archTIS Limited (AR9) Earnings Call Transcript & Summary

All right. Good morning, all, and welcome to the FY '22 Full Year Results Presentation for archTIS. I'm Sam Wells from NWR Communications and joining me today on the results webinar is Dr. Miles Jakeman, Chairman of archTIS; and Dan Lai, Managing Director, and CEO. Unfortunately, Kurt Mueffelmann, the Global COO and U.S. President, he's unable to join us today. Before we jump into the presentation, we will have some time for Q&A following some comments from the team addressing the key highlights and results into '23. And you can ask questions through the Q&A function at the bottom of the Zoom screen. It looks like we've still got some numbers increasing here. So we'll just give it a couple of seconds before handing over to Miles and Dan. All right Miles, do you want to kick things off?

Thanks, Sam, and good morning, everyone, and welcome to the archTIS presentation of its financial year '22 audited financial statements, along with our views on how financial year '23 is shaping up. My name is Miles Jakeman, and I'm the Chairman of archTIS. And as Sam mentioned, I'm also joined today by Daniel Lai, our Managing Director. In presenting this 2022 annual report outcomes, I'm pleased to say that overall, in evidence is another good year and continued execution of the company's strategic plans. The year confirmed that archTIS is trusted to safeguard the world's most sensitive information. And it was a particularly busy year. Some of the strategic highlights included the company signing its largest ever deal to date, acquiring the technology assets of Cipherpoint, completing a major capital raise, entering the U.S. public markets, delivering new products to market, and expanding the co-sell relationship with Microsoft, all of which have set us up for a strong coming financial year '23. From a revenue perspective, we experienced a slow sales start to the fiscal year due to COVID-19, which materially affected the full-year results. Because of this slow start, FY '22 revenues were flat year-on-year and did not meet with our own internal expectations. But despite the generally flat revenue result, we did see good growth in software licensing and in annual recurring revenues. The improved quality of these revenues was particularly pleasing in terms of the nature of the marquee clientele, repeatability of the earnings, and the improved margins. Each of these factors contribute to making the company more predictable and more valuable over time. There were macroeconomic challenges such as the war in Ukraine and general inflationary pressures, and these have been felt across the entire global tech sector as with our share price, the reduction of which was consistent with other technology companies in the microcap space. Nevertheless, we have tightened our investment growth strategy and become much more focused in order to decrease our overall cash burn. From a sales perspective, later in the financial year saw the team successfully enter into its largest ever deal with a $7 million award fee from the Australian Department of Defense, strongly validating the company's products for securing sensitive information and enabling multiparty sharing of such information across global networks. Moreover, this contract provides an important reference for future sales opportunities amplifying what we call the network effect of growth. Coupled with industry tailwinds around increased levels of spending on cybersecurity generally, we expect that the company will continue to witness good growth for its demand and products -- good growth and demand for each products. Because of the large contract, continuing licensing growth, and strong financial discipline, we have provided a robust outlook for the revenue and cash receipt into financial year '23. Core gross margins are expected to remain attractive, while the company aims to have its monthly cash burn during the financial year, given the visibility around the increased revenues and cash receipts as well as close continued monitoring of operating expenses. For further detail and insight, I'd like to hand the discussion over to the senior executive. Thanks, Dan.

Thanks very much, Miles. I'll first just touch on the highlights of the execution that Miles talked about that continued strategic execution has been exceptionally busy year. Let's start with the financial highlights. First of all, I think the big one there is the licensing revenue, which was a triple-digit growth figure year-on-year with 126%. That was supported by our annual recurring revenue, which grew year-on-year by 70%. And of course, that contributed to our targeted high gross margins for a high profitability business. In terms of cash, we finished the year with $6.5 million, and we've collected $2 million in terms of cash receipts post that period already which puts us in a strong position. But all of those factors combined, I think, allowed us to finish the year in a reasonably strong position to launch into FY '23. On the activity side of that, of course, we completed the acquisitions with Cipherpoint assets and integrated those global assets and their global operations and sales teams into the business. We can deed a capital raise -- sorry, $6.9 million to support our ongoing investments in our global operations, our sales, marketing, and of course, innovation in the product. And most importantly, in that innovation of the product, preparing cogency to enter that global market as a shared services platform, particularly for the U.S. marketplace. Finished the year very strongly with a $7 million deal, obviously, the largest in the company's history. And of course, that sets us up for a very strong outlook. That provides us with a platform of a minimum of 60% revenue growth and $9.5 million in cash receipts. I think that, that gives us great support to go towards cash neutrality, and it allows us a number of levers to then manage and look at how we would halve our cash burn throughout the FY '23 year and as I was mentioned, dropped towards that cash neutrality. If we go a little bit deeper into the figures, although the year-over-year revenue was flat. It's the quality of how that revenue has changed, which I think is very important for our investors and shareholders to understand. The service revenues were down. That was a direct impact of the economic circumstances and the impacts of COVID. It's very hard to deliver services when everyone is locked away or not available to provide those services too. It was an unusual year. In fact, I think that if it had been a normal year, we might have hit all the targets that we had set indeed end up deferring a number of deals for us. And 2 examples of that are the KPMG deal, which we have been announced as part of the consultant to win the One, Defense data strategy, and also the defense deal that we finalized at the end of the last financial year. But where it is really -- I'm very proud of the company is in the licensing revenue growth figure, which is a high-quality figure, up 126% year-on-year. That has increased from $1.15 million to $2.6 million. And of course, the annual recurring revenue, which is a very high-value revenue and quality for growing shareholder wealth and company value. And of course, that grew from 1.9% to 3.2%, an increase of 70% year-on-year. Of course, our gross margins, we always targeted around 70%. We've been able to maintain that this year. And going forward, that means that there's going to be good profitability in the business to bring in good cash receipts and drive towards that cash neutrality. Our OpEx has increased, and that's not unusual. We spent the last 12 months investing in building global infrastructure. We had to integrate, obviously, NC, Nucleus Cyber, but also Cipherpoint. We had to rebrand those into those markets, set up sales teams, train up technical advisers, et cetera, go on a campaign for building alliances. And of course, continued investment in our innovation of our 2 products, NC Protect and Kojensi. So overall, I think that indicates that OpEx has been steady for the last 3 quarters. And I think that indicates that to the investors that we are reasonably happy at the level of expenditure that we are for the expected and predicted growth over FY '23. Of course, there are levers to pull, and we can always manage that, and we'll be very cautious of how that money is spent over the next 12 months. Moving on to the market scenario. We have continued to see that 2 and 3 organizations are continually experiencing breaches. So the cyber threat has not dissipated at all. In fact, it increased by 16% over the last 12 months. Those incidents have been occurring from either insider threats, employees, contractors, criminal or malicious or organized crime as well as state actors. The opportunity that we are in, in terms of the marketplace is that we are in the data-centric security. We are an information security company, which is the fastest-growing sector of the cyber security marketplace. In fact, these figures have grown most recently from $24 billion to $39 billion prediction by 2030. And it's the increase in compound annual growth rate has gone from 16% to 30%. So we are seeing a massive shift in the marketplace in terms of being an innovative company, a start-up company, a company that is targeting the high-growth areas of those tailwinds, those very strong tailwinds of the cybersecurity marketplace. We are right in that zone. The companies are looking for automation and security and AI to address those ever-changing technical environments, and we are certainly in that position. Those companies that do invest in it are saving money, and that's indicated by the Ponemon Institute, $3.1 million of savings when they implement these types of security controls. Our rise in data breaches is going to continue. We know that. And of course, new defense security regulations globally responding to the geopolitical situations to address those threats such as Zero Trust frameworks, CUI or marking up of data and classifying that data to regulate compliance requirements coming in to address supply chain security are all in motion and are being implemented as we speak, not only locally but globally. So how has this affected our strategic growth and how we plan to attack that market? Well, the first thing I'd like to tell you all about is that we continue to invest in innovation. The company has always been at the forefront of data-centric security and contextualized policy enforcement and access using attribute-based access control, and that's a lot. But what that really means is that you can access information under security risk and the context has changed to allow you to what you can see. That is particularly important for balancing the need to access information and a need to share information. And of course, our niche market with this innovation is really about secure a sensitive classified information. And there is no greater market in the world today where that is the most pressing need is in the government, defense, and defense industrial base marketplace. So for us, not only is it recession-proof, it is now the spending in that sector is at its highest level in history. It went from $1.9 trillion worth of spending in 2021 to $2.1 trillion in 2022. So out of that, the top 2 expenditures were between the U.S. and China, which made up 52% of that expenditure. So it is an enormous marketplace, and it continues to grow. And as I mentioned that compliance frameworks around those industries and those defense organizations for national security is only increasing. But we have also said that our innovation -- the innovation is being driven and adopted by the government agencies, as I'll go on to explain in a little bit more detail. But it also is our feedback cycle. When we win these clients, they're also providing us user requirements and functionality requirements back to the product set, which we continue to develop. And that's important for our sell-through strategy, which brings in and leverages our partners. Those partnerships include Microsoft, Thales Raytheon, and global resellers. And let me just explain. The revenue by the top 5 companies at the moment in that defense industrial base. Lockheed Martin currently earned $64 billion per annum. Raytheon is the #2 company, earns $41 billion; Boeing, $35 billion; Northrop Grumman $31 billion; and General Dynamics, $30 billion; and then the top 5 defense industrial-based companies. These companies are global. So for us to sell to them and sell through them to get trusted access to global defense organizations and governments is important. Not only that, but it's important for us, one of our goals is to be the shared services platform for the defense industrial base. And so that -- we also need to look at how we can expand that from a small company. We need to accelerate our ability for not only expanding our sales force that are also trusted reputational introductions. And that means that those partnerships become critical to sell to them and use them to sell through to other global markets and expand our sales force and have a sales force to multiply through those organizations. Moving on. What does that mean in terms of our innovation in terms of our product? It is very specific to being compliance-driven, it's specific to allow ourselves to have a Kojensi which is an all-in platform. The technology that we've invested in there is now being very much directed at the specific niche needs of certainly been classified information for the defense industrial base. It's all about making sure that those attributes that we have in that system make it very easy to adopt a Zero Trust framework. We are one of the only companies in the world, which actually applies Zero Trust architectures directly to the data, and that is one of the reasons that we were able to win the KPMG deal with the Strand Department of Defense. In terms of NC Protect, it is all about leveraging Microsoft business applications and applying those same controls to those business application suites to enable organizations such as defense and defense industrial base and other manufacturing companies, the ability to protect their intellectual property, but also share that in a secure way across their supply chain. And of course, Microsoft is still a huge and heavy hitter in not only the defense industrial base and the defense industry, but globally across the manufacturing and collaboration market. So how are we executing and how well are we executing? Well, over the last 12 to 18 months, we've continued to state that we would focus on the Australian Department of Defense. Why? Because we have a competitive advantage in the Australian Department of Defense, where there are barriers for access to entry into that marketplace that we are a trusted provider to them. And of course, there are really 2 primary reasons: revenue and referenceability. And why are they so important? The Australian Department of Defense, and I've said this many times, and I'll continue to say, is spending $15 billion over the next 10 years on information in cybersecurity. Now to put that into some context, the labor government has just announced its commitment to the cybersecurity strategy, and the expenditure for that over the next 10 years is $1.7 billion. So the Department of Defense is spending 10x that over the next 10 years. So from a revenue perspective, it's also quality revenue. Once we win this space, it's sticky. We say that, we get the services, it expands. And it isn't a single client. There are multiple areas of defense, which you can sell to, and we are succeeding in that. Of course, the $7 million cogency expansion deal is a validation of that, and we're being used in there for secure collaboration, which is exactly what the product is intended to do. NC Protect, we did $1.6 million on a multi-year deal to protect the deployed information environment. KPMG, we will make that announcement shortly. It will be a [indiscernible] figure for a discovery phase and will continue to grow over the next 1 to 2 years in terms of consulting services and will provide us the opportunity not only to influence the data security architecture for the whole of defense, but also the technologies that they engage and adopt throughout that program of work, which will be applied to the whole of defense. So from a revenue perspective, over the last 18 months, we have already pulled in $13.2 million, and we expect that to continue as we land and expand in the Department of Defense to become the premier provider of policy enforcement products. What's also important about this execution and the validation that we have done over the last financial year is it has become referenceable. And in the security market, it is very difficult to get a client to not only be named as from an ASX perspective, but also to provide a reference. And I think that this quote from Warren Gold summarizes it all. Before NC Protect, we had to lock everything down, so very few users could access content to the extent that it inhibited our ability to collaborate with our coalition partners. What we do is enable them to open up their information and for it to be secured securely to the right person at the right place at the right time. And that is unique to archTIS and our ability to do that. And that is a direct quote from the NC Protect implementation for the deployed information environment. That referenceability now allows us to provide that use case across the Microsoft co-sell arrangement globally, and we're using that for introductions into our targeted defense clients in Europe and in the U.S. We are not only getting traction, and we're not only singularly focused in the defense and defense industrial base but we also have seen a growth in our customer base for sensitive intellectual property and the protection of that sensitive intellectual property. Kojensi last year, experienced 100% account growth. Northrop Grumman and SAP renewed not only renewed but expanded their cogency licenses. And we're seeing that evidence of that network effect, not only in those areas but also across the higher educational institutions with a number of new institutions coming on board and cross-selling opportunities with NC Protect for secure collaboration on their Microsoft. So we are becoming a trusted provider to all of those organizations. We've had a number of new clients come on board in different areas in the middle of Eastern nuclear government agency, which we protect their atomic energy plans, the U.S. Department of Health, which is research and development. We protect our intellectual property, global IT distributors for their software development, et cetera. So what we are saying is that we are validating it across the entire market strategy. And of course, that all leads from if it's good enough for defense, it's good enough for us to protect our intellectual property. I just want to mention I-Sprint as a new Singapore partner, which procured a 3-year deal for an indication customer. I recently went up to Singapore and signed a new agreement with that organization to also become a distributor, which I had the opportunity to walk through the organization that has adopted that. And their use case is protecting intellectual property for educational courses, which they develop and then pass through the -- I think they have 22 installations of childcare and education, and they protect all of their intellectual property for those education courses using NC Protect, which was a new use case to me and vastly different from what we have been doing that demonstrates the applicability of our competitive advantages in our products. They were looking for a product to do that for 3 years when we were introduced to them both through I-Sprint and [ archTIS ]. Expanding distribution, obviously, we need a sales force multiplier. We have been investing heavily in our key alliances with Microsoft, KPMG, Thales. We have different channels for different execution purposes. Carahsoft, Cirrus, locally Willyama, I-Sprint, which I would just like to talk a little bit about as well. I-Sprint is a large distributor for the Asian market. It is not something that we can commit to investing in on our own. It is a trust environment where it's important to have somebody who already has a client base and can actually target those. For example, they have 500 financial services institutions across Asia, including Mitsubishi Bank in Japan. We would never be able to have a reach of that quality of that geographic expansion without a trusted partner such as I-Sprint. When we signed that distribution deal with them, they brought along the customer and they did a trial with that. We went through that process of implementing it together to train up their technical resources so that they can then train up their reseller network. And that's the type of investment for expansion that we see as a high-quality, high-volume partner and great potential for the future. I just want to talk a little bit about Microsoft partnership and the IP Co-Sell. Kurt will be very disappointed. I couldn't talk to this. He loves working with Microsoft. And to his credit, we have had a very different type of engagement with Microsoft since February this year when there was an easing of the restrictions with COVID. In fact, we have now been able to not only expand the pipeline with the different opportunities. The result of that expanding of that $17.5 million in the pipeline really has come from an engagement and an understanding of our value proposition to increase Azure consumption revenue with Microsoft from the perspective of their defense and national security accounts globally. So we are now talking to the VP of Microsoft in those areas. We've spoken to them. We've got engagement across Asia Pac. We've got engagement in -- also in the U.S. And what the difference is, is where previously, we had just been registering deals, and we have now got evidence of closing deals. We've closed $3 million worth of Co-Sell opportunities with the department with Microsoft and a number of different agents and clients, but also the opportunities are now being brought to us. So we have been now proactively invited into opportunities that Microsoft have been engaged with, where they now understand our value proposition and have brought us in this part of those proposals to different government agencies as well across the world. It is important for us to maintain that MISA, Microsoft Intelligent Security Association accreditation and partnership. It allows us insight to see what they're doing and where they're heading and keeps us one step ahead of those guys in terms of what we can offer them in terms of us being agile and innovative. So we continue to have that Microsoft engagement. We do expect it to be a lot more fruitful over the next 12 months and is now really about executing that pipeline. Targeted revenue threads, there's a lot of talk about what is your pipeline, how much is it growing, and everything else. What I will say about that is we wanted to give you an indication of how that is split apart. We have -- in terms of defense agencies, we expect in terms of that pipeline, 35% of the revenue base will come from that. In terms of defense industry, 20% in terms of those Microsoft Co-Sell opportunities 30%. And of course, those targeted account opportunities we're looking really and particularly in that investment in those direct sales force that we've invested in 15%. Look, the outlook for us is very optimistic, and I think it's very strong. We believe that we're going to take advantage of the industry tailwinds. I've mentioned to you that the global spending for defense is an all-time high. If anyone doesn't think we're in an arms race, they're kidding themselves. What is really interesting about that is that the U.S. strategy defense strategy highlights that the #1 competitive advantage that U.S. has is its alliance. And we've seen that in terms of not only the response to those global tensions, but the Quad, the Five-Eyes, the AUKUS meetings, et cetera. And really, that's where our strength is in terms of breaking down and enabling collaboration and communication across those alliances. So we see that as a particularly high-growth area. And in terms of innovation and lasting competitive advantage, it is really important to understand that with the winning of all of these diverse clients who are either protecting sensitive or classified information, we are getting a feedback loop cycle now into how we innovate. But innovation is not just about what functions your products do. We also have to make sure that we are agile and responsive enough in terms of our development environments and how we can ramp -- how fast and how rapidly we can respond to those requirements and shift and to also counter competitive in the marketplace. And of course, this marketplace is going to see many more competitors in it because it is such a rich environment for profitability. Enhanced capability to drive those returns across defense, we are seeing that network effect. We do set ourselves high goals of being the shared services platform for the defense industrial base. The premier provider of policy enforcement to defense agencies for data-centric security. And those things aren't going to happen overnight. But what we have seen over the past 12 months is the validation that this strategy is becoming successful, that we are winning these clients that they do trust us that they are giving those references and introductions that pipeline is building, and we are getting better at executing those sales and winning those implementations. And we have a number of trials across a whole range of activities, which we very -- put us in a positive light for growth over the next 12 months. And of course, we're global export of products across the industry, that referenceability is critically important. The compliance -- building up those alliances from Microsoft for them to reference us to new clients to open the doors to deals that they're engaged with and inviting us into those deals are all acute indicators that this strategy that we have been so focused on not only building the infrastructure across to execute, but we are executing that. So there's very solid foundations moving to the next year. In terms of macroeconomics, just a quick word on that. I don't think, despite the change in the marketplace that there is going to be a slowdown in investment for digital transformation. It expanded last year to over $2 trillion is expected to be invested in this year alone despite those salesmen. And the only way out of a repressed market and talk state national recession is productivity increases. The greatest productivity increases to be had at this point in time is through technology and transformation of your supply chain and manufacturing processes using those new technologies to increase that productivity. So I don't expect that that's going to change. And with that, I don't expect the threat of disruption from cybersecurity is going to change at all. I don't believe that the geopolitical situation is going to change. I believe it's going to get worse. And I only have to point to 2 areas of that. First is the Ukraine war and the response of China to Pelosi's visit to Taiwan. I think that those things are all going to continue to drive our business forward. Last but not least, I think that puts us in an excellent position for our FY '23 outlook. As we said, the largest deal that we have done in our history with the Strand Department of Defense, which is in a high-growth area, and we expect it to deliver a minimum of 60% year-on-year revenue growth for FY '23. It's going to deliver $9.5 million in cash receipts. And of course, our core gross margins are already at around 70%, and that will continue. Most notably, it will also introduce additional services revenue, which is what dropped last year, I think, by about $1 million. So that's going to be lifted up as well. So I think we're in an exceptionally strong position to execute across FY '23, and I think that's because of the work and the quiet achievements that we have invested in and executed across FY '22. So with that, I will stop, and I will allow Sam to take some questions. But again, I would like to thank you for your shareholder support and your faith in the company and we do appreciate it, and we think we -- hopefully, we'll be delivering greater success over the next 12 months. And I've joined us for the journey because I think we're on a very, very exciting ride.

Great. Thanks, Dan. Thanks, Miles. A couple questions coming in here. [Operator Instructions] The first one, are Kojensi and NC Protect both accredited as protected [indiscernible] with the U.S. Department of Defense. And if not, what's the process and time expected to become so?

Good question. I'll take that on Miles. And you look happy for me, too, so.

I can't answer many of them for you.

So we -- part of that raise that we did, we certainly went out there and it's the preparation of Kojensi launch into the U.S. environment. Kojensi, by its nature being operational in the TS environment already has an accreditation, and that accreditation is higher than Secret. So in terms of being able to implement it into a U.S. environment, if it was being familiar at a secret level, it would be individually certified by the client that implemented it and they will go through that accreditation process. In terms of us being ready for that accreditation process, we already have the frameworks. We already have the controls. We already have the documentation ready to go for that. It's about winning a client in that space, but it already has accreditations at that moment. It is continually undergoing accreditation more broadly in the Australian Department of Defense at secret as well. And of course, that part of our competitive advantages is the certification and credibility of our products. With regards to NC Protect, NC Protect does not need accreditation. It is a component or an individual security control within a broader Microsoft environment and gets accredited as part of that system of systems.

A couple of coming in. Can you elaborate on archTIS' involvement in AS6500 project with any defense partners?

Let's just say that the product is being utilized by the 2 competitors and Australian Department of Defense to exchange information across that program of work. So that is an example of how we become a use case for us being the shared services platform of choice for capability development with the Australian Department of Defense and industry.

On the NDC Edge opportunity, can you please elaborate and provide any update?

I wouldn't want to talk about that at this point in time in terms of the NDC Edge program, it's -- I'm not able to talk on it.

Just on licensing revenues, can you comment on the rough split from new customers versus existing customers expanding our growth?

So in terms of that, we had a high level of growth from existing customers, which was very important for us to demonstrate that the network growth effect was occurring. And I named a couple of examples there with Northrop Grumman, SAP, Attorney General's department, just a number of existing company. New customers included a whole range of customers, most notably, which I can't name, I can't tell you the details about because it is a security and is part of our concerns and conditions with the licensing with those companies. But we had a number of companies come on, which were defense industrial base, manufacturing, engineering, IT, fire control, and also research and education. So I think we added an additional 3 universities to that, which are protecting defense research and development. Globally, we had a number of additional clients also in NC Protect and I alluded to those in the slide earlier.

You touched on it, but can you just elaborate on the current update around KPMG consortium.