Q2 2024 Earnings Roundup: IAC, Fortrea, Hiscox, Iteris, and Kaltura

Earnings call: IAC and Angi Inc. report on Q2 2024 performance and strategies By Investing.com

In the Second Quarter 2024 Earnings Conference Call, IAC/InterActiveCorp (NASDAQ: NASDAQ:IAC) and Angi Inc. (NASDAQ: ANGI) provided updates on their financial performance, strategic initiatives, and future outlook. CEO Joey Levin highlighted the growth driven by Dotdash Meredith (NYSE:MDP) (DDM) and the success of the company's programmatic advertising approach. Angi's focus on improving customer experience and profitability was emphasized by CEO Jeff Kipp, while CFO Christopher Halpin outlined the financial strategies and expectations for the upcoming quarter, including an anticipated $30 million in adjusted EBITDA. The executives also discussed capital allocation, potential market opportunities, and the impact of macroeconomic factors on their business. In summary, IAC and Angi Inc. are navigating a complex market environment with strategic initiatives aimed at improving customer experience, optimizing marketing, and expanding programmatic advertising. Despite anticipated revenue declines, the companies are confident in their profitability and are actively seeking growth opportunities through acquisitions and potential IPOs. The executives remain aware of the macroeconomic factors affecting their business, including the potential impact of Federal Reserve rate decisions on consumer demand. As Angi Inc. (NASDAQ: ANGI) navigates the challenging market conditions of Q2 2024, InvestingPro data and insights provide a deeper understanding of the company's financial health and stock performance. With a market capitalization of $1.2 billion, Angi's recent stock price movements have shown significant volatility. Despite this, the company has managed to deliver strong returns over the last week and month, with a 26.9% and 26.26% price total return respectively, signaling a potential rebound in investor confidence. InvestingPro Tips highlight that Angi is expected to see net income growth this year, which aligns with the company's optimistic profitability outlook mentioned in the earnings call. Additionally, the company's liquid assets surpass its short-term obligations, indicating a solid liquidity position that could support its strategic investments and customer experience initiatives. Here are some key InvestingPro Data metrics to consider: These metrics suggest that while Angi is trading at a high earnings multiple and has experienced a decline in revenue growth, the company maintains a robust gross profit margin, which may contribute to its expected profitability. For readers interested in a comprehensive analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/ANGI, providing further insights into Angi's financial performance and stock valuation. Operator: Good day and welcome to the IAC, and Angi's Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to hand the call to Christopher Halpin, Chief Financial Officer and COO of AIC. Please go ahead. Christopher Halpin: Thank you. Good morning, everyone. Christopher Halpin here, and welcome to the IAC and Angi Inc., second quarter earnings call. Joining me today is Joey Levin, CEO of IAC, and Chairman of Angi Inc. and Jeff Kipp, CEO of Angi Inc. Similar to last quarter, supplemental to our quarterly earnings releases, IAC has also published its quarterly shareholder letter, which is currently available on the Investor Relations section of IAC's website. We will not be reading the shareholder letter on this call. I will shortly turn the call over to Joey to make a few brief introductory remarks, and we'll then open it up to Q&A. Before we get to that, I'd like to remind you that during this presentation, we may discuss our outlook and future performance. These forward-looking statements typically may be preceded by words such as, we expect, we believe, we anticipate or similar statements. These forward-looking views are subject to risks and uncertainties and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in IAC's and Angi Inc.'s second quarter earnings releases and our respective filings with the SEC. We'll also discuss certain non-GAAP measures, which, as a reminder, include adjusted EBITDA, which we'll refer to as EBITDA for simplicity during the call. I'll also refer you to our earnings releases, the IAC shareholder letter, our public filings with the SEC and again to the Investor Relations section of our respective websites for all comparable GAAP measures and full reconciliations for all material non-GAAP measures. With that, I will now turn it over to Joey. Joey Levin: Thank you all for joining us this morning. Special thank you, again as always to the incredibly brilliant and resilient IAC team. Any of you who are on this call today, we are incredibly grateful for the work that everyone has been doing here. This is a team of fighters, grinders, builders and that's what we saw come through not just really this quarter but for the last 18 months is the team that figures out how to make things work and deliver for our customers. At DDM, we are - we've been incredibly focused on delivering for viewers to give them a compelling customer experience and converting for advertisers and we have not been distracted from those focuses and now that's really working and helping to gain share. And we really have the same story at Angi, the focus on jobs done well there to make pros and homeowners happy has been the focus. And over time that's going to show through in a business that can grow and when sharing its category. And same true for businesses that we are minority owners of, Bill Hornbuckle at MGM and Andre Haddad at Turo are totally customer obsessed and we're incredibly grateful to be associated with those businesses right now. I see ahead, I think a great quarter this past quarter and we're feeling some good momentum looking forward. And so we'd love to talk about that with all you and let's get your questions. Operator first question, please. Operator: [Operator Instructions] The first question comes from Ross Sandler of Barclays (LON:BARC). Please go ahead. Ross Sandler: Hey guys. Just maybe starting with Dotdash Meredith, so the letter said you could grow 15% or better in 3Q. That looks great relative to what we've heard broadly from the digital advertising landscape thus far in earnings season. So what are you seeing right now in terms of macro trends that are allowing you to accelerate while others are kind of fading here? And then, the DDM licensing line picked up a little bit quarter-on-quarter and year-on-year. So how much of a contributor to that was the recent AI licensing deals? And how should we think about that going forward? Thanks a lot. Joey Levin: Thanks, Ross. I'll take the first one and Chris could take the second one. Obviously, digital revenue is traffic and monetization and let's do those one at a time. Traffic side has been going very well for DDM. And that's a lot of things obviously it starts with investing in content and investing in the best content. But it's also figuring out distribution. I think DDM has done a really great job in holding court within the Google (NASDAQ:GOOGL) and search ecosystem notwithstanding a lot of things that are happening and changing that system but also diversifying from there. Email has been great. The social media, we've now lapped the sort of Facebook (NASDAQ:META) turning our publishers event and we now see growth in social media our opportunities for growth in social media going forward. Big platforms, Apple (NASDAQ:AAPL) News, Google has a similar concept called Google Discover, video, all these things are areas where we have started to or see real upside and continuing to grow traffic. And so that's been a help in the business and that's where what led to the acceleration in the second quarter and what we think is continued acceleration and what we're seeing as we sit here in August. On the monetization side, that's both direct premium sales and that's also programmatic. And I think it's important to understand that we - obviously, we've been as I say growing inventory, but a solid base of inventory has always been there or been there for a while. And the performance and the performance intent and the measurement of that performance intent has always been there. What's happening right now is, we're getting the demand of advertisers to come in and start to more efficiently price and that's why you saw the our programmatic ad rates up substantially and we think more than the market and if you look at domestic up even more, that that is a product of advertisers coming in realizing the value of that inventory and pricing it up to the point where it continues to drive performance for them. That lifting of that programmatic pricing and the lifting of the premium also feed each other because you start to have less inventory available, which means that that the best stuff starts to get higher prices over time. The licensing business also did well. I'll let Chris to answer that part of the question. But we are starting to have the open AI money in there and other licensing partners that are paying us. That grew healthy. And we still see upside in each of those things as we look forward from here. Christopher Halpin: Thanks, Joey. Ross, with respect to the large language model licensing deal we've announced, if you look at the digital licensing line, revenue grew 19% in the quarter or $4.9 million of dollar growth. If you look at the prior quarter, the existing licensing business grew about 9%. So it's fair to assume about half of the dollar growth to get you to - get you up to 19% came from our open AI license. And we note that represents revenue earned since the partnership started in early May within the quarter. So there's only about 60% of a quarter of revenue captured in the second quarter and will be full going forward. So, if you think about half the dollar growth and gross it up, you have a - you have insight on the fixed portion of our feet. Thanks. Thanks Ross. Operator, next question. Operator: The next question comes from Cory Carpenter of JPMorgan (NYSE:JPM). Please go ahead. Cory Carpenter: Good morning, I had two on Angi. Just you and Joey have been focused on improving the customer experience and profits at the expense of monetization for a while now. So my question is, what inning would you say we're in? What do you think you still need to do? I feel like you're in a position for revenue trends to turn. And then Chris, for you on Angi financials, could you talk about what drove the profit upside in the quarter and the outlook? Maybe expand a bit on your revenue expectations in the back half. Thank you. Jeff Kipp: So I'll start. If I'm going to answer your baseball analogy, I think I'm going to take the bottom of the fourth where the home team and we're on offense. I think as you know what Joey has been focused on and what the company continues to be focused on is getting more jobs done well. Just for reference, we define that as jobs where a homeowner who missed a job on the platform hires a pro, pays for that lead on the platform effectively and the job gets done with a 4 or 5 rating. So we're completely focused there and driving the product and customer experience to give us the long-term repeat and retention required to give us long-term revenue and profit growth. If you want to get into the tactical elements there's some pieces to this. On the homeowner side, as I think everybody knows, our SEO has been in a downward path for a while losing a significant amount of ground it once had. We see that as currently getting to a stable place and turning. That's a big job and a huge opportunity for us given the amount to ground we've seeded that there to be reclaimed. We've been systematically improving our SCM and really been significantly driving the SCM contribution growth. We think we still have work to do. We're still think we are still in the middle innings they're in terms of being able to reclaim ground and grow those jobs. Finally, the other area is really third-party where there have been the most questions around the quality of what's happening there. We think it's a little lower quality. We are continuing to do some work there to make sure that all of our customers have a great experience, which leads to the final category, which is really repeat which has been consistently growing over the last couple of quarters driven by the better experience and more jobs done well. On the pro side, I think you've seen really remarkable increases in retention year-over-year the last couple of quarters. That's also being driven by the focus on jobs done well. We think we still have some territory to gain there which will contribute to long-term growth. We've significantly optimized our sales force and set work is stabilizing and turning back to growth in the near term. And then, finally, you know we're working on getting our online enrollment up and out in the United States. It's been an incredibly successful tool for us. In Europe, that we believe is going to contribute. So we are going to put all the bricks in place. The honest truth is we will be growing revenue again. It will come when we have the experience and the product in a place that we think is great. It's not going to come immediately. But we are continuing to work on that and right now what we are doing is growing value long-term for the business and our customer and our shareholders. Christopher Halpin: And thanks Corey. With respect to Angi profitability and financial outlook, in the second quarter the growth and profit both on a year-over-year and sequential basis reflects the greater efficiency that we've been driving at Angi for some time. Joey started it and Jeff is continuing it. As Jeff said, we've improved marketing efficiency by stripping out lower value revenue streams and what in our view was wasted paid marketing. We've also improved matching and monetization through technology again improving efficiency and that's of course feeding in Jeff's strategies, you heard. And then moreover, we've worked for some time to target higher quality professionals. And that enables us to reduce our service professional acquisition spend while also improving retention and bad debt and we definitely see both manifest themselves. So the investments and experience and efficiency for the business have led to our revenue declines which you referenced, but also helped to significantly improve both revenue quality and margins. Q2 in particular, there was some also benefit of some expenses that shifted from Q2 to Q3 this year. So a little bit of a flattering margins there, but big picture we feel good about the margins. We feel good about the profitability and expect that to continue. Looking forward, we've said we expect revenue declines in Q3 to be a back down about 15%, that's higher than the second quarter but it is more in line with the first quarter and the end of last year. It's really due to two factors. The second quarter last year was a particularly easy comp as it's when we experienced the most pronoun impacts from shutting down certain demand channels that were producing lower quality leads. And then secondly a number of the actions that have been taken to improve consumer experience really started in the second half of last year and early this year. So we're continuing to feel the impact there. As far as profitability in the third quarter, we are guiding to north of $30 million of adjusted EBITDA. That's lower than our profit in second quarter due partly to the shift of expenses I mentioned before. But also targeted investments we're making in customer experience to set us up for future growth. Joey Levin: And I would add to what Jeff and Chris said, all of which I agree with I think it was very well said. Going back to your original question, Corey, Jeff said bottom of the core, we still have work to do here. We still have work to drive the customer experience and the - both on the homeowners side and the pro side to what we think is possible in the category and what we think is a long-term winner and we are going to do all that work over time. Eric Sheridan: Thanks so much for taking the question. Wanted are to come back to two of the themes you talked about in the shareholder letter. First, Joey there was a discussion in there about putting your cash to work in a smart T-shirt manner going forward, as well as the theme of shrinking the discount that exists in the equity of IAC today. Wondering if you could expand upon that statement and how it sort of dovetails back to game on capital allocation more broadly. And the second part of that would be you also highlighted the stakes you have an MGM and Turo, they continued to rise and Turo's percent ownership there. Any color you can give us on pathway to either owning more of those equities over time or the path to creating or crystallizing value around those stakes? Thanks so much. Christopher Halpin: Yeah, thanks, Eric. Those questions are certainly all closely intertwined. There's three things that that shrink the discount that have always been true and I think that that we've always done, but to varying degrees over time. Execution in the companies, smart capital allocation and crystallizing value. All those things are certainly a focus. All those things are certainly on the table and there will be a mix of all of them as we shrink the discount or there will need to be a mix of all them as we try to shrink the discount. We've lived with a discount in our past and we've shrunk a discount in our past. And generally the discount is widest when the gap relative to our last crystallization event is longest. And so, I understand. Now to us, that doesn't reduce the option value of any of those crystallization events. They still exists. They still have value, but I understand that that value may not be appreciated until some of those options are exercised so to speak. We talked a lot already about execution in our companies. And in the letter and obviously that that will continue. The other two capital allocation and crystallizing value are certainly the harder ones to discuss because we haven't done either one of them in a little bit. Our view is, we are definitely looking for new opportunities in M&A. It's been the lifeblood of IAC for its entire history. It's been a great source of growth and shareholder returns and opportunity and we are looking there. We, as always, we have to be disciplined there and we have to find things that we believe are screaming and disputable opportunities. And we haven't found those yet and when we do, you'll certainly know about it. On the crystallizing value side, there's a lot of ways to do that. I mean, if Turo does go public that's a - we'll see what the value is there. There are assets that we could consider selling and optimizing the portfolio whether it's spends or sales or whatever are things that that remain on the table and will be considered to shrink the discount over time. Execution has for basically two years was the lion share of our focus. Now that we've got execution in a place that we feel much better about. I think the other two are getting a lot more attention. As it relates to MGM and Turo, we are very happy with the path that we're on in both of those businesses, which is we get to both hold on to our capital and accrete more ownership in the businesses. And we - that was evident in the last quarter and we hope that to continue and hope both those businesses continue to execute as well as they have been. Joey Levin: And just building on that was in the letter, but for those who follow we executed our warrant in Turo on a net basis. And increased our ownership to 32% without putting any incremental, expending any incremental cash. Thank you, Eric. Operator, next question. Operator: The next question comes from John Blackledge of TD Cowen. Please go ahead. John Blackledge: Great. Thanks. Two questions. On the macro, Joey, just with renewed fears of macro softness. Just curious if you're seeing any signals of macro softness across any of IAC's different business segments? And then, secondly on Dotdash Meredith, could you discuss the key drivers of expected accelerating DDM digital rev growth in 3Q? And then, on the margins on incremental margins were better in 2Q. Can you talk about that outperformance and discuss the strong 3Q DDM digital EBITDA guide both of which I think kind of led to raising our total DDM EBITDA range for fiscal '24. Thank you. Joey Levin: Yeah, John. I'll let Chris do the second. I'll do the first. In our caveat the macro by saying two things. Number one, we're so small, we do have a view but I don't know how much it indicates the entire world. Number two, I do think our view skews towards higher maybe mid income just the nature of our businesses and brands are skewed more in that direction. The answer to your question is, we're not seeing that weakness. We are, we had a really solid Prime Day last month at Dotdash Meredith on the commerce side. We've talked a lot about our view of how advertising - our advertisers our viewing DDM and spend there in terms of both pipeline and booked looks very good right now. So we're - those look healthy. We look by business. I think, care, we've talked about this a little bit that those families. We may be seeing a little bit in the sense of families favoring daycare over individual care, nanny care and so. But that that trend I wouldn't say became more pronounced in the last month. That's been true for the last year or maybe even a little bit more. Same is actually true on the Turo side. I mean Turo and MGM, but Taro specifically demand for travel as far as we can see has held strong. The one trend we have seen which there which has been again true for a little while is mix shift towards cheaper cars. And although we haven't seen that that sort of mix shift happening at MGM yet. And so, in aggregate, it does feel healthy to us, but like I say, we're relatively small. And so, I don't know we're indicative of the whole world and our slice of the world. Jeff Kipp: And then, John, on DDM, I'll take Q2 margins first. Just to do it sort of chronologically. Incremental margins did exceed our expectations in Q2. Combination of little more traffic growth than maybe we conservatively forecast for. And then also monetization was better. Joey talked about strength and programmatic and also momentum in premium and that really drops to the bottom-line. Looking forward, as Joey talked about before, really traffic and monetization are strong. We're seeing solid traffic growth across the portfolio of titles that in and an acceleration so far this quarter. Entertainment is strong as we're lapping strikes, but also doing a good job of targeted content and also driving traffic from new distributions sources as Joey said. Food has been very strong and the team has done a great job re-energizing all recipes and other key properties there. And we see more opportunity. On monetization, it continues to be very solid across premium and programmatic. The recovery/momentum in the broader advertising market is solid and feels to be broadening. It's definitely. not a booming advertising market, but it is solid and key categories for us like health, pharma, retail, beauty remains strong. And then we've seen stability/recovery in categories that we've said previously have been weak. Food and beverage, home and technology. So those patterns and then continued improvement in programmatic monetization where we really feel like our advertising tech stack and our programmatic relationships are differentiated as well as our inventory led us to guide to 15% or more revenue growth on digital in Q3 and 25% plus EBITDA growth. Obviously, our financial plan is back-end weighted. We've said before roughly two-thirds of our profit comes in the second half of the year. But we see momentum, we expect performance marketing to return to growth in the second half and licensing continues to be strong. So we're head down executing. Thank you. Operator, next question Operator: The next question comes from Jason Helfstein of Oppenheimer. Please go ahead. Jason Helfstein: Thanks for taking the questions. Really more two follow-ups on Eric's questions. First, given the improvements at DDM Angi this quarter, your positive outlook and comments in the last letter on the discount versus some of the parts, I would assume the only reason IAC did not repurchased stock was the company was restricted due to M&A talks. The press has obviously reported that you were interested in Paramount that's true or not. So maybe comment on this. And if you can talk about specific areas, you find most attractive for M&A right now. That's question one. And question two, on Turo, you reminded us you're the largest shareholder. It's probably the next large catalyst, unlock catalyst for IAC. Why not IPO now as travel demand has been strong? Are there milestones in the business you are looking which ease or further expand geographic use cases like New York or other urban cities where there's higher risk to the shared cars? Thanks. Joey Levin: Thanks, Jason. I'll do them in reverse order. Turo - Turo management is still very focused on getting public. I think if there's not a milestone that that to advanced into board I think is a threshold to that happening. I think it's more the markets meaning the banks always like to offer someone a discount to buy into an IPO. And I think that the discounts has given the market volatility that discount is looked to be very wide. And Turo being in a very healthy position as a business, with a very healthy balance sheet doesn't need to accomplish that with too wide a discount. So they're waiting for a favorable environment to do that. Whether it ultimately happens, I don't know when it ultimately happens. I don't know but there is not a - to answer your specific question, there's not a business milestone that needs to be hit in order to accomplish that. I think Turo does have the scale to be a public company. I've said all along and continue to say we're relatively indifferent to whether it's a public company or a private company. We're much more focused on how it operates as a company. And I am not sure that that IPO has a meaningful impact on that one direction or the other. But the main thing is just the market environment and getting it into a healthy start with the markets. On your other question, there's a lot in there. Paramount, we did look at that, our Chairman, as you know has a great history with that asset. It's an iconic asset and in a way it is similar to our feeling about DDM, which is content is enormously valuable. And the people who invest in and own the best content, the best IP are in a good position and in a better position as distribution diversifies. And we think DDM, you can see now is a beneficiary of that notwithstanding the sort of prevailing narrative in markets. And so, we like that that concept. The reality is that that deal didn't work for us financially. And I think the elephants have put together a deal that's very hard to be. On M&A and share repurchases, I'll start with that there's lots of things that that can happen in quarters and restrict or complicate our ability to accomplish share repurchases. But we do generally reject the notion that share repurchase is an essential baseline requiring explanation every 90 days. I know it is. It does we have explained it every 90 days for many, many years. But it is a thing that is important. It is a thing that we have not been averse to historically, we've up had huge amounts of shares in our history and we don't have an institutional opposition generally to share repurchases. The only thing we're averse to is the notion of share repurchases we're signaling which is we think a truly foolish game and that's something that that we've ever done. And just to make one more on that, but certainly Monday this week felt like a nice day to look at our treasury and see a heavy stockpile. All that said, Chris and I believe we are outrageously cheap. We would use some cash to buy the things we know so well attractively. And we think we have the ability to afford both share repurchases and M&A. This is the subject of significant internal debate. And the reality is our Chairman wants to put pressure on all of us for pursuing M&A. And to look for those new avenues for IAC that have always been an important source of growth for us. And are something that we expect to be an important source of growth for us in the future. And so, we're sort of keeping that pressure on the organization before we allocate to repurchases. That doesn't mean that we can't or won't or won't soon or won't ever. It just means that we are very focused on M&A right now. And our Chairman doesn't think we have enough capital for both or maybe said differently wants to cash as wide a birth as possible for the next opportunity. And certainly more capital opens up wider array of opportunities. So that's where we are right now. Again, I think it still as always has been and will be true. Anything is possible as it relates to share repurchases, but that's the way that we're thinking about it. And there are - to answer your last bit, there are real opportunities in M&A, right now. I think we are familiar with it in our own cases. There are lots of companies that continue to look to deliver better and better results with the same or shrinking share prices which means multiples if you're not an AI are generally shrinking. And I think as far as public companies, there's a lot of opportunities that we believe are attractively priced. And the longer that trend goes, the more businesses are open to transact at reasonable premiums to those numbers. So that's an interesting area, but we're certainly not restricted to just the public markets. We talk to opportunities in the private markets and unique opportunities and we'll continue to look at all those. I think are generally our sweet spot has been in the $300 million to $700 million range. Generally, we're focused on acquisitions of control or complete acquisitions. But we look at a very wide range and we'll continue to look at wide range. Christopher Halpin: Thank you, Jason. Operator, next question. Operator: The next question comes from Youssef Squali of Truist. Please go ahead. Youssef Squali: Great. Thank you. I have two questions. Just as a follow-up to the prior question on M&A, it seems like in the letter, your telegraphing the possibility of maybe entering a new category. Historically, you've focused on marketplaces. I'm not sure if that's a correct assumption or not, but if it is how will you get investors comfortable with the risk of venturing into a new category at a time when the stock discount is so high. And then second, on the data licensing deal, could you maybe share with us just broadly speaking, how is the pipeline for similar deals historically when we've seen peers do deals like that. Once open AI comes in, then you have a whole slew of others in the pipeline. Maybe, if you can provide some either qualification or quantification of just how big it is the opportunity in front of you for that? Some companies gone in similar situations have been able to sign literally multi - $100 million multi-year deal. Any reason why you guys would not be in that position? Thank you. Joey Levin: I'll do them in reverse order again. No reason why we would not be in that position to answer the last question. But we are in active conversations with a number of players for further licensing deals. And I expect we will have more deals and if you multiply the open AI deal times every other LLM or similar concept, you could get to very large numbers. But we don't know how the market plays out. I do say with high confidence that there will be more. And I expect that there will be many more. And I also think that one of the things that you're seeing in terms of other deals that have been announced recently are relatively tiny players doing rev share kinds of deals, which are maybe interesting. And those kinds of deals if they have happen wouldn't generate real earnings until obviously those businesses start to generate real revenue. And so, you'll see these things play out over time. I think there will be some sort of cash deals. I think there will be some kinds of revenue share deals. But I think it is tipping in aggregate in favor of everyone realizing that content is important, content is valuable and content cannot be stolen or taken for free. And that payment will happen one way or another over time. As it relates to new categories, Yousef, this has been true again for all of IAC's history. Every time we've gotten into something new it's been definitionally getting into something new. Most recently, probably with MGM, that was in a minority way and on a majority way, but when we got into MGM in the first place, people were confused by that. But we saw an opportunity. We thought it was a unique opportunity and we seized it with a sort of billion dollar bet. And that one worked out and I can go through a bunch of other examples that work out. The one thing I'll say, which is also been true for our history and probably the only rule that we truly follow is we don't bet the company. So, we know there's risk in new opportunities and we will never bet the company on something like that. We'll take manageable risk and we'll have to have high confidence that we can deliver that over time. Christopher Halpin: All right. The only thing I had on the licensing deals is, there are active discussions as we've said each LLM and operator sort of has their own approach and philosophy. But we are - we were disciplined in our discussions and approach that led to the opening ideal. And also Joey referenced it in the letter. But given some of the travails on answers that we've seen from LLMS publicly, we believe that our preeminent brands and trusted content will only increase in value for sources in generative AI answers and large language models. And that the that the puck is moving in that direction where it's not about the cheapest answer to get to it is about the best one the most respected one and the most likely to be useful to the consumer who's entering the query or users entering the query. So, we think that's a positive trend and reflects the portfolio of titles and brands that we built. Joey Levin: It's a great point in and there aren't a lot of true broad scaled sources of truth out there and we think we have one of the most valuable one. Christopher Halpin: Don't put glue in your pizza. Operator, next question, please. Operator: The next question comes from Nick Jones of Citizens JMP. Please go ahead. Nick Jones: Good morning. Thanks for taking the questions. I guess, two on DDM. In the letter your aim that you spoke to drive up programmatic ad rates being up around 36% in the quarter versus I think prior expectations of 15% to 20%. How much more growth do you see for programmatic ad rates I guess from here on DDM? And then, another question, kind of the Adweek article on the case study with Pandora (OTC:PANDY). it sounds like decipher guarantee went well. Can you may be speak to how many brands or kind of do you think decipher guarantee and how the conversations are changing after Pandora's performance? Thanks. Christopher Halpin: I'll take those and Joey definitely jump in. Programmatic has been very strong and the team has built in excellent tech stack but also integrations to the various players in the industry. And really moving from strength to strength. What you referenced we said in the letter was our average programmatic rate was up 36% in the second quarter versus a broader market that from a few different data points we'd say up is 15% to 20% on price. That premium represents both superior technology performance, but we also think it highlights or we know It highlights how performance DDM's inventory is that given the intent-based and high conversion dynamics and also predictable nature of Dotdash Meredith's users. The ads will just work very well for both premium advertisers, but also for programmatic coming through. And we're not going to give forward guidance on programmatic. But we have confidence we can outperform the market and that aligns. Decipher is a part of that. Right now, decipher, as you referenced the Adweek article and we'd encourage everyone to read it. It is a differentiated product as Joey said in the letter for our direct premium sales force. It is in over half our premium deals and it aligns with a number of factors that brands and agencies are looking for better performance, better ROI, privacy-friendly, non-cookie-based and we're excited about the partnership with open AI to bring their capabilities, greater scale, greater compute integration of video and images in the targeting and in the performance forecasting. All of these align towards where we think the puck is going, which is intent-driven, privacy-friendly, highly performant advertising. And we appreciated our partner in Pandora allowing us to disclose that case study. We have over 27 case studies at DDM that show decipher is depending on which metric a client's chooses twice as performant as cookies. And that - and the metric along that line was mentioned in the Adweek article. And we will - we look to provide more case studies to investors. But we feel very good about the product. We feel very good about the product roadmap including eventually integrating it into programmatic platforms. And all that gives us optimism about continued outperformance on monetization. Thank you. Operator, next question. Operator: The next question comes from Brent Thill of Jefferies. Please go ahead. Unidentified Analyst: Great. Hey guys. It's James on for Brent. Thanks for the questions. Can you just talk a little bit more about Google's latest plans and not deprecate third-party cookies? And how that impacts your medium to long-term outlook for Dotdash Meredith and your ad business more broadly? And then, could you also just talk about some of the alternative identifiers in the market like UID and whether you're deploying this tool across your portfolio? Thank you. Christopher Halpin: Sure. The punch line on the Google decision that the deprecated cookies is we think the end state is more or less the same maybe the timeline is different but the end state is more or less the same, which is users or Google rather will offer users choice, users depending on how that's presented will likely choose not to continue cookies and the universe of audience that is cookied will shrink. By the way, the universe of audience is cookied have shrink and has been shrinking for a while. It shrank very dramatically when Apple turned out cookies and made cookies unavailable for all of iOS which is by the way a very valuable audience, a more valuable part of the market. And so, we think that that cookied audience continues to shrink. This is one of the reasons we're so excited about DDM. What we offer advertisers is the ability to access the non-cookied audience and the ability to access that non-cookied audience with intent and with performance. And so, what's been happening in the market is a cookied audience that's been shrinking that has all the infrastructure around it to target a cookied audience has had a lot of demand chasing shrinking supply which means price has been going up in the cookied audience and everyone's chasing the exact same customers at a higher and higher price. What DDM is now offering and people are now seeing, advertisers are now seeing is we can access the rest of that audience including the especially valuable iOS audience that is being naturally more valuable audience it should be a naturally more valuable audience. If you just look at demographics and that's really important. The way we do that is, we have intent. So our content DDM's brands but we have travel and leisure. We have food and wine. We have all recipes. We have a product that we have brands rather that are reviewing products and recommending products based on proprietary research that we're doing on those things like within better homes and gardens. That audience has significant intent which proves out in the case studies we do, I think we had 27 case studies showing a 2 x lift in performance for these advertisers, it is very real and it is accessing an incremental audience if they can't access. And so we view what's happened with Google and what will continue to happen with cookies as long-term beneficial for Dotdash Meredith and we are we are seizing that opportunity. Thanks, James. Thank you. Operator, next question. Operator: The next question comes from Yugal Arouninan of Citigroup. Please go ahead. Yugal Arouninan: Hey thanks. Good morning guys. Back to Angi and Jeff if you could give us a little bit more color on kind of what the focus is on the consumer experience improvement right now? They're understanding we're in the fourth innings and you've done some and there is more to do. But what are the key areas of focus at this point? And then on the SEO side I think a little bit more color on kind of what's needed to get SEO from this kind of stabilization point to where it's actually driving improvements? Thanks. Christopher Halpin: So, I'll take it and starting with a second first. On SEO, there's a range of execution things that we need to do. We have just rebuilt the infrastructure to put our content on and to do our site linking that's in place with some encouraging early indicators, but it's too early to call it. I think secondly, we have to have a disciplined program of producing the right content and keeping the content refresh, which you've heard talked about with DDM over the years effectively. And there's a playbook there. We believe we have the team in place. We believe we have the technology in place. And we believe we have the path to execute here. Now it just has to be done. Secondly, in terms of improving the consumer or what we might call the homeowner experience, we've done a fair amount of work here already. At the core, what we've been focused on as rule one over the last year and a half or so is improving matching. And what we've been able to do is improve the number of homeowners who are matched and the number of matches they get significantly and that's been part of what's driven the job said well right. What we're now working on is driving better matches. And so, we've talked about improving our Q&A, making it conditional. What that means is we reduced the number of questions because we only ask the questions that are necessary once you've answered the last question. Example would be is it painting, is it interior, exterior there's different paths you go down. By doing this, we can get more certain about what the job is and how to price the lead and get a better match of the right pro. Having the right pro makes the higher and the job being well done much more likely. So, that is really our core focus there. We're doing a number of things obviously, but I'd just sort of stop there with that. Let's do one more question. Joey Levin: Yep. Operator: The next question comes from Tom Champion of Piper Sandler. Please go ahead. Tom Champion: Hi, good morning, guys. Joey, can you talk a little bit about engagement trends on DDM properties, peers if harness new formats and ML models to drive personalization and higher time spent. Is this an opportunity for DDM? And then, Jeff, I'd just be curious to get your thoughts if the Fed cuts rates next months. Is that a tailwind for the Angi business? Thank you. Joey Levin: Sure, Tom. Yes, that is an opportunity. So I'm glad you raised it on when we think about DDM's growth. There is a on the traffic side certainly it is just volume. It is engagement and it is frequency and different. properties are at different levels of frequency and engagement. We think we have real opportunities across many of them to grow that more deeply. I mean as you maid might imagine, recipes have very deep engagement. And so I think for us maybe opportunity to drive frequency or scale there and something like People Magazine would have very significant scale and volume. And the opportunity there would be to do things like driving deeper engagement. And AI is a fantastic tool for that. We have been playing with that. There the main tool is figuring out what the next article to suggest is and AI is much better at that than people are. And so, we're using those tools to deploy there to figure out how to drive engagement. And I think we can get real wins there on the on the engagement side. What was the second question oh? Jeff Kipp: On the rate cut, Angi obviously, there's a lot of complexity in the macro environment right now a lot of different forces by itself a rate cut would provide homeowner demand, because it would be more likely to increase the rate of home buying and thus the repairs you do to your house to sell it and the repairs you do - the repairs and improvements you do the house that you plan as you're moving in. The other thing it would theoretically do is, it would lower the cost of home equity lines and encourage improvements. That's in a vacuum. It's a little bit hard to predict all the forces that are going on right now. We have some evidence that people have shifted their own personal capital towards improvements, because they can't move. The rate cut would have to do material to impact all the people out there who have 2.5% rates and make them willing to move in terms of the value trade-off they'd make. So, I think there's a little more complexity to it, but by itself a rate cut should help consumer demand in particular and give us a tailwind there. Joey Levin: And just to put some numbers around that, it is every time a home turns over on average is $15,000 of home improvements that happens. So, fewer turnovers, which is what the market has seen for a while now it means that is $15,000 events aren't happening to the same degree. So, you'd like to see more home turnover, but there are some natural hedges there, as Jeff alluded to and there's also the reality that we've said for a while that I think 60% of our business is non-discretionary. So, as we always say at the locksmith you're not waiting for the locksmith for rates to turn. I think that covers it. Thank you all for joining us. Thanks for a lot of great questions. Thanks for the support and as we continue on this journey and especially thanks to the IT folks on here who are making all this happen. Talk to you all next quarter. Jeff Kipp: Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Fortrea Holdings Inc. (FTRE) Q2 2024 Earnings Call Transcript

Hima Inguva - Head of Investor Relations, Corporate Development Tom Pike - Chairman, Chief Executive Officer Jill McConnell - Chief Financial Officer Ladies and gentlemen, thank you for standing by. Welcome to the Fortrea Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would like now to turn the conference over to our speaker today, Hima Inguva, Head of Investor Relations and Corporate Development. Please go ahead. Hima Inguva Good morning and thank you for joining Fortrea's second quarter 2024 earnings conference call. I'm Hima Inguva, Head of Investor Relations and Corporate Development at Fortrea. On the call with me today are our CEO, Tom Pike and CFO Jill McConnell. The call is being webcast and the slides accompanying today's presentation have been posted to the Investor Relations page, fortrea.com. During this call, we may make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties that could cause actual results to differ materially from our current expectations. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statements concerning forward-looking statements and risk factors in our press release and presentation that we posted on the website. Please note that any forward-looking statements represents our views as of today, August 12, 2024 and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures but we believe these help investors gain a more complete understanding of our results. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and earnings call presentation slides provided in connection with today's call. With that, I'd like to turn it over to our CEO, Tom Pike. Tom? Tom Pike Good morning, everyone, and welcome to the call. Let me start by saying that Fortrea had a solid quarter of execution and progress on our strategic objectives despite some difficulty predicting when biotech opportunities would contract that impacted our book-to-bill. As you know, Fortrea is a pure-play CRO that offers end-to-end solutions for clinical trials across Phases 1 through 4. We have a strong track record of delivering high-quality services to our customers ranging from small biotech startups to large pharma companies. We believe we have a strong value proposition in the market as we combine 30 years of experience, deep scientific expertise, operational excellence and innovative technology to deliver faster, better, more cost-effective outcomes for our customers. We also have a diversified and balanced portfolio of projects and a healthy mix of short- and long-term contracts, as well as broad exposure to different geographies and indications. In the Q2, we saw some positive signs of improvements in our business. Let me share with you some of the highs and lows of the quarter, and then we'll talk in more detail about what we see for our second half bookings. First, the highlights. We signed several deals and partnerships with top 20 pharma customers, including one new full-service outsourcing partnership. The other deals are solid footholds into larger customers. Our pipeline of opportunities continues to improve in both value and mix, and our win rates are solid. More on that in a couple of minutes. We've exited about 60% of the TSA agreements with our former parent and are making good progress on the most difficult part, the transition of software, servers and other technology. We delevered the balance sheet. And finally, we have a clear line of sight to improving our margins while delivering quality work and started planning for 2025. I will give you some detail on some of these highlights, and Jill will fill in on others. Our new offerings and approaches to partnering with large pharma are gaining traction. This quarter, we beat out four of the big six CROs to be selected as one of only two providers in an attractive full-service partnership with a larger pharmaceutical firm. The customer noted how Fortrea showed up differently to the opportunities than others under consideration. The increased bookings and revenue from this win should be felt in 2025. As I mentioned, we had some nice wins in a couple of other large pharma firms too. In one situation, would be two larger incumbents take over an important clinical services opportunity and consolidate what was three vendors into one. We also got a nice winning foothold in a third even larger pharmaceutical firm. We've begun to see additional opportunities from these customers. Our clinical pharmacology business continues to be strong with attractive book-to-bills, customers and indications. We're also seeing increasing momentum in transferring the impressive relationships we have in clinical pharmacology into Phase 1b and 2. We have a significant number of opportunities and have increased our win rate where decisions have been made. These relationships are based on the deep scientific knowledge we've brought to the table, working in some inspiring new modalities that include metabolic, neurodegenerative, immunology and more. We had some good wins in biotech in areas such as oncology, ophthalmology and dermatology. Recently, I met with the CEO of an ophthalmology biotech who has a great product, and they raved about our success to date with an important and challenging trial. In the Q2, we also announced two offerings that reflect areas of strength for Fortrea. The first was our diversity and inclusion solution, which is designed to expand patient access to clinical trials and address the U.S. FDA requirements to increase enrollment of underrepresented populations in clinical trials. The solution incorporates our consulting expertise, real-world evidence data, comprehensive planning, implementation and measurement methodology. We've had a very nice response to this solution and have gained significant experience in this area, working on more than 40 diversity action plans in the past year. Greater productivity in clinical trials has become critical for the industry and Fortrea is centering itself on this value proposition. We are developing changes to roles, processes, partnerships and technology. As part of this effort, another offering that we announced in the second quarter was the launch of their AI Innovation Studio, which will develop and deploy AI and ML technologies to drive productivity, quality and enhance site and patient experiences, as well as safety in clinical research. Fortrea's Innovation Studio is a fresh take on AI for CROs, very forward-looking and collaborative, yet still cost-effective. I'm looking forward to seeing what productivity ideas emerge from the studio in collaboration with our forward-leaning customers. We're hoping to share some of this with investors and analysts later this year. In another development, our therapeutic strategy leaders, who are some of our key medical doctors, now prepare strategies for increasing our impact and share in various therapeutic areas. They identify the movers and shakers, interesting mechanisms, as well as what we need to do and offerings, we need to have to increase our share of the pie with biotech's and large pharma. Overall, we're strengthening our offerings and it's getting noticed. Fortrea was recognized in the second quarter for the first time as an independent company with CRO Leadership Awards, sponsored by Clinical Leader, in four categories, capabilities, expertise, quality and reliability. These awards are based on an independent survey, which compiled feedback that customers provide on CROs that they have worked with on a project during the past 16 months. Now, let me address the low light of the quarter that spills into some of our other results. Our book-to-bill for this quarter was just under one. Since we're a new public company, we'll try to give you more color on what happened. During Q2, we said to you, if we execute, we can meet our target of 1.2 book to bill. Let me explain why we thought that. Our pipeline at the beginning of Q2 was larger than any quarter since the beginning of 2022. In fact, it was 11% higher than the average of the three prior quarters. And our win rates have been solid. Overall, about half of our work is with biotech's. We're experienced at working with biotech companies and are optimistic about our capability to deliver attractive biotech solutions that fuel growth for Fortrea. At the same time, contracting in this space can be uncertain, and we're finding it is harder to predict when the final contract will be executed. In the first half, our mix was slanted toward biotech. We're making changes to address the disappointing predictions and bookings these past two quarters. Unfortunately, two quarters of sub 1.2 bookings impacts our guidance and some other key targets. Now, let me turn to our pipeline for the back half of the year. As I mentioned, our pipeline at the beginning of Q2 was 11% greater than our average of the prior three quarters. In Q3 and Q4 of last year, we delivered that 1.2 book to bill are better. The pipeline at the beginning of this quarter, Q3, is even greater than it was in Q2. In fact, it's 7.5% greater than it was. It also has more large pharma, which is encouraging. We're seeing our large pharma partners coming through their internal processes with RFP flow returning. We also feel good about Q4. As we sit here today, the second half overall has more qualified opportunities than any upcoming two quarters since we've been public. The pipeline is very attractive. In addition, the new and refreshed partnership should contribute more opportunities in 2025. Now let me hand over to Jill, she'll comment on the numbers in more detail and our transformation and margin improvement programs, then I'll wrap up with some comments about the remainder of the year in 2025. Jill McConnell Thank you, Tom, and thank you to everyone for joining us today. Before we get into the details of the quarter, I want to acknowledge some of the work we have already done over the past year, exiting around 60% of our TSA services with our former parent, completing the divestiture of our non-core enabling services businesses, and materially improving our balance sheet. These are important building blocks for us to create long-term value for all our stakeholders. Upon the closing of the enabling services divestiture and executing on our receivable's securitization facility in the quarter, we significantly reduced our balance sheet leverage by paying down around $500 million of spin-related debt. We have improved our capital structure and have ample headroom between our current ratios and our debt covenants. We have laid the right foundation for continued transformation. I will start with providing a detailed breakdown of the financial performance of our core business this quarter. Then I will walk you through the components that we are using to enhance profit margins in the adjusted EBITDA margin bridge we provided. I will share progress on our commercial transformation and expectations for the remainder of 2024, including the components that are driving improved adjusted EBITDA margins for the second quarter and that we believe will drive improved EBITDA margins for the second half of 2024. And finally, I will discuss our outlook for 2025. As a reminder, all of my remarks relate to continuing operations following the divestiture of our enabling services businesses unless I note otherwise. Revenues of $662.4 million declined 8.6% year-on-year. This was driven by lower pass through revenues compared to historical highs and lower service fee revenues. The pass-through decline is largely driven by lower pass-throughs on the biomarker studies we have previously called out, which are now normalizing given their stage in the project lifecycle. Our 2nd quarter service fee revenue continues to be impacted by a combination of factors, primarily lower new business awards in the pre-spin period, along with a mix shift towards later stage and longer duration studies, particularly in oncology. Note that we did see mid-single digit sequential growth in service fees, in line with our expectations. On a GAAP basis, direct costs in the quarter decreased 7.6% year-over-year, primarily due to lower pass-through costs. SG&A in the quarter was higher year-over-year by 59.7%, primarily due to incremental onetime costs incurred for exiting the TSA with our former parent. The company reclassified $33.1 million from direct cost to SG&A expenses in the prior year comparison period, primarily related to information technology costs and certain non-clinic facility charges. For the Q2, you will see SG&A as a percent of revenue on a GAAP basis at 23.6%. However, it contains approximately $54 million of onetime costs related to the continued separation from our former parent. Excluding spin related onetime costs in both quarters, underlying SG&A as a percent of revenue was relatively flat to the Q1. We see significant potential to expand margins by reducing SG&A expense as a percentage of revenue over time once we fully exit the TSA services and can transition to lower-cost replacement infrastructure. Net interest expense for the quarter was $45.2 million, however this is comprised of actual interest expense of approximately $33 million, and the remainder being the write-off of a portion of the debt issuance discount based on the debt prepayment in the quarter. As noted previously, we are targeting quarterly interest and related fees expense to decline substantially going forward due to the debt pay-down. When looking at the annualized interest expense using debt outstanding, securitization usage, and rates in effect at the end of the second quarter 2024, estimated annual total cash interest and securitization costs are targeted to be approximately 18% lower compared to the annualized cost at the end of the first quarter of 2024. Turning to our tax rate, the effective tax rate for continuing operations for the quarter was negative 12.1%, primarily due to the combined effect of a forecasted pre-tax loss in 2024 given our large one-time costs, a change in evaluation allowance, and earnings mix. During the second quarter, we recognize tax expense of $10.7 million in continuing operations, primarily due to a forecasted valuation allowance on our deferred tax asset related to disallowed interest expense. We have plans that we expect could improve our overall tax position over time. Our book to bill for the trailing 12 months since the spin is 1.16 times, and for this quarter, it was 0.96 times. Our backlog at around $7.4 billion has grown 5.6% since the spin. As part of our work in the first quarter of this year to disentangle the enabling services businesses for reporting as discontinued operations, we became aware of historical misstatements of certain financial line items which we identified. The overall impact of these adjustments is not considered material to any given year. As previously discussed, we are continuing to bolster our financial control environment through personnel additions and process improvements. Continuing operations adjusted EBITDA for the quarter of $55.2 million decreased 23.2% year-over-year compared to adjusted EBITDA of $71.9 million in the prior year period. Note that adjusted EBITDA more than doubled compared to the first quarter of 2024, increasing by 103.7% on a sequential basis. Adjusted EBITDA margin for the second quarter was 8.3% compared to 9.9% in the prior year period. Adjusted EBITDA margin in the quarter was negatively impacted by lower service fee revenues from the lower awards during the pre-spin year, the mix to longer duration studies, and higher SG&A costs post-spin to support operations as a public company. These were partially upset by the benefit from the restructuring program we initiated in the third quarter of 2023, which is continuing into 2024. In the second quarter of 2024, adjusted net loss of $2.3 million decreased 105% compared to adjusted net income of $46.1 million in the prior year period. Adjusted net loss for both basic and diluted share for the quarter was $0.03 compared to adjusted net income of $0.52 in the prior year period. Turning to customer concentration. In our continuing operations, our top 10 customers represented slightly more than half of our second quarter 2024 revenues. One customer accounted for 13.2% of revenues. As I comment on cash flows, note these relate to Fortrea in total as we have not segregated cash flows from discontinued operations. For the first six months and a June 30, 2024, we reported $248.1 million in cash flow from operating activities compared to $148.1 million generated in the prior year. Cash flow benefited from the sale of receivables under the securitization facility and an increase in unearned revenue, partially offset by the decrease in net income. Free cash flow was $227.6 million compared to $122.3 million in the 1st, six months of 2023. Net accounts receivable and unbilled services for continuing operations were $637.9 million as of June 30, 2024 compared to $941 million as of March 31, 2024. Day sales outstanding from continuing operations was 54 days as of June 30, 2024. 43 days lower than March 31, 2024. The reduction versus the Q1 is primarily due to the sale of receivables through our securitization facility, lower average billings and to a lesser extent, an increase in advances. We continue to make changes to our contracting and order-to-cash processes to enable further improvements to our DSO profile over time. During the quarter, we prepaid $275 million of term loans from the initial divestiture proceeds, with the majority $211 million used to prepay term loan B, which has a higher cost of debt. We also used $229 million of the proceeds from our securitization facility to further pay down term loan B and our revolver, and as a result, reduced total debt by $504 million from the end of the Q1, ending the Q2 with $1.14 billion in gross debt. We have been and for the foreseeable future we expect to be fully compliant with the financial maintenance covenants of our credit agreement. We have considerable room under our covenant ratios due to the debt paydown, the exclusion of securitization usage from the calculations and the benefit of the add backs permitted under the credit agreement. We ended the quarter with more than $0.5 billion of liquidity. Our capital allocation priorities are unchanged, focusing in the near term on infrastructure investments for timely exit of the transition services agreement with our former parent, targeted investments to drive organic growth and improve productivity and then debt repayment. Our target for net leverage ratio continues to be 2.5 times to 3 times over the medium term. Now I will provide an update on our transformation program. We continue to make progress on our journey towards improving financial results while we increase the longer-term health and performance of Fortrea. We've now exited around 60% of our TSA services with our former parent, and we have robust plans in place to exit the majority of the remaining TSA services by year end, with a limited number being exited early in 2025 to ensure business continuity through year end. We are continuing with programs to reduce costs, including a restructuring program we introduced in the Q3 of 2023, which is continuing into 2024. The improvement in overall adjusted EBITDA this quarter is benefiting from these programs as the service fee revenue growth we delivered dropped through strongly to the bottom line as we expected. On SG&A, while we have made initial progress in IT already, we are continuing to prepare for more efficient supporting organizations over time. In a few areas, we begin we expect to begin to see benefits emerge towards the end of the year with other improvements planned for 2025 and beyond as we fully exit the TSA and adopt these more efficient infrastructures. As you can see from our SG&A expense line item, this is critical for us to be competitive with our peers. On operational execution, we continue to enhance productivity by compressing our time to study start-up and accelerating achievement and milestones through targeted investments in project management capabilities. We remain laser-focused on building our backlog with the right mix and volume of new business awards. To that end, we are continuing to invest in resources and tools for our commercial organization and are ensuring senior leadership are intrinsically involved in the competitive selling process by leveraging their relationships and experiences. I will now cover our updated guidance for continuing operations. For full year 2024, we are lowering the midpoint of our revenues to $2.725 billion with a range of $2.7 billion to $2.75 billion. The adjustment to revenue guidance largely reflects the lower recent pass-through trends we have been seeing, in particular due to the biomarker studies I mentioned earlier, and the impact to service-free revenues due to the lower-than-expected new business awards in the first half of the year. As a result of these headwinds, we now expect to have an overall revenue decline versus 2023 of around 4%, with the second half being improved versus the first half, but down slightly versus the prior year. Given that a portion of the revenue reduction is expected to be service-free revenues, we are reducing our adjusted EBITDA target to a range of $220 million to $240 million. In spite of the lower adjusted EBITDA range, we are targeting to show continued improvement sequentially through the remainder of the year, both in service-free revenue and in adjusted EBITDA. Let me bridge this improvement for you as seen on Slide 9 of our investor presentation. You will see that we delivered $82.3 million of adjusted EBITDA in the first half of the year. Using this as a run rate would give you a full year adjusted EBITDA of around $165 million. To get to our revised midpoint of $230 million, we are targeting service-free revenue growth to contribute $40 to $50 million, along with continued operational and SG&A optimization to contribute $15 to $25 million. The margin optimization is anticipated to be a combination of gross margin improvements, given the restructuring programs we have implemented, improvements in facilities and other operating costs, and reductions in our IT spend. In achieving this, we would target to deliver an adjusted EBITDA margin in the 11% to 12% range for the fourth quarter of 2024. Now let me share some implications of our results and these guidance changes to our view of 2025 adjusted EBITDA based on our modeling. We are now targeting the adjusted EBITDA margin for 2025 to be more likely in the 11% to 12% range. While this is below the 13% we had been targeting previously, it would represent a roughly 300 basis points improvement at the midpoint versus 2024, and broadly a 30% to 40% increase in adjusted EBITDA dollars delivered. In addition, we are targeting a return to positive cash flow in 2025, given the expected reduction in spend related to the separation from our former parent. The challenges of the separation and the time it is taking to optimize our commercial approach and operational execution has led to a slower return to growth and margin expansion than we originally anticipated. But make no mistake, with a backlog of more than $7 billion, a global talented team of more than 16,000 clinical development professionals, and full independence to unlock future optimization in-site, we remain a great partner for our growing customer base, a rewarding place to work for our employees, and a long-term value creation opportunity for our investors. We are relentlessly focused on driving innovation and efficiency in clinical development, and we are gaining significant traction with customers, which is opening doors to new opportunities. As a pure-place CRO, we are diligently executing our transformation strategy to drive substantial margin expansion and unlock significant value for our shareholders. Now I'll turn it back to Tom for the remainder of his remarks. Tom Pike Thank you, Jill. In closing, let me provide some thoughts about the remainder of the year in 2025. Regarding the second half of 2024, as I mentioned, our pipeline of opportunities has grown and has more large pharma, which should be more predictable. In both the third and fourth quarter, we have attractive qualified opportunities to close and contract. If we execute, we feel confident that across the two upcoming quarters, we can average 1.2 book to bill. Q4 looks stronger than Q3. We will continue to do everything we can to meet a 1.2 book-to-bill or better in the 3rd, 4th quarters. Now let me pick up on Jill's discussion of 2025. We have a programmatic approach to increase sales and improve operating margins, while delivering for customers with quality. We now understand the investments required and are planning to make them. If we hit our target book to bills, as Jill said, we're modeling more than 30% improvement to adjusted EBITDA dollars next year. In 2025, we will complete our exit from our former parent and end those heavy onetime costs. We also expect to turn cash flow positive in 2025. I acknowledge that this is a different financial trajectory than the one we had hoped, but it is still a very attractive increase in adjusted EBITDA in a short period of time. Let me step back and tell you why I'm so confident in Fortrea, because I get to see the Fortrea team in action, because I get direct customer feedback on our performance and how we show up from executives. We work hard here, we press our innovative offerings, and we seek to exceed our customers' expectations. When customers take the time to get to know us, they see us as innovative, agile, and they know the management team is accessible to them. Internally, I meet with teams working on exiting our former parent divesting enabling services, and improving our delivery and margins. They also work hard, they resolve issues and they meet deadlines. I meet with our AI and IT leaders regularly. We push for practical innovation while reducing overall IT costs. There is work to do, but this is the right team to do it. For instance, Jill and I meet weekly with teams driving our sales process. We review larger and more important deals. We press for critical thinking and what I call ferocious debates among friends to develop compelling solutions. We're getting better all the time. In my career, I've turned around businesses and I've grown businesses. Let me share this. Services firms and CROs in particular can be thought of like flywheels. If you know what a flywheel is, you know it takes effort and time to get it spinning. As Jim Collins has written, you put a great team in place, you confront the brutal facts, and then you create a culture of discipline around execution. We're doing that here at Fortrea. Once the flywheel is spinning, momentum is a very powerful thing. We can go on a multi-year journey to create value. Other CROs have, and we will too. In summary, Fortrea had a very solid quarter of execution and progress, and we're well-positioned for growth and value creation in the future. We will get that flywheel going and build momentum. You think about it, we delevered. We doubled EBITDA from Q1 to Q2. We had some big relationship wins in large pharma. We have a record pipeline as a public company, and we're anticipating more than a 30% increase in adjusted EBITDA next year. In closing, I'd like to recognize the tremendous team of professionals we have working here at Fortrea. We have navigated our 1st year as an independent entity, and the team has remained focused and dedicated to our patient-inspired mission. I appreciate their commitment and their expertise when we deliver solutions that bring life-changing treatments to patients faster, creating value for all of our stakeholders. Operator, can you please open the lineup for questions? [Operator Instructions]. The first question will come from Dave Windley with Jefferies. David Windley Hi, good morning. Thanks for taking my questions. You did hit the doubling of EBITDA in 2Q, which I thought was going to be the hardest hurdle for you to hit. I wanted to dig into some of the moving parts in the P&L and the first question. So, you mentioned that service fee revenue was up mid-single digits, which since total revenue was basically flat means that pass-throughs were down by the same amount. Could you quantify that? And how much should we think about that being a factor that continues through the second half? Thanks. Jill McConnell Yes. Thank you for the question, Dave. We won't quantify, but I will say those biomarker studies, in particular, it's really significant. What we saw at the end of, say -- in this period, same quarter last year, we saw basically high single digits impact through from that study, and it kind of quadrupled over the last few quarters and then was back down more in line with what we saw in the same quarter last year. And so, in particular, that one we think, most of the fluctuations of that one have now worked their way through. And we have been saying all along that the key to us being able to drive the improvements in adjusted EBITDA will come from service fee revenues growing. And so that -- we're pleased to see that. It was in line with what we expected for the quarter, and that's what we're projecting as we look over -- as you can see, you saw the bridge that took you from Q1 to Q2 on our presentation, but obviously, similar results we're expecting in terms of that magnitude for the remainder of the year. David Windley Okay. Another way to come at this maybe is again, revenue basically flat sequentially, operating costs down by about $28 million. What were the drivers of that? You had talked on the last quarter about expanding some of the cost takeout that -- the restructuring that you mentioned in the prepared remarks. I assume some of it was that -- did you get a full quarter impact of that? And how much of that continues, kind of laps into the second half or into the third quarter specifically? Jill McConnell Yes, we didn't get a full quarter of it because some of the additional pieces that we've been taking on to that program really started in the second quarter. So that's some of the additional benefit that you'll see in Q3 and Q4. That program actually has continued through the third quarter. So, you probably wouldn't see the full benefit of that until in the last quarter of the year, but that's part of the improvement. We also -- I called out that there have been some improvements in our IT spend that we've seen as we've gone through the course of the year. They're -- most of the SG&A improvements are very back-end heavy, but we are seeing some of those things help us as well. And it's been just really tight cost management. I'm still meeting every single week to review every single hire in the company all the travel expense. So, we've really just been trying to be very disciplined about costs in this period while revenues continue to be relatively suppressed. David Windley Okay. Last one for me. In the booking's numbers again, kind of wondering the composition of this? Was these just lower new wins? Or given some of the moving parts and changes in estimates, including your forward revenue estimate around pass-throughs, did you take like an outsized pass-through reset or effectively cancellation in the quarter that influenced the overall book-to-bill? Tom Pike Dave, it's Tom. It was really just normal bookings. There were no major cancellations and no unusual events in terms of those pass-throughs. I think the bottom line there is just that we are having some difficulty predicting exactly when biotech's are going to contract. And we're finding, with them being about 50% of our exposure from a revenue standpoint, and in this quarter, they were much higher exposure in terms of the opportunities. We have to do a better job of understanding exactly what the time-lines are and then figuring out what we can do to influence those time-lines. So, as you heard, the pipeline is actually quite strong. Where I would worry about this business is if the pipeline wasn't strong, but the pipeline is strong. Some important wins from large pharma that will give us more of a floor. But unfortunately, in this quarter, we just didn't deliver in terms of these biotech opportunities to the level that I think we could have. And the next question comes from Patrick Donnelly with Citi. Your line is now open. Patrick Donnelly Thanks for taking my question. Tom, maybe to pick up on where you finished there. I mean it sounds like you guys are feeling pretty good about the pipeline, to your point, the pipeline looks pretty good at the start of 2Q. Obviously, the book-to-bill came in light. You're talking about this building book-to-bill certainly over 1.2 in 4Q. Can you just talk about, I guess, the confidence level, the visibility just given the last couple of quarters have come up like, in spite of that stronger pipeline, what gives you the confidence that, that book-to-bill does, in fact, build off of this is pipeline? Tom Pike Patrick, I think the difference, as we've looked at it in a lot of detail, and you can imagine that we're all over this, given what's going on, is that we look at that composition in terms of large pharma opportunities, biotech opportunities. We also look at what's been awarded and needs to be contracted versus what's more speculative. And in these upcoming quarters, we have quite a number of midsized and larger opportunities from large pharma, and we do have a number of things that are awarded and need to be contracted, and that gives us more confidence in what we see. Again, to some degree, I hate to acknowledge this, but we're learning a little bit more about having this much biotech exposure, at least I am. And I think what we're doing is, we're really revising our procedures there to try to really understand exactly what those dates are for contracting and then exactly what we can do about them because the ability to influence them is a key part of what we try to do as a sales team. But this upcoming two quarters with more large pharma exposure gives us some confidence because large pharma firms have a tendency to be more consistent in their scheduling and more predictable because of the amount of experience they have and how they have done their approval process. So that's what makes us feel good about the second half of the year. Certainly, I'm disappointed in the Q2 number. But again, the pipeline looks strong. And then the mix of opportunities in some of these larger pharma relationships, give us some internal confidence that we're in a good position as we go forward. Patrick Donnelly Okay. That's helpful. And maybe one for Jill, just on the 2025 conversation there. I think that the margins are maybe more in that 11% to 12% range. But still, to your point, I think it's 30%, 40%-dollar growth. Can you just talk about the levers to get there? I mean how much of it is contingent on a certain level of top-line growth versus cost outs. If you can talk gross margin, SG&A, that's always helpful. But I just want to talk a little bit about the bridge to get to that new margin number. Thank you. Jill McConnell Yes. Sure, Patrick. So, it's really going to come from two things, right? In terms of the -- if you use roughly $300 million it will be split about half and half based on what we see today. We have coming from gross margin improvements, but more so from really driving productivity and improving our processes in the selling -- sorry, in the project delivery space. And then the other half will come from SG&A improvements. We've been talking about the fact that we need to get really through those TSAs and be fully exited to start to see some of that value and the dollars coming out in SG&A. And so, we're expecting it to be split between these two things. And our next question comes from Luke Sergott with Barclays. Your line is open. Luke Sergott Great. Thanks. I just wanted to follow up on Pat's question there from on the 25% number. So, like if you kind of just do the math there and back it out, so you have 35% midpoint growth in EBITDA and you had like 11.5% operating margin. That implies roughly a revenue number around $2.7 billion, which comes in the low end of your guide. So, one, is my math correct there? And then two, is it like something you do with expected elevated pass-through kind of coming off, continuing to come off as we saw in this quarter? And just any color there what's actually going on between the dynamics? Jill McConnell Yes. I think it is -- you're right, it's really that mix as we continue to expect pass-throughs to moderate as we go through the course of the year. And then service revenues be picking up. We did have strong book-to-bills in the back half of last year. So, we're starting to see some of that come through. But in terms of top line numbers, it's being largely offset by what we're seeing in terms of lower pass-through trends. Luke Sergott Okay. Great. And then I guess, more high level on the market demand side. Could you talk -- we've seen like some weakness here in drug discovery side, especially on the safety assessment, and you guys just talked about seeing good bookings in Clint [ph] farms. So, kind of where does that fit within the overall workflow? I know it's more late phase focused, but study starts continue to be softer. Just kind of where you start seeing -- if there is going to be any pressure there on the late-stage pipeline? Tom Pike Yes. Luke. What we see is pretty consistent with actually with what Dave Windley wrote in one of his recent notes. And that's at the early stuff. But it's true. But we see it pretty consistent. So, in early, so in Phase 1 is a little bit softer in man-and-bump biotech's, but what we've done over the past year is continue to increase our exposure to some of the more attractive larger players in pharma. And what we see is there is a group of pharmaceutical firms that are actually spending quite a bit more on R&D, and we're pretty well positioned with a number of those firms plus picking up some new customers in the Phase I spot that are out of, again, larger pharma. So, I think for us, what's happening is we're just well-viewed and well-positioned, and that's giving us a bit of an advantage when it looks at when we look at the clinical pharmacology. That being said, we also see the same thing that's generally being discussed in the industry that Phase 2 and Phase 3 is being prioritized. And so, given that it's being prioritized, we're seeing for a company like ours, the exposure we have, we're seeing plenty of demand for Phase 2, Phase 3 type studies. So, I think I generally agree with that commentary that's out there about how the industry is going. But again, given that we're mostly exposed to Phase 2, Phase 3 and Phase 4, that is a benefit for us. And the next question comes from Elizabeth Anderson with Evercore. Your line is open. Elizabeth Anderson Hey, thanks so much. Maybe just piggybacking off of what Luke was just asking. How have you found the pricing environment, in the recent, maybe in the pipeline and some of your recent wins? And if you could differentiate between biotech and pharma for that, that would be super helpful. Tom Pike Yes. Thanks, Elizabeth. In terms of biotech pricing, I think it continues to be consistent with what it's been and that's good market-based pricing. And we occasionally see somebody step in to buy something there in biotech, but for the most part, it's solid disciplined pricing in that marketplace. And then in large pharma, similar to the commentary of some of our competitors, we generally are seeing full service outsourcing be reasonable market-based pricings. You should know that Fortrea tries to go for market-based pricing. And what I mean by that is there's probably some band of reasonable prices out there and we try to be in that band where we maintain our margins, but we deliver good value for the customer. We do see in FSP some situations where a competitor is really lowering prices. Luckily, as we've discussed on prior calls, we're not as exposed to these really large volume FSP deals as some of our competitors are. And so personally, I've been around this industry for a while, I don't think that's sustainable, but we are seeing FSP in the largest situations be very, very competitive. So is does that helpful Elizabeth. Elizabeth Anderson Yeah that's super helpful. Thank you for that. Maybe this is a follow up, the back the back half guide, I think, implies a backlog burn of about 9.4% -ish. And I just obviously, that's a little bit of an acceleration versus what we saw in the first half of the year, but down year-on-year still. So how do we just think about that and sort of why is that kind of the right level? Is there sort of studies that are coming forward that you know that have started to burn already? Like you could just give us any more color on why that's the right burn rate, that would be great. Thanks. Jill McConnell Sure, Elizabeth. Yeah, I think it's two things.1, as you say, I mentioned what we won in the second half of last year is starting to come into the pipeline and we are being really focused on those new projects in particular and ensuring we execute them as rapidly as possible, getting sites initiated, getting to those patient enrollment milestones where we can start to also bill in addition to recognizing revenue. So those are important things. So, you have the combination of that plus the work. Tom talked about us being on the sales call. We're also on weekly project review calls, and we're going through and looking at all large projects come forward every week, and we talk through and understand where they are and try to do what we can to get any barriers out of the way, whether it's resourcing or leadership engagement or working with customers in terms of trying to get decisions. So those two things are really allowing us to start to drive some momentum in how we're burning through our backlog. It's a little bit of an uptick. It's a constant battle that we're making to try to grow revenue, but against those two things we're seeing some initial progress. And the next question comes from Justin Bowers with DB. Your line is open. Justin Bowers Hi. Good morning, everyone. Tom, can you talk a little bit how you're positioning Fortrea in biotech versus large pharma and maybe, discuss some of the steps that you're taking in terms of the commercial transformation and how you're going to market? Tom Pike Yes, thanks, Justin. In terms of biotech, we have this strong medical expertise that we inherited from Covance over time and some excellent physicians, excellent strategists. We were just on a call the other day where our lead strategist actually did her PhD in this specific mechanism and indication of the project and had some really innovative ideas. So, when it comes to biotech, what we're really trying to do is figure out how we can, with quality, shorten their timelines and really bring the medical scientific expertise, how we can help them with the protocol development to make sure that we reduce protocol amendments and give them the site investigator relationships and access that it's hard to get as a small biotech. With large pharma, it's interesting. They're -- as I alluded to in my comments, they're very interested in productivity right now. We're seeing some of the consultants to the industry really pushing productivity. It's a discussion topic, whether they're increasing their spending on R&D or not. And so, what we're really doing is leaning into how does Fortrea, with being a relatively agile company, how do we help them be more productive? And so, as I said in my remarks, we've decided this is something I've been passionate about for a long time. And so, we've really decided to try to center ourselves. So not just, for instance, investing in AI generally, but how do we improve the productivity of some of the more expensive parts of the clinical trial, such as the interaction with CRAs around sites or reducing protocol amendments around, that have secondary effect costs throughout the trial. So, with big pharma, we're really trying to center ourselves in this productivity discussion. With biotech, it's more acceleration, scientific support, real-world evidence integration, those types of things. Does that help, Justin? I know that's a little detailed for an earnings call, but maybe it gives you a sense. Justin Bowers Yes, appreciate it. And then just a follow-up for maybe you and Jill on the bookings. Were there any delays or push-outs from 2Q into the second half of the year? I mean, you talked about some awards that were not yet contracted. And then, should we just think of this as being just given the size of the organization and where you are now? Like, should we just think of the bookings as just being a little more a law tool from quarter-to-quarter, but at the end of the year, sort of you can maybe get back to the 1.2 on average. Is that sort of like where we are in the cycle right now over the next call like four quarters to six quarters? Tom Pike Let me start on that. I do think that we are, to your last point there, we are trying to get to a point where we have a trailing 12 months of 1.2, so that we have that ongoing amount of bookings that really helps us grow. And so, I do think for better or worse, what you're seeing in fact is little more volatility than we would like. But again, the key thing is that the pipeline is strong right now. I don't know, Jill, if you'd comment more on that, but I think we should be able to with the efforts we're doing at predictability and then the relationships we're developing, I think we're expecting to be able to get greater consistency here. That's obviously the target. I think we called out the one in the Q1 because it happened so late and it was Yeah. It was big. And it was large and we had confirmation from them that it was gonna happen and then it didn't at the last minute. So, I think I don't want to be talking about pushing from quarter-to-quarter. We're just targeting consistently getting to that 1.2 over time and with the pipeline that we see for the second half, we believe we've got the mechanism to do that. And the next question comes from Max Smock with William Blair. Your line is open. Max Smock Good morning. Thank you for taking my question. Wanted to just drill in a little bit more into your commentary around small biotech and decision-making process there. Can you give us a sense for just how those decision-making timelines have changed across this year? It seems like funding really trailed off in June and July. Just wondering if you've seen biotech become even more cost conscious in the last couple of months in particular. And what do you get to since these customers are waiting to see in order to feel more comfortable about moving these programs forward here in the near future? Thank you. Tom Pike Yes. I think cost-consciousness-wise, they've always been pretty cost-conscious because they're on a budget, maybe 2021, 2022 is a little bit of an exception, but generally, they've been pretty cost-conscious. I do think we're seeing more involvement of different elements of the organization, whether it's the Board, whether it's more interaction with the top executives in the company that are causing the biotech's to just have an anticipated schedule and then at least from what we're seeing, then have that anticipated schedule slip through these further discussions. As Jill said, it's difficult I don't think the fact that we now have a larger pipeline because of some of these slower processes doesn't make us want to promise you anymore. But there's no question that the decision processes over the last, say, four quarters to six quarters have gotten a little bit slower in biotech as they're just a little bit more careful with their budgets. Max Smock And then maybe just a quick follow-up for me here on burn rate. Wondering if employee retention, if you can get some commentary around how that has tracked so far here in 2024 and what impact turnover has had on the lower than expected burn rate that we've seen over the last couple of quarters here? Thank you. Yes, sure. So, I know we've been talking towards the end of last year and early this year that we were seeing attrition levels well below, pre-COVID norms. They've maybe moved up just slightly, but they're really in line with the industry, nothing significant there. We don't think that's a significant factor in terms of the burn rate. I mean for us it's really about continuing to focus on the productivity enhancements, greater execution around the delivery and making sure that we unlock the barriers and for our teams to be able to deliver the projects as efficiently as possible. We're not seeing attrition be a big factor. And the next question comes from Charles Rhyee with TD Cowen. Your line is open. Charles Rhyee Yes. Thanks for taking the question. I wanted to probably just go into a little bit more. You talked about sort of the cost just that biotech is always been sort of mindful of spending. And obviously, some of your peers have also talked about some cautiousness. How much do you think it's maybe on the macro environment that lack of sort of rate, cuts that we haven't seen, has that played a bigger part it hasn't, that come up in discussions? And then secondly, maybe for Jill, when -- if we think about the EBITDA margin guide implied for the 2025 revenue growth, how much of that is predicated on hitting the 1.2 book to bill in the back half of the year? Like, maybe you can give it a sense on maybe some of the sensitivity. Can you still get there if you're a little bit short? Or is it that at least 1.2 is required? Thanks. Tom Pike Thanks, Charles. I think I'd summarize the biotech market as being solid. So, it is consistent with prior quarters, consistent with this year that it is a solid environment. And then in terms of the larger pharma, we really do see three groups of them. We see those that are growing, those that are sort of slow growth or flat-ish, and then those that are flat to decline. And we actually see different behaviors in those different groups. And so, we think about our targeting of them very differently. And so, again, biotech being, more than 60% of the R&D market these days and being where a lot of the innovation is happening continues to be a big target, be solid and attractive for us at Fortrea, a big part of our history. But then we're being very careful because the large pharma market is really pretty distinct in how it's reacting with some actually increasing full-service outsourcing, some pressing for savings and productivity, and then some actually restructuring simultaneously. So, is that -- Charles, does that help on the market overall and how we're thinking about it? Charles Rhyee Yes, it does. Maybe before, Jill, you talked about the margins just to follow-up on that, Tom. You mentioned earlier, right, in your pro-commodity, I just want a big pharma engagement, and you said that they had come and that Fortrea kind of presented differently. Maybe, you can provide a little more details on how you presented differently. Like, what did they kind of call out? Tom Pike Yes, it's a number of factors. It's largely alignment with their values of where they're going. So, when you look at what we're trying to do at Fortrea, this focus on productivity, this focus on how we can be more effective at supporting their need to accelerate drug development, we're getting very good feedback about that. And then the other, frankly, is that our management, it's not just me and Jill, frankly, it's as you go down through levels of this organization, it's all quite aligned. They do like what we're doing in artificial intelligence. We have some concepts here that we'd like to show to you guys later in the year associated with how we think about technology, how we think about simplifying and making more efficient the CRA's job, how we're trying to use hubbing and centralization to lower the overall costs. And they're excited to collaborate with us over the coming few years in terms of how we can try to get greater productivity and to clinical research. Jill McConnell Okay. And I'll pick up on your question. I mean, yes, we are working very hard to deliver on average across that back half, that 1.2 times book-to-bill, that will be very important. We would have margin expansion if we're able to be a little bit less than that, but I think to get to those levels, it's really important because, as you know, getting revenue through the funnel is very critical in being able to bring in those new projects where we can apply the new techniques and methodologies we're doing is really important. So, we are very much working towards getting that 1.2 times to be able to get to the 2025 target. And our next question comes from Matt Sykes with Goldman Sachs. Your line is open. Unidentified Analyst Good morning. This is Will over at Meyer on for Matt. Thank you for taking my question. You touched on the cost savings a little bit on Dave's question, but just to dig a little deeper there. Is there scope to continue to drive costs lower than you previously expected given the revenue and booking trends this year? And maybe some overcapacity you've experienced? And I guess, put differently, how are you thinking about balancing cutting costs and expanding margins while being ready to absorb greater demand when it comes through? Jill McConnell Yes. You've had the nail on the head on that last point there, right? We're trying to be very, very disciplined and think about how we balance improving the bottom line with making sure hearing the feedback from our customers and the things we need, we know when we show up, particularly in large pharma opportunity, they expect you to have a global footprint and be able to produce work in any country that they are looking for support. So, it is a balancing act. We know there's opportunity to take out further costs in SG&A. We're very focused on that. We've talked about that historically. You can see it in our SG&A, even the underlying as a percent of revenue, we've talked about the fact that in IT, in particular, we're working hard to bring down the cost. But we're trying to be really thoughtful. Think about things like Tom had mentioned with the AI and ML, how we can use that to also improve productivity. So, it is a balancing act. We're certainly being mindful of the cost as we go forward while we try to be prepared for what we hope will be significant growth in the future. Unidentified Analyst That's helpful. And then one more quick one on our side. Given the dispersion between pharma and biotech in the discussions this quarter. Longer term, how are you thinking about the customer mix split between biotech and pharma? Are you still aiming for that 50-50 split? Or is your thought process evolving there? Tom Pike Yes. Thanks, Will. I think we would like to continue on with this mix. We like this mix because the large pharma gives you that consistency of opportunities. And clearly, as you can tell from this call, we want to consistently deliver for you and for our people and our customers. So, you get that consistency with large pharma. And frankly, we also think that some of the things we're doing around productivity benefit the biotechs as well. On the other hand, biotech market is rich. It is growing. It is getting investment and it is expected to continue to grow as a proportion of the overall R&D spend. I certainly, in my discussions, big pharma, you certainly continue to have a lot of interest in trying to look at the assets that are attractive and the large pharma is looking to biotech for a lot of its innovation. And so, we think continuing to serve that market. We have a history of it. You'll know that Covance had acquired Chiltern. Chiltern was very biotech -- 100% biotech focused really. And so, we have a lot of good skills for biotechs, and we hope to keep that 50-50 mix going. And our next question comes from Eric Coldwell with Baird. Your line is open. Eric Coldwell Thank you. First, I think I have three questions. What was the breakdown of the $54 million spend related cost here in the quarter? Why was that up over 3x quarter-over-quarter? And what is the expected level in 3Q and 4Q? Jill McConnell Yes. Sure, Eric. I'll take that one. We were expecting it to increase. We won't -- we're not expecting to be at that level quarterly for the remainder of the year. But we knew that it was going to ramp over the course of the year because of the fact that the heavy lift in terms of the -- particularly the IT transitions that we were doing, those were where the majority of the costs were. So, the vast majority of that, probably 80% of it is IT-related type costs and the rest would be supporting the other groups. But I mean, it's all the things around transitioning servers. We've got about 30% of those transitions. The team is working hard and there are more than 1,000 of those. It's the applications, the hundreds of applications that we're working on. We've talked openly about the fact that replacing our ERP and HCM. So, it's really all the cost to help support those coming across. So, we're expecting to have spend on it in Q3 and Q4, but not to the extent we would -- at the moment, based on our projections, this will be the highest quarter, but there still will be spend on it in the third and fourth quarters. Eric Coldwell When you say less, Jill, are you talking I mean, is it $40 million, $20 million? What is there a ZIP [ph] code you could put us in for how to go into the next quarter? What to expect? Jill McConnell Yes, I think it's probably still going to be -- it's not going to be as low as it was in the first quarter, but it won't be as high as it was in the second quarter. Just to kind of -- I think if you about the average of that, that's probably a fair approximation. Eric Coldwell Okay. And then was there a bonus reversal benefit to 2Q? And is there an accrual reduction impact that you would call out that's incremental driving the second half? Jill McConnell There was a very small amount that we unwound in Q2, but that wasn't the biggest driver of the improvement from an adjusted EBITDA perspective. It was really small. I mean, obviously, yes, we have publicly said that we are reducing our future accruals because of the fact that we are below where we were expecting to be for the year. So that is a little bit of a benefit in the second half, but it wasn't the big driver of the 2Q performance from an adjusted EBITDA perspective. Eric Coldwell I'm just trying to get a sense on the comp as you go into 2025. And if you were to move back to normal accruals in '25, obviously, from a lower level than was previously expected. But what kind of a year-over-year headwind might that be? And is that factored into the 11% to 12% EBITDA guidance? Yes, preliminary outlook, it is factored into that. It will be a headwind that we'll have to work to overcome and that's part of the work that we're doing across the teams. And we did talk a little bit about that. The benefits of that restructuring program because we're continuing to work through that through this quarter. Not really seeing full benefits to that towards the end of this year, that will help offset some of that as we go into next year. But that is also a headwind that we're working towards with the efficiency and productivity programs that we have in place. We know it's important to be able to get back to that. Tom Pike Yes. The main thing is, Eric -- The main thing is it's planned in... Yes. Okay. And I know I said I had three questions. I guess there's probably a few more subparts to these. But on the last one, you've said you were making changes to get the bookings going. You've talked a bit around that. But are there any specific details you could give us changes in the terms you're offering changes in pricing, changes in sales force focus, leadership? Is there some kind of more specific detail you could give us anecdotal commentary that we could track besides more of what I would say was a higher-level discussion so far, at least a felt like that to me? Tom Pike Yes. Eric, appreciate that. I'm glad you asked too because we are not making price concessions for -- to increase sales. We're not doing anything out of market associated with extending terms or anything like that. So, we are really trying to stay in market and had the value proposition of working with us. As I was alluding to in the earlier discussions with our strategies, with our medical expertise, with the investigator relationships that we have with the technologies like the Advarra, Viva relationship that's pretty unique that we have we're really trying to press into selling with that, not by making price concessions. So, I'm glad you asked about that. With respect to specifics, yes, I think there are a couple of things. First, we are improving the discipline of our weekly and monthly meetings associated with sales and the predictability. We're going to make a couple of changes to how we predict the second half of the quarter and look at probabilities a little bit differently than we have been. We had gone into to a certain methodology and now we're going to use a couple of different methodologies to try to predict. But the key is what you don't want to do is you don't want to predict you're going to be at 0.96. What you want to do is figure out the way to get at 1.2. So, the key is really working with the teams to really try to understand the decision processes and then how we can influence them and make them work. And the other thing that we're looking at in all candor for next year, and it's incorporated in the numbers that Jill was describing, is actually potential of increasing our resources associated with going after biotech in particular. And do we -- we inherited a sales force of a certain size. And so, we're thinking should we go ahead and have more resources exposed to biotech in certain geographies. So, we're looking at that right now. So, we've got a number of things. I guess the last thing I'd say is we are looking at the use of AI in both targeting and RFP development. There are some tools out there that you may be aware of that incorporates some elements. So, we're looking at what those tools can do. but then also looking at how can we enhance it with some of the skills that we have in-house. So, does that help, Eric? And the next question comes from Michael Ryskin with Bank of America Securities. Your line is open. Michael Ryskin I'll just limit it to one given the time. I want to go back to this comment on pipeline converting to orders both in 2Q and later in the year, talking about the swing between pharma and biotech. So just -- I mean, it sounds like there was -- you talked about predicting -- difficulty predicting when biotechs convert, but does it sound like those were canceled outright or sort of fell through. So just to confirm, all that biotech that was in the pipeline that didn't convert in 2Q. Is it still on the pipeline? Is there -- is it still sort of part of your second half outlook? Because you talked about heavy biotech win in 2Q, but more pharma line entering 3Q. So, I'm just wondering if biotech that didn't converted is still there. Is that part of the equation for the second half? And then just how much does that really swing quarter-to-quarter? In terms of the pipeline, the composition of it? Because that's something that's been really evolved? And so just sort of what are the factors driving that? Tom Pike Yes. I mean, our reality is that a lot of it is delayed decision-making. So, it is, in fact, in the third and fourth quarter. So that's one of the things that makes our pipeline look great. But what is -- the addition to that is that we have some things that we knew were going to be late in the year, award and contract with large pharma, and those are coming into site now too for Q3 and Q4. So that's what makes us feel good about the second half of the year. In terms of the volatility, I think we are finding there's a little seasonality. This seems to be -- perhaps it's introduced by the reprioritization and some of the internal processes taking place in large pharma that are causing more second half awards and first half awards, at least in the companies that we're working with. But you saw this last year, you see it this year. I'm not sure I really want to call it a trend yet, though. It may be more just a temporal thing that's happened in 2024 than it is a long-term trend because historically, pharma firms are pretty balanced through the year. Large pharma is pretty balanced through the year with a potential of a little increase in Q4 as they're trying to finish up their budgets. So, I don't want to call it a long-term trend yet, but it certainly happens to be something that we saw in 2024. I show no further questions at the queue at this time. I would now like to turn the call back over to Tom for closing remarks. Tom Pike Thank you very much. We appreciate your interest in us and support. Again, it's been a good quarter for things like delevering, doubling EBITDA, some of these big relationship wins, and we have a strong pipeline. So, we appreciate your interest and support and look forward to talking to you next quarter. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Hiscox Ltd (HCXLF) Q2 2024 Earnings Call Transcript

Hiscox Ltd (OTCPK:HCXLF) Q2 2024 Earnings Conference Call August 7, 2024 5:00 AM ET Company Participants Aki Hussain - Group CEO & Executive Director Paul Cooper - Group CFO & Executive Director Joanne Musselle - Group Chief Underwriting Officer & Executive Director Conference Call Participants Faizan Lakhani - HSBC Anthony Yang - Goldman Sachs William Hardcastle - UBS Andreas van Embden - Peel Hunt Nicholas Johnson - Numis Tryfonas Spyrou - Berenberg Abid Hussain - Panmure Kamran Hossain - JPMorgan Darius Satkauskas - Keefe, Bruyette, & Woods Freya Kong - BofA Aki Hussain Good morning, everyone. Thank you for joining us. Now, what you'll hear today is that we are continuing to build positive momentum across the Group. In the first six months of this year, we've added $90 million to the top-line, of which $77 million has come from our retail business while maintaining high quality growth and we have delivered a strong insurance result in a more active claims environment. And the key to this is the high quality of pricing, reservation and cycle management on which you'll hear more from Joe in a moment or two. And this has been combined with a lower expense ratio and Paul will elaborate on this in a moment. And we've delivered a strong and increased profit before tax of $284 million at attractive return on equity of 16.5% and I'm pleased to announce a5.6% increase to our interim dividend. Now what you can see here, a whole three themes that resonates and that are familiar to you from when I spoke about on capital allocation for philosophy in March. So as a reminder, first and foremost, we prioritize the proactive deployment of capital in the pursuit of profitable growth. So we're investing actively to capture the long-term structural growth opportunity in retail and at the same time, we are selectively deploying capital into attractive market conditions in big ticket. So by way an example, you can see on the top left that our property net premiums have increased by 40% over the last couple of years. Secondly, we maintain resilience and balance sheet flexibility. Our reserves are prudent and robust and our capital generation has been strong. And finally, we remain focused on balance sheet efficiency as demonstrated by a total capital return to shareholders, which has liked over 150% year-over-year including the share buyback. Now let's turn to our business performance and as usual. I'll begin with retail. In our retail business, we're actively investing to achieve high quality growth and I'm pleased with the gradual improvement in momentum and the robust profitability demonstrated by our combined ratio. Now taking a look at each of the businesses in turn, in the UK, we're seeing a step up in growth rate albeit the headline rate is moderated by some one-time premium we booked in second quarter of 2023. The underlying performance of around 6% growth is a fairer reflection of the business performance in the first half and of the momentum we expect to see in a second. In Europe, we continue to post solid top-line growth. And in US DPD the momentum we were building and have been building during 2023 has continued into this year with our direct business once again putting solid double-digit growth. Now overall US DPD growth has moderated in the second quarter and that's been largely due to some variable performance in our digital partnerships as a couple of our most established partners, our production from a couple of our established partners has slowed in the second quarter. Now we're actively working with those partners to build momentum in the second half. And in our US broker business, revenues decreased by 4.8%, as a couple of our special signs continue to face challenging market conditions and we maintained our underwriting discipline. I expect this growth gap to narrow as the year progresses and as those market conditions ease. And the overall momentum we are achieving in our retail business is the result of many initiatives we've implemented over the last few years. And you can see sample of this openly on this slide. This is by no means a comprehensive list and indeed many of these are already in play and having a positive impact on our business performance. And I'd just pull out a few. Across UK and Europe, we are now winning distribution deals at a fast pace than we've done for many years. Now the deals that we have won of the last 12 months on full activation are estimated to deliver in excess of $40 million of incremental new premium in 2025. Our investment in brand will continue to compound. Many of you will have experienced our award-winning brand campaign in the UK, which we launched in launched last year in September. That's been incredibly successful, not only has it won awards, it's increased our brand awareness, our spontaneous brand awareness is up almost 40% and it's driving increased flow into our UK platform. And finally, we continue to innovate in product, in building out our underwriting specialist expertise and in the use of new generation technology and I'll come back to this last point in a moment. In London market, our colleagues have delivered an excellent result achieving a combined ratio of 86.9% in a more active claims environment. And a key underpin to this is our disciplined approach. We are growing where we want to where we see attractive market opportunities and we are managing the cycle or the microcycles across the London market, portfolio. We regard the Property segment as continue to be attractive and expect this to grow in the second half of the year. In D&O and Cyber, we continue to manage the cycle as rates continue to fall. And in marine, energy and specialty we regard the power and renewable segments as providing the potential for structural growth and we're well positioned given our investment in engineering and underwriting expertise. We are well-positioned to lead more business in this space our colleagues have delivered a fantastic result growing the network by over 10% at a combined ratio of 77%. We've deployed additional capital into attractive property and retro markets and the portfolio is well positioned to deliver strong returns in a mean growth environment. Now as you know, in Re & ILS we have an established third-party capital management strategy it's been in place for well over a decade comprising co-shared partners, ILS Funds, more recently a cat bond fund and side cars. In the first half of this year, we've attracted $300 million of new money into the fund. Now this will go a long way towards offsetting the planned returns of capital in this year. Now, the third-party capital management strategy not only gives us scale in our reinsurance business, it's also a key source of fee-based income, which this year has increased from $28 million to $44 million and as you can see is a key contributor to our overall reinsurance profits. Now I want to spend just a moment longer on our overall big ticket performance. Now our flagship Lloyd's Syndicate, Hiscox Syndicate 33 is the longest continuously operating Lloyd's Syndicate still trading today. It's over 120 years old. And it's into syndicate that we write all of our London market business and almost half of our reinsurance business. What you can see plotted here is the performance of all the large Lloyd's Syndicates those writing over a billion pounds of premium per annum over the last three years. And what's plotted here is the profitability and the volatility of that profit and the quadrant on the top right represents those are the most profitable, and the least volatile. And as you can see the Hiscox Syndicate in the conformity within that quadrant. This is enabled as a result of our dynamic capital allocation framework, our deep underwriting expertise and our disciplined approach. This has enabled our colleagues to deliver market beating results over the last three years. Now as you know, the sector that we're in is inherently volatile. So this is relative volatility. We are remaining absolutely focused we are taking this. We're not we're not being complacent at all. We're absolutely focused on managing that volatility and maintaining our disciplined approach. And then finally on technology. Technology is an increasingly important underpin to creating and maintaining competitive advantage. And as a specialist insurer, we believe to fully realize our potential, we have to maintain a competitive advantage in at least these four areas. Firstly, the ease and speed of doing business. Secondly, the deep customer understanding, third the quality of pricing with selection and cycle management capabilities, and finally the ability to grow our business to scale our business efficiently. Now all of these are enabled and helped by technology. And we at Hiscox have been investing for many years to build market-leading capabilities in auto underwriting and in digital connectivity allowing our customers and intermediaries to place their business with us quickly and efficiently. Our many years of operating as a specialist insurer and collecting data enables us to develop a deep understanding of our customers and their risk management needs. That data that we've collected is now being superpowered to the use of latest data analytics platforms , which further improves our capabilities to price and select risk and indeed to develop more products. Of course, there's a long way to go in this, in this area of using data. And finally, we are just at the early stages of using latest generation technology or AI to augment and improve our processes. There is very initiatives and innovations across the Hiscox group and one of which you heard about when we spoke in May, which has been the Google cloud collaboration with London market, which if you remember we had established or built a proof-of-concept which reduced the time from submission, to quote from up to three days for the sabotage and terrorism line to EMEA three minutes. Well since then, the teams have been looking diligently, taking that proof-of-concept to build a production model. And I'm pleased to say we went live as of late yesterday evening and have now begin to actively quote business through this new enhanced AI augmented platform. So very pleased and congratulations to our London market team. We see this innovations and doing at least two things. Firstly, increasing productivity while secondly creating new opportunities for growth, I look forward to updating you over the coming months and years. As these innovations take hold. So with that, I hand over to Paul to take you through a more detailed financial analysis of our performance and then you'll hear from Joe who will provide an update on underwriting and then I shall be back to make final remarks on outlook. Paul Cooper Great. Thanks Aki, and good morning, everyone. It's great to be here with you today presenting another good set of results. The Group grew insurance contract written premium by 3.3%, driven by a sustained growth in retail and in big ticket property by deploying additional capital into continuing attractive market conditions. Our focus remains on profitable growth and underwriting discipline and the Group delivered a strong insurance service result of $241 million at a 90.4 combined undiscounted in a more active loss environment. The Group is benefiting from its diversified business model, with strong and consistent profit contribution from each of our business units. Also pleasing is the continued improvement in the expense ratio, which reduced by more than two percentage points year-on-year. This is partially driven by our disciplined cost control and expense management, partially mix and partially due to timing. We continue to focus on cost management, including tight headcount control, realizing savings from procurement and vendor management and driving economies of scale in the business. The insurance service result was supported by the investment result of $152 million which was driven by higher bond yields earning through. Together, these underpin a strong profit before tax of $283.5 million, which results in a return on equity of 16.5%. Capital generation has continued to be strong over the first half of the year. We have made good progress with our share buyback with over 85% completed at the period end. Given the strong performance in the first half, the Board has approved an interim dividend of 13.2 cents per share, an increase of 5.6% from last year. Delving into these results a little further, starting with our retail segment. Retail ICWP increased by 5% in constant currency with growth within the target range and contributing $77 million of the $90 million Group ICWP growth in the first six months of the year. We continue to see strong momentum in Europe and US DPD and a pleasing step up in the underlying UK growth. The UK headline growth reflects some non-recurring premium recognized in June 2023. US broker continues to contract with the rate of decrease slowing in Q2 versus Q1. The retail undiscounted combined ratio is 93.8, which is pleasing given our continued investment in marketing to seize the structural growth opportunities. Moving on to London market. ICWP decreased by 2.8% in London market. This is driven by three factors. The decision to non-renew certain large binder deals, our proactive management of the underwriting cycle in casualty lines and a reduction in space premiums as there were fewer risks in the market and we took a decision to reduce line size due to heightened recent loss activity. Despite a more active loss environment, our London market business delivered an excellent insurance service result of $74.2 million and an undiscounted combined ratio of 86.9, the fourth consecutive half year in the 80s range. Turning to RE & ILS. We deployed additional capital early to capture the attractive market conditions with net ICWP growing by 10.5%. ICWP was up 3.9% as growth from additional quota share capacity and our own capital deployed were offset by a reduction in ILS capital. The market remains disciplined at mid-year renewals with attachment points in terms and conditions broadly holding firm while rates on some business has decreased slightly, these were from generationally high levels and the market remains attractive. This is demonstrated by a strong undiscounted combined ratio of 77.3% for the first half, together with an excellent insurance service result of $43.5 million. As a result of gross capital inflows from new and existing investors of $300 million into our side car and ILS funds AUM was $1.7 billion at the 30th of June and following a planned return of capital to investors on the 1st of July, AUM reduced to $1.4 billion. Looking at investments. The Investment return is $152.4 million or 1.9% for the first six months of the year. Coupon income and cash returned increased by nearly 50% year-on-year. The reinvestment yield has risen to 5.2% with the book yield increasing to 4.8% from 4.3% at year-end as we continue to reinvest the portfolio. We have also extended duration to 1.9 years to lock in higher yields for longer. The strong investment results should continue to provide a tailwind in the second half of the year. Moving on to the highlight of today's presentation. IFRS 17 discounting of claims liabilities. For the first six months of 2024, the net discounting impact was $26 million. As you can see, the IFFI unwind is $79 million. This is at the higher end of our previous guidance issued in March. We are continuously refining our IFRS 17 forecasting processes and as a result, we are slightly updating our full year 2024 guidance range to $135 million to $165 million. We have updated the sensitivity to interest rate changes to reflect market conditions and the balance sheet as at the 30th of June. Looking at reserves. Our conservative reserving philosophy remains unchanged with a confidence level of 82% within our 75% to 85% range. The risk adjustment is $262 million. In addition, our OPTs cover over 42% of gross casualty reserves for 2019 and prior and provide protection from inflation and other pressures. Turning to reserve releases. Reserve releases is $51 million for the first six months of the year continue the positive release trend. Our long track record of positive reserve releases demonstrates our prudent reserve philosophy. And finally an update on capital. The balance sheet remains strong with an estimated BSCR of 206%, following the deployment of additional capital into property, payment of the final dividend for 2023 and completion of over 85% of the buyback at the reporting date. And as you can see, capital generation remains strong in the attractive market conditions. This is a strong solvency position. I will now hand over to Joe who will provide you with an update on underwriting performance and priorities. Joanne Musselle Thank you, Paul and good morning, everybody. As you've heard, we've grown and delivered a solid underwriting performance, combination of the composition of our portfolio, the actions we've taken and market conditions. We continue to benefit from a portfolio both balance and choice, enabling us to lead in a favorable way to the attractive markets in our in our reinsurance & ILS market and also executing in parallel, the structural opportunity we have in retail. If you look at this chart, this is a chart of our segments and what we go through is from a small and retail commercial we've grown back 6% and we can continue that year-on-year compound growth. Art and private client is at 7% and that's a combination of both rates and exposure. Both of those portfolios are adding net new customer growth and we have now well over 1.5 million customers globally across retail. In reinsurance, we're continuing to execute on the most favorable market in over a decade and we're growing our top line 3% and our net over 10%. London market property is also favorable and we'll look for growth in the second half as we continue to deploy our Aggregates. In our London market specialty lines, we're growing terror, kidnapper ransom and personal accidents and by executing discipline in product recall as react to some wider market conditions and claims activity. Marine and energy, favorable competitive, but we do see a growth opportunity in our power renewables and we're investing in our lead underwriting capability. And in global casualty we'll have to spend in many years building a well-rated and well-managed portfolio we're now exercising discipline, as some of those segments start to soften. So overall, I'm really pleased with our portfolio management and the underwriting performance it's delivering. Moving on to rates. So the rating environment remains positive. London market rates are up an additional 4% and the attractive reinsurance property rates are holding. As a reminder, earlier rate rise in the segments offset deal of risk. But more laterally has improved the margin, which is evident in the results. Retail is up a further 3% and most generally a less cyclical portfolio, rates has been necessary over the last few years as we dealt with a heightened inflationary and environments. You may recall we priced for a robust view of inflation with claim assumptions in multiples of the historic past and what we can see is was claims inflations - actual claim inflation is a lagging indicator, we're starting to see the emergency that came off through our portfolio at a slightly lower rates than those assumptions. And this is an example on the right hand side of some example portfolios across our Group. Claiming flotation as moderated, the claims activity has actually been pretty busy and the landscape in the first half has been busier than this time last year. We are managing and paying claims is exactly what we're here for. Some of this will have been headline news others not. But our proactive management of all is really vital to the customers that we protect. We have exposure to the Baltimore Bridge disaster and we've reserved $28 million net based on the $2 billion industry loss. The first half has seen significant natural catastrophe activity with sources for an insured loss above $60 billion and higher than the 10 year average. We ourselves have claims from the Dubai floods, the severe German weather and hurricane, Beryl and we've also been dealing with a number of risk losses through our specialty portfolios. So whilst it's been a pretty busy, six months it is not without - it is within expectation. And there's nothing on this page that we don't contemplate when we underwrite our portfolio. And our job is to understand risk, the exposures they represent and price for them starting with the decades of data that we have. We answered this the latest digital and technology capability to augment this experience. In our big ticket businesses, we dynamically allocate capital through the cycle depending on the market conditions. In retail, the vast majority of our portfolio is automatically underwritten, which enables to us to put through prices or product changes at scale and remain nimble. And then technical excellence, this is our build out of processes and frameworks to enable us to take a forward-looking view of risk. And all of this underpinned by people in our technical excellence with experience through the cycle and across the whole value chain from reselection to claims management. And it's a combination of all of these that is responsible for our underwriting performance, So what you have here is the last 10 years that I disclosed combined operating ratio for the Group as a whole but also our reporting segments and maybe I'll make a few observations. So the first is, we operate in a volatile sector and we don't always get it right. The second is the composition of the Group over this last 10 year period has delivered a combined operating ratio of 93% excluding COVID and 94.6% including COVID despite many of those years been a recognized off market. The second thing that maybe I'd say is the volatility of the different segments, ourreinsurance being the most volatile and our retail business being the least volatile. The next observation is the power of the portfolio how that volatility is moderated at a Group level in which the opportunity to deliver returns through the cycle. And then, maybe lastly, the last observation is the most recent past where we've had both an improving and a consistent performance moderating of volatility of our results, which has been our ambition. So, that's what we've done. But we're about the future? Well, this slide is probably where I have been just spending the majority of my time over the next 12 months. Firstly, on emerging trends. We can't predict the future, but stay in half a step ahead is vital reacting to those emerging trends in the future landscape from both a risk and an opportunity point of view. Building out the future of underwriting, so that's continuing our investments in technical excellence and also our Underwriting Academy, which is our training program for underwriters. And then, lastly disciplined profitable growth. It's about doing two things. It's about growing in a disciplined way the portfolio that we've already built but also delivering new saying yes to more customers will already seeking solutions from us and building out our products and our propositions for the future. I'll now hand back to Aki. Aki Hussain Thank you Joe. Through the strength of our diversified portfolio ,we remain well-positioned to deliver high quality earnings through the rest of the year and beyond. In retail, the last couple of years have been about laying the foundations for the long-term. Now looking out to the rest of this year, growth momentum will continue to build gradually into the second half of the year as management initiatives take effect although this momentum is not expected to be linear. I expect London market to return to moderate growth in the second half led by the property division. And in RE and IL&S we have now written over three quarters of the business for the year and I expect the strong net growth that you've seen in the first half to continue to exceed ICWP for the rest of the year. Now going into the Atlantic hurricane season. The Group is well-capitalized with a high quality portfolio, well, underwritten at attractive rates. And so to wrap up, we remain focused on achieving high-quality growth and earnings using the strength of our diversified business portfolio. As ever, thank you very much for listening and we'll now open the floor to questions. Question-And-Answer Session Operator A - Aki Hussain So we will begin with Evan. Unidentified Analyst Hi, thank you, very much for the presentation. I think my first question would be related to growth in retail and maybe if you could first comment a little bit more on what you mean by non-linear acceleration? And secondly, I mean clearly linked to the ramp up in the marketing spend, I'm just wondering what's the relationship there? Do you need to spend a lot more to get to the higher end of the of the 5% to 15% range? Are there any other reasons that stops you from getting there, especially as rates might moderate with inflation moderating because right now you've been growing at fixed rates contributed half to that if I'm not wrong? And maybe secondly, just also related to retail, you've mentioned the tech innovation. Are you seeing your peers coming up with new products, new solutions that make your existing platform make it more difficult for you to compete. Aki Hussain Thank you for those questions, Evan. So, in terms of non-linear simply that growth is non-metronomic. In terms of marketing, we - as you can see, we have substantially increased our marketing this year again for the first half we spent $15 million which is up over 30%, compared to same time last year. Now the last majority of this increase is on brand marketing. Brand marketing doesn't have a one-for-one relationship immediately with growth. This is part of laying the foundations for the long term. As you know, over the last preceding few years, which really cut back and it's time to reinvigorate the brand in all of our territories. We have seen a step up in momentum compared to, say the period pre-2022 I'd expect that momentum to continue to build slowly over time. And we're very pleased with the recognition that we're getting for the brand investment in the UK. We will continue to compound this investment we think that we've been able to do that while whilst delivering a robust profit outcome for the retail business with a robust combined ratio. In terms of Tech Innovations, we've - if you think about our business and how we've executed our strategy over many years, there have been certainly over the last decade or so of two constant pillars, one is the investment in underwriting and underwriting capability and secondly the investment in technology to ease the use of sort of ease how people customers intermediaries can do business with Hiscox. So we're trying to do two things here through the use of technology. Make it really easy for customers to place business with us, but also to further augment our underwriting pricing and resurrection. Those are the kind of key drivers, as well as being able to build scale efficiently. I would say, in tech innovation in many, many places we have been ahead of the market and continue to be ahead of the market. In terms of our ability to auto underwrite that's been at the heart of our - the success of our retail business which we've been able to give customers a fantastic experience of being able to respond to their submissions and their request for quotes in seconds as opposed to hours and days. The innovation that London market has been meeting again is ahead of this. This is the first lead algorithm that we underwritten platform in the London market. So we're very pleased with that. Unidentified Analyst I think a follow-up on the 5% to 15%, would you expect to be within that range this year and next, sorry on the 5% to 15% range? Aki Hussain I expect to be within the 5% to 15% range for this year. Unidentified Analyst Upper or lower end or no comments? Aki Hussain Within 5% to 15%. Faizan Lakhani Hi, this is Faizan Lakhani from HSBC. Thanks for the detailed presentation. You mentioned in your comments that you've seen slow down in some of your key partners and you're investigating that. Can you give sort of an early indication of what potentially drove that? And if that's more sort of transitory or do you think any more structural there? And second on the new partnerships, qualitatively, can you provide some sort of indication on what the economics are relative to your key partners? And effectively, what does that mean for your acquisition cost ratio going forward? Thank you. Aki Hussain Again, thank you for those questions. The slowdown in the digital partners segment essentially is transitory, we believe. These are the same partners that do the double digit growth for us in the first quarter. So I think as I've mentioned in the past for some of our most established and large partners they can be very, very large corporations with the corporate set and what we present to them is a very healthy and almost risk free income if they get effectively a commission clip on the business that we are underwriting. From time-to-time, that continues the market focus and we believe that's what's happened in the second quarter. We are actively engaged with those partners and frankly just wanted to partners to develop joint marketing campaigns for the rest of this year and I would expect that momentum to begin to come through. But it will be gradual over the year. In terms of economics for new partners, as we mentioned the same as existing partners is a clip that they get on the way in as we write business. And that effective commission rate is broadly the same for our partners. And just keep going along, Anthony Anthony Yang Thank you. It's Anthony from Goldman Sachs. Actually, my first question coming to the large ticket business. How should we think about the undiscounted combined ratio from here given your micro cycle or disciplined growth there? And then secondly, just on the under reserve can you update any - can you give us an update on any - update on the loss peaks including, say the casualty lines? Thank you. Aki Hussain Okay. So in terms of reserves and loss picks, I think somewhere between Paul and Joe they will cover that that question. And in terms of big ticket undiscounted combined ratio, as you can appreciate, I'm not going to give you forecast on that. We believe the market conditions in both London market and reinsurance continue to be attractive. The way I describe our reinsurance business is that 2023 was the best market in over a decade, 2024 is the second best market in over a decade. And conditions continue to positive as we look out from here. London market again, I would describe overall as being in a good place, right? London market, due to the nature of the business is just more complex. They are more diverse. There's more diversity in the lines that we write. And there are pockets that are continuing to harden. So the Property segment continues to see rate increases and we're positive about that. D&O and Cyber is a continuation of the trends that we've seen over the last few years. I think from its peak D&O for us, we've seen the rates fall by almost 30%, Cyber? I think around 20%. So these are still risk adequate given the fairly large Price increases we saw prior to that it's just not a time for us to grow in those segments. It's time to take the floor off the gas. And the remaining divisions again, we remain positive on. So, it's a overall positive market. Loss takes clicks on casualty. Joanne Musselle Yeah, so maybe, I will start. I mean, from a reserving point of view, I mean you've seen the results. There's nothing new to report. We've obviously gone through our reserve and exercise and we've had another year of positive reserve releases continue in our - I think I'm broken record of reserve releases. And then also, above that we're holding at the 80 percentile in terms of our risk margin, I think more broadly in casualty, as you as you know, we whilst not immune to those sorts of social inflation trends that you are seeing more broadly, the majority of our portfolio is not as effective. We don't really see that trend in UK and Europe. The US portfolio is very much focused on that SME, that micro segments. And so we don't really see that trend in the same way, where we have seen the higher inflation is in our London market casualty and of course that's most - cap you just been referring to which is being significantly re-rated over that period. And so, from your analyzing point of view pretty pleased where we are in terms of the loss picks and I think maybe just the last thing to say just in terms of casualty reserves as we've also entered into if you will recall a number of loss portfolio transfers predominantly, they were in casualty lines of business and so we have significant protection for 2019 and prior for that whole casualty inflation. Aki Hussain So little bit dark in here. I think that's Will over there. William Hardcastle Good spot. Will Hardcastle, UBS. Just following up on the US DPD, just what is actively working with the partnerships mean exactly that's my naivety. And how much of this is in your control? So sort of driving growth versus its dependent on what they're focusing on at any given time. And just linked with that this week's been a bit violent from a market perspective. US macro growth, potential slow down. I guess how comfortable are we with the targets in that context? Second question just about, sorry. Is the ratio in your FPV investment result it's changed on a 100 BPS is this because you've increased the duration on the asset side? Or is it something else and what was the mistake or something's changed clearly in that new guidance for this year? What was that related to? Thanks. Aki Hussain Okay. Thank you. Thanks for those questions Will. Paul is delighted to receive the question I presenting. Paul Cooper Thank you, Will. On the - on US DPD, I mean, simply speaking we're working with the partners we have developed. Some joined marketing activity, which is we'll be going by right imminently in a few days and weeks. And we expect that to begin to rebuild the momentum. That's it in essence what it means. And then in terms of how much control? But this is like any business, business it's about account management. And we are - we continue to work with our partners. The value that we bring to them is being able to provide a better and more comprehensive service to customers that come to there to that portals and the opportunity to create a high return on equity income stream. So it's in their interest to work with this and we also deliver fantastic service. And so, one of the very, very few companies that can provide pretty much instantaneous quotes for what is complicated insurance for small businesses. So that we have joint interests in their goal congruence for that to that to occur. In terms of you're the other question is about the US. I guess the recently cited sort of macro concerns. I don't think you'd expect me and I am not going to stand here and say, no matter what happens I think it's going to be good. We are not immune to the economic volatility. But there's two three things I would say, firstly, new business formation in the US remains particularly strong. Over the last 12 months right up until the end of June this year it's increased by a further 4.5%. So we now have around $33.5 million businesses to target in the US. The US economy has been remarkably dynamic, particularly the SME segment and I would apply the same description actually for UK and Europe, as well. This segment tends to remain robust and when faced with challenge and we saw that during the course of '20 and '21, many businesses pivot. Because they tend to be the main breadwinners in the home. This is not a - this is their business and you don't give at that lightly. And finally the product that we provide is not a luxury product. It's almost a prerequisite to undertaking business. So people don't give up insurance easily. So what's not immune? We feel good about the business. Paul? Paul Cooper Yeah, to your IFRS 17 question, Will, so, I mean, as a reminder, it's only 18 months old. So, it's still a relatively young standard and you can see sort of the middle bar was where we came in sort of from the top of the range of our forecasts. So in essence, the main reason we put this slide up is just to help you guys model out sort of expectations for the various components of what is a complicated calculation. So IFFI unwind it's dependent upon rate, dependent upon the opening reserves and it's also dependent upon payout patterns. And quite simply, what we've been doing is, improving our forecasts over the time. So in essence the previous guidance that we put out was 120 to 1550 given where we came out we've refined our forecast as we will continue to improve this process and hopefully that standard will mature and firmly bed in across the whole sector. But we've moved it from 120 to 150 and up to 135 to 165. Aki Hussain Andreas. Andreas van Embden Thank you. I just had a few questions on the reinsurance business. I can see your changing the mix of third-party capital. So you are doing more quota share and obviously you're paying back your third-party capital to investors. Is that changing the risk appetite within your reinsurance book? I.e. does that change the mix between what you are underwrite in cat and non-cat reinsurance? And the second question is, you commissions and fees are quite attractive coming through that ILS third-party capital structure. Moving to more towards quota share are the seeding commissions you get on the quota share book equivalent to the fees you are getting on the ILS capital? Or is it going to be a mix shift and in that fee income structure. Thank you. Aki Hussain Okay. Thank you Andreas. I guess, in short, there is no change in risk appetite as a result of the changing mix in third-party capital. So there's no change there. Our a main focus has been for many years. Property and retro and it continues to be property and retro with some additions. In terms of fee income, the fee income that we received from ILS funds oriented quota share partners, the exact quantum or basis points is different. The structure is very similar. And there is not a significant difference between what we would receive regardless with this quota share or ILS for equivalent performance. Nick. Nicholas Johnson Thanks. Good morning Nick Johnson from Deutsche Numis. Couple of questions. Firstly, on marketing investments, so the $50 million spent against $77 million of premium growth in the first half. I mean our face value that doesn't seem like a great return on investments. How do you think about the lifetime value of growth from marketing investments? Is there a magic ratio so how much you spend versus lifetime value expect to achieve? And secondly on London market, you mentioned second half this year we should see some further growth in London market from property. I think that's right. Do you see that growth continuing into 2025? Or is 2024 likely to be the peak for the top line on London market? Thanks. Aki Hussain Okay. Thank you, Nick. I guess, in terms of marketing, the $50 million to $77 million is not an appropriate way to think about it. The $50 million is made up of what we call acquisition marketing, where there is frankly a one-to-one relationship and what we're driving is immediate growth. And for brand that's about laying the foundations for a much longer term strategy about reinvigorating the brand, creating that brand awareness, which over time actually makes the acquisition costs more efficient. The most significant increase in expenditure actually last year and this year in particular has been in brand spend rather than what we call acquisition marketing. So the relationship is a little bit different. But in terms of lifetime value, that's exactly how we think about it. The with the retail business one of the significant benefits driven by our specialist nature and frankly the service that we provide is that retention rates tend to be pretty high, which means if once customers join us, they stay with us for quite some time. And therefore, from a lifetime value perspective, which is a key measure for us we are very satisfied with the money that we are spending and the investment return that we are achieving. In terms of London market property, rates continue to hold up well. We are very pleased and I expect the business to grow in the second half of the year. As far as what will happen in 2025, I think we'll give you a much better update later on this year. To help you can ask Paul when we do the Q3 update. Tryf. Tryfonas Spyrou Well, thank Tryfonas Spyrou from Berenberg. I just want to come back to the sort of partnerships retail. And the PK that's obviously, the comments you made some of your partners obviously getting with sweetened terms and you talk about you together driving marketing, so you won't obviously drive more growth. So it doesn't fit like they are not doing their part of sort of driving that. So I guess, my question really is what are the semi structural difference which is on the products they are selling on your behalf versus what you are doing on the direct side, because clearly there is a discrepancy between the two growth rates. So the second question is on, I guess you touch on the London market growth trends for next year. I was wondering you have any sort of early comments on whether you can literally expand the capacity on the Syndicated fee clearly showed us the profitability question there are a landmark market growth plans for next year. I was wondering you have any. Any sort of early comments on whether you can do to expand the capacity on this indicator 33 clearly showed us the probability being quite strong. And appreciate capacity stop capacity has been flooded the number of years so any thoughts around you potentially going that next year. And then, last question maybe one for Paul. How much limit or headroom do you have still available on the LPT? And how has your US liability reserve position touched that moved during the first half. Thank you. Aki Hussain Okay. Great, thank you. Thanks for those questions, Tryf and Paul, you will cover the question on LPT. Paul Cooper In terms of products, that there is no difference in the products that we sell direct to customers or through the partnership channels the same products. In terms of London market growth and Syndicate 33 capacity, we have a headroom in the capacity currently. And we will see how the year - how the rest of the year unfolds and how will the market outlooks looks like for 2025. I think the key thing is, I would use there from is that the capital position remains very strong. We will deploy capital, where we see attractive opportunities and if needed, we will increase the capacity. Yeah, and then on LPTs, it is relatively net. If you have a look across all of the contracts that we've got in place in aggregate, lots available. And then, as sort of Joe referenced earlier, when we touched on the earlier comment, nothing significant around US reserving. You can see that from the combination of where we end up with the confidence level similar to last year, year end and reserve release it still remain strong coming out. Aki Hussain Okay, we'll move in the room, Abid. Abid Hussain Hi, good morning all. It's Abid Hussain from Panmure Gordon. Thanks for taking my questions. I've got two questions. The first one is on capital. You just reference the capital position is very strong. It does from the outside feel like it's very strong. Just wondering if you have a sort of target range that you like to operate to and how quickly you might want to get down to that target range and whether that's through deploying for growth or perhaps through additional cash distributions. So that's the first question. The second one is slightly less question is on cyber rates and the outlook there. Just wondering post cramp strike outage, if there is any stabilization in rates or if margins are looking sort of attractive enough for you to pursue that as an avenue of growth going forward? Great. Thank you Abid. So Paul will kill the capital question and Joe will address the cyber rates question. Paul Cooper Yeah, so capital as we said remains strong. You can see on the chart we very pleased with the 206% BSCR position. We don't have a range. So, we've being operating in and around the 200%, but we don't have a target. What we have been very clear on and particularly around last year end, if you can cast your mind back around our capital management policy, so very much deployed a capital for growth and you've seen that we've done that last year and this year. That's not only to drive the retail business, but also to deploy into attractive market conditions. So from a reinsurance perspective, we've grown that net business double-digit. Last year it was strong similarly. We maintain a strong balance sheet. You can see the strength of that, we've got the scenario up on the chart around, the stress around it. It is a pretty extreme scenario continue to pay a progressive dividend, I am pleased around the 5.6% increase and then consider any surface to return. So we are in a pretty much mostly through the buyback that we announced to turn year end. Joanne Musselle And then from a further point of views so, yeah, I think the global IT outage in July was at the time you remind that this type of risk shows no sort of geographical or indeed industry The Seas respond to non malicious events in our own retail core policies. Don't respond to non malicious events. As an example, I think the other thing that was quite interesting. Was you know the geographical it came on the time basis a time update. As a you know Asia pack was most affected and then into Europe and then obviously it was largely done and dusted by the time the US woke up. Again from up for our point of view we have very little in Asia PAC and the majority of our businesses written in the US and obviously and in Europe and I think there were other things about that event which was quite interesting one was obviously it was contained really quickly. Those Microsofts and not see what growth come up pretty quickly. So most people who are affected we're up and running on actually, so maybe one day outage and again, within the market and our own policies, there's waiting periods. So from our own point of view, we might anticipate a bit of activity, but our London market business is written high access. So significance of waiting periods before it will be affected, but that was your quite question about price. I think it probably just two things. I think it absolutely drives the need for cyber. I think consumers, customers, businesses will be looking at that thinking how reliant they are on technology. And so I think the propensity of people to buy will increase. This event I mean the sorts of cyber cube so one of the main vendors here coming out with us with an industry loss of. 3.4 and what 1.3 so, whilst not a significant events in terms of some of the RDS. So yeah, that has to scores before it can either drive a people being more cautious because they've seen this test into this aggregation or they may say, we'll actually it tested it and actually it's not going to be a significant market industry loss. And so therefore that might fuel. So I think it's difficult to tell, but I think it definitely will drive propensity of people to buy this product because it really highlighted the risks. Aki Hussain Okay, Kamran. Kamran Hossain Hey, so it's Kamran Hossain from JP Morgan. Just wanted to touch back on the partnerships again. Just intrigued about the partnership concentration risk that you really have. So I think you've got I mean it's very difficult for the so I just see whether this is a small handful of partners that have maybe a disproportionate effects on volumes in Q2 or not, so just interested in that. The second question, I'm just kind of thinking longer term about DPD. You are referencing it was 33.5 million potential customers. I know you probably not going to give us your market share, but you think that's gone up or down in the last five years as the market kind of what direction it went. And that's gone all the number would be amazing. And the third question is, just coming back to the slide that Joe put up which basically showed you've got a really diverse mix of business. You've just gotten RE & IL you've got London market you've got retail. But you stick it all together you can come up with a very smooth result at what point will you move to a single combined ratio guidance for the Group? Thanks. Aki Hussain Thank you for those questions Kamran. In terms of partners, we have at last count over 150 partners. I think the way to think about it is a typical sort of distribution. There will be sort of 20% account for - these aren't the specific figures but 20% account, 20% of the income. So the distribution is no different from that. But we are actually quite happy with actually, I would say with the last few years the diversification within the partnership propensity increased. If you go back a few years, it was perhaps more concentrated. But we've added more and more partners. A few of those have become quite established and large with us. So I'm - we are pleased with that. In terms of market share, I guess, the short answer is I can't give you a stat, but I will tell you it's gone up because our growth if you compare to others and we have a period five, six years ago, our growth rate has been faster than the market growth. And then, in terms of a single combined ratio, not yet. Darius and then we'll go to Freya. Darius Satkauskas Hi, Darius. KBW Two questions please. In your BSCR waterfall, you show that the dividends and the buyback were not covered by the net capital generation in the first half. Is this because you execute most of the buyback in should we expect the repatriation to be fully covered by the year end? Or some of the buybacks should we expect it to come from the excess. So first question. Second question, I think you showed that as a percentage of reserves, your reserve releases have been coming down from 1.8% to 1.3% over the past two years. At the same time, your confidence level did not increase, it actually slightly came down from last year. I would have thought that the hardware insurance market would have allowed you to increase the overall buffers. So what is driving this when the reserve releases were actually coming down? Thank you. Aki Hussain Thank you, Darius I think that both of those questions are for Paul. Paul Cooper Yes, so, I mean you've got to think and this slide is really about the first half. So what you've rightly highlighted is the share buyback 85% of it is in the first half of the year. So we're still got the second half to go capital generation, we still expect to be strong all things equal we get through the wind season to be strong in the second half of the year. The interesting thing on the chart is if you look at the sort of capital consumed, because this is very driven by property cat. And the - both in reinsurance and in the primary basis, a lot of that is weighted towards the first half of the year. So more than 75% of the reinsurance business has been written as at the sort of 30th of June. So capital consumption for the second half, we expect to be relatively modest. Capital generation to be strong and therefore the overall capital generation overall will more than offset both the buyback and the dividend. That's sort of the first aspect. And then I think from the second component around sort of reserves, confidence level, I think it's a combination of different aspects. So, you're not going to just look at the sort of the rates and the hard market. You've got to look at the underlying composition of the reserves and sales the proportion of cat versus non-cat will play a part, but and then I'll come back to the same part we conduct every quarter a comprehensive reserving review with our actuaries. We are at the top of that range 80% is pretty consistent. And you just reflective and you think about the hard market conditions. Just as a reminder, if you go back to the half year last year, we were at the 77% and that was the first time when we published it. So there has been a meaningful increase in terms of the overall confidence level. And Joe mentioned, that the earlier questioning the track record of reserve releases goes back to 20 years or more. So we're very comfortable around the reserving position. Freya Kong Hi, thanks for taking my questions. Freya Kong from Bank of America. Just back to the retail momentum pick up you expect in H2, does this factor in your plans to work with these larger partnerships, which has fallen short in Q2 or is this reliant on the pipeline of partnerships that you have already planned to come online? And I guess a follow up to this is, how hard do you have to work each period to bring on new partners in order to sustain growth? And the second question is more on the market outlook. Given that inflation seems to be tracking below expectations for yourselves and probably for peers. Do you expect this could put downward pressure on pricing over the coming months? And on pricing adequacy, it seems like your comments on seems to match peers, that is quite satisfactory in most lines. Any comments you can share on the competitive dynamics you're seeing across the different lines of business. Or are you going to expect the plateau in rates or the peak in the cycle? Thanks. Aki Hussain Okay. So, I'll address the question on momentum pick up on retail. I think Joe will provide a perspective on pricing adequacy across our portfolios. In terms of momentum, a pick up in the second half of the year as I mentioned, we expect it to be gradual I expect it to be non-linear. And I expect it to be broad based across our retail business, not specifically or entirely driven by DPD. We are working, as I mentioned with our partners on improving momentum in the second half of the year. I would say that this is not, become a switch pawns are in play. They'll be implemented and then momentum will build over time. We have as far as adding partners to our portfolio, we are very pleased, as if we have over 150 partners, and we have actually a pretty healthy pipeline of prospects both sort of large medium and small opportunities that we're looking at. And frankly this is just part of the business proposition that we provide. We are not dependent hugely on those to maintain growth rates They are welcome addition and have definitely made an impact on our business performance in the first half of the year, but they are not the key drivers of short-term growth. Joanne Musselle Yeah, and then maybe in terms of rate efficacy we want to pick up the rate in slide. I think this brings it to live. I think from - when we look at our portfolio, the vast majority of our portfolio is in a really attractive market. What you can see on this slide is, those markets have been repricing for many, many, many years and driven by a combination of lots of different factors. So, unlike other sorts of cycles that are maybe be driven by a single catastrophe losses and that reassurance that then go flows into insurance. What we've seen here is, you investing interest rate environment which meant underwriting profit is being essential, soft markets and there been losses. So people are driving up their prices. We see a political instability. There's been so many different factors and obviously more recently a high inflation environment that is driven up these prices. I think the most important thing that you can't see on the chart is actually this is just relative up or down. The most important thing is how adequate is that is that portfolio? It's fine to take off five points of a portfolio that has 20% in addition to rate adequacy. Clearly it's different if it was just rate adequate and so therefore you would reduce the margin. So, I'd say from my point of view, most of our markets are in very attractive parts of the cycle. Rates are adequate and you can see that. It's evident in our results, the results that were posted. Of course there is always going to be part of the portfolio that is stronger than others and we talked about some of those of microcycles. But that's where we exercise our discipline. And we've done that before. We'll do that again. If we believe that the market is not pricing appropriately, that is when we will reduce and obviously you can see we've done that in some segments that are on the soften end. But yeah, overall the market remains pretty attractive. Aki Hussain Okay. I think we have addressed all the questions. Okay so, thank you very much for listening and thank you very much for your questions. And just to reiterate we are very pleased with the performance of our business. We're going where we want to by delivering robust profitability across the Group. The last couple of years have been about laying the foundations in our retail business. And we're beginning to see that momentum build in the first half and that will continue into the second half. So, thank you very much.

Earnings call: Iteris posts record revenue and bullish outlook for FY25 By Investing.com

Iteris , Inc. (NASDAQ:ITI), a global leader in smart mobility infrastructure management, has announced a strong start to fiscal year 2025, with record revenue and net bookings. The company reported a 5% year-over-year increase in total revenue, reaching $45.8 million for the fiscal first quarter. Iteris also highlighted its strategic partnerships and advancements in AI technology as key drivers for growth, alongside providing an optimistic revenue forecast for the full fiscal year. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Q&A Highlights Iteris's fiscal first quarter results demonstrate a solid performance, with the company not only achieving record revenue but also maintaining a robust ending backlog, which signifies potential for sustained growth. The company's focus on AI technology, as seen in its partnerships and product development, positions Iteris to capitalize on the expanding market for smart mobility solutions. Despite facing some project delays due to third-party product issues, Iteris remains confident in its operational capabilities, citing no supply chain disruptions that would impact product manufacturing. Additionally, the company's contract with Orange County Transportation Authority is on track, indicating reliable revenue streams in the near term. Looking ahead, Iteris is optimistic about its fiscal 2025 prospects and beyond, as outlined in its Vision 2027 targets. The company's strategic focus on AI and smart mobility infrastructure, coupled with its proactive approach to investor relations and litigation management, suggests a forward-looking approach poised to meet the future demands of the transportation industry. InvestingPro Insights Iteris, Inc. (ITI), has shown notable financial metrics in the last twelve months leading up to Q1 2025. With a market capitalization of approximately $299.59 million and a reported revenue growth of 5%, the company's financial health appears robust. The revenue of $174.22 million over the last twelve months, coupled with a gross profit margin of 37.38%, reflects Iteris's capability to efficiently manage its cost of goods sold and maintain profitability. One InvestingPro Tip that aligns with the article's optimistic tone is the expectation that Iteris's net income is projected to grow this year. This aligns with the company's positive revenue forecast for fiscal 2025 and supports the bullish outlook presented in the article. However, investors should be aware of the company's current valuation multiples. Iteris is trading at a high earnings multiple, with a P/E ratio of 211.91, which is significantly higher than the adjusted P/E ratio for the last twelve months of 69.65. This might suggest that the stock is priced optimistically relative to its earnings. Additionally, the company's stock has experienced significant returns, with a 71.57% return over the last week and a 58.73% return over the last year, indicating strong investor confidence and market performance. For readers interested in a deeper analysis, there are 18 additional InvestingPro Tips available on InvestingPro, which can provide further insight into Iteris's financial health and stock performance. These additional tips can be accessed at: https://www.investing.com/pro/ITI Full transcript - Iteris (ITI) Q1 2025: Operator: Good day and welcome to Iteris' Fiscal First Quarter 2025 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead. Jim Byers: Thank you, operator. Good afternoon, everyone, and thank you for participating in today's conference call to discuss Iteris' financial results for its fiscal 2025 first quarter ended June 30, 2024. Joining us today are Iteris' President and CEO, Mr. Joe Bergera; and the company's CFO, Mr. Kerry Shiba. Following their remarks, we'll open the call for questions from the company's covering sell-side analysts. Then we will answer investor questions, if any, that were submitted to the company in advance of the call per the instructions in our press release dated July 29, 2024. Before we continue, we would like to remind all participants that during this call, we may make forward-looking statements regarding future events or the future performance of the company. These statements are based on current information, are subject to change and are not guarantees of future performance. Iteris is not undertaking an obligation to provide updates to these forward-looking statements in the future. Actual results may differ substantially from what is discussed today, and no one should assume that at a later date, the company's comments from today will still be valid. Iteris refers you to the documents that the company files from time to time with the SEC, specifically the company's most recent Forms 10-K, 10-Q and 8-K, which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any forward-looking statements. As always, you'll find a webcast replay of today's call on the Investor section of the company's website at www.iteris.com. Now with that said, I'd like to turn the call over to Iteris' President and CEO, Mr. Joe Bergera. Joe Bergera: Great. Thank you, Jim, and good afternoon to everyone. I appreciate all of you joining us today. Iteris reported record total revenue of $45.8 million in our fiscal 2025 first quarter, representing an increase of 5% year-over-year. As a reminder, we had an unusually strong prior year comparison due to the combination of 2 events that were related to post-COVID recovery. These events were first the release of a large number of sensor shipments that were delayed as a result of previous supply chain constraints; and second, the achievement of certain milestones for some very large long-term consulting projects in our fiscal 2024 first quarter. Given this unusual prior year comparison, we were particularly pleased with our fiscal 2025 first quarter revenue growth comparison. Customer adoption of the ClearMobility platform remains very strong. In our fiscal 2025 first quarter, we reported total net bookings of $48.8 million, resulting in record trailing 6-month total net bookings of $102.1 million, which compares favorably to the $100 million target we set for the first 6 months of calendar year 2024. On a year-over-year basis, fiscal 2025 first quarter bookings decreased 8% compared to our second quarter highest quarterly bookings period on record, which included a $15 million 4-year SaaS order in our fiscal 2024 first quarter. As noted on prior calls, we expect some degree of bookings lumpiness for the next several quarters due to the timing of various large sales opportunities such as the one recorded in our fiscal 2024 first quarter. Reflective of our sustained strong bookings results, we ended the June 30, 2024 period with a record total ending backlog of $126.8 million, representing a 2% increase year-over-year. As always, our ending backlog and net bookings figures reflect firm customer orders rather than total contract value. The total value of customer contracts, which varies from quarter-to-quarter, averages on a historical basis, about 200% of our total ending backlog. Also keep in mind that our backlog excludes a portion, which, of course, varies from period to period of our sensor bookings since those orders typically convert to shipments within a single quarter. At this point, I'd like to share some details about the performance of our product portfolio. For our sensors and third-party hardware, which we refer to collectively as products, we reported fiscal 2025 first quarter revenue of $24.4 million, representing a 3% increase year-over-year. As a reminder, the year-over-year comparison was very challenging due to the release of sensor backlog, which had accumulated over prior periods as a result of global supply chain constraints that we experienced in the prior year. During the first quarter, our teams continue to meet critical, commercial and product milestones that will drive future growth. These milestones included the launch of our new Vantage PedSafe sensor, which is the product resulting from a technical collaboration with Sumitomo Electric Industries that we discussed on our May earnings call. The release to production of our new Vantage Next Vantage Radius advanced connectivity solutions that will enhance VantageCare offer and accelerate our annual recurring revenue attach rate and the initiation of field testing for our new Vantage Apex Rackmount sensors that are scheduled to start shipping in October 2024. Now I'd like to review the performance of our services portfolio, which includes our various Consulting Services, Managed Services, Software as a Service and Data as a Service offerings. We reported record service revenue of $21.4 million in our fiscal 2025 first quarter, representing an 8% increase year-over-year, and that's despite the challenging comparison I mentioned earlier. This growth is attributable to continued strong demand, particularly for our Software as a Service solution ClearGuide. We also benefited from further improvements in our internal labor capacity, reflecting the progress of the various initiatives we've discussed on prior calls. To sustain strong customer adoption of our services portfolio, we continue to introduce important new enhancements to our ClearMobility platform. For example, in the first quarter, we introduced a traffic flow data fusion engine, new intersection risk and work zone impact models using Applied AI and web services and database systems enhancements that we expect to improve the user experience, increase our cross-sell rate and lower our cost of goods sold. In summary, we're very pleased with our fiscal 2025 first quarter record revenue, our record trailing 6-month net bookings and record ending backlog. Additionally, we believe Iteris continues to demonstrate significant progress in evolving to a platform-based business model that will produce significant strategic and financial benefits for the company. As a result, we remain very confident Iteris is positioned to realize progressive improvements in our financial profile over the next several quarters. And on that note, I'm going to pass the mic to Kerry to provide more color on our first -- our fiscal 2025 first quarter financial results. And then after that, as I typically do, I'll come back to further discuss our expectations for the second quarter and the full year. Kerry Shiba: Thanks, Joe, and good afternoon or evening to everyone. As you review our first quarter results, I want to reiterate Joe's comments regarding prior year comparisons when assessing the overall momentum of the business. The prior year comparisons have been affected by dynamics stemming from prior global supply chain constraints, particularly for sensor shipments, while we also benefited from certain key milestone achievements for some very large consulting projects in the first quarter last year, which we commented on at the time. As Joe also described, and I want to underscore that our strength in the market continues to be demonstrated by our record bookings level for the 6-month trailing period and our record backlog at the end of the first quarter of this year. Because Joe already addressed revenue results, I will move down the income statement as usual to the gross profit line and provide some underlying details. On a consolidated basis, the fiscal 2025 first quarter consolidated gross profit reached $17.3 million, an improvement of $500,000 or 3% over last year. The increase was driven by a $900,000 improvement in services, which partially was offset by a decline in products. The services gross profit improvement reflects the 8% year-over-year revenue increase Joe mentioned as well as the benefit of stronger consulting labor mix resulting from increased internal labor capacity. The first quarter decline in products gross profit primarily reflects the impact of product mix and some negative inventory adjustments. Looking at gross margins. The first quarter of this year reached 37.9% in the aggregate, which was 70 points basis -- I'm sorry, 70 basis points lower when compared to the same period last year. Services gross margin improved 220 basis points, reflecting the improvement in labor mix. Products gross margin was 280 basis points lower due to product mix and negative inventory adjustments. Operating expenses in aggregate for the first quarter of fiscal 2025 were $17.1 million or 15% higher than when compared to the same period last year, and 320 basis points higher when measured as a percentage of revenue. The increase was largest in the sales and marketing category and resulted from higher headcount and increased sales and marketing expenses associated with several large sales pursuits. The next highest increase was in research and development and reflects expected investment growth to support new products. And then finally, higher general and administrative expense was due to executive severance costs. The factors discussed related to revenue, gross profit and operating expense fundamentally explain the major comparisons in operating income and net income. For adjusted EBITDA, these same factors also apply with the exception of the impact of executive severance costs, which was excluded from adjusted EBITDA. As Joe noted, adjusted EBITDA was $2.9 million for the first quarter of fiscal 2025, which compares to $4 million for the same quarter last year. Total cash and cash equivalents at the end of the first quarter of fiscal 2025 were $21.4 million, which compares to $25.9 million at the end of the preceding quarter. The reduction primarily reflects an increase in accounts receivable relating to the timing of sales and collections. In our effort to continue to focus on the range of actions to create shareholder value, we also spent $600,000 to repurchase common stock during the quarter. I now will turn the call back over to Joe, who will discuss our fiscal 2025 guidance and provide closing comments. Joe Bergera: Great. Thank you, Kerry. The smart mobility infrastructure management market continues to represent significant long-term opportunities due to favorable technology and market trends. For example, the adoption of cloud infrastructure, artificial intelligence and connected and automated vehicles will continue to drive significant smart mobility investments by state and local agencies as well as by various private sector entities. Therefore, we remain extremely optimistic about the long-term opportunity in front of Iteris, especially given the breadth of our platform, our brand equity and our customer reach. Over the balance of fiscal 2025, Iteris will continue to deliver against an aggressive solutions road map that includes the following major releases. A new form factor that will significantly expand the serviceable addressable market for our AI-based detection system, Vantage Apex. A new mobility data set will address various new use cases, and we'll expand the universe of prospective buyers for mobility data, including new commercial entities like the recent deal we announced with Telenav (NASDAQ:TNAV). A cloud-connected edge solution provided on a subscription basis for remote monitoring and management of critical third-party assets deployed across local and statewide transportation networks. A combination of new cloud and edge applications will enhance, expand our connected vehicle solution portfolio and will drive both product and annual recurring revenue. And a highly advanced radar-based pedestrian detection system developed in partnership with Sumitomo that will be fully integrated with our ClearMobility platform and is expected to transform pedestrian detection and pedestrian safety in North America. We believe our fiscal 2025 release plan will increase our total and serviceable addressable markets, accelerate the adoption of our ClearMobility platform and improve the monetization of our expanding mobility data sets in fiscal 2025 and beyond. For example, as noted earlier, the release of our new pedestrian detection system, which is scheduled to occur in our fiscal third quarter, will more than double Iteris' total addressable market for detection solutions from approximately $500 million to $1 billion. In addition to the focus on our solutions portfolio, we'll continue to pursue key operational priorities, including the productivity of our distribution network, maturity of our customer success function and internal labor capacity of our consulting teams. As a reminder, the tactics outlined on our prior earnings calls have already produced measurable improvement in our internal labor capacity. Next, I want to address our guidance. We continue to expect fiscal 2025 full year total revenue to be in the range of $188 million to $194 million representing organic growth of 11% year-over-year at the mid point of the guidance range. Due to the volume improvement and our continued cost discipline, we also continue to expect an improvement in our full year adjusted EBITDA margin to be in the range of 8% to 10% of revenue. This would represent a 150 basis point improvement in adjusted EBITDA margin at the midpoint of the guidance range even after we continue to invest in talent acquisition and talent development. Although we're not providing net bookings guidance, we do continue to expect some bookings lumpiness over the next several quarters due to the timing of several large pending orders. With respect to our fiscal 2025 second quarter guidance, we expect total revenue to be in the range of $44 million to be $48 million representing organic growth of 6% year-over-year at the midpoint of the guidance range. This rate of growth is a result of some revenue that was previously expected to occur in our fiscal 2025 second quarter but instead occurred in our fiscal 2025 first quarter. Also, our fiscal 2025 second quarter rate of growth reflects the timing of various new product releases that will not occur until the end of our fiscal 2025 second quarter or the start of our fiscal 2025 third quarter. Due to costs associated with the final development and prelaunch activities for those product releases, we expect fiscal 2025 second quarter adjusted EBITDA margins to be in the range of 6% to 7%. The midpoint of the guidance range represents a 20 basis point sequential increase, but a 20 basis point decrease year-over-year. While we're not providing fiscal 2025 third or fourth quarter guidance at this time, we continue to anticipate sequential improvements in adjusted EBITDA margins as our fiscal 2025 full year guidance clearly implies. Due to the forecasted increase in fiscal 2025 total revenue and adjusted EBITDA margin, we anticipate continued improvements in our liquidity, which should provide adequate cash for future tuck-in acquisitions. And additionally, we will continue to evaluate other actions such as further share repurchases to return excess liquidity to shareholders. Looking beyond fiscal 2025, we continue to believe Iteris is on track to achieve our Vision 2027 target. In other words, we continue to estimate fiscal 2027 revenue to be in the range of $245 million to $265 million before any additional acquisitions, which would represent a 5-year organic revenue CAGR, of nearly 14% at the midpoint. With the substantial increase in annual revenue, we also anticipate progressive benefits from scale to result in fiscal 2027 adjusted EBITDA margins in the range of 16% to 19%. And additionally, we anticipate our acquisition program would be additive to our organic Vision 2027 targets. So with that, we would be delighted to respond to any analyst questions or comments. Operator, are there any questions for us at this time? Operator: [Operator Instructions] Your first question comes from the line of Jeff Van Sinderen with B. Riley. Jeff Van Sinderen: Just wanted to circle back to the quarterly revenue progression. I know you gave guidance for Q2, and we see kind of what's implied in the annual revenue guidance. Can you maybe just touch on the timing elements that you're looking at today regarding what the second half revenue cadence might look like? Joe Bergera: Yes. I mean we're obviously implying like high teens organic revenue growth in the second half. And I'll just say that, that's a function of various products that are being released in September, the beginning of our third quarter. By definition, what I'm suggesting is these tend to be products, they're going to generate product revenue. To be a bit more specifically, I'm talking about our Apex Rackmount sensor and our pedestrian detection sensor. The revenue is directly tied to when we begin shipping those products, which we're already selling. But beyond that, Kerry, do you want to talk about what's going to lay out in the third and fourth quarter? Kerry Shiba: Yes. I think some of it's a little redundant, Jeff. But -- so releases, especially for the pedestrian radar will be during the third quarter. It should continue to ramp up in the fourth quarter. And then we still have some of the overall seasonality impact where our fourth quarter, clearly, we would expect to be stronger than our third just from a normal pattern. So that should be the cadence, and we should continue to see some upward trajectory progressively as we go through the year. Jeff Van Sinderen: Okay. That's helpful. And then as we're thinking about gross margin and modeling that, I know mix is a big play there and you've got some new products launching for second half. How should we think about kind of the cadence of gross margin as the year? Joe Bergera: Yes, I think it should similarly be on an upward track as we go along. I think part of that's going to be clearly just revenue leverage that will help us clearly from an EBITDA margin perspective, that would be the case. But even at the gross margin level, I think there should be some directional small ticks upwards as the year. Yes. And then, Kerry, you may want to comment there are additionally some product related and marketing-related investments that are occurring in the first half in anticipation of these product launches too. Kerry Shiba: Yes. On the OpEx side, for example, sales and marketing, as I commented, were unusually large because of both proposal activity that is being worked on for some large opportunities we're chasing as well as some other things. Joe Bergera: That prelaunch activity associated with product releases. Kerry Shiba: Yes. Might as well just continue. R&D would expect to continue to -- we have planned on spending more money this year overall. I think the first quarter was reflective of that, Jeff. So I would almost use that more as a benchmark than what happened in the prior year. SG&A, we did have a blip this quarter, as I had mentioned. Jeff Van Sinderen: Okay. So one more thing about SG&A. So could SG&A dollars be down sequentially in Q2? Or should we just think that the rate is going to ease? Kerry Shiba: I think that you -- from a nominal perspective, auto expect SG&A to be down nominally. Jeff Van Sinderen: Okay. Good to know. And then if we could, I just wanted to circle back since we're on the topic of new products, anything new to add on the pedestrian detection product with Sumitomo. I think you said that you're selling that now. Maybe is that out in the field? What does that look like? Anything around that? Joe Bergera: Yes. So we launched the product in earlier this quarter, which means that we're actively selling it, but obviously, we won't recognize revenue until we begin shipping units. Associated with the launch activities, we do have demonstration product, and we are initiating some pilots with various customers. We are seeing very favorable market response, a high level of customer interest at this time, and we are beginning to take orders. Jeff Van Sinderen: Okay. Great. And then similarly, on the rack mount product. Joe Bergera: Yes. So the rack mount product is different. It's that we have -- our Apex product is already available in a form factor to call shelf mount. There's no functional difference between the rack mount and the shelf mount product. However, about half of the country the jurisdictions have a standard, which requires them to utilize the rack mount form factor, which means that we've not been able to sell the Vantage Apex product in at least half of the country. So we are currently taking orders for the rack mount version. The customers are very familiar with the Apex products. And again, there's no functional difference, but we significantly increased our serviceable addressable market with introduction of this new form factor. And that product is scheduled for release in October. Kerry Shiba: It's related to the traffic cabinet basically that... Joe Bergera: Right, which drives the appropriate form factor, right? Correct. Jeff Van Sinderen: Yes. So I guess the follow-up to that is just -- as that had been holding you back, the fact that you didn't have a rack mount unit and now you will, in October you have that shipping? Joe Bergera: Absolutely. Yes, it's totally held us back. In those geographies, which only use a rack mount form factor it's been an obstacle to upgrade people from our edge of our next product to the Apex family. There's significant demand for the Apex product, and we will be able to begin fulfilling that in our third quarter. Kerry Shiba: I think the same release was logical for us to start with the shelf mount and then move to the rack mount as far as kind of the engineering sequence, but we're very... Joe Bergera: Absolutely. I mean further just totally transparent. I mean, we would have had a rack mount version in market probably 4 quarters ago, if not for the supply chain issues, which required us to re-factor a lot of our circuit boards. And so it consumed a lot of development capacity. And so we're behind schedule, but we'll be addressing that market demand in the very near future. Jeff Van Sinderen: There is just one last one, if I could squeeze it in. Are there any supply chain issues at this point that you're either experiencing or seeing or anticipating? Kerry Shiba: Not in anything that's affecting our ability to manufacture our products. Joe, I don't know if there is anything in the surrounding marketplace that's sort of creating... Joe Bergera: Yes, so Jeff, I'll try to answer your question, like to kind of apply like the prior lens that we were looking at things. I think the answer is clearly no. We are not experiencing any kind of broad global supply chain constraints similar to what we experienced several quarters ago. We don't anticipate that occurring. From time to time, we will receive notification like end of life of certain components. And so we need to endeavor to figure out how we're going to best replace this product. And then we're always trying to figure out how to optimize our component cost, and so we're also making those changes. I think what Kerry is referring to, which is an excellent point is this has nothing to do with our supply chain, which we think is very robust at this point in time. But we do have some third-party dependencies. For example, if an agency has decided to modernize an arterial corridor, which would include kitting the intersection with the newest detection equipment, that's probably going to require them to get a new cabinet and maybe other components like a new signal controller. We do, from time to time, continue to hear about some delays in those third-party products, and that can have a knock-on consequence for us in just simply delaying projects. But in terms of our supply chain, we are not experiencing any kind of exposure. Kerry Shiba: And we don't think if there's any existential kind of thing going on around us. It's going to affect timing more -- we don't think it's going to affect fundamental demand, but sometimes we can't control the timing of everything going on around us. Joe Bergera: Jeff, the reason that I think we're still -- from time to time, we will experience some delays with these third-party products. As you know, we were extremely aggressive in working through our supply chain issues. And so they're well behind us. But I think that there are some other participants in our marketplace that weren't able to move as swiftly as we have. And so they're still getting caught up. And then additionally, as we've talked about, there are labor constraints in the marketplace, which can also impact some of these third parties as well. But again, we do not feel any particular exposure to unusual global supply chain constraints ourselves. Operator: Your next question comes from the line of Michael Latimore with Northland Capital Markets. Alex Latimore: This is actually Alex Latimore on for Mike Latimore here. I just got two questions for you guys. The first one being, you said that you've had a goal of hitting 110% on SaaS net dollar retention rates. If you can shed some light maybe on what it was in this quarter and where you see that level going for fiscal year '25, that would be great. Joe Bergera: That's a good question. Kerry, I don't know if we have our net dollar retention rate handy for the current quarter. Kerry Shiba: I hate to quote it because I don't have it in front of me, Alex... Joe Bergera: Yes, Alex, if we can get you that number on our follow-up call, it'd probably be better than us speculating. In terms of fiscal '25, I don't think that we formulated -- or for the year, our target is 110%. But if you're meeting like beyond that, I don't think we formulated a view that we feel comfortable sharing with people at this point. But I would say that our view is that anything over 105% is a very good net dollar retention rate. Obviously, we endeavor to do better. Don't get me wrong. We want to be best practice or best-in-class, but our objective is definitely to be north of 105%. Alex Latimore: Sweet. And then my second question here is do you see the budgets specifically in California, Texas and Florida for the upcoming year as favorable to your areas? And if so, or if not, why? Joe Bergera: Yes, Alex, that's an excellent question. So we have not specifically been notified of any -- by our customers of any particular budget issues that have resulted in any opportunities that we're pursuing, going away or necessarily being pushed out. Now we do see things move to the right as a result of a lack of labor capacity, both within agencies and with other third parties and then some of the components that I talked about. So we do see things pushing the right. But so far, we haven't seen anything with respect to budget. But that being said, there -- I think everyone is obviously paying close attention to kind of broader economic conditions. And I would say that our agency customers are -- they're certainly mindful of that as well. So far in the few instances that I'm aware of, where there have been budget shortfalls that could have impacted specific projects. In those instances, again, based on what I'm familiar with, the state or local agencies been able to backfill that budget gap with federal funding, which would have obviously been distributed through some kind of IJA mechanism. It could either be the result of like formula funding that provided a backstop, some special grant or some kind of competitive grant money that they've been able to secure as a backstop. Operator: Your final question comes from the line of Allen Klee with Maxim (NASDAQ:MXIM) Group. Derek Greenberg: This is Derek Greenberg on for Allen. My first question is just with the Orange County Transportation order from a couple of months back that $10 million deal, I was just wondering how that's progressing and how you foresee the impact of that playing out from a timing perspective. Joe Bergera: Yes. Great question. So that project is on schedule. Of that nearly $10 million, about $2 million of it is SaaS revenue for our ClearGuide product. And so that's recognized ratably over the 3-year term. The professional services element, even though the nature of the work changes from phase to phase. The overall sort of estimated labor capacity remains relatively constant over that period. So I don't foresee any particular fluctuations in terms of the revenue recognition against that -- on that contract. And as I said, it's in -- it's on schedule. We are currently recognizing revenue against it, and I'd expect the revenue recognition to remain relatively constant for the duration of the contract. Derek Greenberg: Okay. Great. And then maybe just a little bit on the labor and talent acquisition program you guys have. Joe Bergera: Yes, sure. So for people who aren't following all this close, I'll provide some context. Obviously, generally, the labor market has been constrained, I think across basically all economic sectors, but it has been particularly constrained in the traffic engineering and more generally, even in broadly the transportation sector. And that impacted agencies. It's impacted other participants with whom we, in certain instances, have various dependencies we've talked about, and it's frankly impacted our ability to hire as much talent as we had anticipated, particularly last year. And as we talked about, that was a limiter in terms of our revenue recognition and our rate of growth. About the same time last year, we announced that we were going to initiate various programs to try it up amp up our talent acquisition capabilities, including sourcing more talent out of international markets, which then was going to require us to spend more from a legal perspective in order to get the appropriate work permits for those individuals. I would say that, by and large, that program has met our expectations. I wouldn't say that we're at 100%, but I would say that we're, I don't know, maybe like 60% to 80% of goal. And we feel like our talent pipeline continues to improve. So I would not expect -- I mean, Kerry, I think, kind of alluded to, I mean there were some modest impacts in the -- with respect to mix in the most recent period and to some degree, that's because there were still instances where we needed to use third-party contractors to perform some work, we didn't have the direct labor capacity. But the degree to which that's happening is continuing to get less and less, and we expect that to continue going forward. And I would also say more broadly that while we are concerned, I think as everybody is about what the future economic environment is going to look like, that actually is going to make it easier for us to recruit and maintain talent, which -- so there's a silver lining to that. Kerry Shiba: I think progressively knock-on benefit, too, is that even though attracting talent -- finding and then attracting talent at kind of more experience levels as we have found people that maybe are younger and 10-year younger and experienced, they're going to continue to get trained up. also. So progressively, over time, their capability is going to continue to improve. So... Joe Bergera: For sure. And it was really that mid-level cohort that was a particular pinch point for us, and that's why trying to access that talent in international markets. So these would be people with like 5 to 10 years of experience, that we've been able to pull in from other geographies has been extremely beneficial and kind of fill that hole. Derek Greenberg: Great. That's very helpful. My last question is just on the litigation and if there's any updates there. Joe Bergera: Yes, great question. So we had previously said that we had expected the Wavetronix trial to occur in the April period. That obviously didn't happen. I think we talked about it on our last call. At that time, we were expecting the trial to occur in early September. At this point, we are working with the court as well as Wavetronix to agree on a particular trial date. We still expect that to occur in September, but we don't have a specific trial date at this time. Operator: Mr. Bergera, there are no more questions from covering analysts. Would you like to address any investor questions before providing your closing remarks? Joe Bergera: Yes, sure. Thank you, operator. Actually, we did receive, in fact, several questions from one investor regarding artificial intelligence. Unfortunately, given the kind of the limited amount of time we have on this call and also this particular venue, I'm going to limit today's comments to our AI strategy and the opportunities we believe AI represents for Iteris. As stated in the AI white paper we published last year, I just want to reiterate that we believe Iteris is pursuing the most comprehensive, holistic AI strategy in our end market. Our strategy is multilayer and it leverages various forms of AI and machine learning across all levels of our ClearMobility platform. For example, we use AI in our edge devices, such as video sensors for detailed object classification, which drives valuable meta data and enriches our data lake. And additionally, this object classification data enables agencies to categorize corridors by type of vehicle traffic over time, such as periods of high commercial vehicle traffic that can then be used to improve traffic flow and reduce noise and air pollution. Going forward, we intend to introduce additional AI capabilities in our edge devices to address use cases for highway vehicle tracking, pedestrian movement, active use trails and urban mixed environment. And then at the cloud layer as opposed to the edge layer, which I just talked about, again, at the cloud layers of our ClearMobility platform, we continue to add more data and more types of data from our -- across our entire ecosystem. These constantly growing data sets also enable us to expand our uses of AI. So for example, the new intersection safety and work zone models, which I mentioned earlier, are a byproduct of our unique access to verified event data and our multilayered approach to AI. For further context, our AI-based intersection model uses AI to predict accidents and recommend appropriate countermeasures. And likewise, our work zone model identifies various risks and countermeasures to inform work zone design and management. Because we operate in a highly competitive marketplace, as you all know, we're going to continue to be measured in terms of our comments about our AI road map. But that being said, I want to confirm that we continue to identify very compelling uses of AI that will create social and economic value for both our public sector and our private sector customers and we'll continue to provide our investors more visibility to the specific opportunities in due course. So with that, I want to just note that we'll be conducting various investor outreach activities over the next few months. And of course, as always, we're available to speak with investors should you have any follow-up questions. In the meantime, I want to say we look forward to updating you again on our continued progress when we report our fiscal 2025 second quarter results. And with that, we're going to go ahead and conclude today's call. Thank you, everyone. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Kaltura, Inc. (KLTR) Q2 2024 Earnings Call Transcript

Erica Mannion - Investor Relations Ron Yekutiel - Co-Founder, Chairman & Chief Executive Officer John Doherty - Chief Financial Officer Good morning, everyone, and welcome to the Kaltura's Second Quarter 2024 Earnings Call. All material contained in the webcast is the sole property and copyright of Kaltura with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead. Erica Mannion Thank you and good morning. I'm joined by Ron Yekutiel, Kaltura's Co-Founder, Chairman, President, and Chief Executive Officer; and John Doherty, Chief Financial Officer. Ron will begin with a summary of results for the second quarter ended June 30, 2024, and provide a business update. John will then review the financial results for the second quarter of 2024 in greater detail, followed by the Company's outlook for the third quarter and full year of 2024. We will then open the call for questions. Please note that this call will include forward-looking statements within the meaning of the Federal Securities Laws, including but not limited to statements regarding Kaltura's expected future financial results and management's expectations and plans for the business. These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Important factors that could cause actual results to differ from forward-looking statements can be found in the risk factors section of Kaltura's annual report on Form 10-K for the fiscal year ended December 31, 2023, and other SEC filings, including the quarterly report on Form 10-Q for the quarter ended June 30, 2024, to be filed with the SEC. Any forward-looking statements made during this conference call, including responses to your questions, are based on current expectations as of today, and Kaltura assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Please note, during this call, we will be discussing a non-GAAP financial measure, adjusted EBITDA. For a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP metric, please refer to our earnings release, which is available on our website at www.investors.kaltura.com. Thank you, Erica, and welcome, everyone, to our second quarter earnings call. Total revenue for the second quarter of 2024 was $44.0 million, up marginally year-over-year. While subscription revenue was $41.0 million, up 1% year-over-year. Of note, in the second quarter, we posted a company record ARR of $165.2 million. As for our bottom line, we posted in the second quarter adjusted EBITDA of $1.6 million, representing our fourth consecutive quarter of adjusted EBITDA profitability, and the highest result since the third quarter of 2020. Cash used in operations decreased to $1.6 million, an improvement from $4.1 million in the second quarter of 2023. Taken together, our results for the second quarter lead us to increase our revenue and adjusted EBITDA guidance for the full year, and to, once again, reaffirm our plan to post positive cash flow from operations for the full year. Moving on to the business update. As expected, we saw renewed growth in new subscription bookings in the second quarter, which were at the highest level since the fourth quarter of 2022. In addition, the portion of new bookings from new Enterprise Education and Technology customers was at its highest level since the second quarter of 2023. Our bookings from new customers and upsells included 23 six-digit deals, spanning a diverse array of industries, use cases, and geographies. Customers include a large European government institute and a global pharmaceuticals leader, both new to Kaltura, one of the largest banks in the world, a leading healthcare software company, two of the world's largest tech companies, a large U.S. R1 university, and two large telecom companies. Use cases ran the gamut from customer marketing and engagement, employee and channel communication and re-skilling, student learning and engagement, and entertainment. Gross retention in the second quarter of 2024 remained at a similar level compared with the first quarter, which again was better than all quarterly results of 2023. This continues to represent an annualized gross retention rate that is higher than the previous three calendar years. The combination of both higher gross subscription bookings and increasing gross retention rates has yielded the highest level of net new subscription bookings in the last six quarters, helping to fuel future subscription revenue. On the product front, in the second quarter we continued boosting our event platform functionality and user experience with an improved SMB flow between sessions and admin group targeting, enhanced chat options, and a more robust analytics dashboard. In addition, we enriched our video portal content management and guest landing pages, added new features for admin sessions in our real-time conferencing rooms, and continued advancing our video player and the scalability and security of our platform. Related to AI, this quarter we added a number of product enhancements. We launched our internally developed AI-based automatic speech recognition service based on Whisper as an improved alternative to the non-AI-based third-party ASR services we previously provided. With the help of AI, captions are automatically generated within videos regardless of the language spoken, enhancing accessibility and user experience. For our events and webinars products, we developed an AI-based email notification engine that automatically generates notifications for users based on ongoing session information, ensuring SMBs stay informed without manual intervention. We also developed a real-time AI-based sentiment analysis of user chat communications for event organizers and presenters. For our video portal, we added an AI-based quiz generator based on the transcript. And for our video conferencing rooms, we launched an AI-based noise cancellation feature for improved audio. Our product leadership continued to yield industry awards as well this quarter. Amongst them are the 2024 Innovation in Business MarTech Awards for Best Virtual Events Platform, the 2024 Event Technology Award for Best Virtual and Hybrid Event Platform, and four 2024 Eventex Awards for Best Event Technology, Best Audience Engagement Technology, Best Data Collection and Event Analytics Technology, and Best Virtual Events Platform. In the passing quarter, we also conducted our annual VIP events in New York, San Francisco, and London. Hundreds of customers and prospects attended Kaltura Connect on the Road 2024 and discussed how AI-infused video experiences could boost their business results. We had an amazing speaker lineup of marketing and corporate communications leaders from customers such as Adobe, Salesforce, Novartis, IBM, Mayo Clinic, Bloomberg, Siemens Healthineers, AstraZeneca, and Red Hat. During the event, we gave out Kaltura Digital Engagement Awards to companies that have demonstrated creative and exceptional use of our platform and have expanded the possibilities of digital experiences in the enterprise. Recipients across nine different categories included ABN AMRO, Adobe, Audible, an Amazon company, Bank of America, Bloomberg, [FIDE], IBM, Intuit, Netflix, Salesforce, and Siemens Healthineers. Lastly, I want to mention a couple of recent executive changes in Kaltura. Renan Gutman, our Chief Product Officer, and Lisa Bennett, our Chief Marketing Officer, are moving on after 10 and 17 years at Kaltura, respectively. We are appreciative of Renan's and Lisa's great contribution to Kaltura and wish them well in their new endeavors. Navi Azaria, who joined Kaltura 3.5 years ago as General Manager of our Enterprise Education and Technology Business and later held the role of Chief Revenue Officer, succeeds Renan as our Chief Product Officer and will also oversee marketing. Before joining Kaltura, Navi was the CEO of a data analytics company servicing enterprises and communications providers. Navi's prior experience included other leadership roles overseeing product and engineering. He also holds a degree in computer engineering. Liad Eshkar, who has been with Kaltura for over 10 years, has assumed the role of Chief Revenue Officer. Liad's most recent role was that of Chief Business Development Officer. Prior to that, Liad led all our sales customers and partners in the technology sector, including the biggest and most complex Enterprise Education and Technology sales cycles and customers, which also contributed the most to our growth. Liad holds an MBA from Columbia Business School, an MA in business law, and a degree in engineering. In summary, as expected, in the second quarter we saw sequential improvement in our new bookings and continued to yield a gross retention materially above quarterly results from last year. In light of that, and following our revenue and adjusted EBITDA outperformance in both the first and second quarters of the year, we are incrementally raising our revenue and adjusted EBITDA guidance for the year. We continue to believe there are stronger tailwinds ahead as companies reaccelerate their investments in digital transformation and online experiences. Fueling these initiatives are factors such as increasingly hybrid workplace, growth in Gen-Z and millennial video savvy employees, cost savings by consolidating multiple enterprise video use cases around a single video platform, and the advent of Gen-AI, which will bring about more creation and consumption of videos and increased ROI. We believe these trends will continue to grow our new bookings, accelerate our revenue growth, and increase our profits. With that, I'll turn it over to John, our CFO, to discuss our financial results in more detail. John? John Doherty Thanks, Ron, and hello to everyone on the call today. Kaltura continues to make important adjustments to its business including improving our operating efficiency, focusing on further monetizing our existing customer base, adding new logos and reallocating resources towards higher ROI opportunities and markets. I want to touch on a few highlights in the quarter that demonstrate this. The highlights include our sequential and year-over-year increase in new bookings, which more than doubled from Q1 and represents the highest new bookings since Q4 2022. Our sustainable level of gross churn for the second quarter in a row, an improvement from all quarters last year, and if annualized, represents a high watermark for the last three fiscal years, our seventh consecutive quarter of year-over-year revenue growth, driven primarily by strength in our subscription revenue, our growth in remaining performance obligations, and the highest ARR to date. All of which is culminated in what we see as strong positioning to achieve our profitability targets with higher gross margin than the three prior quarters, lower year-over-year operating expenses and continued improvement in adjusted EBITDA, representing the fourth consecutive positive quarter, as Ron mentioned earlier. With that, let me move on to our results. Our results exceeded expectations for both revenue and adjusted EBITDA for the quarter. Total revenue for the quarter ended June 30, 2024, was $44 million, up 35 basis points year-over-year and above the high end of our guidance range of $42.7 million to $43.5 million. Subscription revenue was $41 million, up about 1% year-over-year and above the high end of our guidance range of $39.6 million to $40.3 million. Professional services revenue contributed $3 million for the quarter and is down 4% year-over-year. We expect professional services revenue to continue to vacillate. I will touch on this more when I provide an update on our guidance for the third quarter and full year. The remaining performance obligations were $177.8 million, up 8% sequentially and 2% year-over-year, of which we expect to recognize 60% as revenue over the next 12 months. Consistent with what I mentioned last quarter, this $12.5 million increase in RPO was anticipated and is a result of our strong booking of renewal and improvement in new bookings in both Enterprise Education and Technology and Media and Telecom in the quarter. Annualized recurring revenue of $165.2 million, up 2% sequentially and 1% year-over-year. This is the highest ARR we have achieved to date and is reflective of increased subscription revenue in our Media and Telecom business. Our net dollar retention rate for the quarter was 98%. This reflects no change from the first quarter and is down from 100% in Q2 2023. As I mentioned last quarter, we expected NDR for the quarter to be lower due to lower net bookings last year as NDR is a lagging indicator for gross retention and upsell booking. This result was, therefore, better than expected, and we continue to expect it to improve in the second half of 2024 given the sequential improvement in gross retention that we have demonstrated over the last four quarters and the sequential increase in bookings. Within our Enterprise Education and Technology segment, total revenue for the second quarter was $31 million, down 1% year-over-year as expected. Subscription revenue was $29.8 million, down 2% year-over-year, while professional services revenue contributed $1.2 million, up 33% year-over-year. Within our Media and Telecom segment, total revenue for the second quarter was $13.1 million, representing 3% year-over-year growth. Subscription revenue was $11.2 million, which is up 7% year-over-year, while professional services revenue contributed $1.8 million, down 19% year-over-year. GAAP gross profit in the second quarter 2024 was $28.7 million compared to $28.6 million in second quarter 2023, resulting in a gross margin of 65% for the quarter, consistent with Q2 2023. Within our Enterprise Education and Technology segment, gross profit for the second quarter was $22.9 million, representing a gross margin of 74%, similar to Q2 2024. Subscription gross margin was 81%, which is up from 79% in Q2 2023. Within our Media and Telecom segment, gross profit for the second quarter was $5.7 million, representing a gross margin of 44%, up from 43% in Q2 2023. Subscription gross margin was 55%, down from 57% in Q2 2023. Total operating expenses in the quarter were $37.2 million compared to $38.2 million in the second quarter of 2023, a reduction of 2% year-over-year. Adjusted EBITDA for the quarter was $1.6 million, an increase of $2.6 million from negative $1 million in Q2 2023. This result, along with our improving expense profile indicates our focus on improving our operating efficiency over time. GAAP net loss for the quarter was $10 million or $0.07 per diluted share. This is an improvement of $0.8 million or 7% year-over-year. Turning to the balance sheet and cash flow. We ended the quarter with $71.3 million in cash and marketable securities. We consumed $1.6 million in cash from operations during the second quarter, which reflects a significant improvement of $2.5 million compared with $4.1 million in Q2 2023. This includes the impact of a delayed $2.3 million payment from a large customer that moved from Q2 2024 to Q3 2024 due to their corporate entity restructuring. With this payment, which has already been received, we would have generated positive cash from operations in the second quarter. In the first half of 2024, we consumed $2.8 million in cash from operations compared to $11.6 million in the same period last year and $8.8 million year-over-year improvement. I would now like to turn to our outlook for the third quarter of 2024 and for the fiscal year ending December 31, 2024. Throughout 2023, we experienced pressure on our revenue growth due to year-over-year declines in gross retention and new subscription bookings, along with reduced demand for our lower-margin professional services that was driven by our expansion into products that are easier and faster to deploy. While gross retention improved in recent quarters, new bookings were still low in the first quarter for reasons mentioned in the last earnings call. Last quarter, we guided towards an expected sequential decline in both subscription and professional services revenue for Q2 2024, expecting downward pressure on subscription revenue that had accumulated in prior quarters would catch up to us in the quarter. While we did feel some of that, we were able to manage through it with stronger gross retention and new bookings and have come out above guidance, as I mentioned. Revenues from professional services were indeed sequentially lower as also expected. For the third quarter, we are forecasting a sequential stabilization of subscription revenue, which we believe will be followed by a return to growth. We are also forecasting a continued sequential decline in our lower-margin professional services revenue, which has the positive benefits of enabling faster deployments and higher gross margins. Accordingly, we expect subscription revenue in the third quarter to be between $40.5 million and $41.2 million and total revenue to be between $42.6 million and $43.3 million. We expect adjusted EBITDA in the third quarter to be between negative $0.3 million and positive $0.7 million. As we look towards the full year, we expect to see an increase in subscription revenue, driven by our improved gross retention rate and new bookings as well as the continued decline in revenues from professional services. As a result, for the full year, we are increasing the bottom of our guidance ranges for subscription and total revenues, up by $2 million and $1 million, respectively, and narrowing both guidance ranges from $3 million to $2 million. Accordingly, we expect subscription revenue for the year to be between $163.2 million and $165.2 million and total revenue to be between $174.7 million and $176.7 million. We expect adjusted EBITDA for the year to be between $2 million and $3 million, which compares to the negative $2.5 million adjusted EBITDA of 2023 would be an improvement of $5 million at the midpoint of the guidance range. As Ron mentioned, we also continue to forecast a positive cash flow from operations for the full year. We believe the Company continues to be well positioned to benefit from emerging tailwinds we are seeing of spend consolidation to a single vendor, digital transformation and the hybrid workplace that is continuing to drive demand for video-based offerings. As we move into the second half of 2024 and beyond, we expect to continue to demonstrate that we can achieve both revenue growth and sustained and improving profitability. We believe that we are on the right path to achieve these objectives and to drive consistent returns to our shareholders. We are encouraged by the increased adoption of our products, demonstrated by our increase in bookings, our sustained high gross retention rate and deals in our pipeline that we believe could yield continued growth in bookings and by what we believe will be growing the industry tailwinds in the second half of the year and in 2025. With that, we'll open up the call for questions. Operator? [Operator Instructions] The first question is from Gabriela Borges from Goldman Sachs. Gabriela Borges Ron, you mentioned the impressive work of some of the larger customers that you have in the prepared remarks. [Indiscernible] from a number of software companies that as some of these large enterprises evaluate their AI plans, it can sometimes change how they're thinking about spending with one specific software vendor or on course of some of the software. Maybe share with us a little bit how some of those customers in the enterprise are thinking about their AI road maps? And to what extent does that even pull forward their enablement with Kaltura or perhaps in some cases push it out? Ron Yekutiel Yes, AI is very exciting. It is very exciting for large enterprises. And at our Connect event around the world, we had a very detailed discussion with a great many of them, and they've all come extremely excited and have come out even more so about the possibilities and opportunities behind AI. The huge discussion there is how you could bring about further content creation faster moderation of content in order to make sure that the right people are getting the right content in the right time and in the right context in order to improve their results, whether be it internally for reskilling and learning and training or be it externally for better marketing and sales and better conversions of funnel. And what people get excited about Kaltura is several -- several things. Number one, the depth of the integration into the workflows, the fact that we don't just say here, we have video plus AI, but the video is going deep into learning with our integrations into LMS or going deep into marketing through our integration into the workflows for marketing. The second thing they really like is that we have a federated approach towards data with very advanced data collecting information. And right now, increasingly, we're becoming the single vendor where people have all the data pool on our system. And the reason this is really important, consider when you're trying to track the behavior of a prospect or a customer through multiple events, you want to have a system that would know how to track them across all their different interactions so that you'd know what is their taste, what is their interest, what products do they like, what service do they appreciate. And Kaltura is able to bring that to better prompt the system in order to yield better results. And of course, when you put on top of that integration into the workflow and the metadata and data information that we have, the engagement layer that we offer, then we have a full sandwich that's really exciting. So customers are looking forward. We had mentioned this quarter of all the exciting releases that we've done around AI across multiple areas. As stated, we have both on the E&T and the M&T, a lot of releases that have been put in place, both the new transcription and translation engine that we have fueled by Kaltura as well as the way to analyze reactions in real time as well as in the M&T side, better ways to curate content as well as to further engage and better recommendation at the user level. So there's a lot there. Gabriela Borges The follow-up for either Ron or John is the normalized growth question. So you've talked about how the bookings last year have impacted the revenue this year. Your comments on bookings today are actually more positive. Given everything you know about what customers have been doing with Kaltura, new logos, cross-sell, et cetera, how do you think about the normalized growth profile of Kaltura in the medium term? Ron Yekutiel Yes. Let me say a few words about booking trends in this quarter and then let John speak a bit about maybe forward-looking and thoughts about where things could go. And so yes, Q2, as you said, were more positive. It's correct. It's the highest new bookings since the fourth quarter of 2022. So it's better than earlier quarters throughout all of last year. It was also as expected, a sequential increase compared to Q1. We also had larger deals compared to Q1. So we had more six-digit deals than in general. We also saw a sequential increase in the number and in the dollar bookings from you customers. So not just total between upsells and new but also in the new. And that was also achieved with larger first deals. So our ARPU had grown, in fact, it's the highest ARPU since the first quarter of 2023. By the way, just about trends, most of the new bookings came from North America enterprise, but most of the new logos came from Europe, from EMEA enterprise, both in the dollar and in the percentage in the number of units and in the dollar value. So we're seeing a good turnaround of the European market. We still see customers that continue to consolidate around Kaltura for both internal and external, and that touches on the earlier comment about having data across the Enterprise. And we're seeing success across many sectors. Again, we've -- I've noted a few from tech and financial services and government and professional services and pharma and healthcare and education, of course. And we also see continued awakening in the Media and Telecom market. So both organically growing as well as new potential customers that are picking up. You remember that market tends to be a bit clunkier. And -- but we're seeing some good buying signs there and we're excited as we look into the future. And maybe a couple of other points that I would note that we mentioned earlier, price increases in the first quarter, and we said that, that had gone up. We continue to see that. It was actually 3x the booking we had a year prior in the second quarter of 2023. So competitively, we're able to command better prices for better value provided by Kaltura, even compared to our own services offered the year before. And then from a lead Gen perspective, we still saw a sequential increase in the meeting set by SDRs and RFP. So, all in all, the trend is going in a good direction. Again, this isn't as high as we expect it to continue to be and grow. There's a lot more to grow, a lot more to look forward to. We still broadly see the headwinds that we believe will turn into further tailwinds, but I'll let John comment on that. John Doherty Thanks, Ron. So we talked about how we were working through some of the headwinds that were coming out of 2023. And that was -- some of that was in our guide for Q2. It's also a bit in our guide for Q3 overall, but we did come out and as we've mentioned, we would be where we guided to in Q2. So we're certainly managing through it. The stronger bookings, the increase in RPO, we think, bodes well for where we're headed as we finish this year and as we head into 2025. And our guide certainly supports that as well. The next question is from George Iwanyc from Oppenheimer & Co. George Iwanyc So John, maybe building on the guidance. Can you give us a sense of what linearity was like as the quarter progressed and into July? John Doherty For the quarter specifically, and yes, I'll talk about through June. I won't necessarily talk about into July. But -- and it's not unlike any typical quarter, you see strength towards the back end of it. And that's what we saw in the second quarter. Our guide reflects both for the third quarter and full year, where we expect. But certainly, as I said, there are certain things that we're managing through as a business. One of the keys that I'd focus folks on as we move forward is also what we're doing around gross profit and margin in particular. Our guide does support the fact that we're going to see a little bit lighter PS, but PS comes with lower margins than subscription. We're confident where we're headed on the subscription side of things. And as we've also talked about, we have a strong focus on each kind of line item of profitability. And I think that's showing up in terms of what we're doing with gross margin, where we expect gross margin to be plus our performance around adjusted EBITDA and cash flow, which is obviously a critical importance for us and for shareholders. George Iwanyc And Ron, with the leadership changes that you highlighted, are you making any changes to the organizational structure, especially on the sales side? And kind of following up on that, John, would you maybe give us some highlights from an investment priority standpoint over the next six months? Ron Yekutiel Yes. Obviously, we continue to optimize the organization. We do that at least once a year as we look into the situation, both in the market as well as where we're at and where we could take it to the next level. As part of the changes that were made, yes, there were various optimizations made and everybody is excited about that. The energy levels are high. I'll give you an example. I mean marketing have been put now under Navi's organization, but trying to put together closer product marketing, marketing together with sales enablement in a way that would streamline better. SDRs have been moved. They were for a system period on the marketing organization, they're back in the sales organization. Within the sales team, we had further double down on large enterprise opportunities within the core team that had moved the smaller ones into what's defined as kind of our operations team, our customer care group in a separate place where they are doubling down and kind of fishing with a net versus the others that are fishing with fishing route in a more effective way. And within that, we have further focus on verticalization. So there's a list of things as we get to any one of these changes, we think broadly, and we kind of collect all the wisdom points that we've gathered for recent quarters, and we've come back with a good outcome, and we have great leaders leading the teams going forward. Like I said, energy is really high. John Doherty And I guess the other one was to me in terms of investment priorities. I covered some of that in -- when I spoke a moment ago, but just to kind of highlight. So continued improvement around operating efficiency. You certainly -- some of the leadership changes allowed us to do that at the top level as well as flow some of that through the organization. In addition, we talked about lighter PS, that also provides -- presents us with an opportunity to make some related cost adjustments there as well. In addition, Ron covered kind of broad focus on AI across the business and how external customers are using it as well. Certainly, we'll present us with an opportunity, both to enhance our product portfolio as we deploy it across different parts of our product portfolio, but also in how we run our business and how we can gain some efficiencies from the deployment of that from an overall operating perspective. Additionally, we have seen some growth in M&T. I don't want to say revitalization, but we think that business is also set up pretty well to provide some growth going forward, and that wasn't always the case. So certainly, we're working closely with that team and that's one of our priorities. And then Ron touched on this, but it's key and also can be part of our profit and margin story is focusing on growing within our existing customer base. So, where they have a certain engagement, there's other opportunities for us to work across existing clients and you're starting -- you're certainly starting to see that based on what we reported this past quarter and what we see going forward from -- what we talked to from a bookings perspective. The next question is from DJ Hynes from Canaccord Genuity. DJ Hynes Congrats on the nice bookings quarter here. Ron, how would you characterize the environment as we think about the go-forward opportunity between new customer growth versus cross-sell kind of as you look at the pipeline? Is one faring better than the other? Or how would you kind of frame that? Ron Yekutiel Yes. So I'm going to take you back to my general comments that I've made on this topic in previous calls. And I said that way back, we were more or less on a 50-50. And then it had picked up during COVID to 75-25 favoring new logos. I guess there was a kind of a rush by those that didn't have it to go ahead and get it in a very short period. Followed by a turn to the other direction, which had become more 25-75 in favor of upsells after COVID, where people stuck to their guns and each one kind of stayed with a vendor because even though many had understood that there's a longer-term opportunity in consolidating or improving or going to a better solution, many were quite myopic in their budget process or risk averse to the point that they have stuck to the main vendor that they had. We expect it to continue to kind of shift back towards the 50-50, I'd say. There's a lot of opportunity around upsell as we offer new products. The number of customers over the years that have three-plus products like Kaltura has grown consistently year-over-year. And so people are buying more and moving from inside and outside in multiple events and multiple activities. We expect that to continue, but we do expect gradually to see a rebound in new logos. Especially, as I said earlier, when companies stop being myopic and have the opportunity to think forward, what's better for them for the next few years, not just for that year. Should they switch to a vendor that would not just provide the more value but would actually offer them a more cost-efficient solution because there's economy of scale and you could save money on the mid to long term by switching to a unified leading vendor. And as I said, this is where we win with a knockout. I mean we -- in various places are better. But if you're looking at a unified platform that brings it all together. And I also mentioned earlier the virtues of that from an application level insofar as data harmonization that people move to us. So, the short answer is expect a relatively faster growth in new bookings over time. Does it mean it's going to be next quarter or the one after it's gradual? But ultimately, we're coming back to the 50-50. DJ Hynes John, a follow-up for you. So, look, we posted record bookings or, I guess, record recent bookings. Churn has stabilized, but you're guiding subscription revenue down sequentially at the midpoint in Q3. Is there anything from a revenue recognition standpoint that we should be aware of? Or are you just trying to keep numbers in a spot where you know you can hit them? John Doherty Certainly nothing from a revenue recognition perspective that you should be concerned about. As I mentioned, we're still working through some of what happened in 2023 relative to our lower bookings. We feel we're in a very strong shape. And as we said, I wouldn't characterize it as you did in terms of relative to how we approach guidance. But certainly, I would say our posture is still conservative. Yes. Ron Yekutiel I'll add one more thing. Just to remind us, because we're working with large enterprises and in most cases, deployment takes a few months. I'm not even talking about M&T where it could take a year or sometimes more. But on the E&T front, it's not an immediate kind of launch in most cases. Then from a revenue recognition per your point, if you're seeing a revival or a growth. In bookings, it usually is at least a quarter lag into the behavior of revenue. And so Q1 was a lower booking and Q2 was where it was. Q3 is more a reflection of Q1 than it would be of Q2. So that's not completely an odd. Put that aside, obviously, we're thoughtful in trying to leave space in order to achieve more than we guide for that. Every company does that, and so do we. The next question is from Ryan Koontz from Needham & Co. Ryan Koontz Actually, the improvement in bookings, what are the top factors there you attribute that to across, say, change in the product or changing your own go-to-market processes? Ron Yekutiel Yes. First of all, let's just remind us that the first quarter is typically lower. We also said there were a couple of deals that have been pushed from the first to the second, which had caused it to be lower. By the way, we had closed them in the second. And so we were expecting to see a rebound in the second. The second point is from the general macro move, 2023 was a historic low. We could come back to retention later. It was lower in retention. It was definitely low in bookings, and we expect that to turn around. It was a low behavior across the industry. It's not just Kaltura and we expected and are seeing better signs, better buying signs this year. But yes, we are continuing to beef our products. We are continuing to strengthen and solidify our position across multiple markets. In the case, for example, of our expansion from VOD and live into real time associated also with the move from internal solutions into external for CMOs, this has been getting stronger and stronger. And we're able to take away customers from other vendors and expand customers that are just internally into external and increasing ways. The ones that have started with us with one event or a few things are now consolidating further and growing. So we believe the momentum is being built, and we believe it will continue to be built in the quarters ahead. Ryan Koontz And on the core gross margin for your subscription product, what are the kind of keys to getting that margin up? Is it mainly scale because it picks costs? Or are there any other levers you have there to get that gross margin up? John Doherty Yes. It's truly scale and also making sure that we're focused on the right spaces from an overall customer profile perspective. Ron Yekutiel Just remind us on a good question that ultimately our gross margin is also a blend between subscription and PS. And regardless of our ability to build scale and increase subscription, the fact that we're going to have less PS and the fact that we're going to have a better blend is going to increase our blended gross margin to a higher level as well. In addition to your question. The next question is from Michael Turrin from Wells Fargo. Unidentified Analyst This is [Burnett Shaw] on for Michael. I would love to double click on the AI investment and how that's translating into deal pipeline conversion? Like any metrics that you guys would shine light on would be super helpful. Ron Yekutiel Yes, sure. Again, let me just reclarify what we've been doing by way of AI because it comes on the heels of more work that we've done earlier. I mentioned the fact that we added the new ASR solution, which is based on Whisper and that's automatic capturing. We use third parties to date to do the whole transcription work. And from now on going forward, it's predominantly Kaltura, which not only improves the quality and the ability to do this real-time multiple leverages, et cetera. But also to earlier question about margin improvement could support margin improvement. I mentioned improvements around AI for events with capabilities to automatically generate e-mail notifications as well as the sentiment analysis for chat. So we're learning better our end users and how we could better cater to them. We had a new AI quiz generator in our video portal, which enables to increase ROI so that within the portal itself, it could generate the right quiz in the right context. This is taking us closer to a world where you could have kind of this Khan Academy on steroids where people continuously learn based on their individual knowledge and get pushed and creation -- created content for what they need to get. We also talked about noise cancellation, so improved quality of audio in rooms grove. And as I said earlier, this is just the beginning. And the big focus for us in the second half is around content repurposing. We are -- a big package is going to be released, that is going to talk about how we -- to repurpose content in an automated way, provide AI summaries for key insights for specific users. And of course, everything else I mentioned earlier about Media and Telecom. We have our TVG chatbot, which was for a search and recommendation, looking for similar people like you, personal home page and channels with daily recommendation feeds for each. And then for curation of content, we have our AI curator assistant for dynamic content editing and suggestions and clips and subtitling, so a lot. To your question about how this is monetized. We keep on saying the same thing. It's a bit early days, and you'd find that across the entire industry and those that are talking about things getting picked up and maybe kind of a year-over-year growth in these things. It's year-over-year were a zero number. And so we're going slowly on declaring exactly what the impact is going to be. Is it helping us win more business? Is this helping us increase the ARPU? As it were, like I said, the ARPU for new logo in the last quarter was the highest -- it's been for a long while. And so yes, it could be that it's supporting our ability to sell and sell at higher numbers. I also mention our ability to renew and increase the size of our existing customers. Could that be also supporting it because people are happy? It doesn't mean that we necessarily charge for it separately. At this point, we're not charging for separately. We will continue to consider our ways in the future. Unidentified Analyst And then just a follow-up for John. Can you remind us how you think about capital deployment given your current cash position on the balance sheet and the buyback that you announced earlier this quarter? John Doherty Sure. I mean let's focus on the buyback first. I mean, certainly, where we announced it on the 11th of June, we effectively, we had a bit of a cooling off period. We started -- we launched it on June 25th. So there's really only a few days actually in the quarter itself, where we were actually in the market. We purchased just over 100,000 shares during that window of time. And which was effectively resulted in using about $130,000 of the $5 million that was authorized by the Board. We're going to -- we continue to invest in the business, first and foremost, in areas that where we see opportunity for growth. AI is being one from a main new focus point. However, we did feel it was important given where the stock had traded to for whatever reasons that we don't need to get into. But ultimately, it was in no way shape or form reflective of the underlying business performance. So with the Board's support, obviously, they authorized the buyback, and we thought it was an important tool for us to have in our toolkit. We continue to be active in the market this quarter and to monitor it. But certainly, we're doing what we can. And our main focus about -- around capital deployment is to doing what we need to do to ensure that we're moving this business in the right direction and putting it in place to maximize value for shareholders. The next question is from Matthew Niknam from Deutsche Bank. Unidentified Analyst This is [Michael Allen] on for Matt. I just want to dig in a little more on the churn. So it sounds like it's improving. Was there an area where there was improving more? I know you talked about last quarter, down sales were 75% of the churn. Just wondering if there's any area where you thought that there was improvement this quarter and where you're seeing the trajectory to be better? Ron Yekutiel Yes. So yes, so in the second quarter, as noted, we posted the same high quarterly gross retention that we did in the first quarter of the year. And you remember there, it kind of followed three consecutive quarters of improvement. And we also noted that the current gross within rate is the highest since the fourth quarter of 2022, so better than last year, which again was abnormally high for us and for the industry. And also kind of saying that it represents an annualized retention rate that's better than the last three fiscal years as well. So, it's all together in a point that we're feeling good about. To your question about down churn versus or partial term versus full churn and still kind of the same, around 25% of our churn with full churn this quarter versus about 75%, which was down sales. So it's the same ratio. And it was both in M&T and in E&T. So there's no specific topical area that's associated with that. And so no special area to put a finger on other than it's at a better place than it was a while back and it's definitely maintaining the level of Q1. We continue to forecast that the second half of the year is going to be better than the second half of last year and then the year is going to come out with a much better place than last year. I will just note again the NDR discussion, which is a lagging indicator. In the second quarter, we posted the same results as the first quarter. In fact, as the fourth quarter since the last three quarters were the same number, it's a better result than what we had thought. We mentioned in the last earnings call that we expect it to dip further, so it's good that it didn't. And we do believe that the direction of the NDR being lagging that it will turn around in the coming quarters. So that's my summary. The next question is from Patrick Walravens from JMP Securities. Patrick Walravens It's nice to bookings rebound. So I noticed in the script that you guys called out deals with two of the world's largest technology companies. And then one thing that I've just noticed in my travels, Ron, is when I'm going to one of these user conferences, sometimes you got to wait a long time for the sessions to be available in the app. And then other times, like at the NVIDIA GTC conference this year, as soon as you walk out, you can -- like literally the second you walk out of the session, you can start watching the replay. And then I noticed that's the Kaltura players. So I'm just wondering how big is that opportunity for you guys to power more of the user conferences of these big companies? How much do you guys make when you get an AWS or Dreamforce or an NVIDIA GTC? And how many more of them are there out there? Ron Yekutiel So yes, first of all, you've mentioned great technology companies and some of the largest ones, we indeed are very glad and honored to be providing solutions for the companies you had mentioned and many others that are leading tech companies. We also appreciate the fact that these companies are the kind of, I'd say, "smartest" in choosing technology. They definitely understand what it takes to build great technology and how to test and vet great technologies. So the fact that we're able to be there, we believe, is a prelude to being able to do much more in other areas in which we're at. I'd say to your question first about getting content immediately after you step out. Yes, part of the value of Kaltura is the fact that when we consolidate the various video use cases, we also consolidate various video technologies. To remind you, we originally, we're a leading content management company based on Gartner, the number one for years. And we have expanded in 2020 from content management into also events and added real time. And we said that that we believe the historical divide between on-demand, live, and real time is not natural. But you'd expect to have a continuous experience that spans across various technologies because the users don't care about technology. They care about their experience to your point about stepping out wanting to get the video immediately. And so we've put a lot of emphasis on being able to insert VOD within live and real-time experiences and to immediately convert and experience VOD right after, so that you have a continuum of experience before, during and after then. So I'm happy you've noted that, and indeed, it is a big value that we provide. Lastly, to your question about the potential of these deals. Amazon at the time, I could say to that because for a certain period, they will also define as north than 10% of our revenue. They remain the second largest customer of the Company. They're very large, multi-multimillion and there's a lot more upside there as much as there's similar upside in some of the other large companies that you have mentioned and more others that you haven't. We are in discussions with various companies about potential upsells and growing these accounts. Both by way of the number of activities they do have the same type that they do with us today, also consolidating other vendors. And as I said earlier, not just increasing quality, but also having better economy of scale. But also moving into other adjacent use cases so that they don't use this just externally but internally and for other use cases. So yes, we expect this to grow. I would just finalize by saying the one KPI that keeps on growing until through our year after year after year is the average ARR per customer has always grown, continue to grow. And that is because we could offer more and more value for each customer. [Operator Instructions] There are no further questions. At this time, I would like to turn the floor back over to Ron Yekutiel for closing comments. Ron Yekutiel Thank you very much for all your great questions and continued support and interest in Kaltura. It was a solid quarter from our perspective. But as we said, it's generally within the context of years that have been quite tough with quite a lot of headwinds. We're not declaring any form of victory. There's a lot more work ahead. There will be one key quarter this or that direction. But at the end of the day, we believe we're up and to the right, both by way of bookings and retention and how that translates into top line growth and for sure, how it also translates into bottom line profitability, both accrual-based and cash-based. We look forward to continue to demonstrate that and to generate both growth and profitability. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Earnings call: Hillman Solutions Corp. raises EBITDA guidance amid market headwinds By Investing.com

Hillman Solutions Corp. (HLMN) reported a robust financial performance in its second quarter of 2024, with an 18% increase in adjusted EBITDA, surpassing expectations. Despite a challenging macro environment and a soft market leading to revised full-year net sales forecasts, the company is confident in controlling costs and managing margins. Hillman plans to continue its low-risk acquisition strategy and leverage its in-store services and brands for growth. The company also sees opportunities for its Retail Display Systems (RDS) and expects to end the year with a net leverage ratio of around 2.7 times. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights In summary, Hillman Solutions Corp. has navigated a tricky market environment to deliver strong financial results and remains committed to its growth strategy. The company's focus on acquisitions, service offerings, and product innovation, coupled with its strategic partnerships and efficient operations, positions it well for future success despite current market softness. InvestingPro Insights Hillman Solutions Corp. (HLMN) has shown resilience in its financial performance despite market fluctuations. The InvestingPro data highlights several key metrics that are indicative of the company's current financial health and future prospects: - P/E Ratio**: The company's price-to-earnings (P/E) ratio stands at a high 300.32, suggesting that investors may expect high growth rates in the future. However, when adjusted for the last twelve months as of Q2 2024, the P/E ratio normalizes to 106.72. - **Revenue Growth**: Hillman Solutions Corp. has experienced a revenue growth of 1.2% in the last twelve months as of Q2 2024, indicating a steady increase in its sales. InvestingPro Tips further enrich our understanding of Hillman's position: - **Analyst Optimism: Six analysts have revised their earnings upwards for the upcoming period, reflecting a positive outlook on the company's profitability. - Profitability: Analysts predict the company will be profitable this year, which is in line with the company's performance over the last twelve months. Additionally, Hillman does not pay a dividend to shareholders, which may be a strategic decision to reinvest earnings back into the company for growth or due to the company's high earnings multiple and stock price volatility. For readers who wish to delve deeper into Hillman Solutions Corp.'s financials and future prospects, there are more InvestingPro Tips available on the platform, which can provide further insights into the company's strategy and market position. Full transcript - Hillman Solutions Corp (HLMN) Q2 2024: Operator: Good morning, and welcome to the Second Quarter 2024 Results Presentation for Hillman Solutions Corp. My name is Gigi, and I'll be your conference call operator today. Before we begin, I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. The company's earnings release, presentation and 10-Q were issued this morning. These documents and a replay of today's presentation can be accessed on Hillman's Investor Relations website at ir.hillmangroup.com. I would now like to turn the call over to Michael Koehler with Hillman. Michael Koehler: Thank you, operator. Good morning, everyone, and thank you for joining us. I'm Michael Koehler, Vice President of Investor Relations and Treasury. Joining me on today's call are Doug Cahill, our Chairman, President and Chief Executive Officer; John Michael Adinolfi, our Chief Operating Officer; and Rocky Kraft, our Chief Financial Officer. Before we begin today's call, I would like to remind our audience that certain statements made today may be considered forward-looking and are subject to the safe harbor provisions of applicable securities laws. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors, many of which are beyond the company's control and may cause actual results to differ materially from those projected in such statements. Some of the other factors that could influence our results are contained in our periodic and annual reports filed with the SEC. For more information regarding these risks and uncertainties, please see Slide 2 in our earnings call slide presentation, which is available on our website, ir.hillmangroup.com. In addition, on today's call, we will refer to certain non-GAAP financial measures. Information regarding our use of and reconciliations of these measures to our GAAP results are available in our earnings call slide presentation. With that, Doug will begin today's call by highlighting our healthy second quarter financial results, touching on our guidance and providing some commentary on the macro environment before turning the call over to JMA who will hit on the Hillman Moat and our operations. Rocky will go through the financials and our updated guidance before turning the call back to Doug for commentary on the executive succession plan we have separately announced this morning and providing some closing comments before we open up the call to your questions. It's now my pleasure to turn the call over to our Chairman, President and CEO, Doug Cahill. Douglas Cahill: Thanks, Michael. Good morning, everyone. During the second quarter of 2024, we saw our adjusted EBITDA results increase 18% over the year ago quarter. which outperformed our expectations. Our team did a great job controlling our costs and managing our margins, which led to a strong bottom-line performance for the quarter. We're highly confident in our ability to continue to control costs, manage our margins and manage our product mix for the remainder of the year. Because of this, we are increasing our full year adjusted EBITDA guidance. Our new range of $240 million to $250 million has a midpoint of $245 million, which reflects a 12% increase over our 2023 full year results. We're thrilled with how Hillman team is effectively managing margins and operating efficiently this year. The entire organization is pitched in, trimming costs where they are able to and maximizing productivity above and beyond our expectations, all while fill rates remained strong at 95%. While we've done a good job controlling what we can control, the macro environment is soft, which has weighed in on our net sales expectations for the year because of this, we're revising our full year net sales to $1.44 billion to $1.48 billion with a midpoint of $1.46 billion, reflecting a 1% decrease over our 2023 net sales. So far this year, our results feel a lot like 2009. That year, our top line was down about 5% due to the macro environment. However, our bottom line benefited from deflation, tightening cost control, which resulted in a 10% increase in EBITDA. In the years following, we saw a return to our historical mid-single-digit growth rates, and we believe we're in the midst of a very similar situation today as we are optimistic about our future top line growth prospects. Hillman is a very good company when the economy is growing and markets are healthy, and our results have proven that Hillman is strong as things slow down. Back to the quarter, our 2024 free cash flow expectations remain unchanged after our solid year-to-date results on cash. The strength of our bottom-line performance gives us the confidence to reiterate our free cash flow guidance of $100 million to $120 million with a midpoint of $110 million. Rocky will provide more detail on our guide in just a few minutes. Another highlight for Hillman is that we ended the quarter with net debt and trailing 12-month adjusted EBITDA ratio of 2.9 times, and we will continue to de-lever throughout the year. Hillman has not been below 3 times leverage since 2009. And since the beginning of 2021, we have paid down over $900 million of debt. Our financial strength and operational efficiency allows us to play offense. Let me tell you what that looks like to us. We believe we can continue our strategy of executing accretive low-risk tuck-in acquisitions in adjacent aisles. There are numerous opportunities out there, and we believe we will close on an acquisition, it looks a lot like Koch by the end of the third quarter. We will not only have EBITDA growth due to the natural synergies, but also see additional top line growth opportunities by leveraging the Hillman Moat as we are well positioned with our in-store service team, direct store delivery model and Hillman-owned brands. Outside of growing via M&A, we see sizable opportunities ahead. Our team of product managers and engineers have done a great job with innovation by developing patented and proprietary products. We believe this product innovation will lead to new business wins in the next couple of years, which will allow us to grow in excess of our historical new business growth rate. We're in a great position to stay on offense, which will build the foundation for our continued future growth. Net sales in the second quarter of 2024 totaled $379.4 million, which was essentially flat from the year ago quarter. There are several drivers for our performance during the quarter. Number one, was the sales from Koch acquisition, which added 3 percentage points to the top line. Number two is new business wins, which added about 2% to the top line. There were offsets by two main factors. Number one was a 90-point basis headwind from price, which was in line with our expectations. And number two was the overall market volume, which excludes the impact of new business wins in M&A, overall market volumes were down about 4% for the quarter. These were all in line with our expectations with the exception of market volume, which we are being impacted, obviously, by the macro. We have seen softer traffic, which we believe is driven by existing home sales in the U.S. The decrease from $6 million in 2021 to $4 million in 2023, the lowest level since 1995. This headwind has continued throughout 2024 with existing home sales at a similar level to 2023. Despite the soft macro, the new wins continue for Hillman, this time with our newly acquired open chain product line, Koch. We were successful in winning a $10 million piece of new business at one of our top five accounts. We'll begin to shift and recognize volume from this win in the second half of the year and into 2025. This win is a great example of leveraging our deep relationships and in-source service capabilities to drive organic growth via M&A. For the quarter, adjusted EBITDA increased 18% to $68.4 million compared to $58 million during the second quarter of 2023. Our adjusted EBITDA margins improved to 18%. Adjusted gross margins totaled 48.7%, marking a 570-basis point improvement over 43% during the year ago quarter. For the fourth consecutive quarter, we generated healthy adjusted EBITDA growth and adjusted gross margin improvements. We have managed this by improving efficiencies, managing margins and selling a better mix of products. During the quarter, we generated $42.5 million of free cash flow following a use of $6 million of cash last quarter. Our healthy free cash flow was driven by the cyclical nature of our business. We use cash to build inventory early in the year for our spring and summer busy season, which starts to turn to positive free cash flow in Q2 and continues for the remainder of the year. For our top line results, Hardware and Protective Solutions, our HPS led the way with a 3.5% increase in net sales. To break that down a bit, hardware, our HS, grew by 2.7%, while Protective or PS, sales grew by 7.7%. Driving the increase in HS were new business wins, the contribution from Koch, partially offset by the market in price. PS had a nice quarter with new business wins and an active promotional off-shelf quarter, driving its growth more than wholly offsetting a soft market. Net sales for Robotics and Digital Solutions, or RDS, were down 8% versus the year ago quarter. Adjusted gross margins and adjusted EBITDA margins remained healthy at 70.6% and 31.8%, respectively. The trend of the past few quarters continues to impact RDS, lighter foot traffic and discretionary spending softness in existing home sales and our machines being moved around inside stores at a top customer weighed on RDS results. We remain optimistic about our long-term high-margin growth opportunities in RDS, including the new Mini key 3.5 offering. Our RDS business is a very solid business, and we are the clear leader in market share in North America. We believe we'll see RDS back to positive growth in 2025, and there are two main reasons why we believe this. First, our new Mini key 3.5 machine opens up the Auto key, Auto5 and endless aisle on our self-serve machines for the first time ever. and the weekly footsteps that our top three RDS retailers are staggering, near 180 million footsteps per week in the U.S. We now have over 400 machines in the field with this new technology, and we plan to have 3 times our current number in stores by year-end. Consumers love the ease of this new machine. Our retailers love the new features and revenue growth opportunities. And in July, we successfully introduced the endless aisle on our self-service Mini key 3.5 machines. The endless aisle is really a great name because it's truly endless. It allows the consumer to duplicate virtually any key at the kiosk and have it shipped to your house. Let me give you a quick example of our endless aisle. If you live in Arizona, and want to copy your house key, but you want it on a Cincinnati Bengals Key blank, you now can order the key through our kiosks, the machine scans your key. The data goes to our plant in Tempe, Arizona, where the Bengals Key blank held in inventory. The Bengals Key is then cut and promptly mailed to you. And after a few business days, you can show off your new Bengals key to your friends. The second are the opportunities that our RDS service team can capitalize on. Redbox's recent liquidation provides a new business opportunity for Hillman's RDS service team with two new accounts already inked. The accounts add both top and bottom-line results similar to our RDS mix today, but with no capital required. Additionally, we have strengthened our team with the successful hiring of experienced people from Redbox to help us scale and grow this opportunity further. It's good for these folks, and great for Hillman to add experienced team members with kiosk background on day one. We have a great game plan in place with our top three RDS customers. The feedback on our recent kiosk enhancements have been strong, and the early incremental growth statistics are encouraging as well. For these reasons, we're confident that this high-margin business will be back to growth in 2025. Turning to Canada. Net sales in our Canadian business was down 10.1% compared to the prior year quarter. The market and the economy are softer than in the U.S., but our team has done a nice job with margins, mix and operations during the quarter. We also had some new business wins during the quarter in Canada, which partially offset the market price and FX. While the macro environment is it help when we continue to win new business, strengthen our relationship with our customers and reinforce our competitive moat, which JMA will touch on in a moment. We feel great about where we are with our customers right now and how Team Hillman is performing. We'll continue to execute well during this cycle. We've done an excellent job controlling what we can while managing our margin. That said, I know this team and our customers are ready to ramp when the market improves. It's fun to be on offense again for the first half of the year, we generated $120.7 million of adjusted EBITDA, which is a record for the first half of any Hillman year. I love how Hillman is performing and where we're headed, and I'm excited to turn it over to JMA. He will take the reins for me in January as the sixth CEO in the 60-year history of Hillman. John Adinolfi: Thank you, Doug. I joined Hillman five years ago, and I've gotten to see firsthand what makes this company so unique. Hillman's people, Hillman's commitment taking care of its customers, and Hillmanas moat. I look forward to building on these strengths and carrying on Hillman Legacy as Hillmanas next CEO. First, I'll start with the moat. The Hillmanas moat makes us a strategic partner for our retail customers as we're able to add value and solve problems in ways that our competition doesn't. We believe our moat is the main driver for our long history of consistent growth. The Hillman Moat consists of three main pillars. First, we have our 1,100-plus sales and service warriors that are out in the field each and every day. These men and women are in the stores of our customers providing top-notch customer service at the shelf. This Hillman team in the stores has been adding value for our customers for close to 30 years. Second, our distribution centers, where we pick, pack and ship product orders direct to the stores of our retail customers. Generally, our products do not flow through our customers' distribution network, which eases the logistical burden for our customers. This means that for Hillman products, our customers do not have to worry about the complexity required to get products to the shelves. And third, we typically have said this as our third pillar is the brands that we own, but let me expand on that. As you know, Hillman has been around for 60 years, and we've been working with our top five customers for over 25 years on average. This long history has allowed us to create strong partnerships with our customers from the associates in the store, to the store manager to the merchants, to the leadership team. Hillman is unique broad retail relationships and is connected at all levels. These long-standing relationships allow us to approach the business creatively and strategically with our customers rather than shortsighted approach of meeting a near-term goal. Secondly, when you combine our service teams in the stores, SKU level POS reporting and our direct-to-store shipping, it puts us at the forefront of product trends, consumer insights and research. Given that we're a market leader in many of our product categories, we can leverage this data to work with our customers and better manage the category. This enables us to become the partner of choice for our customers as we help them meet their goals while putting the best products on the shelves for the end user. Another thing I'd like to touch on is product innovation. We have talented product management and engineering teams as well as state-of-the-art test labs in Toronto, Cincinnati and Tempe, combining this group with customer insights that only Hillman has allows us to put innovative, high-performing products on the shelf. Plus, about 90% of our revenue comes from brands that we own and control, which allows us to anticipate and meet the evolving needs of our retail customers and end users. To summarize, the third pillar of our moat, it comes from our 60-plus years of experience that consists of our customer relationships, category management and Hillman own brands. Now I'll turn to M&A. Our moat is critical to how we take care of our customer and how we grow. Over the past 60 years, M&A has been a key part of how Hillman has grown to a $1.5 billion company. When we talk to potential M&A targets and they learn about Hillman, they quickly understand how their businesses can grow by leveraging the three pillars of our moat. At Hillman, our experienced M&A team believed that we can execute multiple acquisitions per year that have a similar size to Koch, the acquisition we closed in January of this year. We remain very excited about Koch. And as I told you last quarter, we expect to increase Koch's net sales by at least 20% this year, driven by our first win as the new owners with more to come. Like Doug said in his opening remarks, we are close to acquiring another company. The M&A pipeline is healthy, and we continue to see companies like Koch that would be a great addition to the Hillman family. Now I'll turn to operations. Our global operations team continues to do a fantastic job. The five folks on our operations team have averaged over 30 years of experience in the industry. Further, half of our supply chain leadership team have worked together for almost 20 years, and it shows with the performance of this team. They continue to execute our plan while controlling the controllables. Here's a few examples. The team is operating efficiently and effectively. Fill rates continue to be strong at 95% per year, which our customers love. Taking great care of our customers remains a top priority. I'm proud to say that our network of 23 distribution centers across North America is running well as well as it has since I joined Hillman. We have the right products and stock. We are getting them out quickly to our customers, thanks to our long-term supplier partners around the globe. The efficiencies we're seeing in our DC network are driving our bottom-line growth, which is critical given the market. Turning to freight. Recently, there's been another jump in spot rates for inbound containers coming from Asia, given the turmoil in the Red Sea and Panama Canal. However, because our team locked in our contracted rates on May 1, as we do every year, much of this volatility in spot rates will not impact us as we ship over 90% of our containers on contract. And finally, our input costs. Many of our input costs like steel from China and India and Taiwan increased slightly during the second quarter of 2024 versus the 2023 average but remain below their highs during 2021 and 2022. As I've said, we've got a great operations team in place, and we continue to execute efficiently while taking free care of our customers. Between our operations team, our moat and our M&A opportunities, I believe the future is very bright for Hillman. With that, let me turn it over to Rocky to talk financials. Rocky Kraft: Thanks, JMA. Let's jump right in. Net sales for the second quarter of 2024 totaled $379.4 million, a decrease of 0.2% versus the prior year quarter. Second quarter adjusted gross margin increased by 570 basis points to 48.7% versus the prior year quarter of 43%. Sequentially, adjusted gross margins were up 110 basis points from 47.6% last quarter. Margins were exceptionally healthy during the quarter. We believe our adjusted gross margins will come down slightly in the second half of the year but remain above 47%. Adjusted SG&A as a percentage of sales increased to 30.7% during the quarter from 27.9% from the year ago quarter, which was in line with our expectations. Driving SG&A was our standard employee bonus expense, which was the result of a strong bottom line during the first half of the year when compared to 2023. We expect our adjusted SG&A rate for the remainder of the year to be relatively consistent with Q2. Adjusted EBITDA in the second quarter was $68.4 million, which grew 18% versus the year ago quarter. Our adjusted EBITDA to net sales ratio during the quarter was 18%, which compares favorably to 15.3% a year ago. Adjusted EBITDA was driven by a positive mix of price cost, product mix in HPS and efficient operations, which drove healthy margins as low COGS flowed through our income statement. Now let me turn to cash flow. For the 26 weeks ended June 29, 2024, operating activities generated $76.5 million of cash as compared to $115 million in the year ago period. Remember, during 2023, we were able to reduce our net inventories by over $100 million throughout the year as we return to normal inventory levels. Capital expenditures totaled $40.1 million for the first half of the year. This compared to $37 million in the prior year period. We continue to invest in high-margin RDS business and also have partnered with one of our top five customers to share in the cost of a four year plan to reset the entire hardware set across the country. This includes all new racking and displays for Hillman products in their hardware department. Our team has already completed 140 resets and the new aisle looks awesome. Free cash flow for the first half of 2024 totaled $36.4 million compared to $78 million in the prior year period. For the quarter, free cash flow was $42.5 million, an increase from a use of $6 million in the first quarter. Now to the balance sheet. We ended the second quarter of 2024 with $705.3 million of total net debt outstanding. This is a $17 million improvement versus the end of 2023 and a $108 million improvement from the year ago quarter. And importantly, this included $22 million of debt that we paid off relating to the Koch acquisition that we completed in January of this year. As Doug mentioned earlier, our net debt to trailing 12-month adjusted EBITDA ratio at the end of the quarter was 2.9 times compared to 3.3 times at the end of 2023 and 4 times just a year ago. Driving the improvement was the aforementioned improvement in net debt and a $40 million or 20% increase in our trailing 12-month adjusted EBITDA. Looking forward, we still maintain our expectation that we end 2024 around 2.7 times net leverage. As Doug mentioned earlier, we have a few changes to our full year 2024 guidance. We are reducing our full year net sales to be between $1.44 billion to $1.48 billion, with a midpoint of $1.46 billion. This midpoint assumes a 1% headwind from price, a 2% lift from new business wins and a 3% lift from the Koch acquisition. These are not changed from our original guide. However, we are guiding for the market being down about 5% versus our original expectation of down 1%. We define the market as excluding new business wins. As you know, we do not control the market, and this is the driver of our updated net sales guidance. Altogether, our new net sales midpoint guide implies a 1% decrease versus 2023. Despite the top line pressure, we are increasing our full year 2024 adjusted EBITDA guidance to be between $240 million to $250 million with a midpoint of $245 million. This midpoint represents an increase of about 12% versus 2023. We expect the operational efficiencies, margin management and mix improvements that Doug and JMA mentioned to continue throughout the year, which will deliver strong margins and a strong bottom line. Lastly, we are maintaining our full year 2024 free cash flow of $100 million to $120 million with a midpoint of $110 million. Our increased expectations for adjusted EBITDA offset our revised top line expectations, resulting in the reiteration of the guy. More information on the assumptions that have driven our guidance is available in our earnings call presentation. Over the last few quarters, we have been saying that even in a down market, our 2024 adjusted EBITDA will increase. As Doug mentioned, this happened in 2009 when our top line was down 5% and our bottom line was up 10%. So far this year, this seems to be playing out as we have benefited from lower COGS inefficiencies, and we control the controls. Looking further out to a healthier macro environment, we believe our long-term growth algorithm remains intact. Historically, our business has seen organic growth of 6% per year and high single to low double-digit organic adjusted EBITDA growth before M&A. And now that the M&A switch is turned on, we think long-term top line growth of high single to low teens is realistic and adjusted EBITDA growth in the low to mid-teens is achievable in a healthy macro environment. With that, I'll turn it back to Doug. Douglas Cahill: Thanks, Rocky. Before we get to the Q&A session, I want to give some color on the succession planning we announced in a press release just before our earnings this morning. And effective January 2025, JMA will step into the CEO role becoming the sixth CEO in Hillman's 60-year history. When we hired JMA five years ago, it was our expectation that he would step into the CEO role in due course, considering his work ethic, strong leadership background and industry experience. Having worked closely with him almost daily, JMA, since then, I can confidently say that he will do a great job keeping Hillman's strong legacy of service and customer-first alive. With the support of the Board of Directors, the entire executive leadership team, this transition has been in the works for the past few years. It was important to me, Rocky and JMA that we went about this succession plan carefully and in the right way, maintaining leadership continuity, minimizing disruptive and keeping Hillman's long-term goals intact. With JMA's promotion, I will step into the Executive Chairman role, where I will continue to be active with Hillman, but have more time for golf and grand tiller. I will continue to be involved in M&A, maintaining relationships with the investors and key customers and presiding over board meetings. I've been with Hillman for 10 years. I love this company. I will continue to help Hillman anyway that I can. JMA will take over with a great team around him with a business in good shape and positioned to grow into a $2 billion company over the next few years. As always, our people are the ones that truly make Hillman, the great company it is. I want to thank the Hillman warriors for working together to take great care of our customers and for their loyalty. Looking forward, we will continue to widen and deepen our competitive moat, focus on executing our growth strategy profitably while we maintain discipline across all of our business segments. We firmly believe that this approach will ensure Hillman's success in the years to come, and we're very excited about what is on the horizon. This concludes our prepared remarks, and we'll begin the Q&A portion of the call. Gigi, can you open the call up for questions. Unidentified Analyst: Hi, Good morning. This is [indiscernible]. On M&A, you spoke to a lot of new, one, especially new prospects market or areas you're looking to expand into particularly or any more color on that? Douglas Cahill: Obviously, we can't talk about the one we think we'll close by the end of the third quarter. We're excited about it. It's very much like Koch. But I think the best way to think about it is just go to either end of Hillman's aisle today and walk about 20 feet, and you're going to find where we're going next. And again, if you just think about it, it would come on the same truck potentially, obviously, serviced by the same folks with the same customers and our relationships with those customers go way back. And so, it's just a fun thing to have these conversations because it's not really a competition when we get into a process because when the management team from the company sees what we could do together and how we roll is pretty easy to convince them to join us. And we're really excited about the potential. But obviously, you've got categories like we did with open chain. As we've talked, plumbing, electrical, all kinds of things that are just around the corner that would make sense. Again, when we talk about that, think about lots of SKUs tons of complexity, fairly low cost, but they require the Hillman Moat to really supercharge. Unidentified Analyst: Got it. Thank you. And you mentioned a little bit of softness on the traffic or discretionary front. So, what exactly is your visibility on home center foot traffic and [R&R] (ph) in general? And what kind of trends have you seen thus far into July and August? Rocky Kraft: I'll take that one. Good morning. So, from foot track perspective, we use some of the same technology and research and insights that some of the big retailers used to be use Placer AI to get a feel on foot traffic. We monitor I'll say, footsteps in the store, foot traffic has been challenging slightly less negative recently. But overall, we see those same concerns facing us and our retail partners. But we feel good about where the business is positioned, and we're going to use this time and focus on growing new categories and taking new business. Unidentified Analyst: Got it. Thank you. Operator: Thank you. One moment for our next question. Our next question comes from the line of Ryan Merkel from William Blair. Ryan Merkel: Doug, you mentioned that the market feels like 2009, and you lowered the market outlook now to down 5%. So, what is surprising you this year? And is the solution lower rates? Or is there anything else that you're looking at? Douglas Cahill: What's really surprised me this year, Ryan, was everybody got it in January and February, and then March was kind of like, woah, put your seatbelt on here we go. And then it's just kind of a dead cat balance at that point. It was just a -- that's probably the surprising thing. I think the retailers really felt like April, May, here we go, and it just kind of stayed the same. From our standpoint, you break it down, the pickup truck pros hang in tough smaller projects that's still busy. And the DIY is the one that's really fallen off, I think from an activity standpoint, that has to be, if you just think about the logic, existing home sales impacted for sure, and we're seeing that in pet tags and in keys. But our retailers feel good about where we go from here. And as we've been saying, we're going to keep our heads down and perform either way, but it will be nice to see some tailwind. My guess right now is we're not going to see that until we get into the fall. Ryan Merkel: Yes, I agree. And then how about the outlook for RDS? I know things are a bit challenged, but what are you assuming for the second half? And I think you said you're going to return to growth in 2025, just unpack why you think that's the case. Douglas Cahill: I mean I'll tell you this, the great news is we don't have hope as our strategy anymore. We are absolutely in the slot on RDS because RDS' new machine on minute with the capabilities is exactly what the retailers want. And the great thing for retailers is we don't change any space. They don't have to do anything, and we're going to bring them revenue and happy customers. And so that's one. Two, that movement at that big customer that we had seen that was really impacting us has worked itself and is working itself through. We feel good about what we've been able to do together with them, because it hurt their sales as well. And then three, when you really think about the service organization, Redbox liquidation was huge because we're picking up new accounts with no capital, which is Rocky's favorite. But my concern, Ryan, and we talked a little about this last time is can we get the people. And we've just been able to hire Redbox folks really quick and they've been hitting the ground running. So that's why we feel very good about where RDS is heading. And again, we struggled for a bit there, but I feel great about 2025 what I think that business can do. Ryan Merkel: That's great color. Thank you Operator: Thank you. Our next question comes from the line of Brian Butler from Stifel. Brian Butler: Good morning. Thanks for taking the questions. Just, I guess, a follow-up on that RDS. I think your original goal was 800 machines by 2024, and it sounded like you were going to be much higher than that if you're at 400 and you thought it was going to triple. So maybe a little detail on expectations on what that goes to on 24 of the total rollout and where that ends up in 2025, as well as is there any initial color on how the higher-priced kind of auto keys and other items that you can kind of push through the 3.5 are going with the 400 machines that are out there? John Adinolfi: Brian, it's Jamie here. Let me hit the machines first. So, we're really encouraged and excited our Tempe team, this manufacturing machine has been able to continue to ramp and get machines out. So, we are taking up to your point, we thought we'd be 800 by year-end, will now be closer to 1200. We feel good about the machine. The team has made some nice continued improvements to the GUI, we just rolled out endless aisle. So, we're going to keep moving that forward with our three, five customers that are out there. So, we're excited about it. We're seeing some nice, I'll say, improvements in the technology. And a couple of things. One, you mentioned the auto keys. We are starting to see some traction. That will be limited or I'll say, be throttled by our ability to put key tech and service those markets, which we're going to be doing in 2025 and beyond. But I would say the other piece of it is the endless aisle we just turned on. It's interesting, we're starting to get some traction, but it's also been the fact that our keys being even home and office is performing better in the new machine than the old, and we're really excited about that. So those three things are really helping us feel very excited and bullish and we're putting a little more capital to work this year because the customers want them and the end users market machines. Rocky Kraft: Brian, it's Rocky. The only thing I would add to what JMA said is, remember, many of these that we're doing this year are conversions from 3.0 to 3.5. It's not a full machine build, and so that's much less expensive. And obviously, we can throttle that a lot quicker than you could throw the build of the new machine. Douglas Cahill: Well, and we played offense there, Brian, because Rocky ordered all of the retrofits and said, hey, for the money for the retrofit, let's not make that be the governor, and we're glad that we did. The plant went ahead and ordered them all. So, we don't have this issue of can we. It's a matter of when our people can. Our customers are saying, go. And that's always a good sign. I do think the fun news about what's happening right now is we have them in stores that have the 3.0 in the same ZIP code right now. And again, as JMA said, the GUI screens much improved. The consumer time at the screen has improved. And while we're not yet rolling the SmartFob because of the key tech we want to make sure we -- as we've always said, we're going to go so that the transponder is a pretty interesting. Consumer gets a $38 to $74 key. We ship it to their house. They're happy. We're happy and the retailer is like, wow, I didn't have to do anything. So, it's a win-win. Brian Butler: Okay. Great. And then on the follow-up, just going back to the kind of the price cost spread. I mean, in a normal environment, I completely understand how that margins bounce back and you get to a more normalized growth on revenue and EBITDA. But if we remain in a weaker environment, how should we think about price cost rolling into 2025 if the macro is not a tailwind. Rocky Kraft: I think we feel really good. It's Rocky again about our margins. And here's the reason. One, I think we've reset the baseline around what this business should do historically, 44% to 45%. I think we're going to live above 46% for the foreseeable future just because structurally in the business. The other thing that will make sense to you, Brian, is as you think about our RDS business has really been more challenged than the rest of the business, and it commands a much higher gross and EBITDA rate. And so, as we see that business, not only getting back to kind of parity but also growing again, that's going to help support the margins as we think about the future. And so, we feel really good, again, about where we are. We sit on the call. We think we stay above 47% for the remainder of the year. And I truly believe we stay in the ballpark for the foreseeable future in that kind of range. Brian Butler: All right. Great. Thanks for taking the questions. Operator: Thank you. Our next question comes from the line of Lee Jagoda from CJS. Lee Jagoda: So, I guess I'll say my congrats for Doug till he is almost out the door. Douglas Cahill: I never thought May was going to help my golf game so much. Lee Jagoda: Well, stay out of the woods, if you can. Just starting with the Koch new business wins. Can you give us a sense for what type of customer that was with? And if it wasn't one of the sort of the big two, is that an opportunity? And how large an opportunity could that be for Koch and for you? Douglas Cahill: So, it does sound like Koch, but it's Koch. But we'll be selling three of our top five accounts in that category, Lee, I believe, in the 12-month period coming up. So, it will be three of the top five and it could be more, but I'm confident three of the top five will see growth. Lee Jagoda: And is the $10 million one of those three? Or is that all of those three? Douglas Cahill: Just one Lee Jagoda: And I guess at that one customer, what share are you getting -- like what does that represent in terms of the share you're getting? Douglas Cahill: I think we don't give this year, but the funny part of that one to me, the day we announced it was the week that the line review was coming due. And when they saw the announcement, they held the line review up. And I don't think I can say anything other than that, that says when Hillman comes into a category, it makes it easier for customers to make a change because and in this case, this is such a complicated category, you do not want to make a change if you don't have the service organization that's going to clean up the store and make sure you can reset stores. The reset ability of our troops in this example was the whole thing. Can we reset those shelves with a new set, with new thinking? Yes. And without that, nobody is going to -- JMA just not going to take that risk away. Operator: Thank you. One moment for our next question. Our next question comes from the line of Brian McNamara from Canaccord Genuity. Brian McNamara: Hi, good morning, guys. Thanks for taking our questions. Congrats to JMA on the promotion and Doug for some more time for golf and the grandkids. I guess, first off, apart from different leadership styles, obviously, there's anything fundamentally changed within the company with this handoff. If anything, JMA, how will your approach be different? John Adinolfi: Well, I mean, the guy with the best seat for that is Rocky, why don't you comment on that? Rocky Kraft: It's a good question. But what I would tell you is we've been running this business together for the last four or five years. And so, while there'll be a different person in the chair, and Doug will be doing a little more cheerleading than doing day-to-day, we don't see anything changing strategically. We don't see anything changing in how we run this business day to day. The other thing I would say is we were very thoughtful in how we structured the organization below JMA coming into this year. We made some changes so that we're ready for the next run. And we're all highly confident not only in JMA and Doug as Executive Chairman, but also the team that we put in place below JMA. Brian McNamara: And then secondly, I guess, on M&A with a transaction expected to close by the end of Q3, are there others in the pipeline that you're considering that we can expect over the next several months? And Rocky, how should this transaction and maybe the other ones contemplated in the pipeline impact your leverage ratio targets? Rocky Kraft: Let me start with the leverage. I mean they're going to look a lot like Koch. And so, I think Koch moved leverage up like two tenths of a percent or something like that. And so that's what you would expect. But these businesses are all going to also come with EBITDA. And as Doug said, natural synergies. And so, on a proforma basis, I think they're going to be close to leverage neutral. And quickly, if we do put any leverage on, even if it's a small amount, we intend to pay it down, like Koch, right? You saw we borrowed money to buy Koch early in the year. We've already paid that debt off. I think we still would plan to be around 2.7 times at the end of the year even if we do this acquisition. Could it mean we go to 2.8, sure, but it isn't something that's going to put any amount of leverage of any significance on the business. And to your question about pipeline, yes, I mean, again, there are a lot of opportunities when you think about what we do, what could be put on the trucks, what could be serviced at the shelf that are out there. And again, it's very interesting that it seems like in the sweet spot of call it, $4 million to $8 million of EBITDA. There seems to be a lot of businesses with a lot of entrepreneurs who seemingly are at the end of the road and want to think about family estate planning. And so, I think we're going to be very successful in doing two or three of these a year. Douglas Cahill: And I think, Brian, the thing Rocky just said, that pipeline looks good. And that's before private equity starts selling the stuff, right? Because they haven't been active on either side, which is an advantage to us, but there'll be quite a few things coming as well. But no, it's really solid right now, and we're in a nice position to take advantage of. And again, it doesn't take long for them to see why maybe Hillman would be the choice. Brian McNamara: And if I could just squeeze in one last one on your guidance adjustment. Obviously, it's all market related. A minus one to minus five feels like a huge delta, but I don't want to put words in your but doesn't feel like just from talking to you guys over the last six months, it doesn't feel like a huge surprise to you. Is that fair? And what's changed compared to 90 days ago? Rocky Kraft: Now if you go back 90 days ago, I guess, what I would say is we looked at our major customers and what they had said about the back half. And you all heard us say, we hoped they were right, and we were going to be more cautious than they were. It just has remained soft as I think JMA commented on a minute ago. And we're projecting that the market remains soft the rest of the year. Again, I'm hopeful that we do get some tailwind and maybe the Fed does a couple of rate cuts, and that gives us some relief on housing. If that happens, that's obviously going to be upside to what we've guided to. But at this point, we just don't see any benefit in guiding to anything, but what we're seeing now in the markets. Brian McNamara: Thanks a lot, guys. Appreciate it. Operator: Thank you. One moment for our next questions. Our next question comes from the line of Lee Jagoda from CJS. Douglas Cahill: Lee, you got pancaked. I'm glad you're back. Lee Jagoda: I'm back. So, can you just speak to where we are in the evolution of the large customer that's repositioning your RDS machines? And how many quarters of headwind do we have left before it turns into a neutral and potentially a positive? Douglas Cahill: I would say that based on where we are right now, it's probably neutral for one quarter, and then I think we start to see it tick up. Lee Jagoda: And then on the new 3.5 machines, given that a lot of the stuff in there has higher ASPs, how should we think about incremental margins on the newer stuff versus the 40% to 60% incremental margins that we've been used to on the self-service key business? Rocky Kraft: They're going to be really close to the same, Lee. We said everything that we've done in this business, we've set up to be at or above existing fleet when you think about EBITDA rate. So different products are going to have a little bit different gross margin profile, but everything is set up to be at the same EBITDA rate. And again, as you think about, as Doug said, some of the service offerings that the team is now working on or entered into. Those have basically no COGS, and they basically have no capital. And so, it's really -- it's a service-related opportunity that, again, is going to generate really, really nice EBITDA rate for the business. Douglas Cahill: Lee, one thing, just to be clear, the service would be, for example, the Redbox type. The one thing we're not planning on is when we start to see SmartFob being programmed and we are doing it. But when if that starts to ramp, we will make sure that the experience for the consumer is there, but we will not make -- we're not attempting to make great margins on that side of the service. We're planning on taking care of the customer and not losing any money, make margins on the actual sale. That's the only thing when we talk about it, Lee, that's the only thing the math that I just don't see it as a -- if we do it right, we make a little money on that side of it. But we're not looking to make the margins on that piece of the service. That's the only piece. Lee Jagoda: And then one last one for me. Just on the Canadian business, obviously, you highlighted the market being weak there and some FX headwinds. Was there any other timing issues on a year-over-year basis? And as we look out to Q3 sequentially versus Q2, how should we think about revenue trends and margin trends there? Rocky Kraft: I would say there's nothing unusual there, Lee. I mean the Canadian market is just softer than the U.S. There's a lot more I would say, European type mortgages and there's a lot more debt on the typical consumer in Canada than there is in the U.S. And so, they've taken this kind of a downdraft horse than here. And so, we like our Canadian business. We think it's going to continue to maintain the 10% EBITDA rate that we've challenged them to have or north of that, but it's going to be -- we think it's going to be tough sliding for the rest of the year in Canada. Lee Jagoda: Got it. Thanks very much. Operator: Thank you. This concludes the Q&A portion of today's call. I would like to turn the call back over to Mr. Cahill for some closing comments. Douglas Cahill: Thank you, Gigi. Thanks again, everyone, for joining us this morning. We look forward to updating you on our progress this fall. Thanks, everybody. Operator: You may now disconnect.

Innodata Inc. (INOD) Q2 2024 Earnings Call Transcript

Innodata Inc. (NASDAQ:INOD) Q2 2024 Earnings Call August 8, 2024 5:00 PM ET Company Participants Amy Agress - Investor Relations Jack Abuhoff - Chief Executive Officer Marissa Espineli - Interim Chief Financial Officer Aneesh Pendharkar - Senior Vice President, Finance and Corporate Development Conference Call Participants Allen Klee - Maxim Group Tim Clarkson - Van Clemens Operator Greetings. Welcome to Innodata to report Second Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the conference over to your host, Amy Agress. You may begin. Amy Agress Thank you, Mike. Good afternoon, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, CEO of Innodata; and Marissa Espineli, Interim CFO. Also, on the call today is Aneesh Pendharkar, Senior Vice President, Finance and Corporate Development. We'll hear from Jack first, who will provide perspective about the business, and then Marissa will follow with a review of our results for the second quarter. We'll then take your questions. Before we get started, I'd like to remind everyone that during this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations, assumptions and estimates, and are subject to risks and uncertainties. Actual results could differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's earnings press release in the Risk Factors section of our Form 10-K, Forms 10-Q and other reports and filings with the Securities and Exchange Commission. We undertake no obligation to update forward-looking information. In addition, during this call, we may discuss certain non-GAAP financial measures in our SEC filings, which are posted on our website you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures. Thank you. I'll now turn the call over to Jack. Jack Abuhoff Thank you, Amy. Good afternoon. It's great to be with you here today. We have several exciting updates to share on the financial and operational fronts. Innodata delivered another outstanding quarter, highlighted by the record revenue growth of 66% year-over-year. During the quarter, we significantly expanded our partnership with a Big Tech customer while also gaining traction with others. We take great pride in the foundation we have built to establish Innodata as a leading partner of choice to deliver reliable, complex generative AI training data. We believe we are uniquely positioned to capture what we believe to be an enormous market opportunity and to drive value for our shareholders. Given the strong organic growth we are seeing, we are raising our 2024 full year guidance to 60% or more revenue growth compared to the 40% growth we guided to last quarter. Also, as we indicated in the last quarter, in order to ramp up for our recent wins and anticipated growth, we invested in scaling our organization. Most significantly, we incurred $3.6 million in recruiting agency fees for a significant ramp in our workforce. As recruiting costs come down to a normalized level next quarter, we expect our third quarter margins to reflect strong unit economics and operating leverage from substantial revenue growth. Consequently, we expect Q3 adjusted EBITDA to be approximately triple to $2.8 million adjusted EBITDA reported this quarter. In a minute, I will describe some of the business we have won in some of the new business opportunities we are pursuing. Suffice it to say, we are seeing an increase in both the number and the magnitude of potential customer requirements, which we reflect in our increased guidance. Therefore, we're taking steps to ensure that we have sufficient liquidity to accommodate working capital as our already substantial growth potentially accelerates. First, we have increased our receivables-based credit facility with Wells Fargo from $10 million to $30 million, subject to a borrowing base limitation with an accordion feature that enables it to expand up to $50 million, subject to the approval of Wells Fargo. Marissa, in her remarks, will give more color on the terms of this facility. I believe the Wells Fargo facility has now extended, will be sufficient to fund our working capital requirements for our anticipated growth. That said, we want to be prepared to react quickly to customer demand that could result in us significantly exceeding our anticipated rate of growth, and therefore, having additional working capital needs. Towards that end, this afternoon, we filed a universal shelf registration statement on Form S-3 with the SEC. Once the registration statement is declared effective by the SEC, we will have the flexibility to sell up to an aggregate of $50 million worth of our securities in registered offerings pursuant to the effective registration statement. We believe it is prudent and good corporate governance to have an effective shelf registration statement on file with the SEC to preserve the flexibility to raise capital from time to time if needed. As disclosed in the registration statement, we have no specific plans to raise money at this time. The intended uses for the net proceeds from any such offering would be set forth in a prospectus supplement. Now, I'll give you an overview of the success we're experiencing in the marketplace with both existing and new customers. On June 3, 2024, we announced one of our existing Magnificent 7 Big Tech customers had awarded us 2 significant new LLM development programs. These programs are expected to deliver approximately $44 million of annualized run-rate revenue and represent the single largest customer win in Innodata's history. These awards are in addition to the new programs and program expansion with this customer announced on April 24, 2024 and May 7, 2024. In the 1 year that Innodata has been working with this customer, Innodata has landed new programs and program expansions that bring the total value of the account to approximately $110.5 million of expected annual run-rate revenue. Innodata aspires to replicate the success across the 6 other Big Tech customers already contracted for generative AI development and to land additional Big Tech accounts. We won several other new assignments in the quarter as well, and we expect to land several others in the near future. Some notables include a Big Tech company that would be a new customer for us. It is one of the most valuable companies in the world and one of the companies most often talked about in connection with generative AI. Another is with an existing Big Tech customer. In connection with this opportunity, we would aim to become certified to work on their premises. We believe being co-located with their engineering and operations teams may potentially enable us to access new attractive opportunities. We also expect to shortly sign a prominent social media platform that is building its own generative AI models and would be a new customer for Innodata. Another noteworthy win was with a clinical provider in the health care market. Up until now, we've been focused on the use of the Synodex platform as a tool for supporting insurance underwriting. This new engagement is the first time that we will be applying the platform in a clinical use case. We believe that the Synodex technology road map may enable us to expand to support additional clinical use cases in the future. We have also been awarded a deal to provide news briefs and media monitoring to a federal government agency that will be leveraging the new generative AI capabilities built into our Synodex platform. We are seeking to expand into the public sector, so we consider this a strategic win. We have started to integrate agility with what we call PR CoPilot, our purpose-built carat AI layer that enables PR professionals to get more done in less time and at lower costs. While we're only about 30% into our road map for PR CoPilot, it is already delivering tremendous business value. This quarter, Agility revenue crossed $5 million mark for the first time. Our Agility demo to deal win rate in the quarter was 36%, significantly higher than the sub-20% win rates we were achieving prior to starting this integration. And we doubled our new business bookings in Q2 compared to the prior year period, even though we're operating with a leaner sales force. Now, before I turn the call over to Marissa, I want to share our perspectives on the generative AI market opportunity and how we have shaped our strategy to capitalize on where we see the market going. In our view, the Big Tech companies are clearly bullish about how generative AI technology will support their core products and services and enable exciting new opportunities. For the Mag 7, capital expenditures in the latest quarter were up 63% year-over-year, with the bulk of these expenditures type generative AI spending. It is clear that the market sees underinvesting as a greater risk than over-investing. In the not distant future, we believe the technology will enable computers to reason and plan, to solve all hard problems and to self-organize in complex ways that help people accomplish their goals. Our belief is that generative AI technologies will soon sit deeply and ubiquitously in every tech stack. That's why none of the Big Tech companies can sit this one out. The shift in experience is destined to be too significant, making the risk of being left behind untenable. Just as the California Gold Rush began on January 24, 1848, the Gen AI Goldrush began on November 30, 2022 when OpenAI demonstrated to the world the power of - power of training a deep neural net on enormous quantities of data and utilizing massive compute for inferencing. As a result, the world's largest tech companies went on the offense committing to massive Gen AI programs solving for the next big market opportunity while simultaneously defending their hegemony. One analyst has forecast $1 trillion of Gen AI CapEx over the next several years. We prescribe wholeheartedly to the notion that in a gold rush, you want to be the person selling the shoppers. The shovels required by the Big Tech companies in the Gen AI Goldrush take the form of compute and data. Compute is expensive and hard to come by, which is why we believe NVIDIA's market cap has skyrocketed over 7x to $2.6 trillion since the beginning of 2023. Data is also expensive and hard to come by. Once more, we believe the data that is likely to be required to train tomorrow's Gen AI is going to become even more expensive and even harder to come by. And we believe that is in a data's opportunity. The next generation of LLM will be trained to handle more complex tasks and to be more agent-like. The complexity will take the form of models that handle difficult multi churn tasks. For example, asking an LLM to find out how much vacation I have left and book me through. Complexity will also take the form of deep domain-specific tasks by helping doctors diagnose disease. We're helping banks sort out complex regulation, and complexity will also take the form of models that enable users to work with audio, video and text interchangeably. You will hear this referred to as multi-mobile capabilities. Training data will be required to build models that can handle this complexity. Unlike web data that gets users halfway there for today's LLMs, these more complex LLMs are going to require a high quantity of high-quality data to be specifically developed to show the models how they're supposed to function. Right now, this data does not exist anywhere. It isn't on the web. It isn't on the cloud. It isn't on premises and enterprises, because it is neither input nor output that exists only in a transitory unpreserved state. It's in permanence perhaps justified by its nature as byproduct. In other words, when we solve hard problems, we don't save our work. When we began building our own AI models and applying them to our managed services work in legal data and medical data, we had to build new workflow platforms to capture and preserve this interim knowledge in an organized way to be used to train our models. This was our eureka moment when we realized that our breakout opportunity would be in creating this byproduct of human thought in order to train other people's models. Doing this as a science and a way that is repeatable and scalable is a huge opportunity, and we are still in the early days. We intend to be the preferred provider of complex demonstration data at scale required to train models for complex reasoning, multimodal use cases, genetic retrieval augmented generation or RAG, and for domain specificity across all languages. Our competitive advantage is that for decades, we've been providing high-quality data across domains, such as medical, law, regulatory, science and finance. We are encouraged by the feedback from our customers who already recognize that no single factor has as much influence on LLM performance as the quality of customized data for supervised fine-tuning. We will always be looking for ways to drive continuous improvement in how we operate, ensuring that our training data is both the best quality and the most economical. Now, on the enterprise side, we believe that in 18 to 24 months from now, enterprises will dramatically accelerate their generative AI adoption. We believe the catalyst for this will be generative AI that can tackle multiphase tasks without losing its way, now often referred to as agentic RAG, in combination with advanced open-source models, which significantly lower the bar for experimentation. These smaller but highly trained language models will likely prove ideal for enterprise applications that require high accuracy for specific tests. Like the Big Tech, we believe enterprises will drive both offensive and defensive strategies to support their investments. The offensive play will be defining new product experiences. While the defensive play will be keeping pace with competitors who we anticipate will work to enable their current products and regear their operations to be AI first. Just as with the Big Techs, we believe enterprises will come to recognize that you've got to be all in, even with uncertain near-term ROI. A few years from now, we envision enterprises will face a shortage of experience, talent and may struggle to manage their internal data. Thus, the shovels for enterprise will be the people with experience to help them choose the right architectures, the right approaches, and the right models, and to help them manage and deploy their internal data. Innodata's enterprise strategy is focused on this. Specifically, we see the opportunity to respond to these anticipated emerging ways, needs in three ways. First, for enterprises building their own capabilities, we will be ready to assist across the entire continuum of integration types and levels from fine-tuning custom models to building agentic-RAG applications. As enterprises move Gen AI services from development to production, they will need to know, how are the models working? Are they performing as intended? Are they as they were intended, helpful, harmless and honest. We see a big opportunity in helping them monitor their LLMs for alignment and safety. We are developing both services and platforms to respond to this need driven by high-quality custom data. Second, for enterprise that prefer to outsource, we will make available managed services that are engineered to leverage the technologies. And third, for enterprises that prefer generative AI encapsulated in industry platforms, we will provide platforms specifically designed for industry-specific knowledge intensive workflows. In this way, we intend to serve enterprises at their highest point of value. I'll now turn the call over to Marissa to go over the numbers, and then Marissa, Aneesh and I will be available to take your questions. Marissa Espineli Thank you, Jack, and good afternoon, everyone. Let me briefly share with you our 2024 second quarter financial results. Revenue for Q2 2024 reached $32.6 million, reflecting a year-over-year increase of 66%. On a sequential basis, we observed a 23% of the increase of $6 million from Q1 of 2024 revenue of $26.5 million. Adjusted gross margin for Q2 2024 was 32%, reflecting a sequential decrease from 41% we achieved in Q1 of 2024. This reduction is attributable to the $3.6 million of recruiting costs we incurred in the second quarter to support a substantial expansion for our organization to prepare to a significantly larger revenue base. When you separate these unusually high recruiting costs, adjusted gross margin in the quarter would have been approximately 44%. Similarly, adjusted EBITDA for the quarter was $2.8 million, a reduction from $3.8 million in Q1 of 2024. But without the $3.6 million of recruiting costs, adjusted EBITDA would have been $6.4 million or 20% of revenue. There are three things worth noting. First, as Jack mentioned, we expect our adjusted EBITDA next quarter to be approximately triple the $2.8 million of adjusted EBITDA reported this quarter. Second, we have since enhanced our captive recruiting engine to enable us to reduce the cost of future larger scale recruiting. And third, we expect weak payback on recruiting costs typically within just few months and strong ROI. Our cash position at the end of Q2 was approximately $16.5 million, up from $13.8 million at year-end 2023. Let me also elaborate a bit on credit facility extension that Jack mentioned earlier. We are indeed very pleased to announce that Wells Fargo has increased on receivable back credit facility from $10 million to $30 million with an according feature that enabled it to scale up to 50 million subject fires approval. The amount drawable under the facility at any point in time is determined based on the borrowing base formula. The facility has an attractive cost of capital for amounts drawn under the line set a software plus 2.25%. We greatly appreciate Wells Fargo confidence in our business and believe the extended facility will be sufficient to fund our working capital requirements for our anticipated growth. That said, we want to be prepared to react quickly to customer demand, which could result in Innodata significantly exceeding the rate of growth we have guided to today. With this in mind, this afternoon, we filed a universal registration statement on Form S-3 with the SEC. Once the registration statement is declared effective by the SEC, we will have the flexibility to sell up to aggregate of $50 million worth of our securities in registered offering pursuant on effective registration statement. We believe it is prudent and good corporate governance to have an effective shelf registration statement on file with the Securities and Exchange Commission to preserve the flexibility to raise capital from time to time if needed. We have no specific plan to raise money at this time. The intended uses for the net proceeds from any such offering would be set forth in a prospective supplement. In terms of preparing for accelerated growth, our expanded Wells Fargo line of credit and the flexibility provided by the shelf registration statement are expected to allow us to finance our short cycle, growth-driven working capital needs for a revenue base significantly higher than our current projection. Thank you everyone for joining us today. Mike, we are open for questions. Question-and-Answer Session Operator [Operator Instructions] We do have our first questioner. Allen Klee from Maxim Group. Allen Klee Yes. Great job. This is just a clarification question. In your press release, one of the first things you say is you won large language model development programs and expansion with a Big Tech customer valued at approximately $87.5 million annualized run rate. Is that a new contract or is that as you talk about below the customer that you expanded with that you say has a total of $110.5 million? Thank you. Jack Abuhoff Correct, Allen. Those were the contracts that were announced during Q2. So, that was a recap of what was won and announced in Q2. Allen Klee Okay, great. And then some of the - some of these other new contracts, could maybe talk a little bit about the contracts you've announced, which ones are just generally, how many are fully ramped up or maybe what percent you expect to get a greater contribution in the future? Jack Abuhoff In Q2, or generally speaking, going forward in the year. Allen Klee Generally speaking, going forward, of the announcements you've made, are there certain ones that could you give us a sense of like? Jack Abuhoff Yes. So, there are seven Big Tech customers that were contracted now to perform generative AI work, and that includes the one that's scaled very, very nicely. Of the seven, I don't believe we're fully ramped up with any of them. I believe that they all hold tremendous opportunity for us to expand into. And I think we're going to be making significant process along that path over the next several quarters. The other thing I would add to that is we also anticipate, as I mentioned in my remarks, landing another couple of Big Tech customers, which similarly will have the opportunity - offer us the opportunity for significant potential expansion. Allen Klee So, just following up on that, the guidance you gave today, does that incorporate any contracts that haven't been announced yet that you may expect to win? Jack Abuhoff So, I think the revenue from contracts that we haven't yet announced but expect to win can certainly accrue to Q3 and Q4. When we provision our guidance, there are a lot of puts and takes. We're making all sorts of factors into that, including new contracts. But again, if you take that in the aggregate, we're comfortable that our guidance is conservative, and we think there's opportunity to exceed it. Allen Klee Okay. Thank you. And then you mentioned that you're bringing the recruiting in pounds, and that's going to save money - - so do you feel that - or is it that you still have to recruit a lot more, or that you can just do it more efficiently than you're saving the money and you feel comfortable about getting enough people to ramp up? Jack Abuhoff Yes. We're very comfortable in our ability to recruit. It's not that we won't use external agencies anymore. I think we still will, especially for particular kinds of recruiting. But we're very excited to have built an internal recruiting engine. Had we had that in place. We probably could have avoided the several millions of dollars that we had to spend in this quarter. But recruiting costs is - it's an elegant problem to have. We recruit primarily reactively pursue it to demand from our customers. And we get a very fast payback on those investments with a very high ROI. So, it's good that we've got a strategy now facility to lower those costs prospectively. But even without lowering them, the ROI and the payback is very fast and very compelling. Allen Klee That's great. You talked about a bunch of contracts that you've won recently. In terms of what you're doing, is there anything different with them of what part of the adaptation and trading and monitoring? Are they kind of everything? Or is there a certain focus that customers are looking for? Jack Abuhoff So, they're a little bit of everything, but our strategy is very much focused on what I think of these three tiers, all of which are growth factors. At the foundational layer, you kind of the bottom tier, you've got the Big Techs and the ISVs we're developing generative AI foundation models. In the middle tier, you have enterprises who were helping leverage generative AI. And then at the top tier, you have us building generative AI-enabled platforms for kind of niche industry use cases. So, in the things that I mentioned, there's a bit of a sampling of all three tiers. The tremendous growth that we're seizing on today is at that bottom layer. It's the enablement layer working with the Big Techs, but we're aggressively planting seeds and earning referenceability in the other tiers as well. And especially long-term, we see those as - if we do things right, and we're planning the seeds properly today, we see those as enable our growth 3, 4, 5 years out from now. Allen Klee Got it. Thank you. You talked about agility and adding CoPilot and the benefits from that. Could you - I don't know if I caught everything. Could you expand a little about what the value-add profile it is and the opportunity you see on that growing agility? Jack Abuhoff Sure. So, in agility, just for a little bit of additional context. We have about 1,500 customers, $20 million of ARR, about 17% - 18% growth, I think, year-over-year, 70% adjusted gross margin. So, lots of operating leverage. We were performing very, very well. I mentioned that we doubled our bookings in the quarter with a sales force that I believe is about 15% smaller than it was last year. So, very high performing, operated very efficiently. The idea behind PR CoPilot was that you could disassemble the workflow of PR professionals, enable them to use generative AI at multiple points in that workflow to enable them to do more with less resources for their customers, to be able to do more for less money. And as I mentioned, we're only 30% into the integration, meaning they are - we'll call it, eight different points within the PR workflow that we feel we can creatively leverage these technologies. And we've only gotten through a couple of them. We are planning on making an important announcement probably within the next few weeks about another element of that PR CoPilot integration. We're excited about that. And we've got every reason to believe that the improvement in the results that we're now seeing will be further accelerated as we further integrate that road map. Allen Klee Thank you. For Synodex, you mentioned that this is the first time you had a clinical application. Could you go into a little bit of what that means? Jack Abuhoff Sure. So, what we're doing in Synodex is we're extracting at a very granular, very detailed level, medical information from patient healthcare records. And the use case that we've been working with up until now has been primarily life insurance underwriting, and rent-related insurance underwriting too. Property and casualty and things like this. What we haven't done is had the technology layer that's sufficient to support clinical use cases. So, for example, analyzing patient medical records in order to make determinations about treatments or make determinations about things that would occur and decisions that would need - would be needing to be taken in a clinical use case, meaning hospitals and doctors and live patients. With this new win and in conjunction with the development we have been doing in our technology, we now see the opportunities now and down the road to increasingly target clinical use cases. And we are very excited about that, obviously, because that would represent an expanded market. Allen Klee Got it. Last question, so you have mentioned that there is around $300,000 of recruiting costs that will be less in the second quarter - I am sorry, the third quarter. If I was just thinking about expenses overall, is there any way to think about - like do you try to like think about like the operating leverage and to what degree maybe operating expenses will grow at a lower rate than the top line? Jack Abuhoff Yes. So, I think the way to think about it is even if you just look at this quarter, our sequential revenue is up about $6 million, and our adjusted EBITDA net of that $3.6 million of recruiting costs was up about $2.6 million. So, that would be $2.6 over $6 million is about 43% flow-through to contribution. Now, obviously that won't hold up or every quarter, there are puts and takes in any quarter, but I think it's indicative. Now, if you look at operating costs, one of the benefits to executing as aggressively as we are in the Big Tech market is that it's very concentrated. You don't need a lot of sales and marketing in order to work these accounts. What you need primarily is great execution and that's what we have been bringing to the table. So, as you think about that contribution margin, which in this quarter would have been 43% or so, absent the recruiting costs, you are not going to consume a lot of that in SG&A. Now, you are not going to - it's not all going to show up as operating profit, but a lot of it will. Allen Klee That's great. Thank you and really fantastic quarter. Thank you very much. Jack Abuhoff Thank you. I appreciate it. Operator We will now hear from Hamed Khorsand with BWS. Unidentified Analyst Hello everyone. Thank you so much for taking my question. This is Sarah calling in for Hamed at BWS. My first question is regarding the addition of the large tech company that you announced today, does this indicate that you are at all seven, magnificent seven companies? Jack Abuhoff So, Sarah, first, thank you for being on the call, welcome, so led Hamed for me. So, we have - what we have talked about is that we are in seven Big Tech companies. And of those seven, five of them are mag seven companies. Unidentified Analyst Okay. Thank you. And then... Jack Abuhoff Under NDAs, we can't use customer names, but it's five of the seven mag seven, plus two others who are very important to notable customers in the Gen AI market, but they are not mag seven customers. Unidentified Analyst Right. Got it. Thank you so much. My next question is, other than the one large tech company that has given you the $110 million worth of work. Where are you in the revenue recognition process with the other six large tech companies? Jack Abuhoff I don't have a number for you handy right now. But what I would say is we are at an early stage. We are seeing that accelerate, especially with a few of them pretty rapidly now. And I think we are going to see that acceleration through the end of the year on several. We believe, frankly, that all of the seven are going to grow with us this year. So, very early days, but very exciting. Our goal, of course is to replicate the success that we have had with this big one, which was earliest out of the gate with as many of the others as we possibly can. No guarantees, obviously, but we are competing against the same people, and we are bringing the same execution that is so differentiated us in this large account. Unidentified Analyst Great. Thank you for that. My next question is regarding the previously mentioned, I guess increase in recruiting costs. Do you find that you are still needing to hire people, or are you at a good headcount figure? And I guess what is the timing of revenue to help offset the hiring and recruiting OpEx? Jack Abuhoff Sure. Great question. So, the timing is pretty fast. It's really within a matter of a couple of months, and there is training that needs to go on. There is other things that need to take place. But generally speaking, it comes on very quickly, and that's why as an investment, it's as compelling as it is. I think you should think about the recruiting spend over time as one that will be reactive, let's say, be a baseline spend that's kind of always going on in a normalized growth mode, and then when we get big lands like we did in the quarter, $44 million win, our largest ever single win then there is going to be concentrated spend. I am hopeful that, that concentrated spend will be lower than it was this quarter by virtue of our captive recruiting capability that we have now put in place. But frankly, even if it weren't, you are not going to ever find a better investment opportunity than that. Unidentified Analyst Right. Thank you so much. And this will be my last question. So, you are raising liquidity needs. Are you seeing extended net terms from customers? Jack Abuhoff No, we are not. We are paid very quickly. So, nothing - nobody is stretching us out. All is good there. Now, when we do our modeling to determine our needs, we take a very conservative approach. If someone is paying us some 30 days, we will model it at 60 days. If someone is paying us in 60 days, we will model it 120 days just to provide that conservatism in our forecast. But no, we are paid well and we will always make sure of that. Thank you, Sarah. Unidentified Analyst Thank you so much. Operator Our next question is Tim Clarkson with Van Clemens. Tim Clarkson Hi Jack. Obviously, I am thrilled with the results, great work. I am sure you and Mrs. Abuhoff are very happy with all the hard work over the many years. And maybe I am the third happiest person in the world about Innodata. But anyhow, getting into the business side, in terms of these big contracts, what's the magic Elixir, that's allowing you to get a contract of that magnitude versus the competition? Jack Abuhoff So, I think there are several things. I think the - if there is one thought that I would ask you to kind of hold on to it, it's that data and AI are inextricably linked. And that's true with the Big Techs when you are training the models. It's true in the enterprises when you are fine-tuning or customizing or implementing RAG-based solutions. Now, as you know, we have been in the data business for a long time. We have worked with the most demanding customers who are the most error intolerant in the world for years, and we learned how to keep them happy, and we were working across domains tax, regulatory, legal, medical, healthcare, technical, financial. All of that is repurposeable into this opportunity. All of that is what makes us. We have been told the number one provider for this largest account that we now have. Now, the good thing is that what we have learned and what we have developed as a platform is transferable. We are now engaged by these other accounts. We are bringing those same capabilities to the field and these other competitions, and we have every reason to believe we will be successful. Tim Clarkson Right. Now, I suppose the corollary of this is that when your large customers work with companies that don't have as accurate advantation, they don't get the successful results. So, from their point of view, it's very risky to do business with someone where the data isn't as good as it should be. Jack Abuhoff Yes, it's absolutely right. garbage in, garbage out, bad data, trains poor performing models, of course. I think there are two aspects to it. One is the data quality. And as I mentioned, the challenge of creating high-quality data is only going to get more significant as we move into agentic RAG and these other applications, think about domain specific models and more complex models, the challenge of finding training data is going to be more significant, and then the challenge of getting it right is going to be harder still. So, that's one of the differentiators that we bring. The other thing that we bring is just very reliable, very tuned execution. So, when someone is training a model, they are depending on getting that data payload on time when expected because they reserve the data center, they have reserved the GPUs for that - those training cycles. If the data is late, if the data needs to be reworked, those GPUs are sitting not being used, costing a ton of money. So, we think of that performance on essentially those two vectors data quality and data timeliness. And if we can execute well on both of those, as we have now, we have become a very important partner to very important customers. Tim Clarkson Sure. Just kind of give a profile, what would be the typical background of an employee in the Philippines or India that's doing this kind of work for you in terms of college degree, speaking English, how many years of experience? What would that look like? Jack Abuhoff Yes. So, a couple of things there, Tim. Firstly, as you well know, our legacy has been in hiring people offshore Philippines, Sri Lanka, India have been locations of choice historically for us. Now, for this set of opportunities, we are hiring people in those locations, but we are also hiring a ton of people in other locations. We are hiring a lot of people here in the U.S., many hundreds of people here in the U.S. So, our footprint and our profile relative to who we are hiring is changing dramatically from what you recall. The other thing I would say is when we are building these teams, we are hiring kind of a pyramid of different skills and capabilities. At the base of the pyramid are people with very fine-tuned language capabilities, people who are linguist. We have PhDs and we have masters and bachelors in linguistics, computational linguist, externalist English language that we are working within is English. People need to pass significant batteries of tests in order to be qualified. We then measure their aptitude for this kind of work. And then, of course, we put them through a pretty extensive training and design. In partnership with our customers, the kinds of workflows that we can parse out to people and have them be effective very quickly after being trained. So, the good thing about that is we believe we can keep on scaling and not face an impediment in terms of being able to recruit and staff. We believe the platform is extensible and can keep growing to support the growing customer base and the expansions that we are anticipating. Tim Clarkson Great. Well, look, I am speechless with how well things are going. I appreciate. Let someone else ask some questions. Thank you. Jack Abuhoff Thank you, Tim. Operator We have reached the end of our question-and-answer session. We will now turn the call back to Jack for any closing remarks. Jack Abuhoff Thank you, operator, and thank you everybody who joined the call. We really never felt more bullish about our business and more enthusiastic about the market opportunity, creating large-scale near-perfect data is a hard technical problem. It took us years of development and a ton of trial and error, but that's why we have emerged as the preferred data engineering partner at our biggest Big Tech customer and why we are getting solid traction with other Big Tech customers. We believe large language models will not be built without training data. It's a critical must-have. We also believe that our differentiating capabilities will be even more highly valued as models become more complex and require more complex training data. If you remember, back in the middle of 2023, we said we were executing on a transformational strategy. We also said that our training data would be the foundation of making LLMs valuable. You are now seeing that with your own eyes in our results. Today, we are focused on growing Innodata to be a larger and more valuable company. We believe there are exciting days ahead, and we are really thrilled that you have chosen to be part of our journey. Thank you. Operator This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

authID Inc. (AUID) Q2 2024 Earnings Call Transcript

Graham Arad - General Counsel Ed Sellitto - CFO Rhon Daguro - CEO Tom Szoke - CTO Greetings, and good afternoon. This is Graham Arad, General Counsel at authID. Welcome to the authID Second Quarter 2024 Results Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. With me on today's call are our CEO, Rhon Daguro; and our CFO, Ed Sellitto. By now, you should have access to today's press release announcing our second quarter 2024 results. If you have not received this, the release can be found on our website at www.authid.ai under the Investor Relations section. Throughout this conference call, we will be presenting certain non-GAAP financial information. This information is not calculated in accordance with GAAP and may be calculated differently from other companies' similarly titled non-GAAP information. Quantitative reconciliation of our non-GAAP adjusted EBITDA information to the most directly comparable GAAP financial information appear in today's press release. Before we begin our formal remarks, let me remind everyone that part of our discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's press release. Others are discussed in our Form 10-K and other filings, which are made available at www.sec.gov. Thank you, Graham, and thank you, everyone, for joining us this afternoon. Our value proposition continues to resonate strongly in the market as we help our customers defeat identity fraud and malicious AI-generated cyberattacks. Let me spend a few moments on one of the attacks our customers are concerned about. On the screen, you will see an AI tool that generates deepfake voices, which is readily available on the Internet. These tools are used to attack call centers, customer support and help desk to conduct an account takeover. Using tools like the one you see here, any fraudster can type in a few words, train the voice model from any public YouTube video and in seconds, they have a synthetic voicing exactly what the fraudster wants. Let's hear what our fraudster has to say. [Video Presentation] As you can see, the fraudster exploited The Rock to have his account reset. Just like any fraudster can exploit any consumer or any employee or anyone on this call to say exactly what they want. It's not difficult to see how this deepfake voice could easily fool any $20 an hour call center agent who is being asked to reset a password. Now, imagine what kind of fraud can happen when a fraudster combines a deepfake voice with a deepfake video. Deepfake tools like you see on the screen allow fraudster to take any static image or video from the Internet to generate a realistic deepfake that emotes like a natural real human being with natural facial movements, natural body movements, natural eye movements in combination with mouth movements to match words prompted by the fraudster. Let's see what the deepfake fraudster looks like with voice and video together. [Video Presentation] As you can see, this video is pretty convincing if The Rock wasn't famous. And it's only going to get even more convincing. I myself have seen improvements in these tools over the last 30 days. No doubt in my mind that this will drastically be improved in the next 90 days with how Fast AI can learn, which doesn't leave companies much time to be prepared. In fact, a fraud attack using a deepfake of a company's CFO was successful earlier this year in fooling a financial analyst to move $25 million out of the organization. Every day, we hear in our conversations with CISOs from some of the largest banks, hotels and tech providers out there that this is what keeps them up at night, simply because they don't have the technology to stop these kind of attacks. Because authID can seamlessly detect and protect organizations against deepfakes, the demand for authID's technology is growing. So, let me summarize the pillars of our momentum before I go into them in more detail. The first pillar is our innovative technology. Our biometric authentication technology was already highly differentiated in speed, but our team has worked tirelessly on delivering the highest level of accuracy on our facial biometric matching as well as the highest level of privacy the industry has ever seen. The second pillar is our sales reach, which has expanded exponentially through our partners, which we began building in Q4 of 2023. Through the second quarter of 2024, we have signed six new committed partners that have strong sales teams who are selling to their already robust customer portfolios. What's important to note here is that our partners can partner with anyone. But through their rigorous evaluation process, they have selected to partner with authID because of the unique value our technology brings to the market compared to anyone else. The third pillar is our market demand, which continues to rise. We continue to build great pipeline at a rapid pace to attract and sign customers. A number of our Fast 100 customers quickly helped us prove out our technology and value proposition. And on a daily basis, authID continues to advance our sales cycles in the Fast 100, the strategic enterprise opportunities with some of the largest financial services, hospitality, gaming and gig economy providers. And our fourth pillar of momentum can be seen in our performance results, which continued to improve, both sequentially and on a year-over-year basis as we continue to focus all our energy on helping our customers become successful. I will go into more detail across these pillars now. Every day, in conversations with our enterprise prospects and customers, we are reminded that speed and user experience, accuracy and data protection and privacy are paramount. Over the last quarter, our highly talented engineering team has enhanced our platform with leaps and innovation that address these requirements to eliminate authentication fraud for our customers. Let me highlight the three technology advantages that are driving the excitement with the customers and the partners who are filling up our sales pipeline. The first is speed. Announced over a year ago with our less than 700 millisecond processing time, our competitors have tried to close the gap but are still 5x to 10x slower. Why is this important? In order to participate in payment use cases, you have to get close to 400 milliseconds and below and we definitely have the capability to get within that range. Our speed has opened up a variety of use cases for authID where our customers cannot afford to provide friction or long lead times to their customers. What makes this result even more incredible is that during the sub-second time, authID seamlessly conducts an extensive series of fraud checks. Detects presentation and injection attacks for both facial and document images, detects the presence of deepfakes and performs highly accurate facial biometric match. The second is accuracy. So, I'm very excited about this. Today, our engineering team is rolling out a world-leading biometric matching accuracy of one in a billion, a phenomenal increase over our previous accuracy rate that matched the NIST, the National Institute of Standards benchmark rate of one in a 100,000. This achievement is not simply a 100% increase. It's not 1,000% increase. It has completely separated authID in the market with an increase of 10,000% in accuracy improvement. Said another way, our game-changing accuracy of one in a billion means that if there were eight billion people in the world and we digitize all of them, we would only get it wrong eight times. This level of accuracy has been validated by the independent testing organization CSIRO, which has a formal set of standard criteria in their valuation and their testing results have shown that the accuracy can even exceed one in a billion, up to one in 34 billion for higher resolution facial images. This means that in any head-to-head accuracy comparison to any biometric identity vendor on the market, authID will be leaps and bounds more accurate. The third is privacy. authID is delivering superior privacy and data protection and biometrics. The fastest speeds and the highest levels of accuracy are crucial to customers. Even more crucial is ensuring the privacy and the protection of their users' biometric data to meet current compliance and future compliance regulations as well as to eliminate any liability associated to storing biometrics. As you would expect, organizations see the value of using biometrics, but they are cautious, cautious to adopt because of all the privacy concerns and the jumble of privacy regulations that are developing at the local, state and national levels. So, our challenge is to provide our customers with all the benefits of using biometrics, but without the increased liability or even the compliance confusion. To meet this demand, authID has been working maniacally on a solution and is now offering a biometric privacy option that eliminates the need to store biometric data anywhere. This revolutionary solution allows facial images to be converted into a public-private key pair, where only the public keys need to be stored, transforming biometric authentication into a cryptographic transaction with no biometric data associated to it. What further differentiates authID from the others is that the private key is never stored and instead is generated each time a transaction is performed using the live facial image of the person, essentially making the person, the private key and not the user's device. Let me show you this more closely. So, before I start the demo, what you're going to see is a facial biometric authentication, which is going to use a private key and a publicly key to make a match. So, we are not using biometric templates or any form of a biometric recall from storage to make the match. Let's see it in action. [Video Presentation] User represent their face. And there you go. You can see how fast that was. Basically, on the screen, it recorded 360 milliseconds, which is actually faster than the 700 milliseconds that we've been touting. But more importantly, on the screen, you can see the private key on the left, the public key on the right, which is being used to run the match. And once the match is completed, both the private key and the facial image stored are completely deleted. No biometric is ever stored and the consumer is never affected and the experience remains absolutely seamless. Our new biometric privacy option is a market game-changer because no other biometric authentication provider has this ability. This has been absolutely been helping us advance our opportunities with many large enterprise prospects. Moving on. Building a strong channel ecosystem is a key pillar of our success. Our channel partners, including FinClusive, Syntrove, IDMWORKS, Kaiasoft and just announced today, DataVisor are all the force multipliers that deliver more feet on the street and quicker access to the customers and verticals they already serve. Because of that quicker access, we refer to their customers as the Fast 100. Our partners are excited about the added value and market differentiation derived from our combined product set to fight fraud. More importantly, they embrace the opportunity to grow their revenue and they have had an immediate effect in amping up our sales in our sales pipeline. We have already signed agreements via our partners in Q2 and are in the process of going live with two customers through the channel, which include a large North American gaming customer and a cannabis e-commerce platform. On the direct sales side, authID has advanced opportunities across our FAT 100 pipeline. Those being large enterprise customers with deal sizes that generate higher revenue and longer-term enterprise value for authID. Every day, we demonstrate our value technology to large hotels, gaming platforms, financial institutions, HR providers, telcos, identity access management platforms and gig economy platforms. The main common denominator between large-scale enterprise CISOs is the fear of the rapid pace of malicious AI-driven attacks and scams targeting both their customer-facing and workforce systems, like I shared in the opening demo. AI-generated IDs and deepfakes are attacking the large enterprises who have the most to lose, which is driving the urgency. Moving on to revenue. Our fourth pillar of momentum is our strong metrics, including our sequential and year-over-year growth in revenue. In Q1 2024, our revenue of $0.16 million approached the revenue in all of 2023. In Q2, we grew revenue by 75% over Q1 to $0.28 million by launching the services with four new customers. Given our current RPO of over $4 million, we expect to continue to see quarter-over-quarter and year-over-year revenue growth for the balance of 2024. Ed Sellitto will provide additional details during his part of the presentation. Moving to pipeline. Our robust sales pipeline growth also reflects continued demand for authID's biometric solutions. In Q2, our direct sales team and channel partners expanded our sales pipeline to its current value of over $25 million, a 20% increase over the Q1 pipeline of $21 million. Our current pipeline includes 71 opportunities valued at $100,000 plus and 12 deals valued at $500,000 plus. Our continued growth in booked contracts also further confirmed strong market demand for authID's biometric authentication. In the second quarter, our sales team secured contracts valued at over $630,000 in gross BARR, a strong increase over Q1 and approximately triple growth over the Q2 gross BARR a year ago. Our Q2 BARR included both direct and channel partnered signed deals, representing gaming, cannabis, compliance, gift cards and universal basic income. While both our channel partners and direct sales teams will continue to identify new prospects and add deals to our pipeline, at this point in the year, we are estimating that we could achieve a 33% close ratio on the $25 million in pipeline to attain our $9 million BARR target for 2024. Before I turn it over to Ed, I'm excited that we continue to build strong market momentum. I'm confident that authID is on the right path and that we will deliver upon our mission to eliminate authentication fraud and realize our near-term and long-term goals. Thank you for your time. I will now turn the call over to Ed Sellitto to present our Q2 financial results. As you highlighted, we continue to expand authID's market reach and advance our growth in Q2 of 2024. Our sales teams expanded our channel partner network by signing new reseller and OEM agreements with fintech and risk management platforms and also increased our booked contracts by signing new enterprise customers. Our engineering and customer success teams work to enhance our biometric platform and roll out service to our customer base. I'll now present our Q2 2024 financial results. Starting with our GAAP measures, the following highlights compare our GAAP results for the quarter and six month period ended June 30, 2024, with the quarter and six month period ended June 30, 2023, unless specified otherwise. Total revenue for Q2 2024 was $0.28 million compared with $0.04 million a year ago. For the six months ended June 30, 2024, total revenue was $0.44 million compared with $0.07 million a year ago. Operating expenses for Q2 2024 were $3.6 million compared with $2.8 million a year ago. For the six month period in 2024, operating expenses were $6.9 million compared with $3.8 million for the same period last year. The 2024 increase is primarily due to a 2023 one-time event, representing a reversal of approximately $3.4 million in stock-based compensation resulting from Q1 2023 terminations. Net loss from continuing operations for Q2 was $3.3 million, of which noncash charges were $0.8 million compared with a net loss of $10.9 million a year ago, of which noncash charges were $9.2 million. For the six month period in 2024, net loss was $6.3 million, including $1.6 million in noncash and one-time severance charges. This compares to a net loss of $12.7 million for the same period last year, which included $8.8 million in noncash and one-time severance charges with approximately $7.5 million related to the exchange of convertible notes for common stock in 2023. Net loss per share for Q2 improved to $0.34 compared with $2.16 a year ago. For the six months ended June 30, net loss per share improved to $0.67 compared with $3.09 for the same period in 2023. Next, let's turn to our RPO. We also monitor and manage our Remaining Performance Obligation or RPO, in accordance with GAAP, and as noted in our financial statements. RPO provides a measure of the minimum revenue expected to be recognized from our signed contracts based on a customers' contractual commitments. As of June 30, 2024, our total RPO was $4.24 million, an increase of $0.2 million over the prior quarter. The Q2 RPO includes deferred revenue of $0.24 million. Deferred revenue represents advanced payments received, which are not yet recognized as revenue. The current RPO also includes $4 million in additional noncancelable revenue, which has not yet been recognized under contracts that were signed in 2023 and through June 30, 2024. This compares favorably with the RPO as of June 30, 2023, which was approximately $0.4 million. We expect to recognize the full RPO of $4.24 million over the entire life of the contracts, which are typically signed for a three year term. Over the next 12 months ending June 30, 2025, the company expects to recognize revenue of approximately 36% or $1.5 million of the $4.24 million in RPO based on contractual commitments and expected usage patterns. While the RPO was based on contractual terms as agreed to by our customers, the expected time to recognize revenue is based on our best estimates given the current known facts and circumstances. Of course, while RPO was based only on minimal contractual commitments, we have reason to believe that each of these customers will eventually exceed their minimum commitments. Turning to our balance sheet highlights. As of June 30, 2024, our cash balance totaled $14.4 million, which includes approximately $10 million in proceeds received from our successful June 2024 fund raise. Our common shares outstanding stood at 10.9 million with 1.5 million shares added from our fundraising. We will use these funds for a number of initiatives, including expanding our sales and partnerships team to drive continued bookings growth as well as growing our customer success team to handle the increasing number of customers onboarding on to the authID platform. On to our non-GAAP results. Adjusted EBITDA loss was $2.5 million for Q2 compared with a $1.7 million loss for the same period last year. For the six months ended June 30, 2024, adjusted EBITDA loss was $4.9 million compared with a $3.9 million loss for the same period last year. The increase in EBITDA loss is primarily due to our reinvestment in identity domain experts across sales, engineering and customer success following the early 2023 restructuring. We also monitor and report on ARR or Annual Recurring Revenue, which is defined as the amount of recurring revenue earned during the last three months of the relevant period as determined in accordance with GAAP, multiplied by 4. The amount of ARR as of June 30, 2024, increased to $1.12 million as compared to $0.14 million of ARR as of June 30, 2023. Turning to BARR or Booked Annual Recurring Revenue, which is the projected amount of annual recurring revenue we believe will be earned under contracted orders looking at 18 months from the date signing of each customer contract. The gross amount of BARR signed in the second quarter of 2024 was $0.6 million, approximately 3x to $0.2 million of gross BARR a year ago. The gross amount of BARR signed in Q2 also increased quarter-over-quarter from the gross BARR of $0.1 million signed in Q1. Our Q2 BARR included both direct and channel partner signed deals, representing use cases in gaming, cannabis, compliance, gift cards and universal basic income. Net BARR, which reflects the deduction of BARR from contracts previously included in reported BARR, which were subject to attrition during the quarter was $0.4 million compared to $0.2 million of net BARR signed in the second quarter of 2023. As previously explained during our first quarter earnings call, BARR comprises two components, which we refer to as CARR and UAC. CARR or Committed Annual Recurring Revenue, as shown in the dark purple on the chart represents the total annual customer contractual commitment through fixed license fees and minimum usage commitments. These commitments are directly recognized as revenue each hijack year after the customer goes live with the service. The Q2 2024 CARR represents $0.35 million or 56% of reported BARR. UAC or estimated Usage Above Commitment, as shown in the light blue on the chart is an estimate of annual customer usage that will exceed contractual commitments. The Q2 2024 UAC represents the remaining $0.27 million or 43% of reported BARR. Turning to our revenue growth stages. As we work to build a sustainable recurring revenue stream, we continually review our progress through the following revenue growth stages. The first milestone we use to monitor our growth is bookings as measured by BARR. For the six month period ended Q2 2024, we realized a total gross BARR of $0.73 million, approximately $0.5 million increase over the same period last year. Regarding our customer financial commitments, we monitor our Revenue Performance Obligation or RPO. As I detailed earlier, as of the end of the quarter, we've secured over $4.24 million in RPO, a $3.8 million increase over the RPO secured by the end of Q2 2023. Our third reporting metric is revenue as recognized in accordance with GAAP. Our year-to-date revenue of $0.44 million grew substantially over the same period in 2023. And as our customer contracts mature, we will increase our focus on monitoring on customer retention and expansion. Key efforts will include refining our sales and support methodologies to deepen our customer relationships and increase the value added by our services through continued usage growth, use case expansions, renewals and the upsell of new relevant products. Looking at our full year targets and guidance for 2024. On our revenue growth, we're pleased with our quarter-over-quarter and year-over-year revenue growth in Q2 and reiterate our guidance of $1.4 million to $1.6 million in revenue for the full year 2024 based on the contracts we have in place and as our customer implementations continue to progress in the remainder of the year. Looking to booked ARR. Our sales pipeline grew in the second quarter to over $25 million. Based on this robust growth in our projected close dates, we remain committed to our previously stated target of $9 million in BARR for 2024, which represents a 3x year-over-year growth. If we achieve $9 million in BARR, depending on the level of our customer commitments and term lengths, we would expect to also grow our Remaining Performance Obligation to a range of $12 million to $13 million. In summary, authID continues to make progress in advancing our sales and financial momentum. We improved our balance sheet with our recent fund raise and we continue to post strong metrics that reflect quarter-over-quarter and year-over-year growth. Our direct sales team and channel partners are expanding our sales pipeline and signing new customers and our customer success team is working diligently to help onboard and ramp these customers as quickly as possible. We're confident that we'll continue our growth in revenue and value creation for our shareholders. With that, we'd now like to open up for questions. Thank you, Ed. [Operator Instructions] Our first question is from [Gary Brode]. Gary, good to see you on the call. Please go ahead. Unidentified Analyst Hi, thanks, Graham. I appreciate you taking my call or my question. Rhon and Ed, I've got a question for you guys. I know you kept the revenue and BARR guidance the same. So, bookings sales about $9 million for the year. And then you put up that great slide showing the current pipeline is $25 million, made up of 83 potential deals. Can you walk us through how you get from that $25 million in pipeline or discussions that you're having to $9 million in bookings this year? Rhon Daguro I'll start. So Gary, as we shared in previous earnings calls, we categorize the deals in basically three buckets. First bucket is what we call the customer and clients that really fit the use case very closely and we could basically win the business with our current capabilities and maybe win the business with pricing. And we call that the Fast 100. The second bucket that we are looking at is this group of strategic large enterprise accounts. We're talking about the top five banking institutions in the world and essentially probably the top mega clients of each vertical in each industry. And those types of customers fall in our strategic enterprise bucket, which we call the FAT 100. And then we just quickly generated over the last -- basically in Q4 of last year, we stood up a new program with our channel, with our partners, to be able to acquire and sell more deals without using the burden of my own sales force and that is through the channel. So essentially, we basically have two buckets of accounts that we go after with minimal company effort, right? One is the Fast 100, where we just have great product market fit and use cases. Two, with the channel partners, where they're basically finding the deals for us and we're supplying them the technology. And then this third bucket is the part that takes a lot of time that is with these enterprise large institutions who, when we show them our technology, they'll say, hey, this looks really great, but can it work with this ERP that we have or can it work with this call center technology or, hey, we want to extend it to this population for this particular line of business. And sometimes, our technology fits and a lot of times, our technology needs to be modified or engineered to be able to handle that capability. And so that's why we look at that as, one, the enterprise customers, we have to make sure we can give them all the nuances and specialty things that they need for their business. And at the same time, we got to work through their process because large institutions have a bigger process of approvals and committees to approve. And so those sales cycles are naturally longer. Right now, the way it's forecast is the bigger FAT 100 accounts that we're talking about are going to be landing here at the -- between here, Q3 and Q4. And that's how we're going to close the gap. Graham Arad Got it, okay, thank you. Did you have another question, Gary? Unidentified Analyst No. That's terrific. I mean basically, what I think I hear you saying, Rhon, is some parts of this don't require a lot of time and attention. The part that does, you expect to start to show those bookings in the second half of this year. Is that right? Rhon Daguro Yes. We're -- if you can imagine, we're in POCs and we're currently in those opportunity valuation stages and we're moving down the sales, what I call the sales process with these large enterprise FAT 100 accounts and we're anticipating that for them to land in the later half of the year. Unidentified Analyst Okay. And for -- and I realize the FAT 100, that's going to be a wide range. But roughly, what would be the amount of bookings or revenue we would expect from one of those signings? Rhon Daguro Unfortunately, my mic cut off. So, I didn't hear what you said. Unidentified Analyst Oh, sorry. So, regarding the FAT 100, and I know this will be a wide range. But what are the -- how much BARR or bookings or revenue would you expect from one of those signings that we might see -- that we'd expect to see in the second half? Rhon Daguro Well, on average, they're greater than 500 for sure. Some of them go over $1 million and some of them are close to $2 million to $3 million. Thank you, Gary. Our next questioner is [Dean Cederquist]. Dean, thanks for joining the call. Thank you. Thank you, Graham. My question is, can you comment on the activity level for your existing customers? How has it been ramping up? Hi Dean. Yes. So, our existing customers are in ramp. They're in full production. We're seeing significant growth week-over-week in new onboardings and those are converting into monthly active users that use our Verified product. So, we're seeing a really nice ramp going into the second half of this year. Unidentified Analyst What are the volumes on some of these users? As I recall, you had Verified in the first quarter, like 0.5 million times. And I just don't know how much you've experienced in this quarter? If you have that metric, it would be nice to know. Tom Szoke Well, second quarter is when most of these started to go live. So, we're seeing just the incremental ramp. We've continued to be around that $0.5 million throughout the second quarter, and we're seeing the increase now towards -- into this new quarter showing up quite significantly. So, we're seeing that increase as they're starting to ramp. So, it's really real early, but they're starting to ramp right now as they just went live during the second quarter. Unidentified Analyst My second question is, what's your biggest challenge right now? Yes, let me go and answer this because I just kind of just got done talking about the FAT 100 in these accounts. So these FAT 100 accounts obviously are the ones that going to give us the most enterprise value. And these are the clients and customers that obviously, everybody wants to have, and we absolutely want to have them as well. Some of them are requesting capabilities that extend our product. They want to build off our core and have additional capabilities off of that and we are trying to figure out how to service as many of those requests as possible, but at the same time, not killing and overburdening our organization. So right now, we think it's a mere figure out how to balance the investments in the development and coding engineering that's going to be required. But at the same time, making sure we don't lose any customer and we win every single customer out there that wants our technology. Unidentified Analyst I guess last question is you -- it sounds like you just added really in the last month or so, this dramatic leap in accuracy. And was that related to -- or do you expect this to be related to boost in activity that will go along with it? In other words, were the account participants that you're seeking as customers really looking for that capability that you now have and have they sort of been waiting for it? Rhon Daguro When we are working and developing and figuring out a strategy to deliver the accuracy as well as the privacy, we did mention it to certain small amount of key customers who have expressed to us that they needed that technology and needed that capability. We made the announcement today, but we have not gone full blown into the marketplace and have gone full on attack with those capabilities. What we demonstrated today was an early version of it. We're ready to be -- we'll go to GA, General Availability soon. But we are certainly using these in our POCs right now to win some of the accounts that I just described that got an early preview of the tech, but we will start to market that and amplify that message on to the marketplace, specifically to our FAT 100 accounts. Thank you, Dean. We've had a couple of written questions, Rhon. One is asking about our channel partners. The company has had mixed success over the years with channel partners. Some have been very productive, others not so much. But why are you excited about the new channel partners that we've been signing recently and their activity? Ron, did you have a question? We've had -- the question relates to the channel partners. And in the past, we've had mixed success. Some have been very productive. Others not so much. Why are you excited about the new channel partners that we've signed recently and started to work with? Rhon Daguro I'm going to just attempt that this is the question that's posted by Ricky in the chat, correct? Okay. So, from a channel partner perspective, there's two philosophies here that I carry that's very different from what I believe is what happened in the past. I myself have built a massive channel partner business in my previous role and won numerous awards for my channel partner business building capabilities with Oracle specifically is where I got recognized for this. The way I build channel partners is that I have to create a mutual business plan where both organizations have to make money. There's no point in announcing a partnership if you can't make money together or set target goal. So, before we even sign a partnership, we qualify whether the partner is willing to do that and to put that investment into moving the partnership forward. Second, what we do is we make sure the partners are willing to commit dollars, meaning they will sign up for a commitment to generate x amount of revenue for the business. This helps us qualify serious partners from not serious partners. And so that's why we will be making partner announcements. We will not be making an erroneous amount of partner announcements because there's only so much capability that we have to support our partners and partner ecosystem is very important to us. So, we highly qualify who we partner with. We secondarily qualify them based off of their commitment. And third, we, as an organization form a business plan around generating revenue with those partners, which I think is a far different approach from the previous organization. Graham Arad Fair enough. Thank you, Rhon. Those appear to be all the questions that we have. So perhaps, Rhon you can just wrap the call up and to give your final thoughts. Rhon Daguro All right. Thank you, everyone. We really appreciate your questions and your time today. I want to thank our investors for their continued support of authID's efforts to achieve our greatest potential. I am excited that we continue to make significant progress on our initiatives. We continue to improve every facet of our business, recruit the best people, bring on the best customers, build great technology and produce strong business performance results in the short amount of time that I've been here. Thank you to our entire team and our shareholders for their continued commitment to authID and dedication to our mission to eliminate authentication fraud. Thank you again. Graham Arad Thank you, everyone. I apologize, we've had a couple of technical issues on the call, but thank you, everyone for joining. That's the end of the call.

Tritax Big Box REIT plc (TTBXF) Q2 2024 Earnings Call Transcript

Tritax Big Box REIT plc (OTCPK:TTBXF) Q2 2024 Earnings Conference Call August 7, 2024 4:00 AM ET Company Participants Colin Godfrey - CEO Frankie Whitehead - CFO Ian Brown - Head of Corporate Strategy and IR Conference Call Participants Allison Sun - Bank of America Mike Prew - Jefferies Corinna Steckemetz - UBS Rob Jones - BNP Paribas John Vuong - Kempen Callum Marley - Kolytics Paul May - Barclays Paul Gorrie - Columbia Threadneedle Emma Bird - Winterflood James Carswell - Peel Hunt Ian Brown Good morning, and welcome to our results presentation for the six months ended 30th of June 2024. I'm Ian Brown, Head of Corporate Strategy and Investor Relations for Tritax Big Box. I will shortly hand over to Colin Godfrey, but first a few reminders. [Operator instructions]. As always, if you have further questions, please do get in touch with us, and our contact details are available on our website. Thank you. Colin Godfrey Well, thanks, Ian, and good morning, everyone. Thank you for joining us. As usual, I will give a brief introduction and come back later to provide a strategic and market update after Frankie has run through the financial results and operational review. Ian will then coordinate Q&A. I'm pleased to say that this has been another busy and successful period for us, and we remain very well positioned to drive growth and returns. We have produced another good set of results, and we're on track to deliver attractive earnings growth this year, whilst maintaining our strong balance sheet. It's been a busy period and considerable progress has been achieved through the combination and integration of UKCM, taking our GAV to £6.4 billion. Successful execution of our strategy through active asset management and development program is producing value now and embedding future growth into our business. Following two years of a challenging macro-economic backdrop, there are positive signs that our sector is at an inflection point in both the occupational and investment markets. We see growing occupational interest and expect this to drive increased lettings activity as the year progresses against the backdrop of reducing supply. The significant opportunities in our investment portfolio and development pipeline, along with the positive tailwinds in our market, offer the potential to more than double our rental income in the long term, and underpins our confidence in delivering attractive earnings growth for shareholders. I'll cover all of this in more detail shortly, but now I'll hand you over to Frankie to talk through our financial performance in the first half. Frankie. Frankie Whitehead Thank you, Colin, and good morning. The UKCM acquisition was a significant transaction for us in the period. Our 2024 first half results incorporate the full consolidation of the UKCM portfolio from the middle of May. And so, this is reflected in our operational performance for just six weeks of the first half of 2024. Now, turning to the key financial highlights for the period, which demonstrate how implementation of our strategy continues to deliver attractive earnings growth alongside careful management of our balance sheet. Headline adjusted EPS has risen by over 10% to 4.35 pence per share. When excluding additional development management agreement income,0 adjusted EPS has risen by over 4% to 4.10 pence. In line with our policy, we have declared dividends equaling 50% of last year's total dividend, which is a 3.65 pence per share, a 4.3% increase. And with our valuations turning a corner during the period, we report growth in EPRA NTA per share of 1.2% to 179.3 pence. The UKCM acquisition contributed to a near 30% increase in our total portfolio value, which now stands at £6.4 billion. And our balance sheet remains strong, with the LTV reducing to just under 30%. So, the headlines demonstrate that it's been a positive half for us. And as you'll hear later, with our market and operational momentum feeling as strong as they have done for some time, we also expect strong operational delivery as we move through the second half. Turning to look at income and earnings in more detail, you can see the further good progress we've made in delivering growth in net rental income. This has increased to over £127 million for the half. We've recognized £12.2 million of DMA income in the period. We also expect to start a second DMA project in the second half, which Colin will cover in more detail later in the presentation. Our operating costs have again shown further improvement on a relative basis with the operational benefits of further scale resulting in our EPRA cost ratio reducing to 12.5%. And as in previous periods, we look through to our adjusted earnings, excluding additional DMA Income as the most appropriate measure for basing our dividend. On this basis, our dividends declared of 3.65 pence, translates into a payout ratio of 89%. And as the bottom right-hand chart shows, there is more to come. The rent already contracted, plus the portfolio rental reversion, means that our current portfolio ERVs sit a combined 27% ahead of today's passing rent. This provides us with great near-term visibility over the future growth in our net rental income. And now to look at the key drivers to growth in adjusted EPS, starting on the left-hand side and the half one 2023 adjusted earnings of 3.94 pence. Net rental income growth has been generated by a number of factors, with the largest contribution to growth coming from asset management and development completions. When factoring in the contribution from UKCM and the impact of our net disposal activity from the previous year, net rental income growth has added 0.54 pence to earnings. The DMA income recognized represents a further 0.44 pence of benefit during the period. Higher absolute admin costs have also had a marginal impact on earnings. And I'll come on to talk about our debt profile in a moment, but the impact on EPS from higher net finance costs relates to both the increase in average level of drawn debt, plus the fact that this is being drawn down at our higher marginal cost of borrowing. So, all of this gets us to the 10.4% increase in adjusted earnings to 4.35 pence. And when excluding the additional DMA income, adjusted EPS becomes 4.1 pence per share. Turning to our operational performance in the period, we've outlined here results of the good progress we continue to make across asset management and development. Starting with asset management, performance is in line with expectation, and we've grown our rental income by £8.0 million. As the top left-hand chart shows, our lease events this year are largely second half-weighted, with a further 18% of the portfolio subject to review in half two, compared to just the 7.7% taking place in the first half. If we look at what we've delivered across all lease events in the period, the bottom left tables summarize this. The average passing rent has been increased by 10.7%, or 5.1% when annualized. And turning to development on the right-hand side, we continue to see significant strengthening across our lettings pipeline. We now have over £18 million of rent attached to development lettings, which are in solicitors' hands, and we expect to see a pickup in the speed of conversion through the second half of the year. These lettings, spanning 1.8m sq ft, are anticipated to be delivered at an average yield on cost of over 7%. In H1, we commenced 0.9m sq ft of development starts. Of this, 0.4m sq ft relates to a DMA contract where the freehold has been sold and we are now developing for the owner-occupier. As I touched on earlier, given our expectation to commence a second DMA project later this year, we are increasing our guidance for DMA income. We now anticipate £25 million of DMA income this year and a further £10 million in 2025. We will be looking to redeploy the majority of these profits back into the development pipeline or other investment opportunities. And so, to conclude on our operating performance, we continue to make good progress in asset management and development, and we are well positioned for a busy second half of the year. Now turning to capital values, and with investor confidence starting to return, particularly over the last few months, we feel that we have reached an inflection point with respect to investment values. Our portfolio equivalent yield remained broadly stable at 5.7%. ERV growth across the sector remains positive. As you can see from the middle chart, our own portfolio ERVs have increased by 1.9% across the six months, whilst this growth has moderated against recent years, as has the inflationary environment. Colin will explain why we feel confident over the levels of rental growth moving forwards. But irrespective of the level of future ERV growth, capturing the current level of portfolio reversion, which now stands at 25.5% across the logistics assets, provides us with a great opportunity to deliver attractive earnings growth over the medium-term. And finally, on the right, you can see how our portfolio valuation movements have evolved over the last two years. I'm pleased to say that we are now back into positive territory, experiencing capital growth of 0.7% across the half year. And here, the NTA bridge provides more detail behind the growth in underlying NAV. As you can see, after operating profit, the development assets were the biggest contributor, generating 1.2 pence of NAV growth, followed by our investment assets and our land option portfolio. The UKCM acquisition was broadly NAV-neutral, with dividends paid being the other constituent parts to the overall growth in NTA of 1.2%. With regards to capital allocation, we have deployed broadly half of our £250 million annual target into development in this first half. And from an investment perspective, in addition to the UKCM portfolio, we have made one Big Box asset purchase for £46 million. With no disposals taking place during half one, we are targeting £150 million to £200 million of disposals from our non-strategic assets during the second half, and we are already in advanced negotiations across a number of these assets. And alongside our strong operating performance, we have maintained a robust balance sheet, with stability across our key financing metrics. Firstly, our available liquidity remains in excess of £0.5 billion. Our average cost of debt remains attractive at 3%, with 95% of the drawn amounts either fixed or hedged. And Moody's upgraded our credit rating outlook to positive in the period. And so, we now stand with a Baa1 positive rating. An additional benefit of the UKCM transaction was the company's attractive balance sheet, and this has contributed to a reduction in the group loan to value to 29.9%. The UKCM loan arrangements acquired were also attractive, and you can see the new debt profile on the left. We inherited two £100 million fixed term facilities, shown here in purple, with an average coupon of just 2.9%, and a £150 million RCF, highlighted in gold, which in the last few weeks we have refinanced. In doing so, we've already been able to implement some of the financing synergies available from the combination, by taking the facility from a secured to unsecured framework and benefiting from a 70-basis point reduction in margin. Looking at our debt maturities, we have two facilities shown by the dashed red lines, with options to extend by up to two years, which if exercised in full, would take our average maturity to over 5.2 years remaining. And so, bringing this all together, our balance sheet continues to provide us with a robust and flexible position from which to execute our strategy. And finally, some thoughts from me around guidance, which underpins our confidence in delivering attractive and growing returns as we move forwards. Our high-quality investment portfolio provides us with a significant inherent opportunity to drive 25% income growth through capturing its inbuilt reversion, with 64% available for capture via lease events occurring prior to the end of 2026. We are targeting the realization of £150 million to £200 million of non-core asset sales in the second half. This capital will be redeployed into our development pipeline where we maintain guidance for 2024 of £250 million into development. Development is where we see significant opportunity, including crystallizing the 1.8m sq ft of lettings currently in solicitors' hands. And encouragingly, we are seeing upward pressure on our development yield on cost target of 7% for these assets. And our continued financial discipline means our balance sheet remains in great shape. This has been further enhanced by the impact of the UKCM combination, and means we have good optionality to support growth in the business as we move forwards. Finally, as I covered earlier, we have increased our DMA income guidance for financial years 2024 and 2025. And as Colin will explain, we have real visibility over 41% of growth to our current passing rental income. And stepping back, given the inflection point we are seeing in our markets, we expect to see greater total returns for shareholders, along with greater opportunity to deploy our capital over the next 12months. And so, that concludes the financial review, and I will now hand you back to Colin. Colin Godfrey Thank you, Frankie. The key message I will be highlighting today is that we continue to successfully execute our strategy in the context of an increasingly positive market backdrop, as highlighted by Frankie. And to remind you, our strategy is simple but effective. We own high-quality assets attracting some of the world's leading clients, which provides a strong and growing compounding income foundation to our business. We spend significant time and energy actively managing these assets to enhance value and support our clients' operations. And once value is maximized, we crystallize it through sales and recycling of capital into our very accretive development pipeline. Being long-term investors gives us great insight into what our clients need. We use this knowledge to inform our development activity, giving us an edge over our competitors. With the UK's largest investment and land portfolios, we are unique in listed UK real estate. And as I've said before, ESG remains at the heart of all that we do. We continue to make good progress in achieving our market-leading ESG targets, a process that extends right through the full investment cycle, with a clear focus on our four ESG priorities. We refurbish, develop, and manage sustainable buildings that meet the increasingly stringent ESG performance requirements of occupiers, market investors, and our stakeholders. The UKCM assets are being integrated into our ESG program, with good levels of opportunity for performance improvement across the board. And just to briefly highlight some of the examples of the progress that we're making. We have commissioned a new bespoke data platform to advance our data analysis in support of our net-zero carbon targets. This integrates across our business from new construction to asset management of existing assets. We are future-proofing our portfolio by identifying ways to optimize power resilience, and delivery of renewable energy to our clients. We're increasing biodiversity net gain in our developments and working with clients to improve nature and well-being at our assets, including social spaces and green infrastructure. And the Tritax Social Impact Foundation is advancing our five-year social impact strategy, including major new partnerships with the Prince's Trust, and Education and Employers, where we have a target of helping 250,000 young people in our communities. Stepping back a moment from our operations, it's worth reminding you why logistics is the most compelling sector of UK commercial real estate. This conviction is built upon three key principles; the range of uses that these buildings are put to, their inherent simplicity, and the long-term structural drivers that support demand, control supply, and deliver attractive long-term rental growth. Firstly, logistics buildings are highly flexible spaces that are not just used for storage and distribution. They're increasingly used for manufacturing, cold storage, film studios, data centers, and life sciences, to name a few. Secondly, while the ability to source, develop, and manage these assets requires expertise and experience, the buildings themselves are inherently simple, which means maintenance is easy and low cost, and with a long-life expectancy, obsolescence is low. They're typically let on long-dated triple net leases. So, occupiers are responsible for maintenance CapEx. And this factor differentiates logistics buildings from other real estate classes. And thirdly, there are clear structural features that underpin increasing demand for modern warehousing, population growth, cost efficiencies, supply chain resilience, ESG, e-commerce, and AI. And against all of this, supply is constrained. These factors in combination underpin our confidence that the UK logistics real estate sector will deliver attractive levels of rental growth over the long term. Right now, the occupational and investment markets appear to be at an inflection point, signaling a positive outlook. Starting top left with demand, we saw 11.7m sq ft of take-up in the first half. 7.3m sq ft of this was in Q2 when 25 deals closed, 8 of which were greater than 300,000 sq ft. And there is plenty more to come, with 12.1m sq ft under offer, and requirements increasing in Q2, particularly for very large buildings. Enquiry levels for our own development sites remain very heathy, with interest across a range of client sectors and size bands. On the supply side, the chart top right shows that overall development activity continues to reduce, and speculative space under construction is now 9.2m sq ft, down from 17.3m sq ft a year ago. Vacancy has edged up to 5.6%, of which around two thirds is new space. But with lower levels of completions to come, market dynamics are back in balance. And with demand picking up, this bodes well for the second half and into 2025. As the chart bottom left shows, further rental growth is forecast, and we are also seeing this across our development schemes where achieved rents have increased over the first half by approximately 2%, and we expect this to improve going forward. Turning to capital markets, bottom right, investment activity improved in Q2, but key is the positive shift in sentiment witnessed recently, with a marked increase in competitive bidding on high quality assets. This is yet to show in most data points, but Savills recently reduced their prime yield by 25 bps to 5%. Taking advantage of this inflection point in the market cycle, the combination with UKCM is an excellent strategic fit, with assets of high-quality that are complementary to our existing portfolio, and which broaden our client offer, especially in the small box/urban category, as shown in the table. You can also see here on the right how the UKCM logistics assets complement our existing portfolio geographically, with an attractive weighting to the key logistics markets of London, the Southeast, and midlands. The portfolio also provides a rich seam of identified asset management opportunities for us to add value through our more hands-on approach. The transaction delivers attractive cost synergies, strengthens our balance sheet, and offers opportunities to capture substantial rental reversion from the logistics assets. It also supports our development program by providing additional financial firepower through lower gearing and the planned sale of non-strategic assets. In summary, a great deal for both sets of shareholders. The combination of the two businesses creates a high-quality portfolio that is 92% weighted to logistics, and within approximately two years will be 100%. It's composed of small boxes in the urban/last mile segment, right way through to first mile mega-warehouses, all in the key locations within the UK. And the green elements on this slide demonstrate how UKCM substantially increases our exposure to small boxes, particularly in the attractive Southeast region, and improves the opportunity from open market rent reviews. Critically, the combination enhances our significant opportunities for rental income growth, as demonstrated top left, with a portfolio reversion of 23%, and a record logistics rental reversion of over 25%, with the timed breakdown and review types shown bottom left. In fact, as you can see on the right, there is opportunity to capture up to approximately 64% of that rental reversion by the end of 2026, and that is before we factor in any further market rental growth. I'll circle back to this later to demonstrate the impact combined with our development opportunity. In addition to capturing this significant rental reversion, we are creating value and growing income through our direct and active approach to asset management, a key part of our strategy. A great example of this is at Stakehill, Manchester, as shown here. The original lease to Tesco expired at the end of last year, and we were able to add substantial value through refurbishment of this 1988-constructed building. Works included upgrading the cladding, adding solar PV, and improving the EPC rating from B to A. Strength of location, building configuration, and low site density proved attractive to the market, and prior to completion of the refurbishment works, we agreed terms for a new lease to Greene King for 15 years, delivering a 38% increase in rental income and an attractive yield on CapEx. This is just one example. We remain focused on identifying and realizing asset management opportunities to grow value and income across our portfolio. Applying the same active approach to the UKCM assets, we have made really good progress, having integrated these into our systems and successfully transferred all documentation and data. We have visited all locations, hosted client engagement days, and we're busy undertaking rent reviews and lease renewals. Client feedback has been overwhelmingly positive. More specifically for the logistics assets, we have already identified exciting asset management opportunities to add value. The non-strategic assets have attracted significant unsolicited interest, so disposal negotiations are advancing well, and as Frankie said, we are targeting £150 million to £200 million of sales by the year end. Turning to our development opportunity, and first, a reminder of the unique size, breadth and flexibility of our land portfolio. This is the UK's largest land portfolio dedicated to well-located, high-quality logistics assets. The large majority of this land is controlled through capital efficient, long-dated options, providing both flexibility and attractive pricing thanks to hard-coded 15% to 20% discounts to prevailing land values. Throughout the cycle, our development progress has been supported successfully by recycling the proceeds from investment asset disposals. Our 2024 start developments are expected to deliver a yield on cost of over 7%, and this is currently growing. And the scale of the opportunity is shown here in the pie chart, with our development portfolio having the potential to more than double our rental income over the longer term. Continuing the development theme, as Frankie flagged earlier, we have benefitted from a significant increase in DMA income in the period, and we expect more to come in the second half. The form of DMA income has changed over the last few years, and it's worth spending a moment explaining this in a little more detail and how this additional income supports our strategic objectives. Historically, DMA income comprised fees and profit share received from land sales or third-party funders for whom we carried out development management services. This element of DMA income is now modest because we have been concentrating on our own development. The larger part of current DMA income relates to profit from turnkey development sales to owner occupiers who don't want to lease a building. This slide provides two excellent examples of turnkey development sales. At Oxford North, Siemens Healthineers, a highly regarded and significant employer, supported our planning application, which helped accelerate approval for a new 371,000 sq ft turnkey R&D facility, expandable to 604,000 sq ft. The center will feature automation technology for the manufacture of superconducting magnets for MRI scanners and employ over 1,300 people. The Siemens planning consent will aid our future planning application for an additional 1.8m sq ft at the planned logistics park, in a location well suited to further life sciences occupiers. Similarly, in June, we agreed terms with Greggs at our Kettering site for a turnkey sale of a 311,000 sq ft EPC Grade A, national distribution center. So, while leasing developments remains our primary focus, turnkey building sales deliver incremental value for shareholders and allow us to capture the full spectrum of market opportunity. Bringing everything together, we are really excited about the opportunities that we have within our business to grow rental income. Now, I've already touched on elements here, but this chart highlights the main components. Through a combination of capturing the rental reversion embedded within our portfolio and carefully building out our development pipeline, we have the ability to grow our rents by approximately £121 million, or 41%, in the near-term, but there's much more to come. Our extensive land portfolio provides additional potential over the medium to long-term to more than double our rental income. And additionally, as you can see on the right, we have clearly defined opportunities to drive earnings growth still further, because this chart is not taking into account future rental growth, value from active asset management, our ability to buy and sell investments for incremental value growth, or the incremental value from potential adjacencies such as renewable power and data centers, where we are progressing opportunities. So, to conclude, our strategy is delivering, as demonstrated by another strong set of results for the period, and we look forward to further opportunity in the second half. Significant income and value growth is already embedded within our business, and we continue to create opportunities to expand this moving forwards. Our occupational and investment markets appear to be at an inflection point, with the potential to amplify and accelerate our growth opportunities still further. And with an experienced and capable team and a strong balance sheet, we're really well-placed to take advantage of these opportunities and create value for our stakeholders. Thank you for listening. That concludes our presentation. I'll now hand over to Ian. He will coordinate Q&A. Question-and-Answer Session Ian Brown Good morning, everyone. [Operator instructions]. To begin with, I think we'll just start with some questions that have come in during the course of the presentation through the web chat, the first of which is from Allison Sun at Bank of America. She's asked, vacancy rate has ticked up in H1 for both market and the Big Box portfolio. How do you expect this number to trend in the second half and perhaps into 2025? Colin Godfrey Thanks, Ian. Good morning, everyone. Thanks for the question, Allison. So, vacancy in the market is 5.6% currently, up from 5.1% at the year-end. That's more or less in line with pre-pandemic levels. I mentioned in the presentation that supply and demand are broadly in balance right now. I think we're expecting to see the vacancy rate in the market edge down a little bit based on reduced level of construction starts and increasing positive sentiment from occupiers in the marketplace. As for our own portfolio, 3.7% vacancy. I think that's very much as a consequence of the evolution of our business. Some of that comes from the UKCM portfolio that we have acquired, and some from our development activity. It is, of course, a very attractive way of capturing the reversionary potential within our business, which is very substantial at 23%, and indeed on the logistics portfolio 25.5% now. So, there's a lot to play for there, and we expect to see vacancy typically around those sorts of levels moving forwards for our business. Ian Brown Great. The next question comes from Mike Prew. He's got two questions actually. The first one is about the DMA income. He asked us if that is part of the Board's dividend setting consideration or they're best stripped out from modelling? And the second question relates to the land portfolio, and he notes that at the time of the acquisition of DB Symmetry, the land portfolio had a 10-year supply. Is that still the case or is the hopper being topped up? Colin Godfrey I'll take the second one. You take the first one, Frankie. Frankie Whitehead Yes, so on the DMA income, Mike, thanks for the question. That's obviously a constituent part of our overall earnings. It does have the ability to vary from year to year, as we've seen coming out of 2023, recognizing no DMA income last year, and obviously guiding to the £25 million for this year. So, for that reason, the policy is to strip out the additional DMA. So, over a longer-term basis, we deem £3 million to £5 million as a run rate for DMA. That is built into our dividend policy thinking. Anything above that is stripped out. So, with regards to the EPS numbers this morning, I point you to the 4.1 pence EPS number from which we're basing our dividend. Colin Godfrey Thanks for the questions, Mike. I think I would just add to Frankie's comment there that owner occupation is obviously a key feature of the market. And so, it gives us an opportunity to capture that component part in DMA. As for the DB Symmetry portfolio, when we acquired DB Symmetry in February 2019, the business, we reported, had the potential to deliver over 40 million sq ft over approximately a 10-year time horizon. And of course, we've been developing assets in the intervening four and a half years. I'm pleased to say that we have been refilling the hopper very judiciously. We've been careful about our selections in terms of pricing point, quality of location. And today, the potential future delivery is somewhere in the order of 42m sq ft. So, it has actually edged up a little bit, but again, largely with options, but we will buy land if we see that there's opportunity to get on site and deliver into a strong market in the near term. Ian Brown Great. Next question comes from Corinna Steckemetz at UBS. She asks, what should we expect on UKCM? How are the core assets performing so far, and what is the progress and timeline on disposals of non-core? Colin Godfrey Okay, thank you for the question. So, look, we are absolutely delighted with the UKCM combination. We have, over the last 12 weeks, been assimilating all of the information, incorporating all of that within our systems. We've been out. We've made contact with all of our tenants. We've had client liaison days on site. The response from our new clients has been overwhelmingly positive given the engagement levels. And we are now implementing asset management initiatives, particularly with regard to the logistics portfolio, to enhance value. And as regard the non-strategic assets, which to remind you is around £450 million of everything other than the industrial logistics assets, we are looking to dispose of those over the course of the next 24 months. We have had a very encouraging level of inbound inquiries, right the way across the board from individual assets, sectoral interest, and whole portfolio interest, which we are currently pursuing. We've had a number of offers, both verbal and written. They're at encouraging levels, and we are progressing some of those, and as we said in the presentation, with the expectation of announcing some sales prior to the end of this year, likely in Q4. Ian Brown Great. I think there's a couple of people on the phones with questions. So, Jess, if it's okay, can we open up the phone line and take a few questions from the call? Operator Of course. [Operator instructions]. And our first question comes from the line of Rob Jones from BNP Paribas. Please go ahead. Rob Jones Great. Can you hear me, okay? Ian Brown We can, yes. Good morning, Rob. Rob Jones Perfect, thank you. Morning, team. So, three, one on reversion, one on vacancy, and one on DCs. When you've got the slide in the presentation and you talk about driving rental income growth going forwards and we have the bridge from H1 2024 contracted rent to total ERV, the figure for the H2 2024 of £7.9 million, is that ERV? And if so, what's the passing rent on that income? I'm just trying to think about the potential reversion capture for H2 2024 specifically. Secondly, on vacancy, useful to see the Stakehill case study. Was that part of the vacancy at the balance sheet date? And if so, now that it's obviously been re-let to Greene King, how much of that vacancy now comes down, if so? And then the third and final one just on DCs, Colin, you said we're progressing opportunities. Just wonder if there's any update there? Thanks. Frankie Whitehead I'll do the first one, which was the pointing to £7.9 million figure in H2. In effect, that is the element of the reversion that we believe we can capture in the second half. So, that's reversionary elements only. The passing rent on that is around about £51 million today. So, that would be what we anticipate to capture on top of obviously where we are today in terms of passing. Second question on Stakehill, that would've been in our December 2023 vacancy, but not in our June 2024 vacancy number. Colin Godfrey Thanks, Frankie. On data centers, Rob, I think there's nothing to announce at this stage. We are conscious that data centers are part of the same use class as planning situation for logistics properties B8. And so, they're interchangeable in planning terms with logistics buildings, and as a consequence, it very much falls into our strengths, our wheelhouses, as you might say, in terms of power and development activity and for our sites, and we have had discussions with data center operators in the past. So, we very much see it as a near adjacency to our business operations, noting that a few years ago, the management team set up a power team to advance our knowledge, relationships, and expertise in this space. And given the way that data center markets evolved with lower latency expectations in locations farther away from major city centers, this does play to our strengths in terms of some of the locations that we have sites in. So, we have been doing more work in this space, noting of course that data centers need significant power, and that's where a large part of the work we've been doing has been concentrated. And we do have a preference for powered shell solutions, co-locators now often being just as attractive as the hyper-scalers. So, we'll continue to look for opportunities and pursue opportunities where that provides incremental value for our stakeholders at or above levels which we're currently delivering from our development activities in logistics. Rob Jones Much appreciated. Thank you. Operator The next question comes from the line of John Vuong from Kempen. Please go ahead. John Vuong Hi, good morning team. Thank you for taking my questions. On the development starts for this year, I think in the report you said that it will be at the lower end of the 2m to 3m sq ft that you're targeting, but on the slides, it says that you already started 0.9m, and that there's another 1.8m in solicitors' hands. Does this imply that part of this 1.8m is more likely to close in 2025 and occupied (indiscernible) Ian Brown John, you've gone rather quiet. We can't hear you, I'm afraid. The line isn't particularly good. Could you just repeat that last bit? John Vuong From the occupied amount improving, is there scope to move higher up in the targeted range for next year on the 2m to 3m sq ft? Ian Brown Okay, I think we got that? Colin Godfrey Yes. John, thanks for the question. Look, there's an element of caution in relation to the numeracy there because the 1.8m sq ft we have in solicitors' hands, some of that could straddle the year-end. So, with a fair wind, we will be well within the 2m to 3m sq ft category. But if a major letting, for instance, falls the other side of December 31st, then we might be at the lower end of that range, and we prefer to make an immediate assumption that is more conservative. Is that fair, Frankie? Frankie Whitehead That's fair, yes. John Vuong Okay, that's fair. And as a follow-up on that, on the yield and cost, you mentioned that you target above 7% for this year. Which part of the equation is driving this? Colin Godfrey Yes, I mean, it's quite straightforward really, John. We've seen a stabilization in construction costs. In fact, I would say there's probably 5% to 10% cost reduction in the first half. We're not seeing that trend continue. And against that, we've seen a continuation in rental growth. I mean, just to put that in perspective, in the core markets we're seeing 25 pence uplift broadly in the market more generally. So, it's a combination of that continued positive momentum between costs and income that's generating the 7% plus level, and we're consistently achieving in excess of that for new development starts. John Vuong Okay, that's clear. That's it from my side. Thank you. Colin Godfrey Thanks John. Operator The next question comes from the line of Callum Marley from Kolytics. Please go ahead. Callum Marley Morning guys. Thank you for taking my question. Just a couple, please. Could you provide some color on the level of interest from the 1.6m sq ft of spec development in the current development pipeline? And then as a follow-up, just looking at spec development more broadly, it declined quite a bit in the UK and currently makes up 1.9% of GAV, well below your threshold. Do you have any appetite to increase this percentage, given some of the tailwinds you highlighted? Colin Godfrey Did you catch this? I couldn't hear the second part very well. Frankie Whitehead I can maybe speak to the first part. I think it was interest in assets under construction that are currently being constructed on a speculative basis. Some of the 1.8m sq ft, Callum, that's in solicitor's hands relates to that. So, I think broadly we're about 50% of that is in solicitor's hands at the moment and good interest on the balance. So, that's where we are in terms of our current active program. Colin Godfrey Yes. I mean, just to sort of add a bit of color to that, what we're seeing on the ground, Callum, is I think very reflective of the market sectoral levels more generally. So, if you look at what we've seen in the market in market take-up terms, so far this year 25% of take-up has been manufacturing, it's been about 30% in the 3PL space, by way of example, a lower level of around 15% for retail, about 10% for online. And you're seeing similar sort of levels. I mean, that kind of reflects what we saw in 2023, and we're seeing similar percentages in our own activity. But of course, some of the lettings can be quite lumpy and that can move the dial, but generally that's the sort of trend. I couldn't hear very well the second limb of your question. Did you pick that up, Frankie, about GAV? Callum Marley That was just regarding if you have any appetite to increase spec development as a percentage of gross asset value, given some of the tailwinds. Colin Godfrey No, I think we're quite happy with the level of spec right now. I mean, if you look at the level of spec activity last year, 85% of everything we started on site was let by the year-end. So, we typically sort of view the spec pre-let relationship as a sort of a 50/50 position at the outset, where we can. But again, a lumpy letting can move the dial quite significantly there. So, you could end up with a higher level of pre-lets. But we're pretty comfortable with that, because we don't undertake spec into a void. We will only undertake speculative construction where we see a high level of occupier demand with identified prospective occupiers for that specific building. We get to know exactly what they want, why they want the building there. We get a good understanding as to the risk of capturing that occupier, and we have discussions with them as to the building size that they want, and the specification. And quite often, we'll have at least two occupiers identified that we know that will take that building before we start construction. So, we're not speculatively constructing into a void. And that's one of the reasons why the letting levels of our spec developments is particularly high. Callum Marley Good. And just to follow up on that, looking into 2025 and beyond, it seems like we're heading back into a pre-COVID normalized trend of rental growth, development starts, occupancy levels. Are you seeing any bigger macro tailwinds or even headwinds that could make this next cycle different? Colin Godfrey I think we're coming out of the headwinds. I mean, our sector I think has structural tailwinds embedded within it for the long term. But in terms of near-term, obviously we've been through an economic cycle that's provided challenges, particularly in the context of inflation and higher construction costs. We're now out of the other side of that. As you allude to, we're seeing really strong sort of positive momentum in terms of occupier sentiment. That's being demonstrated in the data in lettings. We're seeing a controlled position in supply with the level of new construction starts reducing. So, I think it bodes well for continuation of attractive levels of rental growth, particularly with the backdrop of reducing levels of inflation and interest rates. And that is being reflected as well across to the investment market, as I said earlier, where we're seeing increased levels of investor activity in the direct market. Quite competitive bidding. It's changed quite quickly actually. So, you're probably not going to see this coming through in terms of the stats until later this year, but what we're seeing at the coal face is actually quite exciting. And I think that that talks to the pent-up demand of investor capital that we've spoken to before, which is tens and tens and tens of billions of pounds, particularly focused on UK logistics, because we and most of the market believe it's the most attractive commercial property sector in the UK. Callum Marley That's clear. Thank you. Operator Your next question comes from the line of Paul May from Barclays. Please go ahead. Paul May Hi guys. Got three questions on my side. Given your low net initial yield, you haven't topped up net initial yield, assuming no material market rental growth, and I appreciate you're guiding to market rental growth moving forwards, should we expect limited value growth as you capture existing reversion? As in, does the valuation already reflect a reversion? Second one, which kind of links to that as well, like with the Co-Op acquisition that you did, do you see further opportunities to acquire at materially higher net initial yields than your portfolio? On non-core assets, appreciate you said looking to sell those over the next 24months. Are there any assets that concern you, for example, leisure assets sort of come to mind, and what's the value of those assets, and is there liquidity for those? And then a final one, more technical on the DMA, which I can ask after you've answered those, is probably easier. Colin Godfrey I think that's four, Paul. Look, I think we should see incremental value growth as we capture the reversion. I mean, the reversion, remember, is being topped up through market rental growth as well. So, as we've been capturing it, the market's been topping it up, hence why our overall portfolio reversion has remained at 23%. As for other opportunities such as more Co-Op Castlewoods, look, I think it demonstrates our patience. We will only acquire investment assets we believe they're particularly attractive, where they're incrementally beneficial to our portfolio construction more generally. But look, I think we're at a point in the market cycle where we will continue to see opportunities, particularly from - I wouldn't say there's much in terms of true distress in the market right now, but there are and will continue to be for a while yet I think motivated sellers, particularly that have been waiting for interest rates to come down, I think more quickly and to a lower level than has actually happened. So, you will continue to see us being opportunistic in terms of acquisitions in the investment marketplace from time to time, but obviously our primary focus is our development activity. And as regards to the UKCM sales, look, I mean I think it's fairly obvious sectorally that retail warehousing is on the up. I think retail more generally is being seen as being a bit more favorable now. We've got really good interest in the retail warehousing supermarkets in our portfolio. Student accommodation is obviously red-hot. I think that the assets which one would expect to take a little longer to work through, particularly given the short unexpired lease terms and some asset management initiatives that we're starting to embark upon, is the office sector. But that's of no surprise to anybody. But we do believe that the pricing of those that we acquired the portfolio at are at levels which are commensurate with the market expectations on sale. Paul May Cool. Thank you. And then just on the DMA income, I think the statement highlights £12.2 million of income, which I think over the number of shares is 0.6 pence, whereas the slides and the adjustment heights highlight 0.44 pence. There's a small difference there. What is the difference? Why is it 0.44 and not 0.6 of DMA income? Thanks. Frankie Whitehead Yes, I think we're going to quote that net of tax in the slide, Paul, given that the tax charge and the P&L is associated to that. Paul May Perfect. Thank you. Ian Brown Good stuff. Look, thanks. I think that's all the questions from the call, but we have a couple on the webcast, so I'll just run through those that haven't been already answered through the ones that have come through on the phone. The first comes from Paul Gorrie at Columbia Threadneedle. He asks, on the development guidance, how much of the 2m to 3m sq ft is now for DMAs rather than on balance sheet development? Frankie Whitehead 0.7m sq ft, in terms of starts this year that we expect to be within the 2, 3 quota. Ian Brown Okay. And the next question comes from Emma Bird at Winterflood, who asks, will you look to allocate disposal proceeds to the acquisition or development of small mid box assets to add to those acquired from UKCM, or will the focus remain on Big Box's? Colin Godfrey Well, look, Big Box is in our name. It's integral to our DNA. We have really significant knowledge and relationships in that space. You won't see that changing, but we have obviously acquired the UKCM portfolio. That was a conscious decision on our part to increase our exposure to urban last mile small box. And we will continue to acquire assets in that space, where we think that they're adding incremental value and giving us a good balance across the portfolio. So, it will be some of both, quite frankly, and it's opportunistic in terms of the way we think about these things to add value for our stakeholders. Ian Brown Great. Next question is from James Carswell at Peel Hunt who asks, on the Greene King example, what was the Marginal yield on cost? And how do returns on refurbishments compare to the development pipeline? Colin Godfrey I can give you that number. It's 7%, the yield on cost for Greene King. So, it's pretty well bang on line with the 7% plus that we're quoting for development activity on our sites. Ian Brown I'll put your general knowledge of our portfolio to the test and ask, Mike Francis-MacRae, has asked, what is the longest standing asset in the portfolio? How long have we owned it for? Colin Godfrey I remember it well. It's Marks & Spencer, Castle Donington, that we acquired in December 2013. So, I think it's about 900,000 sq ft. And it's a pretty amazing building, highly mechanized. So, Marks & Spencer is our longest standing customer. Ian Brown Very good. And I think that's probably it in terms of questions. I don't think there's any further questions on the phone. So, with that, I think we can probably conclude. Colin Godfrey Thank you very much for taking the time to join us, everybody. That concludes the presentation. Goodbye.