Discl: Held IRL 3.48% and in SM

HSN’s long-standing Chairman, David Trude, sold a bit under 50% of his HSN holdings.

Not a good look at first glance, but on poking around:

• Bought with his own coin, 40,000 shares on 2 May 2011
• Bought with his own coin, 60,000 shares on 5 Mar 2014
• Thereafter up to today, he has been acquiring shares via the HSN Dividend Reinvestment Plan and any sales have been in and around these DRP shares, so very small ins and outs

After 14 and 11 years of holding, fair enough, won’t hold this sale against him ...!

Discl: Held IRL 3.39% and in SM

No change to the FY26 outlook in today’s FY25 AGM, but the Customer Wins slide provide good confidence of a good year ahead.

Discl: Held 2.90% IRL and in SM

Just finished listening to the recording of the HSN call on the announcement to acquire 100% of Digital.

SUMMARY

1. Another good, sensible acquisition which ticks all the usual HSN boxes for acquisitions - complementary product, cloud offerrings, SAAS product with ~90% recurring revenue, immediately earnings accretive, good culture fit as the business is 30 years old and founder led

2. Cost of $66.4m is no biggie with HSN’s $48.2m cash on hand 30 June 2025 - they will take on $30m debt which is completely fine as HSN has excellent discipline and track record of regularly paying down debt early.

3. Adds a good chunk of 150 customers and global reach to 30 countries and opens up opportunities in the telco wholesale market

4. Management was very upbeat and analysts were very complimentary of the deal unlike the powercloud acquisition call which was dominated by all round concern (which was eventually misplaced ...)

OVERVIEW OF ACQUISITION

• Flagship offering is a full-stack Mobile Virtual Network Operator (MVNO) MVNO-in-a-box platform comprising Billing, CRM, Online Charging System, Provisioning, Interactive Voice Reponse that enables communication service providers to launch, operate, scale and monetise MVNO and sub-brand services rapidly and efficiently.
• Also offers a cloud-based wholesale voice trading platform, including routing, billing, fraud prevention and monitoring, for international mobile carriers and wholesale service providers.
• Opens up the wholesale/reseller market space for voice for telco’s looking to resell their product, particularly 6G where telco’s are looking for other companies to ride of their infrastructure backbone - Digitalk is a full out-of-the-box, global solution for the resellers - all about gaining market share, not to migrate existing customers.
• Digitalk owns the IP.
• Product is very complementary to HSN’s Communications Suite.
• Mission critical software - very long term 10+ year customer relationships, implementation cost + subscriber growth-revenue model - revenue grows as subscriber count grows .

FINANCIALLY

• 30 year-old business, historically profitable, cash generative business - last 3 years have grown 8-10% YoY, successfully expanding into more countries
• Buying from the founder - will remain as advisor to HSN
• 60 UK staff to support 150 customers across more than 30 countries
• FY25 revenue of STG10.5m (over 90% recurring), Cash EBITDA of STG3.3m - acquisition multiple 10x EV to Cash EBITDA, HSN currently trading at 12x
• FY26 impact to HSN is A$11-12m, expect Digitalk to grow the top end of HSN’s 5-7% growth targets
• Not expecting to make any significant changes to the cost base of the business, no mention of any investment - this is a “quality business” was constantly repeated

FUNDING

• $66.4m cost, funded through combination of Cash and Debt, to close before end CY2025, no earn outs
• Increased debt facility by $30m, debt ratio will remain ~0.5 or below, expect to pay that debt down quickly over the next 24 months
• HSN had $48.2m cash at 30 June 2025

Discl: Held IRL and in SM

SUMMARY VIEW

• 2H recovered as was guided for FY25 to finish on a very positive note
• Steady-as-she-grows, both verticals doing well - no concerns
• Andrew reiterated that the business outlook is very bright, the business and margins are growing, no fundamental change to business - business continues to execute well and is well poised to capitalise on opportunities
• Not concerned with the broader analyst angst over Licensing Revenue - that is BAU, it will be what it will be
• "AI" has arrived at HSN - sensible use cases, no outlandish promises that it is the mesiah to the promised land, a good thing

KEY TAKEAWAYS

• 2H ended up being stronger as guided - ended the year with ongoing momentum, business in great position
• Operating Revenue - $392.5m, upper end of revised guidance $391m to $393m
• Underlying EBITDA - $111.7m, upper end of revised guidance $110m to $112m
• Cash EBITDA - $93.4m, mid of revised guidance $92m to $94m
• Strong cash generation and conversion - $48.2m cash at 30 June 25, to pay down more debt
• Disclosed R&D Spend Allocation for the first time - Capitalised vs Expensed - $34.5m in FY25 in total, circa 9% of revenue and will stay at these levels
• Big continued focus on Sustainability - good progress on ESG initiatives which are bring externally recognised - important for EU credentials
• No change to the M&A focus and highly disciplined approach, as a vehicle to enter new markets and new verticals - Insurance is emerging as a likely 3rd industry vertical - every deal done has delivered at or above expectation

4 Key Themes

A. Germany, Germany, Germany - that's the immediate focus as Germany moves towards the 2030 Smart Meter timeline

• Powercloud going better than expected - cash generative and positive underlying EBITDA for FY25, customer churn from customers who exited the German market, major release completed in FY25
• Conuti acquisition helps add to German presence

B. AI - AI appears to have “take off” this 2H as there was no mention of AI prior to this update - now a core enabler of HSN’s Technology Roadmap

• Driving automation to automate repetitive tasks, Predictive analytics - improve speed and accuracy, some dabbling into agentic AI - all sensible early and safe use cases
• Not threatened by AI but see it as an enabler, customers are embracing HSN’s view of AI
• Expecting to sustain some headcount reductions via greater use of AI, no outlandish promises

C. License Revenue Angst - this seems to cause a disproportionate amount of angst among the analysts on the call

• Lots of analyst angst at FY25 Licensing revenue was $49m, vs prior years of between $29m and $36m as it is clear that the sharp spike in pure licensing revenue will not recur in FY26
• CFO guided that FY25’s licensing revenue was 12.7%, it typically bounces between 9-12%
• FY26 license revenue expected to be lower, but this is just part of the core business
• Am not concerned with this at all as licensing is typically a small part of an overall software and/or outsourcing deal AND the licensing costing is dictated by, and varies, by customer - it was interesting that the analysts seem totally fixated with this - Andrew mentioned at the back end of the call, that he was very surprised with the focus on this vs the bigger picture - I agree with Andrew
• This might have contributed to today’s price reaction - huge drop to $5.00 before recovering to the close at $5.60 as analysts tried to make sense of what FY26’s numbers might look like

D. Change to Medium Term Outlook vs 12M Guidance - Board decision to focus on the 2-3 year horizon instead of the next 12M, which lines up to how HSN management operates. May have also contributed to the price reaction as well

Overall Outlook

• Management very bullish with opportunities 
• Guidance is for (1) organic revenue growth of 5-7% over the medium term and (2) target medium-term Underlying EBITDA margin of 30% or above - seems that Andrew has been reading or talking to SiteMinder’s Sankar Narayan as this HSN guidance feels like it was lifted from SDR’s guidance ...