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Edited Transcript of DTL.AX earnings conference call or presentation 21-Aug-19 10:59am GMT

Full Year 2019 Data#3 Ltd Earnings Call

Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Data#3 Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bremner I. Hill

Data#3 Limited - CFO, Company Secretary & Financial Controller

* Laurence Baynham

Data#3 Limited - MD, CEO & Executive Director

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Presentation

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Laurence Baynham, Data#3 Limited - MD, CEO & Executive Director [1]

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Thank you very much, and thank you very much, everyone, for joining us this morning for the FY '19 results briefing. And I'll be following the presentation and keeping you up to speed with the page numbers as we progress through.

I have with me Brem Hill, our Chief Financial Officer, as well, who will be taking part throughout the presentation.

In terms of the content of what we'll be covering over the next little while, we'll be doing a brief summary of FY '19. We'll then take a look at the sector of the market in which we operate and talk a little bit about our business and how we're faring in the market overall and what's driving the business that we're experiencing today and going forward into the future.

So we'll be talking about our business, about digital transformation and also, then Brem will take a deeper dive into the financial performance of FY '19. And then I'll round out in talking about FY '20 and looking forward. And then we'll hand over for question and answers. So that's the format for this morning.

Let me move on to Slide 4, and I'll read out Slide 4. For those of you who don't know me, there's a picture in the PowerPoint slide. So -- made it a little bit more human or personal this time. And the -- I'd like to read out that we're delighted with the performance of the consolidated Data#3 business. The full year result demonstrates the inherent strength and relevance of our solution offerings in a transforming market.

Total revenue increased by 19.8%, and net profit after tax and earnings per share increased by 28.7% to record highs. The board declared a final dividend of $0.071 per share, delivering a total fully franked dividend of $0.107, up 30.5% on FY '18 and representing a 91% payout ratio. So as we said before, we're delighted and pleased with that overall result in terms of the sector, in terms of the summary, in terms of our performance.

So let me move on to the sector, and maybe describe a little bit what's driving that growth. And move on to Slide 6, and you'll see we operate predominantly in the Australian market. And Gartner is an analyst that operates and predicts what the Australian market is doing.

We've got a total market spend of $94 billion. It's actually growing at a faster rate than we've experienced before, growing at a 3.5% rate in terms of the overall market. We currently represent $1.4 billion of that $94 billion. So we reckon that there's a little bit of upside there.

In terms of global and taking a -- probably a more granular look at some of the growth, and one of the major growth areas in our business and we'll talk some more about it, is around cloud, and I'll move on to Slide 7. And this one is a global slide from another analyst, IDC, that break the cloud or the cloud IT infrastructure market down into 3 segments, which is the traditional data center, which is on-premise and owned usually by the customer. Then there's the 2 sets of different types of cloud, one is a public cloud and the other one is private cloud.

The private cloud market is something that I'll spend a little time talking about. But the public cloud market in the purply type color, you can see over a 7-year time frame is trending and is growing rapidly. It is also growing in the private cloud market as well. And you can see that the traditional data center spend and the traditional IT spend is slowly declining. Now when I say slowly declining, this is not an overnight phenomenon. So it is something that we deliberately put in the forecast over a 7-year time frame. So we see a continuation of this trend going forward over the next few years.

So in terms -- so what does that mean for -- from a Data#3 perspective? We've broken this down, put some more context around it because over the last 5 years, we've published our public cloud revenues. And our public cloud revenues since FY '15 have steadily grown, as you can see by the chart in Slide 8. And this year, we're really pleased that we've topped $362 million for public cloud. That's growing at 35% and is one of the fastest-growing segments of the market.

Again, let's probably take a broader look at our business and move on to Slide 10 and bring a number of people up to speed if they're not familiar with Data#3, and also just with some current facts and figures around our business. We have around 1,200 staff across the country. As I've said before, $1.4 billion, and we've been around for quite some time. As you can see, the longevity of the business is quite significant, certainly for an IT -- an Australian IT company.

Some of the other -- on the right-hand side of the slide, some other facts and figures, which demonstrate some of the scale of our business, which lead into some of the growth areas as well and some of the focus areas of our business and our strategy going forward. We've got around 55% of our revenues under contract. We deal with enterprise and government. So large-scale commercial customers, enterprise-related customers and government customers equally split around 50-50 in terms of those particular 2 customer sets and nearly 5,000 customers that we deal with.

The third element is based around and it's -- in some respect, it's another way of looking at our public cloud business as well. One of the larger parts of the public cloud business is the products that's sort of from Microsoft, one of the leaders, and Office 365 is one of the larger public cloud software offerings in the market. We have -- and we have provided in FY '19 2.5 million -- over 2.5 million licensed users for Office 365. In addition to that, we have completed over 2,000 projects as well within FY '19. So just some facts in terms of the scale of our business.

Leading on to that, the Slide 11. In addition, we -- in addition to Microsoft, we've partnered with a number of the other global suppliers. And these global suppliers tend to drive and make markets and are driving some of the -- certainly, some of the demand in the market. Our representation of these vendors is the #1 or #2 partner representing these vendors in the Australian market space.

As a consequence of that, we've won many national and international awards as well. And one that I'd like to pick out, which is a Global Cisco Software Partner award. It is somewhat significant for any Australian company to win global awards in the IT industry. But to win it with a very large organization like Cisco and in particular, in the -- probably the #1 goal for them strategically is to grow the software business. It is something that we're very proud of over the last few months in terms of representing them as the global software partner.

The -- moving on -- and to Slide 12, we talked around our vision. This hasn't changed for around 4 years or so. And that's to harness the power of people and technology for a better future. Now let me put some -- a little bit more detail around that and what that actually means.

We take -- in Slide 13, we take a range of solutions to our customers, and we describe them based around Cloud, Mobility, Security, Data and Analytics and IT Lifecycle Management, and we provide as broad a range of services as possible around those solutions. And the combination of consulting project services and support services means that we -- our aim is to provide a full life cycle of those services for each one of these solutions.

One of the other factors, and it is hard to get away from in any IT presentation, digital transformation is something which is becoming commonplace, not only in the IT industry, but really across all our customers, whether they are commercial customers or public sector related customers. Digital transformation is taking place in every customer that we are working with. It is either a #1 or #2 priority and is a business priority.

The business priorities and those changing a range of our customers in terms of their transformation. What I'm not going to do is go into detail in terms of what digital transformation actually is but what it actually means for Data#3, in particular, because we get asked this quite a lot. And my belief is that digital transformation is fueling the spend in the IT market overall. And what Slide 15 will do is position how Data#3 is benefiting from that increased spend in terms of digital transformation.

So Slide 15, we've introduced a foundational layer of digital transformation. So the transformation that our customers are encountering and embarking on and are in the middle of right now is based on having a solid foundational layer, which is built on robust and scalable networks, cloud of either a public or a private nature, mobility solutions and of course, having a very secure and a watertight security across their enterprise.

The foundation layer is core to our business, as we described before, in terms of the solutions that we bring to market. So the more digital transformation projects and the more spend on digital transformation, the more demand we are seeing in the foundational layer of technology, which we are certainly the market leader in each one of these categories in Australia.

Now once our customers have the foundational layer, they're able to embark on digital transformation strategies. And then all the cool stuff then kind of brings it into place such as data and analytics, the artificial intelligence, Internet of Things, sensors on just about everything that we have today, 3D printing, robotics, and the list goes on and on. But these are very much built on the foundational layer for digital transformation.

So not going to dwell too much longer on that, but that's one of the key rationales for the growth and we see for the continued growth in our market segment.

Now on Slide 16, I'd now like to hand over to Brem Hill, who'll provide financial performance details.

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Bremner I. Hill, Data#3 Limited - CFO, Company Secretary & Financial Controller [2]

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Thank you, Laurence, and good morning, everyone. Obviously, we're very pleased to report the significantly improved full year performance with solid revenue growth and substantial earnings growth.

The Slide 17 gives a summary of the results and shows the changes compared to FY '18. FY '18 was a challenging year. And to recap, we had a number of unusual and one-off events in the first half, which impacted earnings. But by comparison, the current year, as you know, returned to much more normal trading conditions. So I'd like to review the key financial trends in a bit more detail on the following slides.

So firstly, the revenue trends, we turn to Slide 18. And just to confirm, Data#3 is a portfolio of quite different businesses, but we categorize them into product and services segments for reporting purposes. And these charts show the 6-year trends for products, services and total revenue. Just on that, I'd like to emphasize that product and services segmentation does oversimplify the business, and it does not acknowledge the significant interdependency between those segments. And our solutions typically involve a combination of both product and services elements.

So putting that aside, if I look at revenue overall, it had the strongest growth at 21.3%. And then the services revenue grew by 13.3% delivering total revenue growth of 19.8% to $1.4 billion. As mentioned by Laurence earlier, we're particularly pleased with the continued significant growth in the cloud-based business, and we saw public cloud revenue increased by 35% to $362 million across both the product and services segments.

Now the various components of the product and services segments, the revenues are shown on the slide. But just to summarize the main elements: Infrastructure revenue increased by 24.3% to $379 million, our Software Solutions revenue increased by 20.3% to $788 million and Discovery Technology's product revenue decreased by 69% to $800,000.

Looking at the service segments. They include: Business Aspect Consulting, which grew revenues by 5.2% to $26.5 million; our Project Services revenues increased by 14.2% to $54.8 million; and Support Services revenues grew 24.5% to $108.4 million. On that Support Services, I just want to highlight that it's a combination of Managed Services and the maintenance services. And that growth, the overall growth of 24.5% reflected very strong increase in the maintenance services revenues, which more than offset the reduction in the Managed Services revenues. And that reduction was due to the decommissioning of the Data#3 cloud that commenced in FY '17 and was completed in FY '19.

The remaining elements of the service segments are Recruitment, which was up 6% to $53.4 million; and then Discovery Technology Services, which decreased by 26.1% to $3.8 million. So in an overall market that grew somewhere between 3% and 3.5%, we achieved sustained revenue growth and gained market share in virtually all areas of the business.

Next, to look at the gross profit trends, they're shown on Slide 19, and the standout was the product gross profit growth, which was up 17.2% to $90.2 million, albeit that the overall gross margin percentage has decreased slightly. This is an excellent result and demonstrates the strength and resilience of our product businesses and the considerable growth opportunity as digital transformation projects drive IT investment.

Looking at services, the gross profit increased by only 0.6% to $83.7 million, and the growth margin decreased. And once again, this is largely due to the change in sales mix and Support Services following the decision to decommission the Data#3 Cloud platform, which has temporarily reduced the high-margin maintenance services revenues.

Putting the product and services together, the overall gross profit increased by 8.6% to $173.9 million, and the total gross margin decreased from 13.6% to 12.3% due to the change in sales mix.

The next to look at, the earnings and dividend trends on Slide 20. It's a bit of a recap here, but FY '19 delivered strong profit improvements, and the charts clearly show the return to the longer-term growth trend. The core Data#3 businesses achieved very strong growth. With the exception of Managed Services and Business Aspects, profit contribution improved compared to the previous year.

The only area of disappointment were Discovery Technology's pretax loss of $1 million and the resulting goodwill write-down of $1.2 million. We've absorbed these negative impacts and still delivered a 28.7% increase in consolidated net profit after tax and earnings per share.

The return on equity was very strong, increasing from 31.6% to 38.5%. And the total FY '19 dividend of $0.107, which is all fully franked, is an increase of 30.5% and a payout ratio of 91%.

And lastly, I just want to give a brief overview of the balance sheet and the cash flow, and the key points there is shown on Slide 21. So we've continued to enhance the financial position through careful management of cash flow and balance sheet. We have no material debt and that any -- the small borrowings that we have are supported back to back with customer contracts.

The net cash flow from operating activities was an inflow of $11.7 million. And as usual, the $121 million year-end cash balance was inflated due to the timing of receipts and payments around 30th of June. To explain the seasonality a bit further, the traditional May/June sales peak produces higher-than-normal collections pre-30th of June that generate temporary cash surpluses and which subsequently reverse after 30th of June when the associated supply payments occur.

The underlying free cash position remains strong and increased on the previous year, and we've also continued to manage our working capital and collections very effectively. Our measured day sales outstanding remained ahead of target and at 28.7 days is well ahead of the industry averages.

So on that point, I will hand you back to Laurence to complete the presentation. And many thanks for your interest in Data#3.

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Laurence Baynham, Data#3 Limited - MD, CEO & Executive Director [3]

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Okay. Thank you very much, Brem. I'll move on to -- past Slide 22 to Slide 23 in terms of FY '20 and looking forward. First of all, I'd like to just spend a few moments talking around the market trends. And as we've described before and as Brem highlighted in terms of our performance, digital transformation is certainly a high priority and is fueling the spend.

In addition, we're also seeing and observing in the market, there's a convergence and continuing convergence of the IT and operational technology. What this means, in essence, is that I mentioned the increase in the number of sensors and the Internet of Things. The growth in the number of sensors and the growth in the number of Internet of Things do need to be connected, do need to be managed, and there is increased data for all organizations that are using these things. So we see that as continuing to grow.

Of course, I mentioned cybersecurity as well. It is an opportunity for -- a business opportunity, but it is a major threat for many organizations and continues to be one of the larger threats for many businesses and governments.

I also -- one thing that I'd like to touch on here is as we progress in terms of transforming businesses, the -- we mustn't forget the elements of customer service. And customer service still remains a key differentiator for, certainly, our customers and our markets today. We're observing that in terms of market trends. Customers are expecting certainly a lot more, and the service that we are providing needs to continue to be -- continue to evolve and continue to improve.

We're also seeing -- and being able to improve the increased customer service, of course, means that we need to be able to continue to attract and retain the best resources in the industry. We believe that we do a very good job of doing that. But nonetheless, we see an increasing market trend, in particular around specialist skill sets that skilled resources are becoming scarcer.

However, and the last point on Slide 23, is around our vendors. And I mentioned our vendors previously on a previous slide because they are a very important component to Data#3 in the way that we work and the way that we work together with them to provide solutions to our customers. And there are changing models in terms of the vendors. And increasingly, there's an adopt -- an emphasis on customer experience, which is hardly surprising, and also on the adoption of their technology. So not only the buying of the hardware and software, the implementation of it is increasingly important, but more importantly how it's adopted and how it's used productively in the customer environment.

We see this as a good thing in terms of the channel model changes. And we see that this enhances or gives us the ability to enhance the services that we provide around the products and services that we provide -- or products and software that we provide for many of the global vendors.

Moving on to Slide 24. Pulling out of some of the key priorities that we see over the coming 12 months. Of course, as Brem pointed out, we still have some room for improvement as far as our services margins are concerned. So that's a continuation. Likewise, we've mentioned before and mentioned several times in this presentation around digital transformation and also around improving our customer experience.

We are investing in systems and we've got cross-functional teams working to improve our customer experience. We don't believe we have an issue at all, but we see it as a competitive differentiator going forward as we improve the overall customer experience. Then, likewise on the vendor relationships, it's investing with the right vendors and making sure that we actually get the solid returns on investment that we're doing with the major global vendors.

Moving on to Slide 25 and rounding out this presentation, the outlook for FY '20, I'll read out this slide. We see ongoing growth in the Australian IT market with digital technologies leading business transformation in both commercial and public sectors, and we believe we remain well positioned to capitalize on these opportunities. We will continue to build on our strengths and enhance shareholder value. Our overall financial goal remains to deliver sustainable earnings growth.

On that note, ladies and gentlemen, I'd like to bring the presentation to a close. And thank you very much for your attendance and interest in Data#3 and look forward to seeing you at the AGM. Thank you.

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Bremner I. Hill, Data#3 Limited - CFO, Company Secretary & Financial Controller [4]

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Yes. Thanks, everyone.

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Laurence Baynham, Data#3 Limited - MD, CEO & Executive Director [5]

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Bye.