Firstwave Cloud Technology Ltd

ASX:FCT

Earnings Call Transcript

[John Grant, executive]

Good morning, everyone, and welcome to Firstwave Cloud Technology's FY '23 Second Quarter Shareholder Update. I'm John Grant, Firstwave's Non-Executive Chair. I'm joined by Danny Maher, our Managing Director and CEO; and Iain Bartram, our Chief Financial Officer and Company Secretary.

We're going to run through the agenda that you can see on the slide. I'll be [indiscernible] of the past quarter first, and Danny will then talk to the key highlights for the quarter before Iain provides more detail on financial performance. Danny will then provide a broader update on the whole business in terms of how the strategy we set at the beginning of the year is gaining traction and more specifically on the sales initiatives that are being undertaken and the outcomes achieved in quarter 2. We'll then wrap up before taking your questions.

So I've been with the company for just over 3.5 years. And as many of you know, as you've traveled the same path, many for longer, it's been tumultuous. I thank all shareholders past and current for continuing to support the company. The good news is that as I sit here today and having consulted my colleague, Non-Executive Director Paul MacRae, who's been on the Board since 2016, I feel very comfortable to say that operationally, the business is in the best shape it's been since listing. And more significantly, our sales and marketing organization is in the best shape since listing to deliver revenue growth from the strong pipeline we now have in hand.

Of course, the proof of the pudding is in the eating. So let me hand over to Danny to do that. Over to you, Danny.

[Danny Maher, executive]

Okay. Thanks, John. So as at the end of Q2, I'm describing the business as growing and manageable, and manageable is key. I want to say at the outset, in line with John's comments, that I'm very pleased with where we're at. I'm even more excited about where we're going to be. And I'm very happy and confident as a CEO based on what I'm looking at, and I'm very happy and confident as a shareholder too.

We have a significant pipeline of sales opportunities, particularly in North America, which indicates a strong outlook for revenue growth, and I'll talk a little bit more about that later. Our normalized cash burn remains under $0.5 million a month, which is down from over $1 million per month in the first half of FY '22. Our cash burn, notably, is an investment in our growth, primarily in sales and marketing. And the cash burn will reduce further with the growth that comes from this investment.

This quarter, much of that growth is in nonrecurring revenues, in particular, sales of software licenses. I want to note that while these are nonrecurring revenues, this is now part of our business, and they are sales, which is fantastic. They are harder to forecast than recurring revenues, but you're going to see more of them because they're going to be selling more of everything.

We've had a really good quarter. I'm going to hand over to Iain to go through some of the financial details first, and then I'll come back later with a little bit more information on the business.

[Iain Bartram, executive]

Thanks, Danny. I have a few data points that I'd like to share with you in this update, starting with the revenue recognized in the quarter, which grew strongly by 10.9%. A significant part of this growth was $650,000 in nonrecurring revenues, up 198% on the previous quarter. It mainly related to an NMIS 9 upgrade undertaken by Claro Dominican Republic.

The upgrade included a perpetual license fee and professional services totaling USD 300,000 that we recognize as AUD 468,000, based on the exchange rate at the time of AUD 0.64 to USD. It is worth noting that we operate Australian and U.S. bank accounts and are currently naturally hedged, with a balance of income and expenses in both AUD and USD. We report in Australian dollars based on accounting standards. However, we rarely convert funds and hence, are not currently subject to exchange rate. This may change in the future.

Annualized recurring revenue increased $9.86 million, a 1.5% increase over the previous quarter. Gross profit in the quarter was up 30.6% to $2.9 million. Some of this increase was due to the Claro license upgrade, which had 100% gross profit margin and therefore, increases the margin as well as increasing the actual gross profit in dollars.

Another factor was adjustments to COGS when accruals were reversed out against actual expenses. To get a clearer view of how the underlying business is performing, I have included an additional calculation of the gross profit and the gross profit margin with these COGS adjustments removed. This shows the underlying gross profit increased by 18.7% to $2.63 million, and that the gross profit margin increased by 5 percentage points to 76.3%, which is a strong result for the quarter. In summary, revenue is up over 10%, ARR increased by 1.5%, and gross profit and the gross profit margin are both significantly up.

Moving on to the cash and expenses. The business finished the quarter with $6.68 million in cash and cash equivalents after cash usage in the quarter of $1.89 million. And there is an additional $1.16 million expected in R&D tax rebates from Firstwave's FY '20 tax return and Opmantek's tax return, which relates to the period pre-acquisition from the first half of FY '22. Both tax returns have already been completed and lodged with the ATO and hence, the rebates are expected prior to the end of the current quarter.

Collections activities were slightly below normal levels and hence, cash usage of $1.89 million was higher than the normalized level, which is calculated against average collections. Taking the R&D rebate and collection adjustments into consideration, the normalized monthly cash burn has been calculated at $0.48 million per month for the quarter. It is noted that this includes $0.2 million per month in the nonrecurring revenues.

These nonrecurring revenues are harder to forecast than recurring revenues. However, there are a significant component of the monitoring side of the business and provide additional cash to support increased investment in sales and marketing that in turn should deliver growth in recurring revenues. As noted at the previous update, the cost savings and restructuring work has not weakened the business's delivery capabilities, and we remain confident that the revenue growth anticipated from the pipeline, together with the continuing focus on capital efficiency and making the best decisions we can for the long-term health of the business will improve profitability and see us track towards cash flow breakeven.

Now back to Danny for some more color around the business' performance.

[Danny Maher, executive]

Okay. Thanks, Iain. The last year quarterly updates, I've taken just a moment to remind us all of our strategic objectives. So these are: to have a sales-led culture right throughout the company; to grow our revenues faster; and to be capital-efficient. So everything that we do falls under one of these pillars.

We undertook some key sales initiatives during this quarter, second quarter. And first, I'd like to welcome Dino Davanzo, who commences our new Chief Revenue Officer based in Sydney. So he's a great addition to our team. We continue to grow and have a strong pipeline, providing multiple paths to success. That means we have multiple potential customers in multiple geographies with multiple products. So we have many ways to find our success, and that makes me very comfortable and very confident as CEO.

We do have a significant deal in the U.S., which we are working to close shortly, and we're very excited about that. We certainly don't depend on it, but it's a good one, and we are working to close that shortly. There are other significant deals in the pipeline also, but this one is at a later stage. We're focusing our sales efforts on the service providers and large enterprises in our strongest markets, which are the U.S., Australia and Latin America, and we're focusing on our highest margin products, which are our network management software and our e-mail security.

We announced a new deal Viaero Wireless, which is in line with our strategy of targeting service providers in North America. We welcome them as a new client. And we announced an extension of our agreement with Claro Dominican Republic, which is a key client for us in Latin America. And we also extended our agreement with Telmex, which is Mexico's largest telecommunications provider. So it's great to see those things happening. We -- so these are both extended and growing, by the way.

We signed several new clients. They're mostly network management clients, but there's also some CyberCision clients in there. And overall, it was a very good quarter of sales, and we expect to see that continue as we invest further in our growth.

So to summarize our current position. It's been 12 months since the acquisition of Opmantek, and the business is a truly transformed business. And what I would say for investors, that needs to be looked at with this transformation in mind and with very new eyes. It's a very different business. We feel very lucky at the acquisition time that we commenced rightsizing and we reset our strategy. So this commenced in January 22, which was ahead of the problems with the tech market, and we were very fortunate with that. So in many ways, we've got in front of the market. We've got our costs under control. We've got our structure right and we've got our strategy right before other companies did. We're growing our teams where other companies are still laying off.

Incredibly, our total operating expenses right now are lower than what Firstwave were prior to the acquisition of Opmantek. So the 2 companies together have a lower OpEx than what Firstwave had as a stand-alone company, which is quite remarkable. We're investing in our growth, and we're showing the early signs of that success. The company is delivering on its goals. We're strengthening quarter-on-quarter results, and that's set to continue. We have a very exciting and growing pipeline, and we have a manageable and growing business.

So on that, I'm going to invite some questions, and I'll hand back to our Chairman John Grant to facilitate those.

[John Grant, executive]

Thanks, Danny, and thanks to those on the call for listening. Let's now take your comments and questions. You can use Zoom Q&A to key in the question or you can raise your hand. Over to you.

Okay. Are there any questions? Use the Q&A or raise your hand. Okay. Thank you. We've got one coming in, we've got 2 coming in. One of our attendees, Danny and Iain, is the R&D rebate always around the same level? Or will it change over time?

[Danny Maher, executive]

It's roughly around the same level. It changes based on the number of development staff in Australia. But at the moment, we don't anticipate a significant change for FY '23. So we have $0.5 million accrued in the R&D rebate at 31st of December.

[John Grant, executive]

Okay. Thanks, Danny. And then [ Mike Parlay ] says, are there any plans to offer a public offering raised security?

[Danny Maher, executive]

Yes, I'll take that one. So we have an off-site strategy session with the exec team and a review of products and product market fit, and that is taking place in February, actually. So we might see some updates on that in the next quarterly update or we may not, depending on the decisions that are made.

It's certainly a discussion point because currently, the cybersecurity products, part of their key differentiation is that they have a particular value to service providers because they allow service providers to take these products to market at scale. So they're not specifically designed for us to take direct to market. They're differentiated for service providers to take on as an offering. But it's certainly -- it's under discussion.

[John Grant, executive]

Thanks, Danny. [ David Heathen ] says, how did OpEx go down so much? Maybe if I just give my sort of take first, [ David ]. We had an organization in Firstwave. We have another organization we've taken, and we've put them together. And that gave us the opportunity to look at the organization from a different point of view in terms of our costs. But Danny, over to you. You've been -- clearly, you and Iain have been leading this project.

[Danny Maher, executive]

Well, there was -- like any company, you can restructure and take costs out and become more efficient. And having a fresh set of eyes helps. So there's just that normal kind of getting your cost under control and restructuring. But then there were some very, very significant synergies between the 2 companies when we put these together. So it actually became a much more efficient company together. I know that shouldn't mean the OpEx should go down. It should mean it should only go up a little bit. But together with the restructuring and cost controls and the synergies of the 2 companies, it was -- that's what it was.

We're running fairly lean on some parts of the company. We've got a heavier slant of our spending towards sales and marketing than either company had prior to acquisition. So it's not just even though the OpEx is lower, it's that the investment is going into the growth as well. So yes, we're in a good kind of fit and shape.

[John Grant, executive]

Iain, did you have anything to add to that?

[Iain Bartram, executive]

Yes. Just to add to that, we had product offerings. We were looking at product offerings that weren't profitable. And with a focus on the best parts of the business, on the best products with the high profit margin, we were able to cut a significant expenditure without damaging the performance of the business. So that was the fresh eyes Danny is talking about, and the revised strategy allowed us to make some significant changes quite quickly.

[John Grant, executive]

Okay. Thank you. [ Kim Wingreen ], have the major prospects mentioned last quarter been closed, Danny?

[Danny Maher, executive]

No. So that was a major one. I'm just referring to it again in this update as has been quite close. Nothing's done until it's done, as we know, [ Kim ]. So we're just continuing to work on that and hoping for some news.

[John Grant, executive]

Actually, we're hoping, Danny, as you know. I need to be more specific. We're working through our team, obviously, in North America. That team is working directly with the sponsors within the customer we're talking -- potential customer we're talking about. So we're getting the information as close from the source as we possibly can. And that gives Danny, and certainly the Board, a level of comfort that Danny has expressed.

And no risk of clawback on any R&D grant? And when can Firstwave no longer apply for R&D grants. Iain?

[Iain Bartram, executive]

No risk on clawback because it's an accrual basis. So the $500,000 that is accrued at 31st of December, it's the work that's already been undertaken on the R&D projects, which were already part of the R&D assessment from -- over previous years. So no clawback risk, but how long we can apply for grants depends on how long we continue R&D investment.

And that depends on the mix of investment in sales and marketing versus product and where our focus is. So you may find as products become more commercialized and less R&D has been put into them that the R&D figure will go down. At the moment, the R&D levels are pretty consistent with previous years.

[John Grant, executive]

Thanks, Iain. Danny, how is Telstra tracking as a customer?

[Danny Maher, executive]

So Telstra is a strategic client for us. And part of the beauty, I guess, of having a diversified customer base and a diversified pipeline in terms of lots and lots of different types of opportunities is we can actually put some focus on them as a strategic account as well because we don't have all their eggs in their basket anymore.

So we do have some focus on them. We're working on some initiatives to ramp up revenues with them, including some new tech initiatives as well as some sales and marketing initiatives. And I don't think I'm at liberty going more detail than that. But it's still at a stage, I guess, where we're working together on the next stage of growth. The revenues are fairly steady, I think, at the moment, Iain?

[Iain Bartram, executive]

Yes. And just to add to that, because we've talked about Telstra a lot for all the obvious reasons, and they are hard to sort of mobilize. But I've said before, and Danny has gone through this in detail before, we're now working with the sales organization. So you get a better opportunity to able to work more closely at the call phase where the revenue comes from. So we've never been in that position before. So we're in the best position possible to grow revenue on Telstra, and we will continue to work it so long as we can see the opportunity there.

[John Grant, executive]

And I know your Telstra relationship is, [ Mr. Box ], are you putting your hand up to help? You're most welcome. Give me a call.

Yes. Thanks [indiscernible]. I didn't acknowledge your question. I didn't acknowledge that, that was your question. And Iain, again, any comment on the Microsoft relationship?

[Iain Bartram, executive]

So that relationship is still one that we're excited about and interestingly growing. There's a lot of growth left there, we believe. So for those that don't recall, we signed Microsoft as a client originally and then we signed another deal with them where we expanded to managing their IoT equipment, their secure IoT devices. There's more growth there, no doubt, continues to go well as a good relationship and renew, but nothing in particular to report other than that.

[John Grant, executive]

I think the extension to that, [ Kim ], maybe it's worthwhile, Danny, to talk about the Cisco relationship as well, where are we at the fact.

[Danny Maher, executive]

So the Cisco Partner relationship?

[John Grant, executive]

Yes.

[Danny Maher, executive]

Yes. Again, I'm not sure how much I'm at liberty to say at this point, John. But -- so the Cisco relationship, we went through -- they're still a strong partner of ours, and they're a key product behind the CyberCision platform that we deliver with Telstra. But yes, we're in conversations there about some new initiatives as well.

[John Grant, executive]

There's a question from an anonymous attendee that talks for further clarity around the government commercial agreement reached to launch a secure, sovereign ISM-compliant e-mail platform for the Australian government and large enterprise.

[Danny Maher, executive]

Okay. So John, I'll take that. So the provider of that service did not wish for us to mention who they are. Obviously, it's a secure platform. But we have been rolling that out, and it's currently being built. We've been paid for about half of the build, if that's correct, Iain, with the other half of the payment we're expecting soon. So we're building that out. It's pretty cool, and it's also very relevant. So there's the Five Eyes nations, which have very similar compliance requirements. So U.S.A., U.K., Canada, Australia and New Zealand. So it's a very relevant platform for those markets, too. And yes, there's ongoing ARR for that platform as clients sign on to the platform.

[John Grant, executive]

Okay. Can I just give a heads up to people on the call? From this call on, I won't be accepting questions from anonymous attendees. I think you need to tell us who you are. And we're -- there's no secrets. We don't have any secrets in our business, so we probably prefer it the other way as well. So just a heads up for the next quarter update on. Any other questions from any on the call?

Thank you. I'm going to -- oh, sorry, [ Mike ]. It sounds like things are in good shape, well played. Are the 2 former product lines still distinct? Or are they integrating?

[Danny Maher, executive]

Okay. So there is some integration forming. They're quite useful side-by-side. But when you say side-by-side, that means they're still distinct products. So there's some -- if you think what the CyberCision platform does, it commoditizes some third-party products, adds a bunch of IP and makes it more easy to consume at scale and be provided by service providers. So if you think about the Opmantek software through the acquisition, it's just another product which can be plugged into the CyberCision platform. So we continue to look at that, and some of that integration is taking place. So we're leveraging some of the IP that was acquired into the CyberCision platform. But generally speaking, I think nature of the question, you'd say they're still 2 distinct product lines. They are [indiscernible] IP. Thanks, [ Ian ].

[John Grant, executive]

Yes. Thanks, [ Ian ]. Appreciate that.

[Danny Maher, executive]

So the anonymous question was [ Ian Leslie ].

[John Grant, executive]

It was [ Ian Leslie ]. Yes. Thank you, [ Ian ]. Any more questions from anyone on the call? Okay. Thank you very much. We're going to get back to doing business.

So again, have a great day. Yes, we're very happy. Bottom line is very happy with where we are. And it's -- as it always has been, it's all ahead of us, but there's a greater degree of confidence and certainty around that than I've ever seen in the business. So -- and when you hear from Danny, he's a major shareholder of the business, saying that from a shareholder's point of view, he's very comfortable. And that's a very good thing for all of us.

Thank you, Danny. Have a great day, everyone, and thank you very much for joining.