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Thank you for standing by, and welcome to the Data#3 FY '18 Results Briefing. [Operator Instructions] .I would now like to hand the conference over to Mr. Laurence Baynham, CEO. Please go ahead.
Okay. Thanks very much, and good morning, ladies and gentlemen, and welcome to the Data#3 FY '18 Results Briefing. I've got Brem Hill, our CFO, with me, who will be covering some of the financial aspects of the briefing. And let's get into it.The contents, if we move on to Slide 2, we'll be covering a summary of FY '18, summary of our business, the financial performance and update on the acquisitions, an overview as far as our strategy is concerned, and then rounding out with outlook and then question and answers. So over the next little while, that's the agenda for this morning.If we move quickly on to Slide #4, and really, I'll read this out as a starting point for our FY '18 results.Despite continued growth in revenue and cloud-based business, and a strong second half performance, the full year earnings were impacted by a number of one-off events, primarily the services segment. This reduced earnings per share by 8.4% and the board declared a full year dividend of $0.082 per share, a decrease of 7.9% on FY '17.Moving on to a summary, as far as a brief summary of FY '18 is concerned, and both financial and nonfinancial and really, which contributed very much to a mixed year as far as Data#3 is concerned.We sustained some significant revenue growth, both across the business, but also had strong growth in our cloud-based business, up 58% to $268 million. We also had -- our earnings were impacted by one-off events, primarily in the first half, both planned events and some unplanned events.The nonfinancial elements. We are pleased to record, record staff satisfaction and also customer satisfaction during the year.Let's move on to Slide 7 and talk a little bit about our business and introduce our business to those of you who are new to us. We're currently well over 1,100 employees. In fact, just tipped over the 1,200 employees in 2018. Been established for a very long time. We operate across 9 locations, so 9 offices across Australia and have recently started in Fiji. And we've, the right-hand bottom corner of the Slide 7, provide some statistics in terms of the scale of our business. And funny how the couple of those in terms of individual products sold to customers through the year amounted to just under 18 million individual products. And to give you some, also some idea of the services business, we completed over 2,200 professional services projects for our customers.Moving on to how we portray ourselves to the market is based around our solutions, and we position our solutions to best meet our customers' business objectives. And the solutions categories that we select and very much customer-friendly positioning is around mobility, cloud, security, data & analytics and IT lifecycle management.Our primary position is to provide as full and as broad a service delivery across each one of these solutions. And that goes right across the spectrum of, starting with consulting, moving through into project services and then following through with support services or annuity-based contracts.Maybe to add a little bit more color to that and bringing the solutions a little bit more up to speed as well, is that on Slide 9, we simplified into 2 categories: One is foundation; the other one is around innovation. On the foundation side of things, in terms of IT and technology, cloud, mobile and security are certainly well-established and provide a foundation for a range of customers' decisions, in terms of a range of projects that we're able to build on. Of course as far as the foundation technology for cloud, mobile and security, we will consider those 3 to continue a leadership position, certainly within Australia.Across into the innovation, we've listed out some of the technologies, which build on the cloud, mobile and security platforms. And moving on to Slide 10. I'll give you some examples of some of the innovation and maybe some of the cooler stuff, if you like, in terms of that technology and some of the solutions that we're providing today.In a cloud and a mobile environment, and of course, with enterprise-level security as well, but some of the innovation examples in New South Wales where we're working with a public sector organization and in conjunction with Microsoft Consulting Services and providing some very innovative blockchain technologies. Likewise, we're working on our Microsoft platform, providing artificial intelligence. In fact, making the use of chatbot technologies as well.And then last but not least, on the, on Slide 10, an example of the Internet of Things and Data & Analytics where we are assisting the City of Adelaide and in fact, around the smart city initiative in terms of making use of Cisco Technologies in improving traffic flows within the city.Those are just some examples. Now let's move on to Slide 11, which introduce the financial performance, going back into FY '18. And I'll hand over to Brem, who will summarize the financial performance.
Thanks, Laurence, and good morning, everyone. As Laurence has already confirmed, FY '18 delivered mixed financial results due largely to a number of one-off impacts, and Slide 19 gives a summary of the key financial metrics for the full year. Data#3 comprises a portfolio of IT businesses, which are broadly categorized into product and services segments for reporting purposes and the results for the year reflect 2 very different halves and mixed contributions from the various businesses.As previously announced, we had a particularly challenging first half due to a number of unusual events and that resulted in a material shift in profit to the second half. We're obviously pleased to confirm a significantly improved second half performance, which largely recovered the first half shortfall, but fell short of our full year objective, which was to improve on FY '17 earnings.Growth in most of the core Data#3 businesses was offset by lower-than-expected contributions from the Discovery Technology and business aspect acquisitions. And as a result, the full year earnings per share decreased by $0.084 -- 8.4% to $0.0914, and total dividends decreased by 7.9% to $0.082 per share. I'll now review some of these trends in a bit more detail.So firstly, the revenue trends which is shown on Slide 13, which gives a breakdown of total revenue into product and services segments. Product revenue increased by 8.1% and services revenue increased by 5.3%, driving total revenue growth of 7.6% to just under $1.2 billion. We're particularly pleased with the continued growth of the core product businesses and the significant growth in cloud-based business, which saw public cloud-based revenues increase by 58% to $268 million across both the product and services segments.The various components of product and services segment revenues are disclosed in the financial report, but to give you a quick summary, the product revenue includes hardware infrastructure, which increased by 12% to $305 million and Software Licensing, which increased by 6% to $655 million. And both the infrastructure and licensing revenues include the sale of public and private cloud solutions.Next, looking at the services segment. The revenue includes Professional Services, which grew by 9% to $49 million. They also include support services, which is a combination of maintenance services and Managed Services, which together grew 5% to $87 million. However, within that, we had an increase in maintenance revenues, which offset a decrease in Managed Services revenues.Another component is recruitment, which grew by 9% to $50 million and Business Aspect Consulting, which increased by 4% to $25 million. And finally, the Discovery Technology services revenue decreased by 33% to $5 million.And once again, most of these components include services provided to support public and private cloud solutions. So in summary, in a market with modest growth, we had achieved a solid revenue increase and gained market share.Moving on to the gross profit trends, which are on Slide 14. Total gross profit increased by 0.8% to $160 million and total gross margin decreased from 14.5% to 13.6% due to the change in sales mix. Product gross margin decreased fractionally from 8.2% to 8.1% and product gross profit increased by 6.7% to $77.4 million. This drove a 10% increase in product segment profit, up from $23.9 million to $26.3 million. This is a very pleasing result and demonstrates the fundamental strength and resilience of the product businesses.Next on the services segment. The services gross margin decreased from 41.5% to 37.8%, and total services gross profit also decreased by 4.2% to $82.7 million. As a result, the total services segment profit decreased from $11.4 million to $7.2 million which is a decrease of 37%. Given the magnitude of that services profit decrease, I thought I'd explain some of the factors in a bit more detail. Firstly, the planned decommissioning of Data#3's cloud platform contributed to the profit decline in Managed Services. We expect to complete that project in the first quarter of FY '19 and thereafter, we will continue to offer customers public or private cloud solutions, working with our global vendor partners and which will include the full range of Data#3 services.Also as mentioned previously, Business Aspect Consulting's first half loss was well below plan, due mainly to lower productivity across the expanded national operation. Utilization levels and profitability have improved significantly throughout the second half, and the business ended the year close to breakeven and well positioned for more substantial profit contribution in FY '19.In the final area, which is Discovery Technology, which had a very disappointing contribution, which was obviously unexpected, and largely due to a customer's early termination of a 5-year supply contract. That action is currently subject to legal proceedings with debt and economic loss recovery by Discovery Technology.Next, Slide 15 gives a summary of expenses, which are split broadly into staff costs and other operating expenses. Our internal staff costs increased by 3.1% to $117.6 million, reflecting a combination of market-based increases, the continual rebalancing of resources to meet changing business demands through the year and growth in overall headcount. So total headcount increased from 1,177 at the start of the year to 1,210 at the end of the year. So that's an increase of about 2.8%.The other operating expenses have remained steady since the step increase from acquisitions back in FY '16, and this clearly demonstrates the ongoing focus on optimizing costs.Next, to summarize the earnings trend, looking at Slide 16. So just to recap, following the challenging first half, the core Data#3 businesses delivered a strong second half result, ending the year ahead of FY '17 and that was despite the expected reduction in Managed Services profit. Business Aspect also had a strong second half. Recovering most of its first half loss to end the year close to breakeven, but below FY '17. And Discovery Technology's contribution was substantially down on FY '17 with full year pretax profit $1.7 million lower.As a result, the consolidated net profit after tax excluding minority interests, decreased by 8.4% as did earnings per share. The directors declared a final, fully franked dividend of $0.066 per share compared to $0.0555 last year, bringing the total dividend for FY '18 to $0.082 per share and representing a payout ratio of 89.7%. The final dividend will be paid on 28th of September and with a record date of 14th of September.Lastly, I just want to give a brief overview of the balance sheet and cash flow, and Slide 17 covers the key points. So we've continued to enhance Data#3's financial position through strong cash flow and diligent management of the balance sheet. We have no material debts and any borrowings that we have are supported back-to-back with customer contracts.The net cash flow from operating activities was an inflow of $8.2 million and as usual, the operating cash flow and year end cash balance were temporarily inflated due to the timing of receipts and payments around 30th of June. So what we see is the traditional May/June sales peak, produces higher-than-normal collections leading up to 30th of June, which generates temporary cash surpluses at 30th of June, and then after 30th of June, the reverse when we make the associated supplier payments. So consequently, the year-end cash balance of $128.3 million, was inflated by this temporary surplus, however, that surplus was lower than the unusually high surplus that we had at 30th of June 2017. The underlying free cash position remains strong and increased on the previous year. We continue to manage our working capital and collections very effectively, and the key trade receivables indicator, which is average day sales outstanding, remained ahead of target and at 25.3 days, is industry best practice and even better than the result of the previous year.So I'll now hand you back to Laurence to complete the presentation. And many thanks for your interest in Data#3 and for listening to our results briefing.
Okay, thanks very much, Brem. And let's move on from onto non-finance, some of the nonfinancial aspects of our business and one of our the fundamentals of our business is based around our people, so Slide 18 provides a little bit more detail based around our customer satisfaction and some of the independent and external awards. We're very pleased in terms of recording the highest level of people satisfaction in terms of our surveys. Also had the record participation as well across our business.Moving on from the people side, and really like to provide an update regarding our acquisitions on to Slide 20. And let's start with Business Aspect. And really, consistent with our positioning and over the past few years, in fact since the acquisition, has been that Business Aspect is fundamental to our strategic positioning and improves the overall Data#3 services portfolio and rounds it out in terms of a connection point between technology solutions and customers' business requirements as well. So we see that it retains a very powerful strategic positioning. Of course, as far as Brem mentioned, the financial performance last year was not where we wanted it to be, and it was primarily very much a tale of 2 halves, 1 a very poor half as far as the first half is concerned, and then largely recovered in the second half and getting close to breakeven in FY '17.We've improved the profit contribution, and we see that the profit contribution, see that continuing on into our expectation is continuing on into FY '19. In terms of Discovery Technology. We've -- then moving on to Slide 21. We started the -- FY '18 by increasing our shareholding in Discovery Technology to 77.4%. And the only other shareholder in Discovery Technology is the -- or the remaining shareholder is the founder. And pretty similar to the Business Aspect positioning, we still very much and fundamentally see that Discovery Technology provides significant strategic benefit. And we see that the, being a software developer and WiFi content management, and around Data & Analytics, it is in a market which is expanding and continues to expand rapidly. We see that the market demand still remains strong, and we still see a significant pipeline of opportunities.Now why do we operate Discovery Technology is very much independently, and has been very much at arm's length as far as Data#3 is concerned. We started to -- and we've commenced working in a different fashion and probably more akin with the way that we work with Business Aspect and starting to work with Business Aspect today, and having closer integration with Data#3, and we see that, that will start to yield some benefits coming into, and our expectation is the yields and benefits coming into FY '19.Now moving on to Slide 23 and maybe having a look at a broader market in terms of the broader market in some of the fundamentals. What I want to do in Slide 23 is go through each individual bullet point. I take it that you all can read the bullet points, but maybe if I pick out a couple of the more significant factors. Digital transformation is not only prevalent -- a prevalent discussion in the IT industry, it's really for every organization, whether it's public sector, commercial, large or small organization. It's a high priority in every organization's business strategy. And we're seeing that the move around digital transformation is fueling the overall IT market, so we're seeing growth in the overall market.Likewise, probably another point that I'd like to point out is that as the growth of multiple clouds, both private and public clouds, and also digital transformation becoming a more important component part of business's strategy, cybersecurity is increasing in parallel, in importance. And in our customer surveys, it remains a #1 priority for our customers going forward. Maybe just, to round out then, in terms of some of the Data#3 key priorities for FY '19, and that's on Slide 24. We've narrowed it down, really to just 3, which we'll focus our attention on over and above a range of the fundamentals in terms of running the business, but more attention will be, of course, in following the statements regarding our FY '18 performance, where we're seeking to improve our services margins and seeking to improve our services business in FY '19.On the second point, in terms of digital enablement. We are looking to reposition some of our existing solutions and also create a range of new solutions, which are better positioned to help our customers move into digital transformation and to enable their businesses. On the last point, we still also see some room for improvement around our overall involvement with our customers right across our portfolio and the way that we interact with our customers. And that's around improving our customer experience. So we see each one of these spending some time, attention and effort, yielding a better result in FY '19 and beyond.Moving on to Slide 26 and rounding out before we move into question and answers. On Slide 26, we see economic conditions in FY '19 remaining steady with a positive IT industry growth outlook. We continue to see digital technologies leading business transformation in both commercial and public sectors. We remain well-positioned to enable this transformation to capture new business. Our overall financial goal remains to deliver earnings growth and improve returns to shareholders.Now on that note, we're now on Slide 27, and I'll just open up for question and answers.
[Operator Instructions] The first question comes from Ray Tollson, a private investor.
Just wondered, with the underperformance of Business Aspect in the first half, was that due -- the low productivity referred to, was that due to underutilization of staff, or some other issues?
Yes, good morning, Ray, and thank you very much for joining us. The -- it was a combination of both, actually, Ray. The -- certainly utilization was the major factor. What we've also done is, as you're well aware, we've succeeded in growing the business, which was primarily a Queensland-centric business into a national consulting business. And we have to say that we probably over-capitalized in terms of some of the resources that we brought on board, probably too quickly, and didn't produce the, obviously, didn't produce the returns as quickly as we would like. As a result of at that, we scaled down some of the resources in some of the locations, with a view to getting better, improved utilization, therefore, better financial results for the second half. Does that answer?
I'll be at the AGM. I've got some other questions, but I'll -- see you and Brem then.
Okay thanks, Ray.
Thank you.
Your next question comes from Adam Dellaverde from Taylor Collision.
I just wanted to kick off with the legal matter. I think there's a note in the back of the Annual Report that says that was settled prior to period end. Is that referring to the same legal matter? Or is that referring to a different one?
Yes. It's Laurence, thanks for joining us this morning. The legal matter referred to in the Annual Report is the Data#3 legal matter. The -- and that has been resolved, prior to the end of the financial year, as we've described in the Annual Report. The legal matter that we described in this morning's briefing was a -- is a Discovery Technology legal matter, which is ongoing. As is, it is not a Data#3 legal matter.
Are you able to comment on how that's progressing, whether the parties have engaged? Or it's still very early days?
On the Discovery Technology one?
Yes.
Yes. It's probably not -- because legal proceedings are taking place right now, and it is for Discovery Technology, it's probably something that we're probably not providing as much detail as you would probably like.
Yes, I think, Adam, Brem, here. Just to -- add to that, yes it is proceeding and yes, the matter is before the New South Wales Supreme Court, but really, not much else we can say at this stage.
Okay, and just with regard to the decommissioning of the DTL cloud during the period. You mentioned that it has had an impact on your margins. Now that, that's mostly behind us, are you able to quantify just how much you spent in the '18 period on that initiative?
Would you like to...
Yes, I'd admit -- it's hard to be too specific there, but in terms of -- it had a couple of impacts, direct cost impact in terms of cost of maintaining the old platform while we built the new public cloud-based platform. And the cost increase is, would be in the range of $1.5 million to $2 million over the year, and the other impact is just around revenue and gross profits as we did the transition. We have seen some contracts cease and not be renewed in the new platform, and that's something we expected to happen. So that's what drives the reduction in the Managed Services revenue and gross profit during FY '18. And obviously, the objective in FY '19 is to win new contracts on the new platform to rebuild that business.
Yes. And the unquantified is around focus or time, in particular around the more specialist and our management working that environment. The benefit of not having the multiple platforms means that we can focus and do a better job on a -- on public and private cloud.
So the $1.5 million to $2 million of duplicated -- of cost that went into play later next year?
Yes.
Is this material cost in the first quarter to finish off that project?
No.
No, it's very close to completion, but the issue with those projects is until we take the last customer off the platform, we really can't turn it off. So we're really at the primal stage.
Are you able to speak a little bit more around the substitute offerings now that you've shut down your own physical sort of offering? How do they differ in terms of the value proposition to you and the value proposition to the customer?
Yes. The -- to simplify it, there's probably 2 options, if you like, that our customers are working with us, on them, both of which our cloud-based. One is private cloud where customers build their own cloud, utilizing pretty much their own finances, and we're providing advice, guidance, implementation and the infrastructure, the software and then the ongoing support in that private cloud environment. And then in the public cloud environment, which predominantly is in a Microsoft Azure-based environment, which the bulk of the increase in that 58% for last year is, so that $268 million, the bulk of that is around Microsoft Public Cloud licensing, it's not strictly speaking, defined that way, but that's really where the substitute is. And the way that we provide that is, is similar to the private Cloud. And is that's, again, the advice and guidance from our consulting businesses through to the implementation. And then the ongoing support is our overall goal. And we've built a range of, in particular, solutions and offerings, which are built purely around the Microsoft Azure-based platform. That's the difference between our own platform, of course, the difference between our own platform and using someone else's is pretty substantial, just in terms of the financial implications in terms of the ongoing upkeep, the maintenance and the skills sets needed to our own platform are very different to a public cloud and private cloud. We see there being significant benefits working on the global players or our customers' clouds as opposed to our own.
And I guess, just to follow on from that. The -- when I look at Microsoft numbers, and the way they're positioning in their go-to-market now, it's all around Azure first and sort of the really high-end products and decommissioning some of the legacy offerings. How do you -- I mean, Microsoft's growth is now really healthy double digits. There's a whole bunch of forward looking stuff around Internet of Things, around augmented reality in the industrial environment. How much of that are you capturing in Australia? And how much of that pipeline is going to come to you, given your sort of proximity to them in this market?
Well, we'd like to think, being Microsoft's largest partner in the country, we are, in some respects, mirroring or providing Microsoft with the growth. We're seeing that Microsoft's growth rates of, and our growth rates in the newer technologies and the movement to cloud are matching each other. So we're very similar. That 58% growth is -- it is very substantial, but Microsoft's growth rate is very substantial, as you mentioned before. What our objective, and probably what our opportunity is, is to capture the services opportunity around that growth. I have every faith that we will capture the software license substitution, which is one aspect of the overall customer spend. And we're doing a fantastic job at doing that right now, where we can make greater improvement is at both the implementation and the support services around that software.Does that answer...?
Yes, that does. And you had a couple of projects in hand, second half. Are they carrying through and is there sort of pipelines still around?
Yes, there is. We mentioned that probably the, for first half briefing that we had larger integration projects, which covered hardware, software and a range of services, they came to fruition as we indicated back in February. They came to fruition in the second half, and we also see some ongoing projects that are in the some of the remnants of FY '18, which are -- is carrying over, but we also see some substantial ones for the first half of this year as well.
I guess final one for me, is just change in software accounting in FY '19, change in revenue recognition. Is that -- you haven't said it's going to have a material impact in your accounts. I just wanted to just hear, is there any impact to the way you record revenue today versus the way it'll have to be in '19?
No, Adam. No change. We've made that change already, historically, so there'll be no material impact.
There are no further questions at this time. I will now hand back to Mr. Baynham for closing remarks.
Okay. Thanks very much, and thank you very much for joining us this morning. And thank you for your support of Data#3. Have a good day.
Thanks, everyone.