archTIS Limited (AR9) Earnings Call Transcript

Good morning, everybody. As usual, we'll give a few of the late participants a chance to log in. We'll be with you momentarily. All right. Why don't we get going? Well, good morning, and welcome to archTIS' Q1 FY '27 Quarterly Report for the period ending September 30, 2026. My name is Kurt Mueffelmann. I'm joined by our CEO, Mr. Daniel Lai. This morning, we'll be reporting on how the business became leaner with higher margins following the Spirion integration. We'll cover the financials, our U.S. DoD and broader defense momentum update, some product direction, FY '27 priorities and then take some questions. Dan, why don't I turn it over to you for some introductory comments and observations.

Thanks, Kurt, and welcome, everybody, to the quarterly webinar. Look, it's a strong result. Annual recurring revenue is $13.3 million. That's 3x our previous comparative period. Revenue was up 140%. Gross margin is higher on 79%. Operating expenses fell 17%, taking us close to an operating cash flow breakeven. Record receipts there of $5.3 million. And of course, operationally, we've had some success there as well, obviously, the U.S. DoD closing the services contract, another great confidence builder there that the U.S. DoD is moving forward with us and looking towards that enterprise license deal. Australian Defense $3.2 million Kojensi renewal with services for them to embed that further within their ecosystem and expand the licenses there over the next few years. Our U.S./EU alliance continues to be delivered. They're all obviously just getting -- coming back to work from their summer holidays, and that progresses well. We also did a partnership agreement with Pexip. And for those of you that are following this more deeply will understand where they're placed in that defense ecosystem for collaboration products. That's a very good partnership arrangement, and we're expecting to turn that dial on some revenue-generating opportunities in the near future. We got FIPS 140-3 validation. And so that just removes an encryption obstacle for operating with the defense clients. And of course, another award, Cyber Business of the Year and Security Innovation of the Year for the way that we approach AI. And last but not least, of course, the CBA Extension, which we announced this morning, moving that $4 million tranche from the 31st of October to the 30th of April 2027. So overall, they're the highlights for the quarter, and I think it's been a strong quarter.

I love how you slipped in the CBA Extension last but not least. Let me run through the financial summary. So against prior quarter, it's all really about efficiency. Gross margins are up to 79%, and we continue to see that being really the point that we want to target for. We'd love to break an 8 as the first digit, but we're really happy with 79%. Operating expenses fell for the third consecutive quarter from $6.9 million to $4.4 million. So you can kind of see how we're operationalizing the business. And obviously, receipts at the other $5-plus million really benefited from our annual seasonal renewals that fall in this quarter. The customer receipts were $5.3 million, which is a record, obviously. We more than doubled the June quarter. And that's the first receipts that exceeded operating payments since the Spirion acquisition. So we feel really good about where that is, again, seasonality behind that. The quality of the series is important really as well as the receipts came entirely from customers. There's no R&D tax incentives, grant income or anything else. It was just straight customer receipts. And those receipts came from $1 million of the renewed DoD with Kojensi contract that Dan talked about in his opening statements and renewals across all our product lines, including some growing enterprise customers, which we really will talk about in a little bit. Revenue for the quarter was $3.6 million, up 242% of $1.4 million, reflecting our continued shift in revenue mix. We're really pushing hard on high-value proprietary licensing, and that's pushing that almost 80% gross margin, which is up over 4% from 75% in Q1 of FY '27. So you can really see where we're pushing that. The growth has been accompanied by a cost discipline. I think that's really what we want to push. We've talked about it and you're starting to see the results of that. The operating expenses declined each quarter since December '25 following our cost reduction initiatives. And now we're at $4.4 million in Q1, 17% below last quarter and 25% below December '25, which is the first fully integrated quarter within Spirion. And I think you can also tell that by looking at where we are from staffing costs. The staffing costs fell 40% -- 46% over the same period from $5.7 million to $3.1 million. And we really expect that to continue to climb. We're looking at ways of continuing to operationalize technology that's out there in the market to become more efficient and leaner as well as looking at ways to continue to make sure that we have the proper synergies in place as we continue to evolve from the Spirion acquisition and the way that we position it. ARR was $13.3 million as of September 30, more than 3x the multiple of the prior comparative period, building up on that recurring base of 150 enterprise customers. And we're really focused on ARR through our U.S. Defense, our federal licensing, including the pending U.S. DoD that Dan will talk about in a few minutes, new and cross-sell Spirion customers, which we've announced over the last couple of months and through our new partnerships that are leveraging TDI, including Mattermost and Pexip. The company ended the quarter with cash of $2.3 million and unused facilities of $0.5 million for a total available funding of $2.8 million. So I guess what I want to do is, Dan, I'll have you chime in, in a few seconds, but we look at October 1 being the 1-year anniversary since the acquisition of Spirion. And obviously, it comes with growing pains. I've done 20 M&A deals previously, and everyone has its own special growing pains alongside and this one was no different. But the December quarter was really our full first quarter with Spirion. And so it's really the right baseline that we can do this analysis. And as we can see, receipts are up 236%, operating payments or cash going out the door is down 29%. And as I said before, staff costs are down 46%. So those are some really good numbers that we're starting to really build the foundation off of. Operating expenses are a quarter lower and gross margins, again, moved up to 79%. Really, the integration has done what it was meant to do. We create a larger customer base on a smaller, more efficient cost structure while adding a stronger U.S. presence that will help support us in the U.S. DoD opportunity coming forward. So Dan, with that being the happy anniversary of Spirion, why don't you talk a little bit about what your thoughts on Spirion has been over the past year?

Yes. Look, it's been one really of opportunity. But what I would say is it demonstrates that we're doing -- executing the strategy that we have told the market that we would execute. You've mentioned really about the diversification of the cost base, which is one of the reasons we acquired them. We wanted to take that lumpiness and some risk out of that revenue stream and then annual recurring revenue. We wanted an opportunity to cross-sell to customers that already have been investing in the data-centric security life cycle and are looking for enforcement opportunities on those -- in their businesses. We also looked at it from a position of complementary technology, which would help us build out a road map for our products into a platform to take to market that becomes a control plane for policy enforcement and ABAC and really put ourselves in a leadership position within the market not just in Australia, but in the U.S., which, of course, is the last part that you mentioned, which is we have now pivoted to the U.S. in a meaningful way with an ARR engine room, which can sustain the way that we reshape this business and execute within that market, which is, again, a huge market. And I guess, springboard of that U.S. DoD opportunity and into the diversified verticals with a common story in terms of a technology platform that's leading in its category. So that's really what we have been about. We've been very focused on it. The acquisition of Spirion has given us an opportunity to reassess how we do that and bring in new technologies to invest in the way that we do our product development and integrate that best-of-breed into a platform and have the customer-led drive from people within the U.S. DoD to make sure our products are market ready, which is fantastic. So as we move after that...

Yes. Interesting, as you mentioned, the springboard into the U.S. DoD. I'm sure that 95% of the people here are interested in learning more about where we stand with the opportunity moving forward.

Well, it's probably -- most of them know that I also recently came and visited you, Kurt and the customer over there in the U.S. in mid-October. So look, what I can say is this, the U.S. Department of Defense with that 315,000 services contract is about getting us ready for being implemented and having the features and functions that they desire as they go through this process. We've already been tested. We've already been -- so these are additional things that they've asked for. And it's the second time they've done it. That gives me and it should give our investors great comfort that you don't go through this entire process over 2 years and continue to invest in a company that you're not going to support through a licenses agreement. Unfortunately, that's still with our partner, Copper River and DISA. But what I can say is this, we are definitely across that bridge where DISA is the one now demanding -- I mean, Department -- U.S. DoD is now demanding that actually contract gets moving. So I'm reasonably confident that we'll get -- see this license come through in a reasonable time period. We've also executed across international defense. We're still incumbent within the Australian Department of Defense. We've seen expansion opportunities there. I think that's really important. And of course, the U.S., EU Military Alliance with that deployment over there. We're starting to see demonstrate that we are the go-to company for collaboration and sharing of classified information amongst the allies. And I think that's a really important theme and in terms of that investment story. We are executing what we said we would execute. It takes time to win these deals. They're large complex deals. We're not always in charge of them. But in terms of the value proposition for the company and the share price, it's a very strong story.

And we're excited about that. I was up in Washington last week as well, meeting with the customer. And there's just great excitement around it. As Dan said, a little bit of this is outside of our reach being the subcontractor, particularly around the technology. We're dealing with large Tier 1 contractors and primes that have $4.5 billion of contracts associated with the U.S. DoD that are tied around data-centric security and where we go. So we're a piece of the cog, but we're an important piece of the cog, which is nice. And when you start to hear things such as the 60 -- 60 warfighter command production test passed, I know we've talked about that the last few quarters, but that was brought up on the meeting last week that people are really impressed by that and organizations have not even come close to that 100% achievement. So we feel really good about -- it's not a question of if, it's a question of when. So we're really happy about that. So one of the things we want to talk about is talk a little bit about where we're going from a product standpoint. It's great to talk about the deals and the opportunities. But you hear a lot of what we're doing. And as we've come across 1 year of Spirion, we've come across 1.5 years of Direktiv, we're coming up, I can't believe it on 6 years of NC Protect. You start to look at where we are as a business from a product standpoint. And so we do not want to be positioned as a bunch of legacy products sitting in an environment, right? Most organizations across the enterprise have 85 different security products that they use in and out of their organization today. So if you imagine that functionality or dysfunction that comes across the business. And so when we look at what we do, right, we look at what -- how we become moving from best-of-breed of even a little bit of a legacy given where we are into this control plane that Dan mentioned, particularly around DSPO. And we're calling that Data Security Policy Orchestration. It's really about pulling together the solutions into a complete policy orchestration control plane that manages that across the entire environment of an organization. And we'll talk a little bit about that as we push through. But when we start to look at it, we start to look how we can actually bring the parties -- the products together to build again this control plane that's built around the methodology of TDI. And so we look at DSPM or Data Security Policy Posture Management, and that's a multibillion-dollar market out there today. You look at the likes of BigID, Cyera. Cyera's raised billions of dollars already and billions of dollars of market valuation in DSPM. We think we can take that to the next level and TDI is the core is that one policy engine. So Dan, can you talk a little bit about the structure and the solution sets that we're bringing to market around that?

Yes. Look, I think previously, we've simplified the data life cycle to a few elements. That is the discovery, the labeling, the enforcement and the governance of data wherever it resides. Obviously, with the advent and uptake of AI, compartmentaling information and making sure it's context aware so that when I ask a question into AI engines, I get back the data sources that I'm entitled to see and it builds that up into a response that is context aware of who I am, what my security clearance is, where I'm accessing it from and what I'm entitled to see, and it removes the rest. That's the sort of stuff that we're now capable of doing in the data ecosystem for our customers. And that's certainly something that we see as a really bright future. We don't think that, as Kurt said, people want multiple different products. We think that they'll want one product to do all of that and connect those various data sources through to those various identities and manage that system. And that's really what we're building in the simplest of terms. How that goes to market is really there's those areas that need -- customers that need to solve that problem for data integration. We've got lots of data sets. We want to bring them together, and then we want to apply some sort of form of security around it. Then there's that market, which is we've got some data and we want to share it either with internally, within our systems or externally to our other supply chain or our other partners. And of course, then there's an example that I just gave you, which is something that we already do with a customer such as Viasat. There's AI guardrails about contextually what -- where I can publish this information, what data sources I can go to. And of course, that integration services about how we can do that for products such as Pexip and just OEM that out and wrap it out as a little solution set so they can do that for their products. And that's really our go-to-market strategy. And now you can probably get a little bit of a better understanding of how those products come together to solve each one of those problems and how we take that to market. And of course, all of those issues are something that defense departments and supply chains have today, and we will see that are coming up more and more in the general commercial activities.

I think what it really does also is it starts to pull together a message that we can really bring to market around the core of TDI, around policy orchestration. And what we're doing is we're really bringing 4, I would call -- not call them modules, but solution sets where we know what data-centric security is through what we're doing with DoD. You've heard some of the components that we're talking about with secure collaboration across Microsoft Teams, sovereign platforms with Pexip and Mattermost. We'll talk a little bit about AI in a second. I think the real key thing to partnering is this integration services. TDI is a very open architecture for us to work. And we really tie in things such as industry standards such as ACP 240. We look at ZTDF and a couple of the others that are out there today. And we have the building block to really resolve a lot of these challenges that just are not being solved out in the market today. So we look at this architecture as a policy control plane, really being the ability for us to play with anybody that's out there in the security market in interacting and being that trusted data integration across the enterprise. And so one of those examples that we're talking about is the Spirion AI guardrails. As Dan mentioned, we won award a couple of weeks ago as Data Security Innovation of the Year. And with all the AI products out there today, to actually be named a Data Security Innovation of the Year product is quite -- I thought it was a really good tip of the cap to us, Dan. So can you take everyone through kind of the AI guardrails is how we look at it today?

Well, typically, I don't want to get too technical here, but the AI is built up of principal 3 components. There's the large language learning models, which everybody knows about your OpenAI, ChatGPT, you call it. There's the MCP and the RAG, which are 2 components. One is called the retrieval augmentation and [ Zoner ]. That's where it pulls the data from multiple different data sources, generates it into an answer and then applies it back to the LLM. The MCP is just what services can I call to actually do this. Do I need to use word? Do I need to do -- write a script? Do I -- and when you bring all of those components together, it's about where you inject yourself to provide that contextual access. TDI can do that. And I think that what that means is we act as a gateway between those components. We inject ourselves either as the MCP or the RAG and effectively, we can become context aware. So before -- when Daniel Lai asked the question, it says, who is Daniel Lai? What is he entitled to? What do I know about him? He's Australian citizen, he's security cleared up to this level and he's accessing it from his office. It then goes down and says, well, what information sets is he entitled to? What's the question he's asked? And I'll build the answer only from those entitlement sets. And where should I publish this information? Do I take it out into a public forum? Or do I only store it in a location that is secure? Now that is an incredibly powerful opportunity in the market today. We've already seen issues of security in terms of AI. We've got calls for guardrails to be implemented. And we have organizations that are already deploying this. So when archTIS looks at AI in total, we look at how can it increase our productivity, and you've seen that through our cost management structures and what we're doing there to reduce our cost base and our people costs and how we increase productivity. We look at what -- where does it need to be within our products to improve the users. And the last one is what is the opportunity in the market. This is our opportunity in the market. And we've already initiated several proof of concepts for different commercially available [ OLMs ] that we want to look at in terms of how we can do this and take this to market early in the next year. So this to us is a very exciting area, but it's stepping stones, and we will build upon this based upon it. We talked a little bit about our customer journey earlier, and we're seeing that most customers' journeys start with where is my sensitive information? What have I got? What should I be doing with it? It often starts with implementing that through Microsoft in my Microsoft environment, my M365, my SharePoint Online, my Teams. Then often these organizations have already leveraged Copilot in that framework and in their enterprise licenses, and they start enterprise-wide spreading out Copilot. We're seeing that in government. We're seeing that in corporations. We're seeing that. And of course, then they're supplementing that with others such as Copilot and ChatGPT. But what we are seeing is they need one place to put a policy to control it and control it. And that's the control plane that we are currently building. And that's the opportunity we see in the marketplace. I hope that...

Yes. And that's the exciting part because it leverages off of TDI, right? It uses that as the core foundation, very similar to what we're doing with Pexip these days. And so I was up last week up in Washington, not only meeting with the U.S. DoD, but I was fortunate enough to attend Advantage 26, which is put on by Everfox, which is a cross-domain provider. So I met with Dave Wajsgras, their CEO. There's about 300 different people there, offices from every piece of the armed forces there. And I'll tell you, most people were very familiar with who they were, who we were. It was interesting to walk around with the Artha shirt on. People saying, "hey, I know you guys, you are the ABAC guys." And we're known as the ABAC guys in U.S. defense. It's pretty neat to be walking around. I also met with one of my old buddies, Teresa Carlson. Teresa used to run Microsoft Public Sector way back when. She is now the Corporate Vice President of Public Sector for Anthropic. So we had a really good discussion around what TDI can do in the Anthropic markets and where that fits. But again, it goes to this extending the reach through partners. The 2 most recent announcements have been Mattermost and Pexip, which were really around securing collaboration within the MPE or the Mission Partner Environment. And so it's a sovereign environment that really focuses on how do you take clearance-based video and chat and apply ABAC technology using TDI to see who can have permission into a meeting or actually if some sort of security clearance changes during a meeting, who gets bounced from the meeting. Very simple, very simple use case around who can see and who can't, but it's very difficult to execute at a real-time dynamic aspect. And so that's why we're looking at these partnerships because we add that piece of policy control that leverages across the enterprise that really provides that trusted level of data integration for that. And alongside of that, we mentioned ACP 240 and ZTDF. One of the things we look at is one of the reasons we also went down for our NIST and FIPS certification, just starting to look to validate some of the encryption technologies that we have out there, looking at ways of continuing to further partner to bring more solution opportunities into the market that when we look at securing the DoD, if we can bring NC Protect, that's great. But then there's cross-sell opportunities in Spirion, talking to them about other solution sets around TDI and policy controls and the way that we handle that, talking about ACP 240 and FIPS and ZTDF and everything. So it's how do you build off the existing account that's out there and it's through the extension with partners and what have you. So I think that's really exciting in the way we drive that. So with that, Dan, I think why don't we finish up with some priorities for FY '27, and then we can open it up to questions.

Yes. Look, obviously, the priority is to close the U.S. DoD deal. It's a transformative deal. It's why we've invested where we've invested. And of course, it springboards that sort of accelerated growth model that we are looking for and into those alliances that we know we want to achieve and we're already penetrating. So we also need that continued growth here in Australia and in Europe. We are doing that through partnerships in Europe, and we're seeing lots of activity there and interest based off the implementation that we've currently got with that alliance partner over there. We need to continue to invest in our road map. Obviously, TDI is the foundation of that and how we bring transform from a best-of-breed to a platform company with a control plane, which has a niche market. And really, provides value to those competitors in the marketplace. And if we can do that, we have a space which we can really push through in terms of that growth. And of course, we need to make sure that the Spirion product with our existing customer base, we start executing that cross-sell and upsell, which we started to demonstrate that we can do. And of course, we need to obviously maintain our fiscal discipline as we move forward. So the big news, of course, for this morning was that funding extension. I think that's been well received in the market. I think people have been -- had a positive response to that. So let's jump across to the Q&A. Again, again a pretty strong quarter results.

Yes. It's funny. The first question is with the CBA loan deferral to April, what was the catalyst for the decision process? And basically, I'll sum it up in a few words, why did it take the bank so long to confirm? As I looked at my [ EyePoint ] at 4:00 a.m. this morning to make sure we had the notification from CBA as I finalize the 4C.

Well, it's really simple. Banks work at bank pace. They don't work at your pace. So that's really the answer there. Obviously, we always look at all of the things that we need to do. We have those in motion. It's not necessarily something we can just go out to the market and tell you until these things have been confirmed, and that was unfortunately the process. Would I have liked it to have happened several weeks earlier? Of course.

Great. Let's see, here's an AI question. Australia, in particular, wants AI guardrails. What is preventing them from integrating archTIS sooner than later? Is it a bureaucratic process simply too slow or the underlying technology?