© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome FirstWave Cloud Technology's FY '22 Q3 shareholder update. I'm John Grant, FirstWave's Non-Executive Chair. And I'm joined by Danny Maher, our MD and CEO; and Iain Bartram, our CFO and Company Secretary.
We're going to run to the agenda. You can see on the slide, I'll give you my headline view over the past quarter first. Danny will then elaborate to give a sense of the transformation that's underway inside the business as we bring together FirstWave and Opmantek and what it means for you. And Iain will give you more detail on the financial performance in the quarter. We're also going to give you a sneak peek of what CyberCision mobile is going to deliver our partners and our end user customers. Then we'll wrap up before we take your questions.
Just moving on to highlights. My view of the highlights for the quarter. Look, it goes without saying, but it does bear repeating that our core objective is to provide shareholders with a return on their investment in the company. That's what we attempted to do every day. As we bring FirstWave and Opmantek together, there are 3 things we are doing to achieve this. Firstly, we're transitioning to a sales-led culture. This doesn't imply any backward steps in our development effort and the intellectual prominent results from it. Both remain absolutely core to the business and to our future, but it does mean our development road map reflecting our customers' priorities rather than perceived market needs. Substance over form, if you like. It also means a change in the state of mind of everyone in the business from tech first to sales first through visibility, accountability and celebrating success.
Secondly, we made key decisions as we've been integrating the 2 businesses to position the company to grow revenue faster. On the product side, we're narrowing our focus and leading with our most commercially attractive products. And after internal release of CyberCision Phase 2 in the quarter, we're targeting external launch for mid-May. As I said, we'll give you a sneak peek of CyberCision mobile, so you can see what a difference it will make.
On the go-to-market side, we've restructured the sales and marketing functions with former Opmantek CEO, Craig Nelson, running sales globally from the U.S. as Chief Revenue Officer. With Danny, Craig has shifted sales team focus and head count towards the regions that offer greatest opportunity. This has meant several of our team have left or will be leaving the business. Danny will elaborate further, but [indiscernible], each of those leading to the contribution they've made in their time at the company, and I wish them the very best stage of their careers.
And thirdly, that cost out of the merged business and the gains have been larger [indiscernible]. So Danny and Iain will elaborate on all of this, let me hand you over to Danny. Thank you.
Thanks, John. So I'll run through for everyone an update on the business in line with our strategic priorities. So to recap, those 3 strategic priorities are to transition to a sales-led culture, to grow the business faster and to spend less, which means less cash burn.
Firstly, on the transition to a sales-led culture, okay? It's about shifting our investment towards sales and marketing and pivoting the business towards being focused on sales and marketing: it's about ensuring the Chief Revenue Officer and Chief Marketing Officer are highly visible to the whole organization; uniting the company around highly visible sales strategies and goals; increasing accountability for all the sales team members in line with those goals; building and maintaining multilevel relationships with key accounts, i.e., more than just the sales team. So we want everybody in the company focused at growing the company and involved in growing the company. We've announced some -- recently some nice wins, and it's about celebrating and promoting those wins internally and externally. So we hope that everyone inside the company and outside the company hears more about the great wins that we have. And it's about optimizing processes to enable sales efficiencies. So when we're creating new processes and doing new things at the front of our mind is how is this going to help us grow the company.
This chart here illustrates some of the shift of focus. So prior to the acquisition of Opmantek, hire at the end of December, we had 69 full-time equivalent employees. And the mix of where those employees work in terms of their function is in the bar chart on the left. By June, well, after some people, which unfortunately have had to exit the business under the restructuring, we'll have 81 full-time employees, and you can see the mix of where those employees are working is quite different. So we have a reduction in percentage terms of the number of people that are working in corporate and a reduction in the number of development and a much, much higher focus on sales.
This next slide shows us the total increase in sales and marketing resources by location. And you'll notice that we increased from 69 to 81 in total, so 12 employees, and 11 of those that have increased are in sales and marketing. So we've acquired a new company, added additional GP, added additional resources, but almost every single resource after the restructuring, almost every single additional resource is in sales and marketing.
So before the acquisition, you can see that these sales and marketing resources were focused in different geographies. Right now, as a company, we have a much larger focus on North America, and we've got a deep prioritization on other markets. So it's Australia and North America, and Latin America, together with a small amount in U.K. and Europe, which have become our focus.
We're better positioned to grow revenue faster. So the growth in this quarter, our annual recurring revenues grew 2.4% over the previous quarter, and they currently sit at $10.9 million. Iain will run through the financials in more detail, and there's some one-off revenues.
There's some interesting things for Iain to go through. There was a significant contract that we announced with Microsoft. And this is a new area of Microsoft that we're now dealing with. Microsoft was an existing account that Opmantek has. We foresee and hope for a lot more growth with Microsoft. There's a significant contract with a large Australian client, which is in the final stage of negotiation. I was hoping to be able to announce that around this time, but that will, hopefully, be coming soon.
We're leading with our most commercially attractive products. So that, for us, means prioritizing frictionless e-mail, which is being launched along with CyberCision Phase 2 and the network management software, which is part of -- which came as part of the acquisition of Opmantek. We're focusing on these products because these are the products that we have the most intellectual property in. That also translates to these are the products that generate the most gross profit for the company and are also the most differentiated. We're targeting the markets where we have strengths. Again, through the acquisition of Opmantek, that means the U.S. is absolutely a market where we have strength and we have high growth potential, and that's where our sales leadership is.
Latin America. We have some major service providers. It's important that we keep some focus on those accounts and renew those accounts and grow those accounts. And in Australia, we have a key account in Telstra, where we're now able to put some strategic focus on them and work together with Telstra to help grow those revenues.
We're launching new products. So the Phase 2 launch of CyberCision is coming this month. So that's the public launch. We've already done the internal launch, and is coming mid-May, sorry. And it will include frictionless e-mail and mobile.
Now I'll touch on mobile a little bit later, but I just want to mention frictionless a little bit because it's something I'm quite excited about. Frictionless e-mail is giving the ability for Microsoft Office 365 users, so those users that use EMR with a Microsoft subscription, to simply log into their Microsoft account and add our e-mail security protection to it. That's really, really cool for us. It opens up a whole bunch of new channels to market. But critically, once you're renewing your Microsoft Office's licenses, you're in a purchasing moment, in a purchasing process. So the ability for us to have them while they're purchasing just add our e-mail security as an option is a much cleaner and simpler way for them to purchase that product. And of course, it leverages off all the IP we have in e-mail security already.
We're spending less. So this is about capital efficiency and lowering our cash burn. A big part -- while -- a big part of integrating the companies together and what we've been doing this quarter has had this focus. The cost reductions that we're getting are exceeding expectations. Our cash expenses are down by $5.5 million per annum since July 2021, which is extremely significant. And there's further savings in excess of $500,000 per annum, which have now been actioned. So we're going to -- Iain will talk more about those in details. The full savings will translate to lower cash burn by June 30, which we're targeting at around $500,000 per month, in July, so entering financial year '23. So that's $500,000 per month that we want to be investing in the business from July.
We'll receive further cost savings by consolidating the CyberCision platforms and continuing to renegotiate some third-party agreements. And of course, as our revenues grow, our cash burn will also decrease. So all those 3 strategies go together.
A lot of people are interested in how the integration of Opmantek into the FirstWave business is going. I think this is a nice, neat way for us to summarize it, which is an overview of our internal project plan. So we created this plan in January. It had 157 tasks. Now some of these tasks are quite large. So for example, 1 task is to develop a strategic plan for the combined business. There's a lot of detail, a lot of people that have to get involved in doing that, but we just note that as 1 task. But other tasks are quite simple. We've completed 107 of these tasks already, and they've been completed on time. There's -- 49 of these tasks are on track for delivery as planned. And there's only 1 of these 150 tasks, which has been deferred by 1 month. And in fact, it's only a subtask within that task with no deviation from the plan we developed in January.
For those that were listening to John when he was outlining the acquisition, he spoke about it as really something that he felt as a hand in glove with the 2 companies getting together. As Managing Director and sitting over this integration, I'm really, really happy with how it's playing out. It's a big task for us to undertake in together with the restructure in the first quarter, but to come up with a plan in January, which almost every single part of it is on track or in front, I'm really, really happy. I mean it's not like we could hope for anything more. So very pleased with how that integration is going.
I'll hand over to Iain now to go into some more details on our financial performance and, hopefully, that will help provide you with more clarity on the things I've outlined.
Thanks, Danny. As Danny has already mentioned, annualized recurring revenue grew during the quarter by $250,000 to $10.9 million, which was 2.4% ahead of the Q2 pro forma result of $10.65 million. However, looking at in-period revenues, we see a much larger growth than we did with ARR. The Q3 pro forma revenue of $3.1 million is $330,000 or 11.8% up on the Q2 result of $2.77 million. The main reason for this increase is 2 significant one-off events that pushed the in-period revenue above the underlying recurring level. The first of these items relates to the Cisco reseller relationship drawing to a close and a contract that had a 36-month term that was being recognized as deferred revenue over the length of the contract now being brought to account as FirstWave has no continuing obligations under this agreement and, hence, can and should recognize the remaining revenue immediately. This resulted in $162,000 in one-off revenue being recognized in March.
This revenue was previously being recognized at the rate of $10,000 per month and, hence, ARR has been reduced by $120,000 as a result of bringing this revenue to account in Q3. The other significant item involves the release of a $235,000 provision against revenue, where FirstWave was uncertain around a particular clause in a client contract that has now been positively resolved and we are confident in being able to recognize that revenue. This outcome results, not only in a one-off revenue bump, but also recurring revenue list lifting by $10,000 per month.
So from a recurring revenue perspective, these 2 adjustments net out against each other. However, when looking at in-period revenues, they are both increases, resulting in additional revenue of just under $400,000 being recognized in March. Neither of these revenues had any COGS associated with them and, hence, their recognition flows through to gross profit at 100% margin. This results in the increase having a larger percentage impact on gross profit than it did on revenue and is the main driver in gross profit increasing by 17.7% quarter-on-quarter and the gross profit margin increasing by 3.6 percentage points to 71.3%.
In summary, all the 4 metrics on this slide are positive in an environment where we have been focused on cost cutting, and the restructuring activities required to set the foundation for future growth.
With the next slide, we will look in a little more detail at the result of these cost-cutting activities. The cash position is strong at the end of Q3 at $12.7 million, and I note this balance is after having paid all of the transaction costs associated with the Opmantek acquisition. The balance was strengthened by having received $1.4 million in R&D grants just prior to the quarter end as well as earlier in the quarter having completed the second tranche of the previously announced $7 million placement. The second tranche being $4.8 million before costs that was conditional on the completion of the acquisition.
The other side of the cash equation is cash burn, and I'm pleased to say we are making good progress towards our target of reducing the burn to below $500,000 per month by the end of the financial year.
I've use the term normalized monthly cash burn. The reason I think normalized is important and draw your attention to the elements being considered in normalizing the cash movement is that the actual monthly cash movements include large swings such as prepayments of annual contracts, the R&D grant as well as Opmantek having significant seasonality in their renewals and hence result in cash collection profiles. The important elements of arriving at a normalized monthly cash burn are listed here on this slide. Normalized includes capitalized development costs and a monthly allocation for the R&D grant earned against these development activities. The revenue inflows are recognized revenue rather than billings.
This normalized cash burn for the last month of the quarter was approximately $800,000. However, this includes $200,000 of salaries for employees who are currently working notice periods and are not planned to be replaced. And hence, the underlying burn is $600,000 rather than $800,000. There is still a number of additional cost savings to be made, such as reducing the number of global platforms. Now CyberCision has removed the duplication in the old CSMP and CCSP platforms as well as reductions in business systems as the integration of FirstWave and Opmantek is completed.
With inflationary pressures and the main cost savings haven't been completed, and a longer-term goal to reach cash flow breakeven, sustained revenue growth now becomes the important next step. And I will hand back to Danny for more information on this.
Okay. Thank you, Iain. Just before we wrap up and move on to questions, I just want to give you a quick little sneak peek on CyberCision mobile to get your bigger appetite for the upcoming CyberCision Phase 2 launch. So CyberCision mobile, and you'll see a video playing that for you, is part of the CyberCision Phase 2 launch. It's white labeled for our partners, and as you can see through the video that's playing, it gives our clients visibility of their threats, live visibility. It gives our clients visibility of their historical protection as well. So it's our first mobile platform with CyberCision. It's supported on both iOS and Android, and it's a cybersecurity platform in the palm of their hand. This is really important for us because when you're providing e-mail protection, it's really important that we're able to show the end clients the protection that they're being given, alert them live when there's a problem and also show them the historical performance of the service to ensure the renewals. So that just gives you a little bit on CyberCision mobile and after [indiscernible] for the CyberCision Phase 2 launch to learn more about that and the frictionless e-mail.
With that, I'll just wrap up by saying that, hopefully, you can see that FirstWave is already a transformed company following the acquisition of Opmantek. A lot of things are different compared to what they were in December. We're now able to make decisions that we could have previously made, and I feel very fortunate to be a Managing Director at this time. There's cost savings that are being realized. There's new markets that are open and active, both horizontally and vertically with new geographies and new products. Our spending is now focused on growth and sales and marketing.
And like all companies, our path to success won't be a straight line, but we are executing our plan well, and we're seeing good progress in Q3. Our core objective is to deliver returns to our shareholders. And we know that doing that means an extended period of delivering good results from the business.
So that's my focus, and I look forward to delivering more good results to you over the next upcoming quarters. I might just invite John for some closing remarks before we take the questions.
Thanks, Danny. Before we move to Q&A. Just a couple of things. You'll recall when I proposed the Opmantek transaction to shareholders on behalf of the company that I believe it to be transformational. Danny repeated that a moment ago. I hope we've been able to give you some sense of this in what we've been saying today. On the inside, I can assure you it is and dramatically so. It won't be a straight line, as Danny said, but the direction is well established, and the momentum is irreversible.
Also, it's relevant to note that merging 2 businesses can be a very unsettling time, often complicated by egos and power struggles that can disrupt a business for months. And it doesn't matter what size the business is, either small, big or indifferent, those sorts of things can play out. My observation is there's absolutely none of that in this case. It is going to plan. It's going very well. And the leadership and drive being shown by Danny, by Craig Nelson and the full executive team is very comforting for me to see.
Thanks for listening. Let's now take your comments and questions and I'll facilitate, if you like, so please -- I think we do have a couple of questions. We have -- just can I just ask the anonymous attendee. Would you be so kind please as to let us know who you are?
I'll just slip to Nick Harris' question as I can see it. Hi, team, thanks for being very clear on ARR revenue and cash burn. Just to make sure I correctly understood the last comment Iain made. Is monthly cash burn $0.6 million excluding the cost of staff who will leave in Q4 FY '22? Iain?
Yes. That's right, Nick. It will be progressive through Q4. Some people's notice payable will run to the end of Q4. Other people would be very early in Q4. So you will see that $800,000, $600,000 just relating to this 1 item will fall through the quarter. I hope that gives you the extra information that you want to.
Okay. Thanks, [ Wayne ], for letting us know it was you with the questions. Thank you very much. Let's just go back to [ Wayne's ] first question. Can you explain that $500,000 cash burn per month entering FY '23 given your -- what's FCF? Forecast?
Free cash flow. For our...
Free cash -- sorry, yes, of course.
I think [ Wayne ] had a previous question in you asking him who it was, it's moved to answered. So what was the ARR gross profit and ARR when you exclude Opmantek and how did each compared to the last quarter?
We're obviously trying to remove, and there's a -- there is need at some time. We're trying to remove the references to Opmantek and FirstWave. And we are very much now thinking about this as products. So the company is completely aligned and we have products. So CyberCision, as you know, was withdrawn from the market and the launch coming up in May. So CyberCision was flat as we expected, and the movements that you've seen in ARR are all related to the [ MIS ] product, the network management products that is the other focus that Danny was talking about, which is the product that we acquired from Opmantek.
And then, Iain, maybe if you take the next question about [ Wayne's ] next question about free cash flow.
We're quite happy to maybe discuss that in more detail off-line. But I mean, I'm not sure where that number is coming from or what the concern is. And hence, the reason for looking at normalized. I mean our cash burn is coming down significantly. And perhaps it's to do with the cash flow statement that got released. And there are a number of one-off and large movements in that cash flow that don't relate to moving on a month-by-month basis. So we might have a large annual payment made in 1 quarter. And in fact, the cash flow statement that's just been released shows us, with even lower burn, is about $600,000 a month because some payments were made earlier in the year, which are now not impacting the cash flow. So we really have to strip out those movements to get a good indication of where the business is sitting at on a profitability perspective.
[ Wayne ], and if you're unhappy, Iain can talk to you directly off-line about that to make sure that you're clear on that. And a question about the guidance on future cash burn include the benefit of the major new contract under negotiation.
Yes. I mean our future cash burn requires some more cost savings, but also requires revenue growth.
Now from [ Mike Ripley ], can you give us some color around the life cycle and the significant company final stages of the negotiation? Is it unique? Or should this be normal expectation? Are you able to discuss this experience in the context of other irons that are in the fire? Danny, you might give that some color?
Okay. No, it's not unique. It's normal in terms of our lumpiness, and it relates to our network management software. Those contracts are typically proactive decisions for customers to make. So sometimes they slip a little bit, but they tend to come through when they get to the procurement stages. So until you get the order, you can never commit to it, I would say that. But it's certainly -- it's a significant contract for us. But it's within the scope of the lumpy contracts we get with our network management software. There's nothing unique to it other than it's a good size contract. The pipeline is pretty decent. We're not going to go through the whole pipeline on this call. But yes, there's a lot of other irons in the fire, and we'll update the market as we get those orders.
I think if I can add there, [ Mike ]. As Danny said, we still live in a lumpy revenue environment, big contracts with direct customers or big contracts with service providers that then develop slowly. So as we've said before, it's always been difficult to sort of forecast that -- forecast around lumpiness is -- has to be misleading whichever way it goes. So we don't do that as you're well aware. And we're still at that environment just as time as we get revenues grow more significantly.
Nick. Quick question. Danny, FirstWave in our security being an opt in for Office 365 it is seen as very significant. How do end user become aware of FirstWave's offering? For example, do you need to market to the end user that may take up your offering? Or what they prompt them to opt in, Danny?
Yes. Sure. So part of the acquisition of Opmantek was the acquisition of an establishment of within FirstWave digital marketing function headed by our Chief Marketing Officer. So digital marketing of these services is really important for us to ensure their growth and the uptake from the end users. It goes through our partner channels. So a lot of our partners already sell Microsoft 365 licenses. So the ability for us to tag along with that is something that's very exciting for us. We have to go through a normal account management and sales process to engage them and ensure that they're offering this to their clients when they do the renewals.
It does open some new channels as well. So -- and it does lend itself to the possibility, possibility of doing something directly in certain markets as well. But for right now, this is a service enhancement, which goes out to our existing partners, which should enable them to sell it in a much easier way with less friction and sell a lot more of it.
Nick, if I can add there, just to put some reality around just to make sure all of our expectations are aligned. Where we've sort of finished the product in Q3 and, as I said before, we launched in mid-May, it will be extremely then available to our service providers after we actually rolled onto the platform. So there is -- there's a timing thing that needs to play out in order to have revenue expectations. We'll elaborate a little bit more fully when we launch the product to mid-May, which we'd encourage all of you to come and have a listen. But the bottom line is that there's a process before you get revenues that you need to undertake, and we're in the middle of that process at the moment.
Just the last question there. How are the products being received from North America? Danny, why don't you give people a feel for what's happening in the partner conversations over there?
Yes. So part of what we've been doing this quarter is a lot of sessions in basically cross-training people from the 2 companies on the technologies. We've always maintained that we weren't going to see that CyberCision, in particular, signing a new service provider up with the CyberCision platform, is something that will take some time. We have commenced some conversations of cross-selling with existing partners. And those have been positive so far, but they're still early stage.
I'd also note that our North American sales team is quite excited about the frictionless product as well. There's obviously some big players in this e-mail protection game, which have very large revenues like Proofpoint and Mimecast, and if we can just carve off a bit of those, then we'd be pretty happy as a company. But that's kind of more -- but so we've got that kind of blue sky side with some new technologies, which we're excited about. And then we've got the side, which we know grows with our network management and that's going well too. So we're pretty happy in North America.
Thanks, Danny. [ Kin Wingery ]. Thank you, [ Kim ], for your question. Can we get some idea of actual sales growth beyond the accounting changes that Iain outlined? Iain, do you want to talk to that?
Well, the sales metric that we focus on is annualized recurring revenue, and that's grown by 2.4%. So I mean that's -- I mean I'm not sure where they...
Yes. I think just a help there, that is the bottom line answer to the question. The accounting changes that you're talking about on what added to one-off revenue, they weren't actually accounting changes. They are revenue that's been earned. They're flowing in a different form. So -- if you remember, [ Kim ], Iain outlined those being in 2 parts. The first was a 36-month contract terminated within that 36-month period, prepaid, and we brought to account the remaining months of that. That was 1 component of it. That's real revenue. It's added into -- it's come as a one-off because it's come as 1 number. It attracts a little bit, $10,000, as Iain said, from the annualized recurring revenue, but that's the way that that -- that's how a change in one-off revenue occurred.
And the second component of it was that we had a concern about a contract. We've provided some revenue -- provide against revenue thinking what went wrong with that contract. That's been resolved positively. So we brought to account the provision that we made. And that's real revenue as well. It would have been declared in previous periods. It's actually been to account in this period, but was [indiscernible] now don't have a concern. So it is a bit complicated, but that's the explanation why we went into such detail to make sure that people would understand that.
Understood. [ Kim ] just said, understood. Just wanted to get a feel for new transactions in the quarter. Danny, would you mind...
Yes. I might just help lead the way and, Iain, you might have the actual precise numbers. But -- so our customers stay around 7 years. So you get some churn every quarter, and that's only natural, but 7 years is a long time for them to stay with the subscription business to start with. So there's some movement of revenues, as John just indicated, and the categorization of revenues. And then there's some churn. And then the net growth in ARR is the 2.4% after that churn. So what's the raw growth in ARR before the churn? Iain, do we actually have that number at hand?
$650,000.
Yes. So more closer to 6.5%, yes. Closer to 6%, there you go, in terms of sales.
Thanks, [ Kim ]. Any other questions from anyone? Delighted to have your questions. You got the chat line or you got the Q&A.
Thank you very much. Let's close this update. As I said right at the outset, as I was closing, I hope we've given you some sense for the level of activity inside the business and the sort of redirecting of the business. It's very significant. The 2 graphs that Danny had showing where our people are actually focusing now is the most significant way of explaining that, too. But the change is palpable. We are -- this quarter, we -- Danny has expressed the view that, I'm sorry, Danny, you can jump in here, if you like. But he's expressed the view that, yes, he feels really comfortable that this is sort of the start of a turn because you can see the business down the pipe and you can see what's going on inside the business from a representation -- sales representation point of view, so.
Look, the next update is the Q4 update. We look forward to keep you -- apprising you again of the business' performance. Of course, if there's anything substantial happens in that time as soon as we know, you'll know. Thanks very much for listening, and have a great day.