archTIS Limited (AR9) Earnings Call Transcript

Well, good morning, everybody, and good evening to our U.S. investors and those over in Europe. My name is Kurt Mueffelmann, I'm the Global COO and U.S. President of archTIS. And I'm joined today by Daniel Lai, the Managing Director and CEO of archTIS. We're pleased to provide our investor update for the period just ending September 30th, 2023, which happened to be our Q1. So Dan, let me kick it over to you for some opening comments and a review of the quarter itself.

Thanks very much, Kurt. Welcome, everybody, to our shareholders and potential investors. Thank you very much for your time and your interest in archTIS and look, I've got to say there's probably never been a bit of time to be interested in archTIS. I think the word that I use for Q1 is momentum. And it's been very pleasing to see the type of momentum that we are building here within the business not just locally but globally as well. The cash position is $5.8 million. But I think that the real issue there has been the focus on the reduced cash burn. So the macroeconomics of the market at this point, we've been high inflation, budget uncertainty, digital spending, reduction in company numbers in terms of staff, and the technology ups and downs in the U.S. marketplace. Well, we seem to be good news in that story. And the good news is that we have to act responsibly, which we're doing with the reduction of our cash burn. But we're also not shy of looking forward optimistically to the growth and reaping the rewards of the investments that we've made over the past 18 months in difficult circumstances I've got to have. So licensing revenue is up 41%. I think that's a great indicator on our primary key indicators. Our annual recurring revenue is up 97% in the previous comparative period. And I think they're all very good indicators of the business. We've really had the most active Q1 in the company's history, and I'm very pleased by that because of the seasonality. And of course, the focus in the marketplace with the trends continuing, Medibank, Optus, the new government being taken these things very seriously and compliance really starting to [ brighten ] and forcing organizations to take the cybersecurity threats very seriously. And that has also led to our first U.S. deal for export control, CMMC and ITAR, which is the International Trade and Arms Regulation deal, which was, again, a Microsoft lead, so demonstrating our alliances are performing and starting to return on that investment. For us, that's a really good sign. We've been holding our consistently our operating expenses over the last 4 quarters, whilst reducing that cash burn. And that's been able to do that by executing the deal on bringing in revenue from that defense deal that we won at the end of June. Product innovation continues to occur. Kojensi v2.0, which has a very big focus on export controls and preparing that for the launch into the U.S. But most importantly, reinvigorating interest from a new avenue of interest from our defense industrial base here in Australia who have to comply with those regulations very tightly. And of course, they're driven by major fines as well. And all of that trending towards our outlook -- a positive outlook of minimum 60% revenue growth, which we can -- the strong Q1 activity and increase in licensing revenue and annual recurring revenue gives us confidence that we're going to be able to deliver against our predicted forecast of 60% revenue growth and $9.5 million of cash receipts. So overall, I'm very pleased with the momentum we're seeing not just here depending in our overseas markets and the market tailwinds are going to only continue to get better for us in the sector that we're in. So Kurt, over to you to go through the details of the figures.

All right. Great. Here we go. Thanks, Dan. Anyways, during Q1, total revenue was $1.3 million, and comparatively, licensing revenues increased 41% to $700,000 as we continue to focus more on leveraging the profitable licensing sales and opportunistically really aligning our services-based revenue streams. You notice services is down. It was down last year because we could not get on-site to do services engagements. As we start to look at our Q1 sales and the backlog that we're building, we're really looking to build up that revenue stream in a real strategic manner that will drive additional licensing that will be attached to it. So the ARR almost doubled to $3.5 million from the same quarter last year. So again, building that predictability and that recurring revenue stream that allows us to build the business to create that foundation and to drive value for the shareholders. Our Q1 gross margin was 63%, and it's down a little bit from the 72% prior period, and that's really focused and attributable to third-party license sales equipment and some of the services related to the Australian Defense Department contract that we have. But pleasingly, the overall software licensing margins remained healthy in the mid-80% range. So we're really focusing again on driving as much margin out of that licensing as well. As we look down towards the operating side, demonstrating our operating leverage within the business. We maintained operating expenses at similar levels to the previous 4 quarters. We made that commitment back to our shareholders and to our employees last quarter and the quarter before and through tight controls constraints, even with the inflation components that are going on in the market today, we're able to keep those levels same. And those expenses mainly consisted of staff and contracted costs, administrative and corporate, advertising and marketing and product manufacturing and operating costs. The company ended the quarter with $5.8 million of available cash. Cash outflows of $671,000 was an 80.1% improvement compared to $3.4 million in the prior comparative period. So really a big shift in where we've been looking at by keeping revenue growing and keeping operating expenses flat over that period of time. And that software contracts as they continue to build, put us in that better position. So we're really happy and really thrilled to be able to confirm that we're able to still look at that outlook of maintaining a 50% reduction in our cash flow outflows from the prior period, which is last fiscal year. So again, overall, I think it was a solid quarter from a financial perspective. I like Dan's word, momentum. We used that quite a lot in the business as we continue to look where we're taking the business from a cash, from a sales and from an operating standpoint as we move forward. Dan, any observations as it relates to the financials themselves?

No. Look, I think it's just pleasing that we've been able to land those results as quickly as we have. And the thing for me is we said we were going to do it, and we're providing evidence to the market that we're doing it. And I think that's the takeaway there.

So maybe it's probably better for you to take on this slide, given all the front page news in the Australian. I know every day I opened up the Australian, there was a new breach. And interestingly enough, I think one of the things that we've done as a company has really played a leading role. I know you have quoted pretty often in the Australia around creating awareness around the security breaches. So it might be good just to talk a little bit about what those breaches are and what that means to archTIS as a company.

Well, again, it's just that consistent trend. And if people thought that this was going to be something that was just going to be one you hit, one of those people focus on cyber is going to go away. Well, clearly, it's not. Optus and Medibank, 2 major incidents that have happened around Australia, 4 million records of data exposed. And it's got -- it's obviously with the appointment of a Minister for cybersecurity with that focus, it highlights the how important it is to the government. And of course, they have to get their own [ shopping order ] as well. But what we really are seeing is now after 12 months of the hype about the cybersecurity market is the compliance framework coming in and biting behind that. And the realization that these risks to your organization are real and very, very expensive. And we're going to see a surge, I think, in attention to the detail of what these type of scenarios are and the risk they are to the executive, and we'll see an increase in expenditure to address these things. What I'm really pleased about, though, is that the realization and we've seen this through our alliances coming to us to ask us to help promote how they deal with the data security. And of course, we've been saying this for over 12 months that it's -- we are in the hottest part of the cybersecurity market, which is data-centric security. We're protecting against insider threats. I'll note that Medibank was the theft of credentials. They got them into it. Now just because you can steal somebody's credentials, it's what permissions and rights do they have to see the data, just because you've got administration rights does not mean that you should have access to the data. And if those -- they have put those privilege management controls and policy enforcement like what we provide. That wouldn't have happened. Now I'm not saying that we're going to get a surge here from corporate all around the world trying to get us to solve their problems. But what I am saying is that ecosystem, we have lots of partners that are going to be out there promoting types -- the types of solutions that we provide into the market to resolve those types of issues. There still will be some compliance and legislative changes I expect to come through over the next 12 months. And as I mentioned, with the ITAs, the [ CMMC ] sale that we did, companies have now got firmly got their eyes on meeting those compliance requirements and protecting their organizations from those types of risks. And that's where I see the future for us outside of the defense type of environments and defense industrial base. And we're still strongly focused on our growth over the next 18 months in that area because they've got the highest levels of compliance. Moving on.

I guess as we talk about the products around it, a lot of these breaches are in the form of databases. And so they go in and they're stealing personally identifiable information. So they're taking things such as credit cards that are sitting in databases, they're taking health information, they're taking address, phone number, e-mail information. And a lot of that is in databases. And if we really look at where we focus, archTIS really focuses on that unstructured data. It's the more difficult components to deal with. It's the areas that have really the most sensitivity around it in things such as strategic documents, classified information, things that really make businesses and government really go that have the highest value behind that. So when we look at that, during the quarter, we really released 2 major product releases. The release of Kojensi 2.0, ensures us the secure document collaboration and then the sharing of sensitive information and really towards that export control the ITARs from a compliance perspective. And then we also released NC Encrypt. So as you recall, about this time last year, we acquired some of the assets associated with Cipherpoint. And we were able to take some of those components and build it into NC Protect and create a module called NC Encrypt and then NC Encrypt provides independent encryption key management and bring your own key support for Microsoft 365 applications and SharePoint server environments. This is really key to our European and APAC regions that are hesitant to use U.S. or Microsoft-based encryption key storage as we move forward. And I think in one of the customer wins that we outlined, one of the POCs were actually taking a German logistics company with 180,000 employees, and we closed an initial proof of concept that's going very well. Now you're not going to have 180,000 licenses come out of that because generally, you don't see people such as the drivers or the pilots or things have access to that type of sensitive information. But when you start to look at a global worldwide organization, comes pretty significant that they're going to be using something along the lines of NC Protect and then see crypto really lock down their sensitive information across the enterprise. I know, Dan, you've been working very closely with some of the government agencies around ITAR support and some of the compliance around export controls. Maybe you want to talk a few minutes about that.

Yes. I think what's been pleasing is that with the access to customers, the activities that we're seeing, we're seeing diversification of products. And one of those areas is the International Trades and the Arms Regulation and Export Control. The [ August ] coalition and obviously, with the quad being introduced, we're seeing the new need for sharing of information across supply chains. And that means that we need to look after each other's information, particularly for capability development, such as building submarines and airplanes and all sorts of other things, particularly with a high level of sensitivity in security. And organizations don't have a commercial platform to do that. They have to build it themselves, which is extremely costly, and we see strong avenues for growth with cogency in those marketplaces. The response that we've gotten since we released the Kojensi SaaS v2.0 with that capability has been very positive.

Yes. And we continue to see that. As Dan said, traditionally, Q1 is, from a sales standpoint, our slowest quarter. When we look at total contract values, it is definitely the slowest quarter by far. Traditionally, it's the kickoff of Q1 for Australia, and it's the Northern Hemisphere summer holiday season. So again, we're really pleased with the broader adoption that we got across the products, both from a new perspective as you see some of the larger deals that came in, the quantity of deals that came in and the minimum churn that we had. Churn remained very low at under 1%. And we're even taking some of those existing customers in upselling them and increasing licensing. So we're pretty happy about where that goes. So I guess if we look at some of the highlights that are out there, leveraging off of the NC Encrypt, we entered into an OEM agreement valued at just under $200,000 with NTT Singapore to deliver that for a small government office based out on Singapore over a 3-year period. So again, tying encryption into the Microsoft stack and then providing the hold your own key and the bring your own key technology into a government agency. So we're really happy about that. The CIOG, procure contract for NC Protect for $138,000. So again, another cross-sell opportunity that we have, but the solution will provide increased access control and file-level security for classified and sensitive information in multi-national joint exercise environment. So that's starting to get us into the coalition forces. So that's being used in some of the 5 eyes exercises that are out there in the battlefield and the war front today. So it's really neat to see our stuff get out there in real-life use. I was at AUSA, which is a large army show here in the states, and we were talking about that with some of the U.S. colleagues and how they actually have heard about Optus and NC Protect because it was coming up in some of the joint exercises with Australian forces. So again, it's that momentum that we're building through. And then on the Australian Department of Health gave archTIS $430,000 contract to provide advisory services around moving towards a more data-centric approach towards security as we drive it. So again, I think there's some really neat things that are going on in there. Dan highlighted the first U.S. CMMC. Again, that came through Microsoft. And so that's part of the IP co-sell program as well as it came in from a new Microsoft rep, which is even better to see we're getting more familiar out in the Microsoft field. We're seeing continued activity out there. But at the end, I think as one of the original founders of archTIS, I think you're taking a little bit of pride in that bottom left-hand industry recognition awards. So why don't you jump on that, if you could?

Yes. Look, I think what's probably important for investors is not that we run an award for the defense industry side of the business for the year. That's great. I'm sure that all the investors would prefer a large check and a lot more annual recurring revenue in the bank. It's what that award is indicated because that award is voted by our peers. So you raised the [ energy talices, your bowing's ]. Across the industry, they all vote for who is the cybersecurity company of the year. What that's really indicating is that our name and our brand is out there, that we are being recognized as doing something substantially of value in the industry for defense and that they see business opportunities with us in this space, and we've got a strong reputation in this space, which I think is -- we're going to maximize the leverage out of that award. So I think that's what's important about that award.

Yes. Great. And that's -- as we continue to build and scale the business, those awards become validation to what we do, whether it's the award that we receive, whether it is the case study that we got from the Australian Ministry of Defense from Brigadier General Warren Gold, we're able to take those and walk these into different alliances, global channel partners, even the defense primes that continue to validate where we are today. So we talked a little bit about Microsoft. We continue to drive that forward. We have meetings on a regular basis with them. They came out with their earnings last night. They were a little bit slowing down. And so they are being affected a little bit by what's going on, particularly in the transition from organizations from on-prem up into the cloud. So we actually help them with that. So we're seeing more activity interestingly enough on the on-prem share point, which you look at that as more legacy systems, but we're building that foundation. We're able to go in and help them secure their existing systems for SharePoint on-prem and then drive them up to the cloud. And that's what Microsoft really likes about us and that ability and taking those people and those organizations and the next step in their journey. I know, Dan, there's probably a lot of questions I just glanced at the Q&A. I'm sure there's plenty of questions about KPMG. I know we're in the middle of finalizing a procurement vehicle on that. So maybe you can shed a little light on that as well.

Look, that's -- I've said this previously, the strategic importance of that relationship is going to be very important for future growth for [ archTIS ]. What it really is, is about providing architectural services to the Australian Department of Defense for their future data strategy. That program of work has kicked off. As we said, we're in the middle of finalizing our agreement with that. It takes us inside the Australian Department of Defense. And once we're in there, we get to contribute to the statement of requirements for the future controls for the Australian Department of Defense to managing and securing their data. That's a very good position to be in. It's not just about consulting services. They are building platforms and their technology pull-through is certainly a potential opportunity for archTIS in that space.

And I think that's important from an investor perspective. We're not going out and grabbing every consulting engagement that we can. We are not a job shop by any stretch. We are doing this in a strategic nature to go out and provide core-level foundational consulting that drives towards the ultimate purchase of product and licensing and building that recurring revenue. So there's a method to the madness of going out there and building the foundation that's really going to drive the business forward. Sure, it provides more cash upfront, which is great for where we're taking cash flow and the discussions that we have. But again, it's building that foundation, building momentum of starting, becoming a trusted adviser and then coming in with solutions that will be supported by the archTIS products as we move in the same direction.

It also demonstrates the value proposition that archTIS has in the marketplace, not only do we have the technologies to do data-centric security, the market demand for data-centric security solutions is absolutely there. KPMG is a huge organization. They would want to build to practice out of this deliverable. And we want them to build a global practice because we want to be - as an alliance partner with their success is our success and the pull-through there. But most importantly, coming to us, and they could have gone to many other companies coming to us demonstrates the unique value proposition that we have in place in the market and that we are the leaders in it.

Great. And our defense prime still -- we keep a really strong relationship across that defense did research development, IP protection, all evidenced by the alliances with Thales, Raytheon and Northrop Grumman. Yes, we'd like to see more traction with them. They are customers. And so that helps. The sell through is really big for us. And the sell-through, again, we're dealing with large organizations that take time, but we're starting to get better traction in the U.S. with these organizations that pre-COVID and even at the end of last fiscal year was a little bit slower. As we came out into September, I've met with each of these organizations with representatives in the U.S., and so we're driving those opportunities a little bit more. And the other nice thing that really has come through as at the end of last quarter, we announced a relationship with I-Sprint. They're a partner that's based out of Singapore, and they closed, I believe, it was a $50,000 deal with one of their customers. They came to us with a business proposition and now they've taken on more of a distributor role into Asia, which is bringing connectivity more into their existing customer base and partner ecosystem, and they have over 500 financial service customers. So when we look at the scale that going into those markets can bring, the upfront time of getting a partner enabled and onboard and technically trained is a pretty significant investment. But when we can turn it around and start to look at how do we go in and co-sell and drive into these financial services opportunities as well as government agencies in Singapore, we start to see some good traction as we look past the outlook stage.

Just on that I-Sprint, they spent the last few weeks doing roadshows across Asia and introducing our products into their clients. So it is a very much an active partnership. And I think that Singapore and Asia, they are going to be very important to open the NTT deal that we've just done in Singapore. It's an important marketplace for our expansion.

Yes. So I think as we turn the page into looking into the outlook and going into the next quarter, leveraging off of our early prior successes of kind of our go-to-market model, we continue to execute on what we've informed the market regarding kind of the key strategic drivers and they really roll into 3 different things. It's building that foundation around product innovation, giving us the ability to go in and leverage the success within the Australian government and then driving those key partnerships with Microsoft, Thales and Raytheon that allow us to scale that reseller channel, which has introduced us into many opportunities. But Dan, you had some insight on how you're driving that forward across the business. And I think it's a good story for where we're taking it now.

Yes. Well, again, we have clients now that are actively engaged in driving the product and the product direction. And that's the market driving it, which is fantastic. Those clients are renewing and expanding their license bases for both products. We are cross-selling those products into the marketplace into the same customers. We've still got that sell-through, sell to capacity with those partnerships, but it's also the government activity and that and defense industrial base. We really want to cement ourselves in there, get that the licensing numbers are up to really drive the business towards cost neutrality and cash flow positive. And before we look at expanding outside of that, and we're achieving that. And that's what I think is really good. The strategy that we've put in work so hard over the last 18 months. The activity we've seen in this quarter, the key partnerships and activity that we're seeing through those alliances they're starting to pay their way. And we can still -- that means we can manage the business cost-effectively. We're seeing efficiencies in the product development, and we're seeing broader opportunities for those products in different areas that we haven't seen those opportunities before, which are being brought to us by our clients. And I think that's important.