ARQ : 2019 Half Year Results Investor Presentation

H1 FY19 RESULTS

INVESTOR PRESENTATION

22 August 2019

Agenda

Arq Group H1 FY19 Results Presentation

Agenda

• Results Snapshot
• Arq Recovery
• Arq Financials
• • Core Operations
  • Non-coreOperations
• Appendix One: SMB: Segment Results
• Appendix Two: Adoption of AASB 16:Leases
• Appendix Three: Arq Group: core andnon-core explained

2

Summary

3Arq Group H1 FY19 Results Presentation

Summary

After a challenging 12 months the recovery is underway.

• The first half result was a story in two parts;
• • a strong bounce back in the SMB division wasn't enough to offset a challenging first half for the Enterprise division
• A comprehensive recovery plan has been implemented and is delivering results;
• • the SMB division had a very pleasing first half - sales of subscription digital revenue are back to historical levels and core underlying EBITDA was up 57% on the PCP
  • momentum is building in the Enterprise division - but it is early days
  • annualised cost savings of $3.8m have been realised with another $2.0m to come in FY20
• Net debt position is steadily improving;
• • net debt of $51.6m at the end of July and a leverage ratio of 2.1x1
  • we expect to be back within our published target range for the net leverage ratio (ie 1.25x - 1.75x) towards the end of H1 FY202on the back of growing billings and continued strong cash conversion
• Full year guidance has been affirmed;
• • H1 FY19 underlying EBITDA for the Group was $9.6m and full year guidance is a range of $27.5m - $30.5m
  • a recovery in the Enterprise division in H2 underpins the achievement of guidance
• We areon-track at the end of H1 FY19 and momentum is building with each month

1. The leverage ratio is calculated as net debt divided by a trailing 12 months EBITDA
2. This is based on the guidance for Group EBITDA.

Results Snapshot

H1 FY19 Result: group

The Enterprise division experienced significant challenges in H1 2019, dragging on the Group result. The strong bounce back in the SMB division only partially offset the Enterprise shortfall.

Group H1 FY19 Results Presentation

Financial Results1

Total Revenue $90.9m

(↓19%)

Underlying EBITDA2$9.6m

(↓62%)

Underlying EPS20.7cps

(↓89%)

Dividend

The Group has not declared an interim dividend

Debt

Net debt reduced by $21.3m to $51.6m3

Net leverage ratio down to 2.1x4

Enterprise

Enterprise had a challenging H1 due to delays in revenue and a shortfall in new business;

• revenue $44.2m(-28%) and underlying EBITDA -$0.2m(-101%)1
• revenue has improved over Q2 and the pipeline for H2 is building steadily

Small & Medium Business

SMB revenue down due to compounding effect of subscription revenue miss in Q2 FY18;

• revenue $46.7m(-9%) and underlying EBITDA $10.4m (+12%)1
• sustainable cost saving initiatives delivering ~ $3.8m pa (with $2.0m more to come by FY20)

4Arq

1. Comparisons versus H1 FY18 financial results.
2. Underlying EBITDA and EPS excludesone-off and non-recurring expenses.
3. Following the sale of the TPP Reseller business.
4. The leverage ratio is calculated as net debt divided by a trailing 12 months EBITDA.

Arq Financials

5Arq Group H1 FY19 Results Presentation

H1 FY19 Result:core and non-core operations1

Challenging performance in Enterprise with a strong bounce back in Core SMB

				Core1				Non- Core1
Half Year ended	Enterprise	∆%	SMB Direct5	∆%	Corporate6	Arq Group6	∆%7	SMB	Arq Group
30 June 2019								Indirect5	(Total)
Revenue	$44.2m	(28%)	$34.6m	(10%)	-	$78.8m	(21%)	$12.1m	$90.9m
Gross Margin	$17.5m	(43%)	$23.5m	(6%)	$0.2m	$41.2m	(26%)	$7.1m	$48.3m
Operating Expenses2,3	($17.7m)	(2%)	($19.1m)	14%	($0.8m)	($37.6m)	8%	($1.1m)	($38.7m)
Underlying EBITDA4	($0.2m)	(101%)	$4.4m	57%	($0.6m)	$3.6m	(91%)	$6.0m	$9.6m
Non-recurring adjustments	($0.2m)		($0.3m)		($1.3m)	($1.8m)		$0.0m	($1.8m)
Reported EBITDA	($0.4m)	(103%)	$4.1m	116%	($1.9m)	$1.8m	(135%)	$6.0m	$7.8m

1. The Group result comprises the contribution from both "core" and"non-core" operations. Non-core operations are those parts of the business that are marked for divestment, have been divested, or are winding down. The core operations will be the driver of future performance. On page 45 there is a chart that breaks out the core and non-core elements of the Group and shows the contribution to the H1 FY19 result from each of them.
2. Included in overhead expenses for the core business are stranded costs that will be removed from the business over the course of the next three years. The annualised amount of stranded costs are approximately $2.0m.
3. Operating expenses excludesnon-recurring expenses such as integration costs, transaction costs, movements in contingent consideration etc.
4. Underlying EBITDA excludesnon-recurring expenses.
5. Segment results for the SMB business unit (i.e. the aggregation of SMB Direct and SMB Indirect business units) is presented in Appendix One to this presentation.
6. Financial information presented above is prepared under AASB 16:Leases.
7. Period on period movement has been calculated using financial information prepared under AASB 117:Leases.

Arq Financials

Arq Group H1 FY19 Results Presentation

H1 FY19 Result:underlying EBITDA bridge

Underlying EBITDA impacted by challenging revenue performance in Enterprise

6

1. Period on period movements are derived from pro forma revenue, COGs and operating expenses.

Results Snapshot

7Arq Group H1 FY19 Results Presentation

H1 FY19 Result:adoption of AASB 16

The new leasing standard (AASB 16) shifts lease costs from opex to depreciation and interest, nominally increasing EBITDA (no cash impact)

Half year ended	H1 FY19	Restatement	H1 FY19	H1 FY18	∆%1	Notes
30 June 2019	AASB 16	to AASB 117	AASB 117	AASB 117
						Revenue is down due to delays in revenue, the poor performance in
Revenue (excl. interest)	$90.9m	$0.0m	$90.9m	$112.4m	(19%)	signing new business in Enterprise in H1, and the compounding impact
of lower than expected new subscription sales in SMB in FY18
						(resulting in a lower stepping off point in FY19).
COGS	($42.8m)	$0.0m	($42.8m)	($48.9m)	12%	Variable COGS savings due to lower revenue during the period.
Gross margin (excl.	$48.1m	$0.0m	$48.1m	$63.5m	(24%)	Margin has been impacted by revenue mix changes in both SMB and
interest)	Enterprise.
Other income	$0.2m	$0.0m	$0.2m	$0.0m	100%
Operating expenses	($38.7m)	($2.5m)	($41.2m)	($44.9m)	8%	The current period has benefited from cost control including headcount
efficiencies.
Underlying EBITDA	$9.6m	($2.5m)	$7.1m	$18.6m	(62%)	EBITDA has been impacted by a decline in revenue and margin
compared to the prior comparative period.
D&A	($7.8m)	$2.4m	($5.4m)	($4.8m)	(13%)	Impact of increased depreciation due to expansion in office footprint.
Net interest expense	($1.6m)	$0.3m	($1.3m)	($1.2m)	(8%)
Income tax credit/	$0.6m	($0.1m)	$0.6m	($3.4m)	n/a
(expense)
Profit attributable to NCI	$0.0m	$0.0m	$0.0m	($0.1m)	100%
Underlying NPAT	$0.8m	$0.1m	$1.0m	$9.1m	(89%)

Note: Figures throughout this document may not be exact due to rounding and includes non-IFRS financial information that is relevant for users understanding the performance of the business.

1. Period on period movement has been calculated using financial information prepared under AASB117:Leases.
2. Underlying EBITDA and EPS excludesone-off and non-recurring expenses.

Arq Recovery

Track record:challenging half detracts from record of consistent growth

Following a challenging half, growth expected to resume in H2.

FY19 Results Presentation

Revenue

120

100

$m	80
60					91.0			112.4			90.9
		82.8
	40		69.2
	59.6
	20
	0
	H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19

Dividend

4.0
3.5
3.0
2.5
cps
2.0				3.5	3.5
1.5
1.0			2.0
0.5	1.0	1.0
0.0
H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19

Underlying EBITDA

20
15
$m10					16.6			18.6
5		10.0	10.6								9.6
6.1
0
H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19

			Underlying EPS
	10.0
	8.0
cps	6.0
4.0								7.7
					6.6
		5.0	4.6
	2.0
	3.3
	0.0											0.7
	H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19

8Arq Group H1

Pre adoption of AASB 15 and AASB 16 accounting polices		Post adoption of AASB 15 accounting policy and pre adoption of		Post adoption of AASB 15 and AASB 16 accounting policies
	AASB 16 accounting policy

1. On 1 January 2019, the Group adopted the accounting standard, AASB 16: Leases. H1 FY19 financial information has been presented on this basis. Financial information for periods prior to 1 January

2019 are presented in accordance with AASB 117: Leases.

Arq Recovery

Recovery:what has been achieved?

The recovery in SMB is largely complete and we enter H2 2019 with a stronger business. The recovery in Enterprise is a work in progress with encouraging growth in the pipeline.

Issue	Status
SMB
Loss of momentum in new solutions sales	Focus on sustainable solutions growth delivering results. Month-
(commencing Q2 FY18).	on-month increases in new solutions sales from January 2019 to
	June 2019. Trend continuing in July and August.
Enterprise
Delay in turning on new revenue in H1 FY19.	Revenue from new contracts now coming online as expected.
Loss of momentum in signing new business in	Growing pipeline of new opportunities. First >$1.0m mobile
Melbourne in H1 FY19.	project in six months won in July.
Capital Management

FY19 Results Presentation

Key customer contract dispute with $9.5m in withheld payments.

Disappointing H1 FY19 for the Enterprise division.

Operating within covenants and expect to be back within our target range for the net leverage ratio by late in H1 FY201. Cash conversion was 123% in H1 FY19 notwithstanding withheld payments.

Arq Group H1

1. This is based on achieving the guidance for group EBITDA.

9

Arq Recovery

Arq Group H1 FY19 Results Presentation

Recovery:what has changed?

Significant changes to people, governance and process have been implemented to address the root causes of challenges in SMB and Enterprise.

• People
• • Increased investment in Enterprise sales team in Melbourne office
  • Restructure of Enterprise business from aproduct-led to a customer-led focus to deliver a better customer experience and enhance sales success rate
  • Restructure of SMB digital sales, account management and fulfilment teams, to provide better customer experience and solutions tailored to customer needs
  • Increased investment in financial planning and analysis capability
• Governance
• • Removal of senior management layer to ensure faster flow of information
  • CFO/CEO leading weekly sales and revenue meetings
• Process
• • Overhaul of the sales & forecasting process
  • Redesign of the Enterprise operating model
• Tools
• • Commenced implementation ofGroup-wide resource management system to, among other things, enable consistent and effective management of billable utilisation and better management of project profitability

10

Arq Recovery

SMB (core):consistent growth in new subscription revenue1

The turnaround in SMB is well advanced. New digital sales have recovered to early 2018 levels and the upward trend is continuing. Underlying EBITDA was up 57% on the PCP.

Arq Group H1 FY19 Results Presentation

Indexed

1.20

1.00

0.80

0.60

0.40

0.20

-

Rapid decline in new subscription revenue in Q2 FY18

Initial recovery driven by
sales incentives that	Sustainable
ultimately proved to be	recovery
unsustainable.	underpinned by
	redesign of
	business model

Seasonal decline in

Summer months.

• In Q2 FY18 the SMB division experienced a rapid decline in new digital subscription revenue.
• The compounding effect on future recurring revenue resulted in a downgrade in August 2018.
• Are-design of the SMB business model has resulted in sustainable growth in new digital revenue from the beginning of 2019.
• The trend in new digital revenue growth has continued in July and August.

11

1. New subscription revenue is a daily average of new digital subscription revenue, indexed to March 2018. March 2018 marked the start of the deterioration in new digital sales that contributed to the poor H2 FY18.

Arq Recovery

Enterprise:revenue per billable day1

The recovery plan for Enterprise is gaining traction. A good second half will provide a springboard for a return to growth in FY20.

Arq Group H1 FY19 Results Presentation

Significant revenue

Revenue decline

Slower than

following end of

expected

contribution from

2.0

exceptional contract

turnaround due to

exceptional contract

disappointing sales

for 8 months

and insufficient new

1.8

business to

performance in

starting in Nov 2017

maintain

Melbourne and a

1.6

momentum.

delay in turning on

1.4

revenue.

Indexed

1.2

1.0

0.8

0.6

0.4

0.2

-

Jun-19

May-19

Apr-19

Mar-19

Feb-19

Jan-19

Dec-18

Nov-18

Oct-18

Sep-18

Aug-18

Jul-18

Jun-18

May-18

Apr-18

Mar-18

Feb-18

Jan-18

Dec-17

Nov-17

Oct-17

Sep-17

Aug-17

Jul-17

Jun-17

May-17

Apr-17

Mar-17

Feb-17

Jan-17

1. Average revenue per billable day has been indexed against the January 2017 revenue per billable day.

• Period-on-periodrevenue performance is distorted by the inclusion of an exceptional contract in H1 FY18.
• H1 FY19 revenue performance is consistent with H1 FY17.
• The pipeline for the remaining 5 months of 2019 is building steadily.
• A recovery in H2 FY19 will provide a springboard for a return to growth in FY20.

12

Cash and Capital

Net debt:leverage ratio improving

The one-off cash outgoings of the past 18 months (approx. $17.0m) are largely behind us. Net debt will steadily decline and our net leverage ratio will be within our published target range by late in H1 FY20.

Group H1 FY19 Results Presentation

Net debt to EBITDA1

3.0
Calculated after the
	sale of TPP Reseller
	business was
2.5	completed in July
	2019

2.0

1.5Net Debt / EBITDA

Target Range

1.0

0.5

0.0

H1 FY16 H2 FY16 H1 FY17 H2 FY17 H1 FY18 H2 FY18 H1 FY19 Jul-19

• The Group's bank covenant for Net Debt/EBITDA was 3.0x prior to the sale of the TPP Reseller business and reduced to 2.5x following the receipt of the upfront component ($21.3m) of the sale proceeds in late July.
• As at 31 July 2019 net debt was $51.6m for a leverage ratio of 2.1x.
• Net debt increased beyond target levels due to the impact of the following significant outflows:
• • fit-outcosts associated with expanding our footprint in Melbourne and Sydney;
  • one off costs incurred in rebranding; and
  • higher than expected earnout payments as a result of strong performance of InfoReady acquisition.
• The Group expects to be operating within its published target range for the leverage ratio (1.25x to 1.75x) by late H1 20202on the back of the recovery in Enterprise and continued strong cash conversion.

13 Arq

1. Based on a trailing 12 month underlying EBITDA. Underlying EBITDA has been calculated using financial information prepared under AASB 117:Leases.
2. This is based on the guidance for Group EBITDA.

Guidance

Outlook:FY19 guidance affirmed

Guidance has been restated following adoption of AASB 16 with no effective change to the original guidance.

Arq Group H1 FY19 Results Presentation

Measure	Original FY19	Restated FY19	H1 FY19	Commentary
	Guidance	Guidance	Actual
	(AASB 117)	(AASB 16)	(AASB 16)

Group

Underlying EBITDA ($m)	$22.0m - $25.5m $27.0m - $30.5m	$9.6m
			The achievement of guidance is underpinned by growth
			in the SMB division (driven by the launch of .au
Core
		domains on 1 October 2019), and the anticipated
			recovery in Enterprise underlying EBITDA in H2.

Underlying EBITDA ($m)

$15.5m - $18.5m $20.5m - $23.5m

$3.6m

Key Points:

1. The guidance issued in June was prepared on the basis of AASB 117 - the old accounting standard for leases. This table presents the guidance for FY19 restated following the adoption of AASB 16 - the new accounting standard for leases.
2. There has been no effective change in guidance following the restatement.
3. The first half results have been prepared post the adoption of AASB 16.
4. The adoption of AASB 16 has no impact on cash. However, costs associated with operating leases are essentially reallocated from operating expenditure (i.e. above EBITDA) to depreciation and interest (i.e. below EBITDA). This has the effect of nominally increasing EBITDA (with an offsetting impact on D&A and interest).

14

Summary

15Arq Group H1 FY19 Results Presentation

Summary

After a challenging 12 months the recovery is underway.

• The first half result was a story in two parts;
• • a strong bounce back in the SMB division wasn't enough to offset a challenging first half for the Enterprise division
• A comprehensive recovery plan has been implemented and is delivering results;
• • the SMB division had a very pleasing first half - sales of subscription digital revenue are back to historical levels and core underlying EBITDA was up 57% on the PCP
  • momentum is building in the Enterprise division - but it is early days
  • annualised cost savings of $3.8m have been realised with another $2.0m to come in FY20
• Net debt position is steadily improving;
• • net debt of $51.6m at the end of July and a leverage ratio of 2.1x1
  • we expect to be back within our published target range for the net leverage ratio (ie 1.25x - 1.75x) towards the end of H1 FY202on the back of growing billings and continued strong cash conversion
• Full year guidance has been affirmed;
• • H1 FY19 underlying EBITDA for the Group was $9.6m and full year guidance is a range of $27.5m - $30.5m
  • a recovery in the Enterprise division in H2 underpins the achievement of guidance
• We areon-track at the end of H1 FY19 and momentum is building with each month

1. The leverage ratio is calculated as net debt divided by a trailing 12 months EBITDA
2. This is based on the guidance for Group EBITDA.

Arq Group Financials

Arq Financials

H1 FY19 Results: reported

Half year ended	H1 FY19	H1 FY19	H1 FY18	∆%1	Notes
30 June 2019	AASB 16	AASB 117	AASB 117		(Movements relate to numbers presented under AASB 117)
					Revenue has been negatively impacted by poor performance in signing
Revenue	$90.9m	$90.9m	$112.4m	(19%)	new business in Enterprise in H1 and the compounding impact of lower
than expected new subscription sales in SMB in FY18 (resulting in a lower
					stepping off point in FY19).
EBITDA	$7.8m	$5.3m	$8.5m	(38%)	EBITDA has been impacted by a decline in revenue and margin compared
to the prior comparative period. This has been partially offset by a
					smaller impact of one-off items compared to H1 FY18.

EBITDA margin

8.6%

5.8%

7.6%

(24%)

Impacted by the drivers mentioned above.

NPAT	($0.6m)	($0.5m)	($2.7m)	81%	NPAT has been favourably impacted by a smaller impact of one-off items
compared to H1 FY18.

EPS (cents)

(0.5c)

n/a

(2.3c)

n/a

17Arq Group H1 FY19 Results Presentation

Note: Figures throughout this document may not be exact due to rounding and includes non-IFRS financial information that is relevant for users understanding the performance of the business

1. Period on period movement has been calculated using financial information prepared under AASB 117: Leases.

Arq Financials

Arq Group H1 FY19 Results Presentation

H1 FY19 Results: reported

Half year ended	H1 FY19	H1 FY19	H1 FY18	∆%1	Notes
30 June 2019	AASB 16	AASB 117	AASB 117		(Movements relate to numbers presented under AASB 117)
					Revenue has been negatively impacted by poor performance in signing
Revenue (excl. interest)	$90.9m	$90.9m	$112.4m	(19%)	new business in Enterprise in H1 and the compounding impact of lower
than expected new subscription sales in SMB in FY18 (resulting in a lower
					stepping off point in FY19).
COGS	($42.8m)	($42.8m)	($48.9m)	12%	Variable COGS savings due to lower revenue during the period.
Gross margin (excl.	$48.1m	$48.1m	$63.5m	(24%)	Margin has been impacted by revenue mix changes in both SMB and
interest)	Enterprise.
Other income	$0.3m	$0.3m	$0.0m	n/a
					Prior period includes one-off costs associated with the reassessment of
Operating expenses	($40.6m)	($43.1m)	($55.0m)	22%	the contingent consideration liability and rebranding costs. The current
period has also benefited from cost control including headcount
					efficiencies.
Reported EBITDA	$7.8m	$5.3m	$8.5m	(38%)	EBITDA has been impacted by a decline in revenue and margin compared
to the prior comparative period. This has been partially offset by a
					smaller impact of one-off items compared to H1 FY18.
D&A	($7.8m)	($5.4m)	($8.5m)	(36%)	Prior period includes accelerated amortisation of WebCentral brand as a
result of the rebranding.
Net interest expense	($1.7m)	($1.4m)	($1.3m)	(8%)
Income tax credit/ (expense)	$1.1m	$1.0m	($1.3m)	n/a	The prior period was impacted by non-tax deducible expenses.
Profit attributable to NCI	$0.0m	$0.0m	($0.1m)	100%
Reported NPAT	($0.6m)	($0.5m)	($2.7m)	81%	NPAT has benefited from a smaller impact of one-off items compared to
H1 FY18.

18

Note: Figures throughout this document may not be exact due to rounding and includes non-IFRS financial information that is relevant for users understanding the performance of the business.

1. Period on period movement has been calculated using financial information prepared under AASB117: Leases.

Arq Financials

Arq Group H1 FY19 Results Presentation

H1 FY19:underlying EBITDA bridge

Underlying EBITDA margins have been impacted by the top line performance

16.5% margin

10.6% margin

19

1. Period on period movements are derived from pro forma revenue, COGs and operating expenses.

Arq Financials

H1 FY19:operating costs bridge

The Group's operating cost base has benefitted from tight cost control and the absence of one-off items of expenditure relating to the acquisition of InfoReady and the launch of the 'Arq Group' brand.

Year-on-year BAU	Driven by Arq brand
operating costs have	launch in the prior
decreased by 12%	period ($2.2m)

20Arq Group H1 FY19 Results Presentation

1. BAU operating costs includes investment in marketing, technology, integration and pay increases.
2. Current and prior period financial information presented above is prepared under the AASB 117:Leases.

Arq Financials

Arq Group H1 FY19 Results Presentation

H1 FY19:underlying NPAT bridge

Underlying EBITDA performance is the key driver of the underlying NPAT result

21

1. Underlying EBITDA excludes one-off and non-recurring expenses.

Core Operations

H1 FY19 Results:

Core Operations

Arq Group H1 FY19 Results Presentation

22

Core Operations

Core Operations: results

Arq Group H1 FY19 Results Presentation

Half year ended	H1 FY19	H1 FY19	H1 FY18	∆%	Notes
30 June 2019	AASB 16	AASB 117	AASB 117		(Movements relate to numbers presented under AASB 117)
					Revenue has been negatively impacted by poor performance in
Revenue (exc. interest)	$78.8m	$78.8m	$99.6m	(21%)	signing new business in Enterprise in H1 and the compounding
impact of lower than expected new subscription sales in SMB in
					FY18 (resulting in a lower stepping off point in FY19).
COGS	($37.6m)	($37.6m)	($43.7m)	14%	Variable COGS savings due to lower revenue during the period.
Gross margin (exc. interest)	$41.2m	$41.2m	$55.9m	(26%)	Margin has been impacted by decline in high margin solutions
products and unfavourable revenue mix in Enterprise.
Operating expenses	($37.6m)	($40.1m)	($43.8m)	8%	The current period has benefited from cost control including
headcount efficiencies.
Underlying EBITDA	$3.6m	$1.1m	$12.1m	(91%)
Underlying EBITDA margin	5%	1%	12%	(92%)
Non-recurring adjustments	($1.8m)	($1.8m)	($10.1m)	n/a
Reported EBITDA	$1.8m	($0.7m)	$2.0m	(135%)

23

Note: Figures throughout this document may not be exact due to rounding and includes non-IFRS financial information that is relevant for users understanding the performance of the business.

1. Period on period movement has been calculated using financial information prepared under AASB117: Leases.

Core Operations

Core Operations:revenue and margin

24Arq Group H1 FY19 Results Presentation

				Revenue				Underlying EBITDA margin %
	120							14%
	100							12%
	80							10%
							8%
$m	60
				99.6		6%
	40				77.9	78.8
			64.2		4%
	20		45.1
	36.1					2%
	0	H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19	0%
		H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19
Commentary

Revenue for H1 FY19 has declined from the prior year as a result of unexpected delays in turning on revenue from

Revenuenew contracts and executional issues in Melbourne, that are being addressed. In addition, the prior year contained a contribution from an exceptional customer contract that was not present in H1 FY19.

Underlying EBITDA margin has been impacted by the drop in Enterprise revenue in H1 FY19. This has been partially

EBITDA Marginoffset by improvements in the Underlying EBITDA margin of the Core SMB business, which is underpinned by synergy savings from SMB integration program and operational cost efficiencies achieved through a redesign of the SMB Solutions business model.

1. On 1 January 2018, the Group adopted two new accounting standards, AASB 15:Revenue from Contractswith Customers and AASB 9: Financial Instruments. FY18 financial information (and FY17 prior year
   comparative) have been presented on this basis. Financial information for periods prior to 1 January 2017 are presented in accordance with, AASB 118: Revenue, AASB 132: Financial Instruments:
   Presentation and AASB 139:Recognition and Measurement.
2. On 1 January 2019, the Group adopted the new accounting standard, AASB 16:Leases. FY19 financial information has been presented on this basis. Financial information for periods prior to 1 January 2019
   are presented in accordance with AASB 117: Leases.

Enterprise

Enterprise:

results and performance

Arq Group H1 FY19 Results Presentation

25

Enterprise

Enterprise:segment results

The Enterprise division had a challenging first half but a recovery is underway.

Arq Group H1 FY19 Results Presentation

Half year ended	H1 FY19	H1 FY18	∆%	Notes
30 June 2019	AASB 117	AASB 117
				Revenue has been negatively impacted by poor performance in
				signing new business in Melbourne and delays in turning on
Revenue (excl. interest)	$44.2m	$61.0m	(28%)	revenue. The comparison to the PCP is also distorted by an
				exceptional customer contract providing $15.3m in revenue in
				H1 FY18.
COGS	($26.7m)	($30.2m)	12%
Gross margin (excl. interest)	$17.5m	$30.8m	(43%)	Margin has been impacted by an unfavourable revenue mix.
Operating expenses	($17.7m)	($17.4m)	(2%)
Underlying EBITDA	($0.2m)	$13.4m	(101%)
Underlying EBITDA margin	0%	22.0%	n/a
Non-recurring adjustments	($0.2m)	($0.3m)	33%	Other non-operating expenses included in the Enterprise results
Reported EBITDA	($0.4m)	$13.1m	(103%)

26

1. The segment results have been presented using financial information prepared under AASB117: Leases. Refer to the table in Appendix Two that presents a summary of the financial impacts of the application of AASB 16 at a Group level.

Enterprise

Enterprise:revenue and margin

Revenue and margin have been impacted in the current half by unexpected delays in turning on revenue from new contracts and executional issues in Melbourne. These have been addressed.

70.0			Revenue ($m)					Underlying EBITDA margin %
						25%
60.0							20%
50.0
						15%
40.0
						10%
				61.0
30.0
			43.8	44.2	5%
20.0
		30.7				0%
10.0
13.1	15.7					-5%	H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19
0.0
H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19

Arq Group H1 FY19 Results Presentation

Outlook

Revenue for H1 FY19 has declined from the prior year as a result of unexpected delays in turning on revenue from

Revenuenew contracts and executional issues in Melbourne. These have been addressed. In addition, the prior year contained a contribution from an exceptional customer contract that was not present in H1 FY19.

Underlying EBITDA margin has been impacted by the drop in Enterprise revenue in H1 FY19, in addition to the

EBITDA Margin absence of the exceptional customer contract (present in H1 FY19), which generated a higher than average margin.

27

Enterprise

Enterprise execution: revenue quality

Revenue mix

Customer Concentration

Multi-practice revenue

Results Presentation

$m

120%

100%

80%

60%

40%

20%

0%

36%

38%

26%

29%

36%

35%

31%

H1 FY18

69%

42%

H1 FY19

58%

28Arq Group H1 FY19

H1 FY18	H1 FY19
ES Annuity		ES Repeatable			ES Projects	Top 20 Customers	Others		Single Practice Customers	Multi Practice Customers

Definitions: 1. annuity revenue is contracted recurring income, 2. repeatable revenues are instances where we have been consistently billing the same customer for 2 or more years, 3. project revenue is where we have been billing the customer for less than two years, 4. a multi-practice customer is an Enterprise customer who takes services from 2 or more of the practices (i.e. mobile, data and analytics, and cloud).

SMB Direct

SMB Direct:

results and performance

Arq Group H1 FY19 Results Presentation

29

SMB Direct

Arq Group H1 FY19 Results Presentation

SMB Direct:segment results (core)

Half year ended	H1 FY19	H1 FY18	∆%	Notes
30 June 2019	AASB 117	AASB 117
Revenue (exc. interest)	$34.6m	$38.6m	(10%)	Decrease due to decline in solutions products
($3.4m) and Direct Components ($0.6m).
COGS	($11.1m)	($13.5m)	18%
				Improved margin % due to progressive
Gross margin (exc. interest)	$23.5m	$25.1m	(6%)	insourcing of solutions fulfilment and COGS
				initiatives in Components.
Operating expenses	($19.1m)	($22.3m)	14%	Benefit of tight cost management, including
headcount efficiencies.
Underlying EBITDA	$4.4m	$2.8m	57%
Underlying EBITDA margin	13%	7%	86%	This has been favourably impacted by operating
cost efficiencies.
Non-recurring adjustments and pro	($0.3m)	($0.9m)	67%	One-off costs of integrating acquired businesses.
forma contribution
Reported EBITDA	$4.1m	$1.9m	116%

30

1. The segment results have been presented using financial information prepared under AASB117: Leases. Refer to the table in Appendix Two that presents a summary of the financial impacts of the application of AASB 16 at a Group level.

SMB Direct

SMB Direct:revenue and margin

31Arq Group H1 FY19 Results Presentation

Good recovery in the underlying EBITDA margin driven by sustainable cost savings

															Underlying EBITDA margin %
	45.0										18.0%
								38.6
	40.0									16.0%
				33.4	34.2		34.6
	35.0					14.0%
		29.2				12.7
	30.0		3.2	5.5	9.3	12.0%
		1.9
$m	25.0	22.6
								10.0%
	20.0	1.5									8.0%
				30.2
	15.0		27.3	28.7	25.9	25.3
	21.1	6.0%
	10.0
	5.0										4.0%
	0.0										2.0%
	H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19
		0.0%
				SMB Direct Components			Solutions		H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19

Outlook

Revenue	Decline in WME subscription services as a result of lower new sales in H2 FY18 causing the FY19 stepping off point
to be materially lower than FY18. Turnaround initiatives showing growth in new subscription sales in H1 FY19.

EBITDA Margin

Sustainable cost savings have not negatively impacted revenue resulting in a stronger EBITDA position.

1. On 1 January 2018, the Group adopted two new accounting standards, AASB 15: Revenue from Contracts with Customersand AASB 9: Financial Instruments. FY18 financial information

(and FY17 prior year comparative) have been presented on this basis. Financial information for periods prior to 1 January 2017 are presented in accordance with, AASB 118: Revenue,

AASB 132: Financial Instruments: Presentationand AASB 139: Recognition and Measurement.

Non-Core Operations

H1 FY19 Results:

Non-Core Operations

Arq Group H1 FY19 Results Presentation

32

Non-Core Operations

Arq Group H1 FY19 Results Presentation

SMB Indirect:segment results (non-core)

Half year ended	H1 FY19	H1 FY18	∆%	Notes
30 June 2019	AASB 117	AASB 117
Revenue (exc. interest)	$12.1m	$12.8m	(5%)	Continued decline in Indirect part of SMB business.
COGS	($5.0m)	($5.2m)	4%
Gross margin (exc. interest)	$7.1m	$7.6m	(7%)	Lower margin % due to decline in higher margin
products.
Operating expenses	($1.1m)	($1.1m)	0%
Underlying EBITDA	$6.0m	$6.5m	(8%)
Underlying EBITDA margin	50%	51%	(2%)
Non-recurring adjustments	$0.0m	$0.0m
Reported EBITDA	$6.0m	$6.5m	(8%)

33

1. The segment results have been presented using financial information prepared under AASB117: Leases. Refer to the table in Appendix Two that presents a summary of the financial impacts of the application of AASB 16 at a Group level.

Non-Core Operations

SMB Indirect:revenue and margin

The SMB Indirect business is in systemic decline

											Underlying EBITDA margin %
30.0							60.0%
			Sale of IDNR			50.0%			Sale of lower margin
				business
25.0									IDNR business
					40.0%
20.0
$m							30.0%
15.0
10.0	23.5	24.1					20.0%
		18.6	13.1	12.8	12.1
		10.0%
5.0
0.0							0.0%
H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19	H1 FY14	H1 FY15	H1 FY16	H1 FY17	H1 FY18	H1 FY19

34Arq Group H1 FY19 Results Presentation

Outlook

Successfully completed the divestment of the TPP Wholesale Reseller business, contributing $21.3m to our balance sheet. The other half of the Indirect business comprises a single customer who has indicated that they

Revenuewill be materially reducing their spend but the timing and quantum of this remains unclear. As such we cannot confidently forecast this contribution due to the uncertainty surround the timing and the quantum of both the divestment and the reduction in spend from the large customer.

1. On 1 January 2018, the Group adopted two new accounting standards, AASB 15: Revenue from Contractswith Customers and AASB 9: Financial Instruments. FY18 financial information (and FY17 prior year comparative) have been presented on this basis. Financial information for periods prior to 1 January 2017 are presented in accordance with, AASB 118: Revenue, AASB 132: Financial Instruments: Presentationand AASB 139: Recognition and Measurement.

Cash and Capital

H1 FY19 Results:

Cash and Capital

Arq Group H1 FY19 Results Presentation

35

Arq Recovery

H1 FY19: net debt

Net debt increased in line with expectations in the current half, primarily driven by financing and investing cash flows

Arq Group H1 FY19 Results Presentation

Free cash flow	Finance &
	investment

• Free cash flow has benefited from improvements in the working capital position in the current half, resulting from cash flow initiatives implemented.
• The Group paid $1.8m in cash relating to the third and final earnout payment for InfoReady in the current half.
• As a result of the adoption of AASB 16:Leases, the cash outflows relating to the office lease liabilities have been reclassified as a financing cash flow (previously these were classified as an operating cash flow and included as an offset to the Reported EBITDA item). This has no impact on the net cash movement or net debt position

36

1. This is based on achieving the guidance for Group EBITDA.

Cash and Capital

H1 FY19:leverage ratio

The one-off cash outgoings of the past 18 months (approx. $17.0m) are largely behind us. Net debt will steadily decline and our net leverage ratio will be within our published target range by late in H1 FY20.

Group H1 FY19 Results Presentation

Net debt to EBITDA1

3.0
Calculated after the
	sale of TPP Reseller
	business was
2.5	completed in July
	2019

2.0

1.5Net Debt / EBITDA

Target Range

1.0

0.5

0.0

H1 FY16 H2 FY16 H1 FY17 H2 FY17 H1 FY18 H2 FY18 H1 FY19 Jul-19

• The Group's bank covenant for Net Debt/EBITDA was 3.0x prior to the sale of the TPP Reseller business and reduced to 2.5x following the receipt of the upfront component ($21.3m) of the sale proceeds in late July.
• As at 31 July 2019 net debt was $51.6m for a leverage ratio of 2.1x.
• Net debt increased beyond target levels due to the impact of the following significant outflows:
• • fit-outcosts associated with expanding our footprint in Melbourne and Sydney;
  • one off costs incurred in rebranding; and
  • higher than expected earnout payments as a result of strong performance of InfoReady acquisition.
• The Group expects to be operating within its published target range for the leverage ratio (1.25x to 1.75x) by late H1 20202on the back of the recovery in Enterprise and continued strong cash conversion.

37 Arq

1. Based on a trailing 12 month underlying EBITDA. Underlying EBITDA has been calculated using financial information prepared under AASB 117:Leases.
2. This is based on the guidance for Group EBITDA.

Cash and Capital

Arq Group H1 FY19 Results Presentation

H1 FY19:cash conversion

Operating Cash Flows (excl. tax & interest)/

EBITDA

200%

185%	188%
Primarily driven by	Favourable impact
timing in payments	from the exceptional
to suppliers	contract

150%

123%

123%

100%

96%

75%

50%

0%

H1 FY14

H1 FY15

H1 FY16

H1 FY17

H1 FY18

H1 FY19

• The strong cash conversion in H1 FY19 had been underpinned by a number of initiatives to optimise the Group's working capital position, including a restructure of the Group's invoicing process, a review of supplier payment terms, and the introduction of supply chain financing for key customers.
• Free cash flow conversion in H1 was 123%, notwithstanding amounts withheld relating to the key customer contract dispute.
• We expect cash conversion to reduce in H2 FY19 to typical levels.

38

Appendix One

SMB: segment results

Appendix One: SMB: segment results

Arq Group H1 FY19 Results Presentation

SMB:segment results (core and non-core)

Half year ended	H1 FY19	H1 FY18	∆%	Notes
30 June 2019	AASB 117	AASB 117
				Decrease due to decline in solutions products
Revenue (exc. interest)	$46.7m	$51.4m	(9%)	($3.4m) , Direct Components ($0.6m) and
				Indirect Components ($0.7m).
COGS	($16.1m)	($18.7m)	14%
				Improved margin % due to progressive
Gross margin (exc. interest)	$30.6m	$32.7m	(6%)	insourcing of solutions fulfilment and COGS
				initiatives in Components.
Operating expenses	($20.2m)	($23.4m)	14%	Benefit of tight cost management, including
headcount efficiencies.
Underlying EBITDA	$10.4m	$9.3m	12%
Underlying EBITDA margin	22%	18%	22%	This has been favourably impacted by operating
cost efficiencies.
Non-recurring adjustments and pro	($0.3m)	($0.9m)	67%	One-off costs of integrating acquired businesses.
forma contribution
Reported EBITDA	$10.1m	$8.4m	20%

40

1. The segment results have been presented using financial information prepared under AASB117: Leases. Refer to the table in Appendix Two that presents a summary of the financial impacts of the application of AASB 16 at a Group level.

Appendix Two

Adoption of AASB 16: Leases

Appendix Two: Adoption of AASB 16: Leases

Arq Group H1 FY19 Results Presentation

Adoption of AASB 16: Leases

• The Australian Accounting Standards Board (AASB) has issued a new leases standard, AASB 16:Leases('AASB 16'), which became effective from 1 January 2019. This standard supersedes the previous leases standard AASB 117: Leases.
• The Group has identified premises contracts (as both a lessor and a lessee) and equipment lease contracts (as a lessee) that are impacted by the application of the new standard.
• The impact of the adoption of AASB 16 has resulted in a reallocation of operating expenses to depreciation and an increase of net assets upon transition. The primary driver of the P&L impact is that premises contracts (as a lessor) changes classification from an operating lease under AASB 117 to a finance lease under AASB 16. This change results in lessor premises income previously recognised in the P&L now being recorded on the balance sheet, with P&L impacts limited to interest income under AASB 16. Cash flows from leases will be unchanged.
• The Group has finalised the financial impact resulting from the application of the new standard from 1 January 2019. The Group has elected to adopt the modified transition approach, which does not require restatement of prior period comparatives. The financial impacts of the application of AASB 16 have been reported in the Appendix 4D and the Half Year Financial Report.

42

Appendix Two: Adoption of AASB 16: Leases

Adoption of AASB 16: Leases

The following table presents a summary of the financial impacts of the application of AASB 16.

Half year ended	H1 FY19	Adjustment	H1 FY19	H1 FY18
30 June 2019	AASB 16	for AASB 117	AASB 117	AASB 117
Revenue (excl. interest)	$90.9m	$0.0m	$90.9m	$112.4m
COGS	($42.8m)	$0.0m	($42.8m)	($48.9m)
Gross margin (excl. interest)	$48.1m	$0.0m	$48.1m	$63.5m
Other income	$0.3m	$0.0m	$0.3m	$0.0m
Operating expenses	($40.6m)	($2.5m)	($43.1m)	($55.0m)

Arq Group H1 FY19 Results Presentation

EBITDA

$7.8m

($2.5m)

$5.3m

$8.5m

D&A	($7.8m)	$2.4m	($5.4m)	($8.5m)
Net interest expense	($1.7m)	$0.3m	($1.4m)	($1.3m)
Income tax credit/ (expense)	$1.1m	($0.1m)	$1.0m	($1.3m)
Profit attributable to NCI	$0.0m	$0.0m	$0.0m	($0.1m)
NPAT	($0.6m)	$0.1m	($0.5m)	($2.7m)

43

Appendix Three

Arq Group: core and non-core explained

Three: Arq Group Explained

Arq Group:core and non-core explained

Appendix

Arq Group H1 FY19 Results Presentation

Arq Group

H1 FY19: $9.6m

H1 FY18: $18.6m

SMB

Unallocated

Enterprise

Corporate Costs

H1 FY19: $10.4m

H1 FY19: ($0.6m)

H1 FY19: ($0.2m)

H1 FY18: $9.3m

H1 FY18: ($4.1m)

H1 FY18: $13.4m

SMB Direct

SMB Indirect

H1 FY19: $4.4m

H1 FY19: $6.0m

H1 FY18: $2.8m

H1 FY18: $6.5m

TPP reseller business

sold as at 31 July

2019

Telco

TPP Reseller

Business

H1 FY19: $3.6m

H1 FY19: $2.4m

H1 FY18: $3.6m

H1 FY18: $2.9m

Core operations

Non-core operations

To assist in understanding the future performance of the Group, from the start of the FY19 we separately disclose the contributions of the "core" and "non-core" operations;

• In 2018 we started the final stage of exiting the Indirect part of SMB. Consequently we considered this part of the business to be"non-core". Everything else was considered to be "core".
• While the Indirect part of SMB didn't meet the definition of a discontinued operation for the purposes of AASB 5(Non-Current Assets Held for Sale And Discontinued Operations), we considered that separately disclosing the respective contributions of the core and non-core operations to the overall group result was both desirable and helpful.
• Accordingly, we present separate P&L statements for the core andnon-core operations
• The chart on the left identifies the core andnon-core parts of the Group and their respective contributions to core and non-core underlying EBITDA.

45

Current period financial information presented above is prepared under AASB 16: Leases. Prior period financial information presented above is prepared under AASB 117: Leases. The impact of H1 FY19 underlying EBITDA following the adoption of AASB 16 has been taken through corporate costs and as a result the period-on-period comparison for all other components is on a like-for-like basis.

Appendix Four

Financial Information

Appendix Four: Financial Information

Arq Group H1 FY19 Results Presentation

Financial Information: reported to underlying EBITDA from Core Operations

Half year ended	H1 FY19	H1 FY18	Notes
30 June 2019	AASB 16	AASB 117
Reported EBITDA	$7.8m	$8.5m
Loss / (gain) on reassessment of contingent consideration liability	($0.1m)	$5.5m	Relates to Infoready acquisition
Integration costs	$0.8m	$1.6m	One off costs to integrate acquisitions
Property costs	$0.1m	$0.4m	Relates to one off costs from property move
Brand costs	$0.2m	$2.2m	One off costs related to re-branding
Transaction costs	$0.4m	$0.4m	One off transaction costs for acquisitions
Restructuring cost	$0.4m	$0.0m
Underlying EBITDA	$9.6m	$18.6m
Underlying EBITDA from Non- Core Operations (SMB Indirect)1	$6.0m	$6.5m
Underlying EBITDA from Core Operations1	$3.6m	$12.1m

47

1. In presenting Underlying EBITDA for core operations, the Group has excluded the financial contribution of the SMB Indirect business, which it deems as non-core to the Group.

Appendix Four: Financial Information

Arq Group H1 FY19 Results Presentation

Financial Information:reported to underlying NPAT from Core Operations

Half year ended	H1 FY19	H1 FY18	Notes
30 June 2019	AASB 16	AASB 117
Reported NPAT	($0.6m)	($2.7m)
Loss / (Gain) on reassessment of contingent consideration liability	($0.1m)	$5.5m	Relates to Infoready acquisition
Amortisation of WebCentral brand intangible asset (tax effected)	$0.0m	$2.5m	Accelerated amortisation of the WebCentral brand
intangible as a result of re-branding.
Arq brand costs (tax effected)	$0.1m	$1.6m	One off costs related to re-branding
Integration costs (tax effected)	$0.5m	$1.1m	One off costs to integrate acquisitions
Transaction costs (tax effected)	$0.4m	$0.4m	One off transaction costs for acquisitions
Property costs (tax effected)	$0.1m	$0.6m	Relates to one off costs from property move
Unwinding of discount on other financial liabilities	$0.0m	$0.1m	Relates to InfoReady acquisition
Restructuring costs (tax effected)	$0.3m	$0.0m
Other non-operating expenses (tax effected)	$0.1m	$0.0m
Underlying NPAT	$0.8m	$9.1m
Underlying NPAT from Non- Core Operations (SMB Indirect)1	$4.1m	$4.5m
Underlying NPAT from Core Operations1	($3.3m)	$4.6m

48

1. In presenting Underlying NPAT for core operations, the Group has excluded the financial contribution of the SMB Indirect business, which it deems as non-core to the Group.

Appendix Four: Financial Information

Arq Group H1 FY19 Results Presentation

Financial Information: cash movement

Half year ended	H1 FY19	H1 FY19	H1 FY18 Notes
30 June 2019	AASB 16	AASB 117	AASB 117
OPERATING
Reported EBITDA	$7.8m	$5.3m	$8.5m
Non cash items	$0.3m	$0.3m	$5.8m
Working capital	$1.8m	$1.8m	$7.4m
Net tax paid	($3.3m)	($3.3m)	($2.6m)
Net interest paid	($1.7m)	($1.3m)	($1.4m)
Total Operating	$4.9m	$2.8m	$17.7m
INVESTING
Acquisition of InfoReady	($2.0m)	($2.0m)	($5.7m) Relates to earnout payments for the InfoReady acquisition
Transaction costs	($0.2m)	($0.2m)	($0.1m)
Return of capital from Tiger Pistol	$0.5m	$0.5m	$0.0m
Purchase of P,P&E and intangible assets	($1.9m)	($1.9m)	($9.5m)	Prior period includes leasehold improvements for the new Melbourne
and Sydney office fit outs.
Total investing	($3.6m)	($3.6m)	($15.3m)
FINANCING
Net payment of lease liabilities	($2.3m)	($0.1m)	$0.0m
Dividend paid	($4.6m)	($4.6m)	($7.0m)
Proceeds from / (repayment of) borrowings	$5.0m	$5.0m	($0.1m)
Total Financing	($1.9m)	$0.3m	($7.1m)

49

Appendix Four: Financial Information

Arq Group H1 FY19 Results Presentation

Financial Information: balance sheet

Half year ended	H1 FY19	H2 FY18	∆%	Notes
30 June 2019	AASB 16	AASB 117
				Decrease due to capex investment, instalments for third
Cash	$7.7m	$8.3m	(7%)	earnout period of contingent consideration on InfoReady
acquisition and dividends paid, partially offset by positive
				operating cash flows.
Other current assets	$74.2m	$73.0m	2%	Immaterial movement after adjusting for recognition of
lease receivable under AASB 16.
Non-current assets	$274.8m	$251.0m	9%	Increase primarily due to recognition of lease receivable
and Right-of-use asset under AASB 16.

Total assets	$356.7m	$332.3m	7%
				Increase primarily due to recognition of lease liability
Current liabilities	$75.8m	$75.4m	(1%)	under AASB 16, partially offset by reduction of the third
earnout liability for InfoReady due to instalments paid
				through cash and equity.
Non-current liabilities	$119.0m	$94.4m	(26%)	Increase primarily due to recognition of lease liability
under AASB 16 and proceeds from borrowings.
Total liabilities	$194.8m	$169.8m	(15%)
Equity	$161.9m	$162.5m	0%	Decrease due to dividends paid partially offset by issue of
shares for InfoReady earn out liability settlement.

50