Firstwave Cloud Technology Ltd

ASX:FCT

Earnings Call Transcript 2023-Q3

[John Grant, executive]

Good morning, and welcome to Firstwave's FY '23 Q3 update. My name is John Grant, and I'm an Executive Chair of Firstwave. I've got a bit of cracky voice this morning, so my apologies. I'm joined by CEO and Managing Director, Danny Maher; and Chief Financial Officer and Company Secretary, Iain Bartram. You can see the agenda for today on the slide. I'll make a few introductory comments before handing over to Danny to take you through the highlights for the quarter.

Iain will then deal with the financial performance before handing back to Danny for a broader update, then I'll open the call for your questions. [indiscernible] Firstwave on quarterly reporting. Sometimes the business cycle doesn't match this reporting cycle. It's a bit like that this time, this quarter, at least for Firstwave. And we are putting this presentation together, Danny described it as [indiscernible] either.

But we had a great cash result at positive cash for the quarter, the first time I can remember in almost 3 years I've been with the company. But this as a bit cyclical, as Iain will describe. But on the other hand, we would have preferred a higher level of sales, which Danny will expand on. That having been said, it's my view that we're running a very lean business well and the cycle back to revenue growth is ahead of us. Let me now hand over to Danny.

[Danny Maher, executive]

Okay. Thanks, John. Sorry. So basically, the highlight of the quarter is that it was cash flow positive, and that is amazing for this company. And Iain will go through in more detail on how that happened. But we're really pleased to be able to report positive cash in the quarter while we are continuing to invest in growth, particularly in sales and marketing. We saw a little bit of growth in our network management.

Annual recurring revenue is around 2.3%. And we saw a little churn in our CyberCision recurring revenue is around 2.5%. So disappointingly, they pretty much cancel each other out, so we didn't get the growth that I wanted in the quarter. But importantly, the pipe is in good shape and the deals have just slipped they're not lost. So we're continuing to make those investments in sales and marketing. And it's just taking that touch longer for some of these deals to drop, but they're there. Our nonrecurring revenues were lower than the previous quarter. As we communicated in the previous quarterly update, we had some once-off license upgrades in particular in Latin America.

December is the end of the financial year in most countries outside of Australia. So we do get some lumpy one-off spending in that final quarter. And that's basically the highlights and the summary of the quarter. And I'll hand over to Iain for now to run through the financial performance, and then I'll come back for a bit more of an overview.

[Iain Bartram, executive]

Thanks, Danny. Looking in more detail at the key financial results for the quarter. The revenue recognized in the quarter fell by just under 18%, which was almost entirely due to the reduction in nonrecurring revenues. Recurring revenues were flat, which is reflected in the ARR result of $9.82 million, down just 0.4% on Q2 is $9.86 million. As Danny noted, this was the net position after a 2.3% growth in monitoring revenues and a 2.5% decline in CyberCision. Gross profit fell in the quarter, in line with the reduction in revenues. There were further write-backs of COGS accruals in Q3, leading to similar adjustments to those made in Q2.

And therefore, to ensure a like-for-like comparison from quarter-to-quarter, both the actual financial results and an adjusted result where the impact of these accruals is removed has been presented. So in summary, revenue is down, ARR is flat and gross profit has fallen in line with the reduction in revenue, and hence, the gross profit margin is consistent with the previous quarter. Moving on to the cash and expenses. The business finished the quarter with just over $7 million in cash and cash equivalents. This is $390,000 [ lower ] than the cash held at the start of the quarter and is a $2.3 million improvement in cash usage when compared to the previous quarter's $1.9 million of cash used.

There are 3 things to note about this movement from cash usage to cash gain. Firstly, collections in the quarter were $900,000 higher than the previous quarter, which reflected the collection of the large perpetual license fees in Q2 and the seasonality in the North American renewals. Secondly, the receipt of the $1.2 million in R&D grants that had been flagged as pending in the previous quarterly update.

And thirdly, the underlying improvement in the company's expenses and is only on this foundation that the 2 cash inflows from collections and R&D have resulted in a positive cash flow quarter. You might remember, I commented in the previous quarter's announcement that the business's nonrecurring revenues are harder to forecast than recurring revenues, and yet they are a significant component of the monitoring side of the business, and hence, we need to accommodate them in the analysis of normalized cash burn.

In Q2, we included a breakdown of the one-off revenues factored into this normalized cash burn. We will continue to include this breakdown and to reduce any subjectivity in this calculation, we will now adopt a fixed methodology for calculating the one-off revenues impact on the normalized cash usage. The methodology being adopted from this update is to take the actual nonrecurring revenues recognized year-to-date expressed monthly, which for the end of Q3 is $110,000 per month.

Using this methodology, the normalized cash burn at the end of Q3 is $560,000, which is up 80% on the Q2 level but includes a $90,000 reduction in the benefit from one-off revenues. So in summary, the costs in the business continue to fall. As I also note that the business continues to invest in sales and marketing to the tune of $400,000 a month, which is just over 30% of the business' cash expenses.

As commented on by both John and Danny, we would have liked more new sales in the quarter. However, we remain confident that the growth anticipated from the pipeline, together with tight cash management, will result in the business reaching our target of cash flow breakeven. I will now hand back to Danny to provide some further comments on the quarter and the business' current performance.

[Danny Maher, executive]

Thanks, Iain. On each of these updates, I do recap on our strategic objectives. It's probably becoming a bit mundane over them now. But I do want to continue to reaffirm with all shareholders what the focus of the business is. It's a sales-led culture, growing the revenues faster and being capital efficient. So everything we do falls under one of those pillars. If it doesn't, we don't do it. Okay. There are again some key sales initiatives in this quarter.

We saw 2 new account managers joined the team. Patrick joined in the U.S.A., which I'm very excited about. Patrick is a very talented account manager, who previously worked for Opmantek. So it's great to have him back. He will be focused on selling the network management products in the U.S. I'm also very excited to see Paolo joining us in Australia. She's located inside of Telstra and focus on growing our CyberCision revenues. This is the first time we've had a sales rep inside of Telstra. So she is a fantastic addition to the team, and she's been welcomed with open arms in Telstra. So that's hopefully going to be a big change for us.

I've mentioned in the previous quarter update a significant deal we're hoping to close in the U.S. That is edging closer and closer, and I check my e-mails every morning for updates. We're all working hard to finalize it, and we're all frustrated that it hasn't dropped yet, but it is really close. Time always adds risk to these things, and we -- for that reason, we want to lock it in now. But it is edging and we're hoping to have some very big news on this very soon.

We continue to focus our sales efforts on service providers and large organizations in our strongest markets, which are the U.S., Australia and Latin America. And we continue to focus on our highest margin products, which are our network management software and our e-mail security offering. In terms of key sales results, we extended our contract with NASA, which is why in my background I'm sitting on the moon here for another 12 months, and we actually doubled the value of the contract. That contract has pretty much quadrupled since they first signed, so that's really pleasing.

And we hope that it continues to grow as NASA continues to build out their Artemis space missions, which is a really cool thing for us to be involved in as a tech company. We extended our contract with John Deere for another 12 months, which is great, and they've now been with us for 12 years, which is fantastic. We extended our contract with the Canadian Imperial Bank of Commerce, which is a good size agreement for us. And again, it's a great one to have extended for another 12 months.

So in summary, our current position is that we're continuing to invest in our growth, a really positive result from a cash perspective, just fantastic. We do still have a good pipeline, and we would have preferred more growth in this quarter, but it's only slippage. It's not lost deals. So we're focused on closing those deals now and, of course, focused on closing out that large U.S. contract, which is so close now.

Before I sign off, I did want to let you know that this afternoon, I'm presenting at the Coffee MicroCap Investment Conference at 3:30 p.m. at State Library in Sydney is when I'm presenting. So I hope to see some of you there. After we've completed this update, we will upload the slides that I intend to present at that conference to the ASX, so you may want to take a look at those. But I thought I'd include just a couple of them in this presentation as a courtesy to all shareholders.

The first one I thought to share was this illustration of the breakdown in ARR. If we focus on the graph on the left, this is the breakdown of our network management annual recurring revenues by geography. Keep in mind that these products are 100% gross profit to us, every dollar that is spent on these subscriptions we keep. So we can see the bulk of our revenues, 54% come from North America, which is also great because that's our primary target of market. Latin America, 26%, which is primarily the American Mobile group, Telmex and their sister companies like Claro in various countries.

And we've got 14% in Australia, which is interesting to me because it hasn't been a big focus of ours to sell this tech in Australia, and there's natural opportunities here. The middle graph is our CyberCision revenues. So we can see the CyberCision revenues continue to be very concentrated in Australia, 95% of them, in fact, with most senior partner, Telstra, and we have a small amount of revenue outside of Australia. The graph on the right shows our total ARR with 58% coming from CyberCision and 42% from network management.

I note that CyberCision ARR is approximately 60% GP. So we did a graph of our GP ARR. It would be at about 55% network management, 45% CyberCision. So we do have a good mix blend of revenues between the 2 products. At the conference, I'm also going to talk a little bit about the Blue Sky opportunity for Firstwave. So I thought I'd pull in a couple of slides about that. The first Blue Sky opportunity the company has is to unlock the potential of the IP that we now own post acquiring Opmantek and integrate some of that with CyberCision.

Basically, we think about what CyberCision does, it takes some clever third-party products, gets them into a platform, which makes it easy for a service provider to take those capabilities to the mass market at scale. So we now have some pretty significant IP in areas such as compliance management, secure IoT management and audit. So it's about getting some of that IP onto the CyberCision platform, which I'm sure will be particularly interesting to all organizations, but especially Australian state and federal government, where we're getting a lot of interest in taking those forward.

The second Blue Sky slide that I'm going to present at the conference is around our open source user base. There are around 150,000 organizations that we estimate is our free open source software. So that's the free version of our network management product and the free version of our IT audit software. These organizations are spread around the world in 178 countries. This is a typical geographical spread for any large tech companies, Cisco and Microsoft, et cetera, have similar spreads.

And we haven't done a lot to attempt to monetize this. And it's a significant opportunity to do that, and we are considering ways to do that. These are very sticky products used widely around the world, and we're thinking what commercial hooks can we put into the free products, what approaches can we take to get those free users to buy something. So that's something we're investigating is a Blue Sky opportunity. It's massive. It's a huge user base. And you may hear a little more about this in the future. Okay, so that's all I wanted to run through with you at this point. So I'll hand back to John to facilitate some questions and look forward to those.

[John Grant, executive]

Thanks, Danny. Let's now move to your questions. [Operator Instructions] Nick Harris from Morgans.

[Nick Harris, analyst]

Thank you, John, Danny, and I appreciate the presentation and giving me a chance to ask some questions. Also great to see your cash balance go up, definitely not -- definitely notice. So -- and to see those underlying expenses continuing to decline, so excellent. Just a couple of questions from me, really. One was, Danny, you mentioned on the slides that sales slippage this quarter. I was just wondering if maybe you could elaborate, do you think customers are being a bit more cautious or changing their behavior? Or do you think it's just a timing thing. And then my second question was just you mentioned you've got a new staff member who's, I think, inside sales now at Telstra. So I think that's also a bit of a first for the company. Could you just talk a little bit about what she's doing there and what her objectives are?

[Danny Maher, executive]

Sure. So on the first point with the slippage, no, it's kind of normal in the fields that we're operating with the network management software, most organizations have something. So they're replacing a system and it's quite normal for -- just for them to get busy with staff and then it just slips a month or 2. A lot of the deals we had were kind of -- we're internally forecasting around March. So they were at the back end of the quarter as well.

But there's no particular underlying issue there or anything like that. It's just one of those things where still a fairly lumpy business, so a few deals slipping from one quarter to the next, make a difference to that quarter. As John said, it's actually not really suitable to do quarterly reporting in that situation because there's actually no underlying issue that the deals are just going to pop up in a different quarter. But when you do quarterly reporting, and they're sitting on the edge of 1 month to the next month. That's how it works.

So there's no real underlying issue and I would have preferred them to come in the quarter, but I don't really have any concerns with any of the deals. In relation to Paola at Telstra, she is part of their sales team. So she is a specialist on our products or the Telstra branded version of our products more to the point. And her job is to work with the account managers and ensure that our stuff is sold such solely targeted on sales of our products through Telstra. And yes, you're right, that is the first for the company. It's the first time we've had someone inside the Telstra sales team representing our products. So it's really cool, and we'll see the impact it has.

[John Grant, executive]

We've got a message on the chat line or Q&A line. Moving forward, if there are any contract wins in first rave reaches cash flow breakeven or positive, but there is no share price reiterate from the market. Would you consider buybacks as a form of capital management.?

So my response to that would be to be loved to get that position. I think it's a big call for a company like Firstwave to do buyback territory when they just turn cash flow positive. I think we'll be putting some money in the bank, quite frankly, for a little while. And my first information after that will be to start by dividends, that's a long way away. It's a big call now. The nearly observations on that can expand on what I've said or different as well?

[Iain Bartram, executive]

That would have to have come on the back of the right investments and the right contract wins, which would lead you to think you would be better off making further investments if there's opportunity to do that. If you're growing the business in that way and you're making those decisions, and that's probably a first place. But I completely agree with you, we'd be putting some reserves in the bank before we went out spending.

[John Grant, executive]

Okay. Thank you very much. Thanks very much for your attention. We'll speak to you again next quarter. And as Dan indicated, hopefully, before that with some good news. Have a great day. Cheers.