K2FLY Ltd

ASX:K2F

Earnings Call Transcript 2023-Q3

[Nicholas Pollock, executive]

Good morning, everybody, and welcome to our Q3 results summary for Q3 FY '23. Appreciate your time and interest in K2fly and ongoing support.

And so we have a brief presentation for you today, summarizing some of the operational report that we put out last week. There are -- there is a Q&A box in the Zoom meeting, so you can type in questions as we go, and we will either address them, if they're pertinent to what we're talking about or we can look at them at the end. So thanks again.

I just thought I'd seen a bit on this. It's something that I'm assuming most people on this call are ongoing followers of K2fly, just one thing I want to point out in terms of certainly on that top row of clients there and activities in there. And then at the next level, we've just completed another solution to Rio Tinto which is the global rollout of reconciliation, the reconciliation module that bolts on to the resource disclosure that they already had to that was a module. So that was the first sale of that module, which is something we've been working on for a while, really -- obviously, a really strong customer reference in that respect. We delivered that in 8 weeks, which was extraordinary. So our -- the rapidity of our ability to deliver these solutions is getting better and better. So that was a great example of a really good team at Rio Tinto actually. So we are seeing a lot of interest in that solution globally.

We just went live with BHP in the Pilbara operations of West Australian iron ore that was also announced in the quarterly review. That's our first contract with BHP. So obviously, if you look at the after solutions below on the bottom line there, we're talking about 1 solution in 1 operation in 1 commodity to BHP. So there's a lot of white space to that organization and, obviously, a really great sign that we've gone live with it now. And that was one of our biggest contracts historically.

Also in that respect, Anglo American, we're in the process of rolling out Anglo American globally for our Resource Disclosure solution. That's something that Rio Tinto also use, Newmont use. That's our most popular solution. I think about 28 clients are using. So that's a big global rollout as well, and we expect to go live in 2024.

So really, really strong activities in that top line. And then if we go down, we're in the process of rolling out a global rollout of Western Power in the Resource Disclosure. We're doing a global rollout for Emirates on the right-hand side there, they're industrial minerals company. That's initially 11 sites going to 250 sites over the next couple of years in very much a license to operate model in access solution. So really nice activity, big long-tail projects, opportunities to extend going on with these guys.

In terms of the regions, EMEA, interestingly enough, which is probably where we have the least sales presence in a way, continues to tick along nicely. We get good, steady business out of EMEA, which is a bit of a surprise to me because a lot of those customers are seeing in pass. This is not necessarily what you think, although they are mining center. Australia continues to be strong. Americas is a bit -- has been a bit slow

[Audio Gap]

6 to 9 months. So we're seeing the effort there coming through. So I'm very confident that, that will pick up. And obviously, the government there is investing a lot in mining and supporting of mining through the IRA and those sorts of initiatives. So I expect that to continue to be a strong region for K2fly.

Next, the other thing, again, for those of you that have spent some time with us, this is a really important piece of the story. And I'd like to come back to it. I mentioned before that Resource Disclosure, which is the solution on the left-hand side there, is our most popular one. We have 18 clients to that, some of which we're still rolling out, and I've just talked about. We've got the new version of that, that was released at the end of last year. We've got modules going on that, which is important in terms of the reconciliation module.

But as we move across there, the important thing there is that the Resource Disclosure is obviously mandated a requirement from the stock market from the regulator to disclose mineral resources and reserves. It's been increasingly impacted by ESG function factors. So all of the codes are being impacted by ESG factors and all the codes are wrestling with that. In fact, we have a paper that's just been released for a conference in Perth and Maine, that we wrote with Goldfields and AngloGold SRK, which describes that tension really well and make some recommendations. So if anybody is interested in that paper, we're happy to share it because it relates to the changes that are happening in the entry, which are really, really important to the K2fly story.

So if you move across those other areas, and that's by no means all of it's the ones that we do -- not everything that we do, again, the Emirates project is using that land access license to operate module across 250 sites globally. We're working with Rio and Heritage. Again, Heritage is a mandatory disclosure. We have Heritage -- new Heritage legislation coming into place in WA at least, which will obviously make things more mandatory. So that notion of from voluntary disclosures to manage reporting, that trend is just continuing to grow.

We just had obviously the tailings, the global stand-alone tailings release, again, not mandatory, but more and more mining companies are signing up to that disclosure and that reporting in order to communicate with their stakeholders that they are doing the right things.

Ground services are really interesting one because they hold a lot the things together, the glue that holds a lot of these ESG risks together and protected hence that, and that's what we delivered with BHP in Pilbara. So I just wanted to make a point that this story has been stronger. And in terms of its ability to create a valuation, which comes from the mineral inventory but also the ability to accelerate that valuation by doing these things well or potentially risk losing valuation or value we're not looking after properly.

So that's a real quick recap on some of the things that are going on, on the story that you probably know well. I'm just going to jump into Q3 here in a bit more detail. So not shying away from the fact that Q3 was a flat sales quarter for us, on the back of a really strong Q2, a record Q2 by a long way, we had a net new in excess of $1.5 million ARR added in Q2, with some of those deals I mentioned in terms of our Rio Tinto Mineral Resources, Anglo American and another one at scale. But I'd say that was a phenomenal quarter. It was depleted or deprecated a bit by [indiscernible] with the Rio Tinto contract. So that was disappointing. But in the long term, a really good decision to K2fly and Rio Tinto. It wasn't a good contract for us and in terms of very much in relation to our clear state direction as a product-led company to be able to deliver products off the shelves as best we can.

And the BHP go-live and the Pilbara talk to that. So that is sort of a good example of building or delivering off-the-shelf software and proving that we can do at that scale in those operations. So in that effect, ARR did increase, albeit we're still looking at a 35% growth rate from year-on-year growth.

Our TCV depleted a bit, but that's normal in some ways. We've delivered a lot of projects. And obviously, we're deprecating ARR and not adding in terms of new sales, but that will change. Again, we had some really great go-lives, which I've talked to, to a certain extent. Our cash position is strong in terms of we had really good receipts in the quarter, and our outflows have been brought significantly under control. So I was going to talk to that a bit later.

So yes, just summarizing some of our key metrics. As I said, we've got the -- the ARR continues to head in the right direction, albeit at slightly lighter growth this quarter but still strong year-on-year growth. Our TCV was deprecated, again, by delivery of milestones on projects and not being topped up new deals, which will turn around soon. And that's sort of validated, I suppose, by when you see go-lives, you can typically see invoicing on the back of those milestones on those go-lines as well. So that's the invoicing event which comes off the TCV.

And now we can look at some of the financial results as well. Sara, do you want to make some comments on these?

[Sara Amir-Ansari, executive]

Yes. Thanks, Nic. I think I'll open with just a reflection that we're really delighted that we're seeing the benefit of growth starting to manifest in our numbers.

So when we look at our revenue results, $3.4 million for the quarter, 19% up on the prior quarter. And of the new acquisitions that Nic spoke about earlier, which we closed in the December quarter and the achievement in the billing milestones for the implementation projects that we currently have in flight. And we sort of see a similar benefit of that in our cash receipts from customers. Collections are running at $3.6 million for the quarter, significantly up from the same time last year, Obviously, we spent a great deal of time managing our collections in our client payment terms. So we do everything we can to ensure that our billings manifests in cash receipts as quickly as they can.

Given the variable nature of our billing cycle, and the fact that our billings are sort of almost 60% weighted to the second half of the financial year, we've included a quarterly -- sorry, year-to-date view in our reporting in addition to the quarterly review to give a little bit of perspective on the performance improvement. So if we look at cash receipts for the third quarter year-to-date at $8.6 million, we're running 21% ahead of the same time last year.

Net operating cash flow similarly has improved significantly. That's driven by collections primarily. And when we think about the path to operating cash breakeven, which we speak about quite reasonably, and we talked about our fourth quarter being our sort of biggest quarter for collections historically, if we reflect on the year-to-date results, I mean you look at last June, well, last June was a net operating cash inflow of about $1.7 million. So we're really pleased to say that the good work, the new acquisitions and the effort on the implementation is starting to deliver us some measurable improvement in our reported results.

[Sara Amir-Ansari, executive]

Now we have a question in the Q&A, which we might address while we're here, if you don't mind, Nic. You mentioned earlier about Emera particular clients growing from a few sites to many. There's a question about how the revenue line for K2fly transforms as the installed base grows.

I think to start with, it's important for us to acknowledge that there are different pricing and bottles and arrangements for the different products. So for example, with our resource disclosure products, the growth in the number of sites won't have a material impact on the expected license revenue, recurring revenue. In the case of a more operational type of software where we're expanding significantly across the initially contracted footprint, then we do expect to see a commensurate growth in the revenue line.

I'm not sure if you had anything that you wanted to add to that, Nic.

[Nicholas Pollock, executive]

Yes. So in general, I mean, Sara quite correctly, in general terms, the pricing model is a base fee, which the T-shirt sizes, small and large, in terms of the size of the client, to a certain extent. And then there is typically a first site fee that goes on top of that. And that can rise a full. Obviously, as clients add more sites, the cost goes up, not always materially depending on where it's a light touch or heavy touch type of things. So yes, something like the ground disturbance, that's sort of we call the heavy touch per site, whereas the Resource Disclosure and/or so something like the land access is a low touch. So it does have an impact, but it varies across the different.

[Sara Amir-Ansari, executive]

Thanks, Nic. We also have a specific question about product manufacturing and operating costs going up in the March quarter. Great question. That was a function of a couple of things. It was a function of third-party license costs that we also pay annually. So in the same way we charge our clients their license fee annually in advance, we have third-party licenses, which inputs into our overall cost of sales, which are charged in a similar way. So we've had those drop in the March quarter.

We also had slightly lower than we would have expected costs in December just because of our vendors going on to Christmas shutdown and billing us later than they would ordinarily have done. And then there was a bit of a cost increase with the ramp-up of the implementation projects with the 2 go-lives that we -- Nic mentioned earlier in the March quarter.

Nic, before we move on, there's a question from Ian Christy about trends in ARR per contract. I think we've previously spoken about that and the average gestation period to enter the contract from initial discussions.

[Nicholas Pollock, executive]

So the trend is not in this pack, but the trend in contracts, certainly, in the reported years up till FY '22, we're not -- and we only sort with that annually. It doesn't really make sense quarterly -- but between FY '21 and FY '22, the contracts were from an average of $90,000 ARR annual to $347,000 ARR, so roughly a 5x increase. I haven't seen that lift -- I mean that's obviously a dramatic lift year-on-year. We're not going to see 5x this year by any means, but I think we're now at a point where I think that average will probably stabilize for a bit but then, over time, we'll start to go down.

Again, as our mode builds as our pricing strength in the market builds with our clients. Obviously, with a lot of these very large clients where the small vendor they're trying to get into the big names. So that's what you've seen historically, but you've also now seen very material change in that price What was the second part, Sara, sorry?

[Sara Amir-Ansari, executive]

The duration for the year.

[Nicholas Pollock, executive]

Duration is a real one. I mean that's the real -- we're in enterprise software sales for the biggest mining companies in the world. Yes, it's never -- and coupled with the fact that we are creating a new space called Resource Governance. So we are changing the way things are done. And I think the -- I think most of you would agree that the rapid rate of sign-ons on particularly the Resource Disclosure side, I think, validates that we are in the right space. And in fact, we can sign those organizations. But across the range of platforms, it does vary a little bit. Clearly, there's a lot of interest in areas like tailings at the moment. And then certainly, there's no doubt that some big players move very fast post [indiscernible]. So incidents like that tend to have an effect not same bits, but yes, it's a process, and it's one that we have very good skills in this business.

[Sara Amir-Ansari, executive]

Thanks, Nic. Just before we move on, there's another question on the financials about whether we're comfortable with our cost base now supports our growth aspirations. Are there costs, e.g. people, to add? I think the answer, as we have achieved a sort of sustainable point in terms of having the capacity internally to support the client base that we have and the implementation of projects that we had in client, and we expect that those teams will roll on to new engagements as implementations go live and the work is completed. So I think it's -- for now, yes. The interesting question for a company like ours is the what next. So we have very aggressive growth aspirations, and we are very thoughtful in investing in the appropriate places to ensure that we are leading the market, and we are the most attractive option for our clients. So yes, for now, but clearly, we always aspire to growth, and the answer to question may challenge. That's it. Thank you, Nic.

[Nicholas Pollock, executive]

So just going to summary. Obviously, continued strong growth in ARR, TCV, those both those metrics but clearly, revenues going up, resets have been going up as well. We have an amazing team, which we're constantly refining and building out in order -- and similar to these costs -- the cost question and getting the right people in the right roles in the right places for long term and stabilizing that. Recently, at the beginning of this year, we appointed a chap, a fellow called Brian [indiscernible] and to help our product group. That has been delivering significant results in terms of the efficacy of that group. [indiscernible] background is that he most recently just came from 5 years at BHP, any other digital batteries initiative.

So he understands the customer really, really well, but he also has a really strong history and background in building enterprise grade off the shelf software. So that capability plus industry knowledge in private, BHP was at Roy Hill and prior to that, he was at Rio Tinto. So he spend 10 years at least in the mining market, focused on delivering products to those caliber of clients, so that's an ongoing thing for us. And that drives the expense line, but it also drives the cost line, as well in terms of efficacy, getting the best out of these teams, and we continue to do that.

The industry dynamics, I touched on that earlier on, that continues to get stronger and stronger again. I think we will hold those impacts more and we see more of that as we go forward. Again, if you are genuinely interested in story [indiscernible] you take the offer of reading that paper expense to take some time to understand that it's a really seminal piece of what we're doing. And then overall, we are in very sticky revenue land. We have had some churn events after, I guess, 3 years or so the business with very little disturbance, a little bit of that now, but overall, the churn rates are very low, very sticky long-term recurring revenues, albeit we're signing 3- and 5-year contracts generally. The average is somewhere between 3 and 5 years. This is sort of 10-plus years type of software that you don't change very often, particularly -- as I said, we're in blue ocean spaces where there really isn't another off-the-shelf alternative. It's either that to build your own in this new world that we're seeing.

So with that, I'd like to thank you all for your ongoing interest in K2fly and happy to take more questions, if there is some.

[Sara Amir-Ansari, executive]

Yes, there are some more questions. We have a question from Sebastian who makes the observation that our business looks to be close to operating cash neutral. And any guidance or outlook we'd provide on R&D spend in the next quarters.

So I said our capital expenditure line investment in intangible assets is not just R&D spend. Some of that is product enhancement, which is less at risk than R&D traditionally would be. We are providing specific guidance. Year-to-date, our spend is about $2.2 million run rate. That would take us to $3 million for FY '23, which is possibly a little bit higher than an organization of our size would spend. But given the things that we are investing in is a topic we're really committed to.

In terms of ongoing spend beyond that, we have work completing in the next half on our Resource Disclosure project. Beyond that, it becomes more of a strategic question about the extent of investment in product. And of course, that is a discretionary strategic question.

Nic, is there anything that you wanted to comment on in relation to that?

[Nicholas Pollock, executive]

Yes, I think watch your base we're definitely looking at, in the background of this, how we bring together through the 4 acquisitions technologies into a more platform play as part of that product lead growth going forward, and that will obviously impact cost to an extent but obviously scale revenues and all.

[Sara Amir-Ansari, executive]

Thanks, Nic. Now we have a question from Gerard about whether we expect to raise capital prior to reaching cash flow breakeven and then a second question about how we describe the sales pipeline and whether the relationship with Maptek has assisted in this area.

Jarred, just to deal with your first question, we've got a closing

[Audio Gap]

in the fourth quarter, which is typically our record quarter for collections. So at this stage, no, we're not having discussions about capital.

Nic, did you want to respond to the question about the sales pipeline and the relationship with Maptek assisting?

[Nicholas Pollock, executive]

Yes. So at the end of last quarter, we disclosed or talked to the market about the integration between both Maptek Vulcan and our Model Manager solution. So in any of these types of things in the sales cycle, it takes a little while for that to take effect. And it's an indirect effect. So it's a comfort that those big clients have that they can buy Model Manager and know that if they're using Vulcan a lot of them are, which is the Maptek product, that gives them another level of integration and reasons to buy. So it's an indirect partnership in that regard. We continue to work closely with Maptek, and I should stress, others, in terms of products to market.

So the Maptek relationship is a really good one not surprisingly, but it's not exclusive. So we are in conversation with other organizations that play in similar spaces. Full disclosure, Maptek know that as well that. We're not competing with those organizations. So we're constantly looking at different paths to market like the Maptek one. And as those things build, we have to talk more about, and hopefully we'll be able to talk about a line of revenue that's new.

[Sara Amir-Ansari, executive]

Thanks, Nic. That's all we have for our Q&A this morning.

[Nicholas Pollock, executive]

Okay. Obviously, most of you are known to us, et cetera. So please feel free to send through other questions or give us a call at any point in time. I'm going to be seen in the next few days, meeting with other -- with investors and presenting, et cetera. So if you want to catch up, please let me know.

Again, thank you for your time and interest in K2fly. We really appreciate it.