Shearwater Group (LSE:SWG) — Results for the six months ended 30 September 2021

0:02 Good afternoon, ladies and gentlemen. Welcome to the SHEARWATER GROUP PLC results for the six months ended 09/30/2021 investor presentation. First twenty.

0:20 The company position to answer every question received during the meeting itself. Over the company review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your Investor Meet company dashboard and you'll be notified by email once they're ready for your review. I'd also like to remind you this presentation is being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Phil Higgins, CEO and Paul McFadden CFO of SHEARWATER GROUP PLC. Good afternoon. Good afternoon and thank you and welcome everybody. First of all I'd just like to give you a little bit of an introduction to SHEARWATER. SHEARWATER is an award winning group and we provide cyber security, managed security services, and professional advisory to corporate to corporate enterprises.

1:06 We our company is divided into two divisions. We have software site consisting of Secure Envoy and GROUP. Here, we actually manufacture and produce our own IP software, and we sell that through a two tier distribution model through resellers, which are located globally. On the other side of the business, we have our services business, which consists of Brookhill, Uxena and Pentest. Here, we supply our services to Corporate UK directly. As you can see there, the revenue split between the organization is 80% with our software and 82% with our services, both contributing 50% operating profit to the organization's revenues. In addition to that, we have a very rewarding 77% gross margin from our software side of the business and a 30% gross margin to our services side of the business.

2:02 During this presentation, we will dig into those numbers a little bit further to give you a little bit more clarity around how we derive those revenues. Our business is focused on delivering cybersecurity and monitoring services to the banking and the retail sectors, along with day loss prevention, penetration testing, red teaming, identity access management, risk assurance and advisory, and IT security solutions. Moving on. Just to give you a little bit of flavor as to our performance on H1 in comparison to last year. Last year obviously was in the midst of the COVID and we, like many companies, we did suffer with our revenues when it comes to our consulting side of business. With the lockdown preventing us to actually engage on a face to face basis, we had to work on workarounds and do remote working.

3:00 I'm glad to say obviously this H1 we've managed to produce a good financial result. Adjusted EBITDA is up 19% and that's majorly contributed to the last year we had order costs without the income in our advisory. This year we're lucky enough to have had a rebound in our advisory services, giving us a strong year on year advisory revenue growth, which contributed to that 19%. Also, we have our software revenues. We have in excess of a thousand end user customers. These are global in in their presence, and as we have been developing our softwares and adding new features, it's allowed us to upsell, add new features to our software pack, and this obviously generates new additional increase in revenues for our software division.

3:56 Another thing that we've been focused on during our time is to reduce the the debt, and I'm now very pleased to be able to say that we are now debt free, and Paul will be able to walk you through a little bit more detail on that position later. There's some KPIs down there that you can see, 90 new customer wins for H1 in comparison to 62 last year. One of the key components here that I'm very interested in is the circa 50% reported.

4:28 The revenue there that we're looking at is obviously we've analyzed our historical customers, our long standing customers, in excess of three years, and we can see a repeated pattern of revenues that come through. We are second year weighted. We were last year. We are again this year. We did see a slight softening on their revenues in H1, and that's just driven where projects were driven into H2. So we do expect to pick that up, but it is nice to know that we have the comfort of seeing 50% of those revenues for our H2 period. And just moving down the bottom there, as I mentioned previously, our software division represents 18% of group revenues and our services 82%.

5:13 So both are great contributors to the stats and the KPIs above. Just moving on, I'm going to pass over to Paul now that's going to give you some a little bit more detail around our financial position. Paul? Starting with a summarized P and L. As Phil has mentioned, the first highlights on here is obviously adjusted EBITDA up 19% for H1 and that represents our third successive H1 growth in underlying EBITDA. In terms of revenue, we did see some softness on top line revenue in first half of the year. However, that was predominantly as a result of some timing within our services division whereby one or two larger contracts moved from H1 into H2.

6:03 I'm very pleased to say this at the very start of October an amount of that was recovered. And in addition to that, one opportunity which was due to conclude in H1 was actually extended. The scope of work was extended which is obviously positive for us as a business. However, it has resulted in a little bit of a lag in terms of finalizing the contracts. We're confident that will be concluded in the second half of the year. And in addition to good second half visibility, gives us a good opportunity to achieve our full year top line revenue targets. Other things in terms of revenue on our software side of the business, we have seen an improvement in revenues in the first half of the year. And as we move forward into H2 and beyond, the release of new product sets, which we have developed over the past eighteen months to two years, start to go live, it gives us a good opportunity to add some incremental revenue streams into that software division.

7:04 In H1, we have seen an improvement, a recovery within our advisory revenues following last year's initial COVID restrictions, which prevented some face to face engagements in H1. And it's pleasing to say we have seen a rebound in advisory revenues in that first half year, which has contributed to the improved gross margin that you see on at the end of the first half. Gross margins 39% versus 33% in the previous year. We have seen in the first half year a slight increase within our overhead base as we've continued to invest in some additional technical resource, some additional compliance and legal investment, which sets us up nicely for the next step of our growth.

7:52 Adjusted EBITDA, as I've mentioned, has improved 19% on a year on year basis, up from £1,100,000 to just under £1,300,000 for the first six months. And again, with that improved gross margin, we're seeing improvements within our adjusted EBITDA margin, up 2% from 10% last year to 12% in the current period. Below the adjusted EBITDA line, I won't go through every single line here, but just a few points to notice. Our finance charges have reduced significantly as a result of material repayments of legacy loans over the past eighteen months and as Phil mentioned we have repaid significant amounts to date and at the start of October we repaid the final outstanding loan leaving us debt free.

8:42 Depreciation costs have reduced slightly during the period as a result of some consolidation of office space, which has resulted in a reduction in the depreciation of right of use assets. Conversely, we have seen a slight increase within our amortization charges for internally developed computer software assets, which as well as we've invested heavily over the past few years, we now have a number of products and modules with some additional functionality, which we now look to sell onto existing and new clients in the periods ahead. An adjusted profit before tax of $5.43 ks represents a 49% year on year improvement. If I can move you on to the next slide.

9:36 Bigger one. Okay, this second slide provides a little bit more granularity of each of the divisions' financial performance in the period. So starting with our software division. I've mentioned that we have seen a slight improvement in top line revenues during the period. And as we sort of look to the second half of the year and beyond, we do so with a degree of optimism. The new product sets we have developed, which are now going live, we have the opportunity through our global sales network to actually go and sell existing product sets and modules to our existing client bases. So that does give us a real opportunity for incremental growth, which obviously will result in reduced cost of sale because selling to existing clients obviously, you don't have some of the costs that would be attributable to introducing a new client to the product sets.

10:31 In addition to opportunities for some revenue growth in the future, we are looking to introduce a number of our larger blue chip services clients to our own internally developed software. I'm pleased to say at the back end of last year, we achieved this feat. A large financial institution took one of our new product sets. As you can imagine, this product was road tested. I'm very pleased to confirm that the products performed well. And this obviously the success of this gives us an opportunity to repeat this process, introducing additional blue chip clients from our services division into our software division's products. Where the opportunity in terms of the characteristics around financials lies here is we have an opportunity to add some material top line revenues, but with a very good quality of gross margin coming from those revenues.

11:31 Software division's margins have been maintained at 77% during the period and based on some of those potential incremental opportunities we have for top line revenue growth, that does support us being able to maintain and potentially gives us an opportunity to maybe improve on that gross margin in the future. Overhead savings reflect some administrative efficiencies during the period, which has led to an improved adjusted EBITDA of GBP 900,000, which is 20% ahead of the prior year. Very pleasing to say, we have maintained strong EBITDA margins, 48% versus 41% in the prior year. And as we move forward, we would hope the introduction of new product sets, existing clients from our services division into this product set will allow us to maintain and gives us an opportunity to potentially build on those already healthy margins.

12:29 On our services side of the business, we have seen some softness in top line revenue. And as mentioned, this is due to a number of contracts which have moved from H1 into H2. As mentioned, very pleased to say this within the first week of October, it's very pleasing to see a number of those opportunities being concluded. And obviously positively an opportunity that's extended in scope provides us some good opportunities to recover that half year delta there. We have seen gross margins in this division improve significantly from 24% up to 30%. And that's driven by the improved year on year performance within our advisory businesses, which has seen strong utilization rates improvements during the period and has contributed additional gross profitability.

13:24 Now overhead base, we have seen some increase in costs. And as mentioned on the last slide, this is predominantly due to some investments into some additional technical resource, legal and compliance costs. Adjusted EBITDA of circa 900 ks represents an 18% year on year improvement and pleasing to see we have continued to enhance those margins, which is something that over the past few years Phil and myself have worked hard to try and improve the overall profitability of the group. If I could move to the next slide please.

14:01 Okay, this next slide provides a summary of our cash movements within the period. It's worth noting that during the first half of the year, we did see a cash outflow, which is predominantly as a result of some unwinding within our working capital in the period. So after a lot of two very strong years for March 21 and March 20 where we achieved adjusted cash conversion in excess of 140%, There has naturally been some unwinding of working capital, which predominantly is due to some supplier payments, which relates to previous periods being successful, which relates to our services division. In addition to this unwinding of working capital, we have had some material payments in the first half of the year, which include 1,100,000 payments for deferred VAT.

14:59 At the end of March twenty twenty one, we had £1,300,000 of deferred VAT, which was a government scheme, which took advantage of during COVID. Obviously, we've paid the majority of that in H1 and we will assess all the remaining $100,000 in the second half of the year. In addition to this, we have invested further within development of our internally developed softwares and some external to take other external investment costs during the period. And very finally on this slide in terms of cash movements, we have settled one of the two outstanding loans in H1, making payments of circa 300 ks during the period. In addition to this, and I suppose as we move into the second half of our year, which historically has been a strong period for cash collection, we do so with an optimism that we will generate some good operating cash inflows in the second half of the year. I'm very pleased to say that we remain efficient when it comes to collecting cash.

16:04 Our debt today is across both our services division and our software division remain very strong and the business has minimal bad debts to report during the period. All in all, as we move into the second half of the year, I'm very pleased to say this, that we have a very clean balance sheet, which in court also removes the £500,000 loans that you see on this page, which was repaid in October 2021. In addition to a clean balance sheet, we have an unused RCF with Barclays Bank, which was signed in March 2021. And with both of these factors here, this sets up nicely for us to move on to the next stage of our development and with two areas of focus in mind. Firstly, this having a healthy balance sheet will allow us to continue to invest in our existing businesses to drive organic growth.

17:03 And secondly, we have the opportunity to potentially leverage the balance sheets to raise some debt finance for the potential M and A. Okay, if I can posh back to Phil. Thank you, Paul.

17:19 Right, what I'm going to do now, I'm just going to take you through probably what I would consider more more interesting part of the presentation in terms of our strategic direction. I'm just gonna give you a little bit of the backdrop first of all as to where we've come from. So in April 2019, Paul and I started working together to streamline the business and bring it back into profitability. We had to redefine the strategy. We had to get the organization working and talking with each other and sharing the opportunities wherever possible. And we did that by creating shared services where we then brought under control the expenditure of the group and the investment. It allowed us to consolidate some of the and remove some duplication in function and activity.

18:06 So HR, IT, legal, it's all held centrally. The benefits package for the group, it's all held centrally. And what that allows us to do is keep a very tight grip on how we actually invest our money. Moving forward, what we then bought into place was the shared services and the incentive programs for cross selling across the the group. This allowed us then to take our sales teams with existing customer relationships and share those with other parts of the business. And that instantly started to record additional revenue streams to to the group, and I'm glad to say they have continued today and ended up working very well. We also had to continue with the development of our softwares, and the teams very successfully pioneered and brought their on premise software into the cloud and started building our platform, which has been once has been ratified by Gartner as a key strategic direction, and we're driving our proposition there to become a the leading security software provider of choice.

19:14 What we also had to do is once we actually brought everything back to profitability, we had to make sure obviously that we then paid down our outstanding loans and deferred payments due to acquisitions. As Paul mentioned, we're now clear and free of that. Now that brings us to box number five, organic growth. It's still very important for us to actually continue with the organic growth side of the organization, and what we're looking for is to continue with our R and D investment inside the software division. There we can add extra features to our existing platform, which allows us to talk and upsell our existing circa 1,100 end user clients to buy more from us.

20:02 And the more features we produce, the more we can actually charge. So you can appreciate why we actually will continue with that investment. We own the IP there, so obviously it's a great asset to the group. Another way we're looking to actually grow our revenues in the software division is by expanding our reseller territory. The more resellers we have internationally allows us to sell and represent our product set in those countries. Today, we deliver our software to circa forty, forty five countries around the world, and we'll be looking to push that even higher. Obviously we're going to continue with the cross selling. We have a very good structured commission plan, which allows for anyone inside the organization to be rewarded for the introduction that concludes into a sale. And we will continue to do that and drive our revenues from particularly on our software side of the business, which are very rich in revenue and margin.

21:06 Also, what we're looking for is this year is to continue with the investment of sales and technical. The more feet we can get on the street, the more sales hopefully we can conclude and win and obviously improve our top line and margin position. What we have been struggling with is like many companies at the moment is obviously making sure that we can be productive, particularly on our consulting side of business. But I'm glad to say with the rebound in our advisory services we can even look to actually increase our sales and consulting base in advisory businesses. Paul will continuously look at reducing the overheads wherever possible. Obviously, with the new hybrid thinking of working as and when office leases come up for renewal, we are considering how and when we renew those.

21:57 And at the moment, we currently have five locations that we're working with, and as we move through COVID it will determine how we actually work in the future, and we will continue to review those costs as we go. We've also this year been allowed to start spending investment in marketing something that we haven't been able to do before due to obviously our financial strength. Had other priorities but now I'm glad to say we're able to actually invest. So I'm hoping that you will see more marketing publicly available, more seminars, more activity, more advertisement from the group, the individual companies as well as the group in whole.

22:45 What we're also looking for is to increase our repeatable business and as we mentioned earlier on this is business where we've seen the trend analysis where year after year we've seen our clients repeat the same order, and obviously that type of business not only gives us good visibility into H2, but it also sets us up for multiple year contracts that we can see next year and the year after. And whilst the technology does change, because of our key strategic position with these customers, we do find that the customers come back to us when that technology changes, and they look for the next installment, the next upgrade, and that's what we deliver. We're now monitoring that very closely, and we're hoping to be able to report that further in further detail towards the end of next year.

23:33 Also, the main reason behind all of this investment in our organic growth is obviously to meet our full year financial targets. And as you can appreciate, they're tough targets, but if you look at last year, we're very talent heavy, H2 heavy, and this has contributed mainly because of some of our key customers. We see our banking sector have a fiscal year end in December. We see our telco and our enterprise businesses at the fiscal year end in March, And we do tend to suck up a lot of spare budget in those periods, which makes and we see a lot of repeated business happening in Q3 and Q4, which is why we get this heavy end to our fiscal year.

24:23 A lot of people do challenge that and say it's a difficult one. It is difficult. It's never always easy, but we do enter it with great confidence. We've we've been in this position basically every year. This is how our business flows. Unfortunately, it is talent heavy. The next stage that we're entering now, and this is the more exciting bit which we've been looking forward to, but we hadn't been able to do anything partly because of we had other agenda items to actually resolve and also the impact of COVID. But now I'm glad to say we can actually now enter and we can start converting some of the conversations that we've been having with companies into acquisition. We're still maintaining our key strategic criteria.

25:11 We do want profitable companies or near to profit companies. I'm going to talk in a little bit more detail about the software division on the next slide, but first of all, just to let you know that our services division, obviously there we're looking to consolidate the market and add to our existing either Brookhill, Exena or our PENTYS companies. So we'll be looking at that arena to add and consolidate wherever possible, as long as we can actually meet the criteria and help reduce any form of dilution. Obviously, in terms of dilution, no one wants that. I'm a big shareholder of the group, as you know, and I don't want to let any more than anyone else. And I'm glad to say, obviously, with the work the call has been doing with the group finances, we're now in a position where we do have a few levers that we can use. We're in we have a very strong balance sheet now, well capitalized, and we do have the the ability to actually fund some or part of an acquisition through raising debt from our our our bank.

26:18 Just moving on. So just to give you a little bit more detail around, what we consider the jewel in the crown. We own the IP. It's a very valuable division for us. And just to walk you through this slide here. So we're looking to become the leading security as a service converged platform provider. And what that means is we are looking to to deliver an on premise and a cloud based software that is key to everything you do when you're logging on to your PC via home, your phone. It's all to do with authentication. Now we've used Gartner's numbers here, but when you look at, if you Google it, you'll find all sorts of different numbers out there.

27:06 And Gartner estimates the market in excess of £30,000,000,000 I've seen numbers up to £50,000,000,000 So it's a huge market space, and as you can see there, there is a little table there that shows you what those sectors are worth and where we sit. So the little table on the left hand side, our software division, we already have the MFA, the IAM and the DLP, And you can see the two opportunity the three opportunities there for us to to acquire and or develop our software. Two of those opportunities are easier to develop than the other, and so you can appreciate where we're focusing our time and what we would like to acquire is is obviously a a small feature rich software company.

27:54 If we buy a bigger company, it will obviously cost us an awful lot of money. If we're looking for the pre rev or or thereabouts, the feature rich, the breakeven software house that needs someone like SHEARWATER with our logistical footprint of 350 plus resellers around the world, we can take someone's product, and we can bring that into our platform and we can make that available very, very quickly to an international level. It allows us to take that product feature and then sell that to our existing circa 2100 ish clients. So you can appreciate why we want to do that. The space that we want to move into is not very cloud crowded at the moment, and there are some big players in there, the Microsofts of this world, the Uptas, they're they're looking to actually grow, and they're fighting it out at the top.

28:49 We're quite happy to actually focus on the tier two and tier three, which is still represented by some very large branded and well known corporates. And what we're looking to do is, obviously, as Gartner's predict, by twenty twenty three, forty five percent of all new inquiries will be looking for a converged SaaS programme. We're looking to actually be in that space well in front of that timeline. Just to give you a little bit of flavor on what we've been doing during H1 to actually increase those features, we have with our GeoLAN product set, we've now got it to version 4.8, We've now sold it to a large corporate, and it's been tested, and it's now been rolled out throughout financial institution.

29:42 We've now got the case study on that, and it now allows us to actually take that to the rest of our corporate client base. With our Secure Envoy I'm platform, what we've been working on now, the team have delivered a locational awareness. This allows now greater control for where you log in to your corporate network, be it which country. And as we get more granular activity with our compliance requirements, we we're now addressing that by bringing these new features and functions which help with the security, and it also addresses a lot of compliance issues that are coming through. We've also been spending time on making sure that the catalog for cloud connection has been expanded, so it allows us to connect to many more different established technologies.

30:37 This is important to allow us to be more flexible when we present ourselves to the customer, make it easier to integrate, it makes it easier for the customer to make a decision. These are all very important things to to to have as part of your cloud platform. And for us, it was a key must have, and that's what the team have been working on. I'm glad to say that platform is now available, and we've now started to see some customers come to this. We've been converting our existing customers into the new cloud, and we are at the thin end of the wedge at the moment. So we're hoping that we we will see more of those revenues as the the months and years progress. Also very pleased to to announce with these new features, it makes us more attractive as a as a software. We now can deliver more for our client base, and in so far this year, we have managed to deliver certain 40 new customers into our software portfolio.

31:36 Then moving on to H2, and what we are looking to do next is we're looking obviously to enhance our existing GEO M technology now. There's still more work to be done there, adding extra features to that make it once again make it more modular, make it more saleable, allow the customer to keep feeding that

32:00 product set. We're also looking to do with that Secure Envoy to white label. And this is important because we're seeing people like in the insurance industry now, if you want cyber insurance, you have to have some key deliverables already established inside your business. One of those being multi factor authentication, and so what we've decided is to allow where it makes sense is to allow the client to brand or co brand if you like the front screen of our product set to allow them to actually go out there and represent it and sell themselves. We also see a lot of application manufacturers who need to secure their product set because they want to protect that application independently of anything else. So we're making ourselves once again very flexible and open to integration with the technology industry as well as corporate business.

33:01 And with that, we're also still focused very much on expanding our geographical footprint. We know with the more resellers and more distributors, the more opportunities we will get in actually selling our product sets through to the end user client. And with that we're looking to develop further into North And South America predominantly to and there will be, I'm sure, announcements in the future of new resellers and dealers that are coming on board with us. Hopefully, that gives you a little bit of flavouring around where we're going with our software and some of the achievements. The team have worked extremely hard. It's taken them some time, but it's been a big lift. And hopefully, you can see why we're very excited by now Grenade's actually moved forward and focus around the development and or the acquisition of either PAM, CAS or an IGA, future rich company that we can add to our existing portfolio, and then target a part of the industry sector that we believe will be

34:07 a key component moving forward. With that, I'd like to just bring to some conclusion points here. So looking forward, Paul mentioned we, you know, we started off with a good beginning to October. We saw some projects move into H2. We saw some projects got delayed and because they've been expanded. We do expect to see, depending on how COVID responds, some of those projects may get slowed down, they may get converted from an appliance based computing into a software based computing, that may change our top line revenues. But what we are seeing, we're seeing continued confidence returning to the market. We are seeing workarounds, especially in the advisory business, is very important to us, And we are still starting to see the hardware deliveries take place again, which is once again very, very encouraging.

35:05 So we do expect to be working towards our fiscal year end with confidence, and we are looking at obviously increasing both the profitability and the revenues across both sides of the business to meet that goal. We're obviously looking at, as we continue to do our development on our software, we will be looking to push that further and wider across our businesses as we do recognize that as being key to our

35:38 successes. The good thing is obviously with the software, we do see a large amount of that repeatable business. On the services side, once again, see a large amount of repeatable business. And within today, as I say, can actually see circa 50% of H2's revenues have already been identified. I must be clear here, they haven't been won. This is business that we have trended, that we're seeing from that comes from 9% of our long term standing customers. This is a business that has generically been repeated year after year, and some of those are multi year contracts which are coming up for renewal. Some of them will contribute to H2 some revenues, as well as contribute into the outlining years.

36:25 So we'll be looking to focus on those and bring those in. Moving forward, the current growth opportunities. So what we're also looking for is obviously to grow our software. We've moved from an on prem software into a cloud base, and we have them both now. We have a SaaS platform, and we're now adding new features. We're adding features to our existing portfolio, and we're obviously looking to either build or buy the areas where we can enhance it even further. But as we move with our new features, we're looking obviously we're hoping that we can actually increase our current 80% recurring revenues that we see in software to make those even higher. The more features we can bring, the more we can sell that through to the customer, increasing the profitability and the transaction value with our existing client base.

37:20 We're also looking to grow with our services division. We have got multiple year contracts. We've identified a repeat business with our advisory business. We do see a good trend there. The utilization rates have increased greatly, which has contributed to that improvement on EBITDA for the year for H1. And obviously, with that improvement, we're cleaning up the backlog of those delayed projects. We've also got new opportunities with new customers.

37:52 And also we're actually investing in additional staff, be it consultants, analysts and salespeople, to actually drive greater revenues in that sector. We believe that there's a return. Obviously, it's still subject to the impact of COVID. If it locks us down again, we may have to slow some of that additional growth. But at the moment, things are looking very positive indeed. I mentioned already about the the upsell of the software modules to our existing clients. And what we have done is obviously introduced our blue chip customers to our software base, and we have got a number of good quality conversations in place, and we're hoping that they will turn into material contracts in the future.

38:45 Obviously, we're looking to continuously expand our clients and also our portfolio and also our logistical presence. At the moment, we are a UK based company. We do have operations in The States and Germany, and we've very recently opened a support office to support our some of our service based businesses from Brookfield Solutions has been opened up in Amsterdam. So where it makes sense, we're actually looking

39:17 to develop our footprint, but not just with our resellers and our distributors, but also internally in terms of our staff. And obviously, what we want to try and do is bring more visibility to repeatable revenues for you. So we are going be monitoring these very closely. And as we when you do see an RNS for a big win, do look at some of those where it says multiple year. Obviously that lays the foundations for next year. It's a piece of business which will be contracted in that we hope will be repeating and it will be cyclical, but it will allow us to actually give you some visibility and confidence into the future as to the stability and the growth line of the company. And with all of that, we can't forget we're a company we're trading in line with the market EBITDA expectations for the full year.

40:10 We're in the same position as we were last year in terms of tail end heavy, as I mentioned, and so we've got a lot to do. We're very confident about achieving that. And with that, I would like to conclude today's presentation and pass back and just ask if there's any questions. Fantastic Phil, Paul thank you very much indeed for the presentation and we'll just run through the questions we've got. Ladies and gentlemen please do continue to submit those questions using the Q and A tab situated on the right hand corner of your screen. Just while the company take a few moments to review those questions submitted by investors already, I'd like to remind you the recording of

40:49 the presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard on the investor meet company platform. I'd also like to remind you that feedback is important to the company and immediately after the presentation has ended, you'll be redirected for the opportunity to provide your feedback in order the company can better understand your views and expectations. Phil, Paul, we have received a number of questions from investors and perhaps if I may, I'll start the q and a session just by reading the first one. It reads as follows. Brook Court Solutions was initially acquired. There were two customers representing circa 1995% of their profits. What impact would Brook Court attaining another customer similar size to these original two customers have on the group? What is the capacity of the business to service such a contract?

41:34 Is the service of Brook Court as scalable as the SHEARWATER GROUP PLC division for instance? And as a follow-up, are there any efforts which indicate another long term large customer could be secured? Okay. Well, thanks for the question. First of let me start off with that that 90% or 95% representation of two customers. Since acquisition, I'm glad to report, obviously, we have increased the number of clients, which has meant we have diluted the reliance on those two customers. Now we're probably looking at they've probably fallen below the 45% mark contributing to the Brook Court figures. The big framework agreement is long standing. We've had those relationships for many years and there's multiple contracts underneath that, so they're very resilient clients for us.

42:27 In terms of the revenues that we see going through there, historically we've demonstrated the ability to scale up, so we're confident we can scale in the future by winning new customers. As I said, we have diluted down those two big ones, so obviously we've added more to the pot. They've been both domestic and international. And we service those throughout COVID. So when it's been very difficult to move around the country, we've been able to actually deliver our services for them. So I'm very confident about winning new blue chip clients. We work in a very specialised space with inside bookings solutions and we do engage with some very large branded well known organisations and we do establish long standing relationships.

43:20 We do have the ability to upscale quite efficiently. We've done it in the past and it's something we continue to do. It's part of our DNA. Hopefully that answered your question. Did I miss any points on that Paul? No. Fantastic, Phil. Thank you for that. The next question reads as follows. Although acquisitions do represent an opportunity to expand, would the board focus on finance via available debt instruments? And to what extent would debt capacity be available for a more material acquisition? Raising equity at the highly undervalued price may prove damagingly dilutive, and I'm sure with skin in the game yourselves, would agree that limiting the issue of equity would be a priority. Yeah, should I take this one?

44:06 Yeah, 100%. Obviously, we want to avoid dilution at this point in time. One thing that we've worked hard to achieve over the past two years or so has been to improve the health of our balance sheets. And obviously it's pleasing to report a very clean balance sheet today. What does this give us? This does now give us the opportunity to one, utilize some of those cash reserves that we have to fund potential acquisitions. And in addition to this, whilst we have an RCF facility of £4,000,000 which is currently unutilized, speaking with our banks, very supportive of us raising debt finance.

44:54 So obviously where the current balance sheet position is, I would like to think that we would be able to leverage that balance sheet position between 1.5, two times adjusted EBITDA. So that would result in obviously a slight increase on the obviously on the 4,000,000 facility that we currently have available. So this is an option we eighteen months ago, two years ago have been a challenge. So it's pleasing to have this additional option open to us now. And in terms of the right acquisition, we do have the ability to finance debt, the initial consideration and potentially within addition of some deferred consideration in the future for obviously the sort of completion of achievement of targets.

45:50 And does give us a good opportunity to get to market and obviously get to grow via M and A. Fantastic. Thank you very much indeed, Paul. The next question we've got here is Brook Court was originally acquired with the access to its blue chip customer base in mind. Is the group's cross selling activities achieving more material penetration into these established large customers of Brook Court over time, or does the scope to increase group cross selling further? That's a good question. Brookcorp do have a very enviable client base consisting of a real mixture of banks, telcos, service providers, oil companies, legal entities, entertainment, retail. It's a real broad brushstroke, so we're very fortunate with that. One of the things we started off way back in 2019 in April was that establishment of that cross selling.

46:54 Within the I know we previously reported on it, but I think in that period, the first quarter, we were looking at circa 100 opportunities, 100 conversations were taking place. Obviously, those conversations that converted into orders, when it's a consulting base, there's a high chance that those orders will get repeated year on year. So that's the whole purpose behind it, to actually start sharing, reduce the cost of sale, speed up the sales process and buy warm introductions. And obviously with contractual contracts in place, allowed us to quickly move through and make ourselves available. So we've been working on that ever since, and I'm glad to say that we've been reporting of that internally.

47:43 And we do see a lot of services being and we've got some great examples of where that's happened. In the services we can see an awful lot of sharing. We clearly don't share the client base from our software side as that goes through to the distribution model. It doesn't stop us inviting our software companies into our existing clients. And we have done that and we've got a number of examples on our software side where we have sold to our blue chip customers an enterprise wide contract which is multi year and allows us to deliver that high return margin to our business.

48:34 We heavily incentivise our teams to do that. Those programmes are in place today and they're very rewarding to the individuals and all concerned. There's no one inside the organisation who would be disadvantaged by sharing their account as it were. We also have the opportunity where we have used Brookline's client base and sold the consulting and advisory. We do see our professional advisory as being some of the best talent in the industry and they're award winning, they're very capable individuals and we can introduce them with great confidence that they'll do a good job. And the reports we've had back have been outstanding.

49:24 And I'm glad to say we've made the introductions, they've concluded the business, and they do get invited back in, not just by the Brookhall team, but also by the Brookhall client base. So we do see the opportunities there for that to grow. It is an area that we are focusing on. Last year, we reported a year end of circa about £700,000 I believe it was contributing to the bottom line which represents around 2% of the group revenues. Obviously we've got a lot of headroom and the good thing is all those advisory contracts and there's a good majority of those advisory contracts from the first year of this programme, and there's good opportunity for those to be repeated year after year. Obviously when we move into multiple year contracts, once again, it binds the group together. It allows for a runway of visibility of group revenues moving forward. So for us, it's something that's very, very important. We will continue to do that. And we will continue to incentivize our group and our sales teams to make sure we focus obviously on the very rich and rewarding side of selling our in house products and services.

50:39 Hopefully that answers your question. Fantastic, thank you. In late twenty nineteen, Brook Court won a large three year contract worth £8,500,000 Is there scope to renew this contract or establish further sales to convert this client into another returning long term blue chip store among the SHEARWATER client register? I believe that client may already be a long standing client. We've won obviously a significant number of clients. We do announce those that make a big material difference. We do have good trend analysis that goes back. We have a number of long standing clients that came from from Brookhill, for example, with in excess of eight and ten years relationship. They spend multiple millions per year and the types of projects that we're involved with there are key and strategic.

51:33 They're critical to that business. So we do see a high rate of return. As and when the technology changes or moves to a new level, new platform, we do tend to get called in to actually be that company that provides that new solution. So I suppose the answer to your question is very much yes. We do intend to see a good level of repeat business. We do see a good visibility into H2, and more importantly into the outlying years, we see in excess of £15,000,000 has been identified for fiscal twenty three, which is circa 15% uplift into fiscal twenty four as well. So yeah, they're very important clients to us and we do service them accordingly.

52:24 We have a very unique position with those clients and but yeah, we do expect to see a repeat of those as the years go by. Thank you, Fang. What are the long term ambitions for the business and what is required to achieve these ambitions? Is the ultimate aim to one day see a hybrid security company with the services scale of a computer centre and the software capabilities of, say, Sophos? Well, the long term ambition of the company is, you know, the group is we've got a growth strategy. It's just focused on sort of building a scalable group that caters for the entire spectrum of cybersecurity, professional advisory, and the managed security needs, if you like, of corporate clients.

53:10 The other part of that strategy there is obviously we're going to deliver that through a focus sort of buy and build. So that's the long term ambition, to create that company, to be the partner of choice, and deliver our products and services to that sector. In terms of how do we compare against a computer centering Sophos, I mean they're two very different companies there. We do have a set of assets inside the company, one side being software, one side being services, and it's my job, along with the team, to make sure we make best use of those assets and that we grow those assets. It is a little bit of a different model, I will say, but needless to say they are complementary, are good companies inside there. And we will become what we believe is that multi disciplined organisation that can service the client from our chosen sectors on software, be it multi factor authentication and data leakage.

54:23 If we do find other organisations that actually complement that software, obviously will be looking to acquire it if it makes sense. And those all go into that part of helping to secure of corporate UK and our large corporate clients. There's no easy answer to say what this hybrid will emerge into, but what we will say is that we're very focused in that market space, both sides of our business actually to deliver into that market space, and we will continuously invest in that and grow those organisations to the best of our ability. Thank you, Phil. I've got another one here which is considering the market growth rate is high, what is SHEARWATER's strategy to accelerate its growth rate? What capabilities does it need to develop?

55:13 I think we covered some of those in the presentation. Hopefully they came across, but obviously we do have opportunities to grow our software division by completing that table that slide with the PAM, the CAS and the IGA. Obviously that would allow us then to attract additional clients when we're more of a complete product. And I will just like to add this, there doesn't appear to be anyone that we've seen of size or credibility in the sector that we're going after. There's even the big players out there, the Microsofts of this world, they don't have the complete solution offering as yet. I'm sure they will do. I'm sure they will get there, and I'm sure they will find it out. But one of the things that we have seen is that there's space for us, I just want to address the problem of that, that we do need to get a obviously we're very keen on getting the acquisition moving, which will allow us then to take advantage of that new opportunity. And I suppose for us that's our biggest commitment and drive at the moment, to get the acquisitions moving.

56:28 We're coming through COVID, we've had a lot of conversations and it's now time to convert those conversations, and that's what we're looking to do. In the stop gap of that, we still obviously need to grow the organics, so we'll continuously invest in our sales and marketing. We've now got a very clean balance sheet which allows us now to actually move forward with confidence and look for business development over and above, for fixing some of the problems that we've had historically. And so, improved profitability for next year. We've also had three successive years of H1 EBITDA growth. The company's in its best financial position, I think, than it's ever been in.

57:17 So please don't forget that it is a good company. It's very well structured and got good revenues, we've good profits, and we're adaptable to the changing market space. And we'll continuously keep our eye on that market as it moves, we'll look to move with it. And we look, obviously, to get the best possible growth out of our organization. But now it really does mean that to really capitalize on that is to look for organisations that will actually complement our software and also complement our services division. Phil thank you very much Phil Paul thank you indeed for addressing a number of questions we are just coming up towards time and we have had a number of questions submitted by attendees so thank you very much for that and of course the company review all questions submitted today and we publish responses where appropriate to do so on the investor me company platform and you'll be notified once they're ready for your review.

58:11 Phil Paul, thank you again for updating investors today. Could I please ask investors not to close the session? You should be automatically redirected for your opportunity to provide feedback in order that the management team can better understand your views and expectations. If Sloan take a few moments to complete and is greatly valued by the company. On behalf of the management team of SHEARWATER GROUP, we'd like to thank you very much for attending today.