K2FLY Ltd

ASX:K2F

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Nicholas Pollock, executive]

Good morning, everybody. This is Nic Pollock, CEO of K2fly. Welcome to our Q3 quarterly update. I'm joined by Sara Amir-Ansari, our CFO; and [ Jeff Zaccaria ], our Marketing Manager.

Good morning, everybody. This is Nic Pollock, the CFO -- CEO of K2fly, welcoming you to our Q3 investor update, which is a regular occurrence for us post our results each quarter. I'm joined by Sara Amir-Ansari, who is our CFO; and Jessica Zaccaria, who is our Marketing Manager, and I'd like to thank you for your time and attention and interest in K2fly. And to that extent, I'll talk through the agenda for today very briefly.

We will give you -- we'll spend -- there's some new people on the call [indiscernible] so we're going to spend a little bit of time talking about the K2fly story and why it's important to investors, of course, while it's important to all stakeholders, particularly those that are taking an interest in all things ESG at mining. And then we'll get into the Q3 quarterly results, and then we'll summarize and take questions as well. So thanks again for your attention.

I will just quickly now visit the K2fly [ overview ]. And I just want to reinforce that K2fly is very much a purpose-driven organization. We believe in this notion of resource governance, we believe that all resources are precious and they need to be taken care of. So that's not resources in the resources mining sense, it's all resources, whether they be air, water, ground -- stakeholders, community, people, communities, et cetera, et cetera.

So we provide enterprise software solutions that deliver license to operate for our customers and ensure a license to operate via adhering to community expectations, compliance, regulations and those sorts of disclosures that they need to make in the marketplace. And we all know that they are growing at an exponential rate across the board in every industry, in every region of the world and at all sorts of levels. So this is a very, very expansive market that is growing day by day literally.

Just wanted to spend a little bit of time on this. There's been an important change to this certainly at the top. When you look at the top box on the right-hand side, which is our Tier 1, what we call Tier 1 top 15 mining companies that have contracted with K2fly. Just to guide you around the rest of the slide on the left-hand side, we talk about the sites and where the ARR revenue is coming from. So 40% of our revenue is coming from outside of Australia, which is an important, really important point. And then down the bottom left-hand side, we have the list of our 10 solutions that are in the market and then a selection of clients on the right-hand side by the different sort of commodities that they play in.

But if I go back to the slide at the top there, I'm really, really pleased. And this is -- I'll point out that this is post the quarter close. But just past the post, if you [indiscernible] something we're very -- trying very hard to get into the -- into the quarter 3. But nevertheless, it's a tremendous milestone for K2fly to sign another top 5 mining company in [ bar lake ] for our resource disclosure solution, which used to be called [indiscernible] For those of you that follow the story know that we've spent the last couple of years, rebuilding resource disclosure from the ground up because it was -- it's been such a successful solution of ours in terms of landing new clients all over the world and landing new clients across the board, but particularly getting us into these very, very large global Tier 1 mining companies. So [ Vale ] is a really important one, Vale, I think sitting about #5 of the top 5 global miners at the moment. And they've acquired the resource disclosure solution, which goes across all of their mining operations, rolling up the critical resources and reserves data that goes into their annual report and the resources and reserve statement.

And for those of you that are invested in mining companies, you should know that, that constitutes a very, very large part of the value of a mining company. It is essentially their inventory on a page or on many pages what they have in the ground and obviously, against the prevailing price of the day gives the value, notwithstanding other issues in and around that organization and particularly these days, the ESG issues, which we also deal with. So we're really, really excited about working with the Vale guys.

It is an important juncture for us because we have been so successful with its predecessor, the [ Acube ] solution and we're in the process of migrating those Acube clients across to resource disclosure, which is the branch banking new cloud first, modern tech platform, which will enable us to scale into many, many other solutions as well. So we now have Vale, starting with that. We have Anglo American well down the path of implementing that as well. And we have two clients that have gone live with it, which are Eramet, a French company and [ ArceloMittal ], a big iron ore steel producer out of the [indiscernible] in the U.K.

So I think what we'll see now is that traditional engine room of that solution, if you like, which has driven a lot of our growth and our steady increases in ARR quarter-on-quarter will continue to grow. And I can see the pipeline already with that, and we'll be backing this up with multiple campaigns into -- more into the middle market now because we haven't done the Tier -- all the Tier 1 [indiscernible] We haven't got there yet, but we're well passed. We've got a majority of them, but we will continue to work on [ getting a lot that's so ] important, but we can now focus more on that [ there as a faster ] middle market, which has a lot more target customers for us, and we'll be driving significant campaigns in that, particularly in and around Australia, where this year, we are going to see in the middle of the year, we'll see the release of the new JORC [ code ], which is the regulatory disclosure about mineral resources and reserves that is an ASX requirement and it's written into ASX and ASIC listing rules, so the customers have to do that.

And what we've seen in other jurisdictions, namely Europe and the U.S. market, when they've had changes in their codes, that drives a lot of business to us in a very similar way, like why would you build your own or try to manage itself when it's off-the-shelf software. So that's been really value those changes in codes, which are ongoing and really important to drive demand, and we should see a significant uptick in -- or already I'm seeing a significant uptick in interest in companies listed on the ASX, notwithstanding all the other reasons why they would do it. So I'm pretty excited about that.

Also worth pointing out that the ARR growth that we saw in Q3, the [ $300,000 ] ARR growth came out of that same group, and I'll talk about that a little later.

Okay. I just wanted to just touch on this. I won't go through this in detail because it's certainly something that you can look at yourselves in your own time. But in terms of talking about mining specifically and the risks in the mining industry, most of this audience will be very familiar with things that have happened in the industry, not least of which things like the cultural heritage destruction and [ Jevan Gorge ] a few years ago, which has driven a lot of organizations. [ So I think part about ] how they address those issues.

A lot of organizations will tell you now that mine planning starts with cultural heritage, which is an interesting phrase and an important phrase, but it's something you wouldn't have heard 10 years ago, let's say, [indiscernible] so the nature of the industry is changing as it reflects and accommodates public opinion and community expectations. And a lot of that revolves around license to operate. And we all know that the world needs -- well, I don't know, but the world needs at least another 300 new mines in order to address the commodity demands that an energy transition [indiscernible] so if we are going to have the wind turbines, the electric vehicles and all that sort of stuff, we need more mines [indiscernible] to supply the critical minerals as well as the traditional minerals like copper, for instance, that drive -- that create these things, license to operate and getting mines up and getting them up in a timely fashion [indiscernible] and we absolutely address our customers with -- in mining, but also increasingly in other areas.

So a lot of you have seen different ways we talk about this. This is [indiscernible] way. We talk about resource government. So K2fly are very unique in that we are creating a new space in the industry. And you can see that, that new space is being readily adopted by global multinational mining companies at this point in time, and that's based as resource governance. We break the space into two areas, what we call the natural resource governance, which simplest way of defining that, it's above ground, and in mineral resource governance. What goes on in terms of your mineral inventories, particularly and how you manage government and report and disclose on those items.

So clearly, there is a natural separation there. So anybody who understands a mining company would need that they absolutely need both of these things. They need to have access to land, first and foremost, and they need to have a resource. And then without those two items, you don't really have a mining company. You have a [ project, that's that ].

So the combination of those two things is very, very powerful. And of course, [ it's not access to land ] and it's cultural heritage agreements or traditional owner agreements, it's partial agreements, it's [ tenants ], it's all those sorts of things that where you're touching ground, [ disturbing around ] and making sure that you don't [ deserve ] things that are sensitive environmentally or culturally.

And then below ground, which is obviously, there's a lot of regulation about because the typical investor cannot see that. It's not like you can go and count stock when we're talking about mineral inventory. So the way that minimal inventory is reported is highly regulated and requires a lot of trust in the results that the company puts out and that they are adhering to standards, and that's what we do. We provide a system that provides that supports the global industry standards and regulatory standard of how you disclose and provides the governance transparency and auditability of those items. And so that you can be confident that the mining company that you're investing in has a proper process and as importantly, a proper system behind that in order to ensure the best transparency and clarity on what they're doing.

We call this the golden thread and this is increasingly in our marketing to our [ prospects ], prospects now. [indiscernible] on the left-hand side, top of the left-hand side, it's all about your public disclosures. That's the output. And of course, those public disclosures are now increasingly being viewed and considered, not just by your average shareholder, but by regulators. So we're seeing an increase in what we call green washing legislation come out in all jurisdictions globally where it's particularly if we were to think about sustainability reports at the moment and [ sustained early reports ] coming out of all sorts of organizations, but in the mining industry and making sure that it's not just the best news story of the day, that's talked about. It is looking at the right things, the material elements consistently and making sure that the data and the processes that are undertaken to make those disclosures have solid backup in terms of the governance of that data and the robustness of that data and where it's coming from. So that goes all the way we started at the bottom from strategy up to business planning up through operations.

And then you can see again how we split this into natural and mineral resource governance and the elements that are consistent across those two things. So starts -- it certainly starts with land and location and then rolls up through stakeholders and engagement and ultimately, compliance and conformance. So you can have -- you might have compliance and conformance, but you might not have stakeholder engagement and you might have a license to operate, but you might not have a social license to operate. So all of these things are pretty -- and then we move into our different solutions and then the key components -- the four key components of compliance performance, stakeholders risk and processes.

So these are the things that drive us and our choices in and around how we address our market with what solutions. So that's a really important thing. So we're really building this [indiscernible]. And so this strategy from K2fly informs what we do and how we do it. Our job is not to create new standards for the industry. There's enough people doing that. There's enough organizations, whether they be regulators or [ peak bodies ], we build solutions that support the client to meet those standards.

So to summarize that, what is it that makes our solutions invaluable to clients and it's probably a good time to point out that we also announced our retention rate of 98%. We've been doing this now for 4 to 5 years in earnest in terms of the software solutions. We've rolled over quite a few contracts -- initial contracts, 3- and 5-year contracts. We've just gone into a fourth renewal with one of our major clients, which I'll talk about a bit later. So this is very sticky software. And I mean that because it does things quite uniquely for these organizations for things that are becoming critical and very, very important to protect their social license to operate, to adhere to regulatory standards, to speed up mining processes and to reduce the risk of greenwashing, if you like.

And what makes K2fly very different is we are offering off-the-shelf software to our customer base, which typically they'd have to do themselves. And that's the software that we cover an overarching sense for resource governance software. So we're filling a gap [ that will only exist ] with a lot of in-house systems and fit things cobble together. So that's what makes us very, very unique.

Okay. So we will jump into the results of Q3 without further ado. So yes. So a solid quarter in terms of a $300,000 increase in ARR. We're maintaining [ it. ] It's an industry best of sort of 98% for any organization such as ours in the SaaS business, that is a very, very high retention rate, something that we're very, very proud of. And again, a 15th straight quarter of ARR growth. Now our business continued to be a bit lumpy, and we're doing business all over the world. So things like the Vale contract [ since a few ] weeks and [ then you're into ] the next quarter. But the key thing is that those global Tier 1 contracts continue to happen and continue to drive our business.

It sort of demonstrates land and expand for us. For those of you that have been following the story for a long time, we talked about land and expand from day 1. So we land a client like Vale with a very substantial contract -- $470,000 of ARR, annual recurring revenue plus a big implementation project. That's our first contract with them, but it's a global contract, which opens up a whole bunch of different doors for us to go and expand within that client. And we've seen the growth coming out of the last quarter was two other Tier 1 clients in that top box, if you like, that are renewing solutions, again, for multiple year renewals over critical pieces of software that are critical to their business. We are -- because we are the only provider of these solutions, we have some price power. So we land -- we deliver value to these clients at sort of an entry price, if you like, that then gives us an opportunity to have a more value-based conversation at the renewal when we come around to second, third renewals, if you like. So that's definitely showing up and we're seeing some good growth with those clients that have been for some time now.

Consulting business, we are not investing so much in [indiscernible] consulting. Our business is a SaaS license business. That's what we want to be measured on. We want to be measured on ARR growth and revenue overall. So we are not investing in some of the legacy consulting businesses so much as we really narrow our focus on the SaaS business, if you like, which is where our valuation is really driven from. And I'm really pleased to see that our pipeline continues to grow. I touched on that, certainly in that resource disclosure area, our engine room of growth for landing new clients. I can see that really growing now that we've moved into full speed on getting that out.

So just sort of touching on that, you can see that demonstrating a 15th quarter of growth, the quarter 3 demonstrates expansion revenue within our Tier 1 customer base, the post Q3 with Vale gives us a really strong start to Q4, which is a tremendous way to start and typically a good quarter for us. And you can see the annual recurring revenues, they're growing at a very, very healthy 42% compound growth rate. So that we're very, very proud of, which is also a very high industry performance.

On that basis, I'll pass to Sara to talk about revenue and costs.

[Sara Amir-Ansari, executive]

Correct. Thanks very much, Nic. I'd like to start by reminding the group that we're discussing our results, it's worth keeping in mind that we invoice and collect our [ site ] software license fee annually in advance and that we recognized [indiscernible] [ the 12-month period. ] So this means that firstly, we have [indiscernible]

Secondly, when we acquire new clients, we earn implementation services revenue during the implementation phase, and then the license revenue benefit accumulates over time. And I can see we've got a question in the Q&A specifically about the Vale ARR initial year prepayment land. So great case study. We've closed the Vale deal with an Australian dollar value ARR of $473,000. We've closed that deal in April. So we will invoice and collect that annualizes [indiscernible] upfront, and we expect to collect that during Q4, so in accordance with their payment terms.

So if we move on to the revenue numbers. Revenue for the quarter was $2.9 million, which has declined due to the completion of implementation projects in the prior quarters. But on a year-to-date basis, revenue to March is $9.7 million, which is 10% higher than the same time last year and represents a 3-year compound annual growth rate of 23% per annum.

Moving on to cash. In the March quarter, closing cash was $1.5 million, and we reported a net operating cash outflow of $650,000, which is an increase on the prior year result, included in our March numbers, the cost of implementing the savings plan and undertaking the strategic review. So if we look at the year-to-date position, as at the end of March, we have a net operating cash outflow of $2.3 million, which is 37% higher than the prior year-to-date. And that's a function of the cost of improvements that we've implemented in product development, some of which has laid the operational foundation for the cost savings that we've recently implemented, some general cost increases to support our growth and then with the one-off costs that I mentioned earlier. So despite the inclusion of recent one-off costs, our gross operating expenditure has been consistent over the past three quarters.

In terms of the business generally, obviously, we're a growing business. With the successful completion of the resource disclosure development project, the solution, which Vale acquired, our expenditure profile is changing. So our expenditure on the development of software was $232,000 in the March quarter. Year-to-date, our investment in our software, so our intellectual property is $846,000 and that's a $1.3 million reduction as compared to the $2.2 million we spent in the 9 months to March 2023.

Nic, I might pass back to you and then address any of the financial questions through the Q&A.

[Nicholas Pollock, executive]

Sure. So thanks, Sara. Yes, so in terms of highlights, we continue to grow our revenue at a 23% CAGR. Our [indiscernible] CAGR over three years. [indiscernible] Our industry dynamics continue to evolve rapidly in this space. So this is not just K2fly talking about that. It's K2fly have been leading this discussion, particularly in the mining space globally for some time and continue to win high-caliber clients across multiyear projects to address those issues. So clearly, we've identified and demonstrated that there is a market called resource governance globally, which is pretty exciting.

Taking that into our growth opportunities, we've established a very strong position in mining. Last quarter, we commenced looking outside of mining into what we would call adjacent industries. And we're actually really, really pleased with the results we're getting there. So we are seeing new opportunities come into our pipeline, particularly around FY '25 outside of [ straight ] mining, particularly in what we would call the linear asset market, which is, I think, of rail pipelines cable, et cetera, items that cross many, many boundaries, whether they be tenement boundaries, [indiscernible] boundaries, [indiscernible] heritage boundaries, et cetera, et cetera, that becomes an exponential problem for those types of companies wanting to cross new ground and having systems that manage that is actually really important to them, and we've got them in the shelf. And then certainly, our sticky recurring revenues is something we're very, very proud of in that 98%.

So at that point in time, I would be very, very happy to take questions.

[Sara Amir-Ansari, executive]

Thanks, Nic. I might just switch through the Q&A here. We've got some questions about gross retention rate and our financial performance, I might take those first, if you don't mind. So we have a question about ARR growth and the benefit to free cash flow. Part of the question is what is it about the business that makes free cash generation so elusive. I think that's a great question from Jess.

I think the context of K2fly is a really important factor in this discussion. So Nic mentioned earlier, we've delivered 15 straight quarters of ARR growth [indiscernible] around [indiscernible] global Tier 1 mining companies. These companies are making a once-a-generation investment. So our solutions are enterprise-level software, although we contract them initially among 3- to 5-year terms. We fully expect that those contracts will renew and consideration of that is enterprise-level software would typically for the client, we expect share sort of be in use for a period of 10 to 15 years. So we were in a highly topical domain with tailwinds supporting the uptake and engagement with our solutions. And we're really committed to laying the strongest possible foundation for long-term value by acquiring as many of those opportunities as we can.

So [ Jess ], I guess that's a really long way of saying it's a choice that we take, and it's a choice that we take in a really thoughtful and considered way with the long-term objective of delivering a really large and stable recurring revenue [ base ]

I might move on to another question about cash. Cash is obviously skinny. It is -- our closing cash balance is $1.5 million. It's important to remember, we also have a $2 million working capital facility. There's a question about our R&D spend. Those of you who have been following us for a while will know that our R&D claim in the previous quarter -- sorry, FY '23 was $360,000 a -- we obviously don't provide [ forward ] forecast, but our capital expenditure over the previous two years, much of which was on R&D activity, so R&D eligible activity, I apologize. So I think it would be reasonable to -- and we have launched an R&D plan. So it would not be unreasonable to expect a consistent result in this financial year.

Nic, we have a question about contract rollovers. How onerous and lengthy the negotiations on rolling over contracts and what leeway do we have to renegotiate pricing or other terms?

[Nicholas Pollock, executive]

Yes. Sure. So first point I make there is there's in multiyear contracts, we have anniversary dates first. So whether it be a 1- or 3-year contract, each year, we invoice the year in advance. Typically, our contracts have a [ CPI clause in ] them, where we will increase the price ordinarily, literally around CPI and that's a fairly straightforward exercise. So the anniversary rollovers are pretty straightforward, and that's all about giving invoices out quickly in a timely manner and collections and Sara, [indiscernible] a fantastic job there. Then we get to the end of the term, there is a rollover.

Now given that the company where we're now sort of in our fourth or fifth year of being a SaaS business in earnest, that's happening increasingly. I touched on the nature of the uniqueness of our solutions. And we've always talked about that we are sort of a [ blue ocean solution ] that we are often replacing in-house software certainly at the big guys or things that don't exist. So we do maintain some level of uniqueness. And [indiscernible] [ power in those relationships because we ] deal with very large organizations that are much bigger than us. But we are -- because of the sticky nature of what we're doing, the important nature of what we're doing and obviously, having delivered value over those 3 or 5-year contracts, and being embedded in those processes, we come at it from a fairly solid position. So our opportunity to raise price is quite strong.

So recent examples would be in and around the 60% mark I've just seen for one opportunity. And [ yes, that are ] -- but it's not always that. But certainly, there is good opportunities for us and everyone is a bit different, as you'd expect.

[Sara Amir-Ansari, executive]

Thanks, Nic. We've got a couple of questions about the current status of the strategic review.

[Nicholas Pollock, executive]

Yes. So the strategic review process we announced at the end of last calendar year, I think it was November. We appointed [ JFAs ] to look at that the -- that was annual [indiscernible] The mandate for the review was very wide in nature and that we were looking, given the headwinds in the equity markets, particularly in and around [ micro caps ], such as [indiscernible] the Board believed that it was the right thing to do and management [ fully indoor stack. ] So we're quite wide in the mandate in terms of looking at all opportunities. We never have expected that to be a quick process. So we appointed the JFAs late last year, we told the market that we would continue to update the market as things unfolded. And we did that at the end of the March quarter, where we identified that the process continues. And I'm not at liberty to say what that process looks like at the moment, but it does continue, which is where it's at. And there's nothing good, better and different about that. That's where we're at and the process continues.

[Sara Amir-Ansari, executive]

Thanks, Nic. Switching gears a little bit. We've got a question about the [ 2% ] of contracts that we lost. So we're talking about our gross retention rate of 98%. If you don't mind, I'm happy to take that. In this rolling 12-month period, the churn that we experienced interestingly, one related to an acquired contract, so obviously, K2fly has undertaken a number of acquisitions over the last few years. We acquired a contract in relation to [ tailings management ] solution. That client had been a very early adopter of the solution from sort of the previous vendor. And at the end of the term after a period has elected to allow the contract to expire.

The way we position and position the solution today and then we sell it and engage with our clients is quite different from how it was when we first acquired that solution. And then the second was a fairly immaterial sort of support arrangement for a legacy product, which is not part of the current portfolio.

Nic, I think we have a couple more questions about cost out, which I might take, if you don't mind. A question from [indiscernible] about what specific [ costs have been ] targeted in the cost-out program and whether there's any [ danger this impact or opportunity for growth ] for revenue. Really fantastic question, and thanks for asking it. We've actually been very deliberate in our cost savings program not to put revenue or client delivery at risk. So the program has been enabled by a number of structural and operational changes. We were able to make those structural and operational changes as a result of a fairly long and sustained transformation program, both in our implementation teams and in our product and development teams. So we have been very thoughtful about taking the cost out of, and I'm sort of using quotation marks here out of overhead rather than direct client impacting areas.

I apologize earlier, for using an acronym that we're not all familiar with, the R&D return is the research and development incentive offered by the government. So it is a submission that we participate in every year and your eligibility for spend depends on approved projects. There's a very long technical criteria and then your [indiscernible] spend on those projects.

Another question about timing, the R&D return, obviously, we submit the R&D returns annually, generally in the third quarter when we actually receive the process on that return depends on the [ ATO ] processing times.

And then, Nic, we have a comment. A [ buyer strike ] and let [ me show we can solve ] the short cash balance. I think the thing for K2fly is that we are very mindful of the lump, Nic. I think Nic referred to the lumpiness of our business, the lumpiness of our cash flows, and we're very proactive about ensuring that we are operating in a financially sustainable way, and the establishment of the working capital facility is one of the things that we have done to ensure that we are able to manage that variability in our cash flow.

Nic, a question for you from [indiscernible], how is the [ traction ] in [indiscernible] management going?

[Nicholas Pollock, executive]

Yes. I think like a lot of these things, there's -- there was the release so K2fly [indiscernible] platform in 2021. And that was targeting [ tailwind ] and also [ rehab ]. There was a lot of activity post the [ Rio ] -- so the Vale disaster in [ Brumado ] in 2019 were 270 lives were tragically lost and all sorts of damage done to villages and an environment. So there was a number of global standards put in place [indiscernible] [ England ]. And then what became that was something called the [indiscernible], the global standard on [ tailings ] management.

So we have built solutions in and around that. I think we have about 7 or 8 clients on that today. And they were probably first movers. So names like [ Alcoa, South32, Tibone ], et cetera, that were early adopters of getting ahead of that. And if those clients, all those clients and members of what's known as the ICMM, International Council of Mining and Metals, and they are -- they set very high standards for their membership about how they address those things.

Suffice to say that K2fly's solution there is probably one of the most comprehensive end-to-end. A lot of the mining companies today are very, very focused on the monitoring of those [ dams ] like through the various IoT devices, whether that be devices on the ground, drones, satellites, [ radar ], et cetera, et cetera. That is their #1 focus, and they're actually coming to terms with how they address all of the things within the [ GIST ], which is what we can help them with. So it's a slow, [ but we had early movers. ] Now we've got people very stuck in execution. We're definitely seeing it pick up again.

I think last year was the first year where organizations were required to report against our standard that was really [ telling for a lot of organizations. ] So I fully suspect that I'm seeing a lot more interest back in that solution. At the same time, we're also looking at that whole platform, and we've actually seen other opportunities in that platform and around environmental monitoring, which we'll be bringing to the market as we speak, and we're seeing quite a bit of interest in that at what is a bigger market opportunity for that platform. So we're quite excited about that.

On that basis, I think that's all of the questions. So I would be really pleased to say thank you very much again for your interest in K2fly and spending the time with us this morning. Thank you also for your active questions and they are very important to us.

[ Since you are out there ] and you're listening and you're paying attention and asking great questions, so we really appreciate your support and interest. And we will speak to you again very soon. Thanks a lot.