Data#3 Limited (DTL) Earnings Call Transcript & Summary

Good afternoon. My name is Richard Anderson. As Chairman of your Board, I would like to extend a warm welcome to all shareholders and guests joining us online today at the 2021 Annual General Meeting of Data#3 Limited. This is a virtual AGM with live streaming from the Data#3 head office in Brisbane. We hope that holding a virtual meeting will assist in minimizing the spread of the COVID-19 virus and also encourage greater participation and engagement amongst our shareholders. Before we begin, I would like to introduce your Board of Directors who are with me at our corporate head office, Leanne Muller, Non-Executive Director, who joined the Board in 2016; mark Gray, Non-Executive Director, who joined the Board in 2017; mark Esler, Non-Executive Director, who joined the Board in 2019. Finally, our Managing Director and CEO, Laurence Baynham. Also in the office are Brem Hill, Chief Financial Officer; and Terence Bonner, the Company Secretary and General Counsel. I would also like to welcome Dan Colwell, the representative from our independent auditors, Pitcher Partners, who joins us virtually. Now for the formalities of the meeting. I note that there is a quorum present, and I declare the meeting open. The Notice of Meeting was issued on 17th of September 2021, and the meeting has been properly convened. We will turn to resolutions later in the meeting. Please note that only shareholders, proxy holders or shareholder company representatives may vote on the resolutions. I'll start today's proceedings with a summary address and then invite Laurence Baynham, our CEO and Managing Director, to address the meeting before we move on to the formal business of the day. Again, ladies and gentlemen, good afternoon, and welcome to this 2021 Virtual Annual General Meeting of Data#3 Limited shareholders. Our primary goal is to provide shareholders with sustainable earnings growth. Perhaps needless to say, the 2021 financial year was a year of extraordinary circumstances for our customers and our people. And so from the outset, we knew it would be a challenging period, particularly after a record profit performance in FY '20. We are very pleased that we have been able to announce another record result. The pandemic has spanned the latter part of FY '20 and all of FY '20, significantly impacting the economy and creating business and operating conditions never previously encountered, requiring significant adaptation, no less so by Data#3 and all its people. Consequently, for example, large integration and transformation projects that typically provide significant workstreams for our business were put on hold. Instead, our customers work with us on their more immediate transactional requirements across cloud, connectivity, modern workplace and security solutions. Additionally, our people cope with significant changes to long-established work environments and practices. These included working from home and virtual rather than face-to-face visits with customers, all in greatly varying conditions as governments across the country responded in different ways. After a very difficult and unpredictable first half, we started to experience a return to market growth in the second half with gradual pipeline improvement. Larger integration and infrastructure projects restarted, combining all elements of our solutions portfolio. These shifting priorities changed the mix of business transacted throughout the year. Our total revenue is by 20% and to $1.96 billion. And once again, we are particularly pleased with the growth in the cloud-based business, with public cloud revenues increasing by 36% to $792 million. As a result of the changing sales mix, our gross profit increased by 3.6% to $195 million, which combined with improved operating leverage, delivered an 8.4% increase in pretax profit to $36.9 million. The result reflects improving services profitability and demonstrates the inherent strength and relevance of our solution offerings in a rapidly evolving market. As previously disclosed, our pretax profit would have been approximately $3 million higher were it not for the global supply delays in computer chips, which our Chief Executive Laurence Baynham will speak further on during his address. The consolidated after-tax profit and earnings per share increased by 7.5%, allowing directors to declare a final fully franked dividend of $0.095 per share, bringing the total dividend for the 2021 financial year to $0.15 per share fully franked. This represents a 90.9% payout ratio for the full year. The financial position of the company remains strong. We continue to be debt-free and optimize the group use of working capital through very effective management. It is particularly pleasing that at the same time as delivering this strong financial performance, we are also making good progress with our long-term strategic plan. The nonfinancial measures indicate that the underlying health of the business continues to strengthen. In a tough market, we have achieved record satisfaction ratings from our customers and our people, both truly exceptional outcomes. Again, Laurence will provide more detail in his address. Our success in FY '21 was underpinned by the hard work and resilience of our people who went above and beyond to help our customers during the pandemic, and we thank them for their ongoing commitment to our company. We have a great culture at Data#3, which has served us well throughout these recent turbulent times. Likewise, we acknowledge and greatly appreciate the continued support from you, our shareholders. Many of you have been long-term investors in Data#3. There are 4 resolutions to be formally considered at today's meeting. The first resolution relates to the remuneration report, which is included in the annual report and which will be put to the meeting for adoption. This report provides considerable disclosure of our remuneration philosophy and practices as well as historic details of the fixed and variable components of remuneration. As in previous years, the targets have been established to produce earnings growth. And the management's remuneration is structured in line with these targets, with a significant proportion comprised of short-term and long-term incentives. These are awarded based on the achievement of appropriate financial and operating targets. We measure remuneration every year against industry benchmarks to ensure it is set competitively. During FY '21, we also reengaged with an external remuneration consultant to review the remuneration of the directors and senior executives. The external review confirmed that the structure and levels of remuneration are in line with the market and appropriate to produce the results we are targeting. The review included consideration of the long-term incentive plan approved by shareholders at the 2018 AGM. In the opinion of the Board, the experience over the 3 years since the plan's introduction has confirmed its success in achieving the desired objectives. I'll comment further on this point in considering resolutions 3 and 4. The second resolution for consideration today is in accordance with the constitution the reelection of Leanne Muller to the Board. Leanne joined the Board in 2016, and she chairs the Audit and Risk Committee, bringing valuable nonexecutive director insight. Information regarding Leanne Muller's qualifications, experience and responsibilities is provided in the explanatory which form part of the Notice of Meeting. I recommend that shareholders vote in favor of this resolution. The third resolution seeks shareholder approval to renew the existing Data#3 long-term incentive plan. which was originally approved by shareholders at the company's 2018 Annual General Meeting. For employee incentive schemes, such as the LTIP, ASX Listing Rules 7.2 provides an exception to the requirement to obtain shareholder approval each time securities are issued under the plan. For this exception to apply, the ASX Listing Rules require shareholder approval in respect of any issues under the plan to be obtained every 3 years. As it has been 3 years since the original shareholder approval was given, the company is now seeking to refresh approval of the plan, including the issue of securities under the LTIP for the purposes of ASX Listing Rule 7.2. The LTIP was introduced to align the interests of eligible employees with the interest of shareholders by assisting to the company to attract and retain high-quality staff by enabling eligible employees to share in the future growth of Data#3. The Board has the discretion to grant either performance rights or options to participants under the LTIP. Since the plan was approved by shareholders at the 2018 AGM, a total of 729,114 performance rights have been granted to the 4 members of the senior leadership team in FY '19, FY '20 and FY '21. To date, 374,235 shares have been issued upon exercise of the FY '19 performance rights, which vested at the end of FY '21. No performance rights have been forfeited and 354,879 rights remain on issue, with vesting dates at the end of FY '22 and FY '23. As I mentioned, the Board is satisfied that the introduction of the LTIP has been successful, and that the plan is achieving the desired outcome of aligning the interest of the executives in the senior leadership team with those of shareholders. Also, as already said, and in accordance with good governance, the Board engaged an external remuneration consultant to review Board and executive remuneration arrangements. This included a review of the operation of the LTIP to determine whether there was scope to improve the plan. The review confirmed that the plan is operating effectively and consistently with our expectations and endorsed the Board's intention to renew the plan and to grant performance rights to the broader executive team. Consequently, subject to approval of this resolution, the Board intends to increase the number of participants in the LTIP to a total of 18 executives in FY '22, each with entitlements appropriate to their position. The maximum number of performance rights proposed to be issued under the plan over the 3-year period from the date of this Annual General Meeting is approximately 750,000, representing 0.49% of issued capital at the present date. This maximum is not intended to be a prediction of the actual number of performance rights to be issued under the LTIP but is specified for the purposes of setting a ceiling on the number of performance rights are proved to be issued under and for the purposes of ASX Listing Rule 7.2 Exception 13(b). The fourth and final resolution for consideration is a request to approve the issue of performance rights to the Chief Executive Officer and Managing Director under the long-term incentive plan. Details of the Chief Executive Officer and Managing Director's remuneration package are contained in the remuneration report and in the explanatory notes, which form part of the Notice of Meeting. The external remuneration consultant reviewed the remuneration of the senior executives in FY '21. And recommended an increase to the value of the Chief Executive Officer and Managing Director's long-term incentive in FY '22 from $160,000 to $256,000. This increases the at-risk component of the Chief Executive Officer and Managing Director's total FY '22 remuneration package to 48%. The Board intends to continue to grant performance rights with 3-year vesting periods to the Chief Executive Officer and Managing Director and other executives with their entitled determined by performance against cumulative 3-year basic EPS targets. These targets are set at a level that is considered suitably challenging but achievable. Consequently, the entitlement is assessed on a line basis from the minimum of 0% growth through to a maximum 100% entitlement on achievement of the relevant 3-year target. The historical target information relating to the FY '19 performance rights, which vested at the end of FY '21, is contained in the FY '21 remuneration report. The 4 participants each received 100% of their entitlement. The cumulative 3-year basic EPS target was a minimum of $0.281 and a maximum of $0.348. That represented annual EPS growth in a range of 10% to 15% each year. The actual cumulative 3-year basic EPS was $0.436 with the overachievement mostly due to the exceptional FY '20 performance which in that year delivered a considerable 30.5% growth in basic EPS. The Board has absolute discretion in setting the LTI targets and amending the targets, if considered appropriate, to reflect the dynamic operating environment. However, the historical performance gives shareholders a reasonable indication of likely future practice. The Board's current expectation is that the EPS growth in the range of 5% to 15% each year is reasonable and sustainable and well ahead of the projected growth of the IT sector. This information is intended to provide broad parameters of growth, which shareholders can expect for the performance rights to vest. Please be aware that it is not intended to be and should not be construed as formal profit guidance. I recommend this item for your approval. During the year, the Board reviewed its skills mix and gave further consideration to management and Board succession planning. The search for new directors to progress the succession plan was paused temporarily due to the pandemic restrictions. The process to recruit another non-executive director is currently underway. In summary, our key objective for the current year is to continue to deliver sustainable earnings growth for our shareholders. With the first quarter of the financial year behind us, we have made a good start to FY '22 and remain very confident in our long-term strategy. I will now ask Laurence to address in more detail the operational aspects of the company's FY '21 performance and the outlook for the current period. Thank you for your continuing interest in Data#3 and your attendance at this 2021 Annual General Meeting.

Good afternoon, ladies and gentlemen, and thank you, Richard. I would like to add my welcome to today's AGM and thank everyone for making the time to join us today. The last year has been one of remarkable circumstances for our people and our customers with the ongoing impact of the pandemic. And I'm particularly pleased to report another record result despite the challenges of FY '21, with strong growth in revenues, profit and share price. This was in line with our overarching goal of providing shareholders with sustainable earnings growth. In addition to the growth in earnings per share, Data#3 delivered a total shareholder return of nearly 27% in FY '21. Echoing what Richard said, our success was underpinned by the hard work, dedication and resilience of our people who went above and beyond to help our customers. I would especially like to thank our team for their commitment through this period, and I'm confident in our team's ability to continue to further our leadership position in the Australian IT market. I would now like to provide an overview of our operations and strategy. In doing so, I will break this down into 3 elements: Firstly, an overview of our FY '21 financial and operational performance. Secondly, a summary of the Australian IT market and the key drivers. And lastly, our outlook for the first half for FY '22. We are pleased with the full year performance of Data#3, and the result clearly demonstrates the inherent strength and relevance of our solutions in an evolving market. Our total revenues have increased to $1.96 billion, up over 20% on FY '20. The majority of business units grew revenue and increased market share. We continue to see recurring revenues climbing now over 60% of our revenue base derived from contracts with government and large corporate customers. Our cloud business was a particular driver for our overall growth with $792 million of public cloud revenues, up 36% on the prior year and is now 40% of our total revenue. Looking back to July 2020, we entered FY '21 with a great deal of uncertainty. There was no vaccine, huge government stimulus packages were in place to counter the lockdowns, and the Australian economy was in a recession. Our customers faced a rapidly evolving landscape due to the pandemic. Many of our public sector customers did not have budgets approved until late into the second quarter, and many corporate enterprise customers have been told to free spending. Planning for FY '21 was, therefore, shaped by the uncertainty surrounding the impacts of the pandemic and the timing of a recovery. As the leading Australian IT solution provider, we continue to help our public sector and large corporate customers adapt to new ways of working. However, during the first half of FY '21, we saw a high volume of mostly transactional activity with large integration type projects typically put on hold. In the second half of FY '21, we started to experience a more normal mix of activity. Market conditions steadily improved in both public and private sectors with some customers initiating large-scale digital transformation projects, combining all the elements of our solutions portfolio. This helped drive growth in our core infrastructure, software and services business. An example of this has been our work with the iconic Sydney Football Stadium to deliver a modern networking solution that encompasses a range of our offerings across WiFi, data analytics and security. During the year, the global chip shortage had an increasing impact on supply chains of our hardware vendor partners with supply constraints experienced right across the industry. This supply shortage coincided with an increase in demand for work-from-home devices as well as a spike in demand for devices traditionally experienced during the fourth quarter in line with our cost procurement cycles. We have excellent working relationships with our vendors and have actively lobbied to secure critical customer deliveries while managing their expectations. Our team has done an outstanding job managing these supply constraints and progressing our customers' projects. We ended FY '21 with a significant backlog of orders that could not be delivered or invoiced, representing approximately $3 million of additional pretax profit that would have been invoiced under normal circumstances. Despite that backlog, we finished with FY '21 with -- we finished FY '21 strongly and gained a fast start to FY '22. And as those orders have now been delivered and invoiced. There'll be ongoing supply constraints caused by the global shortage of chips. And at this stage, it's difficult to predict the extent of the backlog at the end of the first half. However, we are well placed to deal with these challenges and opportunities by continuing to work closely with our customers and suppliers. World-leading IT research and advisory firm, Gartner, has predicted the Australian IT market will have grown at a record rate of 4% in the calendar year 2021, breaking $100 billion. Of that, we estimate our total addressable market to be approximately $70 billion. We, therefore, have considerable upside and opportunity in a growing market. Gartner has predicted the highest growth in enterprise software and services. This is particularly promising as Data#3's current revenues constitute more than 80% enterprise software and services. Our infrastructure business is also fast becoming a software and services business as companies like Cisco, HP and Dell increased their software research and development. These predictions are in stark contrast to the declining market conditions I discussed this time last year and will allow us to accelerate growth of our services business and further cement our leadership position. At the highest level, digital transformation is playing a major role in Australia's economic recovery. and is the major business priority for public sector and commercial customers. Now let us look at our competitive positioning and differentiation. One obvious point of difference is that we've been in business for more than 40 years, during which time we built up a large and loyal customer base. We now have more than 1,200 people across 14 locations, most of which are customer facing. The pandemic has forced us to work remotely and conduct business physically away from our customers. It has been a major test of the strength of our customer relationships, and I'm pleased to report that we've come through with flying colors, and we will only strengthen our customer interactions as we face-to-face engagement. Data#3 has a diverse base of customers, many large and high-profile government and private sector organizations across many sectors, but especially the health care, education and resource sectors. Our breadth of solutions and our highly skilled services team remain key differentiators in the Australian IT market. We continue to strengthen our partnerships with key vendors. The most significant relationship relationships being with Microsoft, Cisco, HP and Dell. These are the leading global vendors that account for a large proportion of the addressable market in large corporate and public sector organizations, and approximately 70% of our customers' total IT spend. In FY '21, Data#3 was the leading Australian partner for Microsoft, Cisco and HP and in the top 5 for Dell. We are pleased to be recognized by our vendor partners and awards continue to form part of our external or valid -- important part of external validation for our work. Cisco's Global Commercial Partner of the year was a particularly pleasing award as Data#3 was selected ahead of 60,000 Cisco partners worldwide. To achieve our objectives in FY '21, we continue to build the connection with our people, customers and business partners to drive greater business efficiency and effectiveness across our operations. We've made steady progress against each of our strategic priorities. We enhanced our solutions to adapt to changing market demands. Every customer has a business strategy that includes digital technologies, all requiring a foundation of cloud networks, end-user computing and security. We continue to help our customers build their digital foundations and thereby enabling scalable and robust digital transformation. We have partnered with specialists for leading-edge digital transformation projects and with specialist service providers to industry sectors. We also continue to expand our solutions across consulting, design, deployment and support services. Our role in digital transformation is around these integrated solutions, supporting our customers through their full life cycle. Our people are at the center of every aspect of our business and provide Data#3 with the greatest market differentiation. We were delighted to announce that we succeeded in winning the HRD of Employer of Choice Award for the sixth year in a row. And we have just been selected by the Australian Financial Review as a finalist in the Best Places to Work. This reflects the continued investment we place in our staff, internal systems and tools to support our current growth as well as deliver future opportunities. It's worth noting that these awards are not limited just to the IT sector. They cover all industries, and many include multinational entries. We also enhanced our employee value proposition that harnesses our ability to attract, develop and retain the best talent. Our annual survey provided validation with 98% of our people recommending Data#3 as an excellent company to work for and our highest score since the survey began 15 years ago. This is particularly important in the tight skills market, given the international border closures and resources have been relatively scarce for certain skill sets such as cybersecurity. We are placing a high priority on attracting the best talent in the market while staff turnovers are well below the industry average. A key differentiator is People Solutions, our own recruitment and contracting agency. Our talent sourcing strategy has a focus on the development and implementation of graduate recruitment, traineeships, and industry placement programs. We're also running joint recruitment programs with some of our vendors such as Microsoft and Cisco. The demographics of our people is also changing. Whilst we have fantastic statistics on tenure, such as the senior executive team with an average of 28 years of service, we've attracted many talented individuals among the younger generation to our team. Our percentage of female representation continues to climb above the industry average. It is now 35%, and I expect this to continue to improve. The gender and age diversity provides us many new perspectives and makes us a stronger business. We will -- we work in a diverse community, and this is reflected in our workforce. We see the many unique perspectives, skills and experiences of our people as a strength to be nurtured. The Data#3 Embrace program brings together our diversity and inclusion policies, activities and support services and seek opportunities to ensure our people have a voice in the company's future. As we grow our business, we continue to increase -- we believe it is increasingly important to support our local community. Data#3's environmental, social and governance program, or ESG works to support the communities in which we operate in make -- to make a meaningful difference. Our people created the SOUL program to encourage passions and channel fits to create a real and last thing effect in the causes they care most about. Lifeline is a national charity partner that we work with, and the past 18 months and proved to be a very worthwhile cause as mental health support became increasingly important because of the lockdowns. In addition to our national charity support, we've also smaller local initiatives on, with every branch who choose the activities to allow them to make a difference in their local communities. Moving to our customers, enabling customer success is a key differentiator for Data#3. We've invested with vendor partners to help our customers maximize the value they get from technology solutions. And we've increasingly embedded our data analysis into customer contracts and service level agreements. We aim to understand and measure every touchpoint and continue to invest in technology to help us improve the overall customer experience. In addition, the life cycle of services for our solutions continues to provide opportunities to expand our relationship with our customers as well as attract new ones. This life cycle approach to improving the overall customer experience by focusing on long term and helping -- and has helped deliver record levels of customer satisfaction. In FY '21, we achieved the highest scores in 15 years due to our ability to meet customers' changing needs and assist in achieving their business outcomes. In my experience, customer satisfaction and people satisfaction scores are an important lead indicator for financial performance. During the year, we continued to enhance our own operational efficiency and gain greater leverage from our investment in technology. Data#3's digital transformation is in full swing in FY '22. The most significant project is the implementation of our new ERP system, which is based on the Microsoft Dynamics 365 cloud platform. This has been a multiyear project that is expected to be completed by the end of FY '22. Some costs have been capitalized, but a sizable proportion is expensed with $2 million of expense expected to be recognized in FY '22. By the end of the project, approximately $6 million will have been capitalized to be amortized over the life application, and approximately $4 million will have been expensed. This is a substantial investment that will bring considerable long-term benefits. Over the course of FY '21, we saw the work-from-home revolution continue and evolve as organizations look to achieve cost savings and improve productivity. Cyber security has remained a top priority for our customers, and our security business one of the fastest-growing parts of the Data#3 group now generating over $100 million in revenue. Building on the success of the security practice and our business aspect security consulting expertise, in FY '22, we have consolidated our security focus under a unified executive leadership. Combining our security offerings across the group will allow us to grow more quickly than the market. In addition, our newly established security committee will continue to keep working on -- keep our business safe from the growing cyber threat. We remain Microsoft's largest partner in the region and Data#3 is 1 of only 4 organizations in Australia to attain the very significant Azure Expert Managed Service Provider certification. In addition, our cloud services strategy complements the massive growth that we're experiencing in Microsoft public cloud. Microsoft is taking the lead in public cloud globally and locally, and we are in a prime position to capitalize on this growth. The IT market outlook is buoyant, and we are well-positioned to capitalize on the return to large-scale digital transformation projects. While some of the challenges we experienced in FY '21 continue to FY '22, we are well placed to navigate our path to success and will be particularly focused on customer success, security and accelerating services growth. As mentioned, we are pleased to have made a strong start to the year with a solid first quarter performance. 62% of our business is under contract, and we have continued to secure new contracts and projects while benefiting from the positive momentum and order backlog from FY '21. We certainly expect to improve on last year's first half pretax profit of $13.9 million. However, the extent to which we can do this remains dependent on opportunities that need to be realized in the second quarter, and the timing of product deliveries impacted by ongoing supply chain constraints. Our current first half projection is to deliver pretax profit in the range of $15 million to $18 million, which is in line with our full year objective of delivering sustainable earnings growth. As in the past, we have a skew to the second half and our fourth quarter is again expected to contribute significantly to our annual profit. The first half results and interim dividend will be announced on the 17th of February 2022. It is also our intention to maintain our usual dividend practice. Our performance continues to be underpinned by our leading market position, unrivaled vendor relationships, long-term customer base and highly experienced and committed team. I would like to thank all our people for their incredible commitment and support during the last year and look forward to reporting on our progress in the months ahead. Thank you. I'll now hand back to the Chairman.

Thank you, Laurence. Before we consider each item of business, I would like to outline the procedural matters for this meeting. At the bottom of the web page under the webcast and presentation, there are 3 boxes, which allow you to get a voting card, ask a question and download the AGM documents, being the Notice of Meeting, the annual report and the virtual meeting online guide. The Ask a Question and Get a Voting Card buttons are replicated at the top of the web page. All shareholders will have the opportunity to comment on and ask questions in relation to the resolutions. I will hold comments and questions until the item of business has been introduced. You can ask your question during the meeting via the online platform by clicking the Ask a Question button. You can then select the item of business to which your question relates, write your question and click submit. You may submit questions online any time. You do not need to wait until we get to the relevant item of business. This year, we have also introduced a new function to allow shareholders to dial in and ask questions by voice if they wish to do so. To utilize this facility, shareholders must use their unique phone pin provided to them by the share registry, Link Market Services. If you don't have a phone PIN who would like to ask a question via the phone, please contact Link on 1-800-990-363 to get your PIN. Once you have your PIN, dial 1-800-870-861 or +612-9189-8866 to access the teleconference facility. These numbers are shown on the slide. You'll be asked to mute your computer or device and listen to the meeting by phone. [Operator Instructions] In order to ensure that all shareholders have a reasonable opportunity to comment and ask questions, we ask you to please keep your questions or comments as concise as possible. And please ask no more than one question at a time. We will do our best to address as many questions as reasonably possible. There have been no questions received in advance of the meeting. After each item of business, we will address questions received from shareholders using the teleconference facility and then those received through the online platform during the meeting. If you're having any difficulty submitting a question, please refer to the virtual meeting online guide or call the help number you see at the top of your screen. I'd now like to briefly summarize the voting procedures, which will apply to this meeting. As shareholders are participating virtually in the meeting voting on each resolution will be conducted by a poll. To register to vote, click on the Get a Voting Card box at the top of the web page or below the presentation slides. The share registry will have sent the relevant proxy numbers to proxy holders validly appointed by shareholders prior to the proxy cutoff. To obtain a voting card, please click on the Get a Voting Card box and key in your proxy number under proxy details in a pop-up box on your screen. If you have misplaced your proxy number or have not received your proxy number, please ring the helpline displayed at the top of your screen for assistance. You may submit your votes via the online platform at any time during the meeting. Following discussion of all items, shareholders will be given a further 5 minutes after the meeting has closed to submit their votes via the online portal. After this time, the polls for each relevant item of business will close, where undirected proxies have been given in favor of the Chairman, the Chairman will vote in favor of the resolution to the extent permitted. The number of proxies voted received on each resolution will be displayed in the slide viewing section of your web browser as we move through the resolutions. Your votes will be counted by personnel from Link Market Services after the meeting closes. The result of each poll will be announced via the ASX as soon as possible after this meeting and will also be displayed on our website. If you experience any difficulties using the online platform, the helpline number displayed at the top of the page. You can also refer to the virtual meeting online guide, which is accessible via the online platform. We will now move to the formal items of business for the meeting. The first item of business for discussion today is to receive and consider the financial report, directors' report and the independent auditor's report for Data#3 and its controlled entities for the year ended 30th of June 2021. The reports are based on the agenda for comment or questions only. There is no voting on this item of business. And Colwell, the audit partner with Picture Partners is available to answer questions relevant to the conduct of the audit and the preparation and content of the independent auditor's report. We will now address questions received for this item of business. Are there any questions from the teleconference participants?

Yes, Chairman. I Have a question from Pete Stora.

Thank you. Over the years, the earnings have generally increased at a higher proportion than revenue or have at least matched it. In FY '21, this was quite different, and we did have a drop in margins. Could you explain if this is going to be an ongoing trend or whether that was a bit of a bump in the road in last year, where the revenue growth grew so strongly at 20%, yet the profit only went up by 8%?

Thanks, Peter. Nice to hear from you. That's obviously a question best addressed by our Chief Executive Officer. So I'll ask Laurence to address that one.

Okay. Thank you. And thank you for the question, Peter, and your attendance at the AGM. And in terms of the answer, there is no direct correlation between revenue growth and the growth and the gross margins and gross margin percentages. And you will have seen that over many years with Data#3. The intent is that we will continue to grow the overall absolute profit as we've stated each year in terms of not only gross profit but also net profit as well, whichever measure you actually care to point out. One of the things that we also, which is a little unusual from a Data#3's perspective is that we continue to win large-scale contracts, particularly in the software arena, which are at low margins, it is a deliberate strategy of ours, particularly to break into new customers. So that's -- and that doesn't assist in our profit and our gross margin percentages. However, it does assist in our overall sustainable earnings growth strategy.

Peter, does that answer your question? Are you still there? I'm looking at...

What about the net profit, and I understand the relationship with gross profit? But if you do look back over the years, the net profit has actually generally speaking, grown pretty strongly in line with revenue. And it seems to that we've had a couple of glitches like this before, but I was just curious as to why the difference was quite significant because that's a big jump in revenue last year. Is cloud having an effect on this as well?

The cloud revenues, particularly the public cloud revenues with Microsoft are at low margin. So it does have an impact in terms of the mix, the sales mix does have certainly an impact. One thing that I will say, though, is that, and you've heard through the address is that our growth in services is a very deliberate strategy. And that growth in services is not only providing great outcomes for our customers. It will provide greater financial performance and greater profit growth for Data#3. So it's, that's a deliberate strategy. And it's one that we don't -- you can't turn around overnight in terms of a large-scale services business.

Thanks, Peter. Phone operator. Are there any other questions?

There are no comments or questions raised from shareholders participating via teleconference Chairman.

Thank you, operator. We will now address questions received online for this item of business. Moderator, are there any questions from the virtual meeting platform.

Yes, Chairman. At this stage, we have 4 questions that have been raised through the virtual platform. The first question is from John Hibbett who asks, what is the company's differentiator compared to the growing number of data center companies?

Again, I think that's a question for management. So I will ask Laurence to address that question.

Okay. Thank you, and thank you for the question. Firstly, just in terms of data center. We don't categorize ourselves as a data center organization. In fact, we don't have any data centers. We used to, but we certainly don't. We don't know what we do provide is a full range of services, which operate inside and outside of data centers. And I think the question was more around the differentiation rather than the actual terminology of data center. The differentiation I covered in my address and in particular, the points are that we've -- being around for a long time in 40 years, we have very deep and long-term relationships with our customers, some of which span 3 decades. And our people have got great working relationships and a deep understanding of what our customers are looking to achieve for their business. So providing technology solutions to assist them in getting better business outcomes is something which is very dear to our hearts over many years. So that's one differentiator. The other one is our vendor relationships from a Microsoft, Cisco, Hewlett Packard, we are the largest provider in each one of those categories. It's a large component of the overall customer spend. The other one is around the solutions and capability the experience that we've got within our business is second to none in terms of the certifications and the skill levels, particularly in our services business. And what we're also able to achieve, and again, I'm not aware of any other organization that has the breadth of solutions that we are able to provide in the market in a full life cycle. So what we mean by a life cycle is from a consulting perspective, translating the business requirements into technology through to the design and implementation of a technology solution through to the support and ongoing recurring revenues for that solution as well. That life cycle is something that we do very well and is a major differentiator for us.

Next question. Thank you, moderator.

Thank you, Chairman. The next question comes from Mark Egelshim, who asks, has the guidance provided for the first half of FY '22 benefited from the full $3 million profit before tax that didn't fall in FY '21 due to supply chain disruptions?

I think in the Managing Director's comments, he confirmed that case, but I will ask him to expand on it a little further now.

Okay. Thank you. Thank you, Richard, and thank you for the question. Yes, the answer is the $3 million, which we were unable to invoice or recognize in FY '21 has now largely been recognized in FY '22 and will be fully recognized in this first half. What I will say is that we do still have ongoing supply chain constraints. Everyone does. It's a global issue, and we're still dealing with it. So what I can't say is and say definitively is what will be second, what we will be carrying over into the second half of FY '22. So that's something which we will obviously address as we progress our way forward. What I will say in terms of supply chain is that because we are working closely with our customers, our customers are now used to working in this environment and understand that it is a global issue that we're dealing with and are working very closely with us. And we are probably fulfilling their project needs as best we can and probably better than anyone else in the market as we've got increasing leverage and working relationships with the global vendors.

Thanks, Laurence. Moderator, a third question.

Thank you, Chairman. The third question is also from Mark Egelshim, who asks I note $2 million of costs from the new ERP will be expensed in FY '22. How much of the new ERP system cost was expensed in FY '21?

Laurence, over to you on that one or...

Thank you. Yes, $2 million in FY '22, and there was approximately $1 million in FY '21.

And the fourth question?

This is the final question for this item of business. It's from Kenneth Victor Pit, who said hi, Laurence. Greetings from a former owner of CIC technology. Apart from supply chain issues, what is the greatest threat to FY '22 performance, please?

Direct to you, Laurence.

Thank you. Again, as I said during my address as well. And this is something like supply chain, it is right across the industry and globally that skills shortage and getting the best resources in the market is something which is not -- we don't view it as a threat, but it is an increasing challenge to our business, particularly for certain skill sets. And again, how do we mitigate against that? One of the biggest things that we've got in our favor, apart from being a great work and all the awards that we've managed to succeed in winning in that, but we also have our People Solutions business, as I said before, is a recruitment and contracting agency that works on behalf of Data#3 and directly with our customers as well. And having a recruitment agency within our business is a major benefit for us to attract some great people into our business.

Thanks, Laurence. Moderator, has that dealt with all questions?

Yes, Chairman, there are no further questions.

Thank you. So as all general questions have been dealt with, we will now move to the next item of business. The second item of business is to adopt the remuneration report for the financial year 30th of June 2021. Please note that the vote on this resolution is advisory only and does not bind the directors or the company. However, when reviewing the company's remuneration policies each year, the Board considers the level of shareholder support received and matters raised by shareholders. Voting exclusions apply to this resolution as set out in the Notice of Meeting. We will now address questions received for this item of business. Are there any questions from the teleconference participants?

There are no questions raised from shareholders participating by telephone, Chairman.

Thank you, operator. We will now address questions received online for this item of business. Moderator, do we have any questions from the virtual meeting platform?

No, Chairman. We have not received any comments or questions for this item of business.

Thank you, moderator. As that appears to address all questions and comments, I ask that shareholders now please cast their votes for resolution 1. The proxy votes received in relation to this resolution are now shown on the presentation slide. As Chairman of the meeting, I intend to vote all undirected proxies in favor of this advisory resolution. I would like to remind shareholders that a poll of this resolution will be conducted at the end of the meeting. [Voting]

Item 3 of today's business is to approve by ordinary resolution that Ms. Leanne Muller, who retires by rotation in accordance with the company's constitution and being eligible be reelected as a director of the company. Leanne has served as a non-executive director since 2016, and she chairs the Audit and Risk Committee. Leanne brings valuable insight to the Board, and her qualifications, experience and responsibilities are summarized in the explanatory notes. The directors, with Leanne abstaining, recommend that shareholders vote in favor of the resolution. We will now address questions received for this item of business. Are there any questions from the teleconference participants?

Yes. Chairman, I have a question from Peter Stora.

Thank you. Firstly, a comment. I would strongly commend the reelection of Leanne. But I also note that you're looking for another independent director and hope that a female candidate comes forward to get the sort of the balance on the Board. I know you're going to go for the best person, but I think it's been good to see that female representation on the Board for the past 5 years.

Thanks, Peter. And yes, I can confirm that we certainly have that as a criteria in mind in the selection process. Anything else, Peter? Phone operator, any other questions from the teleconference participants?

There are no further questions raised from shareholders participating by teleconference Chairman.

Thank you, operator. We will now address questions received online for this item of business. Moderator, are there any questions from the virtual meeting platform?

Yes, Chairman, we have one question from the virtual meeting platform from Peter Burger, who would like to know if Ms. Muller could speak online to her bid for reelection as a director.

Thank you, moderator, and we do have Leanne here, and she's very happy to speak. So I'll hand over to you, Leanne.

Thank you, Chair, and thank you for the opportunity. Thank you. And thank you for the opportunity to speak to shareholders today. I believe I continue to be interested and excited about the opportunity provided at Data#3 as an incredibly diverse and fast-changing business. I believe the experience that I provide to Data#3 comes from a couple of different areas. Firstly, my experience as a senior executive, overseeing a lot of IT proposed of which Data#3 may or may not have been a supplier. I know the way customers think and look at those things. And then secondly, as someone who's a user of those technology services, I think I bring that perspective. And then since becoming a non-executive director, I see how other organizations view not only just general governance and Board practice, but also view their own technology opportunities. So I think there are those areas that I continue be interested in and provide support to not only the business but to my Board colleagues and look forward to a third term with Data#3. So thank you.

Thanks, Leanne. Moderator, are there any other questions?

No, Chairman. We have not received any comments or questions for this item of business.

Thank you, moderator. As that appears to address all questions and comments, I ask that shareholders now please cast their votes for resolution 2. The proxy votes received in relation to this resolution are shown on the presentation slide now shown on your end. As Chair of this part of the meeting, I will vote all undirected proxies in favor of this resolution. Thank you. [Voting]

I will now move to the fourth item of business on today's agenda. In this item, Shareholder approval is sought by ordinary resolution that for the purposes of Exception 13 of ASX Listing Rules 7.2 as an exception to Listing Rule 7.1 and for all other purposes, approval is hereby given -- pardon me, ladies and gentlemen, we've lost our screen. I'll start again. In this item, shareholder approval is sought by ordinary resolution that for the purposes of Exception 13 of ASX Listing Rules 7.2 as an exception to ASX Listing Rule 7.1 and for all other purposes, approval is hereby given for all securities issued or acquired as the case may be under the Data#3 Limited long-term incentive plan that terms and conditions of which are set out in the explanatory notes. The long-term incentive plan has been designed to align the interests of eligible employees with the interest of all shareholders of the company by enabling directors and employees to have involvement with and share in the future growth of the company and to assist the company to attract, reward and retain high-quality staff. The Board has discretion to make grants to eligible employees under the LTIP, and has the flexibility under the planned rules to grant either performance rights or options to participants. No issues of rights or options to a director can be made under the plan without separate shareholder approval under the ASX Listing Rules. A summary of the LTIP plan and rules is provided in the explanatory notes. Voting exclusions apply to this resolution as set out in the Notice of Meeting. We will now address questions received for this item of business. Are there any questions from the teleconference participants?

There are no questions raised from shareholders participating by teleconference, Chairman.

Thank you, operator. We will now address questions received online for this item of business. Moderator, are there any questions from the virtual meeting platform?

No, Chairman. We have not received any comments or questions to this item of the business.

Thank you, moderator. As that addresses all questions and comments, would you now please cast your votes for resolution 3. The proxy votes received in relation to this resolution are shown on the presentation slide on your screen. As Chairman, I will vote all undirected proxies in favor of this resolution. [Voting]

The fourth and final resolution for the meeting is that for the purposes of ASX Listing Rule 10.14 and for all other purposes, approval is given for the company to grant a maximum of 47,067 rights as that term is defined in the explanatory notes to Mr. Laurence Baynham or his nominee, who is the Director of the company. Laurence Baynham is Managing Director and Chief Executive Officer of the company and a related party of the company by virtue of him being a director. Prior shareholder approval is therefore required for the issue of rights to him or his related entities. Accordingly, the company seeks shareholder approval to grant a maximum of 47,067 rights and any shares vested, issued on vesting of those rights to Laurence Baynham or his nominee. The rights will be issued under and subject to the terms of the company's long-term incentive plan. The Board has decided to grant these rights as part of Laurence Baynham's remuneration package and in recognition of his contribution to the company,, The Board considers the grant of rights to be a cost-effective long-term incentive method, which further aligns the interest of the Managing Director and Chief Executive Officer with shareholders by linking long-term incentives to growth in the company's earnings per share. Each right is a right for Laurence Baynham or his nominee to be issued 1 share upon satisfaction of the following vesting conditions, a, Laurence remains an employee of the company on the date of the relevant vestings are satisfied; and b, the rights will vest on a straight-line proportional basis from 0 up to a maximum of 47,067 shares based on the actual cumulative earnings per share over a 3-year period ending on 30th of June 2024 compared to a target as determined by the Board. Notwithstanding these specific vesting conditions in accordance with the LTIP rules, the Board may, in its absolute discretion, waive or alter the relevant vesting conditions. Voting exclusions apply to this resolution as set out in the Notice of Meeting. We will now address questions received for this item of business. Are there any questions from the teleconference participants?

There are no questions raised from shareholders participating by teleconference, chairman.

Thank you, operator. We will now address questions received online for this item of business. Moderator, are there any questions from the virtual meeting platform?

Yes, Chairman. We've received a comment from Ray Tollison Ray says, I'm a long-term shareholder and member of Team Invest. Whilst not speaking on behalf of Team Invest, I know our members strongly agree that earnings per share growth is the preferred key management in our performance criteria as it is easily calculated and growth will eventually grow through flow through to an increase in share price. It is much preferred to total shareholder revenue which contains share price, which is outside the control of management and cannot, therefore, be an incentive.

Thank you very much for that comment. It is greatly appreciated. And as mentioned in our addresses earlier, we certainly do take notice of all comments from shareholders either during this Annual General Meeting or in comments that are occasionally written into us. So once again, we acknowledge and thank you for the comment. Moderator, are there any other comments or questions?

No, Chairman. We have not received any other comments or questions on this item of business.

Thank you, moderator, and very well done. As that appears to address all questions and comments, would you now please cast your votes for resolution 4? The proxy votes received in relation to this resolution are shown on the presentation slide on your screen. The directors abstained from making a recommendation in relation to this resolution. However, as Chairman of the meeting, I intend to vote all undirected proxies in favor of this resolution. Ladies and gentlemen, we have now dealt with all items of business in the Notice of Meeting. I now ask you to ensure that your voting cards have been completed via the online portal for each resolution put to you today. If you will require assistance to submit your vote, please call the helpline number displayed at the top of your screen. [Voting]

With each item of business at this meeting having dealt with, I now declare that the polls in respect of each resolution will be closed 5 minutes after this meeting ends and formally ask Link Market Services to count the votes following the expiry of that period. I propose now to bring today's proceedings to an end. The results of this meeting will be released through the ASX as soon as possible and will also be displayed on our website. On behalf of the Board and management, thank you to everyone who attended Data#3's AGM. We hope you and your families stay safe and well. That concludes the official business of this meeting. Ladies and gentlemen, I now declare the 2021 AGM closed.