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

Thank you for standing by, and welcome to the Data#3 Limited Financial Year '24 Results Briefing. [Operator Instructions] I'd now like to hand the conference over to Mr. Brad Colledge, CEO and MD. Please go ahead.

Thank you very much, and good morning, and thank you for joining us for the briefing of Data#3 FY '24 results. I'm joined by Cherie O'Riordan, our CFO, who will be covering our FY '24 financial highlights a little later in the presentation. For those registered with Orient should have the presentation in front of you now or the presentation has also been lodged with the ASX. So, we'll be calling out some slide numbers as we proceed through the presentation, just to ensure people know where we are at. So, I'll kick off. And just for those that are not familiar with us, Data#3 is an ASX 200 listed IT services and solutions provider in Australia and Pacific Islands. Our vision is to harness the power of people and technology for a better future. We have 47 years of experience in evolving our solutions to enable our customer success, and we partner with world-leading technology vendors. We are delivering the digital future for our customers through our solutions that we'll talk about further throughout the presentation. In terms of the agenda, we'll review the FY '24 highlights. Cherie will then provide a more detailed financial overview. I will then cover IT sector trends and AI, and round out with our strategy and outlook before closing with Q&A. Let's begin with the financial highlights on Slide 5. Comparing against FY '23, our net profit before tax is up over 16% to $62.1 million. Earnings before interest and tax was up 5%, gross sales up by 7.6% to a regular $2.8 billion, and gross profit was up 7.8% to $270 million. As we saw with net profit before tax growth, we delivered earnings per share growth of 16.9%, and we're pleased to announce a healthy dividend of $0.255 per share, which is an increase of 16.4% with a payout ratio of 91.1%. The growth rates reported while moderate compared to previous financial periods are a solid achievement in the context of the challenging economic conditions experienced by many during FY '24. Our business model is largely protected from times of economic downturn through our government and large corporate customer base. However, it was not the market in FY '24 to exceed market growth rates without impacting gross margins. I'm pleased to report that we have balance sales growth with sustainable earnings growth in a competitive market and under subdued economic conditions, and that we enter FY '25 with a strong core business and pipeline. Let's move on to Slide 6 and the FY '24 overview. Our company growth continues to build as evidenced by increasing gross sales, which is in line with the Australian IT market. This is because the breadth of our offerings, our track record for delivering our large private sector and government customers and the strength of our supplier relationships. We're also pleased to report that our recurring business in FY '24 has grown to 67%, boosted by growth in managed services and software solutions of 12% and 11%, respectively, in line with our strategy. Down slightly on prior year. Our Infrastructure Solutions business was impacted by customers ordering in advance of requirements in prior periods, in turn slowing down ordering and decision-making in the current period. Our people numbers increased slightly in FY '24, and we continue to strengthen our capabilities in managed services and technical product sales roles. Our supply chain returned to normal late in FY '23, and we are seeing the benefit of efficient working capital management and growing average cash position with our record interest income. Once again, we achieved huge success with national international vendors and industry awards, notably glad the Software Partner of the Year with Cisco and Microsoft Global Surface Awards, and pleasingly awards focused on our people and sustainability. I transitioned to the role of CEO and MD effective the 1st of March following Laurence Baynham's retirement from the role. And Mark Gray is now our chair after 6 years as a Non-Executive Director. These changes are part of a measured transition process. We'll now move to Slide 7, and I'll summarize some operational highlights. From an operational perspective, FY '24 had a number of high points. Multi-cloud solutions continue to drive transformation for our customers, and our services provide value in leveraging and managing cloud environments. We have also seen very rapid acceleration of generative AI in the last 12 months and have been able to capitalize on the opportunity. You'll hear more about that in the strategy section. Security continues to be our fastest-growing area and a top priority for our customers as the sponsor their ever-evolving and increasing threat of cyber breaches seen by many as the #1 business and risk management imperative. We have a strong balance sheet and continue to be efficient in managing our working capital. Our customer-experience initiatives and our own investment in technology were successful in driving better levels of service, raising customer satisfaction scores. Our vendors continue to support us and recognize us, helping customers to identify Data#3 as a preferred partner. Overall, it was a successful FY '24. Assisting customers on the digital transformation journey remains key to our strategy. We continue to invest in solutions in the foundation layer through multi-cloud, model workplace, security, data and analytics, and connectivity, that enable advanced technologies and ultimately, our customers' digital transformation. We did this effectively in FY '24. We ended the year as the #1 partner in Australia with major technology partners, Microsoft, Cisco and HP. The relationships we forged in our vendor partners -- with our vendor partners allow us to deliver leading-edge solutions to our customers. We invest significantly in our capability with these partners and our certifications and differentiate us in market. Slide 10 now. In FY '24, we continue to convert our investments into awards and recognitions. In addition to many vendor awards, which include the consecutive global awards for both Microsoft and Cisco, we also won numerous security awards, reflecting our dedication to continually improving the security posture with our customers. Even more pleasingly, Data#3 was recognized as one of Australia's best places to work in IT by Great Place to Work Australia and named HRD Employer of Choice for the ninth year in a row. These awards reflect our ongoing commitment to creating a supportive, inclusive and engaging workplace culture that enables our employees to thrive and deliver outstanding results for our customers. Data#3 was also a recipient of the Enlighten Growth Leadership Award by the Frost & Sullivan Institute, an award that considers the synergy between financial growth, corporate social responsibility and environmental social and governance. Our sustainability initiatives are an ever-increasing part of our fabric and it's great to be recognized for our progress. And finally, Data#3 recently was inducted into the Queensland Business Leaders Hall of Fame, in recognition of the company's continued excellence and outstanding innovation in providing technology solutions and services throughout Australia. On that note, I'll hand over to Cherie to cover our financials in more detail.

Thanks, Brad, and good morning, everyone. It's my pleasure to now share an overview of our FY '24 financial results. We achieved growth in gross sales of 7.6% in FY '24 to a record $2.8 billion. Slide 12 shows a steady year-on-year increase in gross sales over the past 6 years, representing a compound annual growth rate or CAGR of over 14% since FY '19. This sales growth is supported by a gradual increase in recurring gross sales to 67% in FY '24 as we see a gradual shift in customers' preferences towards as a service and news-based offerings, and we continue to grow gross sales of multiyear licensing agreements and long-term services contracts. We saw a strong demand in the education, health and resource sectors this financial year and strong growth across most states, reflecting increased market share. Slide 13 presents a graphical view of our earnings and dividend trends over time. Our goal remains to deliver sustainable earnings growth, and we are pleased to report that the growth in gross sales and gross profit complemented by additional interest income have continued our earnings growth trends this year despite the high inflationary economic environment. In terms of CAGR, we have achieved 19% CAGR in profit before tax since FY '19. Each graph shows our consistent performance and successful growth strategy as we've achieved steady growth in all metrics spending several years. As Brad mentioned earlier, basic earnings per share increased by almost 13% and the full-year dividend increased by 16.4%, representing a payout ratio of 91%. The fully franked final dividend of $0.129 will be paid on 30 September 24 with a 16th September record date, and represents a total FY '24 dividend of $0.255. Moving on to Slide 14 now. This financial year, we undertook a detailed review of our software licensing and vendor-delivered maintenance support agreements to reassess whether we are acting as principal or agent under these agreements, which resulted in a change to our revenue accounting policy and comparatives have been restated. The statutory revenue presented in our FY '24 financial statements includes the reclassification of software licensing and vendor-delivered maintenance support revenues on a net basis in accordance with this change in policy. I'd like to emphasize that this is a statutory presentation change only, and the company will continue to measure operational performance and report on a gross sales basis in addition to reporting statutory revenues. Our company is comprised of a diversified portfolio of IT products and services. And the chart on Slide 15 brings the total gross sales into 3 broad functional areas: infrastructure solutions, software solutions and services, and their underlying business units. This chart shows the change in sales mix over time with the strongest growth in software, which is also where most of our multicore sales are recognized. I'll provide more detail on these areas with the next slide. It's important to remember there are very significant independency between these different business areas. And our solutions typically comprise a combination of infrastructure, software and services. Our main product-related businesses achieved gross sales growth of 7.2%, in line with the broader market growth rate, including software licensing gross sales, which increased by 11% to $1.8 billion. Infrastructure sales were down slightly on the prior period as we saw some delays in customer decision-making around larger networking and infrastructure projects, and customers were consuming preorder goods as reported in the first half. Our infrastructure sales are also linked to and supplemented by sales of maintenance support contracts, particularly those under enterprise agreements, which are reported on the services. The combined infrastructure and maintenance business grew by 2% in FY '24. Our combined services gross sales increased by almost 10% to $376 million, reflecting a mixture of growth rates across the portfolio of businesses. Consulting sales were down slightly on the prior period due to a highly competitive market with slightly reduced demand. However, profitability improved this half as we proactively managed our cost base. We saw solid increases in sales across projects, maintenance and managed services, winning new customers and contracts. And people solutions recruitment sales declined by 11.6% to $60 million, following a particularly strong prior period that benefited from post-pandemic increased labor market activity. We achieved solid growth in gross profit of 7.8% to $270.1 million in FY '24 and preserved gross margins in a highly competitive market. The table on Slide 16 shows total gross profit and marginal gross sales in addition to the breakdown by product and services. Total marginal gross sales was consistent with the prior period at $0.098 or 33.5% on a statutory revenue basis. Services gross profit increased by 8.6% on FY '23 with margins relatively consistent at around 36%. Overall, net profitability of the services business improved on the prior year through gradual scale and continued cost management. We onboarded several new managed services customers again this year and commenced transitioning our largest ever contract in Q4. Pleasingly, we also had low rates of attrition with none related to customer dissatisfaction. The initial transition phase for new contracts requires investments with profitability generally increasing from year 2 onwards. Overall, profitability will be blended as we continue to scale this business. The product-based gross profit increased by 6.7% to over $134 million, with margins on gross sales consistent with FY '23 at 5.7%, a solid achievement in a highly competitive market. While our FY '24 infrastructure results was negatively impacted by customers ordering in advance of requirements in FY '23 and following the supply chain challenges experienced in recent years, we are seeing improved sales of networking hardware into FY '25. Sales of end-user computing were up 3% in a declining market and sales of collaboration tools were also up. As mentioned earlier, product sales are supplemented by sales of maintenance support agreements, which were up almost 27% on the prior period. We are seeing results from our strategy to accelerate the growth of services and the pleasing growth in the higher-margin areas of professional services and managed services has helped stabilize the overall blended gross margin. More importantly, the net profitability of our services business overall has improved. Our objective remains to continue to deliver sustained earnings growth in the absolute value of gross profit, which we've been successful in doing over several years, and we believe this is a more important measure of success than the blended gross margin percentage. As mentioned earlier, FY '24 was a year of increased competition with fewer deals to compete for in some areas, which in turn created margin pressure and some competitors reduced pricing to win business. We managed to grow at market rates while maintaining gross margins, which speaks to our continued value proposition and strong position in the markets in which we operate. We expect to continue to deliver solid growth in services, which will boost the overall gross profit over time. You can see our growth in total gross profit in the left-hand chart of Slide 17 and the total margin on gross sales trends. As previously mentioned, we achieved growth in gross profit of 7.8% in FY '24, which was a solid achievement considering the highly competitive markets in which we operated, together with the subdued economic conditions caused by higher interest rates, high inflation and global geopolitical conflicts during the financial year. Some customers deliberated on nondiscretionary IT spending this year, which resulted in fewer deals to compete for, and the year saw some competitors lower pricing to gain market share, putting pressure on our ability to gain leverage of our relatively fixed cost base, particularly in the product side of our business. We manage our internal staff costs and operating expenses very closely, and the chart on the right of the slide shows the trends for these costs and how they compare to the total gross profit. Our internal cost ratio, which is staff and operating expenses as a percentage of gross profit is one of our key measures of operating leverage. This ratio has improved from 88% in FY '16 to 80.6% in FY '24, however, is up slightly from 80.3% in FY '23. This is due to our continued investments in services, people and systems, in addition to inflationary pressures on wages and general operating expenses, in addition to the slightly lower GP off a relatively fixed cost base as discussed earlier. Spend on IT projects increased in FY '24 as we completed work to enhance and consolidate e-commerce platforms, implementing a new payroll system and customer success platform and upload cybersecurity, among others. These projects will realize benefits both financial and nonfinancial over several years. Where contracts allow, we pass wage and cost increases through the customers via annual contract pricing reviews. This is not an immediate adjustment and our ability to increase prices in a highly competitive and price-driven market, such as that seen during FY '24 must be balanced with the risk of losing business. The product business also contains more fixed sales and presales resources, and this business was most impacted by the delayed decision making this year. Longer-term, we expect to improve operating leverage gradually across our business by continuing to gain internal efficiencies through enhanced systems and processes, enabling us to achieve greater scale with incrementally less head count, particularly in part of our higher-margin services business. The next slide, #18, shows the key points on the P&L segment. A statutory revenue was relatively flat year-on-year following restatements relating to the change in our revenue policy, and was impacted by reduced hardware sales, which were presented on a gross principal basis. Our pretax earnings benefited from interest income of $9.7 million compared to $3.5 million in the prior period. As our higher cash position, a result of the company's growth in gross sales and diligent working capital management benefited from the increased cash rate. Based on our current cash projections, assuming a slight reduction in the cash rate in Q4 of FY '25 and no change to our typical cash flow seasonality. Interest income is expected to be approximately $8.6 million for FY '25. This assumes an average cash position of around $200 million at an average rate of just over 4%. Looking at the expenses section of the P&L now. The first 4 lines represent cost of sales is at seeing those items from the revenue from contracts with customers give statutory gross profit. The next slide labeled internal employee and contractor costs comprises our internal staff costs, which increased by 7.6% to just over $190 million. This reflects 2% growth in head count compared to FY '23, predominantly billable services staff as well as general remuneration increases in line with the market, but higher than those experienced in the prior year due to wage inflation and a competitive labor market for skilled technology labor. The some of the remaining expenses lines gives the other operating expenses and that increased by about 13% from $24.3 million to $27.6 million, with increases in travel, insurance and software costs, predominantly related to managed services systems and which will mostly be recovered through customer billing. Also, increased spend on IT projects, as mentioned earlier. The balance sheet is shown on Slide 19, and I'll now quickly run through the key points. Our balance sheet remains strong and debt-free. The traditional fourth-quarter sales spike inflates the current trade receivables and trade payable balance as at 30 June and typically generates large cap re cash services at year-end. A key trade receivables measure is average days sales outstanding, and that was 26 days at the end of the year, down from 33 days in the prior period, which was impacted by collection delays caused by the supply chain issues and associated partial shipment of orders. Inventory holdings returned to normal levels in FY '23 and are comprised of allocated stock. That is product held in our warehousing and configuration centers pending delivery to customers. The fourth quarter sales spikes the working capital at year-end. So, I've included a working capital analysis on Slide 20 to help illustrate the seasonal impact. The chart shows the changes in the working capital components reported at 30 June and 31 December over the last 5 years. The key point to note is that the underlying working capital position, as shown by the yellow line remains stable 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 even negative. So, our business is effectively self-funding. This is due to our relatively low inventory levels; our short collection cycle and the favorable trade terms offer by our suppliers. Lastly, Slide 21 shows the cash flow statement and summarizes the key points. The sales seasonality has a significant impact on the operating cash flows due to the high volume of sales in May and June each year and the timing differences in the collections from customers and payments to suppliers around 30 June each year. This causes the typical operating cash outflow in the first half of the next financial year. The net cash inflow from operating activities was $86.2 million in FY '24 versus $291 million in the prior period. This is primarily the result of a higher number of customers electing to pay early and pre-30 June '23 in addition to the realization in FY '23 of carried forward inventory and debtors relating to supply chain issues in the preceding years. One point of comparison is the average daily cash balance, which was around $217 million this year compared to $121 million in the prior period due to the much higher 30 June '23 surplus cash position carried into FY '24 as explained, and the year-on-year growth in gross sales. These cash balances typically include sizable temporary surpluses due to the working capital cycle. And the average cash position tends to be lower in the second half. The other points to note are the relatively low levels of capital expenditures and the high dividend payout ratio of over 91%. Many thanks for joining this briefing. I'll now hand back to Brad to take you through industry trends and the company's strategy and outlook.

Thank you, Cherie. Let's take a few minutes to review the technology industry trends and AI, plus our strategy and outlook. In calendar year 2024, Gartner expects annual global tech spending to increase 7.5% to approximately $5.26 trillion. Sales growth generated from software is expected to grow at 13%, exceeding $1 trillion globally for the first time. Software has increased at the highest rate over the past few years compared to all other categories. We've experienced this growth with Software as a Service offering such as Microsoft 365. Devices are expected to return to growth -- to grow by 5% this year compared to a decrease in 2023. Data#3 had growth last year, so a return to positive industry growth is positive for Data#3. IT services growth is steady at 7% and Communications Services remained low at 3%. The standout as data center, which is expected to grow by 24%. Most of this will be seen in hyperscalers such as Microsoft as they build generative AI processing capabilities. What this means for Data#3 is additional capacity from our vendors to sell into our customers as part of our integrated solutions. We also expect customers to reinvest in their own data center capability to provide additional processing power. It is approximately 1 year since Data#3 and a select few others were invited into the Microsoft Copilot early adopter program. Since then, we have seen the release -- the full release of Copilot and customers taking the time to understand the potential of GenAI capability within their organizations. We reported a number of readiness assessments Data#3 was undertaken with customers, and that momentum has continued. Having completed readiness assessments, customers are now piloting solutions and moving to production. The process we are providing customers have proven successful and assisting with their adoption, and we're seeing advantages across multiple sectors. While the technology platform provides opportunity for Data 3 software and infrastructure business, we continue to see opportunity for our services business in information governance and security and organizational change management. Our FY '24 strategy remains consistent and is adaptable to industry trends. Let's look at a summary of our strategy before commenting on the outlook. Customer success remains at the center of our strategy. The more successful our customers become, the more successful we become. The inputs to customer success are our remarkable people, innovative solutions and operational excellence. We've consistently enabled customer success, in turn, delivering sustained financial performance for Data#3. Slide 28 shows our innovative solutions. Our ability to integrate these solutions is what sets us apart. We are finding now that nearly all of these solutions are embedded with AI. We see opportunities right throughout the solutions life cycle from consulting to adoption with our project services and ongoing management with our managed services. We have spoken to the AI infrastructure and multi-cloud opportunity. However, there is opportunity in assisting organizations to meet their sustainability goals. 73% say are becoming a sustainable business as a top priority. Our solutions start with our vendor partners, and they are well-advanced to providing sustainable solutions. HP also have a partner impact program, which Data#3 just received 5-star rating for our sustainability initiatives around people, planet and community. The number of soft security incidents continue to grow, and so does the opportunity of this customers across devices, the network and cloud. The devices opportunity is huge and driven by post-COVID refresh, Windows 11 upgrade and the demand for AI PCs. Data#3-unit device to the service offering is adding value to many of our customers, making the procurement and management of the device more seamless. We see this on Slide 30, where the focus of students is on learning. Data#3 device as a service offering for the International School of Western Australia has students achieving their goals with their new HP notebook computers. Our solution supports digital learning initiatives, has improved the user experience and provide a more interactive environment for the students, while procurement and management of the device is made easier for the schools and parents. This solution provides modern, reliable and secure devices that fit for purpose. Moving on to Slide 31. Our competitive advantages when combined, make us a unique organization in the Australian IT market. In addition to our people, partners, expertise and innovation is our ability to respond to the changing market dynamics supported by our strong financial position and market-leading brand that provide comfort to customers in choosing Data#3 as a preferred technology partner. On Slide 32, that comfort leads to long tenure and over time, leads to increased spend. The longer the tenure of our customers, the more they become familiar with our broader capabilities. We see this on Slide 33, where the average sales in GP has increased post-pandemic as we extend our engagement across our portfolio of solutions, including higher GP services. So, in summary, as we look to the outlook, we expect continued growth for our services business and is expected to be accelerated by the demand for AI solutions. We also see further profitability from our managed services business as we continue to onboard new customers. Multi-cloud security will see growth with the continued trend towards annuity offerings. Infrastructure solutions is expected to see potential ongoing challenges with delayed decision-making, particularly in networking. However, we'll benefit from the uptick in multi-cloud and end-user computing infused with AI. Data#3 is well placed to leverage the AI opportunity and to continue to provide sustainable growth while having a positive impact on the local economies and communities in which we operate. Consistent with previous practice, we won't be providing specific FY '25 guidance. In line with previous years, we continue to expect the sales peak in the months of May and June, and our goal remains to continue to deliver sustainable earnings growth. Thank you, and we'll now open for Q&A.

Thank you. [Operator Instructions]. Our first question comes from Chris Gawler of Goldman Sachs.

Yes. Brad, Cherie, can you hear me, okay? No worries. Sorry for that. I had a problem with my headset. Firstly, just a question in terms of the outlook commentary in terms of the challenging trading conditions. I note that you flagged some customer decision-making deferrals back in February as well and some nascent competition emerging. Just interested if you could give us a bit of a sense for what you're seeing now versus then?

Yes, absolutely, Chris. So, we had a very strong Q4. And in fact, we had our best ever June, which is just fantastic. However, we also had very high expectations. So, we are frustrated a little as is the market in general with some of the delayed decision-making, which is there for a variety of operations. Customers still are pausing as they assess the economic environment and their position in the economic environment and also the technology platforms now available in particular, with AI and how that affects the newer products coming and when they should be making the decisions to move forward. So, we've navigated that with many of our customers, but still a little frustrated in some ways of the prolonged decision-making just continuing in general.

Okay. Yes. So, things are maybe still a little bit slower than you would like, but have sequentially gotten better since February. It's the way to take that?

Yes.

And then just one more question in terms of the cost outlook for FY '25. Just noted a comment you made about onboarding one of your largest ever managed services contracts in the fourth quarter. I know that often, as you say, the profitability is lower at the start and then ramps in the second year of the deal. Just interested how we should think about the internal cost ratio into FY '25? And if there's any kind of timing issues with the ramp-up of some of these bigger projects?

Yes. Thanks, Chris. So, I think the challenges with the ICR in FY '24 and us not being able to deliver significant improvements in it were more related to the slight softness in the infrastructure business of a relatively fixed cost base. And as you know, we deliver a lot of business in May and June, and we rely on all of our sales resources to deliver that level of business. So, the ICR was more related to the economic environment and the trading conditions in the infrastructure business and the managed services onboarding of new contracts. We have improved the way we contract with our new customers in terms of being reimbursed for some of those transition costs. I won't say they're fully reimbursable, but we have learned through as we scale up to get better at building in those initial costs into our contracts. So, I don't expect that to have too much of a significant impact on the ICR as such. The ICR improvements will come more from us generating the desired levels of scale from the product business and continuing to look at just generally the way that we operate in the most efficient way possible.

Thank you. Next question from Apoorv Sehgal of UBS. Please go ahead.

Just a follow-up to the points you make around delayed decision-making. Is that potentially a factor with the Queensland election coming up in October? Is that something that tends to slow down decision-making in the lead-up to an election like that? Obviously, Queensland is a pretty important state for you. And is that something that could play a role in like first half '25 as well?

Yes. Potentially, yes. Absolutely. With elections, it's interesting. There's existing contracts largely aren't affected. However, we do see that even some purchasing decisions under those existing contracts may be delayed and also the sign of new contracts. As you know, we've been through this many, many times. However, the reality is that we may see some Queensland business shift from the first half into the second half. I guess the good news from that is that we still have plenty of time in the financial year to still assist the governments with their requirements post-election because that should be out of the way by Christmas.

And just as one more question as a bit of a follow-up to that. The Queensland government in their June budget talked about the smart ascending better drugs plan where they talked about driving $3 billion of cost savings over the next 4 years. And in the budget report, they specifically mentioned reducing the use of external consultants. I'm just curious if you've seen an impact from that already and might that potentially have an impact going forward, please?

Not really. And maybe that's because the level of consulting that we do is not material perhaps across government. However, what we also find is that we've got a very strong project business and our projects business is based on outcomes with the customers rather than just contractors. So, through our projects business, which is outcome-based and managed services, we would expect that. That would still continue.

Thank you. Next question will be from Ed Woodgate of Jarden.

Well done on navigating a tough environment. So yes, interesting question just on the Queensland government cost out, but I think that's been answered. I might just talk to the -- ask you guys to talk to what you've been seeing as far as orders from infrastructure hardware. So, I appreciate you've been seeing the deferrals and decision-making. But can you just talk to what the order growth is year-on-year, similar to say like a Cisco reports? And then is there any kind of disclosure you can provide as to what the revenue impact of any backlogs you were cycling in the second half of the full year, please?

Sure. The Cisco as a vendor that they do report on orders. We tend to report on profitability after the orders being delivered. So having said that, the order pipeline and the opportunity pipeline is a leading indicator as opposed to a lagging indicator. And overall, we've got some pretty healthy pipeline. So, I guess, 3 factors are, you've got pipeline, leads to orders, leads to profitability. And we've got great pipeline as were a Cisco we're seeing in their last quarter, and we've seen good orders in our FY and also the start of FY '25. Just the other anomaly with Cisco there is that the end of financial year is end of July as well. So, while we had to close our books off the 30th of June, Cisco was still processing orders for their FY through to the end of July.

Okay. And then is there any -- just before I ask a follow-up question, is there any color you can provide on what the backlog might have been?

So backlog is back to normal really in terms of our back order, and Cisco are well improved on the supply chain. So, it's sort of really back to a post-pandemic level. Our inventory and backorder are quite back to what we'd say normal levels, if you like.

Okay. And then just quickly, there seems to be a new disclosure in relation to your customer cohorts, if I'm reading correctly, you've got 1,000 new customers in FY '24, which seems to be a great outcome. Just hoping you can provide some color on what's driven that and are these smaller customers than you've historically targeted? Any sort of change in, I guess, the segments you're targeting?

Yes. I think it's probably more around customers versus customer groups. And so, while we absolutely have had great success with new customers, but there's probably some alignment that we'd need to look at between the customers and customer groups. So, I need to get back to you on that. And the second part of your question was?

Well, just are you targeting different -- are you targeting smaller customers or targeting different industries?

Yes, yes. And I guess the answer to that is we do see opportunity, particularly with Microsoft in that medium business, I won't say necessarily small business because we don't deal in consumer or small business, but we have seen good success in particularly Microsoft around the cloud solution provider program, which is that next level down from their enterprise agreement.

Okay. And then just one final one for me before I jump back in the queue is, so I appreciate it's tough for you to provide guidance given so much product revenues within the main chain. But can you comment on what your expectations are for services growth? Like should it continue at a similar growth trend? Are there any verticals that might accelerate or decelerate, particularly, I guess, consulting with GenAI or maybe project services with the slightly weaker demand for networking hardware.

Yes. I guess the short answer there is, Edward, we're absolutely looking for continued growth with services. As you saw in the numbers, we had great progress with professional services and managed services last year. With AI, while we didn't grow the revenue as much as we would like, we did have better success from a profitability perspective. And VA, in particular, has a great opportunity around the AI piece, particularly around that security and governance and change management piece that I spoke about earlier, as it leads into then the technology consulting around the platform. So, we've got, I guess, good aspirations around our business aspects and also continued growth with the managed services as we not only onboard those larger enterprise managed services, as we mentioned earlier, but also develop out our packaged managed services around specific offerings targeting particular customer requirements.

Yes. Okay. Great. Actually, sorry, just one more question because I've had quite a bit of inbound on it. The services, GPM, apologies you've already addressed this completely, but that contracted 400 bps half-on-half into the second half versus first half of serve. So, I mean, is that just a mix shift to maintenance services? Or has there been any individual vertical GP margin compression?

No, nothing to call out, Ed. As you know, the services gross margin only includes direct contractor costs. So often, slightly risk could just see the change in mix of contracted FTEs. So, we have contracts and others in services go back slightly, and we onboarded new FTEs in their place.

Okay. Got it. And yes, once again, congrats, it's a very tough environment out there from what we've heard from everyone the channel. So, keep what you're doing, is still impressive even if it's maybe not what everyone would hope it is right now.

Thank you. Next question from Chenny Wang of MS.

Maybe just first one in terms of those product gross margins. Like historically, the second half has always been quite materially lower than the first half, but that was kind of mostly flat half-on-half and also up versus the second half of '23. I understand, yes, there's been probably some mix shift with some of the delayed decision-making. But can you kind of help us understand the dynamics at play there? And also, how we should think about those margins going forward?

So, just a little bit more information. So, I guess the -- Chenny, good to hear you. Thank you for your question. And I guess, one of the -- we sort of addressed it, but it may have been sort of glossed over in the content because there's a fair bit of content. With Infrastructure Solutions, while we do see a continued slowdown in that networking piece, we are still looking for growth in that networking piece, sort of aligned to that market growth, which is around the 3%. But we do see also opportunity in end-user compute and also data center as well. So, we still see opportunity in that infrastructure space even though we are seeing some delayed decision-making. I guess the other piece is just around the relationship between the infrastructure products business and the maintenance services, and this is relevant, particularly to Cisco is the maintenance services, which is services, including vendor services, it includes a lot of the support agreements that are sold in line with the infrastructure solutions agreement. So, we have seen a little bit of a shift of some of the profitability from the product through to the maintenance areas within the business. And that's also from a Cisco software perspective that sits on the network is also recognized in that area as well. So, when we look at the business, the infrastructure business, we're actually looking at the infrastructure and maintenance combined as well, but we understand we need to report the services businesses separately as well. So, I just wanted to mention that, too, in terms of we are still seeing healthy activity across the infrastructure business. If we hadn't -- we didn't have the infrastructure business, we wouldn't have that uptick in maintenance that we're seeing now.

Yes. My question was actually just in terms of your product segment. So, your infrastructure solutions plus your software solutions, and just kind of the gross margin profile in the product segment. I guess you guys delivered, I think it was 5.6% gross margins for FY '24. And that segment has been on a decline for a number of years now, but it looks like you guys are actually seeing some stabilization there on that product gross margin?

Yes, yes, absolutely. So, the product margin is actually quite stable and healthy. When we report on product in general, we're talking about the infrastructure product and also software products. So, as you know, a lot of the relative -- well, in that column on Slide 15, the relative gross margin for software is quite low on some of those very high revenue growth sales deals as well. So, it's that the lend between software solutions and infrastructure solutions that provides the resultant product gross margin percentage of 5.7%.

Thank you. Next question will be from Adam Dellaverde of Taylor Collison.

Good morning, Brad, Cherie and Steve. I just wanted to ask a question around head count growth. It was -- I know we kind of had a big growth in the prior year in F '22 and then -- sorry, F '23, and it looks like 2% head count growth in '24. I'm just interested in your plans for FY '25 in terms of adding heads and what kind of wage inflation you're still seeing?

Yes, sure, Adam. So yes, as you say, we did see an increase of 2% in FY '24, which represented about 30 staff. Most of those were billable services staff, which sit below the line, as you know. So those people are obviously brought on to service new customers, and we've been quite deliberate in not bringing or attempting to not bring on too many head count across other areas of the business other than we had a few people onboarded in the product space in specialist sales roles to drive strategic growth in future periods. So, in terms of what we expect to happen with head count in for the future, as always, it's subject to the amount of new business that we win. We try to manage our back-office head count as closely as we can and achieve that leverage that we've spoken to previously. I Don't know if that answers your question?

Just directionally similar to 2% or back to trend closer to revenue growth?

Yes. Look, I probably expect it to be a little bit more next year if we can achieve incrementally more growth in the services business. We might need more staff across the project services and managed services business to onboard new contracts. But I can't predict that until that business is one.

The other thing, I guess, Adam, is the general dynamic nature of the industry is fast evolving, and we like to think that we're fairly agile as well. So, I guess our staffing levels will vary based on the market opportunities. So, if we, for example, feel that we need to put some more resource around particular AI initiatives, we may move some people around within the business, but we may also bring on some additional resources on the basis that return on the investment is going to be there as well. But I guess, in direct answer to your question, we're not looking at bringing on substantial head count just for the sake of it.

Yes. And just to answer your question on wage inflation, we saw about 5.5% in FY '24, which we're hoping has now peaked. And should at least carry forward into next year, hopefully reduce.

Got it. And so implicitly, all of the things, all the initiatives that you're trying to do with AI and the project pipeline that you're handling that's going to be handled mostly in FY '25 through the sort of the people infrastructure you have in place?

Correct. Absolutely. And if you think about solutions as well, there's AI needed into the PCs. So, we have existing people that are selling PCs coming through all the training required around explaining the benefits of the AI PC to our customers. Our software solutions people. They're the people that are having the discussions around Microsoft Copilot and whatnot. So, because AI sort of being overlaid across our existing solutions, we don't necessarily have to create a whole new like AI team per se, although we are bolstering some areas where we feel the faster growth.

Great. And just maybe one final one. Just in terms of the pipeline, I'm kind of curious, I'm not sure how much you can talk about. But how is the pipeline shifting? I know last couple of years there's been a fair bit of like commercial projects. There's been stadiums in the past. You talked about data centers in the pack. I'm just curious on how the incoming or the leading pipeline compares and whether that has any impact on the kind of margins you can get or the follow-ons?

Overall, it's not really shifting that much. We still have a pipeline that includes some of those larger infrastructure projects like we've had in the past. Some of those can take a couple of years to come to fruition, of course. But we've also seen some good mid-market commercial business, and our government sector across federal state and local remains strong. So, look, I guess the short answer to your question in terms of is it shifting. We're not seeing it shift significantly.

Okay. And then just I'm looking at the spending in sort of the hospitals and there's education and in mining maybe is a little bit tougher. So, like how sensitive is it in terms of pipeline to the fortunes of those individual categories versus just normal inertia. I know I have announced that.

Yes. Like I guess you're asking really is some of the big infrastructure projects provide a spike to business and then where do we find the business afterwards scenario. I guess we do have a pretty diverse customer base. Some of those infrastructure projects even pick up the -- you probably know about the -- whether we win them is another story, but a huge activity even just within Queensland around building and extending hospitals. For example, we'll see infrastructure projects commence around the Brisbane Olympics. We're still involved in a number of stadium projects in the southern states. So, there's certainly opportunity.

Thank you. Next question is a follow-up from Apoorv Sehgal of UBS.

One follow-up question. Just on Cisco's networking business, if consensus -- analyst consensus forecasts are right for their global networking sales, it's basically going to bottom out kind of right now in the July half get sort of less negative in second half of calendar year '24 before turning back to positive from first half calendar year '25. Would that roughly be the right kind of trajectory that you'd probably expect for your infrastructure sales? Is it like a little bit less negative at the top line in the upcoming December half before hopefully getting back to that positive territory June half '25?

Yes. I guess our dip, although it did affect our numbers a little, our dip wasn't as severe as the Cisco global dip. So, we're still expecting to continue to grow that business even at lower rates rather than being a less negative in the first half, for example. And then certainly, as we enter into calendar year 2025, we expect that to accelerate a little bit further. So, I guess we would be aligned with what Cisco was seeing, but it would be a bit of a smoother road in that regard in terms of our involvement with Cisco in that market.

Thank you. Once again, [Operator Instructions]. Our next question will be from Ed Woodgate from Jarden. Another follow-up question.

Hi Brad, hi Cherie, just very quickly, on GenAI services revenue, is it -- I imagine that wasn't a big impact in FY '24. I don't know if you can call out a specific number there. But maybe more interestingly, are there any lead indicators you can talk to about the potential impact for Gen AI on services next year into the medium-term?

Yes. Last year, we were calling out a number of the readiness assessments that we're working on. We've got, as you know, we've got some great initial momentum with that, which is fantastic. And I guess rather than just necessarily reporting every single readiness assessment that we're involved in now. We are seeing those move forward from a readiness assessment into our pilots and production environment. So, we're not calling out specific numbers per se. And at the end of the day, it will also be -- it's a bit like cloud in some ways. It's actually really hard to report on because it's infused with our services projects overall. So, a services project may be just fully are focused on an AI initiative. But typically, what's going to happen is there'll be a services project that includes an AI component in it. So, it will be increasingly harder to call out specifically other than to say that by having that AI capability and our services team, it really underpins the growth that we are looking at from our services business, both from a consulting project and managed services perspective.

That's very helpful. And then just one final clarification. Apologies, it was just a bit of a bad line for the least. So just can you just confirm what the interest revenue guidance number is? And then also that below-the-line managed services profitability has improved?

Yes. So, I think I've given guidance of about $8.5 million in interest income, that's certainly what we've used to build out our internal budgets as but if anyone's guess what will happen with the cash flow. That's the current set. And yes, I can confirm that managed services and services overall net profitability has improved in FY '24.

Thank you. There are no further questions at this time. I'll hand the call back to Mr. Colledge for closing remarks.

Thank you very much. Well, look, thank you very much, everybody, for your time this morning. There's always a lot of content to cover in the briefings and really appreciate the questions. Of course, if you have any further questions over time, we are more than happy to address them. But overall, Data#3 had a good year. It was the markets in which we're operating, and we're really excited about the opportunity that FY '25 is going to provide Data#3 with the skill sets and the team that we have on the park. So, thank you very much for your time. And we will speak to you again. Thank you.

Thank you.

Thank you. That does conclude our conference today. Thank you for participating. You may now disconnect.