Shearwater Group plc (SWG) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Shearwater Group plc investor presentation. [Operator Instructions] The company may not be in a position to answer every question it received during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Phil Higgins, CEO. Good afternoon, sir.

Thank you very much, and good afternoon, everybody, and welcome to this year's set of results for the 15-month period ending June -- 30th of June '25. Today, with me is Jonathan Hall, CFO. And hopefully, today, we'll be able to overview to you what we've been doing over the last year and the path forward for the coming 12 months. To kick things off, I'll just give you a brief introductory to Shearwater for those who are not familiar with the organization. So in Shearwater, we focus on cybersecurity and managed services and advisory consulting. There's 2 divisions to our company. We have a Services division and a Software division. The brand names that you see there, the Brookcourt, the Pentest and SecurEnvoy, they're independently known. They've been built over a 20-year period, and they've got a proven track record. They're multi-award winning organizations in their own right. With inside our services business, we focus on delivering directly to corporate organizations, the FTSE 100 companies, both domestically and internationally. We do a lot of project-based revenues there. And we'll come on later on and be able to describe a little bit more in detail as to what we do in delivery. On our Software side, we actually manufacture our own technology. We specialize in multifactor authentication, identity access management and Data Discovery. We code this technology in the U.K., and we deliver that business through a 2-tier distribution model. This being we sell to distributors who then in turn sell to -- through a reseller channel of circa 300, 350 resellers, and that touches around about 50 countries worldwide. To give you some idea on the revenues there, our services business represents around about 94% and our Software, the delta. So for the main performance today, obviously, this is above expectations announcement, GBP 39.5 million revenue, up 29%. Adjusted EBITDA, up 91% to GBP 2.2 million. Net cash, GBP 5.1 million. And as you can see from these numbers, these are way above the market expectations. Jon later on in the presentation will give you some more detail around some of these numbers. But needless to say, we're very pleased with the performance that we've had to date. So what's been driving all of that? On the right-hand side, you can see there's some reference quotes from industry analysts. And it depend on who you talk to and which report you read, and the market opportunity globally is worth in excess of GBP 200 billion. In the U.K. alone, we're seeing around about GBP 10 billion marketplace for us. And some of the things that are actually driving that. Obviously, you see it in the press. We've got rising crime, cybercrime. We've also got regulation. We got GDPR. We've got data leakage. We have got financial regulations. These are all driving change and requests for tight security and control. We've also seen, obviously, over the years with the onslaught of COVID and the post-COVID position where workers are now working more from home. So before we used to secure the building and the workplace. Now that workplace is spread across the country. And some of our major corporates now, we have 100,000-plus employees. They've got 100,000 endpoints to protect, to stop the bad guys from getting in. We've also seen emerging technologies. If all the technologies of yesteryear were any good, then we wouldn't have any problem today. The thing is they're not. And as the threat landscape evolves, as the onslaught of new AI-based threats come available, we had to defend that. So we're always looking for new technologies, and we're deploying the next-generation best-of-breed technologies to help defend corporate U.K. The couple of things that you're going to start seeing and hearing an awful lot of is obviously identity first security. What this means in simple terms is, is being able to identify the individual securing where they go, what they have access to and making sure that person who says they have that right is, in fact, that person. He is or she is the person who's entitled to be inside that network. And this leads on to this thing called Zero Trust framework where, in essence, we don't trust anyone even if you are an employee. And what we're trying to do is make sure that we are taking a zero tolerance and zero trust position right across our infrastructures, both domestically and internationally. So you've seen the press, it's there constantly. Jaguar has cost the country GBP 2 billion in revenues. Marks & Spencer have very recently announced the cost of their recent cyberattack, and it's cost them 97% of their EBITDA revenues. These are life-changing amounts of money. These sorts of fines could actually close down or these losses can close down an organization. But there's also the data loss penalties as well. Capita, GBP 14 million penalty after personal data had been stolen in the cyberattack. So for these organizations, they've got to prevent everything all the time, whereas the hackers are only going to get in there once. And this is a -- the cost of failure is high. To give you a little bit more detail on the Services division and what we do. So as I mentioned, we sell through to the Fortune clients. We sell direct. We buy technologies from key vendors who we consider to be best of breed. They're specialized vendors. We don't sell the traditional run-of-the-mill technologies. We're looking for the next solution to a compliance or security issue. So the types of technologies that we sell do not have that many resellers involved. There's -- and that is very important for us. That position means that we've become very sticky. The cost to change for our customer is very high. And the good thing is once you -- you've been successful in winning opportunity, what you find is that you get a repeat business. There's great opportunity for repeat business. But a couple of those deals that we get, I mean, historically, it's been a 1-year sort of subscription deal or solution deal. But now what we're seeing is a lot more multiyear, multimillion dollar deals come to the table. And that obviously allows -- as these big corporates spend the time and effort to evaluate and then implement these technologies, what it means is that they don't want to keep doing that. And as long as the technology is delivering what it needs to deliver, then there's a good opportunity for review and renewal. We service all sectors as well. We're not just restricted. We're very big in finance. We're very big in telco. We are servicing all of the major telcos in this country. We are delivering to high street banks, inter brokers, exchange houses. We've got a whole suite of different types of customer. We also got retail, and we also got G-Cloud 14. We are actually supplying to the government, some of the bigger departments, so Cabinet Office, Home Office, places like that. And the reason why we win and why we're good at what we do is, one, we've got a very talented team of personnel. They are very focused on the type of technology. They're not trying to service every piece of tech that's on the planet. We have a very selective selection. And on top of that, we have a sales team who are very focused and well rewarded and with good commission structures. And they're available to actually sell what is a long game. We don't measure necessarily on the 30, 60, 90. What we do look for is obviously to start meaningful relationships and meaningful conversations with our client partners. We also work very closely with our vendor partners with the customer, so using their skill set in our client base as well. Just to give you some highlights on the Services side, revenue up 35% to GBP 37 million. As I mentioned, that's only 94% of our Group revenues. One of the things that we need to do, obviously, is to grow the business, we've been looking at how do we achieve that. Earlier on in this year, we are very fortunate to actually complete and receive an ISO 42001, which is a landmark certification in ISO for AI management. What that means to us is that we wanted to learn about AI. We want to develop it ourselves, and we've actually gone out and also built our own internal tool. Now the purpose of this tool is not to replace people, but to actually improve productivity. Historically, we would get an RFP that come into our solution business. And it would be distributed between a number of people who've got to read it, then we all got to meet and then we all go to the decide if we're actually going to bid it. And that would take days or weeks to actually go through. And depending on the size and the complexity of the bid, it can consume an awful lot of time. Now with our AI tool, we can simply ingest the RFP very, very quickly, within seconds, we can actually produce a report, which actually identifies if this fits with inside our skill set and our technology set. And that cuts down an awful lot of time wasted with meetings and review. Obviously, we're looking to expand that. Today, it's actually ingesting RFPs and summarizing for us. And we're also using it in our marketing, but the plan is also to actually use it for RFP production and response. Just a couple of things there on some major contract wins. Jon will go into a little bit detail -- further detail later on. But just to give you some flavoring on what we do. On the major contracts there, the GBP 12.8 million is a 5-year contract, and that was a piece of new business and net new customer, which we won last December. And I'm glad to say that, that was the entry deal. And obviously, the objective now is to expand deeper and wider inside that client base. And that particular client was the one that actually completed our complete suite of the U.K. leading telcos. The GBP 8.4 million way back in the 31st of March '22, we were fortunate enough to win a multiyear deal. That GBP 8.4 million is an extension of that deal, and that came in once again on the 31st of March this year. So that gives you some flavoring as to the types of deals that we win there. On that case study on the right-hand side, this one is for a leading bank, high street bank. We've had a -- we've enjoyed a 20-year relationship with the firm. And they had a challenge. And this is what typically would happen where they've come to us and they've got a legacy system, which is not -- it's not meeting compliance. It's spread geographically, internationally across the globe, and they've got multiple risk points on there, and they need to actually arrest that problem. So what we did, we actually managed and -- the whole sales process of bring it in what we believe to be the best-of-breed technologies. We presented an encryption-based solution, which would integrate seamlessly into their existing infrastructure, complementing their strategy on security and meeting all the compliance requirements and meeting the automation requirements to reduce the overhead for management. And as a result, what that gave them was obviously a very scalable, very resistant -- resilient platform, and it strengthens their data protection position as well [indiscernible]. That's a very typical deal, a 3-year contract worth GBP 1.5 million. And what we would expect with that, there'll be an opportunity because of the stickiness of that deal with -- and the complexity of cost of change, we would expect that deal to renew in years to come. To give you a little bit of flavoring around the Software division. We manufacture our own software. We code it here in the U.K., and we sell that, as I mentioned, through a 2-tier distribution network of distributors and resellers. We specialize in the identity access management and the MFA and Data Discovery. A lot of our competitors would actually develop their software within the cloud, and that's where they believe the whole market is moving and that's what they focus on. But we -- our roots have come from what's known as on-prem. We develop our software. It was sold to data centers here in the U.K. and internationally, and that's how it's deployed. We also developed a cloud solution. And historically, the intent was to ramp down our on-prem. But what we saw was there were some government departments and certain customers on critical networks who were actually asking for an on-prem solution. They have no desire to be in the cloud. They find it too risky. And so we've maintained over the years, development on not only our cloud platforms, but also our on-prem. And a couple of things we actually do with that is from a technical perspective, we've got some geolocation. So we can actually put a perimeter around and geolocate someone. So for example, if I was logging in from here in London, would be great, that's fine. But if someone had stolen my credentials and is trying to log in from North Korea, the system itself would automatically detect that and prevent that from happening. And the whole purpose of this is to actually reduce the threat footprint. It's to reduce your risk. And by controlling that and making the software self-administrating, automated and self-serving, it reduces the complexity for the customer. It reduces the overhead for staffing and management and -- but still maintaining the levels of security and compliance that the company needs. In terms of the types of sales there, they are smaller. Hence, got 750 clients around the world. Typical license periods, 1 to 5 years as a deal structure. In terms of revenues there, Jon will come on to some detail on that later on, but needed to say, the revenues that we receive in our software are high-quality revenues. So it's very important to the business. So just a little bit of a case study. You can find further details there on the link below. But just to overview, what it was is a U.S.-based financial services company spread throughout the U.S., multiple offices, multiple environments and they need to create the flexibility plus the security. So they need the high availability and the office access and the scalability. They didn't have the resources for the management, so they wanted the ease of management. They want people to be able to self-serve it themselves. And SecurEnvoy entered with MFA and completed the RFP and the POC. And what they'll be able to demonstrate is obviously the value of their product set, the flexibility of their product set and the integration capabilities of where the product set can go. So it's future proof. It can do everything that's needed today, and there's obviously the road maps for how it can connect in the future. Obviously, this delivered way beyond what clients' expectations were. And I'd like to think that this is a piece of -- another piece of repeat business that we can see further down the line. So the opportunities for growth, where will we see that coming from? So from the Services side, obviously, we've mentioned about the increased threats on the -- that we're seeing in the news. Every time there's a press release with another incident that gives us an opportunity for the purse strings at our customers to open up and for us to sell more. We're attracting new business coming from that. We've got a very prestigious client list. And once again, with that, that helps breed new opportunities in new clients for us. We're leveraging new technologies. We've been working with AI-based technologies now for in excess of 5 years. We've been talking about deepfake for longer than that. Everyone is on AI. We're delivering in the AI. We've been doing that for some time. But we're also looking at the next breed of problem, and that is on post-quantum. And now we're looking at solutions that we can take to our client base. We're already in discussions about post-quantum technologies and actually how to defend in years to come. The reason we do that now is because these agendas do take a long time. The clients are very big. There's a lot of people involved. And what we need to do is make sure that we are seen in this space, not just for today, but also in the future. So we start that journey now. And as we get these new technologies available, we'll be integrating them to those bigger corporates. And obviously, what this helps us to do is increase our stickiness. But also, what we need to do is actually drive our profitability in our services. And to do this, one of the things we have noticed with our large corporates is we have got -- we'll go out and design, we go out and implement and deliver a technical solution, we can even maintain it. But we haven't been so successful in winning all of the services associated with a large corporate. And that's because they want to do it themselves. They will not outsource that piece of risk. So for us, what we're looking for is how do we actually get our hands on some of that. And the way to do that is actually to step down from some of the larger corporates into the Tier 2 and Tier 3 marketplace, the smaller organization where they don't have the skill sets available, they don't have the engineering or the know-how, and they're looking to us. So what we're looking to do is actually build out those services, managed services, where we can actually enjoy margins of 20%, 30% and 40%. And that's what's obviously going to help grow our profit margins. So opening up those Tier 2 routes will be -- is very much on the agenda here forward. We also -- as I mentioned, we're in G-Cloud 14. We're now starting, believe it or not, the process for bidding for G-Cloud 15 -- excuse me, it will take us some time. These are long big frameworks. So we will get through it, hopefully. And hopefully, we'll get a position on that one. But so far, it's been good. We've been winning business on G-Cloud. We're currently servicing some of the larger departments, Home Office, Cabinet Office. We're also seeing some pass-through wins. So we have seen opportunities come to us where we believe that, for example, our Pentest division can be successful. And we passed an opportunity to them. They responded. They wrote the RFP and under very tight conditions, they managed to be successful. And that's resulted in a significant 6-figure consulting engagement win, which will get deployed over the next 12-month period. And these are the sort of things that we're hoping to actually achieve from the G-Cloud. The types again -- once again, the types of solutions we're selling, they're very sticky. Cost of change is very high. It's delivering market-leading technology. And the government, I'm glad to say, are buying these things to help defend against the adversaries that we're seeing today. On the Software side, over the years, we've been spending a significant amount of money on R&D and development. A few years back, the software needed enhancement. It needed to meet new regulations which are coming out. It needed to meet the demands of enterprise-grade requirements. And I'm glad to say, over the time, the team at SecurEnvoy have been spending time, effort and money in actually achieving that. We now have a very robust product set. We have a good infrastructure for delivering. And what we're looking for now is obviously to actually retrieve some of that investment and see these new sales coming through. A couple of other things we see on there in terms of how do we improve the margins and the opportunities for growth is we deliver it through 2-tier distribution, as I mentioned. Not all the locations around the world are benefiting from that. So where it makes sense, we will probably remove some of those distributors, and we will go directly through to the resellers. What that means is that we will obviously be able to take some of that additional margin that we would have passed through distribution and bring that back to our top line. Another thing we got there is our AWS Marketplace. So the American markets, they operate slightly differently to Europe. There's a lot more sort of direct activity. And what we've positioned ourselves now is on the AWS Marketplace where clients can actually go and buy this software directly. And now what we've got to do is go to market that and make sure that we're seen there by corporate America. And with that, I'm going to pass over to Jon, who will be able to give you a more deeper review of our performance to date. Jon?

Thank you. So we're showing there the performance for the 15 months to 30th of June 2025. And I think the first point to address is why we're talking about a 15-month period rather than a 12-month period. Historically, our year-end has always been 31st of March and a significant proportion of the business that the company has done has come in that final quarter of the year. And actually, even within that final quarter of the year has been very weighted towards March and sometimes even within March towards the very end of March. Phil mentioned earlier, a contract with one in 2022, just over GBP 12 million that was signed on the 31st of March. That renewed this year, GBP 8.4 million on the 31st of March. So this wasn't just based around that contract, but it's a good example of why there is a potential for some really quite significant volatility in our reported numbers based on some really small movements in timing around the signature of certain contracts. And that period around March tended to coincide with a lot of the procurement cycles of particularly our telco clients. So we'd see a lot of business transacted. We'd always be expecting a lot of business to be transacted. We could have some quite material variations to our final numbers based on some really small potential movements. And there's a second implication from that is that even when the projects do come through as we'd expected them to, we didn't have clarity and certainty of that until right at the very end of the financial year, made it very hard to manage Investor Relations and to brief the market and guide investors appropriately. What business tended to do as a result was to keep its head down until it knew whether it was definitely going to hit the numbers or not. And sometimes, it wouldn't know that until the year was almost, if not completely over. So by shifting back to June, we still have some big projects. They can occur at any time in the year. We can never completely remove volatility, but it certainly reduces our risk around those timing differences that we were seeing with the 31st of March year-end. We expect it to enable us to be much more proactive from our Investor Relations and our comms activity. So you'll see much more of us out being vocal and talking about the performance in the business because we're able to have a slightly better visibility of where we're tracking towards. So for those of you who are at [ Mello ] next week, you'll see Phil and I there together with a couple of the leaders of the individual business. So anyone who is there, we would be very happy to speak to you and talk to you a little bit more about both the numbers and what we do as a business. So that was the context behind the movement of the year-end. What we're, therefore, looking at is a strong picture overall, revenue up 29% to GBP 39.5 million. Our gross profit and gross margin down very slightly -- or margin down very slightly. Our pricing has actually sustained reasonably well. It's really a mix effect, and I'll give you a little bit of insight into the Services and Solutions segment in a moment, and I'll be able to illustrate that. Keeping tight control in admin expenses, actually down slightly year-on-year. So what that leaves us in total is an adjusted EBITDA of GBP 2.2 million, up 91% on an annualized basis on FY '24. The other point, I think we need to pick up from an accounting perspective, the other thing that's not -- or not quite like-for-like with how it's been done in the past is we've had a slight change to our revenue recognition policy, which also resulted in the prior year adjustment. So to give you the rationale for that, probably best to take a step back, first of all, explain what part of the business it affects. This comes down to our solutions business, which sits within our services business. This is where we are providing cybersecurity solutions to really prestigious big blue-chip organizations. They will come to us with a need or a problem. Our role there is to understand exactly what the issue is, is to understand their existing systems, their existing IT structure, to understand the best tools and products available in the market to go out and to procure the relevant solution, which might be a combination of third-party software, third-party hardware, our own engineering services to deploy that contract and to roll it out across their organization. At the point at which that is rolled out and available to them, our work is largely done. And so historically, the revenue recognition policy, even on, say, a 2- or 3-year software licenses at the point it's been deployed and is available to the client, the full revenue and profit on that contract has been recognized. Now increasingly, when Brookcourt first started, most of these solutions were what we call on-premise solutions. They don't require contact with the outside world in order to retain that functionality. They'll be hosted on the clients' platforms in the client's data centers. More and more now, we are seeing cloud-hosted software solutions, SaaS-based solutions as part of that solution. And while the old policy was a reasonable reflection of where our work was happening, IFRS 15 is reasonably clear that when you are deploying a software SaaS solution and license over a period of time, the revenue on that should be spread. So we've adopted a revised policy this year, whereby on those kind of contracts, we will spread the cost of sale evenly across the contract duration. We will apply a small markup to that cost of sale to determine how much revenue would also be spread. We will then take a balance between that and what we've actually been paid as the fee that's effectively being paid for our expertise and our services. 90% of that incremental fee will still be recognized at the point of delivery because that's when our work has been done, and our value add has been provided. But you will also have 10% of that phase reflecting our sort of ongoing contract and project management across that period. So slightly different approach. But I think one of the things we're very conscious of is while there have been a couple of changes here, I don't want this to look like smoke and mirrors. The original market expectations for the year were revenue of GBP 39 million and an adjusted EBITDA of GBP 2 million. We've reported revenue of GBP 39.5 million and adjusted EBITDA of GBP 2.2 million, so ahead on both metrics. Had we stuck to the old accounting policy, would have been a revenue of GBP 41.4 million and adjusted EBITDA of GBP 2.3 million. So it's even slightly improved. But we've made a change for a couple of reasons. Firstly, just under IFRS 15, it's the right thing to do. But the other advantage of it is it does give us slightly more forward visibility on revenue. So we know we've got to the end of this year, and we've got just over GBP 15 million worth of contracted revenue, which has not yet been booked. So of that GBP 10.7 million will come in during FY '26, the year we've just going into. So as well as being the right thing to do, it gives us slightly better forward visibility on our revenues. To give you a bit of more insight into how our performance breaks down between our services and our software businesses. As Phil has already touched on, the growth engine has been the services side of the business and in particular, that provision of solutions to our sort of big blue-chip long-term and long-standing client base. 35% growth in the Services segment this year, revenue up to GBP 37 million. Gross margin down slightly to 22% from 25% last year. As I say, even within the Services segment, that's primarily a mix effect. There's 2 parts of the services business really. There is this provision of third-party solutions to our client base, which will include a reasonable element of costs related to third-party software, third-party hardware, along with our own engineering services and design of the solution. Alongside that, we have a slightly higher margin business, which is more around our consulting business, which is both our penetration testing and also our governance consulting, our supporting businesses through the ISO processes and those kind of audits. That's typically a higher-margin business, whereas in the solutions business, we're typically in the 15% to 20% range. That business is typically in the 35% to 40% range. What we've seen this year is proportionally growth in the solutions business. We're actually slightly down in our -- particularly in our penetration business this year. We had one material client or material project finished, still a strong relationship with the client, but that part of the business had record revenue in FY '24 with one really big annual project, which finished at the end of Q1 this year. So slightly down in our penetration business, up in our solutions business gives us a slightly lower blended margin, but still a good increase in EBITDA overall in that segment of the business. Our software business, also slightly down year-on-year, down 15% on an annualized basis, although still GBP 2 million of good quality annualized revenues there. The cost of sales you see there are primarily our sales team, our sales promotion activities that go alongside that, relatively fixed in the short run, which means as we drive additional revenue through, that goes straight into revenue, and it drops down into the gross profit and therefore, the gross margin percentage goes up. Conversely, when revenue is down a little bit, and you'll see it down on an annualized basis, GBP 0.4 million. That GBP 0.4 million has dropped straight through into gross profit, so the percentage margin comes down. In reality, other than paying a little bit of commission, as we sell each additional GBP 100,000 of software licensing for our own proprietary software, that falls straight through to the bottom line. So that's what's happening there. And as Phil has touched on already, we've done a lot of work to improve the product to understand where we win, and we've got a good level of confidence that we're going to see some return to growth in that software side of the business in FY '26. In terms of the bottom half of the income statement, the number, I think, will stand out to everyone, the exceptional in particular, the impairment of intangibles. Again, if I take a step back, this being my first year through on the year-end process with Shearwater. When you look at last year's closing balance sheet, there was a goodwill and intangible balance of just under GBP 43 million, which were a business that closed last year with GBP 5 million of cash and had a market cap at the time of about GBP 10 million, always felt like a relatively aggressive valuation for goodwill and intangibles. And of that, about GBP 15 million related to a combination of software business and the penetration testing business, both of which were slightly down on revenue this year. So when we looked at the assumptions that have gone into the forecast, we looked at where those businesses -- how those businesses performed over the course of this year. We felt it was right, it was felt it was prudent to reduce the carrying value of the goodwill and intangibles a little bit. And once we've gone through that process of saying, well, if we're going to reduce it, let's make sure we do this in a reasonably prudent basis, let's not be too aggressive and run a substantial risk of having to redo that next year. So we went with maybe a little bit higher impairment adjustment than possibly we could have done for that reason. I think the other point to make there is we actually have a relatively good level of confidence about how those businesses are going to bounce back next year. But you then get into the discussion around, well, how much of that confidence is based around what you're doing now and how much is based on the retained value that the goodwill and the intangibles we're really assessing go back to the acquisition of those businesses, which were 6, 7 years ago and how much a regrowth we're expecting to see in those businesses dates back to what we originally bought versus what we're doing now to create it. So blending all those factors in, we felt that a substantial impairment made sense. But obviously, that's a noncash charge. It doesn't impact on our underlying trading performance, and it doesn't impact on our cash. And on cash, we closed the year with GBP 5.1 million. The cash balance does move around a lot. We made a note there that we delivered one project for a client. We deployed it at the start of April. They're on 90-day terms. Had they chosen to pay 5 days early, would have been reporting a cash number of about GBP 6.8 million, GBP 6. 9 million rather than GBP 5.1 million. But just over GBP 5 million is not a bad estimate of what the true underlying cash position of the business was, albeit, like I say, it does move around quite a bit during the year. So one of the questions that often comes up to us is, well, what are you going to do with that cash? Is that a cash balance that you want to keep on the balance sheet? I think there's a couple of parts to the answer for that. First part of that is, it is important for us to have a healthy cash balance. We sometimes have the opportunity to make margin on projects if we're able to cash flow them for a period of a month to 2 months. And so having some firepower, having some resilience in our working capital gives us the ability to take on projects that will make us money in return for being able to bridge some relatively short gaps in working capital. Similarly, it's also really important, I'm sure you can imagine, we deal with very high-profile blue-chip large organizations and government organizations. When they're entrusting us to deploy, manage and run their cybersecurity solutions for a 3, potentially 5, we're even talking about a 7-year contract, it's really important for them to see strength on the balance sheet and stability in the business. We're not the largest business they deal with, they will often be talking to a real big 4 or other types of business. So really important for us to show some stability and some security on our balance sheet. So as I say, the cash position does move around. But I think the overall position we have is a strong one, it gives us resilience. It gives us the ability to manage our working capital to help us grow organically. And sometimes we get the question, well, what is then a sensible number? We don't want to see cash just sitting there idle and not being a value. And I think north of that GBP 5 million value is a number that takes us past the position of being what's necessary to manage the working capital, what's necessary to show resilience and into a place where we ask the question of, well, how do we best put that cash to work. And there are a couple of angles we're looking at that. Firstly, the goal for this year was always to return the business to organic growth, demonstrate that you're making profits, hit your market expectations, so we can get the share price moving back in the right direction, granted not over the last 24 hours, but over the last 6 months, we've seen a positive trend overall in share price. We had to prove that. That gives us the ability then to look at whether there are opportunities to supplement the organic growth we can expect to continue with inorganic growth and M&A activity. So that's something we'll be looking at. And we'll also be looking at whether it makes sense for us to have a small share buyback facility just to consistently take out any kind of excess of supply in the market. Occasionally, we've seen some quite big moves in the share price off the back of some fairly low levels of sale. So where we think that there's the cash to deploy, where we think it makes sense to do that, we're also looking at whether we have some form of share buyback scheme, which doesn't materially eat into our cash balance, but does just take a little bit of that volatility out of the market. But fundamentally, the point we want to get across is healthy cash balance, robust position, and it gives us a good platform to drive our growth activities.

Thanks, Jon. So just to take you through some of the momentum now into fiscal '26. First of all, a little bit obviously about the sector opportunity. And depending on which report you read, there's a huge opportunity in front of us now. Global cybersecurity market is growing at a phenomenal rate. And the bad people are out there, they're going to continue to do bad things. And all the time they're doing that, I'm glad to say we've got a job. Our corporate client base is a who's who. It's a very enviable list, and we're looking to build upon that, go deeper and wider to bring in new clients. We've been winning net new logos as well. We're working with some of the -- what we consider some of the best technology organizations available today. We are very much in tune with next generation. And we're working with our clients at a very high level. And those types of relationships do build upon what has already been clearly established as some very long-term client relationships. As Jon mentioned, we've got a very robust financial position. And we're using that effectively. And as that grows out, what we'll be looking to do is obviously then pull up on some of those choices as to do we look at M&A. And if we do, what do we look at? Well, we'll be going down -- we want to buy things which are complementary to the business, which are going to be cash generative, accretive value to the company. And we're not -- we will not be buying for the sake of buying. We'll be very selective about what we go for. And one of the challenges that we had historically, as you know, has been able to communicate to you simply because of our year-end. And what the team have done is obviously changed that. And that's -- those policy updates that we've had have allowed us now visibility into next year and beyond. Historically, we used to take all that revenue on the nose and come April 1, we all went back down to 0 again. What we can see now is, obviously, as we win a multiple year deal, we can actually see into the future, knowing that next year, we've already got some money on the board, which is obviously a part of the objective is to layer up these opportunities, layer up this income. So the [ decline ] isn't quite so big every single year. On top of that, it's okay, well, what's '26, what's it look like so far? Well, we've had a great start to the year. Obviously, with the start date of the 1st of July, you're right in the middle of the holiday season. So July and August tend to be a little bit slow, but things start to warm up in September. Historically, this period was a very productive period for us. So so far this year, we've won some significant million-dollar deals. We've won government contracts. And we've got a lot of bid opportunities on the table. And one of the most important things I'm seeing is the level of conversations, the volume of conversations, the number of RFPs which are coming through from the government, from the banking, from the telco, from retail, we've seen these opportunities come in. And the purse strings are opening up. Every time there's another event that's been publicized on TV and people have seen that the cost of risk of failure is just far too great. So now they're actually investing this money. Some of those delayed products -- projects are coming forward. We do still see some headwinds in the decision-making process and some of the time it takes. But we're getting used to that, and we're working with that program. So the pipeline moving forward is looking very good. We've got some strategies and plans to actually build upon improving our margins and our contributions. We've got some large-scale corporate projects in the pipeline, which we'll be delivering over the next few years. And we're winning new and bidding for new business as we talk. So with that -- with all that in mind, I'd like to conclude today's presentation and hand back to [indiscernible] for any questions.

[Operator Instructions] Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via investor dashboard. As you can see, we have received a number of questions throughout today's presentation. And if I may just start off with the first question here, which reads as follows. Given that the global cybersecurity market is growing as a threat level increases, can you expand on the opportunity this creates across both the Services and Software divisions?

Certainly. You're absolutely right, it is increasing. The budgetary spend is increasing as well. There's a lot more onuses on maintaining the security around that data. And the fines are getting bigger. So there's quite a lot of sort of downward pressure on organizations to spend that money to secure it. The cost of failure is huge. We've seen it in the press. Just look what it's done to Jaguar Land Rover, to Marks & Spencer. These are the sort of things which are driving it. And with our product set, we've got low competition in the types of solutions that we sell. So we've got more chance of winning. We got the opportunity of double-digit margins on this technology as well. It's not -- doesn't have the price competitive positions that many others do. With our Software, we're servicing the cloud market space as well as the on-prem market space. And that's obviously driving new opportunities as well. We've got a very talented team who sort of sit behind all of this. And we are obviously very much engaged with the corporate marketplace. We're working very closely with our partners. And as a collective, as a collaboration, we are winning these deals coming through. So I do expect the threats to increase. I do expect new technologies to come through. And I do expect us to win more business as a result of that.

That's great. The next question we have here reads, what is the outlook for the Software division for FY '26? And what is expected to drive performance?

Well, in terms of driving performance, as I mentioned, we're -- the -- we are seeing renewed interest in our on-prem technology. And not everyone is moving to the cloud. Not everyone wants everything in the cloud. So there is a place of play for us in the on-prem market. A lot of our competition are only developing for the cloud solution, and they're forgetting 20%, 30%, 40% of the marketplace, which is still on-prem. So I'm kind of hoping that we're actually going to start attracting that business. On top of that, we've been -- we've made sure that our product set now is meeting the today's regulations and compliance requirements. And we've got a forward plan for maintaining that. As these new regulations come available, both domestically and internationally, we're making sure our product set meets these. And it now comes down to us actually driving some of that profitability by reviewing our supply chain, making sure that we've got the most efficient route to market, that's the most productive route to market and where we can reduce the people between us and that end client, we will obviously be able to bring back that revenue back to our top line. But coupled with that, we also need to increase the number of sales. So there's a very active drive, not just going for the smaller customer base, but we want to step up. So we're spending the effort and the energy in actually going after the bigger corporations. We've been very fortunate back in the summer to win a significant contract. And we'd like to think that there's a number of RFPs which are available to us now, and we're responding to those. And hopefully, we'll be successful in those, and that will help drive our Software revenues.

Can you talk us through the rationale for the change in accounting policy and the change in year-end?

Yes, that's one for me. I mean I think this is one of the questions that came in advance. I think I've covered it a little bit already, but just as a really brief recap, around the change in year-end, it was around reducing the potential for volatility based on really small timing delays in contracts and about giving us slightly more forward visibility of where our numbers would come, which is going to enable us to be more proactive from an Investor Relations standpoint. From the change in accounting policy, it's around compliance with IFRS 15 in the context of an increasing preponderance of cloud-hosted software solutions as part of the product suite, which also has the add-on benefit of giving us greater forward visibility on our revenues.

Just moving on here. Cash interest seems very low considering the cash balances. Could you please comment?

Yes, certainly. So I guess first thing to say when you start the period with GBP 5.0 million and finished at GBP 5.1 million, it looks like you have GBP 5 million of cash sitting in the bank every day and not really doing that -- that's not the case. Our cash balance does move around through the year. I think you'll have seen at the half year was a bit lower. It rises towards the end of the year because we tend to have -- we've typically had a sort of second half weighted portfolio and a lot of billings. So the average cash balance you take as a basis for that would be lower. We do try and manage our cash [ as sensibly as we ] can, where we can put that to work by using it for working capital and get a better return than we can by putting it in the bank, we do that, and we see the benefit of that in the gross profit rather than in the interest line, but we do still use a combination of long-term deposits, overnight deposits to try and get the best return on the cash we can where that doesn't compromise our working capital.

Forward analyst forecasts have adjusted all through the forecast. When will you get to a clear set of results? And do you expect further write-downs?

So the accounting changes we made are a one-off. So they're just in the sense that going forward, everything is in line with the new policy. If we have a similar portfolio and profile of revenue each year, then actually you'd expect there to be no real net effect of the policy. We've just got a revised policy that then flows through all years. So next year should be a clean set. I think we mentioned when we did the impairment, maybe we could have thought a little bit harder this year to impair a little less. I think some impairment was always going to be appropriate. We decided to be relatively strong in terms of how much we wrote that down by for exactly that reason. We want a clean set of numbers next year. So we're expecting the FY '26 numbers to be relatively clean. Obviously, we're just going through the year. We're not sure what will happen through the year. But the idea of, I think, coming in, new CFO, new auditors, tidying up the accounting policy, moved the year-end, deal with it all in one go, gives us a clean basis from which to move forward. So we're expecting to be clean going forward.

That's great. Just moving on here. What are the main factors preventing a return to 2021, '22 EBITDA levels? Market conditions, internal execution or structural changes? What is in your growth forecast with such a huge market to go after? What is the management teams with growth ambitions?

That's a good question. There's multiple things involved in that. So obviously, there's been downward pressure on pricing and affordability for some time. What we are doing to actually drive some of that profitability back in to actually bring those EBITDA levels back up is to step into what we're referring to as the Tier 2, Tier 3 marketplace to wrap more managed services where the margin levels are at 30%, 40%. And by doing that, we're still going to maintain, obviously going after the large project deals, the multimillion dollar deals over many years. But that's great for the big Tier 1 banks and telcos. But on the smaller companies, we want to get involved more with the managed services on a constant basis and delivering a more steady income. And more importantly, a better quality of margin contribution to the Group. On the Software side, once again, it's about selling. We've got some very strong, very attractive revenues inside the software world. And we need to do more of that. So earlier this year, we recruited a new sales director in the SecurEnvoy division. And there, there's some structural changes have taken place, some reorganization and a review on how we actually deliver to the corporate landscape and through the partners -- making sure the partners, the distribution partners and reseller partners are actually earning their money. We want them to actually go out and sell it. So the incentive programs, the marketing programs, all of these things have been enhanced with a drive to actually selling more. So obviously, we're measuring and monitoring that very closely, and we'll be able to report back on that in -- at the end of the year. And hopefully, we'll be able to show some improvement with our margins.

Just turning to the next question. 22% gross margin on Services doesn't leave much leeway to deal with cost increases. How are you seeing the cost landscape, both for employment costs and non-people costs?

You're right. I mean, in terms of our people costs, we're like any other organization, we try and award pay rises when we can. We enhance our staff's packages as best we possibly can. We try to attract the best possible staff that we can. There is always -- that's always tough. And we try and create the environment for our engineers, where they've got an opportunity to broaden their knowledge base, not to be stuck and pigeonholed into one space. So we're trying to create the environment where we can maintain a good staffing level. It's been really stable over the last few years. And what we've been looking to do is obviously maintain within reason, a cost of -- so to say, inflationary related pay rises. And our team has been very good. We haven't always been able to achieve that. And what we want to do is obviously try and get back to that level. But that does mean that we have to drive our bigger margins inside our business. In terms of the cost of the hardware, there's always downward pressure on the manufacturers to reduce the cost of our nonemployment costs. We have some fixed costs, which obviously suffer from inflation, office electric resources and things like that. But our material costs that we're seeing in -- that contribute to our solution business, we are seeing a reduction in those. That is a very competitive market, and we do see some of those costs are actually getting cheaper. So one is offsetting the other on that. But needless to say, what we are trying to do is actually find some of those new technologies. We are seeing a bigger shift into SaaS-based service and solutions that way. And with that, some of those overheads that we normally would see are disappearing. So it is working itself out. It is balanced. And the thing that's going to change the dial is obviously us improving our profit position, and that we will do, as I mentioned, through improvement of supply chain and also by bringing to the market new service offerings.

Goodwill impairment, why have those acquired businesses underperformed original expectations?

It's a relatively tricky question to answer because the original expectations, I think, was set back in -- when they bought about 2018, 2019, so before Phil and I both being involved in the business. So it's hard to comment, I guess, on the original valuation, the original expectations that was set for them. I think with the software business in particular, it was an early adopter. It was an early market leader in that identity access management space. At the time the product came into the Group, I think it probably prioritized cash flow over the last year or so of the period running up to the acquisition. As a result, we've had some work to do to get the product back to be a market leader. So you've seen some product investment go into that. That's really what, I guess, is giving us an increased level of confidence about where it will be going forward, but it has taken some work for us to get there. The penetration testing business is -- yes, it's a good business. They are very good at what they do. I'd say it's -- I don't know, Philip, if you can add anything. It's hard to comment on the basis of the original valuation. But this is a team that they go out and win global penetration testing competitions. They are expert at what we do. We see a lot of potential for it. There was one other question that came up, which I think I might have clicked on the wrong button where I sent it as to why we lost that one contract during the year. That contract was with a big U.S. Software House, one of the biggest companies in the world. They're still a client. Our relationship with them is very strong. We're still doing work for them. They took on a 1-year contract in a particular segment of their business, which is always a discrete project, a discrete piece of work and the work stopped when that project finished. So we've won other projects over the course of the year, but smaller projects with gaps in between, which makes it hard to sustain that level of utilization at the same level throughout the year, which just drops through to the bottom line. So apologies to have this question I sent a wrong way, but fundamentally good businesses, but hard to comment on the original valuations.

Just moving on, what was the average and the lowest cash balance during FY '25? Where do you see your management forecast for FY '26 see the year average and lowest cash balance this year?

So typically, the business, we were very rarely below GBP 2.5 million. We've been at GBP 3 million at times. It did touch GBP 10 million at one point. If I sound a little bit scattergun on that is because the cash balance does dot around a bit, and it does depend on the timing of payments attached to specific contracts, particularly within that Solutions segment of the business. So there will be points in which it goes very high. There could be points in which it drops lower this year. We're already looking at one opportunity over the coming months, which might require us to cash flow a project for a couple of months in return for some fairly healthy margin. So it is quite hard to answer. I would say at an average level, we probably averaged somewhere slightly below the year-end figure, probably closer to GBP 4 million. I haven't done the math to look at exactly where it was. But of that, it would have been around GBP 3 million for a bit, and there would have been periods where it was significantly higher. And just in terms of where -- again, hard to say where the high and low will be over the next year. I suspect it will drop over the next coming months. We know we have cash coming in and we know we've got cash to collect on. For example, the GBP 8.4 million deal we did in the second half of last year was paid in 2 chunks. So we've been paid one chunk of that. We have GBP 4 million of that coming in with strong margin, which we know will get paid in around the final quarter of this year. So I suspect it will dip, but always to relatively comfortable levels before it will increase again in the second half of the year.

Given the past track record of acquisitions not living up to expectations and hence, the company overpaying, what makes you think that any future acquisitions will be different?

Well, firstly, as Jon mentioned, we weren't involved in the previous acquisitions. And on a more serious note, I think that the way the acquisitions were reviewed last time around was through a different lens. I've been in this industry since the birth of [ PLC ], so over 35 years. And we're taking them -- it's not just a case of is the technology right. Jon and his experience of PLC contributes along with our advisers, our executive -- nonexecutive advisers and [ heads ] and so forth, we're taking reference on where the market is going. We're looking at our gaps inside our company. We're looking for accretive value to the business. We're looking for those gaps. And it's not just technology, it's also the company structure, the ethos of the company. We're looking for that blend to come in. That's the win. We get an awful lot of opportunities thrown at us as to take a look at this. We're getting one a week. And we're going to be very selective about what we're buying. We're not buying for the sake of buying. We're not just going to collect a bunch of companies. We want to collect value, and we want to be able to show that accretive value. And we've got a lot to answer to. So we've got to make sure it's right. So as before, the decision process was very small, not many people involved. We are widening that out, so technology involved as well as finance as well as the market trends as well as looking at where our own holes are inside our business, what we'd like to fulfill. Sort of things that we are interested in, you can appreciate this managed services, good strong double-digit margins. Obviously, software, if we can find complementary software at a reasonable price, then that will be added. But it's going to be able to actually stand on its own 2 feet and be able to contribute to the bottom line.

Yes. I think the only thing I'd add to that is when the Group was first formed or created out of what was a shell of another vehicle, it was set up as a buy and build. And I think there was a desire to show momentum and go out and acquire businesses relatively quickly at that time. We don't need to do that. We're not in a rush. We understand in which areas we win. We understand what's complementary to what we can do well. And so we understand -- and we'll understand where we can drive out synergies. And at the moment, there are some companies out there where the valuations, I think, are more sensible levels than they probably were at the time some of those original acquisitions were made. But we're not -- we're going to be choosy. We're not going to buy something that we don't think adds real value for shareholders.

Just moving on here. Now that the impairment has been taken effectively recognizing the overpayment for pre-2021 acquisitions and with the business steadily recovers pre-2021 performance levels, can you explain the rationale for prioritizing share buybacks over reinvesting in higher return opportunities? Is the plan to shift capital towards higher ROA growth investments going forward?

Yes. We will look to deploy the cash in a way that delivers the best return for shareholders. If we can find opportunities out there to invest in growth organically, we will do it. If we can find good M&A opportunities that require a little bit of cash, we will do that. All the while we're making sure we retain a pretty robust financial position. And if we still see the opportunity to use some excess cash that isn't otherwise being used to just mop up some supply and to ensure there are no -- or to minimize the impact of fluctuations in the market price, then we'll also look at the opportunity to do that. But that wouldn't be done with -- to an extent that it will compromise cash that we've available for our higher-margin growth activities.

That's great. What are your EBITDA margin ambitions for FY '26?

I think most of you've probably seen Kimberley has done a really good note, really detailed note. We see margins growing steadily, but not transformationally in percentage terms in the Services segment of the business. As Phil says, sort of strong relationships, increased volume of work, that will give us the ability to grow that top line revenue. As we can bolt in additional services, particularly managed services, that will enable us to drive the revenue back up. And we think we'll see recovery in the penetration testing business this year, which will give us a better blended margin. Taking us back -- we were 22% last year, taking us back up towards the 25%, I think you would have seen in prior years. And similarly, in the software business, we will invest a little bit in our sales capability this year. That will give us an ability to go direct. That will probably mean we sustain a percentage margin around about where we are now before it will grow into FY '27 and beyond. But we'll do that. We'll sustain that percentage margin based on higher revenues I would expect in the software piece. And obviously, that will give us a slightly better blended margin at an overall organizational level.

And the last question we've got here reads, if you review the revenue and profit results going back to FY '20, the business just hasn't grown despite being in what should be a high-growth area. Revenue for FY '25 adjusted for 12 months is actually the same as it was in FY '20, '21, '22 and I've excluded the 2 poor years in FY '23 and '24. What's changed in the new financial year to make us, investors believe that Shearwater have really turned a corner and will return to growth?

That's a big question. I think it may be a bit of both of us answering there. Obviously, just to go back on the revenues and what we've gone through. Obviously, during the COVID periods, we were affected as a business. We had a high concentration of consultants who would trade their business face-to-face across the table. And that stopped. We still carry the cost. We didn't furlough anyone. We kept everyone on. So we suffered as a result of that. We also then on the half year during Liz Truss' short stint in the government, we had to take a big hit on currency. So there's a few one-off events, which has really impacted our numbers. In terms of the quality of the business, though, that's still been there. We still had -- we haven't lost the clients. We've still got some really good prestigious clients. And they -- our banks and our telcos have been investing constantly. And there has been some slowdown historically in spending that money. Some of those decisions were taking some time. And that's been played out over the last sort of 24 months or so. So what's changed? Obviously, we -- what we've been doing, we've been looking at the business and looking at where we've actually been earning our profits, and we've been gearing the company more towards that. We recognize there's some holes in it. We recognize that we need to move more into those managed services, which contribute 30%, 40% margins to the P&L. And what we've -- we still are servicing those large-scale projects. We're still winning those projects. So we just need to broaden that out. And we've made the investments in the software to actually contribute to that increased profitability. We've got our plans for maximizing our supply chain and getting the best out of that. We've got a very narrow field of market where we're actually a vendor portfolio, which we work very, very closely with, and we're not trying to address everything in the market space. We're trying to be the best at what we do for the clients we do it for. And with that, it's been winning clients. So I'd like to think that, yes, we have had some challenges over the last few years. But I'd like to think that with this positive momentum that we've shown you today, I just want to go back to our performance has been above market expectations. So -- and by all means, and Jon mentioned the Cavendish note from Kimberley, I think this is available on our website or it will be through Research Tree. So please have a read of that. And it gives a good oversight as to where the market is. And you can see in that where the Group actually plays and where it should be benefiting from. Jon, I don't know if there's anything more you want to add to that.

No, I mean, I guess, having been here for a year, it's hard to go back to FY '20 and say where should we have gone from there. What I've seen over the last year, the product on the Software side is in a much better place than it was a year or so ago. That gives us some confidence on the Software side. And obviously, when you look at the blend of the margins, that's very helpful in terms of where it can drive us to. We're seeing a really good volume of activity on the services side, both in terms of what we've delivered in the last year, but also our pipeline looking forward. We've still got to keep winning. So you can never guarantee that it's done, but the level of inquiries we're seeing is strong. We've broadened out the number of clients we have. As Phil says, we've now got all the big telcos. So there was a 5-year deal. We mentioned earlier in the slides, $12 million over 5 years that we've just embarked, that was a completely new client. We also took on another big telco which works periodically within the past, but not at scale. We took a small -- we took a project at low margin in the first half of last year to really open that account up. And we had 2 more projects with that same account come in, in the second half of last year, each one upwards of GBP 3 million. So the sector is growing. Our position, our brand and reputation that is strong. We're broadening out our client base within that, which gives us some resilience to our earnings. And we've made some investments in the product on the Software side, which gives us some, I think, good foundations for growth.

Phil, Jonathan, thank you for answering all those questions you can from investors. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide you with their feedback, which is particularly important to the company, Phil, could I please just ask you for a few closing comments?

Certainly, and thank you. First of all, thank you to the listeners. And hopefully, you found today's announcements positive and informative. I'd also like to thank our staff and the work they do there, our executive and nonexecutive Boards and our advisers. So I mean, they've all contributed to this program. They're all behind this program. this -- today's results are reflective of that work that these people have put in. We've got a very positive momentum at the moment. As we've mentioned, we're very well positioned. There is increasing threat, and we're in there delivering to corporate clients, both in banking, telco, retail and government. We are growing our businesses. We're focusing on our profits. We've got a very robust financial position. And we've got a great team of trusted partners who we're working with. And when you consider all those things together in today's landscape, I'd like to think that we're achieving the first set of our goals, and that's to start delivering back to the community, the numbers on our investments. And with that, I'd like to say thank you very much once again. And hopefully, we will see you again in -- at the interims.

Phil, Jonathan, thank you for updating investors today. Can I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Shearwater Group, plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you.

Thank you.