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

Thank you for standing by, and welcome to the Senetas Corporation 2022 Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Wilson, Senetas CEO. Please go ahead.

Thanks, everybody, and I appreciate everyone tuning in to a short Senetas presentation on our results for the full year ending 30th of June 2022. Group operating revenue was up by 9% versus 2021 to $25.1 million. Impressively, Votiro's revenue was up 82% to $5.8 million, an achievement we're very proud of. The continuing electronic component shortages having a temporary impact on Senetas' revenue, which was the result of the decline in revenue, that was lower than expected at 2.5%. I'll talk a little bit more about the impact of that in the outlook section of my presentation. Importantly, Votiro's annual recurring revenue was up to USD 4.4 million at 31st of August 2022, up 83% compared with 30th of June 2021. So that's a great achievement from Votiro. The Senetas profit before tax, that is the core business that Senetas has, was a profit before tax of $1.9 million. The group net loss before tax was $10 million, but that included a net loss before tax of Votiro of $12.7 million and included some noncash items relating to amortization and share-based payments of $3.6 million. But I should note that the group net loss after tax attributable to members was $5.9 million. And after the -- and the cash loss after adjusting for noncash items was $2.7 million. The balance sheet remained strong with $10.7 million worth of cash at 30th of June 2022, and the group carries no debt. So some key milestones for Votiro. We've been very successful in targeting large-scale client opportunities with Votiro, particularly in the United States, in the Asia Pacific region. We've signed 2 significant customers in the last 9 months to 30th of June 2022. Those customers generated annual recurring revenue of more than $0.5 million each with one of those contracts with an excess of $1 million per annum for a minimum of 3 years, a wonderful achievement by Votiro. And that 3-year contract was paid upfront as well. So that gives us confidence that these large customers, large scale customers have such confidence in the Votiro product to pay upfront for a 3-year contract. So we're very pleased with that. Those 2 customers alone, and there were other customers that we won, represent a total contract value of $5.6 million. So client wins in the last 12 months include large government agencies, financial institutions and industrial companies across Asia Pacific, U.S. and EMEA. I'd love to be able to name those customers, but unfortunately, we're subject to confidentiality deed in relation to publicizing their names. What is particularly impressive about the Votiro business is the proof-of-concept conversion rate. We've been talking in previous presentations about the fact that once we get into a proof of concept with customers, 90% of the time we win those customers. And that is the case, particularly in the U.S., but 75% globally which is great when you're head-to-head with competitors. The customer renewal rate, which is an important stat for everyone to keep in mind, is 95%. So with an annual recurring sort of revenue basis of contracts, we look to renew those contracts each year, and 95% of our customers renew their contracts. And as I mentioned previously, some of those customers are signing up to multiyear contracts. We experienced strong growth in customer pipeline, and we expect that to continue. And we also expect that to drive a doubling of annual recurring revenue through the end of the calendar year in Votiro. We also expect that Votiro will be cash flow breakeven by 30th of June 2023, another very important milestone when we achieve that for the Votiro business. Now turning to the Senetas high-speed encryption business. As I mentioned earlier, the global shortage of electronic components is temporarily impacting Senetas' sales to win users. We have built up inventory here at Senetas and in conjunction with Thales, our main distributor, to ensure that when customers are ready to purchase our product, we can deliver. Unfortunately, those customers that want to build new networks are suffering disruption to the build-out of those networks because they can't procure other electronic components from other vendors. We expect that difficulty to persist for the next -- right through to the end of 2024. So taking that into account, we still expect the business to grow revenues slightly. But after that, we expect the business to revert to growing revenue once that supply chain shortage disruption is over. 100-gig sales in 2022 doubled compared to the prior period, which is great. It's now the single largest revenue-generating product in the Senetas encryption portfolio, and we have a robust pipeline going forward for that particular product. So we're enthusiastic about growing 100-gig sales over the medium term. Sales are primarily in the Asia Pacific region at the moment with an increased focus on the U.S. via Thales opportunities and here in Australia as well for that particular product. Now looking at the outlook, as I mentioned before, we're extremely positive about the growth outlook for Votiro with a strong sales pipeline, which is continuing to build across our key markets, U.S. and Asia, and emerging demand in Europe and the Middle East is pleasing to see. We reiterate that we expect Votiro to double annual recurring revenue by the end of this 2022 calendar year. We're well positioned to execute large-scale customer sales to the customers that we spoke about before. These customers are utilizing a new Votiro product, which is delivered out of the cloud, so that is fantastic to see the adoption of that particular product and the performance of that product in large customer environments. We're launching new resellers in North America, EMEA and Singapore. So we're enthusiastic about that, helping increase the market coverage and the sales performance of Votiro, and we expect good sales growth to drive Votiro to reach cash flow breakeven by 30th of June 2023. We expect the Senetas business will continue to be impacted by the global supply chain issues until sort of late calendar 2023, easing up toward the end of that calendar year. That said, our pipeline continues to grow and is well ahead of prior year. So it's a very robust pipeline for our encryption technologies. Inventory levels are expected to trend towards historic levels as pipeline sales completed over the next 24 months. And the gross margin will increase as the inventories built up in Thales and Senetas have reduced as customers get back to provisioning new networks and purchasing our product. So that ends the short presentation. So I might just, at this point, open up to the room for questions that you'd like to ask me.

[Operator Instructions] Your first question comes from Glen Wellham with MST Financial.

Andrew, just sort of those 2 customers in Votiro, the contract value totaling $5.6 million, can you just give us a bit of color on how long those customers took to get on board in terms of the sales process? And do you sacrifice any margin to get the larger contract for the product?

Good questions, Glen. Because the customers we're talking about are very large customers, that's 80,000 employees, it does take some time. But it's not as long as sales cycles we might experience in the encryption side of the business. So sort of end to end for one of those contracts, the larger one, which was about $1.2 million annual recurring revenue per annum, it was about a 12-month sales cycle and was an intensive process of technology evaluation but then also procurement, which always takes time in these large enterprises. Another customer, the smaller customer, that was a shorter sales cycle, roughly about 6 months. I'd say that even for some of these large enterprises, the sales cycle is between 6 and 12 months for these large enterprise customers. Selling multiyear contracts, yes, we do discount to encourage customers to sign up for multiyear contracts. But the fact that they are signing up for a 3-year contract and paying us for 3 years of usage of that product still fills us with great confidence that customers are confident enough to sign up to a multiyear contract, such as their belief in the Votiro technology.

And just another question, if I may, on Votiro. As the business grows, you've obviously achieved enormous growth. Are you going to have more regular updates on how that business is tracking and release that to the market?

Yes, absolutely. That's something that we're looking at all the time and we'd like to do sort of on a quarterly basis as the business develops. I guess part of the problem is, of course, we'd like to be able to sort of name customer names, but the ASX requirements in relation to naming customer names are quite stringent if you take into account confidentiality obligations. So we might have to wrap it up in a sort of a quarterly announcement of the Votiro business performance.

[Operator Instructions] Your next question comes from [ Tony Carman ], a private investor.

Regarding EON Reality, can you please tell us around how that is going, please?

So we don't have any further news to announce in relation to EON Reality. So to refer back to our stock exchange announcement where EON Reality announced that they were intending to list on the NASDAQ via a transaction with an already listed company on NASDAQ. As far as we understand, that process is ongoing. These processes can sometimes be a lengthy processes, especially where companies have to go through the process of reauditing many years' worth of financial statements in order to satisfy the stock exchange requirements. So we're expecting that they are continuing that process, and we haven't heard anything to the contrary.

And following on that, Andrew, with Senetas' stake in EON, once the company's clients want to come -- once EON is listed, what are your plans to include EON Reality's stake?

Look, the Board will consider what course of action we take in relation to that investment once it's listed. We're keen to try and do everything we can to help EON support the process of listing where we ask for that assistance. But the Board has made no concrete decision about what it will do with that minority investment in EON at this stage. Sorry, I can't give you any more information in relation to that, but that's just something the Board has not discussed, and our focus and their attention once the company has successfully listed on NASDAQ.

And just another follow-up. If Senetas require the -- expect the capital [ the same ], because obviously, we had a $5 million raise a few months ago, and I think the share price is very high. Would Senetas [ list possibly ] debt structure some other way other than raising [ certain ] shares in Senetas as well?

Look, the Board is always considering its capital structuring options. That is a consideration with the price, in terms of that sort of acceptable from a risk basis to the company in general and to the shareholders. But it is a consideration that the Board thinks about in relation to capital structure.

And then with the $5 million that was raised, can you tell us who do you think are the large shareholders that participated in that? If it was an American company that was the largest shareholder, will they buy more shares, do you think?

Yes. So we -- it -- they weren't American investors, just to answer that aspect of your question. They were -- there was a large institution out of the United Kingdom and some domestic institutions in Australia.

Sorry, just one more, I didn't [ hear on Votiro ]. What's the kind of long-term plan for that? Is it a spinout of public price in Australia [ obviously ] et cetera? Can you just give us some ideas on the future plans for that going forward?

Yes, look, all options are being considered at the moment. I think my attention, the Board's attention is on growing that company its maximum potential, right? And none of those options necessarily we're fixed on, but our focus is really trying to grow that business and helping that business achieve its revenue growth which we're doing at the moment, and we are assisting, Senetas is assisting the company significantly in achieving its revenue targets and driving it towards that cash flow breakeven point. And I guess sort of -- that journey, options might be considered by the Board from time to time. I can't give you a better answer, sorry.

The next question comes from Glen Wellham with MST Financial.

Sorry to come back again with some more questions. Just curious about the inventory buildup. Is there any risk around some of that equipment becoming redundant if you don't sell it in the next year or the year after?

No, the good thing about our product is it's got a long shelf life, so it's not like a perishable. And the technology is built to last, which means it's not going to suffer from the obsolescence. Is that your question?

Yes, and I don't know what's happening down in Melbourne. I know that you guys like to keep your doors locked, but Sydney certainly opened up and the rest of the world are opened up. Is that helping the sales at all?

It's beginning to. I mean I had my first trip recently, last couple of weeks for us to kind of visit the engineering team in Israel and see them after 3 years, so it's great to see how they're going. And then I followed on to visit Oman, where I was talking to the Omani government about some of Senetas' encryption projects. The fact that I was able to visit Oman particularly has opened up and reignited some of the opportunities that we were working on prior to the pandemic. My next trip will be sort of around the world trip to go and meet key stakeholders at Thales and just see how business is developing and growing. But certainly, I do see as the world begins to open up, that opportunities of installed come back to life. So the answer is yes.

There are no further questions at this time. I'll now hand back to Mr. Wilson for closing remarks.

Well, thanks, everybody, for tuning into my results presentation, and thanks for some great questions. Hopefully, more shareholders jump on this call next time we do that, but I really appreciate your time.

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