BAE Systems plc (BA) Earnings Call Transcript & Summary

Hello, and welcome to the second edition of The Thread, our technology deep dive series as we look to unpack some of the leading technology capabilities that many of you may or may not be aware BAE Systems excels at and are integral to our business and what we can provide to our customers. I'm Martin Cooper, the Investor Relations Director and your host today. The format will be as we covered before on synthetic training with a presentation by a subject matter expert and then time for Q&A. You can raise questions through the chat function on Webex at any time during the presentation. We start today with a video message on the importance of technology to the group from Thomas Arseneault, President and CEO of our U.S. business.

At BAE Systems, mission and technology set us apart. The cornerstone of our culture is our mission to protect those who protect us. Technology enables that mission as we are driven to develop the most advanced systems and services our customers require and deserve. You'll find BAE Systems' products from the depths of the ocean to the far reaches of space, providing key capabilities made possible by technology our people develop, mature and deliver. Today's global threat environment is a stark reminder that the defense of nations requires focus and commitment. With potential adversaries developing weapon systems that pose a threat to the U.S. and our allies and partners, focus on investment to deter and defend is critical. As a result, while global economic and fiscal pressures weigh on governments around the world, the commitment to defense in our major markets remains robust. BAE Systems' technologies are world class, well aligned with national defense priorities and the foundation of many amazing careers. Investing to develop these innovative technologies is core to our company strategy, and it ensures we have a sustainable business that will continue to support our customers, create value for our stakeholders and inspire our employees for decades to come. The technology that underpins our products and services set us apart, helping us achieve tangible results throughout our global aerospace, defense and security businesses. Through our new technology webinar series called The Thread, we'll take a deeper dive into some of the technologies that enable us to meet our customers' critical mission requirements and drive real value for our shareholders. I hope you find these technology-focused webinars both interesting and helpful and understanding some of the key technologies that set BAE Systems apart. Thanks for joining us.

Thanks, Tom, and always great to see the fantastic showcasing of our capabilities. Today, we're going to cover aspects of digital transformation and what that means to us and highlight through case studies at diverse stakeholder basis and capabilities. I'm delighted that Mivy James joins us from our Digital Intelligence business, which brings together all of our key digital areas to deliver this essential work. As a reminder, our Digital Intelligence business currently delivers around GBP 700 million in turnover and is home to over 4,500 digital, cyber and intelligence experts. They work collaboratively across 16 countries to collect, connect and understand complex data so that governments, nation states, armed forces and commercial businesses can unlock digital advantage in the most demanding environment. The markets they're exposed to attract higher areas of budget growth and we feel we're well positioned to benefit from these growing markets. Before I hand over to Mivy, the following video provides greater color on some of the technology and skills Digital Intelligence provides. [Presentation]

I'll now hand over to you, Mivy, to give us some insights into the work that you are doing and have done in digital transformation. Over to you.

Thank you, Martin. As Martin said, I'm Mivy James, Digital Transformation Director here at BAE Systems. My role is largely to advise leaders in government departments on their digital transformation journeys and to use those insights to inform our own business strategy. Martin has already given you an overview of the Digital Intelligence business, as has the video that you just watched. I like to think of us as being instrumental to the digital thread that is the security and prosperity mission of the U.K. Now I've worked in tech for almost 30 years. I'm a fellow of the British Computer Society, a chartered IT professional and a BAE Systems engineering fellow. So with that long experience, I've ended up becoming an advocate for digital transformation, as I think it summarizes the full potential that tech has to support all types of business and being the best they can be. I'm going to cover some lessons learned, both from the work we do here in BAE and my own personal experiences from architecting, building, road mapping, data-centric solutions and transformations into various government departments such as law enforcement agencies, the Home Office as well as the Ministry of Defense. I'm going to bring to life some of the things that we have done to give you a better flavor of what Digital Intelligence offers, building on some of the examples touched on in the video. Then I'll highlight some of the key features of what I know about digital transformation. A compelling case study of transforming operations through the better drawing of data previously only available in disparate silos is a Cerberus program for the U.K. Border Force. For those of you who don't know, the Border Force is responsible for keeping our borders safe round the clock, covering airports, ports, the Channel Tunnel and the 8,000 miles of coastline that we enjoy. This involves gathering intelligence, searching baggage, vehicles and cargo as well as checking the people crossing the borders. There are over 300 million passenger journeys and 385 million tonnes of freight that cross our borders every year. And previously, each mode of border crossing, for example, by boat or by plane, had its own distinct set of data and systems. Border staff need to be able to identify previously unknown entities of interest, new patterns and trends and understand the holistic risk so the scale of the challenge is clear. Achieving those aims requires efficient use and sharing of data. And when used well, data leads to public services that respond to users' needs and to decisions that need to better real-time results. For example, the power of technology and data analytics can help prevent someone or something boarding a plane, train or boat as far away as Sydney or as close as the freight terminal near Cali. But in a world of ever-increasing data types and data volumes, it's hard to not get lost in the noise. Our mission is to decipher that data and to provide real insight to help those who protect us and do that as fast as possible so that risks are identified as or before they cross our borders. In other words, real-time threat detection and intervention. The data is useful beyond that moment of border crossing to gain an ever-improving understanding of the bigger picture and macro trends to inform longer-term strategy, aid future interventions and assess the success of prevention measures already taken. This capability is developed in modern cloud technologies whilst adhering to the required security standards for this type of data. The infographic that you're looking at here quantifies some of the scale of what Cerberus contends with. The Director of Home Office Intelligence, Dominic Gallard, said technology sits at the heart of operations at the U.K. border. The partnership with BAE Systems enables a more data-driven approach and provides our teams with high-quality information to support operational decisions. This helps us keep the U.K. safe by identifying high-threat movements of goods and people and interdicting them. This also speeds up the progress of low-threat people and goods, thus unlocking efficiencies for Border Force and enabling U.K. prosperity and flow. Another example of successful digital transformation is our ongoing work on ANPR, Automatic Number Plate Recognition, which has been in place for a considerable time in the U.K. When we started working on it, there were some 15,000 cameras feeding 45 disparate systems split across regional law enforcement and organizations. Our work unleashed the power of data that was already being collected but not fully exploited and certainly wasn't previously joined up across organizational boundaries. Using machine learning and data integration on existing infrastructure, what we've been able to do is to train algorithms which codify some aspects of law enforcement tradecraft, spotting travel patterns which are typical of criminals and very different to private citizens going about their normal lives. The data used throughout meets all the compliance needs according to how data is collected, stored and analyzed. For example, vehicle registration numbers are classed as personally identifiable information and therefore, are under very strict handling rules. The patterns identified by the machine learning gets validated with the experts and further refined through ongoing iterations forever increasing richness. We've also been able to identify new county lines routes previously unknown to law enforcement. Current work on this capability includes moving to cloud hosting as part of wider law enforcement programs with security, of course, being central. What excites me about this case study are the clear operational business outcomes. One of the things that's kept me at BAE Systems for over 15 years is that we genuinely care about the mission. For ANPR, there have already been some very impressive success stories, resulting in substantial arrests even during pilot phases. An example was being able to track a warranted subject's pattern of life for a low fast arrest due to increased confidence in their whereabouts. Another case prevented 24 kilograms of Class A drugs from reaching U.K. streets. These are just 2 examples of current work in Digital Intelligence across HMG to enhance data exportation and support digital transformation at enterprise scale. Now as part of living by digital transformation ourselves, we've created our own cloud enablement team. This follows best practice for ensuring successful cloud adoption through having a highly visible cloud center of excellence. Our CET provides direction and advice to our own engineering teams, creating solutions for our customers and directly to those customers themselves. We work with multiple cloud vendors and have close relationships with both AWS and Microsoft. We understand the business change aspects of setting up an effective cloud enablement team, so have communications at the heart of what we're doing. Setting up internal promotional activities and a small number of officially recognized evangelists. As you're about to hear, we know that digital transformation can only be successful when we first know what that success looks like. So to practice what we preach, our CET has an annual set of objectives and key results. A real example of this is our workforce is confident, prepared and qualified at the right time for our customers' cloud demand with detailed key results of obtaining a set number of differing AWS certification in named business areas. As we work in partnership with our customers, we've been very transparent in setting and tracking these objectives and key results. We know that this modest internal investment has already paid dividends to accelerate our own progress and to support our customers. So what does all of this tell us about the bigger picture for digital transformation? It only takes a quick Google search to learn that, unfortunately, all too often, big transformation programs don't quite deliver on their promises. And I've noted that there's a real tendency to blame the technology. So maybe as computer scientists will always be defensive about the technology, but what I am certain of is that technical problems are always eventually solvable with the right talent and resources, which include money and time. Things go wrong because of how the needs were articulated in the first place or that the program has become about meeting some almost arbitrary delivery milestones and has lost sight of the intended business outcomes behind its original creation. Those business outcomes were clear in the 2 case studies that we looked at earlier. It's worth noting that digital transformation is a ubiquitous term these days, but I think it's actually just a consumable way of referencing things that we've known about for a long time and bundling together in a single convenient label. So if it's not new, then why all the attention on digital transformation and why now? One of the things that makes me passionate about technology is that it never stands still. My smartwatch has more storage and compute than an entire server room stuffed full of kit that I used for synthetic environments in the late '90s. This dizzying pace of technical change, along with an insatiable appetite for overwhelming volumes of data of all varieties, structured and unstructured, and sources, means all organizations need digital transformation just to keep up, let alone to get ahead. So how can digital transformation be best defined? I've noticed that digital transformation has often become synonymous and large organizations with specific technical implementations such as cloud migration, machine learning and a little bit of artificial intelligence, that fairy dust sprinkled everywhere. And those technical deliveries run away with themselves, where go live has seen as digital transformation being achieved. Technology, we must all remember, is a tool to support organizational drivers. And I hope that by telling you that as a technologist, it carries some weight. Cloud, AI and ML are just the tools of today, and we're now heading towards edge computing being the norm and quantum computing doesn't seem like it's just sci-fi anymore. If organizations just focus on the tech, all they get is perhaps increased digitization, not digital transformation. So they're replicating a process in another world. It could be paper world to the digital world or on-prem old technology to new cloud hosting, but that misses the transformation opportunity. Digitalization, on the other hand, maximizes the use of those technologies and perhaps previously unharness data and then reimagine the processes for optimum business efficiency and agility. It's also important to emphasize that I've never actually finished with digital transformation. It's a state of constant change. The digital age demands business agility across the whole enterprise and not just in software teams. A digitally transformed organization can be described with the following set of characteristics. It's value stream driven. That's really important because lots of organizations don't actually measure productivity well, if at all. They don't count the effort -- the human effort as part of the cost of their business. And it sounds a bit commercial, but we need to think about time is money. But it's key to being more agile and something that government organizations, in particular, struggle to account for. It's willing to transform both with continuous improvement, maybe gently with Kaizen, automatically with revolution. It embraces innovation everywhere rather than being in pockets, not just having R&D department working in isolation. I'd argue that innovation matters only when it's pulled through to operational benefit. It has a healthy obsession with improving the customer and/or user experience. It's data-driven. And what I mean by that is that it recognizes the power in data and genuinely uses it to make decisions. Uses automation when appropriate, maybe to sift through huge swathes of data, creating consumable digests or to speed up processes and actually only ask for data that's being used. So we don't have these cottage industries of management reporting that's not being used to inform decision-making, which gives a sense of [indiscernible] and of course, have the right data governance in place. It's security savvy with information security as second nature. And here's the tech bit. It has the infrastructure to accelerate digital strategy such as cloud. Technology is utilized to support the organization but doesn't control it. Investment in technology clearly links back to the value stream and driving productivity. And of course, it's fast and agile, which means having an empowered workforce, which is easy to say, but it's very difficult to shift a command and control hierarchy, decision by committee and hiding behind processes. So digital transformation is cultural. It's a mindset, underpinned by exploiting technology and is data-driven and actually understands evidence-based decision-making. Everything is agile. The entire enterprise works in sympathetic cadence. There's no clutch acting as a disconnect between widely different pieces of working. And key to all of this, of course, is leadership culture because this sounds kind of exhausting and will be a fast route to change fatigue. Leaders need to have a consumable vision, be very clear on strategy and be inspiring to get that buy-in. So people can be empowered to make daily conscious decisions that collectively nudge the organization in the right direction. And without the right leadership, I genuinely don't think it's possible to achieve digital transformation. And in actual fact, the wrong set of behaviors will make the digital skills get more acute. I don't like the term digital natives because I think it's ageist. But the people who have more of a digital mindset will leave organizations because they'll feel disempowered and frustrated, and they know there's a better way of doing things, and we're desperate to be more productive. I've touched very briefly on artificial intelligence. I'm not going to dwell on the technical aspects just now. We all know that AI has huge potential. I'm definitely one of the AI optimists. I think it can really help with identifying areas to be more agile, sifting through the unmanageable volumes of data that we almost contend with and helping with the efficiency. What I do have is a call to arms, something which I think investors can directly influence. I've always been disappointed by the lack of pace of diversity change in tech in the U.K. And my observation is that this is more acute across the defense sector. I naively thought it was a generational thing and as I graduated from computer science that it would improve year-on-year behind me as I got older, but I was not being forthcoming. I am genuinely delighted that in Digital Intelligence, we've made some huge strides with diversity in our early careers because we've deliberately disrupted how we recruit and train software engineers rather than waiting for the pipeline to fix itself from a diversity perspective. Examples include sponsoring coding microdegrees through Code First Girls and partnering with Tech Returners. The benefits speak for themselves and show the changes possible when deliberately pursued. Overall, I still have an anxiety that not enough is being done fast enough in artificial intelligence, in particular, across industry more broadly. If the people creating algorithms that drive automation are a homogenous community, then bias built into the machines will go unnoticed. We just don't notice when we're surrounded by people here with the same as us. And when machines train machines, my fear is that it will be too late to undo that. Some horror stories around AI learning to be more bigoted than people have hit the news. Machines have the opportunity to be better than us, but only if we instruct them. So let's not leave it until it's too late, when machines train the machines and we can't undo it. We urgently need more diverse representation among those who create AI, those who decide where it gets used and how, and for those who are responsible for the ethics and governance. So in summary, digital transformation is a way of being its cultural rather than a checklist of technologies to implement. Agile is enterprise-wide and not constrained to software teams. And digital transformation could be exhausting because it knows no bounds. So the right leadership is essential and that right leadership is inclusively [ re-leadership ]. So thank you very much for listening today. Just before Martin rejoins me for Q&A, please do enjoy the short video explaining our Intelligent Lead Assessment Service, otherwise known as ILAS. ILAS develops an aggregated risk picture across disparate data sources and has been proven to identify opportunities for early intervention in child protection. [Presentation]

Thanks, Mivy. These case studies for me really bring home the power of technology, but also probably more importantly, especially with that last video, the importance in everything that we do and how technology helps us in that.

We've now got a bit of time for some questions. [Operator Instructions]. While we're waiting for a few questions to come in, I've prepared a few, which is obviously always good to be prepared they say in IR. So I think maybe I think we sort of touched on it a couple of times and in my intro, Digital Intelligence looks well placed to grow in the coming years with Digital Thread at the heart of that. Could you perhaps articulate to the people online sort of some of the key areas that you think that DI can really focus on to drive that growth?

So some of the work that we've done in Digital Intelligence, as you've heard through these case studies, is driven through various government departments, but there's an opportunity to pull some of those things more into the defense sector and to export internationally. I mean I'm generally proud of the work that we do. It's one of the reasons why I've been with the organization for so long and being close to that mission. And some of the data expertise that we have is sort of just extraordinary. So being able to apply that to more problem sets more widely across government and particularly more widely across defense, I think, is really compelling.

And do you think that we have the opportunity to expand into international markets or allied governments or police forces and things like that? There are some really interesting areas that I suspect a lot of the listeners didn't really appreciate that we get into and it's a technology capability as opposed to -- do you think that's an opportunity?

So definitely, there's an opportunity to do more of that internationally. I mean we do already do work internationally. We've got coverage in, I think it's 16 countries now. But it's -- we're still very U.K.-centric. So as we're being able to grow that business internationally, I think it's a really interesting opportunity for us.

Great. Good. Well, we've had a question online, so I'll cut to that now. So I think the question there is, is digital transformation harder in government and defense given the need for greater security and wraparounds around that? What's your view on that?

I think actually the biggest challenge for digital transformation is in large-scale, very traditional organizations. So just being able to drive that change across the whole enterprise is a very nontrivial activity and particularly where you've got cultures ingrained around how decisions get made and how people are empowered. And I think that can be quite challenging, particularly when individuals have had their sort of careers merged against a particular set of criteria. And in Agile, we talk about fail fast. I think that exposes people, particularly senior people, when you have to admit that maybe there's better lessons learned from ways of doing things. So changing that and making it feel like safe to talk about failing and to learn from those lessons is, as I say, the hardest thing. From a security perspective, that's definitely one of the reasons why government departments have been quite slow in adopting cloud technologies, fear of security. It's quite reassuring in a way to be able to go and look at all of the services in your basement and point to them and go, that's where our data is. When it's cloud, you can't do that. And -- but the commercial organizations, which have similar security constraints, have been able to do that. So there's a way of government learning from those.

Great. We wouldn't -- it's an investor call. So we've had -- we've got a couple of our money now and making money. So I think you see the question in line. It says, can you talk through the business models that allow monetization of this technology? And I think perhaps maybe we've talked about how internally and other things that we can use some of this technology to drive, which is one of our big agendas around driving business efficiency, value for money, margins for the group and things like that, so perhaps wrap all that up into an answer would be really great.

So there's -- I mean there are things that can be taken directly to market as we saw there from the ILAS video. That's a service which is available. The -- one of the other things which I talked through is our cloud enablement team. And that's a fairly small internal investment which drives much greater business efficiency. So we're able to do more things with the same number of people. And that's kind of looking at digital transformation for our own business. And that's kind of -- so we need to work with that and work ourselves as well as the things that we advise our customers. So the cloud enablement work is a really good example of that, which is better described as an accelerator, I think, in terms of improving our business efficiency and as kind of makes us a more profitable business.