Interview: Regus CFO Dominique Yates

WHEN Dominique Yates started out as a chartered accountant in the corporate tax division of doomed Enron auditors Arthur Andersen, few executives had mobile phones, and those who did carried around ‘bricks’ more suitable for a building site than a corporate office. Indeed, Yates recalls his first mobile phone was a “clunky thing with a pull-out antenna”.

Today, Yates is overseeing rapid growth at Regus as the FTSE 250 workspace provider benefits from tectonic shifts in the way companies operate. Traditional office structures are being shaken up and the idea that working means spending the hours between 9am to 5pm in the office has been replaced by greater flexibility in terms of hours as well as working locations.

“When I started, not everyone had a mobile phone. You sent a status report if you were going on holiday and only found out what was going on when you got back. Now you have two devices and people are working in a more flexible way. It is no surprise that the tools needed to support that have developed,” Yates tells Financial Director.

Regus’ business model is built on companies outsourcing their workplace needs and changes in technology, demographics, sustainability and the growing societal importance of the work-life balance has helped the business grow by about 30% a year since Yates joined as CFO in 2011. In the last financial year, group sales increased 23% to £1.5bn.

The number of flexible workers worldwide is set to reach 1.3 billion this year, according to figures from IDC, while Regus has seen its network of office locations reach 1,831 globally. This, explains Yates, has necessitated a change in Regus’ business model, with greater R&D investment in third-place locations – walk-in urban workplaces – based in transport hubs such as airports, motorway service stations and railway stations.

Location, location, location

Finance doesn’t get involved in day-to-day analysis of long-term demographic trends, although a great deal of attention is given to analysing “every investment case” behind new locations for core business centres or new third-space locations.

“We have masses of opportunity out there but have a limited balance sheet,” explains Yates. “Our job is to address as much opportunity as possible without being silly and overstretching the balance sheet.”

The key thing is looking at the return on investment and the amount of time it takes to “get the cash back” from setting up a new site. There is an additional emphasis on where the site is located, Yates says.

“The easiest way to make it difficult for ourselves is put a new centre in the wrong place. I look at output in terms of ROI and assess how quickly a location can be filled, what the income from the location will be, how that compares with similar locations around the world, and how the business is performing in that location,” he says.

One of the benefits of scale is “not having to guess at things we don’t know”, Yates says. “In most cases, we have a pretty good idea of what will be achieved because we have done something the same way – or in a very similar way – many times over.”

In instances where Regus hasn’t done anything that fits – in June 2013 it opened its first business centre in Nepal – the company uses local partners who are willing to put their own capital at risk to benefit from the returns. “Where we don’t know what we are doing, we find a partner to help us do it in risk-light way,” Yates says.
Another benefit of scale – Regus is in 684 cities, in 100 countries and has 1.6 million customers – is keeping control of costs. It is very easy for a company growing at the speed at which Regus is growing to lose control of how costs are added to its overheads base. Being so geographically diverse gives the business flexibility about how it structures its back office and where it bases its shared service centres.

“We are in 100 countries but don’t want 100 finance departments. You can do the basic accounting activities more centrally,” he says. “The infrastructure you need for a country with 100 centres is different from one with five. We adapt and look at what central finance function provision to field and how we do it more efficiently.”

Scale also provides finance with daily operational data at a central level or by individual revenue lines, which provides Yates and his team with the advantage of quickly spotting anomalies in how different centres perform.

“One of the ways we grow is by acquisition, and one of the things we continually hear from people who come in to Regus is, ‘Crikey – no wonder you were so difficult to compete with; you have all this information we didn’t have.’”

Such rapid growth brings its own set of pitfalls, as evidenced last year when shares in the business slipped after it reported that ramping up its expansion into new territories would hit short-term profits. In August, Regus said it planned to open 450 new centres – an increase of its previous intention of about 300. Shares subsequently fell 8%.

Half-year profit growth was wiped out by the hike in investment spend on its growing network of international business centres and the strength of sterling. With the majority of its revenue generated overseas, Regus suffered as the strength of the pound hit the repatriation of its overseas earnings.

“Our costs are where our revenues are and they are in the same currency. The significant risk in terms of currency is one of translation,” Yates says.

However, the dip in share price has been an exception rather than a rule. Since August, the share price has risen to 205.1 pence at the time of writing from 180.7 pence. And Yates has played a key role in increasing the share price – it has roughly trebled since he joined – and consolidating focus on building long-term shareholder value.

“It’s not just about making sure the company is performing well; it is also about making sure the perception of the company among the investment community is what it should be. While I still think there is an element of undervaluation in the company and still some work to do in this area, we have nonetheless significantly reduced the valuation discount over the past three years,” he says.

Yates, who is speaking about what an investor looks for in a CFO at Financial Director’s CFO Agenda on 18 June, has some experience in investor relations – he was CFO at Symrise, the MDAX-listed speciality chemicals company – and has worked almost exclusively at public companies where he has had varying degrees of contact, both direct and indirect, with shareholders. At Symrise, Yates succeeded in expanding the investor base; something he has replicated at Regus.

“One of my key roles was to fund our growth. When I joined, we had net cash, and now we have a manageable level of net debt. One of the most obvious things was raising the funding externally in order to allow us to expand,” he says. “I expanded our investor base away from the UK. We now have a 12% investor base in the US from what was a couple of percent.”

Reverse engineered

However, the very act of accelerating the pace of growth is “overhead-hungry”. When Regus opens a new office, it takes up to 18 months to break even and up to three years for the office to become established, and in the first half of 2014 the business had a measure of success at improving overheads as a percentage of revenues. “We’ve succeeded in reducing that valuation gap by getting that message across in a clearer and more transparent way to the investor community,” says Yates.

Roughly half of Regus’ overheads are applied in sales and marketing. An empty centre, as it will be on day one, needs a lot more to be sold compared to when it is full, which should only mean there is an element of customer churn to be dealt with.

“As we accelerate our growth, the pressure on overheads has been upwards. To have held it and then start to reduce it over the past 18 months is a testament to the fact we take it very seriously,” he says. In terms of how overheads are allocated, Yates says he reverse-engineers the process so the business assumes that sales and marketing efforts are equally successful – or not – in each location.

“We allocate the appropriate sales and marketing cost by looking at what we sold and where we sold it. It’s a very simple methodology,” he says. ?

Dominique Yates will be speaking alongside Marianne Abib-Pech, former CFO, Shell Aviation at Royal Dutch Shell, about what an investor looks for in a CFO at Financial Director’s CFO Agenda. For more information about the event, which includes a keynote from former Sainsbury’s CEO Justin King,  

IN BLACK AND WHITE

2011 – present CFO, Regus
2010 – 2010 CFO, LM Wind Power
2007 – 2009 CFO, Symrise
1998 – 2007 Various roles, Imperial Tobacco
1995 – 1998 Corporate accounts manager, SmithKline Beecham
1991 – 1994 Various roles, Dixons Stores Group
1998 – 1991 Chartered accountant, Arthur Andersen