Firstwave Cloud Technology Ltd

ASX:FCT

Earnings Call Analysis

Earnings Call Transcript 2024-Q4

[Ruth Sloley, executive]

Good morning, shareholders, and welcome to the FirstWave Q4 FY '24 Shareholder Webinar. John Grant, Chair of FirstWave, will now open the webinar. Over to you, John.

[John Grant, executive]

Thanks, Ruth, and good morning, everyone, and welcome to FirstWave shareholder update for the fourth quarter of the 2024 financial year.

For those of you who haven't joined one of these updates before, my name is John Grant, and I'm Non-Executive Chair of FirstWave. I'm joined again today by CEO, Managing Director and major shareholder, Danny Maher who's coming into us from Mexico, it's becoming his second home, and CFO and Company Secretary, Iain Bartram.

We'll also welcome later in this update FirstWave's Head of Latin American Operations, [ Omar Vadillo ]. And I also welcome new FirstWave Director, Daniel Friel to the update. Daniel joins us from Charlotte in North Carolina and he has attended the last 2 Board meetings.

Daniel is an experienced technology and start-up executive and investor, and he is quickly coming to terms with our business and is already adding to our thinking on the opportunities and challenges we have ahead of us. The next update, he'll have his feet well and truly under the table and we'll ask him to give you his perspective on things.

You can see the agenda for the day on the slide. I'll make a few opening comments before handing over to Iain to deal with the financial performance in the quarter. Iain will then hand over to Danny to build on his comments, provide a broader update, and then together with Omar, they'll take you on a deeper dive into our operations in Latin America and hopefully give you a sense of the optimism we have for our network monitoring offerings in this region. Danny will then close with some comments on our outlook for the next quarter and beyond before we open for your questions.

So to my opening comments, 2 points only. Firstly, continuing delays, which you've heard many times, in conversion to sales of our larger opportunities, together with further churn resulting in flat revenues quarter-to-quarter. Belie the fact that we continue to sign new customers to both our CyberCision and NMIS Suites. Danny will provide more detail on this. But my point to shareholders is our products remain competitive and new customers are proving that. We just need a couple of breaks with the large opportunities in our pipeline.

Secondly, and as a result of lack of net sales growth, we're clearly running down our cash. We're managing this as responsibly as we can, minimizing the impact on capacity and capability. And again, Iain and Danny will talk more to this. But my point is that given the cyclical nature of our cash flows, we have significantly more runway than it might appear to be the case.

I can assure you, however, that there's a good deal of tension inside the business as we consider all the levers that are available to us to deliver the best outcome to you. But our priority remains as it has and that's to convert our pipeline to sales and lower our expenses as far as we can.

Let me hand over now to Iain to talk to you regarding our fourth quarter financial performance. Over to you, Iain.

[Iain Bartram, executive]

Thanks, John. Looking at the revenue and gross profit for the quarter, ARR was down by 3.9%, which comes after 3 quarters of ARR growth. As John noted, there were sales in the quarter, including the 20% uplift in Telstra's largest CyberCision customer. However, that particular sale only uplifts revenue from the 1st of July and is therefore not included in the Q4 ARR number. There were also several customers who churned in the quarter, offsetting these sales made and resulting in the decline in overall revenues as well as ARR.

Nonrecurring revenue for the quarter at $157,000 was in line with the prior 12-month average and was $57,000 higher than Q3. However, the churn in recurring revenues noted above more than offset this increase, resulting in the total revenue being reduced by $49,000, which represents a 1.8% decline over the previous quarter. The associated decline in gross profit was significantly smaller than the decline in revenue at 0.2% or $3,000. The margin improved during the period by 1.3 percentage points.

So in summary, ARR and revenue were down, but gross profit, which reflects the portion of the revenues retained by the business to support the operational costs, only reduced by $3,000.

Now looking at the cash position. The closing cash was $1.68 million after cash usage for the quarter of $1.82 million. The cash used in the quarter is significantly more than the normalized cash usage quoted at the end of Q3. The reasons for this can be split into 3 main categories.

Firstly, timing of renewals. Scheduled renewal receipts in Q4 are seasonally low at approximately 15% of the annual figure compared to 30% scheduled for receipt in this quarter, Q1. Secondly, expenses, both timing and one-offs, annual insurances for the business are significant at approximately $360,000, with the premiums being paid annually in Q4. There were also one-off retrenchment costs, including redundancy and annual leave payouts of close to $200,000 paid in the quarter.

Finally, R&D income. There was no R&D income received in Q4, which normalized is approximately $300,000 per quarter. So normalized cash usage, excluding nonrecurring revenues, has improved by $75,000 over the quarter, from $358,000 at the end of Q3 to $283,000 at the end of Q4.

There is also an additional $50,000 per month in staff cost reductions that have been actioned, but the individuals involved were still working through their notice periods at the quarter end, and hence, their monthly costs are included in the normalized cash usage calculation at the end of Q4.

Taking the above actioned reductions into account and modeling the seasonality of renewals and R&D income, even when an assumption of no sales is applied to the modeling and the known churn from Telstra's GPA firewall product going end of life is also included, the business has enough cash to support the current level of operations through to the end of March next year.

Let me now hand over to Danny for a broader update.

[Danny Maher, executive]

Okay. Thanks, Iain. So the first thing I wanted to touch on was go a little bit deeper on cash, because I know that is of interest to shareholders.

We manage our cash very responsibly. And the business continues to target cash flow breakeven for this financial year, which is fantastic. As Iain mentioned, we've got the cash reserves of $1.68 million as at the end of June. But we're entering a period of low cash burn now and our cash burn is cyclical. Q4 is a period of high burn and the next 2 quarters are periods of low burn. And again, reiterating what Iain said, our cash flow forecasting shows that there is sufficient capital, even if we don't sell anything, to support our operations through the end of March, the end of Q3. So we've got very sufficient levels of cash.

On the right is our normalized monthly cash usage. So this is basically our average cash burn per month on a normalized basis, and it assumes no sales as well. You can see that in Q2 of FY '22, we were on a normalized basis, burning about $1 million a month. So it's quite high for a business of our size. And today, we're looking at that dropping below $200,000 on a normalized basis per month. So heading towards $0 on a normalized basis, even without making any sales. So it was starting to become a much healthier business.

The next thing I wanted to do was just drill into some of the positions of our sales. Following on from talking about cash, I wanted to note that in particular with the network management software, customers pay us 12 months up front, okay. So if they purchase a 12-month contract, we see that flow through into the P&L month by month. But we actually get the whole 12 months of cash up front. And the primary part of the purchase is simply a license key. So there's not a lot to do for that and it's very high margin.

So sales in our network management business have a very -- have a more significant impact on cash than they do on P&L and more immediate. This last quarter, there was approximately $530,000 of new sales and renewals, including Claro Ecuador, Macquarie Cloud Services, Services Australia and Claro Dominican Republic. We had some churn of existing clients, including L3Harris.

The CyberCision business last quarter featured significant sales to the Australian government and the churn of a number of Telstra related clients as anticipated, in particular [Technical Difficulty] that GPA business [indiscernible].

We've got a strong month in June with 6 separate sales totaling $115,000. We had approximately 20 renewals across the quarter, which was reflecting strong relationships and a successful acquisition, integration of that business. So very -- very pleasing to see that business we acquired growing inside us.

So I just wanted to touch again on our strategic focus. We renewed the Telstra partnership and extended and redefined it to focus on larger corporate government clients. And so this includes the core product and services agreements, the PSA, which was extended until July 2025. And also our technology relating to the information security manual and the compliant email platform continues to progress to formal launch. But in the meantime, Telstra has responded to numerous bids where they've proposed that technology as part of the solution. And as mentioned, the GPA and CSX2 product lines are being discontinued as we previously [Audio Gap].

We'll see -- in North America and Latin America, our network management pipeline conversion is a major focus for us. The resources have been invested in enhancing our existing relationships, for example, Telmex and the Claros around the region, and -- as well as growing new opportunities.

I am currently in Mexico for some contract negotiations relating to some key things in that business. And I also wanted to note that our sales and marketing team has been restructured following departure of Dino Davanzo, our CRO, with more responsibility on our regional sales managers and myself as CEO with them now reporting directly to me.

So on that, with me being in Latin America, in Mexico specifically, I wanted to take the opportunity to introduce our Regional General Manager, Omar Vadillo to you, and I thought you might be interested to hear a little more color from him about how our Latin American business operates because it is a core pillar in our success.

Omar has been with us 11 years. So originally with Opmantek prior to the acquisition by FirstWave, and he's been here 11 years as head of this region, Latin America. He has deep industry knowledge and networks and previous experience, including Alcatel-Lucent Mexico, where he was a key account manager for Telmex for 20 years, Acumen Telecommunications and [ Danza Technologies ], and he has extensive qualifications, including a degree in computer science and business administration, Masters in digital marketing and e-commerce, and a postgraduate degree in strategic marketing.

If you note, 11 years with us and 20 years selling to Telmex with Alcatel. That's over 30 years of managing Telmex as a client. So he's a great guy and he's a great professional, and we're very lucky to have him as Head of our Latin America Region. So I want to introduce Omar.

So, Omar, I'll hand over to you to add some color on the Latin American business.

[Unknown Executive]

Thank you very much to all. I really appreciate. Thank you very much to make me participate in this meeting. Yes, for me and my region it's very important to show how we are developing the market. Yes. Of all, let me tell you that I started idiomatic, as Danny said, in 2012. After we convert to FirstWave, I'm happy to be here, yes. Mexico is a legal entity in -- belong to FirstWave. We have a physical presence here in Mexico, yes. We have 8 persons working here in the region in different roles. We have 2 salesperson, including me, 4 presales and support people, but 1 is assigned to Telefonos de Mexico. Why is this person assigned to Telefonos de Mexico because Telefonos de Mexico is our major customer here in region, yes.

Maybe Telefonos de Mexico has 60% of the market of private big companies here. For that reason, we have decided to assign 1 person to attend any support or precise situation that appears in Telmex. We have 1 marketing person, yes. And we have 1 person assigned to make all the administration process here in the company. As I mentioned before, we have -- we are a physical entity, so we need to accomplish many local laws. For that reason, this person is working with us.

What are our major clients? Okay, it's Telmex, of course. Telmex is one of our major clients, is a very good client we have. Today, we are more or less attending more than 100,000 devices, yes. Telmex has more than 50,000 employees, yes.

I am sorry. I cannot put on my camera because I cannot put, yes, I have the message from some that I cannot start my video. Claro -- Claro is very important to talk because Claro is part of the Carso Group, of course, is part of the Telmex Group. However, it's a different entity. In all Central America -- all South America it's named Claro. We cover Claro from Guatemala to El Salvador -- to Costa Rica, I'm sorry. 6 countries attending Claro. Also we attend Claro Dominican Republic and Claro Ecuador, yes. Telcel is the Telmex brother. Telcel is the mobile company in Carso Group, yes. We are trying to introduce and work with them with some products, yes. We are trying to introduce STM product to attend the mobile customers, yes.

Ferromex is the main rail company here in Mexico, yes. Today, we are attending all the network -- the Ferromex network and we are working for -- to extend these services in this year. And ISSSTE, ISSSTE is one of the major health companies, I will mention, government health companies, yes. ISSSTE attends all the employees that belongs to government or to public entities, yes. This is our customer, yes. I think the our region is growing very, very strong, yes. We expect to negotiate, as Danny said, very good opportunities here, start to work, define scope and maybe try to give good results in the near future.

Danny, thank you very much for this invitation. I don't know if something else to talk.

[John Grant, executive]

I’ll stay on the line, Omar. We'll see whether there are some questions that anyone has of you. But first, can I just acknowledge your 11 years with the company. It's no mean feat to operate for an Australian company in Mexico. And you and your team have done an excellent job in getting us to where we are today. And also, presumably, we'll continue to do that as we work towards the opportunities that we have in the pipeline. So thanks very much for joining the call.

Thanks also to you, Danny. Just before we move to Q&A, I hope Iain and Danny have added to the 2 key points I made at the start. Firstly, our products remain competitive in the market and we continue to bring on new customers. And secondly, while we'd like to be in a stronger cash position with the cash cycles we operate within, our modeling tells us that we can maintain current operations without any net new sales through until March next year.

[John Grant, executive]

Let's now move to your questions. You can type them into the Q&A function or raise your hand to speak. But over to you. Any questions?

We have one from Kim. Is the market we're in a growing market? If yes, why are we not growing? Is it product features? Is it wrong sales strategy? Are competitors too good or too big?

A lot in that, Danny. Do you want to have a crack at that first, please?

[Danny Maher, executive]

Yes, sure. So we've got split markets. So when we do these presentations, we talk about the cybersecurity market, the network management market. We do still talk about STM as a separate product, but it's very closely related to our network management business. So all those markets are growing. And obviously, our core focus is growing the network management business and converting those opportunities out of the pipeline, in particular in North America and Latin America, which is why I'm here in Mexico. That is a growing market.

We're very lumpy is the simple answer. So we're a small company dealing with very large companies. [Audio Gap] give us a massive [Audio Gap]. And while they're not through, we're not really attacking the smaller end of the market like some of the competitors are. So, yes, we don't have this high volume of lower-value clients. So that's the real thing.

There is definitely some product issues, which we've been working through, and I've been very pleased with the progress of the development team in the last 6 months. But we know our software is very powerful. It's very attractive at the upper end of the market. The bigger and more difficult a client is -- the bigger and more complex a client's network environment is, the more likely they'll need our software and won't be able to use competitors. But it has had the issue that because it's so powerful, sometimes it's a little too complex. And that's why we can't attack the lower and middle end of the markets as successfully. So we've been doing a lot of work on that and we continue to do work on that and I've been very pleased with the progress.

So generally speaking, Kim, we don't lose that many deals. They just tend to slip. We're a small company dealing with large companies and our challenge is everyone has already got a piece, one of these technologies, or usually. And the challenge is getting them at the right time when they're prepared to change it out for hours. But we are making new sales. The technology is good. It works. The customers love it. And, yes, we just got to focus on getting a couple of these larger deals out of the pipeline and everything will look different.

[John Grant, executive]

Yes. Maybe if I can add to that, because they're all good and obvious points, Kim. And I think the last one is an interesting one to think about for a minute. So when we started on the security path with CyberCision, the competitors were, I guess, larger organizations coming out of the U.S. particularly, but also Europe. But there's not been a lot of momentum build up for them, and I'm now talking 5 years ago. And really -- and we had a product that played exactly in the telco and exactly in the telcos installed small to medium customer base. But we just couldn't get traction within the telcos. That's a fact of life. And in that time, since then, there's been millions or hundreds of millions of dollars gone into product -- into product development by a whole range of organizations in the security area.

And more particularly, I guess, the big guys, Microsoft and Google, actually started to get their act together as well. So while CyberCision is still a product that has appealed to a certain segment of the market, it's not the large segment of the market that we previously played to. So -- and you've seen over time how we've decommitted, I think, to continuing to grow the software into those sorts of areas because it's just too hard. So we focus very, very -- very, very closely on what Telstra is doing in its go-to-market here in Australia and how we can amplify outcomes from that. So that's been the approach that we've taken to CyberCision. And in that network management stage -- the network monitoring area, again the competitors are big. And it doesn't matter whether they're good or not, but they're big and they've got a lot of money, and they spend a lot of money and their product sets get all the functionality that they get over time.

There's no question and this -- we're in -- continually in proof of concept, both head on with other competitors with network monitoring. And there's no exception that we don't win the technical sale. But as Danny said, with a very functional product such as ours, sometimes the complexity of that could be just a little bit too much for organizations who don't have a compelling platform to move.

So, as Danny's point about every one of our customers in the network monitoring actually has a product to monitor their network today. And it's only -- we have to displace that. So we're taking on pretty tough sectors of the market and we're doing the best we absolutely can. And as Danny said, converting definitely will be a different -- it will be different if and when we can convert a couple of the more significant opportunities in that pipeline.

Maybe we've covered a bit more of Nick's question there. Can you talk a bit more about how you see FCT sales pipeline over the next 12 months and what management team annual revenue targets are? Danny, do you want to crack at that?

[Danny Maher, executive]

Sure. So as a strategy -- so CyberCision as a strategy, we're very much focused. So we've kind of refocused that relationship with Telstra. We do have the -- other partners on our Sydney platform as well. But we're very much focused on that ISM compliant solution. We've already got a significant contract on there, which we announced on one of those platforms. We deployed that second ISM compliant platform. And it's not fully productized yet by Telstra, but there's already bids out there to try and get some business onto that platform. And so that's what that's about.

The network management business, I'll put STM as separate for this conversation. But network management business has a great pipeline. There's several very significant opportunities in there. And we closing 1 or 2 of those out would make a very, very big difference to this business. I'm in Mexico for a reason.

And we don't -- we don't provide the targets and forecast to the market. And the reason we don't do that is because it is so lumpy and it is so dependent on a couple of these larger deals. So if one of those deals slips makes a big difference to the business. If one of them comes in, that makes a big difference to the business. So that's why we don't provide the 12-month targets. But certainly they are growth targets.

[John Grant, executive]

Maybe if I can add to that last point. Clearly, we don't do a lot of stuff you'd like us to do in terms of providing information because it is so variable in terms of the outcomes. And my view is that it can be as misleading if we did, as it might be informative, and it's only a might be informative too. So we just choose not to. It's not the place we want to go.

We don't want to take you there as well. We want to actually tell you what's really happened. And that's what I think we do in terms of thematically through these conversations.

But when an opportunity comes to fruition, and Danny has mentioned a number of new sales in the presentation today, but we'll tell you when it happens, because anything else would be, as I said, potentially as misleading as it might be informative.

We've got a question from one of our anonymous attendees. Danny, great to see cash burn declining towards breakeven. Thank you. Keep up the hard work. $30 million market cap with $10 million of revenue and high-quality clients must look appealing to fresh eyes at these valuations. Are there any new investors or strategic investors that are showing interest? If not, how do we get this story out there?

Maybe I'll have a bit of a first crack at that and then Danny, happy for you to pick up and/or Iain happy for you to pick it up as well.

We're all the time looking for new ways to get value out of the work that we do. We have a -- I've mentioned earlier in my initial words about the levers that we have, and I'm not going to elaborate on those. You've all been in the market for a long time. You would know what they would be. But it is fair and reasonable that you should be -- you should think that we are exploring all of those. And some of them are dead allies and some of them won't be. So our job is to make sure that we explore every opportunity there is to create value in this company so that can be reflected in share price and can be reflected in returns to shareholders. That remains our core premise. We wouldn't be doing this at all if that wasn't our core premise. So -- and that's my sort of response.

Danny do you -- or Iain, do you want to add to that?

[Danny Maher, executive]

I will. So yes, there is interest from new investors and we're talking with them and some -- so we just need time to work that through. But yes, there is interest. Everyone can have their view. Valuations of a public company can be quite emotional and everyone can have their view on what it should or shouldn't be valued at. But yes, I found it quite ridiculous how low the stock price has got. And it's been -- it's been -- it's been quite obvious and end of financial year tax loss selling had a big impact on our stock price. So hopefully, we're just going to focus on the business. Hopefully, we pull through a couple of these deals and some of those investors do turn up and we start to see things -- see things go differently. But obviously, it's not -- we'll do all the things we can and then you get some strange things happen in the market anyway with an illiquid stock. So...

[John Grant, executive]

But it's also fair to say that new news will bring new shareholders. No question about it. So that's what we're working on doing.

[ Matt Payne ]. Matt says, where are you at with renewals like Microsoft?. And previously, you had a large North American telco opportunity. Has this been lost? Or is there a possibility of re-engagement? Lastly, can you please provide us with color on the magnitude of your pipeline in ARR dollars? Danny, you'd be delighted to answer this question.

[Danny Maher, executive]

We hope to have some news on Microsoft soon. Everything is going well with that account. They're a key account for us. And -- in fact, they are one of the accounts experiencing some bugs in the software. And I was really -- you can imagine the way they use it. They really push it. And I was really pleased to see how the product team worked with them through that to benefit, not just them, but all our customers. So that's not due for renewal yet, but we expect it to renew.

We did previously had a -- you want me to comment on this a bit, John?

[John Grant, executive]

[ Before I ] gave you the question, Matt?

[Danny Maher, executive]

Yes. I'll comment carefully. We did previously have a large North American telco. And it's an opportunity and it's a good example of why we don't like to provide further forecast information because they're so lumpy. They have a significant impact on the company. And that deal was -- they had selected us, they had announced it internally. They had signed contracts with us, and they never got around to send in the purchase order, which was quite -- I've never seen something go that far without the audit. We'd agreed the purchase order terms. The lawyers had put our licensing terms in their contracts and we've negotiated everything. So it was a bit strange.

So I always said that it wasn't dead, it had just become a zombie. And yes, there is a reengagement there, but it's a different type of engagement to what we have. But we'll see where that goes. But no, it's not -- it's actually not lost.

Lastly, I can provide the color on the magnitude of pipeline, ARR. I'll have to check with John. I know what it is.

[John Grant, executive]

No, I don't think we can quantify that. We've tried to do it in loose terms, Matt. [indiscernible]

[Danny Maher, executive]

Well, I could say the pipeline in ARR is bigger than the current company, let me put it that way.

[John Grant, executive]

Yes, that's a very reasonable way of putting it, yes. Okay.

And Kim just come back. Any covenants in the convertible loan agreement related to sales performance? Iain, perhaps you.

[Iain Bartram, executive]

No, there aren't any covenants on that loan agreement.

[John Grant, executive]

Okay. Thank you. Okay. Thank you very much for those questions. And thanks very much, we've had 55 external attendees. I really appreciate that. Maybe it's support, maybe it's just need to know, maybe it's nothing we don't know. But thank you very much for taking your time and spending it with us this morning.

Any last -- last chance for any questions before we close the call. Okay. Thank you very much. Can I just in closing, acknowledge Danny's -- the fact that he's in Mexico and doing this from Mexico, can I acknowledge Omar's participation in this. Thank you very much, Omar. I hope it's given shareholders a bit of color. That's a very Mexican accent as you -- as everyone would know here in Australia, but that's what -- that's Omar who's been operating in that territory for over 30 years and 11 of those with FirstWave and/or Opmantek. So thanks very much to you, Omar. Thanks, Iain. And Danny we look forward to getting you back here in 1 piece. Thanks, everyone. Have a great day.

[Iain Bartram, executive]

Thank you.