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NetDimensions (Holdings) Limited ADR (OTCQX:NETDY)

Q4 2013 Results Earnings Conference Call

April 07, 2014, 09:00 AM ET

Executives

Jay Shaw - (“JS”) CEO

Matthew Chaloner - (“MC”) CFO

Analysts

Brian Murphy - Merriman Capital

George O'Connor - Panmure Gordon

Operator

Greetings, and welcome to NetDimensions’ Full Year 2013 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

Please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports. All information discussed on this call is as of today, April 7, 2014; and NetDimensions does not maintain or undertakes no duty to update future events or circumstances.

Now I would like to turn the call over to Matthew Chaloner, CFO of NetDimensions. Matthew, please proceed.

Matthew Chaloner

Good morning to you all in the U.S. and good afternoon to you all in the U.K.

Welcome to NetDimensions’ first ever live recorded earnings call. For those of you who are sat in front of your pc or laptop you will be able to follow the presentation slides by accessing the URL as highlighted in the invitation to this earnings call.

I’m Matthew Chaloner the CFO of NetDimensions and after this brief introduction I’ll hand you over to Jay Shaw the CEO who’ll take you through what we are about, what our focus is and talk about the NetDimensions Talent Suite.

Jay will then hand you back to me to go through the financials.

Jay Shaw

Thank-you Matthew.

Just a reminder, we are making certain forward looking statements today which we as management believe to be correct but you should not rely on these statements, you should always do your own research.

Having said that, who are we? NetDimensions is a Company that makes and sells people management solutions that help clients in high consequence industries.

What do we help those clients do? We make software and that software specifically helps client companies manage their people better.

Part of what we do is the people part of compliance. Making sure people are properly trained, certified, licensed, supervised. That they have earned or achieved competencies, that they have the continuing professional development credits they need.

Practical Talent Management is a core part of what we do. It’s about appraisals, objectives and an on-going dialogue within the Company to help make sure people are fit and proper to carry out their tasks -- that people are doing their jobs properly, that they know how to do their jobs and that they know how to identify and better manage risks.

NetDimensions offers its clients a truly global system. Our platform is currently available in 41 languages and we are continually expanding this. The NetDimensions Talent Suite platform can be accessed wherever you are -- on your ipad, android, phone, desktop.

What exactly do we sell? Aside from our content development and other professional services, our main product is the NetDimensions Talent Suite, which comes in 3 parts.

The first is NetDimensions Learning. This is a platform that helps our clients manage, deliver, track and report on all aspects to do with how staff are trained, how they become fit and proper, in compliance with company policies, industry regulations and best practices.

Then we have NetDimensions Performance. Performance management for everyone. Not just senior executives but for middle management and line staff as well.

A lot of performance management has to do with competency management as well. Competency management is what binds together learning & performance for companies. It’s about making sure people are competent to do the jobs they are employed to do.

And finally we have NetDimensions Analytics, the last part of the NetDimensions Talent Suite.

This is an environment in which you can take big data or small and do both descriptive and prescriptive analytics. That is, find out what is going on within your organization and make improvements. You can use training and HR related data sets to do that. You can add other data sets as well.

It’s a very powerful business intelligence solution with the ability to push actionable insight out to front line management. The productivity and risk management uses are obvious. This is the next wave in human capital management.

That’s basically what we do. We make software that is a platform for clients to use to better manage their people.

So what holds all that together?

If a client is in a high consequence industry, meaning an industry that is highly regulated or where there is a lot at stake then that client is very important to us.

There are lots of engineering implications around high consequence versus general use, especially for human resources technologies. Because in high consequence use cases there are issues of security, authentication and assurance which don’t exist in other use cases.

We are good at this. This is a clear differentiator for us as a Company.

Highly regulated industries include healthcare, life sciences, financial services, transportation, military, law enforcement and other government agencies, energy and manufacturing. These are not the only high consequence industries but they are the major ones.

Health & Safety issues loom large on both aeroplanes and oil platforms.

For example, Cathay Pacific and Virgin Atlantic periodically test their pilots using our system and the Civil Aviation Authority and European Aviation Safety Agency also use our system.

As of end of December 2013 we had 411 active clients and over 3.2 million users worldwide. Our client list includes many large multi-national companies operating in high consequence industries.

I’ll now hand you back to Matthew who will take you through the financials.

Matthew Chaloner

Thank-you Jay.

We have delivered consistent growth in revenue over the last 5 years and in 2013 revenue increased by 17%. We are typically 2nd half weighted. This is primarily because many clients renew or finalise licence and Software as a Service or “SaaS” agreements in the final quarter, in order to have the expenditure approved prior to the year-end.

Looking at Invoiced Sales, this has also grown consistently over the last 5 years and in 2013 increased by 15% over the prior year. We typically sign three-year client agreements, invoice 12 months in advance for licence, SaaS and Support & Maintenance contracts and get paid 30 days from date of invoice – a good cash flow model. The licence income is recognised on invoicing while SaaS and Support & Maintenance invoiced sales go on the balance sheet as deferred income and are released over the service period in equal instalments. This is why our reported revenue lags behind invoiced sales.

If you consider revenue by product type over the last 5 years, what I really want to highlight is the growth in our recurring revenue streams. The SaaS and annual on premise licence revenue streams have been growing consistently and will continue to do so. We are moving away from the traditional perpetual licence model with support & maintenance to more of a recurring revenue model which has the benefits of more predictable and certain future revenue flows and through our SaaS offering gives us more of a five finger grip on clients.

Increasing focus on direct sales in high consequence industries has led us into bigger deals with the average first year deal size for new direct clients hitting over US$100K in the year, an increase of 42% over the prior year.

In terms of operational achievements we had a busy year. When I joined on 2nd January 2013 the first task I was given was to make an acquisition. And we did. We completed the acquisition of eHealthcareIT on 1st March 2013 for US$3.5M. On acquisition the eHealthcareIT business immediately became NetDimensions Healthcare, our new dedicated division providing talent, learning and compliance management solutions to the U.S. healthcare market. We are excited about the potential this new division offers for growth in the U.S. healthcare industry and as a result substantial investment has been made into the division to drive growth. We anticipate continuing to invest in and grow opportunities in the U.S. healthcare services market.

In May we completed a share placement on the AIM market raising US$6M net of fees. On the back of the placement we commenced the implementation of our 3-year plan to increase revenue and market share in our targeted “high-consequence” sector. The plan involves substantial investment in the Business, mainly in people.

During 2013 we increased our overall headcount by 28% to 167 and our quota carrying sales force (those executives responsible for achieving sales targets) by 71% to 29. Hiring additional quota carrying sales executives is key to the growth of the Business. Each sales person is given an annual new business quota. We had 12 quota carrying sales people going into 2013. We now have 29, so this gives you an idea of the ramp up. It’s fair to say we did not get a full contribution from the quota carrying hiring in 2013 as it takes 6 to 9 months for a new sales hire to become effective. In addition, as we get into bigger and more complex deals the sales cycle lengthens. In general we expect higher contribution levels from the quota carrying hires in 2014.

We also strengthened the senior management team by appointing 5 senior key executives including a new CFO (me), Chief Sales Officer, Chief HR Officer, Global Alliances and Key Account Executive and General Counsel.

And finally we secured a finance facility of up to US$5M with Silicon Valley Bank, which remains undrawn and continues to be available. We intend to use the Silicon Valley Bank facility to help fund our acquisition strategy.

As to our financial highlights in 2013. As stated previously our revenue increased by 17% to US$16.2M in the year and our invoiced sales increased by 15% to US$17.6M.

The deferred revenue balance increased by 25% to US$7.6M, most of which will be recognized as revenue in 2014, giving us a solid start for this year.

We are very pleased with the growth in our global hosted software as a service business which increased by 36% to US$6.1M. This is in line with our strategy of moving from a perpetual licence model to more of a SaaS model.

Revenues in the key market of North America increased by 55% to US$6.8M as we saw continued growth in our global secure SaaS offering along with an immediate contribution from our new Healthcare division. The new healthcare division contributed US$1.3M in revenue for the year. Prior to the acquisition, eHealthcareIT was a reseller of NetDimensions in North America. Therefore the net effect of the acquisition on 2013 reported revenues, after adjusting for the revenue that we would have declared had eHealthcareIT remained a reseller, was six hundred thousand U.S. dollars.

Highlighting some of the key numbers making up the income statement for the year, revenue as previously mentioned was up 17% to US$16.2M and Gross Profit increased by 16% to US$14.6M.

Last year we started work on our 3-year business plan to increase revenue and market share in our targeted “high-consequence” sector. The plan involved substantial investment in the Company, an investment that totaled US$4.9M in 2013. The majority of this investment, US$3.4M, was on new hires.

As a result of this substantial investment the Group’s loss before tax was US$4.9M, and the adjusted loss before tax was US$4.0M excluding net foreign exchange losses of US$0.1M, intangible asset amortisation US$0.5M and non-cash share-based payments of US$0.3M. This loss was substantially lower than forecast. And we added 67 new clients in the year.

Current assets include an accounts receivable balance of US$7.3M and a cash balance of US$7.7M. Current liabilities include a deferred revenue balance of US$7.5M. Shareholder funds at the year-end were US$8.2M, an increase of 36% over the prior year. We currently have no debt on the Balance Sheet.

In regard to cash flow for 2013, the US$2.5M used in operating activities includes the additional investment of US$4.9M as per the plan.

Included in cash spent on CEMA (this is our abbreviation for Capital Expenditure and M & A activity) is US$2.2M in cash payments made in the year for the acquisition of eHealthcareIT. The total consideration paid for the Business was US$3.5M, of which approximately US$1M was paid in shares and the balance of US$2.5m in cash, of which US$0.5M was paid on an earn-out basis.

The net cash inflow from financing activities includes the US$6M we raised from the share placing in May. The cash balance increased by US$0.9M in the year.

What to expect from NetDimensions going forward…

More Investment – additional investment, we started a multi-year business plan in 2013, there will be additional selective investments to support and grow the business.

More Acquisitions – we will look at targets that give us additional market reach, technology, products or services and that increase our reach into highly regulated industries like healthcare

More Compliance, more focus on global and industry-specific compliance capabilities and Healthcare, life science and other high-consequence industry build-outs.

More of a Continuing Global Focus. Providing clients with an exceptional user experience regardless of language or culture. We will be rolling out NetDimensions Talent Suite into more languages this year. Providing Back-end support for portals, interfaces and integration. The use of portals helps to customise the LMS experience for users.

More Mobile, more innovative apps for vertical markets and general use. As mobile apps and usage continue to change we will continue to change and innovate our offerings.

More Practical, Career-focused Talent Management, providing vertical-specific support for individual and organisation development. Making sure people can pass the fit and proper test to do their jobs.

More Sales growth – annual revenue of US$50M within five years. We went public on this in our strategy paper in May 2013, titled “Placement Proceeds to Drive Growth”. This is not a forecast. It’s an internal target we have set ourselves.

Thank-you, that is the end of the presentation and we will now open up for Questions and Answers.

There is an operator on hand to control the delivery of questions which management will do their best to answer. You may have to wait your turn to ask your question if there is a queue so please be patient.

Question-and-Answer Session

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question today is coming from Brian Murphy from Merriman Capital. Please proceed with your question.

Brian Murphy - Merriman Capital

Hi. Thanks for taking my question. May I ask you, could you give us a revenue line item breakdown?

Matthew Chaloner

You mean by product for the Group?

Brian Murphy - Merriman Capital

Right. So I'm looking for licensed software, I was saying maintenance in the services line.

Matthew Chaloner

Sure, sure, yes. We actually got -- we got a slide actually òn the presentations that we touched on. So we're looking at tax revenue with around sort of $6.1 million on the annual licensing, which is the on-premise licensing, was about $2.5 million, $2.6 million. And then in support of our professional services, which is the software implementation, customization, special content, healthcare content, was about $3.8 million.

The support and maintenance which is a function of perpetual licensing up 20% of the original license value, was about $2.3 million. And perpetual licensing, we saw a tail-off in that in line with strategy. We want to move away from the perpetual model to more of SaaS hosting. The perpetual actually fell down to sort of below US$1.4 million.

Brian Murphy - Merriman Capital

Okay, great. And operating expenses came in quite a bit lower than what I was looking for in the second half.

Matthew Chaloner

Yeah.

Brian Murphy - Merriman Capital

Can you speak to that? Is that -- was that a function of efficiencies, or sort of where did you pick up the efficiencies there? And does that have any implication for what you guys are thinking about in terms of operating breakeven and cash flow breakeven?

Matthew Chaloner

Sure yeah. No, that's a good question, Brian actually. We originally plan to implement the three year or the multi-year growth plan in January 2013. But actually we didn't do our fund raising till May 2013. We actually didn't really accelerate investment till the second half of 2013, but originally plan to do in January. But because the fund raising was delayed, we actually delayed the investment in the business.

The remaining investment going forward in terms of headcount, we're pretty well hired up on the sales and marketing organization is in technical development and our professional services about two of the remaining hire is yet to be done. In terms of implication on 2014 sort of forecast, it shouldn't have a material effect on the numbers we have out there.

Brian Murphy - Merriman Capital

And when we think about the revenue mix going forward, I know you're shifting the model more toward SaaS, but for your current perpetual license customers, I mean they are not making that transition. Can you talk a little bit about your renewal rates on the perpetual side? And maybe, how we can think about maintenance revenue in 2014 relative to 2013?

Jay Shaw

Hi Brian, this is Jay, the CEO. Maybe I'll take a stab at answering that question, if you don't mind.

One thing is that we do have an active campaign to flip license plus at an end client to the SaaS model. And that's an ongoing discussion with many of those perpetual license clients. Now, not for all them, some of them are government agencies or are in countries where that's just not possible. So we will continue to sell multi-year annual license deals. And those annual licenses include S&M, so you won't see S&M growing very much in future.

And it's absolutely necessary for key or strategic sale, we will tend to bid until another perpetual license, but it's not on offer. It's not in the price book. It's not something our sales people talk about. So what you'll see over time is that the S&M revenue is likely to go down. And in some parts it's gone down because we've converted them to SaaS. That's a good thing. And if you see any new perpetual licenses, it will be very much a professional case sale. Does that answer your question?

Brian Murphy - Merriman Capital

Yeah, yeah, I think so. But when you're taking about the current install base, when you're talking about shifting the model, are you talking -- is that from a delivery standpoint meaning that they are going to be moving from on-premise to a hosted solution, or is it purely payment related?

Jay Shaw

No. It isn't moved from on-premise to SaaS.

Brian Murphy - Merriman Capital

Okay.

Jay Shaw

I mean it's not driven just from our strategy; it's also driven by changes in the market. More and more internal IT departments are getting out of the cloud business. They are acting more in an advisory role or the business owner within the business and letting third parties, letting suppliers actually do some end-to-end solution provision. So we're actually following the market here, not fighting it.

Brian Murphy - Merriman Capital

Okay. Great. And so, did you say that the contribution from eHealthcareIT was $1.3 million for the year?

Matthew Chaloner

Yeah. It was sort of -- the contribution from our new healthcare division was US$1.3 million in revenue. That actually I would like to highlight the effect of the acquisition on revenues, because eHealthcareIT used to be a reseller in North America. They used to take $0.5 million plus revenue from them anyway. So adjusting from the fact that they used to be retailer, the net effect of the acquisition was US$600,000 on unrecorded revenues and not a material impact essentially.

Brian Murphy - Merriman Capital

Are you guys happy with the contribution from the healthcare business?

Matthew Chaloner

Okay. So let me just add some flavor on that. So the healthcare business is 100% flat. So when we bought eHealthcareIT, there's no deferred revenue with it. We bought it as a blank paper in terms of revenues and we build US$2.4 million in a year. But this is a SaaS business. We couldn't take all out to revenue, went into balance sheet as deferred revenue. And we therefore -- we only took $1.2 million of the $2.4 million to revenue.

Brian Murphy - Merriman Capital

Okay. Got it.

Matthew Chaloner

Yeah. So we were happy. That was a 100% renewal rate actually on that business. So we were very happy.

Brian Murphy - Merriman Capital

Great. And so even if I back out the contribution from the healthcare business, it looks like your business in North America is still quite robust, growing in the 25% range; EMEA, not so much, sort of in the 5% range. Can you talk about what's going on from a geographical basis?

Jay Shaw

I think part of this was the strategy transformation. So we decided that we would focus very strongly on high-consequence in clients. And the EMEA folks went after it tooth and nail and brought in some fantastic, fantastic clients, but the benefit of some of those clients, like (indiscernible) manufacturing will count a lot more in 2014 than it did in 2013.

So we expect all of our divisions to grow at the time, but you may find one area, one geography leapfrogging another from period-to-period and a bit of that happened last year.

Brian Murphy - Merriman Capital

And I'll sneak one more in. Average deal size is way up for the year, up over 40%. The average deal size I guess is about $100,000 now. Can you talk about what's driving that and how hard do you think that can go?

Jay Shaw

So Brian, you have to remember our history. We used to be a software development house, the majority of whose sales were made by retailers. So the retailer would get a discount from the price for the software, the S&M and the retailer would add on locally for hosting and all implementation and related professional services. And that used to be 60%, 70% of our revenue.

Now that we flipped that and we've gone direct, we are capturing much more of the value of the client to our revenue line. So that's one really substantial change.

The other has to do with our strategy. We've actually set our sales force and intended them properly to go after high-consequence industry clients of 5,000 users and above. And what this means is that we've cut out a lot of the smaller deals and we're focusing on fewer but much more high value deals.

Brian Murphy - Merriman Capital

I lied. I'll just try to sneak one more question in. So you guys ramped up the sales force pretty aggressively as well. It looks to me like most of those adds came in the first half of last year. Can you talk a little bit about how those guys are ramping up? I know you're expecting productivity to be up in 2014, but maybe just a little bit more color there.

Jay Shaw

We actually didn't have a lot of expectation for 2013 hires in calendar year 2013. We expect them to contribute this year. And it typically takes six to nine months for new sales person to get his or her feet under the desk and really start producing.

So we did hire in Q2 last year around the time of the fund raise and we hired some after that as well. But the expectation is that in the second half of this year you'll see some of them closing deals that they started sales cycles on in Q3, Q4 last year.

Brian Murphy - Merriman Capital

Okay. Very good. Thanks for all the color.

Jay Shaw

Thanks, Brian.

Matthew Chaloner

Thanks, Brian.

Operator

Thank you. (Operator Instructions) Our next question is coming from George O'Connor from Panmure Gordon. Please proceed with your question.

George O'Connor - Panmure Gordon

Yes. Good afternoon, gentlemen. Just competing on the last question, any impact of price changes in terms of the increase in that ASP? And then secondly, Matthew, you talked about an acquisition strategy, wonder if you could give more color on that point please.

Matthew Chaloner

Sure yes. In terms of selling prices increasing, I think that didn’t have a big impact really in 2013. It's something we were aware of that there is more up-selling we can do in terms of the install client base. All of them have learning, but you know we can do more in terms of selling performance, the performance module to them, and also, indeed our professional services.

So in terms of actual price increases, we didn't actually implement any across the both prices increases as such in our client base in 2013, but what we are doing by getting more into more folks on high-consequence there is less pricing pressure, so that we will give less discounts away because we're competing our strength.

And the second part of your question, just remind me that again, George, sorry.

George O'Connor - Panmure Gordon

Yes. You talked about an acquisition strategy, just wondered if you can give us more color on it.

Matthew Chaloner

Sure, yeah. So we're very excited with the U.S. healthcare market at the moment. Our new U.S. healthcare division is performing well. They're into a number of new deals at the moment. And we've put a lot investment in that business.

It's fair to say that acquisitions in the U.S. healthcare space are probably something that we will get very excited about and we what want to issue. So really an acquisition that takes us more into highly regulated industry like healthcare, or an acquisition that takes us into new geographical markets that we currently don't have a presence in or an acquisition that gives us another technology that we currently don't have. So that would be the three criteria for an acquisition actually.

George O'Connor - Panmure Gordon

Okay. Matthew, good stuff. If you wouldn't mind a question for Jay. Jay, is the C-Suite complete now?

Jay Shaw

We hired last year a Head of Sales who came out of IBM Kenexa, ahead of Global Alliances and key large accounts who came out of IBM; our Global HR Head also out of IBM, and General Council who came out of the Dutch law firm actually.

And we're very, very happy to add those folks to the C-Suite along with our CFO who started actually on January 2 in 2013; and our Head of Marketing who we'd hired earlier. So I feel we actually have the main basis covered right now. We have an excellent team and I'm very excited to be working with all of them going forward.

In terms of future hires, that will depend to some extent on what the acquisition strategy is and how the organic growth ramps and how quickly it ramps. I would imagine that you'll see more in terms of senior hires around professional services, but not C-Suite, but very high level hires. And Matthew mentioned, engineering and technical support, the technology side of the house will be beating that up, both in terms of frontline programmers and support personnel, but also in terms of management.

George O'Connor - Panmure Gordon

Good, great. Many thanks for taking my questions.

Jay Shaw

Thanks George.

Matthew Chaloner

Thanks George.

Operator

Thank you. (Operator Instructions) Okay. There are no further questions at this time. I'd like to turn the floor back over to management for any further closing comments.

Jay Shaw

We just want to say thank you to the analysts who were on the call today and the investors and thank you especially to the analysts who asked questions. We appreciate it. And we hope that our discussion of 2013 operations and financial results gives you color on what we did last year and let you understand where we're positioned to go this year. Thank you very much.

Matthew Chaloner

Thank you.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

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