Dropsuite Ltd

ASX:DSE

Earnings Call Transcript 2021-Q4

[Stephanie Ottens]

Good morning, everyone. It is now 11:30. So the time for the webinar to begin. This morning, we'll be hearing from Managing Director, Charif Elansari; and Finance Director, Bill Kyriacou. We will take you -- they will take us through the results for the quarter and an update on the business as it stands. So Charif, I'll get you to turn on your camera and Bill as well, and we can go to presentation.

[Charif Elansari, CEO, MD & Director]

Thank you, Stephanie, and thank you, everyone, for joining us today. I'm really pleased to be presenting our December quarter results to all of you, and then we're going to have the usual Q&A session after the presentation. Just to start with a quick introduction for those who are new to us, we have a very simple mission at Dropsuite. We safeguard business information. We help businesses stay in business. We do that by building a secure, scalable and highly usable backup technologies that we deploy through IT service provider partners globally. Our business is 100% recurring revenue, monthly recurring revenue, highly scalable. We have been nominated as the #1 cloud vendor for backup 2 years in a row by Info-Tech. We are extremely global operating in 100 countries with a strong and committed team, also very global across Asia Pacific, North America and Europe. We are also operating in a meaningfully growing sector. When you look at the cloud backup and recovery market, it's expected to be growing at about 24% per annum for the coming few years. The market is about $22 billion, and we are a small part currently of that total addressable market. Now there are some tailwinds that are propelling this growth from cybersecurity and ransomware threats, data privacy regulations like GDPR in Europe and other places, and of course, the continuous cloud migration, where millions of businesses are continuing to migrate their workloads from on-premise to the cloud. What we are as a company is we offer cloud backup, but we are focused on some meaningful applications that we do extremely well. We offer backup and recovery solutions for websites and databases, for e-mail, for Microsoft 365 and Google Workspace, which are the biggest part of our business. We pack our backup solutions with meaningful features that strongly differentiate us in the marketplace, not only do we offer backup and restore, but we offer very advanced search capabilities so you can sift through millions of e-mails very, very quickly and discover what you're looking for. We offer archiving and compliance. We offer insights on the business and many, many other capabilities. We are, as I mentioned, seeing the fastest growth in our Microsoft 365 and Google Workspace backup applications. Still a massive amount of white space remains in this sector. And this is corroborated by our discussions with partners, with discussions with companies like Info-Tech and Gartner, still huge opportunities ahead of us just with the products that we have today. Now what we've done in 2021 successfully is we have positioned ourselves as the one-stop shop when it comes to e-mail and productivity application backup. From traditional and legacy e-mail solutions to Microsoft, to Google, we do it all. We deploy these services that need them available across multiple geographies. We have more than 13 data centers in the Americas, in Europe and Asia Pacific. We cater to the micro business, small business, medium business and all the way up to the mid-enterprise and thousands of users. And we got ourselves certified to be able to service specific verticals like health care and finance. So when you think from a partner standpoint, they can come to Dropsuite, and then we can take care of all their needs under one umbrella, which is something that's highly desirable for our partner ecosystem. We have made significant strides in our partner expansion. So here, I want you to really look at 2 different numbers or figures in terms of our traction. Number 1 is when you're counting the number of reseller partners that we've signed directly with us, that continues to grow. But probably more importantly, we have onboarded and we have thousands now of smaller, what we call managed service providers transacting via IT distribution. All this has yielded about 650,000 users in December across, as I mentioned, multiple segments and multiple verticals. Now we love this model because it scales extremely well across sales, support and marketing, we are able to punch way above our weight in terms of our exposure to the market and the number of users that we have. And also, we're able to double down and be really focused on high-quality product and engineering. In addition to the fact that our products are feature packed and highly, highly recognized, we delivered a seamless partner integration in terms of weaving our product into their ERP systems, into their workflows, which is something that, once again, is highly desirable for our partner ecosystem. We have delivered this in a cutting-edge cloud platform since day 1. And we delivered all of the above with a highly engaged and responsive team that cuts across multiple geographies. I will let Bill now talk about the December solid results that we achieved in the coming few slides.

[Bill Kyriacou, Head of Finance]

Thank you, Charif, and thanks everybody for joining us today. We are pleased to report continued strong growth of our key metrics across the business for the December quarter. Our ARR was pleasingly up 13% quarter-on-quarter from $13.1 million to $15.2 million. That's 7% up year-on-year and also 38% higher from second half of the year to the first half of the year. So some great growth there from ARR. Our ARPU also continued to increase. went from $1.90 to $1.95 in the December quarter. So it was up circa 1% on Q3 and 13% year-on-year. Our normalized operating cash flow generated $231,000 of operating cash flow for the quarter of December. This was up 162% on the $88,000 from the September quarter, and it's up 214% year-on-year. But in December last year, we actually had a cash burn of approximately AUD 200,000 year-to-date. The reseller partners, as Charif touched on, has increased 4% quarter-on-quarter to [ 409 ]. Our end user growth increased 575,000 users to circa 650,000 users at the end of December. So 13% quarter-on-quarter and 51% year-on-year, and our cash position is stable at $21.6 million, up from $21.4 million in the September quarter. We can report our cash flow KPIs for the December quarter as below. Cash receipts for the December quarter were up 20% in the quarter from $2.84 million to $3.42 million. That's also up over 100% on prior year. We had no normalizations of tax receipts for the December quarter itself. The cash generated from our operating activities, as mentioned, was $231,000 up from $88,000 in the September quarter, and that's 162% quarter-on-quarter and just shy of 160% year-on-year. Within that $231,000, we also had an extra spend of PPE for new onboarders that we brought on in the December quarter, so that was another $24,000 spent on CapEx there, and we're continuing to spend that in Q1 and Q2 in this 2022 year. Cash on hand, as mentioned, stable at $21.6 million. It's also prudent to touch on this current quarter Q1, which has historically been a higher cash payments quarter for us. With regards to many annual services that we pay for upfront in Q1 being annual subscription, annual insurances and then we also have potential annual staff bonuses that are paid for in this current quarter Q1. We do note that we are committed to the delivery of annual positive operational cash flow within 2022 as we have at the end of 2021. I'll also add here that we note that our gross margin of 62% at the end of December. It was 62% at the end of December, with the company continuing to expand our global data footprint with new partners and new users, and that means that we've got a higher petabyte storage costs that we are starting to look at undertaking various initiatives to improve our gross margin. I know, at the moment, these are tracking slightly behind our schedule at this stage. Thanks, Charif. The quarterly operational cash flow here is a good representation of where we've come from June 2020 up to the quarter that we've just finished. So as I mentioned, December 2020, we had a cash burn of $200,000. In June 2020, we had a cash burn of almost $0.5 million. So we're progressing well there. We are continuing to reinvest in future growth. We are investing in FTEs, in product, in engineering, in sales and marketing and in customer support. So we do have a gamut of new staff coming on board in Q1 and Q2, and these are varied between low-cost centers and higher cost centers as well. We also have new product integrations that we're working through and looking to expand our distribution channel for the year. Thanks, Charif. These are some other KPIs that we keep track on over the past 12 months. So as mentioned, the top 10 revenue partners is stable at 66% quarter-on-quarter. Our partner churn rate is stable at 3%. We've touched on ARPU, which has increased 13% year-on-year to $1.95, and the end users are up to 650,000 there. We can see our six-year CAGR is 77% when we're tracking from December 2015 to December 2021. We continue to grow quarter-on-quarter for us. We're now at $15.2 million.

[Charif Elansari, CEO, MD & Director]

Thank you, Bill, for updating us on the numbers and the strategy on how we're going to be reinvesting for the future, while staying cash flow positive for the calendar 2022. Let me spend a few minutes on outlook, and then we're going to open it up for questions and answers. Our strategy and growth pillars remain the same, growing through existing and new partners, increasing our global footprint and getting more mutual success with our existing partners. We still have a long way to go in terms of getting the right depth and penetration and mutual success. We continue expanding integration options. And if you refer to the 4C that we launched yesterday, we introduced a new meaningful integration option called Autotask that is another type of ERP that's used by thousands of IT reseller partners globally, and that's something that will increase our appeal for a new set of partners that historically have not done business with us. Obviously, we mentioned that we're very product and engineering heavy as a company. So we continue focusing on product differentiation, and we also plan to introduce new products, which we'll announce at a later stage in the coming 2 to 3 quarters. And of course, we want to uphold our product leadership position as we continue enhancing our product and delight our partners. The third pillar is to drive improvement in ARPU, which we have seen tremendous improvements in ARPU in the last couple of years as we shifted the mix into the higher priced and higher featured products like Microsoft 365 backup and archiving. And we expand our product portfolio and reduce our -- the top 10 revenue contribution, while keeping in mind that when you do the top 10 contribution based on total partners, whether they sign directly with us or through a distributor or a wholesaler, we have gone and we are in a much better position than we've ever been in our history as a company. Looking forward, we do expect the tailwinds of the market to continue helping us and propelling the whole industry forward. The challenges of data security and regulation and management of the cloud is expected to stay, and that's reflected in the 24% CAGR that I mentioned earlier when it comes to the total cloud backup and recovery market. We are set to continue expanding our annualized recurring revenue via our partners and the strong pipeline, continue to draw our product innovation, as I mentioned earlier. We positioned to achieve underlying EBITDA profitability in 2021 and 2022 and cash flow positive, as well in calendar 2022. And we would continue advancing M&A opportunities that are accretive and of high conviction. With that, I thank you for listening to our presentation, and happy to answer any questions that you might have.

[Stephanie Ottens]

[Operator Instructions] To kick it off, we'll have -- we'll start the question that we've just received. Could you tell us a bit more about any acquisition opportunities you've considered but decided not to execute and why.

[Charif Elansari, CEO, MD & Director]

Yes. We have been in conversations with several targets. Some of these conversations are deeper than others. What we are looking for are companies that are in the data protection business, right? We're not going to go and do something in pilot foreign to what we do today. Especially that this, as I just mentioned earlier, this sector is expected to grow at a very, very respectable growth rate for the coming few years. So we're looking at that. We're looking at continuing to be a software company with recurring revenue. So we're looking at companies that are SaaS. We're looking at companies that culturally fit and companies that have good technology. right? So when we are doing the conversations and having these discussions with these potential acquisition targets, we want to make sure they tick the boxes. We are not in a hurry to pull something quickly and then make -- and have some real challenges in the future. As you see, our existing business is very solid, and we continue to be very optimistic about the future growth of the business. So we're being very picky on the type of company we'd like to acquire.

[Stephanie Ottens]

On another question, could you outline, I guess, your cloud storage providers. Are you solely reliant on AWS? Or do you have other cloud storage providers within your network?

[Charif Elansari, CEO, MD & Director]

Yes, predominantly, we are working with Amazon Web Services, and we've been partners with them since the company's inception. We also have a private cloud implementation for a large European group based in Germany. So we have the 2 flavors. Now the way we've done the architecture of our product and the way we've done things is that we can easily build presence with another cloud provider if we see that as the right thing for us to do, right? So we have the flexibility built into our back-end and architecture if we need to do that. Right now, Amazon continues to be the leader on multiple fronts. We have a strategic relationship with them that is getting stronger and stronger by the day. and we're quite satisfied with where we are with Amazon Web Services, but this doesn't mean that we need to be stuck to them forever. I mean if we see other opportunities from Google or Azure, Microsoft, we will be looking at those very, very carefully.

[Stephanie Ottens]

I guess a somewhat related question. Could you provide a bit of elaboration on the gross profit margin improvements that you're working towards? And I guess, a little bit more insight into some of the drivers for the gross profit margins for the quarter.

[Charif Elansari, CEO, MD & Director]

Yes, sure. So when it comes to improvements that Bill alluded to, those are on foot. These come in multiple flavors. Will this come from choosing the right or the cheaper storage tier to store a big chunk of the data, which is something that we'll be deploying in the coming few weeks. This also looks into things like optimizing the way we do search. As I mentioned, we have the best search capabilities in the backup industry for small and medium businesses. So that's something that we're addressing by further optimizing that and reducing costs. So we have several initiatives that we'll be rolling out in the coming 3 to 4 months that makes us comfortable with how our gross margin would materialize in the coming few months. Now keep in mind that at the same time, we have seen some tremendous growth especially in the last couple of quarters. So we are also building some capacity in advance because of that extra demand that we've been witnessing in the past few months.

[Stephanie Ottens]

A couple of questions coming through on Autotask partnership. I guess, could you provide a bit of insight into how many users do you believe that they could contribute over the next few years? And I guess, what the impact may be on the integration costs for your customers?

[Charif Elansari, CEO, MD & Director]

Got it. Let me first explain what Autotask does and why it's important and why it's strategic and why we did it, right? When you think -- when you put yourself in the shoes of the partner, which is very important for our company to do, this is a company -- this is a partner usually -- a small partner usually will have like 5 people, a bigger partner will have 25 people, right? This is still a small and medium business type of company. So these companies are servicing tens or hundreds of clients, right, across all their IT needs. What they use Autotask to is to streamline that operation. So what they do is that they take all these software that they're buying from us and others. And they are managing them through Autotask. So whether it's adding new users, provisioning, whether it's billing, whether it's support. That's the only way for our partner's business to scale is to have everything streamlined and does the same workflow into the same ERP. Now a couple of years ago, we've done this with the larger equivalent of Autotask, it's called ConnectWise, and it has been fantastic because we have about 25 -- the industry has about 25,000 MSPs, reseller partners who are using that. And it's very critical that we integrated there. Now Autotask is smaller, but still has several thousand, if I want to get about 10,000 many service providers are using this, especially in Europe and in North America, right? So now we've opened ourselves up to another X thousand possible partners in geographies that we're focused on that before we were not as appealing to them because we were not integrated into their workflow. And that's the importance of Autotask. Now it's very hard to give you the exact or even an approximate number of users that we expect, but this is a highly strategic because now we would be fully embedded into the workflow of the partner and adding users, provisioning, selling -- sorry, billing the end customer and supporting the end customer is all in that ERP system that's called Autotask.

[Stephanie Ottens]

And I guess, just to reiterate, does this have any impact on the integration cost for new customers, like obviously...

[Charif Elansari, CEO, MD & Director]

Not really. It is 0 cost, aside from the cost of the resources that we allocated to building the product, which took us about 6 months with less than 5 people. And so aside from that cost, this is the beautiful thing about our model, right? You build it once, of course, you do some minor maintenance along the way, and now it can be used by hundreds and thousands of possible partners without any meaningful incremental cost. That's the beautiful thing about our business model.

[Stephanie Ottens]

Great. And 1 little further question on Autotask from one of the investors. Does Autotask run in its own marketplace?

[Charif Elansari, CEO, MD & Director]

Actually, I'm not really sure if they do that. But whether they do it or not, doesn't change the way we do our business in terms of focusing our distribution partners who are selling to these MSPs, who might have ConnectWise, who might have Autotask, or might just depending on the cloud distributors platform to do all of the above. ConnectWise, I know for a fact, has a marketplace.

[Stephanie Ottens]

Changing path a little bit. We touched on obviously recruiting and new employees and investment in specific areas. I guess, could you touch on how many employees you put on in this last quarter? And what areas were these employees focused on? Or like what areas were they hired for?

[Charif Elansari, CEO, MD & Director]

Yes. If you look at the last 6 months of 2020, we have been focusing on expanding on our engineer -- further expanding in the engineering. And we've done that quite successfully and we added almost 20 people, or 18 people in that function. Now when you look at 2022, and that's already started in January, we started adding more of the customer-facing executives and individuals in the company. So we hired a global support manager based in the U.S.A. We onboarded a very seasoned success manager based in the United States. We're now hiring more in Europe. We're adding -- I mean, we haven't had even 1 salesperson or sales manager in Australia. We're going to start hiring for that. We are also hiring a Global Head of Human Resources, which we never had before. So lots of investment in few areas, right? One is investing more in customer-facing functions. Number two, investing in bench strength, an example of that would be a Global Head of Human Resources. And number three, we continue investing in product engineering as well. But I think 2022, on a relative basis, there's going to be more investments in customer-facing rather than in engineered product, specifically in Q2, Q3 and Q4.

[Stephanie Ottens]

Then a couple of questions coming through on SOC 2-2 certification. Could you kind of run through, I guess, what this -- what opportunities this opens up and whether you've had any discussions initially that expand the pipeline.

[Charif Elansari, CEO, MD & Director]

Yes, sure. I mean, to keep in mind, SOC 2 is a condition to ensure or to send a signal to the outside world that we are doing the right things when it comes to dealing with data, with security, with privacy and all these critical things that are becoming even more important given all the threats that we see around us and the regulation. We started with SOC 2-1, which is -- that's where you need to start. And we got that a year and a couple of months ago. And now we've got in SOC 2-2. Now this is good for 2 things. One is it makes sure that we are -- we have a very specific set of requirements that we're following and abiding by -- So it's really good hygiene. But it also improves our appeal to the larger type of customers, right? So if you have a customer of 2,000 or 4,000 people, that is a big tick for that category of customers that historically we've not been very, very strong at. So these are the 2 benefits. One is the hygiene and making sure we have the right processes, and number two, it's expanding the appeal to the mid-enterprise and above in terms of customers.

[Stephanie Ottens]

Thanks for that. I guess, following on from that in regards to certifications, could you touch on what's happening with the federal risk and authorized management program? Any opportunity there?

[Charif Elansari, CEO, MD & Director]

Yes. Just to manage expectations, we're not getting to the extreme level of FedRAMP certification. And we are focused more on smaller departments in the state and local government. We're focused on vendors that are catering to the government, which is mostly SMBs and mid-enterprise. And that's something that really solidifies our appeal as the one-stop shop that I outlined earlier, right? We don't have any short- to medium-term plans to be very public focused or very government focused and working with this very demanding type of enterprise deals that, frankly speaking, we haven't done before, and we continue to see massive opportunities in the SMBs and the mid-enterprise and up to thousands of users, 2,000, 3,000, 4,000, 5,000 users per organization.

[Stephanie Ottens]

I guess, slightly going back to the question around staffing to some extent. So you obviously have cash reserves in the bank. Are there plans afoot to ramp up sales and marketing efforts in your calendar year 2022?

[Charif Elansari, CEO, MD & Director]

Yes. I mean, we just slightly covered that by explaining how we're expanding our geographical footprint and adding more resources. So definitely, yes. At the same time, we're going to do it in a measured approach. What I mean by that is that we are going to grow our revenue faster than we grow our operating expenditures, including headcount. So for example, if -- and this is purely theoretical, if we're growing revenue year-on-year by 10%, maybe OpEx will grow by 6%, right, or 7%. But we just want to make sure that we also hit our profitability targets and our cash flow duration targets. And it's basically, I would say, it's called a measured approach which is something that we set up to do strategically as a company, and we've communicated accordingly with the shareholder community.

[Stephanie Ottens]

I guess, slightly related to that. Obviously, with COVID restrictions easing, we've had an opportunity to go back and be involved in a few, well...

[Charif Elansari, CEO, MD & Director]

Back and forth now.

[Stephanie Ottens]

Yes, definitely. So I guess how important in this coming year is business travel and industry conference is going to be for Dropsuite?

[Charif Elansari, CEO, MD & Director]

It's I think the second half of the year, which historically, even outside of COVID, tends to be the busier part of the year. So July to November usually are the busiest [indiscernible]. We have signed up and will sign up for the most highly visible type of conferences. And what we decided to do, again, this is absent of COVID, is to do less conferences, but do the high -- the most highly visible ones and go with a big bang. And this is what exactly what we did back in November in the biggest show in the U.S. and probably in the world when it comes to managed service providers. So we, not only do we have our booth, but we sponsored a party, we sponsored the lanyards, the ones that you put on your neck, we did several other activities that were very, very high profile and highly visible. And this is a strategy that we'll continue doing. This does a couple of things. One is that, On the tactical level, it gets us a lot more leads that will be worked with our sales team, number one. And number two, which is a bit less, more difficult to measure, but really important, is it enhances the brand and who we are. And this is what we've done really, really well in a couple of events we've done, 1 in the U.K., 1 in the U.S. last year, and that's what we're going to do in the second half of the year. Now before that, we will be also doing some strategic partner visits where we go and meet the partners and spend time with them, and that's something on foot starting from February this year. I think that human touch will never go away. Of course, you can still work remote, and we've been a remote company even before COVID, but having this occasional, meaningful touch with your partners and your employees is really important.

[Stephanie Ottens]

That's great. We've gone through all the questions from investors, but I just wanted to come back to the investors and say if you have any further questions or require further clarification on one of your questions, please submit it by the Q&A function. We'll just give a couple of seconds to see if anybody has any further questions. And otherwise, I'll throw to 1 last question for you. Okay. So there's a question from Sean Zang. He says a lot of clients looking at hybrid private public cloud models. How is Dropsuite positioned to take advantage of this?

[Charif Elansari, CEO, MD & Director]

Yes, the hybrid approach tends to be mostly an enterprise approach, where for some applications, they require a very high level of responsiveness, right? So they can't afford to have the data center to be 1,000 miles away or 500 miles away. They want something to be right there for their customers. Now for the type of applications that we take care of, that is not a requirement, right? Because we're in the backup and archiving space. Now that said, we are looking at doing some research on how do we get our products to be containerized, so it becomes deployed in a container that could be possibly deployed either on-premise or in the cloud, depending on what the customer wants. But that's still in the early days.

[Stephanie Ottens]

Okay. Well, there's no further questions. I guess to wrap it up, Charif, would you be able to give us a bit of insight into, I guess, what excites you most throughout the year to come? And I guess, counter to that, what keeps you up at night in regards to the business? And then I'll just hand it over to you to provide any closing remarks as well.

[Charif Elansari, CEO, MD & Director]

Yes. It is a real -- really fortunate to be operating in an industry that's growing, right? And then you combine that with having a really committed and highly engaged team that is delighting the partner every single day, while we're also building products and improving and innovating and hiring. So it is a very, very exciting time to be at Dropsuite. We are also being able to translate all that excitement into meaningful metrics and numbers that are really delighting shareholders and investors, I hope with cash flow positive and really high double-digit top line growth. So I think that combination is something that is -- something that makes me really, really happy. Now what keeps me up at night, obviously, there's a couple of things, right? One is we are the last resort for all our partners and customers when it comes to data. So having the right security cadence, having the right security processes is absolutely critical for our success. This is something we take very seriously. SOC 2 comes into play. Security and penetration testing by third parties come into play. Training and many other things that we do comes into play as well. For example, we're in the midst of just putting the finishing touches on getting certified by Amazon on our security cadence as an example of how we're bolstering our security cadence. That's number one. And the second one is the market is growing. As we mentioned, at the very high rate, the tailwinds are there, and I just want to make sure we execute well and we deliver the strong results that we have been doing so far in the coming 3 years. I mean I would say these are the 2 things that I constantly think about as a CEO of Dropsuite.

[Stephanie Ottens]

Great. Well, no other question. Do you want to provide any closing remarks for the investors?

[Charif Elansari, CEO, MD & Director]

I just want to thank everyone. I mean, we've had an amazing set of investors and shareholders. I'm really grateful for your support. We are also extremely excited for what's to come in the coming 2 to 3 years. And I hope we stay on the journey together. Thank you so much for joining us today.