Dropsuite Ltd

ASX:DSE

Earnings Call Transcript 2021-Q2

[Craig Sainsbury]

All right. Good morning, everybody. Thank you for joining us this morning for Dropsuite's Q2 results presentation. With me on the call today, I have Charif Elansari, who is the CEO; and Bill Kyriacou, who is the CFO of the company. With that little introduction, Charif, I will turn it over to you to go through the presentation. [Operator Instructions] And with that, I'll turn it over to you, Charif.

[Charif Elansari, CEO, MD & Director]

Thank you, Craig. Good day, everyone. I'm really glad to be here to present another solid quarter for Dropsuite. Allow me to start, as always, with a short introduction for those who are new to Dropsuite and to our story. Dropsuite simply exists to safeguard business information to help businesses stay in business. We are 100% SaaS scalable recurring revenue company, building software that is highly scalable, very global with more than 500,000 users around more than 100 countries. We've been validated for the second year in a row as the e-mail backup leader by Info-Tech, and we'll talk more about it throughout the presentation. And perhaps most importantly, we have a highly committed and passionate team across Asia Pacific, North America and Europe.Let me first talk about the market overall that we are operating in. This is a fast-growing market. The average growth expected all the way until 2025 is north of 20% per year. This is propelled by some solid tailwinds. First and foremost, the crazy growth of ransomware and cyber threats and the ensuing data loss threats that are really infecting companies, organizations who are also in government as well, small companies, big companies. I'm sure you're hearing tons of new stories talking about ransomwares. That's the #1 tailwind propelling the industry growth overall. The second one that continues to grow in importance is the growing regulation of -- around data privacy. This started in Europe and it is expanding to many areas around the world, including countries like Australia and Brazil and Singapore. And thirdly, we continue to see this massive cloud migration from on-premise where people were using servers in their own office or in the data center, moving a lot of their workloads to the public cloud. I mean just a case in point here. When you look at Office 365, they grew their users from 70 million in 2016, all the way to more than 300 million in the first half of 2021. Bottom line, this is a massive industry that is expected to grow double digit for the foreseeable future.Let me quickly introduce our product suite that has been evolving over the years. Our origin started with website and database backup upon the founding of the company in 2012. Then we extended into basic e-mail backup, then on-premise Microsoft backup, which is called On-premise Exchange. And then we launched Microsoft Office 365 backup. And most recently, we saw -- we launched the complete backup solution for Google Workspace, which is basically Google's answer to Microsoft 365. Our product suite is packed with meaningful features that are very popular with our partners and with our customers. Everything is fully automated, being able to restore data as simple as one click. We have lightning fast search capabilities that enables our customers and our users to find what they're looking for within seconds. We also are very unique in our ability to combine backup with compliance and archiving capabilities for the lawyers and for the compliance officers, so they can shift through their data quickly in case there's a lawsuit or if there's a regulatory query that affects the company that is archiving its data. And we also introduced some time back GDPR, which is the EU data privacy law's module, and we talked a bunch about of -- about how we help companies comply with laws, whether it's GDPR or Healthcare Act in the U.S., et cetera.We deliver our products via an ever-expanding partner set. We are a partner-led company. We have partners that operate as hosting providers or cloud IT distributors and managed service providers. And just to remind everybody, a managed service provider is where companies outsource IT to, right? They tend to work with small and medium businesses and mid-enterprise customers, and they take care with their -- all their IT needs. So while we expanded our IT reseller partners by about 10% quarter-on-quarter or 8%, it's really important to note that we're only counting partners that we have signed a contract with and we bill every month, but we are not counting hundreds of MSPs that are transacting on our platform every single day. And we're already now approaching about 2,000 partners, direct and indirect, transacting with us, and that helped us reach the very nice milestone of exceeding 500,000 users in the June quarter of 2021. We absolutely love this business model because it helps us scale really well across sales support and marketing. We can double down on product improvement and product innovation. We -- it also allows us to grow our revenue at a much faster rate than our operating expenditures with a very solid path to operational leverage.Now how we win and what is the advantage that we derive in the marketplace. We deliver this partner experience very seamlessly. We integrate into the partner infrastructure. We let the partner work on Dropsuite through their existing workflows, which is where provisioning, billing, support, everything is taking place through their existing ERPs and their existing workflows. We also deliver an exceptional user experience, intuitive interface. We talked about lightning fast search, very granular restoration capabilities. We talked about how we're being unique in combining backup and archiving and compliance in 1 product. And this is something that our partners and our users absolutely love. We deliver all of the above with a cutting-edge cloud platform. We've been cloud-native since day 1. We've been using the public cloud since 2012, since our founding. And that means we don't have any hindrances. We don't have any issues with legacy like many of the players in this market. And very importantly, we have a very highly responsive team that is absolutely loved with our partners and our clients.Now this has delivered and continue to deliver some very meaningful validation. So if you look at the quadrant here, for the second year in a row, as we further up to the right, Dropsuite Office 365 Backup was #1 by SoftwareReviews. And this is a company called Info-Tech operating in North America that has been in the software review business since the '80s. So this is -- and this is something that we are very proud about and the team is very proud about and continues to help us achieve more credibility and more brand visibility in the markets that we serve.I want to double-click a little bit more, and this slide is not in the investor presentation that was launched today. This is available, by the way, on our website. So if you go to dropsuite.com, you can find it very quickly. If you look at what our customers and our partners are saying about us, you can see that we rank very strongly across multiple attributes, from features and capabilities to something more emotional about integrity and reliability and generosity and caring for the customer in a meaningful way. So we combine both the best end results. We also lead in terms of the emotion as well. And if you look at the lower part of the slide, you can see that 97% of the people who were interviewed for SoftwareReviews are likely to recommend. 100% are planning to new and 87% are satisfied with the cost relative to value. This gave us the very high ranking that you see being 9.3 out of 10 on the composite score. With that, we have been able to continue delivering. In terms of product innovation, we mentioned that we launched the full Google Workspace in Q2, and that positively affected our numbers. We also -- as we mentioned this in the operations update, we have launched a new partner portal. As we expand the number of partners globally, we want to continue enhancing the experience, and that's something that we've launched right now in North America with very positive feedback from the partners who are using the new partner portal. We obviously continue to focus on growing our partnership. This is both getting mutual success with our existing partners as well as onboarding new strategic partners that we expect to see more of in the second half of 2021 calendar. And finally, the third pillar of our growth is to continue boosting our revenue per user. And we've seen that delivered very well in this year and actually has been delivered quite well since about 1.5 years. And that is driven by the continuous shift mix into the higher price, higher featured products like Office 365 Backup and archiving as one. We also continue to reduce our revenue concentration with the top 10 revenue contribution being sub-70%, and that's the first in this year, in 2021. So Q1 and Q2, we've delivered that. And that's a first since 2014, just to put things in perspective. Now with us delivering on solid results, product leadership, partner expansion, recognition from SoftwareReviews as the #1 backup vendor for Office 365, we have delivered some very solid results in the June quarter. And I will let my colleague, Bill, take us through the results.

[Bill Kyriacou, Head of Finance]

Thank you, Charif. I'm pleased to report continued solid growth on our key metrics across the business for the June quarter with ARR increasing 15% from $9.56 million to $11.03 million in the June quarter where we saw further momentum with the ARR growth, which was a combination of strong end user growth, increasing reseller partners and a solid 5% increase in ARPU for the quarter.We can report our normalized operating cash burn for the June quarter was pleasingly down 87% to $21,000. And that's down from $165,000 in the March quarter with cash on hand at $2.4 million. With regards to our cash receipts, our cash receipts were materially higher at 5% quarter-on-quarter on an actual basis and 11% higher on a normalized basis for cash receipts. Now we normalize cash receipts due to early or late receipt of material customer funds that arrive within couple of days before or after the quarter-end. For the quarter -- the June ending quarter, there were no material normalizations that were accounted for. The total cash used for operating for the month, for the quarter of June was $21,000. But overall, for the group, it was just shy of $40,000 at $39,000. We -- included in that, we have cash used in investing activities of $17,000, which is for equipment for newly onboarded staff in the quarter. We also had cash on hand of $2.4 million. Thank you, Charif.

[Charif Elansari, CEO, MD & Director]

Thank you, Bill. Short and sweet. As you saw, our results have been positive across the board. We are delivering our commitment in terms of continuing our growth while at the same time, investing responsibly in the company. You can see that our growth has continued really solidly throughout. You can also see that our churn continues to be world-class below 3%, keeping in mind that the industry churn overall is between 5% to 7%. We covered ARPU with an 18% growth year-on-year and end user growth of 51% year-on-year. And again, if you look at the whole picture from December '15 onwards, we have been delivering solid double-digit growth throughout, and we are very optimistic about our outlook going forward.Before I talk about the outlook, I just want to remind everyone that 2021 is our focus on honing and improving and innovating around what we have versus building and adding new products that will start showing in 2022. So for this year, our calendar year, our intention is to have a single vendor story, the one-stop shop for our partners where we can back up and archiving literally any e-mail platform out there. We cover every geography with now 14 data centers, we just launched a new one, across Americas, Australia and everything in between. We are able to appeal to customers any way from micro businesses all the way to an enterprise of thousands of employees. And we can cater to many of the verticals, including those that are regulated. So we are working on several certifications. One is something called FedRAMP for the federal government in the United States. That's something in the works in Q3, Q4. So we can work more closely with either vendors selling to the federal government or to the federal government, U.S. federal government itself. We're also putting our finishing touches for SOC 2-2, which is a very critical certification for companies usually above 500 or 1,000 employees where they look at SOC 2 as a signal that you are dealing with privacy and security with utmost seriousness and compliance. So we finished SOC 2-1 in November 2020, and it usually takes 1 full year, so they can observe you how you operate before they give you the certification in November, December of 2021.So with all that's going on in terms of solid execution, product recognition, tailwinds affecting the whole industry, we continue to be optimistic about our ARR growth and user growth. We also will continue investing in future growth. I mean we onboarded a record number of new employees in Q2, calendar Q2, and we expect to do more. However, we continue to do that responsibly, ensuring that we achieve cash breakeven and profitability within this year, calendar year, and expect us beyond 2021 to expand our product offerings both building them organically within our team, that's been expanding. As we talked, we're investing in the company as well as through high conviction, strategic acquisitions when we see something that complements -- that strongly complements our offerings.Now when it comes to investment, we will invest in people, bench strength. We will invest in added sales and marketing activities in the second half of 2021 and beyond. One thing that's been already confirmed that trade shows and conferences, which is one of our most effective way to derive brand visibility and leads is trade shows and conferences. And that will start opening up in the U.S. and the U.K. starting with September. So with all of this, I mean really bottom line, we are very optimistic about our future. We have a great team, great products and we are very fortunate to be operating in a fast-growing industry with tailwinds propelling our growth.With this, I will conclude our presentation and will be absolutely happy to answer your questions for the next 15, 20 minutes. Thank you.

[Craig Sainsbury]

Thanks, Charif. Thanks, Bill. [Operator Instructions] All right, Charif, the first one is within your existing channel partners, how many potential end users are there?

[Charif Elansari, CEO, MD & Director]

We -- so when we look at the industry overall, one thing that we're also blessed in is that our #1 competitor is white space. So when I look at the net new business that we're adding every quarter and if I want to give an educated guess, I would say 90% of the new business that we're getting is coming from companies who have never done any data protection for their cloud applications like Office 365, right? So -- and the 10% is usually displacement. So when I look at our existing partner base and when I look at our existing distributor base, I would, again, estimate that we still have about 85% of that market is up for grabs. And as we continue executing well growing our team, expanding our partners, that number will continue increasing as we expand our footprint globally.

[Craig Sainsbury]

Great. Next question is, performance has been strong. Were there any particular geographic areas that performed well during the quarter?

[Charif Elansari, CEO, MD & Director]

The 2 areas that performed the best is really reflective on where we are putting our resources. And those are North America where we have the largest sales presence and also Europe where we've been investing lately in more capabilities and more visibility and more staff. So these are the 2 areas that are really shining. Asia Pacific is growing, but at a -- from a smaller base. And again, as we talk about investment in the future, we intend to also add more resources in Asia Pacific, specifically OECD countries, or developed countries in Asia Pacific, at least for the next couple of years before other countries like India and Indonesia reach a higher level of IT maturity.

[Craig Sainsbury]

Great. Just another one on growth. What proportion of growth is coming from existing partners versus new partners?

[Charif Elansari, CEO, MD & Director]

I would say it's a very healthy mix of both. We don't usually separate those 2. But one thing to look at is if you look at the concentration of the top 10 partners, over time, you can see it's been declining because we're getting newcomers and increase in new partners or customers who are contributing to the top 10. That's number one. Number two, we are holding ourselves accountable to a very high bar in terms of revenue concentration because we're not looking at it as a percentage of the total number of partners. Of the 2,000 partners that we're looking at, we are counting only the 350 partners, and I'm scrolling down, my apologies, to explain the -- on the slide. When we look at the top 10, we are looking at the top 10 of the 350, and that's where the revenue contribution is at 68%. If you look at it over the 2,000 partners that we have, that revenue concentration will drop sub-40%. So just keep that in mind when you listen or when you see our revenue concentration metrics.

[Craig Sainsbury]

Great. Just sort of follow-up question on that one and while you're on that slide is, who are the biggest MSP partners that you work with?

[Charif Elansari, CEO, MD & Director]

So those are not household names, unfortunately. But when it comes to the -- like hosting providers or IT distributors, I will throw out some names that might be known to those attending the call. I mean, for example, Crazy Domain in Australia is a partner of us on website hosting. Ingram Micro, who's one of the largest IT distributor in the world, is a partner. Pax8 in the U.S. and now growing in Europe and possibly Asia Pacific is another great partner of ours. Unfortunately, not household names, but they're really successful in what they do in the industries that they serve.

[Craig Sainsbury]

Great. Another question that just sort of references that slide, Charif, is can you provide an update on marketing to enterprise and government clients? Any significant wins or progress during the quarter?

[Charif Elansari, CEO, MD & Director]

I have to say that we have delivered some good results in Q2 on the mid-enterprise. We're defining mid-enterprise, which is really also enterprise, as between 1,000 to 4,000 -- sorry, 5,000 users. And actually, that was one of the reasons why we saw stronger growth in the June quarter with 80-plus percent year-on-year ARR. So what we've done on the enterprise side or mid-enterprise side is that we have doubled down on working with partners who are very focused on the mid-enterprise and enterprise standards. So there are several partners that we've onboarded in the last few months that do not dabble in the SMB space. They solely focused on the mid-enterprise and enterprise, and that is starting to show results. Now government will take a bit longer for us because we are still at early days of having the government cloud live and getting the right certifications in place. So that's going to be more in the next 3 to 4 quarters.

[Craig Sainsbury]

Great. A couple of questions on the customers now, just changing tack a little bit. The top customers locked into contracts on a month-by-month basis. And if they are on a contract basis, what's the standard term of the contract?

[Charif Elansari, CEO, MD & Director]

Yes. So usually, our contracts with our IT seller partners, and I'll be talking about the 350 partners, those tend to be annual contracts and they have an auto-renewal clause, right? So if nothing happens, if there is no notice given by each party, the contract would renew for another year and thereafter. There are some at 2 or 3 years, but the -- I mean, in general, it's 1 year. Now when it comes to the service providers, the MSPs buying the service from the IT distributors, we were the new kids in the block 2 to 3 years ago. So there was nobody -- we were nonexistent in that channel. And what we did is we took a very fresh approach to getting into that market. Historically, backup vendors tend to lock MSPs with longer-term contracts, and they tend to hold their data hostage and charge them an arm and a leg if they want to extract data out of that backup vendor's platform. When we came, and as I said, the new kids in the block, we came with a completely fresh approach to doing business with MSPs. We told them, "It's month-to-month. You can leave any time. We're going to give you the most simplified billing ever, so you don't have to worry about how you bill your end clients. And guess what? You can download your data from our platform for free anytime by yourself without us having to intervene." And that has created a solid reputation in the market and a solid trust in the market in -- I would say, in a record time. I mean you're talking about 2,000 MSP partners in less than 3 years. And then for those who are worried about churn, you can see that our churn despite this very generous way of doing business is sub-3% on an annualized basis.

[Craig Sainsbury]

Great. Another question on the customer. What are the -- are the switching costs high for the end customer? And are they high for the IT distributors?

[Charif Elansari, CEO, MD & Director]

I would say that the switching costs are -- depends on the implementation. So the deeper the integration is -- we use something called APIs. So they can take our APIs and deeply integrate our products into their platform. The deeper that is, the more difficult it is to extricate yourself out of it. However, as I said, we also make it easy for the smaller MSPs, right? These are small businesses or small and medium businesses selling to the end clients. We really don't stress them out with locking them in anything. So if they want to leave, we make it easy for them to leave. Now this applies for the lower tier, like the MSP here that you can see just below IT distributors. With IT distributors and hosting providers, it's more difficult just because of the virtue of the tight integration that we have with them. However, it's not impossible.

[Craig Sainsbury]

Yes. Another question on the customer. When you get a new IT partner onboard or a new customer, do you ask them the reasons for buying into a backup service? And do you know whether the majority of people that come onboard are clients who have suffered a cyberhack or a ransomware attack?

[Charif Elansari, CEO, MD & Director]

Could you repeat the first portion of your question, please? Your voice broke down. Thank you.

[Craig Sainsbury]

Okay. The first part of the question was when you onboard new clients, do you ask them the reason for buying a backup service?

[Charif Elansari, CEO, MD & Director]

Sure. What we have been seeing in the market, and that has been a very serious driver of our growth, is that an increasing number of these many service providers are no longer selling their core product like an Office 365 or a Google Workspace without security and backup. So what they're doing is they are bundling solutions together and selling it to the end client. For example, in the U.S., they were selling it at about USD 100 per user per month, and that includes a plethora of IT services combined into one. Now this has been made "easier" for the service provider because now the end client is becoming only too familiar with the ransomware events and cybersecurity events that they are hearing about, and that's making the lives of the MSPs to sell it to the end clients easier and so is our life as well. So we're seeing more and more MSPs standardizing on backup offering, right? It's not -- it's no longer an option for many of the MSPs. And the reason is really simple. When you look at some of the most recent cybersecurity events, let's take the one that happened in December 2020. This affected one of the best cybersecurity software companies in the world, FireEye. It affected the U.S. government. It affected also, of course, SolarWinds where the whole thing started. The bottom line is there's no amount of cybersecurity software that you can deploy that can fully protect you from data loss, okay? You have to combine that with 2 critical components. One is user awareness and user training; and number two, you need to have a proper backup infrastructure. So you can take your data away from your production environment, encrypt it, save it somewhere completely delineated and have it available for recovery whenever you need it. And that really bodes well for us in the foreseeable future.

[Craig Sainsbury]

Fantastic. We've got about three more questions left to get through, Charif, two of those are on ARPU. First one on the ARPU, is that net revenue to DSE? Or is that after any payment to partners?

[Charif Elansari, CEO, MD & Director]

This -- all our numbers are net to Dropsuite. So the ARPU, this one is what flows into our revenue top line. One word on ARPU. I want to mention that -- I mentioned earlier that we are seeing the fastest-growing products are the highest revenue per user product like Office 365 Backup. But I think what's also equally pleasing is that, especially in North America where you have a very high level of litigation, we are seeing tremendous adoption of the compliance module on top of the backup. So not only are our North American partners and clients adopting our Office 365 or Workspace Backup, but the mix of clients and partners taking the highest price and highest feature products that includes compliance and archiving is extremely high and very pleasing. And we expect this to continue in the foreseeable future. So forward-looking, let's say, a 1-year view, we do expect our ARPU to continue to slowly climb beyond where it is today.

[Craig Sainsbury]

Great. You actually answered that second question on ARPU.

[Charif Elansari, CEO, MD & Director]

Okay.

[Craig Sainsbury]

Another question here is asking how big is the Google space market? When did this go live? And what sort of penetration would you expect into this market?

[Charif Elansari, CEO, MD & Director]

Yes. That's a great question. When we look at Google, it's interesting. So Office 365 or Microsoft counts the number of users. And they say -- recently, I think they said they have 307 million users. Google, on the other hand, does not count users, they count organizations. So they claim that there are 6 million organizations using Google. And you know that Google is stronger in the SMB space rather than enterprise. So if you do some extrapolation and assume they have 50 million users, you're talking about they are less than 10% market share compared to Microsoft. Now you asked why are we launching it? Why aren't we launching something with a higher total addressable market? Well, this goes to our strategy of wanting to be the one-stop shop for our partners. We want to deliver all backup and archiving for any e-mail platform. Just take an example, a service provider who's got, let's say, 30 clients. Let's assume that they have 27 on Office 365 and 3 on Workspace or Google. The last thing we want is to invite the competition to come in so they can take care of the backup requirements for these 3 clients. So what we do is we offer this one-stop solution across everything. Now again, 50 million users is not a small amount, keep that in mind. Now the real impacts of the launch really happened in June. So we saw some uptick in June that came just when we launched the full solution. So historically, we've had only the e-mail backup of Google Workspace, which used to be called G Suite. So in June, we launched the full thing. And that has resonated really well. There was some pent-up demand that really showed up in June. We still have a long way to go in terms of getting more and more users to come from Google Workspace.

[Craig Sainsbury]

Great. One that sort of follows on a little bit from that for the starting year is, why would someone needs a backup for Office 365 given one version is in the cloud and the other one sits on your device?

[Charif Elansari, CEO, MD & Director]

Yes. So when -- first of all, I think it's really important to remind everyone that Dropsuite is not inventing the backup business. I mean the backup business has been around since the 1960s when information technology became a thing, number one. Number two, if you read the terms or the conditions of any SaaS provider, including Google and Microsoft, and I encourage you to Google, for example, Microsoft terms of service. And then if you look at Clause 6, they clearly say, we are not responsible for your data, and we recommend that you use a third-party backup to protect your data. So let's take an example where you have your data in the cloud and you think it's protected, forget about the hardware because the hardware can melt down anytime, and then you have a ransomware event, right? You're completely locked from this data, right? You can't exit it until you pay the ransomware. And if you're lucky, you get your data back. That's number one. Number two, if you have a situation where you deleted your data from, let's say, your OneDrive, which is part of Office 365, well, after 93 days, it's gone forever. And that's -- you cannot restore it, right? So when you think about an organization and you think about data accumulation over 5 years, right, it's literally impossible to use your production data, let's say, Office 365 data as your data protection mechanism, right? You've got to be able to take what you have, separate it from production, back it up and make it restorable at any point of time.

[Craig Sainsbury]

Great. Conscious of time, this is the last question that we'll take coming, Charif, and it's a good one to finish off on. Can you please talk a little bit more about your nonorganic growth strategy? And will you be looking at complementary product services, et cetera?

[Charif Elansari, CEO, MD & Director]

Yes. Thank you for the question. I think it's a good way to end this webinar. Let me say that I'm happy to answer more questions if there are. The -- what we're looking, first of all, is high conviction, right? So high conviction is, I don't want to be putting a short-term time frame and put some extra irrational pressure on myself and the team to deliver inorganic acquisition in the shorter term. We are really focused on strategic high conviction acquisitions in the coming few quarters. That's number one. Number two, we are looking what we call scope, complementary bolt-on acquisitions rather than scale, meaning that looking for companies who are doing more of the same and then combining the user base together. Now why are we doing that? We're doing that for a couple of reasons. One is integrating 2 identical services is a very risk-fraught thing to do, right? So rather than spending your time on building new capabilities and new products to get more users and more partners, you would be diverting, let's say, half of your team working on integrating 2 companies together, right? While, if you work on scope acquisition, for example, let's say, a sales force backup, which we don't have, or some data government solutions, you're talking about very easy integration of these services via APIs and you can quickly make it available to our customers and partners to use and to buy, right? That is something that's very important. The other thing is, we continue to see what I'm calling or what some people call specification of the backbone of operations for companies. So companies are moving everything into SaaS. And as that continues to happen, more options and capabilities for data protection will become a must-have. And that's -- hence, our interest in building new products or potentially looking at inorganic acquisitions as well.

[Craig Sainsbury]

Fantastic. Thank you, Charif. That ends the questions. And if there are any more that do pop up, I'm pleased both Charif and my e-mail addresses and contact details are at the back end of the presentations and the releases. Get in touch with us, and we can follow up. And Charif, thank you very much for your time.

[Charif Elansari, CEO, MD & Director]

I want to thank everyone for taking the time, for being an investor, for showing interest. And I always remain available for further follow-ups in SaaS. Thank you, everyone.