Shearwater Group plc (SWG) Earnings Call Transcript & Summary

Good morning, and welcome to the Shearwater Group plc Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Phil Higgins, CEO.

Good morning, and thank you. Hello, everyone, and welcome to today's presentation. With me is John Hall, CFO of the group. And so we'd like to take you through today, obviously, our results. And this year, we're doing it slightly differently. We're actually going to show you our -- obviously, our closing slide, our executive summary. And just to -- what we're hoping for you to take away today is obviously these key points. Firstly, obviously, our sector that we're in is growing constantly, as you can see from what's coming out in the news on a regular basis. We've got a proven track record. We've got over 40 awards to the group, and we have got our own proprietary software. We've got our own award-winning consulting business, and we've got our own solutions business. So as you can appreciate, what we have -- we specialize in certain type of technology and services that we deliver through to blue-chip customers. Over the last 12 months, we've been delivering good, strong organic growth, and this is our second year of good growth, and we'll be able to give you some more details on it later on. The 34% revenue growth is obviously an annualized number. Don't forget fiscal '25 was a 15-month period, and this is our fiscal '26 was our first 12 months. So on an annualized basis, numbers are up. Obviously, we've still been focusing on our organic growth. We've been looking at improving the efficiencies of the company, improving our balance sheet and also improving the service offerings to actually help grow the company. But that's not all we're doing. Obviously, what we want to do is obviously deliver the value for the shareholders. And hopefully, you'll see that today as we walk you through the process. So moving on. So a little bit about the group. The group is consistent of two divisions. We've got a services division where Brookcourt and Pentest, both well recognized within the industry, both award-winning, as I mentioned. With inside Brookcourt, we sell the next-generation cybersecurity solutions and services. And within Pentest, we sell Red Team and Blue Team consulting. So these are professional hackers who actually test your network. We also own a software division where we've got our own proprietary software. We supply authentication solutions for on-prem, in the cloud and hybrid. And we sell that through our resellers and a distribution channel as well. And it's sold in roughly around about 50 countries collectively when you consider our services and our software businesses. When you look at, obviously, the numbers there, the services represent 96% of our revenues and software 4%. We'll give you a little bit more detail around those numbers later on. But some of the key points that you need to be aware of is obviously, we -- the group, we supply cybersecurity solutions and services into large blue-chip corporates. You know all the logos. We service banks, high street banks, investment houses, telcos, mobile operators as well as retail and local government and central government as well. Very recently, we responded to the RFP requests for the G-Cloud 15, and we actually grew our services significantly from there from circa 30-odd on G-Cloud 14 to over 50 in G-Cloud 15. And we'll come on to a little bit more about that later on. But basically, we are in a very good market space and we have great momentum. So the highlights of the day, the numbers. So revenue is up 34%, adjusted EBITDA up. And obviously, one of the questions down there is obviously on net cash position. John will give you a little bit more detail on that as to why our net cash is where it is and the timing of our cash, which is most important. But the bottom line is obviously, on a year-on-year basis, our revenue and our business is growing, and we're growing above market rates at the moment, which we're very pleased with. We've got strong momentum. We came out of fiscal '25, very good. We ended '26, very good. And obviously, our confidence so far into '27 is looking very good as well. So just a little bit about the market opportunity. Outside of what you read in the press and what you see on TV, it's not a case of if we're going to get hit, when we're going to get hit and how can you stand up? And there's a lot more talk around now about the resilience of the company. And it's known and it's expected that there will be a lot more hacks, which are -- which will be spoken about in the press. The fines are increasing, regulatory compliance is increasing, and we're responding to that market space. We're providing new technologies and some of those technologies are AI-based, but we're also looking forward. We're also -- and part of what we do as an organization is look at the next generation. And we are already in the space of looking at quantum-based technologies. They are on our portfolio, and we're talking to clients for those. And there -- obviously, they will become more of a requirement as the year goes on. The bad actors aren't going away. When the economy gets tight, when there's war, the bad actors, state actors, they increase. So the activity there is increasing. And I'm sure we've all received those scam e-mails asking for money and our data. So we're responding in that market space. So death, taxes and cyber, and we're in it to stay. Take next slide, John. So a little bit about our positioning. There's three logos there, the group companies. Brookcourt, say, we supply the next generation. We sit above a lot of the noise. So we don't sell the day-to-day stuff. We're selling the specialist stuff. And that's why you'll see on the RNS is multiyear contracts, multimillion dollar deals, and there's an awful lot of renewals and expansion. We see it in the government, we see it in our banks and our telcos and the commoditized technologies tend to be lower margin. They tend to be highly competitive, whereas we have less competition in the space. However, the solutions that we get involved with, as you can see, in the closing month of fiscal '26, we did GBP 25 million deal. And that took a year in negotiation, that one deal. So they do take longer. We do have a good pipeline, and we do see these -- we do win on the global stage for those types of techs. Pentest, obviously, they also specialize in that area as well. Once you spend all this money, you need someone to actually test it. And this is where the Pentest Red Team and Blue Team has come in, and it's a compliance requirement. It's a legal need, and you can't ignore it anymore. And you don't want to be caught out. So this is why you test. And then you come onto how do we actually maximize even further. So you start selling the same services and these consults through the distribution channels. This is where we sell to distributors, who then sell on through to other resellers who then sell on to end-user customers. And we are able to do that with obviously with pen testing and with our SecurEnvoy products there, more so to do with SecurEnvoy, which is why we can touch so many countries around the world. And today, we're touching around about circa 50 countries. So a little bit about into the -- where the revenues come from. Obviously, there, you see the contractual highlights. These are some of the deals that we actually announced last year. When you don't see an announcement, it's because the deal is probably sub GBP 1 million. We have an awful lot of run rate that's going on constantly. But these are the headline deals that came out, GBP 25 million, of which half of that was seen in '26. The rest of it will be discharged over the period. It is the first phase of a deal, and that is for a telco provider. The GBP 9 million was for a financial institution, once again trying to secure the e-mail framework of their global network. And as you appreciate, a lot of the virus and hacks transfer the networks via e-mails. And then we had another contract extension and expansion with another mobile network. We are servicing all the mobile networks now in the U.K., all the majors. And obviously, that's contributed to our growth line. What we do have is, obviously, we are working hard to actually build out more of our services. So they're homegrown. We've got a good strong consulting base where our engineers are fully engaged constantly. Our utilization rates are up, and we're looking to obviously to expand as our client base expands, where we expand our engineering to meet that demand. From a gross profit perspective, yes, the services segment is the major contributor to that. John, you can just move on. So on to the software side. Still -- whilst there's some negatives there, you've still got to look at the positives. We have been building out our software. We've got an enterprise-grade software both in identity access management and data discovery. We can service both on-prem and in cloud. And when you look at some of our competition, they've all been investing time into the cloud. But we're seeing also activity coming back down to the on-premise where some of our corporate clients and some of our government departments don't trust the cloud. They want that data back, and they want it under their control. So there is a place for us to play. It's a boutique. It's a unique space, but we've also got a proprietary technology, which has got two Queen's Awards. It's got multiple [ quality ] awards, and it's still on the global stage today, and it's still being used by some very significant organizations. When you look at the numbers, they're still contributing to the bottom line. And we are seeing -- it's a good quality revenue. And whilst we have been investing in that over the last couple of years, we are -- we do have a new technology that we're -- is now in POC, which is coming through, and we're expecting to see some revenues of that come through towards the end of this fiscal year. And with that, I'm going to pass over to John, who will take you through a little bit more detail around the numbers. And John, over to you.

Thank you. So good morning, everyone. So as Phil has already touched on, the highlight is probably really strong growth year-on-year. So revenue up 34% on an annualized basis to GBP 42.3 million. And that builds on really strong growth we had in FY '25 too. We were 29% up in FY '25. So when you compound that up, that's top line growth of more than 70% in 2 years. And as Phil has touched on, that was really driven by the strength of our services business. Our gross profit was up 9.4%. Percentage margin down, which is really a mix effect built out of where the growth has come from, and I'll come on to a little bit more granularity in what's happening between the services and software side of the business on the next slide. Adjusted admin expenses, very small increase, a very small reduction year-on-year. So we've effectively been able to do more for less, and that's pleasing. And there's really two things at play there. Firstly, we did some restructuring activities in the end of FY '25, and we've really had the first full year effect on that, just trying to keep our cost base as lean as possible to make sure we're getting value or as much value for shareholders from everything we do. And the second thing we've been able to do is we've invested in our own technology. Our own proprietary technology, our own AI tools. And that's enabling us to get more for less. So we were the second organization to get our ISO for use of -- second organization in the U.K., 16th globally to get our ISO for use of AI within the business. We've built our own proprietary AI tool and that's helping us distill what are often quite complex briefs we get from clients and shape the response. They can't do all the work, but it can break the back of it and it helps us respond to a lot more, be a lot more efficient in what we do. So it's great for us that we've been able to deliver that top line growth without actually increasing our cost base. All of that helps us deliver an adjusted EBITDA number, which is 44% up year-on-year to GBP 2.6 million. If you take out the depreciation on our own development spend and add back the finance income, that's an adjusted profit before tax of GBP 1.4 million. A small number of exceptionals this year compared to last year, there's a fairly sizable write-down -- noncash write-down in value of intangibles. Much smaller this year, just again, a small restructuring just to make sure we stay as lean as possible in what we do and principally affecting the services the solutions software side of the business rather, which I will come on to in a second. The amortization you see below the adjusted EBITDA is the more sort of conceptual amortization that we were required to create on the intangibles that we bought as part of acquisitions, which are just coming through. But again, that's a sort of noncash item, which takes us down to a loss before tax of GBP 0.3 million, which is 97% improved year-on-year. And as Phil touched on, we have a very different picture across the services and the software side of the business. Firstly, just in the scale of the two businesses. The services side of the business is now 96% of our revenue, 90% of our gross profit. And that's been the real growth engine of what we've seen year-on-year, some big high-value multiyear contracts from some of our blue-chip client base. You still see within the services side of the business, the gross margin down slightly year-on-year. And that's a reflection of the fact that even within the services side, there are two distinct business models to what we do. We sell our own people. We sell our own engineering services. We sell penetration testing. We sell our own governance and compliance consulting. And that's good, strong margins on selling our own people. We also sell top-end cybersecurity solutions encompassing third-party software and third-party hardware. And those are, again, better margins than you would see for a typical reseller because it's quite specialist stuff, which we are taking to and introducing to our clients, but it does have a more significant cost of sale. And while across the services side of the business, all those different components showed improvement year-on-year, the largest single element of the growth engine was those big multiyear contracts Phil spoke about, which encompass the part of third-party IP. So what that meant is on a percentage basis, we had a little bit of dilution in the gross margin, but actually still a gross profit number that was up 18% year-on-year from GBP 6.4 million to GBP 6.4 million annualized to GBP 7.6 million of gross profit. And that, again, with admin expenses that were essentially static in real terms, dropped down to an adjusted EBITDA of GBP 3.7 million, which is 40% up year-on-year. So really strong performance out of the services side of the business. Software side, a lot of competitive pressures in that side of the business, in particular, for the for those organizations that the SecurEnvoy product was a real early adopter market leader in the multifactor authentication space. A number of the clients who had weren't using all the full functionality of it and where they've been able to use products like Microsoft Authenticator that they may have been able to get as part of a wider bundle, which they weren't having to pay extra for. They've done that. We've seen a bit of attrition there. But I think where we are seeing some real wins now is in that on-premise side, where actually the people who need our product, the people we have left are those who have the need for the additional functionality that our product can provide. So we expect to see that stabilizing and actually growing back into FY '27, particularly with the potential upside of the Data Discovery product, which we hope to see more of coming in H2. There's a little bit of a different classification between the cost of sales and the admin expenses this year. But what you're essentially seeing there is a relatively static cost base within the software side. Revenue down GBP 0.3 million year-on-year on an annualized basis, dropping through to an EBITDA that's down GBP 0.3 million year-on-year. So while we do see opportunity there, we didn't want to just stay static on that. So we have also implemented a restructure in the tail end of this financial year. So not particularly impacting these numbers, but impacting the numbers going forward. So GBP 0.8 million reduction in annualized spend on software. More than half of that will be CapEx, so it won't impact the P&L other than the amortization you'll see in future years, but also GBP 0.3 million reduction in OpEx. And we've also restructured that business to simplify distribution channel, take out some of the layers of distribution which will mean that on every deal we're selling in some of our key markets, we're actually going to retain about 20% higher value of that deal into our revenue line than we've seen before. So it's been a more challenging space in the software market. It is a smaller part of what we do, but we do see some reasons and we're taking some good steps to set us up for more success going forward in that side of the business. From a cash flow side, we continue to grow our cash, up to GBP 5.6 million at the year-end with no debt. So it's a really strong balance sheet. The cash growth does lag or lag the profit growth a little bit. Principal reason for that is the largest single deal we signed during the year, the GBP 25 million deal with GBP 12 million of that impacting FY '26, we signed in June. And so none of the cash and the profit element of that deal would have been collected at year-end. But ultimately, we're seeing a strong cash position, strong balance sheet, and that's creating opportunities for us. So I think we've always -- one of the questions that always comes up for us is you're holding quite a lot of cash. What are you doing for that? And how are you going to make sure you're giving shareholders best returns for that. And I think we've tried to be very consistent in how we've answered that. It's important for us to have a strong balance sheet. It enables us to do a couple of things. Firstly, I'm sure you can appreciate if you're signing multiyear deals with [indiscernible] government, with big banks, big telcos for mission-critical pieces of software for them, you need to demonstrate a strong, strong level of resilience. They need to be very confident you're going to be around in a few years and having a healthy amount of cash on our balance sheet enables us to do that. It also enables us from time to time to cash flow certain deals. And investors who've been paying close attention to our sort of our regular results and looked at the half year numbers would have seen our cash was down at half year because we did exactly that. We paid out around $2 million on a deal, which we didn't collect the cash on until the other side of the half year. So having a healthy balance sheet enables us to show that resilience. It enables us to drive additional margin by occasionally cash flowing certain deals. But I think we've also always been consistent in that having up to GBP 5 million of cash allows us to do all those things. Beyond that, it opens up new opportunities for us. The primary thing we'll always look at is how do we use that to drive growth. And if we can find great growth opportunities, we'll look to take advantage of that. But we also want to have the flexibility to return value to shareholders in other ways. And so a number of you would have picked up on the fact that we've already started a capital reduction process, which will give us the flexibility to either declare a dividend or buy back our own shares in the future. There's two stages for that. One is to get the shareholder approval for it. And the second is then you've got to go through a High Court approval process, which is primarily there to protect creditors to validate and complete the process before you're then able to declare a dividend. So we've been through the first part of that. You would have probably have seen we had a general meeting in the company about two weeks ago. Pleased to say we had 99.8% of shareholders of the company approving that process. We're now in the process of preparing the documents we need to for the High Court process. We'll finish that process, I suspect, around the end of the calendar year. So we'll go into FY -- go into 2027 of the calendar year with the flexibility to look at those different ways we can deliver value back to shareholders. And that is all I was going to do for the financial slide.

Thank you, John. So just some of the key drivers as to where we are today. Obviously, you've seen the results. You've seen the numbers, where are we going? Obviously, we've got -- there's two phases to what we're looking at. One is obviously continue with our organic growth. Our sector is growing, and that's contributing well, and we're very much in that space. We've been successful with our public sector, and we've now got a significantly greater offering inside our G-Cloud 15 with the government. And we're responding to more bids. We're using our own AI internally to get more throughput from the teams. We're being more efficient. We've -- we're not using AI to reduce the headcount. We're using AI to actually increase our output. So hopefully, we're going to get more bang for our buck. And with that, we do see a good growth opportunity inside public sector. We also got quantum on the horizon. We've been talking about quantum now for a good 3 or 4 years. And now we're starting to see new technologies come available. We've already got two in our kitbag that we're working with. One of them is around obviously front-end security and the other is around data security. And the quantum computing isn't necessarily publicly available at the moment. But obviously, there's -- there are nation states that do have it. And there will come a time when it becomes more of a headline news, and we're all going to have to respond differently to how we do things today. Until then, we are obviously working with our large corporate clients to actually bring to their attention our capabilities and the technologies we've got today, and they're in discussion. Data discovery, obviously, with the compliance rules, they're only getting tighter. The more bad actors that steal our data, the more we have to respond to it. The more regulation comes in, the more fines and penalties will be bestowed upon large corporates. And so we're in that space with our own proprietary software, and we intend to build on that. We have our data discovery, but also we've got our data access management as well to validate who is touching data, who's moving the data. And that -- those control mechanisms are going to be a key significant part of what we do moving forward. Data sovereignty, who owns it, where does it sit? These are things we need to know now as individuals and the governments are making sure of it. So with some of the technologies we've got, it helps control that data sovereignty, who owns it where it sits. You've got the U.K. data laws, you've got the European data laws, the American data laws. And then even in Europe, you've still got certain principalities that are insisting on a higher level of data control. And we're addressing those needs and wants with a very diverse set of technologies. We've -- a lot of our blue-chip customers, they're international by nature. So we're very used to actually dealing with not just the laws and the systems of the U.K., but a further afield. And we'll continue to develop that. It's all going to be around the data, who sees it, who touches it, how do you secure it, how do you audit it and how do you make sure it doesn't get in the hands of the bad people. And that's what we're all about. Now that's on the organic side. So we're going to carry on doing that. But what's actually going to help us accelerate really quickly is obviously inorganic target acquisitions. We're looking for organizations when you consider -- if you're buying a software company, with 20 years' experience with a developed client base, developed product set, they're expensive. So as John mentioned about our cash position at the moment, we want to bring best value to the shareholders. So it does give us choice, but what we are looking for is to obviously inorganic growth. And I imagine there's quite a few opportunities coming available at the moment where in the market space. And I imagine for us, focusing around the services sector will be a key priority for client acquisition and actually seeing the company grow that way. So it's on the agenda again. We're now in a good position, and we've got a very strong footing, and we can see a pathway through over the next few years of how do we actually get to that GBP 100 million target. So coming back to the executive summary. So hopefully, from today's presentation, you can see, obviously, there's a major opportunity in the market sector. We're a company with proven ability. We've got awards to our name. We've built our individual brands over the last 20 years. They're recognized in the market space, and they're used by large global organizations today. The relationships with these -- some of these customers extend back north of 20 years. And I'm pleased to say that the type of market space that we sit in, we are seeing a lot of repeat and expansion inside -- in those clients. We've delivered -- last couple of years, we've delivered strong growth, and we are feeling confident about fiscal '27. We've already announced a couple of large deals. Obviously, we have positioned ourselves on G-Cloud 15. We've also won a recent deal, which we published on the RNS. So we're feeling confident about our growth in the government as well as our major corporate banks and telcos. We've got a good strong financial position, 0 borrowing, got good balance sheet. We will continue to use our cash to help fund and drive some of the larger deals. We need to make sure that we can stay in the game and we appear and we act financially robust with that. But at the same time, the reason that we're -- John has been doing his recent work is obviously to free up some capital to see how we can best return some value back to the shareholders. So inorganic growth is on the agenda. We're not just going to be buying anything. We're only going to be buying something which is accretive and actually going to add value to the organization and something that we can actually show good value and good synergy to our shareholders. And that's all going to hopefully going to give our shareholders back the value that they've been searching for over the last few years, both in the growth of the company from the top line and its EBITDA position and also with expansion by acquisition as well. And with that, I'd just like to thank you for listening today, and I'd just like to pass back to Control.

That's great. [Operator Instructions] As you can see, we have received a number of questions. And if I may just start off with the first question here, which reads as follows. Where do you see growth within the company coming from in the next 12 months?

Okay. So growth, obviously, we're seeing a lot of investment being made at the moment in basic e-mail security from our financial institutions. We're also seeing packet and forensic monitoring in our telcos. At the end of the day, they're all having to invest. The larger the firms, obviously, the bigger the numbers. And you're seeing that in some of the RNSs we're releasing at the moment. We're also seeing a lot of threat intelligence requirements coming through. So this is information from the dark web. So that's all being coupled with one of the challenges is not having the resources available with our client base. So for us, we are actually selling those services as well. So it's not just a product and solution. We're wrapping those in services, and that's where we're seeing the majority of our major growth coming from all sectors, government, telco and finance that we operate in.

That's great. Just turning here to the next question. I consider share buybacks reduce liquidity in small caps. Therefore, I prefer a dividend. What are the views of the Board and your Nomad?

Should I pick that up? First thing I guess, to address there is why wouldn't we consider a share buyback? Historically, we're sometimes seeing some quite big fluctuations in the share price off the back of some very small volumes in trading. And if we go back to even the very tail end of last financial year, so back in sort of May, June, some of those sales are happening at share prices around 35p, 40p, which we felt fundamentally undervalued the company. If we do go down the share buyback route, it's not going to be a significant proportion of the company's cash. We're not going to -- we're not using that as a route to take a lot of shareholders out of the market. It will be used as a route just to smooth some of those fluctuations, which can be distracting to shareholders and create a sort of a slightly artificial picture of how the company is doing just because someone suddenly drops some shares in the market on a particular date. That would be the logic we had share buyback. It wouldn't be hugely -- yes, it wouldn't be of huge scale. In terms of where the Board, I think the dividend is the one will be more attractive to shareholders. We haven't formally approved that as a Board policy yet. So as we clear the way and go through the process, the Board will then formalize our decision on that front. So we don't have, I guess, a policy to announce on that front yet. What I can say is, obviously, there is quite a bit of work to do to go through a process like that. We've been through a general meeting. I've now got to prepare some analysis and a witness statements to take to the High Court. We've got to get a barrister to go through that process with us to submit the application. It's not something you'd do if you -- just on the off chance you might want to do something at a point in the future. So hopefully, that positions where we sort of -- without sort of quoting a policy that doesn't exist yet, it probably gives you a flavor of what we're thinking on those fronts.

That's great. Just moving on. As threat actors increasingly leverage AI to automate and scale sophisticated attacks and with quantum computing on the horizon threatening traditional encryption standards, how are you evolving your proprietary software, such as your access management and data discovery tools and managed services portfolio to help blue chip and public sector clients future-proof their cyber resilience against these next-generation risks?

That's a big question. So obviously, we've been talking about quantum now for a while. It's on the agenda with our software division. When quantum comes available, the world is going to change if we believe what people are saying about it. So a lot of those old traditional methods probably won't be used anymore. They will change. And that's right across the board, and that's from Microsoft all the way down. So what we will see is we are reviewing that space. We are working with our customers as well. And we do have a couple of technologies where we're defending from quantum at the front door, but also in data management in terms of where it's stored and how it's stored. So we're looking at those sorts of things. In terms of identity access management and data discovery. Data discovery and some of those things will sit behind those security fences and they will sit inside the network. So as long as we've got a good strong perimeter, then we will have more capability to actually still use some of those identity access management components inside our networks. But IAM does need to evolve. And the answers to that yet are not available, to be honest with you, but they're being worked on. And the people that are in the -- have been working in this space now for the last sort of 25-odd years. They're the guys who are leading this conversation inside our organization. So we will be coming back once we're ready. We're still a few years away before quantum's out there, but we -- rest assured, it's on our agenda, and it's being worked on at the moment.

Just turning to the next question. Going to all the effort to generate distributable reserves and then not declaring a small dividend or declaring a buyback today seems like a massive own goal. What is the thinking behind this?

That's probably one for me. So the process to completing that transfer of reserves has to go through two stages. I think I touched on this. We've been through the first half of that was to get the shareholder approval. We've now got to go to the High Court to ratify that. We then file that High Court decision at Companies House, which completes the process. Once that is done, we're in a position to then announce. So that's something that depending on how long it takes us to get a court appointment will either happen just this side or just the other side of the new year. But essentially from the start of FY '27, we'll be in a position to advise on that. Calendar year '27, sorry.

Just moving on. Congratulations on a fantastic year. I'm a fairly new investor. Can you help me understand your position in the market? Are you in competition against much larger businesses? Or would you say you're the market leader in your niche?