Infotrust Ltd (ITS) Earnings Call Transcript & Summary

Okay, James, as the time is now 2:00, I'll hand it over to you to open the meeting.

Good afternoon all. My name is James Joughin. And as Chair of Spirit Technology Solutions Ltd, it is my pleasure to welcome you to this Annual General Meeting. Today's meeting is being held virtually. Shareholders will be able to participate and view a live webcast of the meeting, ask questions and vote at the appropriate times whilst the meeting is in progress. I note that we have complied with the relevant requirements of convening this meeting, and a quorum is present. As the time is now 2:00 p.m., I formally defer the meeting open. I'm joined today through this webcast by my fellow directors: Mr. Julian Challingsworth, our Managing Chief Director and CEO; Julian Haber, our Executive Director; Greg Ridder and Michelle Bendschneider, our Non-Executive Directors. I would also like to welcome our Chief Financial Officer, Paul Miller; and our Assistant Company Secretary, Stefan Ross. In addition, Steven Bradby, representing PKF, the company's auditors, is also in attendance. And we're making himself available during the meeting to answer questions on the accounts at the appropriate time. Unless there are any objections, I intend to take this notice of meeting and the text explanatory statement sent to shareholders as read. As previously advised, this is a virtual meeting that shareholders will be able to participate in view of live webcast of the meeting, ask questions and cast direct votes at the appropriate times whilst the meeting is in progress. The format of today's meeting will be a brief tier address from myself; a presentation on the operations of the business by our Managing Director and CEO, Julian Challingsworth; to consider the business on today's agenda; we will then proceed with a Q&A session on the items of business, following which shareholders will be provided additional time to vote on the resolutions. Stefan Ross here, our Assistant Company Secretary, will now outline the procedures for today's meeting.

Thank you very much, James. As mentioned earlier, shareholders will be able to participate, ask questions and vote at the appropriate times whilst the meeting is in progress. Visitors and media are reminded that whilst we welcome you at this meeting, it is a shareholders' meeting, and you may not make comments or ask questions. We may experience some time lag, and this may cause some delay in your text questions or comments coming to our attention. We encourage you to lodge them as early as you can. Shareholders wishing to ask questions via text, please take note of the following instructions. [Operator Instructions] Shareholders wishing to speak and ask a question, an audio questions facility is available during this meeting. Please follow this process. [Operator Instructions] Prior to asking your question, please state your full name and who you are representing. Regarding voting on today's resolutions, all shareholders, proxyholders and authorized corporate representatives and attorneys of shareholders who are entitled to vote will be able to do so via the webinar hall. It is important to note that if you have launched the proxy form and voted prior to this meeting, you do not need to vote again at this meeting unless you wish to change your proxy instruction. Those proxyholders, shareholders and authorized corporate representatives who have not yet voted prior to the meeting, please cast your votes on each of the resolutions when the poll is opened. For proxyholders, you will have a summary of proxy votes, which detail the voting instructions, if any, for the items of business. By completing the voting via the webinar hall, when instructed to vote in a particular manner, you are deemed to have voted in accordance with those instructions. Where the Chair has been appointed proxy on behalf of the shareholder, James Joughin, as Chair of the meeting, intends to be voting these in favor of all the resolutions. For shareholders, proxyholders and authorized corporate representatives who intend to vote online via the webinar hall, please observe the following instructions. When the poll is declared open, a poll window will appear. To vote, simply select the direction in which you would like to cast your vote. The selected option will be marked. To submit your vote, simply click on the Submit button. You will have the ability to change your vote up until the time voting is closed. Voting on all resolutions is allowed up until the time the poll is closed. Back to you, James.

Thanks, Stef. I'll now provide some opening comments. Then I'll hand over to Julian Challingsworth to provide an update on the company's operations before we move on to the formal items of business for today. On the FY '22 results. As indicated in our recent annual report, the FY '22 year was the most difficult and challenging period for our company. We had expected strong growth after completing a series of acquisitions. However, COVID shutdowns, restructuring, slower integration impacted our financial performance, and it was unfortunate but was also unacceptable. During the year, we simplified our reporting into 3 segments, those being Collaboration and Communications, Cyber Security and Managed Services. As reported, the Board is satisfied with the performance of Collaboration and Communications and Cyber Security. However, Managed Services underperformed due to several factors, and Julian will provide more specific detail around this shortly. The Board acted by refining its target market and product offering. We believe we've addressed the issues so that the business unit is focused on delivering improved returns for our shareholders. As part of the group restructure, we had a new Managing Director, Julian Challingsworth, who has already in his short tenure had a profound positive impact on the business. He's an experienced CEO with a strong cyber industry background. In addition to Julian, we've also welcomed Michelle Bendschneider as a Non-Executive Director. Michelle has a deep understanding and experience in the IT services sector and has been invaluable in assisting with our restructure and refining our go-to-market strategy. Thank you to both Julian and Michelle. Outlook. Our 3 operating segments have underpinning sound growth fundamentals. Our challenge has been to rightsize the business and produce satisfactory returns. We are tracking to our plan, and we are confident of providing shareholders with increased value. I would now like to hand over to Julian for his presentation.

Okay. Thank you, James, for the introduction. And I wanted to welcome shareholders and the Board members who are attending today. There is no doubt that FY '22 is a challenging environment for the business with a combination of lockdowns, moving staff to work from home and managing a difficult transition period for our customers and staff across the country and in our offshore centers. This had a material impact on the company and resulted in a very disappointing and unacceptable result for the business and our shareholders. We have acknowledged the issues that we have created through previous periods and have done some detailed work to understand the problem, developed a detailed plan and are now partway through a restructuring program that will return value to the business, to our shareholders who we thank for their support through this turnaround period. The result for FY '22 included a material goodwill write-off of over $48 million. Following an assessment of the underlying value of the Managed Services, Spirit IT&T segment was [ divested ]. We've also been through a process to sell noncore wireless assets as we move away from a business and consumer model. That process will continue in the near term as we rightsize the business and identify which customer cohorts are non-strategic to our go-forward position, and we'd like to focus on the core areas that we believe we can be successful, deliver a profitable business and drive improving returns in the business. As part of that transition, we have extended our focus to include key verticals around health, aged care and education, all areas where we have a strong presence to date, but where we see continued growth and the ability to expand into more profitable, sustainable business. Throughout the process to date in the restructure, we've off-boarded hundreds of small customers that we feel we're not part of the future solution and where we couldn't extend services and products to make those customers the right fit for the business. This focus on a narrow customer base has enabled us to rightsize the business and the team. And unfortunately, through the process, we've had a number of staff changes, but we believe those changes are enabling us to return to profitability and establish a foundation for future growth. Throughout the process, there's also been significant work done in understanding which technologies will support us growing and being more stable. We've recently introduced some AI solutions into our support desk that have significantly increased our ability to improve our customer support and at a lower cost to serve, again, underpinning the drive to profitability in the Managed Services business. For those who may not have seen the structure in the breakdown of segments, you can see, as part of our process of improving shareholder transparency, we have broken the segments out from 1 segment to 3 CGUs. As James mentioned, Collaboration and Communication, which is the part of our business that focuses very much on the small and medium enterprises and provides them with voice and collaboration and technology solutions that are appropriate for small businesses. This has been a very strong part of the business and continues to be strong in the current environment, contributing the majority of our underlying profit before tax and having very strong margins to 24%, 25%. We also have a very strong and capable Cyber Security team that has been continuing to grow, continuing to support the business and will enable us, over the next 12 months, to bring some of those cybersecurity services down into and support the Managed Services team. Key initiatives underway at the moment are enabling us to bring some of that capability down into that market as hugely topical for all types of businesses to be improving this type of capabilities. And over the next 12 to 24 months, we see significant growth in this area and opportunity to expand our cyber capabilities. The only area that has given us the most concern is Managed Services, IT&T. This is a part of the organization that came together through a number of acquisitions. And it was the integration of those acquisitions that has created some problems. Broadly speaking, the product portfolio was too complex. The integration of the back end needed significant work, and that has been a key focus. And we needed to ensure that we have the right level of staff in to have a profitable organization. If I touch on some of the key points that have -- key highlights for each of the areas. Within the Collaboration and Communication area, you can see very strong growth, 143% year-on-year. And we were recently awarded Cisco's Partner of the Year for Communication and Collaboration, not just for Australia, but for Australia, Asia Pacific, Japan, China, and it's something that the team is very proud of. And we continue to develop and build on our relationship with Cisco and roll out their technology. FY '22 did suffer, as you can see, from COVID there with the offices closed. But as soon as we were back at work and back at full strength, you can see a significant uptick in revenue. That growth in revenue has continued into the current year, and I will touch on that in a second. Cyber Security, as you can imagine, very topical for everybody, strong demand in the cybersecurity market, strong demand for the support and services that we can provide through our 24/7 SOC and a great team that continues to win large contracts to the sites. I see the Cyber Security team as a key base for extending its services and capabilities and namely Spirit to deliver highly valuable services into our customer base over the next 12 to 24 months. I think the challenging area, as highlighted by James and myself earlier, is Managed Services. And we have really introduced a restructuring program into that team and really focused on getting this right. We know this is a drag on our results, and we have a clear plan to address the issues within this environment and make it a sustainable part of the go-forward profitability of the organization. Through '22, there was a divestment of the noncore assets, the consumer and fixed wireless, which returned net $18.5 million of capital into the balance sheet to enable us to pay down some debt and support the restructuring program that we're undertaking. Significant program of work to reduce complexity in this business. It has been way too complex. And we've really started to streamline the processes, the number of systems needed to support them and the number -- the diversity of products that are sold within that team to focus on the things that we are very good at, so things like Microsoft Modern Workplace, our relationship with Cisco Networking and the other key areas around introducing the capability of Cyber Security team, although our [ finite team ] can see it's something that is well progressed around the Microsoft security platform. There is no doubt in that area. I've touched on some of the issues. We had some underperformance around some of the products that we acquired. We had supply chain challenges with chips and hardware being delivered on time, but we see that as being resolved and returning to normal supply chain over the next calendar year. As part of the restructure, we also had some churn in the sales team, and that had an impact on the customer experience, but we now have a stable sales team that has been nationalized and delivering some really solid pipeline across the next 12 months. You can see from this slide that we've moved to segment reporting, really trying to help our shareholders understand that there are significant parts of the organization delivering real value. You can see from there, Collaboration and Communication, outstanding results for that team and really good margins of 24.5% there. Cyber Security, a significant part of the operation, delivery of solid margins, but really as a platform for where we need to go. This will underpin the part to turn around the Managed Services, IT&T. Results there, a significant impact by an impairment. Having reviewed the acquisitions and looked at the carrying value of goodwill there, there was a noncash impairment of $48.4 million, a final charge now that we've considered the carrying value of both those assets. Overall result at a loss of $53 million reflects a challenging period and underpinned by or took the restructuring program to make the changes that are needed to return value to the shareholders. As a view of where we're going today, as James mentioned, the restructuring plan and the plan for the group for the first 4 months has delivered to expectations. So if I look at the actual revenue by each of those CGUs, you can see that Collaboration and Communication has achieved $15 million, puts them squarely on track to deliver the full guidance that we provided earlier in the year. Cyber Security has delivered $9 million. You need to know that in Cyber Security that the number has some seasonality in it because we typically have a very strong December, which is not included in these months, and a very strong June. So it makes it challenging just to divide the numbers and roll them out. But Cyber Security on track to deliver the results even while facing some challenges that the entire market is facing in attracting and retaining the right level of talent. Managed Services, strong revenue, growing 30 -- $20 million delivered in the first 4 months, but mainly significantly pleasing elements of that is the amount of revenue that has been delivered from strategic product sets going forward in the Microsoft Modern Workplace area. We have a strong pipeline in Managed Services, which is currently sitting at circa $19 million of that type of work, and we see the cost base being rightsized through the restructuring process to achieve the targets that we set ourselves for the full year. And as group, EBITDA level, we're still targeting $8.5 million to $9.5 million, so confirming the guidance. Importantly, it's not just about FY '23, we really have an eye on FY '24. And we'd like to exit FY '23 with a minimum 10% EBITDA run rate for the group. So it's not just cost-out program for this year. It's about building the right foundations, the right product sets, the right capabilities and the right back-office costs to deliver sustainable growth for the business and for the shareholders as we move into next year. So look, I think when you're in a restructuring, you tend to focus on what isn't going well, but a lot has happened throughout the year that has been really positive. As I mentioned earlier, within the Collaboration and Communication team, awarded Cisco Partner of the Year against 1,000 other partners and very big brands in there. So something that we are particularly proud of. Solid customer book building, almost 6,000 customers. And regional expansion that happened during the period into Melbourne has proven to be very successful. It became profitable within a very short period of time, and that team continues to establish and grow their presence across [ Victoria ]. Cyber Security, ongoing demand for cyber services, more recognition of the team and their ability to deliver to enterprise and government clients across the nation. And continued recognition for excellence from our cyber partners and the customers and the feedback that we get. Recently, NPS score for that was outstanding at over 70, which is something that's difficult to achieve and sustain, but something that the Cyber team has been able to maintain with their customers. Managed Services, we've touched on this, rightsizing the IT services headcount back to revenue and align with future product road map. Simplification program, producing 42 systems down to 6; 10 brands down to 2, and we aim to get that down to 1 in the next 12 months and. And off-boarding of hundreds of unprofitable nonstrategic accounts. So a lot of work achieved in a short period of time. And I thank, Paul, my CFO, and the broader team for the work that's happened to achieve that. A lot more still to do for the remainder of FY '23. Within Collaboration and Communication, we're looking at new geographies and how we can extend the lessons we learned in Melbourne and continue to grow that team. Our key point is identifying new market offers and solutions to sell. Very strong customer base and being able to take new products into that customer base will help us with our organic growth. And to keep just focusing on growth and executing the plan for a team that is working very well. Within Cyber Security, some key opportunities there to take their capability and their first-class services down into our Managed Service, IT&T, customer base. For us, the sum of the parts need to be greater than the individuals. And to date, there have been quite distinct groups. There's a real program of work now to do some integration and deliver outcomes that leverage the skills and customer base of both parts of the organization. We'll look to expand our team into Melbourne. And we've got a significant program around aligning with Microsoft cybersecurity capabilities because of the success that Microsoft is having in the marketplace in cybersecurity. So we need to be behind that and aligned with that as well. Managed Services, we continue on the restructuring program. We are looking to transfer some nonstrategic customers and the associated costs with supporting those customers to a third party. This will accelerate our return to profit, and we hope to have that done in the very near term and make an announcement to the market when that's achieved. We'll continue to focus on Modern Workplace. This is an area of significant opportunity. There's more and more organizations who understand the value proposition and moves there. And we'll continue to relentlessly work on streamlining the back office, getting the processes right, lowering our cost to serve. And that's included some investment in some AI technologies that are having a material impact on how we support our customers and reducing the number of customer service agents we have in that area. So that was all I really wanted to say as a formal update, but I'm happy to take any questions. And Paul Miller, the CFO, is also online and is able to take any financial questions for anybody in the audience.

Thanks, Julian, for that presentation. So before we begin the formal business for today, we will address any questions that the audience might have on the operations of business in general. Shareholders are now advised to ask general questions in relation to the operations of the business. Stef, did we receive any written questions? Or does any shareholder wish to ask a general question about the business?

No questions received at this time, James. Thank you.

If that's the case, so we'll now move on to the formal business of today's meeting. We will now open the poll. Shareholders and their representatives may cast their vote as and when the resolutions are being addressed. I wish to remind shareholders that the poll remains open for an additional minute or 2 after we have considered all resolutions. I now declare the poll open. I'll now refer you to the first item of business as set out in the notice of meeting. If you have a question on this item of business, please follow the question process, which was previously outlined by Stefan. We will now address your questions after the last resolution. The first item of business pertains to the receipt and consideration of the financial report of the company, together with the Director's Report and the Auditor's Report for the year ended 30th of June 2022. These items are contained in the annual report, so I'll ask that they'd be taken as read. The annual report is available on the ASX announcement platform or on the company's website. The Corporations Act requires accounts and reports to be laid before the shareholders at the Annual General Meeting. However, except as set out in Resolution 1, to be considered later, there is no requirement for a vote of the members to be taken on them. No written questions to the auditor under Section 250PA of the Corporations Act were received by the cutoff date, 5 days before this meeting. Questions may be directed through myself to the auditor in relation to the conduct of the audit report, the company's accounting policies or the independence of the auditor. As this matter does not require a vote, we will now move on to the first resolution. Resolution 1. First resolution pertains to the adoption of the remuneration report. If you have a question on any item of business, please follow the questions process, which was previously outlined by Stefan, and we will now address questions after the last resolution. I now propose that shareholders consider and, if thought fit, pass Resolution 1 as set out in the notice of meeting and is displayed on your screen. Remuneration report is set out in the Director's Report in the company's 2022 annual report. The remuneration report sets out the company's remuneration arrangements for the directors and key management personnel of the company. The vote on this resolution is advisory only and does not bind the directors or the company. With respect to this item of business, the following proxies have been received, as outlined in the presentation: in favor, 96.82%; against, 2.95%; open, 0.23%. I move that shareholders consider and, if thought fit, pass the ordinary resolution. I now refer to Resolution 2, which pertains to the reelection of Greg Ridder as a Director of the company. I now propose that shareholders consider and, if thought fit, pass Resolution 2 as set out in the notice of meeting and as displayed on the screen. In respect to this item of business, the following proxies have been received, as outlined in the presentation: in favor, 97.19%; against, 2.59%; open, 0.21%. I move that shareholders consider and, if thought fit, pass the ordinary resolution. I'll now refer to Resolution 3, which pertains to the election of Michelle Bendschneider as a Director of the company. And I propose that shareholders consider and, if thought fit, pass Resolution 3, as set out in the notice of meeting and displayed on the screen. In respect to this item of business, the following proxies have been received, as outlined in the presentation: in favor, 98.78%; against, 1.01%; open, 0.21%. I move that shareholders consider and, if thought fit, pass the ordinary resolution. I now refer to Resolution 4, which pertains to the election of Julian Haber as a Director of the company. I now propose that shareholders consider and, if thought fit, pass Resolution 4, as set out in the notice of meeting and as displayed on the screen. In respect to this item of business, the following proxies have been received, as outlined in the presentation: in favor, 98.01%; against, 1.78%; open, 0.21%. I move that shareholders consider and, if thought fit, pass the ordinary resolution. Resolution 5 pertains to the approval of the Loan Funded Share Plan. I now propose that shareholders consider and, if thought fit, pass Resolution 5, as set out in the notice of meeting and as displayed on the screen. In respect to this item of business, the following proxies have been received, as outlined in the presentation: 95 point -- I'm sorry, in favor, 95.33%; against, 4.46%; open, 0.21%. I move that shareholders consider and, if thought fit, pass the ordinary resolution. I now refer to Resolution 6, which pertains to the approval of the loan to the Managing Director. I now propose that shareholders consider and, if thought fit, pass Resolution 6, as set out in the notice of meeting and as displayed on the screen. In respect to this item of business, the following proxies have been received, as outlined in the presentation: in favor, 95.27%; against, 4.52%; open, 0.21%. I move that shareholders consider and, if thought fit, pass the ordinary resolution. I'll now refer to Resolution 7, which pertains to the ratification of the prior issue of 8,219,178 shares. I now propose that shareholders consider and, if thought fit, pass Resolution 7, as set out in the notice of meeting and displayed on the screen. In respect to this item of business, the following proxies have been received, as outlined in the presentation: in favor, 99.19%; against, 0.60%; open, 0.21%. I move that shareholders consider and, if thought fit, pass the ordinary resolution. I'll now refer to the final item of business, Resolution 8, which pertains to the approval of the 10% placement facility. I now propose that shareholders consider and, if thought fit, pass Resolution 8 as a special resolution, as set out in the notice of meeting and as displayed on the screen. In respect to this item of business, the following proxies have been received, as outlined in the presentation: in favor, 98.02%; against, 1.77%; open, 0.21%. As this resolution is a special resolution, it requires 75% of votes cast to be in favor in order to be deemed as passed. I move that shareholders consider and, if thought fit, pass the special resolution. We'll now go to shareholders' questions. Stef, did we receive any questions on any resolution? Or does any shareholder wish to speak to any of the resolutions?

Thanks, James. Yes, we do just have one question that's been received. Can you please explain -- can you please expand on CapEx going forward and debt levels currently?

I'll hand that over to Julian. It's operations.

For sure. Thanks, James. I'll take the first half of the question and then refer the second half on current net debt to Paul. But I think one of the big transitions that has been made post the disposal of fixed wireless network is that we have a lot less CapEx to sustain the business. The majority -- vast majority of the business and the revenue is professional services or sale of equipment that doesn't require CapEx to sustain it. So you'll notice from previous years, we would have had material depreciation and CapEx required to sustain the business. That's no longer the case. And part of selling the fixed wireless network removed the noncash associated with the depreciation and the sustaining CapEx. So moving forward, it will be a couple of million dollars to support infrastructure for the business, but it won't be the material cost that it previously was. I'll hand over to Paul for the current position on net debt and where we are with that. And we have good support from the Commonwealth Bank to sustain our ongoing facility with them.

Yes, thank you. Thank you, Julian. As of the end of October, our net debt was circa $10 million. As was disclosed on the balance sheet at 30 June 2022, the company has ongoing contingent consideration liabilities in relation to certain earn-outs. So there will be some ongoing need to draw down that debt facility. But as Julian indicated, the company and the group has a facility within the CBA that's supporting that requirement moving forward.

Thank you. Any further questions, Stef?

Nothing else at this time, James. Thank you.

Good. If that's the case, but given the [indiscernible] for the purpose of this meeting, I'll now provide shareholders sufficient time for poll voting to be completed here.

Thanks. Probably, we'll just give you another 30 seconds, just ask while you're call waiting. James, just before we do close the poll, we just had one other question come through. Given the considerable trend towards digital transformation through every level of the economy and associated service requirements such as cyber, what grounds has the Board to believe that Spirit has a credible competitive advantage, if at all?

Go ahead, Julian. It's a topic that is...

I think -- well, there's a number of factors that give us a competitive advantage. One is a hugely skilled workforce across those 2 domains. The majority of our revenue comes from a digital transformation or hardware associated with supporting digital transformation. We see a key element of what organizations are asking for is secure digital transformation and not just looking at the technology, but embedding the security elements by design into that transformation. And that is what we have built our market offer around. We are one of the few managed service providers that would have a true 24/7 eyes on glass cybersecurity capability. And we're gold partners across the board with Microsoft, who are really underpinning that transformation for most organizations. We have significant capabilities here in cloud and helping organizations move to Azure in the cloud and strong presence currently across health, education, aged care with some clients in mining and services, so not to mention our presence in government, in state government, not federal. So I think we have the core competitive advantage elements coming together perhaps in a different way to our competitors who didn't have the strength in cybersecurity and didn't have the customer base such that Communication and Collaboration has, where they're regularly touching 5,800-plus customers. So it gives us a really strong position to be meaningful in that transition as organizations undertake their digital transformation.

Yes, back to you. And that's the last question, and could you close the poll?

All right. As additional time is now up, I declare the poll closed. Once the poll results have been processed, we will announce the results later today on the ASX market announcement platforms. Ladies and gentlemen, that concludes the formal part of the meeting. Since there's no other business that have been put forward at this meeting, I declare the meeting closed. Thank you for your attendance, and we look forward to your continued support. Thank you.

Thanks, everyone. I'll now end the webcast. Thank you.