Firstwave Cloud Technology Ltd

ASX:FCT

Earnings Call Transcript 2022-Q4

[Ruth Sloley, executive]

Good morning, everybody. Welcome to the FirstWave shareholder update. John Grant will now start the call.

[John Grant, executive]

Hi, everyone. Thank you, Ruth. Good morning, everyone to FirstWave's Q4 FY '22 shareholder update. I'm joined -- for those of you who don't know, I'm Non-Executive Chairman of FirstWave. I'm joined today by our Chairman -- foretelling the future Danny, by our CEO and Managing Director, Danny Maher, and by our CFO and Company Secretary, Iain Bartram.

Today, we're going to cover -- Ruth, if you could just move the slides onto the agenda, please. I'm going to walk you through -- I'll walk you through my view of what the highlights are of the quarter. Iain will run us through in depth the financial performance. And then Danny is going to take us through a lot of work that we've been doing within the business over the last 6 months, more particularly in the last 3 months around strategy for the future. It's important, we think, that we convey that to shareholders because it's what we're basing the whole business on. Danny will wrap up, and then I'll be happy -- we'll be happy to take your questions, which I'll facilitate.

So moving on to the highlights of the year from my -- for the quarter from my point of view. Q4 was a very busy half for FirstWave. We completed the acquisition in early January of Opmantek, as you'd be aware. And since then, the people from both organizations have worked really, really hard to finalize the integration project, which is no mean feat. There's a little bit of work that will continue into Q1 and FY '23, but on the 1st of July, the business transitioned to 1 CRM or customer relationship management system which is critical, and 1 accounting system which provides a significant lift in productivity. And we expect further savings going forward as we decommission the systems that we were using and that are no longer required.

In addition, it is unfortunate, but effectually, we had to move -- we had to change up the people structure in the business and all the necessary retrenchments that came as a result of that have now been made. And the full savings will flow into Q1 of FY '23. We're at a market at the moment looking for additional resources in software development and sales because that's where we need now focus our -- and go forward.

Compared with what I've experienced and seen over a dozen or so acquisitions and mergers, this integration project has gone exceedingly well. We foreshadowed that when we announced the acquisition, but it has gone exceedingly well. And we are very strongly positioned as we enter the new financial year. The product focus that Danny has given the team around CyberCision e-mail and around NMIS and the geographical focus on Australia, the U.S. and Latin America that the sales team and the marketing team are now executing on has maintained existing key relationships with customers, which is clearly important. And it's changed our approach to the way we handle the areas where we've been struggling. We're in the process of restructuring those relationships, particularly in India and in Africa.

The impact of this change in sales focus and the narrowing has also delivered a significant pipeline of opportunities that will give us -- really give us a course to believe the outlook is strong, albeit growth in the quarter was marginal, but the outlook is strong, and Danny will speak more to that.

Q4 also saw the launch of CyberCision Phase 2, delivering real-time cybersecurity visibility in a mobile app for end-users, first time ever, and frictionless e-mail protection for service providers. Phase 2 provides FirstWave with increased access to high-growth markets and empowers our partners to rapidly onboard customers at scale.

As shareholders will recall, we were targeting to reduce normalized cash burn to $500,000 per month entering the new financial year, and will expand on this, but the bottom line is that we enter FY '23 with $10.4 million in the bank and taking into account the timing differences on savings because not all of them flow immediately, we are very close to that target.

So let me now hand over to Iain. Over to you, Iain. Thank you.

[Iain Bartram, executive]

Thanks, John. Let's start by looking at the revenue. Our annual recurring revenue is our main metric, which was flat Q4 on Q3. We would obviously like to see growth. However, as John mentioned earlier, this last 6 months has been a huge period of change for the business. And with a focus on integration and restructuring, it's pleasing to have maintained our client base and their revenues.

I also note that these numbers do not include the recent deals signed with Macquarie Cloud Services. FirstWave reports annualized recurring revenue is 12x the most recent months recurring revenue. So even though the deal was signed in June, the first month's revenue will not be recognized until July. We expect for this relationship to grow substantially over time as has been demonstrated in the past with other key clients such as Microsoft.

The revenues -- the Q4 revenues and gross profits were both down on Q3, although you might recall that we had some significant revenue adjustments in Q3 relating to deferred revenues being brought to account in the period, which lifted the quarter's results above the underlying run rate. Therefore, as an additional reference point, we have included a comparison of Q4's results to the pro forma results in Q2. And we can see that Q4 is 4.4% up on Q2 revenues and 11.5% up on gross profit.

Moving on to the cash position. The business finished the quarter with a strong $10.4 million in cash and cash equivalents. Cash usage in the quarter was $2.3 million. However, this cash usage includes almost $200,000 in redundancy payments as well as other one-off costs. Applying the same normalization approach discussed in the previous update, I estimate that the Q4 normalized cash burn averages to under $600,000 per month. This monthly average includes salaries of just over $50,000 per month for employees who are no longer with the business.

There are also more cost savings to be realized from the termination of duplicated IT systems where cutover to a single system was only completed on the 1st of July. And hence, as John noted earlier, the full impact of these savings will now flow through in Q1 FY '23.

There is also the ongoing work to consolidate FirstWave's global platform costs, where resellers originally signed up through the Cisco relationship have transitioned off the old CSMP platform onto the new CyberCision platform. This transition will save around $15,000 to $20,000 per month once completed. Therefore, our starting in this new financial year is very close to the $500,000 cash burn target that we sell ourselves when acquiring Opmantek. And with a growing pipeline of recurring revenue and some one-off revenue opportunities, we aim to reduce the cash burn even further in the coming months.

I will now hand over to Danny to take you through the strategic plan.

[Danny Maher, executive]

Okay. Thanks, Iain. Hi, everyone. I'm pleased to with you for another quarterly update. Something I wanted to mention right at the start of the update is that we have recently released a new strategic plan, which was approved by the Board and was launched to all staff in the last 30 days. It's a plan that's been worked on since the acquisition of Opmantek, and it's great that it's now being built out with some deeper operational information, and we've finalized that to enter the new financial year.

So I just want to give you a little bit of a flavor for what that plan is about, and I have a few high-level slides, which I'll run through.

Firstly, of course, the plan contains a new vision and a new mission statement, which I'll simply read out for you. So our vision is to be the leader of transformational change in the IT operations and security world. And our mission, to create intelligent software with high levels of automation that our service provider partners and customers love and recommend to each other.

Okay. So the plan is quite detailed, but it's guided by 3 strategic principles for us. And these 3 high-level principles were defined some months ago, and we've been working under these objectives by building out the detailed plan, and I know I've communicated these in a previous update.

So the number 1 for us is to have a sales-led culture in the company. This is about everyone in the company knowing that they should make decisions that act and act with a mindset that will help sales. Number two is to grow faster, which, of course, is about growing our revenues and in particular about growing our recurring revenues. And the third strategic objective is to be capital efficient, which, of course, involves a lot of cost reductions and an ongoing consideration for how we manage our capital.

So far, I'm really happy to say that these guiding principles and strategic objectives are having a positive impact on the business. If we look at our capital efficiency, it's quite remarkable, really, how far we have already streamlined our use of capital with our burn dropping from $1 million a month to a forecast $500,000 per month for this quarter without negatively impacting our revenues. So that's a pretty significant streamlining of the business.

If we look at the transition to being a sales-led culture, that's something that's been very well embraced by the organization. And if we look at growing revenues faster, the early signs of that are in our pipeline. When you have an empty pipeline, you're not going to get any growth. And our pipeline at the moment is very strong and something I'm really happy with.

I wanted to take a little bit of a deeper look at sales and marketing because I know this is of key interest to shareholders. In line with the strategic plan, we have put together a new go-to-market plan and product strategy, which focuses our sales efforts on the service providers who are our main clients. 75% of our revenues come from service providers, and it also focuses on our strongest markets, which are the U.S.A., Australia and Latin America.

On top of this focus, the go-to-market plan further focuses on our highest margin products, which are our e-mail security products and our network management products. So it's really about getting to the point end of where we're going to get our growth from.

We're progressing multilevel relationships with key accounts. This includes putting a renewed focus on Telstra. I'll reiterate what I said in the last quarterly update. Prior to the acquisition of Opmantek, it was critical that FirstWave sought diversification of revenues as it was heavily reliant on Telstra. Post the acquisition of Opmantek, the revenues are diversified both geographically and from a product perspective, which now means we're able to put some strategic focus around growing the revenues with the Telstra relationships, which is great. And this work is becoming part of our needle-moving pipeline.

We've also commenced the cross-selling of CyberCision to some of the 26 service providers that were obtained through the acquisition of Opmantek. As you would expect, in some cases, there isn't an opportunity there. And in other cases, there are. Where there are, the opportunities, these are surfacing and they are part of our needle-moving pipeline also.

We've commenced engagement with some new service providers in North America, in particular, both on the CyberCision and the network management front. We've got excellent reference customers in North America through the acquisition of Opmantek. And these engagements also form part of the growing and needle-moving pipeline. So there's a lot happening.

I also want to give you a quick example of what the impact of transitioning to a sales-led organization means and there's quite a bit more detail on this in the strategic plan, but I thought one of the easiest places to articulate this was in product development.

Conversations with product development now go along the lines of, we only develop something if it is going to help us sell more, help us sell at a higher price, if it's going to help our customer retention, i.e., reduce our churn or it's going to make us more capital efficient, which is usually about reducing costs. So our product development is focused on reducing churn and increasing speed of product adoption as these are the 2 things that are key to growth: we want to maintain our client base on the platform; we want to increase the speed at which we add new clients to the platform.

We're also making faster decisions on underperforming products and features. These are things that slow us down and loses money, and they don't warrant further investment. This includes some streamlining of our third-party IP providers also. We're enhancing existing products, and we're building new products. So we are investing in product development, but this is the way that we're doing it now. Significantly, we are commencing the integration of the IP acquired with Opmantek into the CyberCision platform in this upcoming quarter.

I'm really excited about this. Obviously, I came across as MD with the acquisition of Opmantek, and I know quite well the power of some of the IP that was acquired. This is a massive boost to CyberCision that will take years of development cycles and will enhance the functionality of CyberCision and increase our product margins as well because it's IP that we wholly own. So it's a rapid and cost-effective method of significantly enhancing what we're doing and the IP within CyberCision.

So to wrap up, we feel the business is aligned for growth. We've managed to reduce our cash burn significantly. We've reached a stabilized cost structure while not impacting our revenues. At the same time, as integrating Opmantek and restructuring our costs, we're significantly growing our pipeline, and that pipeline continues to grow and contains some new and really exciting opportunities for us. These are opportunities that weren't there 3 and 6 months ago. So in summary, the outlook of business is very strong.

I'm very happy as MD, and I'm very happy as a key shareholder with the rest of you, and I'll leave it there. And I'll hand over to you all for some questions that you may have, which our Chairman, John Grant, will facilitate. So John, I'll hand back to you.

[John Grant, executive]

Thank you, Danny. [Operator Instructions] So either way, it's set. Just had a question that we have got, Danny, in 2 parts. When referring to cash flow breakeven, is that just operating cash flow breakeven or total cash flow breakeven? Iain, you might be able to give us an answer on that if you wouldn't mind?

[Iain Bartram, executive]

Sorry, John, if you wouldn't mind repeating the question. I was struggling with my video and I wasn't listening.

[John Grant, executive]

When referring to cash breakeven, is that just operating cash flow breakeven or total cash flow breakeven?

[Iain Bartram, executive]

Total cash flow breakeven.

[John Grant, executive]

And Danny, can you go -- also go into more -- Iain, this is for you as well. Can you add more detail on how much you expect ARR to step up next quarter on the back of the Macquarie deal?

[Iain Bartram, executive]

We're not giving forecasts out into the market at the moment. So I don't want to talk about that. But if you look at the history of Opmantek, it's to start services within customers across their devices and then to grow across other devices within the business. So what we're looking at is how many devices in total that we could service as well as other divisions within the group. It's obviously a very large group.

[John Grant, executive]

It may not satisfy the question, but that's as much as we can provide. I did think, Iain, in the announcement that we made, did we quantify the value of the contract, the initial contract over the 5 years?

[Iain Bartram, executive]

The contract was quantified in the announcement, and it's $100,000 a year. There's some services work in there as well that made up the difference.

[Danny Maher, executive]

Of [ 66 ] from the initial order, for the initial batch of devices and some services, and as Iain mentioned, like all contracts of that type, it's only initial batch of devices, and you expect it to grow over time. At that rate, it would be 1% of recurring revenues and then growing from there.

[John Grant, executive]

Thanks, Danny. [ Kim Winger ], I think -- welcome, [ Kim ]. Any updates on the Microsoft relationship? I don't know whether, [ Kim ], you're really meaning the announcement that was made yesterday between Telstra and Microsoft, which we're happy to talk to. But Danny, just to start with the Microsoft relationship.

[Danny Maher, executive]

So it's interesting, so we've got 2 elements to our Microsoft relationship. So one is we have Microsoft as a client of ours and they use our network management software as a client and they're a significant client of ours. And the other is that we, with the launch of CyberCision Phase 2, we launched the frictionless e-mail security product for Microsoft Office 365. So I might just touch on both of those. The relationship with Microsoft as a client using our network management software continues to be very strong, and we do expect further growth from it. So Microsoft is now using our software across 3 different divisions, I believe.

And the one which I'm particularly interested in is that they're using it to manage some of their IoT devices, specifically their security cameras. And we're very hopeful that they continue to add more devices to that. This is one of the -- we own one of the very few pieces of IP in the world that we say can manage anything at any scale. So if you invent something today, our software can manage it today. And that's really exciting in the IoT world, and we're really looking forward to and hopeful that Microsoft continues to add a bunch of stuff to that platform.

In relation to our e-mail security product, which protects Microsoft e-mail users from e-mail security issues, we launched that with CyberCision Phase 2. I'm really pleased to say we've already upgraded the Telstra platform, for example, with that update. So they now have that frictionless Microsoft e-mail security product. And we're working with Telstra on how to expand the use of that software, which is a really great thing. We're engaged with both the product teams, and we've got a really kind of fresh engagement with Telstra Purple. There was an announcement overnight about a strategic relationship between Telstra and Microsoft, and it talked about specifically how that would work with Telstra Purple. We see this as a fantastic timing for us because we have the Telstra product that secures Microsoft e-mail. So you only saw that announcement about the increased strategic relationship with Microsoft and Telstra. Yes, this is a good thing for us. So it was a bit long winded, but there's a lot in it. There's a lot in Microsoft for us, and hopefully, that gives a little bit of flavor to it.

[John Grant, executive]

Thanks, Danny. Nick Harris. Thanks, Nick. Iain and Danny, can you please make some comments on churn, that is what is your natural rate of revenue churn? And has this changed since the merger?

[Danny Maher, executive]

Is it you or me, Iain, to take that one? I'm happy to...

[Iain Bartram, executive]

Well, I suppose one positive thing to say there is that we can't give you accurate data at the moment because the churn is much longer than the relationship -- the lifetime of the customer is much longer than the relationship we have with Opmantek. So we don't have a full picture of that and won't have for several years. We work on a modeling basis of about 7 years churn on a customer. Obviously, with an intention to grow revenues, many of your customers are new customers, and therefore, you would expect your churn to be even smaller than that 7-year average because you've got a bigger proportion of your base that's new customers. So we'd be modeling on a lower number than 7 years or 15%.

[Danny Maher, executive]

Yes. I think it would be fair to say, Iain, that there's probably been some unusual churn, nothing to do with the acquisition over the last couple of quarters. But yes, but for all of our products, the CyberCision products and the network management software, the expected -- you don't expect customers to churn for around 7 years.

[John Grant, executive]

Maybe I can add another dimension to that here because what's actually going on in the last 6 months in this integration project is that a lot of the stuff that was in the coveted FirstWave is actually being cleaned out. It's an opportunity we did not have before. It's an opportunity we absolutely have and which was one of the intents of the acquisition with Opmantek to give this company some choice going forward and it's got multiple choice now, which is a great position to be in.

But what you can then do is you can actually take a different view about some of the things that you were doing and some of the people that you were dealing with. And I made the comments in my opening -- comment in my opening remarks that we're dealing now with particularly in India and Africa, which have been very promising markets for FirstWave, but very frustrating markets and very, very hard to get real traction, and now we're dealing with them in a different way. We're dealing with them in a much more commercial way rather than a presales play. And that's going to have fall out most likely, but it's going to be good for the company whenever it comes as an outcome.

So it is not necessarily an aspect of churn that you'd want to build into a model, Nick, but it is a statement effect about how we're cleaning up a cupboard the things that we no longer need and no longer run. And Danny explained the same observations about some of the product with end of life out -- with end of life, our end point security product because it's no longer financially viable for our company to offer it. There are many other solutions. So there's a whole bunch of things coming on -- coming -- happening in this half that have actually made the business much stronger business and a much more focused business doing the things that make a difference. So an answer to the churn from a different perspective.

Going back to the questions. Thanks, Nick, for that. [ Mike Miolo ], what is the geographic split of the sales-driven efforts domestic versus offshore? And does this reflect the existing revenue proportions? Or how is it targeted? Danny, can you take that one?

[Danny Maher, executive]

Yes. So we see our high-growth geography in terms of customer expansion as North America. And so that's the first thing. So we do expect to see a higher percentage of our revenues coming from outside of Australia. However, there's a bit of an interesting adjunct to that statement, I guess, in that. The recent multi-level engagement with Telstra's sales arm and the launch of that frictionless e-mail product to Telstra, who are the highest reseller, the #1 reseller of Microsoft Office products in Australia, creates a little interesting bent to that because like if you were to put -- there's some big potential revenues there through that restrategizing of the Telstra arrangement. But that aside, in terms of numbers of customers, we'll see higher growth in North America. And in terms of revenues, I expect to see higher growth through North America as well. However, there is a significant opportunity with Telstra at the moment.

[John Grant, executive]

I think it's important to say, Danny, that we've got feet on the street in the U.S. and in Latin America. And we've got more feet on the street in those 2 locations than we have in Australia. They're very, very different types of businesses. So as you know, the volume, a large volume of our -- a large proportion of our revenues comes from Telstra, but maintaining that account and working on the strategic opportunities there does not necessarily require the same sort of work -- scale of workforce or sales force as you have in the U.S. or in Latin America.

[Danny Maher, executive]

Yes, certainly.

[John Grant, executive]

And [ Kim ] says her usual question or is the usual question, any updates on Board expansion and/or renewal?

Without any commitments whatsoever, Kim, yes, we -- number one, we are seeking and we've confirmed that we will seek an extra director on the Board, and that may cause some changes in the current directorships, but we're seeking an extra director on the Board. The thinking, and I guess just to give you a sense of how we do think about this, we're a global company. When you look at the executive team, we've got a senior executive in Danny -- our top executive in Danny here in Australia. We've got our sales lead, our Chief Revenue Officer in San Francisco, and we've got a considerable sales team and sales -- presales or support team throughout the U.S. and in Latin America.

And we can say we are truly global at that level, but at the Board level, we're not. So if you really want to be a global company, then you have to look like and feel like and act like a global company. And as you well know, directors have been pretty preoccupied with just sort of keeping this company going. And we've now got a little bit of breathing room so we are in the process of engaging to see whether it's realistic as to whether we can bring additional resources at the Board level on that would actually give us some experience and some capability and some on-ground capacity in the U.S. and that would be great if we could.

Now this is not easy. We are a very, very tiny company here in Australia with great opportunities. But when you look at it through the lens of the U.S., it's a totally different thing that they would see. So I'm not saying it's going to be easy, but I am telling you that our aspirations are certainly down in that direction. So we will continue to update you. But in answer to your question, [ Kim ], we have advanced beyond where we were previously, and we are intent on expanding/renewing the Board and all of the directors are of the same mind in this, by the way.

Can we have any more questions through the Q&A? Anyone want to raise their hand? Okay. Going once, going twice.

Thank you very much. Thanks very much, everyone. Thank you very much for your attention and for your continuing support. I can assure you now as a Non-Exec Chair that I see what's going on in the business. And the leadership that Danny is giving the business and the focus he's giving the business is exactly what this business needed. So my level of confidence is quite high, and I'm not sort of a glass half empty kind on these sorts of things. But I'm feeling very positive about the direction that we're going and have confidence in Danny's leadership to get us there. So we'll speak to you again at the end of quarter 1. And again, obviously, at the end of quarter 2, so I look forward to that. Thanks very much for your attention and questions today.

[Danny Maher, executive]

Thanks, John. Thanks, everyone.