Q2 2024 Earnings Season: Mixed Results Across Tech and Industrial Sectors

IHS Holding Limited (IHS) Q2 2024 Earnings Call Transcript

Jim Schneider - Goldman Sachs Jonathan Atkin - RBC Capital Markets Richard Choe - JP Morgan Maurice Patrick - Barclays Good day, and welcome to the IHS Holding Limited Second Quarter 2024 Earnings Results Call for the Three Month Period Ended June 30, 2024. Please note that today's conference is being webcast and recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Naya Bermudez. Please go ahead. Naya Bermudez Thank you, operator. Thanks also to everyone for joining the call today. I'm Naya Bermudez, Senior Manager of Investor Relations here at IHS. With me today are Sam Darwish, our Chairman and CEO; and Steve Howden, our CFO. This morning we published our unaudited financial statements for the three month period ended June 30, 2024 with the SEC, which can also be found on the Investor Relations section of our website. We also issued a related earnings release, presentation and supplemental deck. These are the consolidated results of IHS Holding Limited, which is listed on the New York Stock Exchange under the ticker symbol IHS and which comprises the entirety of the Group's operations. Before we discuss the results, I would like to draw your attention to the disclaimer set out at the beginning of the presentation on Slide 2, which should be read in full along the cautionary statements regarding forward-looking statements set out in our earnings release and 6-K filed as well today. In particular, the information to be discussed may contain forward-looking statements, which, by their nature, involve known and unknown risks, uncertainties and other important factors, some of which are beyond our control, are difficult to predict and other factors which may cause actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements or industry results expressed or implied by such forward-looking statements, including those discussed in the Risk Factors section of our Form 20-F filed with the Securities and Exchange Commission and our other filings with the SEC. We'll also refer to non-IFRS measures, including adjusted EBITDA that we view as important in assessing the performance of our business, and ALFCF, that we view as important in assessing the liquidity of our business. A reconciliation of non-IFRS metrics to the nearest IFRS metrics can be found in our earnings presentation, which is available on the Investor Relations section of our website. And with that, I'd like to turn the call over to Sam Darwish, our Chairman and CEO. Sam Darwish Thanks, Naya, and welcome everyone to our second quarter 2024 earnings results call. We're reporting solid performance on revenue, adjusted EBITDA and ALFCF, while CapEx decreased meaningfully. This quarter, we began putting the negative impacts of the January 2024 Naira devaluation in the rearview mirror as we started to realize more of the benefits of the ForEx resets in our revenue contracts and saw a significant step-up in adjusted EBITDA and adjusted EBITDA margin from the first quarter. The reduction in CapEx reflects the actions we're taking to generate more cash and narrow our focus to projects that we believe will deliver the highest returns, two of the main goals of our ongoing strategic review, which I will discuss in more detail shortly. We've made important progress on commercial matters in the quarter with the extension of our contract with MTN South Africa through 2034 and the renewal of contracts with MTN Rwanda, also through 2034. And most notably, just last week, we announced a significant milestone in our long-term commercial relationship with MTN in Nigeria. We renewed and extended all our tower contracts with MTN in Nigeria through 2032, covering nearly 13,500 tenancies and approximately 23,800 lease amendments. This also includes 1,430 of approximately 2,500 tenancies that were due to expire in 2024 and 2025, but will now remain with IHS Nigeria. Over the last month, we have renewed or extended all 26,000 tenancies with MTN in addition to approximately 26,000 lease amendments across six countries into the next decade. With the MTN renewals completed, we can now focus on value creation and operational efficiencies. We now have approximately $12.3 billion of contracted revenues with an average remaining tenant term of more than eight years. Let me also touch on some of our financial highlights in the quarter. We saw revenue increase by 4% and adjusted EBITDA increased by 35% from Q1 2024 as we saw our contract resets kick in. Organic growth for the quarter versus Q2 2023 was 69%. Group-wide, we added net 385 tenants, 1,566 lease amendments, and built 207 towers, including 136 in Brazil. For the remainder of the year, we expect strong performance in our KPIs as the underlying trends driving our business remain healthy and the higher adjusted EBITDA margin continues after the dip of Q1 margins emanating from the January 2024 devaluation in Nigeria. During the quarter, the average ForEx rate for the U.S. dollar to the Naira was NGN1,392. As the Nigeria ForEx market gradually stabilizes, we continue to see USD availability and more favorable conditions to source an upstream U.S. dollars to the Group. Turning to Slide 7. As you can see, we are in a great position having renewed and extended all tower contracts with MTN in Nigeria and across our other African markets. In Nigeria, we renewed nearly 13,500 tenancies through 2032, which includes 1,430 out of the approximate 2,500 sites that were due to expire in '24 and '25, bringing our total tenant count in Nigeria to over 25,000. Please remember, we also signed a multi-year 3,950 tenant rollout agreement with Airtel Nigeria in February, which also included a three-year contract extension. The agreement with MTN in Nigeria, together with the recent renewals between IHS and MTN Group across all six African markets covering approximately 26,000 tenancies, Nigeria, Cameroon, Rwanda, Zambia, Cote d'Ivoire, and South Africa, where we both do business demonstrates how the two companies are set to work collaboratively to continue delivering mobile connectivity across Africa. Building on our 20-plus year relationship as commercial partners, both companies will leverage our shared operational excellence and engineering expertise to meet the end users increasingly sophisticated data demands. Together, IHS Towers and MTN Group have a track record of navigating complex operating environments and challenging macroeconomic conditions to deliver connectivity crucial to economic growth and digital inclusion. I want to commend our Nigerian team and their commercial colleagues for their efforts to get this agreement across the line and find a solution that helps secure our long-term financial stability. The renewed contracts provide a more sustainable split between local and foreign currency and introduces a new diesel-linked component that better shares the risk of potential fluctuations in the value of the Naira and the cost of diesel. With the introduction of a power indexation element in Nigeria and the unwind of our power managed services in South Africa, we are now much more protected against energy price fluctuations as a company. The renewal is a testament to the valued relationship with MTN and our commitment to work together to mitigate the impacts of global macro conditions and broaden mobile connectivity through our critical infrastructure. We continue to believe in the vast opportunity in Nigeria and look forward to working with MTN to enable critical communication services and mobile connectivity, as well as address increasing data demands in this fast growing market. In addition to commercial milestones, we are making great progress across a number of our initiatives. Let's turn to Slide 8 to look at some of the highlights. As it relates to our strategic review of unlocking shareholder value versus our existing suppressed valuation, we are starting to deliver on elements such as improving our governance framework, as evidenced by the positive outcome of our '24 AGM and resolving our commercial matters as reflected by the comprehensive contract renewals with MTN. In addition, we continue to focus on increasing our operating profitability and substantially reducing our CapEx to improve cash flow generation. We are assessing group-wide costs and CapEx structures, including how we can introduce more technology, especially artificial intelligence, into our ways of working to help us realize efficiencies. During the quarter, we also reorganized our Brazilian operations, increasing the levels of integration between our tower business and fiber business. This will provide not only cost efficiencies but also speed to market benefits as well. We are beginning to see the impact of this overall efficiency improvements in our Q2 '24 results and our '24 guidance implies continuation of higher margins versus '23. Additionally, we continue to examine our portfolio of markets to determine the right composition for IHS going forward. And as previously indicated, this will include raising proceeds with a target of $500 million to $1 billion. The capital raised from these initiatives will primarily be allocated to reduce debt, while also considering share buybacks and/or introducing a dividend policy. As a reminder, these initial targets do not rule out additional initiatives we are assessing in parallel in our pursuit of increasing shareholder value. Moving on to governance. As I just mentioned, we are pleased that the proposals to amend the company's articles of association were approved by shareholders at the AGM held in June. The voting results mark a significant achievement for IHS, better aligning our governance framework with that of mature US-listed companies. With MTN, we remain engaged on any outstanding governance issues and anticipate a mutually agreeable resolution in due course. Moving to our balance sheet, which remains a top priority, we continue to remain comfortable as we actively pursue initiatives to extend maturities, manage interest expense and shift more debt into local currency. At the end of the quarter, we had $746 million of available liquidity. We continue to expect to remain within our target leverage range of 3 to 4 this year, albeit at the top end of the range. I'd now like to provide an update on Nigeria's macro. Since the end of the first quarter, the Central Bank of Nigeria further increased the policy interest rate by 200 basis points to 26.75%, initially in May and then again in July. As the CBN continues to combat inflation and remains focused on price stability in the country. We remain cautiously optimistic as the ForEx market in Nigeria appears to have stabilized modestly with the Naira closing at NGN1,597 on August 9, 2024. We continue to see U.S. dollar availability in the country, which supported our sourcing of nearly $290 million year-to-date, of which we have upstreamed approximately $94 million to Group during and after the second quarter. Market conditions permitting, we expect to upstream more through the second half of 2024. Lastly, on LatAm, we completed the sale of our Peru subsidiary to SBA Communications on April 30, 2024. And as noted earlier, we built 136 towers in Brazil during the quarter for a total of 294 towers year to date. We remain committed to Brazil, which is our second largest market and one of our fastest growing. We continue to drive strong operational results there and see significant ongoing growth opportunities. Thanks, Sam, and hello, everyone. Turning to Slide 10. As Sam mentioned here, we show our Q2 performance. As you see, both towers and tenants are up approximately 3% in Q2 '24 versus Q2 '23, while lease amendments again increased by double-digit percentages, positive signs of the fundamental underlying tenancy growth continuing across our key markets. The year-on-year financial performance in Q2 '24, however, was impacted by the Naira devaluation from an average rate of NGN508 to the dollar in Q2 of last year to NGN1,392 in the second quarter of this year. Therefore, on a reported basis, revenue and adjusted EBITDA declined year-over-year. However, as indicated last quarter, we now see a meaningful step-up in profitability as our revenue contract FX reset kicked in following the impact of the January devaluation of the Naira. Specifically, in Q2, we saw revenue increase by 4% and adjusted EBITDA increased 35% from the first quarter of this year. Versus the second quarter of last year, revenue declined 20%, adjusted EBITDA decreased by 11.9% and ALFCF fell by 9.6%, in each case on a reported basis and driven largely by the impact of the devaluation more than offsetting the strong organic growth. However, our adjusted EBITDA margin increased to 57.6%, a notable improvement year-over-year and quarter-over-quarter. Our level of CapEx investment decreased by 73% in the quarter, driven by the significant pullback in CapEx across all our segments. And finally, our consolidated net leverage ratio increased to 3.9 times at the end of Q2, up 0.1 times versus Q1 of this year, and that's consistent with the expected increase we flagged following the Nigeria devaluation in January. But we remain and expect to remain within our 3 to 4 times leverage target as guided. Moving to Slide 11, and I wanted to provide some more color on the updated contract structure with MTN and how we have de-risked our power exposure. On the left side, you see a comparison between our actual revenue by contract split for the second quarter 2024 and what it would have looked like after adjusting for new financial terms in the renewed contracts with MTN in Nigeria. Given those MTN in Nigeria agreements were signed in August 2024, post the quarter end, the impact of these changes are not included in the second quarter 2024 results. Despite the terms being effective from April 1, the initial impact will reflect in our third quarter results. The new structure provides what we believe is a more balanced split between foreign and local currencies and the newly introduced diesel-linked component acts as a hedge against diesel price and FX fluctuations. Our contracts have always had some level of shared risk and under the new terms there is a more balanced split whereby our USD exposure is reduced, but in return we no longer own the risk of diesel price fluctuations which is now passed on to MTN Nigeria through diesel indexation. It's important to note that the USD component will continue to benefit from quarterly FX resets and annual U.S. CPI-linked escalations, and the local currency component will continue to benefit from local CPI-linked escalations now applied every six months rather than annually. The significant change on introducing power indexation to our use fees with MTN in Nigeria, together with the unbundling of the backup power contract with MTN in South Africa, now means that IHS has moved its business model to being significantly hedged against power across our footprint. All our country businesses are now predominantly either power pass-through or have power indexation elements within their use fees. We believe these changes have materially reduced the risk of our operating model. And moving on turning to our revenue on a consolidated basis, you can see how the continued devaluation turned a quarter of strong organic growth into a 20.3% decline. The Naira devalued 63.5% in Q2 '24 versus last year, yet the business delivered organic growth of 69.3%, driven primarily by FX resets, CPI escalations and power. Fiber, new lease amendments, new colocation and new sites also contributed to organic growth this quarter and came from countries across our portfolio. The right side again shows the organic growth of each of our segments for the quarter, where our Nigeria segment grew approximately 105%, including a large benefit from FX resets. On Slide 13, you can see our consolidated revenue, adjusted EBITDA and adjusted EBITDA margins for the second quarter 2024. As discussed, the Naira devaluation drove a 20% decrease in reported revenue in the quarter despite the quarterly organic revenue growth of over 69%. That again demonstrated the strong top line growth trends of the business. In Q2 '24, reported revenue includes a $15 million headwind quarter-over-quarter and a $478 million headwind year-over-year from the Naira devaluation, but it's actually a net $159 million headwind after adjusting for the impact of FX resets over the past year. As we've previously noted, most of the FX resets on the USD denominated portion of our Nigeria contracts reset quarterly, and therefore our Q2 '24 results now reflect the FX reset benefit from the late January devaluation. In the second quarter of '24, adjusted EBITDA of $251 million decreased 12%, while our adjusted EBITDA margin of 57.6% was up 550 basis points from the prior year and up 1,330 basis points from last quarter. The year-over-year changes in adjusted EBITDA and adjusted EBITDA margin primarily reflect the decrease in revenue, partially offset by a decrease in cost of sales, driven by a decrease in tower repairs and maintenance costs along with lower power generation costs. On Slide 14, we review our adjusted levered free cash flow. In the second quarter of 2024, we generated ALFCF of $67 million, a 10% decrease versus last year, primarily due to a decrease in cash from operations post Naira devaluation and an increase in net interest paid, partially offset by a decrease in maintenance CapEx. ALFCF cash conversion rate was 26.7%. And looking at CapEx in the second quarter of 2024, CapEx of $54 million decreased 73% year-on-year. The decrease was driven by lower capital expenditure across all our segments, with the decrease in Nigeria primarily driven by decreases related to Project Green and maintenance CapEx, while the decrease in SSA was primarily driven by a decrease in refurbishment CapEx. The decrease in LatAm and MENA was primarily driven by decreases related to new site CapEx, although we still retain a healthy level of new site build in Brazil. On the segment review on Slide 15, I want to add to Sam's earlier comments on what we're seeing in Nigeria. In May, the CBN raised interest rates by 150 basis points, followed by another 50 basis point increase in July, bringing the NPR to 26.7%, total of four rate hikes in 2024. These actions appear to have had a positive impact on Nigeria's FX market with the August 9, U.S. dollar to Naira Bloomberg rate at NGN1,597 to the dollar. Most recently, the World Bank approved a $2.3 billion program for Nigeria as the government remains focused on stabilizing the economy with the aim of increasing dollar flow within the country, enhancing the attractiveness of Nigeria as a foreign direct investment destination and improving transparency in the money markets. There is still more to do, but as we -- as a result of these actions, we've seen an increase in U.S. dollars in Nigeria and FX reserves in the country have increased to $34.2 billion at the end of June from $33.8 billion at the end of March. Since the FX environment adjusted in January and February, we were able to access nearly $290 million to settle U.S. dollar obligations locally in Nigeria and upstream $94 million to Group during and after this second quarter. We continue to expect to upstream more throughout the rest of the year. For IHS in Nigeria, second quarter revenue of $270 million decreased 26% year-on-year on a reported basis, reflecting that negative $478 million FX headwind year-over-year, more than offsetting the 105% organic growth, which was driven primarily by FX resets and escalations. Nonetheless, a meaningful step-up from last quarter. Our colocation rate improved to 1.6 times, up from 1.57 times in Q2 of last year. Lease amendments continue to be a strong driver of growth, increasing 6.8% year-on-year as our customers added additional equipment to our sites. Q2 '24 segment adjusted EBITDA in Nigeria was $171 million, a 22% decrease from a year ago, but a 66% increase from last quarter. Segment adjusted EBITDA margin was up 340 basis points to 63.6% given the reduction in cost of sales, primarily driven by a decrease in tower repairs and maintenance costs. In Sub-Saharan African segment, towers and tenants increased by 1.3% and 3.5%, respectively, versus this time last year, and revenue is impacted by the unwinding of our power managed services business in South Africa this quarter, whereby we now recognize the pass-through power revenue as net as opposed to previously gross revenue recognition and gross cost recognition. We flagged this in our original full year guidance prior to the agreement being completed, which it now has been. Therefore, revenue for the segment decreased by 12.3%, but its segment adjusted EBITDA increased 21.5%. In addition to the pass-through mechanics changing, the segment adjusted EBITDA also benefited from a decrease in cost of sales, driven by lower maintenance costs. Segment adjusted EBITDA margin increased 1,970 basis points to 70.7%, mostly as a result of the unwind agreement with MTN in South Africa this quarter, further de-risking the business model. In our LatAm segment, towers and tenants grew by 10.4% and 6.7%, respectively, versus this time last year, and revenue decreased by 3.9%, of which organic revenue growth increased 1.5% as a result of negative FX movements and a reduction in revenue recognition from Oi as we discussed last quarter. Segment adjusted EBITDA, therefore, decreased by 6%, leading to a 71.6% segment adjusted EBITDA margin, 150 basis point decrease versus Q2 last year, which, again, reflects the decrease in revenue and increase in power generation costs. In Brazil, our second largest market with 7,951 towers, macro conditions notwithstanding the FX headwinds as the Brazilian real devalued against the dollar were mostly positive as both interest rates and inflation came down. In MENA, towers and tenants grew by 8.5% and 8.8%, respectively, while revenue increased by 12.7%, including 6.4% organic revenue growth, driven primarily by new sites and escalations. Segment adjusted EBITDA increased 14.5%, and the Q2 '24 adjusted EBITDA margin increased to 55.4%. Onto Slide 17 and we'll look at our capital structure and related items. And at June 30, 2024, we had approximately $4.2 billion of external debt and IFRS-16 lease liabilities. Of the $4.2 billion, approximately $2 billion represent our bond financing and other indebtedness includes $430 million that has been drawn down from the three-year bullet term loan that we have at the IHS Holding Limited level. As Sam mentioned, continuing to improve the strength and flexibility of our balance sheet is an important component of our strategic review. We've already undertaken and continue with various balance sheet initiatives to extend maturities, manage interest rate expense, swap dollar obligations into local currency where possible, and add flexibility to our capital structure. This includes the TowerCo and FiberCo debentures we signed in Brazil for approximately $54 million and $29 million, respectively, and plenty more initiatives to come over the second half of the year. Cash and cash equivalents increased to $446 million as of June 30. And in terms of where that cash is held, approximately 16% was held in Naira, that Nigerian business. We were able to upstream $94 million during and after the quarter as we mentioned. While we anticipate to upstream again in 2024, we do caution it remains to be determined if the increased dollar availability can be sustained. Consequently, from all these moving elements at the end of Q2 '24, our consolidated net debt was approximately $3.7 billion and we had a consolidated net leverage ratio of 3.9 times, up 0.1 times versus the end of March '24. We expect leverage to remain within our target 3 to 4 times net leverage ratio this year, prior to the realization of any future disposals, at which time we expect the leverage to drop. Moving to Slide 18. We updated our 2024 guidance last week as a result of our renewed and extended contracts with MTN Nigeria. We anticipate that the agreement with MTN will negatively impact our results for fiscal year 2024 by approximately $30 million to $35 million. Although the contracts were signed in August 2024, they are effective April 1, 2024. And so on an annualized basis, the headwind is approximately $47 million. Despite the impact of revenue and EBITDA, we expect our business will continue to benefit from colocations and amendments. And with the reduced diesel price exposure, we expect we'll benefit from more operating leverage. As a reminder, we completed the unwind of our power managed services agreement with MTN in South Africa in the quarter. But again, this does not impact our guidance as it had already been factored in previously. And finally, on Slide 19, on the left you can see revenue by reporting currency for Q2, whereas on the right we provide the breakout of revenue based on contract split. The bottom of the slide shows the average annual FX rate assumptions used in our 2024 guidance and are unchanged from last quarter. This now brings us to the end of our formal presentation. We thank you for your time today. And operator, please now open the line for questions. Your first question comes from the line of Jim Schneider from Goldman Sachs. Please go ahead. Jim Schneider Good morning. Thanks for taking my questions. Just wanted to get a sense as to how you characterize the overall new lease activity in both Nigeria and your broader African profile. Any -- I mean, you mentioned some activity. Do you feel like there is more of a positive kind of macro view at this point? And would you -- at what point -- any time in this year, would you expect that leasing activity to step-up or accelerate? Thank you. Steve Howden Hey, Jim. It's Steve here. Yeah, certainly the quarter is demonstrating that the fundamental growth characteristics continue to be there. So if we think about the different buckets of growth we have right now in terms of new build sites, we did 207 in the quarter. Now a chunk of that is in LatAm, where we've decided to continue investing growth CapEx when we pulled back in Africa. But actually when you look at the colocation, which there was close to 400 in the quarter, and the lease amendments where there was 1,200 plus in the quarter, a lot of that's actually being driven out of the African portfolio, scattered around a little bit. We had a good chunk of colocation in Rwanda in the quarter, where we had reached a new deal with one of the carriers there, some in Nigeria as well. A lot of the lease amendments are actually coming out of Nigeria, particularly South Africa, as we see the continued slow and steady 5G rollout in those two particular markets. So, yes, the signs still continue to look good. I don't think we'll get too ahead of ourselves in terms of knowing that the carriers are looking at their CapEx spend plans and trying to sort of rationalize where they can given how global macro is impacting everybody in the industry. But we still see kind of a steady growth in our key markets. Jim Schneider Thanks. And maybe as a follow-up, can you maybe just characterize where you are on some of your asset sale discussions with potential buyers? Are there any major deals that are sort of towards the later stages, maybe in the, the 7th to 9th innings, if you want to use a baseball analogy? Steve Howden Well, I'm a Brit. So I understand your baseball analogy, but I won't get drawn into it too much. No, look, we don't want to get too drawn into comments generally on that particular topic. We said last quarter in May that we were looking to raise $500 million to $1 billion of proceeds. We've reiterated that today. We gave ourselves a 12-month timeline back in May and so all of that is on track. There are discussions happening, but we'll just leave it there for now and we'll update people when there's something concrete to discuss. The next question is from the line of Jon Atkin from RBC Capital Markets. Please go ahead. Jonathan Atkin I think Cricket has a lot of innings, so 7th to 9th inning might actually qualify as early. But I'll let you be the judge of that. So I was just interested, two things. On the strategic review, there's a lot of flexibility that you talk about in terms of potential outcomes, capital allocation, fair buybacks, dividends and so forth. But you also talked about not ruling out further initiatives to continue increasing shareholder value, which we continue to assess in parallel. Can you talk a little bit about what might be behind that and what would drive you towards that decision? And then just more of a LatAm question. I noticed that amendments increased significantly and what's driving that? Thanks. Steve Howden So I'll comment first on the strategic review, then I'll let Sam jump in and add a bit of flavor as well. And then I'll come back to LatAm on the lease amendments. So in terms of the strategic review, look, the way we consistently characterize that is, we are looking at a whole broad variety of opportunities. We're very, very focused on what can create value for shareholders. And whilst we wanted to provide some guidance as to how we were thinking about it last quarter when we set those targets, we also don't want to rule out, potential other value-creating opportunities. Now, what we would also say is, things like the progress on the governance, things like progress with MTN renewal, that all sits squarely in our minds in terms of value creation. It might not be disposals of any type, but that sort of internal work, if you like, is also very important. So there's lots of different strands to our thinking around value creation, the disposals we've characterized so far, what we're targeting initially, and when we said, we will look to pay down some debt with that and we'll think about other shareholder direct return methods after that. So all of that remains the same. But Sam, I don't know if you want to add anything specific on that before I go back to LatAm. Sam Darwish Yeah. Hi, Jon. Look, I think it's very important that we remain focused on shareholder value unlock. We really believe our -- there is much more intrinsic value than the market is really awarding us. I mean, our free float at the moment is more than 20%. We have no major renewals anymore coming for at least eight years. We have more than $12.3 billion of contracted revenue, yet our market cap remains under $1 billion. So we will announce things as they happen. We'll wait until the ninth inning to kind of like finish and then we'll say what we've done. But for now, we will leave no stone unturned until the market realizes there is much more value to this company than it's been awarded. Steve Howden And then, Jon, on your lease amendment question, so there wasn't too much of a step-up on LatAm lease amendments. So there are about 196 now in Q2. They were 186 last quarter, albeit they were sort of 69 when you're looking at the comparative quarter from a year ago. Where we did see some step-up in lease amendments this quarter versus Q1 was in the SSA segment, which was in South Africa, and that's -- that was 5G rollout in South Africa. That's simply customers taking more space on the towers. But, again, I wouldn't overplay that just yet. It's stepping up from 69 to 196, which doesn't compare that kind of that sizeably to the 37,000 that we have across the portfolio. Jonathan Atkin And then just on LatAm, and then one more question to Sam's answer, because I was going to ask that as well. But -- so LatAm, some of your peers have noted that the judicial recovery proceedings around Oi will have a kind of a multi-year impact. And I know that you're kind of less exposed given the tenant mix there, but any color there as to how your organic growth aspirations in the region might be affected by the Oi judicial recovery proceedings? Steve Howden Yeah. I mean, if you look at our LatAm growth rates from this time around, when you kind of unpack them for FX and those sorts of items, we were about 1% growth, but that's because we backed out Oi this year versus last year. So actually, the organic growth rate is more like 12%, 13% for LatAm. So we continue to see, decent double-digit growth in the absence of, that Oi revenue, and we'll see how that progresses. As you say, that's tied to the judicial recovery plan that they have, and we've effectively taken it out of our numbers. So to the extent that there's realizations from that, then that will all be upside. Jonathan Atkin And then lastly, Sam repeated what you put in the script around the contracted backlog. And as we think about a medium to longer term margin and EBITDA generation path, how would you bracket kind of the incremental margins associated with that backlog? And I know there's a lot of moving pieces around FX and energy pricing, but any kind of brackets or guardrails to put on in terms of margins associated with that contracted revenue backlog? Steve Howden I mean -- yeah, I mean, I'll sort of take that. The way that $12.3 billion of contracted revenue works is that that's the business on the sites today. So that effectively gets you to your 57% margin this quarter, or as we're guiding to the full year, about 54% margin. So I triangulate people around 54% margins this year, which is what we've pretty consistently said through our guidance through the course of the last few quarters. But we are seeing -- when you break it down into the quarter-on-quarter piece, we are starting to now see higher margins and we expect to be exiting the year in the mid- to high-50s. And we think that that sort of progression can continue through '25 and into '26. So we're certainly targeting, and we said this for a long time, we're targeting something beginning with a 6, so 60% in terms of EBITDA margins. That's a couple of years away yet, but we're trending in the right direction. And we also believe, Jon, that -- we also believe, John, that the fact that we have now a power indexation in Nigeria with our largest client with MTN, which we did not have before, in addition to the fact that power as a service has moved on from our business in South Africa, is going to make our margin way more stable going forward into the future. Your next question is from the line of Richard Choe from J. P. Morgan. Please go ahead. Richard Choe Hi. I have two questions, one kind of macro level and then one more company-specific. What are you seeing in Nigeria and your other major markets on data usage? Is it growing at the rate that, I guess, you had expected? And then on -- specifically for the company, as you kind of transition to more indexation and less of the power managed services, are there costs that could come out of the business? And maybe, talk a little bit about potential cost initiatives overall? Steve Howden Sure. Sam, do you want to take the data usage one? I'll just cover the cost side of things first, but if you want to take the macro one. So Richard, you're right. The initial areas to look at are obviously locally within the OpCos, which we've been doing as we've been transitioning those business models. And so that's kind of been happening as we go along and you'll see the realization of that in elements over this quarter a little bit, but then into next quarter as well. As it relates to further kind of cost initiatives, and that is also an element of our strategic review, if you like, which is looking at profitability around the group, including central cost structures. And we're continuing to look at different ways that we can operate more efficiently. Some of that's because of the shift in business model away from this power element, but some of it's just new ways of working. We're looking at trying to introduce more technology, trying to use artificial intelligence, such that we can be more efficient, more accurate, and, ultimately, reduce overall costs. So that's kind of an ongoing element of the strategic review and will continue that for quite a period of time there. Don't want to put any numbers on that just yet, but that is happening. Sam Darwish In terms of the market growth, we're seeing massive growth on the African side, Richard. So, for example, in Nigeria, I believe, MTN reported recently more than 50% increase year-on-year in terms of data usage. I mean, these are the kind of numbers we're seeing. So that runway remains there. LatAm is more modest, but again, data growth remains large. Richard Choe Right. So it seems like despite some economic headwinds or volatility, there's -- the growth in data has been pretty strong and at some point the carriers will have to keep investing in their networks? Sam Darwish They have to, in our opinion. They have no choice. I mean, to be able to meet the demands of the population, whether in terms of fintech adoption, in terms of smartphone adoption, in terms of new entries into new users adopting phones, it's just one way traffic. At the moment what we're seeing is global macro, local macro is putting a pressure on their CapEx cycle, but that pressure is cyclical and they just have to meet the demands at some point in time, which we believe sooner than later. And your next question is from the line of Maurice Patrick from Barclays. Please go ahead. Maurice Patrick Yeah. Good morning, guys. Thanks for taking the question. I've got a couple, please. The first one a follow a bit on from Richard's question on identification and traffic growth. When I was on the Helios call last week, they were talking very -- a very sort of upbeat message really around the operator need for densification, partly for traffic but also new coverage. And I think they were referring to it as here and now as well as the future. You seem to be a bit more cautious and I'm just keen to understand if that's more to do with geographic mix, so more LatAm and Nigeria rather than differences between the companies. And the second question is on Nigerian EBITDA trajectory. I doubt you want to give 2025 outlooks quite yet, but investors are asking quite a lot around the moving parts of cost and revenues for next year in EBITDA. I guess you're happy tailwind coming from CPI resets, you'll have the tailwind from the increased tenancies in Airtel. You'll have a -- presumably a headwind from the lost 1,100 tenancies. So just if you could walk us through some moving parts, even if you can't say you think EBITDA will go up or not in Nigeria next year. Thank you. Steve Howden Let's talk about that last one first. So, Maurice, I mean, you're right, we're too early for 2025 metrics and guidance, but you have started to unpack some of the moving parts. Another element I would point you to is macroeconomically speaking, obviously the biggest driver for IHS in 2024 so far, and one looks like it's going to be for the rest of '24, was the Q1 devaluation. So obviously there was a significant dip in revenue and earnings in Q1 post the Naira devaluation, which has then now rebounded in Q2. But obviously as you drop that quarter of dip, let's say, then you start to get a more even run rate through the back end of the year. So as you move forward into 2025 we'll be having a good hard think about what our forward curve looks like, but certainly at this point in time, one would hope it doesn't include any kind of form of step change, but let's see. So that's probably one area to look at. You're absolutely right. In Nigeria, organic growth being driven by Airtel. MTN are continuing to do business by the way, so they'll come through as well. We're seeing plenty of traction in Brazil towards the back end of this year and into next year around new build sites, around colocation, around more lease up -- excuse me, more lease amendments as 5G starts to roll out more seriously. I think as it relates to LatAm, the 5G take up while it's there, I think it's been a bit slower than people had originally thought, but it's now starting to gather some pace. I think we're going to see that come through into next year. So -- and then you're right, in terms of contractual resets, those will all flow through as usual. So those are some of the moving parts without us putting numbers on it yet. And obviously, it's a bit early for that. Yeah, densification point. I mean, I think it's a little bit to do with different markets at different points in their technology cycle, right? And so I'm not sure you can draw a complete apples to apples across it. Our markets are largely 4G penetrated now and we're sort of on that cusp of 5G. We're starting to see it a little bit in Nigeria, but early days. We're starting to see a bit of it in South Africa. I would still say early days, but more advanced than Nigeria. And as I just mentioned LatAm, it's starting to flow now. So I think it's more a question of where are we in the technology cycle of the given markets, recognizing that over the last few years we've continued to add thousands and thousands of lease amendments and colocations as well. Just keep in mind, Helios report those two metrics differently to how we do. We split them out, they merge them. So just keep that in mind. Maurice Patrick Helpful. Just one very small question, if I may. Just on the CapEx guidance, you reiterated the $300 million and $370 million. I think the first half you're running at $110 million, so well below that run rate. I don't think you've got a huge step-up in BTS. What's some -- what's driving the kind of significant 2H, 1H based on the CapEx? Steve Howden It's a fair point. We've got a little step-up in BTS CapEx as we're delivering our pipelines, and a little step in fiber as well. But we'll see how that guidance go -- that guidance number goes. We've been looking at whether that's the right metric to retain or maybe trim slightly, and we'll look at that again as we go through Q3. We are certainly trending at the bottom end of that range. Yes. And that brings us to the end of the IHS Holdings Limited second quarter 2024 earnings results call. Should you have any questions, please contact the Investor Relations team via the e-mail address [email protected]. The management team, thank you for your participation today and wish you a good day.

Open Text Corporation (OTEX) Oppenheimer's 27th Annual Technology, Internet & Communications Conference (Transcript)

Open Text Corporation (NASDAQ:OTEX) Oppenheimer's 27th Annual Technology, Internet & Communications Conference August 12, 2024 3:45 PM ET Company Participants Harry Blount - Senior Vice President of Investor Relations Conference Call Participants George Iwanyc - Oppenheimer George Iwanyc Good afternoon, everyone. I am George Iwanyc, one of the Technology Analysts here at Oppenheimer. Today I have, the pleasure of hosting Harry Blount, Senior VP and Head of Global Investor Relations at OpenText. We are going to do a fireside chat, but I'd like to let Harry have the floor to start off and kind of give us a level setting of OpenText 3.0 and the recent results. Harry Blount Yes. George, thank you so much. And thank you to you and Oppenheimer for hosting us. Before I get started, obligated to make sure everybody, refers to the safe harbor statement in our most recent investor presentation. So that any of the statements that I do make are covered by that Safe Harbor. With that, thank you very much, everyone. So OpenText 3.0, to share what OpenText 3.0 is, let me just level set for the audience. I know we may have different levels of knowledge about OpenText, but we're the leader in information management and what does that mean? Basically, our software manages some of the largest content repositories in the world. If you think about all of the data that is generated from your office applications, if you think about all the data that's generated from global supply chain, whether it be for parts like an auto dealer or Nestle's as another big customer, all the food ingredients from all over the world, there's thousands and thousands of suppliers and associated paperwork and taxes and tariff and compliance that has to be kept track of and retained. If you think about all the data generated by an SAP system, a lot of that'll flow onto our content management repository. Your IT operation support, all the documentation that is associated with supporting your technology and operations is managed many times in our content management repository, even developer code. So, the volume of data that a business generates, particularly the unstructured data needs to be managed for compliance reasons, for regulatory reasons, for taxes and tariff reasons, any number of reasons. So, if you think about the business that OpenText's in of information management, it's about managing that data. It's about protecting that data. We have cybersecurity that helps protect the data, and we have an analytics and AI business that helps you extract more value from that data. If you then look at what that means for OpenText and OpenText 3.0 information reimagined, new use cases are emerging, and those use cases are going to require more cloud deployment, more security deployment, and more AI deployment. So those are some of the three big initiatives that you'll see that'll drive a lot of our growth under OpenText 3.0. I'll not get into a lot of the details at this moment, but with AI specifically, before you can really deploy these learning models onto your data, you have to have that data organized, protected, intellectual property protections, everything in place, and we have a meaningful role to play there. If you think about what that means for us for F '25 and some of the key metrics, you'll be looking for us to continue to lead with cloud revenue growth up to 5%. You'll look for us to continue to focus on improving our EBITDA margins on a journey from where we're at, up to the 36% to 38% EBITDA by F '27 continuing to return capital to our shareholders. We announced 50% of our capital is being used for primary purposes, which is dividend and buyback, and the other 50% for the highest return of capital. This year, we think our stock is the biggest and highest return of capital. So up to 90% of our free cash will be used to buy back stock and grow dividends. So, George, that's a quick overview on OpenText and what we do and kind of the very highest-level priorities for us. Question-and-Answer Session Q - George Iwanyc Thank you, Harry. So, I'll jump in with some questions, but if anyone in the audience has questions feel free to either email me, which would be george.iwanyc.co.com [ph] or send a comment through the chat. So, Harry, maybe starting with the recent results you had a few mixed trends with respect to moving pieces in the business. Kind of unpack those and then put that in context with the overall environment and what you're seeing there. Harry Blount So what George is referring to is that our overall results, on a line item basis were generally in line with expectations except for our license business. And we called out a couple factors for the difference in license. First of all, we did not attribute it to any macro factors or competitive factors. What we are seeing is the lighter results in license reflects two primary things: One, we're seeing customers increasingly choose to deploy our products using cloud than we've had historically. So that's one factor in driving the strong cloud bookings growth that we did see and the lighter license. Specifically, on cloud, we raised our cloud booking estimate multiple times throughout '24 from the 15%to 20% range at the beginning of the year up to where we ended at 33%. So that's a reason code number one, customers choosing to buy more cloud from us versus on-prem or license. The second reason is, we had two big strategic activities in Q4, our June Q4 quarter. The first one is that we divested of our mainframe business. It's called our AMC business. And through that separation, we had some of our account executives go with the conveyed over to Rocket Software, the buyer of the AMC business, but we also involved some of the other account executives. We kept we're involved in now going to our existing customers and separating contracts to move those over to Rocket while still keeping our existing contracts in place on the OpenText side. So that had an impact on business as well. The second action, strategic action in the quarter was what we call our business optimization. And there what we did is we did a tremendous amount of planning of moving more of our people into our Centers of Excellence, India, Romania, Philippines, and Canada. We are going to hire back a portion of those people, the savings that we realized from that business optimization in the form of R&D and sales. But those two big strategic actions plus the increasing choice of customers to deploy in the cloud did impact our license business. The cloud transition, if you don't mind, let me take a moment on that. What we are seeing is we completed a project a little over two years ago called Project Titanium that cloudified a lot of our content products. And if you think of the normal enterprise sales cycle, now is the time you should start to see the cloud ramping. And that's exactly what we are expecting in '25 and beyond. It does have an impact on our financial model with license, we typically recognize all that license revenue upfront, and it has a high 90%s gross margin. We also typically get a one-year renewal, sorry, a first-year maintenance out of that customer support revenue. And that also is in the 90% gross margin. Whereas when they choose to buy cloud from us typically our contract is now approaching four years, the midpoint, and we typically only recognize about 15% to 20% of that in year one. And it does tend to have initially lower gross margins. So that's another factor that investors have been asking us a great deal of questions about the impact of the cloud transition on our financial model, George. George Iwanyc Yes. So maybe kind of digging into that, when you look at the transition from your licensed business to cloud, if you gave us baseball analogy of where we are in that transitioning, what any are we in how does it accelerate from here? Or do we kind of do it linearly? Harry Blount Yes, it's a great question. There's still a tremendous opportunity ahead for us in the cloud. We do see growth opportunities, in our private cloud business. We see significant growth opportunities in public cloud growing more consumption, AI, how quickly AI takes off will clearly be a factor in driving that. That being said, we always, we do expect that we will always have a portion of our customer base that does want to keep items on-prem or off cloud. We talk about nuclear France, some government facilities, defense intelligence type of customers are still going to want to maintain off cloud capabilities. The other thing with us that's interesting is that in many cases, the data that we have is years old for compliance and regulatory reasons sometimes 6 years, 7 years, 8 years or long or old. And in many cases, it's actually more cost-effective and less risky for those customers to keep that portion of their products with us off cloud. So, this is a really critical nuance in understanding our business, but most of the cloud growth we see is for new workloads, new deployments, not for lifting and shifting their data from the off-cloud. So, we expect to have a long tail on our customer support business, but because most of the cloud growth is incremental in new workloads, but we think there's many years of opportunity ahead of us with the cloud business yet. George Iwanyc You mentioned Titanium, why don't you give us some perspective on Titanium X and where you are with that deployment? Harry Blount So, the first in instantiation was Titanium before Titanium X. And we completed that a few years ago and really think about that as moving our products to the next generation of cloud architecture, cloud additions, essentially enabling our customers to deploy our software anyway, they wanted it in the cloud, public cloud, in the private cloud, or continue to keep it off cloud. With Titanium max, we announced that right after we acquired Microfocus. When we acquired Microfocus, the vast majority of their revenue was on-Prem. They had a very small cloud business. So, Titanium X covers a couple things. One, it's to cloudify micro focus products. Two, it's to increase AI to embed AI throughout our entire portfolio products, also to embed security throughout our entire portfolio. So, if you think of autonomous clouds, autonomous computing, we'll be moving at the end of Titanium X to having all of our key products cloudified with AI, with cybersecurity, and we're targeting to have that Titanium X completed by the June quarter of next year. We think that helps us in a number of different ways, provides all the flexibility to the customers that they want, but also able to protect the data more securely, make it more valuable through the analytics and AI. George Iwanyc I mean, this is a good time to ask about microfocus and how should investors look at the overall company with the OpenText core value proposition on content management? And then what Microfocus added there. And once Titanium X is done, what should customers expect from a go-to-market perspective? Harry Blount Absolutely. So, and let me just kind of touch on that. We completed the acquisition in January of '23. At the time we acquired it, micro-focused was a declining asset. As of June 30th, we've now arrested that decline. We've hit basically all of the targets that we set out to hit. We said we would try to stabilize and grow the business from a $2.3 billion base if you adjust for the AMC business. We did that. We said that we were going to try to take their renewal rates, which were in the low eighties, and get them into the nineties by fiscal '25. We exited fiscal '24 in the high eighties. So, we're on path to get the renewal rate into the nineties. We said we'd get their EBITDA onto corporate plan and we did that. So, the good news is that we have now operationally completed a lot of the products, the portfolio, the integration, and arrested the decline of the asset. And it's really positioned for growth as we move forward. In terms of what does Microfocus bring to the table for us? Well, it brought a couple things important. First of all, it was a fantastic financial transaction. Secondly, it brought us new buying, it brought us critical mass of products for the Chief Security Officer. We didn't have that before. It brought us critical mass of enterprise-class products for the CTO. We didn't have that before, and it brought us a critical mass of products for the head of DevOps. So, we now are addressing almost all the major buying centers inside of a corporation. Many of the customers were the same, but the buying units inside those corporations were different. So, it helps us become more strategic to our customers. Another thing that Microfocus brought to the table is large content repositories. What the business that we're in. If you think about all of the technology documents to support your software, your technology or operations, there's a tremendous amount of documentation that needs to be managed. It's a content management problem. Think of an airline for instance. Every time an individual plane takes off and land, you have to keep track of it. All the parts on that airplane, the number of hours that's been in the air, it's a big content management challenge. So that it brought us another large set of content repository. Same thing with DevOps, millions and millions of lines of code. So, it enhanced and strengthened our position strategically in the enterprise. More buying centers, good financial transaction, operationally, profitability now on our model. And as we look to the future, what's left to complete with microfocus is our back-office systems integration, legal entity rationalization and some tax optimization. So, as we look forward, we're now one company. We no longer think of it as OpenText and microfocus. We are one company and it gives us a very strong platform to move forward on. George Iwanyc And when you look at those final pieces on the merging the companies, is there a gross margin lift that you can still see from that effort? Harry Blount We see gross margin lift primarily in our cloud business, not so much on a line item by, line item business, where we do see the margin improvement is on the EBITDA line. We do think that, we have an opportunity to lift our EBITDA margins from the low 30s where we acquired micro focus to the combined entity getting into the 36% to 38% range by fiscal '27. So, part of that EBITDA margin improvement is coming through the cloud gross margin improvement. And part of the EBITDA margin improvement is coming through the business optimization that we took. And part of it's going to be through mix as we grow more of our public SaaS business that'll have higher gross margins as well versus our private cloud. George Iwanyc When you think about those levers, is there one that is a nearer-term driver, or are they pretty balanced across all the ones you've highlighted? Harry Blount Yes, I think they're relatively balanced across. George, I think if you take a look at the timing wise on it, the cloud gross margin, we saw a meaningful improvement sequentially in our cloud gross margins here in the most recent quarter. The business optimization, you'll see benefiting us as well as if productivity efficiency from AI, et cetera, over the next several years. And then the SaaS growth will happen over the next several years as well. So that's kind of the high level on timing. George Iwanyc So, digging into that cloud opportunity that you have. From a growth perspective, it looks like you have some opportunities to accelerate your cloud growth. What are the main levers from an organic growth standpoint to get your cloud revenue up and how quickly do you see getting from five to, let's say 7% or 8%? Harry Blount We finished fiscal '24 with cloud growth, cloud organic growth in the 1% range. But in the fourth quarter, we did start to see an uptick to the 3% range. To back that up a little bit, the leading indicator that we've seen is cloud bookings growth. We raised our cloud booking growth several times in fiscal '24. We finished at 33% cloud booking growth in the enterprise for fiscal '24. We do expect a long-duration ramp on it. So, we're expecting some of that to ramp in '25. So, the fiscal '25 cloud organic that we're looking for is up to 5%. As we look out to fiscal '27, we're expecting cloud organic to reach the high single digit, 7% to 9%. So, we have the visibility with our cloud bookings and our deferred backlog. that gives us the confidence to put those targets and aspirations out. George Iwanyc When you look at that, are you building in a macro recovery or is this a straightforward execution and product blocking and tackling? Harry Blount For the most part, it is about blocking and tackling. And if we get some help on the macroeconomic front then certainly it's skewed more towards the high end. But we can get there based on what we're executing through our product roadmap, the bookings, et cetera. George Iwanyc Maybe it's a good time to pivot to AI that feels like it's a massive change throughout the industry. And a company like OpenText that has all the content stored within their platform and their systems, how much of a competitive advantage is that? And how do you go about talking to your customers and saying, we can help this transition to maximize the value in that content? Harry Blount It is a great question, and it's a fantastic opportunity for us. Our customers have trusted us with their data for many years, and that trust really matters. And it's not only about trust, but it's all of the business processes of keeping that data up to date, protecting that data so that only the right people can access it at the right time, under the right conditions. So, there's three specific opportunities for us in AI, two on the revenue side and one on the internal side. Bucket number one is helping customers get their data ready for AI. Bucket two is the products that we sell that are AI products called our Aviator products. And then bucket three is some productivity and efficiency that we can use applying AI internally. Let me touch on each one briefly. The enterprise AI is very different than the AI that you'll hear about with a ChatGPT or OpenAI. The data that's in there tends to be highly protected, highly procured with specific use cases, specific users, specific business processes. And those business processes need to be protected so that you don't have any leakage for intellectual property reasons. You don't break any privacy or compliance rules and regulations and those, that data, the business processes that are feeding that data need to be kept up to date. And they're very typically from an SAP or an Oracle or Salesforce or what have you. So, the challenge with helping our customers, the challenge our customers have with that data is they need to keep everything up to date. We already have those business processes in place. We already have the data repository in place, the protections. So, we are a trusted partner to help the customers get their data ready for AI. On top of that, if that data resides in many different types of repositories, let's take a customer, for instance, let's say you want to bring together different customer data. You may have some in your call center system. You may have some in your web system for like an Adobe. You may have some in your sales pipeline, like a Salesforce, bringing those all together so you can apply AI to it is a challenge that, an opportunity that we're kind of uniquely qualified to provide and help our customers do. So that bucket one is getting the data ready for AI, and we're very well positioned there. The second opportunity for us is our Aviator product line. And here we are already doing some large pilots. We're generating a little bit of revenue. You saw a press release from us today from a company called Pick & Pay that has helped them improve their efficiency by 95%. We're working with one of the world's largest apparel manufacturers to help them with all things on the procurement side of the equation. And there's -- we're solving many of the very large problems, supply chain issues, et cetera. We have not provided any specifics on the revenue impact that we're generating from AI, but we feel very good about that. The way our CEO describes it, is that it's going to be kind of steady, steady, steady, steady, and then all of a sudden, you're going to see a nice big lift up with our AI revenue. The third opportunity for us is, we announced publicly something called Project Athena. And there think about leveraging the ability to test code more efficiently. We have a product called Fortify. We sell commercially that's outstanding at testing, providing test cases on new software code, and improving the rate at which we develop and automate that code. So, Athena is an opportunity for us to internally improve the quality of the testing of our code, the speed and efficiency at which we develop code. George Iwanyc Maybe digging into each one of those points. On the first point with the enterprises, where are we with respect to enterprises wanting to go from testing generative AI type of applications and their own AI and ML development to actually operationalizing it and starting to ramp and use the content that they have? Harry Blount Yes. We're very early days in that Accenture in their recent call talked about the speed at which customers are using on AI depends on the strength of their digital core, and the more ready their data is, the faster they're able to move. But there's still the second aspect of it, which is you need to make sure before you spend the money, that you're going to get a good ROI from it. And so, it's very early days for us. We are pleased that we've announced some early wins on that front. The way our CEO describes it is we have documented over 100 use cases. Basically, every conversation that we have with customers includes AI. But in terms of actually spending money on AI it's very early days. George Iwanyc And when you think about going to your customers with those use cases, how much of that is just in an individual OpenText effort and how much is a partner effort with channel partners and SIs and technology levers to make generative AI work? Harry Blount Yes, a lot of the work we're doing right now is OpenText-driven. We are the knowledge experts when it comes to the customer's data and content management and the business processes that keeps that data up to date, keeps it protected. I wouldn't say it's there isn't any partners involved, but it's predominantly OpenText-driven. George Iwanyc And kind of going to the Aviator product, when you talk to a customer with that product, is this I know you said it that monetization may come later and kind of see a pretty good ramp, but do you have very specific product discussions with Aviator, or is this a cross-platform that this makes everything within OpenText work better? Harry Blount I think I would say it really is use case driven in terms of which products we lever. I will there be more cross-platform, more opportunities over time? Time will tell. I think we certainly think that there will be opportunities, for instance, to take security across many of our -- throughout our portfolio, take AI across our entire portfolio. But right now, I think, it's people are more narrowly focused on proving out their use cases. As a for instance, we've demoed publicly content aviator, and there's a couple things that I thought were quite unique about that. We took all of the FAA data and were able to integrate many different types of content, everything from video and audio feeds to paper documentation, PDFs, et cetera, and very quickly assemble and accelerate the use case of an investigator being able to identify root causes, where to focus, et cetera. So that to me is one example of where we're unique, being able to take the typical content, you might see the PDFs, the word documents, et cetera, but then also being able to scan and search through video and audio files to bring it all together. And then there's kind of more of a broader search aviator use case where it's not only our content, but being able to search other types of content repositories that may or may not be within our overall portfolio. So those are two, that earlier ones that we've demonstrated and talked about publicly. George Iwanyc And then on the last element, internally using AI, you've also talked about having very strategic hiring objectives and putting people in new areas where they could help optimize your cost structure. One what does AI allow you to do with optimizing the cost structure? And two, can you maybe dig into the hiring plans where, when, what kind of priorities? Harry Blount Let me address the last one first is, we've already started July 1st to start to hire into the sales and R&D arena. So, we're already starting to deploy some of those savings into revenue or productivity enhancing areas. In terms of -- actually and let me touch on that a moment as well on the sales side of the equation, we also announced a new head of sales, Todd Cione a few months ago. He is now been on the job about a hundred days. And one of the other things that we did from an optimization efficiency perspective with him coming on board is, we now have a unified global sales organization. Before Todd came on board, we had four different groups reporting into our CEO. So now, we've standardized that, and that allows a tremendous amount of efficiencies for go-to-market segmentation efficiencies and cross-functional collaboration. So that's another important aspect that shouldn't go unmentioned in terms of the cost efficiencies. There's several fold. I touched briefly on using Aviator to enhance our development of our code, the testing of our code. But we see a tremendous opportunity for IT service management as well, supporting our customers more efficiently with our IT operations management products and that's an area that we've only briefly mentioned publicly, but we think that there's a tremendous opportunity there as well. George Iwanyc Kind of digging and digging into the sales opportunity here, one of the things that Todd has said is, there's a doubling down on the business cloud specialization. What does that mean? And how are you executing with respect to that? Harry Blount Yes, absolutely. I think, one of the areas that having a single unified sales organization allows is that you can start to create product specialist groups that can serve an entire sales organization. So, you can have your cloud specialists' pod, you can have your cybersecurity pod, and you can leverage that entire pod across your entire service organization. So that's one of the areas that Todd was mentioning in terms of having people that are really outstanding at cloud deployment, cloud support, cloud implementation, even some on the design side of the equation. And can you unpack what you're doing with, let's say, the global 10,000 versus the mid-market and commercial and then SMB customers? Harry Blount You bet. At the very top of the pyramid, we have our global account management team, and think of your very, very largest customers where there's a cross-functional team servicing that. So, there's great coordinate. It may involve many different contracts, so say a Nestle's or BMW or what have you. But to the customer, even though there's many different contracts that we have with them, we're still serving that customer in a holistic strategic way. So that's the very top of the pyramid. The next layer is our global 10,000 accounts. Think of this as the 10,000 largest organizations in the world. And here you think of more of like a named account rep who's dedicated to that account. And it may not have quite the infrastructure that our global account team has dedicated to a single customer, but it that account manager account AE has access to all of those areas of special specialties that we might need. And there clearly is what we call our love model is starting with a particular individual product and continuing to expand into other products over time, as well as expand the initial product. Below that then is the mid-market. Think of that as more covered by our inside sales group. And then the final piece of the puzzle is, our small-medium business channel. And that is done predominantly through channel partners like managed service providers. And there, we partner closely with Microsoft on that, on the small medium business channel. So that's our high-level go to market. George Iwanyc And going back to something that you said at the very beginning with the AMC divestiture, you had to do some account executive, realign and just digging into who is responsible for what. When you look at all the things that Todd has done, has the realignment of the sales group been completed at this point? And especially with respect to one unit between Micro focus and OpenText. Harry Blount Todd's done a fantastic job. He's identified talent internally and moved them into roles where they can be more productive, more impactful. He's brought in some outside talent from his tenure at Microsoft and Oracle and Apple Enterprise, Teradata, and many others that he's worked at. So, he is brought some talent in and he's aligned this, the structure organizationally now so that we're set and really focused on executing to an F '25 plan now. George Iwanyc Maybe pivoting to a few things about the operations side with respect to cash flow your EBITDA targets and maybe putting that in context of the macro environment. One, where are you seeing the most fluid engagement with customers from a demand perspective? And then when you start to looking at maximizing the cash flow and the return to shareholders, what should we stay focused on? Harry Blount I would say in the macro environment, we haven't really called out macro as a factor influencing our targets and aspirations. 80% of our business is recurring. We have a substantial deferred port portfolio about mid-forties -- mid to high forties is the amount of deferred that'll is current. So, we have tremendous visibility into our F '25 targets because of the bookings, the backlog and the deferrals. A macro environment that is strengthens would certainly help us to the upside to the higher end of the range. But and then, if you look at our overall business as always, you'll see areas that maybe a little stronger, a little we lighter depending on where they're at in the cycle Europe for instance if we get a little help with the dollar-euro exchange, there might be some opportunity to do a little bit better in the European market. But for us, a lot of it is based on our product cycles, our go to market capabilities and the newly enabled cloud products that we've brought to market. George Iwanyc Doubling down on what you said earlier about capital returns. So dear term, it looks like you're very focused on the share buybacks, but how should we look at the strategic plan for buybacks, dividends and M&A? Harry Blount We've announced a capital allocation plan a quarter ago, and it's 50-50. It's 50% primary, and that is focused on growing our dividend and growing our buyback. And then we call the other portion additional. And the additional piece is going to be dedicated to the highest return of capital. And that could be M&A. It could be de-leveraging. It could be more buyback; additional buyback could be dividend. If you look at F '25, we're intending to use 90% of our free cash flow for dividend and buyback. We think at current stock price; our stock is the best M&A we can do. That being said, if you look at our capital allocation longer term, M&A still is a part of our overall core strategy. Specifically, the M&A that we would do going forward is going to be small or medium cloud M&A. We don't need to do any more transformative M&A. We have enough addressable market now. It's really about continuing to strengthen the businesses that we're in through small and medium sized cloud M&A. George Iwanyc You have already touched upon this in kind of multiple points, but maybe just digging into your cashflow target and how we progress from here to what you're expecting in FY '27. Harry Blount You bet. So, we're at in F '25, we're looking for $575 million to $625 million of free cash flow. Now, that number includes approximate $250 million tax payment for the sale gain on sale of the AMC divestiture. So, if you kind of take, an adjust for that tax payment, you'd see our free cash flow now is comfortably north of the $800 million range for '25. And then, we're on our way to getting free cash flow of $1.2 billion to $1.3 billion fiscal part, part of a significant chunk of that improvement in our free cash flow is coming through the EBITDA margin improvement that I mentioned earlier. We're in a -- looking for 33% to 34% EBITDA in '25, going up to 36% to 38% by '27. So, if you kind of take the midpoint of that range on a $5.5 billion, revenue business that accounts for a substantial portion of the remaining gap between kind of the normalized F '25 and where we're going for F '27. George Iwanyc Maybe one last question to wrap everything up. If you were going to point investors into the key metrics to watch over the next year, what would you highlight? And two, how do you think OpenText could change over the next three to five years? Harry Blount Look for F '25, it's about cloud revenue growth. It's about our EBITDA margin improvement and providing visibility into our improving free cash flow profile. And then the biggest capital allocation capital return to in our history is kind of the four highlights I talked to in '25. If you look at where we're going in over the next three to five years, clearly cloud is going to be our leading growth driver, is you get out to '27 the 7% to 9% cloud growth. And obviously, we're not giving any targets beyond '27 at this point. But cloud is a big piece of where we're going. But we also are expecting fantastic contributions from security and AI as well. So, more consumption coming in as part of our model as well. George Iwanyc Great. Well, Harry, thank you very much. Harry Blount Thank you.

Earnings call: Sportradar reported a significant 29% increase in revenue By Investing.com

Sportradar, a global provider of sports data and content, has reported a significant 29% increase in revenue for the second quarter of 2024, reaching €62 million over the same period last year. This growth has been fueled by a substantial 59% revenue increase in the U.S. market and a 22% rise across Europe, APAC, and Latin America. The company's CEO, Carsten Koerl, attributes this success to several factors, including new partnerships with major sports leagues, an expansion of its managed trading services, and a strategic focus on AI-driven betting and streaming products. Sportradar's optimistic outlook is further bolstered by its raised full-year guidance, anticipating revenues of at least €1.07 billion and adjusted EBITDA of at least €204 million. Sportradar (ticker: SRAD), continues to demonstrate its ability to not only navigate but also thrive in the dynamic sports betting and data industry. The company's strategic investments and partnerships, particularly in the U.S. market, underscore its commitment to capitalizing on the growing demand for real-time sports data and betting services. With a clear focus on innovation and market expansion, Sportradar is well-positioned to maintain its momentum and drive long-term shareholder value. Sportradar's financial performance and market position can be further illuminated by insights from InvestingPro. The company's market capitalization stands at a robust $3.37 billion. A notable highlight is Sportradar's P/E ratio, which at 116.68 suggests a premium valuation by the market, but when adjusted for the last twelve months as of Q1 2024, it lowers to a more reasonable 60.41. This adjustment is particularly relevant given the company's near-term earnings growth, aligning with the InvestingPro Tip that Sportradar is trading at a low P/E ratio relative to near-term earnings growth. The revenue growth figures are also impressive, with a 21.57% increase over the last twelve months as of Q1 2024, and a quarterly surge of 28.1% in Q1 2024. This aligns with the company's reported success in the article, where strategic focus and new partnerships have driven revenue increases. The company's strong return over the last three months, as indicated by a 19.85% price total return, reflects investor confidence and market reception to its growth strategies. InvestingPro Tips further reveal that analysts predict Sportradar will be profitable this year, which is corroborated by the company's profitability over the last twelve months. This is significant for investors considering the company's future prospects. For those seeking more detailed analysis and additional insights, InvestingPro offers more tips on Sportradar, which can be found at https://www.investing.com/pro/SRAD. Operator: Good day and thank you for standing by. Welcome to the Sportradar 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 now like to hand the conference over to Jim Bombassei, Senior Vice President Investor Relations. Please go ahead. Jim Bombassei: Thank you, operator. Hello everyone and thank you for joining us for Sportradar's earnings call for the second quarter of 2024. Please note that the slides we will reference during this presentation will be accessed via the webcast on our website at investors.sportradar.com and will be posted on our website at the conclusion of this call. A replay of today's call will also be available on our website. After our prepared remarks, we'll open the call to questions from analysts and investors. In the interest of time, please limit yourself to one question and one follow-up. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue and future business outlook. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecasts. For more information, please refer to the risk factors discussed in our annual report on Form 20-F and Form 6-K filed today with the SEC along with the associated earnings release. We assume no obligation to update any forward-looking statements or information we speak as of their respective dates. Also during today's call, we will present both IFRS and non-IFRS financial measures. Additional disclosures regarding these non-IFRS measures, including a reconciliation of IFRS and non-IFRS measures, are included in the earnings release, supplemental slides, and our filings with the SEC, each of which is posted to our Investor Relations' website. Joining me today are Carsten Koerl our CEO; and Craig Felenstein, our CFO. And now I'll turn the call over to Carsten. Carsten Koerl: Hello everyone and thank you for being here today. We are thrilled to share the incredible momentum we are experiencing across our businesses. We feel an energy and an excitement in our growth and success and I look forward to discussing the remarkable progress we've made. I'm very excited, pleased with our third consecutive quarter of record revenue. Our revenue increased 29% year-on-year, driven by an uptick of 59% in the U.S. and 22% across Europe, APAC, and Latin America. This dynamic year in sports marked by several major international competitions, propelled fan engagement to unprecedented levels, further demonstrating the value of our products. I'm proud that we continue to reinforce our leading position as an essential partner to the sports industry. It's particularly encouraging to see that we achieved this topline revenue, while strengthening our business throughout operational efficiencies and a focus on enhancing cash generation. Our focus on maximizing efficiency led to excellent cash flow this quarter. We will maintain this focus to drive further improvement in this key metric. Our new CFO, Craig Felenstein, will be a key partner in our efforts to continue optimizing our performance. I'm pleased to welcome him to his first earnings call today. He joined us in the beginning of June and has hit the ground running. Craig will provide more color on our financial highlights from this quarter in his remarks. We also welcome Behshad Behzadi from Google (NASDAQ:GOOGL), who will lead the advancement in our technology. Hiring a top international AI leader is a clear statement of our ambition in this important area. Under Behshad's guidance, we will enhance our AI capabilities to drive efficiency and cost savings and develop products that transform the way sports are consumed in our sports platform. Our technology and history of innovation is one of our core competitive advantages together with our market-leading content portfolio and distinctive client-centric approach. We will drive deeper into these three areas during today's call. But first, I'd like to highlight two key milestones of which I'm particularly proud of. First, we expanded and expanded our exclusive multi-year partnership with UEFA, the governing body of European football. Starting with the 2024, 2025 season, we are the only provider eligible to distribute official data for betting purposes. This deal strengthen our competitive global soccer rights portfolio. We view this as a strategic asset given that soccer accounts for almost 50% of global betting turnover and is surging in popularity in the US ahead of the 2026 World Cup. The agreement which features a 33% increase in soccer match coverage to 900 annually, includes a first-of-its-kind agreement to distribute data for non-betting media, opening up new revenue streams for us. We will also for the first time have the ability to leverage advanced player tracking data to refine and enhance our leading AI enabling betting and streaming products and services. With this deal, we have the exclusive right to use tracking data for the Champions League and the Europa League competition for our products and services. Second, I'm increasingly pleased with the continued outperformance of our managed trading services or MTS business, a core solution designed to help operators manage and optimize their betting offering. So far this year, we have signed up 46 additional sportsbooks across some of the fastest growing betting markets globally, including Brazil and Africa. Our success with MTS not only underscores, its vital role in optimizing an operator's performance, but also reflects what we see as our three core strengths which I highlighted earlier. I'd now like to spend some time talking about these in more detail. Sportradar has been unmatched in both the depth and scale of our coverage and client network. We bring together over 800 betting operators 400 sports leagues and 900 media companies who cover close to one million matches annually. This means, we have access to the richest dataset in the market. The breadth and the depth of our content combined with the advanced technology enables us to provide clients unique insights into nearly all sports as well as bettors' preferences throughout the year. It creates a virtual circle of innovation that constantly sets new industry standards. Our growth is driven not only by our ability to deepen relationships with existing clients through effective up-selling and cross-selling, but also by our success in attracting new clients. New market entrants turn to us because of our deep understanding and our ability to address the evolving and sophisticated needs. Our relationship with clients go beyond the transactional. It's a collaborative partnership where we work to help clients enhance their value proposition and diversify their branding and strengths. Our unwavering focus on meeting our clients' needs is the reason we continue to strengthen existing relationships and forge new ones. In fact, our net retention rate stood at 117% for the quarter, demonstrating that our clients choose and stay with us and do more with us year after year. We work with all the major US market leaders including FanDuel and DraftKings (NASDAQ:DKNG). Our client-centric approach has helped drive many of our US clients' rapid growth and innovation since launching in the US market. Our partnerships often started with supplying live data to power their fantasy sports offering. When the US sports betting market legalized in 2018, Sportradar supported building up their online betting product. As their business expanded, we continually adopted to meet our customers' involving needs covering additional sports and developing tailored product features, including in audiovisual streaming services and their consumer acquisition efforts through our ads products. This client-centric focus and innovation in product development highlights why we are a strategic partner to many of the leading operators. For example, our partnership with FanDuel is a core long-term partnership. We have supplied data to FanDuel for multiple sports since 2015, when it was a fantasy sports business, and data and streaming since its launch of sports betting in 2018, as well as other services since then. We recently extended our relationship with them through 2031. Innovation is central to our culture. We continue to lead charge in the industry and through our application of AI across the product. For over a decade, we have been at the forefront of integrating AI into sports, such as tennis, table tennis, basketball, through machine learning and computer vision. As I mentioned, Behshad's leadership as CTO and CAIO will help to propel our efforts even further to enhance our product portfolio and to drive innovation. Our mission is clear, harness the full potential of AI to transform the sports economy. Our data advantage is crucial, but it's not just the data. It is also what we do with it on our sports platform that makes a difference. Our extensive and historical content portfolio combined with advanced AI positions us uniquely to tackle this challenge and seize new opportunities. And we are doing just that. We are transforming how fans interact with their favorite sports through products such as sports live streaming, our AI-enriched streaming technology, and emBET which integrates betting directly into OTT platforms. We expect to use gen AI to build new experiences, which can answer all types of questions about ongoing and historic games to new multimodal experiences for sports consumptions that are hyperpersonalized to fans. We see this as the next phase in the evolution of sports consumption. We are also using AI to reduce friction in client workflows. For example, by building AI power chatbots that can handle a significant amount of the hundreds of thousands of support requests, we receive annually. We will reduce manual processing, speed up processing time, and increasing customer satisfaction. This means, we will be able to address more queries and do it faster. These innovations are setting new standards for our client engagement and creating new opportunities in revenue streams for our company. We believe we have significant growth potential, and see an opportunity to become an even more essential and integrated partner for our clients and partners, as technology opens up new ways to engage the next generation of sport bettors and fans. I look forward to share our exciting plans in the future, including our long-term growth story or exciting roadmap for driving innovation and our opportunity to drive operating leverage and tremendous shareholder value, at our upcoming Investor Day, which we are planning in New York City in early 2025. With that, I will turn it over to Craig. Craig Felenstein: Thanks, Carsten, and thank you everyone for joining us this morning. I have spent much of my career interacting with the investment community, and look forward to connecting with each of you over the next few months, to further discuss our business, and its multifaceted prospects. I am extremely excited to have joined Sportradar, and to have the opportunity to work with Carsten, our Board and the entire Sportradar team, to capitalize on the variety of growth avenues ahead in both the short and long term. In my brief time here, I have had the chance to meet with many of our passionate and knowledgeable employees worldwide, as well as some of our lead partners and customers. And it has reinforced how integral we are to the overall marketplace. Sportradar's unique position at the intersection of the sports media and betting industries will allow the company to drive significant value creation for our shareholders, as we generate sustained double-digit topline growth, while expanding margins and delivering high levels of free cash flow. The strength and durability of Sportradar's position is evidenced by the operating momentum and financial results the company generated during the second quarter, with another quarter of record revenue combined with strong growth in adjusted EBITDA and cash flow. Revenues of €278 million increased €62 million or 29%, as compared with the second quarter of 2023, led by higher spending from customers, including incremental contributions related to our new ATP and NBA partnership deals. We continue to have success growing our client relationships by increasing uptake of our leading products and solutions, which are helping to drive their business performance. Looking at the individual product groupings, we delivered broad-based growth across both our betting, technology and solutions products, as well as our sports content technology and services. Betting, technology and solutions revenues of €229 million delivered 30% growth versus the second quarter a year ago. The increase was driven primarily by 33% growth at our betting and gaming content, including 41% growth at our streaming and betting engagement products, most notably due to a strong growth in audiovisual revenues. Odds and live data also performed well, up 27% year over year. Both AV and odds and live data benefited from existing and new customer uptakes of our products premium pricing and strong US market growth. Additionally, our managed betting services grew 21%, led by continued strong managed trading services performance, due to higher trading margins and more betting activity from existing and new customers of our sportbook clients. Sports content, technology and services products also delivered strong results this past quarter, with revenues of €49 million, increasing 22% year on year, led by marketing and media services growth of 28%, due to strong growth in our ads business, as we saw several sportsbooks launched marketing campaigns in 2Q. The growth across all product groups was significant worldwide, especially in the US, as we continued to outpace the market, growing 59% year on year and representing 22% of our revenues in the quarter. The revenue growth across our product portfolio translated to significant adjusted EBITDA growth with adjusted EBITDA of €49 million, increasing €9 million or 22% year on year. The sports rights impact in the quarter was mostly offset by the operating leverage we delivered across the rest of our cost base. We have been disciplined and strategic in building up our premium rights portfolio and have significant visibility moving forward, having secured many of our most significant rights under long-term deals. There is inherent scale and operating leverage in our business and we expect to meaningfully expand total company margin, as we drive further revenue opportunities, closely manage our cost infrastructure and realize the benefit of sports rights being amortized on a straight line basis over the life of each contract. Looking at the individual cost buckets this past quarter, sports rights increased 83% to €96 million in the quarter due primarily to the new ATP and NBA rights. Each of these properties is driving significant revenue growth, as we leverage the power of these two franchises to upsell solutions to existing customers, as well as add new customers, given the premium nature of this content. And we see continued opportunity going forward to drive incremental value through these rights. Personnel expenses were €89 million in the quarter, up only 6% year on year and down approximately 700 basis points as a percentage of our revenue. We will continue to closely manage headcount to ensure we are focusing our talent and resources on the most profitable growth opportunities and unlocking operating leverage. In addition to the leverage we delivered across our personnel costs, other operating expenses of €23 million increased 8% versus last year, a decline of approximately 160 basis points as a percentage of revenue, as we further leverage our existing infrastructure. We generated a loss for the quarter of €1.5 million versus approximately break even last year, as the €9 million improvement in adjusted EBITDA was more than offset by higher sports finance costs and foreign exchange losses, resulting from unrealized currency losses due primarily to US dollar-denominated sports rights. Turning to the balance sheet. We continue to be in a strong liquidity position, closing the quarter with €322 million in cash and cash equivalents, an increase of €48 million from the first quarter with no debt outstanding. During the quarter, we delivered strong cash flow from operating activities. While there will be some quarterly fluctuations related to the timing of sports rights payments, specifically in the third quarter, we anticipate strong free cash flow growth and conversion for the full year. During the quarter, we also began to buy shares under our €200 million share repurchase program. As of August 9, we have repurchased €8 million worth of our stock at an average price of €10.67. We continue to believe that our shares are undervalued given the strong growth we are delivering and the expectations for significant further margin expansion and cash flow conversion in the future. It is important to note that our capital allocation priority is investing in expanding the long-term growth potential of the company and we will weigh returning capital to shareholders versus additional organic and M&A investment opportunities in both the short and long-term. Turning to our full expectations for 2024. Given the continued operating momentum and strong results during the quarter, we are again raising our full year guidance. We now anticipate revenues of at least €1.07 billion and adjusted EBITDA of at least €204 million or growth of at least 22% versus 2023 on both the top and bottom line. The strong adjusted EBITDA growth will result in full year adjusted EBITDA margins of approximately 19% despite the one-time significant ramp in sports costs this year. Please note that while we continue to focus on margin expansion, we do anticipate that Q3 margins will be below prior year due to sports rights and product development costs. Conversely, we anticipate that Q4 will deliver significant margin expansion, as we lap the initial impact of our new NBA deal and continue to focus on driving operating efficiencies. Overall, the continued strong results during the second quarter reinforce Sportradar's significant growth opportunity in 2024 and beyond. As we further drive revenues from additional innovation and product development increased pricing and the expansion of our addressable market both in the US and across the world. We expect to drive long-term shareholder value by delivering real operating leverage and strong cash flow in the months and years ahead. Thank you for your time this morning and now Carsten and I will be happy to answer any questions you may have. Operator: [Operator Instructions] Our first question will come from the line of Ryan Sigdahl with Craig-Hallum. Ryan Sigdahl: Good day, Carsten, Craig, Jim. Nice job. Solid performance here. First question, I want to start on operating leverage cost control. Everything looked really nice in the quarter kind of first half and then looking at the assumptions you have on Slide 17 for the remainder of the year, but two parts to my first question here. But I guess, how do you feel about the current cost structure to build on that operating margin momentum into 2025? And then secondly to that, I guess, on guidance, I might be nitpicking a little bit good to see it increased, but a little lower incremental flow through on EBITDA relative to the underlying performance of the business seems to support so any comment there? Hello, guys. Am I still live? Ryan Sigdahl: All good. I'll do my best to ask it in the same way. Asking on operating leverage and cost control a really nice job in the first half of the year Q2, especially given the well-known step-up in rates but everything else. So two parts to my question, but one, how do you feel about the current cost structure to build on that margin momentum into 2025? And then kind of second part to that I guess, great to see the guidance increase and maybe nitpicking a little bit, but the incremental flow through to EBITDA implied in guidance is a little lower than what I think the underlying performance of the business seems to support, so any comment on the incremental margins and the updated guidance? Carsten Koerl: Good. So let me take the first part and the second part, I leave to Craig. So looking to the operating leverage, yes, that will continue. We see a margin -- a target margin mid to long-term of 25% to 30%. You will see now year-over-year that there is some leverage in there. So as you said, we are very happy with the acceleration on the revenue side. We don't see major costs in the next years from rights. There are some rights, which we will add to the portfolio. That is not major. We have a very solid portfolio. We will manage our personnel costs in the way like we demonstrated and you will see a flow through on the EBITDA for this. Craig Felenstein: Great. Thanks Carsten, and Ryan, thanks for the question. So certainly, we look at long-term margins. We expect there to be high incremental margins in the business. And the margins for the company, as Carsten said, will increase pretty significantly here in the out years. When we look currently -- in the current year, the revenue obviously is going strongly not only for the first half but it will be mixed growth in the second half as well. When we think about the full-year flow through, as of now, we decided to keep margins pretty much the same where they were on prior year, about 19%. But when we look at the back half of the year the margins will accelerate versus where they were in the first half of the year. There certainly is some additional upside with regards to the margins in the back half of the year and we'll revisit that on our third quarter call. But for now, we're comfortable leaving the margins where they are for the full year. Ryan Sigdahl: Very good. For my second question follow-up, just curious on MTS and specifically Euro 2024 soccer tournament. Seem like really favorable betting volume results, but can you comment how that played into your results and then, if there's any incremental upside vis-à-vis traditional MTS customers and then ones using Alpha Odds? Carsten Koerl: Well, we saw a significant uptick with the clients using Alpha Odds for the Euro. That was roughly around about 15% better from a trading reserve than the clients without it. And as you know, the Euro was a very, very good event for bookmaker sports betting, not comparable at all with the Olympics, so the volume is significantly higher there. Profit margin, over average comparing it to the last Euros, so we had a lot of favorites, which struggled there, which is naturally very good. But what made us really happy is the 15% uptick from Alpha Odds, which demonstrates that this is the future of trading. Operator: Our next question will come from the line of Michael Graham with Canaccord. Michael Graham: Hi. Thanks for taking my question and congrats on the strong results. I wanted to just ask about sports rights. Maybe just comment on how you're seeing that situation developing more broadly. And I know you've made some moves to get more visibility with some longer-term deals, so I would just love to hear a little bit about how you were able to make that happen, and just touch on how you're managing sports rights cost going forward? Carsten Koerl: Well, we don't see major upticks from the sport rights in the next couple of years. We will add some rights we will lose and replace some rights. We have the main pillars of our portfolio this year, NBA and ATP was a major step up for us. I think we demonstrated that we handled this with excellence and you see that in the revenue growth, and also in the cut or the slow growth of our personnel costs. That will simply continue. We don't see something in the next years, which is material on this. And what we will try to do is we will manage our portfolio like we did it in the past. But we don't see here major step up. So, the things are you can calculate very well where that leads to. It will be a leverage extension on the EBITDA margin. And that's what I predicted before. We think we'll end up in a ballpark 25% to 30% on the mid to long-term. Operator: Our next question will come from the line of Bernie McTernan with Needham. Bernie McTernan: Great. Thanks for taking the question. Want to ask on revenue. The guidance implies a deceleration revenue growth in the second half of the year. I'm assuming that's the NBA, just comping the NBA. But really the question is how to think about 2025. Is that maybe the second half rate and then maybe take off a couple of points for the ATP. Craig, you mentioned, expecting strong or sustained double-digit top line growth here so just if there's any kind of early color if that's the right way to think about 2025 for revenue growth. Craig Felenstein: Great. Thanks, Bernie. Thanks for the question. Obviously, we'll guide our 2025 revenue as we get towards the end of the year and closer to 2025. That said, we certainly expect strong double-digit growth on the revenue side moving forward. The rest of this year which you'll have is obviously, stronger growth in the third quarter on the revenue side before you start lapping the NBA in the fourth quarter when the growth will slow a little bit. That said, the growth in 2025 will not just be driven by sports rights but it'll also be driven by broader take up of our existing products by attracting new customers, by higher pricing. So we fully expect there to be some strong growth in 2025. The specifics behind that will give more color on us to get towards the end of the year. Bernie McTernan: Understood. Thanks, Craig. And then just one follow-up. Thinking about the potential cadence of share buybacks, nice to see the program getting started. Any restrictions that we should be aware of? Just trying to think about if there's anything preventing you from being more aggressive on the buyback. Carsten Koerl: That's a question of capital allocation and like we said it in the script, first we are looking to organic growth and supporting our product with organic growth. We are investing here. Second, we are looking into opportunities which are raising in the market. You might have followed some of the statements. There is a consultation ongoing and some properties are coming to the market. We are looking into all opportunities here. And third, we want to support our growth units with investments probably for ads where we see a strong pickup and strong growth. And then we revisit all the time our buyback. There's a pricing grid behind it and it's a 10b5 trading plan, which has the usual restrictions, nothing special. Robin Farley: Great. Thank you. Can you talk a little bit about your MLB sort of the timing of that and you mentioned in general terms that you don't expect anything significant in terms of an increase in sports rights, but were you including MLB in that or would that be something that would change in terms of the rate of increase? Thanks. Carsten Koerl: Hi, Robin. Significant is always a definition of numbers. At this stage I can't give you detailed numbers. When I'm speaking about significance looking forward, it will have not a major influence on our cost position in the sport rights when we are closing with MLB. So far today, we have nothing to announce here. We are very happy about our partnership with MLB. We have very constructive calls. That's the same message I gave to you in the last quarter. Craig Felenstein: And Robin, what I'll add on top of that is if you look at 2025, regardless of the impact of a new Major League Baseball deal, we do expect there to be a margin expansion in 2025 once that deal is hopefully completed. Robin Farley: Great, very helpful. Thank you. Just a follow-up question. You mentioned that you recently signed a contract with one of your major sports book clients going through 2031. Is it fair to assume that you have price increases built into that as part of that contract that you have contracted price increases? Thanks. Carsten Koerl: Robin, the majority of our betting contracts here in the US is revenue share, so we are growing with our customers. And this is the major mechanism here for the sportsbook and the operators. But what we do and hopefully demonstrated is for example with FanDuel, how we lift them up on the value chain, how we can hook up additional products behind the existing offering. And that is a continuous effort which you will see over time. And of course, we expect increases here. Robin Farley: Great. Thank you. Operator: Our next question will come from the line of David Katz with Jefferies. Q - David Katz: Hi. Good morning, everyone. Thanks for taking the question. I wanted to see, if we couldn't take all of the well-received detail on this morning's disclosure and just talk about, how you view the company's algorithm particularly as it relates to the US, right? And if we were to put a growth rate on the US market growing, call it 30%. How does that translate into Sportradar's US business? And walk us through what that means for your revenue and earnings, et cetera. And I recognize that there are some time to this long-term EBITDA margin level and we're not there yet. But any insight around that would just help us get organized. Thanks. Carsten Koerl: David what we saw in the US is, we see now more and more from our business perspective, a strong growth in the betting sector. And we have a media sector in here and we have business technology in the leagues. What we see, I think it's fair to say, that 50% of our revenues roughly are now in the betting space. It was a third last year. It meant that it's growing strong with the 59%, comparing it to the last year's quarter. We expect that the market is growing roughly 25% in the next years. And we expect that we outperform this market. That's what we demonstrated in the last years. We have the broadest offering. We have three of the top four leagues. We have deep partnership relations on product level, with all the main players here. So, we have a solid starting base to outperform the underlying market growth. Looking from a profitability perspective, of course, we see leverage here. Our costs more or less stay well, not gladly, but they're growing very slow. And we have to lock in rights deals for multiple years. So we will see a strong growth in the betting space. There are two major things, which nobody can say at the moment. California and Texas, what will happen here. We know the size of this market is significant, so we can't calculate at the moment for the market opening here. We don't have it in our projections. That will play in our favor, if that happens. Q - David Katz: That's really helpful. And just to follow up, right. Your commentary is around your positioning in the US market price, right? And so... Carsten Koerl: That was the US market. You asked specifically, our hope about the US place. Q - David Katz: I absolutely did, but as my follow-up, just taking the larger rest of the world, which obviously isn't growing as fast. Could we ask the same question about, how the rest of the world works if we were to make an assumption for revenue growth or market growth assumption for the rest? Yes. Thanks. Carsten Koerl: Of course, you should ask, David. So what we see here is, we see a growth between 10% and 12%. We see more growth opportunities around the live product. Specifically here, we see the market in Brazil, where we believe it's going from a €2 billion GGR to a €5 billion in the next three to four years. That is a significant size. We see continuous very strong growth in Africa. And there are a few joker cards in Asia, I would say. Looking now to India, that might be something where we see a market opening or a slow market opening. We have it not in that 10% to 12% overall, market growth. Might be something in Japan, on the horizon of three to five years, which gives us here even more acceleration. In Europe, I think we have a pretty solid picture that is an average between 10% to 12%. We see some markets performing better, some markets performing worse. That is the overall picture. For us, the main important thing is with this growth in TAM, we need to place our products that we are replacing services, which our clients are doing at the moment in-house, with our service. MPS is a perfect example for this. So we are growing our TAM. In a growing TAM, we start with 10%, meaning we put a market leverage in here that we can achieve our growth rate. And let me remind you historically, we have a CAGR of 25% from quarter 2021 -- to quarter two, 2021 to the quarter two 2024. The average growth is at 25% quarter-by-quarter. And I think that demonstrates our ability to outperform the market growth. Operator: Our next question will come from the line of Jason Bazinet with Citi. Jason Bazinet: I just had a quick question. You guys have such a long track record outside the United States. I'd just be curious if you could just name two or three things that have surprised you about how the US market has evolved relative to your history outside the United States either in terms of the betting behavior of the individuals or the way the OSBs are sort of responding to the products and services that you offer. Thanks. Carsten Koerl: I think the US market is still on the very early innings. What has surprised me is that we saw not more operators coming into the market and investing significantly. I think we have a couple of big operators or I know we have a couple of big operators outside of the US which really looking very careful when is the right time to invest. We saw a couple of operators which went out of the market because of the very high customer acquisition costs so there is a dynamic here and size matters. I believe that we will see more operators coming into the market once the customer acquisition costs are more settled down. That is one of the surprises. Another one is that if I'm looking now to the big digitals here in the country, I think, you can make significantly more out of sport and data and create a product which is very appealing for clients. I think we will see this and we will see here much more investment in rights which is very supporting for our overall platform approach. So the adaptation of technology goes quicker than I have thought. The development of new betting product goes a bit quicker which is a positive surprise and it's all about the player-related things. So the more information you have here the better you can use technology to create an appealing betting product but also an appealing sports information media product. These are the three things if you ask me about it. Jason Bazinet: That's great. Thank you. Operator: Our next question will come from the line of Michael Hickey with The Benchmark Company. Michael Hickey: Hey, Carsten, Craig, Jim. Congrats on the quarter guys. Thanks for taking my questions. It looks like in the quarter your net retention rate 117% was down 120% prior years. Just curious any trends in customer churn there or how effective you've been in cross-selling? And then the second question on capital allocation, Carsten you touched on it obviously you've got your buyback you cleared your debt here and you alluded to some assets coming on sale. Obviously, Endeavor is in the process of selling their sports betting assets opened that in IMG Arena. I think they sold that or bought them and sent it to the side -- €1.2 billion. So just curious if you could talk about the synergistic value you see of that asset in terms of tech and maybe data rights and then maybe how you think about competitive scenarios as a competitor was to pick it up. Thanks, guys. Craig Felenstein: Yeah, Michael I'll start with the NRR question. Obviously if you look at the numbers quarter to quarter we improved sequentially versus where we were in the first quarter. On the NRR if you compare to where we were a year ago the primary difference is just the timing of some ad campaigns on some of our larger clients. It has nothing to do with any slowdown in those clients. It's just the timing of the campaigns related to them. And when you look at the 117% obviously it implies that there was much broader take-up of products by our existing customers. And they were also willing to pay higher prices when the products were appropriate. So we're seeing nice growth across our existing customer base. Carsten Koerl: Good. And the capital allocation is like I said before maybe I go a bit deeper on this. We have the client-centricity approach, meaning, we kind of need to listen to our clients what makes their life easier how can we leverage and how can we sell more. The first thing that every client is telling us make it easy for us to integrate you. Make it easy for us to integrate all your services. Make it not that complex that you have 20 different integration procedures streamline this kind of thing. That is what you do in a sports platform. We are investing into this like you see in the purchase services and in the race here. So we believe that is a very good investment for our future. So that's a piece of the capital allocation. You mentioned Endeavor. I didn't do that. And I can't speak about specific opportunities in that space. But I can tell you that we actively monitor also the market not only with the major consolidation. We are looking into the market how can, we support our growth products, Ads is a sample here. And that is a very interesting space specifically in the US, where we see the high growth. And then we are adjusting the pricing groups step-by-step. We are looking to this. We think that we are undervalued. That's the reason why we have to share buyback. And we visit this step-by-step and then on quarterly basis. That's the strategy here. Operator: Our next question will come from the line of Jordan Bender with Citizens JMP. Jordan Bender: Good morning, everyone. I want to discuss a broader question and maybe similar to a previous question and that's around the regulatory and tax changes that we're starting to see bubble up here in the US. You know Carsten, you've been in the industry for quite some time, and you've seen these changes globally over the course of your career. So the question is, can you help us maybe frame what you've seen outside of the US to help us understand how your clients might ultimately react here in the US? And how ultimately what I'm trying to get out here is, how do you position your company to adapt to some of these changes and do you ever see maybe opportunities emerge as the environment starts to get tighter around you? Thank you. Carsten Koerl: Yeah. We are investing in that space, since quite a while. As you all know, our integrity services are the gold standard worldwide. We feel obliged that we are providing that service to protect the sport. That's the most important, if sport has not the trust that is played neutral and that everybody has the same chances there will be no sports betting. And by the way there will be not a progress in sport without this. We think responsible gaming is absolutely important. So with the data and the information which we have now with the betting ticket in a normalized way, we can build algorithms to show if there are developing gaming addiction what to do with it how to measure it, we call that, 'Responsible Gaming services'. Of course there is a -- it is completed with geolocation. It's completed from a government perspective with how are taxes paid? At the moment this is still a batch profiling as some of you might know. We believe that from a calculation perspective, you should do this real time online that you're calculating the taxes. I think that leaves much less space for mistakes manipulations whatsoever. All in all, we summarize this through our responsible gaming services. So we think there is a very nice opportunity. And there is not one standard around the globe. We believe that the US can pave the way for this. We think it's by far the most attractive market at the moment from a gross potential and from a size. We see in Brazil, all the same size, so the regulator is looking what is the best standard but it always goes in the same way. How to protect the sport? How to protect the people? And then, how to generate taxes for the state? So these are the three things. And we see with the positioning of Sportradar as a global player with the listing and the transparency and excellent basis that we can scale here and establish beside our market-leading integrity services more. Jordan Bender: Awesome. And then just on the follow-up, I don't think you mentioned it but from the first quarter to today your rates for the total year are projected to increase by about 8% or so. Can you just kind of help us bridge where you were a couple of months ago and why that went up about €25 million for the year? Craig Felenstein: Yeah, Jordan. So - thanks Jordan, so the bulk of the increase relates to the ATP deal and where the revenues are being generated. There are some nuances to the accounting related to the ATP deal, but for the most part the deals are working pretty much as we anticipated. The margins on the deals from EBITDA and the cash perspective have been better than we anticipated. So even though the sports rights are a little bit higher the return on those rights has actually been greater than we anticipated thus far in the year. Jordan Bender: Thank you very much. Operator: Our next question will come from the line of Samuel Nielsen with JP Morgan. Samuel Nielsen: Good morning everyone and thank you for taking my questions. Looking at the updated guidance, I guess when we go back a few quarters, I think you mentioned the initial 2024 revenue guidance was assuming roughly 60% of growth coming from business as usual and 40% of growth from a step up from a revenue perspective around the NBA and ATP partnerships. So just wondering where the incremental contributions have come from here since your initial guide. Is it more across the board or are you seeing a more meaningful benefit from your contracts than kind of that initial 40% split that you laid out? Craig Felenstein: So from what I've seen and, of course, I've only been here for two months, but from the expectations that I've seen, the increase has actually been across the board. That said, we are doing a nice job of leveraging the sports contract more than was anticipated. So it's not just the sports, but we are seeing a nice return on the sports. But the sports also help in other areas. It helps us to drive more products. It helps us to drive more price. So all in all, there's the direct benefit from the sports and there's the indirect benefit. But if I was going to look at the increase versus original expectations it really is broad-based and not just related to one item. Samuel Nielsen: That makes sense. Thank you. And then I was wondering if you could touch on what you're kind of seeing in the ads business a little bit into the back half of the year. We've heard many larger North American operators talking about leaning into customer acquisition given a favorable environment. Obviously, you had nice growth in the 2Q, but just wondering, how your conversations and maybe commitments are going with operators for future periods, maybe how long the lead time is there and how much upside is maybe not baked into the guidance for the back half of the year from the ads segment? Carsten Koerl: We see quite an interesting pickup in quarter two here. We see a lot of demand specifically in the US. Our ad service here looks like the product of choice for doing acquisition and reducing costs for our clients. Uptick was 28% like you will see in the script is, I think a clear statement for this. And I also mentioned that we are looking to expand in that space. It's all about how can we get the sports fan together with our partners in the sports betting space to convert them and how can we stimulate this. And we have the market-leading product here. We are optimistic in the second half of the year that this will further expand. Stephen Grambling: Hi. Thanks. One more follow-up on this on the US market. When you think about the 25% growth going forward even with fewer states legalizing, what are recent data points or your experience in Europe tell you about how much of that's going to be from customer growth versus spend per customer? And how we should be thinking about who the incremental sports betting customer is and/or how their betting behavior may evolve versus the existing base? Carsten Koerl: It's a broad mix. So what we see is there are different demographical groups. That's probably the most interesting play here in the US. So it goes away from this Las Vegas type of punter into something which is the younger generation, which needs another entertainment product and specifically to mention here is live betting. So we see an uptick. We are now on a 35% to 40%. As you know, every percentage point which goes into live renders for us roughly €1.6 million more in revenues. That comes more or less without cost. Yes, there are some minor cloud costs associated to this, but that's more or less pure profit. That's what we see all over the place. So it's a mix of product adaptation education of the punters going into new customer groups. And that goes quite rapidly here in the US. Jim Bombassei: Great. We want to thank everyone for joining us for our earnings call and I will turn it back over to the operator. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Parker-Hannifin Corporation (PH) Q4 2024 Earnings Call Transcript

Julian Mitchell - Barclays David Raso - Evercore ISI Scott Davis - Melius Research Mig Dobre - Baird Jamie Cook - Truist Securities Joe Ritchie - Goldman Sachs Stephen Volkmann - Jefferies Nathan Jones - Stifel Jeffrey Sprague - Vertical Research Partners Nicole DeBlase - Deutsche Bank Brett Linzey - Mizuho Securities Welcome to the Parker-Hannifin Corporation Fiscal 2024 Fourth Quarter and Full Year Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to Todd Leombruno, Chief Financial Officer. Please go ahead, Todd. Todd Leombruno Thank you, Kevin, and good day, everyone. Welcome to Parker's fiscal year 2024 fourth quarter and year-end earnings release webcast. As Kevin said, this is Todd Leombruno, Chief Financial Officer, speaking. And with me today is our Chairman and Chief Executive Officer, Jenny Parmentier. We appreciate your interest in Parker, and we thank you all for joining us today. If I could draw your attention to Slide 2, you will find our disclosures on our forward-looking projections for non-GAAP financial measures. Actual results could vary from our forecast based on the items we have listed here. Our press release, the presentation we're going to go through today, and reconciliations for all non-GAAP financial measures were released this morning and are available under the Investor section on our website at parker.com. We're going to start the call today with Jenny summarizing our record fiscal year 2024 that was really driven by our portfolio transformation and really some exceptional strength in our Aerospace businesses. She'll also touch on our bright future and what really is driving the company today. I'm going to follow Jenny with some more details on specifically the strong fourth quarter we just posted. And then both of us are going to provide some color on the Fiscal Year 2025 Guide that we released this morning that sets us off on our journey to achieve our FY'29 targets. After those remarks, we'll open the call for Q&A session. We'll try to take as many questions as possible within the one-hour time slot. And with that, Jenny, I'm going to hand it over to you and ask everyone to reference Slide 3. Jennifer Parmentier Thank you, Todd. And thank you to everyone for joining the call today. Parker delivered an outstanding year in fiscal 2024 on the dedication of our people, the strength and balance of our portfolio, and the value of our business system, the win strategy. We met or exceeded many of our commitments for FY'24. We produced top quartile safety performance aligned with our goal to be the safest industrial company in the world. The strength of our portfolio was highlighted by a stellar year delivered by our Aerospace system segment. On low single-digit sales growth, the team delivered 200 basis points of margin expansion. Our earnings per share grew 18% on top of earnings growth of 15% in fiscal year 2023. And we generated record-free cash flow of $3 billion. Parker has a very promising future ahead, as you'll see from our strong fiscal year 25 guide and the targets we have set for fiscal year 2029. Next slide, please. And it was a record year for Aerospace. Our first full year with Meggitt, achieving over $5 billion in sales, more than two times the sales of fiscal year '20. All market segments delivered double-digit sales growth, and the strength continues as we look ahead. We are positioned for growth with significant content on leading programs, and our extensive portfolio will continue to create value for our customers, as well as our large install base will drive continued aftermarket growth. Next slide, please. As illustrated on this slide, the transformation of our portfolio further expanded longer cycle and secular revenue mix in fiscal year '24. And although Aerospace is a big part of the transformation, it's not the whole story. The acquisitions of CLARCOR and Lord and our on-purpose strategy to expand distribution in Europe and Asia have greatly contributed to the longer cycle secular and industrial aftermarket mix. We see this transformation continuing and expect 85% of our portfolio to be longer cycle secular and aftermarket by fiscal year '29. Early last week, we announced that we have signed an agreement to divest the North American composites business that came with the Meggitt acquisition. As mentioned during our investor day, we continue to optimize our portfolio. Our best owner playbook identifies businesses that find greater value with a different owner. Through this process, we determined that this business is not aligned with our core products and we are not the best owner. It's a great team and we are confident that they will be successful in the future. Next slide, please. These are the four key messages we presented at our investor day in May. We are positioned for growth with our interconnected technologies and the secular trend. We have demonstrated the win strategy. Our business system is compounding our performance and driving us to top quartile. Operational excellence, years of driving a continuous improvement culture through our lean tools creates growth and expands margins. We have confidence in achieving the fiscal year '29 target launched at our investor day in May. Next slide, please. As a reminder of what drives Parker, safety, engagement, and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top quartile performance, allowing us to be great generators and deployers of cash. I'll turn it back to Todd to review our outstanding fourth quarter results. Todd Leombruno Thank you, Jenny. It really was a fantastic year for the company. On Slide 9, I just would like to take some time to talk about the fourth quarter. Q4 was an exceptionally strong quarter for the company. Once again, every number in this gold box on this page is a Q4 record. They also happen to be the highest levels of performance that we experienced this fiscal year. Total sales growth was up nearly 2% from prior year. We reached almost $5.2 billion in sales in the quarter. Organic sales were positive at roughly 3%. That was a little bit better than what we were expecting with our guidance. Divestitures were just very slight, unfavorable impact, and currency really turned into another headwind, almost 1%, unfavorable on currency. If you look at adjusted segment operating margins, Jenny mentioned this, but we did improve them 130 basis points from prior year. And for the first time in the history of the company, we generated 25.3% segment operating margins for our quarter. Same story with EBITDA margins. The increase was a little bit greater, 190 basis points. For the quarter, we did 26.3% adjusted EBITDA margins. You look at adjusted net income, $884 million of adjusted net income. That is up 12% from prior year, and that is a little bit better from prior year, and that is a 17 return on sales. Earnings per share, Jenny mentioned this as well, $6.77 that was up $0.69 or $0.11 from prior year. And it was just really an exceptionally strong quarter. It was a great way to finish the fiscal year, really driven universally across the globe by our engaged team members, and it was really just a nice way to finish the year. And it's another data point on Parker being able to deliver on our commitments. If we jump to Slide 10, this is just the bridge on that 11% improvement and adjusted earnings per share. Again, the story is very similar to what we saw all year, strong operating execution continues to drive earnings per share growth. If you look at segment operating income dollars, we increased by $90 million, or 7%. That's basically $0.54 or 80% of the EPS growth quarter-over-quarter. And we've talked a lot about this already, but the Aerospace system segment, once again, is really responsible for over 90% of the earnings per share growth when it comes to segment operating income. The diversified industrial North American businesses made up the rest. If you look at some of the below segment operating income line, corporate G&A was $0.16 favorable in the quarter. That really, again, was a result of some favorable items from the prior year just not repeating. Interest expense favorable, again, $0.17 versus prior year. That really is the result of our successful deleveraging efforts that we've been working hard on all year. Tax was unfavorable, $0.12 against the prior year, and that was really just from slightly higher operating tax rate and, of course, the higher EBIT. And then other expense and share count were just both a bit higher than last year, but really the story here has been consistent throughout the whole year, strong operating execution, driving margin expansion, really keeping an eye on cost controls, and being disciplined with our debt pay down. Just a nice way to finish the year. If we jump to Slide 11, let's look at the segment performance. You can see, again, margin expansion across every business here. Really proud to see that. Incrementals for the company and really every part of the business were incredibly strong. Order rates inflected positive. It's 1% that's positive. We're really happy to see that. And our backlog remained at near record levels. We have $10.9 billion in shippable backlogs, so that was a nice way to finish the year. Let's look at the diversified industrial segment, specifically in North America. The U.S. sales volume really remained strong, $2.2 billion in sales. Organic growth was negative 3, but that was a full point better than our expectations. Softness in North America continues to be driven by off-highway markets and transportation markets. But despite those lower volumes, we were able to increase adjusted segment operating margins by 150 basis points, and the North American businesses achieved 25, that is a record. It is all driven by operational execution, executing the win strategy, and really working hard to deliver for our customers. Order rates in North America also did improve to flat. That ends our negative string of year-over-year order declines, and we were really happy to see that. If you look at the International businesses, sales were slightly over $1.4 billion. Organic growth was down 2.5% the prior year, but again, that was also better than our forecast. Off-highway markets continue to be soft. And if you look really across the regions, in Europe, we were negative 5%, in Asia-Pac, negative 1%, which did slightly improve from Q3, and Latin America just continues to be robust at 19% organic growth. Same story on the margins. Margins increased 60 basis points in the quarter. Our International businesses generated 23.9% segment operating margins, and really just continue to be focused on simplification, productivity improvements, and I'm really happy to see this in the continued margin expansion from those International businesses. Order rates in International finished at minus 1%, with positive order rates in Asia driving the majority of the improvement. So nice to see that improve from Q3 as well. But if we look at Aerospace systems, right, that business continues to shine. Sales reached a record $1.5 billion in Aerospace. First time we've had $1.5 billion of sales in our Aerospace business. Organic growth, 19%, with double-digit growth across all the platforms within Aerospace. Operating margins, a brand-new record, increasing 130 basis points to 27.1%, and it really is driven by great volumes and unbelievable strength in these. Aerospace orders still remain strong. We did get the highest dollar level of orders for the year, and order rates continue to grow at plus 7%, so all things are looking up in Aerospace. If we go to the next slide, Slide 12, I just want to highlight our cash flow performance for the year. We finished FY'24 with record cash flow performance. CFOA increased 14% to a record of $3.4 billion, that's 17% of sales. Free cash flow, nearly $3 billion. That's also a record. That was 15% of sales. It's also a 15% increase from prior year, and we did achieve a conversion of 105%. I really just want to thank our team. This has been a lot of effort by a lot of people across the company, really made some nice improvements in working capital, really nice efforts on AP and AR, but I really want to note this year we were able to reduce inventory by over $120 million, really showcasing the efforts and focus that we've had on supply chain excellence. Across the globe, we continue to focus on being great generators and great deployers of cash. If we jump to Slide 13, you can see what we did with all that cash. We reduced debt by over $800 million in the quarter, $800 million in the quarter alone, and since closing Meggitt, we have now reduced debt by over $3.4 billion. We had a target to reduce debt by $2 billion in the fiscal year. We hit that target, and if you look at our leverage ratios, gross debt to adjusted EBITDA is now 2.1 times, and net debt to adjusted EBITDA is now 2, so it's exactly what we had forecast. And it really wraps up just a solid Q4 and a great fiscal year. So with that, I'm going to hand it back to Jenny, and I'm going to get to what I know everyone is focused on, and that is our outlook for FY'25. Jennifer Parmentier Thank you, Todd. So at our Investor Day in May, we introduced the six key market verticals of our business that you see on this slide. This slide represents our FY'25 sales growth forecast for each market vertical, resulting in organic growth of 2% to 5%. We are providing a realistic guide for fiscal year '25. At the midpoint of this guide, we have Aerospace at 8.5%, industrial North America at 2%, and industrial International at 1.5%. We are confident in growing EPS, achieving mega synergies, and continuing our track record of expanding margins. I'll get it back to Todd to review the guide in a little more detail. Todd Leombruno Okay. Thank you, Jenny. So I'm now on Slide 16, and let me share some of the details of the FY'25 guide. Reported sales is forecast to be in the range of 1.5% to 4.5% or 3% at the midpoint. That will equate to approximately $20.5 billion in sales. That is really supported by outside support in our Aerospace businesses. Total sales for the company are modeled at 48% in the first half and 52% in the second half, so right in line with what we've historically done on sales splits. If you look specifically at organic growth, we are forecasting organic growth in the range of 2% to 5% or 3.5% at the midpoint, and we're expecting high single-digit growth from Aerospace, roughly 8.5%, and a gradual recovery in the industrial markets throughout FY'25. For the North American businesses, we are forecasting organic growth of 2% at the midpoint, and for the International businesses, we are forecasting growth of 1.5% organic at the midpoint for the full year. If you look at the mix on organic growth, it's 2.5% first half, 4.5% growth second half. And I will note that this guidance does include sales from the recently announced divestiture that Jenny mentioned. We are expecting that to close sometime in the second quarter, and we will give an update once that closes to the impact it has on the company. We are based on June 30 currency spot rates, and we're forecasting that to be a slight headwind of about 0.5% or $100 million on currency versus prior year. Jenny mentioned margin expansion, 50 basis points of margin expansion is our plan. And in FY'25, we're going to get that by continuing to do exactly what we've done over the last couple of years, is really implement and advance the win strategy. Adjusted segment operating margin guidance is 25.4% at the midpoint. There is a range of 20 basis points on either side of that, and segment operating income is split 47% first half, 53% second half. If you do the math on incrementals, we're expecting slightly at 40% incremental margins. That's a little bit higher than what we normally have had just based on the growth in Aerospace and of course, continued mega synergies. Few additional items on the guide. Corporate G&A is expected to be approximately $230 million. Interest expense is $450 million. That is a reduction of approximately $50 million from FY'24 and other expense is expected to be about $5 million. Tax rate, we are modeling a 23% tax rate and full year as reported EPS of $23 or adjusted EPS of $26.65. Both of those figures are at the midpoint and the range on those, both of those ranges is $0.35 on the high end and the low end. And if you look at adjusted EPS, it is split 47% first half, 53% second half. In respect to cash flow for the full year, we are giving a range of $3 billion to $3.3 billion. That is $3.15 billion at the midpoint. That will be approximately 15.3% of sales and of course, we expect free cash flow conversion to be greater than 100%. If you look at the far right column on this page, you'll see some specifics, specifically about Q1. And these are all at the midpoint. Reported sales, we are forecasting to be plus 1%. Organic growth is 1.5% positive. Adjusted segment margins of 25.2% and adjusted EPS is expected to be $6.05. As usual, we've provided several other details for guidance in the appendix. If you look at Slide 17, this is a very similar story to what we just did in FY'24. Segment operating income is the main driver of our EPS growth. That is $1.51 of EPS growth. We'll continue to have lower interest expense as a result of our great cash flow generation and our deleveraging efforts. That will add $0.34 to EPS. If you look at the tax rate, that will be an unfavorable number. Just a reminder that that will be a 23% model tax rate. That is a headwind of $0.41, really compared to a favorable rate that we had in the full year of FY'24. Our corporate G&A is slightly unfavorable, just $0.06. Other expense is $0.10 unfavorable, and share count is just another headwind of $0.07. But if you look at that all in, that's our walk to the $26.65 midpoint or 5% increase year-over-year. With that, Jenny, I'm going to hand it back to you and ask everyone to reference Slide 18. Jennifer Parmentier Thanks, Todd. As mentioned at our investor day and demonstrated in our results, this is a different Parker. We will add more than $10 to EPS and generate an additional 50% free cash flow by fiscal year '29. Our performance will continue to be accelerated from the wind strategy. We have a longer cycle and more resilient portfolio. We will experience growth from secular trends, and we will continue to be great generators and deployers of cash. Next slide, please. We are very proud to be celebrating 60 years on the New York Stock Exchange, and we'll ring the closing bell next week on Wednesday, August 14. Yeah, okay, Kevin, we are ready to open the lines for Q&A. And we'll take the first person in the queue. Certainly. [Operator Instructions] Our first question is coming from Julian Mitchell from Barclays, your line is now live. Julian Mitchell Hi, good morning. Maybe just a first question around the first quarter outlook. I think first off, maybe to talk about the organic sales guide a little bit. I think you're dialing in a bit of a deceleration from the June quarter year-on-year, even with better orders. So maybe just any commentary around kind of very recent demand trends, any big movement month-to-month? And then sort of on the firm-wide P&L for Q1, you're basically saying flat EPS dollars year-on-year but with sales growth and margins up. So is there something below the line moving around? Todd Leombruno Yeah, Julian, this is Todd, I could take that. There is some seasonality just going from Q4 to Q1 if you look at our historical sales splits and our historical earnings split. What we're modeling here is in line with what we've historically done. Our organic growth guide for the total company is plus 1% for the quarter. That is driven by Aerospace, which continues to be a low double-digit organic growth is what we're expecting in Aerospace. But in the industrial businesses, both in North America and International, we are still expecting that to be down from prior year. So it's low single digits, but it's still down. We expect that to improve throughout the fiscal year, and this is just our best look at a roll-up. So you're right, it's a little bit of a soft industrial environment, but really offset by strength in Aerospace. If you look at margins, you know, what we just did in Q4 was all-time record for the quarter. We are guiding the 25.2%. That would be a Q1 record for the company. So it is not an easy number there. It really is, it would be a record. And to do that in light of some softness on the industrial side of the business, we're pretty proud about that. There's some below-the-line stuff that just is a first-quarter phenomenon, but nothing abnormal. We are experiencing earnings per share growth and net income growth in Q4. And that really supports what we see throughout the balance of the year. Julian Mitchell That's helpful, thank you. And then maybe just my follow-up would be around Slide 15. So you have that very helpful color on the end-market verticals outlook for the year. Maybe just any context you could give around sort of, maybe fourth-quarter rates in some of those end markets. And I suppose in plant and industrial I'm particularly focused on. It seems like the CapEx environment is getting a little bit worse out there. Just wondered what you're seeing in that in plant and industrial piece, please. Jennifer Parmentier Sure, Julian, be happy to do that. So if you look at in plant and industrial equipment, it improved from negative low single digit in Q3 to neutral in Q4. And as you can see on the slide that you're referencing, our FY'25 guide is forecasting neutral in the first half, low single digit in the second half, resulting in a low single digit for the full year. If you look at transportation, it was mid single digit negative in Q4, and that was primarily driven by automotive cars and light trucks. We are forecasting low single digit negative growth for transportation in the first half, mid single digit growth in the second half because we expect automotive to return to growth then. Work truck strength continues and heavy duty truck is positive now. So full year is at that low single digit growth. If you look at off-highway, it was high single digit negative in Q4. And we are forecasting the same for the first half, neutral for the second half, and mid single digit negative for the full year. Inside of there, we expect ag to be double digit negative this year, offset by construction, low single digit positive. So that's some color there. And then energy is forecasted to be low single digit for fiscal year '25, neutral in the first half, mid single digit in the second half. HVAC was low single digit negative for Q4, but it is improving. We are forecasting mid single digit growth for the first half. This is driven by a recent regulation change on refrigerant. And the second half growth forecast is at low single digit growth, but that's dependent on how fast some of these manufacturers get through their inventory and ramp up production under the new regulation. So for the full year, we have them at low single digit. Thank you. Next question is coming from David Raso from Evercore ISI. Your line is now live. David Raso Hi, thank you. My questions are on your comfort with the organic sales guide, right? We have 1.5% in the first quarter. We can back into 2Q, right? It's 3.5%. So that 2% faster growth in 2Q from 1Q, I'm the impression I get that's coming from industrial going from, say down 1.5%-2% in the first quarter to going slightly positive. And I just wanted to get some color on why do we see that turning flat to positive in 2Q? The comps get a little easier in North America, but just any color around that, particularly in the mix of orders. Are you seeing it more from distributors? Is it the lack of de-stocks, maybe from a year ago at the manufacturers? Just trying to get more comfortable with that delta on year-over-year growth for industrial 1Q and then getting essentially slightly positive for 2Q. Thank you. Jennifer Parmentier Yeah. So I'll take that, David. So some of the things that Todd mentioned earlier, total company order rates did go positive to 1% in Q4. Industrial North America improved to zero in Q4 after being negative for -- so that was a positive sign. And as Todd mentioned, that did end five quarters of negative order entry. International orders improved to negative 1% from negative 8%, and that was driven by Asia-Pacific. When you look at the channel, that destocking in the channel started over a year ago, and we believe that it has pretty much played out. We see the distribution trend going up, but I would say it's not a step change yet. We aren't actually seeing them add inventory. But these are all the things that are placed into our guide. Todd mentioned also the backlog remains strong. Q4 flat with Q3, dollars at near-record levels. So all of these things are baked into the guide and the reason that we feel good with the organic growth numbers we have in the first half. Todd Leombruno David, I'd agree with everything Jenny said there. As usual, your math is spot on. You mentioned the comps. Comps are 2% easier in Q2 than against the prior. So it's a little bit of all that stuff, but I just wanted to call out the comps. David Raso The reason I asked is it doesn't seem like there's much pricing -- new pricing for July 1. So I'm just trying to figure out what's the incremental bump may be. You're saying there's a little bit of comp and, obviously -- maybe some pickup -- Jennifer Parmentier We're back to a normal pricing environment. So it's more about those comps getting easier. If you look at North America, Todd mentioned that we expect Q1 to be flat to Q4. But that gradual industrial recovery is what we have really baked into the guide. And the growth uptick, mainly in the second half, is on easier comps. David Raso And follow-up, if you could indulge me with one question, you don't have to answer it. But I'm curious, the verticals that we're now breaking out. We know the margins in Aerospace, obviously, they're highlighted separately. But the other 5 verticals, would you give us a sense of kind of force rank highest to lowest the margins between those 5, just so we get a sense of the mix looking at it in this format? I would tell you, just look at those -- the Diversified Industrial segment. Those margins are -- they're record levels. The International businesses are not that far off from the North America businesses. And it's really just a factor of some softness in Europe and Asia kind of going through a recovery mode. But the margins are strong across all of those verticals, David. Jennifer Parmentier All the businesses are performing really well in margin expansion. Thank you. Next question is coming from Scott Davis from Melius Research. Your line is now live. Scott Davis Hey, good morning Jenny and Todd, congrats on another great year. I know it probably hasn't -- the answer probably hasn't changed much since the Analyst Day, but perhaps you could give us a little bit of an update on M&A and what you're seeing. I think you clearly have the balance sheet space to probably step up and get a little bit more aggressive. So just a little bit of an update would be helpful, I think. Thanks. Jennifer Parmentier Yeah, you're right. Not a lot different, but obviously, we still have some debt to pay down. That's still our focus. But when we look to acquisitions, we're always working the pipeline. Those relationships, maintaining and building those relationships is really important to us. And we've been doing quite a bit of that. We're looking for those things where we are the clear best owner, with the interconnected technologies and building on the secular trends. But the one thing that I'd say the most is that we're looking for deals that are accretive to growth, resiliency, margins, cash flow and EPS, it really has to tick all of those boxes. And in some cases, it really is based on timing. So we like all of the 8 core technologies, and we see opportunities to build on the entire portfolio. We have different businesses that we're looking at, of all sizes. So a question that I get a lot too is, you've built with each one, is the next one going to be bigger than Meggitt? And that's not that's not something that we're focused on. We're focused on the right deal with all of that criteria that I just mentioned. Scott Davis Okay. And Jenny, the portfolio optimization and the small divestiture, is the lens here that you guys are looking at -- the Slide 15 lens that -- the key market vertical stuff that's outside of that vertical? Or is there a -- or is it more a function of kind of margin growth potential and kind of more traditional metrics? Jennifer Parmentier It's the latter. We have to see that it's part of our core technologies, our core product offering. Obviously, this business was in Aerospace, and that's a market that we're very fond of. But it's the future profile of the business, both margin expansion and growth. Scott Davis Okay. That makes ton of sense. Thank you. I'll pass it on. Appreciate it. Thank you. Our next question is coming from Mig Dobre from Baird. Your line is now live. Mig Dobre Thank you. Good morning. I guess one of the things that kind of stood out to me over the past couple of quarters within your industrial technology platforms is that motion systems and low-end process control kind of behave the way we would sort of expect them to in the kind of industrial downturn we're experiencing, this whole down high single-digit revenue type. But your filtration, engineered materials platform has been pretty remarkably stable. So I guess my question is, looking back, why has that been the case? Is this sort of different than what you've seen in prior downturns? And is there an impact on margin from a mix standpoint within your industrial business from this filtration business hanging in there a little bit better? Jennifer Parmentier Yeah. So thanks for the question, Mig. So if you think back to the on-purpose strategy that we had with our acquisitions to double the size of filtration, double the size of engineered materials and Aerospace. We've done that with the last four acquisitions. So if you take filtration for instance, with the acquisition of CLARCOR, we greatly increased our aftermarket exposure in filtration. And that business has become more resilient than it was in the past. And when you look at Lord, into engineered materials, that's where we picked up a lot of that longer cycle business. And so you see those two groups behaving a little bit differently than the other two that you mentioned. That is definitely the main reason. The margin impact is accretive, just like the criteria that we give to the acquisitions that we would do in the future. These have been -- those have both been very successful deals where synergies were hit. And they continue to use The Win Strategy to improve margins. Todd Leombruno Let me give you a little color on this. If you're worried, we agree with you, the top line has acted exactly as we expected it. But I would tell you the margin expansion has been equally generated by all of these businesses. When you look at that record that we put up for the quarter, 25.4, that motion systems platform, that flow and process control, those were equally contributing to those margin ramp. Jennifer Parmentier Yeah. Wouldn't have happened without those two areas. Todd Leombruno Yeah. And when you look at the cash that we generate, those businesses are stellar cash flow generators as well. So it's all part of the mix. It's all why we love the portfolio as it sits, and it's helped generating all-time record numbers. Jennifer Parmentier Those technologies are a very important part of our portfolio and participate in the secular trends that we talk about. Thank you. Next question today is coming from Jamie Cook from Truist Securities. Your line is now live. Jamie Cook Hi, good morning. And congratulations on a nice quarter and guide. I guess my first question, Todd or Jenny, just looking at the implied incrementals for the year, the 40%-ish, it's a very good incremental margin above your targeted range on lower organic growth relative to your longer-term guide. So is there anything unusual in your -- in the mix this year that would allow you to have above-average incrementals on a low organic growth versus your targeted range? And then I guess the follow-up question is, once you get to the 4% to 6% organic growth, like why should your incremental margins be better than that just given what we're seeing already today? And then, Jenny, you're probably not going to want to answer this, but I'm going to ask it anyway. The order surprised me both on Industrial North America and on International. Anything you can do to talk to like the cadence of what you saw since April? And where were there -- did the orders outperformed your expectations as well? Thank you. Todd Leombruno Yeah, Jamie, let me start on the incrementals. This is Todd. Thank you for the recognition of the quarter. We appreciate that. You're right. The incrementals are a little bit higher than what we have historically forecast. That 30% is really kind of over the cycle, so sometimes we think we could do better, sometimes it might be a challenge on the top line. But the way the math works is a little bit funny, right? Aerospace, with the strong growth in Aerospace and the margin profile that Aerospace is operating at, it is driving the incrementals for the company a little bit higher than normal. We also are committed to the $300 million in synergies that we have promised for Meggitt. We expect $50 million of incremental synergies in FY '25 versus FY '24. So that's putting Aerospace a little bit higher than historically where we've been at. And when you look at the Industrial businesses, we still see margin expansion even in a low-growth top line environment. So when you put all that together, that's how we came up with the numbers. So we feel really good about that. But the team is energized and focused on making sure that we deliver that. Jennifer Parmentier Yeah. And from an order standpoint, Jamie, on the May call, I did something that I normally don't do, but made the comment that we were encouraged at the start of the quarter with what we were seeing in orders. And obviously, that continued and we saw ourselves get to the order condition that we're talking about today at the end of Q4. So that played out well for us. But what we have in the guide today is supported by the comments that we've made at those Q4 orders. So no additional color on orders. Thank you. Next question today is coming from Joe Ritchie from Goldman Sachs. Your line is now live. Joe Ritchie Hi, good morning, Jenny and Todd, a terrific year, not just the quarter, it was a great year. I'm going to tackle the margin question maybe slightly differently. And so, look, the exit rate for the Industrial businesses were really strong, right, both in North America and International. If you take a look at the 25% North America and the 23.9% in International, squarely either at the high end of your guidance for this year or the midpoint for the International segment. I guess why isn't it going to be better than that? If we're going to expect some growth, and typically, you guys have shown that you could expand margins even in a no-growth environment. Todd Leombruno Well, Joe, I'll start. I'm looking at Jenny, she's smiling. We just a few months ago gave you the FY '29 targets. And if you look at this, this is right on track with those FY '29 targets. Aerospace, we're going to expand 100 basis points off of an all-time record for that business. And when you look at the Industrial businesses, we're showing margin expansion there as well, and really an unbelievably low growth top line number. So we feel really good about that. If you look at the cadence throughout the year, every one of these quarters would be a record margin number for us, and it increases, outside of Q2, which is a little bit of seasonal volume, they're aggressive numbers. So that's what we feel today. That's what we have confidence in. And that was kind of all that went into our guide. Jennifer Parmentier Yeah. I would just back that up by saying, obviously, it was a fantastic year, it's a fantastic exit rate. But this guide is realistic. And this isn't a slam dunk for our teams. We believe in The Win Strategy, we believe in our ability to continue to expand margins, but this is a -- this isn't easy. Joe Ritchie Okay. Got it. I'm sure you'll make it look easy. But the follow-up question is the -- Yeah. So you mentioned that you're still planning to continue to pay down debt. You got your leverage ratio, your net leverage down to two turns, so congrats on that. I know there was a question earlier around M&A. So just talk to us a little bit about what's the kind of right leverage ratio that you want to get to before you get a little bit more front-footed with capital deployment on the M&A side. And then is there an opportunity to continue to buy back shares as well? Like how are you thinking about that priority going forward? Todd Leombruno Yeah, Joe, it's a great question. It's something we talk about constantly here. We've been very clear, our target was to get to and operate around a 2 net debt to adjusted EBITDA leverage. We got there, we're very proud about that. It was not easy, but the team worked really hard to get there. The way our debt is structured, we have a service debt that goes all the way out into 2026. So we feel good that we will not -- we'll be putting our cash to good work as we continue to pay down that debt. But I would tell you, our preference continues to be to deploy our capital optionality towards deals, as Jenny mentioned it earlier. It's going to be the right deal. It's not going to be one that just happens to be available. It's got to be able to grow the top line differently. It's got to be accretive to our margins. It's going to have to be EPS accretive. And it's going to have to help generate cash in a way that's different than what the company has been able to generate. And if we can't get those done, we have no worries about deploying that elsewhere. We're going to keep our dividend record going. And our share buyback is $200 million a year. We're going to do that at a bare minimum, and we will be active. I could assure you that. Jennifer Parmentier And if the timing and the deal don't line up the way we'd like one to in the future, we'll always buy back shares, like Todd said. I mean, we believe in Parker. Thank you. Next question is coming from Stephen Volkmann from Jefferies. Your line is now live. Stephen Volkmann Great. Thanks for taking the question. Todd, I just missed it when you said the Meggitt synergies in FY '24. Todd Leombruno Yeah. We increased those Meggitt synergies. I think that was in the second quarter or the third quarter, $200 million is what the accumulated synergies were at the end of FY '24. We're committed to the $300 million number. That would be $50 million in FY '25 and an additional $50 million in FY '26. Stephen Volkmann Got it. Thank you. And then I'm trying to think, just mentally, if I back that out, how much did mix add relative to sort of other drivers for the margin in Aerospace? Todd Leombruno Yeah. I mean everything in Aerospace is really booming right now. Aftermarket is especially strong. You know the profile of that business. That is the highest-margin business we have, and it's been really robust. So if you look at what they did for the quarter, I think it was 27% margins. If you look at what we are forecasting for FY '25, it's another 100 basis points of margin expansion in Aerospace. And that gets us 27.5% ballpark. So really strong margins in Aerospace. Stephen Volkmann Great. I guess what I'm trying to think about is, assuming that the aftermarket OE mix kind of normalizes at some point, maybe that's a big assumption, I don't know. But if it does, should we be worried about potential kind of margin headwinds in that scenario? Todd Leombruno No. When you look at our team -- of all of the forecast tools that we have that we've improved across the company, our best tools remain in the Aerospace verticals. And I would tell you, our team, we've had multiple discussions with the team. We feel really good about that. And I don't want to speak outside of FY '25, but we feel really good about what '25 has in store. Jennifer Parmentier Yeah. We feel very positive about air traffic growth. So we're not concerned about that. Thank you. Our next question today is coming from Nathan Jones from Stifel. Your line is now live. I'm going to go back to the revenue guide. For as long as I can remember, Parker has been guiding for a revenue split, 1H to 2H of 58% to 42%. So I wanted to ask, you've got a much larger backlog now than you've had historically. So potentially some better visibility out into that. So I'm just interested on what you're visibility into that second half revenue guidance is based on where the backlog is. And what kind of macroeconomic assumptions that you've got baked in there? A lot of peers and competitors have been talking about lower CapEx spending going forward, but it's -- maybe that you guys went into the downturn first, you're coming out of it first. But just any color you can give us there. Jennifer Parmentier Well, just to run through it a little bit. Obviously, for Aerospace, as we talked about, we have 8.5% organic growth out there. In the first half is at 11%, second half is at 6%, and that's really because the comps get pretty tough when you get into the second half. So obviously, we feel really good about Aerospace. We have good visibility over -- we have a high backlog there, right? So no concerns there. When you look at North America, as Todd mentioned, we're guiding to 2% organic growth, minus 1% in the first half. And as we've talked about, that's based off of a typical Q1 and based off of what we see today in the orders and the information that we have from our customers. Again, we expect continued softness in off-highway all year and transportation in the first half. So kind of going back to those forecasts for the market verticals. We do expect a gradual industrial recovery, as we've mentioned here, and that's what we have baked in. So again, the growth uptick is mainly in the second half, and it is somewhat on easier comps. Those are the inputs that we're looking at. In International, 1.5% organic growth, again, negative 1% in the first half, second half at 3.5%. As we mentioned, order rates improved, but they're still in negative territory. Our guidance assumes that Asia-Pacific turns positive, offset by continued weakness in Europe. So that's what we're looking at right now. Again, softness around end-markets in Europe, neutral growth in the guide for the full year. So that's what we have built into the guide. Nathan Jones Do you need things like interest rate cuts to spur some of that recovery that you're looking for in the second half in various parts of the industrial economy? Kind of what are the underlying assumptions that you've got that inform that expectation? Todd Leombruno Yeah. Nathan, this is Todd. Those certainly would be helpful, there's no doubt about it. What we have baked into the numbers is really -- again, you've heard us talk about our AI forecast. So we have a variety of macroeconomic forecasts that we're using. There's nothing outside of anything that you're not seeing yourself. It really is driven by great Aerospace performance, a gradual recovery in the Industrial markets, mainly in the second half of the fiscal year. And that's based off of what we've seen orders do for many, many, many years. We were really glad to see North American orders turn not negative, and we were really happy to see the Industrial orders move to minus 1%. So all of that is what we've been using to build our forecast. Thank you. Next question is coming from Jeffrey Sprague from Vertical Research Partners. Your line is now live. Jeffrey Sprague Thank you. Good morning everyone. A lot of ground covered here. A couple of things from me. First, just on the divestiture, Jenny or Todd. I think it sounds like it's kind of part and parcel to your kind of normal process of reviewing the portfolio and assets. But should we view this as largely kind of a one-off? And obviously, it just kind of came with something you recently acquired? Or there's kind of other pieces here and there that could be methodically coming out as your margin structure has moved up, right, and your threshold for what's good enough rises, does that cause some additional things to shake out of the portfolio? Jennifer Parmentier At Investor Day, we mentioned that we would continue to trim around the portfolio, but not anything significant. All of our businesses have to perform. Every year we go through an analysis of our businesses, a best owner analysis. But again, nothing significant, Jeff. It would be just some trimming around the portfolio. Jeffrey Sprague And could you also just share with us your view on Aero for 2025 in terms of the big buckets, commercial OE versus aftermarket military OE versus aftermarket? Jennifer Parmentier Absolutely. So on commercial OE, we are forecasting high single digit, really based off of narrow-body rates and wide-body ramp-up. Commercial aftermarket, low double digits. And again, air traffic recovery, broad-based growth there, been very strong as we've talked about today. Defense OE mid-single digit increase, increasing defense budget and continued demand for legacy fighters. And then defense aftermarket, high single digit. And again, pointing to those public-private partnerships we have with the depots, that's really proved to be great growth for us. And again, retrofits, repairs, upgrades. So really it's going to be a strong year for Aerospace, high single digit at 8.5%. Thank you. Your next question is coming from Nicole DeBlase from Deutsche Bank. Your line is now live. I just wanted to ask another question on the divestiture. And we all have the revenue number that was in the press release. But I guess, any color on whether the divestiture will be accretive to margins? And can you just confirm that that's all coming out of the Industrial North America segment? Todd Leombruno Yeah, Nicole, this is Todd. It will all come out of the Industrial North America segment businesses. We do expect that to close sometime in Q2. It will be margin accretive, there's no doubt about it. I'd rather wait until we get the actual close date to give you exact color on that. Jenny talked about it. It's a great business, just maybe not perfectly aligned with our core products. If you look at the enterprise value that we got for that business, it's $560 million of enterprise value. So there will be a gain on that. And like I said, we'll be looking to share more of that once it finally closes. Nicole DeBlase Got it. That's really helpful. And then on the outlook for International, it sounds like you guys are expecting Europe to be down again. If you could kind of confirm your thoughts there. And I know it's small for you, but any color on what you're seeing in China. Thank you. Jennifer Parmentier Yeah. So the guide does assume that Asia Pacific turns positive, offset by continued weakness in Europe. So the full year for Europe is neutral to fiscal year '24. So just continued softness there. What I would say in China, growth improved to negative low single digits in Q4, and Q4 orders increased due to some project orders. So there's some positive there. Kevin, I think just in light of time, I think we have 5 minutes left, maybe one last question. Final question today is coming from Brett Linzey from Mizuho Securities. Your line is now live. Just a question on the margin outlook, but specifically gross margins. So another strong year in '24, but you're now seeing a better mix of secular in these applications. Are you embedding a higher-than-normal gross margin lift in the '25 outlook as you're seeing some traction here? Todd Leombruno Yeah. Brett, this is Todd. Thanks for noticing that. We've been working hard on all elements of profitability for a long time here. When you look at that 50 basis points of segment operating income expansion, the vast majority of that will come in the gross margin line. Brett Linzey Okay. Got it. Great. And then I apologize if I missed it. On off-highway, so I appreciate the color on adverse construction, but I was wondering if you could dimension the outlook between OE, the distribution business in Off-Highway, and what's your level of visibility is on some of the OE inventories. Thanks. Jennifer Parmentier I mean, I don't have a good picture of that that I could share with you today, but perhaps we can pick that up in a callback. Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further closing comments. Todd Leombruno Okay, Kevin, thank you. This concludes our earnings webcast. Thanks to everyone for joining us today. As always, we do appreciate your attention, interest and support of Parker. If anyone's got any more follow-up questions, whether that's on the quarter, the year or the FY '25 guide, Jeff Miller, our VP of Investor Relations; and Yan Huo, our Director of Investor Relations, will be available throughout the day and even if tomorrow, if needed. I hope everyone has a great day. We appreciate it. Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

Owlet, Inc. (OWLT) Q2 2024 Earnings Call Transcript

Mike Cavanaugh - IR Kurt Workman - Co-Founder and CEO Jonathan Harris - President and Chief Revenue Officer Amanda Crawford - CFO Good afternoon. Thank you for attending today's Owlet's Q2 2024 Earnings Call. My name is Jayla, and I'll be your moderator for today. [Operator Instructions] I would now like to turn the conference over to our host, Mike Cavanaugh, Investor Relations. Mike, you may proceed. Mike Cavanaugh Thank you, operator. Good afternoon, everyone, and thank you for joining us today for the Owlet Baby Care's Second Quarter 2024 Earnings Call. We appreciate your time and interest in our company. Earlier today, Owlet released financial results for the quarter ended June 30, 2024. The release is currently available on the company's website at www. investors.owletcare.com. Our speakers for today's call are Kurt Workman, Owlet's Co-Founder and Chief Executive Officer; Jonathan Harris, President; and Amanda Twede Crawford, our Chief Financial Officer. Kurt will begin with an overview of our performance and key developments followed by Jonathan, who will provide color on our go-to-market results and then Amanda will provide a detailed review of our financial results. Following their remarks, we will open the call for questions. Before we get started, we would like to remind participants that today's discussion will contain forward-looking statements based on current expectations. These statements are only predictions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, but are not limited to, those described in our most recent filings with the SEC and in the Risk Factors section of our annual report on Form 10-K for the fiscal year ended December 31, 2023. Please note that the company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. With that, I would now like to turn the call over to our CEO, Kurt Workman. Kurt? Kurt Workman Thanks, Mike. Good afternoon, everyone, and thank you for joining Owlet's Earnings Call today. As always, we appreciate your ongoing support of Owlet. Throughout the first half of 2024, we have consistently delivered on every key operational milestones. These milestones include the launch of our FDA-cleared devices in both consumer and medical channels and our CE Medical approval and its launch in the U.K. and Europe. We've met all of our key financial goals in the first half, including double-digit sell-through and revenue growth, gross margin expansion and significant operating cost savings resulting in a positive adjusted EBITDA in Q2. As promised, we plan on maintaining at or near breakeven adjusted EBITDA on a go-forward basis. In addition to our significant Q2 operational achievements, our July Amazon Prime event was the strongest in company history and exceeded our expectations with Dream Sock sell-through up 61% year-over-year in units and revenue up 68% year-over-year. We've also crossed a major milestone with the launch of Owlet Care our new subscription service, which was released to a limited number of users. That service will gain the scale to our user base throughout this year and represents a major shift in the LTV potential for Owlet in 2025. Finally, we have now fully integrated our telehealth partnership with Wheel on owletcare.com to accelerate access to insurance reimbursement. When I look back over the past few years, it's clear that Owlet's commercial position today is the strongest it's ever meant. There is a robust, continued and discernible momentum for Owlet in the market that continues to grow on the back of the second of our two FDA approvals in the US last November. We believe this year is the turning point propelling us to our vision of a safe and healthy journey for every baby and a sustainable growth company. I'd like to take some time on today's call to share what success looks like over the next few years as we continue to make progress towards our vision. There are over 140 million babies born every year, and every single parent is worried about their baby safety, health and getting more sleep and yet unexpected mortality, respiratory infections and sleep deprivation are still a major issue for parents. These are universal problems that we firmly believe can be solved with access to personalized information in the home. I say this a lot, but I went through more training to get a driver's license than I did to become a dad, the caregiver of a little baby. Parents are exhausted, worried and have very few tools in the home to assess their baby's health and that leads to one of the highest rates of primary and urgent care utilization. It's time to empower parents in the home with tools and technologies they need to give the best care possible to their baby. Owlet has collected a very large data set of infant health and sleep in the home. We've monitored over 15 trillion heartbeats and millions of hours of infant fleet on over two million babies in the past eight years. We've taken all of that data to build beautiful subscription insights. The launch of subscription, we're calling Owlet Care signals the beginning of Owlet's transformation from a product and hardware company to the platform for pediatric health that helps bridge the gap between the hospital and the home. The rollout of this platform will have three distinct phases. The first phase is focused on unlocking insights and information that helps parents better understand what's normal for their baby and what's not. Parents will be able to get daily updates on how their child health and sleep are trending relative to their own baseline and how it compares to the broader population. Owlet will also help parents store their babies health data, an important moment structured by the camera and SOC and will make it easy for them to share that information with their pediatrician. I remember probably like every parent being surprised the first few weeks of how often their son is waking up and how frequently he was getting sick. There are so many questions that new parents have, but one comment thread among these is the simple question, is this normal? Is my baby okay? The second phase will integrate professional service partners into our app that will provide integrated care 24 hours a day, seven days a week. Parents will be able to chat with pediatricians, nurses, sleep coaches and mental health professionals who have access to Owlet's data to provide personalized care at home. We'll be able to use this data and new AI models to deliver unparalleled insights and proactive detection that will help move pediatrics into preventative care. In our third phase, our strategy is to use our biggest assets, our network of parents, hospitals and data to drive continued value into our platform. As a result, we expect that the price point of our subscription will evolve over time as well as the value and services we are providing. I can't imagine a world where every parent and pediatrician doesn't have access to some sort of information like Owlet about their baby that we will be providing and passionately advancing. As a corollary, 70 million adults in the US alone have a wearable health sensor, and they've come to expect it for their children. We believe that just like every baby leaves the hospital with the thermometer, a breast pump and our car seat, every baby will have access to Owlet Care that could one day be reimbursed by insurance. BabySat and Dream Sock are complementary in this vision, giving access to Owlet's technology to both parents who have a critically ill baby leaving the NICU and to the new parent who's trying to navigate bringing their newborn home for the first time. The opportunity to become the standard of home care in pediatrics is absolutely massive. It's been overload and Owlet is in the best position to build it. We will continue to execute on decision by focusing on three areas in 2024 and into 2025. First is driving continued adoption of Dream Sock. Second is expanding the medical and health care channels to offer an insurance reimburse monitor for babies who are sick or high risk. Third is to transition Owlet into a service that helps parents from infancy into the toddler years and increases LTV. The opportunity these three areas present significantly increases our revenue and margin without increasing the complexity of the business and will help to drive continued growth in top and bottom line. We believe our business in the next few years can be several hundred million in revenue and very profitable. Before turning the call over to Jonathan Harris, our President, to talk about these three pillars of our go-to-market strategy and results for Q2. I'd like to welcome Amanda Twede Crawford to our earnings call today. She will be covering our Q2 financial results. As we announced a few weeks ago, Kate Scolnick is leaving Owlet to pursue other opportunities and will remain at the company in an advisory role for a transition period through September. On behalf of the Board of Directors in Owlet, I want to thank Kate for her executive leadership and significant contributions since joining our management team prior to our initial public listing. Over the last 3.5 years, she has been instrumental in supporting our top-line growth, margin expansion and profitability objectives. And with her help, we are on track to achieve our 2024 operational and financial goals. We wish Kate continued success in her future endeavors. Amanda is a key financial leader and contributor at Owlet and we're excited for her to be moving into the Chief Financial Officer role. She joined us in 2022 with over 15 years of finance and accounting experience from Swire Coca-Cola and Price Waterhouse Coopers with the matters in accounting. Amanda knows our business, our leadership, our community and our vision incredibly well. And as such, we anticipate this will be a smooth transition. Welcome, Amanda. And now I'll turn the call over to Jonathan. Jonathan Harris Thanks, Kurt. And as Kurt just mentioned, we have some really strong momentum building in our business, not only in the US but across the globe. First, demand and adoption. The response to our new FDA-cleared Dream Sock here in the US has been outstanding. We've witnessed strong parental engagement with over 66 million organic views of our content across TikTok and Facebook in Q2. And we continue to see great press with almost 1,500 pieces of coverage and publications such as BuzzFeed, Fierce Biotech, PureWow, USA TODAY, CBS and Today's Parent. The response to the FDA clearance of Dream Sock continues to be strong with sell-through achieving over 40% -- 44% growth with our Dream Sock and Duo products year-over-year. Customer satisfaction supports this growth with NPS scores exceeding 70 and Dream Sock hitting an all-time high in this category. We achieved this market enthusiasm while maintaining strong growth trajectory, including net revenue growth of 58% over Q2 of last year. In the US, our partnerships with major wheelers Target and Walmart are growing with expanded merchandising and placements to bring Owlet experience to life. Specifically, we are seeing sell-through of Sock at target increase by almost 50% year-over-year and Duo almost 40%. Our baby list registries grew at almost 60% versus previous year. Proving our messaging and FDA clearance continues to resonate with expecting parents. Owlet is still in the beginning stages of growth for Dream Sock, about 10% of the 3.6 million US births every year coming home with an Owlet Sock. We believe that just like car seats and strollers, every baby will have access to health sensing technology at home. And finally, I'm pleased to share Owlet had our most successful Amazon Prime event in the company's history with record sales of both our Duo and Dream Scok. In fact, Owlet was ranked number one baby monitor as well as number one in baby safety. Secondly, our U.K. CE launch but is extremely well positioned to take advantage of our U.K. and CE Med mark clearance with key retail partnerships across the European market, such as Mama & Papas in the U.K. BabyOne in Germany and into Australia with Baby Bunting we're already seeing sell-through up significantly. With our EU and U.K. medical clearance releases, we were able to generate over 650 million unique media views with coverage in Cosmo U.K., the independent mother and baby and many, many more. Overall, Owlet's saw international revenue grew at over 275% over the previous year, providing the demand for Owlet products is truly global. Third, opening medical dentals, in a similar vein, the response of pediatricians to Owlet's BabySat has also been extremely positive. In Q2, we've seen hundreds of pediatricians prescribing BabySat. The feedback we are receiving from parents and doctors tell us that BabySat is a powerful new tool in the care is at risk inference. We launched our partnership with AdaptHealth in Q2 to expand our distribution in medical channels. Adapt serves as a cornerstone for Owlet successfully entering this vital market. We are integrating with all major insurance plans, including Aetna, Cigna, United and the BlueCross networks removing barriers and ensuring families can access BabySat when they need it most. We're also streamlining BabySat purchase flow through partnerships with providers like Wheel who offer telehealth services directly through owletcare.com for prescription access. Parents can now seamlessly obtain a prescription and submit reimbursement through the Owlet website. We expect this channel to take some time to grow. In 2024, I will continue -- we will continue adding new distribution partners to expand our reach. We see this as a long-term opportunity to provide our innovative technology to infants with medical necessity with insurance reimbursement for the families. And finally, subscription service. In addition to our channel expansion, we're also focused on driving additional value to our customers through a new subscription service. Our unparalleled data set in forced by capturing over 15 trillion baby heartbeats, provides deep insights into infant health and sleep that only Owlet can provide, and we're unlocking its potential. Health and sleep are at the fundamental concerns of every parent. We're navigating these challenges, parents want to know what's normal and when they need to get professional support. Owlet's impressively large set of infant health data can help parents better navigate what is normal for their baby, when to visit the doctor and when to stay home. Additionally, parents with over 44 nights of sleep in the first year alone. Our subscription service will analyze baby sleep data and provide parents with personalized recommendations and support to get the whole family slipping better. Owlet has just released early access to this service to a few highly engaged users and we expect to make this service available to all outlet users by Q4. Apart from offering information and insights to parents during the initial year of their child life. We firmly believe that our products and service cost extend their value well into the toddler years and beyond. By focusing on core parenting pain points in the health and fleet and leveraging our data to drive continued releases of software features, we believe that this can expand our TAM and significantly extend our LTV per customer. Owlet is in a stronger commercial position than ever. We're a growth-oriented company, operating efficient efficiently and bringing innovative solutions that address the fundamental needs of parents around the world with our landmark FDA clearances were establishes a pioneer and infinite health technologies. This unique set of circumstances has a company poised for success as we continue to deliver value from our families and stakeholders alike. We're excited to share this incredible journey with you. Thank you. And now I'm going to turn it over to Amanda for our financials. Amanda Crawford Thank you, Jonathan, and thanks, everyone, for joining us today. In Q2, 2024, Owlet demonstrated strong financial performance and momentum. We achieved $20.7 million in net revenue, up 58% year-over-year, gross margins of 50% and positive adjusted EBITDA, bringing us closer to our goal of exceeding 50% margins and profitability. I'll spend the next few minutes walking through Owlet's key financial metrics and providing some additional detail. Gross billings for the second quarter were $26.9 million, up 59% year-over-year. Product promotions and discounts were $5 million primarily higher than average as a percentage of gross billings for Amazon Prime Day load-in. Returns and allowance reserves were $1.1 million approximately 4.1% of gross billings and below our average range. Q2 net revenue, which includes promotions, discounts, returns and allowances was $20.7 million versus $13.1 million in the prior year. Revenue growth was primarily driven by higher sales of Dream Sock products, reflecting an increase in consumer demand as compared to the same period in the prior year. Our gross margin for the second quarter was approximately 50%, up over 1,000 basis points from margins in Q2 of the prior year. Gross margin increased primarily due to higher revenue, favorable product mix and lower direct product and fulfillment costs. During the quarter, we experienced some cost of goods sold expense impact from elevated transportation costs related to global disruptions and inventory routing, along with other companies seeking shipping alternatives, we are working to mitigate these factors. Total operating expenses in the second quarter were $12.5 million, an increase of approximately $600,000 year-over-year. Excluding stock-based compensation, Q2 operating expenses were $10.4 million. Second quarter operating loss was $2.2 million for the quarter compared to an operating loss of $6.7 million in Q2 2023 and $5.7 million sequentially. Second quarter net loss was $1.1 million for the quarter compared to a net loss of $8.5 million in Q2 2023. Within net loss, there was a gain of $1 million as compared to a loss of $1.6 million in Q2 2023 as a result of a decrease in the fair value of the common stock warrants outstanding. Adjusted EBITDA for the second quarter was $100,000, improving significantly from adjusted EBITDA loss of $4.3 million in Q2 of last year. Turning to the balance sheet. Q2 ended with $15.6 million in cash and cash equivalents. We remain focused on executing our strategic initiatives to further strengthen our commercial and financial performance in 2024. Looking forward, we are focused on executing on the core business activities in 2024 that will maximize the following initiatives. Supporting Dream Sock product commercialization globally and driving continual balance of sell-in and sell-through of consumer retail inventory. From a sell-in linearity perspective, we anticipate a seasonal revenue increase from Q2 to Q3 for sell-in for the November and December holiday promotions. Q4 is expected to be lower than Q3 sequentially due to less promotional activity following the holidays. We are making effective strides in BabySat commercialization with new DME partnerships and bill integration on owletcare.com. As a reminder, we anticipate BabySat product revenue will be ramping in 2024 as we develop these partnerships and will drive revenue impact in 2025. We plan to launch our subscription product in Q3. Projected revenue will also be ramping in 2024 and drive revenue impact in 2025. We remain focused operationally on driving quarterly gross margins within our target range of 46% to 50% through unit volume, product mix, and operational efficiencies. We will continue to drive leverage in our business operations initially towards breakeven and then towards sustainable profitability. We have reached a level of operational maturity that we are comfortable in providing forward-looking guidance. For the second half of 2024, we are estimating net revenue to be stronger than the first half and in the range of $37 million to $42 million. Gross margins of 46% to 50% and adjusted EBITDA loss of $3 million to breakeven. For the full year, we are estimating net revenue to be in the range of $72.5 million to $77.5 million, gross margins of 47% to 49% and adjusted EBITDA loss of $6 million to $3 million. With that, I will turn the call over to the Q&A portion. Operator, please open up the call to questions. [Operator Instructions] Our first question Charles Rhyee calls with the company TD Cowen. Your line is now open Charles Rhyee Yes, thanks guys for taking the questions and grabs on the quarter. Maybe to start Jonathan, you talked about sort of the exposure that Owlet is gaining across a bunch of media channels, social media as well. How are we tracking that? And how are we tracking in terms of how that is translating into sales? And maybe just sort of how you're looking internally to make sure that you get an effective ROI on that spend? Jonathan Harris Thanks, Charles. Yes, we're tracking that. So in Q4 of 2023, we hired a PR agency to actively and aggressively reach out to various press because we saw the clearance of our FDA product. And so we are really leveraging that PR agency to help us continue to grow and expand our reach, not only here in the US but internationally as well. So we're having the PR agency as well as ourselves are monitoring that. We're tracking site traffic as well as relevant sources. Additionally, we're looking at what we're seeing organically and inorganically on TikTok and Facebook and really driving that exposure. We're really seeing strong engagement from our social media channels and continuing to drive that. And we're just finding that it's very, very positive and that customer feedback parental awareness is growing and expanding. So it's great news across the globe. Charles Rhyee And are we still partnering -- I know in the past, you've partnered with a lot of nonprofit organizations, particularly groups may be focused on SIDs and other conditions, for instance, how much is that part of the strategy? Or is this more of a general push into sort of the currency market? Jonathan Harris Yes, great question. Yes, we absolutely we continue to drive with our partners. That's certainly helping us. But we're not only seeing the awareness from the SIDs partners we have, that the parental community in general, parents are looking for insights. They're looking for how do I get more sleep, what insights can I gain from my baby to help me have a healthier, safer, better sleep for their lives. Charles Rhyee Okay. Got it. And maybe I want to ask about -- I think the comment at the beginning, sort of talking about sort of at or near -- Amanda, you talked about sort of at or near adjusted EBITDA breaking for the rest of the year and then moving to sustainable growth. Is it fair to think that we should expect positive adjusted EBITDA to start increasing sequentially as we move through the rest of the year? Or are we looking to sort of reinvest in incremental earnings this year and really moving towards more sustainable profitability next year? Amanda Crawford Charles, that's a good question. So when we look at the Q3 and Q4 in terms of profitability. We do expect Q3 to be stronger from a sell-in perspective just due to the holiday load-in like I mentioned. And then from an adjusted EBITDA perspective exiting the year, there's a few things that could impact it, and we will match our operating expenses with our top line. There is potential cost of goods sold headwinds from increasing fee and air transportation costs, and then we could potentially have some sales and marketing investments along with some clinical and regulatory investments towards the second half. So we do expect sequentially, depending on the impact of those items, we may see an increase. However, it's just dependent on those items. That's why we're looking to break even in the second half of this year. Moving into 2025, Q1 is usually sequentially lower than Q4. But overall for the year, we are expecting to move towards a profitable business overall. Charles Rhyee And speaking of shipping costs, can you -- I mean, I guess, when I look at the gross margin guidance for the full year, that imply sort of gross margins down sequentially from the second quarter. Is that all related to shipping costs? And related to that, what is sort of your assumptions for freight? Maybe you can talk about what you're seeing in the outlook right now and what the trend is going? Is it sort of continued to tick up here? And what are you assuming in the guide? Amanda Crawford Yes. So we are assuming a certain -- to a certain degree, just because we are operating at a very lean level in terms of working capital and inventory and just keeping up with the demand that we've seen in our business. It's highly likely that we will need to air freight in some of our inventory just to get it on time to support the holiday season. So we do have a small level of that in the plan, but just depending on how we continue to perform, we could see higher airfreight costs to support the business. But with that, we are proactively looking at our inventory plan and seeking to get ahead of that. We're placing POs sooner just to make sure that we can get the product in time through the most cost-effective shipping means possible. Charles Rhyee Okay. I see. So it's really more of a mix of what type of shipping that you're looking to utilize that's driving sort of the higher cost. Are we seeing long delays in traditional shipping sort by container? Amanda Crawford I think the containers are taking a little bit longer than what we typically see historically. But it's really just a matter of us having such an inventory can beat the demand in the second half as this first half was stronger than we expected internally. And we are seeking to build up our inventory, just so we can meet the needs of the business in the second half. Charles Rhyee Okay. I see. Okay. That makes sense. Maybe just real quick on the revenue side. Where are we in terms of returns as a percent of gross revenue? Have we got finally gotten back to a normal level? I know last year and before we've been dealing with the sort of returns of the original stock. Just where are we in terms of that at this point? Amanda Crawford Yes. So returns for this quarter were 4.1% of gross billings, which is well below our average rate. Typically, we were seeing around 10% in the business. This quarter, we did have a little bit of recoveries of some charge backs from some retailers. But overall, our historical rate that we base our reserve upon has decreased. So looking ahead, we're expecting to see a reduction in returns overall. And I think it just speaks to the health of our business and consumers are buying the product and keeping the product and this is a positive thing. Charles Rhyee Got it. And maybe a question, Kurt, you talked about maybe babies leave -- or required to leave with a car seat, and that's reimbursed by insurance, if we get to the point where everyone leaves with a Sock, that will suggest that BabySat is the predominant driver of revenue. And is that sort of where we could be heading? And maybe talk about what it takes to sort of increase the insurance coverage. My understanding is that you can get reimbursed under current codes. Maybe give us an update on sort of what it would take to sort of have sort of a mandatory type of -- not maybe the Owlet per se, but that is sort of some type of monitoring device, for instance, leaving the hospital. Kurt Workman Yes, this is my favorite subject of all subjects. So Thanks, Charles. Yes, we -- I think the FDA clearance was probably the biggest milestone we can cross towards that. You can see not only just in the business, but the parental demand, the satisfaction with the product has taken a step function up, and we're taking advantage of that right now. There's so much momentum in the business. I think you can see that in the earnings. We're opening up the medical channel. When I think about every baby, it's going to start with every right today, it's every baby that parents who have that concern, they get an Owlet is the number one choice. We're expanding that to the every baby that leaves the NICU has some sort of health conditions should go home with an Owlet. It's literally tens to size. It's significantly less expensive. There's no wires that go into the crib. There's no reason why baby should leave the hospital with wired technology anymore. And there's about 20% of babies born between those leaving those with serious respiratory conditions or heart conditions. All of those babies should have monitoring at home. And we're making that happen. There's existing insurance reimbursement codes. We're building out the infrastructure for that right now. That's a really exciting piece. And as we continue to show the outcomes and the results from having access to this monitoring at home. We're going to expand this to include healthy babies at home because even healthy babies are at risk. There is the highest rates of unexpected mortality happen from SIDS, babies who have respiratory illnesses at home leads the number one cause for ER visits and doctors visits. Parents are losing hundreds of hours of sleep that first year. So there's no reason why this is a practical solution for every parent. There's no reason why every parent shouldn't have access to this. We think that we'll be able to demonstrate those outcomes over time. And as we do that, the ability to reimburse this by insurance will expand evolve. When we think about that business, that's a massive business. We're at 10% market penetration today. That's 100% market penetration like car seat and breast pumps and thermometers and strollers, we think that's where the category goes here and in Europe, and then that will position us to take this globally. So this is a massive opportunity. We're just getting started and how it's in the very best position in the market from a data perspective, from a clearance perspective. There's a community of over two million parents. That's -- yes, it's the most exciting thing about this business for sure. Charles Rhyee And Kurt, who is the main -- like where is the driving into this coming from? Is that working through AdaptHealth and other of your DME partners? Like who is it that is going into the providers to really kind of demonstrate the effectiveness of the Owlet Sock and why it should be the preferred device for inventory? Or is this going to require a build out more of a sales force internally to really push outwards? Kurt Workman I think the incredible thing about Owlet is that we have a community of two million parents. You can ask any parent in the United States. You can show them a picture of the Sock and say, what is this? And 50% of them without any brand recall will say that's the Owlet's Sock. That's pretty incredible brand awareness they're demanding it from their pediatricians. We've also seen more pediatricians reach out to Owlet proactively than we've ever been in our history. We've had children's hospitals reaching out and saying, why are we sending babies home with these big hospital devices. I think the advantages are so obvious to the market right now that we're seeing it come from both sides of the market. There's interest from the providers. There's definite brand awareness and interest from parents. And that's what, I think, is creating the momentum. We're continuing to build out the infrastructure this year, just to be clear, there's going to be -- there's work to be done there for BabySat. But as that comes together, and we're able to take this message to parents to say, hey, look, if your baby is coming on to the NICU and we'll have some sort of condition and they need monitoring, you can get an Owlet reimbursed by insurance. That's a really powerful message that's going to be very sticky in the market, and it's -- you're going to see every parent is going to understand that message very quickly when we get to that point. Charles Rhyee Great. And maybe one last one for me in terms of the international market, given that we're -- when we go outside the US, we're talking about single payer health systems, particularly in Europe and in Canada and Australia, what is the potential here that this could -- we could see this more of a mandated covered item at a national level? And maybe you can talk about any kind of discussions you've had now that you have the CE Mark in place. Jonathan Harris Charles, this is Jonathan. I'll grab that one. Yes, getting the CE Med mark in EU and U.K. We've seen the demand. Our international business is up over 275% year-over-year. So we're really seeing demand. We're starting to have conversations with Alder Hey, which is one of the leading pediatric research hospitals in the U.K. So again, getting those clearances are opening the door and we're actually getting inbound calls from these markets as well. So again, these are early days, and we're just starting these conversations. But having these clearances are really -- it's not us dialing up looking for help. We're actually getting inbound as well. So it's super exciting, not only here in the US but internationally as well. And we're answering every call, and we're going to continue to keep driving forward. Thanks, Charles. I think we're going to have Mike go through some of the written-in questions, right? Mike Cavanaugh Yes. We -- that's right, Kurt. We've received some questions from investors in the retail community and wanted to share them during the Q&A. First one is for Jonathan. How should we think about this year's progress with the FDA and other clearances combined with BabySat and subscription translating into revenue growth in 2025. Jonathan Harris Great, yes. So we haven't provided specific guidance for 2025. But based on our current market share, global footprint and beginning stages of BabySat and soon to be our subscription service we believe that there is considerable runway for sustainable growth in 2025 and beyond. We will provide additional commentary on our November call. Mike Cavanaugh Great. Next question is to the management team. Is the focus going forward going to be on top line or bottom line growth? Amanda Crawford Thanks, Mike. I'll take this one. The short answer is both. But the longer answer is, our top priority is building a sustainable and profitable business. So to achieve this, we'll focus on accelerating revenue growth. We've just talked about it. The opportunity is massive for us. We're at about 10% penetration in the United States. We have a key opportunity internationally. So the opportunity to grow our revenue is there. As we've shown, we're expanding our margins. With the addition of subscription and accelerating BabySat and the overall volume increase, that will help us expand our margins. We intend to invest strategically utilize our operating leverage that we have currently. And then overall, just maintain the operational efficiency. So we really believe we have momentum in the business, and we'll continue to build upon it and become the sustainable profitable business we are seeking to be. Mike Cavanaugh Thanks, Amanda. And final question we've got today for the team. What is your plan to get people to notice the Sock going forward on the back of these strong results? Kurt Workman I'll take that one. First and foremost, it's business results. We've achieved every one of our key financial milestones and our operational milestones this year. I think if you look at the company over the last three years, gaining the FDA clearances driving significant adoption, opening up the health care channels, launching our subscription with limited access. Those are all the key milestones that are going to continue to propel the business towards sustainable growth, profitability like Amanda talked about, and I think that's going to be hard to ignore. We're also spending more time and energy and building awareness among investors through our IR efforts and through online and social channels. And we'll continue those efforts and continue to deliver the business execution and just keep that drum beat going. And I think it will be a story that a lot of people are really excited about. Mike Cavanaugh Great. And that's all the time we have for questions today. And we'll turn it back over to Kurt for final remarks. Kurt Workman Well, thank you, everybody, for joining us today. I think it's clear there's a lot of momentum in the business. It's been an exciting journey for Owlet, and we're grateful for everybody's continued support I'd like to take this opportunity to thank our talented team for the incredible dedication and hard work that they put in Owlet. Your commitment to our mission and drive for innovation is absolutely inspiring. It's what makes this all work. We have achieved significant milestones this quarter We're demonstrating strong financial performance and continued growth. And as we move forward, we remain focused on executing our strategic initiatives to further strengthen our commercial and financial performance. And we're confident that our innovative solutions, data, our unwavering commitment to quality and the passionate team that delivers all this will continue to drive success for Owlet. So thank you again for your trust and your partnership. That will conclude today's conference call. Thank you for your participation.