archTIS Limited (AR9) Earnings Call Transcript

All right. Great. Why don't we get going? Good morning, everybody, and thank you for joining us. I'm Kurt Mueffelmann, and I'm joined by our CEO, Daniel Lai. Today, we'll be reviewing archTIS' Fourth Quarter FY 2026 Results. We really have 2 themes to find for this period. The Spirion acquisition has continued to fundamentally transform not only the shape of the scale of our business and the defense momentum that's continuing to build on both sides of the Pacific with the U.S. Department of Defense and the Australian Department of Defense, each taking significant steps forward with our technology. And as we move forward, the way that we can scale and continue to drive shareholder value moving the business forward. So let's talk -- let's push it over to Dan for some opening comments. Dan?

Thanks very much, Kurt, and welcome, everybody, to the fourth quarter report for 2026. Before we begin, I want to address a couple of questions directly from shareholders, particularly around these 4 areas. On the share price, we know it hasn't reflected the business' progress. And it's just as frustrating for the Board, the executive and as well as institutional and retail base of shareholders. The small cap liquidity and uncertainty around the timing of the U.S. DoD outcome have weighed heavily on the company and the expectations in the market. But the catalysts for changing that are clear. Obviously, we need to convert the DoD negotiations into a single independent award. The other component of that is making sure that we guide the company towards a sustained cash neutrality and obviously, ultimately to breakeven. Those 2 components, we believe, are the catalysts for that change. And we are very confident with the DoD award that we are going to get there. So I wanted to address that first and foremost. Business, as you have said in the opening remarks there, Kurt, has been transformed, and we are a very different business to where we were 12 months ago. And I think people need to -- I think we need to explain that a little bit better to the shareholder market and what the opportunities now are in front of us. On our growth, our biggest opportunities run on government procurement time lines, not ours. That is the nature of government and defense, particularly when you're dealing with a defense organization that's pretty occupied globally around the world. However, we are moving closer and closer to the outcome that we are seeking, and we are no longer dependent upon just a single award. We now have with the Spirion acquisition, 225 customers and 12 months ago, we had 60. That upsell revenue opportunity and cross-sell and partner channels that we're engaging throughout our 12 months of hard work this year are going to pay those dividends that we are seeking. Yes, there's been some churn in the Spirion base, which was expected, but that's also indicative of a competitive growing market that is now seeing not only the customers turning to data-centric security solutions, Zero Trust as well as the defense industry, but it's being acknowledged by the cyber vendors themselves, and that's what's created this competition. So we are seeing that upsurge of that market driving towards us. On performance, we are not where we need to be relative to our revenue, and we understand that. We've continued to cut operating expenses 2 quarters running. And we expect that to continue. We're still looking for that opportunity to remove waste and create synergies in the business. The bridge to breakeven in receivables and converting that cash, deferred revenue flowing through, and holding our cost discipline, they're all critical to us achieving that. A year ago, the U.S. team consisted of 3 people all playing a global role. Today, with the Spirion acquisition and turning that into an archTIS entry point into a go-to-market strategy, we have 30 people covering sales, presales, customer success management and product engineering. In December, post the acquisition of Spirion, we identified $4.5 million in annualized savings. And since then, we have identified another $2.5 million, which we executed. We will continue to look for those savings, but albeit with a clear understanding that you cannot cut your way to growth, and we'll continue to walk that line. And finally, on dilution. We understand that there's a time pressure -- the perception of time pressure in the marketplace on cash. However, we've made a very deliberate decision back in December that we wanted to make sure that we didn't want to dilute shareholders post that Spirion acquisition. And that, that strategy was to use debt financing, which we believe was an economic way of making sure we didn't dilute while we acquired time to make sure that we could close the deal with the U.S. Department of Defense. Now we will continue to look at that financing and those opportunities, and we have recently announced that the CBA has extended that loan. And obviously, they have done their due diligence on the company as well. So any capital decision will be weighed against the alternatives and the strengths that we need to look at from continuing the success of the company. But these are the real challenges of the company, and we acknowledge them, and we wanted to make sure that you understood that we are doing positive things about it. But why am I saying all of this? I'm saying it from a position of confidence because we, on the inside of the company, are seeing the progress that we -- gives us confidence that we will execute what we need to execute. So moving on to the results of Q4. I'm not sure that's rendered right perfect, but we'll see. So annual recurring revenue closed at $14.8 million. That's up 208% on the previous comparative period. Year-to-date, gross margins are still strong at 74%, a little lower than last -- this time last year, but obviously on a much bigger sales revenue pool. We've got under and contracted, we've got $16.6 million, and we did $4.1 million in total in sales across the period -- of the year, sorry. And 40% deferred revenue growth still on the books, which will support us going into this year, strengthening our revenue baseline. As I mentioned about cost management, we have reduced our OpEx by 11%, and that's the second consecutive quarter that we have reduced our cost based on that identification of that $4.4 million annualized savings and the $2.4 million that we're now introducing, which will continue to see us reduce that cost base. And finally, we've got momentum now in the defense industry baseline. Obviously, we have had the win with the U.S. and European alliance, but also the announcement with the Australian Department of Defense. And finally, the announcement of that we've got 100% or 60 out of 60 use cases, which we prosecuted with the U.S. DoD, which has now led us past that point of technical evaluation into that commercial conversation and negotiations. And with that, I'm going to hand over to Kurt to get more detail in the numbers.

Yes. I think Dan made a couple of good points in the overall summary, and they are reflected, right? If we take some of the cash issues outside of where we are from a finance standpoint, it's looking pretty strong as where we look at comparative to prior periods. So for the quarter, ARR, or our annual recurring revenue stabilized at $14.8 million. That's up 208% from the prior comparative period of $4.8 million. So almost $10 million of ARR growth, albeit through Spirion, but over year-over-year. Total revenue for the quarter was $3.5 million, and that's a 92% increase over the period, and that's in line with the same from last fiscal period. Gross margins really were strong at 74%, and that actually was 74% across the entire year. So very strong and at the top realm of where SaaS and software companies generally should be from a gross margin standpoint. So we're managing where our cost of goods are as it relates to costs. This reflects really our continued transition away from lower-margin services equipment and that third party and really looking at towards the proprietary software across the products that we have today in NC Protect, Spirion, Kojensi and TDI. Total operating expenses were $5.3 million, and that's almost $1 million or 11% lower than the March quarter. That's the second quarter, as Dan talked about, a reduction, reflecting the full and continued effect of cost actions implemented following the Spirion acquisition. We continue to drive that forward and look to decline in the coming quarters to better align ARR with the overall revenue and have it directly tied to how we look at cash and how we drive that towards cash flow neutrality. I think some of the other aspects is when you look at cash, we had a couple of things at month end that really were impactful. If you look at combined cash, term deposits, which we received since the beginning of the quarter and trade receivables, they were actually $5.8 million, almost $6 million. So pretty close to what our net operating expenses would be over a 2-quarter period. So that was actually $2 million higher than the prior year. I think the other things to start to look at is some of the strength of the balance sheet that you'll see at the end of August with the release of our audit, but deferred revenue grew by 40% to almost $9 million. So that will actually be revenue that we'll be able to convert in 2027 without doing anything. It's just the actual ticking of the clock for annual recurring revenue. The other thing you'll see on the balance sheet is that our net assets increased to $15.6 million from $5.4 million over the prior period. So again, that's all following the capital of Spirion acquisition and the actual capital raising. I think some of the other things that really start to come into play as you start to look at what we do is not only are we looking at diversifying where our revenue is coming from, but diversifying the customer base itself. So FY '26 delivered record contract revenue of $14.1 million. That was up 65% from last year. And if you include Spirion for the entire full year inclusion, it was $16.6 million. So that's really a strong growth period. That's almost 100% increase year-over-year. And as we indicated, one of the things we really push is that upsell and cross-sell, and that's emerged as really a genuine growth opportunity. Just last year alone, particularly in the second half of the year, that contributed $2.7 million across 12 separate transactions. That's essentially across 0 from 2 years ago. So you see where we've gained $2.7 million towards our annual recurring revenue just through cross-sell and upsell. And that's coming in and selling additional services or additional product to the existing customer base that we have today. And really, what I think is also strong is we went from roughly 60 defense heavy customers to 225 across a dozen verticals with the top 10 concentration halving to 32%. So we're also losing our real strength or our real inability in the way that account concentration drives. And that's really looking at where, particularly for Australian defense has gone, where that's down to 17% from a total revenue standpoint. So at one point, that was as high as 65% 2 years ago. So now that's less retention or less -- I'm sorry, less resilience on one account and spreading that risk and spreading that shifting of right of procurement over across all sorts of different accounts that are out there today. Yes, we remain focused on U.S. and Australian defense as well as NATO and coalition forces. But again, this diversification of the customer base and the derisking of it really helps where our strategy goes going forward. So it becomes much more predictable and allows us to better operate and how we match against operating expenses that materially impacts cash flow requirements as we move forward. So as we talked about, one of the exciting things is also the Department of Defense and where we are today. So Dan, why don't we talk a little bit about some of the strategic milestones that we hit during the quarter?

Yes. Look, I think this is the critical one, which was that we finally got the report out of the U.S. DoD, which confirms that we have met all the criteria technically, security-wise and all the rest of it. I know that there are some questions already pouring in about the U.S. DoD. And one of them is, do they still have NC Protect production environment or has it ceased? No, it's still in there. They're still working with us on that. We already completed the services to more tightly integrate the product in, which was a component of that testing. And of course, that testing was done with Central Command, which is the operational area, which is dealing with the war in Iran at the moment. So they not only did they believe that it was critical to do the test and prioritize resources while they had other priorities, they completed that testing. So that's a really important indicator of the importance of this to the U.S. DoD. And where does that take us? Well, that really takes us into that contract negotiation process. But as I said, we are working towards the U.S. DoD timetable, not hours, unfortunately, and that's where that frustration creeps in. So there's no technical barriers remaining. There is an operational urgency, as I just mentioned. They have recognized this. It has been mandated by the U.S. DoD CIO that they will implement Zero Trust. We are the only product being trialed and tested for the Microsoft DoD 365 environments, and that's been completed. And of course, we're in negotiations now, and we continue to have those negotiations. In fact, I'm heading over to the U.S. next week, just checking on the progress of those negotiations, and I'll be catching up with Kurt on that ground tour. In fact, we're also introducing new products to the sponsors of that with the U.S. DoD. So we continue to have momentum in Australia and the allied environment. We've spoken a little bit about that. And what is this doing? This is all building up that story that we are carving out a niche for archTIS that has defensible boundaries from competitors while we build this up and get this long sticky. Yes, the deals are long. Once you're in there and you acquire that revenue, that revenue is a long period of revenue too. It becomes very sticky. And a good example of that is the Australian Department of Defense with Kojensi. We know what their plans are for expansion. Not only have they increased their -- got quotes for increasing their licenses and revenues, but they also have put in $2.2 million in services annually across a budget of 3 years. So $2.2 million annual a 3-year term of investment for expansion of Kojensi in the Australian Department of Defense in those highly classified areas. That's the sort of stickiness and the growth that we expect to see. That validates what we're doing in terms of the strategy. The U.S. and EU military alliance, another one. Cracking these things from an Australian company is major, and it does take investment and it does take time. But the referenceability of that for growth is critical. Kurt, did you want to add to that?

Yes. I think what it also does is it provides that cross-sell, upsell, and it actually leads to what we talked about, and we'll continue to talk about a little bit later in the presentation is about that partnership traction. Because we're talking to this alliance over in Europe. And you start to talk about how we're in with NC Protect within the SharePoint environment, SharePoint on-prem. But one of the interesting things that's happened in the quarter also is Microsoft's completely restructured their go-to-market lines of business. They've created this company called Microsoft Frontier. They've taken all their defense and intelligence leads and have actually put them into Microsoft Frontier. Our main lead for our main contact within Defense and Intelligence is now heading that up within the D&I team globally for Microsoft. So we're carrying additional contacts across. We're going, as Dan said, to DC. We're going to be briefing them and a number of the Microsoft Defense and Intelligence teams and Frontier team members on not only what we do with Microsoft, but what we do with some of the other different partner opportunities that are out there today. And I think that ties back in, Dan, into one of the big announcements that we made that actually saw a big bump in the share price over the quarter earlier in the quarter was the Mattermost Technical Partner agreement. They are very strong into coalition forces, into other defense ministries and NATO allies and coalition partners. And Dan will take you through a little bit of the technology in a moment, but we're looking to increasingly scale through the business through partners. We're not looking to bring on 15 account executives at $200,000, $250,000. We think that we can really scale the business through these technology partner agreements with the likes of Mattermost and others where we can incorporate our product lines into them. So it's a sell-to, sell-through. They are the trusted advisor. They already have existing customer bases. We don't need to spend significant amounts of money on marketing. We can really look at what that partnership drives, as we extend our channel into the different NATO defense ministries and coalition forces that are out there today. So we're really happy about where that direction is going. And I note just from what we have in meetings next week, we're meeting with 6 different Mattermost organizations or companies that have Mattermost currently. And again, they already have this product, and they're looking for how to provide the secure collaboration in real-time against the products that they have out in shipment today. So it's external validation of not only what we do as a company, but it's also validating the technology, the product and the use cases that we bring to the market.

Thanks, Kurt. I mean just to answer one of the questions that's popped up here as well. Mattermost is not a competitor to Microsoft. What they do is they apply the ability to do chat in offline circumstances where Microsoft's major capability is in the cloud. So it's that offline chat for connected, disconnected deployed states that they use it for. So when we send an operation out into the field that needs to do chat amongst themselves, they'll get a Mattermost technology platform for doing all of that chat. Pexip, which is another group, will do the video, which gives them that teams like functionality when they're off the grid. And that's really important. We apply the ABAC and policy enforcement to that, which enables them to classify and compartmentalize that information between Five Eyes and other such organizations. And it's that ability to be able to be effectively policy enforcement layer across so many different aspects of collaboration and information management that we received the recognition again from Defense Industry Awards as the 2026 Cyber Business of the Year. This is the third time that we have won it. And what I'm really proud about with this recognition is an award is that it's done by your industry peers as well as defense. The judging panels form a combination of the 2, and it's highly contested and coveted. So for us, it's fantastic recognition. And I'll say this, the mood in the awards night was interesting because defense has been extremely tight in its budget. The labor government didn't win it on national security. They want it on a whole range of other aspects of social welfare and benefits and health. There hasn't been a lot of cash injection into the Australian Department of Defense over the last 3 years. And although what has been injected has been forward loaded and also into the submarines. What we have seen in the last 6 months is them opening the door and coming back for more budgets. That's what's been -- we think there's been a pivot there now, and we are having direct talks, obviously, in multiple opportunities in the Australian Department of Defense, not just the Kojensi one. So this recognition is critical and important to us. Next. So I wanted to talk a little bit about why people are getting excited in and around the defense organizations. In February, I think it was in February '25, we acquired Direktiv. And what we did was we enabled that platform, which we added our ABAC policy enforcements, which through the NC Protect capabilities that we had, and we combined it and created a trusted data integration platform. This is what's quite unique in the market. What that does is it takes information which is being clearly identified, whether that's from Microsoft Purview or other things, and I know this is getting a little bit technical or Mattermost, and it adds consistent policies to any data source, to any application, provides that information to any security management information tool and takes any identity source, which means it becomes like a fabric. So some people out there might hear about data fabrics. This is now the policy fabric. And what we are seeing in the marketplace is a real excitement about this particular product because what it solves is allied interoperability and joint force interoperability. It also then goes into manufacturing interoperability. And this is where we're consolidating what we have acquired with Spirion, Cipherpoint and other products and building out a platform to enter the market and consolidate it, which is why we took the opportunity to grab Spirion and build enter that U.S. market. The cost of doing that is time, and we have to be very careful about how we manage our capital expenditure, but the opportunity is enormous. And in fact, we've just received out of New Zealand, a tender, which specifically asked for that. And we're seeing Gartner and Forrester also talking about this is the missing gap in the marketplace. So we're excited by the validation in the marketplace with our existing customers. Kurt?

Yes. When we look at those -- that technology, it really validates where we're taking the market across the policy orchestration. You see a massive investment into data security posture management right now. That's actually identifying what information is out there and managing it. So that's what Spirion really does. There's some massive companies out there, Cyera, BigID, multibillion dollar revenue as well as multibillion-dollar investments. They're up at anywhere from 50 to 100x ARR from a valuation standpoint. So we're looking to sit on top of that. And so we feel really good about where we are with the technology. And that actually leads into what some of our 2027 go-forward priorities are around creating that one platform, one story. So Dan, why don't we go through some of those go-forward tech priorities?

Yes. Obviously, we're there -- we top of the pops, and we opened with this was we obviously are disappointed with where the shareholder price is. The way that we can turn that around is by announcing wins. So for us, it's concentration on closing business and particularly converting strategic momentum in the U.S. with closing that U.S. DoD deal. Again, that's the basis of my whole trip to go to the U.S. next week. Achieve sustainable cash flow is the second component of that. They are the 2 catalysts that we outlined at the beginning. They are what we continue to be focused on. And of course, converging our product portfolio into a single platform, best-of-breed products as this market consolidates and matures, we'll not be able to be competitive. We need to make sure that we move towards a platform, a single platform that can do data discovery, labeling enforcement and governance, which is what we have spoken about previously. We're well on our way to that. We're ahead of schedule in terms of product development, and we have validated that that's what the customers are seeking. What that means is we can take that platform and then integrate into all of those competitive -- all of those larger cybersecurity companies and not treat them as competitors, but treat them as a value add and enter the market that way with referenceability from large customers such as defense organizations. And then all of this is about scaling through strategic alliances. We want to use Cyera's and BigIDs' customer bases as an entry point for ours because we can integrate with them, not compete with them. And that is the same with Microsoft as others, which I think answers one of the questions out there is, are we locked into the Microsoft ecosystem or expanding beyond it? We are definitely expanding beyond it. But we wish to leverage all of them as a customer access entry point.

I think it's all about a disciplined approach, right? I think we have -- we mentioned earlier, Dan, that we feel like we're in a better position today than we were 12 months ago. And I think we were better positioned even 12 months earlier than that. So it really is an underpinning of every initiative needs to be disciplined around what our capital allocation is. We need to improve our operating efficiencies. We need to return and maximize return on invested capital, particularly around the invested technologies that we acquired. So you see that with Spirion. You see that with TDI, with the Direktiv. We need to minimize that shareholder dilution as we go forward and ensure that every investor and every investment that we have contributes to long-term enterprise and shareholder value as we move forward. So again, we understand where we are from a cash position. We understand where we are with the U.S. DoD. Those are the main things we hear day in and day out. I'm on 2 or 3 investor calls with potential U.S. investors on a weekly basis. They like the core foundation that we have today. There's some things that we need to free up a little bit. But again, when you look at that, the -- where some of our competitors are from a multiple standpoint, we're at 1.6 of ARR market cap right now, right? We're at, say, $15 million of ARR and a $25 million market cap. So we feel like we're in a pretty decent position. We just need DoD to fall, which we -- again, Dan and I are going to meet with them later on next week, as well as look at ways that we can extend other components of the road map into them. So they're already looking beyond this initial NC Protect purchase. So we feel really good about where we are with that and looking at that cross-sell, upsell just within DoD itself. So again, we understand the frustration. We understand the challenges that are out there. We feel it ourselves as 2 of the top 5 shareholders within the business. We feel it every day. And not a day that Dan and I don't go by and look at it and just say, we got to do something. We got to drive hard. We got to keep this thing moving and where we go. So I think we're -- there's a good foundation there. We just need to get DoD closed and move on to making sure that we provide that capital allocation and disciplined approach going forward. So with that, Dan, why don't we -- I'm sorry.

I think to some extent there, that's also distracting from what we have achieved. I mean, 12 months ago, we had $8.6 million in sales. We're now at $14.1 million. We had ARR of $4.8 million. We're now sitting at $14.8 million. Gross margins are strong. As you said, 60 customers to 225 in terms of diversification. We're starting to see that cross-sell, upsell engine now hitting the function. We -- it does take time to turn, and we've got a major acquisition launch pad in the U.S., which is the largest market for this product, these type of products and the fastest adopting market for these types of products in the world. So we have substantially transformed the company, and they're all good things. But again, we can get caught up in the short-term execution things that we have to do, but we still have to take care of those things. So over to some questions, I think, Kurt, and we've got...

Yes. Why don't we get those going if you could?

And we do want to get through all of them for everybody. The first question was from JT, Mattermost partnership. Is it a competitor to Microsoft? I think I answered that question a little bit earlier. It's not. And in fact, Microsoft and Mattermost are co-market and co-exhibit. Ed -- Anderson has asked, does the U.S. DOW still have NC Protect in production? I think I've answered that question. They still have licenses for it and they're with the system integrator and it's still in their environment. Greg Board has asked, how is the upsell going with the Spirion acquisition and their customers? And where is it on the balance sheet? I think you talked about that in terms of starting to see some upsell, cross-sell revenue, $2.7 million there. And of course, when you acquire a company in the U.S., you have to retrain them into your product sets. They haven't seen our products. They haven't known how to position it. They're learning all of that, and that takes a little bit of time. And I think we're now in a position where we are enabling that sales force to execute those things more diligently and more effectively. Here's one probably for you, Kurt. Our ARR is $14.8 million, cash receipts were only $7.8 million. Can you explain some of the difference there? In terms of...

Yes. So a lot of it is timing, right? And so when you look at where the U.S. markets are, the U.S. markets as of 12/31 close date, we only brought Spirion in for 9 months of that. And if you look at that on the financial statements, the cash -- we did not bring cash across. We did not acquire cash in the transaction because it was an asset purchase. So Spirion does have a heavy Q1 of our fiscal year, so July to October -- July to September. So a lot of that cash already came in. So you're going to see that difference where it sits. You'll also see some cash that came in, in July as well as receivables that were high. So if you can balance that out, you'll get pretty close to where your cash requirements are as you go forward.

Okay. Tim O'Keefe, Tim has asked, please explain the impact of AI on product development and the risk to archTIS of AI infiltration. I might take that one, Kurt. We've obviously rolled out and invested in AI in our product development, in our testing, in our harness testing, all of that sort of thing. And we've seen a good increase in terms of productivity. And what that's enabled us to do is obviously squeeze some of those costs and look at different ways of preserving the cash base as we increase our productivity and particularly as we consolidate best-of-breed into, obviously, the process of creating that platform, which we discussed earlier. AI infiltration, no. One of the things that we are heavily focused on in the defense industry, which gives us competitive advantage is the management of AI and making sure that they can be controlled and governed effectively. AI gives you implicit trust. It doesn't give you explicit trust. That difference is critically important to organizations in national security and defense. What we do with our TDI product is put guardrails around that and make sure that the sources of data that it accesses that what people -- questions can be responded to, what services AI integrates into can be controlled. And that's something that we think is a potential growing market that we can look at. We also have added AI into the product base itself to make sure it can be deployed more easily, policies that are write are in plain English, et cetera, et cetera. So yes, we're very heavily investing in AI in the business as well. We're not concerned about being taken out by or losing competitive advantage by AI at this point. Neville. Neville Drake has asked, does the product road map include a move outside Microsoft environment, leveraging Direktiv acquisitions to increase potential customer base? I think we've answered that one. I saw that Virtru do the policy enforcement for Mattermost. This is from Ryan, Ryan Tindall. Ryan, no, Virtru do not do policy enforcement for Mattermost. What they do is encryption enforcement. So once a policy says, take this piece of data and please encrypt it with Virtru, that's what it does. What we are is the policy engine that tells that which thing happens to be -- needs to be done and encrypted by Virtru. The other aspect of that is if I'm Daniel Lai, I want to search a whole range of blobs of data in a database that are all encrypted by Virtru, we have the policy which says decrypt this suite of data so that I can see it as opposed to not being able to see it or not being able to search it. So we align and add value to Virtru. We don't directly compete with Virtru. It's probably a little bit messy in the marketing language out there, but we're pretty confident, and we're working inside the Australian Department of Defense to solve exactly those sorts of problems. Greg Board, again, he says, we see domestic losses of data like Origin Energy. Why aren't we seeing any direct approaches with product domestically? And is there an opportunity there to do more of this? Look, I'll start -- I think Kurt's got an opinion on this, but I'll kick it off. The worst time in the world to approach an organization and try and flog them some product is when they're in the middle of a media crisis and an incident management response. That's the worst time to approach them. That does not mean we haven't directed our teams to have a crack at all the other energy companies and ask them whether or not they feel that they've got their cybersecurity postures right. But most importantly, investing in different sectors and verticals in the marketplace costs a lot of money to get right. You can be opportunistic, yes, absolutely. But to get it right, you have to make an investment. And right now, we are very highly focused on where our investments should be where we've got the biggest competitive advantage and the most defensible market. Kurt, would you like to add to that?