Senetas Corporation Limited (SEN.AX) Earnings Call Transcript

It is now 10:30 a.m. This is a properly [Audio Gap] Is present. I therefore declare the 2021 Annual General Meeting of Senetas Corporation Limited open. I am Francis Galbally, Chairman of Senetas. Today's meeting is being held online via the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit votes. Please note that while you can submit questions from now on, I will not [Audio Gap] Bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. You do, however, have the ability to change your vote. If you are eligible to vote at this meeting, you will be able to select the Voting tab, which will [Audio Gap] Up until the time I declare voting closed. I will give you a warning before I move to close votings. In attendance online with me today are my fellow nonexecutive directors: Lieutenant General Ken Gillespie, Lachie Given, Dave Hansen and Phil Schofield. And I would like to thank them for their efforts over the previous 12 months. I would also like to welcome and thank our CEO and Managing Director, Andrew Wilson, for his leadership and his team's efforts for the past 12 months. I also thank our Chief Accountant, Lauren Barker, and our engineers and innovation team, ably led by John Weston, Julian Fay and James Baird for their continued innovation and product development; our marketers for developing the material to best present our products; and finally, our global partner, Thales, and its team for their efforts. I also welcome our company's Secretary, Brendan Case, and thank him for his assistance over the past 12 months. The past year has seen another significant step forward in Senetas' journey to broaden its revenue base and invest in higher-growth cybersecurity technologies. Whilst our consolidated financial results for financial year 2021 were impacted by early-stage losses from our investment in Votiro, underlying business performance was strong. [Audio Gap] Will cover the 2021 years results in more detail in his presentation. However, with group revenue up 13% on a constant currency basis, and underlying profit before tax for the Senetas business segment, up over 70% on a constant currency basis, the business is in a very sound financial position. And we are very excited about the outlook for our investment in Votiro. The risk of cyber attack at a personal, government and corporate level poses a security threat greater than any we have previously experienced, and the potential financial losses and impacts on critical infrastructure are enormous. One expert analysis of cybersecurity incidents targeting small, medium and large Australian businesses that was referenced in the federal government cybersecurity strategy paper, estimated a potential cost to the economy of $12 billion per year in Australia alone, and cyber attacks are clearly a global problem. Senetas identified this problem some years ago and looked for suitable investments that would benefit from Senetas' experience in cybersecurity and our key partnerships. We have now invested over USD 12 million in Votiro since late 2018 and have a controlling shareholder of just under 70%. The rise of ransomware attacks is one of the most serious global cybersecurity threats, and Votiro's Secure File Gateway solution is effective at neutralizing those threats, including threats with 100% efficacy, 0 breaches and no latency, providing Senetas with immediate access to a high-growth and scalable market opportunity. Votiro's business model is SaaS-based contracts with high-end customers, governments and large enterprises, with annualized recurring payments usually initially over 3 to 4 years. Over the past 18 months, Votiro has been restructured with a key focus on sales execution targeting priority markets. A highly experienced management team has been recruited, and our new CEO Ravi Srinivasan, who has outstanding experience in cybersecurity [Audio Gap] Votiro [Audio Gap] in the United States, which is our key target market. [Audio Gap] Were in new and upsell deals. Since the end of September 2021, Votiro has concluded additional new deals with 2 agencies of an Asian Pacific government, one of which was Votiro's largest sale to an end client in its history. This new contract for the Secure File Gateway was signed recently with a value to Votiro of over USD 1 million per [Audio Gap] 3 years. This contract is particularly exciting for Votiro because it raises some of the momentum building -- it realizes some of the momentum building within the business recently with strong growth in customer engagement and a record level of proof-of-concept trials underway through the past 6 months. It also reaffirms the confidence large organizations have in Votiro's positive selection technology and adds to the broad range of successful case studies for Votiro across both commercial and government organizations. Votiro's CDR technology is world leading, and it recently won the award for the best overall e-mail security solution of the year in the CyberSecurity Breakthrough Awards program. Cybersecurity Breakthrough is a leading independent market intelligence organization that recognizes the top companies, technologies and products in the global information security market and exemplifies the best in cybersecurity technology solutions across the globe. As we look forward, Senetas is on the cusp of what I think is its most exciting period since I founded the company more than 20 years ago. Whilst there are some constraints on hardware and crypto sales over the next year due to the global shortage of semiconductors that we outlined in our financial year '21 results, our hardware sales pipeline is as strong as it has been in recent years. The pipeline has increased more than 50% from the same time last year, reflecting the successful integration of Gemalto and Thales and the leveraging of the increased sales force operated by the combined group. We also are seeing very encouraging early signs for SureDrop. And off the back of the very significant recent contract wins, the outlook for Votiro is very promising. Votiro's pipeline of sales opportunities is continuing to grow with a strong schedule of proof-of-concept trials through the December quarter and into 2022, and we expect to win some important new contracts within the next few months. With this strong sales momentum, Votiro's annual recurring revenue is anticipated to double in the 2022 calendar year. I would now like to hand over to Andrew Wilson for his CEO presentation.

Thanks, Francis. Good morning, everybody, and welcome to the Senetas 2021 AGM. This morning, I'm going to run through some operating and financial highlights from the 2021 year and provide you a brief update on year-to-date developments. Next slide, please. Group revenue of $23 million was up 2% on the prior year. However, as 90% of Senetas' revenue is denominated in U.S. dollars, the strengthening of the U.S. dollar during the year had a major impact on Senetas' reported growth revenue rates. On a constant currency basis, however, group revenue was actually up 13%. Similarly, while profit before tax for the Senetas business segment was up 3%, on a constant currency basis, it was actually up 76%, which is a very strong result. We're very excited about the progress being made with our investment in Votiro, which represents a significant growth opportunity for the company. Malware and ransomware attacks are becoming more common and more severe, and greater awareness of these threats is leading to a significant increase in the engagement from potential customers for Votiro's solution. Uniquely, Votiro's Secure File Gateway has proven 100% effective at both unknown and known ransomware and zero-day attacks. The consolidated group loss before tax for 2021 was $7.5 million, which included a loss of $10.9 million from Votiro. However, in that $10.9 million loss, there was $5 million in noncash items. The group net loss after tax attributable to members in 2021 was $3.7 million. And Senetas' balance sheet remains strong with no debt and $11.8 million in cash at 30th of June 2021. Next slide, please. Kindly turn the slide again. Now moving on to some further key financials. A key difference in the 2021 result compared to 2020 is the treatment of Votiro. Votiro only became a controlled entity from November 2019 and consequently, Votiro's results in 2020 were only consolidated for 8 months. However, in 2021, Votiro's results were consolidated for a full 12 months. The underlying Senetas business segment remains profitable and in a strong financial position, as I mentioned before. The gross margin for the group was down marginally, but still very strong at 85%. Depreciation and amortization was much higher, reflecting a full 12 months of Votiro amortization against only 8 months in the prior year. Loss before tax was just over $7.5 million, including the $10.9 million loss from Votiro. As we've already mentioned, $5 million of that loss for noncash items. Next slide, please. Now looking at a bit more detail at some of the highlights for the Senetas encryption business segment last year. Next slide, please. The operating revenue from the Senetas encryption business solutions was up marginally on the prior year, but on a constant currency basis, as I mentioned, it was up 11%. Recurring maintenance revenue was up -- just up to -- just over 50% of total revenue generated by this business segment, and gross margins were steady at 84%. The majority of product sales revenue for Senetas continues to be driven by 10 and 1 gig encryptors. However, 100 gig encryptors are the fastest growing of our product lines. The Senetas business segment achieved good sales growth across the European and Middle Eastern markets, which were very strong. However, U.S. sales, due to a softer commercial market, were down. This, however, is changing year-to-date, and I'll speak a bit more about that later on in the presentation. Net profit before tax for the Senetas business excludes Votiro, and it was $3.4 million, and this was lower than the profit before tax in 2020 of $4.1 million. Again, however, on a constant currency basis, the Senetas segment net profit before tax was actually up 76% on the prior year. In response to the COVID crisis, Senetas instituted a number of cost reduction initiatives in 2020 and 2021 to reduce costs. Therefore, our corporate overheads fell by 10%. Next slide, please. Key sales highlights for the Senetas encryption business included Senetas' single-largest order for 100 gig encryptors to a customer in the Middle East and the first sales of our 100-gig encryptors into the Australian market, which was great to see. The first ever of [Audio Gap] SureDrop, which overall remained quite small. However, there's some very good sales momentum developing at the moment. We also had our first sales of our new hardware encryptors with Transport Independent Mode. The new Transport Independent Mode enables our encryptors to operate over a far broader range of networks. Now with that capability, the addressable market for our encryption solutions has increased significantly, and we can expect further sales growth from that capability in the future. During the year, [Audio Gap] First quantum resistant solution -- encryption solution that gives our customers long-term protection against a growing threat of quantum computing. These solutions are expected to provide additional revenue opportunities as the threat from quantum computing emerges and grows over the coming years. The next slide. Now turning to our exciting investment in Votiro. Votiro is a market leader in Secure File Gateway technology. The technology protects organizations from all file-based attacks like ransomware, no matter where they come from or how complex. Importantly, it provides this protection without [Audio Gap] Business productivity. Votiro's patented technology instantly deconstructs and reconstructs content of all types in the original file format, making it safe for enterprises use. It is effective at preventing content-borne ransomware and supply chain attacks. With malware and ransomware attacks becoming more pervasive and more severe, the demand for Votiro's solution is expected to grow strongly. This presents a significant growth opportunity for Senetas, and we're excited by [Audio Gap] And have consequently invested over $12 million since late 2018, and we now have a controlling shareholding interest of just under 70%. We are leveraging here at Senetas our cybersecurity experience and our long, deep relationships with U.S. government agencies, large commercial organizations and Thales, our global distribution partner, to help deliver significant benefits to the Votiro business. I must say as well, Votiro customers are all marquee customers and government organizations. Next slide, please. Over the past 18 months, the Votiro business has been restructured significantly with a key focus on sales, execution and targeting priority markets. Votiro has now established a physical presence in the United States, which is our key market. And we've recently appointed a new CEO based in the United States, Ravi, who Francis mentioned before, and the U.S. is the commercial head office for the business. Ravi brings strong experience in the cybersecurity industry, having worked for IBM and Forcepoint for many years. With the worst of the COVID crisis behind us, Votiro has developed a strong pipeline with many concurrent proof-of-concept trials across the U.S. and Asian markets. We expect this trend to continue. Confidence in converting pipeline into sales is very high because on average, Votiro wins customer contracts in over 75% of cases once reaching [Audio Gap] Actually, the success rate in the U.S. of converting proof of concepts into sales is over 90%. Next slide, please. Now looking at some of the key milestones achieved in 2021 for Votiro. Votiro has now around 400 customers globally and processed over 5 billion documents with 0 [Audio Gap] and consequently, the U.S. government is currently testing Votiro. Votiro has established an important partner and channel relationship with organizations, such as Thales, Gotham Technology Group and Menlo Security. These relationships, although fairly new, are already generating sales and pipeline growth. Recently, Votiro launched a cloud-based SaaS solution, providing customers working in the cloud with a scalable way to completely eliminate file-borne attacks. [Audio Gap] Acquired during 2021 included a Fortune 500 company in the financial services sector, Liberty Mutual, with over 50,000 users; DBS Bank in Asia Pacific, a large multinational bank with over 40,000 users; and a large South African bank. And there are many more customers acquired in 2021 as well. Next slide, please. Votiro's operating revenue for 2021 was $3.2 million, up from $2.8 million in FY 2020. But on a constant currency basis, the revenue was actually up 27%. Votiro's sales growth during 2020 and '21 was impacted by COVID-related disruption. However, good sales momentum and pipeline developed toward the end of the year and has been growing strongly year-to-date. This is a very encouraging sign. As I mentioned earlier, 2021 is the first year that we've consolidated of 12 months of Votiro's results. Votiro's net loss before tax for 2021 was $10.9 million, which compares to a net loss of $5.9 million for the 8 months that it was consolidated in the prior period. The Votiro segment loss before tax was $5 million -- included $5 million of noncash items such as share-based payments, $2.9 million, and amortization of $2.1 million. The underlying loss before tax, excluded noncash items, were 7% lower in 2021, which was lower than the 12-month period before, reflecting good revenue growth, partially offset by increased costs relating to additional sales and marketing investments in the North American market, which I'm sure you will all agree is very important for future revenue growth. Next slide, please. I'll now finish with a few comments on the year-to-date progress for the Senetas and Votiro business. Next slide. Despite some challenges, sales momentum for Senetas in early FY 2022 has been very positive. As Francis has mentioned earlier, our current sales pipeline is up over 50% compared with the same time last year, and there were some large sales opportunities across the American and Middle Eastern markets. COVID continues to have an impact, limiting in-person access to customers in some markets, and there are budget constraints for some government customers slowing down sales cycles. But overall, demand is strong. As we mentioned in our 2021 results announcement, the major challenge we faced this year in the Senetas encryption business is the global shortage of semiconductors. This shortage is affecting many industries, including electronics and auto manufacturers and is anticipated to remain an issue for much of 2022. We've worked hard to minimize the impact of that shortage on our business. However, at this point, we expect that customer demand will exceed our manufacturing capacity through 2022. We are working with customers to stagger delivery of encryption units over the next year or so where possible. But frustratingly, we expect the sales of our encryption solutions to be likely -- most likely be down by 10% to 15%. If we were in a normal operating environment, we would be expecting solid revenue growth. I must also point out that despite that chip shortage, Senetas recurring maintenance revenue and our share of revenue from Votiro will be unaffected by the shortage. Next slide, please. So an update now on the year-to-date for 2022 for Votiro. The September quarter was a very strong quarter for Votiro. It was actually the strongest quarter in a number of years. And October was Votiro's stronger sales month ever off the back of a large sale to NCS in Singapore that Francis mentioned earlier, which is worth over $1 million for each of the next 3 years. This is Votiro's largest sale ever, and it will be delivered out of the cloud by Votiro's new SaaS offering, and this is a really exciting win for the company. The key regions of focus for Votiro remain North America and the Asia Pacific markets, and the Votiro sales pipeline in those markets are building strongly. Customer trials completed in recent months continue to prove the superiority of Votiro's solution with a track record of winning contracts after reaching the proof-of-concept stage. Our confidence in the sales pipeline is reinforced by a very full book of concept -- proof-of-concept trials scheduled for the remainder of this year and into 2022. We expect that the Votiro's annual recurring revenue will double in financial year 2022. That brings me to the end of my presentation. I'd like to thank everybody for listening, and I'll hand the meeting back to the Chairman.

Thank you, Andrew. Before I move to the formal part of the meeting, I would like to introduce Brock MacKenzie and Emilee Williamson from Grant Thornton, who are online with us today should shareholders have any specific questions for our auditors. We also have online Wayne Hopkins from Computershare, who will act as the company's returning officer for this Annual General Meeting. Today, we have 5 items of business on the agenda. The order of business will follow the notice of meeting, which has been made available to all shareholders and is also available on the Senetas and ASX websites. As I mentioned earlier, the poll is open on all items of business. Proxy results received prior to the meeting for all items of business being voted on should now be displayed on your screen. The first item of business is the consideration of the financial reports and statements. The Australian Corporations Act requires the directors to lay before the Annual General Meeting the financial report, the director's report and the auditor's report for the 2021 financial year. Shareholders may raise questions through me as Chairman to the auditor on the conduct of the audit, the preparation and content of the auditor's report, the accounting policies adopted by the company in relation to the preparation of the financial statements and the independence of the auditor in relation to the conduct of the audit. Now if there are any questions relating to the audit? There aren't, then I'll move to item 2a on the agenda. This is the reelection of Lachie Given. Lachie was appointed as a director of Senetas on 20th March 2013. Until 18 September 2019, Lachie held the role of Executive Chairman of Ezcorp Inc., a NASDAQ-listed specialty financial services firm and is now Head of M&A and Funding. He is a Board member of The Farm Journal Corporation, a 134-year-old preeminent U.S. agricultural media company; CANSTAR Pty Ltd, the leading Australian financial services ratings and research firm; and Cash Converters International Ltd, an ASX-listed retail and financial services organization. Further information on Lachie's background and experience is provided in the notice of meeting. The Board, with Lachie Given abstaining, unanimously recommends that shareholders vote in favor of this item of business. Are there any questions in relation to the reelection of Lachie Given? No, there aren't. The next item of business is the reelection of Dave Hansen as a director of the company. Dave Hansen was appointed as independent non-executive director of Senetas on the 28th August 2015. Dave Hansen has had a successful career in leading international IT and data security organizations. He has a strong international M&A and business integration background having directed worldwide teams since 2005. Dave is currently an operating executive for Marlin Operations Group, Inc. Dave joined Marlin in September 2015. Prior to joining Marlin, Dave was VP and General Manager of Dell Software Group, responsible for approximately 3,000 staff in sales, marketing channels and services roles and oversaw its go-to-market strategy. Further information on Dave's background and experience is also provided in the notice of meeting. The Board, with Dave Hansen, abstaining, unanimously recommends that shareholders vote in favor of this item of business. Are there any questions in relation to the reelection of Dave Hansen? No, there are no questions. Then I'll move to item 3 on the agenda. This item relates to the grant of options to the Managing Director and Chief Executive Officer, Andrew Wilson, as outlined in the notice of meeting. The options will be subject to a service condition and will only provide value to Andrew if the company's share price exceeds the exercise price at the end of the performance period. The exercise price was calculated by adding a premium of approximately 20% to the 5-day valued weighted price of the company's shares trading on the ASX measured at the close of trading on Wednesday, 30th September 2021. Therefore, the grant of options supports the achievement of the company's business strategy by linking Andrew's rewards to improvements in the financial performance of the company and aligning his interest with those of our shareholders. The Board, with Andrew Wilson abstaining, unanimously recommend shareholders vote in favor of this item of business. Are there any questions relating to the grant of options to Andrew Wilson? There are no questions. Then I will move to item 4 on the agenda. This item relates to the adoption of the Remuneration Report. The Remuneration Report is contained in the annual financial report, which is available on the company's website. It provides an overview of the remuneration framework, which provides competitive rewards to attract high-caliber executives; links executive rewards to shareholder value; provides that a significant portion of executive remuneration is at risk and is dependent upon meeting predetermined performance benchmarks; and establishes appropriate demanding performance hurdles in relation to variable executive remuneration. The performance of the company depends upon the quality of its directors and executives. To prosper, the company must attract, motivate and retain highly skilled directors and executives. The Board unanimously recommends that shareholders vote in favor of this item of business. Are there any questions in relation to the adoption of the remuneration report? There are no questions. So I will move to item 5 on the agenda. And this is the final item of business at this meeting, which relates to the approval by way of a special resolution being sought by the company to have the ability to issue equity securities under the 10% placement facility permitted under ASX Listing Rule 7.1A. The 10% placement facility is in addition to the company's 15% placement capacity already available under ASX Ruling 7.1. The Board unanimously recommends that shareholders vote in favor of this item of business. Are there any questions relating to this item? No. Well, that now covers all of the business before today's Annual General Meeting. Shareholders, please note that I will shortly close the voting system. Please ensure that you have cast your vote on all resolutions. Andrew and I will now address any other questions from shareholders.

We do have a number of questions, some of which had been dealt with in Andrew's presentation, so there is no need to follow up. But there is a question, if the company [Audio Gap] Will you include a share purchase plan for minorities? There was no intention of doing a placement. It's just having a backup in relation to the ability to do that. And if we did, we would certainly ensure that minority shareholders would be looked after through a share purchase plan. The next question, Andrew can answer, which is, can you provide an update on Votiro's proof of concept with the U.S. Department of Defense.

Yes, I'd be happy to do that, Francis. So the proof of concept with U.S. Department of Defense has gone well. They're currently testing a competitor's product. We're expecting some news about the next stage with that tender process toward the end of December.