Senetas Corporation Limited (SEN.AX) Earnings Call Transcript & Summary

It is now 10:30 a.m. This is a properly constituted meeting and the quorum is present. I, therefore, declare the 2020 Annual General Meeting of Senetas Corporation Limited open. I am Francis Galbally, Chairman of Senetas. Today's meeting is being held online by the Lumi platform. This allows shareholders, proxies and guests to attend the virtual meeting and to watch a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and [Technical Difficulty] automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. Please submit your votes at any time. I will give you a warning before I move to close voting. In attendance with me today are my fellow Directors, Lieutenant General Ken Gillespie, Retd.; Phil Schofield; and Lachie Given. And I'd like to thank them for their efforts over the past 12 months. I would also like to welcome and thank our CEO and Managing Director, Andrew Wilson, for his leadership, and his and his team's efforts for the past 12 months. Andrew will be giving a presentation immediately after this address. I also thank our Chief Accountant, Lauren Barker, and our engineers and innovation team ably led by John Weston, Julian Fay and James Baird for their continued innovation and product development. I thank our marketers for developing the material to best present our products. And finally, our business development team and global partner, Thales, and its team for their efforts. I also welcome our Company Secretary, Brendan Case, and thank him for his assistance over the past 12 months. The 2020 financial year saw some significant milestones for Senetas as we continued to build our platform for sustainable revenue growth. Senetas has been producing world-leading Ethernet layer hardware encryption devices for many years now. And whilst those products will remain a critical feature of our business going forward, we recognized some years ago that the relatively narrow market of customers that require such high-speed and high-assurance devices was not going to drive the business growth that the Board expects. Our objective has been to use Senetas' outstanding engineering and innovation skills to develop a portfolio of security products that meet a wider range of customer needs and geographies, broadening our revenue base and deepening our relationships with customers. The results of this heightened focus on realizing growth opportunities has seen the development of new products and capabilities in recent years that we are confident will provide significant revenue growth for Senetas into the future. These include: the development of the ultrafast 100-gigabit high-assurance encryptors for mega data networks; network-independent encryption capabilities for our hardware devices that now have the capability to encrypt across both Ethernet and Internet networks; custom algorithm devices targeted at the Eastern European market; virtualized for software encryption products scalable to thousands of endpoints across wide area networks; and SureDrop for encrypted file sharing and collaboration. Senetas is continuing to innovate in order to ensure that its customers can be assured that its products are best of breed and capable of protecting data in motion from both present and future threats. We will have more to say on these developments in the coming weeks. During the 2020 financial year, Senetas also moved to a controlling stake in Votiro, the producer of patented content, design and reconstruction technology solutions. Ransomware attacks are one of the greatest cybersecurity threats the world is facing, and the capability of Votiro's file disarmer product to protect users against most ransomware threats is driving significant customer interest from both commercial and government customers. As a sign of the strength of our relationship and the regard in which Senetas' products are held, our global distribution partner, Thales, has agreed to take on distribution of all these new products, providing Senetas with distribution in up to 68 countries worldwide and a sales force of more than 400. Whilst the vast majority of Senetas' revenue in the 2020 financial year was driven by our traditional hardware encryption devices, we expect that these new products will begin to make much more significant revenue contributions in the coming years. Andrew Wilson will provide a more detailed operational update in his CEO presentation shortly. However, already in the 2021 financial year, we have seen our largest ever sale of 100-gigabit devices and our first SureDrop and custom algorithm device sales. Encouragingly, all of these sales were to customers who until recently had not been users of Senetas' products. Our challenge is to ensure we harness the strength and reputation of our global partner, Thales, to make use of their country and customer coverage to drive a significant increase in sales. Whilst COVID-19 has been disruptive from a travel perspective, Thales and Senetas have used the opportunity to plan how to deliver significant growth in sales. As a result, a number of new initiatives have been introduced, the most important of which is the establishment of a cross-business unit sales group to ensure Senetas' encryption solutions can be embedded in large projects undertaken by Thales business groups apart from CPL and TCT, which are our traditional Thales partners. We are starting to see benefits from this new initiative. Cybersecurity is a topic receiving increasing global attention and continues to present Senetas with further opportunities for growth. The Board has determined that Senetas will continue to identify and deliver on these opportunities to grow our business using the capabilities of the Senetas' engineering and innovation team to deliver and develop high-assurance security solutions that meet our customers' needs. Whilst we continue to remain somewhat cautious about the short-term outlook in the current economic environment due to the impacts of COVID-19, the 2021 financial year has commenced strongly for the business, and I remain very confident about Senetas' future and its ability to deliver returns for shareholders. Now I'd like to hand over to Andrew Wilson for his CEO presentation.

Thanks, Francis, and welcome, everybody, to the Senetas' AGM. This morning, I'd like to take you through some operating and financial highlights for 2020 and talk a little bit about the developments in 2021 year to date. Next slide, thanks. Operating revenue in the 2020 financial year was $22.6 million, up 6.1% on 2019. That revenue included $2.8 million contribution from Votiro for the period after it became a controlled entity in November last year. Gross margins for the group were up slightly to 87%, in part reflecting gross margins from the Votiro business. Operating profit before tax for the underlying Senetas business was up 4.8% during the year, excluding Votiro. The consolidated group loss after-tax for the year was $3.6 million, taking into account the results of Votiro. Net assets were up 3.1% for the year, and the cash balance ended the year at $15.7 million. Next slide, thanks. Now I'll move on to the detailed financials for 2020. Next slide. As I mentioned, a key difference in the results for 2020 financial year is that the Votiro became a controlled entity from November, and consequently, Votiro's results will be consolidated from that time. The loss of the associate you'll see in the P&L reflects Senetas' share of the Votiro loss for the period prior to consolidation. That is the period from July to October 2019. The underlying Senetas business segment remains in profit, and I'll talk a little bit more about that on the next slide. However, the consolidated results reflect the impact of the Votiro investment to date. Despite the loss before tax of just under $2.9 million for the consolidated business, the group still incurs a tax charge for the year, and this is the result of the tax expense on underlying profit generated by the Senetas core business. Next slide, thanks. Now turning to the Senetas underlying business operating segment. Importantly, in the current economic climate, the performance of the Senetas business has been strong despite the second half slowdown in hardware sales to commercial customers. However, good sales to government customers and strong repair and maintenance revenues led to a profit before tax growth in -- for financial year 2020. Within the Senetas business segment, operating revenue was down 7.1%, with lower product sales partially offset by higher maintenance revenues. The product sales were higher in Asia Pacific and U.S. Government sectors but were lower in Europe and North American commercial markets as a result of COVID-19. The North American commercial segment is the customer group that has been most impacted by the slowdown in activity as a result of COVID-19, and that continues to be the case as we progress into the financial year 2021. Recurring maintenance revenues continue to grow, and I'm pleased to say we've now reached 50% of our total revenue in maintenance revenues. The higher proportion of maintenance revenues also contributed to an increase in gross margins during the year. Higher R&D costs in 2020 relate primarily to the new European certification and the new network-independent encryption features which we've introduced, both of which we expect to drive revenue growth in 2021 and beyond. However, the higher R&D costs were largely offset by cost reduction initiatives that we implemented and lower corporate overhead costs by 8% during the year. Next slide, thanks. Turning to the balance sheet and cash. Senetas' balance sheet remains strong with no debt and substantial cash reserves. 30th of June balance sheet also includes liabilities and assets from Votiro after it became a controlled entity. Overall net assets increased to 3.1% during the year to $20.3 million, and the cash balance ended the year at $15.7 million. Significant cash outflows during the year included $1.6 million for the first installment of the second tranche of Senetas' investment in Votiro before it became a controlled entity and $0.5 million relating to the return of capital approved by shareholders at the last AGM. Next slide, thanks. I'll now move on to an update on 2020 operations, next slide. In the Senetas business segment, we've seen continued growth, as Francis mentioned, in 100-gigabit encryption sales as more customers moved to adopt those kinds of networks. 100-gigabit networks are still relatively rare in many countries, but we're expecting those networks to grow over time, and with it, sales of our 100-gig encryptor. Our R&D priorities in 2020 continue to focus on building our portfolio of products -- product offerings to expand our revenue base and drive growth. Key projects included network encryption -- network-independent encryption, the new European certification, and again, we expect that to open up further market opportunities and revenue growth opportunities. Network-independent encryption features is a significant development. Our hardware encryptors now have the ability to encrypt across a far broader range of networks, significantly expanding the customer environments across which Senetas encryptors can be used. After a significant period of development and testing, we also completed our development of custom algorithm encryptors that we specifically developed for the Eastern European market, somewhere that Senetas has not previously sold. We also signed a SureDrop partnership in Australia with AUCloud, a sovereign cloud provider in this country, who now offers our secure file sharing and collaboration capability, SureDrop, with 100% data sovereignty and end-to-end encryption for Australian government customers. And we're excited about the opportunity that, that provides for revenue growth in the future. Next slide, thanks. Turning to Votiro. Senetas completed its tranche 3 investment in the Votiro convertible notes during the 2020 financial year, with the third tranche being made in January 2020. Subsequently, Senetas' convertible notes automatically converted into ordinary shares in July 2020. The Senetas' investment of $8 million across 3 tranches resulted in a controlling interest in Votiro of approximately 60%. Senetas also recently increased its funding of Votiro through a loan of $1 million. Financial year 2020 saw a number of highlights in the Votiro business. Sales grew strongly, driven initially by sales into the North American market and expansion of sales into Singapore. Votiro's target markets in the near term remain Japan, Asia Pacific and the North American market, with the North American market expected to become Votiro's single largest market within the next 2 years. As Francis said, ransomware attacks are one of the greatest cybersecurity threats the world is facing. The capability of Votiro's disarmer product to protect users against ransomware threats is driving significant customer interest from both commercial and government customers. Importantly, as Francis also mentioned during July 2020, Votiro announced a partnership with Thales, and the partnership will focus on government agencies in North America and allow Votiro [Audio Gap] in the region. Next slide. [Audio Gap]