Qoria Ltd

ASX:QOR

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Timothy Levy, executive]

Good morning, everybody. Good afternoon, I think, in some places. Look, thanks for joining us. There's a few people that are still popping in, so I'll do a bit of an intro. We'll run through a quick presentation of the quarterly results, should go for about 15 to 20 minutes. If you can please hold your questions to the end, Ben Jenkins, our CFO, who is on the call, will let you in and allow you to ask the question to the group. So, let's get into it.

Okay. Look, before I get into the highlights, I guess the key thing or the key message, I think, out of this quarterly result is, of course, it's very strong, but really, it's about being on plan. We have a plan to grow our ARR better than we did last year. We grew effectively $21 million last year and we're on plan to do that. We have a plan to maintain our cost structure where it is, maybe with a bit of CPI and we're on plan to do that. We have a plan to unify our tech stack and we're moving on very rapidly to do so and that obviously creates huge opportunities for us in terms of cost structure, but revenue growth as well. We have a plan during this unification road map to also deliver key features to the market. We talked about that in this session where we've released some Content Aware capability, which is really exciting, and we brought the Octopus business into our business.

In fact, some of the guys are here today in the last couple of days and workshop with them, how do we bring their products into our business quickly. And so that's all going to plan. And then we've also spent a lot of time in the last year, probably behind the scenes, thinking about broadening our access to markets through partnerships and one of which we achieved in the last quarter, which is the launch of the partnership with Schools Broadband. So overwhelmingly, we feel like we're on plan and building confidence as our business is maturing.

So, key highlights are we passed through $120 million of recurring revenue. Our inaugural free cash flow of $8.5 million is a huge turnaround, not a shocking one, but very consistent with what we've been telling the market we're planning to do over the last couple of years. Again, brought OctopusBI, is a very, very exciting data analytics business that will -- it is already a good business. It's got $1 million of revenue already from its existing operations. And literally within days of that coming into our business, they've added more than $135,000 of ARR with existing Qoria clients. So that's really exciting. Schools Broadband is a huge achievement, having access now to 3,000 more schools in the U.K. And then cracking 20% of students in Texas on our platforms is a fantastic achievement. We've done that in about a year. And remember, Texas is as big as Australia effectively in terms of student numbers. So, there are kind of big picture highlights. I'll touch on some of those again in a minute as I go through our overall quarterly results.

So look, 24 million kids are kept safe across our platform. Platform and revenues growing north of 15% year-on-year. 29,000 schools, we're dominating in the U.K. -- dominant, sorry in the U.K. and dominating in the U.S. And most pleasingly, also in Australia and New Zealand, which is the key selling period coming up for our K-12 in these markets. We're also looking at a really strong pipeline. So, across all of our Education segments and our Consumer segment, things are looking very, very strong for our business. Again, it's the result of hard work and discipline and focus in our business to build something that's unique and differentiated.

From a financial perspective, added $5 million of ARR in our education business, which is, again, on target. We're expecting to do better than we did last year. And over the course of the year with the pipeline as it currently sits, we're feeling very, very confident. $120 million of ARR. We ended the year with -- sorry, ended the quarter with $42 million in cash or cash equivalents and a net debt of $110 million. Operating cash flow of nearly $15 million and free cash flow of $8.5 million. That's -- I think to some analysts, a surprise to the upside. But for us, that's consistent with our plans. We're very happy with that.

Geographically, we're a bit of a change in the way we're reporting. We're going to be reporting a local currency ARR now and that just makes it easy to compare the noise of foreign exchange movements, of which there has been substantial changes since May. That's affected our ARR by in the order of $2 million, $2.5 million. But there is, of course, a cost saving in -- through the natural hedge in our business where a big chunk of our costs are aligned with our revenue streams as well. So anyway, that's a bit of a change, but you can see across the portfolio of markets that we're in, the U.S. market for us is the absolute growth engine. And that will continue to be so for the next year.

And the U.K. is somewhat held back by the fact that it doesn't have all of our product capability, but a unification road map is really directed at doing that and solving that by the end of this financial year. So, we're super excited about the U.K. for the '26 financial year. So, you can see the ARR growth. It's increasingly -- our education growth is coming from existing products and price increases through our existing customer base, which is pleasing. Churn is still modest. I think we're industry-leading in churn in the U.S. in particular, I think broadly, we're industry-leading in safety tech. And the custodian business is metronomically delivering on its or above its target. So that's what's punched us to $120 million of ARR.

The SaaS metrics, which, again, I'm hoping that the market starts to look at these or focus more on these because these are stellar. Against our competitors, I think we're leading in all of these, if not most of them, 99% recurring revenue. We don't have bad debt. The people who pay our bills are governments and government funded. Our service margins at 93% and growing. Net revenue retention, we're selling more and more products to existing customers and we're losing very few of them. And for every dollar that we spend in marketing, we're getting $9 of revenue. These are phenomenal stats.

And then the one on the bottom left, ARR growth at 20%. We're expecting that to continue and we're expecting EBITDA margins in the order of 15% for this year, 10% to 15% for this financial year into the 20% range for the next financial year. And so, we're hoping to be talking Rule of 40 type metrics. And some of our peers who are achieving Rule of 40, they're valued in the 8 to 10x revenue ranges. So, that's the kind of rerate opportunity we're seeing and it's underlined by the substance of our business and what we're delivering.

It is important for investors to recognize that there are cycles in our business. So, this chart is really highlighting that the first half of the financial year, the December half usually accounts for about 60% of our cash collections. Our cash collections to be clear, are net of reseller commissions and the reseller commissions are in the order of 10% of our revenue. So, what you see here as compared to revenue is much lower by the order of 10%. But you're seeing a constant increase in our cash collections. And for this half, we're expecting to be very comfortably cash flow -- free cash flow positive. Here's our operating cash flow. So, we've been talking for a while about being operating cash flow breakeven on a run rate basis. And you can see very clearly here now that we've passed through operational cash flow profit very comfortably.

Okay. Let's quickly switch to our education business. Crispin Swan, who's usually on this call, he's currently in Texas on a kind of sales setup with our U.S. team for the next selling season, which kicks off in January. So unfortunately, he's not here to answer questions, but I'll do my best. September quarter for us is the tail end of the U.S. selling period. It's very much a low point for the U.K. It's pretty much the focus is on the U.S. and Texas in particular. Very happy with the results. Again, increasing contribution from selling additional products to existing customers. That's really key for a business like ours, particularly markets where we're increasingly becoming a dominant provider, you grow not -- the extraction of new logos from that market becomes more difficult. So, you have to focus on growing price points and growing product. So, we're doing that very, very well. I'm really pleased with that.

Notwithstanding the kind of U.S. fall against the Aussie dollar in the last 3 months, our average sales prices and average revenue per student continue to climb. That's really, really important, north of $7 per student per year in licensing. It was only 2 years ago, that was under $4. So, incredibly pleased with that result. Net revenue retention is lower than the June quarter, but that's always the case. It's the June quarter where the most of our sales and renewal traction happens and that's where you get your opportunities to have a crack at new product sales, additional product sales and price increases. So overwhelming, that was a very solid result.

The September quarter usually accounts for about 15% to 16% of our sales. So, if you divide $5 million ARR by that, you kind of work out where we're kind of expecting to be for the financial year. So again, set up really well. And one small comment here, I touched on it before is the introduction of Octopus into our business came with an immediate sales opportunity offering that data and analytics capability to our biggest client, a group called International Schools Partnership. And this little deal, albeit pretty big actually of $135,000 per year is for less than 10% of the footprint of that school. So that's a really exciting opportunity, one that we didn't even know about when we were considering bringing Octopus into our business. So that, again, shows the capability of bringing all this product capability -- sort of potential to bring all the product capability to this massive and growing customer base.

Finally, Texas was a great result. Nearly 20% of students -- sorry, more than 20% of students in Texas have been managed on our platforms, but business continues there. And where most importantly, for our business is Texas has not only a big market, but it has some very -- some of the biggest school districts in the U.S. And so we're now getting to test our technology with school districts with more than 100,000 students. This is really exciting. And we've deployed into one already and it's going well. And now we're doing proof-of-concept trials with a number of others, we call them T5 districts. So, massive school districts, well known in the U.S. and within the top 100 school districts in the U.S. So again, everything in the U.S. is going to plan. Crispin is in the U.S. right now working with that team to set ourselves up for a massive financial year.

Just thought, we would talk about Student Monitoring. It's definitely been a huge growth engine for our business since we brought the Monitor product into our portfolio in 2011. Our revenue from them has grown from just under $5 million to nearly, I think, $23 million or $24 million today of ARR. So that's outstanding growth. And the contribution is both in the U.S., which was a bit of a clean, greenfields market for safeguarding 3, 4 years ago. And the U.K., which is buoyed by regulatory changes under a regime called KCSIE, Keeping Children Safe in Education. So, both of those markets, we estimate about 30% satiated. So, there's a lot of greenfield opportunities in those markets still. And we announced -- and I think the market immediately understood the potential of the Schools Broadband Partnership.

There are 3 managed service providers, essentially connectivity providers in education in the U.K. And we've never really been able to access those massive, something like 4,000 schools and 4 million students managed by these MSPs and being able to now have access not only to the biggest MSPs, Schools Broadband, but on an exclusive basis, we are now their selected monitoring product. That is a really good opportunity. That's in market now. We've already had sales now, nothing to move the needle in terms of our ARR, but the engine is now moving and I'm hoping to talk more about that in the December results, which we'll announce obviously, in January. So, Student Monitoring, a huge growth engine. I think I expect that will be as big as our filtering business within the next 12 months. It's -- there's a lot of room to move in monitoring.

Okay. Community. So again, cautious, but very deliberate growth in this business. To those not familiar with Community, is the selling of our parental control product through our schools. We've been doing that for a little while now in Australia and we're getting north of 30% of parents in our Australian schools enjoying the Qustodio product in free and paid subscriptions. We've launched that now in the U.S., launching it, I think, to this half, something like 500,000 parents and very comfortably getting north of 20% of parents in these launched school districts signing up to Qustodio product. Those parent accounts have now passed through 70,000.

And we've got some school districts achieving north of -- in fact one achieved 38% of parents in the school district in a meaningfully scaled school district. That is huge for us. That offers us the ability to make our K-12 offering more sticky, gives us opportunity for premium upgrades and it's an opportunity to build the Qustodio brand without spending money in advertising, which groups like Life360, their marketing spend is $90 million a year. We're spending, I think, $3 million or $4 million -- maybe $4 million or $5 million in marketing that Qustodio brand. And now we've got literally hundreds of schools, school districts in the U.S. talking about Qustodio. So that's the play here. It's to make our education products more sticky, get premium upgrades, but build that cost effectively build that Qustodio brand. And all of that's now starting to really work.

The emphasis now is shifting to how do we line up that more quickly. We've only had about 10% of our -- on a per student basis of our school districts launched this product today, yet there's enormous interest. So, now the emphasis of our business needs to be, how do we turn that on more quickly. And it's not just simply clicking a button. You have to introduce the concept to the executive in the school district. Sometimes you have to talk to the committees that are decision-makers or influential decision-makers in these schools. So, how do we drive the demand and get it through that sausage machine into the hands of parents more quickly. That's really becoming an increasing emphasis. So in my view, that is an outstanding stream of our business doing really well.

And one final point I might add is we're now finding private schools in Australia, international schools and massive school districts coming to us because of the fact that we have a parent control offering that's beyond everybody else. So, I'm very, very excited with the community offering. And of course, the Qustodio business, which we'll talk about next, has been probably our best ever merger. Qustodio keeps growing comfortably in the order of 15% to 20% year-on-year. Average revenue per account keeps going up and recurring revenue keeps going up.

I think I made the point last quarter, the emphasis of that business at the moment is on feature expansion. We want to make sure that we have more features essentially than anybody that competes in parental controls, but most importantly, meaningful features beyond just blocking and allowing kids from accessing social media and porn or what have you, it's also now allowing families the opportunity to connect with the therapist. It's allowing parents to have visibility about the kids' online activity. What are they seeing in social media, reading their child's messages if they choose, tracking, improving their location tracking features, using AI to scan all of the data that our platforms have access to and again, provide parents with meaningful insights. That's really becoming the increasing emphasis.

Next year for us, it's about the kind of one button launch or onboarding of the Qustodio product, making the experience of using our product seamless for a less anxious customer base, which is the customer base that comes to our business from schools. So again, Qustodio doing outstanding, fabulously run out of Spain. Okay. What's next for us? The December quarter is that our attention focuses on Australia and New Zealand. Their pipelines have never been so strong. We've reorganized the Australian business model to, in many ways, mirror what we've done in the U.S. and very, very excited. I'm sure Australia and New Zealand will -- and they both had their best performance last December. But without question, they're going to have their best results of all time this coming quarter. Our pipeline is strong, so we're supportive of hitting our budgets. There is much excitement about some new product launches.

I talked about it last quarter, which is our cloud, we call cloud scanning. So, it's being able to, in a real-time way, scan what's happening on that child's page and hide their ability to make comments on social media, hide images that are objectionable or adult or hide the text or hide pages that have got adult content or text on them. And that is meaningful, that product has already sold before it even launched, we sold $500,000 worth this content and web type capability. So that's really exciting. So, K-12, it will be -- the December quarter is slower than the June quarter and our U.S. and U.K. sales teams are now in busy planning mode and pipe generation mode for the start of that selling period from January.

Qustodio, obviously, it's a consumer business. So their emphasis is back-to-school and the Christmas and holiday selling periods. They had their best ever sales last year. There's no reason to expect that won't be the case again this year. And from a financial perspective, obviously, free cash flow positive half and we're aiming to hit that 10% to 15% EBITDA margins for this financial year. So, all of that's looking pretty strong. Again, as I said at the beginning of the session, we feel like we're on plan and that's really my focus is just making sure that people in this business are super clear on what that plan is and we are working across it to derisk that plan across the board.

All right. That was -- that's me. Ben, maybe I'll let you just quickly scan through the...

[Ben Jenkins, executive]

Yes, sounds good. Thanks, Tim. We won't take too much time here, so we can get into questions, but summary here of the cash flow statement. As Tim touched on earlier, a really strong performance, record operating cash flow performance and free cash flow positive the whole way down that stack for the first time really, which is really pleasing. The numbers on this page are the reported position, which includes your interest and acquisition costs as well within the investing and operating cash flow lines, but still strongly positive after that. We've also included the adjusted cash flow, which reclassifies the education capitalized development costs out of operating costs into investing activities. So people -- sorry, other way around out of investing activities into operating costs, so people can see how we historically did it.

I think now that we're through that breakeven point and showing free cash flow the whole way down and we've been reporting this way for a while. We can probably just report on a reported basis moving forward, but continuing to show that transparency for the time being. Available funding includes the pro forma amount for the capital raising. So, we're now well and truly funded. We are sitting at over $40 million worth of cash on the balance sheet on a pro forma basis, including that. So comfortably, a way through to the future.

Next slide, please, Tim. On this page, we have the -- I guess, similar to historically with the direct cost and staff cost allocation. And then what we've done is also included hardware costs and leases. The leasing numbers sit below the investing activities line in financing activities in line with accounting standards, but we like to show that here to show that we're well and truly covering those costs as well. A couple of key callouts on this page really are the efficiencies that the team has managed to achieve in direct costs year-on-year, notwithstanding the fact that we've added probably 2 million students from this time last year. Our direct cost, which is primarily data and hosting is down 22%, which is an amazing achievement. So that will track up in line with adding students over time. But on a per unit basis, we expect it to reduce still and get more efficiency there. So really, really strong outcome there.

Most other key cost lines are down year-on-year as well, which is really pleasing. And the other thing to call out, which is right down the bottom there is the business acquisitions line. That relates to the CIPAfilter deferred position. That's completely gone now. Last payment was made in September. So, you'll no longer see that line item in our cash flow statement. So that's a strong positive as well. Arguably, other costs, you could normalize out as a one-off payment, but we've shown it as reported there and it's not an ongoing cost for the business. So that's why it's sitting in the other cost line. So yes, short story is costs remain under control, remains the focus for the business, notwithstanding the capital raise to keep strong discipline on cost control other than new typical CPI movements that you'll see in staff costs and continuing to grow the top line and generate cash over the next 12-month period and into the future.

So probably, the main points I'd like to call out there, Tim.

[Timothy Levy, executive]

Yes. I agree. I think that's an outstanding result. We've included what I consider as operating costs, trading costs like hardware costs, which are the hardware, the appliances that we deploy in schools networks and obviously, leasing, which is office costs, which are bizarrely not included in the operating lines and the cash flow. So, when I think about the underlying cash flow of the business, that's that adjusted free cash flow line. And as Ben mentioned, the business acquisition cost, that's over now. The other costs are one-offs that won't happen again. So, the underlying performance of the business is actually a little bit better than what we're seeing here.

So, we'll keep reporting like this. I think that the market will like seeing how we think about the underlying cash flow of the business. And I feel like, yes, I think if you extrapolate these numbers, you can see what we've been talking to the market about, which is essentially we're now on or about free cash flow positive, and we will always be from now on.

So that's probably for us. Maybe I hand over to questions.

[Ben Jenkins, executive]

I'll just turn people's microphones on quickly. And Lindsay, you're first [ off the ring ]. I'll try and unmute now. You should be able to...

[Lindsay Bettiol, analyst]

Okay. Question from me. Just on costs, I'll start there. Your cash costs have been, as you've called out, kind of flat on my math for maybe 5 quarters in a row now. You've recently done this placement. You've got $40-odd million in the bank. So, I guess 2 questions. First one is, does the mindset change at all? Like can you relax a little bit on the cost front? Or is the mindset completely unchanged?

And then the second question is like at some point, the dam has to break, right? Like you can't just keep your costs flat forever. So, could you just maybe talk about how much spare capacity you think is still left in the business and when the costs just naturally have to start creeping back in?

[Timothy Levy, executive]

Yes. It's a really good question, Lindsay. Well, let me explain -- let me answer this. So, when we did that capital raising, we had a global hang out, I think the day after or 2 days after. And the first comment I made to the entire organization is nothing changes in our plan. That money sits in our balance sheet, it is not to be deployed for any productive purposes. It's got a very deliberate purpose, which is to sit adjacent to our debt facility and ensure that we've got a net debt position that the market wants to have. So no, there is no change in our thinking about costs and investments. That does make things challenging, but not without question. And I don't think that's a problem. I have no problem explaining that to staff that we need to be very careful with the money that we've got and prove to ourselves in the broader market that we can live within our means. And as you've seen from our top line results, it's not impeding our business. It's just making us be more responsible.

And in the medium term, there is still an efficiency dividend that's going to become meaningful from the consolidation of our technologies. And what is -- I don't want to get too ahead of my skis here, which I love that expression. But there is -- it is pretty exciting having this Octopus business in our business. Just as an example, an engineer or a software engineer in Sri Lanka is costing us in the order of AUD 12,500 a year, a software engineer in Australia is AUD 140,000 a year. So, as we get the benefit of unification and then the ability to potentially move offshore development to that market, and they're very, very good. There is opportunities for very significant cost savings in this business as well as providing more value to customers. So no, I don't see a philosophical perspective change in our thinking on investments and costs. I don't think we need to. As I said, our top line is strong and our competitors are all kind of being dressed up for sale. So no, I don't think there's going to be a big change here at all, Lindsay.

[Lindsay Bettiol, analyst]

Okay. And then just -- I mean, maybe just pushing a little bit on the second point around when the costs have to creep back into the business. It sounds like there will be some CPI type cost increases, then you've got natural efficiencies that come in over time. So, should we think about the current cost base as being appropriate for the next 18 to 24 months? Is that the right way to think about it?

[Timothy Levy, executive]

With CPI, yes. And then I'd be -- I think Ben in his modeling kind of plans for flat line, but hopes for cost out.

[Lindsay Bettiol, analyst]

Yes. Brilliant. Okay. And then you made a comment that the first half will be free cash flow positive. Post this quarter, you're starting with an $8.5 million tailwind. So, you've set yourselves basically no target at all for Q2. So, could you put a finer point on what free cash flow looks like in the coming quarter? Is that kind of going to be flattish? How should we think about that?

[Timothy Levy, executive]

I'll let you -- let you answer that one, Ben.

[Ben Jenkins, executive]

Yes. I think the December quarter should be pretty close to breakeven on a free cash flow basis, give or take, either side of that. And then the second half of the year, we will burn a little bit. Expecting to be -- I mean, our view is first half of the year should be able to provide the cash to support the second half of the year, if that makes sense. So, we will end the year in a similar position to putting capital raise to one side and the year in a similar position to what we were on a cash basis at the start of the year.

[Lindsay Bettiol, analyst]

Yes. Brilliant. All right. I'll just ask one more, if I can. Just there's kind of a strange chart on Slide 11 around net revenue retention, which looks like it slipped below 100% for the quarter, but then all the other commentary and charts seem to run counter to that? So, is there like some seasonal effect in the way that chart is constructed? Or how should I read that?

[Timothy Levy, executive]

Yes. Look, it's just the seasonal thing. That's right. So, when you have your best crack at renewals is when you have your best crack at net revenue retention, if that makes sense, because you're doing a renewal cycle and you can add additional products. When you're doing a new logo sale, you're kind of at the discretion of their procurement processes. So, your best chance to load up products is in renewal cycles and that's the June period. Now that's going to change in Texas in the September quarter in the future because we're building out our existing customer base in Texas. So again, it's just the cycles and the September quarter for us hasn't been a -- we haven't had a big base of customers to have a crack at renewals for. So, you'll see that change next year.

[Ben Jenkins, executive]

[ James ], you should be able to unmute now.

[Unknown Analyst]

Just a couple from me, maybe around the pipeline. I think it looks like that's sitting at about sort of $8 million weighted just eyeballing the chart. Is there any schools broadband revenue factored into that number?

[Timothy Levy, executive]

No, not really. If it is, it would be $100,000, tiny.

[Ben Jenkins, executive]

There's not.

[Timothy Levy, executive]

That's another point, actually. You've made this point to me on today. In our pipeline and in our ARR, there's no Octopus revenue as well. So that's to come in the next quarter.

[Unknown Analyst]

Okay. Great. So, I guess that's about $1.1 million plus you've had some wins. So that will come in next quarter, which sounds good. It sounds like Schools Broadband will be contributing there as well. Just on larger type deals or Schools Broadband type deals, are there any within that pipeline? I think the unweighted pipeline is pretty big. So, just if there's any larger things that could drop?

[Timothy Levy, executive]

There are. There are always big things that we're working on that are binary and hard to predict, but we don't put any of those, let's call them, state type deals or country type deals. We don't put them in the pipe.

[Unknown Analyst]

Okay. Great. And maybe just one more. In terms of the upper end of the EBITDA margin target of 15% for FY '25, I guess what needs to be done to hit that number? I think you spoke around cost out potential over time. Is there any cost out in that number? Or is that sort of BAU and continued growth of the business to get to that level?

[Timothy Levy, executive]

Yes, it's BAU. It's just to keep our cost as flat as you can. And if we hit those numbers, if we grow our ARR like we did last year basically. So, I feel like we can do better than that. But again, sorry, Ben. So, we've modeled that based on essentially keeping our -- achieving what we did last year. Owen?

[Ben Jenkins, executive]

Owen, you should be able to unmute now.

[Owen Humphries, analyst]

Can you guys hear me? Just 2 questions from me. Just first one is around ARR and the second one is just about the EBITDA guidance. The first one, just on the FX adjustments. Now just to understand, I know there's FX moving around. You said there's an adjustment in the way that you calculate the ARR. Can you just kind of talk through when you finished the period at $116 million of the entry ARR and then finished at $120 million and then FX is 0, just what spot currencies you're using there? Because I guess we're Aussie shareholders, so we're kind of -- we are thinking in Aussie dollars.

[Timothy Levy, executive]

Yes. So, we actually used to put the FX in there. So, we need to do that again. So, sorry about that. The FX -- positive FX contribution of ARR was sub $500,000. That's why it's kind of rounded to 0 here, but it was more than 0. The FX, Aussie dollar strengthened against the U.S. in May and then very sharply in the last week of June, if I recall, and that affected our reported 30 June ARR to something like $2.6 million or $2.4 million. Now that's reversed a little bit, but only in the order of $400,000. So, if -- but for that movement of the U.S. dollar, we'd be currently reporting about $122 million of ARR. So that's really the point of this slide. The rates that we use for reporting, that's a good observation. Ben we'll make sure that they're in the future releases.

[Ben Jenkins, executive]

The main ones are the U.S. and U.K., USD 67.28, so slightly worse than June and GBP 51.48 in the U.K., so slightly better than June. So, we lost a little bit on the U.S. conversion, but gained a little bit more on the U.K. It was about the same up in the U.K.

[Owen Humphries, analyst]

No worries. And then just around the EBITDA guidance you provided. I know in the past, when you talked about EBITDA, you did include some capitalized costs in that number, just 10% to 15% you're talking about there, how much are you talking -- how much of that's just, if you...

[Timothy Levy, executive]

On a reported basis, that's right.

[Owen Humphries, analyst]

Sorry, on a reported basis.

[Ben Jenkins, executive]

Yes. So it's the same run rate of capitalization as FY '24 plus CPI. We're not expecting to capitalize as a percentage of our engineering costs anymore. It will be very similar.

[Owen Humphries, analyst]

So, hold on a second. So, the difference between the 10% to 15% is inclusive of some capitalization.

[Ben Jenkins, executive]

It's inclusive of capitalization, yes. The 10% to 15% is purely because, yes, it's 9 months out. So, we're giving a range rather than an exact number.

[Owen Humphries, analyst]

And can you talk about that amount? It's about $20 million. Is that a good proxy?

[Ben Jenkins, executive]

Yes.

[Owen Humphries, analyst]

Okay. So, the 10% to 15% is inclusive of the $20 million proxy. Yes. Great quarter. Well done.

[Ben Jenkins, executive]

[ Morgan ], you should be able to unmute shortly.

[Unknown Analyst]

Can you hear me okay, Ben?

[Ben Jenkins, executive]

Yes, we can hear you.

[Unknown Analyst]

Sorry. My apologies. I did drop out just before. So, if you did cover this, I'll pick it up elsewhere. Just on the -- obviously, on the headline at the start of the presentation, where you referred to your operating -- or sorry, your free cash flow of $8.5 million. And then when you go into a little bit more detail throughout the presentation, a little bit further down, your operating cash flow, you've got the $6.7 million of free cash flow in your financing activities. Brings you up to $9.3 million, which obviously you referred to in the earlier one with your hardware costs and leasing costs. But I was just trying to reconcile those 2 numbers, the $9.3 million and the $8.5 million.

[Ben Jenkins, executive]

Where are you getting -- sorry, $9.3 million.

[Unknown Analyst]

So -- sorry, your net cash flow, the [ $9.313 million ], can you reconcile that to the free cash flow number of $8.5 million, which you reported on earlier on?

[Ben Jenkins, executive]

There's a couple of things in there, but the 2 main ones are your interest costs, which we're adding back to that $8.4 million number and the acquisition costs of the CIPAfilter business are the 2 main ones. Yes.

[Unknown Analyst]

So obviously, that variable should be less given the paydown of the debt and then obviously, without the acquisition costs in the future quarters?

[Ben Jenkins, executive]

Yes. And to be fair with the debt, we won't pay down initially, but we should be able to offset. That net interest costs will come down as we put the cash to work in term deposits. So, we expect to earn more interest income. We will potentially look to pay down debt in the short to medium term. But at the moment, it's slightly prohibitive with make holes at this point. We're only 15 months into the loan period. So, we're probably 12 to 18 months away before that becomes a little bit more palatable.

[Timothy Levy, executive]

It's a good area of focus because the ending of that CIPAfilter payment and the bringing in of the $23 million, it's in the order of $2.5 million, $3 million of savings, cash savings to the business is pretty material.

[Ben Jenkins, executive]

Ross, you should be able to unmute shortly. I'll let just let you through.

[Ross Barrows, analyst]

Can you guys hear me now? Just 2 for me. Just Tim, you talked earlier about, I need to get more access and maybe quicker access to the schools. Just to understand that. I mean how much of that can you control? Is there a capital requirement there to do it, understanding the time frames as well? Maybe just explore that a bit more.

[Timothy Levy, executive]

Yes. It's not a capital thing. It's top of the funnel and bottom of the funnel things. It's a whole series of things that need to be done from how do we make sure we create the momentum, the demand generation? How do we get districts coming to us rather than having to choose districts? And that's social media post, media events, conferences, kind of stuff that's already in our marketing approach, but just getting that messaging right. It's testimonials. So, we've had some very successful school districts. One here, I said it's got 38%. We need to turn that into testimonials and get that messaging out there. So that's top of the funnel demand generation stuff. And then there's the kind of execution stuff and everything in between.

The execution stuff, it's still quite manual to launch these school districts. We have plumbing to do on the school manager system and then into the Qustodio system and into the mailing platforms and stuff. So it's a little bit [ hydraulic ] today. So, there's some system things to do. There's some marketing things to do. And there's a whole set of B2B2C success type stuff that has to happen. So, it's just a lot of small stuff.

[Ross Barrows, analyst]

And when do you think you get kind of critical mass and momentum on that?

[Timothy Levy, executive]

It's hard to say, to be honest, because you have -- the back-to-school period is when you get the most interest in talking technology in school districts or in schools everywhere because the kids are being given the Chrome Book or the iPad or whatever. So that's a perfect opportunity. It isn't the only opportunity though, right? So, what we need to do better is now find the cyber-bullying week type moments or hijacking TikTok, media or whatever and bringing those to the attention of the decision-makers in schools. So, it's not an all back-to-school type opportunity, but we've been really focusing on that because we've had a huge -- we're doing a huge amount of launches right now. So yes, we've got 90% of our students in the U.S. still to have a swing at. I'm hoping to have a swing at most of those next year.

[Ross Barrows, analyst]

That's helpful. And then just on Texas, if we can revisit that for a second. You mentioned about 20% of the student population is now on a Qoria platform. There's a bit of an 80-20 rule in that market because there are some very big school districts and there are quite a few small ones. Can you just talk about the traction you're getting across big and small? Obviously, the bigger ones have more capacity to do their own homework and outside of, I guess, what might be recommended to them. Are you still getting traction with those and maybe some color on that?

[Timothy Levy, executive]

Yes. So, our bread and butter school districts across the U.S. are in the order of 4,000 to 20,000, let's say, and that's slowly climbing. Our biggest deployment is with a group called Northside in Texas, which is 100,000 -- 104,000 students. And that's really challenged our platform. Remember, our Linewize platform, which we sell in the U.S. was built for New Zealand schools and the typical New Zealand school has 300 or 400 students. So, we've had to scale out the potential, the capability of that unbelievable technology. We've had to scale it out and have these little appliances that used to manage 300 students now deploy networks that support hundreds of thousands of students. So that's been a big process actually getting Northside to run and deliver.

And now we've displaced from Northside ContentKeeper, which is the go-to appliance, network level filter in big school districts, certainly in the U.S., but also in Australia and the U.K. And we've displaced it and done so and the client is very happy. So now, I think that's -- there's some excitement about us having a swing at these bigger school districts across the U.S. And as you see at the bottom here of the comment that some of these T5s that working in Texas are equivalent size to Northside. There are 2 massive districts in the U.S., LA Unified, which is, I think, 900,000 or 1.1 million students and the New York Independent School District, which is a similar number. We're not yet ready to tackle those things. But almost all other districts now in the U.S., we now can credibly say that we can support. So yes, it's not just the Texas story, but Texas now pretty much across the board, we can support Texas customers, and we can now demonstrate that. So, we're in a good spot.

[Ben Jenkins, executive]

Wei, you should be able to unmute now.

[Wei-Weng Chen, analyst]

Just one for me. Just in terms of Qustodio and the growth outlook for that part of the business, can you give us some color on how we should think about that?

[Timothy Levy, executive]

Yes. It's growing -- the plan, it's always the same actually. The plan is 15% growth and they just seem to always beat it. So look, that's why I saying here that they're comfortably growing their direct business at 15% to 20%. We're now starting to see some resonance of our schools, Australian schools, U.S. schools talking about Qustodio. So, we're now starting to get better performance in the markets where our schools are talking about the product. It's constrained though, I touched on this at the beginning of the presentation. We don't have the money to spend in marketing, above-the-line marketing of Qustodio would like. And we're dealing with that in 2 ways.

One is we expect as our margins grow and our service margins are 90-plus percent, which will build capacity for us to spend more and more marketing spend, in terms of social media posts and media events and PR and so on. In fact, in Australia, we used to do radio ads for our Family Zone product, which are incredibly successful with the home school runs. So, there's a lot more to do in terms of traditional marketing spend, hard marketing dollars to be spent. I'm hoping for 3, 4-fold increase in our ability to spend in Qustodio marketing in the coming years, okay, margins permitting it. And then the other piece is just getting schools talking about it because that's almost like a negative cost of acquisition. The schools are solving a problem, promoting our product for us without any direct marketing spend by us.

So at the moment, we're going to leverage the B2B2C, our school promotion as all of our business grows and then we'll have margin in our business to spend more in traditional marketing for the Qustodio business. Whilst doing all of that, as you see here, there's very much an emphasis on building out the features -- feature capacity of that product so that as I said earlier, [ non-competitors ] with the breadth of features in our product. So yes, I mean, the thing that's holding us back, I had somebody raise this with the other day, why can't you achieve the results of Life360? Well, they spend $90 million in advertising. If I had that money, I'd be achieving it, too. But I think in the long term, actually, us getting schools talking about our products free is probably a better business model, which is really an emphasis.

[Wei-Weng Chen, analyst]

Okay. Yes. No, that makes a lot of sense. And right now, just in terms of that growth that we're seeing regionally, is that all kind of like the EU region that we're seeing the growth? Or if you can give some color on the region.

[Timothy Levy, executive]

It's moving around a lot. I mean the Australian market has been a stellar performer for Qustodio since the merger. It used to be top 10, now it's come from the top 5 performing market. And again, that's good part of improvement areas on Qustodio. The U.S. has improved in the last 6 months. Spain has been a huge performer recently. We've got a number of telco partnerships, which kind of launch, get good traction and then kind of get into a steady state. We've got a few more of those that we're working on, which are pretty exciting and they're outside of Europe, which is exciting for us as well. It just -- it kind of moves around. And it depends on some of the competition too like Bark is our biggest competitor in the U.S. And if they've got a big war chest, money to spend, then that market becomes challenged.

And what's brilliant about Victoria and her team in Qustodio is they are literally monitoring that stuff real time. And if they're finding that their cost of acquisition, they measure everything LTV versus CAC. If they're finding that equation isn't working in the market, they just divert their resources somewhere else. They are brilliant. So, they don't kind of think about it like an enterprise SaaS business sort of approach this market and invest in it and build relationship, blah, blah. They are searching for an LTV CAC equation and that customer could be anywhere. And they support 100 countries and 13 different languages and stuff. So, they have enormous flexibility in how they run the business. That's why I think they never really missed targets is because they aren't focused on a particular market. They're focused on particular customer who's available in all markets, if that makes sense.

[Wei-Weng Chen, analyst]

Yes. No, it does. That's a good way to penetrate the market very commercial. Maybe one last one for me. Sorry, I know I said I ask one, but just in terms of Japan, I think we spoke about some potential opportunities there. It would be good to get an update if there's anything there.

[Timothy Levy, executive]

Yes. I'm really excited about it. Look, I'm hoping to talk to the market about this in coming months. We've been working with some distribution partners in Japan for a while, trying to -- and there's a number of opportunities from consumer to schools as well. And if we can crack it, it's a really important market because it's big, of course, like it's 100 million people. It's also the best telco market for value-added services, like in Australia, if you're selling Spotify with your Octopus account, if Octopus can get 3% to 5% take-up of that mass product, then they're really, really happy. In Japan, it's 60%. So, their attachment rates for value-added services in Japan from telco products is massive. So, for a business like us, which is increasingly becoming a partner-driven business, Japan is sensational. So, really excited and working very, very hard. So, hold your breath. We're hoping to -- some things in coming months.

[Ben Jenkins, executive]

Jules, you should be able to unmute shortly.

[Jules Cooper, analyst]

All right. Fantastic. Tim, one of the things that sort of stuck out to me here in the commentary is just the performance of OctopusBI post acquisition. If I heard you right, you said $135,000 of incremental ARR within days. I mean that's probably 13% of their total. Could you just sort of maybe provide some color around was this already in the pipeline? Is this you activating sort of cross-sell? And are you seeing it coming the demand out of the U.S. or the U.K., just thinking of sales seasons here and what's relevant and what we can read the tea leaves moving forward on this, please?

[Timothy Levy, executive]

Yes. So, this particular deal became alive as we were getting into the final stages of the merger. I wasn't aware of it. I mean other people in our business were, but no one told me. So, it was a pleasant surprise. So, they -- we -- this is a big client of ours, International Schools Partnership. I think it's a -- I don't comment on this, but I think it was a GBP 750,000 deal with ISP, it's a meaningful customer of ours that's run out of the U.K. business, our EMEA business. So, they've got international schools spread throughout the world. And in the last few months, Octopus started talking to them about their capability. And this sale that we're talking about here is less than 6%. It's about 6% actually of their schools -- international schools footprint. It's -- and if it works, there is a real chance of that being rolled out across the entire footprint. And that would be a very meaningful deal if that happens. I'm not promising it, but that's kind of why we noted here because it's a big win. This International Schools Partnership is a very meaningful player in schools globally.

Now in terms of what happens next for the Octopus existing business model. Hansa is here at the moment. We're kind of working through that at the moment. And to be honest, the focus for me is more about how do I put product in the hands of the -- our U.S. team run by Harrison, our U.K. team run by Gav, how do I make sure that they've got product that they can demonstrate at FETC, the conference at the end of January and which I think is the end of January, early February in the U.K. Now that might mean that we're somehow somewhat constricting Hansa' existing go-to-market, but that's okay because Gav and Harrison can sell to ice to Eskimos. If we can get them product, these guys will make it rain. So that's really the emphasis.

So their existing business, it's not going to be destroyed in any sense of the word and they've still got existing relationships and sales capabilities. So that will go. But the emphasis of our business has to be putting product in these events that we can demonstrate to customers and turn into millions of dollars of ARR this financial year. That's really the focus. So, you'll see that we'll actually have beta-ready products per yesterday's plan, we'll have beta-ready products by the end of January. So, we'll be in the market properly with an integrated Octopus Linewize product or Qoria product literally in 4 months. Excellent. And great stuff. Fantastic stuff. All right. Is that it for questions?

It is, okay. Look, thanks, everybody. I'm just scanning through the names of people in the session today. So, thanks for existing investors for being along this journey with us for so long and for the new names that I'm seeing here that have joined us only recently in some in the recent capital raising event. Thanks for joining this journey. Again, I feel like we're very much on plan. And I'm hoping in January, I'll say the same thing that we're on plan. I'll see you all very soon. Thanks so much.

[Ben Jenkins, executive]

Thanks, everyone.