CV Check Ltd

ASX:CV1

Earnings Call Transcript 2020-Q2

[Operator]

Thank you for standing by, and welcome to the CV Check investor conference call. [Operator Instructions]I would now like to hand the conference over to Mr. Rod Sherwood, Chief Executive Officer. Please go ahead.

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

Thank you, Rachel. Good morning, everybody. Thanks for joining us today. We're covering today last quarter's operating and financial performance. And included in that, we'll give some insights as to the quality of our operations during the quarter. There'll be a brief opportunity for Q&A at the end, and we aim to wrap up in about half an hour.Firstly, a summary of the key investment highlights for CV Check. It's a seasoned stock with a commercially proven team and business model. Cash-neutral, 4 of our 5 past quarters have been cash-positive at an operating and investing combined level. We have a strong track record of ongoing growth in ARR that's been sustained over a number of years. And we're very well positioned for continued organic growth that comes in 2 pillars. We've positioned over recent months to accelerate the potential for existing commercial gains through a sustained increase in our business development resources. More pointedly, that means bolstering our sales, marketing and executive teams.We have a second pillar which goes to the heart of how we see the landscape playing out, that is leveraging partnerships across the HR tech landscape, and that will better enable businesses to use risk management of their people resources through us bringing a screening solution [ through ] those providers.Turning to the quarterly highlights. We produced $3.2 million of revenue, an increase of 7% on the PCP. That comes despite the devastating natural disasters across Australia and New Zealand. Produced $2.4 million of B2B revenue receipts and $0.8 million of B2C revenue. Cash receipts from customers were higher at $3.3 million, with us again demonstrating excellent conversion of our revenue to cash. Our booked ARR increased to $9.8 million in the 12 months to 31 December 2019, up from $9.6 million in 30th of September and $9.2 million at the 30th of June. Gross margin expansion is also arising from our continued focus on selling bundled solutions to our enterprise clients.HRIS integrations and partnerships. New ones were announced with SmartRecruiters, which went live and were the first revenues. And we also announced an alliance with xRef. The integration work on that is due to go live this month. And I'll be in -- with the xRef team along with our CRO, Mark, and marketing manager, [ Menucha ] on 7th and 8th of February to do an event with one of our partners -- our joint partners as it turns out. So that relationship is kicking off well. We expect that to produce solid revenues from here.B2B is a core focus. It's been driving growth through both new customer wins and tender wins. Consistent with our Q2 seasonality, there was a modest decrease in our average revenue per account for Q2, but that has continued to expand over the past 12 months. Our growth potential has been lifted substantially during the past 9 months through expanding the business development team and lifting our leadership capability through new hires and internal appointments. Our sales capability increased by 5 people. And we also appointed a Chief Revenue Officer who's been with us for a couple of months, and we've seen a marked change in the way of working.Operating and investing cash flow was $2,000 positive when including a $0.1 million R&D tax incentive receipt. We have $5.8 million cash in the bank and remain debt-free. So we have a strong balance sheet position to prosecute our agenda.Some of the business development highlights. Again, several hundred new B2B clients signed up, converted to placing orders and started generating revenue in the quarter. Some notable names amongst these include Volkswagen, Intesa Sanpaolo Bank, Ricoh, Panasonic and Neighbourhood Watch amongst a great many others. We also had a couple of great tender wins which we're really pleased with. We announced these in early January and are expected to produce first revenues this quarter. And we are experiencing a number of large enterprise wins so far during this quarter.We have substantial opportunities to pursue in the Australian market. When we look at the addressable market opportunity, there's 5 -- 15 million employees across Australia and New Zealand. And CV Check is currently conducting checks on just over 200,000 candidates per annum. So you can see there is a lot of upside for us remaining in our domestic and New Zealand market.There's a notable revision that we've made to our organization and leadership structure in order to unlock further potential of the company. To drive our performance to the next level, the Board elected to augment a change and revision of the company's leadership structure. And we have successfully managed to assemble a very strong group of executives through both internal and external appointments.Jenny Cutri assumed the role of Chief Compliance Officer following years of high-quality output for CV Check, and it's drawn on and built upon an extensive history of prior and current other ASX-listed company experience. I can't underestimate how much of a contribution she and her team make to our ability to deliver.Following a couple of extensive searches, we appointed, first, Mark Thompson, who joined the company as Chief Revenue Officer during the last quarter. Mark is located in our customer engagement hub in Melbourne. He's a highly positive person and he's already had a great impact on our way of working across the teams. And we're very pleased to have him on board driving our customer outcomes.Jason Margach joined us this week as Chief Operating Officer, again, following an extensive search. Jason also carries great energy, is action-oriented and shows great promise as an excellent addition to our C-suite. So we're very pleased to have him on board as well.That largely covers the highlights. So just wrapping up, we've seen continued outstanding financial performance as has been the theme and evolving over the past 3 years. We've invested in people, capability and development. That's been ongoing across the past 9 months to lift the growth potential of the company. And our strategic initiative to integrate with a wider landscape amongst the HR information system sector is progressing well. Each one of these new partnerships and integration unlocks a new pool of B2B clients that will benefit from CV Check's services. There's no doubt that the company's market position is compelling value in its current state, particularly so when you compare it to HR tech peers listed across the ASX.I'd just like to recap on our strategy, which we have been conveying to the market during the past 12 months. Given our prudent commercial success and our large client base, our core compliance strength amongst our people and our strong tech position, we've been moving to position the company to go to the next level. And we're pursuing those opportunities on 3 fronts: to build, to partner and buy.So in building, we've been growing out our business development and customer engagement hub in Melbourne, identifying current opportunities and adding both product and technology additions and features to better serve our existing customer base. We've had a number of successful developments of technology with the release of our white label solutions. And we've now got 18 customers using us and producing revenues in this manner. It certainly is an interesting and dynamic way to improve the customer and candidate experience, and it improves the moat around our customer base.Partnering, our technology and commercial success is attracting attention from large enterprises across the globe in our sector but also adjacent in the HR tech sector. Opportunities to leverage our technology solutions into larger-scale markets should present through pursuing this path. And we're finding that, that is advancing and we're seeing international players come and connect to our systems. Although a lot of discussions are in initial stages and there's no guarantees on delivery, some of the opportunities that we are currently facing are very, very promising. And our goal is to execute on such a partner-driven solution from our current geographic base.At a domestic level, our strategic alliance with xRef was announced in November and is a form of partnering. It's nearing completion and will be launched as a joint go-to-market during this quarter.We have also been reviewing the landscape of our immediate sector in background screening. And as long haul -- long-standing shareholders will recall, we enjoyed great success from our entry into the New Zealand market when we bought Resume Check from the gentleman who is now our MD of the New Zealand operation. And what we found there was our ability to couple with that team and their outstanding customer engagement with our technology platform, we've seen customer and order volumes double and won a strong flow of new business. So we would like to replicate that elsewhere should opportunities present. We have been reviewing the marketplace as time permits but as yet, nothing of similar caliber has presented, but we'll continue looking at that.So that concludes the presentation for today. I think we've had an outstanding quarter to close out what is seasonally our weaker first half of the year. We've repositioned to enable much higher growth potential through bringing on new resources. And we're certainly enjoying a great start to the second half.I'd like to open the questions for Q&A.

[Operator]

[Operator Instructions] Your first question is from Carlos Gil from Microequities.

[Carlos Gil]

Look, just I want to understand why you're qualifying the quarter as outstanding given the top line growth has only been 7% PCP. And also I want to understand why the slowdown in the B2B growth for both quarter-on-quarter and also PCP.

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

Okay. I think everyone will be aware that Q2 is traditionally our weaker quarter of the year. And I don't think anybody can ignore the fact that we've -- that Australia and New Zealand has been badly affected by natural disasters and more recently, a coronavirus outbreak. In light of that and in spite of that, we still managed to grow year-on-year.Now we have seen that our pipeline has still remained solid and that the team's activity has been solid, but we recognize that 7%, when you look at the narrow quarterly result, is not great. We're not happy about it. But that said, it is growth. It is high-quality growth. And when you consider the backdrop, I actually think it's an outstanding result.

[Carlos Gil]

Rod, I just -- I mean, the coronavirus outbreak really was a late-December event. And the impact so far, particularly for a lot of technology companies, is muted. So I would argue whether that really had any sort of flow-through for -- in your numbers in the last quarter.With respect to your B2B growth, if you look at first quarter, your B2B growth was plus 24% PCP. And then looking at second quarter, which -- and agree it's your seasonally weakest quarter, but it is -- we're comparing the P2P number, is only plus 7%. So I'm trying to understand what's the cause of, I guess, the slowdown.

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

When you look at the prior comp, B2B in that quarter grew 40%. It was nominally, we had orders coming through from Delaware North, where they screen people in 2 stadiums. So we had a very, very strong comp to go up against. So from that perspective, stripping that out, we actually did really well. Now in addition to that, to do so in a backdrop of a very, very affected economy, I think it is outstanding.

[Carlos Gil]

Do you think that your BD, your business development team is at optimal efficacy? Is there issues in your business development sales execution? Because this is not an organic growth rate that I would qualify as a high-growth business, particularly given what is a relatively small base number.

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

So with the -- with regards to the BD team, in March of last year, we've had a couple of people on. We added and expanded the team from that period. And it takes time for them to come up to speed, build out and accommodate the pipeline that's coming through and convert it. We have a sales cycle for a large enterprise that ranges from 3 months to 2 years, and a number of those enterprises are on 2- and 3-year lock-up contracts with their current providers. So no, I don't believe that we have an issue there.That said, as any CEO would say, I'm very impatient for growth, that's just how life is. And I appreciate that shareholders would look and say, well, you're making an investment in those people, which is not inconsiderable for you guys, it's about $1 million a year, and we expect results. Now our ROI modeling is that we would not anticipate an immediate impact. We would expect it to start showing from the 6-month period. And we really wouldn't start to see payback until we get into year 2, but we would expect to see growth starting to accelerate through the current half.So to some degree, yes, it's disappointing, but at the same time, given the backdrop, given the relative youth of the majority of this team in terms of their time with CV Check and the sector, I think it is explainable. I cannot ignore the fact that the growth potential has been substantially lifted, and we see the pipeline and how it's building. And as a sign of that, if we take a look at these 2 tender wins we announced in January, they came about as a result of several months of work by that team. So they've done well.

[Carlos Gil]

Rod, I'm just -- I'm a bit concerned when I hear a CEO look at a plus 7% year-on-year growth and qualify that as an excellent quarter. Really, I think, given the significant increase in resources in your business development, given the momentum that you had in your B2B, I fail to see how a flat 7% PCP growth rate even actually qualifies to a CEO and say that, that was an excellent quarter.

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

Well, Carlos, I note your comment. I welcome your comment. It's something I'm aware of, my Board are aware of, and we're working on it. We -- things don't go in a straight line, unfortunately.

[Operator]

Your next question is from Stuart Nutting from GPO Fund.

[Stuart Nutting;GPO Fund;Managing Director]

Just a quick question. Can you talk a little bit about the ARR progression and perhaps try to uncover 1 or 2 examples of clients, you don't have to name them, but just as you have landed and expanded a relationship over a period of time?

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

Yes, we can do that. We've got a large number of companies where we have examples of that. If we take the example of a large telco landed in late 2017, the first 6 or 9 months, the business was around $5,000 per month. That rose to $7,000 across that first year. Since then, through the building of trust and customer engagement, that organization has increasingly engaged with us and our technology team to bring about better solutions that unlock value for them. And we're close to tripled the value per month generated from that account on average. And then on top of that, we see spikes of up to $50,000 per month in revenue from that account.So we're seeing that as we prove our confidence and as we prove out our compliance and insights that we can provide them, those companies are coming to us for solutions, which end up taking, a, more products in terms of widening the range and data points that they take when they're looking at each candidate but also bringing in and accommodating additional areas of business that weren't originally foreseen. In this case, this company has a large-standing permanent workforce. In addition to that, it has a substantial portion of franchises and contract employees. And we're seeing that those contractors and franchises are now being directed to come to CV Check to handle the same screening and people risk management requirements.There are so many examples where we could go to in so many sectors, which are the same, but this is our approach. And what's that seen us do is build the large enterprise portion of our ARR is now dominant in what we do, and that's very different to how the situation was several years ago. So it's been sustained. It's been positive. We've seen both landing new customers and expanding ARPU, and I expect that, that will continue. That has been the justification for why we expanded the business development resources and the customer engagement teams, and we expect it to pay off and lead to very good ROI.

[Stuart Nutting;GPO Fund;Managing Director]

Okay. Can you talk a little bit about the concentration of some of the, like, the biggest customers? Just -- you tend to have some clients, some cohorts over a couple hundred thousand dollars a year. Can you talk a little bit about any of that sort of the anatomy of those enterprise customers and the cohorts?

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

Yes. We've got essentially 3 strata of people in our client base. We look at large enterprises across Australia and New Zealand. And you're really looking at a group of 300 to 400 significant accounts, for us, which are relevant. Those, in terms of our overall revenue pool, are not highly concentrated or carry great risk. Additional to that, we have the SME sector, which is largely self-serve, have more simplified needs, and they come on to the website and satisfy their needs for compliance but also people manage -- people risk management and screening. There's a final pool, which we refer to as individual and consumer revenues, which are referred to us increasingly by employees or persons that they've worked with to get screening done on themselves for employers. So it's a way of them presenting to an employer and satisfying a compliance need or whatever it may be in order to stand a better chance of either getting a role or satisfy their requirements for ongoing screening requirements.Now the largest portion of that in terms of production of ARR is the large enterprise group. The second portion is the SME group, where we see, after the first year of acquisition, we see an initial dip, which is quite substantial, where those companies come on and we don't see a whole heap of ARR in that year, but once they get past that first year, we see quite high retention rates in and above 75%. So that cohort is also able to produce good long-term value. And our individual customers come back in proportion to how frequently you would expect them to change jobs or have a compliance requirement. So about every 3 to 4 years, we see customers come back from that cohort as well. It's the smallest part of our recurring revenue.

[Stuart Nutting;GPO Fund;Managing Director]

In terms of your analysis of offshore entry, what are the 1 or 2 best countries? Kind of using the skills from New Zealand and Australia, what do you think are the 2 best geographies?

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

For me, I think it's -- for those who don't know, I'm also Swiss. So I've got a sense of experience in Europe. It's also an area of the globe that's very privacy-aware. There's a high compliance load in that arena, and background screening is certainly applied for people risk management purposes. There's also large amounts of migration across borders. So that's a very attractive market to us. There is established commercial proofs there as well. So it's an area of interest. It also would open up the ability to serve customers in the Africa time zone, so the mining customers out of Australia and so on.In the Americas, the U.S. market is very mature, quite low growth, highly fragmented in the U.S. That said, it's an established market where we could perform well. And we certainly, with our SME and individual go-to-market approach that we've learned here, we do have the technology and platform where we could play there. At this stage, though, we're concentrating our efforts on looking at our domestic market and just starting scoping out opportunities across Europe and potentially Asia.

[Operator]

[Operator Instructions] Your next question is from Matthew Chen from Foster Stockbroking.

[Matthew Chen, Equities Research Analyst]

Just wondering if you can make a -- sorry, I just wanted to clarify firstly, go-to-market live for the xRef alliance and -- is this month or this quarter?

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

This month. So yes, so in terms of timing, we first have the xRef guys needing to develop to make CV Check available in their platform. So we've concentrated on that so that, that will get them up to speed quickly and enable the ability to put a button inside there. So that's in testing, as I understand it. And we've got a client event, which is invitation only, in Sydney, scheduled for the 17th. So we'll be looking forward to that date to show the first signs of how this works in a live environment with xRef. And we're doing that in partnership with another of our partners, with [ job out ] where xRef also has an integration there as do we.

[Matthew Chen, Equities Research Analyst]

Great. And so does that sort of color your expectations? Can you make a comment on your sort of expectations and like potential shortening of the sales cycle as a result of that go-live?

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

The answer to that is it actually has, in many ways, already shortened the sales cycle. We have seen clients trialing us already, but we're not announcing anything about that because we need them to then integrate and go live. But what we have seen is it's immediately led to us receiving introductions and getting clients approaching us in order to see if they can get a solution which is better than what they have now. And the answer to that has been yes today.And likewise, xRef is benefiting from our exposure, particularly the insights that we have in the SME market, with their launch of xRef Lite. So the relationships are strong. It is leading to, for us, a noticeable change in sales cycle and ability to penetrate. But actually converting that to material revenue, we haven't seen that yet, but it's something there in a [ matter of a week ], so far.

[Matthew Chen, Equities Research Analyst]

Okay. And setting aside like sort of leads, I guess you could call them, from xRef, how's the sales pipe looking?

[Rodney Cameron Sherwood, CEO, CFO & Executive Director]

Pretty good actually. I was -- we reviewed it earlier this week. One of the things that we have addressed with the team is that, when you're putting in your numbers for the sales pipe, underestimating isn't helping. We actually need to know what the number is because it helps with our resource planning. So our previous view of the pipe was lower than what is actually the case. One of the recent wins that we've announced, for instance, was generating hundreds of thousands per year, when we had it in the pipe as an opportunity of $90,000 over 3 years. So the pipe is good. It's solid. It's in the many millions at a level of 50% and above. And we've got to convert it now. After Australia Day when a lot of businesses actually come back and start deploying resources, we've certainly seen a pickup in conversion and wins from both competitors, but also completely new business that we weren't anticipating. So it's looking pretty good.

[Operator]

[Operator Instructions] There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.