Kinatico Ltd ($KYP)

My name is Craig Sharp. I'm the Company Secretary here at Kinatico. For your information, this session is being recorded. It will be available online later. [Operator Instructions] Before we get going properly, I would like to acknowledge the Traditional Owners of the various lands on which we meet here today. Personally, I come to you from the lands of the Whadjuk Noongar people, and I pay my respects to their elders, past and present. Can we go to the next slide, please, Tom? This is a standard disclaimer, but it's still, nonetheless, remains important, as I tell everyone, every webinar. These results we are presenting today are unaudited. Any estimates and forward statements that we make are based on assumptions that we believe to be reasonable but may not hold true in time. Always take your own investment advice before making any investment decisions. Can we go to the next slide, please, Tom. We have a very brief agenda today. We've kept it short and high level. We have -- we're going to review the results for the most recent quarter. We will talk a little bit about the sales update and where we're placed. We will talk about the comp market in wider context. And we will, of course, be updating everyone on AI and our involvement with AI. So with that, I will now hand over to our Chief Financial Officer and Corporate Development Officer; Jason Margach. Over to you, Jason.

Good morning. Thank you very much, Craig. As to really and truly reflect on the quarter that passed, I think it's pertinent that we pause and consider the contributing factors that have driven such immense turbulence in our market. We saw the peak of the SaaS coupler mid-quarter, we saw the commencement of the Iranian invasion late into the quarter. Against this backdrop, why are we different? Goldman, Bains and Gartner highlight the compliance is excluded. Kinatico operate within a regulatory-driven environment, which is deemed nondiscretionary. Countercyclical, of course, is uncertainty will increase demand. We have 12 months of deployed native AI in our solutions. We are not a road map status. Affirmation further emphasized by the Deutsche Bank in March that highlighted that vertical compliance software companies are structurally protected. So how did our results for the quarter validate this difference? Well, we grew to $5.2 million SaaS revenue. This is a 27% increase on prior corresponding period. We grew our existing SaaS customer base by 10%. We continue to demonstrate our operational leverage at our EBITDA level for the quarter being $1.3 million or 30% up on the prior corresponding period. Next slide, please. Our delivery has been consistent across consecutive years. This is not a single positive period result that we bring to you this morning. Our SaaS revenue at 61% is now contributing a material majority of our total revenue, which, to emphasize, is now annualized at $20.6 million, which is also a first time for us that we've exceeded this $20 million mark. Operational leverage, again, highlighted in our EBITDA growth of 30%. This is against a backdrop of a 5% overall revenue growth. But let's unpack this 30% operational leverage for a second. How did we achieve this? Well, it was achieved through the foundational strategy that we've deployed. We will continue and have in the past looked at both the front and back end of our business. We remain committed to ensure that every single dollar of sales that we generate equates to a dollar of margin we enjoy. I would like to now hand back to Michael, who's going to take us through momentum on our sales pipeline. Over to you, Michael.

Thanks, Jason. So as we can see, despite the clear global effects and the macro conditions that we're seeing out there, the statement that Jason had in his slides about the countercyclical nature of demand has been reflected in the fact that the pipeline for KC has continued to grow. We have seen -- and it's only been 5, 6 weeks relatively since we did the half year update, that the pipeline has now exceeded $12 million. What we've also seen within that is that it has come from a number of new sectors, not previously targeted by us amongst our 4 key ones of industrials, aged care, health care, disability care, higher education or government, and that these are organizations that have approached us with requests for proposals, direct inbound. And with an increasing size and quality of those opportunities, these are from organizations that traditionally have not considered Kinatico in the realm of the initial nature of our products didn't potentially meet the complexity of their situation with a myriad of subsidiaries, supply chains, various constructs of contractors, volunteers, workforces, et cetera. And what have we've been able to do and now responding and in the process of that sales process with these larger opportunities, we're now playing an entirely different game that we haven't been up to being able to access in the past. So we believe this puts us in a very good position. Next slide, please. One of the things that are driving that, the -- first of all, is economic uncertainty in the workforce diversification. Seeing the complexity that's going on, increasing contractors, casuals outsourced roles, uncertainty within organizations, as it turns out, is actually an opportunity for us to highlight the need for getting one thing off the table of concerns and issues currently running for organizations in making sure that they are compliant. At the other time, we see a number of new regulations coming into force. From July 1, we have 80,000 new entities coming into our addressable marketplace with the requirements for anti-money laundering monitoring and management across the Tranche 2 organizations, so that includes things like real estate agents, accounting firms, lawyers, firms. All of these areas that traditionally may have considered their requirement simplistic increasingly are falling into the same requirements overall as every other organization. And for us, anti-money laundering is fully automated inside KC. Results within seconds gives these organizations the ability to not only meet that requirement that they're now obliged to do, but also the -- all of their other requirements become covered by that at the same time. The hybrid and distributed workforce, we increasingly see as that plays out in the marketplace of what is required also. An organization's obligations do not cease or reduce just because a worker is not physically located in their office, et cetera. Working from home has exactly the same, if not increased requirements. And then as mentioned previously in terms of the pipeline growth, the interest across all enterprise sectors we're seeing and sharing today that the one that's actually started coming in at a statistically significant volume across the pipeline is childcare centers. It's always been an awareness of target. But certainly, we're now seeing a number of them that have come in. So if I could move on to the next slide and pass back to Jason.

Thanks, Michael. We've acknowledge the macro environment, which is showing signs that the hiring market is softening. Our new indicators point to a potential near-term downturn in the preemployment screening volumes. These volumes had a real and direct bearing on our transactional revenue stream. And to this end, we do see that -- we foresee a short-term downturn in the revenue. In addition to a potential downturn in transactional revenue, we also expect to see continued external delays in closing those enterprise compliance solution sales. But this is not specific to us at Kinatico, taking a look at some macro factors, current consumer confidence has fallen from 84.5% to 58.8% by the end of March. Which for context is that an all-time low. 95% of businesses surveyed by the ACCI in April were reporting fuel prices do and are affecting the operations, 43% faring a lower consumer spending. Enterprise CFOs are now required to sign off 79% of purchasing decisions. This is up from 45%. Enterprise sales cycles have increased. Sales cycles Increased by 25% to 134 days. This is the environment in which we now operate. But despite this, as we have highlighted, our qualified pipeline and opportunities continue to grow quarter-on-quarter. We now exceed $12 million. Allow me to hand back to Michael, who will take us through the real important bit of how we're going to navigate through these challenging times. Mike?

Thanks, Jason. So why are we confident? Not only do we see the opportunities in continuing to grow, as I've outlined, the regulatory tsunami of additional things that are coming through, Payday Super is another one, the operational systems overhaul required across all compliance requirements with organizations is only exacerbated by yet another example of that regulatory wave being Payday Super. Whether it's the penalties and modern slavery laws and WHS enforcement regulations that we're also seeing on the horizon. And this countercyclical logic, the uncertainty, more contractors, casuals, more compliance complexity. So why are we confident around that? Well, because we're seeing the feedback from the market and where we're at. To address some of the questions that I see coming in already, do I see any back any barrier remain to convert some of these larger deals in the pipeline? No. In fact, we have gone through and addressing the RFPs in the discussion of that selection process. So going through it, we have seen that and the feedback is very strong that we've met every requirement. What we're seeing and what Jason has touched on them is that potentially there is an increasing in the time lag to actually get that final decision on the Board. So no, we do not see any barriers. In fact, we're quite bullish and confident about it. What is the current game that is just outside of our control is potentially a delay in actually getting that signature and that signing across the board. The -- where we've seen to answer another question there about -- of the pipeline, the conversions, we've been saying all along since launch, we'll provide details around that at the end of the fin year. What I will share today is the numerous of the large opportunities have continued to progress through that sales cycle to increase and get to that decision point. The other thing that we're seeing in the market and the results in KC, what I can share is the ongoing proof in point of entry and sign-ups of SMBs into KC and the proof point of the self-service and the config. We've been able to prove, even to the large enterprises going in there to the demonstrations, et cetera, a platform configured to their exact requirements to their exact infrastructure for their first demo. That was something that was unheard of for us before. And then in terms of our corporate position, we've always demonstrated disciplinary OpEx -- discretionary OpEx discipline. And we've seen that in the way that year-on-year, the management of costs and stabilizing of costs while revenue has continued to grow. And that is the thing that is driving that situation that we see a 30% increase in EBIT, while on a 5% increase in revenue. The AI automation that I'll talk about further and the things that we've already been doing and have already talked about are already having an effect there. For us, AI is not as I've discussed before, is not a -- yes, we're doing it also. It's been foundational. It's fundamental to the way we've approached KC. It's fundamental to the way we manage the organization. The ROI for us is twofold: not only the velocity, quality and type of customer features, but leveraging AI in our operations to actually further increase our operating leverage. We do all of these things starting from a base where we are a cash accretive profitable company with $10 million in the bank. And so what does that mean? And fundamentally, what we're going to do for the next -- or this quarter now that we're into it and actually what's going to happen is we're not doing anything to reduce speed around KC development. We're not going to reduce any of our marketing spend or portion. In fact, we're going to double down. We have the ability to do that. We have the ability to go after it. The demand is there, and we want to continue to build that to ensure that as we get through these short-term timing issues, et cetera, we'd really take advantage of the opportunity that is in front of us and the foundation that we have. And we're also not going to pull back from any kind of distribution development across third parties actually distributing KC, whether via white label or other type of agreements. So the net reality is that the macro pressure makes compliance more critical. The requirements don't pause for any kind of geopolitics. And if anything, a further point that the position of Kinatico and going after compliance and with our USP being the fact that we save companies time, we give them visibility, this is -- we remove the complexity from managing compliance, it resonates very strongly and is further reinforced by the fact that we see the growth in SaaS despite the challenges on the global macroeconomic situation in terms of what it may affect short-term transactional revenue moderately. So the -- it really is a reinforcement of the reason why we have the company heading in the strategy that we have made. And for us, it's further reinforced, it's exactly the right thing to do. Next slide, please. Getting on to the AI, very excited to share detail on this development. We've talked previously about some of our custom AI engines or large language models that we've developed not reliant on any one of the major players. This isn't a license thing. This is something Kinatico owns. This is something Kinatico developed based on our knowledge in the industry, based on the proprietary data access we get. And we have developed this from scratch. We own it, it's ours. This is an LLM that is able to recognize and process in document. It is not just OCR. It is intelligent. Here, we have the example on the screen where we have a birth certificate from somebody born in the 1800s, and the creases across the paper, et cetera, et cetera. The LLM is able to actually recognize what it is and extract the data for automated processing. The key to this is that this solution does not require training. Traditional methodology around this would be to provide hundreds or thousands of samples of these type of documents to train the LLM on what it was actually doing and how it worked. And then over time, its accuracy would increase. We have put the logic in here that it is able to read and recognize any document from scratch. Not only that, it supports multiple languages. Circa 15 day 1, including Chinese, including all of the languages of target markets where we have aspirations to expand into. So the idea that not only for us internally, we can actually have the processes that automates and expands the ecosystem of credentials and documents that can be processed, we also, though, have the customer benefit where all of your proprietary internal things that you may use, and it's astonishing how many legacy type cards and credentials are used across organizations today, all of a sudden can be tracked and monitored for expiry dates, renewal requests, requirements, updates, et cetera. So not only do we have a customer impact of manual entry going from hours to second, things that literally couldn't be supported in the past, finally automated. But for us means there is effectively infinite scale without adding overhead or people overhead. This is a material development. It is the example of not something that needs thrown together and is a concrete evidence of the point of how long ago we started our AI development. Next slide, please. The next one is the previous example, really customer-facing and now the operational leverage example. The -- we've now have on our org chart virtual verification officers. These AI agents effectively appear on the org chart, managed by department managers, can be allocated as resources to process verifications and targets of where you have repeated tasks of going and extracting information from our restricted sources, et cetera, processing and positioning and assessing it, et cetera. It all fits within our AI mantra internally in Kinatico of human-led AI. We are dealing with people's sense of information every day all day. And ensuring 100% accuracy, ensuring security, et cetera, always remains our highest priority. So while we leverage AI wherever we can, we have a very strict mantra of there's always people-led AI. What this means for us though is that this is the next stage of our efficiency gains in our EBIT expansion. We've already achieved very strong growth in that area. This is the thing that drives the next stage. And we believe or we know that we will see the effects of this in the coming financial year. So not only does this improve our operating leverage, you get a faster turnaround time for customers. This operates on 24/7, on weekends, no toilet breaks. It's a material move. And again, this is something that we have developed with our domain expertise because we have access to data and then utilizing AI. So AI is not the differentiator, it's the way we use it and what we do with it. So to sum up before we get into questions, next slide, please, Tom. For us, this is about disciplined growth through global uncertainty. We'll continue to expand at KC. And the marketing at pace, very much protecting our margins and our end-of-year results and our leverage. Our targeted NPAT, our targeted cash accretion, our targeted EBIT, we have plans in place should there be short-term revenue effect that we will maintain our targeted outcomes, and we're confident around doing that. The -- but having said that, we also believe, with the strength of the SaaS, et cetera, we're somewhat insulated from effects for many other companies, I think, where they're materially affected.

So the questions there to move on. I've answered some of them already as we go. But the has -- one is has the transactional revenue already being impacted. I would say, yes, a little bit. We, as an organization with where we're positioned in preemployment, particularly have very strong lead indicators to the economy overall. And what we're seeing across the board, I would say, is a decline of economic activity and hiring and -- or companies pulling back and pausing activity. And so there was an effect of that in the Q3 numbers for the transactional revenue, and we expect more of one in Q4, as I say, as a function of that economic activity. The -- another question, can I provide examples of white-label opportunities? So there's -- we've been in discussions with and they continue whether it is industry organizations, whether it is other large distributors in the RegTech space of adding our compliance solution to their overall offering or it is the type of -- I hesitate to use the word consultancy firm, but that sort of encompasses it up overall -- that all of those pieces of where we get that added value chain of all of the business systems required within an organization without necessarily having to offer all of them. So partnerships with HRIS and payroll companies, they're all the type of examples of white-label themes. There's a focus on defining margins is laudable, but does that imply the business is struggling to actually grow NPAT margins? No. The -- we, in fact, target very much both of them and actually looking to grow both across the board. When we look at how we measure the indicators of performance, we often talk about EBIT. But there is no question that ultimately NPAT margins is a key target. The general question of are we confident of our trajectory? Absolutely. It's the -- on both historical reference of the achievement and the growth of taking the company to be where it is in terms of its growing, having a product in market that is in demand that we've developed is already developed for the AI age. We're already cash accretive, and we're in a position to grow from there. The -- so there's -- I would simply say the confidence internally is the highest it's ever been. The question, are we seeing a runoff in CV Check? Do you expect this to stabilize or continue to decline? Well, it's a question we obviously get a lot. And I wouldn't confuse any short-term macro effect with the overall view. We've said for some time, and that is our position. Transactional revenue is going to stabilize at $15 million to $16 million per annum. And some of that ends up being converted. As we take customers into the SaaS chain and will get replaced by new customers coming in, but that's about the level and size of that business. We may see a short-term effect, but that is not structural, that is not indicative of that business space. It is a direct effect of the almost daily change we're seeing to the macroeconomic condition in the short term. Do we still plan to go internationally? Absolutely. Again, whether the timing is affected in the short term because of everything that's going on and whether this, in this climate, is the right time to expand or push the button on that expansion is a question. But our plans and development around our international expansion actually is accelerating. So you'll notice some of you who are more attentive may have noticed at the beginning of this call that Jason's title had changed. Now Jason, traditionally being CFO and COO has given up the COO functionality with Odelia Sarre taking over as COO because Jason is focused on corporate development, which includes international. And that, in itself, is our -- is the indication of the seriousness with which we take it and how we look at it. Another one is when we talk about longer sales cycles for enterprise, is it a budgetary issue? Or is it product functionality? I'd say neither. It's a focus issue internally in those organizations. When they have plans afoot to make decisions and start rollout plans, we are being told things like we're going to speak to you in a couple of weeks because the CFO wants us all to redo our forecast budgets internally to see what costs we can save for the next couple of months. So it's the fact that they're engaging in a transparent way around those things about the timing effect is very significant. The -- but it is universal from the data that Jason shared, that organizations right now are moving into a phase of risk planning in the event that global situations actually decline further. The other -- one of the other questions, I think the last one, I don't think I've answered is the -- have we converted some of the larger deals in the pipeline that are pending to go live yet to show up in the ARR? Yes, there have been some of the historical deals that we've signed previously that have now gone live and driving the start of that uptake in the SaaS is the short answer to that, and mentioned in terms of KC wins been consistent, and I'll continue to say we'll share more detail about that at the full year results. And I think that answers all of the questions. Craig, back to you.

Great. Thank you all for attending. As previously advised, a copy of this will be published online on our website in due course. Thank you all for attending. Have a very good day.

Thank you very much.

Thanks, everybody.