Dropsuite Ltd

ASX:DSE

Earnings Call Transcript 2021-Q3

[Stephanie Ottens]

Good morning again, and welcome to Dropsuite's quarterly investor Webinar. This morning, we will be hearing from Chief Executive Officer, Charif Elansari, who will take us through the results for the quarter and an update on the company. Also joining us on the call is Finance Director, Bill Kyriacou. Obviously, following the presentation, we'll provide an opportunity for Q&A. [Operator Instructions] I will now hand over to Charif to take us through the results. Thank you.

[Charif Elansari, CEO, MD & Director]

Thank you, Stephanie. Thank you, everyone, for joining. Really pleased to be here presenting about our milestone Q3. But before I do that, as always, I'd like to make a small introduction for those of you who are new to the company. Dropsuite has a very straightforward mission. We are here to protect data for businesses, big and small. We are a partner-centric company. That means we go about our business, working with IT service provider partners globally. All of our business is recurring revenue. So we are a pure SaaS company. We've been leading specifically in areas of focus around e-mail and productivity backup. We were #1 cloud vendor by Info-Tech for 2 years in a row. We're extremely global with close to 600,000 users now in more than 100 countries, and we have a very diverse team and very committed team across Asia Pacific, North America and Europe. We are operating in a massive market. If you just look at the cloud backup and recovery market, it is growing at about 24% per year and expected to do so until 2025. We continue to see some very meaningful tailwinds propelling our growth from cybersecurity and ransomware threats. I'm sure you've -- you hear all kinds of stories about people losing their data and losing their businesses because of these cyber threats. Another major tailwind is the increasing regulation by governments about data privacy and data management. This started in Europe, but we're seeing it everywhere now, like California, Australia, Singapore, Brazil, and many countries I'm sure will follow. And the continuous -- constant here in terms of tailwinds is the ongoing migration into the cloud where companies of all sizes are migrating and moving their workloads from their own servers into the public cloud. Those tailwinds bode really well for us at the company and for our industry overall. Now in terms of the products we're focusing on, we are a specialist SaaS company. We focus on some highly critical applications and we back them up, and we do it extremely well. So we do back up for websites and databases. We do backup for legacy e-mails on-premise like Microsoft Exchange. We back up any e-mail of any flavor. And we are especially focused on Microsoft Office 365 and the recently launched Google Workspace. So practically, when we think about what we've been doing in calendar 2021, we've been doubling down on offering high-quality backup and archiving capabilities revolving around communication and productivity, especially as I mentioned, Office 365 and Google Workspace. And what we've been doing is really positioning ourselves with our partners as the one-stop shop for any backup requirements when it comes to communications and productivity. So we back up any e-mail solution. We are in every key geography. We have data centers with Amazon Web Services, where data sovereignty is becoming more important, where partners and clients want to have their data protected in their own countries. We cater to almost any segment from one-employee companies all the way to 1,000-employee companies. And we cater to any vertical. Whether it's health care, whether it's financial, whether it's government, we cover it all and we bolster that value proposition with specific industry certifications like GDPR compliance in the EU, like HIPAA, which is for health care in the U.S. And very soon, we're also going to be achieving SOC 2-2, which is a key certification for midsize companies and above to give the end clients and the partners the peace of mind that we are handling security and data privacy properly. Now the reason why we're focused on these applications is because of the size of the market. When you look at where we are today in 2020 -- or 2021, there are more than 350 million users for companies from all sizes who are using these products. So 350 million is only for Office 365 and Google Workspace. We currently have a very minute share of that at 0.15%. This market is expected to grow to close to 600 million in 2026. You can understand now why we're really focused on these applications, and you've seen that being translated into some solid growth in the past 7, 8 quarters. Now the way we go to market is also very important and a key ingredient for our success. We are a partner-led company. The vast majority of our business comes through IT service provider partnerships. We believe this gives us a really great path into operational leverage. We don't have to spend and invest extensively in sales, support and marketing. We double down on our products and our engineering. We will focus on building the best quality products and then enable our partners to sell and offer our services of data protection to the clients. So Dropsuite sells to a plethora of IT service providers, from hosting providers to IT distributors to managed service providers. Those are the providers that are selling IT services to millions of small and medium businesses worldwide. We have seen some solid traction in terms of the number of IT reseller transacting with us. And I want to encourage you here to look at 2 different numbers. One is the 395 or close to 400 partners that we have. But underneath those, we have hundreds of managed service provider partners who are buying our services via the IT distributors. And this is translating to, as we said, approaching 600,000 users globally but with -- especially focused on IT-mature countries who tend to be like North America, Europe, Japan, Australia and the like. We have been winning quite a bit of accolades in the market. We have been chosen as the #1 Office 365 backup provider for 2 years in a row, competing with -- some of them are much bigger names who are selling 10, 20 different types of backup applications while we are specializing in a limited number of backup applications that we do extremely well. What we're doing extremely well is we focus on seamless partner integration. What I mean by that is that we want to integrate our products into the ERP systems of our partners, into their workflow. And that's a very powerful value proposition because our partners' #1 cost element is people. It's a service business. So making sure that we're embedded into the workflow and the ERP is a critical advantage that Dropsuite delivers in the market. The other one is we deliver the best user experience in the industry, intuitive, backed with powerful features. We offer insights to explain how the business is doing overall. We also offer archiving and compliance, which are tools which are given to lawyers and compliance officers. And then of course, we've been more in the cloud. We're absolutely on the cutting edge of the cloud platform and building software in the cloud. And perhaps most importantly, we have a highly passionate and responsive team. We've made sure that every single person in the company is an owner in the company as well, which drives a high amount of responsiveness. It also drives a very stable team. We have very, very little churn in the organization. Now that we've covered the introduction and some of the high-level insights about the business, I will pass it to my colleague, Bill, who's going to talk about the results.

[Bill Kyriacou, Head of Finance]

Thank you, Charif. We are pleased to report continued solid growth across our key metrics and our first quarter of sustainable positive cash flow generation from operations. We had solid growth in ARR and ARPU for the quarter, with ARR growing 14% on quarter and ARPU up 3% on quarter. We continue to report on a constant currency FX basis as we believe it provides a true quarter-on-quarter growth reflection even though using actuals would provide a more optimal result. Operating cash flow generation for the quarter was $88,000 positive. This is more than 500% growth on the last quarter. Reseller partners and end users both grew in double digits, with reseller partners up to 395 and end users now touching 575,000 as at the end of September. Our cash position of $21.4 million includes the net proceeds from the capital raise in August for just shy of $19 million. The breakdown of the positive cash flow quarter includes cash receipts at $2.84 million, which was 18% growth on prior quarter and 78% growth on prior year. As we mentioned, net cash generated from operations was $88,000. But we then also invested $22,000 in investing activities for PPE equipment for our growing and onboarded team. Cash at hand, $21.4 million, as previously touched on. The shift to positive cash flow generation also aligns with the increase in revenue for the quarter and our continued cost control measures whilst also reinvesting for future growth. Quarterly operational cash flow movement shows that we've gone from a cash burn in March last year to a cash generation in September this year. So we -- while maintaining our profitability, we continue to reinvest the future growth within our product development, our sales and marketing and our sales and marketing team, new product integrations and our distribution channels. The key areas to highlight here is that we're reducing our reliance on our top 10 partner revenue contributions from 71% in September last year to 66% at the end of last quarter. We have a very stable churn rate at sub-3% year-on-year. Our ARPU, as mentioned, $1.90, which year-on-year is up 19%; and our end users at 575,000 is a growth of 52% year-on-year as well. So we're tracking well in those KPIs there.

[Charif Elansari, CEO, MD & Director]

Thank you, Bill. Let me spend a few minutes talking about our outlook for Q4 and beyond. The first thing I want to remember -- remind everyone that our focus in terms of our strategic growth pillars remains unchanged. We want to grow through existing and new partners. We want to expand our global footprint of new partners and also build additional integration options so we can further delight and improve the partner experience. Number two, and as I mentioned, we really focus on continuous product innovation and improvement and also add new products in the coming 12 months. And the third one is to continue boosting our revenue per user, as you've seen very clearly in the results, and further diversify our revenue streams. The outlook continues to be very positive for us, strong tailwinds, as I mentioned, around data security and cybersecurity issues and regulation and migration to cloud. We are continuing to be very optimistic on the ARR growth given how entrenched we are, given the strength of our products and the brand that we have today versus where we were 3 years ago or 4 years ago. As I mentioned, product is a critical component of our success. We are positioned to achieve positive EBITDA for the whole year of calendar 2022, which is also our fiscal year. And of course, we will continue maintaining a sustainable, positive cash flow from operations for each quarter and for every year going forward. And then lastly, the impetus for raising $20 million a few weeks ago is that we are looking very seriously into high-conviction, accretive mergers and acquisitions that will bolster our value proposition to our partners, expand our product base and add meaningful ARR to our existing business. With this, I want to thank everyone for joining, and I'll be very delighted to answer your questions. Thank you.

[Stephanie Ottens]

Thank you, Charif. That was great. There's been a couple of questions that have come through. So we'll just kick straight into it. You've just obviously touched on the capital raise and the M&A opportunities. Obviously, there's limited amount of commentary you can make, but would you be able to give investors a bit of a sense of how things are progressing on your implementation of that -- those funds?

[Charif Elansari, CEO, MD & Director]

Thank you, Stephanie. And that's a very relevant question given that we raised the money a few weeks ago. What we've said is that we want to give ourselves 12 months to find the right acquisition and do the DD and conclude the acquisition. I didn't want to paint ourselves in a corner and say it's going to be a shorter time frame and then we rush things, we make the wrong acquisition. So I want to be able to have enough space to make the right decision for us and for our shareholders. That's number one. Number two -- and it's very important, we mentioned the word accretive a couple of times, first in this presentation but also in our document we launched yesterday with the 4C. We are looking for companies and we are in serious conversations with companies who have meaningful products and also meaningful revenue that we believe would be accretive for Dropsuite. So these are the type of companies we're looking for. Obviously, the companies we're looking for will need to be within our mission of protecting and managing data on behalf of our customers and our partners. So we're not going to go and do a -- pivot into something completely different. Now the reason why we feel strongly about M&A is because we can continue doing a lot of innovation and introduce new products inside the company, but we also see some very interesting acquisition opportunities in the foreseeable future that will solidify our position in the market.

[Stephanie Ottens]

Yes. So thank you. You've kind of touched on this but just to make sure that we answer everyone's questions.

[Charif Elansari, CEO, MD & Director]

Sure.

[Stephanie Ottens]

The acquisitions that you have in mind, will there be vertical or horizontal and -- sector-wise?

[Charif Elansari, CEO, MD & Director]

We are looking more for horizontal. What I mean by that is -- we mentioned earlier how we're leading the pack in terms of offering the highest quality, Office 365 backup as one example. Hence, we're not looking for companies who are doing the same thing and just to acquire the users. Keep in mind that migrating the users is a very dangerous and time-consuming task. What we're looking is to bolster a value proposition by offering additional services that then we can on-sell to our partners.

[Stephanie Ottens]

Turning to ARPU. What are the drivers of growth for ARPU? And I guess how or why will this continue into FY '22 and beyond?

[Charif Elansari, CEO, MD & Director]

Sure. When you look at our ARPU growth, the ARPU growth has been going nonstop for about 7 quarters now. And the reason why this is happening is we have several products in our portfolio. So we have low ARPU products, i.e., below AUD 1.90 or USD 1.40. I encourage our attendees here to look at U.S. dollars because the AUD has been playing quite a bit up and down. So the USD will be a better measure. So we have products that have lower ARPU below the USD 1.40. And then the fastest-growing products, however, which is like Office 365 backup and Office 365 backup plus archiving, which is the highest-end SKU, are our fastest-growing products. Now the average ARPU for these higher-end products that are growing the fastest is about USD 1.70 or USD 1.80 per user per month. So in the foreseeable future, keeping everything constant, assuming no new product introductions, we continue to be optimistic that our revenue per user will continue slowly but surely ticking up in the foreseeable future because of this mix shift to the higher-end products.

[Stephanie Ottens]

Yes. Perfect. In regard to, I guess, the ARR and your outlooks, the market slides that you've touched on, what do you see is the aspirational ARR outcome in the next few years?

[Charif Elansari, CEO, MD & Director]

Yes. I mean we haven't been giving any outlook to the market. But I mean given where we are today, I think you can see that double-digit ARR has already happened and we expect it to continue growing. Now with the combination of M&A and new product reductions, we definitely have much higher aspirations to where we want our ARR to be in the next 2 to 3 years. But forgive me that I won't be able to give a specific number on the ARR.

[Stephanie Ottens]

Yes. One around competition. Office 365 backup is obviously highly rated, but your penetration obviously is only 0.15%. Could you talk to the competitors and how you see your best-in-class status providing scale of opportunities?

[Charif Elansari, CEO, MD & Director]

Sure, happy to. One thing to keep in mind is that when we look at the market and one of the big reasons why we're very excited about the markets we're serving today is the availability of massive white space. So when we really think about our competition today, our #1 competitor is what we call nonconsumption, users and partners not using any backup for their cloud SaaS applications. So when I, for example, talk to my sales team, we clearly see 85% to 90% of our business is coming from new users who've never used backup before. So that's an important point to mention here because the 0.15% or the minutiae that we have is also -- also equates to the whole market being underpenetrated. So when it comes to small and medium business sector and mid-enterprise sector, when it comes to our product, we lead the pack with the capabilities and features that we have, namely lightning-fast search capabilities that are extremely nuanced both for normal users as well as for lawyers and compliance officers. We tend to have this compliance module, which is really unique in the industry, where we combine the backup capabilities for industrial recovery with compliance features that are really applicable for a lawyer or HR manager or a CEO, and that's extremely unique in the marketplace. On top of that, we also introduced -- we have introduced something called Insights. So we present insights about the company and about the employees. Like what's the average response rate to e-mail? What does the work-life balance look like in the company? And that is another strong and unique value proposition. Now we combine all this with an incredibly excellent partner experience in terms of a new partner portal and reporting, and you have a winning combination.

[Stephanie Ottens]

So just to touch on one thing that you mentioned there, the Insights analytics aspect, do you see that as becoming, I guess, more sophisticated as you progress? And if so, kind of I guess what's the -- what has been the journey of that aspect of the business?

[Charif Elansari, CEO, MD & Director]

Yes. I mean what makes backup interesting and compelling is not only that it is a critical component of somebody's cybersecurity strategy. What's happening is that now we are sitting on massive amount of data, right? So we have data about the e-mails, about the files, about everything, so creating -- making more sense out of this data. And just to be clear, this is not for third-party users. This is to provide data and value back to the customer is an important part of what we will be doing. Now just to be also clear, we're not saying we're going to pivot the company into an analytics company either. For me, it's about -- the fundamental is backup, and then you've got the archiving and compliance, and then you've got on top of that the insights and analytics. We're working on our road map for 2022 on how we're going to be bolstering the insight piece not only for the end client but also for our partner, how do we enhance our reporting to make their lives easier as well as we are -- when we think about the persona we are pursuing or the customer we're pursuing, we're actually pursuing the service provider rather than the end client. They are the ones we are working with. They are the ones that are provisioning the product, choosing the product and also being built for the product every month.

[Stephanie Ottens]

That makes great sense. I guess on the partner relationships, do you see yourself returning to face-to-face marketing into 2022? And how do you think that will look like? What are some of the events or other facets that you leverage?

[Charif Elansari, CEO, MD & Director]

Yes. You can see me smiling because one of the best things about -- starting from September until the end of this year, we are finally back on the road, specifically in the United States and the U.K. So we're back to meeting face-to-face. We're back to sponsoring and being highly visible in industry events. And I think that's a really exciting development after a hiatus of more than 1.5 years because of COVID-19. We expect this to continue and to accelerate in 2022, and I believe that bodes well for our company because historically, the #1 lead-generation vehicle for us has been trade shows and events.

[Stephanie Ottens]

Following on from that, will you see any inflation in your input costs, i.e., wages, hosting, obviously touching on marketing as well, I guess?

[Charif Elansari, CEO, MD & Director]

Yes. I mean everybody is talking about inflation already happening. The question is whether it's going to be temporary or it's going to be long term. We continue watching for the situation, and we'll take actions accordingly, including making sure our team is well paid. It's something we absolutely make sure that we are paying at or above the industry because, I mean, we are a knowledge company and it's all about people, right? That's number one. And if we need to take some measures on the ARPU side to make sure that we're covered, we'll take them. So far, we haven't seen any of this inflationary pressure on our side.

[Stephanie Ottens]

Great. Going back to more of the market, would you be able to give some insight, I guess, on whether there's other similar offerings in the marketplace and how Dropsuite is unique?

[Charif Elansari, CEO, MD & Director]

Yes. I mean I think we covered that in the previous answer about how we combine the backup search, restore capabilities with compliance and then Insights analytics and then we offer a seamless experience for our partners. Obviously, it's a massive addressable market and there are many competitors out there. But the thing that we pride ourselves on is that when you look at the cloud backup recovery market, it's growing at 24% per annum. We're growing at north of 70%, 80%. And for me, the critical area of success is how -- is to how to maintain and sustain this premium growth in the foreseeable future. And that's what we've been doing so far.

[Stephanie Ottens]

Great. Yes. One last question that's going back to the M&A question but I guess people have a strong interest in that area at the moment. So could you provide some examples of suitable, like, services in relation to M&A that align with your mission statement?

[Charif Elansari, CEO, MD & Director]

Yes, yes, yes. Happy to do that. Let me preface by saying that we continue to see an unstoppable movement to SaaS. So every company, big and small, is SaaS-ifying their operations. Everything is moving to the cloud, from e-mail to customer relationship management software like Salesforce to accounting software like Xero or QuickBooks in the U.S., et cetera. So a good example of a complementary service would be, for example, a company that's doing Salesforce backup, right? It is a critical application, right? Sales is running off that application. And right now, the importance of backing up something as critical as Salesforce is clear, right? That would be one example. The other one would be -- as I mentioned, accounting software would be another example. Now a third example doesn't have to be exactly backup. It could be something around data governance, ensuring your data doesn't leak out of your company's files and communication devices, right? That's also the data protection. So we're looking at both sides of the spectrum. One is the, I would say, more traditional cloud backup solutions. We're also looking at something a bit more on the data government and the data loss protection area as well.

[Stephanie Ottens]

Great. That's really insightful. Last question that's come through, but obviously, if people wish to submit more questions, please use the Q&A function. Are your partner resellers experiencing any bottlenecks to growth, i.e., finding skilled staff, accessing equipment, regulation, et cetera?

[Charif Elansari, CEO, MD & Director]

Yes. The answer is yes on 2 fronts. The first front is that the #1 asset to these companies is people. And as -- we all know that it's always a challenge to find solid IT personnel. So that will continue. However, we see also a lot of well-established service providers who are well-staffed, et cetera, but you have one -- others that are struggling. But I think the most -- the more important thing to -- here to consider is to think about the journey of these service providers. These service providers historically used to be managing servers on the office. They were mostly reactive to the customer requirements. And now with the cloud with Office 365, with everything moving into SaaS, these service providers have had to reinvent their business. Now they are selling bundles and stacks of services together. They're selling them on a recurring revenue basis, very much like what we do or what Microsoft does. And they have completely transitioned their business into the solution selling and bundling type of service. Now this is still at the early days. I don't think more than 20% of the service providers worldwide have transitioned into this model. And there are tens of thousands of partners or partners-to-be who are in the midst of that transition from the break/fix reactive model and to the solution-selling model. And that is the other bottleneck in the company. And that's why -- we are not saying we want to take the $20 million and do some very aggressive marketing activities and very aggressive sales activities because we have to follow the inertia of the market in terms of working with these partners and educating them as they move into the solution-selling mindset and this -- and the bundling. And once that happens -- and that's been happening and that's why we're seeing the growth, but once we see more of these partners moving in this direction, we're going to see continued growth in our business as well because backup is an integral part of that solution.

[Stephanie Ottens]

Yes. Great. So you just kind of touched on another question that's just come through. So part of it will overlap to some extent.

[Charif Elansari, CEO, MD & Director]

Sure.

[Stephanie Ottens]

But are you finding your partner resellers, service providers learning more about the Dropsuite product and recommendations more to their clients? Like, i.e., are they educating their clients? And is there a flywheel occurring as they become more familiar with Dropsuite?

[Charif Elansari, CEO, MD & Director]

Exactly. So the flywheel has been happening with the movement to cloud, regulation and cybersecurity and ransomware, and then it's coming back to the partner and then to the customer. So there's a really, really strong virtuous cycle for us here. But it's important to manage expectations here. The persona we're really focused on is not the end client. The end client, very, very rarely, is involved in deciding which vendor they want to go to. So our real focus is to deliver the best user experience for our partners is first. And hence, our branding with the partner create multiple enablement capabilities for the partner from product training, sales training, sales material, marketing materials. We deliver a phenomenal enablement experience for our partner so they can be equipped to sell to the end client. And that's what we're really focused on.

[Stephanie Ottens]

Perfect. On the aspect of equipping your partners, what sort of training do you provide to your reseller partners for your product?

[Charif Elansari, CEO, MD & Director]

So we tend to segment our partners, right? So when we talk about the strategic partners, medium plus, we intend to have a quarterly training with them. We introduced them to something called product councils. So that means we have our head of product and our product managers working with them, sharing road maps, soliciting feedback. We also conduct quarterly training, and we have quarterly business reviews with them. For the longer tail, we work either with our distributors. So we pass all this information and train the trainer, sort of, to work with our distribution, and then they would share this information and train the partners that way. And then for the remainder of the partners or long tail that's transacting directly with us, we tend to have occasional touch-ins with them, and we equip them with a lot of information and documents online so they can use to sell to their end clients.

[Stephanie Ottens]

Great. Final question but just a reminder if people want to submit more questions, please feel free to do so by the Q&A function. Just a question on SOC 2 progression. Will this add to additional sales or large emerging contracts? And will M&A potentially assist in this area as well?

[Charif Elansari, CEO, MD & Director]

Yes. To the first point, SOC 2, that's true. It's becoming a more critical requirement for all the midsize and large companies as well as for the more sophisticated partners. And just to remind everyone in terms of our journey, we got something called SOC 2-1, which is the first iteration, almost exactly 1 year ago. And then it takes 1 whole year to get certified with SOC 2-2 because they want to see you in action before they give you the certification. So that's all on track for later this year. And that will expand our opportunity set with medium and large-sized companies. In terms of the acquisitions, it doesn't really make a difference except by making us more demanding of the type of companies that we'd be interested to acquire, companies who really follow best practices when it comes to data security and data privacy.

[Stephanie Ottens]

Great. One more question has come through. Given you are reliant on MSPs to resell your product, have you considered derisking by going direct, i.e., business cloud end customer?

[Charif Elansari, CEO, MD & Director]

Yes. One thing to mention is that one thing I love about the MSP business is that we are transacting through, as I mentioned, about 2,000 of these MSPs. So when you compare our situation today with where we were, let's say, 3, 4 years ago, when we were really having very limited number of partners contributing to the revenue, we are in a much, much better position. When it comes to direct, we would be entertaining some direct access while respecting the fact that we are a partner-first company. And in fact, we already have some direct business with medium and larger companies who say, "We don't have a partner. We have all our ITs in-house. We'd like to buy the products from you directly." So there might be a bit more than that, but in the foreseeable future, I see the majority of our focus remains in the partner channel, which is really vast and we still have a lot of white space there.

[Stephanie Ottens]

Well, great. Thank you. If there are any further questions that people have, please feel free to e-mail them through to myself or Charif. But I guess at this point, we will finish up the webinar. So over to you, Charif, to provide any closing remarks.

[Charif Elansari, CEO, MD & Director]

Thank you, Stephanie. I want to thank everyone for joining and taking the time. I also want to thank all our shareholders for being on the journey. We strongly feel that we still have massive headroom to grow, and I hope you stick around for the journey. Thank you very much, and hope to catch up soon.