Firstwave Cloud Technology Ltd
ASX:FCT
Earnings Call Analysis
Q2-2024 Analysis
Firstwave Cloud Technology Ltd
FirstWave Cloud Technology, headed by CEO Danny Maher, experienced some changes in Q2 of FY '24, as COO Iain Bartram took on more operational responsibilities. This strategic shift, part of an earlier organizational restructure, seems geared to enhance sales and marketing efforts, with Maher focusing more intensely on these aspects. The sales momentum is building, although this has yet to fully reflect financially. A positive change is visible in the company's ability to advance its sales pipeline under this new arrangement.
FirstWave has extended its agreements with key partners such as NASA and Telmex, the latter being Mexico's largest telco. Notably, FirstWave secured its first reseller arrangement with Telmex, which is anticipated to yield $1 million in revenue over three years, reflecting a new model where Telmex is now bundling FirstWave's software for its clients. This is expected to encourage similar deals, potentially ramping up sales.
The company's Annualized Recurring Revenue (ARR) grew by 1.8% on top of achieving a $10 million milestone in the preceding quarter. The revenue uptick was modest at 3.2% due to additional revenue streams from the acquisition of Saisei. The rise in high-margin revenues contributed to a gross profit margin increase of one percentage point from 77.4% to 78.4%. Notably, the Telmex reseller sale, which is expected to add $300,000 to ARR from Q3, wasn't included in the Q2 ARR, hinting at further future growth.
The leadership emphasized their focus on maintaining lean operational costs and improving cash flow towards achieving breakeven. While the cash position ended at $1.95 million after using $1 million in Q2, optimism remains with the anticipation of a $1 million R&D tax offset, which may balance the cash usage in the upcoming quarter. Challenges such as further sales slippage are being managed with the consideration of various options to provide working capital support.
The company released Open AudIT Version 5, a significant update to its popular technology, which could drive growth in its uptake. FirstWave, including its acquisitions such as Opmantek and Saisei, managed to maintain a lower total operating expense than FirstWave's standalone figures before acquisitions, showcasing efficient operational execution.
There is ongoing dialogue with potential investors which are described as probing at this stage. The discussions are part of a broader investor relations strategy to amplify FirstWave's presence, especially as the company expands its sales and accounts in North America. The hope is that delivering on sales and reaching cash flow breakeven will make the company more appealing to investors, including those from North America who may value the company's offerings more amidst the geographical revenue diversification.
While certain big deals have faced delays due to market conditions, they are still in play and could materialize in the near future. Achieving cash flow breakeven remains the primary goal, with significant pending sales expected to have a material positive impact on working capital. The company also aims to communicate its progress and value proposition more effectively to the investment community to enhance market understanding, liquidity, and share value.
FirstWave anticipates continuation of R&D tax credits, which are critical to its cash flow strategy, albeit expecting a slight reduction. The company maintains confidence in its R&D claim process, which is backed by robust systems and external consulting advice. However, there's a recognition of audit risks, with prudent processes in place to mitigate any potential issues.
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Good morning all, and welcome to FirstWave's FY '24 Q2 Update. 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; and Chief Operating Officer, CFO 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 us through the highlights of the quarter. We'll then go to Iain to deal with financial performance before handing back to Danny for a broader business update. We'll then open the call for your questions. So 2 things stand out for me in Q2.
Firstly, in Q1, we announced an organizational restructure, with Iain taking on more of the operational responsibility as a COO and Danny is significantly more involved in the sales and marketing business. If I just stand back for a moment to look at the results of these changes. I think it's very fair to say that we've seen a positive -- we are seeing a positive change in momentum of moving forward what consistently we referred to as a strong pipeline.
This hasn't shown up in the financials as yet. But within this pipeline, there are several opportunities, each of which can make a material change to both our revenues and working capital. To maintain this momentum, Danny will be in Latin America and the U.S. for the month of February with our Chief Revenue Officer, Dino Davanzo, following him later in the quarter.
And secondly is our cash position. Iain will elaborate, but the bottom line is we used $1 million in the quarter to leave us with just around $2 million. We don't expect this to decline substantially in Q3, but clearly, to move closer to breakeven, we need further conversion in the pipeline, particularly of those larger opportunities. Hence, Danny and Dino are going into Latin America and the U.S in Q3.
The static balance between revenue and cash is obviously critical and can be unbalanced by many things that are outside of our control. But that's our job, and that's what Danny, the Board and the whole team is focused on, including, as you'd expect, looking at ways other than through SaaS to take some pressure off this.
Let me now hand over to Danny, and Iain to elaborate. Over to you, Danny.
Okay. Thanks, John. We -- so a few highlights for Q2. So as John mentioned, we went through an organizational restructure in Q1, which saw Iain appointed as Chief Operating Officer and taking a bit of that pressure off me. We're seeing several opportunities move closer to completion and, pleasingly, closed a number as well. So we received an extension of our agreement with NASA, which was great. We received an extension of our agreement with Telmex, which is Mexico's largest telco and one of our longest-standing customers. So that was excellent also.
And really pleasingly, we saw for the first time sale of our software under a reseller relationship with Telmex, which will deliver additional revenue of approximately $1 million over 3 years. So Telmex has been a long-time customer of FirstWave and previously Opmantek. But Telmex was buying our software and using it themselves.
This is the first time Telmex had bundled our software with a network that they're then on sold to a client. So the software is installed for that client specifically. So they were able to use our software to successfully differentiate that deal, and we won it. And as a result, we expect them to bring a few more like that or as many as possible to us, and we already have seen that start to happen, which is great news for us.
We're operating a more agile business than ever with lower ongoing costs, such that our normalized cash usage is down to approximately $380,000 per month. This quarter, we expect $1 million from an R&D tax offset. So we don't really expect to burn any capital this quarter, and we expect to finish the quarter in materially the same cash position as commencing it.
And Iain will run through in his financial update a lot more analysis on the cash and revenues and financials. So I'll let Iain do that, and then I'll come back to you further on a business update after Iain.
Thanks, Danny. Looking at the revenue and gross profit numbers for the quarter, we see that the annualized recurring revenue grew 1.8%, which is on top of the $10 million annualized recurring milestone that was reached in the previous quarter. This figure does not include the recently announced Telmex resale that approximately 300,000 ARR represents another 3% growth that will flow into the next quarter's results.
Revenue was up by just under $100,000 or 3.2%, and this is mainly due to the inclusion of a full quarter's revenue from the Saisei acquisition against only 1 month's revenue in Q1. The majority of the revenue increase was from 100% gross profit margin products and hence, the gross profit is up in line with the revenue increase, resulting in a larger percentage increase for gross profit and revenues. The increase in 100% margin revenues led to an increase in the gross profit margin of 1 percentage point from 77.4% to 78.4%.
As mentioned in previous quarters, historically, there were some adjustments to COGS that were not relevant to the business' performance in the quarter. And so in line with the previous quarter's reporting, we have reported gross profit on a pro forma basis to ensure a like-for-like comparison of the business' underlying quarter-on-quarter performance. In summary, revenue is up; gross profit and the gross profit margin are both up; and ARR, which is the key metric we measure the business against, is also up.
Moving on to the cash position. The business finished the quarter with $1.95 million in cash reserves, having used $1 million in the quarter. Given the materiality of our annual R&D tax offset, it's important to understand the status of this claim in analyzing current cash reserves. The current claim is for $1 million and has been lodged with the ATO, but has not yet been received. It is anticipated that the $1 million will be received in February, and this will completely replenish Q2's cash usage.
In Q2, there was $110,000 of one-off payments relating to the redundancies announced in Q1 and $125,000 in salary payments being made to employees working out their notice period. The $1.5 million annual cost savings announced in Q1 were being fully realized towards the end of Q2 and the normalized monthly cash usage calculated at the end of the quarter is based on these lower costs. As previously noted, to provide a consistent treatment for nonrecurring revenues to include in the normalized cash usage, we take an average of the 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 Q2 was $64,000 per month for the CyberCision and NMIS product lines combined and 25,000 for the Saisei business. Taking all the data we have into account, a normalized monthly cash usage figure for Q2 of $383,000 was estimated, which is $115,000 improvement on the previous quarter.
Now I hand back to Danny for some further commentary on the businesses' performance.
Okay. Thanks, Iain. As has been customary at these quarterly updates, we just reconfirm what our strategic objectives are. They are: to operate the business with a sales lead culture, so sales first; to grow our revenues faster; and to be capital efficient. Okay? So they are the things that are going to get us towards cash flow breakeven positive.
In terms of sales-led culture, I'll be spending from February 5 to March 6, as a minimum, in Mexico and the U.S.A., primarily Mexico, to work on some significant opportunities that have developed in those regions. We've got some really exciting opportunities there. So for the business, I need to be over there working on those. Our Chief Revenue Officer, Dino Davanzo, will also make a trip to the region. I'll be tag-teaming with him between Mexico and the U.S.A. to bring some of these deals out of the pipeline.
Further efforts have been made to focus centralized resources on supporting key global sales opportunities. So what that means is getting resources such as support engineers, people from the finance team, software developers, from anywhere in the company, getting a bit more of their time focused on assisting the sales team and bringing these deals out. And we're starting to see some good things coming from that.
So in terms of growing our revenues faster, we continue to invest in sales and marketing, with ARR growth being our major focus. I note that in our ARR, the reseller sale through Telmex, which is fantastic, was not included in our ARR for Q2, and it will add an additional $300,000 of ARR from Q3 onwards. So we'll be -- we're hitting Q3 with a nice little boost to our ARR, which will be reported later.
There are several major opportunities which remain in an advanced stage in the pipeline. Completing or closing any of these opportunities will materially impact the company's working capital position in a positive manner, of course. We also have released Open AudIT Version 5 during the quarter. This is a significant release. It's FirstWave's most popular technology. It's primarily a free open source product, but it's very, very popular around the world. And so we expect to see some growth in the uptake of that product through that release.
Capital efficiency. Incredibly, our total OpEx remains with FirstWave plus the acquisition of Opmantek, plus now the acquisition of Saisei, the total operation expenses of the company is much lower than what FirstWave's stand-alone before those 2 acquisitions. So we're operating nice to lean, but we're also operating very efficiently, I think, is the point we're operating quite well.
The consolidation of the CyberCision platform continues to reduce our operational support costs and it creates a density of customers on a smaller number of platforms, which leverages economies of scales. It reduces the cost of operating those platforms because we've got a smaller number of platforms. There's a normalized monthly of cash usage now of $380,000, as Iain mentioned, which continues to reduce. I know a question which we'll get to later in the forum on that.
In closing, managing our cash reserves to balancing opportunity and longevity is a focus for us. We want to keep investing in sales and marketing. Our current cash levels will be retained in Q3 given we're going to receive the $1 million R&D tax offset. And the company is reviewing a number of options to provide working capital to support and manage the possibility of further sales slippage. What does that mean? That means we're not -- we don't anticipate burning capital to any material expense this quarter. But nonetheless, the Board and management feel that the levels of working capital are pretty skinny if we were to suffer some further sales slippage.
The cash flow breakeven continues to be our primary focus. There's a strong pipeline of sales opportunities. And completing any of these sales will positively and materially impact the company's working capital position. So that's our focus, and that's the best way to have more working capital is to complete these sales.
So on that, I'll hand back to our Chairman, John Grant to facilitate some questions.
Thanks, Danny. [Operator Instructions].
There are 2 questions in the Q&A, Danny. Let me just sort of straighten now. Let me just open those up. One of our attendees would like to know whether we expect normalized cash burn to continue to decline over the next quarters.
So I'm going to take that. Yes, absolutely, and that's the focus. And it can -- the best way to have that decline is through these sales coming through. So that's the best way. But yes, absolutely, our focus remains on getting to cash flow breakeven following that cash flow positive.
And we're on a good trajectory to do that. So we're seeing quarter-on-quarter this normalized cash burn come down. And absolutely, we expect that to continue to decline until we actually see we're not burning cash, but we're actually generating cash.
But to add, it is a fine line we're walking.
Yes, with the levels of working capital we've got, we need these sales to come out of the pipeline or to see that burn come down.
And [ Kim Wingerei ], "How is the big deal going?" Danny?
So there's a few big deals. I think I noted the one you're referring to. So there was a larger one we referred to last year, which put their procurement on hold in North America. And that wasn't just us. That was market conditions. They -- we know through the partner we're dealing with, all their deals were put on hold, reported to us by them. They were to recommence conversations with us in January, and they have done that. So we're just tracking that along to see how those conversations now go. When you delay a deal, that length of time, obviously, you've got to consider it puts the deal at higher risk. But they're still saying we're the selected product. They're still saying they don't have another vendor.
They're still operating on an end-of-life system and the lady who's heading the procurement for us is taking an extra month of procurement leaves -- maternity leaves, that's not helpful. But it's still there and it's still possible. And no significant updates, though. There's another couple of deals which are quite close, which I'd expect to pop out before that one.
Thanks. And [ Mike Nialo ]. Mike, have I got your surname correct? He said, "Things looking good. Well done. Are there any plans to spread the business to the share market to impact on shareholder value?"
Spread the business is a sham. Well, we had planned previously -- I think I know what now you're getting at. Look, Investor Relations and engaging the investment market is in our plan. We want to see some of these deals come out before we do that.
We believe getting to cash flow breakeven is key to engaging a whole new section of the investment market. But yes, any significant deals that come through, absolutely, we want to be doing some promotion of the change that has occurred in this business.
I did present at the Australian microcap's conference last quarter. I'd encourage all shareholders to have a look at the presentation that was delivered there. That was well received. And in summary, yes, we would like to see more investors. We would like to see more liquidity in the stock, and that does require communication to the investment industry about the business. And yes, it is -- in fact, internally, I can say on those strategic pillars, I actually had a little sub-note to the growth, which is about the engagement of investors as well.
If I can add to that, Mike. I think we're doing everything we reasonably can do without granting information for the sake of information. Obviously, we just don't believe in that. I think you've got to report the facts, but you've got to report every fact and you're going to do it in the best way possible. So -- and I think we're doing that.
But as Danny said, the big turning point for this company is cash flow breakeven. And on the way to that, there's got to be a couple of announcements of significant deals. So that's where the facts -- our focus is, and that's where I think the facts of the market is as well.
Then one of our attendees, Danny and Iain, Iain probably first, "Is there a risk the R&D credit is not approved by the government? And are these credits expected to be recurring in future years?"
So the R&D claim is not -- there's not an approval process on that. There is an audit process that runs against claims over various periods of time where you might be selected for an audit. . We've got a pretty robust R&D process, and external consultant advisers and have been doing this for a long time. So we don't feel that we are at any risk there. But it wouldn't be to do with an approval that would be an audit.
The credits are expected to continue, but they are reducing in line with some of the reductions that we've made in R&D resources and some of the focus of the business in shifting towards the sales and marketing phase. So we expect them to reduce slightly, but to continue.
Thanks, Iain. I'll come back if you need more information.
Next question. "Last quarterly call, it was said that there is interest from potential new investors, e.g., overseas, strategics, new brokers, et cetera, but the share price and traded volumes have been disappointing. Why do you think there is minimal interest in this global cybersecurity stock? And do you think the Australian market and new investors understand the opportunity?" Danny?
So new investors, that type of interest that you're referring to, are not the type of people that are going to buy small numbers of stock on market or possibly even by our market at all. They're the types of investors which would be interested in a more significant stake of the organization. Those -- we are wrapping some of those conversations into a process to see where they lead to, but I'd still describe them as fairly probing at this stage.
In terms of does the Australian market value this business properly? I think -- look, it's only an opinion, like so -- so everyone can have a different opinion on that. It's not really factual. But my opinion is that we're building out -- well, what I'm seeing from investor interest is that as we're building out more of these sales and accounts in North America, we do become more interesting to some North American investors when we weren't previously where most of our revenues came from Australia.
And my comment is that some of these North American investors certainly understand the value of our 3 open source products and the popularity of those better than what I believe that the ASX does. So that's interesting to us from an investment perspective. But in the end, the market sets the price. And I think referring to Mike's comments, we need to get our message out there and we need to get to cash flow breakeven.
And hopefully, as we announce some of these deals, we start to see that impact of the stock price, but positively. But who knows. There's Not a lot of liquidity. We'd like to see that improve. But that means the stock can go both directions with a lot of -- some good news, we can get a nice uplift so news of -- so the negative can go the other way. It's just where we are.
Maybe if I can add to that, Danny. Yes. If you see, I've been with this company since the middle of 2019 and where we're positioned now in terms of shareholder value or the opportunity for shareholder value is better than it's ever been, in that we have our major opportunities coming out of the U.S. and Latin America.
And when you have a discussion with people who are in the tech industry in U.S. and America, the U.S. and LatAm, it's an entirely different conversation than the one we have here, entirely different. They see it entirely differently. And hence, that footprint we've got, which we continue to expand on and that will get now to the floor, if you like, by opportunities as we close them, but that's the best source of value for shareholders in this company. And that's always been the case, and that's what we've continued to do ever since I've been involved.
So we've got a larger presence in that big market, particularly, but a larger international presence than we ever had that costs money. And if you don't get your revenue to match expenses, you get a bit of the burn that we're having, but that is declining. It is a balancing act all the way through. But that's the reality. Reality is that shareholders are best positioned they've ever been to actually get real value expressed in the stock.
And our job is to -- and Danny's job and Dino's job when they go over there is to work with the opportunities we've got to bring them home. So it's a serious stuff. You don't send your CEO and your CRO overseas for 1 to 2 to 3 months in this -- unless you're in this opportunity stage. So that's what I think about it. You may or may not agree with that.
I live in the Gold Coast and I'm now renting an apartment in Mexico City for February, which is one of my favorite times of the year. So as John says, it's pretty serious stuff going on over there, and I need to be over there.
The sacrifices we make, Danny. Next question, "How can you monetize the success of Open AudIT IT?"
Okay, I'll take that one. Look, that's a really, really interesting question. And there's lots of ways to do it. It would -- most of them would require investment in some different tilts on the business. So it's not something we're focused on doing right now. But as I mentioned, when you -- some of the U.S. investors of that product are actually -- some of them come around that product because of its popularity. But there's lots of different ways to monetize it. We could get some of the data up into the cloud and then as that data -- all that data that it has is quite valuable, like we're talking about one of the world's most popular IT audit tools that we believe the most popular. It's what we're told. And it's got data on every single license piece of hardware, everything that all these organizations have in their environment.
So there would be ways to monetize that data, for example, go to Microsoft and say, give us a list of your end-of-life products. And when a customer runs an audit, we'll tell them that this is the end of life and will provide a link to upgrade their license or whatever. So there's that type of thing. We can put ads in there. We can use it to provide links to other commercial products that we sell.
Right now, we sell commercial versions of the product, which do generate some commercial revenues. So it's also about kind of pushing those commercial versions of the product harder. We're really pleased when Comparitech named it the #1 agentless IT audit tool in the world. Comparitech is, you don't apply to them. They don't talk to you. They go in research and they're an industry advocate. So they research everything that's out there.
They picked it as the world #1. And the only negative comment they made was that the best features are in the paid versions. So that made me very happy. I thought that was a nice little add for us and nice little add for people using the free product to upgrade to the paid version. Sorry, long answer, but it's a big topic.
No, but it's a very important topic because it's actually about the intellectual property that this company has, and it's a really important topic because we've been really focused, as everyone knows, on converting a pipeline, a seriously good pipeline. And what fades into the distance when you have that sort of conversation is what are the products? And products are leading edge. These are products particularly in the monitoring and the audit area. These are products that when you compare it against the world's best, they stand up and they'll be [ candid ].
It's very, very significant, but we continue to invest in this Open AudIT. In fact, the Comparitech assessment, as Danny referred to it. In terms of Open AudIT, it was the best agentless discovery tool for IT asset management worldwide. It was the second best network configuration management tool. And it was the third best hardware monitoring tool from all over the world. And FirstWave's [indiscernible], which is a part of the [indiscernible] fleet was named the fourth best free [indiscernible] log service for Windows and Linux and the fourth biggest log analysis tool.
So we've got really substantial software and that is taking a long time to convert sales and should not, in any way, discredit the value in the intellectual property. So we've got the strength of the intellectual property, and we have to keep it competitive. That's the balancing act internally between prioritization of investment. When you have to keep it competitive and you are in the U.S. and Latin American marketplaces, then that's the formula the best formula you can get to through there successfully and that's what we keep being focused on.
Sorry, that's a long answer, but that Danny's [indiscernible] and hopefully you get some value out of that.
Another question. Internally, what is your target growth in ARR over the longer term?
Yes, you're looking for me with that one, John? Unfortunately, we're not -- we don't put out our forward forecast. And one of the major reasons for that is that one of these significant deals makes a complete difference to the forecast. Completely.
So one of these larger deals and sometimes refer to them as the whales and the baby whales.So the whales I've been saying that's big straight up and then the baby whales, those ones that start here, but you know they're going to grow into a big whale over time.
So we don't put the forward forecast out for that reason that because the sales are still lumpy. And I'm not trying to jump around the question and people can do a bit of math, I guess, on what our normalized cash burn is versus when we're going to be cash flow breakeven and make estimates.
But yes, we haven't been in the policy of putting out those forward forecasts. I would actually -- actually, I'd love to, but it creates more problems than it solves due to the lumpiness of the pipeline.
Yes, we deemed it a long time ago, as potentially misleading because things don't happen as you forecast them to happen. So we talked for a long time about the big deal that Kim referred to his earlier question. And it was a real deal -- it's still a real deal, but this stuff happens. And it's not helpful. I don't think to take shareholders down paths that haven't got some real certainty around them, which is what we're trying to do in terms of the way we convey this information to you. At the time of the target, by the way, is to get the cash flow breakeven end of story. That's it.
Yes. And the plan is to do that through sales. And of course, if the sales slip, there's other levers we can pull.
So a comment, not necessarily a question. We thank very much. Good luck this quarter. Good luck, Danny.
Thanks.
Happy with the direction of the company is going now, and hopefully, we get a few more wins. A bit of momentum can turn things around rapidly. Particularly in a cash flow positive environment. Exciting times ahead, Danny. That would -- that is a perfect summary of the way we feel. So thanks very much for that comment. Are there any more questions? That's the Q&A there. Anyone got a question from the floor? Just jump into the conversation.
Okay. Last chance, All right. Thank you very much. We'll close the call. Danny's off, as we said, to Mexico and the U.S. Wish him luck. He enjoys it as much as the Gold Coast, believe me. That's a very good thing.
All right. Everyone, have a good day. And we'll be speaking to you again shortly. Bye now.