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

Good morning. I'm Francis Galbally, Chairman of Senetas. It's now 9:30 a.m., and this is a properly constituted meeting and a quorum is present. I therefore declare the 2024 Annual General Meeting of Senetas Corporation Limited open. Thank you for your online attendance this morning and for your ongoing support as Senetas shareholders. Shareholders and proxy holders in attendance online today have the ability to ask questions and submit votes. In attendance with me here at Senetas are my fellow nonexecutive directors, Lieutenant General, Ken Gillespy, retired, Dave Hansen and Phil Schofield. Lachie -- given is attending online today. I would like to thank them all for their efforts over the previous 12 months. I would also like to welcome and thank our CEO and Managing Director, Andrew Wilson, for his leadership and his team's efforts this year. And I also thank our Chief Financial Officer, 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, our marketers for developing the material to best present our products; and finally, our business development team. I welcome our Company Secretary, Brendan Case, and thank him for his assistance this year. Our CEO, Andrew Wilson, will provide a report on our 2024 financial results and business operations shortly. But first, I would like to touch briefly on some of the highlights from the past year, including a strong rebound in sales of Senetas' encryption hardware by our global distribution partner, Thales, and continued growth for our majority-owned subsidiary, Votiro. The 2024 financial year saw some very strong sales results for the Senetas business and a return to more normal ordering patterns from customers following an easing of the global component shortages that have affected sales in the previous 2 to 3 years. Sales to customers via our global distribution partner, Thales, were up over 100% during the period, and the number of units shipped were up almost 50%. A particular highlight has been the recent development of our business in the Middle East region where we have seen some rapid growth and large-scale transactions with new customers. This sales growth included Senetas' largest ever sale by value through Thales to a Middle East government customer. That transaction, which was completed late in the 2024 financial year, added over $2 million in revenue in 2024. The strong growth in recent sales by Thales and the ever-increasing prevalence of cyber threats globally provides confidence in the outlook for Senetas' core encryption business and has been supported by good growth in our sales pipeline over the past 6 months. Senetas is continuing to innovate with the development of new and updated products that meet the needs of our global customers. Key R&D projects in 2024 included upgrades to our 10-gig encryptors, a new version of our 100-gig encryptor and further developments to our post-quantum capabilities. Senetas is also in the early stages of conducting some proof-of-concept trials using our encryption technology embedded on autonomous vehicles, seaborne, land and airborne. Further work is underway to open what could be a new market for the company, and we hope to be able to provide you with an update during the course of the next 12 months. Importantly, Senetas regained NATO certification for our encryption products during financial year '24, and we have seen increased sales opportunities from European NATO members. In addition, we have won business from 3 new Middle East government bodies, and we anticipate our encryption business will continue a steady growth in that region. Finally, we are seeing, while not spectacular, steady growth in our defense-grade secure document exchange business, Suredrop. We are working on some early-stage projects, which if they come to fruition, have significant revenue potential. Moving now to our majority-owned subsidiary, Votiro. There was good growth in all of Votiro's key performance measures in the 2024 financial year, including its annual recurring revenue, which was up 49% following growth of 50% and 93% in the 2 preceding years. Importantly, this solid growth in revenue has now positioned Votiro to reach a cash flow breakeven point in the very near term. Whilst the majority of Votiro's annual recurring revenue continues to come from the Asia Pacific region, increasing recognition of Votiro's solutions is now occurring in the North American market following the successful launch of Votiro's data detection and response product, or DDR, in the first half of the 2024 calendar year. This represents a major new opportunity for Votiro, particularly for the North American market, where demand for this broader security capability is greatest. This new capability provides a unified content security platform, combining real-time cybersecurity for data privacy and threat protection. Votiro DDR is the first in the industry to bring together threat prevention, data security and privacy controls in a Zero Trust DDR solution and will play a key role in accelerating Votiro's penetration of the cybersecurity market. Whilst DDR sales are only at the early stage, customer feedback to date has been very positive. At this stage, Votiro has completed 4 DDR sales transactions, including both upsells to existing Votiro customers and sales to customers new to Votiro, with the future sales pipeline for DDR now sitting at approximately USD 5 million. Votiro's recognition by the industry is also leading to an increasing range of technology partnerships and integrations with key industry partners such as Palo Alto Networks, Zscaler, CyberArk, Menlo Security and our Cyber Defense, among many others that are broadening the market opportunity for Votiro. And at a corporate level, S&P Global Market Intelligence has recently commenced coverage on Votiro. -- further reinforcing its profile in the industry. Andrew will speak more about the business outlook and year-to-year performance in a moment, but we expect the positive 2024 trends for third-party sales in the Senetas business and the Votiro revenue growth momentum to continue as we progress through 2025. I want to take this opportunity to thank our partner, Thales, for its ongoing work as Senetas' global partner. I'll now turn over to Andrew for his presentation before we conduct the business of the meeting.

Thanks, Francis, and welcome, everybody, to the Senetas 2024 AGM. This morning, I'll take you through some of the operating and financial highlights from the 2024 financial year and then provide a brief business update and current year update on activities. Next slide, please. Looking at the highlights of the 2024 financial year performance. The consolidated group revenue was up 6.5% to $31.2 million, with revenue growth in both the Senetas and PetiROe businesses. Senetas operating revenue was up 6.8% after adjusting for variable consideration. For those shareholders unfamiliar with the impact of variable consideration on Senetas revenues and profits, I recommend shareholders take a look at the 2024 full year results presentation that we released at the end of August, which provides a detailed analysis of the relevant adjustments. For the Votiro segment, revenue was up 25% and annual recurring revenue was 49% higher than the prior period. As Francis mentioned earlier, customer sales of Senetas products by Thales, our global distribution partner, were up over 100% compared to financial year 2023. And the number of units shipped was up 48%, a great result reflecting a return to normal customer ordering patterns following the easing of the global electronic component supply chain issues that we faced over the past couple of years. Consolidated group gross profit was up 12.6% to $27 million, with gross margins up 4% to 86%. And the Senetas segment adjusted profit before tax was up 63% to $3.6 million after adjusting for variable consideration. Next slide, please. Now turning more specifically to the Senetas segment. 2024, we saw a strong growth in customer demand for our encryptors, and that included the largest ever sale by value in the company's history to a Middle East and government agency that Francis mentioned before. That transaction added not only added $2 million of revenue to Senetas in 2024, but it also contributed approximately $1.4 million of additional maintenance revenue to Senetas over the next 3 years. I've spoken a bit about the impact of the global component shortages over the past couple of years for shareholders in our presentations and in particular, the impact it's had on Senetas' reported revenue and profit due to the application of accounting standards for variable consideration and revenue. And also the increased level of inventory that both Senetas and Thales have been -- have had to carry to mitigate the impact of the supply chain issues on sales. Now with the global component shortages easing, we expect over the next 12 to 24 months, both Senetas and Thales inventory levels will return to more normal levels, more historic levels. Throughout this period, Senetas will continue to provide shareholders with information both on a reported basis and adjusted for variable consideration in order to provide a transparent view of the underlying business performance. The Senetas sales pipeline grew very strongly in 2023. It moderated somewhat in 2024 financial year as a result of major sales transactions that were completed. I'm pleased to report sales pipeline is growing again and grew in the 2024 -- June 2024 quarter, providing solid momentum that we expect to drive growth in 2025. Next slide, please. Now turning to Votiro, our controlled subsidiary. Annual recurring revenue was up 48% to $10.4 million, a pretty good result, I would say. The total lifetime contract value was up 52% to $33.3 million. Total sales pipeline for Votiro at August 2024 was $35.4 million, representing growth in the pipeline and the customer renewal rate for existing customers is nearing 100%. Next slide, please. Over 70 new customers and upsell deals have been signed by Votiro since the beginning of calendar year 2023, including 30 that were signed this calendar year to August 2024, a strong sign of the awareness and momentum that Votiro is building in this market. One of the key milestones for Votiro in 2024 has been the launch of its new data detection and response platform in the first half of the calendar year. And Francis has summarized key aspects of the new DDR capability earlier. It is an industry first and represents a significant opportunity for Votiro in its ambition to penetrate the North American market, where growth for the business is yet to reach levels achieved in the Asia Pacific region, but we're sure it will. Early feedback from customers has been very positive about this new DDR capability and the sales pipeline for that capability is building strongly, and we've closed a number of deals, early deals, DDR deals in the North American market. So the North American market remains our primary focus for DDR in the near term, and we believe revenue growth will result as enterprises set budgets for 2025 to include DDR. Next slide, please. Now turning to the outlook for the 2025 calendar year. Strong underlying customer sales of Senetas products by Tales are expected to be maintained through the 2025 financial year. There's good sales pipeline growth in the June quarter. And pleasingly, that momentum has continued so far. As I mentioned earlier, we expect Thales inventory levels to normalize over the next couple of years now supply chain issues have resolved. We expect end customer sales to be maintained in the 2025 financial year, and there's likely to be a lower level of inventory transfers to Thales and therefore, a potential for a negative impact on the reported results due to variable consideration adjustments. We nonetheless expect sales -- 2025 sales adjusted for variable consideration to be maintained at a similar level in 2024. There are, however, some key sales opportunities for Senetas in the Middle East and other markets that may provide some upside to 2025 revenue. These opportunities have long lead times, and therefore, timing of the realization of these deals is difficult to predict. They may not fall in the 2025 financial year. With regard to Votiro, we expect Votiro's strong momentum will continue through 2025 and its sales pipeline and revenue will continue to grow. Votiro's sales pipeline is now up to $37 million with good contribution from the new DDR platform, which has grown its pipeline to approximately USD 5 million year-to-date. There have been 4 completed sales of the DDR product, including 2 sales to existing customers now buying DDR and 2 new customers, 2 new logos. It's still in its early days, but the signs are encouraging. We continue to expect the Asia Pacific region will remain Votiro's largest market in the medium term with most of its large customers being government agencies and enterprises in that part of the world. Votiro's annual recurring revenue continues to grow and is now approaching USD 11 million, and Votiro has some large opportunities ahead through the balance of the 2025 financial year. However, as always, with these large customers, government customers, the precise timing of completion can be a little bit uncertain. Importantly, we continue to target cash flow breakeven for Votiro by the end of the calendar year, thereby limiting the financial support required from Senetas shareholders. That concludes my presentation. Thanks again for your participation today and ongoing support. I'll now hand the meeting back to the Chairman.

Thank you, Andrew. Before I move to the formal part of the meeting, I'd like to introduce Brock Mackenzie, who's in attendance from Grant Thornton, should shareholders have specific questions for our auditors in relation to the 2024 financial year audit. We also have Angela Lipas from Computershare, who will act as the company's returning officer for this Annual General Meeting; and James MacDonald and James Hill from our solicitors Piper. The Notice of Meeting was made available to shareholders on the 14th of October 2024, and I propose that it be taken as read. Voting instructions were set out in the Notice of Meeting. We will address shareholders' questions not pertaining to the business of the meeting once I've run through each item of business. To ask a question, select the Q&A icon and type your question into the text box. Once you finish typing, please hit the send button. Please note that your questions may be moderated or if we receive multiple questions on one topic, amalgamated together. Finally, due to time constraints, we may run out of time to answer all of your questions. If this happens, we will answer them in due course via e-mail posting responses on our website. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will now open voting for all resolutions. If you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. Please submit your votes at any time. You do, however, have the ability to change your vote up until the time I declare voting closed. Where the Chair of the meeting has been nominated as a shareholder's proxy, all open and available proxies have been voted in favor of all items. So that shareholders can see the full picture of voting instructions received in advance of the meeting, direct and proxy voting will be displayed on the screen as we move through each item of business where relevant. Today, we have 6 items of business on the agenda. The order of business will follow the Notice of Meeting, which has been made available to all shareholders, and voting today will be conducted by way of a poll on all items of business. The first item of business is the consideration of the financial report, directors' report and auditor's report. The Corporations Act requires the directors to lay before the Annual General Meeting the financial report, the directors' report and the auditor's report for the last financial year. Shareholders may raise questions through me as Chairman to the auditor on the conduct of the audit, the preparation and contact of the auditor's report, the accounting policies adopted by the company in relation to the preparation of the financial statements and the independence of the auditor in relation to the conduct of the audit. Are there any questions concerning the company's financial report?

Yes. So we've received a question from Mr. Stephen Mayne. The question is, we've got $125 million in accumulated losses and a market cap of just $35 million. Where did all the money go? And if the Chair had this time again, what would he do differently?

Well, the accumulated losses are a result of the company, firstly, being a mining company and being taken over by the acquisition of some technology companies. And then there have been some write-offs in relation to businesses that over a period of time, we discontinued. Would I have done my -- done differently? Well, I wouldn't have bought the businesses we discontinued in the first place. So yes, our market cap at $33 million, I believe, is way less than what our market cap should be today. So at the moment, the market does not recognize the value of the company we have, the value of our subsidiary, Votiro, nor the cash we have at bank. No further questions. Then I declare that the financial reports, directors' reports and the auditor's report have been received and considered by the meeting. The next item of business is Item 2, the reelection of Lachie Given as a Director of the company. In accordance with the requirements of the company's constitution, Lachie given retires at this meeting and being eligible to do so, offers himself for reelection as a director. Lachie was appointed as an Independent Non-Executive Director of Senetas on 20th March 2013. Lachie is also the Chief Executive Officer of EZCORP, Inc., a NASDAQ-listed company and was reappointed as a Director of the EZCORP Board in March 2022, having previously served as a Non-Executive Chairman of the EZCORP Board of Directors from July 2014 to September 2019. Before joining EZCORP, Mr. Given provided financial and advisory services to EZCORP through his own business and financial advisory firms. Lachie is also a Director of Cash Converters International, an ASX-listed company. In addition, Lachie is a member of the Board of Directors of the Farm Journal Corporation, a 134-year-old preeminent U.S. agricultural media company and leading Australian financial services rating and research firm, Canstar Proprietary Limited. Further information on Lachie's background and experience is provided in the Notice of Meeting. The Board, with Lachie Given abstaining, unanimously recommends that shareholders vote in favor of this item of business. Are there any questions in relation to the reelection of Mr. Given? I will now formally put resolution 2 to the meeting in accordance with the notice of meeting. Direct and proxy votes received in advance of the meeting are displayed on the screen. Shareholders and proxy holders, please lodge your vote now if you have not already done so. I declare that Mr. Given has been duly elected as a director of the company. I now turn to Item 3, the adoption of the remuneration report. The remuneration report is contained in the annual financial report, which is available on the company's website. It provides an overview of the company's remuneration framework. Are there any questions or comments from shareholders in relation to the remuneration report?

Yes. So Mr. Stephen Mayne has asked, have there been any substantial protest votes against any items today, including this remuneration report item?

No. There are formally put resolution 3 to the meeting in accordance with the Notice of Meeting. Direct and proxy votes received in advance of the meeting are now displayed on the screen. Shareholders and proxy holders, please lodge your vote now if you have not already voted. I now declare that the meeting has adopted the remuneration report. The next item of business is Item 4. It relates to the approval and the grant of options to the Managing Director and CEO, Mr. Andrew Wilson. The options will be subject to a service condition and will only provide value to Andrew if the company's share price exceeds the exercise price at the end of the performance period. Therefore, the grant of options supports the achievement of the company's business strategy by linking Andrew's rewards to the improvements in the financial performance of the company and aligning his interest with shareholders. Are there any questions or comments from shareholders in relation to the approval of the grant of options to the Managing Director and CEO -- then I'll formally put resolution 4 to the meeting in accordance with the Notice of Meeting. Direct and proxy votes received in advance of the meeting are now displayed on the screen. Shareholders and proxy holders, please lodge your votes now if you have not already done so. I declare that Item 4 of the business of the meeting has been passed. I now turn to Item 5, and it relates to the ratification and approval of the prior issue of securities in late November and December 2023. Comprehensive details in relation to this item are set out in the explanatory notes to the notice of the Annual General Meeting. Are there any questions or comments in relation to resolution 5? I'll now formally put resolution 5 to the meeting in accordance with the Notice of Meeting. Direct and proxy votes received in advance of the meeting are now displayed on the screen. Shareholders and proxy holders please lodge your vote now if you have not already voted. I now declare that Item 5 of the business of meeting has been approved. The final item of business is Item 6, the consideration of the approval of a 10% placement facility. The effect of this resolution is to allow the directors to issue the equity securities under Listing Rule 7.1A during the 10% placement period without using the company's 15% capacity already provided under the listing rules. Are there any questions or comments from shareholders in relation to this final item of business?

Yes, there's a question from Mr. Stephen Mayne. There have been many substantial protest votes against resolutions like this during the current AGM season. It is not good practice to allow the Board to selectively place up to 25% of the company's shares to anyone they like over a 12-month period, diluting the existing shareholders without compensation for the lost property rights. What is our history of doing selective placements? Why are we asking for this authority? And has there been a substantial protest vote against this resolution?

To the last question, no, there has not. This company has not normally used any of these provisions, either the 10% or the 15% provision. I don't expect it would. And the comment made by the questioner is a valid comment. But in practice, most small cap companies on the ASX do, in fact, pass these resolutions just in case. But I would not expect us to use this at all. So I formally put the motion in relation to the issue and approval of a 10% placement facility as described in Item 6 of the Notice of Meeting and as displayed on the screen now. Direct and proxy votes received in advance of the meeting are displayed on the screen. Shareholders and proxy holders, please lodge your vote now if you have not already voted. I declare that Item 6 of the items of business for today's meeting has been approved. That now covers all of the business, the formal business before today's Annual General Meeting. Are there any other questions that shareholders want to raise?

Yes. So we've got another question from Mr. Stephen Mayne. Could Chair Francis Galbally, please explain the full history of his substantial shareholding in Senetas? And could one of the other independent directors address the issue of whether the Board has considered moving to an independent Chair? How many more years is Francis planning to serve as Chair?

Well, that's an interesting question, isn't it? I plan to serve as Chair for as long as the Board will elect me as Chairman is the answer to that. My history in relation to my shareholding is public record. If you care to look through the public records that are on the ASX, ASX site or on the Senetas shareholding, you will see I was a shareholder in the company and founded the company back in 1999 because of my wife's illness and her death, I left the company for personal reasons. The company then was controlled and run by a separate management team and Board of Directors and ran out of money. I then reinvested in the company, saved the company and bought back into the company in 2013. Since then, the company has paid dividends, made profits and made distributions to shareholders. My initial investment has been repaid to me by the company's profits. But thank you very much for your question. I reinvested in the company again last year, and I'll do so this year by exercising my options. I have great faith in this company, and it's a very important business in cybersecurity. It has a global business around the world, selling encryption devices to 63 companies with a global multi multibillion dollar company, Thales, who we have been partners with often on for 25 years, says something about the nature of the people who work in this company, the Board of Directors we have on this company, such as [ McDennon ] General Ken Gillespie, former Head of Army; Dave Hansen who's run multibillion-dollar businesses and now and Lachie Given, who's done the same. But thank you very much for your questions, Mr. Mayne. One more.

So we have another question from Dr. Peter Wilkinson. Does Senetas include quantum computing in any of its technologies? If so, to what extent?

Andrew?

I'll answer that question. So Senetas itself does not include any quantum computing technologies in our device. But what we do implement is quantum-resistant algorithms. And recently, NIST, which is part of the NSA, specified a number of quantum-resistant algorithms that organizations should begin using and implementing in their security devices. A quantum-resistant algorithm is thought to be a new method of encrypting information that could withstand a quantum computing attack. And we have implemented all of the 3 standardized quantum-resistant algorithms that are ready for our customers to use today.

Then that covers all of the business today. And there are no further questions, I declare that voting by poll is now closed and formally declare this Annual General Meeting closed. On behalf of the directors and staff of the company, I thank you for your attendance via the online platform today. The results of the motions carried at this meeting and the voting instructions received in advance of the meeting will be released to the ASX and will be displayed on the company's website. I now formally declare this Annual General Meeting closed, and thank you again for your attendance.