archTIS Limited (AR9) Earnings Call Transcript & Summary

Well, good morning, everyone, and thank you very much for the opportunity to present the Q3 FY '25 results ending in March. And today, it's just myself flying solo, Daniel Lai, Managing Director and CEO. Kurt is on some well-earned leave, playing a highly competitive golf tournament in Las Vegas. So he's given me the privilege of presenting this today to you on my own, which is fantastic because I'll be happy to take my time and walk through this presentation with you and also answer any questions at the end. You can submit your questions through the question application in the call, and we'll go through those at the end of the presentation. Welcome to any new prospective investors. And again, thank you to all of our loyal investors that have been following us for some time, and welcome back. Okay. Q3 highlights. Look, I think that the -- it's been a steady performance, and this is a bit like the masonry's crack. You don't know whether it's going to happen on the 10th hit or the 100th hit. But when you do hit it, it actually happens. So I think what you're seeing here is the strikes have been pretty solid. ARR has risen to $4.6 million. That's up 27% on the prior comparative period. And revenue for the period was at $1.4 million with $1 million in licensing and just under $0.5 million there in services. We finished pretty strongly on our gross margins, and I'm pleased to say that those gross margins are steadily above 70%. They're currently at 75%. That's a 6-basis-point improvement on the PCP. And of course, that meant that we finished the period quite strongly in terms of available funding of $4.4 million. Subsequent to that close at the end of March, we have also accumulated another $2 million in customer receipts in the beginning of April. So you can see that there was just some timing there in terms of the cash flow coming through in terms of those invoices. So we feel that we're in a relatively strong position in terms of available funding to drive the company forward at this point in time. Operating expenses at $1.7 million, that's a decrease of 18% on the PCP. And you can see that we're continuing to do that strong cost management perspective on the business. And that's post the acquisition of Direktiv, and of course, we completed that in February of this year. And I'll talk a little bit about Direktiv in this presentation as well. And one of the exciting things that we will be talking about is the first TDI or Trusted Data Integration platform sale to Japan. That is a sale that was conducted to NEC, which is one of the largest primes for Japanese Ministry of Defense. So that's quite exciting for us in terms of our global expansion plans. So moving on. On this slide, I guess the key points outside of what we've already mentioned in those highlights is probably the focus on that revenue figure bar 2, which really looks at that $2.6 million and that drop down to the $1.4 million in the comparative period. And really, as we have mentioned to the audience previously, this was a strategic decision to move away from services. And in fact, in the last quarter, we presented a POC, which we lost, which we choose to opt out of, which was really becoming a system integration deal where we were providing third-party products, which were at low margins, and we really didn't want to stray from our core business of data-centric security and become a system integrator and have revenue skewed by that and also have it affect our gross margins, which it tears down quite considerably as you're only making about 30% on those services pushed through as well as pass-through of sales of other third-party software and services and hardware. So we decided not to pursue that, and that is reflected in the change in the revenue. What I do want to focus on, though, is the key metrics for our growth moving forward. And obviously, that's the ARR component. And I think that ARR, we're happy to see it grow by that 27%. Obviously, it's not as much as we would like and probably not as much as you would like. I think that's the implications of not only the holiday period, but the electional period because Q3 and Q4 are usually where we do significant deals in Australia with the Australian Department of Defense. And obviously, that's not occurring as quickly as we would like and it's on pause with the current election period, but that's not an excuse. We certainly still have done well out of the Australian Department of Defense in the quarter, just not as well as we would have liked, which just means that things are deferred, not lost. The second area there is obviously the gross margins. Gross margin is critical for us because of the more cash that we take in from our licenses, the more cash we've got available to inject into the business. And of course, our operating expenses, which we're managing very tightly as we still drive towards cash flow neutral and positive. Obviously, moving towards that figure has been affected a little bit by the acquisition of that $750,000 in cash that we have committed to the Direktiv sale. Some of that has been deferred into next financial year, but obviously, there was a hit upfront in terms of making a payment for those assets. And let's move on to then our customer acquisition and talk about how we're executing the strategy and where we see that going. So again, customer highlights. I did mention the NEC sale. It's our first sale in Japan. It was -- it is really a proof of concept. They paid AUD 390,000 deal for -- to do a proof of concept where they put TDI, Trusted Data Integration platform into an environment where they're developing new services to present to the Japanese Ministry of Defense. Why is this exciting? NEC sought us out after a global search, came to Australia, and we were the only customer that they -- vendor that they visited. They spent 3 days with us here in Australia going over all the different products and the strategies for how they could take this to market and then invested that AUD 390,000 to commence the trial with TDI to develop services for not only the Japanese Ministry of Defense, but also for the Japanese government more widely. Why is this significant? Because it's really about the driving of that data-centric security program for them to be able to interoperate on AUKUS, the Quad and others because Japan has aspirations to join that AUKUS consortium. So it's also very critical from that perspective of sharing classified information for the defense industrial supply chain. Japan is one of 3 parties, including Italy and the UK developing a sixth-generation war fighter jet plane for Europe. And they're also looking at from that. And that's where we got the Microsoft introduction. Microsoft has been trying to work on that deal to secure the supply chain and sharing of that information across that supply chain, and that's exactly what we have been looking at there. So this is a fantastic opportunity with an enormous prime in Japan, which has already got a large amount of services into the Japanese Ministry of Defense and have selected us as the only trial for additional services in that data-centric security space. So we're very excited by that. That goes to show you the potential of what that Direktiv acquisition can do for us in terms of adding a string to our bow in the data-centric security space. And of course, that's off the back of that BAE trial that we did a couple of years ago, which was what was really important to them because with that we could demonstrate that we had done it previously. I also want to talk to you about the Australian Department of Defense. Post quarter, Defense renewed its expanded commitment to Kojensi. Now this goes back to a deal that we won some time ago, 2 years ago, in fact, which was a $7 million deal to develop and implement Kojensi into a highly classified area. Not only have they renewed that deal for the coming 12 months, but they've increased the user count by 150 users from the 200 users that they initially licensed for the development of the platform. As it gets rolled out and it commenced rolling out in November last year, it will expand through that defense environment. And it is specifically being used to collaborate with allies. The growth -- the potential growth that we see with this contract is up to about 2,000 users. So you can see that this is another potential enterprise license deal inside of Defense following the NC Protect licensing deal that we did for $2.3 million in Q1 to secure their deployed environments. And this goes to how we are executing that to own the data-centric security space for not only Defense but the Defense supply chain. I now want to talk about a couple of renewals that are really important to archTIS as well, global science manufacturer. Why is this important? Because it's starting to see some of these verticals are now starting to adopt aggressively data-centric security as well. And what's really important to us there is that we need to start to diversify and not just be dependent upon Defense is the key revenue base for archTIS and its products. Why have we waited this long? Really, it's not about waiting so much for -- to be aggressive in the marketplace. It's about the timing of the market acceptance of data-centric security being a Zero Trust application that needs to be adopted. And now we're starting to see that the market is maturing and the demand is suddenly in the marketplace for us to start to get a bit more aggressive in those additional verticals. Australian Research University, there -- for the Defense programs, again, they've done a renewal and expanded their license base. They paid upfront for a 3-year contract. South Korean Aerospace, again, you're starting to see that we're starting to win more spaces and expand in Southeast Asia, particularly Southeast Asia in terms of Korea, Japan. We're obviously reflecting back on our strategy for Singapore, but also, obviously, and I'll talk about this when we update you on the POCs, some things that are happening in Europe and the U.S. But again, different verticals that we're starting to see highly active and new marketplaces for our products. I wanted to go into this on the basis of Direktiv. Again another proof of concept, which we have just completed with Direktiv to talk about also how we're going to diversify into other vertical markets and the strategies that we can use Direktiv or TDIs that will become in the marketplace. So this business use case, we just completed a trial successfully with a global hyperconverged infrastructure. For those people who don't know what technically that means, these are the guys that provide the team, which is virtualized for cloud services, whether that's on private clouds, on-premise or in hyperscalers such as AWS, Microsoft Azure, Google, et cetera. So that's the type of infrastructure that they use, and virtualizing just means that I can modify that to have it integrated and scale up and down as I need to use it as utility services for my workloads. But that market has had quite a structural change. VMware, which dominates that market, which has about $1 billion in revenue annually, has been consumed by a company called Broadcom and the prices for it have gone up to 200% in terms of licensing fee, which means there's a real shift in that marketplace. One of our clients has decided that they want to get off that particular product and move to another product, which will reduce their cost. And the time frame that it was going to take them was 4 to 6 weeks per node and 3 to 4 weeks for us to get the infrastructure in place and load it up before the additional 2 weeks of becoming productive in each of the data centers that they wanted to deploy in. That's a considerable amount of time and cost. They came to us to see whether or not the Direktiv product could automate that and reduce the time frame for standing up that hardware. And we produced a result which was pretty amazing. We decreased the time to 4 hours for the hardware vendor or the hyperconverged infrastructure vendor. We reduced it from 4 weeks to 4 hours. That's resulted in a $60,000 pilot license. That is not the licensing that we will generate out of it, it's just to continue the POC for the time being. They paid $25,000 in services. We're doing another $50,000 of scoping work for them. This is one client of several tens of thousands of clients with this particular customer. And obviously, now we're talking to -- they've engaged us to have further talks about putting this in as a serviceable product for their future deployments to not only reduce their own costs, but to offer new services for clients as this shift in this marketplace occurs. So that's a fantastic opportunity that has been created since the acquisition of Direktiv and its transformation into that TDI product on the back of that Japanese sale. So look, we are pretty optimistic about this, and we're starting to see that demand come through, as I said, in multiple different verticals, which is exciting for the company. I also wanted to go back to the POC update. We started doing this in the last quarter. There's been a lot of comments about what's happening with these POCs. We get questioned a lot about it. And I know that some of these things are slow, but I think it's really important to understand the considerations of these POCs and also the size of these POCs if they get converted into outcomes. So let's start with the U.S. Department of Defense Agency where we have done a trial in the world's largest private M365 instance. This is a highly classified secret cloud in the U.S. There's up to 150,000 users in the first tranche that could be potentially deployed. We have obviously passed the technical selection. As far as we know, we are the only product being evaluated at this point in there. And I'm pleased to say that we have had some progress on that, and we have moved to a verbal agreement to have the product what's called now go through that security selection process, which is what's called an authority to operate. Now departments do not commit to going to the next stage of authority to operate unless they're pretty -- got a reasonable intent of moving into commercial agreements. That department has up to 400,000 potential users just in it alone, but it services up to 4 million users across Air Force, Navy, Marines, Space and others. So it is a transformative deal if it is successful. Global/UK Defense Industrial Base, one of the providers that we've said we've always targeted is not only the Defense industry itself and that we wanted to break that program open, not just in Australia, which I've talked about, but also globally. To do that, we also need to own the supply chain that go hand-in-hand together. And there's a Global/UK trial that's continuing on. Again, we've got technical selection there. We're just waiting for them to move to the next stage. There has been a little progress there, but again, it's slow. These are enormous organization with global workforce employees. And of course, they have also been disrupted by the Trump factor as well and the uncertainty in the market that we have all suffered over the last couple of months with the tariffs being -- conversations being in the market and unsettling the certainty of the market. Military Alliance, that's obviously the NATO one that we have been discussing. Again, we are in the technical selection stage. We have progressed. And of course, we have to go through some sort of accreditation process similar to the U.S. DoD, and that's what's taking the time there. And of course, I've just mentioned the Japanese defense contractor, which is NEC to explore TDI's potential in the JMOD marketplace as well. So look, I think what we need to say from the update on the POCs, yes, they are taking time. You can understand that something as significant as a potential deal with some of these large organizations, they do get disrupted by competing demands. But most importantly, you're seeing the right indicators that these POCs are going in the right direction. And again, if we continue -- if we're successful with these and we keep our gross margins up and they increase our ARR, I guess you can have a guess that if you're doing something at about $2.50, $3 per user per month on 150,000 users, you can start to see the quantums of the transformation that's going to have for archTIS in the future. So again, moving forward, I just wanted to take into consideration now all of those tactical things that we've just talked about that are happening in the marketplace for us as a company and start to go back to the growth strategy that we have been putting into place over the last 3 years and that we have been executing. First was the Australian defense market. Again, we've got existing proof of concepts, win a number of different tenders in different areas. We've been working with BAE across a number of opportunities. But most importantly, again, that high potency in that highly classified area with that growth rate now increasing licenses expected to be up to potentially 2,000 users in the coming 18 months, but also the NC Protect enterprise license being rolled out across there. And there are a number of other areas as they execute their strategy going forward, which we have opportunities in to again, generate good ARR and significant dollars in terms of injection into the business. But the real one here is archTIS has definitely got its eyes on the overseas market. We believe that the growth that we need to inject into the business and return shareholder value has to come from those overseas markets. We think we're relatively close now, not only in the U.S. but also in Europe to cracking those 2 markets with very highly referenceable clients with growth network effect in those deals. And that's really, really important because we spent a lot of money investing in those areas to get some sort of reward for the shareholder base. So we're very excited by that. Global Defense Industrial Base, we still have the lowest churn in this area. We still are seeing high demand in this area. It is being driven by compliance both in the U.S., in the UK and in Australia. It is being driven by AUKUS. We've seen the setting up of what they are trying to achieve in that AUKUS agreement moving into the phases where they're now investing in the transfer of those technologies. An example of that is the Australian Submarine Agency, the Australian Navy infrastructure bases being upgraded and also now Austal in Perth also engaging in how do they share this information, but also South Korea in terms of some of those providers providing back into the Australian Defense Force, Babcock, a whole range of other suppliers, which are renewing their licenses and expanding their licenses. And we think that we're going to be expanding into that global market through that industrial base as they're all multinational companies. So we see that as an exciting chapter as well. Finally, enter new verticals. And I think that what you'll see archTIS actively pursuing in next financial year is aggressively moving into new vertical markets in those other territories as well. What does that really mean? It means that we have to be highly focused on winning and closing these Defense deals and servicing them, but also preparing ourselves with the opportunities that the acquisition of Direktiv and the new demand in those marketplaces that we're seeing can be serviced as well. So when I say we want to enter those new verticals more aggressively, manufacturing, banking and the legal services, all of those type of things, that requires a fair bit of preparation to make sure that you can execute that well. And that is what we have been spending the last 6 months on planning. What does that also entail? It can also entail inorganic growth, which means that we are looking for accretive opportunities that have direct entry into the key client bases and complementary sectors that we are looking at, and we continue to do that. So we have been, again, over the last 6 months, planning these types of integrations and opportunities to look for that inorganic growth on that basis. So they are the things that I guess I wanted to update you on the activities that the company has been moving forward with over the last quarter and essentially the last 2 quarters. But I think it's important for the shareholders to understand that we are not being static, even though sometimes it might feel that way that we are absolutely executing against what we have said we wanted to achieve. Okay. I think I'll take some questions now. Let me call that up from the Q&A.

There was a slide -- question one, there was a slide at the Henslow Defense and Security Conference a year ago where the aim was to get to $150 million, $200 million market cap over the next 24 to 36. Do you think that is still achievable considering we have 12 to 24 months left, and given that we're at $17 million right now? Look, excellent question, Norman. The answer is yes. That is absolutely what we are targeting. We're targeting -- we know that we need to get out of the microcap space. We don't want to be a $20 million company. How do we achieve that? We close some of these international deals. That's how we get there. We look at accretive growth through a number of different acquisitions. But most importantly, we do that when we have that referenceability to get that network growth effect in there. And we wouldn't have said that if we didn't think we had the opportunities. And I hope the update on some of those POCs gives you an indicator of the size of some of those deals that could be transformative for archTIS. Is the $600,000 IP cash outflow capitalized expense? Look, it's not -- it is capitalized -- I'll take that on notice and get back to you on that one. I think I better consult with the CFO to make sure I don't stuff it up. So if you don't mind, I'll respond to that in due course. That's the deal, right? I'll take that in. Any other questions from the crowd at the moment, and I'm happy to -- you've got me here. So please feel free to ask me. Yes. Good one, Anthony. Where do you see our cash positioning as capital -- as a capital raise at this share price will cause significant dilution of shareholder wealth? Look, that's going to be one of those balancing questions. I don't -- as we have always said, we wouldn't be doing a capital raise unless there was a significant reason to do it where we believe that there would be significant increase in shareholder wealth that would offset any dilution that may impact on shareholders. And I am one of those shareholders that would be diluted and so is Kurt. So we do take those things into consideration. And obviously, we think about those things consistently. If we do find something that we would like to acquire, obviously, we will take that -- all of those factors into consideration of what we believe is the best interest of all shareholders. So it is critical that you know that we -- we have said previously, we're not out there to do capital raises just for cash for working capital. It would have to be for a significant strategic opportunity to increase baseline shareholder worth. Ryan Tingle. How does election affect archTIS in terms of contract signing? Excellent question. I'm glad you asked it. It's been a pain, absolute pain. Why? Okay. Both sides have talked about Defense in the election. But what it means is this, once the election is called, which is usually in our most prosperous season in Australia, it means that no purchasing decisions can be made until after the election. That gives us a smaller window to execute any potential sales that we have lined up or increase licensing revenue out of the Australian Department of Defense. What is fortunate is that we know that the election is this Saturday. And once after that election, we have a bureaucracy, which comes out of a frozen state. And obviously, our guys are ready to jump straight back in there to try and close as much business as they can as quickly as possible. So that's really the impact of the election. It has stopped all activity inside our key client base. That doesn't mean we -- as you have seen, we have done deals with the Australian Department of Defense, but we had done deals where we were already in an existing arrangement, I should say, get my words out. Can you expand on the opportunity with Microsoft and issues it has with data security? Thanks, Tim. Yes, I can. Obviously, we are tightly aligned with the Microsoft teams, and that's through our NC Protector arrangements where NC Protect does the data center security enforcement for Microsoft, not only on-premise for its SharePoint sites, but also in the cloud for its Azure and M365 offerings. So we have been obviously working closely with them. We're a MISA organization, which is an invitation only. MISA stands for Microsoft Information Security Alliance, and we work with them. They have partnered and done a number of different introductions and through a number of deals. And they're -- generally, those deals are through other partners as well. So it is a convoluted channel and partnering arrangement when you do these deals with Microsoft. And again, they're generally through their Defense and Intelligence Division, which, again, does those introductions, but doesn't do the sales directly with Microsoft. So it is a process, and they're large organizations and they are complex. With the U.S. DoD POC, this is from an anonymous attendee, is this related to the acquisition of Direktiv? No. It's not. It is through the hard work of some of the existing products that we have and it's being a Microsoft environment. And as I've just mentioned, it is more of an NC Protect opportunity. So it is more about securing some of those Microsoft services that the U.S. DoD utilizes. Does that mean we are looking at opportunities to cross-sell Direktiv into those arrangements? Absolutely, it does. And that's where we see that NC Protect really looks after those documents and files, which we call unstructured data. And Direktiv really looks after those structured data components, which usually you'll find in databases. And that's where the 2 products in terms of product development will seamlessly integrate, and that's the big opportunity for us. We're very excited by the Direktiv opportunity. We've done a lot of work on the next version of NC Protect as well over the last 6 months and spent some good money in there developing it to make sure that everything can be integrated and run from common services, reduce our code base and reduce our cost base, but also become more productive in the way that we deliver our products. So we think we're maturing that, and that's the opportunity. So yes, thanks for that question. I'll keep moving down. Does Direktiv find its place with Kojensi rather than NC Protect? Actually, it will find its place in both products, Ryan. Now what do I mean by that? We can then orchestrate switching on NC Protect when it is required for what services and encrypt as a component of NC Protect as well as what has to be happened and how that document is accessed and the permission rights that a user has for it. But we can also then turn that around and say, Direktiv, can you check that it's allowed only to go through this firewall, on this service, on this port to this device. And that's the power of Direktiv. It gives us a Zero Trust framework to run Zero Trust from the enterprise in a single place, really powerful stuff, whereas NC Protect does the permission rights on the document itself and Direktiv can also do that to the data itself. So combination, combined, really good. How does it work with Kojensi? It can start to replace some of that third-party software that Kojensi is built in so that we can have a common code base for Kojensi, NC Protect and data orchestration for Zero Trust for the enterprise. That's the plan moving forward here so that we become the data-centric -- Zero Trust data-centric security of choice for these enterprise organizations. They don't have to go to best of breed. They don't have to go to third parties. That's why we're building up this product suite in preparation for moving into these bigger markets to challenge the players in those bigger markets overseas off the back of potential wins in -- and referenceable clients in those markets. That's why we've been working so hard. That's the opportunity in front of us. Which product has the best uptake breakthrough potential overseas? Well, they both do, but we need to make sure that the products are ready to be accepted into those overseas markets. And that means NC Protect is more agile because it sits within a Microsoft Azure space, which is already accredited. And Kojensi needs to make sure it's accredited to those different and varying accreditation frameworks in those different countries. However, moving it through -- Kojensi can also be put on-premise and that means that it can also be accredited by the organizations themselves. But NC Protect is where we see our next spurt of growth, but we rapidly see Direktiv also in that space in a global marketplace being something that's going to drive. And as I said, eventually, they will come back to the same code base. At a previous conference, we had Fujitsu demonstrating Kojensi. Do you see a market for it outside AUS DoD? Yes, I do. In fact, Fujitsu right now are demonstrating it again into Japan. We do not have an exclusive deal with NEC or the broker that services NEC, and we have both parties selling Kojensi into that marketplace. Kojensi, the deal we have with Fujitsu is actually a reseller agreement in the UK for European market, but they're also demonstrating that in the Japanese market with Fujitsu headquarters. They also have requested to not only demonstrate Kojensi, but Direktiv or TDI, Trusted Data Integration. I'm going to stop saying Direktiv because we are rebranding it. It's just because we did the Direktiv acquisition, the shareholders will understand that. But it's now TDI, Trusted Data Integration. They're going to be demonstrating both of those at the UK DSEI, which is the largest military conference in the UK, and that will be happening in September. Ryan. What if any have the Direktiv team personnel brought to the company in terms of innovation after being integrated? I've got to tell you integration is really hard work. We are continuing to do that. We have them working with us. But we're also trying to get them expanded in terms of their knowledge base across NC Protect and Kojensi. What have they brought to the company? Professionalism. These guys are really good coders. They are really agile and they're really productive. That lifts the standard in the whole company, and that's what we're really excited by having this group in here. Last question for the day, given that we're already at 11:36, what has happened with the DHL NC Protect, Encrypt? It's still going. In fact, we have just got off a call from them yesterday, and they've been putting in new design requirements for Encrypt. And as I just mentioned earlier, we have been redeveloping the next version of NC Protect, version 9. We are getting it higher in terms of scalability, more secure and also in terms of integrating more neatly into cloud environments. But most importantly, we're taking feedback from clients to improve a whole range of different features and functions. And one of those is around the Encrypt product. So they are giving us direct feedback into the future of that development. Look, I'd like to thank everyone for their time. I hope I've answered most of your questions. I really do appreciate the opportunity to speak with shareholders and give you a little bit more depth into why we are excited about the situation that we are, even if it's not reflected in the share price, what does that really mean? My goodness, are we undervalued. How undervalued are we? I know it's going to take a couple of these deals to close to get the rest of the share market interested in us and to drive it forward. But I'm very confident that we are going to be turning the corner reasonably soon, and I'm excited by the future that archTIS has. And I hope, from today's presentation, you are also excited about what we are doing with the information we've been able to present. So thank you very much for your time. Have a great day, and I look forward to the next presentation.