Firstwave Cloud Technology Ltd

ASX:FCT

Earnings Call Transcript 2020-Q3

[Operator]

Thank you for standing by, and welcome to the FirstWave Cloud Technology Limited Quarterly Investor Update Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Neil Pollock, Chief Operating Officer. Please go ahead.

[Neil Pollock, Chief Executive Officer]

Thank you, Ciena, and good morning, and hello, everyone, and welcome to the FirstWave Cloud Technology Q3 Market Update. My name is Neil Pollock, and I'm the Chief Operating Officer of FirstWave. Joining me today is our Executive Chairman, Mr. John Grant. Our objective today is to report the progress of FirstWave Q3 of FY 2020 and update you on the company's response to COVID-19. The presentation we're about to give has been lodged on the ASX portal or e-mailed to the address provided with your registration. We will refer during the presentation to the slide number we're talking to so that we can stay aligned. Slide 2 provides the disclaimer. And I'm now moving on to Slide 3, the agenda. We'll commence today's presentation with an update from John, followed by my update, which will include our COVID-19 response; our path to revenue momentum; [ a section ] on platform and partner progress; evolution of our line of sight to annualized recurring revenue; a new product offering, the Remote Worker Cyber Security bundle, which we launched in the last month. I'll then finish up with the Q3 financials and a Q-on-Q view of revenue prospects out to financial year '22 before handing back to John to summarize the key takeouts. We'll then open the lines for Q&A. All right. Let's begin. Slide 4. I'll now hand over to our Executive Chairman, John Grant. Thanks, John.

[John Grant, Executive Chairman]

Thanks, Neil, and welcome to all on the call. Now let's move on to Slide 5, if you can. When I first spoke to shareholders and investors in August last year, I provided commentary on the formula I thought gave FirstWave the greatest opportunity for success as a global security services company. Firstly, I proposed the product must be world-class as it has to win against the biggest and the best, and it must appeal to a very large global market it can actually address. I suggested given FirstWave Limited's financial capacity that the only way it can successfully get the product into end customer hands globally was via partners to whom the product is important in a leveraged channel model that is one partner to many partners, to many more end customers, and that can ultimately drive exponential growth. I said at this time that forecasting revenue prior to scale was challenging but was offset by the leverage channel, describing it as a numbers game. The more partners in the channel, the more certainty of sustained growth in revenue. I also have mentioned that it's not sufficient to get partners on board and for them to get customers signed up. There must be a global delivery platform of cloud infrastructure and onboarding and support capability for our partners and our end user customers, 24/7. And finally, I said building a global business takes time and money, likely more than expected. The company has been executing to this formula, applying its scarce resources as well as it possibly can. Let me give you my view as to where we are now. So move on to Slide 6. FirstWave's Cloud Content Security Platform, and I'll refer to it as CCSP from here on, is world-class as validated firstly by the partnerships it's put in place with global players; and secondly, by the results of the independent proof-of-value trials we conduct against products from the big global organizations for many of our partners and larger end-user customers. It's no mean feat also to have Cisco fly 10 of its product and engineering people into Sydney as occurs every quarter to review progress on the work we're doing with them. With the introduction of our new Remote Worker Cyber Security offering, we've updated our addressable market opportunity for FY '20 to $1.88 billion. The calculation supporting this are included in the appendix to the pack. It's also worth noting that this offering took only 10 days from inception to launch. That's extraordinary, particularly as it brought 2 new products, one from Cisco and another from Trend Micro onto CCSP. This demonstrates the speed and integrity with which new offerings can be delivered to end-user customers of our largest telco partners and points also to the company's ability to tactically pivot to new opportunity very quickly in response to drivers of our partners' revenues. With this offering -- with this new offering at least and the increasing number of partners in our channel, 138, up from 108 at the end of Q2, 26 of whom are now billing, we've also updated the annual recurring -- annual recurring revenue we have line of sight to through the partner channel to $60 million from $45 million. For those of you who do the calculation of revenue per partner, the average is low, but that's only indicative of the fact that CCSP is tightly integrated into our partners' management and operating environment, and they start with very few years, as in some case, internal only until such time as they're comfortable the integration is doing what is intended. Clearly, we expect this to grow. And also, to clarify, by line of sight, we mean the revenue available for conversion to booked revenue from our partners over the midterm that is around 3 years. With 11 platforms around the world and a 24/7 support facility through a partner in India, we now have the global delivery model we need to scale. And finally, it remains true that the company needs more time and more money to get to scale, but not much more of either we think. On this, Neil, will be providing some detail on work we've done to give you a sense of the revenue prospects we consider possible for the company over the midterm. As you'd expect, we've made a bunch of assumptions he'll detail to do this, but we are well placed to make a judgment as to how momentum can build, and we think you need to know that. But I will say, and I'll also say now that this is not a forecast and it is not guidance. It is our best judgment based on everything we know. The other important thing you'll see in this section is the commitment of around $1.7 million through until June 2021 from the Board, executive team and senior managers in the company by way of an exchange of a percentage of remuneration for shares. This will be subject to a new share appreciation rights plan that will put up for approval by shareholders at the AGM. We don't expect any problem with this as it will be similar to plans in most listed companies and will directly address the dilution issues of the current share option plan. My final comment for now is that I remain of the view that if FirstWave is able to continue to execute on the formula, it can be a global success. Time and money, of course, will tell. Let me now hand back to Neil, who'll take you through the operating update.

[Neil Pollock, Chief Executive Officer]

Okay. Thank you, John. Slide 7 is the start of my update. I'll now move you very quickly to Slide 8. I have to admit, when I took on this role 2.5 months ago, I didn't really think I'll be talking in April with the world in various stages of lockdown or quarantines due to a pandemic, the likes of which my generation at least has never seen. But sometimes these things happen, and so it is today. Firstly, I want to cover the topic of the virus, COVID-19. It has impacted business across the world, not to mention our daily lives. It's potentially one of, if not, the most important and significant business events in history. For FirstWave, COVID-19 situation is the point where preparedness meets opportunity. And I've taken this quote because it's a quote from a Board member of one of our partners' customers. As a result of the efforts that we've made over a long time now, and especially what we've done in the last 6 to 9 months, we were well prepared, not just to manage the risk that COVID-19 presented, but to leverage the opportunity presented by it as well. Let me explain what I mean. I'm going to run through this slide, Slide 8, in a clockwise direction from the bottom left-hand corner of the slide. So firstly, I'll draw your attention to the market comments in the bottom left-hand corner of the slide. The rapid move to remote working has created well-publicized and well documented significant additional cybersecurity risk for businesses. It had expanded our direct addressable market, however, to conservatively $1.88 billion. It has also increased our line of sight over the medium term, the 2- to 3-year horizon to annual recurring revenues from going up from $45 million to $60 million. That's a 30% increase. That's how significant the increased cybersecurity risks across the world today. With the growth in our product portfolio, we now have more to sell to a bigger market, and material revenues are definitely now within sight. Let me move on to the partners. Our leverage channel partner model now comes into its own as it's positioned to deliver exponential growth. Our partners on the path to revenue have progressed from 108 to 130, as John has already said. But more importantly, our billing partners have doubled from 13 to 26. Why is this important? It's important because as John has often said, this is a numbers game. Our billing partners are a key lead indicator for us of future revenue flows. It's our billing partners, which generate revenue. And while the revenue may be a trickle to start with, as they sell more, the revenue accelerates. It's a compounding effect. And our subscription-based annuity revenue model delivers this compounding revenue growth month-on-month. The other important element is our immediate and near-term sales opportunities, which the pipeline has now grown from 45 opportunities at the end of January to 55 at the end of March. From 45 to 55 in 2 months. This is also important because these sales opportunities are the ones that we work to convert into billing partners and then into revenue. Now all of this occurred in a quarter, which was effectively 4 to 5 weeks long because from the time everyone came up from the Christmas and New Year break in mid-Jan to the time COVID-19 really started to bite in mid-Feb, we effectively had 4 to 5 weeks to sell. But COVID-19 has made our partners hungrier for new revenues, and they're now even more committed to us and CCSP than they were. Moving now on to the product, top right-hand corner of this slide. In the last month, we've seen the real power of the platform and the product offering. We were prepared and we delivered. We completed the current phase of platform rollouts, such that we now have 11 platforms deployed across almost every geography. We are in the right place and the right locations for our partners and their customers, and you'll see that in a few slides. We launched a new Remote Worker Cyber Security product bundle comprising e-mail security upgrades, web security, endpoint security and an option for multifactor authentication. And from inception to global release, we did it in under 2 weeks. This is a classic example of being in the right place at the right time with the right tech. We were ready with our platforms, our product offering was ready to go, and we seized the opportunity. We've now received first orders, and we've provisioned them, but I'll get more on that later on. Finally, for this slide, the financials. COVID has hit business and we're not immune. And our partners, while enthusiastically embracing CCSP and seeking ways to address their own and their customer security needs, have had to shore up their own businesses. And so, while our international recurring revenue grew, that distraction resulted in the trajectory flattening. We exited Q3 with an international annualized run rate revenue of $265,000, which was up from $232,000 at the end of January. On the cost front, we continue to meet our cost-out commitments for FY '20 and we've also planned potential additional cost-out opportunities in response to COVID-19. I hope this slide and my commentary gives you a feel now for how we responded to and how we're dealing with the COVID-19 situation. It's a testament to the talent in FirstWave that we did all of this at same time we moved our staff to remote working and made every effort to ensure that they and their families are safe and secure from the virus and we continue to meet and exceed our partners' expectations with regards to our service levels. Now moving on to Slide 9. Our partners' progress and momentum on the path to revenue continues. We have 20 active opportunities in the pipeline under our Cisco OEM agreement, and we have line of sight to over 2.8 million seats with Cisco alone. Our other international partners are also on the move. DWS has brought on 3 additional partners, NTT Data has taken up the RWCS office with gusto and SHELT has also seen completion of a number of deals in Africa. The 11 platforms supported across the globe are now all carrying either billable or test traffic. And let me be clear, that's not traffic testing if the platform works. That's traffic testing their internal processes and systems to make sure that they are ready to go to market, and it's a precursor to revenue turn on. We are also about to deploy our first sovereign platform outside Australia, and we expect completion of that in either Q4 or early in Q1 of FY '21. Finally, our foundation partner, Telstra, has launched the SOHO/Micro/Small cybersecurity bundle. We've received our first orders in first revenue. And existing Telstra customers are taking up e-mail and firewall upgrades and picking up on our offer to assess their cybersecurity posture positively. Our Telstra subscription revenue model is giving us a sure footing of annuity revenue to confidently address the COVID-19 opportunities that are presenting. We see continued solid progress along the path to revenue across the globe. Slide 10 gives you our global deployment of CCSP. We now have 11 platforms deployed across the globe to meet our partners' needs. And as a result, moving to Slide 11, you will see the continued partner and end customer onboarding across the globe. This is testament to the strength and maturity of the partners who we have signed agreements with. I now want to talk to the line of sight. If you can move to Slide 12. This next slide will be familiar to some of you, but I want to highlight 3 key data points on Slide 12 as it brings them together. Firstly, with the addition of endpoint security, our market opportunity in the current year has grown to about $1.88 billion. Secondly, our mid-term line of sight has grown, as I've already said, from $45 million to $60 million annualized run rate. That's a 30% increase. And thirdly, and most importantly, our partner ecosystem, reflecting the power of the channel model is growing exponentially. What this means is as our partner ecosystem and product offerings expand concurrently so too does our addressable market and line of sight to revenue. I hope that gives you a feeling for how those 3 key elements of our business go together. I'm now moving on to Slide 13. I want to cover off our Remote Worker Cyber Security offering because if there was ever the right offer at the right time, this is surely it. Sometimes as storms hit, the clouds appear, which have a silver lining. And with RWCS, the combined cross functional FirstWave team found one. In 10 days, as the reports of the significant increase in cyber-attacks and the risk of remote working spread like wildfire, the FirstWave team put a product offering into the market in response to our partners' requests, which enable them to address both their own internal cybersecurity gaps and those of their customers. 10 days of inception to launch. And it's been ordered, provisioned and is now generating unsolicited positive feedback from our partners. Our partner, NTT Data, is on the record thanking us for what we've achieved. The offer is commercially flexible. It's simple to provision which, at the end of the day, will generate between $3 to $5 per revenue per user per month at maturity. Slide 14. I now want to go into the Q3 financial summary. Despite COVID-19 impacting from mid-Feb of this year, our quarter-on-quarter revenues were held flat. The year-on-year decline in domestic revenue was flagged at the AGM and as a result of the churn of some larger accounts and the end-of-life of the previous web product in the domestic market. But I do want to say that our product investment has been maintained, but it's been directly targeted at revenue generation. On to Slide 15. Our revenues -- the Q3 revenues. In the domestic market, first revenues from SOHO/Micro/Small cybersecurity initiatives have been received. And as I flagged earlier, although our international revenues have flattened from their previous trajectory as a result of COVID-19, impacting and shortening the Q3 sales cycle -- sales -- sorry, the sales window. Slide 16 addresses operating expenditure. Our operating expenditure is reducing in line with advice given at the AGM. Our Q3 OpEx of $3.7 million includes $138,000 in termination costs. Our corporate headcount has been further reduced. There's a plan in place to exchange cash salary for equity being implemented in Q4 and incremental investment in our global platform deployment is now substantially complete. Slide 17 deals with cash flow. On cash flow, $600,000 reduction in Q3 includes a $200,000 deferral of Telstra's cost of goods sold payment into Q4 to align with cash receipts from Telstra. And the Q4 forecast also includes our annual prepaid product purchases, such as the advanced purchase of e-mail licenses that we undertake every year. And our cash outflow trend is continuing as per the commitment that we've made. On Slide 18, I just want to cover briefly some initiatives that we've taken to extend the cash runway in the current environment. At the AGM, the Chairman advised we would have sufficient cash to see out the financial year. And through specific cost outages, we would get to June 2020. Today, I'm reporting, we will actually get to July 2020. In order to extend the cash runway through to beyond July, the company has initiated 2 additional cost-out measures, including, as John has already alluded to, a Board of senior executive and senior -- sorry, executive management and senior management salary exchange of shares to deliver an additional $1.7 million in cash savings through the June 2021 and additional noncost -- nonlabor cost-out initiatives of approximately $100,000 a month, representing a further 23% reduction in nonlabor expenses. There's a critical note to make here. We're taking out significant additional costs. This is not without risk, and the Board has been very clear that I am not to implement any measure, which will impact the business to the point where we lose talent, thereby lose IP or partner relationships or, in any other ways, devalue the business. This is a very fine balancing act, one which is at the front of my mind. We reduced costs significantly in the last 9 months and that has resulted in some considerable pain in some parts of the business. Doing more is a risk, and it will need to be very finely managed. Moving on to Slide 19. The final section of my part of this presentation deals with the Board and management's view of the financial prospects for the business. As the Chairman has previously commented, we are by choice, selling through a channel model to our partners who then sell on to their partners who then sell on to their end customers. Revenue is notoriously hard to forecast in this model, but it's offset leverage that has proven for all-time can deliver exponential revenue growth. However, with the level of maturity of our partner increasing, we now believe we can provide shareholders with our best view of forward prospective revenues. On Slide 20, I give you the background and assumptions to these prospective revenue flows. The background to the next 2 slides is that COVID-19 has disrupted the global economy and the recovery time frame and market conditions in a post COVID-19 world are uncertain. So, we have framed the revenue prospects using a number of assumptions. First, business will be back to business pre-COVID-19 levels in Q2 FY '21. That is from October of this year. Secondly, our partners will apply their resources to taking CCSP to the market at least as they did in the pre-COVID-19 world. Cisco, in particular, remains at least as committed to FirstWave post-COVID-19 as they were pre-COVID-19; that FirstWave's level and location of resources will remain at least as they are now; that shareholders will approve a new share appreciation rights plan, which will allow the Board executives and leadership -- senior leadership to exchange $1.7 million in fees and remuneration for shares; and that the required funding will be available. The note here is that the detail provided here is not a forecast or guidance. John's already mentioned that. Rather, it is the company's best judgment to quantify the potential conversion of our line-of-sight revenue to booked revenue in the short-term in an uncertain market. Moving on to Slide 21, which gives quarter-on-quarter perspective revenue. The graph on Slide 21 highlights the following. For FY '21 -- FY 2020, we estimate that we will achieve revenue of $8.3 million, which is 6 percentage point -- 6% down on pcp and we will exit June 2020 at an international annualized run rate revenue of $875,000, up from $12,000 at the start of the financial year. In FY '21, revenues will reach $11.4 million, up 37% on pcp. We will exit in June of 2021 with an IARR of $12 million. And in FY '22, our revenue will be up 134% pcp to $26 million. And we will exit at June 2022 on an international annualized run rate revenue of $22 million. Thank you. I will now hand back to John to summarize with the key takeouts. John, over to you.

[John Grant, Executive Chairman]

Thanks, Neil. And we're on Slide 22, folks. So COVID-19, with all its issues, has what Neil referred to as silver lining for FirstWave. It's brought attention to information security at the individual level within all organizations, large and small, across the world. And the CCSP allowing FirstWave to get a new remote worker offering into market in response in 10 days. It's elevated us in the eyes of our partners as they urgently look for new revenues to replace those that are gone, which can only add to the credibility of the company and the continuing growth we are seeing in the partner channel and the pipeline. Our prospective revenues for FY '21 represent growth of around 37% and our estimates for the full FY '20 year and if achieved, represent June exit annual recurring revenues of around $20 million, of which $12 million would be international. I'm going to close by reassuring shareholders that we have paid a lot of attention to reducing costs and are now operating at the lowest viable cost without compromising the business' ability to execute or without devaluing the intellectual property that is at the heart of the future value of this business. Thank you for listening. And Neil and I would be delighted to take your questions. Back over to you, Ciena. Ciena, back to you.

[Operator]

[Operator Instructions] Your first question comes from [ Rod Jamieson ] from Eremite.Mr. [ Jamieson ] has left the queue. Your next question comes from Nick Harris from Morgans.

[Nick Harris, Senior Analyst]

Congratulations on reducing costs. Obviously, preserving capital and adding partners -- more partners to the platform, that's great news. And I guess, just a bit of feedback, it's great to see the execs looking to take some of the remuneration in shares as well. So it's great to see go on between shareholders and management. So, thank you. I think they're great initiatives. I guess, I just wanted to get a little bit more detail around the remote working and security bundle that you've recently launched. That's a pretty amazing effort in 10 days to get all of that put together and launch. Can you just maybe one, explain the freemium model? Two, just talk through what's the motivation of your channel partners to sell the solution? And three, just any feedback you may have from those channel partners and end customers as to how easy to use, easy to sell and effective it is would be fantastic?

[John Grant, Executive Chairman]

Neil, over to you.

[Neil Pollock, Chief Executive Officer]

Thanks, John. Yes. Look, thank you. The -- let me take each of those in turn, and I'll start at the end, if I can. The response from our U.K. partners to the response from SHELT has been, frankly, phenomenal. The decision to launch it was -- in the speed that we did, the way that we did was driven by them because they not only have customers with a need, but they also, in one case, and I won't tell you who it is, but they had an internal requirement. So the first thing is that it's received a very positive response from our partners. The second thing is, one of the first paper use opportunities came out of Asia, which was with Scicom. So the commercial offering that we determined was in line with what a lot of other companies are doing in different industries, different parts of the market was either paper use or freemium with an opt-in or an opt-out. And the enthusiasm that we're seeing from our partners means that our initial estimates on potential size and scale is probably pretty conservative, but we're seeing a mix of paper use and freemium. And the way the freemium offer works is in an opt-out situation that some of our partners have decided to go with a 12-month contract for 2 or 3 months, 60 or 90 days upfront free to get them -- to get what they anticipate will be the length of time to get through COVID-19. And then the other one, which is the opt-in is, look, we just want to get you secure. We want to get you protected. We want to seed this product into your organization and therefore, if you decide after 60 days that you're not going to use it, then that's fair enough. We won't worry about it. I hope that addresses both the enthusiasm and the way the commercials are working. What was the third aspect of it? The ease. So one of the reasons that we talked specifically about e-mail upgrades rather than new e-mail is that there is a little bit of work required when you launch the e-mail cybersecurity product into a customer. You've got to get their certain technical aspects of this setup into the system. That kind of -- it doesn't really -- it's less simple than putting the web and the endpoint solutions straight in to provide protection via the Internet and protection at the remote working site. So it is very simple. It is very straightforward. The provisioning is in minutes, not hours. And it is able to be turned on at basically at the same time that the partner or the customer orders it. But we are seeing interestingly, Cisco -- sorry, the Cisco -- our Cisco partnered e-mail solution being upgraded. So customers are moving from basics through to a more advanced e-mail security protection option. I hope that answers the question.

[Nick Harris, Senior Analyst]

Yes, that does.

[Operator]

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Pollock for closing remarks.

[Neil Pollock, Chief Executive Officer]

Thanks, Ciena. I'd like to thank you all for your attendance this morning and thank you for the question. The -- as I've said, the presentation we've given has been lodged on the ASX portal or you have it in your e-mail inbox. We will also ensure that the narrative from today on each of the slides is provided to you over the next 24 to 48 hours so that you can reference back at the comments that we've made on each of the slides. Thank you all very much for your participation. John, hand over to you for any closing remarks, please.

[John Grant, Executive Chairman]

No. Nothing to say. Thanks, everyone, for taking the time to pay attention to what we've got the say. You all have a very good day in this -- in the middle of COVID world we're living. Bye now.

[Neil Pollock, Chief Executive Officer]

Thank you. Bye-bye.