Data#3 Limited (DTL) Earnings Call Transcript

[Presentation] Good morning, ladies and gentlemen. My name is Mark Gray as Chair of your Board. I'd like to extend a warm welcome to all shareholders and guests joining us today at our head office in Brisbane for the 2026 Annual General Meeting of Data#3 Limited. This is a hybrid meeting with in-person attendance and live streaming. I'd like to start by introducing your Board of Directors who are with me today, our Managing Director and CEO, Brad Colledge; Mark Esler, Non-Executive Director, who has been on the Board since 2019; Bronwyn Morris, AM, Non-Executive Director since December '24; Diana Eilert, Non-Executive Director since July 2025; and and Laurence Baynham, Non-Executive Director, who rejoined the Board in July 2025. Also in attendance are members of our executive management team; Cherie O'Riordan, Chief Financial Officer; Terence Bonner, Company Secretary and General Counsel; and Tash Wick, Chief People Officer. We also have in attendance, Haley Harpha, Chief Counsel and moderator for the online questions today. I'd also like to welcome Ben Woodbridge and Rebecca Otto, Rebecca is up the back there, representatives from our independent auditors, PricewaterhouseCoopers. Now for the formalities of the meeting. I note there is a quorum present. I declare the meeting open. The notice of the meeting was dated 22nd of September 2026, and the meeting has been properly convened. In the Notice of Meeting, we set out 4 resolutions to consider, which are shown on the slide. Please note that only shareholders, proxy holders or shareholder company representatives may vote on the resolutions. I'll shortly start today's proceedings with a summary address and then invite Brad to address the meeting before we move on to the formal business of the day. Turning then to my address. The company delivered another year of solid above-market growth with record gross sales of $3.4 billion and earnings before tax, $78.8 million. This performance continues Data#3's track record of adapting to evolving technologies and markets while delivering consistent growth in sales and earnings. Since listing in 1997, Data#3 has delivered sustained earnings per share growth maintained a high dividend payout ratio and generated strong share market appreciation for shareholders. Over the past 5 years, from FY '21 to FY '26, we've achieved compound annual growth rate of 11.6% for gross sales, 9.4% for gross profit, 16.3% for basic earnings per share and 16.3% for dividends per share. Again, these are compound annual growth rates. That consistency reflects the strength of our market position. the breadth of our vendor and customer relationships and the strength of the recurring nature of a growing share of our business, with around 70% recurring revenue anchoring our performance. It's the aim of the Board to maintain steady, reliable and consistent growth into the future. A Board renewal process that was supported by an independent recruitment consultant was completed by the end of FY '25. Diana Eilert and Lawrence Baynham were appointed by the Board as nonexecutive directors effective 1 July 2025. Both were elected by shareholders at last year's Annual General Meeting, as was Bronwyn Morris AM, who joined the Board in December '24. Their appointments have strengthened the Board's mix of skills, industry experience, continuity and strategic perspective. In line with these appointments, the Board continued to enhance and embed its governance framework during FY '26. We progressed our approach to Board composition and succession planning and updated committee responsibilities to support the company's evolving strategy and governance priorities. The Remuneration and Nomination Committee was renamed the People Remuneration and Nomination Committee with a broader remit, including people and culture, the use of AI, the oversight of workplace and whistleblower frameworks. Diana Eilert commenced chairing this committee in November 2025, and we approved an updated committee charter with effect from 1 July 2026. The Audit and Risk Committee continued its focus on financial reporting, risk management, compliance, cybersecurity and compliance with sustainability reporting requirements. Capital management remained a key for for board oversight during the year. Data#3 continues to maintain a conservative, debt-free balance sheet and a strong liquidity position, with growth historically funded through internal working capital. The Board endorsed a new capital management framework this year designed to preserve financial resilience and to fund operating requirements and investments that support organic growth and deliver consistent shareholder returns. The framework recognizes the importance of maintaining flexibility to respond to seasonal working capital requirements, market opportunities and potential strategic growth initiatives. The company has maintained historically a high ordinary dividend payout ratio and remains focused on delivering attractive, fully franked returns to shareholders while balancing the need to fund growth and long-term value creation. During the FY '26 year, the board continued its practice of visiting interstate branches, including trips to Perth, Adelaide and Canberra, which continue to provide an opportunity to hear from local staff, the local management team and connect with their customers. Through this, we gained first-hand insights about customer projects in these locations. During the year, I also took the opportunity to visit our office in Hobart during a private visit to Tasmania. In accordance with our constitution and the ASX listing rules, I retire by rotation at today's meeting and being eligible, offer myself for reelection. Shareholders are also being asked to consider an increase in the maximum aggregate fee pool available to nonexecutive directors, which has not been changed since 2022. Both resolutions are explained further in the notice of meeting. As I end of my fourth year as Chair of the Data#3 Board, I remain privileged to serve in this role and to work with such a capable board and management team. Turning now to the financial highlights for FY '26. Data#3 delivered another record result achieving gross sales of $3.4 billion, up 12.7% on the previous year. Growth was delivered across most business units and statutory revenue increased 6.4% to $907.3 million. Total gross profit increased 5.3% to $305.2 million, and the internal cost ratio improved from $79.7 million to 77.5%, reflecting operating leverage delivered through automation, the adoption of AI and a continued focus on efficient execution across the business. Earnings before interest and tax increased 16.6% to $69.8 million, and profit before tax rose 14% to $78.8 million. Net profit after tax of $54.5 million was up 13.1%, representing basic earnings per share of $0.35. Total fully franked dividends for the year were $0.3175 per share, up 13% and a payout ratio of 9.3%. In FY '26, our balance sheet remains strong and debt-free with net assets of $95.2 million and a cash position of $326 million at 30 June 2026. Net cash generated from operating activities was $23.3 million, with the movement on the prior year, reflecting primarily the timing of customer receipts in the peak trading month of June. From a strategic plan perspective, we were pleased with the progress made in FY '26 on our strategic priorities as part of the rolling 3-year plan, which Brad will touch on shortly. During FY '26, we strengthened our ongoing planning processes to improve the identification, analysis and prioritization of investment initiatives to support our strategy. This carbonated in the sovereign 247 Security Operations Center proposal and the AI practice initiative, which formed part of our plans for FY '27 and beyond. This month, we've already commenced our new strategic planning cycle with a view to working out further initiatives to power our continued growth into FY '28 and beyond. In summary, the business continues to deliver on our strategy of consistent and reliable growth. The success of Data#3 in FY '26 is underpinned by the expertise of our people and their dedication to our customers. I'd especially like to thank all employees for their commitment and contribution to delivering the strong result. I'd also like to thank our Board for their continued support and guidance. And finally, I'd like to thank our shareholders for their ongoing support and trust in Data#3. Your confidence enables us to continue investing in solutions. People and innovations positioning the company for sustained long-term growth. In May this year, we were deeply saddened by the southern passing of Richard Anderson OAM, a foundational figure in Data#3's history. Richard served on your board for 26 years, including 23 years as Chairman and his calm leadership and stewardship we're instrumental in shaping the company into the national organization that it is today. On behalf of the Board and everyone at Data#3, it's important we acknowledge Richard's Sterling service and extend our ongoing gratitude for his outstanding work and his enduring legacy. Before moving to the formal resolutions, I'd like to hand over to Brad Colledge, our MD and CEO, and who will further provide further detail on the operational performance for FY '26 and the outlook for the current financial year.

Good morning, ladies and gentlemen, and thank you, Mark. It's my pleasure to welcome you again to Data#3 AGM, and thank everyone for making time to join us here in person today and online. As Mark mentioned, FY '26 was another record year for the company, with gross sales of $3.4 billion. This represents a 12.7% increase on the prior period and continues our track record of sustained earnings growth above IT market growth of 8.9%. Our recurring sales growth -- our sales increased from 69% to 70% in FY '26, reflecting the ongoing shift from our customers to multiyear subscription and as-a-service purchasing models, such as our Device-as-a-Service offering, which grew by more than 100%. Equally pleasing, our internal cost ratio improvement demonstrated improved operating leverage. Macroeconomic conditions remain challenging during the year with inflationary pressures, geopolitical uncertainty and global memory shortages contributing to higher hardware prices and extended customer decision cycles. Despite these conditions, Data#3's business model held strong. Let's now review how our segments of infrastructure, software and services performed during the financial year. Our Infrastructure Solutions business delivered gross sales growth of over 14%, supported by strong demand for end-user computing, driven by Windows 11 upgrades, device refresh cycles and AI-enabled devices, along with hybrid cloud solutions supporting supporting modern data and AI workloads. Gross profit rose 18.6% to $84.5 million. Average gross margin improved from 12.5% to 13% and and management profit increased by more than 78% to $31.2 million, reflecting the disciplined focus on deal margins, higher vendor rebates and automation and restructuring initiatives that improved operating leverage. Our Software Solutions business delivered gross sales growth of 14.1% to $2.3 billion with gross profit up 7.6% to $78.1 million. ahead of our expectation of a flat year-on-year results. This was achieved despite the full year impact of the changes to Microsoft partner incentive programs and was underpinned by growth in Azure migrations and consumption, cloud solution provider agreements, copilot, security, software advisory services and stronger contribution from non-Microsoft vendors, including Adobe, VMware and Veeam. Our key achievement this year was our appointment by the Digital Transformation Agency as the sole panel provider for Microsoft products to the Australian government, a 5-year contract, the largest in Data#3's history, and our appointment to the renewed New South Wales government Microsoft Software panel. Our Services business delivered a mixed performance with gross sales of $412.3 million, up 3.6%. Business Aspect Consulting had a record year with growth of over 22%. Maintenance services grew 11.5%, supported by a record year in Sysco enterprise agreement wins, and Managed Services grew 9.4% on the back of strong renewals and new contract wins. This was offset by Project Services down 15.3% and People Solutions down 8.7%, both affected by extended procurement processes and reduced business confidence impacting on customer timing, fewer larger infrastructure projects in some states and a challenging labor market. FY '26 was a start of a multiyear transition for Project Services with leadership changes, new solutions and capability and enhanced services growth strategy for execution from FY '27. During FY '26, we continue to expand and refine our solution offerings across data and AI, cybersecurity, applications and automation, collaboration, end-user computing, hybrid cloud and networking. AI is both a market opportunity and an important internal productivity level. And during the year, we embedded AI further across our own operations, including automation across procurement, software development, cyber security and customer experience workflows. Demand for security solutions continue to grow, including for managed security services, further expanding our recurring gross sales streams. Combined with our cloud advisory and Device as a Service capabilities, this positions Data#3 strongly to meet the evolving and diverse needs of our customers. Our people remain central to our success. During FY '26, we were recognized as HRD employer of choice for the 11th consecutive year and again achieved great place to work accreditation. We're also recognized by our customers with an increase in customer satisfaction score from -- of 4.36 out of 5. Data#3 received significant number of partner awards this year, including Microsoft Country Partner of the Year, a series of global, regional and local awards with Cisco. We're also recognized for our sustainability leadership with APC by Schneider Electric Sustainability Champion of the Year and HP Amplify Impact Partner of the Year. Let's now move to FY '27. In FY '27, our strategic priorities remain focused on solutions, customer experience, operational excellence and people and community, supported by operational actions across accelerate services, people engagement, customer engagement and data and AI. We are taking deliberate action to accelerate the growth and profitability of our services business. through a more integrated solutions practice model, stronger sales discipline, clearer ownership of services offerings and a greater alignment to customer demand. We're also investing in a dedicated AI practice and a customer-facing AI delivery squads, and we are complementing our even security operations center capability with a 24/7 sovereign security operations center to support customer requirements for data residency, locally and government services and regulatory alignment. Infrastructure Solutions growth is expected to be supported by AI-ready infrastructure and end-user computing, hybrid cloud, networking, cybersecurity and life cycle services. In Software, we have a strategic focus on winning with complementary vendor partners, services and packaged offerings. Microsoft's AI products and programs provide further opportunity in FY '27 and and we continue to drive large Azure commitments, software advisory and Microsoft services opportunities in the public sector. The strategy also provides focus on growth in the mid-market, supported by a continued investment in our MyD3 customer portal that enables efficiency and scale. As you were informed through our FY '26 annual report, and our market trading update on the October 1, we have started the new financial year strongly and have further refined forecasts as first half visibility improved. Subsequently, we are announcing today that we have an upgraded first half projection to deliver pretax profit in the range of $52 million to $57 million, which represents a 55% to 70% growth against the $33.5 million in the previous corresponding period. This includes gross profit growth of around 20% at the midpoint and forecasted interest income of around $8.8 million. There are, as always, many variables that could have an impact on this forecast, including global supply chain conditions, vendor program updates and timing of customer purchasing decisions. and product deliveries and service project milestones. Profit before tax in FY '27 is expected to be skewed to the first half, due in large part to the one-off large transactions we announced to the market earlier this month. We expect to deliver growth in the second half and across the full year, although at a more normalized rate than the growth anticipated in the first half. We have a clear strategy to continue delivering sustained earnings growth for our shareholders, underpinned by strong execution and expanding market for technology solutions, excellent support from our vendor partners, and growing momentum from AI. I look forward to updating you on our progress in our half year results announcement scheduled for the 22nd of February 2027. In closing, I would like to thank our Board, our shareholders, our customers and most importantly, our exceptional Data#3 team. whose dedication underpins everything we achieve. Thank you. I'll now hand back to Mark.

Thanks, Brad. Before we consider each item of business, I'd like to outline the procedural matters for this meeting. For those participating virtually at the bottom of the web page, under the webcast and presentation, there are 3 boxes, which allow you to get a voting card, ask a question and download the AGM documents being the notice of meeting, the annual report and the virtual meeting online guide. Shareholders will have the opportunity to comment on and ask questions in relation to the resolutions both in person and virtually. I'll hold comments and questions until the item of business has been introduced. For those shareholders using the online platform, you can ask your questions during the meeting by clicking the Ask a Question button and follow the prompts. For each item of business, we'll address questions received from shareholders attending in person first, then from those shareholders participating virtually. We may choose to aggregate some questions where there are a number of similar questions received. I'd now like to briefly summarize the voting procedures, which will apply to this meeting. Voting on each resolution will be conducted by a poll. Shareholders who are attending the meeting in person will have been given a voting card on registration and the completed voting cards will be collected at the end of the meeting. Shareholders who are participating virtually in the meeting can register to vote by clicking on the get a voting card box at the top of the web page or below the presentation slides and follow the instructions. Following discussion of all items, shareholders will be given a further 5 minutes after the meeting is closed to submit their votes via the online portal. After this time, the polls for each relevant item of business will close. The resolutions before you today have been put forward by your Board for your consideration. However, as outlined in the AGM notice, your directors recommend Resolution 2 for your approval, with myself abstaining, as that resolution concerns my own reelection. On Resolutions 1, 3 and 4, each of which involves matters in which your directors have an interest, the directors do not make a recommendation. Where undirected proxies have been given in favor of the chair, the Chair will vote in favor of the resolution to the extent permitted. The number of proxy votes received on each resolution will be displayed on our slides as we move through the resolutions. The results of each poll will be announced via the ASX as soon as possible after this meeting. and also be displayed on our website. If you experience any difficulties using the online platform, the help line number is displayed at the top of the page, you can also refer to the virtual meeting online guide, which is accessible via the online platform. We'll now move to the formal items of business for this meeting. The first item of business for discussion today is to receive and consider the financial report, the sustainability report, the director's report and the independent auditor's report for Data#3 and its controlled entities for the year ended 30 June 2026. Ben Woodbridge, the audit partner with PricewaterhouseCoopers, please stand. Ben? Ben, is available to answer questions relevant to the conduct of the audit, the preparation and content of the independent auditor's report, the accounting policies adopted by the company and the independence of the auditor.

I'd now like to invite questions for this item of business. Are there any comments or questions from shareholders attending in person. There is a roving microphone. If you wish to ask a question, can you please state your name very clearly because this is being recorded. So it'd be great if you could give us your name very clearly. And if you're representing an organization, if you could indicate that as well. Any questions?

Good morning, Mark. Steve Mabb. I'm representing that's representing ASA today and also -- just want to congratulate you on a wonderful year. It's been a very impressive performance across the business from what we can see. Also, I want to thank you for your address today where you called out the the work the Board has done visiting our operations across the country. That's fantastic to see and not something that's common amongst some other large ASX companies that we follow. So it's great that you're getting out there and seeing what's happening in the field. I've got 1 request, though, and that is, please guard for Hybris because with the wonderful results that you've been delivering for salon, that's a potential threat. So please continue to guard and watch closely for that across the business. And then 2 questions around 2 areas of the business that look particularly strong for either you or Brad, perhaps the first one is the people and culture in the business and a very strong staff retention and engagement scores you get. What, if anything, have you done in the last couple of years that you think is driving that or improving that? Or any particular examples or things that you're doing there that you think would be helpful for us to know?

I might ask Brad to start on that.

Yes. It's a -- there's many factors that and we have [indiscernible] just behind you as well. It's okay, I won't attach one to you. But there are many, many programs that we run right across our teams. And we quite often get complementary comments about the culture of Data#3 and why people do stay so long and enjoyment in working here in the awards that we mentioned earlier. One such program that popped in and introduced to those who I haven't met, where people from a leadership development program that we had in this room last week, which where we had people from around the country come together on a journey over many months through the financial year around upskilling their skills and their leadership techniques. -- that's, I guess, just one example. We also invest heavily right across our business from our technical people in terms of their technical certifications. So that's why they want to stay with us. they have a diversity of projects that they get to work on and that's a great thing. Then across corporate services, for example, we're doing some great innovative things internally, both from a technology perspective and also processes perspective. So I think there's always opportunity for challenge within Data#3 and the people are just really well supported by the senior leadership team, which is our broader group and the executive management team and Board, of course.

If I can just add to that, Steve. I think culture is a sort of somewhat intangible thing at times. It's a mixture of a whole pile of things. You can put your finger on some things, but other things are intangible and often very, very difficult measure. But it's that combination, which I think is really important and moving around the various offices. The business still has a sort of family feel to it. And that's obviously a challenge as we get bigger and bigger but it still has that sort of family feel to it. The other thing I'd like to say is Diana joined the Board, as I've indicated, July 1 last year. Dan is very, very experienced in the people and culture area. She chairs the People and Culture Committee or people People, Remuneration and Culture Committee, and she's worked very closely with Tash. And I think that's been a great bonus to have that experience to to drive us forward. And Tash has also joined the executive management team in the last couple of years. And all that, I think, has helped to sustain the momentum we have in the culture. Did you want to add anything to that, Diana?

Just briefly, I think there's a lot of hands-on work that happens in the business. And Tash is doing some really innovative and new programs such as putting in place and it's really good to see that momentum and she's getting some real take up. I won't go into the detail, but it is -- there's some real drive for change in excellence in a very grassroots way. And it's really great to see it as you join the Board. So congratulations to Tash and the team, I think they're doing a really great job.

Yes. Great. Thank you on behalf of shareholders for that work that you're doing. The second question was more around the financial metric. So we've operated on a fairly low net profit margin for a long time, and we're very comfortable with that. I'd be interested in bringing our comments here around what you're seeing with competition. It's our belief that that's a bit of a barrier to potentially large new competitors coming after you. But have you got a different view or any views on that in terms of what's happening with competition in general? Are you seeing it increasing? Or are you finding that your competitors are acting fairly rationally at the moment?

I'll leave it up to the competitors to discuss whether they're acting rationally or...

Competitors never behave rationally.

But we're not -- I guess the short answer is we're not seeing any different competitive behavior to what we've seen over many, many years. We do have more commoditized offerings and products that drive very low margins. And one of the -- as you alluded to, advantages that we have is that we've been doing this for a long time. We've got some very good systems and processes in place for handling high volumes at low costs and still providing value to our customers. And that is really hard to replicate. So that certainly helps us without our lower volume, lower margin offerings. And then from a strategy perspective, we complement those lower commodity offerings with higher value services offerings. And that's why you'll see in the FY '27 strategy, so much focus on the services development that augments the products and software solutions that we're selling.

Question here.

[ Adrian Boss ], shareholder. Just a quick question. AI is just long exponentially, and the growth is enormous. You've got enormous amounts of money being poured into AI in the U.S. I mean, massive growth there. How is Data#3 supposed to cope with that?

Yes, I'll make a general comment and then ask Brad to speak in more detail. I mean -- we don't take big bets on AI. We're not making massive investments in infrastructure. We're providing services around AI. So we don't have the huge exposure, which is causing a lot of consternation. Yes, did you want to add to that?

Yes. So I'll just qualify that at last bit was as far as competition to data whether AI will have a negative effect on Data#3?

Yes.

Okay. Yes. No, it's a good 0question. And there's always a level of risk with regards to new technologies. But at the moment, that's not what we're seeing. So we've actually flipped it the other way, where from a go-to-market perspective, being an IT services and solutions company, what a great opportunity is for us to help our customers through the AI journey, understanding what it means to them and how they can implement it within their organizations. So AI is very good for us from a go-to-market perspective. We're also seeing AI being embedded in the software solutions that we sell that come from our suppliers, our vendors, whether they're the software vendors or the hardware vendors and then implementing AI to improve efficiencies within Data#3. So overall, we're able to -- well, as Mark said, we're not a hyperscaler, we're not a Microsoft or an AWS or a Google or an investing in those levels ourselves, but we're certainly in a great position to be able to leverage the investments that those organizations are making.

Question over here.

[ Peter Stuart ], a long-term shareholder. Just a comment, if I may, congratulations on a very solid FY '26 and a gobsmacking first half to FY '27. My first question relates to that. We've traditionally had a long history of skewed to the second half. Is this the start of a change, a gradual shift to a more even half? Or is this very much a one-off year, do you think?

We're seeing this as a bit of a one-off at the moment. We have seen in the past skews years ago, we used to have a massive skew to the second half, particularly Q4, and particularly June. And over the years, we've actually tried to provide more offerings to the market that would smooth that out. And we've been successful in doing that, particularly with a lot of our annuity-driven offerings like Device-as-a-Service, for example. But this year, we've had some large one-off type of benefits that we've certainly earned, but we don't expect those to occur. Again, certainly in the second half. So what we do have is last year, we had a very solid second half. So we still expect to have a very solid second half this year, and our plan is to grow in that second half. But the -- certainly, with the exceptional results that we've had in this first half, as I've just updated to, well, we expect to see a skew to the first half for the first time for us.

Okay. My second question, a lot of industries have what they call their opportunity pipeline. And I know you guys can't put a number on that, but one thing that is coming up is the Olympics here. Could you give us a bit of a -- have you got a feel yet for how big the opportunity is going to be and the timing of it?

It's another great question because people say the Olympics and then they think, "Oh, it's gets a massive opportunity." It might be a vast opportunity for some of the organizations. But for us, it is a good solid opportunity. But it's the same opportunity as for example, when they refreshed Olympic Park in Sydney or when they did the Sydney football stadium City Football Stadium where we did the -- all the networking technology behind that rebuild, for example, -- so we have an equal opportunity with that, and we certainly have are pursuing that. And so it is a good opportunity, but it's not a shot the lights out sort of opportunity that you may think it could be. And the other dimension to that, I suppose, is whilst everyone is focused on trying to get a seat in the Olympics, there's plenty of other opportunities outside the Olympics as well.

Any other questions from the room? Any questions online, Hayley?

No, Chair.

Thanks, Hayley. This item of business doesn't require a vote by shareholders. We will now move to the next item of business. Second item of business is to adopt the remuneration report for the financial year ended 30 June 2026. Please note that the vote on this resolution is advisory only and does not bind the directors or the company. However, when reviewing the company's remuneration policies each year, the board considers the level of shareholder support received and matters raised by shareholders. Voting exclusions apply to this resolution as set out in the notice of meeting. As in previous years, targets have been established to produce earnings growth and the management team's remuneration is structured in line with these targets, with a significant proportion comprised of short-term and long-term incentives. These are awarded based on the achievement of appropriate financial and operational targets. We measure remuneration against industry benchmarks on a regular basis, generally every 3 years, to ensure it is set competitively, the last independent review of nonexecutive and executive remuneration was undertaken in 2024. Consistent with our recent practice then, we're undertaking an independent review of remuneration in FY '27. Invitations for proposals have recently been issued to selected parties, and we expect to appoint a consultant in the near future. Any changes arising from this review will be introduced from FY '28. Shareholders are also being asked separately today to approve an increase in the nonexecutive director pool fee pool, which is dealt with under Item 5. I'd now like to invite questions for this item of business. Are there any comments or questions from shareholders attending in person? Again, please speak -- state your name very clearly for the record. No questions from the room. Any questions online, Hayley?

No, Chair.