Good morning, everyone, and thanks for joining our December quarterly presentation. And as usual, we'll be going through the presentation and holding questions to the end. Everyone's ability to unmute their microphone is turned off at the moment, but I'll turn that on at the end once we're finished the presentation. So if you raise your hand, I'll be able to do that. You can ask questions through the Q&A function at any time, and we'll again hold those to the end and answer them at the end. So handing over to Tim to take us through the first part of the presentation.
Great. Thanks, Ben. And thanks, everyone, for your time and interest in Qoria. Yeah, it was a very big quarter for us. It was a record, adding AUD 12 million of recurring revenue in the quarter, obviously assisted by the FX, which has been very helpful. And I don't think there's signs of that going the other way. But let's go through it, so we ended the calendar year with supporting 25 million kids, seven million parents, 21,000 schools across 100 countries. On the key financial metrics, we had AUD 12 million recurring revenue. We ended the year at AUD 132 million of ARR. Our operating cash flow was positive again at AUD 4.2 million, free cash flow negative at AUD 1.1 million, which is just negative and over the half that we had free cash flow of close to AUD 7 million, which is a good result.
40 million of cash net down of minus 11%. So we're in a really good position for the back half of the financial year, which is the big selling season for this business. I'll talk more about that in a moment. Pleasingly, all segments are growing above industry. I've spent a lot of time analyzing our competitors and our industries, and we're in really good shape in all of the markets within which we operate. The Australian market had its biggest ever sales period. Again, I'll touch on that in a moment. Qustodio is a standout, and we're still not investing in that business like I'd like to. So as our business margins increase more in Qustodio, I think you'll see that growth increase beyond the 21%, which it is having at the moment. U.S., obviously, the key growth engine, that's 31% year-on-year growth in U.S. dollar currency.
That's a fantastic result. Here's the waterfall of our ARR. Obviously, the December quarter isn't the biggest selling period in our education part of our business. It typically is in the consumer part of our business. You see that we added about AUD 5 million of ARR growth in the education business and just a touch under AUD 2 million in the consumer business. We had FX tailwinds of about AUD 7 million, which combined to end the year with AUD 132 million of ARR. We're very, very comfortable and very happy with those results. Last year, I should say, so not 2024, 2023 December quarter, there was a flurry of sales in the UK with the mandatory rate where there was a kind of statutory obligation on UK schools to monitor students. That's kind of returned to a normal sales cycle in the UK.
We didn't see a huge uplift in sales in the December quarter in the U.K. this year, but we're excited to see what we can achieve in the March and June quarters, particularly with the Schools Broadband partnership, which had really come into its own this quarter. Our SaaS metrics, everyone recognizes, are pretty outstanding. Our churn is outstanding. If you look on any of the kind of chat sites that talk about education technology in the U.S., you'll see always glowing comments about our deployment and after-sales service. Our service margins are high. Our net retention, it's not a great net retention period for us the December quarter because we don't get many opportunities because it's not the key selling period, but 105% net retention period of that calendar year I'm very comfortable with. ARR growth at 26%.
Marketing efficiency for every AUD 1 of marketing we spend, we get AUD 9 of revenue, contracted revenue. These are outstanding stats, and the last one is obviously a key. We really don't have any bad debt, so it's a very, very sound book, and another one that's important is that we convert our ARR to cash very, very reliably, and we'll see that in the chart I'll show you in a minute, so cash collections, you can see here the cycles where cash is mostly collected in the September and December quarters, and then it kind of tails off, but you'll also see clearly in this graph this kind of step change in our business as we're selling to more and more and bigger and bigger school districts and selling more and more products.
There's one measure about the more and more products I want to show you in a moment. Operating cash flow, which is the standard accounting measure of that, we've been positive now. This is our third positive operating cash flow ever and second in a row. Now let's quickly turn to the K-12 highlights. The chart I want to highlight is the one on the bottom right, which shows our average revenue per student. It's essentially our average license fee, and that's creeping close to the $8. People would have heard me talking over the last year or two about kind of a target of $10 of ARR per student. In the medium term, I think we're really in a good shape to get there.
A combination of, obviously, the price increases by customers becoming more comfortable with who we are in the markets that we operate, but also these additional products that we now have access to, which are really starting to make a dent in our average license fees, and actually, I'm pleased to talk about some of those new products at the end of this session, which are mostly AI-driven and in almost all cases kind of put us ahead of the market and the way the market thinks about filtering in particular, so the education business ended about
AUD 105 million of ARR, so broke through AUD 100 million, which is a huge milestone. Pleasingly, 20% of our ARR in the U.S. came from these new AI-based products that were only recently introduced, so that's very exciting. As I said, Australia achieved 515,000 of net growth, which is easily a record. That, again, shows that. Well, I guess to explain that, the Australian business has gone through a restructure over the last couple of years of kind of really trying to change the model to how we talk to customers and deploy our technology in the U.S.
Really, now starting to show strong signs. In particular, the Qustodio, the ability to offer parents in Australian schools the parent control products is really starting to drive business to us. So that is another great reason for that Qustodio move. We enter the third quarter with a record of AUD 32 million of deals in our pipeline. That excludes some kind of, what do you call them, whale-type opportunities we have out there with some state and country-based deals. That's bread and butter business. We've got AUD 32 million in the pipe, AUD 11 million in a weighted value.
We're reasonably confident that we'll add at least AUD 11 million of ARR in the education business in this half. Last year, if I recall, we added something like AUD 14 million of ARR in the second half of the financial year. So we feel like we're in a really good position. Consumer business is just doing brilliantly. ARR has topped AUD 25 million, getting close to AUD 26 million. The average revenue per account continues to climb. The promotion of Qustodio through our U.S. school clients is continuing to achieve all of our aims. We're getting more and more districts willing to promote that deal. We're getting typically 20% of parents in the school district signing up to the Qustodio freemium product. And while it's not a huge, it's not our kind of focus right now, we're getting encouraging 1% of those parents upgrading to the paid product.
We've got in the pipeline access to about 1.4 million students of school districts in the U.S. that are in this calendar year hoping to start launching and talking to parents about Qustodio, so the overall Qustodio proposition is doing brilliantly. Its core business selling direct is exceeding our expectations, growing north of 21% per year. Its selling it through our schools. We're hitting all the numbers that we'd like to achieve, and then, as importantly, we're now getting schools coming to us because they can extend the school capability to parents through the Qustodio product, so that's doing very, very well for us, so what's next? The March quarter is seasonally the key selling period in the U.K. That is probably going to extend through to June. BETT, which is the key edtech conference in the U.K., is happening literally this week.
FETC was really the launch of the education conference season in the U.S., and that was last week. And I was really pleased with our presence in the stand there and really pleased to see the excitement around the AI capability that we're now adding to our products. So, as I said, we're set up in a really good place. In fact, this is literally the words of Harrison Parker, our U.S. VP. He said, "We've never been in a better position for the key selling period in the U.S., which is the June quarter, because we have very, very good products, a very good reputation, and a whole range of new add-ons and new modules that we can talk to customers about." Again, I'll talk about those in a moment.
Qustodio, March quarter isn't a particularly high-value retail period for us, but we do have the exciting SoftBank partnership, which we're hoping to bring to the market this quarter. If not, it'll be April. But that's a very, very exciting opportunity for us and hopefully a harbinger of things to come. And then financially, as everyone knows, the December half for us is the key cash collection period. We collect something like 40-45% of our cash in the second half. We're still expecting to be EBITDA, reported EBITDA positive for the year at somewhere between 10%-15%. So free cash flow on or around about break-even for the year, reporting EBITDA profitability for the year. Very excited about that. And we'll be talking about kind of half-year results. We'll be talking about EBITDA profitability in our half-year results, which will come out shortly. Okay.
Haven't done this before, but just want to switch gears and introduce the market, the hard work that we've been doing in innovation. We've bought the Octopus business, which is a whole, which is the data and AI capability. We've also been working internally on AI tools for some time. And I thought it's worthwhile just to present to our investors some of the fruits of that effort. Okay. We launched recently an AI-enhanced categorization. Categorization is when you analyze websites and you categorize them. And there are third-party services that do that that we use. And I'll say that particular URL, like Pornhub is porn, or this particular website contains hate speech or viruses or whatever. And that is the historical and the sort of sound way to classify websites by analyzing the text.
But what we've added now is the ability to scan web pages for images and then add contextualization categorization to them. But it's really a breakthrough. It allows us to classify image-heavy websites and international websites, Russian websites, websites with all sorts of different languages, and provide a much more, as we say here, unparalleled level of protection. That is a real innovation that's making a real impact in schools. We've also launched this product. We launched it actually late last year, and I think we're probably north of $500,000 of ARR from this product already. This is allowing our schools to enable page-level obfuscation of images. Now, the use case here is because people are probably familiar that Google Search and Edge Search allows you to hide images.
But what kids are doing to bypass that stuff is they're sharing pornography via self-created websites or other platforms where there isn't safe searching type functionality. So with our AI capability now inside the browser, we can actually look at images before the child does and obscure them real-time. It is an outstanding service, and it's a major turning point in our business going from essentially a blunt block and allow to an approach where we want to open up the internet to kids, but make sure that the experience can be managed, can essentially create an age-appropriate experience. We're adding video blurring right now. In fact, that's in beta right now, and that will be being sold in the U.S. in the next few months.
So again, in the page, as the page is loading, we can check out the images and the videos, and we can obscure anything relating to pornography, guns, gore, child sexual abuse material. It is an outstanding innovation. It is an extension to our digital monitoring product. So we can now log into the kids' Office 365 and Google Workspace accounts, log into their docs, their drives, soon to be their emails and chats, and have a look at what they're doing in cloud services. Our monitoring technology today is all on-device. And now we can, and this is in beta now, we can scan what the kids are doing in the cloud and also look at what's called third-party conversations. So we can also look at what kids are receiving from third parties, including text. And that allows us, again, to provide an unparalleled level of safeguarding for kids.
We have awareness of what they're doing on the device. We have awareness of what they're doing in the cloud, and we can bring all of that capability to bear to protect these kids, these very vulnerable kids. AI-enhanced moderation. We capture something like 400 million bits of text and images a month. 400 million, it's extraordinary. And of that 400 million, about 100,000 get sent to our human moderators every single day. And they escalate something like 1,000 to 1,100 per day to school safety leads and police. Now, that's a huge task. And as that part of our business, which has gone from 5 million to 35 million in the last couple of years, as that business continues to grow, we need to make sure it's scalable, but also we need to protect our human moderators who are seeing some very nasty content.
We've introduced AI into that whole cycle in a number of places. Pleasingly, we've reduced the number of captures that we have to handle by about 30%, which is offering very substantial cost savings in just human moderation. We will soon be able to automatically moderate child sexual abuse material to save our team having to see that material. And we're also introducing innovations in the way that we process these captures, which is expected to save us in the order of AUD 1 million in process costs this calendar year. And there's a heap more to come. So there'll be a constant stream of work in our business to add value from costs and to our customers and absolutely save more lives in this moderation.
Okay. In our Qustodio product, we're using similar sorts of tools now to look at what kids are doing on their devices and in their cloud platforms like Instagram and the Japanese LINE social media product and so on, and we can scan what kids are doing in there. We can scan what the kids are typing in their Google searches, and then we can let parents know that there is something in here that you need to pay attention to. It's called Behavioral Alerts, and that was launched last year, late last year with a search term alerting. It's now social media alerting. WhatsApp alerting has just launched, and that will be definitely a theme in the coming 12 months in the Qustodio product, and I think one more piece. There's a lot of AI work going on in this business.
It's enhancing our support processes to deal against the kind of bread and butter queries which we almost receive and automate those, and then really get our outstanding service team to focus on the high-value and more complicated escalations from customers. So we launched an AI-based chatbot in our K-12 business in the U.S. That's soon coming to Qustodio and to our U.K. business. It's anticipated to generate about $1 million worth of hard savings, so people's savings in this business within 12 months of the implementation. So that's live now and is making a real impact on customer support. Okay. So I think that is it for me. I'll hand over to Ben.
Thanks, Tim. I'll just touch on a couple of quick points for the quarter on the financials. I think a lot of it's fairly self-explanatory. The results are in line with our expectations of a small burn in the quarter. As a reminder, Tim touched on the December quarter is seasonally lower than the September quarter. It is our second-highest cash collection quarter, though. And we'd expect March to be slightly lower again. And then the June quarter is somewhere in between.
So the bulk of our cash collections do come in the September quarter, and we collected that cash reasonably well. So there wasn't really much hangover from the September quarter into December. One thing that is worth pointing out, and again, Tim touched on it briefly at the start, is the business a net beneficiary of a weakening Australian dollar against the US in particular, to a lesser extent the pound as well. We've done a little bit of sensitivity analysis at this point in time.
Obviously, as the business matures and the US dollar becomes a greater proportion of revenue over time, these numbers will change. But right now, based on the size of the business, that's roughly the benefit that the business gets for every cent in decline of the Australian dollar versus the US dollar or the pound. And you see that flesh out in the AUD 7 million worth of benefit in ARR. But that actually translates into real benefit from an EBITDA and a cash flow perspective as well. Jumping to the next slide.
If you'll turn for me. No, not too far.
There we go. So receipts touched on there are about 10% up year on year. Again, the September quarter was a really strong quarter, so that limited the increase year on year a little bit. Staff costs, we've talked about the fact that the pay rise, annual pay rise for the business is now 1 October. So you can see the majority of the increase there. Once you strip out the FX impact of a strengthening U.S. and pound against the Aussie, it's around about 3.8% increase in staff costs, which is a little bit CPI increase, but also we've touched on the need for some growth heads, but it's minimal.
There'll be a few more that'll come through the business over the March quarter, but nothing dramatic, and similar story with fixed costs. They're up slightly. Some of that's a function of the fact that some annual payments have come through in the quarter. So there is a little bit of a peak there. March will have a similar sort of number, but then I'd expect those fixed costs to come back down again in the June quarter. It's certainly not a permanent increase at that level. But it is worth pointing out, I think, that the business has grown dramatically over the last couple of years, and we've kept costs across the board pretty flat, which has been a really good effort. And actually in the case of the direct costs, you can see they're actually down 19% year on year.
Yet ARR is up 26% and subscription numbers, similar sort of thing. So the efforts of the team there to get the data and hosting costs down and improve our gross margins have been really, really significant. So that more than offsets the increase in those fixed costs. Other costs are very much one-off in nature. There's been a lot of corporate activity in the business over the last six months. Payments for some of those things fell into the December quarter, and we've, I guess, expensed in there for the benefit of showing what's the true ongoing costs for the business, so the general message, I guess, is the business continues to punch through that cash flow break even respect point and is very, very focused on cost control.
That discipline that's been built within the business is very much being maintained, and it's a focus for every executive in the business, which is really pleasing, so that's probably the main things to touch on that. Corporate structure on the last page is fairly self-explanatory. Nothing really to call out there that's any different. Available funding is significant, more than enough, comfortably more than enough than we need. Net debt's in line with our expectations. We'll continue to manage that. At the appropriate time, look to actually start reducing the gross debt number as well over time once those, I guess, massive metrics become sensible. On that note, unless Tim, you've got anything to add, we can jump to Q&A. No, let's go to questions. Thanks, Matt.
I'll just unmute people. Give me two seconds. All right. We've got a raised hand from LB. I'm not sure who LB is, but if you'd like to unmute and ask the question, you're first cab off the rank. Maybe an accidental hand. Let's go to Owen. Oh, Lindsay. Yeah, yeah. Lindsay. No bad. I initially should have given it away, guys. Come on.
A couple of questions. First one, clarification question on the EBITDA guidance for the year. You've slotted the word reported in there and a 10%-15% margin. Just had a couple of questions on that this morning. Not sure if you touched on it because I kind of joined a couple of minutes late, but just making sure that's not some enormous upgrade to guidance, and that's more or less what we're thinking at Q1.
No, that's no change. That's more me trying to clarify that it is after the capitalization of salaries. I think there was some confusion before as to whether or not that was a pure cash number, including the cost of capitalized salaries, and it's not. But what we overlooked in that wording, by the sounds of things, is to reiterate that it's excluding ESS. So it doesn't include the share-based comp. So yeah, call it the underlying report. We'll tighten up the language. But there's no change to our guidance from previous quarters. It's 10%-15% allowing for the capitalization of salaries, but excluding share-based pay.
Yep. Brilliant. No, that makes sense. And then just trying to square a few of the things you've said kind of on this call. So you've got direct costs falling pretty aggressively. Looks like you've got some growth investment, which you flagged in the announcement. But then you've talked about enormous costs out via AI and some of these sorts of initiatives. So just squaring it all together, how should we think about costs over, say, the second half of this year? Is this kind of the new normal? Will they tick back down when you bunch everything together? Just trying to understand costs.
Yeah. Look, I'll start then. So the thing we've been telling the market that we expect that we're expecting kind of CPI this year and then in the next financial year, flat, if not falling. There's a lot of reasons to be confident in our midterm cost structure because of the completion of the unification work, which is this calendar year, because of the ability to access kind of more cost-effective engineering out of Sri Lanka through the merger with Octopus.
And obviously, the AI innovations that I'm showing you today that don't immediately deliver savings with those savings a year over time. So I think Ben will probably kick me for saying this. I think kind of where our cost structure is now is kind of where it will be for this financial year. But I'm certainly focused on our business not going beyond that in the subsequent financial year or two with potentially downside risks. But if you want to add to that, Ben.
Yeah, I think that's about right. As I mentioned before, there might be a couple of extra heads in the March quarter that are just growth-related, but it's not a significant number. And to touch on your point around the AI and the moderators in particular, Lindsay, that's more cost avoidance rather than taking existing costs out of the business. If you look at the growth in the moderation product over the last couple of years, it would be somewhere around 60%-70%. Yeah, with added maybe, I'd say it would be somewhere around GBP 250,000 worth of cost into that team. he size of that business has almost doubled, and we've increased the size of the headcount by about 25%, so the figure that is quoted in the package, think of it as cost avoidance and efficiency.
Yep. No, that makes sense, and then just a final one. What was I going to ask? Oh, yeah, the pipeline. That was kind of like maybe a highlight from this quarter. It's up something like 70% year- over- year, even though you've had a reasonably strong quarter. Just maybe picking that apart a little bit. Is the core business just getting stronger? Is there one region or regions where that pipeline growth is coming from? Just trying to understand kind of what's driving the $11 million-weighted pipeline.
Oh, it's the U.S. I mean, it's good everywhere, and it's growing everywhere, but without question, it's the U.S. Our reputation is booming in the US, building so strongly. And all these new AI products, the content-aware kind of managed digital experience theme that we're building is generating a lot of interest. And now we've also just launched, and I'll talk about it in the next quarter update, we've just launched the first insights product through the integration with Octopus. And that was launched at the FETC last week and again drove an enormous amount of interest.
So yeah, it's without question the US.
It's fine.
Brilliant. All right. I'll hand it over. Thanks, guys.
Thanks, Lindsay. Owen.
There we go. Can you hear me okay?
We can. There we go.
Well done.
Strong quarter. I know it's a quiet period for you guys. Just to clarify, the capitalized cost you're talking about inside your guidance is around AUD 20 million.
Yep. That's right. Our overall cost base is steady when it comes to staff, and so the portion that's getting capitalized should be fairly steady. It will ebb and flow a little bit depending on what they're working on and what can be capitalized versus not under the accounting standards, but it's ballpark around that number.
Yeah, good one, and just to clarify that pipeline discussion you spot on, that's a big number. Obviously, the thesis around the second half is important given the operating leverage into 2026. It's gone from 6 to 11 year on year. Last year, you did 4 million in that third quarter. Is it proportional? Were you saying a 70? You would say 4 to 6 is an appropriate number for this quarter?
Look, I always get trapped in these kinds of calls, the which quarter it's going to land in. It can depend on so many things. We've got some really, part of the reason for the increase is we're getting these really big districts coming to us now. We're talking 50-300,000 students, and they don't necessarily slot simply into particular quarters the way those procurement processes work, so in the past two, three years ago, it was quite reliable that 80% of the reported weighted ARR would deliver in the next three to four months. It's kind of changing now. I've got high confidence in that AUD 11 million at least being hit this half, but precisely which quarter, it's hard to predict at the moment.
I mean, have you got a different view on that, Ben, or any further insights?
No, I'd agree with that. It's still predictable in the sense that it'll land. It's just harder to predict exactly how quickly it'll land.
It just takes a little bit longer in some cases, particularly the big end. Yeah. And just a quick one on prices. I know prices, now that the industry's kind of stabilized, you could say we're going to a key selling period. Just remind me, do you put prices up into the selling period or after the selling period? I imagine it goes into the selling period. What's the price rise expected kind of to contribute in calendar year 2025? We usually do our prices at the beginning of a financial year. So it's that September quarter when the prices, the SKUs all get adjusted. Yeah, so they'll all be flying through now.
Okay. Easy. Well done.
Thanks, Matt.
Just quickly check if there's any other questions. Leif, you should be able to unmute and ask a question. We've left another couple of seconds. Otherwise, we'll move on to the next.
Hi, can you hear me?
Yep. Yeah, there we go.
Yeah, I just wanted to follow up on the cloud scanning piece and also the AI filtering piece. Can you just talk us through the pricing and how it works and how this may impact the overall expectations over the medium term as to what you can achieve per student on a pricing basis? So you know how you talk to that $6-$8. Is the potential going higher, excluding some of the currency movements?
Yeah.
So simply the cloud scanning type module, so it's this one, the AI moderated experiences and the AI cloud scanning, we're charging at what is it? Is it $2 or is it dollar per student per year? It's a dollar per student per year, isn't it, Ben? Each one of them, we price them as a module so that we can get a specific pricing uplift for adding these capabilities to our filtering stack.
You will find. I'm expecting, right? We'll resist this as long as we can, but to be honest, I'm expecting that these managed digital experience type capabilities will become standard components within our filtering offering. I have a view that by us selling a filter, which is an inherently commoditized product, our whole industry is doing ourselves a disservice. And so I'm seeing that I'd like us to evolve to be talking to districts about providing open access to the internet, providing moderated experiences. Again, our industry's cost is something like 0.1%, so 0.1 of 1% of schools' budgets is spent in safety and wellbeing technology.
I think we do ourselves again a disservice by just selling the very blunt view of a commoditized idea of filtering to the IT admin in schools. So again, these two products are $1 per student per year. This one, the image scanning, has been live now for nearly six months, and it's made a material impact on our ARR in the U.S. We're adding video blurring literally right now. And the cloud scanning of the collaboration services, that's in beta right now. It'll be launched into this selling season. So the way I think about - actually, let's keep going while I'm here.
This one is about cost saving, behavioral awareness.
Yeah, but just to clarify what you've said so far, can I just - are you talking about video being any different, or does that come with an extra cost if schools want to adopt the video scanning AI tool? Did you say it's $1 for each of the AI? So both AI cloud scanning when it's live will be $1. Is that what you're saying? And then the current AI filtering of images for those schools that have adopted it over the last six months, it's roughly $1 per student.
Yeah, that's right.
And most likely, we'll bundle the image and video blurring to that same price point. So video won't be any more than.
I don't think so.
We'll see.
I doubt that. I think we'll just include that in that same price point.
Got it. Thank you. And so over time, I think that that will fold into our overall pricing of filtering, but we'll protect that for a period of time because it is valuable, and it is distinct and unique in the market. No one else has that capability. So there's definitely been deals for us and definitely adding value to our ARR. The way we think about that internally, look at. We're expecting to add 15% or more of ARR growth this year than we did last year.
These sorts of capabilities de-risk that and provide some upside. Exactly how that manifests, we'll see. I mean, in the June quarter last year, we added AUD 9 million of ARR. I mean, that was extraordinary. There's a lot of reasons to think that we can do better than that this year with these sorts of capabilities.
That's how I think about that, Leif.
It's really those two are the specifically priced incremental products. The rest are included in our existing offerings or about cost reduction.
Got it. Thank you. Nice. Okay, Claude, you should be able to unmute now and ask your question. Hi, guys.
Can you hear me?
Yep.
Yep.
Great. Thanks. Apologies for my relative ignorance about your company. Haven't been following it that long. I just had a couple of questions. The first has to do with, I guess, how it works operationally. Obviously, as part of keeping kids safe, there's a lot of technology that I guess does take away some of their privacy to see what they're talking about or what they're exchanging emails about, what kind of content they're looking at. What adults actually have access to this stuff? I guess where the mind goes is if there were a bad actor, if an adult, like a teacher or something, that wanted to manipulate and take advantage of the kids, are there any teachers?
Who are the adults that are getting access to this information? The scenario I'm thinking of is, okay, a kid's doing something wrong. He's whatever, smoked pot with his friends. He's really scared that his parents would find out. And some teacher finds this out through the kind of technology you're talking about. And then instead of telling the kid's parents, they actually just use that information to blackmail the kid. Is there potential for that kind of wrongdoing? Who are the adults that get access to this information?
Yeah, look, it's a really good question. And we formed an ethics committee in our organization to deal with exactly those scenarios. It's often talked about that kids, for instance, that might have certain sorts of inclinations, right? They might be going through a sexual identity or politics or imagine the scenario of a 15-year-old girl who's searching for Planned Parenthood in the US. And that information flowing that way to a parent can put that child in more harm.
Obviously, there's a lot of activists in the US who have very different views on these things. There are some states in the US where that sort of information has to be provided to parents, for instance, in Florida and Texas and some states like Georgia and others where you're by law not allowed to provide that information to parents. We have to navigate all of those things. The way that we do it is that we, I mean, schools ultimately, it's their data, their services. If the students and the parents don't want to opt into these things, then that will limit the ability of the school to deliver their services. We are very strong with our schools about transparency on these things. We also have a professional services team within our business that educates schools on the best way to deploy this technology safely.
That's most particularly in areas of our digital monitoring services where we are dealing with some literally life-impacting moments. And we want to make sure that the professionals inside our schools are dealing with that in consideration and with evidence, certainly legally, and each state's laws can be different, but also responding to these things with an evidence-based approach. Again, we have child psychologists and all sorts of experts in our business that support schools with these things. And again, our strongest advice to all schools is about transparency. The kids should know what services are running, what data's being captured, and who can get access to that data. Some schools don't comply with our recommendations because there's no specific laws mostly on these sorts of things.
And those. So just specifically, who is it that gets access to the data, to the kids' data? Because I don't know if you've read Grace Tame's book or something like that, but I would have thought the threat of somebody like her abuser having access to that kind of data would be actually super high. That would be really bad for those children because they might be on the verge of telling what's happening to somebody, but then if there's a teacher that's taking advantage of them or something, if that teacher knows that they're close to somebody else, then that teacher can act to break up that relationship because this is how adults who abuse children operate is they isolate the child. So I'm just wondering, do all teachers have it, or is it just the principal? Is it school counselor? Who's getting this information?
It's highly configurable. First of all, inside the classroom, the teachers have access typically. Outside the classroom, those teachers wouldn't see that information. Safety leads. Now, to get really to the nuts and bolts of it, our moderation technology does find situations where kids are being abused by their teachers or other teachers. So schools have, through our technology, the ability to look for the situations and scenarios that you're talking about. Kids have the ability to, and parents have the ability to opt out of these sorts of services. So it's all.
So what I'm how do you solve it though? Because what happens? You just said that the technology has the ability to pick on that, pick up on that kind of thing? We escalate that to the designated safety leads in the school. The school. Okay. So there's a hierarchy in the school or whatever.
Okay. Very cool. Very, very established processes.
But so ultimately, the big answer to my question is it depends on the school, essentially.
Well, yes. I mean, yes, but there are unbelievably complex and sophisticated rules and protocols around these sorts of things that you're talking about, Claude. In the U.K., it's called Keeping Children Safe in Education. Unfortunately, I've read the California Education Code, and there'd be 30 pages of 85 rules about how you deal with these sorts of things. It's not a trivial thing. I know all the concerns that you're talking about, but trust me.
No, no. I'm not suggesting it's trivial. In fact, the reason I'm asking is because it seems very difficult.
Yeah. And there is an industry that, and a whole series of rules and laws that deal with these sorts of incidents and make sure the kids' best interests and the community's interests are at centerpiece.
Great. Cool. Thanks for your answer. So my second question is actually just purely financial. I have an opinion which others may disagree with, but my personal opinion is that for many companies, debt is kind of poisonous to the valuation. And therefore, one of the things that I think about most when I think about investing is whether a company has debt.
And so I was just interested in hearing you talk more about how you think about debt and also what the path to becoming debt-free might be and when that might happen, not in any kind of specific forecast, but what is the trajectory you're aiming for? What do you think's the realistic range of outcomes? You may be able to tell me, "Look, Claude, I love debt leverage. It's brilliant, and I'm never going to get rid of it." So I'm just keen to know more about when the company might be free from debt.
Yeah. So we're very focused on becoming cash flow positive. And so in the short order, we won't need debt. And so imagine that's a scenario. So this year, when we pre-cash flow break even or thereabouts, and the next year, say we're generating AUD 20 million of free cash flow, and say then we're given opportunities to accelerate our business, which require more capital. So we can dilute our capital by raising money in the market, or we can, if we're cash flow positive, then we can raise debt. Those are the options that we'll need to be thinking about next year. I don't really want to get into the hypotheticals of where we'll get to. I think there is a conversation that we need to come to the market with in the next kind of six to nine months as we get to this place of generating cash.
Because as I kind of touched on at the beginning of this session, with the custodial business, we're capital constrained. We could be growing that business a lot faster if we poured more money into it. We're acquiring a customer for $60 that has a lifetime value of $300. We should be increasing our cost to acquire to $100 and growing that business more quickly. So we are capital constrained. We could be delivering much more returns for our shareholders, but we're doing very deliberately right now because we need to demonstrate to the market that we are being very careful with our costs, and we're going to punch through that break-even point and beyond. So look, I think that's a conversation for another day, and maybe we can have that chat in the next fireside.
Okay. Cool. Well, yeah, you've given me a bit to think about. So thanks for that. Have a nice day.
Thank you. I wonder if you have one last question. We've got about a minute left to squeeze you in.
All right. So I'll run a really quick one. Just to people coming to me on the call as we speak, but just around understanding the cash cost base, is there inside your COGS, call it, is some of the staff expenses that we're seeing in the cash flow statement also embedded in your COGS? So you can't just analyze that as a fixed cost base?
No. It all sits below the line, below the gross profit line in our statutory reporting. So yeah, no, there's not. Right. Because the questions people are asking me, and I'll just maybe just ask a few guys, is if you look at the, so if you go to that cash flow statement, you look at the staff expenses, you add back the sales and marketing and the other costs, and you analyze that, and you add the intangible investment, call it, you're looking at 100-plus mil of kind of fixed cost base, and your GP margins are 70-odd %. So it looks like revenue must be. It's a big number to hit your 10% margin profile. So I guess people are just trying to backsolve how they get to that 10% given what you've displayed in the cash flow statement. I'm the messenger here.
Yeah. I mean, the fixed cost is. The fixed other in that table is slightly inflated in the December quarter. So I think if you were to analyze that, that's overstating our cost base. Probably the first element. The second is if you're analyzing the staff cost for the quarter, that's also incorrect because the September quarter was lower as well. So you're adding money to a quarter that's already been through and is lower than that, and you can say the same for the fixed other as well. And I think the direct costs, as you can see, they're really under control, which means our gross margins that you've seen in the P&L over the last couple of years, we've talked about their journey towards 80%. You'll see that continue to play out in the second half of the year.
Okay. Very good. And I thought I'd just ask just to clarify it. Thanks, guys.
Thanks. Thanks, Tom.
No more questions, Tim, so if you want to make any comments to wrap up.
Yeah. Look, I think the stage is set. As Harrison Parker, our VP of the U.S., said last week, we've never been in a better position for the key selling period in education, which is really kicking off right now. We've got a great pipeline, a whole suite of new products, growing and building reputation, particularly in the U.S. So very excited to see what this team can deliver. And of course, on the Qustodio side as well, we've got an outstanding product, the Schools Broadband deal to launch.
In fact, we didn't really talk about all the other partnering that is going on in the business, in particular the Schools Broadband one in the UK and the SoftBank one in Japan. So a lot of reasons to be very confident in the next half, and we're hoping to be well into the 140s by the end of this financial year. So very exciting times. Thanks, everyone, for your time, your attendance, and your support. I'll see you all next time.
Thanks, everyone.