Toople Q&A: Acquisition synergies propelling the company towards positive cash generation (LON:TOOP)

Toople plc (LON:TOOP) CEO Andy Hollingworth caught up with DirectorsTalk for an exclusive interview to discuss changes in the business, acquisitions, impact of COVID, cash generation and profitability and what the future holds for the company.

Q1: Interim results just published and the business seems to have change a lot since your last set of results. Andy, can you talk us through the major changes?

A1: It’s a dramatic set of changes over the course of the last six months, January, this year, 2020, we announced a successful placing to fund the acquisition of DMSL UK which was transformational. The reason why it was transformational was DMSL have multiple revenue streams, including upfront cash and recurring revenues from BT, recurring revenues from its directly managed and contracted customers and revenue shares with over a hundred plus partners and resellers that they’ve had over the last 19 years.

So, the combined group is now of significantly larger scale which has opened up opportunities to benefit from material operational gearing and operating efficiencies.

Q2: Now, you talk about the acquisition being transformational, can you expand on that for us a little?

A2: One of the major results is that pre-acquisition the material customer growth in Toople came at a capital loss for the first 10 months of every customer’s life that we bought on board. That obviously consumes cash before we experienced a return, the gross profit kicks in a sort of month 10 to month 11 and then you make the margins between month 11 and  month 24, which is the typical life of a customer contract.

Whereas the DMSL business model is built around receiving payments upfront and our new carrier relationships mean that customer acquisitions are, at worst, cash neutral from day one so not cash burning and are generating gross profit sort of immediately. This coupled with the cost synergies that we’ve identified and are delivering on substantially reduces our cash burn.

Next, the acquisition also expanded the group’s reach into the UK consumer market, which is experiencing a huge change, and a rapid change, and as operational automation further develops and more people choose or in the current situation of forced to work from home, that is a real key new segment for us – the consumer market and delivering high speed broadband to homes.

Finally, we also recently launched a telecoms price comparison site so a and we also have a site that is available for credit checking and credit referencing and reports for UK businesses. So, they complement the groups IT and telecom services per se.

Q3: I think you’ve hinted at this, but how has the combined business performed since COVID? Has it impacted growth and have you won any new contracts?

A3: I think it’s fair to say that obviously nobody in the UK or globally is insulated from the financial impact of COVID and its true impact cannot be underestimated by any business.

Our sector as a whole has suffered but considered to be reasonably insulated on the basis that there’s a huge move of people working from home now and not in the office and what do they need, they need high speed connectivity with great bandwidth. So, whilst trading conditions in the B2B environment have been challenging, the group as a whole across all of the companies have traded actually solidly during this period which is good to see. In recent weeks, we’ve notably seen a change back to pre-COVID conditions for all the numbers and activity so we’re quite comfortable in terms of where we’ve been in this period.

We’ve continued to win a number of new contracts which we’ve updated the market with in the retail, the hospitality and insurance sectors and our core offering to support that is strong with cloud telephony platforms that ensure business continuity for all of our customers that can act as a solution in an increasing environment that is supporting remote working.

So, the core cloud VoIP offering supports the significant unprecedented times that we’re in.

Q4: You talked about COVID presenting opportunities for the group, what can you tell us about those?

A4: I think, as I just said, the trend towards working from home has been accelerated by the onset of COVID and the subsequent lockdown which may remain with us in some form for a long time to come. All businesses in the UK have undoubtedly been forced to make, as I say, unprecedented changes to the way in which they operate and now more than ever are reliant on connectivity and their communications wherever they may choose to work.

All the group brands differentiate, they seek themselves to differentiate, by offering IT, telecoms and broadband solutions with robust and reliable packages that enhances that customer’s business wherever they may be and are based on, always, the Toople’s DNAs of trust, transparency, no hidden fees with fixed pricing where possible. That is critical for companies adapting in the new challenging circumstances.

Q5: You talked a lot in your statement about the acquisition synergies and cost savings, can you elaborate on that for us?

: DMSL has always had a history of being cash generative which considerably accelerates our timeline to achieve profitability and cash generation. We communicated at the time of the acquisition, and a key part of our rationale was seeking to achieve cost savings of some £50,000 per month so equating to £600,000 a year of savings. To date, we’ve already achieved over £40,000 pound a month of synergy savings so £480,000 on an annual basis, we’ll start to follow through in terms of cost savings with the remaining £10,000 already in frame to be delivered and we’re delivering as we speak to another £120,000 of synergy savings that will be delivered.  In addition, as a result of the integration of the two businesses, we’ve also identified a further annualised total of £420,000 plus that can be realised.

So, in summary, we expect to achieve over £1 million of synergies over the course of the next  financial year, substantially more than we than we originally identified and really good to see.

Q6: So, what does all that mean for your cash generation and profitability?

A6: I think we must remain cautious about the overall macro impact of COVID but as I’ve said, we’ve traded through it solidly, we’ve seen a return to pre-COVID conditions in terms of all the numbers that are coming in on an hourly daily business. We expect materially to be in a much, much stronger position from a cash generation perspective as a result of the acquisition synergies that we’ve identified and realised and they are certainly propelling us more quickly towards positive cash generation.

Q7: Just looking at the future, what do you think the future holds for Toople?

A7: Growth is all being driven by a number of factors, not least, and we’ve talked about it many times, a notable switch from UK small businesses and homes to super-fast fibre broadband, VoIP telephony. This is all being driven by the government’s policy and OFCOM’s policy of phasing out the existing legacy copper infrastructure, a process that has to be complete for new orders by 2025 and copper infrastructure closed by 2027. The company is aligning itself, and has aligned itself, to that future connectivity.

Businesses are forced review their existing telecom services, many are seeking new solutions, reviewing their current costs, looking for enhanced quality at affordable fixed prices and SMEs are increasingly dissatisfied with a lack of pricing, transparency, poor service offerings and poor customer service from the traditional tier one providers. We’re taking advantages of those failings by the bigger competitors and we’re fast becoming a major disruptor in the market.

The trend is coupled with a seismic shift in UK working practices accelerated by COVID, perverse to say that there is opportunity in these unprecedented times in our segment and for the company. More workers are either electing or being forced to work from home, driving further reliance on home-based infrastructure, home-based speeds, home-based based bandwidth, and IT capability in a consumer environment as well as the business environment.

We will continue to demonstrate what we’ve always done, which is be agnostic to the carriers, deal with all the biggest UK carriers and the best choice for the customer providing them with the best service at the best price with transparency of offerings. Particularly, this difficult time businesses and consumers need this from a telecoms and IT suppliers where the business confidence grows over the coming months or year, or shrinks businesses still need to be remained to be connected. We offer the best telecoms technology and solutions at a fixed price and we should always remain attractive against our sluggish incumbents in the marketplace.

So, I’m very, very positive about the opportunities that exist, even considering the difficult times that we’re in and will continue to be in.

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