ll take you through our financial results. And then we’ll give you a wrap on our outlook for the year and what we expect to see in the year ahead, and then we’ll move to questions. (Operator Instructions)

We’re pleased to announce results that we’re very proud of for this year. Gross sales grew 29% to $325 million. Our net revenue grew 15% to nearly $56 million, and our operating profit, excluding Japan, at $15 million or $13.8 million including Japan. Importantly, our Licensing business, the core Licensing business actually grew operating profit at 36% for the year. And our investments in our Solutions business to build the business of the future and diversify our revenue streams was the drag on that growth in operating profit. So 36% growth in our Licensing operating profit and 17% growth in operating profit, at the group level.

Reported EBITDA for the year at $11.6 million. And many of you will know, we did a capital raise during the year, and that’s put us in a position where our cash position has grown $35 million pcp to $60.9 million at the end of the year. So we’re in a very strong position going into FY ’21.

In terms of our operations update, we have 3 key parts to our business. There is the Cloud Licensing business, which I talked about before, with a 36% year-over-year growth in operating profit. That business is now generating $42.4 million in net revenue. Net revenue being the revenue that we collect after we paid vendors like Microsoft. We then have our cloud services and support business, which is a newer business that’s been growing over the last couple of years. And that’s now a $14.6 million contribution to net revenue. It is an area of investment for us, and it’s an area that’s growing very strongly. And then Cloud Operations, which is our intellectual property. It’s our PRISM platform, which we’ll talk about a little bit today. But it’s also the other things that we’re doing that make us a differentiated player as a born in the cloud software distributor.

Our business continues to grow. We now have 400 full-time employees spread throughout the region. The biggest changes in this year is that our manila office is now our largest office with nearly 200 people. And our Tokyo office, which is a joint venture, again, I’ll talk about that shortly in Japan, had 6 FTEs at the end of the financial year.

For those of you who have not been following the rhipe story for some time, we are a born in the cloud software distributor with no warehousing, no forklifts, no trucks, very capital-light business, providing a digital platform to distribute software licenses on behalf of multinational vendors like Microsoft and VMware and others.

Our business model is focused on a Pay-As-You-Go monthly consumption. And our business is also via a channel of resellers. We now have over 3,000 resellers throughout the region. On average, we’re adding 1 every day or so. We do provide value-added resellers with services, including 24/7 Support-as-a-Service, Marketing-as-a-Service, Consulting- and Implementation-as-a-Service. And what you’ll be seeing from us as our business grows further is more investment in these areas because we think it’s a really strong differentiator for our business that demonstrates to our vendors like Microsoft and to our resellers the value that we’re providing in the ecosystem that they live in.

Our strategy has 4 prongs of growth. The first one is geographical reach. We have been expanding over years to now being Microsoft’s largest cloud distributor in the APAC region in all of the offices I just shared with you. And that geographical focus in APAC will continue, and we have invested this year in Japan, in a joint venture, and you should expect to see us continue to invest in the APAC region as the leader in that market.

The second pillar for growth for us is new vendor products, new vendor programs. We are not a company that’s going to invest in selling hardware from a warehouse. It’s not our business model. But we’re a multinational vendor or even a local vendor has a product that we believe we can add to our PRISM platform and distribute on a subscription basis and clip the ticket on that and add more value to our resellers than those vendors are the sorts of things that we’d like to add to our offering.

The third pillar of growth for us is our value-added services, and I’ve mentioned this already, our Consulting- and our Support-as-a-Service. These things demonstrate to Microsoft and to other vendors, why it is that they need rhipe, but they also help to differentiate us when we’re dealing with resellers about the things that we can do to empower and enable their business.

And then the fourth area for us, which has been a fairly significant step-up for us in the last 4 or 5 years has been building out our intellectual property. We’ve invested heavily in our platform for recurring subscription management called PRISM. It is the leading platform for Microsoft CSP, which is cloud solutions provider in the APAC region. And then in the last 12 months, we also acquired a company called SmartEncrypt, which I’m going to talk to shortly, but building out our intellectual property is a key pillar for growth for us as we move forward as a business.

We thought like many companies, we should take you through the impact of COVID-19 on our business. And it is a case of positives and negatives in our business. Importantly, cloud technology has seen significant demand from a number of end-user clients and IT resellers in a way that we’ve not seen in the past. And this is largely because companies are now working from home a lot more than they used to, and people need to collaborate and work together in an online environment rather than sitting together in an existing presence. The opposing force to that, of course, though, is that some end user clients and resellers have got their businesses closed, and they don’t work from home. They might be a restaurant or they may be a travel agent or they may be an airline. But while we see growth in some parts of the industry, we also see the decline, for now at least, in other parts of the industry.

In markets like Japan, where cloud has been slow to move and where we’ve taken a step of investing ahead of the curve, we’re seeing the conversations change much quicker than we expected, and we’re seeing that at the end of the financial year, we had more partners than we’d forecast. We’re seeing that, that is a really good opportunity for us. And that conversation is becoming much more mainstream.

Another positive for us, that is also a negative, is that Microsoft announced, as a result of COVID, that net new SMB clients could sign up for brand-new Office 365 seats free of charge for a period of 6 months, up until about October of this year. rhipe has added approximately 100,000 free seats under this program. And that impact on us in Q4 was a slowdown in our billable seats. So normally, we bill 16,000, 17,000, 18,000 seats a month, something like that. In Q4, we only billed approximately 10,000 seats because of the free seats were being added. The upside of that, of course, is when those free seats come for renewal or conversion, if we can convert a reasonable percentage of them, it will be a big step-up again in the number of seats that we have in our business.

Another positive for us is that we control our costs very well. Of course, with very low travel, very low marketing realistically, no big events, reduction in — not a reduction majorly, but a slowdown in headcount costs, lower investment in Japan than we originally anticipated. So you’ll see our OpEx didn’t grow as it would have if COVID didn’t exist.

Perhaps the biggest negatives in our business where we saw demand from IT resellers for extended payment terms. We did have a lot more effort going into accounts receivable, and that’s been fine, and the cash flow is looking really well. But we have been fairly careful about this and taken a $1.1 million provision for doubtful debt extension into FY ’21, which obviously has an impact on that $13.8 million operating profit. If it wasn’t for that, it would have been higher. But we think it’s important that we do that, given the uncertainty that lies ahead.

The second major impact on our business was in our rhipe Dynamics 365 practice. And this is a practice that’s implementing ERP software for companies. Many of those projects did go on hold. In the early stages of COVID, clients were telling us they were going to go ahead anyway, be in reality as time moved on, people put their projects on hold. We still have a very good strong pipeline for that coming into FY ’21, but the result of it was that, that business, which we acquired didn’t make a turn out. And so we wrote back the earn-out and offset that with a reduction in goodwill in our balance sheet. So it’s a net-net, no real change, but the business did underperform and didn’t make any money this year.

Again, one of the potential negatives is that a slowdown in travel and marketing and then challenging economic conditions may make it more difficult for us in FY ’21 to continue growth, but we’re not seeing the signs of that at this point in time. It’s an unknown.

Just briefly talking about our Licensing growth. You can see from this slide that our Licensing growth continues with a $69 million growth in sales year-over-year, another 28% growth a year. And on the right-hand side, our Office 365 billable seat count grew from 450,000 to 630,000, which is a 40% growth year-over-year, and that’s excluding the free seats that we added for Office 365 via the Microsoft promotion program. So a very strong year in terms of sales growth for us.

If we look at the annualized recurring revenue stream that comes from Microsoft Office 365 and Microsoft Azure, you’ll see similar trends. Importantly, I’d like to point out that on the left-hand side of this graph, where you see the growth of 56% in Office 365 sales, if you back sold the average dollars per seat, you’ll see that the revenue or the sales per seat has grown from approximately $11 to $12 per seat over the year. And that’s a reflection of our strategy to start moving customers up the stack in terms of the SKUs they’re adopting. We’re still at the early stages of that, we believe, but it’s a good trend to see that the sales revenue is growing per seat rather than going in other way, which is what we always did expect.

And on the right-hand side, Microsoft annual recurring revenue for Azure is continuing to grow at very strong rates. On a percentage basis, not as strong perhaps as the previous year, but then the numbers are a lot larger. So that explains the reason why.

Moving along to our recent investments and our recent acquisitions. Those of you who’ve been following the story for some time will know that we did enter into a joint venture with JBS during the year, very large Tokyo-based IT consulting firm. One of the Microsoft’s leading partners in Japan with 2,200 employees, focused specifically on Microsoft technology. There are others as well, but very, very strong in Microsoft. We hold an 80% share of that JV with JBS holding the remaining 20%. Due to COVID-19, we didn’t expand perhaps as fast as we would have in that market. But as at June 30, 2020, we had 6 full-time employees. We’d also signed up 32 partners when we’d originally set a target of 10 for the year. And 6 of those were transacting at the end of June, and that’s grown again by another couple since at that point in time.

On the right-hand side, SmartEncrypt an acquisition of network to share, a company that specializes in encryption technology. Our plan with this business, it was a very small company, but with some really exciting technology. And our plan is to bundle that technology with a unique rhipe-only Office 365 plus SmartEncrypt offer to our resellers. The technology will allow SMB customers to encrypt data in a very simple and easy-to-use manner, which will allow us to drive the dollars per SKU in that stack, higher than we would otherwise achieve.

We’ve launched that program in beta in — sorry, we launched it in our own organization, beta has commenced where we’ve got a number of partners signed up, and by Q3 of this financial year, we expect to go live with a mass rollout of that product to our customer base.

I’m now going to hand to our CFO and COO, Mark McLellan, who’s going to take us through our financial results for the year. I will then come back and talk to the outlook at the end of the presentation.

Thank you, Mark.

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Mark McLellan, rhipe Limited – CFO & COO [3]

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Thanks, Dominic. I’m going to dive into our financials in a bit more detail over the next 4 or 5 slides. Internally, I’ve been describing the results. FY ’20 is being resilient in the face of weak economic conditions driven by the pandemic. So overall, I think it — they are a good set of results.

Looking on Slide 14 in the gross sales. Gross sales grew by 28% year-on-year, similar to what it was last year. But in dollar terms grew by almost $73 million versus $56 million last year. A similar story from last year in terms of the source of that growth. It’s really driven by the Microsoft public cloud programs, so Office 365 and Azure, which grew by almost 70% year-on-year. Microsoft is now 75% of our total sales. Within that Microsoft CSP is equivalent SPLA, so they’re at the same size. In terms of Microsoft SPLA, our legacy product, the private cloud program, that grew 8% year-on-year, similar to what it was in FY ’19.

In terms of non-Microsoft sales, they grew by 20% year-on-year. Again, similar to last year’s 19% and now equates to about 25% of our overall sales.

Looking at Solutions. Solutions grew by 68%, boosted by the expansion in our support offering in Manila, in the Philippines and also the addition of our Dynamics business towards the end of FY ’19.

Looking at the group revenue. The group revenue for the year increased by $7.4 million or 15%. The growth came 50% from Licensing and 50% from Solutions. In the Licensing area, it grew by 10%, off the back of continued growth in public cloud. The revenue growth was slower than the sales growth, really driven by our Licensing margin, which came down from 15.9% in FY ’19 to 13.6% in FY ’20. That decrease in the licensing margin was driven by lower incentives, and also product mix, geographical mix and competition.

In the Solutions business, the revenue grew by $3.6 million or almost 40%, really, again, driven by the expansion in our support offering and our investment in the Microsoft Dynamics business.

Going on to Slide 16 around our OpEx base. Our OpEx grew year-on-year by $5.6 million or 17%. Included in that is the increase — or the investment in Japan of $1.3 million. So excluding that, it grew by $4.3 million or 13%. As Dominic also called out, we increased our provision for bad debt by $1.1 million in the year. So if we back that one out, the actual net increase in OpEx was $3.2 million or just under 10%.

Looking at the Licensing business. It is broadly flat from an OpEx perspective with increased employment costs and bad debts, offset by cost reductions in marketing and travel costs, really driven by the COVID-19 pandemic.

In terms of Solutions cost base, that has increased significantly year-on-year as we continue to invest in that. We’re investing in our Microsoft Dynamics business, our SmartEncrypt business that we bought at the beginning of FY ’20, and our Support business, we’ve added more headcount during FY ’20.

Now looking at operating profit for the year. As I said, what this shows is a resilient business. Given the challenging economic conditions, our operating profit grew by 17% or $2.2 million. If you look at the slide here, you can see all of that growth has been driven by our Licensing business, which has come from $9.1 million to $12.4 million, and that’s up $3.3 million or 36% year-on-year.

Our Solutions business has gone from $3.8 million to $2.6 million as we continue to invest in that business, in the Solutions business, in the Support business and SmartEncrypt and also the Dynamics business.

Slide 18 shows you the reported EBITDA for the business. Again, that’s gone up by 16% or $1.6 million. So similar growth rate shown in our operating profit. On the right-hand side shows you the adjustments that take you from operating profit to EBITDA. Taking these individually, if you look at FX gain or losses for this year with a loss of $100,000 versus a gain last year of $0.3 million, so that’s a swing of $400,000. That’s really driven by the strength in the U.S. dollar in FY ’20.

In terms of transaction restructuring costs, typically here about $0.5 million every year. We had $1.1 million in FY ’20. So there’s about $0.5 million of restructuring costs, driven by a — an internal reorganization that we did at the end of FY ’20, which aimed at efficiencies and resulted in a number of employees being made redundant.

The next item is around impact of AASB 16 of $2 million. That’s around property costs, which no longer are in operating costs but are in amortization charges. I would say, in terms of operating profit and operating expenses in the previous slides, we have retained those property costs in OpEx and operating profit in order to show a like-for-like basis.

The next item is around DBITS, which Dominic referred to earlier. As a result of the underperformance in that business, we are not paying the earn-outs of $3.5 million in relation to that acquisition. So we’ve written that back. And at the same time, we’ve impaired goodwill by a similar amount of $3.4 million, so a net $0.1 million to our P&L FY ’20.

Final item is a share-based payments expense of $3.1 million, up from $2.6 million in the prior year, really driven by our increase in the share price year-on-year.

Slide 19 shows the cash for the business. Despite the COVID challenges, the operating cash flow for the business is $13.7 million in FY ’20, again, similar to our operating profit. In terms of where we spent that operating cash flow, we invested almost double in fixed asset additions of $1.4 million. And that’s really driven by the fact that we’ve moved to a new office in the Philippines, where we have our support activities to really plan for future growth in Manila.

We’ve also invested in our intangibles in PRISM and in SmartEncrypt over the year. And we’ve also spent $2 million on the acquisition of SmartEncrypt in August 2019. And in terms of the financing activities, we’ve raised $32.5 million on capital raise in April. And the other thing we’ve paid is we’ve paid dividends of $2.8 million during the financial year. Ignoring the sort of capital raise, net-net, our cash is up $2.9 million on the year, which given the challenges and the request for extended terms, credits (inaudible) from many of our partners, that’s a positive result for the company.

Slide 20 talks about net profit after tax and EPS. The net profit after tax, in yellow, you can see the historical numbers is — last year, we had $6.2 million net profit after tax. Our reported net profit after tax for this year is $5 million. So it’s down. And what I’ve sought to do is just to identify 2 of the large adjustments to bring you back to what is more an underlying or adjusted net profit after tax. So the biggest one is Japan. So there’s a tax effect of $1.1 million of costs and then the tax-affected provision for bad debt. So the underlying or adjusted net profit after tax is $6.9 million versus from $6.2 million in prior year. So pretty close to being a 10% increase year-on-year.

Similar story with EPS. Our reported EPS last year was $0.0453, the reported EPS for FY ’20 is $0.0349. But again, if you adjust for some of the large items that we’ve mentioned previously, the real underlying number or adjust the number is $0.0493. Again, growth of around 10%.

We’re also announcing today that we are making a dividend of $0.02, fully franked dividend of $0.02 per share that will be paid towards the end of September.

And with that, I will hand back over to Dominic to talk about our outlook.

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [4]

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Thanks, Mark. This is probably the area that people are most excited about, I’m sure. But as with many companies, there’s some uncertainty in the future given where we are in the world today. So I think rather than saying we have a target of a certain dollar range for next year, we thought we’d give you the thematic of what we’re seeing in our business and also how we’re targeting our executives and our staff towards what we expect them to achieve during the year. Revenue, we expect to continue growing.

We’ve talked about the negatives and the positives of COVID-19. But on the whole, the business is resilient. We’re seeing growth in revenue continue, and we expect to see that continue throughout the rest of this financial year based upon what we see today and based upon what we know today. We also know that we’re planning to continue our investments in licensing sales and solutions. We’re very hopeful, of course, that the Dynamics business turns around and that the pipeline we have for that business shows solid growth in FY ’21, but it is an unknown, and we are continuing to invest in our Solutions business. As per our strategy, it’s very important for us to diversify our revenue streams, but also to make sure that we’re showing value to our vendors and to our partners so that they remain loyal and sticky with us.

From a cost point of view, we’re going to continue to carefully manage our costs during the COVID crisis. We’ll just do what we’re doing now. We’re being very diligent in making sure that we’re not spending money unless we have to. As Mark pointed out, we did do a restructure at the end of the year. And that was about driving efficiencies in our business and looking for ways we could improve the way that we’re generating as much profit as we can for our shareholders, but also without impairing the growth potential in the business. So there is a balance there. And we think we’ve been doing a pretty good job and we continue to think that we will do that in FY ’21.

And as it relates to operating profit, what we’re saying here is that we’re targeting, which means my [STI] and Mark’s STI and the rest of our executive team are all being targeted on continued growth in profit. It’s not a year where we expect to see profit go backwards unless something happens that we can’t currently see. So we think that if we can continue to grow our revenue, continue to make investments, manage our costs carefully, we should see growth in operating profit in FY ’21 and beyond. And if we get to our AGM or to our half year results or to a point in time where we think we have more clarity around what that means from a dollar point of view, we will absolutely share it with the market at that point in time.

I’m now going to call for questions. (Operator Instructions) If you would like to ask a question at this point in time. Please feel free to do so.

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Questions and Answers

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [1]

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Our first question has just come through. Thank you. And the question is, how should we think about Licensing margins going forward?

I think I’ll answer that by saying, we believe that we’re being as transparent as we can with what we see in our business. The Licensing margin is — it is complicated in the sense that it does depend upon the SKUs that people are consuming, the vendors that they’re consuming, the regions they’re consuming them in. Our largest resellers do have more bargaining power than smaller ones, and that’s just part of our business. We have seen the some incentives come off during FY ’20. We don’t expect to see that happen again in the same way in FY ’21. So we think that would be a stable sort of margin for FY ’21. That’s actually in the Microsoft CSP business. So we expect that to be relatively stable. We do also have global incentives, which are tied to stretch targets. It’s too early in the year for us to know how we’re feeling about those ones. And I think given the COVID pandemic, it’s quite possible that during the year, those targets move around a little bit. We’ll just have to wait and see. So in answer to your question, it’s very hard to tell. We’re not seeing any major future reduction in margin, but we just — we don’t really know.

The next question is, what are you targeting on the acquisitions front? Also what you’d expect in regards to licensing into FY ’21 incentives?

I think I’ve talked to the incentives as well as I can. But the question about the acquisitions front is an interesting one. We have been working on a number of target acquisitions in our business. We’ve been very active on it. And it’s quite interesting that the companies that we thought potentially we may be able to buy perhaps a bit cheaper than we could have in the past, some of those businesses are actually doing better through the COVID pandemic and their business is growing. So they’re actually going the other way, saying we want more money than we thought. And we’ll be continuing to look at that. We do expect to be targeting acquisitions during the year. I’d be very disappointed if we don’t close out a couple during the year at least. So we can’t really share much more than that other than the sorts of companies we’re looking at are companies that provide either licensing from vendors we don’t have or value-added services that we can’t currently provide. It could be something around Microsoft Azure, for example, or it could be something to do with another major vendor.

There is a question also in relation to whether those acquisitions may have products with IP that can be sold to reseller base?

The answer is yes, absolutely. We have to do fairly significant diligence on such products. And we do go after a reseller base saying, are you interested in this? And would you buy it? But that’s exactly what we did do with SmartEncrypt. What we don’t believe we’re in a position to do right now is to go out and buy another business or another bunch of businesses that aren’t making money, in the hope that one day we can sell their IP. We have to balance very carefully the profit that we expect to generate for our shareholders with the cash flow in the company, and I think it would have to be a pretty compelling story for us to look at another SmartEncrypt until we’ve proven our ability to deliver against that value proposition.

The next question, is there a strategy to move away from Microsoft reliance as a major customer in case client elects to terminate contract?

There’s 2 parts to this question. The first part of it is, is there a strategy to move away from Microsoft reliance? The answer is we now have about 75% of our revenue coming from Microsoft, and there is a very clear strategy to diversify our business so that we have other sources of revenue. The reality, however, is that Microsoft is booming. And as one of Microsoft’s major partners, that part of our business is booming. And it’s very difficult for us to find other sources of license revenue that would change the mix. Unless we make either an acquisition or b, we have significant organic investment. And I think that the reality is we’re looking at acquisitions to help us with that. And also services. So for example, we have a lot of our revenue coming from Microsoft, but it’s not just from 1 team or 1 executive at Microsoft. We have people that are doing 24/7 support. They’re reporting to a completely different part of the Microsoft Corporation than the licensing part. So diversification within Microsoft, diversification outside of Microsoft, they’re both part of our strategy, and they go to the strategy slide I shared earlier.

In relation to client elects to terminating contract, that’s not something that’s high on our radar. Microsoft is very, very sticky, very, very well entrenched. We’re not seeing people moving away from Microsoft, certainly haven’t for a number of years.

Next question is, what are your sale expectations for the SmartEncrypt product? What is the preliminary feedback from your reseller partners about the product?

Good question. We’re actually in pilot at the moment internally. We’ve got, I think, about 100 staff internally on the product. The feedback has been — the preliminary feedback has been very good. We did survey a number of our resellers before we bought the business about the technology. We actually had an independent security company from the U.S. review the product with us. The feedback has been very positive. In terms of the dollars and when, that’s an unknown for us, but we’ll launch it in Q3, and then we’ll report to the market once we’ve launched how it’s traveling.

Okay. The next one is about growth in resellers. And what I can say on that is some sense of how many resellers are onboarded. We’re adding resellers all the time. The — I think the last slide, we sort of — we don’t really report. It’s now 3,126 or anything like that. We just take 3,000-plus type resellers. We’re seeing very little churn, and we’re seeing on-boarding of resellers all the time. I think that during COVID, we probably see a bit more churn than we’ve seen in the past, and that’s to be expected because we’ve got a number of resellers that are very small organizations, potentially in Thailand or Malaysia, whose businesses have actually stopped. But post COVID, we would expect that reseller base to continue to grow, and we are seeing it growing at the moment. We’ve already been asked about licensing margin, and we’ve answered that one.

At one point in time or how much lead time is required for resellers to have a conversation with their clients to convert the 100,000 Office 365 seats? So there’s questions about when will the free seats convert? And the answer is they were on a 6-month limited time frame. And if they convert or when they convert, it will be on a fixed date, which is coming in October, I believe it is. And that date will be a conversation that’s starting now. It’s ongoing with resellers. Whether they convert or not will depend on whether their businesses will survive, I think. And if their businesses will survive or they’re surviving through the pandemic, I would expect them to convert. And those who are just taking free seats for now because they can’t afford to pay for them and they still won’t be able to afford to pay for them later, they probably won’t convert.

More questions coming in. Are there existing dynamics projects still running? And was there a drag in earnings caused by carrying unutilized Dynamics personnel? Question one, are there existing Dynamics projects still running? Yes. We’ve actually signed a few projects recently in our channel. And we do have projects still running. But some of the projects we were expecting to close in terms of signing a contract and commencing did not commence or they’ve been delayed. Two, was there a drag in earnings caused by this? Yes, there was. When we bought the Dynamics business, we were expecting it to make a profit of about $1 million for the year, and it made a very small loss, I believe.

Next question, Microsoft Free seats. Is this ended now? I think I’ve already answered this one, do we…

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Mark McLellan, rhipe Limited – CFO & COO [2]

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The question around Microsoft seats, are you seeing a return to your sort of normal run rate of 16,000 seats per month? What we’d say in the last couple of months of June and July, yes, it’s returned to 16,000, a slight above that. So it’s reverting back to where it was pre COVID. We did see a drop-off in the number of seats when Microsoft issued its free seat offer. But we’re now seeing that return back to normal levels.

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [3]

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Let me go to the next one, too, Mark. Operating cash flows (inaudible) stronger in the second half?

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Mark McLellan, rhipe Limited – CFO & COO [4]

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Yes. I think what I would say about that is we — is really around our cash collections from our customers, our partners. And what we did was we normally sort of look after our accounts receivable function, normally 4 or 5 people in there. We triple that and more. So we got more people involved in talking to partners, seeing the impact of COVID on their businesses and helping them manage their business, looking at their customer base. And for some companies, in that customer base, they weren’t going to come back online, so we’re terminating them. So we’re helping to manage it. And as a result of that our cash flows were very strong in the second half. So that allowed us to have stronger cash flows in the second half.

There is another question around the Japan investment, the [$1.1 million] investment backed out in PAT. Well, there’s a question about whether the investment in Japan is an ordinary course of business? Well, I suppose that’s a subjective decision. The point of doing that was to show we didn’t have a Japan investment last year, and we had 1 in this year. So what I’m trying to do is to show the impact of that Japan investment in FY ’20 to show you what the underlying like-for-like trend…

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [5]

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But the reported impact does include Japan.

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Mark McLellan, rhipe Limited – CFO & COO [6]

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Yes. Correct.

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [7]

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Next question is, can you give us an update on SmartEncrypt go-to-market strategy?

I think we’ve talked to this. It will be by our channel. The question is, is it going to be by channel, and we expect it in the next month? I think we’ve announced Q3 of 2021 for that.

Do you want to enter into an entirely new geographical region or happy to stay within APAC for now?

I think that the focus of our business is APAC. There are other markets outside of APAC that could be interesting to us at some point in the future. But in reality, when you enter into a new market like that, you enter into a new competitive conversation with completely different competitors than what we’ve got in Australia. And U.S., for example, is very saturated. So it’d have to be a pretty compelling story for us to expand outside of the APAC region. Having said that, you never know, some of the new vendor comes along or SmartEncrypt, for example, could be a product that we take outside of the APAC region. It will depend upon the business opportunity that presents itself.

Could you please provide us a rough idea on the planned investment relating to Japan in FY ’21? What would you be happy with for the business that looks like at the end of the year, transacting partners or hires, et cetera?

The answer of that is it really depends on COVID, and it depends on COVID in Japan. If we see people continuing to work from home, if we see the sort of behaviors that we’ve seen over the last few months in Tokyo, we’ll be very cautious about ramping up headcount in Japan in FY ’21. If we, however, see more and more traction with our marketing, if we see customers saying, look, we really want to sign up, if we see more transactions coming through, we’ll look at that at the time.

So the question about how many transacting partners or hires at the end of the year, honestly don’t know that yet. We have got a plan in place internally, but it’s not a plan that I can sort of share with shareholders because it’s very fluid. It will move around depending upon what we see from a COVID point of view.

I did have another question on Japan here, which says it seems to be tracking ahead of plan despite lowering investment in the region. Is there any reason you can’t accelerate there?

The answer to that question is the first target I gave to the team was to sign partners, and I asked them to sign 10 by the end of the year, and we’ve obviously done a lot better than that. I didn’t expect any to be transacting, and they were 6 transacting at the end of the year. I think we’ve now got 8 transacting sort of 6 weeks later. But the transactions are very small. We’re not talking — I’ve always been very cautious about this with the investors saying long term, great opportunity, short term it’s going to be difficult. And my view is if we see material traction in terms of revenue or dollars hitting our P&L, we absolutely will step up investment. But if we’re just seeing numbers of partners coming on board that aren’t really transacting yet, then will be a bit more careful.

There’s a question here about bad debt provision.

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Mark McLellan, rhipe Limited – CFO & COO [8]

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I’ll take that. So I think the question about bad debts, there are a couple of questions about bad debts. One around, have you had any unusual actual bad debts, I think, is what I’m going to say? Or are we just being conservative?

I think what we’ve seen, we’ve seen a number of partners who are struggling to pay their bills. If you look at our annual report, the amount of 60 days overdue debt has increased from $2.1 million to $2.8 million. Some of that has to do with the growth, but certainly been a slowdown from some partners who are struggling to pay. So we’ve seen a slight increase in bad debt, but we’ve also seen a deterioration in slower payers. So we’ve taken a provision to cover what potentially may be future bad debt.

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [9]

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Next question is will Japan JV losses increase in FY ’21?

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Mark McLellan, rhipe Limited – CFO & COO [10]

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Well, I think it will be…

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [11]

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It’ll be a full year.

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Mark McLellan, rhipe Limited – CFO & COO [12]

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It’s a full year. So we’ve got $1.3 million and that includes setup costs in that, $1.3 million was effective from November last year. So we get a full run rate cost of losses in FY ’21.

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [13]

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Next question is how many free seats do you have? And I assume this is — we’ve already talked about the new free, 100,000 seats to SMB clients. This, I assume, means how many free seats have you got from academic or other sources that you’ve talked to in the past?

The answer to that question is almost 1 million free seats, including the 100,000. So about 900,000 academic or those other types of free seats at the moment. Our total seat count is over 1.6 million at the moment.

Next question is DBITS. What happened here was project delays or projects being canceled completely?

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Mark McLellan, rhipe Limited – CFO & COO [14]

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A bit of both.

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [15]

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A bit of both, but I think it’s more delays than projects being canceled completely. And we’ve also got — we’ve actually got 2 Dynamics businesses at the moment internally, the one that DBITS had, which we’re selling direct to end users, and we’ve got a channel-focused Dynamics business, which was kind of a new start-up which we invested in when we acquired DBITS, and that channel business has been going pretty well. There’s been 2 or 3 deals signed in the last 6 weeks, probably. So we’re hoping that, that has a better year for us in FY ’21.

There’s a lot more questions coming in. Licensing and Cloud both grew revenue $3.6 million each, but Licensing was plus 10% and Cloud 37%.

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Mark McLellan, rhipe Limited – CFO & COO [16]

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Solution 37%.

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [17]

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It is not Cloud. This is Solutions. So Licensing and Solutions both grew.

Okay. What was the primary driver of Solutions growth? And do you expect to see the same drivers of that growth in FY ’21?

The primary driver of growth in our Solutions business is investment by us. It’s a strategic decision that we’ve taken to build new sources of revenue over and above the sources where we’re clipping the ticket on licenses. And those new sources of revenue include a 24/7 support desk, a Dynamics business, a modern workplace, small practice and Azure small practice at this point in time.

Do we expect to see the same drivers of growth continue in FY ’21? Yes, we do, subject to what happens with COVID and the conversations we’ve already had around Dynamics.

Level of intangible investment for FY ’21?

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Mark McLellan, rhipe Limited – CFO & COO [18]

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So I would expect it to — for FY ’20, we invested in PRISM, and we invested in SmartEncrypt, and the cost, it was about $2.9 million. I’d expect it to be along similar lines in FY ’21.

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [19]

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Next one was why were share-based payments so high in FY ’20 and what’s the outlook for FY ’21?

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Mark McLellan, rhipe Limited – CFO & COO [20]

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So there’s 2 reasons for that. One was the share price appreciation in the last 12, 18 months. And actually, when the FY ’20 plan was granted, that’s — that feeds into that cost. And also, I would say that when we account for the share-based payments, we are, I would say, conservative around our estimations of when — if we hit the main targets, the stretch targets and the base target. So I think we are conservative. So there’s an element of conservatism that’s caused that increase in the cost as well in FY ’20.

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [21]

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I believe we have to accrue it, stretch for a number of them as well, don’t we?

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Mark McLellan, rhipe Limited – CFO & COO [22]

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Yes, there’s 3 targets for the market-based target, which is the total shareholder return, you need to assume that you hit the stretch number. And that’s — so therefore, that’s a high cost that goes into our P&L.

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Dominic John O’Hanlon, rhipe Limited – MD, CEO & Executive Director [23]

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Competition. Called out some margin impact from competition, how has the competitive landscape changed in APAC?

Bob, I don’t know that there’s been a great change, to be honest. I think that the impact we see is largely our biggest resellers. Once they get really big, then our competitors target them and say, we can provide you the same licenses at a lower price point than rhipe can. Maybe we don’t provide all the services that rhipe provides, maybe we don’t have the same platform, maybe we don’t have this or that. But we can do it a bit cheaper. And those resellers usually come back to us saying, can you please compete and give us a better price. And we’ve always had that in our business. It’s been there for 20 years, and we’ve seen more of that ongoing in FY ’20 than we had in the past.

The other thing I would say is that it used to be a SPLA conversation, but CSP was very new, so no one had those conversations. CSP has been around for sort of 5 years now. So it’s becoming more of a mainstream product offering and we probably have more of those questions than we used to have in the past.

There was one other question to do with the capital raise during the year. There was a question that came in and said, what was the rationale for the capital raise? And I assume that they — just to recap that rationale. The rationale at the time, in April was, we believe that doing a capital raise would give us the opportunity to take advantage of a number of acquisition targets. Our strategy as an organization is to continue to grow and to continue to diversify new vendors, new geographies, new services. For example, acquisitions give us a great opportunity to get to market quicker. And without the same drain on our OpEx, especially if we can buy profitable businesses. So that’s the rationale behind it.

The secondary question was why didn’t retail investors participate on that and why wasn’t there a retail placement? And the answer to that is we moved very, very quickly on it. We announced the capital raise and closed it in a couple of hours. It would have taken us more time. And — but I would say we did get feedback from retail investors post that saying you really shouldn’t do that, and we would like to see a retail placement. If you do this again, and we’ve taken that feedback on board. We did say the retail investors at the time. The share price is now lower than it was at the time we did the capital raise. So if you do — did want to participate, you can actually now buy in the market cheaper than you could at time of the capital raise. So that was some sort of feedback. But the reality is the feedback from investors was next time we’d like to see a retail placement as well. And we said, thank you for your feedback. We’ll take that on board.

I think we’ve now covered all questions. So it is 9:48. What time were we scheduled to close? We were scheduled to close at 9:45. So with 3 minutes over, I’m going to wrap up there. I appreciate everybody’s time. Thank you for dialing in today and look forward to speaking to you all soon.

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