archTIS Limited (AR9) Earnings Call Transcript & Summary

All right. Looks like we're there. Well, good morning, everybody, and welcome to archTIS' Q1 '24 investor update for the period ending September 2023. I'm Kurt Mueffelmann, Global COO and U.S. President. And today, I'm joined by archTIS' Miles Jakeman, Chairman and Daniel Lai, our Managing Director and CEO. And as we didn't have Miles present at the year end investor update, we wanted to start by giving Miles the opportunity to update you on the company as well as the overall market. So with that, Miles, I'll turn the meeting over to you.

Thanks, Kurt, and good morning, everyone. Overall, we, as a company, in particularly, as a Board, are quite happy with how we finished up in financial year '23. We had good revenue growth at 37%. We had very good cash collections of around $9.5 million and a solid reduction in our cash outflows. Importantly, we also increased our ARR and decreased our operating expenses as we push into cash flow positive territory. For the coming year, we are targeting a 50% revenue growth, and we'll continue to focus on both ARR and cash flow. And also more importantly, margins, which should help balance the ledger going forward. I think, to be honest, given the tough market and just all of the external risks that are facing investors at the moment, the company has performed well, and we will continue to focus on our [ net income ] and doing what we need to do to get the company both profitable and improving shareholder value. So as a snapshot, I think we've done quite well. And I'll now hand over to Daniel, who will show you how the first quarter has progressed. Thanks, Dan.

Thanks, Miles. Welcome, everybody. Thank you for your support and your keen interest in archTIS. Look, I think on the back of that good annual results, we continue to improve. So this quarter, we were up 140% in our revenue. Principally that was driven by services. Services have been driven by a number of proof of concepts, which we believe are going to pull through our licensing opportunities in the second half of this year towards the end of this calendar year as well. It's been a very active first quarter. In fact, it's probably been the most active first quarter that I think I had been involved within the company. And that gives me a lot of confidence moving forward. The other things that we've achieved, obviously, is the net cash outflows have been dramatically reduced. So that has been supported by an increase in revenues, particularly by the proof of concept, $4 million deal that we did with this Department of Defense in June. But the trend is certainly there for us to drive towards cash flow positive, which is critical to the company. The other goals that we've also been able to achieve is, of course, the launching of Kojensi into the international markets, which is slated to that back in November last year. This is opening up new opportunities for us, and it's particularly well timed given the alliance with archTIS and what's going on with archTIS. As you will all be [ continued to be ] aware there with the ongoing scenes in Israel, the geopolitical situation is driving expenditure in this market. And the need for alliances to share information is becoming more and more critical. It's also becoming -- we see much more activity to try and address this also in the international supply chains for defense, and that's in principle where we're seeing a lot more activity coming up. So with that, I'm going to hand it over to Kurt on -- and he can go through the details of the financial results with you. So thank you.

Yes. Great, Dan. Thank you. During Q1, our total revenue was $3 million, which was an increase of 140% from the prior comparative period and up 35% from last quarter, that was Q4 of FY '23. The revenue was slipped across licensing of $1.1 million, which grew 60% and services of up to $1.9 million, which expanded by 239%. So a nice pop there in services. With the services increase, our gross margin did decreased to 47% from 62% from the prior comparative period, although it was consistent with what we did in the fourth quarter of last year. Low gross margin percentage was really associated with the increased services of our third-party resources to deliver the various Australian defense contracts as well as the PoCs. We continue to drive the proof of concept and mature pipeline of those opportunities to drive future licensing sales at increased margins from that supported services initial investment. Our operating costs for the quarter were $1.6 million. The significant decrease in costs reflects a reduction of 40% from $2.7 million in the prior comparative period. The drop in the operating expense reflects the company's cost reduction initiatives announced in November of last year as well as management's overall commitment to becoming cash flow positive as Miles outlined in his opening statement. The company ended the quarter with $3.0 million of available cash and $1.5 million still available on our entire credit line. So a really strong position from that standpoint. That was really bolstered by record cash receipts from customers for the quarter, which totaled $4.8 million. And as Dan has outlined, the company's net operating cash flow or cash burn for the quarter was $200,000. It's interesting because that was down from $700,000 from the same quarter last year and $3.4 million from 2 years ago. So you can really see how we're really making a real strong effort to pull down those cash burns. So within the 24-month period, just in that first quarter alone, we were able to pick up $3.4 million -- a $3.2 million of cash flow from a [ capital revenue ] standpoint. We continue to see strong quarterly growth. You can really see that over the last 5 quarters we're really pushing hard on not only driving executing on those PoCs, but the drag on revenue. Alongside those operating expenses, these really become our leading indicators on deploying our vision for becoming cash flow positive as we drive the business forward. But what really comes down to at the end of the day is, [indiscernible] they will always be our top priority. So I'd like Dan to take you through some of the customer adoptions and some of the key highlights that we have from the quarter, and then I'll jump in with some comments around the U.S. markets and what we're doing here as well.

Great. So I think the highlight, obviously, there is the opportunity, that is the proof of concept within the Australian Department of Defense. I think it's important to note that we've got a number of different proof of concepts running in Australian Defense and [ up without ] the clients as well. But this is the main focus because one of the goals that we are setting ourselves obviously is to win that defense space and be the preferred provider of policy enforcement products to defense also to the supply chain industry. That's a goal that we've set ourselves, and I think we're winning that goal. We've also launched, as I said, mentioned before, Kojensi with Fujitsu. We're in the final stages of taking that to market with and obviously a key entry point into the Ministry of Defense over in the U.K., which was restructured the way we approach that market and had a number of cost savings out of that market area. And we're opening up a huge opportunity. The launch of DSEI was a fantastic launch, a number of different opportunities to come forward from that. Also, obviously, becoming a network technology partner as well. So we continue to build those alliances. In the customer space, we have got some diversification there but primarily they've been widely adopted in the global defense manufacturing area that we obviously had -- owing with the banking sector, even a U.S. real estate agency, which is coming on board to deal with the usual ongoing security threats. And of course, Australian logistics company in there as well, again, a defense supply chain provider. [Technical Difficulty], obviously, but we can't but -- and I know how good you are with your investigating skills and I think, I'm quite sure that there's a lot of people will be able to follow that. And just looking forward, I can say this [Technical Difficulty] so we're looking forward to the second quarter. I think we not only get fantastic first quarter, but I think we're going to have a strong second quarter as well. And again, in all of those target markets that were executed.

I think what was really [indiscernible] was fortunate enough to get invited [Technical Difficulty] Microsoft's Aerospace and Defense conference. There is 400 Aerospace and Defense vendors are at present with Microsoft. They followed up with the [Technical Difficulty] directly with the customer across [Technical Difficulty] and then with the third [indiscernible] we closed the [Technical Difficulty]. So we really like the way that Microsoft relationship brought that in. But what I really like from the sales standpoint is we went from deal within a 30-day period. So speed...

All the territories. What we've had is this long lead up time, I guess, over the COVID period and what we're seeing with our customers going out there and finally realizing that there are no better solutions or other solutions for what we're doing and coming back and closing deals in a much faster sales cycle. Last but not least, I would like to say, which is a fantastic recognition for our brand and the company is that recognition of those awards, not only were we are finest in the Microsoft data security partner, but also the defense industries focused security company for the second year running. And that's a real good indicator of the awareness in the market of our branding and what we do. And I think it's also demonstrating to the market is rapidly coming towards us as we've taken more opportunities in it.

So as we look at that throughout the quarter, so we can kind of -- I guess you're going through a little bit of strategic growth objectives. This is recurring, but we want it to be recurring because you saw the customers that we have that recurring fee across defense and intelligence. So Dan, if you can go through the strategy and the objectives behind it.

So again, we want to dominate our market before we really spread our wings and get into all the verticals. I mean in the last slide, you would see the customers in vertical markets. It's a really challenge that vertical markets and dominate. We need to own a marketplace first. And we've chosen defense. Everyone knows the reasons why we've chosen defense, $247 billion over the next 10 years is going to be spent, in capability up with just in Australia. Japan does announced a 1% increase in its GDP of military spending. The geopolitical situation and all the tailwinds and besides the threat that goes along with that. So for us, we've been very active and very focused in the Australian Department of Defense, setting that we've got increased licensing just going across the board for NC little more. And the proof of concept, the Australian Department of Defense, essential recognition. And we're also being very well presented for service in the one data division strategy. So that gives us a number of opportunities in the Australian Department of Defence, the place, our products. And most recently, we have provided guidance on the data-centric security architecture for the whole of the Australian Department of Defense. So we're inside. We're doing good business. We are trusted and we expect to see our future results how the Australian Department of Defence and we are very much committed to owning that space and being the policy enforcement platform of choice. You need a policy enforcement area for global defense market, obviously, we're bringing on new providers. We have had engagement with the largest prime provider of BAE in the small services contract, which is -- it gets us entry point into that provider. But obviously, we also cross-sold both NC Protect and Kojensi into Thales, Northrop Grumman, [indiscernible] we've also got a number of lot of clients in aviation, SAP, et cetera. And we are seeing massive activity in that space. Particularly, as I look at the threat of combining that international supply chain, as I mentioned before, and not only that we're seeing them move that product to -- introduced into their subsidiaries overseas. So for example, SAP started in Australia, they moved it to Germany, it can move to Canada, and we're seeing that [Technical Difficulty] companies as well. So I'm excited by the network growth initiatives that we're seeing at place. And last but not least, a global thought leader in the data center architecture. We really need to dominate the thought leadership into the marketplace, and I think it's our taking the adoption in this space, but we need to be able to introduce that data-centric security and application to our verticals. So we need to actually be a leader in this space, and we saw how it gets integrated. And that's where those services dollars really are driving the uptake of the licenses. They want to understand and test and get assure that the product's capability solving a business problem, and that's where those services are really driving the product update.

I think on the global thought leadership as well. Specifically, 9 months itself, back into the partnerships, I went through one of the relationships and the deals that we closed with Microsoft in the quarter. We got half a dozen leads from Microsoft and that show in that quarter. And you don't get needs of that quality and direct interaction to those types of customers, which are the top 50 dibs in the world without that thought leadership. Microsoft is not going to do that to you. You do not get the ability to have a global company like Fujitsu, bring you on to their stand, one of the largest military shows in the entire world and lead with Kojensi. You don't have the ability of an organization like Thales, which is one of the lead defense plants in the entire world to talk about your products and the way that they bring them in and how we interact with that from a product innovation standpoint. That's what the thought leadership is all about. It's just not going out there, providing [indiscernible] coming out there with press releases, it's a very secret squirrel market that we play in. And these are the relationships that are continuing to drive the proof of concepts, that are helping us drive the opportunities and helping us drive the revenue growth that you see in the charts from the earlier phases.

[Technical Difficulty] recognition by our peers. So that gives [indiscernible].

Yes. Maybe on defense now, I guess sometimes from -- when I do investor road shows, defense is a very hard market and that it's a long cycle and aren't going out and doing health care insurance, financial services, manufacturing. And I talked about the best thing about our products is that everybody wants it. The worst thing about our product is everybody wants it. And so we have to make sure that we stay focused on what we're driving because talk about things such as cash flow positive. We need to go out and do cash raises and capital raises, well, if we go out to all these different markets, we need to do that. But where we are focused right now, we achieved Miles as directive of being cash flow positive and stay as far away from a capital raise as we can. So maybe Dan, talk about some of the points around why our focus is on that global defense industry.

Well, there's been a major shift in the Australian defense department. First of all, we focused on building capability from a peace time to a prepared time focus. And that was the outcome of the Defense strategic review. The threat of cybersecurity and cyber worthiness is now at the forefront of mine out of that $273 billion, and I've said it all time and time again, $15 billion alone is spent on cybersecurity and information management, and we're in the right places. But what's noticeable is that they not only has the Australian Department of Defense, but the U.S. Department of Defense has mandate and zero-trust architectures, and mandated data-centric security. During our visit in the U.K., we met with a number of groups in the MOD, and it's the same there. So they are looking for common solutions, which don't necessarily -- they find hard to put in to address that data-centric security and we are one of the only companies that has the pedigree in defense to deliver that. The second part of that is, of course, when you -- they will pay for the development of the product. So you're not dealing with small deals, you're dealing with large deals. The deals that we announced out of defense are usually in the 6 figures as opposed to a $10,000 or $20,000 or $30,000 or $120,000 sales. And that is critical for turning to dial, not only on the revenue side of it, but also on the margin side of it. And the barriers to entry to that market are strict. We are already present in this environment and we are already located in there and trusted and providing the advice to this. So for us, it's very strong. And what we are seeing is that these organizations are starting to consolidate on solutions, which means that there's a strong network growth effect there. And of course, the Department of Defense like other government agencies is very, very sticky. And the best thing is they pay their bills on time.

Great. Fantastic. So one thing we talk about all the time, Dan and I have been 2 of 4 larger shareholders in the business, it's been a slog, right? It's been -- it's a challenging time for an economic sector. There are just natural components to do the actual share price movement and what have you, both macro and micro. So we want to talk a little bit about how we're shaping that shareholder value. That's something we wake up and talk about every day. Dan, why don't you talk a little bit about the opportunity because that we're going to drive that improvement and bring visibility?

Well, I guess we've sensed a level of frustration out there with same shareholders and you have been incredibly loyal and seeing that -- I mean I think that's a bigger on this call where we geared valued at this point in time. But you need to know that we are actively thinking about this. One of the goals that we set ourselves to -- with opportunities to improve that shareholder value. There's three that we are incredibly strongly focused on, you've heard these things for -- but this is the first time we put them in a slide and presented them back to you. That is that we want to achieve positive cash flow. In this current market, we need to be cash flow positive [Technical Difficulty] that's what we are going to achieve. And you can see from the trends in the drop in the cash outflows that we are committed to that. The second one is, obviously, we're going to wind defense. We need to start being significant enterprise license agreements. And so that is the second goal that I have set for our organization to start to ramp that up. What gives you reference ability, it takes a claim in your key market denominator and it also provides opportunities for other markets. And this as I just mentioned, is the fastest-growing market at the moment. Most importantly, of course, then we need to prove that our investments that we have put into our overseas marketing and growth gives us a return and that this isn't just located in Australia. So I think from those three goals alone that we will add significant value. Now I can't tell you that that's going to -- what that's going to do to the share price that is outside of my control, and particularly with the current markets. But what I can comment is that, that will drive value of the company. And so we're highly focused on those three outcomes.

So Miles, as Chairman, you're always beating us up on making these three things happen. Do you like to comment on that at all.

Yes. And hi again, shareholders. Look, it is a challenging market out there. And I think the share price is being impacted by a number of things beyond our control. But also obviously, some things in our control. And I've got to be honest. I think the company is in a better position today than it has been for the last 2 or 3 years. Revenues are growing. Margins, we can talk about, because that's one of the questions that we'll discuss in the forum discussion afterwards. But the opportunities that are in the pipeline are real, they're large, there's a number of them, and they are across a number of different defense markets around the world. So we, as a Board, are fairly comfortable that all of the indices are heading in the right direction. The price [Technical Difficulty] to adjust. And I think once we hit cash flow positive territory once we have a couple of those larger deals under our belt then the price will look after itself. But at this stage, management is just focused on executing and the Board is very focused on holding it accountable. And we feel as a team that we're in a good spot and that we're very close to actually being a solid, well-performing business.

So we will go to a question-and-answer session now. Please feel free to type in your questions into the chat box and we'll try to get to many as we can as time permits. So Dan, you touched on this one initially. Can you please discuss the sharp decline in gross margins? And what is your expectations around it going forward?

Yes. Absolutely. Coming out of COVID, obviously, we had expected margins for that. And what down was that our customers wanted it to be led through the specific [Technical Difficulty] security, which means they wanted a number of different services, initiatives before they would go into our procurement of those licenses longer term. That increased the services and services to start at a lower margin. I wouldn't necessarily think that, that's a bad thing, that's opening the marketplace, people are concerned about out of being a services-driven company, we're not. We're doing is leading the product through its natural process of getting adopt and getting adoption in the right places. And to do that being a new capability, you've got to have services to lead them through at a lower margin. That's what affected the margins last year that I am seeing the right activity with these proof of concepts and the license pull through in terms of the pipeline, but I'm quietly confident. More importantly, we've got targets there for our gross margins that we want to achieve. We don't want to be a services company. We want to have a strong license, high gross margin pull through for the company to really get back to the shareholders.

And I'm happy to add that, Dan. So in terms of margin, it's something that we as a Board have set as a KPI on the executive to increase the margin. As Dan said, we had a bit of services revenue last year, which adversely impacted that, but it's very much our priority to go back to the high 60s, low 70s in gross margin again. So we're very much tracking closely to that.

All right. I'll get probably into the next one. Darren would like to know how we received the R&D tax incentive for FY '23? We have not received that yet. Generally, we will receive that on the back end of filing our taxes and then a period of time after that based upon the flow within the ATO that generally brings us to the December -- 2nd to 3rd week of December for receipt of that tax incentive, which we're planning on this year. That's generally, I believe, right now on our balance sheet, I think, was shown about $2.1 million. So that will always be a nice thing that we look to as a little year-end -- calendar year end Christmas present that we look at from the business. Maybe, Dan, you can talk about this a little bit. Can you speak to the $5 billion Microsoft deal to expand the Australian footprint in collaboration with Australian Signals Directorate?

Yes. Look, it's -- obviously, in the early stages of just being announced, so the details haven't been provided yet. But obviously, there was an announcement last year with REDSPICE, which was, I think, a total of between $7 billion and $9 billion being spent for the uplift of Australian cybersecurity capability. That was introduced in the doubling of the Australian Signals Directorate in terms of personnel. And obviously the capabilities that they need to build and execute against. They will bring us a number of opportunities. I can't say when or where -- what I can say is, obviously, we're closely monitoring those things and we're engaged obviously in our target markets for defense and intelligence.