Firstwave Cloud Technology Ltd

ASX:FCT

Earnings Call Transcript 2021-Q4

[John Grant, Executive Chairman & Interim CEO]

Welcome, fellow shareholders and others, to FirstWave's update for the fourth quarter of FY '21. My name is John Grant, and I'm Executive Chairman of FirstWave Cloud Technology Limited. On today's call, I'm joined by Iain Bartram, FirstWave's Chief Financial Officer. As we announced earlier this month, FirstWave delivered a robust performance to close out FY '21. On the top line, growth in international annualized recurring revenues continued, increasing by 53% in the quarter to exceed $3 million at year-end. We ended the quarter with 52 billing partners, up from 49 in Q3. Continuing our focus on expense management and collections saw a reduction of cash burn, which, together with the capital raise of $6 million, and thank you to those shareholders who are listed and became part of that, led to a cash position at the end of the quarter in line with the expectations at just under $10 million. As we also announced, I had assumed day-to-day leadership responsibilities of FirstWave following Neil Pollock's departure in July. Neil resigned following the Board being unable to approve his FY '22 plan. Having stepped into the role of CEO on an interim basis, my immediate priorities are to have a detailed look into the business more so than in my role as Executive Chairman, work with the executive team to finalize an acceptable FY '22 plan and lead the business until we appoint a permanent CEO with a recruitment process currently underway. Before I talk more about this, let me hand over to Iain to run us through our Q4 financial performance in more detail.

[Iain Bartram, CFO & Company Secretary]

Thanks, John, and good morning all. As John noted, our international annualized recurring revenue was just over $3 million at the end of Q4, up from $2 million at the end of Q3 and $1 million at the end of Q2. It started the financial year at $448,000 and, while off a small base, has grown nearly sevenfold during FY '21. In absolute terms, international revenue growth for the second half of FY '21 has been consistent quarter-on-quarter. However, percentage growth each quarter has obviously been impacted by the growing base. The story for domestic annualized recurring revenue is quite different, with FY '21 being flat throughout the year and down on the previous year. However, through a renewed focus on the Telstra relationship, we saw green shoots towards the end of the quarter and signed a new customer contract at the end of the financial year that will be a good start for us domestically in FY '22. Total annualized recurring revenue ended the year at $9.3 million, which is over 30% up on the previous year. More billing partners slide. In Q4, we added 3 new billing partners, which takes the total to 52, while level 1 partners remained consistent at 9. Throughout FY '21, there was a good increase in the number of both billing partners and level 1 partners. And now our focus needs to shift from acquiring partners to getting the most out of our existing partners and focusing on the opportunities that offer the highest returns, as John will elaborate on later in the presentation. Cash on hand at the 30th of June was just under $10 million, and I would like to take this opportunity to thank all of you who supported the business in either the $6 million placement in April or the share purchase plan that followed. If we look at what I've call cash-settled expenses, that is, those expenses that the company pays for in cash, so excluding share-based payments or depreciation and amortization, then the FY '21 expenses are more than $2 million down on the previous year and in line with the guidance provided in previous updates. We are focusing on ensuring your money is well spent, and there have been several costs such as office space and hosting costs where we've been able to make significant savings. The change from an annual prepayment by Telstra that, at its peak, was $4 million to monthly billing in arrears, has provided renewed motivation for the business to maintain a strong focus on collections. With the growth in billing partners, we have a lot of partners who are paying us for the first time, which requires us setting up reporting and billing with these new customers and for them to set us up in their systems. This can take time, especially with larger entities with strict onboarding processes such as anti-money laundering and know-your-customer checks. You will see from the Appendix 4C released earlier today that we collected just over -- just under $2 million in Q4. This was significantly higher than the amounts collected in each of the previous 3 quarters and represented approximately 50% of the year-to-date collections. We are planning to do even more in FY '22 with targeted cost reductions that will save $2 million in the year and will have an annualized cost saving impact of over $2.5 million. These savings will all be put in place over the first 6 months of FY '22, and many have already been enacted. In summary, in Q4, we continued to progress on all key metrics and expect to continue this trend in FY '22. I will now hand back to John to talk about our plans for FY '22.

[John Grant, Executive Chairman & Interim CEO]

Thanks, Iain. Having had that opportunity to look under the bonnet of the business and stepping into the interim CEO role, it's pleasingly clear that the strategic rationale for FirstWave's ultimate success remains totally intact. The global cyber threat landscape continues to deteriorate, and investment in cybersecurity continues to increase. The SMB market globally remains poorly serviced by current vendors and at significant risk. FirstWave's platform and its enterprise-grade services remain best in class, as verified by partners at our recent global customer advisory board meeting. And FirstWave's channel model remains the most cost-effective way of accessing SMBs globally. However, it is also clear, as we all know, that the enthusiasm and initial revenue from our partners has not converted into sustained and accelerating revenue growth. It has become clear there are 2 factors constraining FirstWave from achieving its growth ambitions: The first is a lack of organizational focus, and the second is friction within our software to rapid adoption at scale. Dealing with organizational focus first. It's clear that the business has spread its available time and resources thinly across too many fronts, and more timely decision-making is required to take us forward. This lack of organizational focus and direction, effectively having too many plates spinning at once, can happen when belief in the strength of your underlying technology and abundance of opportunities to distribute it globally and short-term revenue targets collide. We have a lot of people working very hard to keep a lot of plates spinning caused by: being overly focused on the number of partners in our channel rather than focusing on maximizing revenue from partners with the highest potential; sustaining the Cisco OEM relationship at almost any cost and consequently being dragged from pillar to post rather than creating equity in the relationship; altering the product road map and deploying tactical solutions to meet individual partner requirements rather than to deliver the best return; dealing with the implications of too many organizational processes dependent on manual effort, and there are more; and doing so against the backdrop of lower operating costs, working remotely and in a global environment that remains filled with uncertainty. I have been delighted at the commitment of our team, but a committed team doing too many things for too long rather than focusing on the right things does not deliver sustainable results. Going forward, we need to simplify through timely decision-making and focus on the things that matter most. Our international sales team numbered 19 in June 2021, 5 in London, 1 in Africa, 3 in India, 2 in Singapore, 6 in Australia and 2 in Malaysia. It's not a big team, and it's geographically very dispersed. So it's very important that they focus on the right opportunities. Having reviewed the numbers in detail, they clearly affirm my view. The chart on your screen now shows international annualized recurring revenue over the course of the year. As you can see from this chart, management and sales focus was singularly on our core portfolio, shown in red, through until October when international annualized recurring revenue was $942,000. This result represented 110% growth in the 4 months from June 2020. From October, shown in blue, WebProtect services added to core services revenue. Shareholders may recall that in our Q2 update, we referenced early sales of WebProtect, a service we have taken on exclusively from Simplifyd Systems U.K. It uses a different adoption model for partners with their own network, bundling it with a broadband subscription and requiring end users to opt out rather than opt in, which is the case for almost all app-based solutions, including FCT's services portfolio. The numbers suggest 3 things happened when we added WebProtect to the portfolio. Firstly, focus of the international sales team moved almost completely to WebProtect with great results. Secondly and resultingly, revenue growth from our core portfolio tapered off, ending June at $940,000, flat with October. Thirdly, as seen on the graph now on screen, with Board, management and market focus on international revenue, domestic annualized recurring revenue through Telstra declined by 6% over the year. This was caused, as previously reported, by churn through end of life of the web service from Cisco and uncompetitive pricing of Telstra's cloud on which our offerings sit. But a contributing factor was a decision to shift some domestic sales capacity to the Cisco opportunity, noting that despite this shift, increase in revenue from Cisco was anemic. The conclusion, not unexpectedly, is that when focus is aligned with opportunity, results follow. The second factor constraining FirstWave from achieving its growth ambitions became clear when we saw the rate in which revenue flowed from WebProtect under its opt-out model. This model makes it easy for both the end user and the partner to adopt the service and caused us to look at our core CCSP and services offerings and consult with our partners. Our conclusion was that there are relatively superficial but critical elements of our offering that represent friction to rapid adoption and scaling by our partners and their SMB customers. To understand what I mean, you need only look at the graph on the slide. Growth from our core portfolio through until Q2 FY '21 had been good but not great and certainly not at levels we'd hope to achieve. With the example provided by WebProtect from Q2 on, it seems reasonable to conclude that the rate of growth in our core portfolio can improve if the friction that currently exists is removed. If I can elaborate a little further, the friction for the SMB end user is primarily related to the need for each user to make a technical change to their system as part of the opt-in process. While it's not a difficult change, for the nontechnical SMB end user, this represents a challenging step to opting in. We've also concluded that for our partners, the friction for their SMB customers represents time and cost for them. And this has impacted their selling and deployment effort. In Q3 last year, it was decided that these roadblocks in the software needed to be removed. This work, which can be characterized as making changes to sort of the skin of the core software, is still relatively substantial and had been competing for priority with other development activities. My view is that this decision was critical and should have received the highest priority. It has now been accelerated, and we are planning a progressive rollout of new software and platform releases over the next 9 months to bring it to existing and new partners. We are not planning for our services to be opt out, but the process of opting in will mirror what we all do every day on our mobiles to simply turn a setting on. We will talk in more detail to this when we provide our annual product road map update in Q2. As part of these releases, we are also planning to deliver a mobile dashboard for end users indicating the status of their threat environment and providing alerts and recommended actions to be taken through our new Advanced Detection and Response capability announced in June under the partnership with SHELT Global. This is very sophisticated and adds significantly to our value proposition for SMBs, the democratization of enterprise-grade cybersecurity services. This approach has been endorsed by our partners again at our recent customer advisory board meeting. So our go-forward plan has 3 elements. Firstly, we're enhancing the software to remove the friction for our partners and their end-user SMB customers to easily and quickly adopt the platform and its services. The program of work to do this sees it completed in Q3. Secondly, we will not actively engage with new partners around our core portfolio until the software is enhanced. And in the interim, we'll concentrate our sales focus on the highest return on investment opportunities for point solutions, including WebProtect taken to existing and new partners who have their own telco network, Advanced Detection and Response for e-mail for existing e-mail customers, and multi-tenant Palo Alto Networks firewall and end point protection to existing customers. This shift in focus has the potential to dampen the rate of revenue growth in the first half compared to recent quarters, which is clearly not ideal. But it is the right thing to do to maximize impact for second half and beyond. And thirdly, this potential dampening will be offset by further lowering operating costs, particularly in our international sales and operations business units. As Iain indicated earlier, our early quantification of this is an in-year reduction of approximately $2 million, annualized at $2.5 million. Finally, let me turn to our OEM relationship with Cisco. At our Q3 update, we indicated that negotiations were underway to transition from the OEM agreement to another form of partnering relationship. We indicated the possible outcomes ranged from no additional revenue and material cost reductions to strong revenue and continued investment. These negotiations have not proceeded as quickly as we can reasonably have expected. Together with Kevin Bloch, our technology and markets adviser, I'm now directly involved in the discussions. And my view is that while we will likely transition to a new relationship as a Cisco Secure Technical Alliance partner, the most likely outcome under the OEM will be no additional revenue but cost-out. I expect the final outcome will be clear to us by the time of our Q1 FY '22 update. This begs the question, of course, what of the U.S. market, which we had reserved to access via Cisco? Should we agree to becoming a Cisco technical alliance partner, we will have access via both the Cisco direst sales team and the Cisco partner community. But to be effective, we will likely need more direct representation on the ground to build the relationships required to generate sustained revenue. We'll look at our options on all of this during the first half. I appreciate there's a lot of information in this, but also know this: we had it in hand. We've identified the issues, and we have a clear plan going forward. So to summarize, the strategic rationale for FirstWave's ultimate success remains intact. The business has been hampered by a lack of organizational focus, effectively a committed team trying to keep too many plates spinning at the same time. In FY '22, we are removing some of the spinning plates and focusing on those that will give us the greatest return. One that is likely to be removed is our OEM relationship with Cisco. The roadblocks to the adoption of our platform and services by partners and end users, end user SMBs, at scale will be removed in Q3. And until these roadblocks are removed, we will only actively be pursuing the sale of point services from our portfolio to partners where we can get most traction. We expect this will dampen the rate of revenue growth compared with recent quarters, but the consequence impact on cash will be offset by a reduction in operating costs of approximately $2 million in year. As always, we will keep shareholders fully informed via our quarterly updates. Let me thank you now for listening and invite your questions.

[Operator]

[Operator Instructions]

[John Grant, Executive Chairman & Interim CEO]

I think anyone on the call who wants to ask a question can also come by voice, can't they?

[Operator]

Yes, they can. We have a question from [ Mike Fittler ]. "John, given the detail of your plans, is there a chance you may commit to be the CEO for a minimum of 12 to 24 months?"

[John Grant, Executive Chairman & Interim CEO]

Settle down, [ Mike ]. No, the answer to that is no. I don't think that's the best way for me to contribute to FirstWave. I think we need an actively engaged, day-to-day, full-time executive who's got the passion that should -- a leader like that should have for this business but who understands this business. And that's the job. This is not my job. My job is to be Chairman of this company and Executive Chairman so far as it's been related to the external interface of this company, and it's been a job I really enjoyed and I think I've contributed. There's no doubt that I'm certainly trying to do stuff now that a CEO would do. I was a CEO for a long period of time, so I sort of know that. But no, I don't think -- this is not an extended playbook for me. It is, however, my job and the Board's job to get in place the best CEO, and that's the process we're going through now. So thanks, [ Mike ]. [ I'll keep it no ].

[Operator]

Nick Harris. "John and Iain, can you please talk a bit about the U.K.? Lockdowns were challenging in the U.K. a while ago. The U.K. is reopening now. Do you think sales in the U.K. will improve over the next 12 months?"

[John Grant, Executive Chairman & Interim CEO]

Nick, a really good question. And again, like the last update, I think we spoke about there being -- what Iain referred to in his presage of -- about green shoots in the U.K. I'd have to say those green shoots have sort of disappeared. We don't see promise in the U.K. set in the next 6 months. Our major partners in the U.K. are preoccupied with their core businesses. We are not yet core business for them. I mean, we had the potential to be that when we certainly were in the pre-COVID days. But at the moment, we're not. And we've pulled a lot of our resource out of the U.K. I think we had 5 members there. We're down to 2. We'll put another 1 in, but that staff will service the Middle East and North Africa as well. So I'm not -- the U.K. will definitely come back. I thought timing of it would be quicker. I don't think we're seeing the timing of it from our partner's point of view yet. So we'll keep you posted on that.

[Operator]

We've got another question. "Can you provide some breakup on the cost? You said rent reductions, wages, et cetera."

[John Grant, Executive Chairman & Interim CEO]

I'll just say quickly that the majority of it is people costs. Because at the end of the day, the lion's share of our costs are in the people in the business, and that hurts. But that's what you have to do when you get to these sorts of situations. So that's what I'd say. And then Iain, do you want to add anything more from a detailed point of view?

[Iain Bartram, CFO & Company Secretary]

No. You're correct, John. The majority of it is people cost. 85% of the savings will be people costs.

[John Grant, Executive Chairman & Interim CEO]

By the way, just to say this very clear, we do have a very heavy heart. It's not something that we would choose to do, but we are battling with things that we know that we can't control. And that's what I've run you through in the comments that I made. But we're still betting with things that we can't control. So in a marketplace that's still the way that it's been for a long time now, I think we're making very good progress, by the way, in that marketplace. And I think for a small business out of Australia, doing what it's doing globally is bloody amazing. So we're going to keep doing it as long as shareholders continue to support us, and that's the bottom line.

[Operator]

We've got another question from [ Andrew Smith ]. "Your quarterly refers to 6.4 quarter of funding availability. Is this conservative given cost cutting announced?"

[John Grant, Executive Chairman & Interim CEO]

Maybe to you, Iain.

[Iain Bartram, CFO & Company Secretary]

I think it's relatively in line. There weren't any major -- so if you think back to quarter 3, we had a $2 million R&D, which -- a grant received, which made a massive impact on the quarterly numbers. I mean, the Q4 numbers are relatively illustrative of a standard quarter. If you look at collections, it was $2 million. So annualize that, $8 million, pretty much in line with revenues. So I think that, that's a reasonable expectation based on where the business is currently at.

[Operator]

Are there any further questions?

[John Grant, Executive Chairman & Interim CEO]

I have Nick. So I've got a question, I can see, on the chat here. So there's 2 questions on the chat, sorry, we thought just jumped in. From [ Charles Stanley ], "While the people cost cutting provides short-term improved results, were does just leave the business from a longer-term point of view?"That's a very good question. And the question, [ Charles ], in my view, this business, I think, frankly, is better poised now than it ever has been. We -- the changes that we've made in terms of taking out costs is an interim measure so that it allows us to do the work we need to do, which is to enhance the software. It also allows us to actually pull the organization back into real focus and not leave on the table the decisions that need to be made. So it's a faster organization. It's now going to be a more flexible organization. That might seem a strange thing for me to say about a small business that is as small as this business is. But I mean, it does very big things, and it's quite complex. And it's easy to get it sort of embroiled in that complexity. So simplifying the way we do things and focusing on the outcomes that we really want and prioritizing those is where the business culture is heading, and that's the exercise that we'll follow through over the next 6 months. So I think that, together with the fact that changing the small things, as I said, they're relatively substantial from a software development point, but the small thing is really about the product to allow end users to flick a switch to get the service and allow partners much more power in the integration because we're going to put a lot more APIs into the core software, the core platform to allow the integration, again, much tighter integration, much more quickly. I think we're better positioned in this exercise than we ever have been before. And in the large part, and you won't like when I'm saying this, but this journey of FirstWave has largely been a journey of discovery. We're figuring out what the best thing is to do, and we're better positioned now. We know much more about what the right things we ought to do now than we knew 6 months ago and 12 months ago. So I think the business is very well positioned. And I think we're removing some costs down into such time as we can restore the opportunity for our platform to do the things that we know it can do. And we're very confident about the outcome of that. And the customer advisory board meeting that we had, which had reps from all of our customers right around the world, we did it over 2 nights, run by -- facilitated by Kevin Bloch, told us these sorts of things. So we're in a much better position now, and we need -- just need this next bit of time to exercise on that.

[Operator]

Nick has a question as well.

[John Grant, Executive Chairman & Interim CEO]

Yes. "Can you please elaborate on what needs to happen by Q3 for opt-out change to be successful?" You're talking to the wrong bloke, aren't you, really? It's good I didn't have Roger on the call. There are a list of things, but the bottom line to it is instead of an SMB end user -- and if you imagine this, so an SMB subscribes for the service from one of our telco partners. And the first thing to bring the service on board they've got to do is change their MX record. Now I don't know about you, but I don't know what an MX record is. And I've been in this industry a long, long time. So I've got no idea, and I've got no idea where are we going to do that. Now one of the first thing I do is I contact the partner. And the partner would say, "Well, the MX record," and they talk them through it, right? But that interchange is something that shouldn't need to happen. That's not the world of the SMB end user. The world of the SMB end user is the mobile world. It's things that they do on their mobile every day. So we're taking all of that and putting it there, and that's what will take the time. But that engagement will then be, subscribe for the service, flick here. Flick, you've got the service. So I've got e-mail threat protection and prevention. I've got web protection and prevention. I've got firewall protection and prevention. I've got end point. Thank you very much. That's exactly what I need. And by the way, now I'm getting on my mobile messages that tell me that you are safe. Well, if you are not safe, then you're at level 1. And now you're at level 2, and this is what you need to do. So that's the combination of our platform together with the Advanced Detection Response that we put together with SHELT sitting over the top of that, which gives not only threat prevention but gives threat interrogation, gives advanced notice and gives response mechanisms. That's extremely sophisticated. That's only being done in large enterprises today. So it goes back to [ Charles' ] question a moment ago. I think this business is much better placed with a greater understanding of what its product needs to be and how that's going to interact with the end user community and the partner business. So those changes, I haven't been too specific other than to try and describe them from a sort of user point of view, Nick. But they are the ones that will be implemented over the next 9 months. These are -- and these are the things that have not been done in the world today. So we -- this business has always been doing cut-through stuff, and now we're doing more cut-through stuff. And we will do it successfully as we've done in the past. So that's my sort of nontechnical description of what we're trying to do. I hope that's helpful. Thanks, mate.

[Operator]

Do we have any other questions?

[John Grant, Executive Chairman & Interim CEO]

If I could just add then, given there are no other questions, it doesn't seem to be, we have been very transparent on this call. We presented you with the facts in the best way possible. We've been realistic and truthful about it, and that's what you need to take away from this. Need to take away from this also that we've got this right. There are things that need to be done. We know what they are, and we're in the process of doing them. And you can be guaranteed that this business is more focused now on getting the outcomes and getting the right things done than, in my view, it has been done previously, which would seem the criticism of past management. But -- and it is. But that's the -- as I said in my address, it is really easy to get bound in this area -- this whole thing of bountiful returns because we are into huge markets with a very, very good product, engineered well, that has great opportunity. And sometimes in that sort of environment, you can get a little bit lost. And that's hopefully where the business is going to -- what the business is going to come out of. And it's been now very focused going forward. So that's sort of a summarizing statement, if you like. So thank you very much to all of you for listening. Iain and I will both be available. You can contact by e-mail if you've got any further questions, and I know we'll be speaking to some of you more directly over the next day or so. We look forward to that. So thanks. Good morning, everyone, and have a great day.