Firstwave Cloud Technology Ltd

ASX:FCT

Earnings Call Transcript 2023-Q1

[Ruth Sloley, executive]

John, would you like to start the meeting?

[John Grant, executive]

Yes. Thanks, Ruth. Good morning and welcome, everyone, to Firstwave's Q1 update for FY '23. I'm John Grant, Firstwave's Nonexecutive Chair. I'm joined today [indiscernible], Firstwave's Managing Director and CEO, Danny Maher; and then Chief Financial Officer and Company Secretary, Iain Bartram.

Just very quickly, I'd like to say that -- openly saying that Q1's sort of company completed the last elements of the integration of Opmantek. It's been a very good piece of work, and has gone relatively smoothly and quickly for integration of that type.

We've also consolidated the gains we've spoken about previously, particularly in cash burn and expenses and then pipeline as the leading indicators to revenue. So Danny and Iain will add more detail, as you can see on the agenda, and then we'll talk to answer your questions.

Let me now hand over to Danny. Danny?

[Danny Maher, executive]

Thanks, John. So I'll start by saying that Q1 has been a good launching pad for the year. It's our first quarter since completing the integration of Opmantek where we're truly operating as an integrated company. We had a significant pipeline of sales opportunities, which you'll hear a little bit more about, which has been growing, particularly in North America. And it indicates to me a very strong outlook for revenue growth.

We've got good levels of cash on hand, over $8 million. And our normalized cash burn is on target. So we're exiting Q1 at a run rate of $5 million -- $0.5 million per month and still decreasing. This is down from over $1 million burn per month last year.

I'm going to hand over to Iain to go through the financials to start with, and then I'll give you a bit more of a general update.

[Iain Bartram, executive]

Thanks, Danny. We can see on this table that both revenue and gross profit are up for the quarter. However, annualized recurring revenue is down 11% on the previous quarter. So let me start with an explanation of this fall and any impact this has on future revenues and cash flows.

Approximately 1/3 of the reduction in ARR is due to the removal of some infrastructure recharges that Firstwave was not making any margin on. This was simply cost incurred in supporting the platform that were passed on to the customers at no markup. These costs have now been engineered out of the solution. And although there is no net gain or loss in cash flow from removing this recharge, it is worth noting that this change has made the total cost of our services cheaper and, therefore, more cost effective.

This should lead to better revenue growth in the future. $320,000 of the ARR reduction or just over 25% was from customers where we were experiencing multiple payment issues. These were also contracts where we're making our smallest margins. We made the decision to end these partnerships, significantly reducing the level of expense associated with supporting them. This decision will be cash flow positive for the business.

The remaining $500,000 per annum or approximately 40% is customer churn. The customers are currently still using the platform while they migrate services to alternative providers, and we may find their revenues continue throughout Q2 and even into Q3. However, we know they will not be continuing in the medium term, and hence, we've chosen not to report them in our ARR numbers.

It is important for shareholders to know that these customers did not churn due to issues with Firstwave services. They have broader telecommunication agreements in place with our partners and have churned those agreements. The termination of our services is collateral damage. This is an unfortunate consequence of a channel sales model. And it is our job to ensure we continue to sign up new partners and work closely with our existing partners to offset these losses. We estimate we've lost around $35,000 a month in gross profit from this churn and have taken this into account in our estimates of normalized cash flow.

Growth in revenue for the period was 7.5% and related to items that were nonrecurring in nature. The growth in gross profit was similar, albeit slightly lower at 6%, and hence, the gross profit margin dropped slightly by 1%. However, with the removal of recharge revenues that carry no margin and the reduction in lower margin deals, the gross profit margin will now increase over time.

So in summary, revenue is up, gross profit is up, ARR is down with 40% of the drop in customer churn in the channel, and 60% being active changes made to improve the profitability and cash flow of the business.

Moving on to the cash position and expenses. The business finished the quarter was a solid $8.57 million in cash and cash equivalents, after cash usage in the quarter of $1.84 million, which is just over $600,000 per month. However, adjusting for the fact that there was no R&D income received in the quarter, that a large annual insurance prepayment was paid in Q1, and taking into account other timing adjustments required to give a normalized view on cash usage, the average cash burn across the quarter was $520,000 per month.

Adding to this the timing and impact of permanent cost savings that were made during the quarter and the ARR reductions noted earlier, the normalized monthly cash burn equity in Q1 was under $500,000 per month. And this is expected to reduce further in Q2.

This target to reduce the cash burn to $1 million per month to under $500,000 per month was first announced in FY '22 at the time of the Opmantek acquisition. It is very pleasing to be able to announce that the integration has been completed, that the cost saving synergies of the transaction have been realized, and we have achieved the cash burn reduction target. The business is now supporting double the gross profit on half the cash burn when compared to the levels for the Opmantek acquisition.

The cost savings and restructuring work have not weakened the business' delivery capabilities, and we are confident of being able to support the growth anticipated from the pipeline and further reduce the cash burn as the next target being to meet cash flow breakeven. We expect this will not only come from revenue growth, but also by continuing to focus on capital efficiency. We will continue to make the best decisions we can for the long-term health of the business, improving profitability and tracking towards cash flow breakeven.

I will now hand back to Danny to take you through more detail on the existing pipeline and the business' current progress.

[Danny Maher, executive]

Thanks, Iain. And just before I go through that, I'll just recap to all shareholders our strategic objective. So everything we're doing in the business falls under 1 of these 3 objectives. We want to have a sales-led culture. The most important thing for us is to have a sales-led culture. We want to grow revenue faster, and we want to be capital efficient. So -- and actually, you're seeing some of those things coming through in the financial results.

So in line with those objectives, I'm going to start with giving you an update on our key sales initiatives. Those that tuned in for the previous quarter's update would have heard me talk about 3 deals in the pipeline that I regarded as strategic. I'm really happy to say that one of those has come through and [ be fine ]. That's a commercial agreement that we've reached with a partner to launch a secure sovereign, ISM-compliant e-mail platform for Australian government and large enterprise. This gives us some revenues immediately, but it's more about a strategy for our growth in the future, and I'm really, really pleased that we've got that agreement done this quarter.

IoT management. We're emerging as a leader in this space, in particular with secure IoT management bouncing on the technology we have and replicating the success we have with IoT management with Microsoft. I'm just flagging that in this quarter's update because it's something that you might hear or see a little bit more in relation to that because we're uniquely positioned to provide secure IoT management, and IoT provides a unique security risk for organizations and increasing.

Our Telstra relationship has been reinforced, including a direct engagement with their sales team, which is fantastic. We have collaborative sales planning. We are bringing sales targets with them. We have new marketing initiatives. And of course, we continue to work with their product team on new initiatives as well. But really, really pleasing to have this enhanced engagement with their sales team.

We've got an excellent diversified pipeline, which provides us with multiple paths to success. I mentioned last quarter that we had 3 strategic deals. We've signed one of them. So we now have 2, what I will call, highly significant deals, both of these in North America that we're progressing, and I'm really hoping to progress these further in this quarter.

In terms of sales and marketing, we continue to focus our efforts on service providers, our main clients, as well as large enterprises, and our strongest markets being U.S.A., Australia and Latin America. We're focusing on our highest margin products, which are e-mail security and network management. We've appointed a new sales director in North America, and he commenced on September 26. So welcome, James. And we've appointed a new CRO who is joining us on November 2nd in Sydney, and we'll be announcing who that is early next week. Our current U.S.-based CRO has moved to advisory specifically on these key U.S. accounts, working with our North American sales director.

And we've launched a one-brand strategy, which has commenced the retirement of the Opmantek brand. But of course, we still continue to leverage all the things that Opmantek brand has brought to the business, but under one brand, including the acquisition of the domain firstwave.com where we consolidate all our digital marketing.

In terms of product development, those of you that have been following what we've been doing with our products would have seen the release of a product called Enterprise Services Monitoring. This changes the way that network management has performed. It allows IT operations people to manage their networks in businesses rather than technology or geographical views. So in simple terms, you might have a failure of a piece of technology in London, which doesn't affect anyone in London and affects users in Sydney. And this Enterprise Services Monitoring module will give them the view of where it's impacting the business rather than geographically or technologically where the problem is.

It's already been released and is in use by significant Australian government clients, and we're looking forward to winning more clients and rolling this product out to our existing clients and further enhancing our revenues.

The first integration of Opmantek IP with CyberCision is going to be released next quarter. That is so-called -- for those of you that understand the products that were acquired with Opmantek, this is going to particularly leverage the IP events product. Once this IP is integrated with CyberCision, there are enormous things that we can do. If you can imagine that we acquired a company in January, which had 10 years of development of its IP behind it, had rolled that IP out in very large organizations around the world. So we can really take a leapfrog step with CyberCision. We have to develop this IP because we now own it, and getting it up on that platform opens up enormous opportunities for us.

Immediately, it's going to provide an enhancement to our e-mail protection. It's going to give us some advanced automation features, i.e., so that IT managers can automate actions that happen when attacks happens. It's going to be really cool. And it gives us a fantastic potential for further enhancements and feature pull-through. I'm really excited about it. I'm excited about it and there's so much we can do.

So the summary of our current position is that our cash burn continues to reduce. We're delivering our cash objectives. Let's have a think about this next bullet point. We have doubled our gross profit with lower OpEx than we had prior to the Opmantek acquisition. So we've doubled our gross profit, and our OpEx is lower which is pretty cool. We're delivering on our goals. We're strengthening quarter-on-quarter, and that is going to continue. And we have a very exciting, growing and diversified pipeline. I've mentioned that the 2 significant and what I regard as game-changing deals in the pipeline, we don't rely on those to grow this business. We will grow without them. But if we happen to pull one of those off, which I'm hoping we will, that's going to be a really exciting time for this company.

So I'll hand back to John there for some closing comments and then perhaps we'll take some questions.

[John Grant, executive]

Yes. Thanks, Danny. And as shareholders can tell, Danny remains very excited. He used to be a number of times amidst [indiscernible]. I'm very positive about the business, which, given, he's the largest shareholder is a good thing for all of us.

So I'm not going to say anymore. I think the presentation speaks for itself. We're more interested in actually answering your questions. So you can either use the Q&A [indiscernible] or raise your hands. So if anyone has any questions, please use one of those facilities.

[Danny Maher, executive]

I think I saw Nick raised his hand, John.

[John Grant, executive]

Yes, I got that. Yes, thanks, Nick. You can jump into the conversation, if you like.

[Nick Harris, analyst]

Great. Can you hear me?

[John Grant, executive]

Yes.

[Ruth Sloley, executive]

Yes, we can.

[Nick Harris, analyst]

Excellent. I appreciate the call and also that disclosure on the ARR, Iain and Danny, that's great to hear, and also hitting those cash burn targets that obviously you talked about a while ago. So it looks like you're hitting all those targets, which is great.

Just on the ARR cleanout. I guess that's happened over the last couple of quarters. I understand why you've done it. It makes a lot of sense. And you're growing your gross profit dollars, so the quality of your business is getting better. So it makes sense. Just trying to understand, is that largely done that ARR cleanout? Or is there perhaps a little bit more to come in the quarters ahead?

[Iain Bartram, executive]

As I said, some of the numbers are still in there for Q2. We've made the decision to take them out of the reporting at the end of Q1 so that we have completely finished that, and we can be on a clean slate if you like going forward.

[Nick Harris, analyst]

Excellent. So yes, it will be a lot cleaner going forward, as you just pointed out. Maybe I'll just throw one other one, which is just around the North American sales traction and partners and things like that. Obviously, that seems to be the area you're getting a lot of success from -- maybe I got this wrong, but from what I understand, it seems to be largely Opmantek. Could you just talk a little bit about where the new customer wins are coming and what sort of services you're providing?

[John Grant, executive]

Danny, you might pick that up, if you can.

[Danny Maher, executive]

Yes, sure. Well, obviously, we've integrated the companies now sort of have all got -- kind of get used to what the new Firstwave is. I mean even around 40% of the shareholders came across from Opmantek. So it's a truly blended company. And we're starting -- as I mentioned in my update, we'll start to see the blending of the IP from the first quarter of next year, which is pretty cool. In fact, it's very exciting for me.

But yes, you're right, Nick. The significant growth in North America is off our network management products, which were acquired with Opmantek. However, we do have a growing pipeline of opportunities in the U.S. on CyberCision as well. And -- but I do see CyberCision in our North American strategy as something that I'm really looking to do a small number of larger deals on CyberCision. Whereas the network management, there's a couple of large deals, but there's also a kind of a real kind of underlying run rate business. We're talking internally with CyberCision about launching a direct-to-market initiative in the U.S. So that's something we're investigating as well. But definitely, we're looking at all the products, but the pointy end for us is e-mail security and network management. But you're right, the large part of the pipeline in North America is network management.

[John Grant, executive]

I'll add into that, Nick, that it's about the go-to-market model. So as you know, with CyberCision, exclusively partner to market. And what you've also seen from this company's history is that getting partners to sign up is not necessarily getting revenues from their customers. And that's a continuing thing that we're dealing with from a channel point of view. But the Opmantek suite of portfolio of products is mostly a direct kind of marketplace, so then there is the end customer.

And I guess just to give you an outcome, not necessarily give you an outcome, I want to give you with a different opportunity to bring [indiscernible] home. So -- but having seen all of that, they're all enterprise sales team. So they're all large sales. They're all complex sales. And they all take time to work through organizations. But -- it's a wonderful thing really for the other 60% of shareholders who didn't come with the Opmantek merger. We've now got these multiple entities to market, that was one of the strategies that we had about the acquisition, and that's what's actually happening down below [indiscernible].

[Nick Harris, analyst]

And obviously, cybersecurity hacking is very topical at the moment. There's been a number of really large scale ones. Just curious, has that caused an increase in inquiries towards Firstwave? Is the pipeline growing as a result of that? Or would you see that through to, John, to your point, through the CyberCision partner model rather than direct? Just some comments on that, please? And then I'll stop asking questions.

[John Grant, executive]

That's a good question. I can just jump in on that because that is exactly the issue. And a lot of people asked me the question that you just asked me a little later, can you solve these problems? Can you get to them? And the answer is, yes, we can solve a lot of those problems, but we're dependent on our partner. We don't have a -- we don't have brand recognition independently, and that's always been a challenge for us.

So while we've got leading -- sort of leading technologies in terms of what's available in the marketplace, depending on our partners to actually take that to market, and the end users and customers are not talking partners about that. So it's just an anomaly at the moment that we live in this environment which we're living which is quite frightening.

And I could tell you a story in that -- just bear with me for a minute. I'm getting some work done in the car and I went to this upholsterer the other day, and I said, can we book it in? And he said, I just can't deal with it at the moment. I've just been hacked. This is quite around the [ 15% ] the business made. They got into this e-mails. They got the invoices. They reworked the invoices and put their bank account on it. And then 4 of those invoices, with his approval, through the accounts payable department, for 4 days it was paid in [indiscernible] like that. This is what is really happening.

So the anomaly is that without the branding that we've got direct to market, it's really hard for us to sort of respond to that, which is one of the reasons why Danny spoke quickly about looking at that opportunity, direct to market in the U.S. It has to be something within our consideration because of just what's going on in the environment.

So I said a lot on that, and Danny, anything more you can add?

[Danny Maher, executive]

No. I support all of that. Thanks, John. And our major partner in Australia, Telstra, on the cybersecurity front, is receiving absolutely increasing inquiries, especially because we know that their major competitor which had the largest breach. But yes, so they're absolutely seeing more inquiries, and we hope to be beneficiary of that.

In terms of us, we all know our stock doesn't have a lot of liquidity. And as a Board and for myself as MD, we've got a bit of focus on making sure that our brand is directly visible in Australia. So you'll start to see us more at the front as well. But currently, as John mentioned, the main organization that needs to respond and pick up the deals is our partner Telstra, and we'll be a beneficiary at the back end of that.

[John Grant, executive]

The first to understand to that for -- the one point you made in the conversation that you have about the change in engagement with Telstra. Our engagement has been through our professional services agreement and have been in direct engagement in that the products we put by the product team into the market. But that has been able to bring personally through these relationships would get us into the Telstra side of things at the highest level, at the enterprise sales in Australia. That's a game changer for us in terms of access to Telstra.

And that's why we're getting sort of understanding an in demand -- we [ got a bit ] of results in terms of flat revenue. There's certainly a level of engagement in the Telstra business that we've never had before. And it's at the front end, which is the salespeople, and that's what matters.

So we're -- I'm again very, very hopeful if we change our projection within Telstra as well. And given the environment that we're dealing with, they're [indiscernible].

[Nick Harris, analyst]

Congratulations on the traction.

[John Grant, executive]

Thanks, mate. If we have any more questions coming through, last chance, anyone? All right. Thank you very much for listening. Our AGM is -- I got to remember, it's on this slide, it's 10 a.m. on the 24th of November. Ruth, is that right?

[Ruth Sloley, executive]

Yes, that's right, the 24th.

[John Grant, executive]

So we're doing it in Sydney. We're doing it face to face annual AGM and we'll be in our office in Sydney, in North Sydney. We would really, really welcome shareholders who are based in Sydney to have the opportunity to join us. We haven't really been able to face to face our shareholders. And indeed, we'll face to face our shareholders in actually this whole period. It's been through the last -- must be 3 years now. And we're very much looking forward to the AGM and talk to you face to face at the AGM.

So [indiscernible] is in Sydney. If you want to fly and meet, [ Martin ] will take you to lunch. But it's a day that we really want to talk to you directly. I'd like to thank you, guys. Thanks very much.

All right. Let's call it a day and get on with the rest of the day. Thank you very much. Cheers.

[Danny Maher, executive]

Thanks, and goodbye, everyone.