archTIS Limited (AR9) Earnings Call Transcript & Summary

Okay. Why don't we get going? So good morning, everybody. I'm in beautiful Sydney right now with Dan, and I'd like to welcome everybody to the archTIS Q4 FY '24 Investor Update for the period ending June 2024. I'm Kurt Mueffelmann, the Global COO and U.S. President. I'm joined by Daniel Lai, our Managing Director and CEO. So Dan, why don't we keep with the format that we generally do and kick it over to you for some opening comments and thoughts.

Thank you very much, Kurt, and thank you, everyone, for joining us for this Q4 March (sic) [ June ] quarter update. Look, I think we had a very positive quarter. The total quarterly licensing was -- revenue was up 54%. That is, in fact, [indiscernible] and ARR surpassing $4.1 million. So an increase in that ARR. Not as much as we'd like, but obviously, it's foundational and things looking forward to the next financial year. Significant customer wins. We've had a number of wins in this last quarter, which are setting us up for a very nice Q1 and net revenue retention of 104%. So overall, that churn has been very good, and it's increasing in terms of market product expansion and our licensing. Year-to-date numbers, excellent. Revenue is up 54%. OpEx is down 18% on the year and positive operating cash of $1.4 million, 151% on prior comparative period. That's a strong showing. Now, obviously, that's a target that we had to make sure that we were viable throughout the year, but also investing in the product, but also setting ourselves up for a strong FY '25. We [indiscernible] very strategic partner in Copper River. We'll talk a little bit about that later. But, obviously, that -- those people that would like to go and research Copper River, it's an excellent commercial mechanism for government and particularly U.S. Defense Department in terms of their credentials and where they are playing at the moment. Significantly, gross margins are up to 60%, and that's something that should be pleasing to all the shareholders. Okay. And, of course, we continue to win awards for the product. So market validation of our product is still strong. Kurt will take you through the numbers.

Yes. I think when you look at Q4, it was really driven by the relative comparative period where we showed good licensing growth in ARR, while maintaining our operating expenses. And so, that really starts to spin off what we're looking at from an operating cash flow perspective, as well as moving towards more -- becoming more neutral from a cash -- overall cash flow standpoint. So quarterly revenue was $1.5 million, driven by the strong licensing revenue of $1.2 million, which is up 425% and 54% over the prior period. Annual recurring revenue, as Dan said, for June 30 of the year was 4.1% -- $4.1 million, an increase of $470,000 or 13% over last year. Our operating cash was positive for the quarter. And we look forward to kind of looking at how that really rolls up into where we take cash coming into next fiscal year. And I think you can really start to see that effort of cash coming into the annual numbers. We had a strong Q4, really pushed the line in a number of key areas and metrics. Cash from our operating activities was $1.4 million for the year, driven by continued operating -- revenue growth, increased margins, lower operating expenses. We actually had cash receipts of over $12 million. So that was a record for archTIS. Revenue was up 54% from the prior year with a $1.8 million increase in licensing revenue and a $2 million increase in services. It may be good there, Dan, to stop for a moment and have you comment about the increase in services and where you think that might be able to take us as we go forward because that $2 million was a real big number in services.

Yes. Look, it was. And I expect that we'll continue to see services growth throughout next year. But what I'm really interested in is how that is affecting the license revenue pull-through. And I think that, that is the key, and we're starting to see that growth now. So where we are really getting good penetration in the marketplace is guiding our customers and how to apply data-centric security to enable the benefits of the licensing of the products.

Yes. And I think that starts to also look at where it affects our gross margins. I think in earlier quarters where we didn't have strong -- as strong licensing, we really see that in Q4 and how that carried towards the end of the year, where we achieved 60% gross margin or $5.8 million that allows us to operate the business. That's up almost 80% from the prior year. So good growth in where we're taking the margins within the business. It's really...

Bringing in Andrew Burns as the CFO, we've been very tightly focused on those margins where we can extract good margins out of those services, as well as those licensing fees. So we'll focus on the margins growth.

Yes, it really is driven by -- obviously, margins is driven by 80-plus percent from a licensing standpoint and the execution of delivery of the services contract by the team really doing a good job there. When we look at kind of our strategic objectives around cash flow, we continue to focus that. You see operating expenses was reduced 18% year-over-year. So, again, being capital efficient in the way we run the business. And if you really look at what the cash flow from operating activities goes, showing $1.4 million of operating cash flow, which was up 151% from the prior year. And we finished the year with $4 million of available funding. So we feel confident in where we are today from a capital efficiency perspective. Jumping over to the quarters. During the quarter, we had some continued activity around some key market areas with the Australian Department of Defence, Penten from an intelligence agency and some global defense suppliers. Dan, do you want to kind of touch on some of those highlights?

Yes. Look, I'm really excited about the Penten opportunity. Obviously, they are a really well-known name in Australian cyber, but I think they're less known in Australia for what they're doing overseas in the U.K. where they are being very successful. In fact, a large majority of their income comes from the U.K. That will also open up opportunities. That Penten deal is the first deal that we've been able to establish with them. And I think both companies have seen great synergies between the 2 companies. So I'm expecting some growth in that deal over the next 12 months, as well as overseas opportunities to partner with them there. Australian Department of Defence, we've been ahead -- they've validated us and had reference use cases for us into the marketplace. What we're seeing there is, again, growth on those licenses. But more importantly, the importance of that spreading and growing through different networks within the Australian Department of Defence. So I see growth there as well. Australian Department of Defence for the services, again, we're seeing NC Protect -- they're now taking NC Protect. So with all of those deals, we are -- I think we're definitely going to be seeing some growth in those deals across this FY '25. And that's very exciting because it means we've really penetrated that. It's taken us some time to get there -- Department of Defence through those services deal and now expanding those licenses and deploying us further within the Department of Defence.

And I think carrying those deals across really allows us to look at where we can take a more predictable model going forward. As we mentioned, we only had churn of under $20,000 last quarter. So we actually had an increase in our revenue retention rate of 104% for the fiscal year. So basically, we upsold more license revenue to existing customers than we lost revenue across normal customer churn events. That's a pretty good indicator. So when we get a deal and get a customer, we generally keep it for a long period of time. I know one of the Australian defense agencies that purchased the $630,000 of additional services. We just celebrated, I believe, 11 years of them from a subscription standpoint. So you start to take that from a predictability model standpoint, you become very strong in what you start to do from a cash perspective, as well as repeatability and customer growth as we do it. We also won 2 awards, which is always nice. That gives market validation. So we won the 2024 Cybersecurity Excellence Awards, where Kojensi was named the National Cyber Defense category winner, and NC Protect received the Data-centric Security category winner. So really happy about that, and that continues to be a nice job. Heading into '25, the company remains actively engaged with a number of proof of concepts and across the global markets, including one with a pretty strong name, NATO came in for the use of NC Protect across multi-coalition forces to collaborate with information across various departments and within their various trading partners as well. We've also had a couple of them within the U.S. Department of Defense and some key U.S. and U.K. global manufacturers in the defense industry. And then lastly, our partner, Complior over in Sweden is really pushing hard across the NC Encrypt product line and really pushing that policy-based encryption. So, Dan, I know you want to expand a little bit more around those POCs. So it'd be a good time to do that.

Well, I think certainly from our shareholders, there have been lots of questions about the POCs. I think we've given you a good indicator of where they are. We have had strong feedback on those POCs. And, of course, what does that actually mean for the company moving forward? Well, they are the foundation elements of that strong network growth that we've all been waiting for. So we win those POCs, get those things done and you're inside the tent for solving a very strategic problem with multiple different customers and ultimately, strong opportunity to expand your licensing base in there. So that's really what is important about those proof of concepts is where they are. Now, given where they are, it's also a little bit frustrating, but it does take a little bit of time. These are big and large complex organizations.

And I think that kind of ties into what we're doing with Microsoft. Our partnership with Microsoft remains very strong. We had a number of global co-sell deals that closed across FY '24. The support across kind of our key markets of defense and intelligence space has really led to a lot of those previously mentioned POCs. And when you're in at that level with Microsoft being your partner and coming into global coalition forces, they will take time. Things do push to the right, but I think we're in a good spot there, as well as within Microsoft itself. When you start to get that multipronged attack from a distribution standpoint, things start to move in a much stronger fashion as we look at it.

Yes. And just on that, too, with the Microsoft relationship. Again, I mean, they're just as big as those bureaucracies that look after NATO and U.S. Defense and all those other things. So -- but once they start to get behind you, that is when you really start to see that growth. And I think that people should understand in the marketplace, Microsoft is obviously a key provider of collaboration services to U.S., U.K., NATO, Europe. When -- one of these sorts of wins from these sorts of deals can take Microsoft a little bit of momentum. Once they do, they will be repeating that pattern across markets.

Yes. And I think that's what we're looking for as we go into '25, how do we provide that? Where do we take the business? We see success in certain areas. But as we look at '25, it still remains all about what the core tenants of the business is. It's about trust. So you want to talk a little bit about that kind of tenancy?

Yes. And again, those sorts of deals that we're doing, they're trusted reference introductions. The work that we have been doing in the Australian Department of Defence has been picked up by NATO and by others, and they've reached out back to us to commence those POCs. But in the end, it's all about who should have access to your data and when and what can they do with that data when they have access to it. And that's a complex problem to solve it. And that's really our differentiator. And when you're dealing with classified information, it is pretty critical, and we have validated ourselves time and time again with our solutions and our customers.

Yes. No. And again, it's trying to simplify, right? There has been a lot in the news lately around CrowdStrike and the blue screens of Microsoft. CrowdStrike is, obviously, a big security player in the market, right? And so, we differentiate ourselves a little bit by really focusing on that data-centric component, right? At the end of the day, we saw 2 really core things, who should have access to data and when can they have it? And then once they do, what can they do with that data that they have access to. And those are the 2 core areas that we really focus. Again, we're not tied into the [ CrowdStrike ], we're not tied into the endpoint, we're not tied into the device itself, we're not tied into some of the things around breaches with credit card information or health care information or what have you, we really focus on that data. But yet when we look at it, we start to look at the actual size of the market, it's still a massive market opportunity that we defined. And we've tried to take a little bit of a swag at it by looking at how big is the overall cybersecurity market, right? There's some estimates right now that have upwards of $225 billion. But then you got to pare it down into where do we see our targeted markets within cybersecurity, within DoD. And then how do you pare it down into defense -- I'm sorry, data-centric security. And then we start looking at what's our opportunity out there. And we still think we have a ways to go and the opportunity in trying to define that a little bit, and that's starting to open up a couple of new opportunities across the continued messaging around access-based access controls, policy orchestration, data fabric, unstructured versus structured data, and where we can take the continued product innovation, as well as leverage the existing customers that we have into new areas. So Dan, do you want to just kind of touch on where we're kind of going a little bit with this? Because there's some interesting market opportunities at hand here.

Look, we have been traditionally focused on unstructured data documents filed, that sort of thing in terms of that collaboration space. But those services that we have been winning over the last couple of years has opened up an insight into the data structures themselves. So the work that we've been doing for KPMG and One Data Defence program has identified, and of course, having an insight into what they're trying to achieve and how they're trying to achieve the compliance requirements, the classification requirements, the security requirements that they have. We also get to look at other products that are in the marketplace. And we've been investing quietly on the side about how do we solve that problem for structured data, and we see a great opportunity in that marketplace. And, of course, we're being encouraged by our partners like Microsoft, who have recently released other products such as Copilot, AI and on that side of it, how do you control AI? How do you point them to trusted sources of information for them to do their analytics on? And also, how do you facilitate that information being dispersed for people to make important decisions on? So we see a great opportunity in the marketplace there of taking what we've learned over the number of years in the unstructured data and how we deploy policies and secure information and apply that to structured data.

Yes. And you can really see that again through some of the early wins that we had with BAE, which was a December win and how we're driving that opportunity forward and then even the continued discussions with Microsoft and how we're looking at really both sides of the coin from an information and data standpoint.

I'll be honest, because I think we surprised ourselves at how far advanced we were to solving some of those problems with big organizations. I mean, BAE is an enormous organization and they couldn't solve it. We swept in there and demonstrated how to do it. And that's led to future opportunities with BAE. It is exciting for FY '25.

Yes, I think so. And I think that ties into kind of our closing slide before we get into questions that, we still look at how we're constantly trying to build shareholder value. FY '24 was a better year. If you think about it, in FY '22, we did $4.6 million. Last year, we did $6.3 million. And this year, we did $9.8 million. So we've doubled revenue in a 2-year period. We've taken cash -- outflow of cash. FY '22, we've gone from -- we went from $10.4 million. Last year, we dropped to $5.3 million. And this year, we had a net cash burn of $1.3 million. So you can kind of see the trends are going in the right direction. So we really feel that we're in a good position. Some of the backup metrics that we look at, we just want to share this a little bit. We're really 2x or 2.2x of our trailing 12-month revenue of what our structure looks like. And we also look at it from a licensing standpoint from an ARR around the Rule of 40. And the Rule of 40 is more of a SaaS based, really doesn't have as much services involved. So we're on the periphery of it. But if you can show a 40% increase in revenue and a flat EBITDA, that's really what is a good tipping point for a lot of companies moving forward. So we're a little bit above that right now, which is nice, even not as a non-100% SaaS company. So just trying to share kind of with everybody the metrics we look at and what our key measures are as we go forward. So we still look at those key things, but we still need to increase our ARR. We still have those 2 key components of going out and getting an enterprise agreement with defense and an overseas agreement, the coalition force, and trying to drive that, but the indicators are there. The technology solutions, as you saw, with the award wins from NC Protect and Kojensi, as well what Dan just talked about, about some new innovation that we have discussed around product innovation around structured data and strong market tailwinds. We feel like we're in a decent position. So, Dan, any kind of comments or follow up on that?

No. Look, I think the only other thing that I would mention is that, the increase in sales activity that we've seen over the last 2 to 3 months is really exciting for FY '25. And so, we're seeing that the market is now coming to us. We're seeing that those POCs are coming to a closure to move into some sort of positions where we can see some revenue growth for '25. But I think the historical performance has been good -- has been a good solid foundation for growth in FY '25. And I'm excited by that. So I think we're finally -- I think we're close, let me just say that.

Yes. Great. So before we jump into questions, I'd just like to welcome our new CFO, Andrew Burns. He is a great asset to the business. He'll be joining Dan and I, as well as our Chairman, Miles Jakeman in late August for the annual report, as well as some further strategy into FY '25 around kind of our global distribution, as well as product innovation. So at this point, Dan, why don't we kind of just open it up for questions.