Infotrust Ltd (ITS) Earnings Call Transcript & Summary

Good morning, and welcome to the Spirit Technologies FY '22 H1 update. My name is Sol Lukatsky, I'm the Managing Director of Spirit Technologies Solutions. And I'm joined by our Chief Financial Officer, Paul Miller. The presentation today will cover the past half, some of the commercial aspects of that, the challenges and also some of the many wins that Spirit have over that period as well. Paul will cover the financial reflections and some of the KPIs that we measure the organization on. And I'd like to invite you to be interactive on this session. So you can either e-mail us at [email protected] with the questions, or you can use the Q&A panel, and we'll defer those questions towards the end of the presentation. So welcome and thank you for being with us today. We start off with our H1 results and some of the narrative behind those numbers and some of the wins that we've had also as well in terms of growing the business. First of all, if you look at it from a calendar perspective, I think, the word tumultuous that were difficult, and all of those things can be summed up through what we saw through the calendar year. To give you a perspective before we go through the numbers and some of the detail. If I look at a snapshot from May to June to August to September and all the way to October, you almost had 2 very different businesses in terms of what was achieved. So through calendar year, May and June were our most profitable months in terms of growth at the NPAT line and the EBITDA line. And then I thought we'll turn to July and August and September when for the first time, we had lockdowns through 3 capital cities across Australia. But I'm very pleased to say that the business has gone through very, very well with positive EBITDA and in particular, revenue growing even during that period. But I have to acknowledge, during that time, we were in a negative cash flow position for those few months. And we had to do that for a variety of reasons. Typically, you may want to cut costs if there is a macro change, but that was a point in time where we had to carry our staff through that period, knowing that the labor market was very, very tight during that time. So we made the decision to cut costs on variables, but not on paper because of the skill set shortage in the Australian market, which meant that first quarter was very difficult from a profitability perspective. What that allowed us to do is then move into record periods of sales through November, December because we kept those skills within the organization because of that tight labor market. And pleasingly, November and December were record sales months across the entire organization as reflected in the total contract value. November and December, both record periods for the month. So the summary is, I think, we use the word solid. We got through H1 with a 5% drop in EBITDA year-on-year. I'm also pleased to present that we didn't lose money from an NPAT perspective. And I look at some of the peers in the group as well. And it's not a large cash profit or any of that type, we did get through it without an NPAT loss, which I think is pleasing for the organization as well. I'm also pleased to announce today that our bank CBA has approved the extension of the facility all the way through first of July 2025. And they've actually increased our facility from $25 million to $32 million. So we went through a number of scenarios with them in terms of our business strategy, in terms of divestments and in terms of acquisitions. And they came to us confident in Spirit and also the extension of the facility, which I think shows the strength of the balance sheet, the strategy and also our ability to have close partnerships with debt funders at this point in time and not using the capital markets to raise money. So strong balance sheet. We closed December '21 of $17.5 million, which is a mix of cash and debt. Cash in the bank was at a healthy $2.4 million after the period. And importantly, we also saw organic growth coming through, particularly our cyber business, right? So I've had a lot of feedback and tell us whether the organic growth to cyber is growing organically, and we're also seeing the mix of cyber move through the entire portfolio. So that strategic move, cyber no longer is a specialized service. It is a ticket to the game to provide secure cyber solutions for mid-market in particular. And we talked about resilience. So the business model held up really well. Not only did we make a positive EBITDA contribution, but our recurring revenue actually increased. And also, we never actually went backwards on monthly recurring revenue for that period. Even during a difficult time and monthly recurring revenue on a net basis, which includes churn increased as well across the whole organization even during that period -- that difficult period of 6 months, which is very, very pleasing and shows that there is stickiness within the portfolio and our customers like the services and the products as well. So what are we today? Because we're a very different business to what we were 2.5 years ago. We like to refer ourselves as a one-stop shop for digital workplaces. And I do want to spend some time in because it's vital to understand what is the connection here between the business strategy and what is happening in the market with employers as well across multiple sectors. So today, we've got 5 key product lines that we work to. Clearly, the legacy business or the Internet connections, although that's changed fundamentally because we've got Spirit and our digital platform. We can do communications from the team calls all the way the mobiles. We also have cyber that we talk to and manage services that allows us to wrap human intellectual property around all those skills, right? And obviously, finally, we've also got the cloud applications and the hardware services as well. Those are the most 5 critical services that organizations need to allow their digital workplace to function in 2022. So why is that so critical and why am I so passionate about this slide and this strategy? Quite simply, the workplaces of organizations have changed, right? So you've got organizations that are now working remotely from beach houses. They were 2 days in the office, 2 days at home. All of those services are a critical services to allow that employee to work within that organization. But I'll take you a little bit further into that step, and I'll talk to actual deals on the next slide, but I want you to think about it a little bit differently. When we think about workplaces, most of us may think about white collar workplaces that might be accounting firms or Spirit or other telcos as well. But there is a dramatic and structural change occurring in workplaces in other verticals as well. And that includes mining. That includes the way doctors and nurses in health care. That includes education. And that is where Spirit is positioned to take that advantage of all those structural changes. So today, I want to talk to the deals that are real deals, not just the slide around the operating world. And that's the next slide that gives you real deals in the last half that have been one. And these are just a selection. They're not all of them. There's a number of them in the pipeline that have been one that show you the strategy in real life execution. And these are important for everybody to understand in terms of the intrinsic value of the organization today and what it can become over the next 3 to 4 years. First of all, Banking & Financial Services, it's 2 very large Queensland-based financial services organizations, where we launched a cyber detection product and a network product. One of those deals is we're -- sorry, 2 of those deals together are worth over $3.3 million in total contract value over a life of 2 to 3 years. The next one is in services. So this one is for a large health care organization, which is ASX-listed as well. So in that one, what we've done is actually broken their network into parts similar to what you would do if you have an issue with a submarine as example. So there is protection in different layers. That total contract value is worth $2.6 million. They are now taking and considering Internet and data services from the organization. Health care, another very large listed health care provider. We are now providing a large cyber application across protection parts of their business. So cyber criminals can't get in. The final one that I want to talk to, and this is an important one because sometimes we got about how technological mining units. So this is a large ASX-listed company as well in the mining sector who have large sites nationally all the way from regional New South Wales up to Northern Queensland. So we started the -- we started with that organization working on some simple Internet deals. We've recently won a large part to allow all their mining sites to have high-speed Internet all the way down those shafts because their equipment these days is WiFi-enabled and requires all of those, and there's governance and security issues that we deal with as well. But the best part is and it's not included in the slide. Last week, they signed a managed services agreement for managed services and cyber services and cross-sell as well. So what you have there is an organization who starts with Internet and data and move across the entire Spirit product set, and that deal will move into around $3 million in total contract value over the next 2 weeks as well. So what you can see is, to the previous slide, you can see the set of services that are in the market that Spirit has as a digital services provider. And you can see those across the different sectors and how important these are becoming in terms of digital workplaces and not just white collar workplaces, but industrial workplaces, mining workplaces, health care and all those coming through. So why is that actually happening? Well, it's happening because the workplace has fundamentally changed over the last 2 years, right? And although I've talked about this for 3 years, it's been accelerated through COVID, right? And that's occurring because people need to work in different places and their expectations have changed. But more importantly, you've got a race for talent, right? And when you've got a race for talent, that talent expects that your technology needs, right, are best of breed. And what do I mean by that? So you talk about and you see a lot of articles in the press around wage inflation and you talk about the great resignation. But what we're seeing is a lot of our presales people are beginning to work with not just the IT manager but human resources managers and other cultural people in the organization to provide those people with best-of-breed technologies. That could be the highest speed Internet. That could be the best cloud solutions. That could be the best hardware. We've got organizations now. We're looking at turning over their hardware almost every 12 months to allow those talented people to have the best productivity tools they can, be that if they're working from home or the office or anywhere, right? So the change is happening structurally and we're positioned within the heart of that opportunity as well. So that -- I hope that gives you a good perspective and probably the linear view of what's occurring at a macro level. It's not just driven by Spirit. It's partly driven by our JV results, but it's also driven by structural and macro changes that have kind of been accelerated through labor issue -- supply side and labor, but also technologies required to allow those workers to work anywhere productively. So what's happening in terms of some of our asset strategy and how do these pieces connect? We obviously -- I'm very proud that we divested our consumer business last year. So we had that at book value circa 2.5%, and we divested that at $5.1 million. I get a lot of questions around M&A consolidation. My simple answer is the activity levels have probably never been more active. The discussions in terms of approaches to us or private equity have accelerated in the last 6 months and it's quite simple. There is margin pressure. If you're larger than Spirit and there is margin pressure than your smaller than spirit. So ultimately, that leads to accelerated consolidation. But there's nothing here today that we're ready to talk to the Board have we been approached from a private equity perspective or other smaller organization in peers, there's been a variety of conversations. But there's nothing here that we're ready to take to the Board, which shows us incremental intrinsic value at this stage. Obviously, we've talked to the market as well, probably our final piece that, I guess, we would certainly like to consider Tigers our fixed wireless assets. So that is the steel or the hardware it delivers the fixed wireless services. We are an exclusive DD. That is going in a positive direction. But I'm always conservative before the money is in the bank and the SBA side. We, obviously, don't want to talk to that at length until that is completed, but it's heading in the right direction. Acquisition targets, look, 2 things to have targets, you have to have capital. We've had a strong tick from CBI in terms of our strategy, our cash flow and our financial metrics. And if we do bring capital back from Big Wales, we have identified about full targets that we would like to have discussions with and have already begun those discussions with. But I think you've got to do this piece by piece. However, the values in the last 6 months. And obviously, you see those values between public and private. The arbitrage between the two has shortened, right, which is a good piece if you have solid balance sheet like we do. So I think I almost feel that it was like 2020, when asset prices did stabilize lower, and that gave us an opportunity to buy assets of multiples at around 3 to 4 that are within the business now. Not saying we can buy it. It's a 3% to 4%, but it feels similar to 2020. And clearly, we continue on the integration trial. This business will be integrated and complete integration on our last asset, NextGen towards the back end of this calendar year, and that's hitting in the right direction. So on the ERP and the billing in the CRM. In terms of an internal piece of work, I want to try to bring that to life for you today, but we will have in this quarter also and in Q4, a deeper investor view of what this is. But today, we introduced Spirit 2.0. And what is Spirit 2.0. Well, it's really around working through the creation of the competitive advantage with the new revised assets and our value proposition in the market. So today, we launched our mission statement, which has already been articulated within our organization to be Australia's leading provider of modern and secure digital workplaces. And I know their words, but they're important and I want to take a minute to talk to those and why each works important, both in terms of our culture and how we position ourselves to both investors and customers. So first of all, we acknowledge that we want to be or to be. We are on a journey. We're only really 2 years into what we started off in the last period. And obviously, Omicron and unfortunately, the recipes about the walls has disrupted a little bit of that. But we want to be in Australia. So we're an Australian company, and we want to execute to the Australian marketplace. We want to be a leading provider of that. And modern talked to what is happening in workplaces and it also connects to the modern workplace and a term that Microsoft is, obviously, using as well, secure. We acknowledge that in the new world. And in the 2.0 world, you cannot launch applications of complex solutions without them being secured through our cyber business and digital workplaces. All the workplaces across Australia and the world have changed and we've acknowledged that. So today, we launched a mission statement to be Australia's leading provider of modern and secure digital workplace. At the operating model, the 6 points that I want to talk to today and we'll have more on this on the investor call coming through the -- through an open house investor call, we will showcase our new talent and some changes that we're making on the leadership team as well. But we will go to market with 3 key business units. The first one is the SMB market, which is our NextGen brand. So think of that as really 2 core products, data and voice, targeting businesses that are 5 to about 50 or 100 seats, mid-market. So today, we announced that we are merging the Central Services business under the Spirit brand. And we are appointing Julie Reeves, who's an IBM executive, who's been with us for the last 6 months as the CEO of the Spirit IT business, reporting directly in to me. And then Intalock, obviously, our side of the business. So 3 core business units with a core function, obviously, led by Paul Miller on the call. I had a question earlier that I'll talk to about digital platforms. We're moving from product to digital platform. So we will have all our products and our digital platforms by the end of this financial year as well. So we will move from being an organization that is just selling through people through Spirit X having the entire product range across all our managed services business in one place as well. And clearly, cross-sell, and I bought it with this, but it is the vital path of getting our EBITDA margins up and stickier customers as well. So you saw some of those cross-sell examples, real-life cross-sell examples, not just PowerPoint slides on the ES line. It is happening. But clearly, with the sales force, it couldn't have face-to-face contract for the last 6 months, right? We've probably lost 6 months, but our pipeline has never been stronger. We want to leverage our market share and win in mid-market. So our SMB businesses are actually going well. Our cyber business is going well. The opportunity to improve and improve our margins is really in that mid-market around that Spirit business and some of the legacy products we've got in there. So -- and also, we want to be really tagged in terms of what we do with acquisitions. With a strong balance sheet, we hope to make it stronger, and we want to acquire and bulk up in certain areas very precisely. And finally, we talked to this before, in the last 12 months, we've also invested heavily in our procurement area to maximize our synergy. So we're corporatizing the business by creating roles. So Chris Stevenson has joined us as Head of Procurement. He ran the Melbourne University function there to maximize our buying power. We're now a business run rating of that $140 million, $145 million mark. We've got enormous capabilities to get the margins there. But remembering, we did a number of acquisitions, and it just takes some time to bring those synergies to the market as well, and there's some headwinds on inflationary pressure as well. So I will stop there from -- we talked enough. I'll pass over to Paul Miller, who will take you through some of the key financial metrics that have been in the market already for the last month. Thank you. Paul?

Yes. Thank you, Sol, and it's good to have the opportunity this morning to sort of present the financials for Spirit. Look, as Sol has sort of highlighted, our sales revenue was up about 54% year-on-year to $65.9 million. And relative to the previous half being H2 FY '21, sales revenue is up 10%. And that is a pleasing result in the context of the last 6 months that Sol addressed at the start. Total revenue and other income was at $69.6 million, which is up 58%, and that factors in the profit of $2.5 million on the divestment of our consumer assets, again, that Sol referenced. Our underlying EBITDA, which excludes the consumer profit of $2.5 million was at $4.2 million. It was down on a year-on-year basis and reflects the challenging environment but also the factors in the investments we are making to scale and grow our sales team, our corporate teams, such as the procurement that Sol just mentioned. And all that is aimed to gain market traction and also build long-term organic growth. Again, I just want to reiterate that I'm very pleased to confirm that our banking partner has provided for more approval to permanently lift our facility to $32 million and extend for another 3 years. And again, I think, it's important to reflect that's a reflection of the strategy that we're pursuing and the recognition of that strategy. At 31 December, we had available capital of $17.4 million. Next slide, please, Sol. Look, it's worth highlighting a few revenue component observations. Sol has touched on a couple of these, but I just want to talk to this slide, which provides some metrics relative to the previous half being H2 FY '21. So our security revenue is showing strong organic growth, and it's up 45%. So that's largely driven by our cybersecurity division, which we acquired in December 2020. But again, to Sol's point, we are seeing more cross-selling that's occurring with our customers in other parts of the business for those cyber-related products, which is the mining example that Sol spoke to. Voice, data and Internet revenues are up, which is largely driven by the NextGen acquisition contributions. And in regards to managed IT services, these revenue streams incorporate hardware and solution revenue. And the decrease is a reflection of customers pulling back on spend in lockdown environments through the first half of this financial year. So assuming no further COVID restrictions and on the basis that business conditions continue to return to a more normalized environment. We expect to see our second half revenues to build and be in the order of circa $75 million. Next slide, please, Sol. This slide addresses recurring revenue, which is up 66% year-on-year and 21% on the previous half being H2 FY '21. Following on from Sol's comments in cybersecurity services, we are seeing an increase in our enterprise customers contracting for multiyear cyber products and services. And the growth also reflects the contribution of the contracted revenue streams that came out of our NextGen acquisition that was completed in April 2021. Next slide, please, Sol. Look, the table provides a detailed year-on-year financial summary, which largely address the revenue and the EBITDA components and happy to take Q&A on this at the end of the presentation. In regards to profitability, as we've highlighted in today's market release, we have started to implement price rises. And Spirit is working on a broader set of initiatives as part of the Spirit 2.0 transition, which Sol just addressed, which, amongst other things, is targeted at a progressive lift in those profitability margins over than forward 12 to 18 months. And back to you, Sol.

Thank you, Paul. Well done. I will now move to Q&A.

So we've got, I think, 4 questions. I encourage you, if you're interested, please we'd love to make this interactive. We would love to move into some of the details. So please put your questions forward if you've got them. I'll kick off with a couple of questions, one from Lucas in terms of specifically what is Spirit's competitive advantages. Thanks for the question, Lucas. We're winning in kind of 2 scenarios that I'll point to, and then I'll talk to competitive advantage and how that wins. We're typically winning when we're an incumbent and typically a telco cannot provide the managed services and the cloud and the cyber under one offering. And that's when we're winning as there is a need for a composite of products. So we're typically winning when an incumbent doesn't have the other products, we can provide that under one managed services agreement. So I know ole example of that ASX company capital health, but I'm happy to share with -- that with you because I know on their call I think I mentioned Spirit as well in some capacity. So that -- we won those kind of ASX deals because we're able to run the voice, data and a number of those managed services all in one bucket. So it's the sum of the parts executed project managed professionally across the organization, one account manager, which is -- and one bill, which is very, very different to what some of the other provides. But I think the other part is we're lucky enough to acquire a good price, a really quality cyber asset. And that cyber part is becoming critical to any good governance and any good Board when they look at mid-market as well. So the combination of those gives us enormous competitive advantage and that's why we talked to cross-sell is the internal term for creating competitive advantage with the entire product set, Lucas. Mark asked the question -- he's got 2 questions. Has Spirit had success -- Spirit has success in government. Is it still a focus in which business unit responsible? Mark, I'll probably answer it. Look, I have to be frank, government probably isn't a focus right now. We think that our competitive advantage, connecting the question to Lucas' before, is more in the mid-market. What we do find in government is that the time frame to win government business is a very long time frame. And the reality of, this we've only got semi resources to work on certain projects. And government contracts, although they're good, they are very [indiscernible] margins, and you don't always know if you're really in the game, right? So government is not a focused target market at this stage. We have won some contracts before, mostly in fixed wireless, but I have to be frank, they'll probably not -- they're not overly profitable, and they took 2 to 3 years to win. So it's not an exact factor in -- not an exact market that we want to play in. Your second question, Mark, has -- have we grown in the education space? We have grown the education space, but predominantly on the hardware side of that because of the ability to enter schools in the last 6 months. It's very, very hard for schools and us to go in and create managed services. Lucas asked the decline in market sentiment over the [ foreign ] period. Yes, it's a good question. I think the market sentiment has been against most small-cap growth stocks, particularly in the tech market, Lucas. So I don't think it's just Spirit. Spirit is certainly not an island on the Australian Stock Exchange. I think we certainly had some headwinds beyond Omicron, Delta and COVID. And then now unfortunately, there's some volatility in the market across coming out of the situation in Europe as well. So I think you've seen a more conservative approach in terms of maybe investors not wanting to touch high-growth tech stocks, that's my personal view, but obviously, do your own research in terms of how you invest as well, but that's a personal view. And clearly, I'm -- all 95% of the shares I hold in the company, I pay for, right, with my money. So I'm deeply invested as is my shareholding in this business as well. And I thank you for too good a question, Lucas. Thank you. Final question, but you're all welcome to continue, we've got 3 minutes to go, was around the Spirit X platform that came through from Chris. Chris, the Spirit X platform is still fundamental to the Spirit business. We're actually expanding that platform to have the managed services products in that, which will be launched in or, I would say, by the end of this financial year. So it's still imperative. It's just, Chris, that the business is growing so much, so larger. And the data products have seen a lot of price deflation across the entire industry. Our focus has been not just on the data products, which sit in Spirit X but selling larger services. So some of the data products, if you look at them, they were total contract value of maybe $20,000. But you're now doing deals, which are $2 million to $3 million. So it's still there. It's still functioning. It's just a very small part of the business in terms of the economics and the commercial upside that we can see. But I thank you for your question. I can't see any more questions. Kate, I don't know if can you see any more questions? No? No? Once again, Paul, I thank you for your being here. I thank investors, particularly in these volatile markets, who are supporting the stock on this ongoing basis. And as always, you can contact me directly at [email protected] or via [email protected]. I wish you well, and I hope you have a good day, and thank you for being on the call.