• Revenue: $1.27 billion, an increase of 7.9% on prior corresponding period (pcp).
• Underlying EBITDA: $73.6 million, up 16.4% on last year.
• EBITDA Margin: Improved by 40 basis points to 5.8%.
• Net Cash Position: $55.4 million, an improvement of $47.5 million since June.
• Operating Cash Flow Before Interest and Tax (OCFBIT): $90.6 million, with a conversion rate of 126%.
• Net Profit After Tax (NPAT): $33.1 million.
• Adjusted Earnings Per Share: $0.061 per share.
• Interim Dividend: $0.025 per share, a 25% increase on pcp.
• Telecommunications Revenue: $626 million, up 5% on last year.
• Utilities Revenue: $530 million, up 11.4% on pcp.
• Utilities EBITDA: $22.4 million, up 38% on pcp.
• Transport Revenue: $110.5 million, up 8.4% on pcp.
• Work in Hand: Increased by 17% to $5.9 billion.

• Warning! GuruFocus has detected 5 Warning Signs with ASX:SSM.

Release Date: February 21, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Service Stream Ltd (ASX:SSM) reported strong financial performance with a 7.9% increase in revenue to $1.27 billion for the half year.
• The company achieved a significant 16.5% increase in underlying EBITDA to $73.6 million, reflecting improved operational efficiency.
• Service Stream Ltd (ASX:SSM) generated strong operating cash flows, resulting in an improved net cash position of $55.4 million.
• The utility division showed a substantial improvement in margins, with EBITDA margins increasing by 80 basis points to 4.2%.
• The company secured $1.1 billion in new contracts, maintaining a high retention rate of 94% across existing contracts.

Negative Points

• The telecommunications segment may experience minor seasonality, potentially affecting revenue distribution between the first and second halves.
• Corporate costs are expected to remain elevated due to ongoing expenses related to defense tenders, which have been delayed by six months.
• The company faces potential budgetary constraints in government transport agencies, which could impact future procurement processes.
• Adverse weather conditions did not provide the expected boost to telecommunications revenue in the first half, potentially affecting future performance.
• The utilities segment experienced a major shutdown maintenance program in the first half, which may not be replicated in the second half, affecting revenue consistency.

Q & A Highlights

Q: Can you provide insights on the seasonality of the Telco segment and its impact on the second half? A: Leigh Mackender, CEO, mentioned that while there is generally not much seasonality, there could be a minor impact of 1-2 basis points. The first half exceeded expectations, but the effect is relatively minor, and they wanted to provide that insight.

Q: What are the expectations for corporate costs, and is there any update on defense contracts? A: Linda Kow, CFO, explained that optimization benefits from property consolidation and fleet are passed to business units, not corporate costs. The defense tender has been delayed by six months, so costs will continue for another six months before revenue can be derived.

Q: How do cost escalation clauses in alliance-style agreements affect revenue growth? A: Linda Kow noted that most O&M contracts have cost escalation clauses tied to indexes or conversations, reflecting CPI or WPI on a lag basis. Historically, this has supported a 3-4% organic growth rate.

Q: Can you comment on the guidance for the second half, given the strong first half EBITDA growth? A: Leigh Mackender stated that while they don't provide quantitative guidance, they expect solid earnings growth for FY25. The strong start has de-risked the year, but it doesn't change their full-year view.

Q: Are there any impacts from government budget constraints on transport contracts, particularly in Victoria? A: Leigh Mackender acknowledged some flat expenditure from state-owned clients due to budget pressure, but incremental revenue is expected from new contracts like VRMC, which should moderate growth.

Q: How has adverse weather impacted the utilities and Telco segments? A: Leigh Mackender explained that adverse weather is generally positive for O&M contracts. There were no significant weather-related benefits in the first half, but some impact is expected in the second half.

Q: What is the outlook for utilities margins, and are there any potential surprises? A: Leigh Mackender mentioned that utilities margins have improved, exiting the second half of '24 at 3.6%. They aim for a 4% margin in FY25 and incremental improvement in the second half, but not reaching 5%.

Q: Has there been any change in activity levels following the government's additional funding for nbn? A: Leigh Mackender noted that while the government announced additional funding, the impact is expected in the future. Current programs will continue through the year, with competitive processes for new work.

Q: What are the expectations for cash flow conversion in the second half? A: Linda Kow stated that while they target an 80% conversion rate, the first half benefited from timing. The second half is expected to revert closer to normal, between 80-100%.

Q: Can you provide more details on strategic acquisitions and areas of interest? A: Leigh Mackender highlighted that they are exploring opportunities similar to their existing business, focusing on annuity-style O&M work. Utilities present significant opportunities, while Telecommunications is well-covered.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.