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

Thank you for standing by, and welcome to the Data#3 Limited FY 2022 results briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Laurence Baynham, CEO and MD. Please go ahead.

Okay. Thanks very much. Good morning, everyone, and thank you for joining us for the FY '22 results briefing. We've got a simple agenda that we'll be taking you through this morning, which will start with an overview of the business, the operational overview. Brem Hill, our CFO, will be providing a summary of our financial performance. I'll then take back the presentation with strategy, customer success and then talking about going forward with a summary and outlook. So that's the agenda. So if we can move on to the Slide 3, as we progress through this, I have to say that we are very pleased with the strong result for FY '22. All the arrows are pointing in the right directions. And -- but more importantly, we're making a lot of progress from a strategic point of view as well to underpin and make the results sustainable going forward. The revenue growth of 12% translated into a 19% net profit, which reflects really strong operating leverage. The earnings growth flows through to the growth of 19% in dividends and a high payout ratio, which represents, again, a strong return for shareholders. We move on to Slide 4, provide a little bit more detail. Nearly half of our business now is public cloud. And 2/3 of our business is now recurring. We see this as positive signs. Particularly pleasing is that we had growth across our portfolio in each portfolio segment and also in each Australian geography. And we have a strong pipeline of larger integration projects. With the ongoing global supply chain situation, we came into FY '22 with a $3 million backlog. And we have a larger backlog of $6 million going into this current financial year, FY '23. The mix in the backlog, however, is different, and it's predominantly in the networking and data center space, which traditionally produce and they do higher gross margins. We also have a deliberate strategy of growing our software and services business in particular, driving recurring revenues and margin accretion. Public cloud growth provides greater opportunity for our growing services portfolio. In FY '22, we had unparalleled success in winning several -- or in fact, many dozens of awards. But in particular, I'll pick out 3 global awards, 1 from Cisco and 2 from Microsoft. It's certainly unusual for an Australian company to win global awards, but 3 in 1 year is certainly a first, and I'm not sure whether it's the first for the Australian IT industry, but it's certainly a first for Data#3 to be recognized on a global stage 3 times. And certainly, awards can be viewed as a lead indicator, as they are also important in winning new customers and also attracting new talent to our business. Along with doing great things with our customers, improving financial -- our financials, our focus is also about building a better business. And our increased focus on ESG and our new sustainability report for 2022 is certainly underlines our focus on -- continuing focus on the ESG. If we move on to Slide 5. So what's driving the growth? And quite simply, it starts with digital transformation. And digital transformation is, every one of our customers, whether it's public sector or larger commercial customers, has a digital and digital transformation agenda. And it's very high, very much in sync with the business agenda as well. Our role in digital transformation is providing that foundation layer, which we've described here as multi-cloud, modern workplace, security, data analytics and connectivity. And once we provide that foundation layer, it enables some of the cooler technologies, such as robotics and 3D printing and artificial intelligence, the headline-growing parts of the technology industry, to provide a fuller solution for our customers. We may partner -- we may provide some of these solutions in full, but we also may partner with specialist organizations as well. But digital transformation is still the primary driver for the technology growth in our industry. And we see it's still got quite a long runway to go. Moving on to the next slide. And to build out our solutions, you will see, match the foundation layer of digital transformation. So building out these solutions is something that we continue to invest in. And these solutions also operates by themselves, but also interoperate within each other. Perhaps the more important point though, is that the solutions that -- our aim is to provide as full a life cycle of services as possible for these solutions. And the longer-term strategy is providing each one of these solutions. The full life cycle, just in simple terms, would start with consulting or advisory work, moving to the design and implementations of project services and then follow through -- once we do a great job in implementing a project, follow through into support services where we've got recurring revenues and contracts. And that's what we mean by the full life cycle -- full services life cycle. Moving on to the next slide. Another major differentiator is our vendor relationships. And we're a leader with each one of the organizations that are portrayed here on the left-hand side of the slide: HP, Microsoft, Cisco and Dell. And we're a leader in as far as the Australian market is concerned. And we estimate that these vendors represent 70% of customer spend, as they continue to grow and drive markets themselves. In addition, we've got hundreds of other vendors as well. And one of our greatest strengths is to combine the products from multiple vendors to make tailored and integrated solutions for our customers. Move to the next slide, I'll talk around the operational overview as well and pick out on Slide 9 some of the operational highlights. The -- in addition to public cloud, we also have seen a substantial growth in private cloud. It's where customers build their own clouds using similar technologies to public cloud, and hence the use of the terminology multi-cloud. Most of our customers have multi-cloud environments. Our strategy and focus certainly for FY '22 was to grow our security business as well, which is a top priority for our customers and certainly complements our other solutions. Services was another one of the key highlights in terms of FY '22. In particular, the consulting and support services, in particular, the managed services component of support services, both had improving gross margins. We continue to focus on customer experience. And what we mean by customer experience is not only providing a great job for our customers, but more importantly, using the data and analytics that many of the cloud-based technologies are able to provide now, we're providing long-term value to our customers. And last but not least, I'm really pleased to say that we successfully implemented a new cloud-based Microsoft ERP system, certainly something which is -- has been substantial and has been ongoing for several years now. I'm pleased to say that we have completed that and completed the year-end successfully. This is a more robust, scalable and secure system than our previous one. On that note, I would like to hand over to Brem Hill.

Great. Thank you, Laurence, and good morning, everyone. It is my pleasure to review the financial performance with you in a bit more detail. I'll start with Slide 11, which shows the impressive revenue trends. And we've delivered sustained revenue growth, and the compound annual growth rate of that 6-year period has been 14.3%. And once again, we're very pleased with the strong growth in our public cloud-based revenue, which is shown in the chart on the right-hand side of the slide. So the public cloud revenues increased by 31.3% to just over $1 billion, and that now represents 47% of our total revenue. As highlighted by Laurence earlier, approximately 66% of our total revenue is recurring, up from 62% in the PCP, and that is derived from contracts with government and large corporate customers. This reflects our deliberate focus on growing our software and our services businesses. Our revenue mix has changed significantly over time, and the next slide expands on this change in mix. The Data#3 comprises the wide portfolio of IT businesses, and the chart on the left-hand side of the slide splits the total revenue into 3 broad functional areas, which is infrastructure, software and services. The chart clearly shows that the change in revenue mix that's occurred over time really has the strongest growth in software, which is where most of our public cloud revenue is recognized. The public cloud revenue's trend shown on this chart with the green line. Then the table on the right shows the breakdown of revenues by business unit within each of the 3 broad functional areas and the changes compared to the PCP. We have a range of services business units, which collectively generated $318 million in revenue, which was an increase of 32.7% on the PCP. This really is an excellent result and demonstrates our success with our strategic priority to accelerate services. We're especially pleased with the outstanding 66% growth achieved by Support Services, which is the combination of maintenance services and managed services and with Business Aspect Consulting's 50% growth. Our Project Services and People Solutions businesses also delivered solid growth of 5% and 8.7%, respectively. The Software Solutions part of the business once again achieved strong revenue growth, increasing by 14.8% to just over $1.4 billion. The shift to public cloud offerings, especially subscription services for Microsoft Azure, Office 365 and Dynamics 365, has driven the solid and annuity-based growth. And we have continued to gain market share with new business wins. Lastly, the infrastructure business bore the brunt of the supply chain delays with revenue decreasing by 5.7% to $440 million. However, margins improved as we return to the delivery of larger integration-type projects following the predominantly pandemic-related projects in the PCP. The restricted supply resulted in a significant backlog of orders that could not be delivered or invoiced before year-end. And if supply had been within normal parameters, the Infrastructure Solutions business would have delivered mid- to high single-digit revenue growth. And another point that's important to note is that there are very significant interdependencies between these different business units and our solutions typically comprise a combination of these elements. So while revenue growth is important, we also placed great emphasis on gross profit. And Slide 13 expands on the sales mix summary to show the relative gross margins generated by the various business units, and that's broadly rated low, medium and high in terms of the typical gross margin spectrum. The gross margins have remained relatively stable within each business unit, and we are also seeing gross margins strengthening in some areas. The vendor incentive programs are also gradually changing and increasingly shifting rebates from product businesses to the services areas. The main point I want to emphasize is that our key objective is to achieve sustained growth in total gross profit, and that is a more important measure of success than the blended gross margin percentage. Next, Slide 14 shows the gross profit and gross margin trends on the left-hand chart. We've delivered sustained growth and total gross profit. And as mentioned previously, total gross profit increased by 12.1% to $218 million in FY '22. The blended gross margin percentage has decreased from FY '16 to FY '21 due to the changing sales mix with the strong relative growth in software and public cloud, which are low gross margin areas. However, our deliberate strategy to accelerate services growth has been successful, and the very strong growth in our higher-margin areas of consulting and Support Services has helped stabilize the overall blended gross margin in FY '22. We expect to continue to deliver strong growth in services, which will boost the overall gross profit and should also gradually increase the blended gross margin. We've always managed our internal staff costs and operating costs very closely, and the chart on the right-hand side of the slide shows the trends for these internal costs. And our internal cost ratio, which is staff and operating expenses expressed, as a percentage of gross profit, is one of our key internal measures for operating deliveries. This ratio has decreased steadily, which is a good thing, and the green line on the chart demonstrates improvement in the leverage we have achieved. Over the past 6 years, the internal cost ratio has decreased from 88% to 80.1%. We expect to continue to drive further operating leverage across our business and especially in services. Next is a brief review of our earnings and dividend trends on Slide 15. Our goal remains to have a sustainable earnings growth, and we're very pleased to report strong earnings and delivering another record profit. And as highlighted by Laurence, basic earnings per share increased by 18.8% and total dividend increased by 19.3%, representing a full year payout ratio of 91.3%. And the charts clearly show this is a standout result. The fully franked final dividend of $0.1065 will be paid on 30th of September. The next slide shows the P&L statement, and I'll summarize the key points, which are shown on the right-hand side of the slide. Total revenue increased by 12.1% to $2.2 billion, as highlighted previously, and this includes a small reduction in other revenue due to the decrease in the interest income. The first 4 lines in the expenses section of the P&L is slightly hard to read but they represent cost of sales. So if you deduct those items from the revenue from customer contracts line, that gives the total gross profit, which increased by 12.1% to the $218 million. The next line is labeled other employee and contracted costs and that comprises our internal staff costs. And those costs increased by 10.6%. This reflects a 6.6% growth in headcount compared to the prior year, and that headcount growth was predominantly in the services areas. And it also reflects general remuneration increases in line with the market. The sum of the remaining expense lines on the P&L give the other operating expense total, and that increased by 6.4%. This is partly due to the Dynamics 365 ERP project costs and some of those costs actually reflected in staff costs as well. And it also reflects a small increase in travel expenses, partly offset by rent savings. The return on equity for [ FY '21 ] was an outstanding 49%, up from 45% last year. The balance sheet on Slide 17 is also a bit of nice chart, so I'll run through the key points. We have a strong balance sheet and we have no borrowings. [ So this year ] we have a fourth quarter revenue spike that inflects the current trade receivables and current trade payables balances at year-end and typically generates a large temporary cash surplus at 30th of June. The key trade receivables measure is average day sales outstanding, and that was 28.1 days for FY '22, which is slightly higher than the PCP's 27.7 days. And this increase is mostly due to the impact of the supply chain challenges with parcel deliveries, delaying some collections. Our inventory holdings are normally relatively low and comprise allocated stock. So that's product held in our warehouses and configuration centers pending [indiscernible] customers. However, in FY '22, we've seen inventory levels increased, inflated by parcel deliveries due to the supply chain delays and the year-end balance was $19.2 million higher than the PCP. However, I must emphasize that all of this inventory is allocated to noncancelable customer orders. The fourth quarter sales skews the working capital at year-end, so I've included a working capital analysis on Slide 18 to help illustrate the seasonal impact. The chart shows the changes in the working capital components reported in 30th of June and 31 December over the past 5 years. And I think the key point here is that the underlying working capital position remains stable and positive despite the significant seasonal fluctuations between the reported period ends. We have a very efficient working capital model, and the working capital cycle is typically very short or negative, so our business is effectively self-funding. This is due to our short collection cycle of around 28 days and the favorable trade terms offered by our suppliers, which typically range between 30 and 60 days. Lastly, Slide 19 shows the cash flow statement and summarizes the key points. The seasonality has a significant impact on the operating cash flows due to the timing differences in the collections and payments around 30th of June each year. As I mentioned before, the 30 June cash balance is usually significantly inflated by sizable customer collections, with the associated supply payments occurring after 30th of June. The cash flow has remained healthy, but has been impacted by the supply chain challenges. One point of comparison is the average daily cash balance, which was $117 million in FY '22 compared to $127 million in FY '21. However, these average cash balances include sizable temporary surpluses due to the working capital cycle. Our estimate of the underlying free cash position is typically in the $15 million to $20 million range, but that has been reduced in FY '22 due to the inflated inventory position. This is expected to normalize in FY '23 as the backlog unwind and the supply chain greatly improves. Our cash conversion has remained strong, albeit that the operating cash flow can vary significantly due to seasonal swings. And if you take the 7-year period from FY '16 to FY '22, the total free cash flow was $173 million and the total net profit after tax was $141 million, giving a cash conversion of 123% for that period. The other points to note are the relatively low levels of capital expenditure and the high dividend payout. We hope this information has helped to give you a better understanding of the key drivers of our financial results. I'll now hand you back to Laurence to complete the presentation. And many thanks for joining in this briefing.

Okay. Thanks very much, Brem, and thanks for that comprehensive financial overview. I'd now like to look forward into FY '23 and beyond. We're moving to the next Slide 21. Our strategy is consistently underpinned by a focus on customer success. Quite simply, the more successful our customers become with digital transformation projects, the more successful that we'll become with improved financial results. The inputs to making our customers successful revolve around our people, having the best people in the market and the most certified people in the market, also having the most secure and scalable and innovative solutions in the market. And then lastly, operating our business efficiently. We've consistently been able to achieve that at a very high level, enabling our customers to succeed and enabling sustainable financial performance growth. If we move into the next slide. In terms of focusing on our customers and focus on customer growth, we've been very pleased with many new customers and great customer outcomes in FY '22 across many different sectors, including health, education and resources but also, more importantly, across all geographies. Move on to the next Slide 23. We have one example in the South Australian government that's -- that we announced last year as a multiyear managed services contract for the Department of Education. Well, I'm pleased, this year, 12 months on, to announce a further 4 contracts following the breakup of a single large outsource contract. We see this as a favorable trend. The next slide shows our growth in customers, and we're winning new customers for many reasons. And that includes, but is not exclusively around our market-leading position, our skilled certified people and our strong vendor relationships. The graph on the right shows customer spend increases over the years. With average revenue on the left-hand side and average gross profit on the right-hand side, you'll see a slight dip in the profit margin in FY '20 and '21, at the height of the pandemic, where customer spending was focused on collaboration and, quite understandably, the work-from-home environment where our customers shifted their spending from large integration projects into a work-from-home projects. This spend, we saw a slight dip in the profit margins there. However, FY '22, we saw a return of the larger projects, which is now heading into more -- what we would classify as a more normal environment. The reasons for the increased customer spend is that we've got a broad portfolio, so that when we secure a customer, we are able to cross-sell in many different parts of our solutions portfolio. Likewise, the life cycle services, whether we start with a customer providing a -- providing consulting, our aim, as I've described before, is to provide as full of life cycle as possible. So the Project Services and then the Support Services we see as a natural continuation of the life cycle within the customer. And these charts illustrate this over several years. Maybe if we move on to the next slide. And as I've indicated previously, we've got many focus areas as far as our strategy is concerned, but I've highlighted 3 on this slide. Customer experience is very much a long-term view. It's not transactional. It looks at the full life cycle of services. Likewise, security continues to be the highest priority on our customers' agenda, in fact, on everyone's agenda. So we see that continuing within our market. And lastly, the continuing growth in services, in particular focus on the higher-margin consulting and managed services, is our aim going forward and continues to be our aim going forward. So if we move into the next slide, which is the outlook. In addition to the carryover and the backlog carryover, we see continued momentum in our services business and our software business with large integration projects, with a strong pipeline. Our pipeline remains strong and has remained strong through the second half of FY '22. It remains strong going into FY '23. And we continue to -- and we're carrying over $6 million -- an estimated $6 million of profit. What we also see, within our market, is that the various forms of cloud, whether it's public cloud or private cloud, all forms of cloud will continue to grow. We'll also see that supply chain constraints will continue well into this financial year. And we are certainly well positioned and probably better positioned than anyone else in the Australian IT industry to manage through these supply chain constraints. So what I'd like to do now is to just read the last [ quarter ], which is the backlog from FY '22, has again provided a fast start to the current year. We're well positioned to capitalize on opportunities this provides. We remain committed to delivering sustainable earnings growth, underpinned by our leading market position, unrivaled vendor relationships, long-term customer base and our highly experienced and committed team. On that note, I'm going to pass over to questions and answers. And actually, just before we do that, which you may have seen in the market brief, what we also had was an announcement that Brem has provided his intention to retire and having a very long transition period to the end of calendar year 2023. So certainly, and there's a quote there from Richard Anderson, our Chairman in terms of thanking Board -- Brem on behalf of the Board for his outstanding commitment, loyalty and contribution. That's certainly the case anyone who's -- and I think many people who are on this call would have known Brem over many, many years and certainly provided 30 years of service to Data#3. So on that note, I'll open up for question and answers.

[Operator Instructions] The first question comes from Hayden Liu with Evans & Partners.

Brem, congrats on your retirement, wish you all the best.

Thanks, Hayden.

Maybe if I could start on just the services segment. So clearly caught out in the presentation, and we saw consulting and Support Services had some pretty strong growth in the year. I mean Support Services, in particular, sort of accelerated in that second half. Given the sort of outlook commentary calling out the increase in integration projects into '23, which Laurence touched on, I mean just trying to get a sense of the run rate and opportunity in services. So is it sort of fair to assume you expect sort of sustained run rate of services going into '23? Or sort of how should we think about that?

Yes. What we -- it's not only what we expect, it's what we're currently seeing and experiencing right now and also in our near and midterm outlooks. It's a very strong services performance right across that services portfolio actually, right from consulting through to the Project Services and the Support Services. The run rate business is holding up well. Our utilization levels are as high as they ever have been. And our outlook is as strong as it ever has been. Does that answer the question, Hayden?

Yes. That's helpful, Laurence. I mean -- and you also called out you expect gross margin percentage improvement as a result. But if I could just touch on the sort of FY '22 margins, so we're sort of still a step down in the second half to about 9.5% from a bit over 10.5% in the first half, though I note the services contribution across both parts remain relatively consistent as a percentage of revenue. What sort of contributed steps that step down in the second half given sort of would expect probably margin -- the benefit from the services to sort of come through? Or is that just not the way to think about it?

Actually, Hayden, I'll have a go at answering that. It all comes down to a mix this year again. So even within services, while we had very strong growth in that particularly Support Services part of the business, if you -- at the next level down, that breaks up into maintenance services and managed services. So while both grew strongly, the maintenance services component is the larger component in there and it is a lower-margin component compared to managed services, if that makes sense. So it's -- each business in its own right grew margin. But if you look at the blended mix, it can reduce just because of the lower margin areas grew stronger or were larger than the high-margin areas in revenue terms. Does that make sense?

Yes. No, that makes sense, Brem. so I think Laurence mentioned you're seeing the managed services side of things within support services growing strongly. Is that...

Yes, definitely. But -- and we're not being cute by not saying that next level down, but it is quite sensitive to give that level of information competitively. So we don't disclose our -- the breakup between managed services and maintenance services. But I can say that managed services is the smaller component of support services, but it is growing rapidly.

The next question comes from Bob Chen with JPMorgan.

Just a few questions for me. I mean just given the ongoing change in sales mix across your business, can you provide a bit more color on what changes happening on the incentive programs as well? And maybe what percent of your gross profit is actually driven by these incentives?

Yes. This is Laurence. The vendors, in particular, are shifting their global programs more along the lines of the overall customer experience. And what this is -- what this provides is an opportunity to gain incentives almost all the way through the services life cycle, so across our services portfolio. And there is a definite shift away from just providing the -- rather than the volume of incentives. So there is still a component, which is provided as far as the volume that we are able to sell for the global vendors. But increasingly, that's being converted into really based around customer outcomes rather than selling the products. So that's the background and the trend in the industry, and it's right across all the vendors, Microsoft, Cisco, HP and Dell in particular. So the -- we're going to increasingly see enough that FY '22 was really the first year that it became material. It's not become material as far as the services business being able to attract vendor incentives. We haven't provided that level of detail in terms of what that incentive is as part of the overall services business, but we see it being -- we start to see it becoming certainly a greater component going forward. Brem, do you want to add anything just in terms of the numbers? But it's something that we're certainly pleased with. We see it -- we see the opportunity of providing service to our customers, gaining margin in doing that in the usual fashion. But in addition to that, we're able to gain incentives around our vendor solutions as well. So we obviously see these changes as a favorable move.

So the only thing I'd add, Bob, and this is probably going back to the previous question is that the gross margin in every part of our services business has improved. And certainly, if we look at the infrastructure space, the gross margins have improved because of the mix of the sort of projects that we're working on. The only part of our business where there is a slight reduction in gross margin is in software licensing, and that's for the reason that Laurence has just explained, that the traditional vendor rebates are gradually shifting into services.

Okay. And I guess, just in terms of just trying to think about how that impacts your gross margins longer term, are there newer incentive schemes? Do you expect to sort of get more rebates under these newer incentive schemes compared to the more volume-based ones historically?

Currently, we're seeing it being similar. So we're not seeing any decrease. We're not seeing any increase. However, the intent from the vendors is that they'll be paying more across many different areas. So I think as we see these programs evolve, I think there will be an opportunity for us to earn more, but we're currently not seeing it.

Okay. Perfect. And then just looking at your sort of internal cost ratio. I mean, it's great to see that improvement over the last few years. How do you think that sort of plays out over the next couple of years, especially given the wage inflation that's happening in the background as well? Like are you sort of driving your business at the peak operating leverage now? Or do you expect more to come?

I think we expect more to come. It's just a gradual improvement in leverage. So yes, you're right, the increase in staff costs does put a bit of pressure under that. But we use that measure for our planning purposes. And long term, we do continue to see steady improvement. But yes, it can be relatively minor improvement, but it just continues to trend down.

We also know that everyone is experiencing some form of wage inflation anyway, so it doesn't know what organization. There is -- as far as the wage inflation is concerned, the majority of ours is within our services business, which is where the majority of our people are. And where possible, and we are doing this on a programmatic basis, is to pass that -- pass the increases on to the customer. And customers are very willing to pay for the highly certified people and scarce resources.

Okay. Great. That sounds good. And then just that comment around the really strong outlook and pipeline for the services and solutions business. Can you talk a little bit about the nature of these contracts that you're seeing? I mean, are they typically larger contracts or are they longer in tenure outlook? What are you seeing in terms of the pipeline?

There's a whole raft of them, but the ones that grab the headlines are the -- what we would term either infrastructure- or construction-type projects, which are pretty visible, whether it's new hospitals, stadiums, or like the large complex in Queen's Wharf in Brisbane. So those types of projects we're seeing more and more of and we are involved far earlier than we ever have been previously.

And typically, those are sort of multiyear contracts benefiting both infrastructure and software as well as services.

Okay. Great. And just the last one on that. I mean are you winning these contracts through a competitive tender process? Or -- and what's driving Data#3 to win these contracts over some of your competitors?

Anything in the public sector is a tendering process, so that's a given. Anything outside of the public sector sometimes goes through a tendering process, sometimes it doesn't, sometimes it's based on previous experience. So if we're working with a large construction organizational developer and have done a great job on a previous large project, then it's quite usual for that to flow through into the next project.

Next question comes from Ed Woodgate with CCZ.

Laurence, Brem, great results. Brem, I just wanted to say congrats on your retirement. You've done a great job and probably have a few [indiscernible] Just wanted to ask about the revenue backlog. So I appreciate you provide the backlog [indiscernible] revenue growth might have been otherwise. But would help if you call out a specific number on the revenue backlog.

[indiscernible] without being speak to sort of details of our margins. But my first comment is we always have a backlog of, to some degree, but what we've seen is considerable increase in that backlog, certainly at the end of FY '21, and then even more so at the end of FY '22. So when we call out the profit impact, that's really the excess backlog, just for clarity. But when we say the back -- the $6 million backlog at the end of FY '22, if you want to work out in revenue terms, it would probably be in the sort of $60 million to $80 million range in revenue. And that's made up with product right across the spectrum from the end user devices, which are relatively low margin. But a large proportion of the backlog is the sort of networking, communicating-type infrastructure. So that's definitely typically higher margin in product terms. Does that help, Ed?

Yes, yes, that's useful. And then just this morning Cisco announced their results. So they gave their fourth quarter revenue guidance and they were calling out supply revenue at the back end of the quarter and continuing into this quarter. So just wondering, is that something that you're starting to say? And yes, if you could provide some color on that.

Look, I think the -- I'll have a go. I mean, Laurence can probably elaborate a bit more because he's close to the vendors than I am. But yes, I think the situation does tend to vary between vendors. So some have a much more significant challenge than others and probably Cisco falls in the one of the larger challenges and the longer delays. I think they're all saying it will get better, but the time frame for improvement sort of altered. So on that note, I want to see, Laurence, what's your thoughts?

We're seeing some improvements on the end-user computing and with the likes of Dell and HP in particular. As Brem said, with Cisco, it's still long-term constraints. However, the -- what we're hearing from each one of the vendors is that things will be getting better. We've yet to see it materialize. So we're waiting, and we'll be very pleased when that occurs.

Sure. Okay. That's useful. And then maybe a question for [indiscernible] talk through what the utilization is like in the different segments of the services business. And you keep talking about that strong services pipeline you have. Do you need to hire -- take on many more headcount to fill that?

Yes. I think we expect to continue to grow our services headcount.

Yes. Okay, sure. And is there -- maybe it's last question, but is there -- I mean talk about your put through remuneration in line with the broader market. Is there a piece of job functions or service lines you're seeing? And I appreciate that's mostly on services line, but within that, is there particular as a business aspects of the implementation services, et cetera?

I think really, I'd begin -- I think the key benefit we have is our own -- having our own recruitment business in Data#3 people solutions. So I don't think we're experiencing any significant constraint in any one part of the business. I think there's probably instances where the specific skill sets are hard to come by, but they are very specialized skill sets, and those are pretty -- that's not -- that's in a limited number of situations. I think we're managing well. Would you add anything to that?

No. It's really down to the role and even the location or even the sector that -- if we're looking for someone with deep skills and high-level security and security clearance in Canberra, then they're going to be pretty rare, as an example.

Next question comes from Nick Harris with Morgans.

Guys, can you hear me?

Definitely.

Excellent. Congratulations and commiserations, Brem, on your retirement. I think you've absolutely won the award for the longest-serving CFO and also the longest period giving obviously shareholders nearly 1.5 years, which is great. So that -- it will be sad to see you go, but great to see you, give people a lot of time to get used to that transition. And obviously, to give Laurence a chance to find someone to replace you. So I just wanted to call it out. I had really two questions. First for Brem and second for Laurence. Brem, your operating cash flow, I was just trying to get a feel for what it would look like in a normalized year. Because obviously, it was negative this year. I think if you just -- you talked about that pipeline, you just mentioned $60 million to $80 million of revenue. I sort of got a similar number. So if you ignore the backlog that's $6 million, that would imply you would normally have had positive operating cash flow in this year. Is that the right way to think about it? It's just the drag from that pipeline?

Yes. That's correct, Nick.