Firstwave Cloud Technology Ltd
ASX:FCT
Earnings Call Analysis
Q1-2024 Analysis
Firstwave Cloud Technology Ltd
The company maintains a cash balance of just under $3 million with a burn rate of $500,000 per month. Despite this, the current financial strategy and timing of cash inflows such as R&D grants, and the seasonality effect given a significant number of renewals at the end of the year, suggest the company can preserve its cash levels for the ensuing two quarters.
With a focus on service providers (75% of Gross Profit), complemented by direct-market offerings to clients like NASA and Microsoft (25% of GP), the company is targeting growth in the U.S., Latin America, and Australia while maintaining opportunities elsewhere. NMIS, their highest-margin product, and the recent Saisei acquisition for network management automation, underscore the company's strategic approach to growth. This acquisition is projected to bring $1 million in additional annual revenue and over 50 new North American telecom clients.
In an effort to become sales-led and capitalize on growth, the restructuring of the company has been implemented. The focus is on converting sales pipelines directly into revenue and enhancing operational efficiency for cost savings. The team's structure is redesigned to streamline business operations and support a more aggressive sales approach. Investments in sales and marketing are intended to fuel this thrust, which is demonstrated by the 7.2% growth in annual recurring revenue.
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Welcome, everybody, to the FirstWave call. We're just about to start the webinar, I'll hand over to John.
Yes. Thank you, Ruth. I am sitting in front of a camera, not saying anything. Good morning to all. I hope you've had a good day so far, and the rest of it is going as well. Welcome to FirstWave's FY '24 Q1 update. For those who haven't joined one of these updates before, my name is John Grant, and I'm Nonexecutive here at FirstWave. I'm joined today by CEO, Managing Director and major shareholder, Danny Maher; and Chief Operating Officer, CFO and Company Secretary, Iain Bartram. You can see the agenda for the day on this 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 business update. We will then open the call for questions. So just in terms of the opening, first quarter of this financial year once again saw a significant change in this business, all in the pursuit of getting to cash flow positive while building on the company's ability to grow its revenues. This is a very delicate balance, which can be unbalanced by many things that are outside of our control, but that's our job. We understand that. That's what Danny, the Board and the whole team is focused on. To this end, in this quarter, we carried out 3 relatively significant activities, and Danny, of course, will elaborate on this. But we acquired Silicon Valley founded network automation software company, Saisei Networks that was a transaction that remarkably was cash flow positive for FirstWave on completion. We [ undertook ] a process of reviewing our investment priorities because you have to make some hard decisions about where you put your money when you've got to get a return, and when you're chasing the objectives, we are chasing, and as a result, we're restructured to deliver cost reductions and aim more of the company's resources at generating revenue from our most profitable products without putting existing revenues at risk. [indiscernible] in my view, to do all of this in 1 quarter without losing momentum and we did it. Congratulations, thanks go to Danny and the whole team for that. Given our clear focus on cash, you'll also see we had larger cash outflows in this quarter than in previous quarters. Iain is going to elaborate in detail for you on this. It is just a reflection of the cash flow seasonality we have in the business, which is why we talk to you in terms of normalized cash flow. We expect to get this as was planned, and we expect to get this and more back in the next 2 quarters. Let me hand over to Danny now, and Iain to elaborate further on all of this. Over to you, Danny.
Okay. Thanks, John. So I'll just quickly give shareholders a few of the highlights before I hand over to Iain, and then I'll come back and elaborate in more detail, as John indicated. So this quarter, we furthered our strategic pivots with our investments to maximize and accelerate the opportunities in the areas of the business, which are most leveraged. We continue to have a strong sales pipeline, especially around our network management products in the U.S. and Latin America, and that's where we get the greatest value for ourselves. So it's excellent that we've got a strong pipeline there. We completed an organizational restructuring about executive, product development and marketing levels. And part of that restructuring were some retrenchments and that will lower our ongoing costs by $1.5 million annually, and we'll start to see some of those cost savings flow through in November and December. We made an all scrip based acquisition of Saisei, which John mentioned, and I'll go through that in a little bit more detail later. But it enhances our network management IP, and it brings customers, revenue and people to us. Our normalized cash usage remains under $0.5 million per month, which for us is what we have planned.
So I'll hand over to Iain, so he can go through some of the finances in more detail, and then I'll come back with a more -- with a broader business update.
Thanks, Danny. Looking at the revenue and gross profit numbers for the quarter. Annualized recurring revenue, which is a key metric for the future health of the business, grew 7.2% over the previous quarter with ARR now reaching $10 million. Total revenue was down by 8.1%, a fall of $250,000. This was mainly due to the nonrecurring revenue being $230,000 lower than the previous quarter. The gross profit is down by the same amount as the revenue being $250,000, which is not surprising given the business' nonrecurring revenues typically at 100% gross profit margin and that the fall in revenue was mainly due to a fall in nonrecurring revenues. Given gross profit has reduced by the same dollar amount as revenue and is a smaller number, the percentage reduction in gross profit is higher at 10% compared to the 8.1% for revenue, and the profit margin has, therefore, decreased marginally to 77.4%. As mentioned in the previous update, there were some adjustments to the COGS in FY '23 that had a positive impact on the gross profit in Q4, but were not relevant to the business' performance in the quarter. And so in line with previous quarters' reporting, we have reported gross profit on a pro forma basis to ensure a like-for-like comparison of the business' quarter-on-quarter performance. In summary, ARR is up and hence, the business is growing. Nonrecurring revenue was down, which in turn dragged down the quarter's revenue, gross profit and profit margin. Moving on to the cash position. The business finished the quarter with $2.95 million in cash, having used $2.65 million in the quarter. This cash usage is significantly higher than the normalized level but was anticipated, and is in line with our internal budgets. There are a variety of reasons for variations in cash usage from quarter-to-quarter. For example, annual payments made in the quarter need to be [ smoothed ] across the year. If you have a range of annual payments spread out across the year, then these adjustments will balance out. However, in our case, all the annual licenses to 2 of our technology partners being Cisco and Palo Alto that were just shy of $1 million that in Q1. Some other Cisco licensing and other operational cost to suppliers such as AWS, are monthly and hence, spread out -- already spread out evenly across the year. This means there's about $750,000 in Q1 expenditure that needs to be allocated to the other quarters to get a true picture of the normalized cash usage. Another significant recurring item for FirstWave is the R&D tax offset, which can only be claimed after you finalize your annual tax return. We plan to complete the FY '23 tax return, including the R&D tax offset in the coming weeks and will likely receive the R&D funds towards the end of Q2, worst case early in Q3.
The estimated amount of this claim is $850,000 and hence, an additional income of just over $210,000 should be allocated to the quarter. As well as the timing of significant expenses and receipts, there are one-off items that need to be considered. The restructure undertaken in the quarter resulted in redundancy payments to staff that impacted cash outflows in the quarter -- and the quarter's profit and loss. There were also cash payments for accrued leave balances of the affected individuals. And although those leave balances were fully provided for on the balance sheet and hence, will not impact the P&L, they do have a cash cost to the business that was born in the quarter. The total cash cost of the redundancies paid in the quarter was $186,000. To provide a consistent treatment for nonrecurring revenues to be included in the calculation, we take an average of the actual results for the 12 months prior to the quarter end and use that as a proxy for the likely nonrecurring revenue into the future. This figure at the end of Q1 was $100,000 per month for the Saisei decision and NMIS product lines. For the time being, the nonrecurring revenue from Saisei's STM product has been separately estimated at 40,000 per month. When we have enough actual data for STM sales under FirstWave's sales teams, we will roll the STM result into a total estimate across the whole business. There are other timing differences and one-off items and taking all the data we have into account, a normalized monthly cash usage figure for Q1 of $498,000 was calculated. It is important to have this view on normalized when thinking about the business' cash runway. And it's similarly important to understand the working capital balance rather than just the cash balance, as the cash balance oscillates with every payment made or received, for example, our internal modeling anticipated the receipt of a renewal for close to $600,000 in Q2. This particular renewal was paid by check, as some of our U.S. clients still insist on doing, and the check being for a significant amount was selected for a manual review at the bank and the clearing process took a week longer than normal, and this balance was not part of the quarter end balance. With a cash balance of just under $3 million and a normalized cash burn of approximately $500,000 per month, you would say the business has 6 months of cash reserves. However, as the business grows and the burn reduces, then not only do the reserves last longer, but in the case of NMIS, where the majority of licenses are sold on a 12-month prepaid basis, the cash inflow from new sales provides additional cash to the normalized cash workings. Taking all these points into consideration, particularly the timing of the receipt of the R&D grant, and the seasonality of the NMIS business with a large number of renewals due to occur at the end of U.S. and LATAM financial years been 31st of December, the business is forecast to maintain its current level of cash reserves for the next 2 quarters.
With that in mind, I'll hand back to Danny for some further commentary on the businesses' performance.
Danny, can I just jump in quickly before you do and just remind shareholders and those on the call, any questions that you want, please queue them into the Q&A function or you can raise your hand during the presentation. Over to you, Danny.
Okay. Thanks, Iain. Thanks, John. So I'll go through a bit more detail on the business. And for this quarter, I thought I would illustrate to shareholders what the direction of the company is in a little more detail. So we're really -- the company has a lot of opportunities around our technologies and our markets to leverage. But we're very focused on where the greatest opportunities exist. So we're not chasing everything. We're focusing on where the greatest opportunities are. Service providers are our main clients. 75% of our GP comes from service providers, but 25% of our GP comes from direct-to-market offerings. So they're customers like NASA and Microsoft. So they're also still important to us. Geographically, our growth focus is on the U.S., Latin America and Australia. Okay? So -- but we will engage on inbound opportunities from outside these geographies, and we are engaged on some opportunities outside of those geographies. So basically, that tells us the core is service providers in U.S.A., Latin America and Australia, but direct-to-market offerings are important and we do still engage in other geographies also. Our highest margin product is NMIS, our network management products, and that's where our most significant IP is, and that's core to our international growth in particular. CyberCision, our cybersecurity platform continues to be a focus for us, and in particular, with the sovereign ISM government platform here in Australia, which will be replicatable to other countries, should we be successful with it here. Global CyberCision clients are being consolidated onto the Sydney platform, and we continue to add clients and partners to that Sydney platform. The Saisei acquisition, which many of you will have seen in the news and certainly the ASX releases, enhances our NMIS functionality, and it enhances our growth opportunities in the network management automation markets. It adds approximately $1 million in annual revenue for us and delivers us over 50 new clients. Most of these clients are North American telecommunication organizations. So it's right in the core of our strategy. It was an all scrip transaction and actually increased the company's cash reserves by $200,000. So it's a really, really good transaction for us and have brought 6 new network management automation software developers, so people that have deep expertise right in the area of focus for us. And it expands the company's expertise not just in terms of software developers, but also in terms of network management and automation in general. So salespeople, presales and their CTO joins us as well. So it's a really good acquisition for us, right in a sweet spot, all scrip, cash flow positive and adds $1 million in annual revenue and some clients and some expertise. So it's fantastic that, that fell into our lap. So our strategic objectives remain the same: to operate with a sales-led culture, to grow our revenues faster and to be capital efficient. So I'll just give you a quick update under each of those. In terms of sale-led culture, I've mentioned we had some restructuring. So we continue to structure our strategies and our organization to focus on converting our sales pipeline to revenues. In line with that, our Chief Revenue Officer, Dino Davanzo, we've extended his responsibilities to include marketing and product strategy globally. So we've brought on a new product manager, Guy Brunsdon and so he reports to Dino. So this is what having sales-led culture is about, our product manager reporting to our Chief Revenue Officer rather than in the development team, for example.
Saisei CTO, John Harper, who is going to be key for us moving forward, also is reporting to our Chief Revenue Officer, again, not into a development team or something like that, but their CTO reporting to our Chief Revenue Officer. Our CFO, Iain Bartram, has been appointed as Chief Operating Officer and is now responsible for our corporate functions as well as operations, customer support and development. That allows me as CEO, a little more time to focus on sales and marketing technology direction with the product managers sitting under our Chief Revenue Officer and the company's strategy. So it's a much more streamlined and focused operation for us to execute on converting that pipeline. [ Further ] growing faster, we continue to invest in sales and marketing, and we haven't backed away from that. Our annual recurring revenue is the major focus for us. So it was pleasing to see 7.2% growth in our annual recurring revenue, that is the platform to take us forward. Saisei's General Manager, Jerome Fink, has joined us under Dino to spearhead the growth of Saisei's technology and the cross-selling of NMIS and we've just had a strong presence at a major conference in the U.S. as a platinum sponsor of WISPAPALOOZA, which is the wireless Internet service provider conference in Las Vegas. We had already planned to be a platinum sponsor of that event. It was our key event for the year. And purely coincidentally, it's actually Saisei's core market. So it's also Saisei's a major event. So it was great to see Dino over there with James, who heads our U.S. team and most of our U.S. sales team at the WISPAPALOOZA conference. We've got to meet the partners and customers that were acquired with the Saisei acquisition as well as expand to new networks and new potential customers. So we look forward to seeing how that impacts our pipeline positively and hopefully get some customers out of that, but it was a really great event for us. Being capital efficient, we are still investing in the business, and we're focusing our investments where we get the most strategic leverage because, obviously, that's where it's most efficient. So where do we get leverage from our capital. The restructuring will deliver us $1.5 million in annualized savings, again, starting from this month and increasing. And I want to make the point that our total operational expenditure now, so we think of FirstWave back in January of last year prior to the acquisition of Opmantek. So we now have that old FirstWave plus Opmantek and now plus Saisei as well. So all of those 3 together, our operational expenditure is lower than what FirstWave's was standalone. So that's quite remarkable if we think of that and we're growing. We're consolidating the CyberCision platform, so that continues and that reduces our operational costs and it creates a density of customers on a smaller number of platforms, in particular, the Sydney platform, which allows that business to be more profitable and leverage economies of scale. So in closing, cash flow breakeven continues to be the primary focus. So we're still focused on being cash flow breakeven in next financial year. The pipeline remains strong, and it's very pleasing pipeline to look at as CEO, but the sales results are a key to achieving cash flow breakeven. So we need these deals to come out of pipeline and become clients, but they are there in the pipeline to convert. So I'm a very happy CEO. But before I close, there's one more slide. And I'd say a picture tells a thousand words. Well, this next slide I'll show you is a graph which tells a thousand words, but also tells a story of millions of dollars and what our transformation is. So this is a slide, I'm in Melbourne at the moment. I presented at the Microcap's conference yesterday, and that went well. And this slide was put together for that conference. And I thought it's an important one to share with shareholders. This is what transformation looks like. And when we say the business is transformed, these are the facts. These are the numbers. These are our cash usage and our revenue plotted in 6 months increments over the last 3 -- 4 financial years. And it's quite remarkable if you look at it. And this is a trend that we're going to see continue in the business, our cash usage going down, and our revenues increasing. So hopefully that speaks for itself. It is -- and that's the story of the business in a picture. So we're doing well. And as John mentioned, we're on a journey. We're not at the end of our journey, we continue on the journey, but that's how the journey looks and that's -- it's a good look. So I'm a happy CEO. And with that, I'll close, and I'll hand over to John to facilitate some questions.
Thanks, Danny. it still is thousand words -- picture is worth a thousand words. I'm not sure what the right is saying is there, but that's spot on. That picture is powerful. Can I just hand over to anyone on the call who would like to ask a question. We've got one question already from Dev Ramachandran. Dev has asked Danny, can you please explain why ARR increased while revenue decreased.
That question was probably asked, if you look at the time, it is 9:36, it's probably asked before the slide on revenues and gross profit.
That's okay. We can quickly recap. It's because we have nonrecurring revenues, which vary quarter-to-quarter. So in the previous quarter, we had quite a lot of nonrecurring revenue. This quarter, it was about -- it was $230,000 lower in nonrecurring revenues. This quarter or next quarter, we'll see a spike in nonrecurring revenues again. So the nonrecurring revenues come and go. Our focus is on growing those recurring revenues.
Thanks, Danny. Thanks, Dev. [ Ian Leslie ], any update on the previously mentioned large NMIS transaction that was going through procurement, Danny?
Good question. Thanks, [ Ian ]. So the large U.S. deal that we've mentioned previously remains in procurement. We have signed the master agreements, and we've agreed all the terms of procurement, but that organization has had structural changes, cyber hacks and they are without a CIO at the moment, and they've paused all their procurement, not just ours and they're restarting those processes in January. Obviously that creates some risk for us, but at the moment, that procurement process is paused until January, and we'll pick it up again then. So still on the table. We're still the selective vendor. It's still the same contract size. It still is significant. It has some more risk around it, I guess, and the procurement process will reengage next quarter.
Danny, just to add to that. I think to be clear to our shareholders, I said in my opening remarks that there are some things we can't keep -- we don't have control over. This is an example of one of those. The fact is that we won the battle inside the organization at the technical and functional level, and we were chosen as their supplier. And that was by the people who use these tools on a day-to-day basis, and that recommendation was made by the [ hit ] lead of that team. That then recommendation gets passed across to contracts, then gets passed across to procurement, then finally has to get executive sign-off. It's sitting in procurement with all the terms and conditions are approved, the procurement people are supportive of the transaction, and we now need the executive sign-off, and that's what Danny said about there being no CIO, so we are there. We're still there, but these take unfortunately longer than we anticipate. And our job, of course, is to navigate around them, which is what we're doing our absolute best at doing.
Any more questions? [indiscernible] anonymous. Can you give us some more color on the pipeline in terms of size, number, stage, et cetera. Really good question, Danny.
Yes, a bit of a curly one to answer when we don't share forward-looking forecast, I guess. But the -- I can say that the internal forecast we have for this quarter is in line with our budget. The potential is to exceed that. Of course, we also are aware that lots of deals also slipped. So the board watches the conversion from pipeline to becoming commercial client quite closely, some color. So the pipeline is, I would say, the most diversified that we've ever seen it. So there's quite a sizable number of deals in there. So there's a lot of deals around the $50,000 ARR, $100,000 type of mark, which is a nice or sweet spot for us. And then there's 2 -- there's 3 deals that we're looking at in the next 4 months that are very significant for the company. So that's kind of the color of it that makes sense, which is nice too. So 3 or 4 deals that are very significant and then a whole host of deals around the $50,000 to $100,000 ARR mark. Very much, again, for more color, very much back ended. It's the end of financial year in most of the world in December. So a lot of these deals are forecasted in December and very late in December. And then we look pretty strong for next quarter as well.
Yes, it's a tough one. Thanks, Danny, for that crack. Maybe if I say a couple more things about it. So what I do from our director's point of view, I will look at the numbers of transactions and the volume of transactions and what I can say, and I'm prepared to say is that the number continues to increase and the volume in total continues to increase. So that's a sign of a strengthening pipeline. And as Danny has already volunteered, we've said before, the majority of this is in our NMIS products and it's -- and the majority of it is in the U.S.A. and Latin America, all of that's a good thing, although they are now emerging other opportunities in South America as well.
The other thing that's worthwhile thinking about too is that the journey that we're on, as Danny said, we've retained investment in all of our sales and marketing because that's what we need to do right now. And it's almost a choice of about every dollar we spend, where we spend it. And clearly, we're spending it to have a [ great ] return. That's been the theme of this whole presentation. And that is in marketing and converting the pipeline opportunities in the U.S. and Latin America into revenue, and that's where we're focused. And that's what we look -- we have ahead of us. One other aspect of this, which is worthwhile you're knowing is that when we look at the pipeline, when Iain looks at the pipeline and looks at the forecast of conversion of that pipeline, we take a worst case, most likely and best case scenario. And when we talk to you, we talk in terms of what we believe is the worst case scenario. So worst case scenarios are not going to get worse because, again, you just have sort of core transactions in those that could be quite considerable and can move in and out. But our best call at the moment is what we're telling you about the next 2 quarters from a cash point of view based on what we see as being the worst case scenario for our pipeline conversion.
So I'm being very, very transparent with you on this. This is how we run the business. It's the right way to run the business. The good side -- the signs are -- is the pipeline continuing to expand? And then the second sign is, are we converting that pipeline? And that's, of course, where our efforts are now focused exclusively.
And I don't plan on delivering the worst case [indiscernible].
That's good.
Any other questions? Thanks for the question to whoever that person was. Thank you. Any other questions? Last call.
Thank you very much for listening in. We'll be back to you again with -- we've got an Annual General Meeting between now and the end of the second quarter, and certainly, we could be able to give you some indications of progress then, but we'll then talk to subsequently at our Q2 update. So everyone, have a very good day. We're looking forward everyone, and see you when we talk next. Thank you.
Thanks, everyone. Bye.