Shearwater Group plc (SWG) Earnings Call Transcript

Shearwater Group have this morning published the full year 2026 results reporting strong annualized growth in revenue and adjusted EBITDA. For investors, we're watching customer concentration, margins and cash conversions. Joining me to discuss the results and the outlook for full year '27 is CEO, Phil Higgins; and CFO, Jonathan Hall. Gentlemen, welcome to you both.

Hello.

So Phil, let's start with the headline numbers. Congratulations. They're looking very strong. Revenues reached GBP 42.3 million and adjusted EBITDA was GBP 2.6 million, both well ahead of the original expectations. So well done. What's the takeaway for investors here?

First of all, it's worth pointing out, obviously, that's on the annualized growth of 34% in comparison to obviously last year, fiscal '25 or the previous year was a 15-month period. So there's still solid growth there, but it's just obviously just for the shareholders to be aware of that. And obviously, we've seen a huge increase in cyber activity in the press. And obviously, we've been benefiting from that. And the more that goes on, the more we benefit, particularly strong has been our financial and our telco sector, so within our Services division. So it's all contributing well to the fiscal year-end numbers.

So as you said, the Services division appears to have driven much of that growth. Can you share with us what's going particularly well? What are you seeing there on the coalface, so to speak?

Well, obviously, it's been -- we deal with some very large blue-chip organizations, both in the telco and the financial sector. And they have been growing and responding obviously to the serious cyber threat out there, and that is preparing their businesses to make them defend better against the onslaught of cyber events. We have seen a huge amount of uptake in endpoint security for our financial customers where they're protecting themselves against email attack and email takeover. And the telcos have been doing much the same, including forensic and packet analysis on their networks, making sure the quality of their networks are up. So these 2 divisions themselves, these 2 sectors are the ones that are actually responsible for a lot of our growth, and we're benefiting from that our product sets sit very nicely and respond to those 2 business issues.

It's important to point out that software did have a little more of a challenging year, let's say, with revenue down something like 17%. What was behind that decline? And are you confident that performance will improve going forward?

We've continued our investment in our proprietary software. And we've -- as you know, our software covers multiple disciplines of cloud, on-premise and a hybrid version. We also expanded that in terms of who's got access to that software. We've also changed our delivery model to bring back profitability and growth. But more importantly, we've been developing it. We've been investing into the software to actually make sure it actually fits the next-generation requirements of our client base. And we've now -- I won't say we've seen the green shoots of growth, but we are seeing a more positive outcome. And we are seeing more conversations. We are seeing more traction inside the marketplace for our product set.

Jon, if I can turn to you, if I may, talking -- looking through the financials here. Gross margins fell from around 24% to just under 20%. Can you talk us through what drove that change?

Yes, certainly. It's primarily a mix effect. So we've got 2 quite fundamentally different business models between the software and services side of the business. And actually, even within the services side, there's 2 quite distinct models at play. So within the software side of the business, we do have some cost of sales, but they're relatively fixed costs. They're salespeople, they're marketing. So what you tend to see is if revenue drops, it falls straight through to the bottom line, and we get a drop in the percentage margin. If you add that into the -- or add on top of the fact that it's forming a proportionately smaller part of the business. Services in revenue terms was 96% of the business this year and 90% of the gross margin. So proportionately, that software side is also forming a smaller part, which dilutes the overall margin. But actually, even within the services side, there are 2 quite distinct models. So we make good strong margins on selling our own people, our own expertise. So our engineering services, our pen testers, our consultants. But we also deliver quite complex integrated solutions for some of the big blue-chip banks and telcos that Phil has mentioned. And that includes the cost of sale of third-party cutting-edge software, hardware. And although actually within our Services segment, we've seen better financial performance in all those different disciplines, the biggest single area of growth has been those big integrated solutions for some of those blue-chip customers. And so you've got a mix effect at play with a higher cost of sales attached to that, which is don't look at the percentage margin, but our gross margin or gross profit is still up by almost 10% year-on-year. So we're still seeing good growth. But yes, you just got a margin effect at play, which is impacting the percentage margin.