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

Good morning, everyone, and thank you for standing by. Welcome to the Ava Risk Group First Half FY '23 Result Webinar. [Operator Instructions] This call is being recorded. I will now hand over to David Cronin, Chair of Ava Risk Group.

Thank you, Alex. Good morning, everyone, and thanks for taking the time to hear from us today. We're well into the execution of our growth strategy. And to that end, I'm very pleased to introduce Mal Maginnis, our group CEO. Mal officially joined us in early January and has come to us with a distinguished background in driving global growth in both large and small technology-led businesses, including more recently as the Global President of U.S.-based Rapiscan, a USD 750 million revenue business. Mal, I might ask you to let shareholders know what attracted you to Ava and Mal would be doing most of the presenting today. Also with us is Neville Joyce, our CFO. Over to you, Mal.

Well, thank you, David, and good morning, everyone, and thank you for joining. As David has pointed out, this is my first meeting, so please do be gentle with me through this. First up, I'd just like to explain to you what attracted me to come to AVA. I've known the business for about 15 years. And the 2 key things that attracted me were, one, it has an outstanding technical base, a very solid technical functional base, which is critical if we're going to be able to penetrate the market. And the second point was the actual market opportunity. The growth in critical infrastructure protection is only going to continue. And so that combination of the technology and the market is what attracted me. So let me start the actual formal part of the presentation. AVA has continued to build its position as a global leader in risk management technologies. We have a suite of complementary technologies and have re-orientated the business to align these technologies with customer solutions. The Detect segment provides smart fiber optic sensing systems for security and other applications. The Access segment specializes in high security biometric readers, security access control and electronic locking products. And the Illuminate segment provides market-leading illumination solutions supporting camera and other security technology. We have a high-quality customer base across commercial, industrial, military and government sectors. And the success of the company is underpinned by the ongoing development of our intellectual property. Now during the first half of the year, we achieved a number of significant milestones. In August 2022, we acquired GJD and created the Illuminate segment within the business. GJD is a leading U.K.-based security technology supplier, specializing in illumination and detection applications. The addition of GJD provides the company with a complementary product and technology footprint as well as an established go-to-market capability in the U.K. and Western Europe. We continued our upward trajectory and sales order intake, a leading indicator of future revenue for the group. Total order intake grew by 47% over the prior year, with growth in all operating segments. We won further contracts in the North American energy sector, building on the successful deployment of our solutions in FY '22. We also received our first commercial orders for Aura IQ and Aura AIX. Both of these have been areas of significant focus for the company in recent years. We have further developed our AI capability, building on existing Aura IQ and perimeter detection platforms. And this investment is critical to growing our market-leading position within the market. And by using AI driving investment in our access and illumination technologies ensures we'll remain well placed to support our major global distribution partners. As I mentioned previously, sales order intake is a leading indicator of expected future group revenue. Total sales order intake for the half is $14.4 million, which is an increase of 47% on the previous year. Pleasingly, we saw continued growth in each segment. Detection order intake grew by 15%, Access by 21% and the addition of the Illuminate segment accelerated total group orders. The financial performance of the group was strong during the first half of the year. Group revenue of $13.6 million represents growth of 50% on the prior year, broadly in line with the reported growth in sales order intake. Resultant EBITDA grew to $1.2 million, and EBITDA margin expanded to 9%, illustrating the leverage in the cost base as revenue grows. We have continued to invest in developing our technology and had a cash balance at the end of December of $7.1 million. The cash balance is after the acquisition of GJD and also investing in inventory to secure the supply chain and pricing for critical components. I will now hand over to Neville, who will provide you a more detailed analysis of our financial performance.

Thanks, Mal. The Group recorded very strong revenue and earnings performance for the first half year. The comparative data for FY '22 is for continuing operations. So it excludes any contribution from services during last year when we divested that business. Against that benchmark, both revenue and gross profit grew very strongly at 50%. Pleasingly, we were able to maintain our gross profit margins at 66%. The improved revenue and gross margin has translated into growth in EBITDA. As Mal mentioned, our EBITDA margins have expanded from 3% to 9% in the current year, again, illustrating the ability for us to put more revenue through the business to drive further EBITDA growth. At a segment level, we saw impressive growth in both the Detect and Access segments. Detect revenue grew by 16% and that improved revenue position, also improved EBITDA for that segment. Similarly the Access segment grew by 17%. And again, that improved revenue position has dropped to improved EBITDA. Growth in the Detect segment largely reflected improved sales order intake. Growth in the Access segment has been supported by expansion in OEM channels. And we expect as we move into the second half of the year, that we'll see further expansion from that channel. Following the acquisition of GJD in August, we had a 5-month contribution from the Illuminate segment, which has also helped support the growth that we've seen through the first half year. In terms of our revenue footprint, geographically, our revenue was well dispersed. We're seeing significant growth in the North American segment, which has been an area of key focus for us over the last 12 to 18 months. Following the addition of GJD, we've also seen an increase in our position in the U.K. and Western Europe. We're well represented in key OECD economies, the U.S., Western Europe and the APAC. But we retained a presence also in some of those emerging economies where we have done work previously. In terms of the split of revenue across segments, we are still skewed towards the Detect segment. But it is worth noting that following the acquisition of GJD, both Access and Illuminate make up about 40% of the group revenue. And there's a high level of predictability of revenues coming from those distribution channels. The first half financials reflect the acquisition of GJD. What we're reflecting in this slide is the impact of that acquisition accounting on the balance sheet. As many of you will be aware, the acquisition of GJD was a combination of cash and script. That combination had a fair value of AUD 7.5 million. We acquired net assets of $1 million. And that's after assuming a borrowings position that sat with GJD associated with some working capital facilities and also some COVID support mechanisms that sit on their balance sheet. As a result of that, we recognized goodwill during the first half year of $6.5 million associated with the acquisition of GJD. In terms of what the group balance sheet looks like, yes, on this slide, we've effectively backed out the opening acquisition entries of GJD to get a better representation of what the underlying movement in key balances looks like through the first half. And I'll draw your attention to a couple of items. You'll see that our outstanding receivables have increased by $1.5 million. That's primarily a timing issue associated with some large project orders, which we completed in December and have subsequently been paid for in early January. The increase in inventories, as Mal alluded to, it was a deliberate move on our part to effectively secure the supply chain and lock in some pricing associated with key componentry, particularly in both the Detect and Access businesses. And the borrowings balance that now sits on the balance sheet is a result of those facilities that I mentioned that effectively we kicked up with the acquisition of GJD. In terms of the cash position of the group, the group has cash available of $7.1 million as at December. The key outlays during the period were $4.5 million associated with the cash component of the GJD acquisition. As I mentioned, there has been an increase in working capital. I do expect at least a chunk of that working capital to reverse in the second half of the year. I also note that we'll continue to monitor supply chain in the current environment to ensure that we can support future growth and make sure that we've got access to critical components at appropriate pricing moving forward. And again, as Mal mentioned earlier on, we continue to invest in our technology, which is the bulk of that development and capital expenditure. The cash position of a tick over $7 million leaves us well placed to support our growth through the second half year and beyond. With that, I'll hand back to Mal.

Thank you, Neville. I'll now take a few minutes to discuss the strategic direction of the company over the next 3 years. And this has been a critical focus for me in my first 7 weeks. So AVA is well placed to grow aggressively in the near term. The business model in each of the segments is very scalable. And while we will continue to invest in our technology, the underlying technology platforms in each segment are already in place. And as I said before, are extremely strong. I mean what this means is that we have an enormous opportunity to deepen our relationships with our existing customer base while simultaneously deploying our solutions in adjacent markets and with new clients. By deepening our customer relationships, we will also grow the recurring revenue base within the business by providing these customers with a compelling reason to receive annual upgrades, improve the system performance, implement artificial intelligence and cyber insurance. The development of our leading AI technology built off our existing Aura IQ and the perimeter detection platforms is fundamental to exploiting this opportunity. As we saw in the first half results, our revenue base is very geographically diverse and balanced between leading OECD economies and developing economies. It means that we have the business development resources and distribution partners in all our key geographies. The acquisition of GJD has helped expand our footprint in Western Europe. And in recent years, we successfully targeted a growing presence in North America. We are a high gross margin business, reflecting the maturity of our solutions with initial development of our technology complete. Now as we move forward, we expect that we will maintain our margins at their existing levels in each segment. All of our future planning is underpinned by the continued development of our market-leading technology. Our AI development will provide a compelling upgrade path to deepen our relationships with existing customers, while we continue to invest in our Access and Illuminate technologies to support our global distribution partners. Our growth ambition is also supported by the external factors. Global security concerns are driving increased investment in premium security applications across government, military and commercial sectors. Global connectivity is also driving demand for remote service capability as well as creating the requirement to manage huge volumes of data generated by the sensing devices. We believe these factors leave us well placed to grow in each of our operating segments, while also providing solutions to adjacent markets using our technologies. What all this means is depicted on this slide. We believe that the foundations are in place to grow the business significantly over the next 3 years with estimated revenue of around $70 million to $100 million annually in that time frame. The path to doing this is by growing revenues across our existing OEM distribution channels, continuing to grow our project-based business and significantly growing recurring revenue via compelling customer support proposition. We believe this growth can be achieved organically, though we will continue to assess inorganic opportunities where they make sense to accelerate expansion and scale. Now it's important to provide you with an indication of what our growth looks like over the next 3 years. Now while our growth trajectory in each year will not always be linear, we believe that we will be able to maintain our gross margin around existing levels in each segment. We are also confident that we can leverage our existing cost base; revenue growth will require some further business development and sales capability, some ongoing investment in our technology and some relatively modest expansion of our existing manufacturing and assembly capability. However, the rate of additional operating expenditure will be much lower than the rate of revenue growth. Hence, the expected expansion in EBITDA margins to somewhere north of 25%. Now we have often used this slide just to illustrate the capability that exists across the operating segments today. I don't plan on laboring on each of the applications. Suffice to say that our existing technologies can provide multiple solutions for our customers. And we have an opportunity to combine our core technologies inside a single solution. And the acquisition of GJD has just expanded that capability. Now it's also worth noting the sheer volume of data that all of these sensing devices generate. It highlights both the opportunity and the importance of being able to detect and classify information quickly and accurately, a space in which we believe we lead the market today. Now before I open the floor to questions, I thought I'd take the opportunity to recap the key drivers as I see it for future growth. And in some respects, this is linked to what attracted me to AVA 2 months ago. I see a company that has a proven set of technologies that have been deployed to solve real problems for real customers. A company that has shown that it can grow and is well positioned to accelerate its future growth, a company with a highly scalable model, where our existing technology and our production capability can be leveraged to deliver increased EBITDA margins and cash generation. And a company that already has a global revenue footprint with enormous potential to exploit. The opportunity and challenge for myself and the management team is to make sure that we exploit these drivers for growth over the next 3 years. I want to thank everyone for joining the call and giving me your time today. I'll pass it back to Alexandra, the moderator, to open the floor to questions. Thank you.

[Operator Instructions] The first question is, is there an expectation that the number and amounts associated with Aura IQ will increase and how? Will it deliver any recurring revenues? And has that been the case with any contracts announced to date?

All right. So I think the short answer is, yes. We certainly do have expectations that the number and amounts associated with the Aura IQ product range will increase over time. It's absolutely fair to say that the traction, commercial traction has been painfully slow. But with the recent wins and obviously, contracts that we're still working through the pipeline, we do expect that to pick up. There was also a dual model that we went to market with. One was to increase recurring revenue. So that's where we make offers of a recurring revenue basis, which might be paid annually in advance or otherwise. And the other model is our traditional CapEx model. At the moment, the systems that we've announced have been predominantly CapEx in their nature. Whilst there are some small ongoing fees on those, the recurring revenue associated with those contracts is not material at all. We do expect some customers to take up contracts that will produce more recurring revenue. And that still forms part of our contractual basis for that product. Thanks, Alex.

The next question is, the balance sheet has receivables of $7.8 million. How much, if any, is related to historical Indian Ministry of Defense contracts when is on those expected to finish?

So now, that's related to IMoD. And the IMoD project, the current POs that were on foot had all been fulfilled by our partner SFO in India. And at this stage, as we've communicated to the market before, we're not really going to guess the timing of any future IMoD-related revenues from the primary issuance of licenses, because obviously, being one step removed from the customer. And obviously, it's a very large program. There are, some timing considerations there with the way that program operates. So we'll update the market when we know more. In terms of future revenue from the IMoD program, some shareholders will recall that after a 3-year warranty installation period that then we start to deliver some revenue off the warranty, after the warranty period, which amounts to quite a few million dollars that will be generated sort of from years -- from year 3 to year 10 over a 7-year period.

You've highlighted that you expect OEM revenue to increase in the second half. What gives you confidence here?

Mal?

Thanks, David. The confidence is, as I explained, we have an excellent footprint globally. And we have really good partners and excellent system integrators. I put a lot of investment into expanding the sales force and regionally directing the sales force to work closely with the OEMs. In addition, I've combined the sales forces to give us an opportunity to sell all 3 of the functional capabilities. And that's why I've got the confidence. We clearly have the footprint. We have the incumbency and I think we've got the technology base. And that's a confident platform to work from.

Is there an FY '23 forecast or an indication of how this quarter is progressing?

So the only forecast that we put out there is that we're forecasting the current half, the second half of FY '23 to be an increase from a revenue and EBITDA perspective on the first half. We will provide further guidance when we have Q3 done. There's a number of large contracts and will have you that are still moving around. And obviously, given the fact that Mal early started in the beginning of January, we want to give him enough time to actually get well across the business because at the end of the day, he's the guy that's going to be accountable for the forecast.

What is the policy for amortization of the GJD goodwill?

Neville?

We'll be amortizing that over 7 years, effectively. And we will continue to be -- value of that goodwill to assess the valuation of that goodwill as part of our impairment testing at each balanced date.

What attention are we giving to sales penetration in the U.S. given the size of that market?

Over to you, Mal.

Thanks, David. That's an excellent question. We've recently changed over some of the staff in the U.S. and we'll be appointing a Head of U.S. business to support the Global Head. And in addition, adding to our service staff there. So we've identified that America is absolutely one of the critical markets. That said, though, we have pretty similarly added the staff in Europe and changed over some of the capabilities in Europe and Asia Pac at the same time. But we are focused on improving our position in the U.S. That's correct.

Mal, whereabouts are you based and how close are you to our major sales opportunities?

I'm based at the moment in Singapore. And what I've done in my first 7 weeks is spent a month with the business in Melbourne and Auckland. And I'm in the U.K. right now visiting our Illuminate business. And my intention is both to travel to the different businesses as I need, but also I'm in contact daily with the entire sales force. That's also one of the reasons I've regionalized the sales force to make sure that they are close to the customer base as opposed to being centrally controlled and divorced from the customer. So I will move to where the core customers are required and Singapore is an excellent position for me to be able to do that.

We have recently begun collecting maintenance fees from installed systems. Are we planning the same revenue from the Illuminate group?

The Illuminate group primarily sells at the moment through distributors and partners. There isn't a significant maintenance part. However, there is a new product line, again, attached to an artificial intelligence approach and also through a communication approach, which I think is going to give us some opportunities. In addition, if I can bring the Illuminate business, which I intend to closer within the detection business, that will give us the opportunity to expand recurring revenues.

On BQT, the fourth quarter of FY '22 saw a surge quarter but the first quarter and the second quarter of FY '23 have been lower than that level. How is the dormakaba partnership going? Has the product launch going to plan?

Thanks. Mal?

Yes. So the dormakaba relationship is going excellent. We've just completed something like about 50 training sessions with the sales force with dormakaba. The new product lines are being released very shortly with dormakaba. And I'm looking forward to a very strong last 4 months with that. There's also several other nice releases coming out of the Access business. So I see a very strong last 4 months of that business.

Can you please talk to the dividend policy change?

Yes, sure. So in the past, AVA did not have a dividend policy. And shareholders that have been with us for the last 2 years would be well aware that the Board has successfully returned tens of millions of dollars to shareholders by way of special dividends and a small capital return; both from operational profits of the company and also from the divestment of the Services division. We had a lot of positive feedback from very happy shareholders in terms of what's been achieved there. We've also had shareholders rightly asked the question. You guys are with the technology division and the focus you've got there, you are turning profitable and that should grow into the future. What are you going to do with the money? And so the Board sort of considered what internal needs we have for capital, particularly given the growth path that we've publicly stated. And we've come up with a policy where not less than 35% of EBITDA annually would be declared as a dividend. So unfortunately, at the moment, they're un-franked. But that will obviously change in the future when we're in a tax paying position, but that's the policy of the company. We see it appropriate to reward shareholders and at the same time, retain a great portion of that EBITDA in the business to facilitate growth.

Is the current OpEx and R&D spend sufficient to support the $70 million revenue vision?

Go for it, Mal.

Thanks, David. Yes, I believe so. There will be some expansion required, particularly in the business development, program management and sales force as the revenue grows. We don't see any major need to expand our operations footprint, except in small team size base, not significant. Mainly though, I would see expansion as the recurring revenue grows and we take a stronger service position. But as I said, the real advantage that I see going forward is just how scalable this business is. And you can see that in the way the EBITDA grew once we lifted the revenue. So the focus is, lift the revenue, because I think we can support that quite effectively.

Are there any difficulties attracting and retaining technical staff?

Look, I think it's fair to say that it's a very tight labor market. And I'm seeing that in a number of companies that are technology led. And so I won't say it's exceptionally easy. But at the same time, with the exceptional management team that we have with their connections, with their pedigree, with their networks, we are managing to retain and attract the type of staff that we want in this business. We are still a small business on a global scale for the big things that we do. So there is a large labor pool out there that wants to be part of leading innovative, nimble technology companies like Ava.

On GJD, how is the U.K. doing? Do we see much impact from the current economic conditions yet?

I mean we've reported in the pack and Mal spoke about the Illuminate division. Look, there are economic factors at play in the U.K., which are on the first and second page of the international newspapers in Europe most weeks. But we haven't seen that business falling off a cliff like you've seen some of the U.K. businesses. We are, as Mal stated, we are a distribution business. So we are somewhat reliant on channel, which can also be a really good thing because there's a big opportunity there to expand within that channel. Mal is over in the U.K. at the moment and looking at how we really harness that opportunity through the likes of Bosch about by watch other companies that we can leverage in that ecosystem. So we certainly have made some decent ambitions for growth in that business coming forward that isn't affected by the slowdown in the U.K. economy.

For the $70 million to $100 million revenue forecast, can we talk to any further breakdown between business units and confidence in achieving this target?

So I think you'll see in our last presentation that was released to the market. There is a bar chart that actually looks at where that growth is coming from. So in that bar chart, you can see for each division, each type of revenue. You can see actually where that growth is forecast to come from and what the current base, is at the moment, there's 2 different colors on that bar chart. So I would recommend anyone interested in having a look at that can refer back to the last presentation. And obviously, in the presentation that's been given today, there's some flavor around that.

What news flow can we expect in the second half?

So news flow is an interesting one. And we quite often get asked about this because there's a lot of good things going on in the business. One challenge with being a listed company and also being a smaller listed company is that we need to make sure that anything we announced by the ASX is material information. And the ASX obviously has guidance notes. It has rules; Directors have obligations to make sure that the markets being informed but only being informed of material things. I would encourage everyone to go ahead and subscribe to our various LinkedIn feeds. There are -- there is a lot more news flow on the LinkedIn feeds that I think shareholders would be interested in versus the ASX feed. But that said, we're going to keep engaging with the investor community through the ASX, both by doing investor presentations like the one we're doing today, but also doing regular quarterly updates and obviously in line with our continuous disclosure obligations. We will be making ASX announcements when they do reach the materiality threshold that's set by the ASX.

Thank you, David. There are no further questions. I'll now hand back to Mal for closing remarks.

Thank you. Thank you, Alex. Thank you, everyone, for today, and thank you for giving us your time. I'm very excited about what we are going to be able to do over the next period. As I said, the key is to me, a great platform, excellent technologies. And I think we've got a really good basis for growth. So thank you very much. I look forward to speaking to you again soon. Thank you.

Thanks Mal, thanks, everyone.

That concludes our webinar for today. Thank you for participating. You may now disconnect.