Ava Risk Group results 'nothing but positive'

Rob Broomfield is the relatively new CEO of Ava Risk Group, which is a security technology and services company, focusing on asset and infrastructure security among other things.

The company's share price had barely moved all year until July 30, when it released its quarterly report, which sent its share price up from 18 cents to 26 cents. The company had previously flagged they were expecting to exceed revenue and EBITDA guidance, so the now ex-CEO had done a good job in a financial sense.

I discussed with Rob what has gone well over the past year and during COVID and where he plans to take the business from here.

Here’s Rob Broomfield, the CEO of Ava Risk Group.

Table of contents:
Structure of company
Recent quarterly update
Revenue model 
COVID impact on business
Cyber security offering & differentiation to competitors
Pipeline moving forward
Share price movement
Thoughts on COVID challenges ahead

Thanks for joining us Rob, a bit over a month ago, you assumed the role of Group CEO after Scott Basham retired. You were previously the chief operating officer of the tech division. Could you explain a bit about your history with Ava Risk Group and how your first month in charge has been?

Well, I've actually been involved yes, with the group, or some of the companies with the group for a while. I've been a CEO of Future Fibre Technologies in past years. I was the CEO at the time of the group coming together, when we brought in BQT and Ava into the one group and we rebranded it Ava Group. At that point of time, I had been previously involved both with BQT and Ava when they were a publicly listed company under the MAXSEC Group. I've had a long experience with all of the groups. I obviously understand the FFT technology quite well and that’s been at the CEO level for that part of the business for a number of years.

Some of our listeners or readers are familiar with Ava Risk Group. But for those who aren't, could you briefly explain the structure of the company because you've got a services arm and then a technology arm?

That's correct, Alex. The services arm is really called Ava Global and they're providing a secure logistics offering and they help with the international logistics of currency, bullion, material from mines, but they're a bit different from most of the players in that market, in that they have a very flexible and a cost-effective and high-performance model. Where they don't have in-country assets, they actually subcontract the internal movements of all that material to something like 100 accredited internal providers. Unlike the bigger players, they don't need to have the asset base in-country. They have the option of selecting the best in country providers and provide the best services in a very flexible model. That differentiates them from what you'll know as the bigger players that are involved with the high secure logistics, and they're quite innovative, have a lot of experience and have grown quite significantly over the past few years.

Under the technology division, we have two operating brands. One of them called BQT who have had a strong presence in access control and in high technology locking solutions. They actually provide bespoke customised access control solutions to many government departments, as well as having a range of locking solutions that have attracted the attention of the world's largest distributors of locking solutions. And then complementing that is Future Fibre Technology that has technology associated with fibre optics for sensing intrusions, providing precise location of intrusions and advanced warning on perimeters, along pipelines. And also with data networks where we can provide some unique security to high security data networks

It seems you've taken the reins at a good time. In early July, you put out a statement to the ASX announcing you were expecting fourth quarter revenue to exceed guidance and you ended up recording an increase in cash of $4 million. What do you put the success of the last couple of months down to?

Well, actually the success has been over the year and you've got strong performance from all of those operating units. And even in the last quarter with Ava Global, they've actually had some minor benefit from the COVID-19 situation whereby they can provide some very unique bespoke services where freight has been quite limited and difficult to get. They've been able to secure that freight capacity and provide their customers with a service, many others can't. They've also been steadily building their customer base over the past three years and further grew that through the last financial year and gained the benefits of that and they've also improved their margins. They've done really well and they have a very quick turnaround in terms of cash collection. So that's contributed well to the cash balance during the year. On the BQT side, really they've received a large order from the Department of Defence. that contributed to their fourth quarter and made sure that they have a very strong first half in the year ahead.

They've also done a lot of work in consolidating their operating costs and consolidating facilities to improve their ability to obviously generate positive EBITs from the revenue base going forward. From an FFT perspective, we've seen good margins continuing to come from the platform we developed a few years ago, we call it the Aura Platform and so that's obviously helped us keep our position in the security market and move into other markets. But probably the most significant contributor was FFT now starting to deliver and getting the revenues from the Indian MOD Project. That one's quite unique. It's quite large. It's about US$12 million in terms of revenue, but it's a licensing model. We're not actually manufacturing the product it's being manufactured under licence and being delivered to the Indian Defence Forces, which commenced in the financial year. And about 25 per cent of that program was actually generating revenue last financial year and we expect the remaining portion of that to generate revenues in the financial year ahead.

You mentioned that contract with the Indian Ministry of Defence, and you also briefly mentioned before your contract with the Australian Department of Defence, how does your revenue model through these contracts help provide you with consistent income?

Well, good point. With the Indian MOD one, yes, there's obviously a big hit in terms of revenue and profit during the delivery phase, but there's actually more to it than that because that then goes into an annual maintenance contract phase for seven years after the warranty period. That actually has a long-term revenue, not the same magnitude of the initial rollout, but it will contribute. There's also been some work to actually utilise our capabilities in software and connectivity to enhance our services offering. And we have a strong focus going forward on long-term comprehensive maintenance agreements to build on the large install base so that we can obviously get more recurring revenue from that.

We're also extending the solution into as are called condition monitoring applications, such as conveyor belt monitoring, which is not security. The models that we're looking at there are very much focused upon a recurring revenue model, as opposed to the capex model. We see that as contributing to the longer-term revenues. Also, our position from an FFT perspective in terms of a network security. It's one that we've actually not been super strong on, but certainly the Indian MOD Project will give us significant credibility in that market space and the options to go with other providers in that market either OEM-ing our product partnering or licensing the technology going forward, which is very attractive.

You briefly mentioned how COVID impacted the company in terms of customer deliveries and things like that. But it was interesting that you pointed out that it's actually been a benefit, as you can have a point of difference, I guess, to other companies with your air freight and things like that. How has COVID impacted customer deliveries and your ability to operate?

Well if I look at all the operating units, so I'll go to the technology, we do have manufacturing operations, so we are somewhat dependent upon international logistics. We did see initially a little bit of a disruption or slowdown in some component suppliers. Not that it had an impact material in terms of any of the results and it appears to be operating well. We've been able to maintain all our product development and manufacturing capabilities through that whole period. It's really in the area of customer demand that we're obviously much more focused on. As I said, BQT have substantial contracts in place that they're expected to deliver in the first half of next year.

FFT did declare there was about a $2 million impact in expected revenues in the last quarter of last year, but we still had very strong growth despite that. And the logistics part of the business, again, it's a differentiation for them to be able to provide services that their competitors can't, and that's really just one part of the benefits that they have. They're also in an industry that's quite large, a $600 billion plus market with a few very large players that are going through consolidation. The number of players is being reduced. That's also working to their advantage because end customers need to look at spreading their risk and that makes their offering and their capabilities even more attractive to potential customers or could increase their share of existing customers as well.

In the quarterly update, it also mentioned alternative ways of transportation were being organised, such as cargo and charter aircraft solutions. Are these methods you could see yourself continuing to use as COVID continues to disrupt logistics and things like that moving forward?

Well, for Ava Global, that's pretty much business as usual. They're very innovative and will find the most optimum solution to any logistics issue. In the past, even before COVID, they were leasing aircraft as needed to move material. They've got a relatively small, but very competent, well-connected team and a lot of tools that they use to effectively manage and communicate the logistics part of their process as material moves through their chain to the customer. They just had that capability and flexibility and obviously it's coming to the fore, their ability to actually look at the optimum freight solutions and not be beholden to large infrastructure that is tied to the company and an asset that needs to be swept, they're able to find the best solution, most cost-effective solution in every case.

From a financial perspective, I know you've received some assistance from the US Government's COVID Support Program. I think it was worth around $330,000. How else has the company managed its financial position throughout COVID?

Obviously, we did reduce some hours for certain parts of the business when we thought it appropriate. We're back to full hours at the moment because there is plenty to do and business is solid. We did obviously look at all the support available from all of the jurisdictions that we're in because we have staff in the UK, New Zealand, Australia, in fact, around the world. We've looked at and utilised as best we can, the available support that we can get from governments, but really, we're in a strong position in terms of the cash balance that we've got, the cash that we're generating. And so we're not exposed necessarily to having any issues to do with cash and overly dependent on any government support in any way.

We’ve interviewed a number of cyber security companies, which have been doing quite well recently. Are you offering a similar technology in terms of your cyber security offering or how are you able to differentiate from competitors?

We're very different. Our technology actually works on the fibre optic cables and our technology is there to alert the operator that there is unusual activity or someone attempting to access the fibre optic cable itself. We don't look at the data. In fact, it's one of the advantages of FFT technology is that we're not accessing the data. We don't look at it. We can't be a source for loss of data. We provide advance warning of any activity that's suspicious on their fibre optic cables and provide them with sufficient notification that they can take action, which could be shut down data flow, redirect it, go and inspect. We're very different in that we're not operating on the data we're actually operating on the infrastructure that's carrying the data and give a unique advanced warning of attempts to tap or interfere with any of that infrastructure.

Have you seen an increased interest in this area of the company? I mean, there's been quite a lot of focus on cyber security and things like that after Australia was cyber attacked and Scott Morrison's announcement of a lot of investment in the area. Have you received increased interest over the last couple of months?

We've certainly had interest from government departments and government agencies where we've done a little bit of work in the past, but no doubt we're expecting to see significant increase in interest. In those particular agencies, they're well aware of the exposure of fibre optic cables outside of their physical control and therefore are attuned to the risks they face. And encryption has traditionally been the technology that's been most relied upon and they also know that with quantum computing that encryption may not provide the protection that it used to in the past. We also see the rise of technology such as quantum computing and exposures to encryption technologies would make physical technologies that we have far more important in the years ahead.

Your offerings are over quite a number of industries. Is that government sector, the customer you see as having the most potential going forward or are there other ones?

Well, no. There's also even to do with utility companies and their reliance on fibre optic cable networks through infrastructure and between infrastructure, nuclear power plants or military facilities that have reliance upon their fibre optic network, you know, for their operation and security. It’s utilities would be interested in cyber security; we're seeing great interest in the US regarding enhancing and hardening their datacoms because they could be a point of weakness in terms of their ability to operate and could be a point where there could be interference or damage done to their abilities to operate.

Just in terms of looking forward, do you have any new plans or ideas in terms of what you're going to be bringing as the new CEO? What's in the pipeline moving forward?

Well, building upon the work Scott did, certainly the aftermarket focus will continue and we're working on some enhanced offerings to again, get that recurring revenue from a pretty large install base. There’s the extension of the platform, which is already underway, where we're taking the hardware and software platform we developed a few years ago, which is we believe, is seen to be world-leading and its capability in the security applications but moving it into condition monitoring applications. The first one of those being conveyor belt monitoring. The first stage of that, being the ability to monitor all the bearings on all the rollers on a conveyor and provide advance warning of any failures of any bearings, which is going to have a significant impact in terms of the reliability, safety, and ongoing maintenance of conveyor belts in the mining industry.

That's the first stage, but there are other applications wherever there is a fibre or wherever there is a fibre that can be deployed, our sensing technologies and capabilities and software capabilities are really going to enable us to move into those markets and power cables, for example. All large power cables have a fibre optic inside them at the moment. They’re used primarily for temperature sensing. We can actually now use that to monitor its infrastructure to monitor for damage in tunnels, looking at monitoring damage to power lines looking at monitoring the areas where the power cable goes. Looking at monitoring power cables that are submarine cables that run across rivers that run out to wind farms that are all seaborne. All those areas of condition monitoring and maintaining the capability of that infrastructure, we can provide significant capabilities to enhance the operational effectiveness.

And you're operating across a number of geographic locations, which location has got the largest addressable market? Do you see yourself growing more consistently across all geographic locations or is there a particular market you're going to be focusing on?

The long-term focus has been the US where we have got a great footprint. Obviously with the rise of investment in India, in the military in particular, where we've won a number of significant opportunities, even outside the data network opportunity we've spoken about and upgrading security to air bases, et cetera. We see that as a good growth area going forward. The US, in India, and certainly the Middle East is one, that's probably a bit slow at the moment, but we're confident it's going to pick up with further investment across the Middle East and into parts of Europe. And again, we've got people and we've got partners in those areas that are building up an interesting profile of projects and opportunities.

Just looking at the company's share price. It seemed to be quite flat in terms of this year and then when you realised your June quarter results it jumped up from 18 cents to 26 cents. This was the biggest move it's seen this year. What do you think investors have been impressed by, in as you said, what's happened over the previous year?

We’ve been beating the forecast that we provided. It's been, I guess, nothing but positive news in terms of the quarterly and half year results and the final year forecast in terms of upgrading and increasing the forecast. And particularly in the midst of some of the stresses that many companies have seen with coronavirus, et cetera, we're still in a very strong position. I would say it's been consistently meeting or beating the forecasts.

Just finally, what do you see is the biggest challenge going forward in terms of what COVID brings and the uncertainty in the market?

Look, it is definitely a challenge. What I'm seeing happening though, is there is still a lot of activity occurring in terms of the planning phase. Obviously, there's still a lot of work going on with all our partners in terms of programs that were queued prior to corona hitting, and even are still in the planning phase, obviously awaiting the release of budgets and the movement of people to be able to complete much of that work. I think we will have a bit of a challenge in terms of moving staff into certain areas to complete maybe commissioning services, but we've been working on being able to do that more and more remotely, so provided we can get the network access, we can do much of what we used to do on site remotely.

I think we're addressing that in terms of the capability of the solutions to maintain the maximum ability to fulfil the contracts. We don't typically install equipment that's done by others. It's really the commissioning phase of our equipment that's most important. Obviously the BQT business is a little bit different. They don't need the site support, and again, their products are installed by other partners without any support needs directly from BQT. They're not as dependent upon deploying people. And obviously I've mentioned Ava Global, they're actually able to provide really important services that others are struggling to deliver again with their networking capabilities, to find the optimum provider, to move material internally within countries.

Great to chat, Rob, thanks for your time.

Okay, thanks very much, Alex.

That was Rob Broomfield, the CEO of Ava Risk Group.