archTIS Limited (AR9) Earnings Call Transcript

Good morning, everybody. We'll just give a few minutes for the stragglers to come in and for the Zoom update to allow all participants and thanks for your patience. All right. Looks like we totaled out there. Well, good morning, everybody, and good evening to our U.S. shareholders. Welcome to the archTIS Q2 '23 Investor Update for the period ending December 2022. I'm Kurt Mueffelmann, the Global COO and U.S. President, and I'm joined by Daniel Lai, the Managing Director and CEO of archTIS. Dan, why don't I pass it over to you to kick off a summary of the quarter and get things moving forward.

Thank you. Well, welcome, everybody. Thank you very much for your attention to archTIS and continued support for those shareholders that are existing and that the new shareholders welcome. And I hope that you get something out of the webinar presentations that are on our quarterly results. I'll just quickly start by going over the highlights for the quarter. Obviously, the highlights are, the strong message there is continued revenue growth, strong reduction in cash flow, cash burn, as we drive towards cash flow positive by the end of the financial year '23 and the objective of becoming cash flow positive. So, that's the good news. That strong revenue growth continues quarter-over-quarter and you can connect the dots there to see where we're heading. However, obviously, there has been some challenges throughout the quarter. We have seen some delays in the ability to convert opportunities into revenue, specifically, that has been due to global supply chain slowing down and the delivery of some equipment, which we could then recognize as revenue for deliveries into the Australian Department of Defense, but also onboarding of personnel into some services contract, which we could convert to revenue more quickly. We're seeing the easing of that happen at the end of December. And obviously, as we've moved into January, we're quite confident that we'll be able to convert that revenue significantly in Q3. Where does that leave us? Well, that backlog of work provides us with a very strong positive of $5.3 million in contracted revenue to be converted by the end of this financial year and we're very confident that will come in. That puts us in a very strong position to continue and with strong confidence to continue our forecast of a minimum 60% growth on revenue and also booking our $9.5 million of cash receipts. So, I think the company overall is in a very strong position. And of course, the other positive news out of this quarter has been the booking of $1.2 million in services work orders with KPMG for the Australian Department of Defense for their data strategy program, which we are advising on security and access controls in the Australian Department of Defense. That I don't want to underestimate the importance of that activity. We are there to provide the Australian Department of Defense and to find for them their requirements for data-centric security going forward and what good looks like in terms of access control, which of course is our bread and butter with Attribute-Based Access Control. So, I see many positive opportunities there for growth in licensing and continued services moving forward towards the end of this financial year. And that, of course, is off the back of the $7 million deal that we did in June last year. That places us in a very strong position. And I'm very confident that we're doing the right things to grow that revenue and particularly, the license revenue from there. We also went through the quarter and did a capital raise of $3.5 million. Part of that was in a loan facility and part of that was from an SPP on a strategic investment from an investor in New York, Brio Capital through a direct traditional capital placement. So, all of those activities have been focused on us supporting the growth in the U.S. business with the launch of Kojensi into that market. I do want to say a little bit about that. Obviously, we have invested very heavily in our global infrastructure and our sales. Obviously, that's a significant part of the business investment. Obviously, we wouldn't continue to invest in that and support that operations. If we didn't see the ongoing activity in the world's largest market to continue to support that. We have seen that activity. We have got active opportunities there and I'm looking forward to providing some news in the future of that conversion of that opportunities. And of course, it being the largest market in the world for an opportunity for archTIS, we're positive that we're going to get a return on that, which will help assist rerate the company in the market. So, just a little bit on that. So, I think we'll get into the details now. I thank you again for your support. I think it's been a positive quarter. I'm very encouraged, and I'll get Kurt to run you through a little bit of the details and the comparisons of those figures on our previous comparative periods. Okay. Kurt?

Thanks, Dan. Yes. As we put together the presentation over the last couple of days, what really came to me was really what any public company is looking for. They're looking for predictability and visibility. And in these uncertain market times, particularly in technology space, having that visibility into what archTIS can drive from a revenue standpoint over a contracted backlog for revenue conversions over the second half of the year is very positive. And so we look very forward to where we can take this over the next couple of months. So, from a financial standpoint, during Q2, our total revenue was $1.1 million. Licensing revenues increased nicely, up 30% from the prior comparative period from $800,000 and it was actually up 20% from the prior quarter. So, we're very happy by those trends that we continue to see. ARR or Annual Recurring Revenue was $3.5 million, which was a 116% increase against Q2 of FY '22. And a big driver behind that was our churn, which is where we potentially could lose customers, really remained stable around that 1%. So, we know that our products are very sticky in the market. And when we get a customer, we generally keep them for a long period of time. The company finished the quarter with $7.1 million of contractually obligated revenue or backlog, of which, as Dan mentioned, that $5.3 million is expected to convert prior to June 30. So again, going back to the kind of the theme of predictability and visibility, we have visibility into $5.3 million for the back-end of the year from a revenue standpoint. Gross margins increased for the quarter to $600,000 compared to $500,000 during the prior quarter. However, our margins did decrease slightly from 69% to 57%. The decline in the gross margin percentage was attributed to lower margins associated with services from delivery of the Australian Department of Defense contracts. However, if we look at really where the core business is going, our licensing margin percentages remain very strong in the 85% range. So again, we're very happy with that. The company ended the quarter with $6.8 million of available cash. The quarterly cash outflow or burn from operating activities was $1.1 million, which was a little over a 26.5% improvement compared to a cash outflow of $1.5 million in the comparative period last year. So again, really looking at being dedicated towards capital efficiencies and moving where we need to go from a cash flow positive direction standpoint. The improvement over the prior comparative period was predicated upon our decrease in underlying operating expenses, increased customer seats and the associated software licensing and service contracts as well as the receipt of $1.8 million from the FY '22 R&D tax rebate through the ATO. So again, very positive on where we see the predictability and viability of the quarter going. And so I wanted to touch on that as we look at kind of backing up where our outlook statements are. And based upon the quarterly financial performance, I'm pleased to confirm our annual outlook that we actually talked about almost 6 months ago. So again, predictability and visibility, which is really key in these uncertain markets. Firstly, we confirm our outlook of a minimum of 60% revenue growth against FY '22. The company recognized $2.35 million in revenue for the first half of the year with an additional minimum of $5.3 million of committed revenue for the second half of the year, thus a target in excess of 60% growth. Broken out in further detail additional short-term deferred licensing of $1.7 million that is currently accounted for on the balance sheet will be revenue recognized over the next 2 quarters. Revenue obligations with services and equipment of $3.6 million are contractually deliverable again prior to the 30th of June 2023. All totaled, the confirmed FY '23 outlook is $7.7 million or a minimum of a 66% increase from FY '22, where our revenue was $4.64 million. Additionally, licenses and services contracts that we do between now and the end of the year will add to the percentage increase over the prior year, where we still have current visibility into triple-digit percentage growth from the prior year. So, we're really pleased about maintaining that, seeing that, again, from a predictability and visibility very early in the fiscal year and being able to maintain that as we go forward. Secondly, we confirm our outlook of a minimum of $9.5 million of cash receipts, which would be a 127% increase from the prior year receipts. The company has received $6 million in cash receipts through the first half of the year from customer receipts and the ATO tax rebate payment. With the above-stated contractual obligations of $3.6 million, cash targets are projected to be reached and exceeded against the $9.5 million outlook. So again, very happy about where that predictability goes. Lastly, and moving towards becoming cash flow positive in calendar year '23, archTIS is in target to achieve its objective of lowering cash burn from the prior fiscal year by 50% or greater. In FY '22, the company had a negative cash burn or cash negative outflow of $10.7 million through the first half of the year. We're averaging $291,000 on a monthly cash burn, well below the target of $448,000. So again, really looking at where we're managing the business from a cash flow standpoint, from an operating expense standpoint and maintaining the minimum requirements around what our receipts and the excitement around our revenue growth as we move forward. So Dan, any comments on that as we move forward?

No. Look, I thought this was an important slide to show the shareholders in 2 reasons. One, we're growing our revenue and 2, we're restraining our cost base and reducing our cash burn. I mean that's a very difficult thing to do in these challenging markets and to have that visibility of triple-digit growth in this current marketplace, I think we're doing a stellar job. It's not easy. We certainly, we've been working extremely hard to do it, but those figures should give everybody confidence that we're on track to do what we said we would do.

Great. So Dan, as we look at customers and partnerships, maybe you can talk about kind of that lifeblood that we have within archTIS around the key marquee customer that we have and how that spin-off effect around defense and intelligence leads into other areas across the business.

Look, we've all said on a number of occasions that our key market is defense and intelligence, intellectual property in this marketplace. Obviously, we have gone from strength to strength in the defense and intelligence markets here in Australia and we're looking to expand and leverage that in the overseas markets. And we've been building up that infrastructure and alliances to grow our business overseas. I'm exceptionally pleased with how we're tracking inside the Australian Department of Defense. I have said on numerous occasions that that's going to be very important for us, not only for generating revenue, which we -- it has been very successful. And they are also in referenceability to those overseas. We've all seen the geopolitical situation with AUKUS. I would note that our previous Chairman, Stephen Smith has -- not only was behind the defense strategic review, which is going to be very important about where expenditure goes in the future, but he's also been made the High Commissioner of the U.K. And I can tell you right now that the AUKUS and security are going to be at the top of his agenda in the United Kingdom. I think that's important. He's obviously invited us over to catch up with him in that U.K. market and it's something we intend to do. But we are well positioned with the Nexus opportunity with Thales to look at that expansion with NATO partners. And obviously, they're watching the AUKUS commitment and the Australian Department of Defense very closely as well as the U.S. KPMG has provided us the opportunity, as I said, to walk the floors, unblock certain opportunities and I can see a number of our trials and proof-of-concepts coming through for licensing there just because of that opportunity, as well as the $1.2 million that we've booked in terms of work orders over the past period. CORNING and key customers excerpt, which I'll go into a little bit, and obviously, those key alliances to grow that global network. SAP is a good business case because it's something that started here in one of our target markets, which was securing and collaborating of information between the Australian Department of Defense. SAP is partnered with the Australian Department of Defense to implement their Enterprise Resource Management Program tools. They needed to do that in a secure way and they selected Kojensi as that platform. When they saw it, they became very excited about the ease of use and how quickly they could get their people on board to use it. And of course, the administrator then went across and started speaking internally to the business and that got onboard Canada and the U.K. One of the targets that we wanted to do, which obviously grew the number of licenses and started to do that network growth effect that we've seen here in Australia with the Attorney General's Department and others are Thales, Northrop Grumman. But the big issue there for them was, obviously, not only was it good to get feedback for product development, but it was about how do we continue to grow with SAP, one of the world's largest software companies in the U.S. And of course, they said to us, well, guys, we need you to be sovereign in the U.S. That was one of the areas of thinking behind expanding Kojensi into the U.S. We obviously, are market testing that very strongly at the moment and planning the execution of Kojensi into the U.S. markets. And we see 2 big opportunities. It's not only for the secure interaction with these government agencies in the U.S., but also export control of sensitive intellectual property and commercial information in that marketplace, as well. So, standby for more information on that launch into the U.S. as we work very hard to get that off the ground. On alliances, I'll hand over to you, Kurt to speak more about the Microsoft and I'm sure people -- we've spoken a lot about the Microsoft alliances over these periods of webinars, I'm sure people really want to know how we're going and what activity we're seeing with that, particularly in our overseas markets in the defense and intelligence space. Over to you.

Yes. It's been really exciting. We spent a significant amount of our Q2, particularly in the December period working with Microsoft, and they are very strong in our global distribution and product integrations. Our partnership with Microsoft remains very strong. And listen, we all know Microsoft has gone through its challenges like all the other big tech companies out there. They've experienced a slowdown on cloud migration and revenue. And our pipeline remains strong, albeit it's pushed out a bit, which again, is more relevant around Microsoft, moving organizations from on-prem up into the cloud. So, we've taken a little bit of a more aggressive strategy and trying to kind of preamble that by working with Microsoft in making customers comfortable on their journey to the cloud. And so taking NC Protect will actually work and deploy on the on-prem and work through a hybrid environment to provide the same level of sensitive technology or sensitive inside protection for Microsoft and an on-prem share point and then carry them across on that same journey through the cloud. So, we've done that through working very closely. And so at the recent Microsoft Intelligent Security Association Conference in December, archTIS was featured as a lead partner solution for the Microsoft Purview Information, which is SMPIP, formerly known as Microsoft -- or formerly known as Microsoft Information Protection and we've also integrated into Microsoft Sentinel. It's taken some time to get us to the stage of going out and meeting with the various governments. I was up in Canada for a couple of times over the last quarter, obviously, Washington, D.C. And since the U.S. government is very kind of fragmented and separated, we've been spending a fair amount of time on planes going out to a different intelligent bases, this, the Army, the Navy and the different sites that are out there today. So currently, we have half a dozen strong U.S. and Canadian defense coalition opportunities where Microsoft had brought us in as their preferred solution for ABAC technology and have visibility into the final selection processes. So, we really feel confident that we'll see a couple of these come over the line over the next couple of months. So, we're really excited about that. And I know the U.S. team is working hard to push that through on a number of different fronts. The relationship is also a source of new partners across the security space as well as Microsoft providing additional funding for co-marketing benefits and we are even scheduled to do a webinar with one of the leading Microsoft product strategists in the middle of February. So, if you like to participate on that, I'd urge you to take a look at that as well. So again, you can see that the webinar is strong, the product integration, the security and more importantly, that field relationship stays very strong. So, as we kind of look at where the corporate directives went for the year -- for the first half of the year. During the quarter, the company put in place a number of programs to support the entity stability and growth. In December, we established a $3.5 million corporate finance program to better support the growth, while specifically allocating additional funds towards the launch of Kojensi into the international markets to better support the export controls in ITOM markets. We created a 3-tiered finance program that was comprised of a $1.5 million shareholder placement made up from international investors and institutional investors, both from the U.S. and Australia, family offices, high net worth individuals and I'm pleased to say all the Board and senior executives within the company itself. So, we had 100% participation from the Board and the key senior executives. We also sponsored a shareholder purchase plan, which was actually 40% oversubscribed for a total of $700,000. The SPP included 100% and of organization -- I'm sorry -- I'm sorry, you heard the wrong thing. So, the SPP was oversubscribed by 40% for a total of $700,000, which we are pleased to see. And lastly, we received a $1.5 million market rate facility from CBA, which gives us that flexibility without creating dilution for existing shareholders. Given changes to the overall technology markets, archTIS also initiated a $2.25 million annualized cost savings program. Taking effect from December onward, the company reduced its overall workforce by 18% and reset budget expectations across a number of discretionary areas. So again, not unlike any of the other technologies companies that have been out there in the market today trying to make sure that we're as capital efficient as possible and making sure that we work towards that goal of being cash flow positive in the near future and by the end of the calendar year '23. We also implemented Fresh Equities, which is a shareholder portal that allows for greater insight into shareholder trends and direction as well as allows for a more collaborative experience between management and shareholders. Shareholders must sign up directly through the archTIS Investor Relations website to participate in this experience. Shareholders will be alerted around general company updates, all releases, including ASX and non-ASX press releases and will receive direct notifications on Q&A responses to increase. And going forward, we get quite a lot of shareholder inquiries through e-mail and we're going to push all shareholder inquiries will be required to go through the portal for efficiency and transparency. We want to make sure all shareholders have the proper ability to have that insight into the information that's being shared as we move the business forward. So Dan, kind of as we look at where we go for the back-end of the year, this is probably a slide that people have seen before. But again, it goes to our commitment around what the strategic growth at the beginning of the year has been. It goes to our predictability and viability from a number standpoint as well from a strategic standpoint. So, why don't I turn it back to you to provide a summary around our kind of strategic growth and how we intend to move everything forward.

Thanks, Kurt. People would have seen the slide previously. It hasn't changed. We know the market well. We're continuing to execute and build a very sustainable business that takes time, but the quality of the revenue, the repeatability of that revenue and the licensing of the annual recurring revenue is very strong. And I think our growth figures are strong, too. So, we're going to continue to innovate. We do that through the Australian Department of Defense as a strategic target market. We do that with the intelligence agencies as well. That drives through to the rest of the government and defense industrial base particularly. And our partnerships see that value and are continuing to invest in us and grow our marketplace and opportunities such as the Microsoft one that Kurt just described to you. But that's also happening with Thales. It's also happening with Northrop Grumman. It's happening with the number of others as well out there, DXC included. So, we can see that we'll continue to do that. As I said, I think there'll be a number of key wins that we're focused on in the next 6 months and that will continue to be our growth trajectory and now able us to convert our revenue and deliver on that minimum 60% growth plus and our cash receipts. So, I think there's more of steady she goes in this marketplace and I think we'll continue to execute what we said we would do in the marketplace over the last 6 months and I look forward to reporting on the Q3 results. Traditionally, this is a busier period for us, the last 6 months are traditionally a little bit busier for us in terms of deal activity. So, I'm looking forward to how we execute across that next 6 months and quietly positive that we should see some growth in our overseas markets as well. Over to you for Q&A.

Yes. Great. So, I think one of the things -- there's been some follow-up on what that $5.3 million is in deferred backlog. Let me just go back and re-clarify that. That $5.3 million is contractually obligated backlog. Those are contracts that have already been signed that we have not delivered the revenue as of yet. It could be services, it could be equipment and it could be licenses, right? Licenses generally are recognized over a 12-month period or the term of the contract. So, we have $1.7 million of licensing revenue that's just going to tick off over the period of time. So, that $5.3 million is really baked in revenue, that's done. And so anything over and above that from a new sales standpoint, whether it's the Canadian, U.S. or additional sales in Australia, those will be additional revenues that we'll be able to recognize in fiscal year '23. So, we feel really, again, bullish around where our predictability and visibility is for that 60% growth for that. So Dan, one of the questions was the previous strategy for growth was partially around M&A with the goal of cash flow positive. How long do you plan to stay cash flow positive? And how does the M&A change the strategy for growth as you move forward?

Well, again, we haven't stopped looking at M&A opportunities. What the criteria for those M&A opportunities might have looked like prior to the market turning 2 years ago versus now, it has changed a little bit. I think that the strategy is the same. Kurt and I are constantly in the marketplace. We look at every deal that we do and companies that we work with as opportunities for merging and acquisition. But the criteria is the same. We have to have a strategic cultural fit. And we've been through 2 mergers and acquisitions and it does take time and money for that integration to occur and for you to achieve the efficiencies and then be able to execute against the opportunities that those mergers and acquisitions bring new markets or with new clients. The second one there is, it has to be strong technical fit. If it's not a strong technical fit in our niche, then it's probably unlikely that we're going to go because you have to invest in broadening your market appeal. And last but not least, of course, for us, it has to have now a strong revenue stream. What we're not interested in at this point in time when we're so close to really driving through into the markets that we've been investing in is to then have to invest in another company to get them to profitability. We do want them to be positive cash flow in terms of the mergers and acquisition opportunities that we look at. So, it hasn't gone away. It's still part of the strategy. We are still looking for the right opportunities but we're also making sure that we've got a strong revenue base in which to execute that M&A strategy from.

Great. Well, it seems like the outlook statement is the one that's driving most of the questions. Is the license projection of $1.7 million in the FY '23 outlook statement from Q3 or Q1? So again, that $1.7 million is deferred licenses that we'll recognize over the next 6 months. So, take that $1.7 million and bring it in, in FY '23 revenue. So again, that's deferred revenue that will come in just from the timing of contractual contracts that we have in there. And the follow-up question of that was publicly announced licenses seemed to suggest a higher projected FY '23 growth rate than shown. We've always said that we were projecting a minimum of 60%, but we do have visibility for higher growth rates based upon additional contracts coming in, additional revenue that we'll be able to recognize for new contracts that we see through the existing pipeline and the expansion of some of the other opportunities that we have in place. So again, if we look at what we have already brought in, what we have in backlog for licenses, services and equipment, that adds up to, I believe, a 66% growth year-over-year. So anything else will be additive to that on a percentage basis.

So I just think of backlog is under contract to be delivered. I think that's the best way of referring to it.

Has the business seen any wins by Thales' CipherTrust as of yet? I know we are working through a -- we have an active POC, which is a small contractual win over in Europe and that will hopefully convert into a larger deal within the next month or 2. So, we feel excited about that. But we're doing a lot of work with Thales. I know we're going to be meeting with the team in Singapore. We have opportunities within the Canadian government right now that we're working with Thales and we're also working across the U.K. from MOD. Again, that's all resonating through the relationship that the Australian entity has built up with Thales and some of the key executives there. So again, that was a last quarter announcement about building and working with the BYOK that just went out to market. And so we've taken a little bit of time to build up some pipeline and some interest in it, but it's definitely getting a lot of play. The biggest word is getting play is really around this whole policy orchestration where NC Protect and the archTIS product is able to make an intelligent and real-time determination of which encryption key should be used. Should you be using the Microsoft encryption keys or if an organization maybe is in Europe and they don't want to get locked into the Microsoft keys, they can flip it over as Thales' CipherTrust. So again, it's a real-time decision that we're making. So, we're seeing some really positive traction, particularly across Asia and Europe right now around that CipherTrust relationship itself.

And it's exciting when we talk to clients about it because when they discover we've got that capability, they get excited. It solves a unique problem for them and that's critically sovereignty. I can control my own data with my own encryption. So look, I think that there's good things to come from that. It is again, something that takes a little bit of time for people to absorb and it's not necessarily just sold in isolation, it's sold with the NC Protect product.

So Dan, this one escaped me, so I'll let you answer it. There was a recent AFR article regarding Austal. Is there a potential opportunity for archTIS?

I'm not familiar with it. So...