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Edited Transcript of CGL.AX earnings conference call or presentation 20-Aug-19 1:00am GMT

Full Year 2019 Citadel Group Ltd Earnings Call

Symonston Act Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Citadel Group Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Darren Stanley

The Citadel Group Limited - CEO

* Jennifer Martin

The Citadel Group Limited - CFO & Company Secretary

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Conference Call Participants

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* Chris Savage

Bell Potter Securities Limited, Research Division - Senior Industries Analyst

* Garry Sherriff

RBC Capital Markets, LLC, Research Division - Analyst

* Shane A. Storey

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Citadel Group Limited FY 2019 Results. (Operator Instructions)

I would now like to hand the conference over to Mr. Darren Stanley, Chief Executive Officer. Please go ahead.

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Darren Stanley, The Citadel Group Limited - CEO [2]

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Thank you, and good morning, everybody. Thank you for taking the time to join our FY '19 results call. Our FY '19 financial results have been uploaded to the ASX platform this morning, and I will now take you through some of the key points of our results presentation.

Going through our results overview on Slide 2. Our FY '19 revenue was $99.2 million and EBITDA was $23.3 million, in line with the guidance provided in May 2019. The results had been impacted by the delay in customer-controlled budget extensions and lower Q4 customer spend, which has previously occurred within our government business and which was impacted by the federal government election. However, we won't reinforce our view that our Citadel 2.0 strategy is the right growth strategy to drive diversification of our company's client base and secure a higher percentage of software and Software-as-a-Service based revenue over time.

Software and Software-as-a-Service revenue continued to become an increasing proportion of our revenue as we execute on Citadel 2.0 strategy and is now generating 35% of our segment revenue, up from 26% in FY '18. Total revenue from this revenue stream is now $34.2 million, up 23% up on the prior year and 144% up since FY '16, and this is expected to continue to grow.

The gradual experience follows the strategic investments made to develop and enhance software and platform capabilities of our business in support of our customers' demand, and our R&D investment in FY '19 was 14% of our software and Software-as-a-Service revenue. We had a weighted pipeline in excess of $137 million in domestic and international opportunity, with software and Software-as-a-Service opportunities representing over 60% of the weighted pipeline and international representing 20% of the weighted pipeline. I should note that the weighted pipeline is pleasing given we secured a Defence managed services extension and the NRA managed services contract, which were included in the H1 weighted pipeline report.

The directors have declared a final dividend of $0.06 per share fully franked, bringing the total FY '19 dividend to $0.108 per share fully franked. We'll continue to assess opportunities to execute and accelerate our Citadel 2.0 strategy. This may include increased investment, complementary acquisitions or other initiatives. And the Board will continue to review capital management initiatives, including dividend policy, considering the capital requirements for such growth opportunities as and when they occur. Our balance sheet remains strong and continue to support business investment and growth initiatives.

While the reduction in earnings was disappointing, we maintained a focus on implementing our Citadel 2.0 strategy where we're increasing our addressable market, reducing client concentration risks and increasing the quality of our earnings. The FY '19 results reinforced the need to continue to diversify our client base and secure a higher percentage of recurring software and Software-as-a-Service base revenue.

Moving to Slide 3. We have built a significant pipeline of international opportunities, predominantly across our e-health and Citadel-IX offerings. We see opportunities to further leverage our Australian IP and knowledge in international markets, and we plan to utilize strategic channel partnerships to support our market expansion.

During the period, we successfully completed acquisitions of Gruden and Noventus, which further expanded our capability in strategic verticals including government, defense and national security. Importantly, we are now in all 3 towers of the Defence ICTPA Panel through which the majority of Defence ICT procurement will occur.

Our Citadel-IX solution is gaining momentum, with revenue increasing by 157% in financial year '19, albeit off a lower base. We are well progressed in the development of the next stage of Citadel-IX, a product called Citadel-IX Share. There are some more detail included in the appendix of the investor presentation. We have also successfully invested and deployed new software products including CHARM Web and goTRIM, which have significant new addressable markets.

I'll now ask Jenny Martin, our CFO, to cover off some more detail on the financial results.

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Jennifer Martin, The Citadel Group Limited - CFO & Company Secretary [3]

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Thank you, Darren. Today, I will first start to cover off some of the key points outlined in the investor presentation and then touch briefly on the operational results, our balance sheet and cash flow.

Taking you to Slide 7. We have, for the first time, reported revenue by our 3 operating segments being knowledge, health and technology. We have had growth in revenue from 2 of our segments being health, which had revenue of $19.6 million, up 7.1% on the prior year; and technology which had revenue of $35 million, up 20.7% on the prior year. Revenues from our knowledge business was $43.6 million, down 25% on the prior year, predominantly in the consulting and professional services revenue stream, which was particularly impacted by a lower customer Q4 spend.

Slide 8 shows that the revenue mix is shifting to a greater proportion of revenue and generated from software and Software-as-a-Service, now at 35%, which is across our health and technology segments; and to product sales and installation, now at 29%, which reflects the continued growth in our technology division.

Managed services revenue continues to be a cornerstone of our business at 26%, with consulting and professional services revenue reducing to 10% as we continue to focus on recurring revenue stream. Overall, our technology segment contributed 36% of segment revenue, up from 28% in the prior year; our health segment contributed 20% of revenue, up from 17% in the prior year; and our knowledge segment contributed 44%, down from 55% in the prior year.

Moving to Slide 9. Revenue from software and Software-as-a-Service increased by 23% over FY '19 to $34.2 million and is up 144% since FY '16. The strong revenue growth from this revenue stream follows investments made to develop and enhance software and platform capabilities. Citadel-IX have gained substantial momentum, generating revenue growth of 157% during FY '19.

Taking you through our full profit and loss on Slide 10. As mentioned by Darren, our group revenue decreased by 6.9% to $99.2 million. Our gross profit margin moderated to 45.4%. This has been impacted by the delay and lower Q4 spend on revenue, as mentioned earlier. The change in mix of revenue from higher-margin consulting and managed services business to product and installation revenue and the impact of Software-as-a-Service and related software services that operate at a reduced margin in the short term before scaling out in the medium term.

Cost control remains a focus of the management team with our sales, general and administration costs remaining largely flat at $21.5 million. This came despite significant investments made to develop our software engineering team and sales capabilities to support software and Software-as-a-Service growth initiatives.

From a balance sheet perspective, on Slide 10, our cash position of $14 million as at 30 June 2019 reflects dividend payments of $10.5 million; repayments of loans of $5.3 million; payment for business acquisitions, net of cash acquired of $2.5 million; and intangibles of $5.6 million. Trade and other receivables was up $6.3 million, while income accrual was down $3.0 million as payment milestones were reached. We expect the income accrual to continue to reduce over FY '20 as a major project comes to completion.

Debt reduced to $12 million following the scheduled amortization of our debt facility, and we have a net cash position of $2 million at 30 June. In relation to cash flow on Slide 12, our cash generated from operating activities was down $5.7 million, impacted by a net increase in receivables and income accrual of $3.3 million and the reduction in accounts payable of $2.4 million, again, impacted by a major project.

Cash outflows from investing activities of $8.7 million was significantly lower than the $24 million outflow in the prior comparative period, which included the final payment for the PJA solutions and Kapish acquisitions of $13.6 million; net cash consideration for CHARM of $4.6 million; and cash consideration for APP of $2 million.

The current period acquisition of subsidiaries include $1.1 million paid for the acquisition of Gruden and the part payment for Noventus of $1.4 million net of cash acquired. Financing activities included $10.5 million in total dividend payments and $5.3 million used to repay borrowings.

In relation to Research and Development spend, since FY '16, we have invested approximately $16.5 million in R&D activities to develop our software solutions. This has led to a direct increase in software and Software-as-a-Service revenue from new client wins and cross-selling to existing clients. Key investments were made to develop CHARM Web, develop our Citadel-IX solution, develop Kapish products and vResponder and redevelop the Gruden eProcurement Platform to .net.

In FY '19, we also invested $1.9 million into our new ERP system to enable Citadel to scale into the future. I will now hand back to Darren, who will provide additional color around operating highlights and contract wins and conclude with our positive outlook.

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Darren Stanley, The Citadel Group Limited - CEO [4]

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Thank you, Jenny. I'd like to quickly cover some additional operating highlights for the period. Taking you to Slide 5. We continue to win significant contracts across our 3 core vehicles of knowledge, health and technology. In our knowledge segment, we had the renewal of the Defence managed services contract. And Citadel-IX has been successfully implemented into Australia's largest council and a number of new key clients, including 2 Royal Commissions, and we are now just starting to benefit from the investments in these early implementations of the platform.

In our health segment, John Hunter Children's Hospital successfully went live with the CHARM oncology information management solution for pediatric oncology, and we were awarded a 5-year CHARM contract with St Vincent's Hospital in New South Wales as well as a number of other extensions and new contracts. And we are now at 28% of the Australian medical oncology eHealth market, the market leader.

In our technology segment, we have the extension of the Monash University contract until December 2021 valued at $25 million and secured Monash -- Melbourne University as our third G8 university, reinforcing our position as the leading content and collaboration company in the Australian tertiary education sector.

A 10-year $33 million contract with the Spotless Group, part of the Downer Group, to provide support, maintenance and technology research services to the new Royal Adelaide Hospital was also a highlight in our technology segment.

Other key achievements include: during the period, we were appointed as a new supplier as part of the Federal Government's Digital Transformation Agency Software Licensing and Service Panel for Commercial-off-the-Shelf Software Services and -- software and services.

We secured our first commercial client for vResponder in the Department of Agriculture, and we developed a disruptive new video conferencing support solution based on our vResponder technology, which has a globally addressable market. And as Jenny mentioned, we invested in a new ERP to support the future growth of the business and automate as much of the finance and back office logistics functions as possible to enable us to scale efficiently as our business grows.

Other key strategic priorities and objectives outlined on Slide 14 are as follows: we continued our transition toward successful software and services delivery as we support our clients as they move to secure cloud environments. We are developing new Software-as-a-Service offerings, including Citadel-IX Share to complement existing businesses. We are targeting international expansion using our Australian IP. We are looking to develop new channel strategies and exclusive partnerships to take Citadel-IX, our productivity suite and our eHealth solution to the international market. And we are increasing investment in core technical capability to enable us to scale. While the FY '19 financial performance was disappointing, the outlook for Citadel is very positive, underpinned by our Citadel 2.0 strategy, which continues to be the focus of our strategic priorities.

To our outlook, as presented on Slide 15. We are now focused on delivering return to revenue and EBITDA growth in FY '20, underpinned by low double-digit organic revenue growth, with pre-Noventus margin broadly consistent with FY '19. We expect full year contribution from Noventus of approximately $18 million in revenue and $2 million in EBITDA. Importantly, we are forecasting organic revenue growth in FY '20 across all of our segments.

Our trusted pedigree of delivering solutions to blue chip clients, provides opportunities for us to grow organically and scale our solutions. In FY '20, we expect to enhance our existing software and service offerings, develop new Software-as-a-Service offerings to complement existing business and move into adjacencies where our pedigree and experience can be effectively leveraged to drive growth.

Thank you for your time once again, and I'll now open up the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Michael Toner from the Royal Bank of Canada.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [2]

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It's actually Garry Sherriff here. It's his colleague who's commandeered his line. Just a few questions. Firstly, around the pipeline growth, appears on the face of it too have decelerated a little bit, but can you maybe just provide a little more color around that weighted pipeline, please?

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Darren Stanley, The Citadel Group Limited - CEO [3]

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Yes. Garry. Page 1, we reported a weighted pipeline of $132 million, and we reported a weighted pipeline at the end of Page 2 of $137 million. As I've said in my report, it's pleasing because that $137 million has a 37 -- $33 million taken out for NRA and also a large amount, in the tens of millions, where we secured the Defence managed services contract. So in comparing like-for-like, it would have been a much higher number, but of course, taking those very large opportunity there. And for us, still being above the H1 pipeline even with NRA ongoing gives us -- it's pleasing for us.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [4]

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Okay. And in relation to FY '20 guidance. I just want to try and clarify it because there's a few parts to it. And maybe if I just step back and go, right, let's just start with the base levels that you referred to but I can't find in the detail, firstly, the base organic revenue in FY '19. I just want to clarify what that number is.

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Darren Stanley, The Citadel Group Limited - CEO [5]

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Well, we reported $100 million for the year, so use that as a base.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Yes. So $100 million organic. And then as per guidance, growing that by low double digits. Again, just clarifying that, that means low-teens growth to that $100 million. Is that correct?

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Darren Stanley, The Citadel Group Limited - CEO [7]

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That's correct.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [8]

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And then adding $18 million from the contribution from Noventus is correct, yes?

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Darren Stanley, The Citadel Group Limited - CEO [9]

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Yes.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [10]

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And then if I'm looking at it from the EBITDA point of view, again, you've referred to EBITDA margin ex Noventus in FY '19. So what was the EBITDA contribution for Noventus again in FY '19? Because I can see the PBT but I can't see the EBITDA lines. I'm just trying to figure out what Noventus was EBITDA contribution in '19?

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Darren Stanley, The Citadel Group Limited - CEO [11]

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So not very -- insignificant, it was at the very last week or so of the year. And we have included it in the strategic outlook, a revenue contribution of $2 million EBITDA from Noventus.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [12]

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Okay. So it's effectively FY '19 EBITDA margin for the group really, plus a couple of mill. Okay. That's clear. And then the final question is really just around how we should think about gross margins and EBITDA margins over the next few years, given that you are investing more in your SaaS business.

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Darren Stanley, The Citadel Group Limited - CEO [13]

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Yes. We -- the only commentary around those margins being broadly consistent with FY '19, Garry. And I think that should be your starting point, we're continuing to invest in capability in software. And once we're getting some higher margins on some of our software products, we're going to continue to invest for financial year '20 and beyond.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [14]

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Okay. So if I look out for 2 to 3 years, is it safe then with the additional investment to just flat line margin. So is that the way to think about things?

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Darren Stanley, The Citadel Group Limited - CEO [15]

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Garry, I don't really want to provide any guidance on margins that far out. I think if you go back to the strategic FY '20 outlook on Slide 15, that's all I'm really comfortable with. But obviously, we see the opportunity to scale out our solutions and Software-as-a-Service solutions to provide better margins in the future, yes. But we will continue to invest to capture additional growth, and there will be a different revenue mix, depending on which segments grow faster at different times over the growth of the company.

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Garry Sherriff, RBC Capital Markets, LLC, Research Division - Analyst [16]

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Okay. And the last one, sorry, you flagged international growth opportunities. Can you provide any detail just on the geographies or countries that, that's likely to come from?

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Darren Stanley, The Citadel Group Limited - CEO [17]

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We -- in Asia, obviously, with some of our health care products and IX products, Garry. And we've already said we have a contract now in Asia. And the U.K. is of interest to us given the similarities between -- as a commonwealth country for health care at this stage. And then obviously given the number of U.S. clients that have potential opportunities for us with our IX products would probably be the best way for me to answer that.

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Operator [18]

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Your next question comes from Shane Storey from Wilsons News.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [19]

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The first I had was just around the revenue guidance this year if we just leave the acquisitions to one side. Just -- I mean should we see a similar first half, second half sort of proportionality in '20 compared to what we saw this year?

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Darren Stanley, The Citadel Group Limited - CEO [20]

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We're targeting a more even split in '20, Shane. There's always a little bit of a skew in the first half, not necessarily ever be as strong as the second because we still want to get -- there's still additional government spend that generally happens later in the year, but our whole intention with the Citadel 2.0 strategy is to reduce that H1-H2 split as much as possible. But there'll possibly still be some slight skew, I believe, not exaggerating.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [21]

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Okay. Yes. Okay. Good. And that makes sense. The second one I had was just on -- thanks for the granularity on the amounts that have been paid in this FY '19. Any other sort of cash consideration amounts expected to come through the cash flow statement in FY '20?

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Darren Stanley, The Citadel Group Limited - CEO [22]

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Jenny, did you want to take that one?

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Jennifer Martin, The Citadel Group Limited - CFO & Company Secretary [23]

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Yes. We had an additional payment for Noventus, which is due around the middle of December which is $2.85 million. That's the only one.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [24]

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Okay. So reflected in your...

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Darren Stanley, The Citadel Group Limited - CEO [25]

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Yes.

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Operator [26]

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(Operator Instructions) Your next question comes from Chris Savage from Bell Potter.

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Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [27]

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Darren, you've had a couple of months now to reflect on what happened in Q4. Was the issue just delays and reduced spend? Or were there other factors that negatively impacted the quarter?

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Darren Stanley, The Citadel Group Limited - CEO [28]

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I think we've answered it pretty succinctly in the release in May that the customer-controlled contracts were impacted by the Federal Government election, and we didn't see that discretionary spend happened to the extent that we would have liked in Q4. And I guess no one expected the liberal government to get back into power. Most of the embargoes on spend in the federal government levels have now been lifted, which is generally positive for us going forward. So I think moving forward, we're in a reasonably strong position.

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Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [29]

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So in hindsight, it was really isolated to just that dropping government spend?

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Darren Stanley, The Citadel Group Limited - CEO [30]

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Well, we also had some, as I said in the May announcement, we had some customer-controlled contracts, which weren't necessarily just associated with the Federal Government elections, particularly in our -- the education space that had some delays in moving the work through. And we don't believe that was entirely necessarily connected to the Federal Government election. But regardless, it was in their control and those things pushed out into FY '20.

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Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [31]

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Okay. You mentioned the extension of the Defence managed services, are there any other key renewals or extensions due in the next 12 months?

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Darren Stanley, The Citadel Group Limited - CEO [32]

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No.

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Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [33]

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Very good. And Jenny, last one for me. You mentioned income accrual will come down again this year as a large project is completed. What is that project and will it leave a gap or hole in revenue once that is completed?

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Jennifer Martin, The Citadel Group Limited - CFO & Company Secretary [34]

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We can't disclose what the project is. But I think that the FY '19 result is largely reflective of the reduction in that revenue already. So there shouldn't be a drop between FY '19 and '20 for that particular contract. We have done most of what we need to do. It's purely around the timing of getting the milestones from the customer.

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Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [35]

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And it will be completed, as far as you're aware, in FY '20?

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Jennifer Martin, The Citadel Group Limited - CFO & Company Secretary [36]

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That is the expectation.

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Darren Stanley, The Citadel Group Limited - CEO [37]

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Yes. And I think most of the cash recovery we're expecting to come in, in the first half as well. So we've said FY '20 in the pack, but we're happy to see most of that cash come in, in H1.

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Operator [38]

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Thank you. There are no further questions at this time. Therefore, that does conclude our conference for today. Thank you for participating. You may now disconnect.