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

[Technical Difficulty] everyone, and welcome to the AVA Risk Group H1 FY '25 Result Webinar. [Operator Instructions]. This call is being recorded. I will now turn the webinar over to David Cronin, Chair of AVA Risk Group.

Thanks, Alex. Good morning, everyone. I'm very happy to present the first half 2025 results to you today. As you will see, management has made significant progress in achieving its strategic outcomes for the 3-year plan that we set about a few years ago when Mal joined. On the call today, Mal Maginnis, our Group CEO; Neville Joyce, our Group CFO, and they'll run you through the business and also give you a good indication of where we see the outlook for the current financial year and then beyond. I'll also update you on a few of the strategic objectives that we set out and how we're going with the progress on those. Over to you, Mal.

Thank you, David, and good morning to everyone. Lovely to have you here. I'm delighted to be able to present to you our H1 results for financial year '25. So as I've discussed with you for some time over the last 2 years, my strategic focus has been on the commercial group and on the technology because that fundamentally leads to the results. I'm delighted to advise you that we've had excellent results in H1. Our revenue is $17 million for the period, which is up 20% on the same period prior year. Our EBITDA has had a major turnaround, up $2.6 million from the previous period. Our gross margin has remained solid, in fact, has increased slightly, up to 64%. Our sales opportunity pipeline remains extremely strong at larger than $100 million, which has been one of my core focus with the commercial team. We have a solid sales backlog of about $8 million, which I'm happy with. And the cash was $4.7 million. But I would point out to you that we received about $1.7 million of cash very early in January. was simply delayed due to the programmatic nature of some revenue in December, and that was an excellent result for us. So overall, very, very strong revenue, excellent EBITDA based on the revenue, in particular in Detect, and we'll take you through some of the detail of that now. So what were the highlights? As I said, strong revenue and EBITDA growth, really focused on what the commercial team has achieved, coupled with the technology. Fundamentally, we have to have product and technology that the customers want, and that's been clearly proven through the first half of '25. The underpinning was Detect. I've always said to all of you in my briefing that Detect is the critical path for us to growth. It is the larger programmatic business with the higher margins, and it was excellent to see the strength across the market in the first half. Our recurring revenue has also been a real pleasure. I did focus on this right on joining in releasing Aura Ai-X and producing a recurring revenue stream. And that was up another 20% in the period up to $2.4 million. Again, this is critical for us to be able to have a consistent revenue growth position. We're adding to that every year. We have a very strong sales pipeline. And in the strategy session later, I'll go through that in some detail because it's quite different from where we were 18 months ago. And again, partnerships in the new verticals. We're seeing some really strong partners who are now coming back to us with return business. And that, of course, is the key issue. Once I get a good partner and win business, what the team needs to achieve is repeat business. And I'm delighted to say that that's exactly what they've been doing. There are 2 nice examples there, but there are only 2 of some of our big projects that we delivered in this half. But again, good examples of the type of infrastructure projects that we're now working on. For a reminder of everyone and some I know are new investors, I just wanted to make sure I explain as normal how we manage the business. So we have 3 organizations across the globe: Detect, Illuminate and Access. Detect is the largest of our businesses based on fiber optic intrusion detection. You hear it often called DAS. The interesting one for me here is that the perimeter intrusions, which is our traditional business, 18 months ago, the fence type system was fundamentally the core of our business. I would say now that we're seeing telecommunications, data networking pipeline, borders, some other critical infrastructure growing in all 4 of our major geographies. Illuminate, a smaller technology detection system, complementary to Detect and has been doing a very nice job in developing its LoRa wireless system and integrating its sensors there. I've been delighted this year with an improvement in its global position. We've recently had some good success in America and growing success in Asia Pacific. So Illuminate, smaller business, but we're seeing some solid growth. And Access, high security access and control technology. It has had a solid year first half, although weaker than the previous period, although that was somewhat slanted due to the large dormakaba order in the equal period last year. So overall, we have a small global business in all 4 of the core regions. Detect is our largest business based on fiber with 2 complementary technologies. This has been the core of the message that I've been getting across to the market, sensing beyond security. If you have fences, walls, ditches, gates, cameras, fundamentally, that will prevent honest people from doing something. You need a smart sensing solution 24/7 that triggers other responses from within the organization. And so everything that we're seeing now is based around this concept of sensing beyond security, live sensing centered around the fiber optic system, supported by Illuminate and secured by Access. The core piece here is the technology. The technology has to work. Now one of the great things, and I'm not a buzz person, AI gets a lot of buzz in the market today for a company like us who collects huge amounts of data without AI and particularly deep learning and machine learning or convolutional neural networks, without that, we couldn't process the amount of data that we're collecting. So AI has been a fundamental part of our success going forward, and we're continuing to expand and develop that. So sensing beyond security is the key for us going forward. I just wanted to remind you of the go-to-market and revenue model that we work on. Fundamentally, across all 3 businesses, we look at services, which is installation and commissioning, primarily of Detect systems. selling products directly off the shelf to distributors, that is more so Access and Illuminate, but Detect also and a series of smaller scale products and a really good introduction into the technology. And then recurring subscriptions. Recurring subscriptions are critical to underpin the business going forward, and that has been a real success point over the last 18 months. We then work very closely with large system integrators and distributors. One of the key changes for the commercial team in the last period has been we used to be a Tier 4 or 5-level subcontractor. What I've worked with the team on is to get us up right underneath the system integrators and where possible, closer to the actual core customer. That allows us to influence the design and get a better program result for us. So overall, the end user is the critical group because fundamentally, they buy the technology, and I'm delighted with the way we've been able to get to the end user in the last period. The next thing I talked to you about was driving growth beyond FY '25. And this is all driven by the pipeline. And the pipeline is built by the commercial team, coupled with the technology. So the great thing is we have a proven technology with Aura Ai-X. Aura Ai-X is the absolute go-to for the market now. The great thing, and I'll talk a little bit later about it, is we've now added 4 platforms to the Aura Ai-X family. This is absolutely critical. The best way for us to be able to expand our technology into other applications and get the best market value out of that technology. Complementing it with the LoRa wireless system, growing recurring revenue and the development of the Access product line has all been extremely critical and key to actually building this pipeline. We are seeing that 20% growth in recurring revenue, which then becomes an underpinning to the pipeline. I would say to you that the pipeline is really evenly spread across all 4 main geographies that we work in. Each one is slightly different in style, but all of them are reflecting the strength of Detect as a core technology. High-quality partner and end user base. I show this mainly because it just explains the type of companies that we work with. As I said earlier on, the great thing for me is to see the repeat business coming out of these large system integrators and partners who clearly are happy with the product and continue to come back to us time again. And that is what is going to build that growth into the future. So I think with that, I should hand over for the nuts and bolts to Neville and let him talk to you about the specific financials. Neville?

Thanks, Mal. So look, a little bit of a deeper dive in the financial results. Mal has obviously touched on some of the highlights of the performance. We've had a really strong first half of the year and a pretty solid indicator that some of pathway to growth, which has been identified previously, we're starting to hit some of those markers along that journey. So revenue up by 20%, as Mal mentioned, and that's really on the back of a significantly improved Detect performance, which we'll look at shortly. Importantly, that revenue growth has also driven growth in gross profit and margin improvement. Obviously, the Detect business is the highest margin product of our 3 product segments. So as we've been able to increase revenue in that segment, that's favorably impacted gross margin. We've always indicated that gross margin sits in that 60% to 64% range. And certainly, we're seeing nothing in the market today to indicate that those margins are under pressure. Importantly, the improved revenue, the improved gross margin has effectively dropped into a significant improvement in EBITDA. And there's a couple of things really sort of happening in that EBITDA number. The chart on the right-hand side of this slide shows as revenue has grown, what's actually happened to our cost base. You can certainly see over the last 3 half years that the cost base has come off. And that really reflects that some of the additional costs which we incurred through FY '24 associated with increasing our commercial capability, redeveloping some of our technology. As that investment has stabilized, we're seeing the benefit and the leverage of that investment in increasing revenue. And that's obviously increasing our EBITDA margins. And certainly, when we talk to outlook shortly, we expect to be able to see that continue into the future. I will call out an increase in our D&A charges. Some of you who have followed us for a while may recall that at June, we changed our amortization period on our intangible assets. Last year, effectively, it was a 10-year period. This year, we're amortizing over 5 years, and that's driven some additional amortization charges. And again, we'll talk to the outlook in a little more detail, but going to that leverageability and scalability piece, we've got target revenue somewhere between $50 million to $65 million in 2026, and we expect that to continue to deliver significant growth in our EBITDA through that period. When I look at the segment results, as we've mentioned, the revenue growth is really underpinned by a significant improvement in the Detect segment. A lot of that comes out of having a strong enough backlog of orders to give us some certainty around what our revenue profile looks like in a given period. So we expect as we move forward that we continue to see that sort of growth in Detect. Access has come off from where it was in the first half last year. Mal alluded to the fact that this time last year in the first half last year, we've received significant orders coming out of dormakaba in the U.S. It's fair to say that our growth in Access really is driven by our ability to leverage those distribution channels with our key partners and dormakaba is certainly at the forefront of that. I think the other thing to call out here is the growth in the recurring revenue. Clearly, from a backlog perspective, we have significant recurring revenue associated with multiyear service contracts sitting in the backlog. But you can see that that's actually translating into revenue as well with $900,000 of revenue realized in the P&L compared to $0.5 million in the comparative period last year. As we look at the balance sheet, there's a decline in cash of about $400,000. Look, it's fair to say on this sort of revenue and this sort of EBITDA performance, we would expect to have been cash flow positive. The main reason for that was just the timing of a couple of shipments, in particular in December, which effectively meant that we received that cash in early January rather than late December. But the cash position is strong, and we were paid for those shipments in the early part of January. There's a few movements in other assets, primarily associated with prepayments and some leases that we've taken out, mainly around our facility here in Melbourne. And as a reminder to people that the borrowings that we carry on the balance sheet really relate to the acquisition of GJD and some debt facilities that were in place when we acquired that company a couple of years ago. Cash flow, notwithstanding my comment around, yes, I would have liked to have collected some of those December shipments in the half. We still had a favorable working capital movement, and that reflects the fact that particularly through Q1, we collected a number of receivables relating to our FY '24 performance. I mentioned before that on the level of revenue, which we're able to generate and the EBITDA, which we've been able to generate, I would expect us to be cash flow positive. And certainly, as I look towards the second half of the year, that's certainly my expectation. We continue to invest in the technology. So in round numbers, there's $1 million worth of development work that continues to support the Aura platform. And that level of expenditure, I think you can expect to see as we move into the future as well. But it is fair to say that a lot of the heavy lifting associated with the redevelopment of technology has been completed and our opportunity that's in front of us is really how we continue to leverage that opportunity to grow Detect revenues. So with that, I'll hand back to you, Mal.

Thank you, Neville. So I'm just going to give you now a strategy and outlook of where we're going in H2, building on that strong performance in H1. As I've said, in Detect, it's fundamentally Aura Ai-X as a platform. And we've added 3 new platforms. In fact, we're going to add another 2 at the end of this month. They're specifically targeted towards applications in the market. But by leveraging an application, we don't have to spend a lot of money reinvesting. It's just about taking our current technology and sweating it in a more effective way. And I'll talk a little bit about that in a moment because it's important about when we talk about the adjacencies. In Access, they've got a very good technical position now with the Cobalt 2 locks being accepted in the market and the new Bluetooth YG80. I'm delighted with how that's going. We'll continue to work closely with dormakaba and other large distribution partners across the globe to enhance Access. We've seen a solid return by Access in the first 2 months of the second half, which is encouraging as it was year-on-year a bit of a decline from last year. Illuminate, we are seeing more cross-sell opportunities. And I'm very, very pleased with the work in North America. The commercial team there have done a really good job of getting Illuminate into the North American market. We've had some of our biggest sales there. So I see some real success going forward. LoRa allows us to integrate the Illuminate product line easily with Detect. And I would see in the next year further integration of Detect and Illuminate going forward. So I just want to talk about at the AGM and the investor meetings in September, I spoke about the verticals. And the reason I talk about this is because 18 months ago, we would have talked primarily about fencing and our fiber solutions on the fencing. That has definitely changed in the 18 months, and it's changed across all 4 geographies. The global borders has been a real change, primarily buried solutions or covert or discrete solutions. We've had some outstanding performances in Eastern Europe and for obvious reasons. And the big issue there has been the performance of the AI and the deep learning with our Aura Ai-X reducing the nuisance alarms. Customers are delighted with it. The really strong part is we've had now 4 independent tests by third parties who come back with outstanding results, better than they expected even at the point we've been able to replace competitors' installations due to the performance. Mining, oil and gas also was a quiet sector when I took over. I would say it's one of our most important at the moment. They are seeing a lot of threats to their infrastructure. And so we are seeing across the globe, all of mining, oil and gas being a major player, both buried, fence, pipelines and a range of other applications of the technology. One of the most pleasing areas has been transport. If I was talking 18 months ago to you, we did nothing in metro and transportation. We are now very, very closely aligned with metro solutions, not just in Sydney, but bidding on other solutions across the world. and a growing requirement and interest from airports in their long perimeters. So we've seen an uptick across the globe. We've recently deployed new systems into Brussels, into Morocco, into Dubai, and we're seeing continued expansion of this in the pipeline. So these key verticals, it's quite a change from where we were 18 months ago as fundamentally a perimeter solutions company. We now see a much more sophisticated approach to smart sensing and detecting activity around key assets. I then want to bring us on to adjacencies, and I want to spend a little bit of time on this because it will answer some questions that some of you will have about the adjacencies and the forward-looking numbers that we're providing as guidance. The adjacencies, telecommunications are an outstanding opportunity for us. I would have to say it has been slower than I expected, but the opportunity remains very high. You, I'm sure, have all seen the amount of noise about the subsea cables and particularly the subsea cable landing threats that are there. We have developed new technology specifically targeted that adjacency. And while I can't, at the moment, give you a commercial result, I'm anticipating commercial results on that very soon. We successfully demonstrated and proved the technology to a major telecoms player, both with the assistance of a major Melbourne University. We showed that what we had designed, what we built and what we demonstrated actually worked. And that's really quite exciting. And so there's a whole range of opportunities with telecoms and not just in Australia, we're now working with a group of telecoms companies internationally. The key areas are surface and subsea sensing. They all have very large terrestrial layouts of fiber plus also the landing stations for subsea. There is a lot of change to the cabling going on because of environmental and climate change, for example, flash flooding, et cetera, which is leaving large areas of exposed cable. And we've been able to demonstrate that we can target that and advise the service groups, the InfraCo type groups to repair and support cabling when it's had a problem. And of course, there is always the challenge for telecommunications with interference in their infrastructure, either unexpected or accidental or nefarious and deliberate. And so we've also been able to demonstrate our capability there. I would say we are now 18 months into that process with the telecommunications companies. They are large. I would also have to say they are probably slower to adopt new technologies just given their scale. But I see that we are right on the edge now of getting to that final position with them. So the adjacencies, as we call them, will start to show results in the second half and into '26. So just giving some guidance outlook on where we are. The critical change for the second half for us has been the adjacencies. As you remember, I had $37 million in the core revenue and about $5 million in the adjacencies. Now we explained that we deliberately separated the 2. Adjacencies was new for us. It meant that we had to develop new technology, new applications and also demonstrate to new partners that there was value in the technology. As I said, I'm very comfortable we've now achieved that. But of course, it did mean that the adjacencies have not had as big an impact into this year as I expected. That said, I'm delighted the way we'll be able to go with the core business from $17 million to the lowest point, $37 million this second half. That is a substantial movement within the core of the business. And then we'll start to see some really strong results coming out of the adjacencies into the latter half of this half and into next year. And this is really driven by the programmatic nature of the adjacencies. These are very large partners who do very large projects, and they take some time to materialize. And we've worked very hard at it. As I said, I think we're right on the edge of it now, both technically and commercially with those clients. The really good part too is, as Neville spoke before, is our operating base has now stabilized. really well. And that is every time we're selling additional product at the margins we sell into Detect, that's flowing straight to the EBITDA, which is where we wanted to go and also improving our free cash flow. So overall, although I have moved out some of the adjacencies, the core business remains fundamentally growing to where I thought it would. The adjacencies will take a little bit longer as we build that capability, but I'm absolutely confident that, that capability is coming. So that's the outlook leverages going forward. So I believe it is a compelling case of investment. The first half has shown what our target was and what our strategy was. And our strategy is based on the commercial team's performance, coupled with the technology and building our market base across the globe, across the 4 regions, which has shown growth of 20% year-on-year. It's shown a continued very high margin, somewhere between 60% and 65%, which we achieved higher than the 60% in this part. Highly scalable model, and I can't emphasize that enough. Everything we now do just supports increase in that EBITDA and free cash flow. There is no additional cost base I need to put in, although as we get beyond the $37 million to $40 million part, I may need to add some additional program support for the large partners or some service, but this will be very much at the edge, not a substantial investment. We have very strong competitive advantage given because of our position technically and with the product and with a really, really strong commercial team. The commercial team now has shown they not just have the sales, they also have the application and the installation and technical expertise to support the clients. And that has led to the repeat business, which is great. And global opportunity for a small company, and we are a small company, we operate in 4 major geographies, and we operate extremely well in those. Melbourne is the core center of what we do, both technically and manufacturing, and we very easily support the team across the globe. So I believe that we've demonstrated in H1 the growth that we said we were going to do, and it is a very compelling case for investment. Just a quick corporate snapshot. That's just really just for your info of where our shareholding, our largest shareholder in the top 20 at the moment. And you can have a read of that in your own time. And that, ladies and gentlemen, brings me to the end of the formal presentation. I'll hand back to Alexandra and ask her to manage the Q&A. Thank you.

[Operator Instructions] A good place to start might be on the downward revision in FY '25 revenue forecast. We've had a question on what drove that downward revision compared to numbers that were presented at the AGM, and another on the FY '26 revenue guidance of $52 million, which appears ambitious. What concrete factors support that projection? Investors might see some clarity on why this number is achievable.

So [ Jesse ], I'll answer your first, and I tried to answer that in my discussion about the adjacencies. In the AGM, we have got to a point with the adjacencies that I felt we would get to a closure with several of them. That took a little bit longer than anticipated. I'm sure all of you who see large infrastructure projects understand that these things are not always easy to predict. My feeling is that we need to be forward-looking and push those numbers both to help push the commercial team and also my technical team to deliver the solutions. So the downward revision is fundamentally driven by the adjacencies, the $5 million that we pushed out. But as I said, I'm very confident that will come back. And [ Ruben ], you asked the question about the adjust in the guidance, and it is ambitious. But as you saw us lift the Detect business from $7 million to $12 million in this first half with the backlog that we have and with large pipeline we have, remember, the pipeline is all Detect. We don't manage a pipeline in Illuminate and Access. So it's all Detect. I see a strong underpinning. Now there is always a danger in the program business that a $3 million or $4 million program, if it moves 2 months out of the half, that has a material impact to me. But this is guidance, and we're trying to give you the best opportunity that we see going forward. I think there was another part of that question, which I might have missed. I'm just trying to read the rest of it. I think I've answered that. If there's anything else that I haven't answered there, please just come back.

Yes, we can get back to it now. You touched on the Telstra deal in the presentation, but could you give a detailed update on the status of that? Do we expect revenue within this financial year or next? And just on Telstra, there's been another question on whether AVA is actively negotiating a renewal of that contract. If so, what are the key factors influencing whether this agreement will be extended? If not, should investors assume this revenue stream is coming to an end?

No. So that's a really good question, and thank you for that. Yes, we are actively negotiating the extension of the contract. It has an automatic extension built into the contract. I am delighted with the work we've been doing with Telstra in the last 3 months. Obviously, you'd all be aware, obviously, December, January is a little bit slower in Australia. But we had a very good November where we were proving the new technology platforms, and that followed up in January and into February. I would say at the moment, we're now involved with about 5 different major parts of Telstra. We just logically should be part of the technical development there given our fiber position and given their position as a major fiber infrastructure. So we are actively working on the extension, and I personally don't see any concerns with that. We will see the first commercial sales into the adjacencies, which include Telstra, but not only Telstra in this second half that we're in right now and then building that into next year. So I'm very, very comfortable where that revenue stream will go to. I'm a little bit disappointed that I thought we could get it into FY '25. We will get something in FY '25, but the majority will be in '26. It does take some time with these large partners. But I'm very, very happy with where that's going.

Thanks, Mal. Just on the backlog, is there a seasonality in the backlog, noting that the backlog is lower than it was at 30th of June '24?

That's a really good question, and it underpins the programmatic nature of this business. When we were sitting in the AGM, I was very confident that 2 large infrastructure projects would close in the period. And what happened was they have both moved out into the early part of this year. Both have not been lost. Both of them will happen. They simply moved about 2 or 3 months. Again, the risk of large infrastructure projects, they sometimes take longer than we'd all expect. So that just simply moved part of the backlog. But again, I'm very comfortable. The backlog sits both with recurring revenue and the hardware part. Remember, it's all Detect only. I'm sitting on about 2 months backlog at the moment. As a CEO, I would like to have 4 or 6 months backlog, but 2 months is very solid where the team are working to get it back to 3 and 4, but I'm comfortable where it is, and that purely was because of the movement of 2 large programs.

We've got a question on GJD and the launch of LX LoRa Connect. So it's been a year since the product was launched. How has the market responded? Given that GJD's revenue has remained flat, what specific challenges have prevented stronger adoption? And what actions is the company taking to address them?

So LoRa has been well accepted. One, it gives a really good advantage to installers. So they don't have to go around digging huge amounts of effort to get actual cables in and connect to all the different Detect sensors. So it's been well accepted. We are seeing a move in Illuminate from the older smaller detectors into the higher-value lasers, illuminators and LoRa, and we're in the middle of that transition. We're also seeing some growth in the American market, I mentioned and some growth in Asia. So what's the company doing about it? It's one, building up the offering in the higher-end sensors. There's not a lot of value in the small end sensors. So building up the lasers, LoRa and illuminators is key and increasing our position in America and Asia. America, in particular, I'm pretty excited about where we're going with Illuminate and America, thanks to the huge efforts of the commercial team. So it is flat, but the good thing is we actually recovered some, what I would say, product wind outs or removals by the new products and bringing in new markets.

Just briefly going back to the Telstra deal. In addition to this, do we have any other long-term plans in growing the revenue significantly from different angles?

Yes. Again, a really good question. The critical piece is what I spoke about, the Aura Ai-X platform. What has delighted me is we have been able to prove that by using the core of that pipeline and then changing its application that we can then open a new market sector. So all of the things I talked about, the adjacencies, the exposed cable, the cable landing stations, securing critical infrastructure, these are all new applications in the Telstra part, including being able to operate on a live lit cable, whereas in the past, we always use what's called dark fiber. So that was a big change. And what we're doing at the moment is continuing to expand that technical capability. We're in the process at the moment of releasing another new platform, which will be at the end of this month. And that platform is going to give us some other opportunities in extended range, the application of amplifiers and repeaters, which will have another application in aerial cabling or in long-range terrestrial cabling. So the key issue for me is this technology capability, continuing to expand that and add the different platforms to it. That's what keeps adding new markets for the growth.

We just had one on the share price and what we think needs to be done for results to be reflected in the share price.

I think maybe, David, I'll turn that one over to you.

Yes, the million-dollar question. Look, all the company can do is set about achieving our objectives. And I think we've certainly got a track record of doing that. The management team has been ticking a lot of boxes. We've got to get that message out to shareholders, both new and old, so that hopefully, they buy shares. And we've got some investor engagement coming up through a major broking house in mid- to late March. We will be getting in front of some small-cap fund managers that have been following us. Liquidity has been a problem in the stock for some fund managers as has our market cap size and revenue size. But obviously, the team is doing a great job of growing that. And I think you're right to point out that with results like these, more investors should be taking note because certainly on a valuation basis on a few things that I watch and involved in otherwise, we look extremely cheap compared to others and compared to some peers in the industry. So hopefully, that can be reflected in our share price in the coming months as management continue to do their thing and achieve results.

Thank you, David. Just in terms of capital management, are there any plans to potentially buy back shares?

Nothing at the moment, Paul.

There are no further questions at this time. I'll hand back to Mal for closing remarks.

Thank you, Alexandra. I just wanted to take an opportunity here for me to thank the team that's been working with me. These results are fundamentally down to the commercial team focused on delivering results with partners and very much the technology, science and engineering team doing a wonderful job in delivering new products that let us get into those new markets and applications. So thank you all for attending today. I look forward to seeing you on the investor rounds and after H2. So thank you very much.

Thanks, everyone.