Good morning, everyone. Thanks very much for joining us at our Investor Day. A lot of very familiar faces. Hopefully, you got something from that video, just a little bit more in terms of what we actually do. We get asked that question quite frequently. I get asked that question quite frequently from my family. "What is Data#3? Well, what do you do, and what does Data#3 do?" Anything that we can do to provide you more information about what we do is important. Today's certainly very much along that line. We and Cherie and I do many meetings with many of you in the room today in terms of working through operationally what we do and what our strategy is.
Today's all about having a deeper dive, and a deeper dive as far as what Data#3 does. And that's certainly one of the objectives. The other objective today is for you to see a few other faces as far as the executive of Data#3 is concerned. So we've got a range of Data#3's executive team. Actually, on that note, we've also got a management transition as well. Many of you may have heard that I'm transitioning out of the CEO role. We're working through a four-month transition. I'll be handing over the baton to Brad Colledge, who you're gonna be seeing, in fact, a lot more of over the next little while this morning.
Certainly, hopefully, you'll see that the management transition will be a very smooth one, and we're very confident in terms of what the long-term future of Data#3 is. In fact, I'm so confident as well in terms of handing over to Brad. He's a relatively new boy to Data#3. He's only been with the business 28 years. Certainly been a pleasure working with Brad hand in hand in terms of growing the Data#3 business over that period of time. So you'll see a lot more. In terms of the agenda today, I'll also be passing over in a moment to Mark Gray, who's our new chairman.
As of the AGM from two weeks ago, Mark took over as the new chair. Mark isn't necessarily a new boy either. Been with the business six years as a non-executive director. Mark will be handing over to Brad, who'll be providing an overview and our strategy. Just an understanding from the top and from the top down, which hopefully will then feed into a lot of the other presentations that you'll see on the agenda as well. The agenda's broken into two parts. So we'll end up with the first session with Cherie, who'll provide financial insights and touch on ESG as well.
We'll then move into the area of artificial intelligence, which I'm pretty sure there'll be some questions on artificial intelligence. And Graham Robinson, our CTO, will be covering all things AI. So if you've got any questions on that, we'll be rounding up with a Q&A session at the end of the first session, so not at the end of the individual speakers. So we'll collectively handle the Q&As at the end of the first session. We'll then have a morning tea break outside, and there'll be some hopefully some wonderful tea, coffee and wonderful food as well. And by courtesy of JP Morgan, so thanks very much.
Then we'll move into the second session, and John Tan, our Chief Customer Officer, will be talking all things customers. Then we'll go back into AI, but AI from a different lens. We've got Steven Worrall, who will be joining us. He has some time restrictions, but he will be joining us for the second session. Steven Worrall is the Managing Director of Australia and New Zealand for Microsoft, and he'll be covering Microsoft and, in particular, the role of Microsoft with artificial intelligence in the market as well. We'll take Q&A when Steven is presenting as well, because we'll take Q&A after he presents, rather than waiting to the end of the session two, as Steven's got some time constraints.
We'll then move into the people section, and Brad Colledge will be coming back to the stage, presenting people. We originally had our head of HR and people, Tash Macknish, down for this, but unfortunately, she's unwell, COVID-related, and I'm sure you'll understand. And Brad stepped in, so thank you, Brad, for doing that. And we'll then round out session two, talking about cybersecurity. And it is the number one topic of our customers as well. That and AI, but also the relationship with AI and security as well. And Richard Dornhart, the head of our security practice, will round us out on session two.
We'll then go into Q&A and have all the presenters available for questions, and then we'll break for lunch. The time, as far as the Q&A is concerned, we'll be out of this room by 1:00 P.M. So that's the agenda for today. On that note, I'd like to welcome Mark Gray. So good morning, Mark, and welcome.
Thanks very much, Laurence, and good morning, all. Great to see you. Thanks for being here today, and especially thanks for your interest in Data#3. Laurence has gone through some of the changes that have recently occurred, and I'm delighted to be here in my new role as chairman of Data#3 since the AGM, as Laurence indicated. Following the retirement of Richard Anderson, who was in the role for some 23 years and on the board for some 26 years. So enormous effort by Richard, and I'd like to just acknowledge his enormous contribution to the company over that long period of time. So, I've been on the board for six years, as Laurence mentioned, so I'm hardly a newbie.
But in terms of the 28 years of Brad and still serving out his time, I do feel like a relative newbie. But the six years has been an interesting journey. Over that time, I've also been chair of the Nomination and Remuneration Committee. And as Laurence indicated, he's stepping down from his role, and Brad's taking over. This is all part of a very carefully planned and managed strategic succession planning process, which started several years ago with the appointment of Cherie as the new CFO, and now transitioning into the new chair and new CEO MD roles. So it's never an ideal time to make these sorts of changes, but this time is probably as good as any.
We've got significant momentum in the business, and that's reflected in our strong financial performance for FY 2023 and also reinforced in our recent update at the AGM on our first quarter performance and also on our first half projections. In September, we were also delighted to be included in the ASX 200 for the first time, and it's a significant milestone in our journey, as an ASX-listed company. We're operating in a growth market for large corporates and government customers, and our pipeline for large integration projects remains solid. Data#3 is ultimately built on great experience, culture, and tenure, and we have significant longevity across the team very generally. We want to take this opportunity to reaffirm that our strategy, despite the changes at the top, the strategy remains unchanged.
The strategy is fundamentally sound, and there's enormous value in continuity, consistency, and stability of our strategies. Our strategic framework continues to be underpinned by a focus on customer success. As far as we're concerned, the more successful our customers are, the more successful we become. Our strategy also revolves around having the best people and the most secure, scalable, and innovative solutions in the market, while operating our business as efficiently as possible. We'll continue to focus on accelerating growth in services, given this is the fastest-growing area in the market. We've seen strong performance in higher margin areas of consulting and managed services, and this has helped stabilize the overall blended gross margin of the business.
Brad and I have both been involved in the development and evolution of the company's strategy over the last few years, so we both have a strong commitment to and ownership of that strategy. I don't, I certainly don't see the need for significant changes to that strategy. Any change is likely to be incremental rather than substantive. In my experience, issues tend to arise in the execution of a strategy, not in the strategy itself. And there are certainly areas where we can improve in execution, and of course, as the market evolves, we'll evolve as well. Along with my fellow directors, we will be reviewing board composition to ensure that we have the right mix of skills to see the company successfully through the next chapter, and as the Data#3 continues to grow and change with the market.
I'm encouraged by the momentum within the business and the significant growth runway ahead. The market opportunity remains substantial. The IT market continues to grow, both domestically and internationally, as decision-makers increasingly seek automation and opportunities for driving greater efficiencies. Gartner has forecast the Australian IT spend to grow 7% in calendar 2024, to exceed AUD 133 billion, led by digital investment programs. We're ideally placed to deliver much of that growth. I'll now hand over to Brad to discuss our strategy in more detail, and I look forward to meeting many of you during the course of the day. Thank you.
Morning, everybody. I met a few of you this time last year. So, who was here last year? There we go. Mm, yeah, and so we have a few new people. It's going to be great to get across you all over the years to come. And so I thought I'd kick off with just before we get into the Data#3 update and strategy, just a little bit more detail about me, since you're going to be stuck with me for a few years to come. So, let's kick off with a little bit of the background.
I completed my business degree in Brisbane at QUT, and I started my IT career here in Sydney, just across the bridge in North Sydney, working for NCR Australia. Does anyone know what NCR stands for?
National Cash Register.
National Cash Register. National Cash Register is arguably the oldest computer company in the world, and when I say arguably, because if you Wikipedia it, it says that IBM is. The little story there is that, John H. Patterson, who started NCR, actually had this, this gentleman working for him, and, he ended up firing that gentleman in about 1914, and, he went on to start up IBM, which became the biggest computer company in the world. So, so I started with the oldest and, then after a few years with NCR, I moved back to Brisbane. I spent a few years with a software and services company before joining Data#3 in 1995. So, Laurence hired me-...
To look after, amongst other things, this new thing that was called Microsoft Volume Licensing. We started the software licensing team at the time, which is now Software Solutions, and that business is now over 150 people, but more importantly, produces over AUD 1.5 billion of our AUD 2.5 billion in revenue. That software business has certainly been incredibly successful and continues to be. Over the years, I've been a general manager of Infrastructure Solutions as well, having responsibility for our services sales and services delivery and various other functions across the business.
In my current role as Executive General Manager, I also have involvement with the strategic planning, as Mark said, also a member of the strategy team and senior leadership team. So just confirming, as Mark said, we have a very sound strategy, and as the market evolves, we'll continue to evolve our strategy to maximize the opportunities in market. Our culture is second to none, with our team focused on our core values, and we'll... Actually, I'll talk about that. Tash will talk about that a little later, about HEART, which is our core values around honesty, excellence, agility, respect, and teamwork. We'll talk about that in the people section, a little later today. We have a great team.
The market has plenty of potential, and I, and I am excited of leading our team into the future. So that's enough about me. Let's introduce you to Data#3, if you're new to Data#3, and update you, if you are familiar with us. So we're 46 years in business, and we just had our 46th birthday last week, so not quite as old as NCR. We now have revenues of AUD 2.5 billion, and this is seen across our lines of business, and let's just move that slide on. Across our lines of business of software, infrastructure, and services, and of course, we have our Business Aspect, which is our fully owned consulting business.
We listed on the ASX in 1997, which was one of the first Australian IT companies to do so, and as Mark mentioned, we are recently now into the ASX 200. We now have over 4,000 people across our technical sales, marketing, and administration roles, and nine locations across Australia and the Pacific. What those nine locations allow us to do is to work with our customers, stay close to our customers, to help them execute right across the region. Our customers do range from federal, state, and local government, large commercial customers, and smaller corporate customers. We've had great success as well across our industry focus with education, health, mining, and construction.
So as Mark said, the Gartner say, this year, in terms of FY 2024, started off at 5.8% growth, and they've updated that to 7.8% for the next calendar year, so a growing market. You're going to hear plenty about artificial intelligence, or AI, as we'll call it this morning. And there's a reason for that, because there's plenty of opportunity that presents not only for the industry, but also for Data#3.
This time last year, you may remember that, like many industries, we had challenges with supply chain, and this has improved significantly, which means that we have more current stock for our customers, rather than our warehousing configuration centers filling up with stock that's waiting for that last piece to arrive before we can ship it off to the customers. So that certainly improved our inventory position. And we also have predicted growth in security and cloud, and that reflects what Data#3 is seeing today as well. Okay, so let's talk a little bit about our strategy and how we execute on the market opportunity. For those that have known us for a little while, you may have seen this before.
This is our strategic framework, and it is important to cover if you're not familiar with it or even an updated version of it, because this is where we really put the stake in the ground, and then work towards our performance. Customer success is at the center of our strategy. In fact, it's our core purpose to enable our customers' success, and it's always been at the center of our strategy, as it's proven to be successful. We achieve customer success by investing in our remarkable people through our professional development, increasing skill sets, and technical certifications. We have the best people in the industry, and our vendors and customers tell us that regularly. We have innovative solutions. I mentioned on the previous slide about the growth in cloud.
This has driven the need for solutions to migrate customers to the cloud and manage those customers while in the cloud. We invested in state-of-the-art technology solutions ourselves to manage our clients' cloud environments. We've also invested in upgrading our ERP. We did that a couple of years ago, and we continue to enhance that. It's a Microsoft system, of course, and upgraded our administrative and systems and processes to provide efficiencies and excellence in operations. So all of this leads into customer success for our or success for our customers, which in turn leads for exceptional performance for Data#3. So that's our strategic framework. We expect technology, and specifically what the industry calls digital transformation, to continue to play a leading role in Australia's economic future. The trend to digital transformation is not one or two years, but rather, it's a long-term strategy.
Data#3 provides a foundation layer that allows more advanced use of technologies such as the Internet of Things, robotics, and extended reality. In our foundation layer, we have five solution categories: multi-cloud, and I'll explain what multi-cloud is in a minute, hybrid work, and we'll explain that, too, security, data and analytics, not to be confused with AI, and connectivity. So cloud continues to grow at incredible rates and comes in multiple forms. We are familiar with the explosion of public cloud solutions, such as Microsoft Azure, and many of our customers still have private cloud solutions, either on their own premises or in partner organizations, such as NEXTDC in data centers. Data#3's opportunity is to provide the cloud solutions that best meet the customer's requirements.
However, the larger opportunity is to help the customers manage those environments. For example, we've had great success in helping customers manage their Microsoft Azure and M365 environments. So, hybrid work. Hybrid work includes end-user devices, applications, and collaboration environments such as Microsoft Teams. Hybrid work environments are important for productivity when we have a distributed workforce. However, also important to reduce travel and greenhouse gas emissions. You don't need to jump on a plane for that internal meeting or even an external meeting. It certainly reduces your carbon footprint. We continue to be busy implementing hybrid work solutions in our customers' offices around the country that both connect to offices and also individual personal mobile devices. Of course, implementing secure environments is increasingly important. Our security business has grown steadily in recent years, and the number of offerings continues to expand.
Richard Dornhart, our Security Practice Manager, will talk more to the ongoing security opportunity shortly. So data and analytics. Data and analytics continues to be an incredible opportunity. With the evolution of sensors and data-gathering techniques, there is more data to analyze than ever before. From sensors in electric vehicles to monitoring rainfall patterns in farms and fields, the applications of data and analytics is endless. High-performance sports, such as Formula One cars, MotoGP motorcycles, and SailGP 50-foot foiling catamarans, are all driving exponential development in data and AI. Closer to home, Data#3 has been involved in projects from monitoring and managing refrigerator temperatures for customers, through to analyzing computer networks and security data. Some of the industries we've been successful with data and analytics include emergency services, health, manufacturing, and public sector. Last but not least, is connectivity.
Connectivity remains critical for connecting all devices together and to the cloud. We've seen our partners, such as Cisco and Aruba, advance substantially with software-defined networking, which makes the management of the network so much more efficient and more powerful. But what about artificial intelligence, I hear you ask? AI has been around for years. However, with increasing computing power and launch of ChatGPT last year, we've seen a groundswell of activity and development in generative AI. We believe AI is fast becoming a digital milestone in the same vein as computing and the internet. AI enables all of our foundational technologies, which in turn enable our operational technologies. This means AI is increasingly integral to all of our solutions. AI is being maximized into all of our vendor solutions and integrated into those solutions, and we are well placed to maximize that opportunity.
Data#3 is also a handful of customers and the only channel partner in Australia to be invited into the early access program for Microsoft's M365 Copilot. I'll just explain what M365 Copilot is. In very briefly, M365 is Microsoft's modern work platform that covers the traditional Microsoft Office products, Windows, and some of the newer applications around security and also collaboration. And the Microsoft Copilot platform is an artificial intelligence platform that integrates with M365. So we're on that early access program, and we're already helping customers on their Copilot journey. So Graham Robinson, our CTO, our Chief Technology Officer, will talk to more than this is his in his presentation, and of course, the Managing Director for us for Microsoft Australia, will be joining us this morning.
As you listen to Graham's presentation, listen carefully for the difference between AI and generative AI. Don't let them down, Graham. All right. One of our competitive advantages is being able to integrate all of these solutions and support our customers through the full solution lifecycle, from consulting, project services, and support services. Let's look a little further at our lifecycle services. You'll see this a couple of times as, as John digs into it a little bit, later as well. Which, from our learning and consulting perspective, procurement with our infrastructure and software businesses, implementation and adoption with our project services, and the operate phase with our support services through maintenance and managed services.
The closed-loop approach with our customers means we're continually working with them to ensure their success, and John will, our Chief Customer Officer, will talk to this in more detail in his presentation. So there's going to be a number of customer stories mentioned throughout the morning, that have solutions incorporating various stages of that solution lifecycle that we just showed. And I encourage you to all to visit our knowledge centre on our new data3.com site, to see how our solutions have been adopted by our customers. There's many, many customer stories up there. Okay, we also have a deliberate strategy to invest in partners who are leading the industry globally. This includes significant investment in technical capability and certifications.
This strategy ensures we're able to obtain the support we need from the vendors to execute effectively locally and provide our customers with the confidence they are obtaining quality solutions from Data#3, which is supported by industry leaders. Our top vendors represent approximately 70% of our customer spend. However, we complement these with hundreds of smaller vendors. It's an ongoing process right now, and we have about 37 new vendors that we're onboarding to provide complementary solutions around those global leading vendors. Vendors will vary as customers' needs change, and a diversity in vendors ensures that our ability to shift with the customers' requirements.
Speaking of vendors, so our team just returned from the Global Cisco Partner Summit in the United States, where Data#3 was announced as the Global Software Partner of the Year and the Customer Experience Partner of the Year for the region, for Asia Pacific, Japan, and China. These awards are rewarding as we were up against thousands of Cisco partners from all around the world, and they recognize our customer-centric approach to providing the Cisco solutions. It was great Amanda Toogood could join the team this year and receive the award personally. Amanda manages our customer success team, so it's direct representation that her team is doing a great job. The Global Award is our sixth consecutive award, Global Award, across various categories, including software, networking, and security.
In addition to Amanda and Garrett, our Chief Marketing Officer, up on that, on that slide, in the picture, we also have several Cisco senior executives, including their global CEO. So it's great to see the support from Cisco as one of our major partners. The Cisco Awards are the most recent examples. However, proof of our expertise is seen in awards recognition by many of our vendor partners. These awards are validation of our strategy. That is, where we invest, we succeed. They also add to our competitive advantage in market, providing confidence to our customers that we have the proven expertise to help them achieve their technology and business objectives. Continuing on the theme of competitive advantage, there are many factors that set us apart in the market: our people, partners, expertise, innovation, agility, financial stability, and brand.
While each of these are great competitive advantages in their own right, together, they provide a unique value proposition only Data#3 can provide. So we have substantial opportunity. Services growth that will complement software and infrastructure, leading to improved margins and lifecycle services. Growth in cloud services continues to be much faster than the overall market, as, as is the investment in security. Generative AI is a game changer, and all of our solutions will benefit from this technology. We have a growing pipeline in large infrastructure projects, as Mark said earlier. This sets us up well to continue that momentum, particularly with the investments we'll see for the Brisbane Olympics. That's it for me at the moment. You'll hear from me a little later on, with our, our people slides. I would like to now introduce you to Cherie O'Riordan, our Chief Financial Officer.
Thank you, Brad. Morning, everyone. Welcome again. Hopefully, you can see me okay. I'm told my colors are so on brand that I might blend into the slides this morning. So, I just wanted to start by providing some commentary around our gross margin trends in recent years, 'cause that's something that we get asked quite often about. Before I do, I just wanted to reiterate our consistent message that as a business, we're focused on growing sustainable gross and net profit rather than our gross margin percentages. That being said, some factors influence our gross margins in each financial period include: the product mix sold in any given period, the occurrence of large deals. Oops, sorry. Flick that over. There we go. The occurrence of large deals, which can significantly impact on the blended gross margins.
Our vendors and customers moving from hardware spend to software spend, which spreads profitability across financial periods, giving us better retention and visibility. Customers taking up consumption and as-a-service offerings, which again, spreads profitability across future years. Vendor programmatic change is also shifting. More rebates throughout the life cycle, that is post-sale rather than upfront, which doesn't change the overall quantum of rebates, it just makes them less lumpy. Supply chain has also skewed the timeline of delivery in recent years, so the true performance was spread across a longer timeline, but the impact of that is thankfully largely behind us. We also win larger deals with a profit strategy. For example, we might incur lower margins for infrastructure and then drive services growth in the future. We're increasingly doing this, and it should result in improved profitability over time of a potentially lower margin deal at the outset.
While market conditions may be more challenging and competitive, and we have seen a tapering in product margins in recent years, we've still been able to achieve growth above market levels and continue to focus on our growth profit. I wanted to next touch on the company's inbuilt protections against price and wage inflation. We're largely protected from increases in the cost of wages and product by our ability to pass through these costs through the majority of our customer contracts. Our reseller agreements enable us to pass through any vendor price increases on product and software. We also have inbuilt protection in the terms of our professional services contracts, such as time and materials contracts, which are obviously lower risk from a pricing perspective, and fixed price contracts, which are managed closely against budget and have inbuilt contingencies to minimize risk.
We undertake an annual review of our professional services rate cards and our managed services cost models to adjust for price increases, but we balance these increases with remaining competitive in market. Lastly, our goal is for all managed services contracts to include clauses relating to periodic price reviews. Our preference is to use CPI increases to determine the amount of the price increase. However, in some instances, this is fixed for the initial term. I'd like to now provide some insights around our enterprise managed services contract cycle and the relative profitability at the various stages. Stage one is the sales and transition process. The sales process can be elongated up to 12-18 months, while we build confidence and trust with our customers, and we work with them on their in-house outsource strategy.
On commencement of the contract, the transition process can begin, which includes investigating and connecting a customer's environment, assessing key risks and gaps, and providing recommendations for risk mitigation. Significant investment is required by Data#3 for the engagement to be successful, which, although factored into the contract pricing, results in minimal return during this phase, as typically, billing would be straight lined across the life of the contract rather than matched with internal effort. The year following the transition of a new customer can be viewed as a stabilization period, where we build maturity and knowledge of the customer's environment. There is a continued high level of effort required, which results in year one being less profitable than subsequent years.
Years two and three of an enterprise managed service contract would involve further refinement of the customer environment with, for example, reduced volumes of incident tickets. It's from year two that we start to realize the benefits of MaIT and see improved profitability. Finally, from year four onwards, we see continued profitability, especially if the contract is renewed for a second generation, as it would obviously require significantly less effort than the initial onboarding. Incremental profitability in our managed services business also comes from the modernization of legacy technology within the customer environment. For example, a product refresh, implementation, and adoption. An enterprise managed service relationship also gives us the first right of refusal for our customers' new projects, which generates cross line of business and lifecycle sales opportunities.
On this slide, I'd like to highlight a few ways in which we can and have increased profitability over time. Cross-selling across all our solutions and services drives increased profitability, especially where we can provide our customers with value-added, higher margin services. Being a market leader in new solutions, such as Microsoft Copilot, enables us to play an important role in our customers' digital transformation strategies, from consulting to product sales. Never disconnecting from our customers, from consulting through to managed services. Driving our security sales strategy, as security is the number one concern for our customers and can lead to sales across most of our solutions and services portfolio. And lastly, increasing our market share across all core vendors will drive increased sales and profitability. Moving on to our internal cost ratio and opportunities for operating leverage in the business.
As previously reported, our ICR has reduced from 88% in FY 2016 to 80.3% in FY 2023, with FY 2023 slightly up on the previous year due to increased travel costs returning to more normal levels and our continued investment in people and systems. Particularly managed services, where we onboarded several new customers and contracts during the year. The system and process improvements made during FY 2022 and 2023 relating to the implementation of our Dynamics 365 ERP should enable us to put more volume through the business with proportionately fewer additional resources through digital connection, as shown by the following examples. We've invested heavily in our ERP and its integration framework, allowing for customers and suppliers to work seamlessly with Data#3. We've invested in AI technologies like Azure OCR, Optical Character Recognition, where basically AI keys in order for us.
This gives us scalability for large contracts without having to take on additional resources, thereby moving staff away from data entry to checking and value-add activities. Teams can now bulk import orders, further improving our ability to deal with increased demand. Order Assistant is a system-driven workflow that checks a number of order elements automatically. For example, a customer's credit rating, reducing the time to convert a customer quote to an order by automatically verifying information and data fields. We're investing heavily into our digital platform, D3 Commerce, to complement the way our customers can connect and work with Data#3, including orders, maintenance, and asset management, but John will talk about... to that later in his presentation. We're also working on an API package to allow our customers to self-serve with orders and avoid duplication with procurement.
Basically, this means a customer's procurement system can push orders directly into Data#3 systems. We continue to assess new ways of building AI and automation into our processes, such as customer invoicing portals, where we upload sales invoices directly into our customers' systems and have them automatically matched against their purchase orders for prompt payment. The continuous service improvement initiatives in our managed services business will also drive efficiencies and automation in the areas of incident reporting and monitoring, in addition to providing greater visibility over contract profitability, with reporting and time sheeting enhancements being made. Next, I wanted to talk briefly to working capital. Data#3 has an efficient working capital cycle, driven by favorable trade terms with our suppliers, which often extend beyond our customer payment terms.
We continue to be self-funded, with a strong cash position, and have therefore benefited from increases in the cash rate this year, unlike a number of other businesses. The seasonal peaks in sales towards the end of Q2 and Q4 each year are reflected in the inflated cash positions shown at the end of June and December. However, most of the funds held are committed to trade payables. The black line in the graph shown reflects our net working capital position, which you can see is pretty consistent across the last five financial years. Excuse me. We have a very low default rate on customer payments and continue to work on reducing our days sales outstanding to pre-pandemic levels. All inventory is committed to customer contracts and is closely managed to ensure timely delivery and invoicing.
Instances of part shipments from suppliers can hold up, excuse me, can hold up this process, but these have returned to more BAU levels. The next slide contains explanatory notes on the types of revenue and expenses that sit in the various lines of our consolidated income statement. Its main purpose is to show the allocation of employee costs between cost of goods sold and internal employee costs. The employee and contractor costs directly uncharged includes all payments to contractors working on services contracts. The internal employee cost line represents all costs for Data#3 employees, including both billable and non-billable staff for all lines of business, including services. This line includes salaries and wages and all staff on costs such as super, insurance, leave, commissions, training, among others.
I've included some other explanatory notes on the other expense line items that you can read at your leisure to give you some insight around which lines our various overheads sit in. Finally, I'd like to provide you with an update on the company's ESG strategy. ESG is integral to our company strategy, and we have a cross-functional ESG committee working hard on making our company better for the world. Not only because it's the right thing to do, but increasingly, it's what is expected by our key stakeholders, such as our customers and shareholders. We released our 2023 ESG report to the ASX on the 24th of October, and while we're proud of our achievements to date, we recognize that there's a lot of opportunities for improvement and greater impact.
We also released our Reflect Reconciliation Action Plan during the year, and we'll continue to build on this during FY 2024 through our RAP working group. We're on our third year of greenhouse gas emissions data collection and measurement to determine our Scope 1, 2, and 3 baseline emissions, of which electricity and internal IT equipment are the biggest Scope 2 and 3 contributors. From here, we'll formulate more detailed plans for achieving carbon neutrality by 2032 and commence formulating our net zero strategy alongside our external partners. Lastly, we're working towards integrated climate reporting for FY 2025, but we'll be taking a staged approach by making incremental improvements and additional climate-related disclosures for FY 2024 within the four pillars of the Taskforce on Climate-related Financial Disclosures, or the TCFD, which are governance, strategy, risk management, and metrics and targets. Thank you for your attention.
I'll now hand over to Graham Robinson, our Chief Technology Officer, to talk AI.
Thanks, Cherie. Good morning, everyone. I think we're going to change gears here pretty, pretty quickly. It's great to see a whole bunch of faces, fresh faces that I didn't get to meet last year, so thank you very much for joining us today. For those of you I haven't had a chance to meet yet, my name is Graham Robinson. I'm the Chief Technology Officer at Data#3. I've been with Data#3 for about 16 years, and I do have a background in tech, in business, and in law, but I'm an engineer. So just understand what you're going to get today. If I wasn't here, I'd probably be designing something, building something, coding something, or if I was in my really happy place, I'd be down by the harbor playing my bagpipes, but that's probably a different presentation.
My focus at Data#3 really revolves around working closely with our global partners, understanding how the technology that they're evolving, technology they're bringing to market, how that's going to impact our customers, and then really working across our organization to build the services, the lifecycle services, the professional services, consulting services, managed services, adoption services, how we add value to those technologies, and really how we connect the technologies that we sell to the outcomes our customers are looking for. And AI, of course, is one of those significant technologies which offers great opportunities for our customers, for us, and for the, the market more broadly. Being a technology company, we tend to talk about the digital milestones.
We talk about computing, we talk about the internet, but these are just part of a history punctuated by disruptive innovations, innovations that have fundamentally changed industry, creating new technology and also enhancing the technologies that we already have. Generative AI is doing exactly that. We are at the beginning of a new era, an era in which AI is already testing at about 155 IQ, putting it smarter than about 98% of the population. We're in an era where, in online dating experiments, 40% of the participants can't tell whether they're talking to an AI or to another human being. We're at the start of a new era where an AI doctor in healthcare trials was found to be 7 x more empathetic than a real doctor. It's not really surprising, though, can I?
Generative AI technology is evolving and being adopted at an astonishing rate. In fact, if I was to give you a really recent example, just last night, the CEO of OpenAI came out and said they've actually had to stop accepting new ChatGPT paid subscriptions because they can't meet the demand. We're talking about unprecedented rate of acceleration for a technology that is evolving faster than anything I've ever seen. So the question becomes: How does generative AI show up in the industry broadly for our customers and the solutions that we continue to develop? Last year, I outlined five trends that we saw as influencing our customers' investments. Over the last year, these trends have continued, but now they're being influenced by generative AI.
It's one of the many things driving these different trends and driving the changes that we see across our customers and within Data#3. From a talent perspective, as digital transformation continues to reshape business, almost every company is now a digital company, which means they need access to digital skills. The Digital Pulse paper, for those of you who saw it this week, the Digital Pulse paper from the Australian Computer Society actually highlighted the growing challenges in access to digital skills. Not just now, but the impact that generative AI is having on the workforce and will continue to have on the workforce as we look out to 2030.
Our investments in building lifecycle services, those consulting, professional, managed, and adoption services that I talked to earlier and that Brad talked to in early today, continue to be key to our ability to deliver outcomes for our customers. From a security perspective, again, this week has been a week of announcements. So the Australian Signals Directorate, earlier this week, came out, for those of you who saw the news probably yesterday morning, really released its Australian... Sorry, its annual cybercrime report, highlighting the fact that cybersecurity incidents had increased by about 23% compared with the same period last year. So security was already one of the most challenging and complex environments for our customers to deal with.
The introduction of generative AI is driving an increase in the veracity of those cyberattacks, but also in the capabilities of the technology of the cybersecurity defense solutions that we provide for our customers. I'm going to leave security here because we've got Richard Dornhart very shortly presenting, and he will take you through how we're helping our customers address the complexity and rapidly changing security environment, so I don't want to double up on content. Automation remains a key focus for our customers. Now, it doesn't matter whether it's to address skills shortages, cost constraints, or even to meet the expectations of end users. We expect everything on instantly now, and automation is actually is how we are addressing that.
But AI, or generative AI more specifically, is extending our existing services and our solutions, enabling us to combine generative AI with data and analytics. And that means that we can automate and optimize the way our customers' business processes work and optimize the way that our companies deliver value to their customers. From our global partners, such as Microsoft, Cisco, and HP, and they're just three of a long list of great partners that we work with, AI is already being embedded into those automation solution or automatic or automated or automation-enabled solutions, I should say. And that's enabling us to increase the value that we are able to deliver for our customers now. In the decentralized space, I won't spend too much time on this but decentralized continues. The decentralization trend continues, both physically and virtually.
Distributed teams power our businesses today, really supported by those hybrid work solutions that we continue to provide, such as, I believe, either Brad or Laurence mentioned. Brad mentioned Microsoft Teams as one of a number of examples. But our customers also rely on distributed applications across distributed clouds. These are being powered by the hybrid cloud and multi-cloud solutions that we continue to work with them on and ensure they're delivered securely for their environment. And the digital experience, again, a really cool space. But we continue to see amazing advances in augmented or digitally augmented experiences. And I'm talking about the HP, the Apple, Meta, all with amazing video technologies. Now, I'm talking virtual reality, augmented reality, mixed reality. These are all in that now even made more impactful by generative AI.
Not just in the physical devices like you may have seen Meta doing with Ray-Ban and their Stories line, but also into the virtual meta metaverse space, where our education customers are looking for new ways to train or new ways to help students learn and understand the world. But as AI drives and accelerates all these trends, it's valuable for us to ask: What's driving AI? And the crazy thing is, we've actually we know the answer because we've been watching it since the mid-1960s. Many of you will be familiar with Moore's Law, the observation that our computing power that we have access to is doubling about every two years. It's commonly shown on a graph like this, and I've mapped out a few significant points in our industry's history, just as points in time.
The purple circle you're looking at on the left was about the mainstream shift to broadband internet back around 2000. The green dot is where Google released its "All You Need is Attention," basically the pivotal research paper that drove the introduction of generative AI in 2017. And then the blue dot on the right is this year. It includes OpenAI's release of GPT-4, the most advanced model that OpenAI have to date. Moore's Law is typically, and pretty much always shown as a graph like this, as a logarithmic graph. It shows a steady, slow, upwards increase in computational power. But those of you who appreciate numbers and graphs, as many of you do, know that logarithmic graphs hide linear trends.
So you look back at Moore's Law and look back at the graph, and looking at the same data from our industry on a linear chart paints a very different picture. Over the 17 years leading up to the Google paper, we added about 20 billion transistors to each processor. That sounds like a lot because it is. But then in the last six years, we've added about another 880 billion transistors to each processor. So what we're talking about is a 44 x increase in the number of transistors in 1/3 of the time. So Google changed the world with their research paper, and that started a lot of the generative AI conversations. But the exponential growth in computing power is actually what's made it all possible. So if artificial intel...
So artificial intelligence is absolutely benefiting from this explosion in computing power, in an exponential growth, in an exponential world. But so are about half a dozen other incredible and disruptive technologies. And now AI, in turn, is interacting with these technologies. AI is being applied to these technologies, which is not just about adoption of AI technology itself, but it's making all the rest of the technology easier to adopt. It's accelerating the adoption of these technologies, and our customers are already attempting to apply these technologies to create outcomes never before possible. We're talking about compound exponential interactions in a way that we've never seen before, creating opportunities for our customers to create new services for their customers and to drive their business in new ways.
What this means for us, in the operational technology line that Brad presented earlier, the operational technology line continues to grow in size, scale, and complexity. That, as it does, the foundational solutions that we provide to our customers become even more critical. Our global partners are already embedding generative AI into their into our foundational solutions, enabling us to better support our customers, and our customers' operational technologies. Really maximize the benefit that they get from their investments. To give you some practical examples, again, I'm just not gonna go too deep into this, but I really want to showcase how generative AI is showing up in what we sell today, and the solutions that we take to market, and how it's already transforming what we are doing on a day-to-day basis for our customers. I'm gonna keep it really simple.
I've broken our solutions down into three layers: a computing layer at the bottom, an AI layer in the middle, and an application layer at the top. I'm happy to take questions and answers on this a little bit later. But really, what you'll see is that many of our customers are already using cloud-based productivity platforms like Microsoft 365, M365, that Brad mentioned earlier. By embedding generative AI technology in that middle layer, Microsoft has extended the productivity solutions with a set of AI assistant capabilities called Copilots. Now, that enables our customers to dramatically increase their employee productivity.
One of the opportunities for Data#3 is not just to provide access to them through licenses and subscriptions and all, but rather the lifecycle services to help our customers understand how to structure their data, how to protect their data, how to create responsible usage of AI policies inside their organization, and then train their people on how to use these emerging tool sets. In the multi-cloud world, and many of our customers, particularly our government ones, there's a real need to deploy generative AI services into their own data centers to align with data security and data sovereignty policies. As we start to deploy AI within customers' own environments, AI is driving... It's not about the AI itself, but AI is driving a significant refresh of the server storage and network infrastructure that underpins it, in order to actually deliver business applications and the AI models.
From a security perspective, our partners are already embedding AI directly into their cloud and on-premises applications. Generative AI, it's not an add-on. It's being embedded directly into what we're already selling, and customers are looking at bringing forward their refresh cycles to take advantage of the new capabilities that generative AI is creating. And from a device perspective, end-user devices, laptops, tablets. In the end-user space, we see a step change, or with the end-user technology space, we actually see a step change, causing a deviation from traditional procurement conversations. What I mean by that is for many years, customers have had two conversations: one about the hardware and one about the software.
But the demands created by generative AI technology into Windows Copilot and the work that Microsoft is doing to increase the productivity applications on the devices itself is having a ripple effect through the actual hardware layer itself, causing the conversations we're having with customers to be not just about software, not just about hardware, but software, hardware, and the applications all at the same time. How can they deliver a better outcome for their people through that process? In each case, the opportunity being created by the introduction of generative AI technology isn't just about a software upgrade. It's also commonly requiring an upgrade to the underlying infrastructure, too.
I know Laurence and I share a love of the gold rush conversation and picks and shovels, and the importance of providing our customer in a gold rush world, looking at the value of AI and everyone rushing towards getting value out of it, the importance of providing picks and shovels to our customers and being there to support them as they look to actually deploy generative AI technology into their organizations. AI is a new type of gold. It requires a new type of pick and a new type of shovel, and that's absolutely what we're focused on building for our customers. With that, I'd like to hand back to Laurence for some questions and answers. Back to you, sir.
Thanks very much. That concludes the first session of presenters. We'll now open up for Q&A. I'd like to bring any of the presenters from the first session up to the front. The way we're gonna do Q&A is we don't have a roving mic. If you could put your hand up and ask any question, I'm gonna repeat it for the purpose of the recording. And then we'll do our best to answer the question. We've got Nick Harris putting up his hand as a starting point.
Thank you very much for the presentation. Just a question for Graham, really, on the AI picks and shovels side of things. Just so it's clearer in my head, what I interpreted you saying was, you don't necessarily make a lot of money out of the AI itself, but you make money out of businesses needing to basically upgrade all their infrastructure so that they can feed all the data into the AI agents. Is that the right way to think about it?
Let me repeat the question. It's along the lines of the picks and shovels analogy regarding AI, and essentially, it's where do we make our money, Graham?
It's a great question. So you are heading in the right direction. The common misconception is that AI is just about something like, you know, ChatGPT, and it's a website. The reality is, in order to successfully deploy AI into an organization to get value out of it, our customers are investing in the software layer, the actual applications that use AI. They're investing in access to those AI services, so that would be such things like the OpenAI stack on Microsoft Azure. So you can access the OpenAI technology through Azure, and we provide that to our customers. But then there's also many cases, there's actual physical hardware and infrastructure refreshes that our customers need to look at. When it's not cloud-based, it may be on- premise or on a particular device.
So again, it goes back to data sovereignty and the consideration of: How do I deploy? What do I need to physically run the AI technology if I'm not running it? So yes, Microsoft might be running it for many services, but what we're going to find is, we're not living in a homogeneous world, where it's all just one AI technology. There will be AI on many different devices, and those devices, in many cases, will need to be upgraded and refreshed in order to run the AI technology. And with all that, then you get our lifecycle services, how we actually help them structure, secure, and manage the data and the data policies to get the value out of it from AI. So it's the entire stack, top to toe.
Would anyone else like to add anything to the question?
No, he did a good job.
Yeah, you did a reasonable job.
I've got a question.
Let's, um-
Can I ask the question?
Sure.
Did Graham cover off the differences between AI and generative AI sufficiently for you? Would anyone like to explain it? Okay, if anyone's got any questions, I can ask you over morning tea.
Probably just following on, I'll add my two cents' worth as well, following on from Graham. The other point is, and as Brad made the point, and in fact, Mark made the point as well, that our overall market is growing, and the IT market is growing faster than we've ever seen before. AI is fueling a lot of that growth, and we see being a leader in the current market, in the IT market, and having that market growing is... It's more than just the picks and shovels and the solutions that we're providing. The overall market, the overall pie is growing. The last point is, as Cherie mentioned, we have an opportunity to make our business more efficient as well.
That's the other point of AI from an internal perspective, in making ourselves more productive, which we are currently doing. Yes?
Hi. Yeah.
Ed.
Ed, from Jarden.
Mornings.
To follow on from the AI picks and shovels comment, I understand that you are going to benefit across a variety of different solutions, but can you just give some details about Copilot? And is there any sort of, color you can provide on the, the revenue model there and the actual, like, how you, how you're going to make money out of that, with the rebates difference, the rest of the portfolio, because it's a newer product?
Okay. All right. Thank you. Thank you for the question. I'll just look to repeat that. Another AI-related question, specifically around Microsoft and Copilot, and really the... How do we what is it looking like in terms of monetizing that and monetizing that opportunity? So what's the current thinking on that? Brad, how would you like to have a go?
Let's, let's ask the question again to Steve, maybe when he comes in, from Microsoft: What's the opportunity for partners?
Sure.
But to answer your question, Ed, it's absolutely for certain the opportunity for us is particularly around services. Our consulting business, in terms of making sure that our customers' data is ready to be able to handle this tool that's coming over and looking at their data, the security aspects, all of that. The platforms piece, picks and shovels, is really the platforms piece. So for us, it's not going to be so much in getting a margin or a channel incentive from the vendor for the software. It's going to be around everything associated with it and the pull-through of all the technology solutions that we provide around it.
Great. Thanks.
Okay. Anyone else like to add anything? Another question. We'll start here.
Ben Jones, JP Morgan. I mean, just touching on a point you just made on the use of AI internally, I mean, there's been a lot made about AI products coming to market and use of AI-enabled products. But, I mean, how material do you think a benefit you will see from the use of AI on your cost base?
Let me just repeat the question. And thank you very much for hosting us today. The question is, what, how material is the impact of AI from a productivity and from a our existing cost base? And what are we currently seeing, and what do we expect to probably see going forward? Cherie, would you like to answer that one?
I can start.
Yeah.
You can supplement. So I think the short answer is that it'll be probably a slower burn than what we would all like it to be. But I think the initial estimates of Copilot, in particular, are that it'll help with about 30% productivity gains. Is that correct?
Right.
Yep, yep. So we're starting to see some benefits, but it's still early days for Data#3 internally. I guess we'll see over the next couple of years what happens with our internal cost ratio. But I think it'll be steady improvements.
Was the question more generally or specific to Data#3?
Specific.
Yeah, yeah. So there will be some further examples in the people section that I'm presenting on behalf of Tash a little later. Cherie is absolutely right in terms of percentage, but it's all potential. So we're just like any other customer, we're currently looking at the technology and creating the use cases for the technology. Some use cases will create incredible benefits and others, not so. So it's a matter of working through those use cases. And Data#3 is only 1,400 people.
You take organizations that have tens of thousands of people and massive amounts of data, like in the financial industry, for example, and you'll see that the benefits can be massive, depending on the use case that it's applied to. So it's a bit of a how long is a piece of string? So, question to answer. But with the right use cases, it can provide benefit across all operations, really, not just customer-facing or research areas.
Uh, yes?
Wei Sim , Jefferies. Two questions. One is for Cherie, which is, the graph that you put up on the sort of spending and the, the tenure. I'd be keen to understand, what is the average tenure of, customers currently and, you know, what we're doing in order to, I guess, increase the tenure with Data#3.
Okay, that's the question is related to the customer spending. Is that that-
Yes, spending and average tenure.
The average tenure as well. One thing that we will be doing is in our customer section. I'm pretty sure our Chief Customer Officer will be in an ideal position to answer that question. But from Cherie's point of view, do you want to offer any?
Yeah, I think that, I mean, the question's around how do we make our customers sticky and long-tenured. So Brad spoke to some of our competitive advantages, and as Laurence said, John will touch on a lot of that content later this morning. I think in terms of our average tenure, it's not usually a metric that we disclose or actively measure. But yeah, it's all around creating that long-term relationship and cross-selling across all services and solutions is really, I guess, the crux of the answer. Anything else to add?
Yeah. Well, can you give the example of-
Mm-hmm.
one of our customers that you and I saw?
Oh, yeah. There's, yeah, there's one customer which Brad mentioned earlier in terms of the first customer, first Microsoft customer that Data#3 had 29 years ago, that's that is still with us. It's a large customer. The Department of Education in Queensland, it was a AUD 20 million contract at the time, so it was very material as far as Data#3 was concerned at that stage. And every three years, we've managed to succeed in winning competitive tendering on that particular piece of business. So to give example in terms of the stickiness of customers, there's one.
Thank you.
Yeah, yeah.
I would-
Yes. Yes, sir.
TNE is in the... obviously have some connections in terms of generative AI with someone like TNE. That's the first question. What about someone like Breville? Does this open an opportunity for Breville and for you to work together, as an example, of a device manufacturer?
Okay, so the question was generative AI. Is there any relationship between Technology One and ourselves? Is that correct?
One question.
That's one. And then, and then secondly-
The opposite end of the scale. So here comes the device manufacturer. Maybe you don't work with them, but where's the overlap with you? Maybe it's an urban council that's got lots of widgets out there, uses AI, generative AI, to be smart about what works.
Mm-hmm. So it's really where the opportunity is across a range of different sectors, including the likes of manufacturers such as Breville or local government organizations.
Yeah.
Okay. There's a wide-ranging question there for you, Brad.
I'd love to. You're lucky. The opportunity is really for everybody. So, when I need to service my Breville coffee maker, I now get out my app, and I press the button, and it tells me what to do and what buttons to press, and it cleans the coffee for me. So behind that is a whole bunch of data. They now know that, you know, Brad just cleaned his coffee. And they might hit me up with, you know, next I'll get an email saying: "Hey, do you want to buy some more coffee?" So there's a lot of data behind all of that. That's more data and analytics.
On the generative AI, which is more content creation based on data, then Breville could use the generative AI technologies to help them create their next marketing strategy, their next business plan for a particular product or getting into a new market. And ask the generative AI tool questions that their team might take six, 12, 18 months to generally gather to be able to build a business case. With generative AI, it's going to accelerate that business decision-making substantially.
Yeah.
Yeah, I hope that answers the question.
Yeah, that's fine. And what about TNE ?
Oh, TNE. Sorry, you just want to repeat the-
Technology One. Business-
Yeah
From live to new live. I'm not sure where you're working.
Well, so Technology One is like any other application provider. So they're an application provider, and we provide the infrastructure and the connectivity that Technology One applications run on. So again, for them, generative AI will be an opportunity for them to streamline operations and also potentially to look at the likes of the Copilot applications and how they integrate into their systems and work with their data and help their customers. So as you said, I think you mentioned the local councils before.
Yeah.
Creating the use cases, it's again, it's fairly new, but creating each of those use cases for how Technology One's applications can benefit the customer and the data that their applications create, and then putting AI across that. So yeah, absolutely.
Okay. Thank you. So moving across-
Just going back to the question on the customer lifestyle, and perhaps you could go back to the slide, that showed the revenue through time, over 12 years or so. It probably surprised you a bit in what it showed. We've only got deceleration, then it swooned a bit and then accelerated a bit. Perhaps you could talk about, what drives that, with, obviously the initial revenue contribution and then a dip and then, then a re-acceleration around recontracting, initial contracting and additional services.
Yeah.
Is that my revenue-
Yeah
-type slide? Yeah. I think what actually drove that was there was-
Sure.
Yeah.
We go back.
There was an anomaly in the underlying data where there was just a single really significant customer. I think it was year seven where you saw that dip. So that's why I added in that linear trend line, so that you can see it without that. Forward or back? Sorry. That one there? Yeah. Yes, I think you're probably better placed to look at the dotted line in terms of trend. It does flatten slightly across that seven to eight-year period and then ramps up again in terms of spend over time.
That's on average across all your customers?
Yeah, it is. Yeah. Yeah.
One customer can skew the data that much?
Yeah, there was a pretty significant customer in that year. I think it was year seven. Yeah, that did actually skew that. So yeah, I did look into that when I put that together because I was equally surprised. Yeah.
Thank you.
Okay.
We have a-
Yeah, Nick Weal from Evans and Partners. How do we think about the margins on AI products? Is it still more a transactional software sale margin, or do customers need ongoing support and managed services? If that's the case, what does that actually look like? Types.
Thanks, Nick, for the question. The question is regarding AI and the associated gross margin. What does that look like, and what do we expect it to look like coming through? So, Brad?
I think we had a similar question before around the opportunity. The opportunity is really going to be around the services is the short answer, as opposed to the licensing transaction. However, Graham also mentioned that AI is being built into many of the products and solutions that our vendors are bringing to market. So we take Microsoft Teams, for example. Microsoft Teams is a premium SKU within the Microsoft Office suite, and we transact that. And because it's a premium SKU, there's better margins in that, in around those products. So it it's really aligning with the vendors' go-to-market and the vendors' strategies, whether it's collaboration in AI within Teams or some of the security solutions.
So it's really up to us to make sure that we've got the right ability to execute on that market opportunity. But it is both. It's both. The transactional, there'll still be opportunity there, but it's more so in the services.
Okay, thanks.
Okay. Yes, sir.
Matthews, Team invest. With all this new era, potential growth, very exciting. Is the strategy just to concentrate the company's business in Australia? And if you were to move elsewhere, can you extend your relationships with Microsoft, et cetera, to other geographic areas?
Thank you. Thank you for the question. I'll repeat the question. In terms of the exciting growth in our industry, are we... Have we got any plans to extend outside of Australia? And, and if so, what does that mean in terms of our major vendors, such as Microsoft? Brad.
Thanks, Laurence. The answer is there are no current plans. But it's never off the table. We've decided over the years, and I can just talk about our experience over the years, is that there's still so much more to do in Australia. So whenever we look at where we can invest, there's still so much more that we can do in Canberra or Victoria or Perth around different technologies and different solutions. So that's what we have decided to do to date. And we still think that some of the statistics that we saw earlier in terms of the growth of the IT industry in Australia is strong. Stronger than it has been in previous years.
So while we could expand into Asia, we've chosen not to. If we were to do that, it's more than likely that we would get good support from our vendors, you would think, because we've been successful in market. We've actually been asked by various vendors over the years to do that, because they don't have necessarily the partner community that they need overseas and throughout Asia as well. But we've found that the best return on our resources and to provide a return to our stakeholders is to continue to invest in Australia.
Okay. Thanks very much. And also, in the second session, again, John Tan, our Chief Customer Officer, will actually be talking about the total addressable market as well, and where our concentration is. So, watch this space.
Can I just ask one last question? So Ed from Jarden again. So one for Cherie, just when you talked about... Well, maybe I'll ask you, or else you can allocate it out. But when you were talking to the managed services before and the end of year for being the most profitable, if you look at your current portfolio managed services agreements, what's the average tenure there?
Okay, question is, regarding managed services, which are typically five-year contracts, back to Cherie's presentation, and, the most profitable would be around year four. Then what is the-
What's the average tenure of your current contracts?
Yeah, what's the average tenure of current contracts? Cherie?
So, short answer, don't know. But as you know, we built that managed services business up from pretty much ground zero over the last two, three years. Correct me-
Revisited, yeah.
Revis- Yeah. So we sort of, you know, did a re-correction of the business model and a reset a couple of years ago. So if I was gonna have a stab, I'd probably say we're probably partway through the four-year on average, but it also depends on what we've brought on, you know, year to date, FY 2024, obviously, we're continuing to grow that business substantially. So it'll be a blended tenure. So I'll give you that vague answer.
That's all right. Yeah. Thank you.
I'd also say with the contracts with the enterprise managed services part of our business, they're typically five-year agreements, as we've stated before, usually with options to extend either a further three or five years. So over time, that average tenure is likely to be five plus. Yes. Yes, sir?
Howard Coleman here, Teami nvest. I was fascinated to hear the comments about it being a slow burn. As you can see by my gray hairs, I'm old enough to remember when the Internet was first being spoken of in the same way that AI and generative AI are now being spoken about. And Data#3 is old enough to have been around at the time. So you were around at the very beginnings of when people were starting to say: Can we somehow use this new technology called the Internet? And most of us didn't even yet have email, and that ended up being a very slow burn. That's, if I'm correct, but correct me if I'm wrong, you're still getting part of that slow burn, helping your business grow or our business grow, I'm sure, over all these years.
Does that suggest to you that there's a runway in AI and generative AI to be working with customers for maybe another 26 years, as there has been since the Internet was in its infancy?
Okay, great question. So let me see if I can repeat that as well. So the question is regarding the longevity of AI and its impact on the market and our customers, and the relationship, for instance, with when the Internet was first released, and as we both described, and we were both around at the same time, because we've both got gray hair.
Yep.
The opportunity at the time was a slow burn with the Internet and still is currently, as far as Data#3 is concerned. Will AI follow the same path? Is that-
Yeah
... reasonable?
Expect it to. I mean, I-
What do-
Sure.
Yeah. What, what do we expect? I think it's a great one for us, as Chief Technology Officer.
I have a great photo from a 2000 paper that's sort of basically where everyone looks like the Internet is just a fad. Everyone's given up on the Internet. There was a time when there was absolutely a time when we didn't understand the implications of the Internet, but I don't think... I think that we've learned a lot and, you know, this is very different. I don't see-- It is a slow burn at the organizational level for us to understand exactly what the right use cases are, how we deploy generative AI and how we get the benefits to our organization.
I think there's a very, very long tail of impacts across the entire industry and across the entire world as to the way generative AI will be applied to every industry. But to my point in the presentation, it's not just generative AI. We're dealing with a whole bunch of new technologies that will also be influenced by generative AI. So yes, we are still the beneficiaries of the digital milestone that we look at from a computing perspective and from an internet perspective. We've had everything built on that. We've had cloud, we've had video, mobile technologies, everything has been built upon the internet that came out around about the year 2000. Now, the question is: what are we gonna build with generative AI? And that is one I can't answer yet, but it is absolutely a huge opportunity for all of us, both inside Data#3 and for our customers. And we're, and we're, we're actively looking, looking on a daily basis to understand what can we do. So short answer is, yeah, this is, this is what we call a slow burn as an industry, but every organization needs to take a measured approach to how they apply it to themselves to get the right results.
Okay, thank you. I think that we're just gonna wind up the questions right now. We're gonna have an opportunity of coming back after the next session with some more questions with a longer Q&A session. So, in the interest of time, we'll take a break. How long is the break? 15? 20-minute break, and then we'll come back, and we'll have our Chief Customer Officer, John Tan, who'll be answering some of the questions that we had as well. So, thanks very much. Okay, let's kick things off for the second session. Thanks very much. Everyone taking their seats. That's great. I'll hand over to John Tan, our Chief Customer Officer. He'll be talking all things, guess what? Customers.
Yes. Thank you, Laurence. Welcome back to session two, and I see we've got a darkened room now, so let's get into it. All right, so I'm John Tan, Chief Customer Officer, and I am responsible for the sales performance of the business and also a heavy focus on our customers and our customer experience strategy as well. 16 years at Data#3. I've held various management roles, including running our maintenance practice, which has turned into a maintenance and annuity practice, our infrastructure solutions business, and now I look after our infrastructure and software business and our overall sales performance. So I'm gonna be covering how we bring this all together and how we win in market. Covering more on our industry, our customers, our vendors, and the overall sales strategy for Data#3.
Let's look at the tech market. We talked a bit about this this morning, and some observations. This information is from Gartner, and I've really pulled out the areas in which we play the most. So from a data center and devices perspective, fairly flat growth expected over the next few years. So flat across the data center and devices, but they are very much markets that we play in and we have plenty of success in. So our ability to get market share above that growth is absolutely still there. Okay, so you're gonna have to excuse me as I juggle a few different screens here. But certainly opportunity in services and software.
Services growing 7.1% and software 13.3%. As I said, regardless of these numbers, I think Brad mentioned around AUD 120 billion total tech market, AUD 62 billion from an Australian enterprise market or B2B perspective, so plenty of opportunity out there. If we look at it by a segment size, we typically play in a customer segment of around 300 above. The customer growth throughout those markets remains strong, and there's also continued room for growth from a market share perspective. Obviously, you can see it really skews upwards as we get towards that over 5,000-seat organization, and we've got a good spread of customers across all segments, particularly 250 and above.
So in terms of the sales environment, there's plenty of opportunity, especially in the areas that we focus on, continuing to have strong market opportunity and in security, AI, software, and as a service. So with the market continuing to move, we expect more growth, and we're positioned to take more advantage. As Graham mentioned, our investments in these areas will only strengthen our capabilities and our go-to-market. So large opportunities remain despite the market growing and fluctuating across the different areas. We don't have the backorder position that we have had in previous years, and the public sector also remains strong and engaged across our many years of engagement with those agencies as well, and large corporate and enterprise remain solid.
We also see a shift in buying models, and traditionally, we have services really well in terms of product transactions, a focus on the solution sale, and also managed services as well. And what is emerging is an increased focus on marketplace via Azure, AWS, customers consuming cloud, and then leveraging the cloud spend to consume further purchases of IT and technology via their cloud spend with those hyperscalers. We also see the shift towards buying models of as a service and consumption models. And last year, I talked about that shift and our customer base, or the customers are really choosing to consume in that way as they're consuming in their own lives as well.
So how we've addressed that is really to drive the right sales motions across our business to ensure that we can have consumption-based conversations with customers and really take them on a journey of consuming subscriptions and enterprise agreements, to really take advantage of shifts in technology and the move towards software-based technologies as well.... We've talked a lot about what's going on externally and how we connect our customer conversations with our solutions. I think there's four key areas from a business perspective. Enabling a multi-cloud approach for customers, that is continuing. A strong focus on moving between public cloud, private cloud, on-premise.
Providing hybrid work solutions, we've talked about that this morning as well, working from home, working from the office, having conversations in the office with someone at home at the same time, and all of the solutions that support that. The shift towards buy models and also the rapid adoption of AI. What that means is we're connecting our solutions to those business problems, and these are some of the solutions that we're carrying to market today, around public cloud, private cloud, the services around them. Also collaboration, devices, security, connectivity, the buy models I've just talked to, and then generative AI, enterprise AI, the data management and security aspects of that as well. From a customer perspective, I think there were some questions before about the profile of our customers.
There's over 2000 customer groups that we deal with, and beneath those customer groups are many customers. You can see the mix of our customers today still heavily around government, federal government, state government, local, as well as, corporate or commercial customers as well. We've got strong diversification across many verticals, in particular, education, a strong hybrid approach to learning, smart campus approach, coming into those learning environments, and they are continuing to invest as well. Healthcare has always been a focus for us, for both public and private health. With an aging population, we see further growth in private and public, and a need to have a strong technology footprint and a secure environment as well.
Construction, you saw the video at the start, covering Queen's Wharf, but there are a whole bunch of other construction projects, including Sydney Football Stadium, Melbourne Cricket Club and other customers really moving towards a stronger technology footprint, as well as being buoyed by the 2032 Olympics in Brisbane or Southeast Queensland as well. Mining has always been a strong vertical for us, particularly out of WA and Queensland, and we see that experience dealing with mining customers and those shifts really creating ongoing opportunity for us. In addition to our existing customers, we also have a strong focus on, excuse me, business development and acquiring new customers to the mix and bringing them into the Data#3 experience as well.
So there's a large customer base that we have an existing footprint, but we also see opportunity within those customers to cross-sell and up-sell them through managed services, further services, areas that we haven't done business with them previously. So with a large customer footprint, a lot of our focus is on ensuring that we are going deeper and broader and wider with customers and having the right skills to have different conversations and evolving conversations with our customers. A key part of our sales strategy or our sales approach is delighting our customers through a customer success approach, and Brad talked about our customer success lifecycle. This is something we've been building on for the last five years, and we're really evolving this strategy to focus further on customer outcomes.
We're building processes, and we're also embedding platforms to really drive the customer conversation around this infinity loop. So if you look at each phase of this infinity loop, our customer success approach, it is carefully applied to each of our solutions to ensure that we understand what journeys our customers could take, what is best practice, what is most meaningful to them, throughout the lifecycle of a solution. And we do this on a per solution basis, not a per customer basis, but really to ensure that every solution they engage with us on has a meaningful, outcome-driven engagement that delivers outcomes for them, but also delivers outcomes that mean that they can consume more technology, engage further with us, and really get more value over time. So what we've been doing is really focusing further on adoption and consumption.
Having different skills within our business to really drive beyond that procure phase, a great technology implementation, but also great adoption of the solutions that we're selling. And great adoption means that they will consume, they'll get business value, and they'll consume more over time and have a great experience, more likely to renew and more likely to go around this solution, process with us throughout the lifecycle so that they can repeat it with confidence on future projects. We're also measuring it by customer health. And customer health score, a customer health score is an aggregation of all the interactions that we're having with our customers. We did talk about this last year as well, because it is allowing us to get visibility of how impactful we are throughout the lifecycle.
So if we're, if we're engaging well throughout every stage of our customer success approach, then we'll see the health score improve. And the health score could be a combination or is a combination of many things, including, successfully completed, adoption engagements, win-loss ratio, are they paying their bills, what's their CSAT? All of those all those factors combined so we can get a sense of how are we engaging and what does that mean for our customers. We're starting to see some strong metrics, based on the last 4-5 years of doing this across a growing number of customers. So we've selectively looked at customers that could really benefit from this, and we're starting to see some fantastic metrics.
Some of those metrics include an improvement in opportunity volume and opportunity value, and we are also seeing an increase in win rates and also an improvement in gross margin as well. So the increase in win rates ensures that... Well, is a result of us being closer to a customer. Them going through a lifecycle engagement with us means that we're more connected to them, we understand what's driving them, what outcomes they're seeking, and we're obviously embedded to really position ourselves to together build future solutions with our customers. So we've taken this approach across many, many customers, and that number of accounts or engagements is growing, and we should only see further continuous improvement in terms of these metrics across our customer base. A big part of moving towards that is the digitization piece.
So we're digitizing ourselves as well so that we're more organized. We, we're building best practice into our processes so that we can turn up predictably in a meaningful way across many, many more customers. Face-to-face engagement may not be for every customer, so we're also segmenting our customers to ensure that some of our largest customers get face-to-face engagement through this process, and then other customers, it may be more a digital engagement to give us scale and efficiency as well. One customer that I'd like to take you through is Griffith, Griffith University in Queensland. Griffith University, established in 1971, is one of Australia's leading universities, ranked in the top 2% of universities worldwide, and over 50,000 students across 130 countries.
So, has been a customer for some time and we did actually sell them a Cisco Enterprise Agreement in 2019, and from that point, we then assigned a customer success manager. In addition to implementing technology, the CSM was engaged, really embedded into the business to understand the business further and really engage more closely with the customer around those technology outcomes. We had support from our vendors, both Microsoft and Cisco, and we've got a track record of supporting and understanding their environment. So we've really engaged from design through to implementation, supporting the EA, and we're then awarded the network transformation project recently. So we're currently going through that project implementation, but through that engagement, you can see that that's then led into a smart campus proof of concept.
A smart campus proof of concept is really grabbing all the data from the network and from their environment and turning it into meaningful customer experience metrics and insights so that they can really tune their environment to their students and drive the right student and research and business engagement with their end users based on data and based on what type of campus experience they wanna drive for the future. As you can see, it's. Well, this also involves technology and wireless access points and switches. It is about business outcomes. It's not about selling more wireless access points and switches and licenses. It's about engagement with the customer around outcomes and how it impacts their future as well. Through that, they will buy technology, but we're obviously engaged around those business outcomes.
You can see the quote from Mark Keenan, supporting the way that we've engaged from a business perspective that then leads to those business outcomes. Okay. In terms of the team and our sales and go-to-market, our sales team is a differentiator. I believe we are the best team in the market and there's some reasons for that. We certainly have the scale and capability, and we do have salespeople all the way around Australia, supported by a sales operations team and a customer success team. We also have a growing number of specialists, and our sales specialists are in the areas of security, networking, et cetera. Areas that are of focus for us and where we've invested, where we need deeper specialization to really engage further with customers.
The sales channel is a face-to-face sales channel, but increasingly, we see our customers wanting more of a digital channel. We do have a D3 Commerce platform and a Lifecycle 360 platform that are ways of engaging our customers so they can procure and engage with us from a digital perspective as well, and we see that increasing into the future, where our digital footprint needs to be more engaging, bigger and wider to really capture a larger part of the market and also engage with our customers over time. I'm gonna talk about that in a second. Okay. And in terms of customer and tenure, we've got a mix of long-term customers.
We've talked about, you know, some of those customers being large government customers and some of them being corporates as well, but the opportunity is absolutely to cross-sell and upsell into those customers even further, given our footprint. As I mentioned, our digital platforms, my vision for a digital future is to even go further with these platforms. Our D3 Commerce and Lifecycle 360 platforms are coming together to really drive a broader, more meaningful engagement with customers. They are connected, or will be connected, with our vendors, and through that connection, our customers can really purchase, engage, visualize, and optimize their environments by seeing their entire environments through a digital platform. So whether they've got assets that are aging or moving or need to be optimized, they can see that environment.
They're already doing this with us, with us today, but we're connecting this platform even further for a greater digital future. And what that means is more customers, more engagement, more meaningful engagement, and we apply those customer success methodologies into the platform. So it's not only dependent on our face-to-face engagement, we're digitizing the great customer success approach we have via our platform. So some of the reasons we're winning in market, I think, are down to the people that we have in the team. We've got a great sales team with a great culture. We've got people that understand business. They understand technology as well, and they really engage with customers across a number of different verticals, depending on their skill set.
We do partner with great partners, and shortly, you'll be, you'll be meeting Steven Worrall from Microsoft as a great example of one of our key partners, and how we partner is key to how we turn up. It's supported by our culture. It's also supported by the completeness of our services approach from a lifecycle perspective as well. And when we bring all these elements together, we are really successful with customers, but we're also really successful with partners and really successful with each other as well. So these are some of the reasons that when we approach the market, when we respond to a tender, when we partner, and we get the right solutions for our customers, we are successful. Another thing that's shifting is our vendor strategies. Our vendors are shifting their strategies, as are we.
And so, Brad and Graham both talked about our key partners, and we've got a long list of partners beyond these four. But when we think about our core vendors and where we're really focused, we build vendor strategies with them together so that we know how we're focused and how they're focused and how that complements or works with them to deliver great solutions for our customers. What is happening is there's a shift, and we've talked about a shift towards lifecycle. We've talked about how our customers are consuming technology differently from a software and as-a-service perspective. What comes with that is also incentives, and focus shifting throughout the lifecycle as well. So we've always had focus on selling and procuring products and services for our customers and implementing them as well.
But we are now, and with our partners, really moving towards this era of moving towards more adoption, more consumption, and an increased focus on managed services, operating and optimizing environments as well. Okay, with that, I'd like to move onwards to Steven Worrall, who is the Managing Director of Microsoft Australia and New Zealand. Been with Microsoft since 2017, and Microsoft has more than 10,000 partners in Australia and New Zealand as well, and we are one of them. So with that, Steven, over to you.
I appreciate it very much. Thank you. Thank you. Do I need that?
Yeah.
Thank you. So
You'll need that, and-
So I think I'll just use the laptop. I've been given a couple of instructions already in terms of some of the technical difficulties that we've had so far this morning. So what are the odds for a Data#3 investor presentation that we would have a technology issue? Laurence has assured me that it's not Windows. Is that right, Laurence?
PowerPoint.
We'll have to check that later. But look, John, thank you so much for the introduction. I appreciate that, that very much. Also very interested to see your model there in terms of how you're thinking about managing your relationship with organizations like Microsoft. Be very happy to offer some thoughts on our perspective of that model as we get into the dialogue, but I think I have just a few slides that I wanted to share. And, Laurence, I'm going to take questions as we go or at the end of my segment.
End of your segment.
Very good, and then I might have to exit stage right, if that's okay. So, if I can then jump to the first one here. I do need to use the clicker. There you go. So look, I had just a couple of messages to share. The first and most important is the relationship we have with Data#3. It's fundamental to the operation of our business here in this part of the world. Data#3, as you'll know, have been in operation for many years. We've been a partner together since 1994. In fact, that was the time Laurence has just explained to me that he joined the organization. And back then, I personally was working at another firm, a company you might have heard of called IBM.
So I've known Laurence for more than, well, coming up to 29 years. And it's a long-term partnership, both personally and professionally, that I think, well, the results speak for themselves in terms of what Data#3 has achieved over so many years. This summary just gives you a sort of perspective of the things that we think about when we look at our partner community. I won't go into all of these, but suffice to say, as I said, Data#3 are fundamental to the operation of our business. They go to the heart of how we operate our business. Our business model is built on relationship with our partners and the role that they play-...
The crucial role that they play in managing our client engagement and, of course, helping our clients to get the value from their investment in the Microsoft portfolio. A couple of things here that stand out that I think are really important. You'll see at the top right, I'm going to say the Copilot Early Access Program, Data#3 are one of the small number of participants in that program. I'm sure there may be some questions on all things Copilot as we get into that segment of our conversation. But suffice to say, this is a big part of the future of our business here and, of course, around the world. And Data#3, as they are in every part of our business, are at the forefront of how we think about bringing those new services to market.
You also see the number of, individual exam certifications and assessments. That goes to the heart of a fundamental reality of the partner community, which is it's, it's the partners that have the deepest skill and the deepest capability that inevitably, allow, our clients to get the best value from their investment with us. And that's another reason why we so value the relationship with Data#3, because an organization that's operated so long and so successfully in this market has clearly understood that, that issue, over many, many years.
And whether it is with other partners, it's certainly true in our relationship that Laurence and Brad and the team invest deeply in ensuring that they bring the very best capability to the market because they know how fundamental that is to ensuring that they are the chosen partner for our clients more often than not. So that's a little summary of the Data#3 relationship. Look, and then a couple of slides maybe to talk about a topic that is of deep interest to all of us, which is this new wave of artificial intelligence that we see sweeping across the sector. We have been fundamental, I think, to much of what has happened over the last 12 months, but we know that this is a market segment that is evolving rapidly, and there's so much to play out.
When you zoom back for a moment and think about some of the technology revolutions that we have participated in or that have played out over hundreds of years, in fact, over the last thousand years, you'll see the impact that that technology has had on GDP and indeed productivity more broadly. We think this moment, as early as it is in this wave of artificial intelligence, we think this moment is as profound as some of the others that you see listed here. Whether that's the advent of mobile computing, as you see there, the evolution of cloud computing, and of course, going all the way back to the printing press back in the fourteen hundreds.
We feel that, over time, this period will prove to be as important as some of those evolutions and the use of technology. At the same time that's happening, and this might go to add further weight to that first thought, we're seeing a fundamental shift in the business model that is at the heart of how my industry operates. Cloud computing, which has been popularized now for, let's say, a decade, was all about providing access to compute services wherever you were, and by sharing the capital load associated with the delivery of that service, thereby democratizing access to services for the largest and, of course, the smallest organizations to leverage. Under the covers, of course, that meant organizations like Microsoft and other hyperscale providers had to use their balance sheets to provide that infrastructure.
This moment with AI is turbocharging that transition. And just last year, we saw for the first time in our history, the crossover between capital investment and our investment in R&D. For an organization like Microsoft, that's a pretty telling moment because it points to the future, where that capital expenditure line is only likely to continue to accelerate very dramatically. In fact, last year, we spent something in the order of $34 billion in capital across our operation. We were running at about four to five to $6 billion a quarter, and we're now running closer to $10 billion.
Gives you a sense of something very, very, deep that is happening in our business, and that is the compute capacity required to provide these AI services is unlike anything that we've seen before. And the demand that we see in the market for these services, the signal we are seeing here in Australia and elsewhere, tells us that, we need to build out, that infrastructure and build it out rapidly. That's why we're seeing such, interesting, developments in the AI market, NVIDIA in particular. You're seeing a massive demand for that organization, given the scarcity of GPUs in the market.
And of course, while that particular issue won't last going forward, what you do see there is a massive realization across the sector more broadly, that investing in this infrastructure is vital to ensure that you are able to provide these services for your customers into the market more broadly. And so, this is a very fundamental shift in our business that is capturing a lot of attention in our financial briefings. I do want to talk briefly about the use of this technology, because it's one thing for the industry to be excited about the potential, and indeed, many people who are using these AI services are genuinely excited about how this will transform the way in which they live their lives and how they conduct their work.
But of course, there's so much more that needs to be done in terms of the permission and the social license that goes along with the use of artificial intelligence. We are participating very directly in those conversations, as you might expect, because we feel that's fundamental to the relationship we have with our customer base. It's also part of the partnership we have with Data#3, because for us to continue to develop and build our partnership, trust in the services that we provide and trust in the services that Data#3 and Microsoft provide together, is at the heart of our value proposition. I think it was true for Data#3 back when it was formed, it's certainly true today, and it's fundamental to how we think about the evolution and use of these new services.
Interestingly, we're seeing different models evolve, state-based approaches in some countries, more a rules-based approach in the European Union. Just recently, the President of the United States signed an executive order to lead to a more of a market-based approach, which I expect Australia will fall into that sort of category. Our Minister Husic was in the U.K. just recently engaging on these conversations. So there's a lot to play out here in Australia in terms of how this technology will be used. And of course, the many, many applications of AI that we have yet to see. While we are bringing many first-party services to market, we are really just at the beginning of this wave.
It's an exciting moment because I think it means that, for our business, we see great opportunity to continue to add value and be relevant in the sectors of the market that we serve. But also talks to the future of Data#3, because this wave is as consequential, and is as significant as any I have seen in my 32 years in the industry. And working side by side with an organization like Data#3, we fully expect to bring the full value of these services to our customers here in this part of the world. Maybe the last thought then... Yeah, I wasn't sure about the image, but anyway, here it is.
Look, you may have seen in the press recently, we made an investment announcement with the Prime Minister in relation to building out data center infrastructure here in Australia. This is important because it goes to the heart of how do we contribute as Microsoft to the growth of the local economy? How do we think about our role here, 40 years here of operation in Australia?
We feel, we think very deeply about the role that we play and how we can continue to play a constructive role in helping Australian industry leverage the very best technology so that we can evolve the shape of our economy, so that we can address the productivity challenges that we have, and so that ultimately we can participate in creating roles, opportunities, economic opportunities for the next generation that have been as positive as the ones that we have enjoyed or I have enjoyed during my working career. The announcement also included the intention to continue our work with skilling programs to ensure that more Australians have access to the digital skills that they need to participate in the digital economy.
More than 300,000 Australians will be able to leverage some of those assets. And we're working closely with government, state government, and federal government to continue to develop new pathways for the development of new curriculum and new ways of helping people to pick up skills, including the New South Wales government, their announcement of the Institute of Applied Technology out at Meadowbank , a purpose-built facility, working with TAFE to create new pathways for many, many, many more Australians to get access to the skills that will be necessary for them to continue their career journey or indeed to get a job in the technical and digital sector. And so we're very proud to make this announcement.
We also made an announcement in relation to our participation, working side by side with the Australian Signals Directorate to create the Microsoft ASD Cyber Shield, which will contribute directly to establishing a more safe and secure environment for all of us to live within. If you saw the ASD announcement yesterday as the latest cyber threat report for the nation, you'll know this is a pressing and urgent issue for all of us. That's probably more than enough from me. Maybe I'll stop there, Laurence, and I'm very happy to take questions or comments from anyone.
Yeah.
And you can tell me when I should get the hook to get off.
Questions, if you could repeat the question.
I'll be happy to. We have one over here. Hello.
Hi, Ed Woodgate from Jarden. I've got two questions. So first, everyone's interested in Copilot. I tried to ask a question about it before, but it was redirected to you. So can you just talk to the revenue model that the partner might expect to receive? And then I guess also the interest is like, would you expect the... If the partner sells a license of Copilot, would they expect to get more value than, say, the previous portfolio because it's a newer solution?
Yep.
And then the second question is, I guess over the course of your career, have you seen the reliance on the channel increase? Because we've heard them say other vendors, and that's certainly been the case, but it'd be interesting to see if you've seen this at Microsoft.
So for the record, Ed's asked two questions about the commercial model for our partners in relation to the use of Copilot, and then, secondly, an observation or a question about partners' dependence on technology firms-
Sorry.
in the market.
Vendor's reliance.
Vendor's reliance-
On the partner.
On the partner. So my reliance on Laurence and the team, for example. Got it. So first and foremost, on Copilot, we haven't finalized and formalized all of the commercial arrangements in relation to how partners will participate in the sale and then implementation of Copilot. Suffice to say, what you have seen in the market, Ed, is that we're looking. We have an early adopter program, which is underway in the country. We have early availability also here, and what we're seeing is those early lessons being applied within organizations to determine how they will move forward. And so, some of the commercial details are yet to be finalized. But what we can say is the...
And you'll see this reported by the financial press when some of these services first came to market, the profound impact this is likely to have on our business. The fact that Microsoft 365 Copilot, I'll just use that one because there are several copilots, is intended to be priced at about $30 per user per month. And when you think about the number of Microsoft 365 users we have on the planet, about 400 million, you can make your own assessments of what that might do if a decent share of them took up the Copilot service. Of course, there's Copilots in security, GitHub, and other aspects of our portfolio. To your question, I fully expect partners to participate fully in the execution of those services into the market.
Because it perhaps comes to your second question. The vast majority of our revenue goes through partners, as a business model. I talked a bit about some of the changing aspects of our business model. What's not changed is that dependence, and dependence is probably the wrong word. It's a, it's partnership is the right way to describe it, because Data#3 and other partners here in the country provide an essential service to connect our clients with the value delivery of the capability that we provide. As you might imagine, as a manufacturer and designer of these services, given the ubiquity with which these services are now seen in the market, it becomes very difficult for us to play that role, and we have it in the past, and we have no intention of in the future.
And we also know that it becomes very client-specific, industry applications, the value add that goes around the services, because rarely is it all about Microsoft. It's about an ecosystem of capability. And it's organizations like Data#3, who have that deep understanding of the client, their industry, the circumstances that provide that necessary translation. So, the answer to your second question is that dependence and partnership will continue to deepen and strengthen, I think, as a consequence of these announcements, because the value delivery will be significant for our clients, and you might expect that for our partners, they should participate in the rewards that come along with that outcome.
Thanks.
Is that helpful?
Yeah, very much.
Good on you. We've got one here and then one there.
Ben Jones, JP Morgan. Just a quick question on how important is speed to market when you're thinking about the having the compute capacity available for AI infrastructure? And then as a follow-on to that, do you feel like your current commitments are sufficient to meet the demand you're seeing?
Yeah. So Ben's question was in relation to the speed to market and having the compute capacity to meet the market. It's an excellent question because that's the deliberations that Amy Hood, our CFO, and Satya, and the leadership team make regularly in terms of how quickly do we need to deploy our balance sheet. You can see the rapid acceleration from the earlier slide, Ben, that would suggest that we've made some very clear decisions about how quickly we need to act. Equally also, this is a very important moment for the industry and for Microsoft, because through our partnership with OpenAI, we invested $10 billion in OpenAI last year, as you all know. And now we're bringing those services and embedding them in Microsoft capability.
The demand signal that we're seeing is sufficient to suggest we have to move very, very rapidly. Even so far as in the last 12 hours, we've made a public announcement that we are investing in our own silicon and our own hardware capability because of the shortages we're seeing of GPU capacity. So this is a very different time, right? Microsoft has historically not made those sorts of decisions, perhaps because we haven't needed to. But here we are now investing in compute capacity silicon to ensure that we can keep up with the demand that we see. So very significant. Are we making enough of an investment here?
I can tell you that the announcement that I made three weeks ago is not the sum total of the investments that we're making in the nation. You should expect to see further announcements from us over time. Then there's one over here.
Ross Barrows from Wilsons Advisory. It's kind of an extension of that question, to be honest, but it feels like people think I'm so slow and people think that Microsoft are moving very quickly and that the infrastructure is probably slower to visibility as we do it.
Yeah.
So it's probably an extension on that question of just how, I guess, you and your team balance the infrastructure and software demands, and then maybe on the infrastructure side in particular, you know, the self-build as opposed to relying on third parties to help you get that capacity.
Yeah. So, it was Ross? Yeah, the question from Ross was, similar in terms of how we're managing the, the dynamic between the software capability, which seems to be rushing ahead, and then the compute capacity that's required to ensure that you can deliver that, that service. Of course, Ross, a lot of it comes down to the actual take-up of the service, and so our first party strategy to bring Microsoft Copilot to market, Security Copilot, GitHub Copilot, is very deliberate. We want to get this technology in the hands of users as rapidly as possible. And the demand signal that we've seen so far has obviously led us to make some of the decisions that have got us to this point.
We're being very thoughtful about that signal in regards to what we see 3, 6, 9 months out, so that we can continue to monitor and align the delivery of capability through the software, but also then ensure we have the compute capacity where it's needed. As you might imagine, for these services, you quickly get into sovereignty issues as well, and the need for clients to be comforted that particular data doesn't leave offshore, for argument's sake. So you're not just talking about mega data centers in certain locations in the world, you're also thinking about the geographic footprint, which again, is why the announcement we made, we think, is so consequential because it's part of the U.S.-Australia partnership that we would logically want to invest here, side by side, as alliance partners.
We think that's a massive vote of confidence in the Australian economy and the opportunity for us. But to your point, getting that balance right is obviously something that we look at very, very carefully. And as I said a couple of times, we're at the beginning, and so, as we see take-up, as we see the use of these services, as we see the business cases that start to flow from the use of these capabilities, I expect that will then inform even further how we think about that, that timeline. It's also, again, why, you know, we're, we're working on this topic in a multiple, multiple ways. So we're working with NVIDIA. We're working with our other chip partners. We're now providing GPU capacity from NVIDIA as a third-party service. We're providing OpenAI on our platform.
We're working with the ecosystem. There are multiple routes to market as well, and so that also is part of the calculation that we have to undertake to work out how do we have the right capacity at the right place at the right time that it's needed. Thanks.
Nick Harris from Morgans. Just trying to understand how you prioritize what stands out overnight. OpenAI saying they've had to sort of park new customers due to supply constraints. And obviously, you know, earlier this year, Microsoft's kind of built data centers here, but had some challenges with the council getting the size that you wanted. So, you know, AUD 5 billion seems like a lot of money. What are you spending it on? Data centers, security operations centers, servers, and how can you get the government to help you actually get that to market in a reasonable time frame?
Mm. What was your name?
Nick Harris.
Is that Nick Harris? A question about the process to ensure that we build the capability here in Australia and obviously working side by side with government to deliver-
Actually get it done.
Actually get it done. Yeah. It's a really important question, and again, part of the reason why we've... The announcement is obviously important, but it hopefully goes to the heart of what really matters, which is the close collaboration that we work on and invest on or invest in with the government. These sorts of investments require collaboration across federal and state government. They also go to the heart of a shared vision of what we think these investments can do for the country, and so we observe every protocol and every approval process, as you might expect, in any jurisdiction across the country. But the investment here, of course, is a great signal to the Australian government about our intentions.
It talks to a shared belief in what this will mean for the country and how we can hopefully stimulate further economic activity, especially at this time. When we talk about productivity as a nation, this is a really important topic. Creation of high-paying jobs for more Australians. These are really core topics for all of us as members of the community. So, working side by side with state and federal governments, we feel confident that we can achieve the things that need to be achieved. Again, being mindful of the fact that we're early in this wave and I'm sure there'll be changes and adjustments as we go forward. The great news, I think, is that these sorts of investments haven't been announced in every country around the world, quite obviously.
We're very proud working here in Australia to bring those investments to our country.
Sorry, is the bulk of that capital to servers or hardware?
Yeah, but the capital. And so how is the capital being used? It's a combination of land. So we, part of this announcement is nine new physical locations. To this point, we have partnered with third parties to provide data center capacity, and we still do, and we'll do going forward. But this announcement specifically was about the nine new data centers that we will own and operate. So it's the land, it's the construction of the data, the physical data center. It's obviously all the servers and technology that goes into those data centers, and it's the 300 people that typically operate a medium-sized data center on a 24/7 basis. So it's all of the above. So there's a site out at Kemps Creek, so it's a beautiful, beautiful spot out west.
I'd love to take you out there someday if you'd like to come out, Nick. You, I'm sure you'd enjoy it.
Thanks.
There you go. Maybe one more question, Laurence?
Yeah, mate. Yeah, Nick Weal, Evans & Partners. I have a question about functionality, what Copilot 365 actually does.
Right.
Let's say February next year, Data#3 brings out their half-yearly report. Can I say to myself, "Copilot, can you put the numbers into my spreadsheet?" Is the functionality, you know, that sophisticated?
Well, the functionality that we're talking about in Copilot, Microsoft Copilot, is essentially the ChatGPT capability. And so, obviously, ChatGPT is available publicly, and any information that you ingest in that engine is then available publicly. One of the simplest ways to describe the value and benefit, of course, is that in Microsoft 365, then it is constrained within your organization with your security protocols in place. And so, yes, you will be able to ingest data, whether it's an annual report, financial data, and other, to create summaries and other perspectives of that information that hopefully allow you to consume it and work with it in a more effective way. Sounds like we need to get you onto the Copilot program.
We got it.
That's the intent. So, I'm gonna finish. I just want to say finally, I wanted to acknowledge Laurence, a friend and a colleague, someone who's achieved a great deal in the market over a very long period of time. I think transitioning late February, early March. So congratulations to you, Laurence, for all that you've achieved at Data#3, and I wish the Data#3 management team all the very best with the transition. Brad, I know you'll do a fantastic job. Thanks very much.
So, yes, unfortunately, Tash isn't able to join us today at a fairly late notice. So you have the pleasure of me talking about our people, which is excellent. So, we wouldn't. There's no way that we can possibly be successful without our people and our development in our people. And Steve mentioned, yeah, a number of the things that we're about to cover in terms of investment in the right skills. So, let's go on a little bit of a people journey for a few slides before I hand over to Richard to talk about our security operations.
Our people costs are AUD 200 million annually, which accounts for 87% of our expenditure. 87% of our expenditure, you want to make sure that you've got a pretty good people strategy in terms of looking after and encouraging your people. Substantial investment underscores our commitment in nurturing our greatest assets, our workforce. The investments we make in our people are instrumental in our mission to not only attract our top tier talent, but also to empower and support our ongoing development of our people. As an employer of choice and a certified great place to work, our values of HEART, which I mentioned earlier, which is honesty, excellence, agility, respect, and teamwork, have long underpinned our exceptional culture. This culture has yielded remarkable outcomes, including consistently high levels of people satisfaction.
lower than an industry average turnover and an average tenure of 5.7 years, and a work environment where we can harness the power of people and technology to deliver a digital future for our customers. So let's talk a little bit about our key people, opportunities, and risks. Even with these strong fundamentals in place, we're not immune to the risks posed by macroeconomic trends. We are, however, well-positioned to seize the opportunities that these trends present. We see key people, opportunities, and risks for our business as being talent shortages, skills for the future, diversity and inclusion, and a technology-enabled innovation and automation. Let's look more closely at each of these opportunities and risks. The labor market continues to be employee-centric. Means due to low unemployment and migration and further exacerbated by industry skills shortages and key technologies.
Financial pressures due to the rise of interest rates and cost of living have driven wage inflation, resulting in the need to ensure our employee value proposition is clearly articulated and driving our strong reputation in employee brand. Because without that employee brand, how are we going to attract the right staff and the right talent that we need in our business? Tactical improvements, such as the enhancement of our careers page and social media platforms, along with the release of our ESG report, support our brand in promoting compelling elements of what we offer prospective candidates. Data#3 is a key differentiator in having our own embedded recruitment and sourcing division called People Solutions. This gives us the firepower and expertise of a recruitment agency.
People Solutions provides us with an in-depth understanding of tech of the technical skills and competencies our customers need to achieve the full value from their technology investments. People Solutions source talent for Data#3 and many of our customers, so for ourselves and our customer environments, including contracting permanent and permanent recruitment and staff augmentation. These services give us the flexibility to increase our tech workforce quickly and effectively for the project work and staff changes. We are committed to forging accessible pathways for individuals at the onset of their careers and in the ICT industry.
We have fostered connections with collaborations with the education sector, including universities and TAFEs, and Steve mentioned, TAFE, previously, where he needs about 300 people, as well as further investments underneath the Cyber Shield investment that they also discussed. We have initiated numerous trainee opportunities aimed at supporting early career students, women in technology, and First Nations people, thereby enriching and diversifying our talent pool. Our strategy to source across multiple platforms saw an increase in applications from LinkedIn. We saw a 280% increase in applications from LinkedIn. LinkedIn, a Microsoft company, of course. And Data#3 career site, 215% increase from our Data#3 career site on data3.com, with, however, a decrease from SEEK placements.
This highlights the importance of using and improving these platforms as key sourcing streams. Employee referrals resulting in placements increased by more than 20%, so that's good, and the use of external agency recruitment decreased, which resulted in some cost savings. Talent remains scarce in critical areas, and there is fierce competition for top-skilled professionals. For example, specialized vendor technologies such as cybersecurity and specialist sales roles. Our opportunity lies in attracting and retaining top talent across the board. A stable and highly skilled workforce is critical for our profitability and also for achieving our strategic objectives. Let's talk about the skills for the future. As part of our FY 2024 strategic plan, we've established an operational action focused on people development. The outcome of which will be a three-year workforce plan, charting the course for developing and maintaining critical skills needed to future-proof our business.
The Tech Council predicts Australia is on track to have 1.2 million tech workers by 2030, with the current workforce at 935,000. So it's a pretty big increase over the next few years. This is due to strong growth, with an 8% increase in technical jobs, double the growth of all other jobs in the past year. Tech is the seventh largest employing industry in Australia. We have strong relationships with our vendor partners, as you've just seen, which provide access to exciting technologies. Steve just covered off that we're one of the first partners to internally deploy M365 Copilot, and we also already have service offerings for Copilot in Microsoft's marketplace.
So we've already worked with Microsoft to upskill our staff, which in turn assists us to support our customers in developing their AI strategies and adopt the benefits of AI across their organizations. These exciting and leading-edge innovative solutions and technologies give Data#3 the edge to attract, to attract and retain talent. Who wouldn't want to work on M365 and Copilot? It's the newest, latest thing out there. Come join Data#3. All right. On learning, our ongoing learning ensures our workforce stays agile and responsive at consistently meeting dynamic challenges. Beyond the significant amount of technical and vendor training our people undertake regularly, we have a robust learning and development program, which delivered over 10,000 hours of professional development, training, and coaching for our people in FY 2023. Innovation, diversity, and inclusion. Our culture is primed for innovation, and the era of AI is upon us.
Not only are we helping our customers, we are leveraging this technology internally. There's been a few questions asked about how Data#3 is leveraging this technology already today. A recent example is how we've utilized Microsoft's AI capability to remove the manual effort in managing our customer supply chain data. We can now automatically categorize nearly 2 million products, meaning more efficient and accurate quoting. You can imagine all the vendors that we have from Microsoft through to Cisco and others, and how many products we have in our catalogs that we have to manage and make meaningful for people to be able to quote them effectively.... More importantly, this provides a reallocation of human time and effort into more high-valued activities.
In doing so, we're not only increasing the operational efficiency of the business, we're also creating opportunities for our talented people to work on more innovative and high-value assignments. The productivity gains of using AI will potentially provide up to 30% greater output. We discussed this earlier. I think the percentage of the productivity will depend on the use case. Some will be a lot higher, some will be a lot lower. With increasing staff costs, which allows us to leverage our staff base and drive our internal cost ratio down. The opportunities for enhanced productivity, efficiencies, and cost savings are immense, and Data#3 is working to ensure we capitalize on these fully. Data#3 is a diverse workplace, with 28% of our workforce having English as their second language. Additionally, over 60% of our workforce have caring responsibilities.
Data#3 is dedicated to providing our people with the support they need to balance their personal and professional commitments. It's a core part of our culture and reputation as one of Data#3's leading employers. Data#3 became one of the first organizations in Australia to be accredited as a family-inclusive workplace. This accreditation not only endorses our commitment to fostering an inclusive culture, but it bolsters the support we need to provide all of our people with caring responsibilities. Inclusivity in our workplace leads to more innovative and creative teams, which fuels innovation and strengthens our competitive advantage. We're actively fostering a diverse culture and promote and promote inclusivity, collaboration, innovation, and supporting employees' well-being, essential for improving morale and productivity. Managing an intergenerational workforce is a challenge we actively embrace.
Different generations bring diversity and expectations, life experience, and worldviews, all of which we strive to accommodate through our core values. We have made significant strides in enhancing gender diversity within our workplace, with women representing 25% of our workforce, which is around 7% higher than the industry average. Succession planning continues to be a key focus for us all, and I can certainly vouch for that. This is evidenced in the recent succession plans with the new appointments across the board and senior management. These plans are buoyed by our strong talent and development programs. Workforce growth. We've seen a consistent increase in our headcount over the past five years, with a remarkable 14% growth in the last 12 months.
This growth has primarily been in our services business, fueled by the addition of several large, high-profile customers and a surge in demand across our comprehensive services portfolio. Our managed services have successfully commenced service delivery for new customers in finance, government, retail, and hospitality sectors. Our professional services business has managed and delivered major projects across construction, resourcing, and education. Resource levels across our business have grown in line with the increased growth and activity, but with potential for further operating leverage as we continue to grow the business with less incremental headcount growth. Our average tenure of 5.7 years underscores our wealth of experience, IP, and skilled talent. We're diversifying our talent pools with a mix of permanent, limited-term, casual, and offshore talent to navigate talent shortages effectively.
For eight consecutive years, Data#3 has been recognized as an employer of choice in HRD Magazine. In 2023, we have earned certification as a Great Place to Work. These external validations underscore our culture and employee experience, further positioning Data#3 as an attractive employer in the Australian IT market. This investment in our people has successfully reduced turnover, increased retention, enabled us to attract highly sought-after talent, and ensured the fulfillment of our strategic and operational goals. The key workforce data highlights that we have a solid foundation from a talent perspective, an exceptional employer brand, a highly engaged workforce, and values-led culture, which provides fertile ground for innovation and exceeding customers' expectations. These people-related opportunities are central to our future success.
Our $200 million investment and commitment to creating a diverse, inclusive, and adaptable workforce, underpinned by an innovative and innovation and commitment to continuous learning, upskilling, and. This differentiates us in the dynamic IT market and positions us for success. By addressing and investing in these key people opportunities, we empower ourselves to navigate challenges effectively, meeting strategic objectives, and driving profitability and sustainable growth. In doing this, we will ensure the future success of our people, partners, and customers. That's it for our people. Thank you. I will now hand over to Richard Dornhart, our Security Practice Manager, to provide an update on security.
Just to do a quick mic adjustment, because I'm not as tall as Steve was. So everybody can hear me okay? Awesome. Set. And the slides are working again, so we're all good. Awesome. Good. So my name is Richard Dornhart. I'm the Security Practice Manager at Data#3, and what that essentially means is I'm responsible for our go-to-market strategy and sales within our, the specialist organizations. Within one of the specialist businesses that's been spoken about. I also have the privilege of managing our security sales specialists and solution architects, and I'm actually a retread at Data#3. So what essentially that means is when I migrated to Australia in 2003, I started as a consultant at Data#3, implementing some of the technology that I'm gonna talk about today.
I left in 2006 and spent some time at a couple of different vendors. And 10 years ago, so I just clicked over 10 years. 10 years ago, I rejoined, and here I am in front of you today. So thank you very much. So I recently attended a presentation by one of our strategic vendors, Palo Alto Networks. And the presentation focused on the cybersecurity challenges that our customers are facing as they work through some of their top business objectives. And obviously, this isn't a full list, but it's. I just chose 3 for the purposes of this presentation. But what I really wanna do is I wanna drill into the digital initiatives that are connected to each one of these business outcomes.
These are things that CIOs or chief information officers are focused on in terms of ensuring that they can deliver the outcomes around these business initiatives. So they all represent significant opportunities for the organizations. However, not without introducing a level of complexity for the IT teams and the chief information security officer, which I'll narrow down to the CISO from here on out. So if we take a moment and maybe put ourselves in the shoes of a CISO, the typical. When you look at each of these initiatives, they see risk, and they have to think about how they mitigate that risk in an organization.
So they start thinking about the cybersecurity projects that they need to deliver each one of these initiatives, and you can see that the level of complexity that they have to deal with increases as they start thinking about the cybersecurity projects. And once they've started to think, once they've got that sorted, they have to then start thinking about or considering the tools each project will need from a solutions perspective, in order to ensure a successful outcome. And as you can see now, the complexity of the problem increases significantly when you start thinking about the tools. And it's at this point that the CISOs have identified the digital initiatives, they understand the different projects, and have identified the tools that they need to look at and contend with.
Then they have to start thinking about choosing solutions. You would think that that would be pretty simple, but it's not. I've been using this slide for a long time, and I'd have to say that cyber is probably one of the only industries where you can put a slide like this up. So many vendors and so many areas of focus for organizations. This slide, if I was to summarize what you can see here, because it is a bit of an eye chart, and there will be a test at the end of this, so, no. So there are 18 primary categories, as you can see on this slide.
If you start thinking about, if we look at the subcategories, there's 47 subcategories, and so each one of these solves a particular business challenge for an organization, and that's what our, you know, our security teams are thinking about. So if we couple this with the evolving threat landscape and the fact that more data is online than ever before, and the fact that organizations are looking, and I'm sure each and every one of you, there's probably significant cybersecurity controls in your organization, and you want that to be as frictionless as possible. You wanna know it's there, but you don't want it to impact how you interact with your customers and the information that you manage on a daily basis.
We're also all very highly mobile in terms of how we approach our day-to-day jobs, and we've had a lot of discussions here about cloud today, and just about everything we do today is in the cloud. And so that actually in it. So you get a sense of the complexity that cyber teams have to deal with, the challenges, but also the opportunities that cyber brings, because it'll gives us the opportunity to interact with our customers in ways that we never thought was possible and with our employees, and just ensure that we can do that securely. So in our practice, we have a saying, "Complexity is the enemy of security." And so our objective is to help our customers navigate the complexities of cybersecurity, ensuring their digital ecosystems and information remain secure.
While Data#3 is taking advantage of the market opportunity that cyber has. And so there's been a number of slides put up here today around the total addressable market. This is just one view of the total addressable market from a cybersecurity perspective. It's not a complete view. But it absolutely would come as no surprise to any of you in the room that the security solutions in the market, security solution market will continue to increase, and cyber will continue to be a focus for every organization. It's an area that we're continuing to see significant growth, and I wanna focus now on how we'll capitalize on that growth, and I'll start by talking about what we do in the practice.
So I guess in the spirit of remaining, trying to simplify things, we have worked to break down what we do into five succinct areas. And I should call out, because there's been so many conversations about AI, that AI is absolutely embedded in all of these areas, and we're continuing to see an increase in increases in how that AI is being utilized. But if I first focus on safeguarding our customers' identity, information, infrastructure, and applications, this is essentially where we're talking to our customers about the business challenges they have and the technical controls that they need to ensure that they can keep their employees and customers safe, and their information. So this is where we're doing a lot of our implementation, a lot of our architecture. Second is around proactively assisting our customers managing cybersecurity risk.
In the beginning, I think Brad mentioned Business Aspect, our consulting organization. They have immense capability in this space, and this is often how we lead the cybersecurity conversation, talking to our customers on how we manage governance, risk, and compliance. And I'll talk to some of the solutions and services that we talk, that we offer about that in, in some future slides. So managed services and SOC. So I think Steve mentioned some of the skills gaps. Cyber is absolutely not immune to this. I was at a presentation at Griffith University, and there's a number of different statistics on what the skills gap looks like for cyber, but it's significant, and we hear numbers upwards of 30,000 individuals.
So there's a lot of focus on helping our customers bridge that skills gap by providing managed services and SOC services to help them deliver on the security challenges and opportunities in their organization. The infinity loop or the racetrack, John spoke about it. I almost called him JT. That's what we call him around the office. But, John spoke about the infinity loop. It's come up many times. This is super important in terms of how we approach security with our customers, because oftentimes our customers are investing in significant technology platforms and organizations like Microsoft, Palo Alto Networks, or Cisco, and we wanna make sure that we work with them throughout the lifecycle of their requirements to ensure that they get as much ROI as they can out of the platforms that they're acquiring.
They utilize that technology, and they implement it to the. We utilize it through best practice approaches. And finally, through talking about cloud and helping our customers build strategies to migrate to cloud, to ensure that they do that securely. So what we've done is we've broken down how we approach this and how we work with our customers. We've broken down into four questions. I'm gonna take you through how we would talk to a customer about what we do. But you can see the four areas that we focus on within the practice: advisory, assurance, technology, and managed services. And we often start with: what does an organization need to plan for?
So we're helping them understand some of the security requirements around maybe a particular industry that they work in or their regulatory compliance frameworks. And this is primarily driven by our Business Aspect team. And this helps organizations ensure that they do have the appropriate level of compliance, et cetera. And you see, there's a number of offerings that we have there. One that's particularly of interest at the moment is information protection and governance. As we talk and think about AI, obviously information is a big part of that, and we wanna make sure that when we implement the AI, it's done securely. Second, we wanna help organizations answer the question: Am I protected?
Now, this is integral to any cybersecurity strategy because we wanna make sure that we understand where our gaps are through solutions and services like penetration testing and vulnerability assessment. That gives us a window into where there might be gaps that could be exploited. We also wanna make sure that we're helping our customers through education. So I suspect, and I hope everybody in this room has been through some form of cybersecurity education. Yeah, I would expect. And it's super important because we are the last line of defense. It's very easy to... You know, we implement a lot of technology but ensuring that our employees and our customers are educated in how to defend themselves against against potential malicious activity is very important. And we have a number of solutions and services there.
So the next thing is technology, and there's been a lot of conversations today about the technology we deliver, and we wanna help those organizations. So if you think about the business challenges or the tools that I talked about and the vendors, when we get down to the technology, there's a lot of options. And so we wanna make sure that our customers understand the technology that they need, and it typically boils down into these five areas that we focus into. And finally, something that we're working on maturing is helping our customers run the technology. So we do that through our professional services organization and our managed services business, and there's a number. And actually, a number of our partners, and there's a number of solution and services.
So what you see here is our offerings across the four pillars of the practice, and this is how we engage with our customers and talk about cybersecurity on a daily basis. Now, as you can imagine, we have a number of solutions, a number of tools that we provide. Now, if you remember back to the eye chart, this is where the test comes up. But now, remember the eye chart? So what we've done is we've looked at that; we've looked at those vendors, and we've built our own portfolio and our own platform. Each one of these vendors represents an opportunity for us to engage with our customers, to help them solve business challenges.
Some solve individual issues, like privileged access management, and others have a full range of capabilities, and that's really what you see between where the blue and the vendors that aren't in the blue, the differences there. So I could spend an hour talking to you just about the customers that we engage in, but I only have a couple of minutes left, according to Cass, who just told me that. So what I'm gonna do is I'm gonna focus in on two quick examples to talk about where we're helping our customers in delivering outcomes. And our first one, I'm gonna talk about the Western Australia government and a project that we, that we've jointly delivered over the last two years called Project Fortify.
Project Fortify was an initiative by the WA government, the Digital Government, or as they call it, DGov, and the Department of Finance, to deliver upon the goals of the WA cybersecurity policy. We've been assisting the government in deploying security services across three key domains. The first is, yeah, including security operations, Essential Eight compliance, which is a regulatory framework that's been put out by the federal government to help organizations ensure that they're secure, and also legacy systems and risk assessment. You can imagine there's a lot of old technology out there that needs to be protected. We can't always migrate as fast as we'd like to, therefore, we have to have solutions and services in place to protect legacy information. We've delivered these services across a number of different government agencies.
And the second one is a very recent one. It's the Melbourne Racing Club. So with cybercrime increasing in frequency and complexity, the Melbourne Racing Club sought a security partner to help improve visibility for vital round-the-clock support to support its IT team. Working with our SOC partner, SecurityHQ, we're delivering a 24/7, 365 visibility of security threats in the environment and acting as an extension of their team. And I have a quote from their general manager, and it says: "We lean on Data#3 and SecurityHQ to provide expert advice and help us align the technology stack in our environment going forward. Whether we're doing a refresh or other projects, it gives us more visibility and helps us enhance our cybersecurity posture." So this is just two examples of the outcomes that we deliver for our customers.
I'd like to end where I started, and I'd like to... Our objective is to help our customers navigate the complexities of cybersecurity, ensuring that their digital ecosystems and information stay secure. So that's it for me, and I'll pass it back to Laurence. Thank you very much.
Okay. Thanks very much, Richard. That now concludes the presentations for the second session. We'll now go straight into Q&A, so if I ask the presenters to come up to the front and round out on any questions that we've got on anything that you've seen or heard this morning.
Yeah, I was just going to ask, just following on from Ed's question earlier and, Cherie's slide, pre-managed services, and the fact that it's a relatively new, segment you're, you're targeting there, and just how, I guess, how confident or how speculative are the year three, four, five improvement in margins? And, do you have data internally that gives you the confidence that the, the longer-tenured customers you are actually getting better margins?
Okay. Thanks, Tom. The question on... Cherie, are you going to join us here? Because I think this is one for you. The question's around managed services, and the margin improvement as we'd see as we progressively work on, say, a five-year contract, and what's our confidence levels?
Sure. So yeah. It's top of mind because we're reviewing this regularly. So, I guess, ongoing, we're constantly reviewing our skill sets, tools, and efficiencies to be able to deliver on those contracts profitably. So, ongoing, ideally, we continue to increase profitability through automation and enhancing our systems and processes as well. So, I think there's a question asked earlier today as well about our contracts and renewals and how long we have our managed services customers. I think that we have the opportunity to...
That's what we're seeing at the moment, is that as our managed services customers on board with us, and then they add additional services, and then they have the confidence that we're managing their environment effectively, then they all roll forward with us as well, and that's the opportunity to continue to drive the margins as we add additional product lines or services to the, perhaps the initial core managed service that we offered. And you've probably got a bit of a taste from today about the breadth of our products and services that we do offer. We may start off with managing a customer's environment in one area, which provides a bit of profitability, and then continue to add additional services and offerings, which increases the profitability over time as well.
So does that answer your question?
More or less.
More or less?
Yeah.
Yes, we do have the data.
Okay. Thank you. Next question.
Yes. Hi, my name is Sophie. I think you mentioned offshoring some of your talent, and I was just wondering what proportion of your talent is outside of Australia and how you see that evolving over time?
Sure. So the question is, what proportion of our people and resources are onshore and offshore? Thank you. Over to you, Brad.
I presented the content, so I'll answer the question. So the... It's a fairly small percentage. It would probably be around the 5% mark. And we can vary that on a week-to-week basis, which provides us that flexibility. But the main goal is whether it's onshore or offshore, that we're providing the right services to the customers. Our customers are aware of where that service is coming from, what we're providing and what skill sets we're providing. John, you've got team members in that model. Is there anything you'd like to add to that one?
Yeah, well, it's a journey we started some years ago, and we've kind of grown that over time in a controlled way. Based on the roles that we see, we are the right roles to do offshore functioning from. And that's something we evaluate on a monthly basis, actually, so as a whole. So it's a very conscious process that we go through to select the right role and the right individuals as well.
Thank you. And probably one additional thing, as we've increased the number of offshore roles, we've increased the number of onshore, our people that we've hired, more so at a faster pace as well. So we've grown in both areas. Thank you.
You spoke earlier on about sort of driving profitability through a few sort of initiatives like cross-selling and the likes. I mean, can you just talk us through how the sales function is incentivized, and if you think there's gonna need to be any change in that incentive structure to drive certain behaviors?
Okay, so the question's around the sales incentives, and how is that driving increased profitability? Okay, so over to you, John.
Yeah.
You'll notice that I've got very good at passing the question over. It's actually part of the transition period, so I'm doing a handover.
Thanks for the question. It's an ongoing focus for us to get that mix of compensation incentive right, and as our strategy changes year on year, we need to incent our teams to focus on different things. And there's a number of ways we can do that through their standard compensation plans, as well as additional blitz incentives on certain things to really drive an uptick, depending on the maturity of that solution. So, as an example, our consumption offers for a period of time have attracted additional compensation to ensure that our teams get to upskill on the proposition and also are rewarded for doing so.
Because some of these agreements have been typically sold as a CapEx transaction, and they're moving to a five-year annuity model, and that requires a different compensation plan. So we'll do that for a period of time. And in addition to that, from a cross-sell, up-sell perspective, some of that is the right target setting. It actually gets down to mechanics of what the individual's territory looks like and what opportunity we see incremental to that within that territory. So we do not have a broad brush, it's done quite at a granular level per territory and based on the sales environment in that territory. Yeah, sorry.
Okay, thank you. Any other questions? Yes, sir.
Allen from Bridge Street. Are you guys seeing customers moving away from AWS and back to a sort of a hybrid solution?
Okay. So the question is, are we seeing any customers moving away from AWS, Amazon, and Microsoft-
Correct
... so public cloud into what? A more on-premises or a-
Well-
or a hybrid
Blend of, yeah.
... a hybrid environment. Okay.
Yeah.
Who would like to answer that? Fred.
So we are... We have seen some customers decide to move back from public cloud back to on-premise or in their own data centers. Really does depend on the workload. But the amount of customers that we've seen going the other way into public cloud is, you know, multiples of those that have come back on-prem. I think those that have come back on-prem are those that haven't necessarily considered all the factors before they've moved their workload up into the cloud to see whether it was appropriate for them in terms of the efficiencies or the connectivity and all the other aspects associated with that. So we have seen some instances, but it's not material.
Okay, thank you. Let me go to someone who hasn't asked a question. Nick, if you don't mind.
Yeah, it's Karl Craig from Canaccord Genuity. It's a question about cybersecurity. I guess, maybe first part is an assessment of the level of readiness of corporate Australia around cybersecurity. A lot of press reporting for the main five, six credit problems last year. Secondly, on the, on the view, preempting that you were going to say, "That's not very ready," the data you put up about the market size, do you expect that to grow, say, 2025, 2026, 2027? The third part is selling off to the side. Is it a different motion of selling from other products? It feels to me like that's a product that is sold rather than bought, like an insurance policy. So how do you plan to navigate that?
Okay, so three questions related to cybersecurity. One is the readiness, the corporate readiness. Second one is the-
Growth in the market.
Growth, do we expect the market to grow as a consequence of that? And the third one is the.
Sales.
Sales, yeah. So-
Might need to repeat this-
Richard
So I remember.
There we go.
All right. We'll start with the corporate readiness. I think every organization is focused on improvement, and that's probably the best way to put it. And cyber is constantly evolving, and so it's a moving target. And so really, what corporate America is focused on... Corporate America, I'm not in America, I'm in Australia. I do have an American, I do have an American, 20 years. I am an Australian also, if you can believe it. I have an Australian passport. Anyway, so it is a moving target. Second question was-
The TAM.
The TAM. I absolutely think that this will continue to... I think the total addressable market will continue to grow. You know, what that growth looks like, we'll have to just wait and see what it looks like in the future. If the past has anything to show, then the future looks positive. And thirdly?
The sales capability.
Yeah, sales capability in the context of-
Is it a different type of sale?
Oh, yeah.
So let's say, feels to me like this is like an insurance product-
Yeah
which you sold rather than bought, and so.
Look, it's interesting because some organizations—it's kind of. There are two answers to that. So some organizations have business problems or security issues that they know they need to fix, and they can get very specific about the solution and focus that they need to do to deliver that. Alternatively, and not everything is that simple, therefore, it can be very much a consultative sell, where we actually have to come in and help an organization understand the business challenge or the regulatory framework and how it specifically applies to their organization. So it can often be a very consultative sell.
All right. Thanks. Probably got time for a couple more questions.
Yeah. Hi, guys. Chen Wei, Morgan Stanley. I just a quick one in terms of your people and cost base. You ended FY 2023 with about 1,400 people. Just interested in how you guys see that people or staff base growing over the next three to five years. You know, do you guys have any initial thoughts on, you know, what how big that could get, yeah, over the medium term?
So, questions regarding our people and what's the near- and mid-term plans in terms of people growth. Have you presented on people, Brad? Over to you.
The answer will be it'll completely depend on the contracts that we win. So we did talk a bit earlier about our managed services contracts and some of the new contracts that we brought on board. So they're people heavy. For certain functions, it depends on the functions that the managed services functions and services that we're offering as well. So it's a really hard question to answer because depending on the service that we offer, will depend on the number of headcount that we need, and some services can be automated, and others can't. And then we can also look at the models that we've spoke about before, whether we onshore it or whether we offshore it, whether it's full-time resources, part-time resources.
So, not trying to dodge the question, but it will depend on the customer contracts that we win.
Yeah. As Brad said, it won't be linear. There's... Okay, let's move on to... What have we got? We've got competing interests. Ed and Nick, who's gonna go first with the last question?
Yeah, just a quick one. Nick here again. In October 2025, Microsoft stops supporting Windows 10, and they move to Windows 11. What does that? Is that a big catalyst for growth in your business? What do you think about that?
Yeah.
Uh, considering.
Yeah, that's so question is, Microsoft stopped supporting Windows 10, encouraging everyone to move to Windows 11. Is that a catalyst for growth in our business?
Yeah.
In fact, Graham Robinson, our Chief Technology Officer, has just gone to an event on Windows 11. So he's hosting an event with our customers on Windows 11, so it is a big driver.
Yeah. I'll
You.
I'll start off, and if anybody else would add to it. Yeah, I guess that's the perfect segue. We've got an event on right today. We've got about 70 or 80 customers understanding the value of moving to Windows 11. And it also, there's the value, but there's also just the support. At some point in time, you do need to move on. So for us, it's a multipronged opportunity. So there's the new devices, as well as the software and the services associated with that. And I can't remember whether it's this year or last year, because we've won a few lately, but the... So with Microsoft, Microsoft have two awards.
We won one—certainly last year, we won the Worldwide Surface Award, but we also won an award, which is their OEM partners. And a lot of that is around someone like HP, Lenovo, and the other vendors and the operating systems. So a lot of that growth is based on moving people to the newer platforms to be able. So they're easier to support and get the benefits of that.
Yeah.
So, yeah, great... It's a great opportunity.
Will you procure them from Dicker Data?
Will we procure them from Dicker Data?
Yeah.
We will procure some from Dicker Data. So we've got. So they're a supplier of ours, so not competitive in any way, shape, or form. We have direct relationships with the vendors for some of the volume commitments. And then we also have. We use distribution, whether it's Dicker Data or Ingram, others, for certain products. So yeah, we will buy some. We will probably use other disties and vendors as well.
Okay. I think that's, that's about it. I think we're out of time as far as Q&A is concerned, so I'll just wrap things up, and then we'll head to lunch, which is outside. First of all, I just wanted to make you aware that that we are recording, and as you're well aware, as we keep reusing the microphone. The recording will be available, hopefully tomorrow, on our investor website. So we'll put it up as soon as we're able to do that. As far as the summary of the morning's concerned, I said there were two objectives, and hopefully, we've achieved both. Well, the first one is getting a deeper dive into Data#3 and what we actually do.
Hopefully, it's given you a much clearer understanding of some of the high-level strategies that we've got and how it translates into more operational and what it actually means. So hopefully, you've got a better understanding than you did when you first walked into this room. And then secondly, also to provide you the opportunity to meet and see and hear from the executive management team, the wider executive management team. So hopefully, we've been able to achieve that. In addition to that, we were also fortunate to gain some of Steven Worrall's time as well, and hopefully, you found that of interest at a higher level in terms of what's actually driving the market and what's Microsoft's perspective as well. So hopefully, we've been able to achieve those objectives.
So from that point of view, I just wanted to thank you for your time, for your interest in DTL, and your support of DTL as well. So, thank you very much, and look forward to seeing you and having a chat next door over lunch. So thank you.