AVA Risk Group Limited (AVA) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for standing by. Welcome to the Ava Risk Group FY '22 Results Webinar. [Operator Instructions] This call is being recorded. I will now turn the conference over to David Cronin, the Chairman of Ava Risk Group.

Good morning, everyone. Thank you for joining us for the presentation of Ava Risk Group's FY '22 results. I'm David Cronin, I'm the Chairman of Ava Risk Group. And with me on your screen is our CEO, Rob Broomfield; and our CFO, Neville Joyce. I'll now hand over to Rob to take you through the presentation. There will be an opportunity to ask questions, and we'll answer those at the end of the presentation. Thanks once again for your participation. Rob, over to you.

Thanks, David, and welcome, everyone, to today's presentation. In today's results, [ Neville and I ] will cover the Ava Risk Group, who we are, and followed by FY '22 performance overview, FY '22 financials and then strategy and outlook followed by questions. Ava Risk Group continues to be a global leader in technologies to protect critical infrastructure globally. We recently strengthened our breadth and reach of security technologies for protecting critical infrastructure with the acquisition of U.K.-based security technology company, GJD earlier this month. And I'll give an overview of GJD and the attractive synergies shortly. Both FFT and BQT continue implementing their strategic initiatives. And starting in FY '23, we're integrating our global sales and support teams, including GJD under the leadership of Jim Viscardi who has done a great job growing our Americas revenue in FY '22. We need to note the global deployments of the group technologies and solutions and significant expertise in their respective areas. FFT and its capability on large perimeters and long linear assets, BQT Solutions ability to secure building access points, both on the exterior, interior and even down to the individual cabinet. And GJD with their optical technologies for the protection of small to medium perimeters and enhancing the performance of cameras, video surveillance. I want to remind everyone that FFTs fiber optic-based security is used by many of the world's most security-sensitive organizations globally. And the most dense deployment are, in fact, in the Washington, Virginia area, where we protect a large number of sensitive U.S. government agency sites. FY '22 is also a focus for FFT and success in the growth in the energy sector that I'll cover shortly. Note that all these customers have multiple sites, and we have the ability to continue our land and expand strategy where we get additional orders for additional sites, these large users over the years. It's been successful in the past, but we'll grow on that in the future. And BQT continues to be very strong in government and the transport, building access control, and you'll note many international airports are reliant on BQT technologies as well as government agencies. But note their go-to-market is very much focused on distribution and distributors and the work that's been going on in terms of working with the world's largest global distributors is an important part of the future growth. And then with GJD, the new company and its synergies, they also have a very strong OEM and distribution customer go-to-market. They're particularly strong in the U.K. and Europe. And we will leverage the U.K. and European sales and customer relationships for both FFT and BQT as we go forward. But you'll notice a very common theme of large end users and the opportunity for all the group technologies to service those customers. So I'll now move into the performance summary. FY '22 was a year of sharpening our focus on technology following divestment of our Services Division, which provided investors with close to $39 million in cash return by way of special dividends and capital returns. The directors were pleased to be able to both reward our support of investors with the cash returns but retain working capital reserve to support additional growth opportunities, which was successfully done with the GJD acquisition recently. I also want to highlight the outstanding work by FFT and BQT manufacturing and logistics teams for maintaining exceptional customer fulfillment through the regular challenges of supply and logistic interruptions caused by COVID-19 during the year. We fared far better than many other technology companies in our particular market space and other markets. We really had a strong last quarter or quarters when we came through and out of COVID-19. So we're very optimistic with the capabilities that we had through COVID-19, but we're seeing the move out of COVID-19 in FY '23. Most importantly and despite the headwinds, management sales order intake grew by 13% over the prior year and also, we progressed all strategic initiatives, including Aura IQ, trials and the first sales, the signing of the dormakaba global framework agreement, the first licensing agreement in Latin America, and we also grew FFT long-term support agreements, and we demonstrated the ability to secure new recurring revenue streams from the large FFT installed base. All of these initiatives will underpin further growth in the year ahead. I'll now hand over to Neville to talk through the financial highlights.

Yes. Thanks, Rob. Look, we delivered a strong profit result underpinned by the gain on the divestment of the Services Division. But the underlying or continuing operations of the business following the divestment of Services Division delivered revenue of $19 million and EBITDA of $800,000. Note that the EBITDA metric excludes the impact of foreign exchange variances in the year, which were actually favorable to us through FY '22. That result represented growth on revenue and other income of around 12% compared to the previous financial year. We carry a backlog of confirmed sales orders, which are pending fulfillment of $3.2 million, which leaves us well placed to enter FY '23 with momentum. And finally, our cash position remains strong at $15.2 million at the end of the financial year, which leaves us well placed to pursue our growth objectives into the future. This chart tracks our sales order intake over the past 8 quarters. While it shows some lumpiness in terms of intake in any given quarter, it does demonstrate a clear upward trend through FY '22, which is consistent with the investment that the company has made in growing its sales and business development capability. We've also seen a number of significant orders in the energy sector, and pleasingly, that's continued through the first quarter of FY 2023. Order intake for BQT also lifted through the second half of the year. Its performance through the first half of the year was impacted by the COVID lockdowns, particularly here in Australia, but bounce back as these restrictions ease. We're confident that we can drive additional growth in BQT, particularly by leveraging the key partnership agreements that we have in place with companies [ we partnered ] such as dormakaba. Looking at our revenue by key geographies in which we operate, look, it's pleasing to note the significant growth that we're seeing in the U.S., which is consistent with the additional investment we've made in that market. Look, again, we're confident in our ability to drive further growth out of the North American market. It's also worth noting that we're still seeing quite a significant volume of work coming our way from India, where we support -- continue to support airbases and other critical assets. We also expect that, that growth to continue through FY '23. Back to you, Rob, about GJD. You are on mute, Rob.

Sorry, we're really excited about the acquisition announced on the 1st of August of GJD, the U.K.-based security technology company. And there's a number of complementary synergies with FFT and BQT that I'll cover. The transaction consideration was 60% in cash upfront from Ava's existing cash reserves and 40% in [ securities on 3 ] tranches over the next 24 months. And you can see that their revenues, their gross margin, EBITDA fit in the range of FFT and BQT and provide positive financial impacts. Their geographic sales is U.K. and EU dominated, again, increased the group's revenue streams from the U.K. and balances the global spread of revenues that we achieved. GJDs are really great fit for the group. The technology adds to FFTs perimeter solutions with their optical sensors. Their channels are complementary to BQT and immediately increase BQT's reach into the U.K. and EU. Although, the global integration of the group or through the global integration of the group sales and support teams either can increase GJD penetration into Asia Pacific and the U.S.A., particularly. And look, they're currently well run. They're profitable, and we really see minimal integration effort or risk in the year ahead. So the technologies that they have include passive infrared, microwave or laser detection. So in the optical area, they have sensors that work very well on perimeters and a range of perimeters. They have LED lighting technology that's very important as improving video surveillance cameras on large sites. And they also do automatic number plate recognition technology for a number of U.K.-based government agencies. I'll now hand over to Neville for the FY '22 financials.

Thanks, Rob. So I'll provide a little more detail on the results that we've released this morning. Revenue from continued operations declined as we expected due to the contribution from the Indian Ministry of Defence contract, which was recognized across FY '20 and FY '21. In broad terms, that contract delivered revenue of around $15 million split across those 2 years. The other key element to note on this slide is the increase in operating expenses in FY '22. That uplift is a combination of additional resources, which we've introduced [indiscernible] organization, supporting our sales and business development efforts. There's also an uplift in some expenditure, such as marketing, employee travel, which were effectively suspended in FY '21 due to COVID-related impacts. We feel that the level of expenditure we've seen in FY '22 is more representative of the cost footprint going forward. Thanks, Rob. This presents the result for ongoing operations in FY '22 against a normalized view of FY '21. The FY '21 results have been restated to remove the impact of IMoD revenue in FY '21 and also some government grant income, which was received relating to COVID support. It provides a better view of the performance of the underlying business. On this basis, revenue grew by around 12%, which is consistent with the increase in order intake that we've seen, particularly in FFT. Gross margin grew slightly to 65% in part driven by the increase in revenue on our higher-margin FFT business. The improvement in margin is particularly pleasing given the complexity and cost pressure, which we've seen during the second half of the year associated with supply chain and logistics challenges. It's a number we continue to focus on to ensure that our pricing is reflective of the operating environment, which we are in. The slight dilution in EBITDA margin is attributable to the increase in operating costs, which I spoke to previously. This basically reflects the investments we've made in the business as well as a return to run rate expenditure post COVID on some expenditure types. Looking at cash. Look, pleasingly, the business continues to generate positive cash flow from operations of a $2.5 million cash flow from operations, $900,000 of this related to the Services Division prior to its divestment at the end of the first quarter. The underlying business going forward generated $1.6 million of positive cash flow from operations during FY '22. We also continue to invest in the development of our technology. The key elements of that capital expenditure related to Aura IQ, ongoing development of our machine learning capability as well as our core perimeter detection capability. You'll see in this chart, obviously, a large inflow associated with the proceeds from the divestment of Services, which basically will be passed back to shareholders by way of special dividend and capital return during the year. Finally, the balance sheet reflects our strong financial position. Cash at the end of the financial year is $15.2 million, and we carry no debt. We're extremely well placed to pursue our growth objectives as we move into FY '23 and beyond. Back to you, Rob.

Thanks, Neville. I'll now cover the strategy and outlook. Look, many of you will have seen this slide or similar before, but the fact remains the same. Over the past 4 years, we've demonstrated strong revenue growth along with operational cost-based discipline. So this has also contributed to cash generation with a return to investors and special dividends over the past 2 years and leaving cash for investments in future growth. We're obviously leveraging our technology capability, especially the machine learning and Cyber Assurance; the strengthening of our global sales team, especially with Jim Viscardi, who joined in the last financial year. And our large and high-quality customer base with repeat sales and the potential for increased recurring revenue, and we have a very flexible go-to-market which we innovate, which we've included things like licensing in past years, and we have active programs for those going forward. So GJD will simply add to this very, very strong base that we've developed over the years. We have some great go-to-market partnerships and technology partnerships. Obviously, we have the dormakaba global agreement that we will be leveraging in the years ahead. We've been building on the technology partnership with Mining3, and we have a range of others in the global space that we're using at the moment to move into new applications in area. You'll also notice from the revenue chart -- quarterly revenue chart that Neville showed that the projects business for FFT in particular can be lumpy. It is growing. The trajectory is positive, but we're certainly focused on what we call high-visibility revenue for future growth and recurring revenue. And we will get this, and we'll grow it through the strategic distribution relationships, the expanding OEM relationships that also GJD bring and long-term support agreements for the large existing installed base we have with FFT. I've talked about the large installed base all companies have and what we've been doing to leverage this. We increased the number of FFT systems under long-term support agreements from 4 at the start of FY '22 to over 50 systems by the end of FY '22. In FY '23, we integrated our -- we will integrate our machine learning into these long-term support agreements. And so the focus will go from just -- not just hardware and our Cyber Assurance support, but actual improvements in the system performance year-on-year. We'll see this increase the value and the uptake from the existing installed base but also new system purchases. Aura IQ is moving from the proof of value into commercialization. And importantly, all these initiatives were well supported from existing OpEx and modest OpEx expansion planned in the year ahead. With our conveyor monitoring solution, Aura IQ progressing along its development road map, we'll start to further expand condition monitoring solutions in a focused manner to support both conveyors and all other condition monitoring or situational awareness applications, including in these areas that we've already demonstrated capability and some success, which includes railway, road infrastructure, and long linear assets such as power cables and pipelines. FFT has some significant leads in this area of what we call situational awareness, which moves into the smart city domain, particularly based on existing fiber optic cables that are already used for data communications. We are proven through numerous commercial deployments. Everything shown on this graphic, we've demonstrated, and we've generated revenue today with the exception of earthquake monitoring, but we have real business in all these areas. We have decades of domain expertise in both photonic sensing and advanced software and machine learning and other potential new entrants won't have that domain expertise that FFT has. We're investing in the next generation of hardware and software platforms. We'll be developing new capabilities from a solutions group that can drive development of new or integrate in new technologies into the condition monitoring space. In FY '22, FFT and BQT was deployed to numerous critical infrastructure sites around the globe, few technology companies in Australia and New Zealand would claim such a range of high security sites in the Northern Hemisphere. But the global market is massive. And even with these samples of new sites in FY '22, we are not in any way constrained by the size of the markets we're focused on serving. So we'll continue to expand and integrate our customer face in global sales and support capabilities, and we'll continue to develop our solutions for both the security and the adjacent markets. So in summary, we already have exceptional platforms across FFT, BQT and GJD that are exceptional. We have exceptional domain expertise, and we will continue to innovate. We'll continue to grow our security revenues but also the particular share we have with that high visibility of revenues from distribution, OEM servicing, licensing and also the ongoing support of those systems and services. So we'll grow new revenue streams from condition monitoring, and there will be a year of growth of both organic and from acquisition of GJD in the year ahead. So that ends the formal part of the presentation. I'll now hand back to the operator for questions.

[Operator Instructions] The first few questions are from Mark Yarwood at Petra Capital. On the recent acquisition, can you provide some color on how the acquisition has traded historically? What is the OpEx in that business and how much investment is needed?

Okay. Thanks, Mark. So just to give you a little bit of color and these numbers have come from a private company. So I just need to warn everyone that they are unaudited, but we obviously did extensive due diligence on them. But to give you some color, the business has grown from about GBP 3.6 million in revenue to GBP 4.6 million in revenue last year, the year-end is 30 September. And from an OpEx base, they did have a slight contraction during COVID in their OpEx, just simply because of the slowdown in that market, even though their revenue was growing particularly through their OEM channels, but their OpEx at the moment is sort of running in that GBP 1.7 million to GBP 1.8 million range, which is around about the AUD 3 million based on the FX rates at the moment. So definitely a business that's been growing its revenue, both in Europe and in the U.K. during the pretty tough period. So we were pretty impressed with that. But also a good cost base where we're already at a profitable stage where we intend to exploit that cost base with the group products going forward in the current and future financial years.

The next question is, on the IMoD contract, have you a line of sight on when this might appear?

Might get Rob to talk to that.

Sure. Yes, with the IMoD program, we agreed with our partner in India that with the slowdown that they were seeing with the deployment around COVID and particularly the extended lead times that we were seeing with COVID for componentry that it was really going to take them a while to ramp up to the last part of the program. And as that last program wasn't committed, we decided between ourselves and the partner that we would take that one off at the moment until we actually saw the deployment of the large quantity of systems progressed and that they're wanting to pull through additional systems. So it's hard to say exactly when that will be. We don't have direct line of sight into the deployment of all the systems that were produced today. We know they are being deployed, but we expect to get some more clarity during the year as to the uptake of that last portion of the order. But the other part of the IMoD program is the ongoing services and support in terms of the 7-year after the first 3 years of warranty. So there is a 7-year program of ongoing support that we will be looking for that kicking in in the coming years, and that will give us a revenue stream outside of the deployment of the systems. But I would like to say in India, there's a lot more going on actually than just IMoD and we've got strong programs and deployments around a number of different military assets across the Indian military. We've been doing a number of sites during last financial year, and we've got a number of sites coming up this financial year. So our position still in the industry -- Indian market space, particularly in defense, is really strong.

Where are you with any additional licensing deals?

I'll take that one, David. So what we have is we've got the one that we signed in one country, Brazil. So again, they've signed the contract during the year. They're in the process of actually ordering material, getting materials a bit longer than they had planned. So they will take the low pay and order the licenses when they start producing, which will occur in this financial year for sure. The same partner is wanting to do more countries in Latin America, and we're considering that because we want to see them successfully start their program going in the country they have, and then we would look at extending them to other countries across the region. In India itself, there are a number of additional programs that are in consideration but might take a while to develop that would be suitable for further licensing programs, particularly with our strong partner in India. So really, the Indian and Latin American markets are the main ones that we're looking at this particular year. But it is suited to a number of markets where a traditional go-to-market and a traditional high-end price premium may not be suitable. So we'll continue to explore. But certainly expansion of Latin America and continued focus on India will continue.

Last question from Mark Yarwood is, what would be the catalyst for dividend [indiscernible]?

Well, we haven't stopped dividends yet. And the main catalyst for dividends is profits, and the board has said that we're committed to rewarding shareholders when we're trading profitably, and we expect to be. Obviously, in the past couple of years, we've rewarded shareholders both from operating profits and increased operating cash flow and also from an asset divestment being the Services Division. And obviously, the management team is looking at a year of growth. So we would expect that, that would be considered in due course so that we can continue to reward shareholders by paying dividends.

I now call on [indiscernible].

Just was interested in your thoughts around the recurring maintenance contracts. Obviously, you've offered -- sorry, you signed up 50 this year. Just wondering how we should think about FY '23, and where you think you might be at the end of this year?

Do you want to talk about that, Rob? And also talk about some of the added features that we're adding.

Yes. So in terms of setting a specific number, what I will say to you is that we do have an internal target of 250 systems as an interim quantum. And obviously, what we achieved in FY '22 was without actually a dedicated sales resource, it was really through the existing team and the solution or the product that we're offering was one that was just built around hardware support and the benefits of the Cyber Assurance program. Now in the year ahead, we'll be adding some dedicated resource because of the success we saw, particularly if you looked at the major markets like the U.S., where they really see the value of this, and we can actually get really high revenues just for the existing product that we've been offering. And in fact, the last contract we had the other week was actually a 5-year contract. And it was at a rate that was higher than our target per dollars per system per year. But when we talk about machine learning and the ability to actually given guarantee improved detection performance every year by upgrading the configuration of the machine learning really is a compelling value proposition with a few other elements that we're developing at the moment to help that particular feature in the market space. So therefore, we're actually selling a program that actually not only maintains high reliability and not only helps with Cyber Assurance, but actually drives performance improvement, detection performance and reduction of nuisance alarms every year that program is running. And that will have a significant impact, and we'll start that whole program of announcement actually at a major U.S. trade show shortly where the -- that program will be released. And that will have 2 things. It will drive the value and it will make it more compelling. So we should accelerate significantly on the 50-odd systems we've done this year. But also we'll start seeing that being [ bought ] both on installed systems, but also new system orders we expect to start taking up that offer that they'll take it at the time of purchase. So I think that we've got a good line of sight of that objective of 250. And when we get the value that we expected around $20,000 at least per system, that's that $5 million of recurring revenue that we're targeting. I don't believe we'll get it this year, but I believe the line of sight over the next couple of years is pretty clear that we'll get towards that very quickly over the next 2 years, I think.

The next question is from Peter [indiscernible]. The EBITDA margin is very thin. Do you expect improvement in next financial year? And what is the target EBITDA margin?

Yes. So it's a good one, Peter. Look, our target EBITDA margin is obviously a lot higher than what we achieved in the last year, but we did flag that we were making investments in growth in the last financial year, which we'll continue to make this year, most mainly in people, expanding out our team like the hiring of Jim Viscardi and others in the senior management team and then salespeople under them. So it just does take a little bit for those extra costs to sort of build it through into returns in EBIT. But we're definitely targeting double-digit EBITDA margins in the future because we're pretty happy with our cost base at the moment. We have a very scalable cost base. GJD also further improves that scalability of our cost base. So the revenue that's added above where we traded at last year really does drop to the bottom line at a faster pace with the margins, with the gross margins that we're seeing in the business at the moment.

Next question is from [ Stella Wang ]. Regarding BQT, is it possible to disclose the revenue achieved for the expanded dormakaba distribution agreement in December?

So I think -- I mean, Rob, if you want to talk about this, you can, but I think the main points to sort of note the first training sessions occurred in late March at ISC West, the big conference, security industry conference around that contract even though it was signed in December and further trainings have occurred between then and now. Initial stocking orders have been agreed with several of their offices. But I don't know if we have a number that we want to put out there, Rob.

Yes. Look, it is actually sort of in the hundred thousands thereabout, but it's really only an interest stocking order. It's not the long-term quarterly orders that we're trying to build towards with that group. So that program is really initial stocking order, just to seed it. What we now need to do is we're going through that whole education program within dormakaba and the countries need to be sort of educated through their headquarters and through our own efforts, so that they become aware of the capability and then they'll start pulling through and actually drawing down that inventory very quickly. And then it will be replenished and then we'll start getting better forecast and growth going forward. So it's really the seed of that initial stocking. The fact that they took inventory is a huge, great first step. And now just getting the sales teams educated on the uniqueness of the locks underway, and then we'll start seeing a pull-through from all of the countries that are being serviced from headquarters with that program. And also, we'll see the countries that have access to it expand across the dormakaba business.