Toople PLC (LON: TOOP), a provider of bespoke telecom services to UK SMEs, has today announced interim results for the six months ended 31 March 2019.
Commenting on the results Richard Horsman Toople plc Non-Executive Chairman said:
“We continue to add more customers, typically on two year fixed term contracts. Our growing customer base will result in a lower cost of acquisition per customer and will boost our future outlook. We are now seen as a major disruptor in the SME telecommunications space, and we are being benchmarked against by a major tier one UK carrier. Our competitors find our transparency and fixed price contracts unsettling as this clearly appeals to small businesses. The major incumbents have traditionally used ‘increase in price’ strategies linked to RPI. We offer a product that provides customers with exactly what they need, at a fixed price and are increasingly becoming a natural choice for customers looking for an easy to use, no hidden costs, telecoms service.”
Financial and Operational Highlights:
· Group revenue grew year on year by 57% to £1.08m for the six month period
o 169% revenue growth attributable to our directly contracted SME business
o Broadband revenue grew by 159%
o Cloud telephony revenue grew by 82%
o Mobile revenue grew by 124%
o 7% decline in wholesale revenue – largely expected as we take action to eliminate legacy, low margin revenue
· Gross profit increased by 150% (up 72% on H2 2018)
· Gross margins improved by 7 percentage points over same period last year
· 80% increase in marketing spend (102% higher than H2 2018) reflecting increased level of spending to grow the business, driving significant increase in lead conversion and sales, which will ultimately lead to a lower cost of acquisition per customer
· New Head of Digital and Commercial Marketing appointed focussed on driving growth, innovation and sales
· Major contract win of £3.5m as previously announced performing in line with expectations and the first batches of customers have been transferred over to the Toople billing platform
· New contract wins and partnership agreements continue, validating management decision to increase marketing spend
· Strong current trading including a record month in April 2019 and a healthy new business pipeline, with over 900 orders in the month from over 600 small businesses placing orders with Toople for the first time
· Cash at period end of £1.15 million in-line with expectations and sufficient to allow business to continue with the growth plan outlined at time of Placing completed in September 2018
Commenting on summary and outlook, Andy Hollingworth, CEO at Toople added:
“This has been an excellent six months for the Company. We continue to execute on our growth strategy and are performing well against all our key operational and financial benchmarks. Our cash position as at 31 March 2019 stood at £1.15m and the Board believes that the current cash position is sufficient to allow the business to continue to pursue the marketing strategy outlined at the time of our Placing. The investments we have made in people and digital marketing are paying off. In our direct business we continue to generate an increased level of enquiries from potential customers and our conversion rate remains strong. Additionally, our decision to move away from onerous historic partnership contracts with high debtor risk and low margin, will sacrifice revenue in the short term, but will deliver overall improvement in gross margins and ultimately profitability. Current trading is strong with another record month in April and a healthy new business pipeline, with over 900 orders in the month from over 600 small businesses placing orders with Toople for the first time. We believe we can still grow our customer acquisition rate with the same level of marketing spend and will be able to drive further efficiencies with our marketing and sales performance. We look forwards with confidence.”
Chairman’s Statement
Introduction
UK Small and Medium Enterprises (SMEs) continue to switch to Toople and we have seen record numbers of new customers signing up with us. For customers who want certainty and ease of use, Toople is a natural choice. Our fixed rate propositions satisfy all SME telecommunications needs; broadband, cloud telephony and mobile. Our pricing is transparent and we have UK-based support desks offering premium quality customer service, which makes us unique. Our products are flexible and carrier agnostic.
Underlying market dynamics and our product mix change all the time, but we consistently make progress towards becoming the leading provider of fixed price and transparent telecommunication services to UK SMEs. Our customer satisfaction scores are positive, especially when compared to other UK providers. We continue to grow both by adding new customers as well as selling add-ons to existing customers, typically on two-year fixed term contracts, giving us an increasing degree of revenue visibility. Our success is being driven by our digital marketing strategy and the investments we have made in this area are clearly paying off.
Another growth driver for us is our partnership agreements. As previously indicated, we have evaluated this area of our business following the appointment of a new dedicated partner channel manager and following an assessment of our legacy contracts, the majority of which were signed before our IPO. We are now focused on signing new partnership agreements that deliver gross margin improvements. Furthermore, as old contracts come to an end we will either renegotiate them on better terms or else terminate those which provide risk without sufficient reward.
Our growing customer base will result in a lower cost of acquisition per customer and will boost our future outlook, as operational automation further develops and we start to see average revenue per user improve. We are now seen as a major disruptor in the SME telecommunications space, and Toople is being benchmarked against by a major tier one UK carrier. Our competitors find our transparency and fixed price contracts unsettling as this clearly appeals to small businesses. The major incumbents have traditionally used ‘increase in price’ strategies linked to RPI. We offer a product that provides customers with exactly what they need, at a fixed price and are increasingly becoming a natural choice for customers looking for an easy to use, no hidden costs, telecoms service.
Macroeconomic factors, such as Brexit uncertainty, do not negatively affect Toople; as all our customers are UK SMEs and now, perhaps more than ever, they need our fixed price propositions as it is business critical and it allows full cost visibility.
Our cash position as at 31 March 2019 stood at £1.15m and the Board believes that the current cash position is sufficient to allow the business to continue to pursue the marketing strategy outlined at the time of our Placing that was completed in September 2018. We are on a strong growth trajectory and momentum is with us. As planned, we have increased our marketing spend, which is required to grow the business, but we believe this will lead to a commensurate increase in customer numbers and we have a strategy in both our direct business as well as with our partnership contracts to maintain and improve gross margins, even if this means sacrificing short term revenue growth.
These initiatives and our excellent product offering and customer service will, we believe, ultimately set us on the road to achieve our stated goal of long term future profitability.
Richard Horsman
Non-Executive Chairman
CEO’s Review
Overview
In our last six months, we have continued to work hard at further developing the Toople brand and ensuring it is front of mind for SMEs. We have said before that we aim to be disruptive in an industry dominated by old legacy providers who are well known to the market but do not have as attractive an offering as we do. There is proof that these goals are being achieved; a well-known tier one UK provider has recently started using Toople as the number one comparator against which they market their products. Industry benchmarking by an established provider of its pricing and service offering against ours is a clear indicator of how far we have come in a short space of time.
Financial and Operational Performance
Financially and operationally we have exceeded or performed at least in line with all our KPIs. Group revenue grew year on year by an impressive 57% to £1.08m. Revenue growth excluding our wholesale business was even stronger at 169%, justifying our decision to invest in digital marketing and our in-house sales team. The cost of new customer acquisitions is declining and we are generating new incremental business for the Company with existing customers providing an increasing number of orders.
Within our business all our segments improved. Broadband revenue grew by 159%, cloud telephony revenue grew by 82% and mobile revenue grew by 124%. An overall increase in the number of Revenue Generating Units (RGUs) has led to a growth in gross profit, which increased by 150% (up 72% on H2 2018). Gross margins have also improved by 7 percentage points over the same period last year, given the strategic investments which we have made to drive future profitability. Although EBITDA has declined when compared to last year, this is as a result of the continued investment in marketing related activities to grow the business. Our operating loss was £0.8m compared with £0.7m. This performance is in line with our expectations at this stage of the Company’s development.
Overall marketing costs increased by 80% (105% higher than H2 2018) reflecting an increased level of spending to grow the business, driving a significant increase in lead conversion and sales, which ultimately will result in a lower cost of acquisition per customer.
The increase in costs from our investment in bringing the sales team in-house and in digital marketing are driving an increase in lead conversion and sales. The majority of these new clients are on two-year fixed contracts, giving us clear visibility of earnings. The major contract win previously announced is performing in line with expectations and the first batches of customers have been transferred over to the Toople Merlin billing and provisioning platform.
As discussed in the Chairman’s statement, our legacy contracts have historically delivered low gross margins and our strategy is now to only sign partnership agreements which are more profitable, as well as renegotiating or terminating historic unattractive contracts as they come to an end. As a result we have continued to sign a number of new agreements, but only where we are satisfied that debtor risk is low and margins are attractive. This strategy and the termination of onerous partnership agreements means that in the short term we might see headline revenues decline, but the overall margin mix is improved and this will result in improved gross margin for the business.
Market
The Government continues to expand the availability of superfast broadband. All indications are that the demand of broadband and broadband solutions will grow as more users gain access to high speed fibre networks. We also continue to see an increased demand for cloud based technology solutions which are a key driver for new customer acquisitions.
All our products are delivered and managed through Merlin, the Group’s proprietary software platform. Merlin provides an end-to-end automated process that allows customers to place orders easily and enables the business to grow its customer base, without the need to scale expensive resources. This helps support one of our key differentiators – quality of customer service. There continues to be consolidation in our sector, with notable deals recently announced such as the proposed acquisition of KCOM Group for in excess of £500 million who were a major player in the UK SME market. Over time we believe we will have a role to play in this M&A activity.
Customer acquisition and service
Toople’s approach to customer acquisition is to deploy a marketing and advertising strategy aimed at delivering high-levels of online market penetration, either directly or via affiliate sites in order to increase brand awareness. The focus is on attracting customers through the quality and transparency of Toople’s products and retaining them through their service experience once they are live. This provides opportunities for us to progressively grow the number of solutions they purchase.
Summary and Outlook
Toople propositions continue to be disruptive and competitive in the market. Whether business confidence grows or shrinks, businesses need to remain connected and we offer the best telecommunications technology at a fixed price that will always remain attractive against sluggish incumbents.
This has been an excellent six months for the Company. We continue to execute our growth strategy and are performing well against all our key operational and financial benchmarks. In our direct business we continue to generate an increased level of enquiries from potential customers and our conversion rate remains strong. Additionally, our decision to move away from onerous historic partnership contracts with high debtor risk and low margin, will sacrifice revenue in the short term, but will deliver overall improvement in gross margins and ultimately profitability.
Current trading is strong with another record month in April and a healthy new business pipeline, with over 900 orders in the month from over 600 small businesses placing orders with Toople for the first time. We believe we can still grow our customer acquisition rate with the same level of marketing spend and will be able to drive further efficiencies with our marketing and sales performance. We look forwards with confidence.
Andrew Hollingworth
Chief Executive Officer
Principal risks and uncertainties relating to the Company’s business strategy
The Group is subject to a number of risk factors. The Company’s prospectus published at the time of its Standard Listing and the further prospectuses published in June 2017 and September 2018 included detailed assessments of the risks facing the business. The Directors have remained cognisant of the following key risks in the first six months of this financial year. Other risk factors not presently known or currently deemed immaterial may also apply.
• The Company is dependent on the ability of the Directors to implement the Company’s strategy and significantly increase customer numbers. There is no assurance that the Company’s business strategy will ultimately be successful;
• The Group operates in a competitive market and may not be able to sell multiple products to customers;
• The loss of, or inability to attract, key personnel could adversely affect the Group;
• The technology upon which the Group’s products and services are based may become obsolete; in particular, the Group is reliant on the technical robustness of its software platform;
• An increase in supplier costs could result in significantly reduced gross profit margins;
• The Group is currently dependent on marketing spend to generate customers. The Group may not be able to acquire customers at a cost that will generate sufficient gross profit margins for the Group, particularly if competition in the market increases;
• The Company may not be able to secure capital to provide working capital for the Group to drive the growth of the business on terms acceptable to the Group, or at all
• The ownership and use of intellectual property by the Group may be challenged by third parties or otherwise disputed;
• From time to time the Group may be subject to complaints or claims in the normal course of business;
• The Company is exposed to the risk that third parties that owe the Group money, securities or other assets may not fulfil their obligations. These parties may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons;
• The Group’s performance could be adversely affected by poor economic conditions;
• The Group’s infrastructure and systems could be targeted by cyber-attacks;
• The pricing environment in the telecoms industry could become more difficult;
• The UK telecoms market is subject to regulation by Ofcom and subject to high incidence of fraud and bad debt risk;
• New data protection legislation (“GDPR”) became effective on 25th May 2018. The Group relies on assurances from its data suppliers that such data is compliant.
The Directors seek to mitigate these risks by applying their considerable experience of operating businesses in the sector and by devising trading and operating strategies designed to seek out and exploit profitable trading opportunities whilst seeking to protect the business from downside risks.
