K2FLY Ltd

ASX:K2F

Earnings Call Transcript 2024-Q2

[Nicholas Pollock, executive]

Good morning, and welcome everybody to a very hot day in Perth. I think we've got 39 degrees here today. It's my pleasure to join you and providing this Q2 investor update of K2fly. I am joined by Sara Amir-Ansari, CFO; and Jessica ,our marketing leader to take you through the session this morning. So thanks again for making the time to join us. As usual, today, I will -- given the nature of the audience and the [indiscernible] I will not spend too much time on the background, if you like, and tend to focus here more on the results. However, there has been some changes to some of the background material which I'd like to introduce you to today with which I think is important. So that you can than go and look at that in your own time on the deck that was released last or this morning to the market. So I encourage you to go and check in on some of those things, but I'll point it out as we go along. And to that point, the first thing I'd like to take you to is indeed the top risks for the mining industry.

So as you all know, our market is very, very much focused at this point in time on the mining industry. That is where we have enjoyed a tremendous amount of success over the last few years. [indiscernible]. So we often share this information from the big consultants, if you like, in terms of the surveys that they run annually in regards to the top risks for the mining industry. We have just recently updated this because they all put out their 2023 and 2024 reports already. And to that extent, not a great deal has changed in as much as the demand for our types of solutions and how K2fly can help the mining industry with some of the challenges it faces particularly in and around the areas of ESG, in and around the areas of license to operate, in and around the areas of transparency. So those things resonate really, really strongly in these reports. Those things haven't changed.

Obviously, there's been a curve in global instability in the last 6 to 12 months where it seems to be the norm in the last few years. Nevertheless, the drive towards ESG metrics performance within all organizations, not just mining continues to remain a really top priority, in fact I was on an ASX training session yesterday in and around climate and sustainability disclosures on the ASX and how much of scrutiny that's getting in terms of -- and just demonstrated by the fact that the ASX are providing training courses that link into the global IFRS standards. This topic is not going away. This is a trend, not a fad. We continue -- we'll continue to enjoy benefits of our clients and our new clients and prospects making to address those issues more and more and more.

This is a really long-term game. And we are actually pleasantly surprised and gratified by the fact that more [indiscernible] and stakeholders and investors a [indiscernible] to our products. So most of you are probably familiar to this [indiscernible] the reason I have [indiscernible] up again is because of fact that probably exceeding our expectations since starting ESG 5 years ago about the 2 elements that we play in the mineral resource disclosure and governance and in natural [indiscernible] that we have operated increasingly, we're seeing our clients and as importantly, regulators pushing those things together. So that [ now addresses ] the whole game.

Now obviously, we have more solutions in all of those spaces, and we look to increase the solution that we can offer to fill out that space, particularly at the moment, but increasingly now for other adjacent industries which we can talk to [indiscernible] certain the ASX and the Australian market this year will be the new JORC code which we can reasonably comfortably say will come out in '24 that mineral reporting code given on the left side of your screen at the traditional valuation resource disclosure, mineral resources and reserves, that -- the code that drives that is actually pulling in the things to the right formally.

So they are formally demanding more disclosures on ESG and then other things like more disclosed on reconciliation, which we also have in order to address as well. So we are very much following and engaged with these codes and the stakeholders and influence on those codes in order that we can address the needs of our customers going forward.

What is new? It's obviously, resource governance is an area that we are incredibly passionate about. We've built a business around. It is a new space exploration, K2fly defines the thinking in and around this. You've heard us talk about natural resource governance and mineral resource governance. Our marketing folks have done a good job and our industry folks have done a fantastic job to basically how we express that story better, how we cover the story more efficiently and more clearly to our prospects, to our shareholders, to our investors about understanding the importance of this space.

And I'm really, really pleased and proud of what we've managed to create in a very simple diagram, and simple is good in terms of how that looks furthermore in a more comprehensive we've been marketing a new story called the Golden Thread, which is seen at the bottom of this slide, which is actually originated out of the [indiscernible] that we did through our global mineral resources and reserve for and every one quarterly with all of the most senior [ deposits ]of mineral resources and reserves in our customer base, which is as you know, the biggest companies, mining companies in the world. So we did [indiscernible] with that group, we produced, I guess, I think we produced 3 or 4 papers out of that group and this notion of the Golden Thread came from our clients. And the criticality of linking the ESG fundamentals [ brute ] strategy into your mineral resources and reserve operations and output and disclosures.

So it was -- it's so true because I was sitting in a meeting with a prospect the other day with the board member and the operation folks now talking about our strategy of them wanting to be a premier player in terms of license to operate the stakeholders and the land that they operated, how that played up to their planning, their operation and ultimately [indiscernible], and then we talked about all the things [ there's massive opportunity ] around land location, compliance, responsibilities engagement with those communities and ultimately compliance with the regulations, but also commitment on how our solutions address that. So this is a really, really nice way of encapsulating what we do in order for services -- shareholders to understand, but certainly, it's much more relevant for our clients to save these sort of things.

So that -- in terms of our clients, that license to operate, still [indiscernible] and in a world where opening new mines is increasingly difficult. And I've heard me say before the world needs over 300 new mines to support the energy transition, that is not possible unless we are mining more, [ winning ] better. So that license to operate, getting the trust of those communities in order to operate to be able to disclose with confidence and clarity and know the minerals, not greenwash, is more and more important.

So just going into where we are today. We are very happy to break through another milestone in terms of our ARR has now hit [ $80 ] in this quarter, which is great. Obviously, it wasn't a -- we did knock it out of park in terms of new growth, but it was another reported milestone. We were very gratified by continued support from our major shareholders Maptek, we participated in a small raise at a premium of $0.10 to the market, which show -- the growth report which takes them to 17.7% and our cash position at the end of the quarter was a healthy $2.5 million on top of the $2 million working facility that we already have in place. So I'm pretty comfortable about those things.

Just jumping into the results for the quarter. This is filling into what we presented in our quarterly review, which came out last week. So as I said, we did have a flat quarter. So we're not super happy about that. But in a business and enterprise software business like ours, dealing with [indiscernible] clients and very large companies and decision processes, we will have [indiscernible] quarters from time to time. That said, we do continue our record growth of 14 quarters of growth. So I'm not going backwards. I think what's important like that demonstrates to me, it's basically the underlying resilience of this business as we build our annual recurring revenue streams and the underlying growth in that, that will happen quarter-on-quarter year-on-year as to roll over, et cetera, et cetera.

So I suppose that's showing by the fact that year-on-year revenues grew 21%. Our costs remain pretty much the same with an increase of 8%. So our revenues are growing considerably faster than our costs that is a significant directional improvement for a startup like ourselves where in the early places your revenue might grow and your cost grow at an equal amount. We are definitely very good on the cost management, very, very focused on what the market and shareholders tell which is to get to breakeven as fast as we can. So we continue to have a big focus on that. That so we have a slightly flat quarter, fact that we are completely within our cost projects us well, projects the sustainability of the business, very grateful for that the hard work that Sara has done as a CFO and ensure that we manage those things.

On the revenue side, we continue to enjoy a 48% growth rate on our ARR, which is actually [indiscernible]. During the quarter, we signed the next phase of a rollout with an important French customer called Eramet. Eramet is really important because they're a very large producer of industrial minerals globally. They are Paris-based, listed organization, the first, we have an initial rollout [indiscernible] their sites in September -- starting in September the year before. We've got to first milestone, and we have extended on that contract to move to the next 100-plus sites.

What's really interesting about this project for us is this is our first truly global rollout of the land management system with a major, multinational global company. Eramet is a mining company. Of course, they do a lot of mining and borrowing, they might have industrial products but they also have manufacturing facilities as well. So this is a more -- this is quite a holistic project, which I think ultimately will be rolled out to over 200 sites globally over the next ensuing years, effectively, it's a long-term project with this group in order for them to be able to get to a corporate view of their risks in and around land.

So this portray K2fly message very strongly. What we've seen in recent times with some of the disasters that we've seen happen in the [indiscernible] Brazil in that regions and decisions at regional level can have a devastating impact on the company's reputation, their balance sheet, their executive, all sorts of things. That's really critical that you don't let things slip between the cracks in terms of outliers and the corporate ESG risk is managed at corporate and you have controls and governance in and around the things that they do and what your obligations are. So that's really important. So this is a really important project for us, and we're really excited to work with a visionary like Eramet that sees that.

The new resource disclosure platform has been released. Obviously, most of you know that we are in the throes of going live with Anglo-American, with Eramet and others. So that's really exciting, as exciting is that we are now embarking on the rollout of the migration of our customer base. So we have I can tell about 20 customers on that solution. We have, I think, 16 customers on the original [ huge ] solution, which are new resource disclosure solution designed to replace [indiscernible]. And so we basically have signed the first client to undertake that migration, which is Newmont, which is clearly the [ biggest ] gold mine in the world, as we all know, we recently [ added ] Newcrest who are another client of ours on that resource disclosure products so we'll be rolling out the new solution. That will be one of the series of those migrations that will happen and synchronization over the next probably 2 years and also provides [indiscernible] for us to upsell the new modules that go with it like model manager, like reconcession, et cetera. So that's pretty exciting milestone [indiscernible] to begin that process.

We also commenced the strategic review, which has been announced, looking for ways to unlock further value in the K2fly, so a far-reaching exercise that we're undertaking with our fund advisers to assess what those opportunities are. So that's a very exciting time for us looking forward as well.

And basically, yes, in terms of -- I talked a lot about the cost management and looking forward, most of you on the call would know the story pretty [indiscernible] that our second half is traditionally stronger. Last year, we had a very strong positive cash accretive [indiscernible] and that is determined by the fact that a lot of significant portion of our annual contracts fall in the second half. I think we've got at least [ a true ] history of demonstrating that. So that's also something to watch [indiscernible].

[Sara Amir-Ansari, executive]

While we're [indiscernible] our IT issues.

[Nicholas Pollock, executive]

I'll just -- so essentially just talking about future results, again, talked about the 14 consecutive quarter's growth in ARR, which we're really proud of. And again, slightly flat quarter in terms of ARR, still growth nevertheless. And we're going into the second half with a high degree of confidence about maintaining and growing our ARR significantly and demonstrating the cash generated on that basis.

So I hand over to Sara to talk about the next level of detail on our results.

[Sara Amir-Ansari, executive]

Thanks very much, Nic. Just on discussing our results, it's worth keeping in mind that we invoice and collect our software licensing fees annually in advance. But for accounting purposes, we recognize license revenue over a 12-month billing period. So what that means is, firstly, we have and we expect to have volatility in our cash receipts from clients, which is impacted by the anniversary dates of new contracts in the portfolio. And secondly, when we acquire new clients, the license revenue benefit accumulates over time. I think, Nic covered our revenue for the December quarter, which is $3.4 million, up 21% on the prior comparable period. And that, of course, is a function of that growth in the portfolio of contracts represent by ARR and of course, the associated implementation fees attached to those acquisitions.

We often talk about our focus on cost management and our emphasis on achieving an operating cash flow breakeven. Historically, due to our inworking profile, the second half of the year is operating cash positive with the June quarter being particular very strong for collection. In the September quarter, we reported a net operating cash flow of [indiscernible] was a 62% increase on [indiscernible]. But with our gross operating expenditure consisted of $4.2 million across the [ prior ] quarters, the movement that we're seeing there is due to the timing of collections from customers.

If we're looking at the net operating cash outflow for the half year to December '23, it's $1.7 million, which is 8% higher than the prior comparable period. But it's worth keeping in mind that we're a growing business. And with the successful completion of the resource disclosure development project. Our expenditure profile view is changing. And we're seeing that in terms of our overall [ set ] moving, but also changes in the allocation of our expanded cost line. So for instance, the expenditure on the development of intellectual properties, so our software, declined to $186,000 in the December quarter. And year-to-date our total investment on IP is $614,000, which is a $900,000 reduction as compared to the $1.5 million compared in the 6 months to December '22. So quite [ iterative ].

More generally, Nic touched on this as part of our ongoing focus on cost management and it actually helps us on achieving our [indiscernible]. We have been envisioning a program [indiscernible] and initiatives there included [indiscernible] and restructuring to improve our [indiscernible].

We have some questions in the Q&A, which I might be addressing it now. And just to remind the group that I think [indiscernible] we don't offer forecast, whether they relate to revenue or costs. So in terms of our ongoing intellectual property spend, I think the conclusion of the resource disclosure project, which has been a multi-year long-running projects, which I think Nic has spoken about at length over a number of quarters, has concluded. And we're seeing the impact of that in the decline in our capital expenditure. At this point, there's not much more to elaborate on in terms of the forward expectation on CapEx other than to note that we have sustained a drop in CapEx over the last few quarters.

Nic, I'll like to hand back to you.

[Nicholas Pollock, executive]

Thanks, Sara. Okay. So essentially, just to sum up, some of the key things that I believe that you're here for, and we are certainly here for in terms of what are the highlights here. Strong growth continues. We have a flat quarter. But overall, our CAGR over the last [indiscernible] 48% growth on the ARR and similarly in the [indiscernible], so that continues quarter-on-quarter. The industry dynamics are incredibly behind us. The tailwinds are as strong, if not getting stronger, with more and more regulation and regulatory requirements and investor expectations.

I didn't touch on this before, but in terms of rapid growth opportunities, not just within our traditional mining base, but we have started looking into adjacent industries. We have appointed a role in that space, which we are really, really pleased with the response we're getting across some of those alternative industry like energy, infrastructure, particularly in and around linear assets, although we have a really strong use case. And I would stress that the opportunity in those areas are large opportunities akin to our land management deals that we've done that you've seen that with are large enterprises that have exactly the same challenge that [indiscernible]. And the good news is that our solutions can solve those problems without any significant changes to the product. So it doesn't require that much development to address those demands from [indiscernible]. So that's opening up a whole new chapter of opportunity to scale right into different industries. Very excited about that.

One of the things also we talk about, we probably don't emphasize enough is the sticky recurring revenues that we have, but this fiscal year has been exceptional. Basically operating at the highest level [indiscernible] we talk about our first customers in 2 examples of the retention and the stickiness of the revenues. AngloGold Ashanti started [indiscernible] 20 years ago this year. It's been amazing, Anglo are still driving us to do more better with that solution and [indiscernible] of leasing our land management. So there you go. So when you look at the contracts we signed, it tends to be of 5 years, the reality is that a lot of these comers are going to be with us for a very, very long time. So that's pretty exciting and it's a solid base to move forward on and obviously keep evolving and adding on to those solutions to grow from a satisfaction point and kicks off in the [indiscernible]. Obviously, the revenue will continue to grow and [indiscernible].

[Nicholas Pollock, executive]

So on that basis, happy to open up questions. I'm looking at questions now. And I think Sara has addressed some of them, there is a question here. Can you elaborate on what your sales [indiscernible]?

Yes. So we had some disruption in year 2023, with essentially our previous house director had to retire for medical reasons. He still [ stays supported as he can ]. [indiscernible] in October. We appointed a lady called Louise Hall, who is a very, very experienced season sales director across enterprise [ touchy ] solutions, across asset intensive business, including mining, both oil and gas and other instances, [indiscernible] other ways to market, if you like. So Louise is doing a great job, and our pipeline has been [indiscernible] with an increased focus.

For those of you that understand the nature of our business and enterprise sales, things that happened 6 to 12 months ago show up in the results, 6 to 12 months later. So we're humbly confident of our second half, I'm confident about the second half in terms of what we typically see in terms of the dollar. I'm also very bullish about new opportunities, someone makes a specific [indiscernible]. So I think what you're referring to is some big chunky dips. And we will continue to be landing new clients in Tier 1 and Tier 2 mining company, is growing existing client base is a new opportunity on the solutions within our expansive base and continuing to get [indiscernible]. So that is something we're confident about.

Does the rollout of the new platform constrain your ability to take on new clients?

We don't believe so essentially one of the key reasons why we decided to reinvest in rebuilding the platform was during a period when we were onboarding. We're up to 20 clients now. So we have been running multiple implementations of what the [indiscernible] product and solution in parallel and managing. And there I say, we've managed to retain 100% of our client base over the last 4 years. So we have experienced very, very busy periods of multiple implementations. So what we'll be doing is we'll be managing that migration of those existing clients in an orderly fashion when those clients are ready over the next probably 24 months.

So that's a baseline requirement that we are solving for, but we also believe and because of the new platform because we can implement the new platform faster, easier plus -- so there's the platform element to that, but also our processes, our implementation processes and disciplines have advanced considerably over the last years. So we've got a pretty good [ machine ] in place between product and delivery in order to be able to scale our business and scale implementation, particularly on that product interval. So we're confident that, that won't be an impact. And it's a good challenge to have.

The next question Sara refers to you about, with the new platform coming online, will that have impact on the margins?

[Sara Amir-Ansari, executive]

Good question. [indiscernible] is that resource disclosure platform, which is a more modern version of our existing platform. We'll have, Nic talked about earlier, some improvement into the implementation sort of back end and operational improvement. We obviously, as you know, don't talk about margin at the product level, given the portfolio that we have, it's certainly reasonable [indiscernible] a new and enhanced [indiscernible] of an existing solution has been designed certainly with [ fresh ] benefits in mind.

Nic, I think there's an adjacent question about the expansion opportunities with the new platform. I'm not sure if you wanted to add anything?

[Nicholas Pollock, executive]

Yes, yes. So obviously, we -- we're very, very successful in terms of sales of the ARPUs, the platforms or resource disclosure in our new iteration of resource disclosure. Clearly, for engagement with our clients, we have built out our mineral resource governance platform, if you like, to include the addition of Model Manager. It got us on the toll on the first client going live with resource disclosure and model manager in conjunction with one another. So that's an important milestone for us. We've also had last year, we added Rio Tinto as the first client reconciliation module. Again, it plugs into that really importantly and really nicely.

So going forward, what you should look forward to as in terms of announced from K2fly is not just announcements in an around new what was our key client, what was our disclosure client, but clients that are increasingly moving towards the mineral resource governance suite, which clearly are bigger deals by the nature of the fact there's 3 modules in their relevant one. So that's a very typical sort of land and expand strategy in terms of us adding on modules to grow this suite. The same applies in our land manager or our natural resource governance as well.

What's really interesting and something I've noticed talking to clients lately is that more and more those 2 topics were somewhat disaggregated within the client and the buyer. However, what I'm saying more and more is that our clients want to talk to us about both of those things. And that's indicative again of the rapid changes in regulations and requirements on these corporations to disclose across the board and that the codes are linking them together. So yes, I think there is definitely more I'd say -- to answer the question specifically, in this migration process of those 16 clients moving from resource, so resource disclosure, that creates, obviously, 16 opportunities to talk to them about the add-on modules and a more comprehensive suite. So we're pretty excited about that.

We are right on time. I would like to thank you for your continued support of K2fly. I'd like to thank you for tuning in today for the [indiscernible] for the question and of course, look forward to talking with you more in the future. And of course, we're always accessible for our [indiscernible] questions and discussions at any point in time. Thank you very much.