01 Quantum Inc. (ONE) Earnings Call Transcript & Summary

Okay. We'll get started now. Thank you for joining us today on our first quarter results and business update. I'm Brian Stringer. I'm the Chief Financial Officer for 01 Communique. And with me today is Andrew Cheung, you all know, our President and CEO. The agenda for today will be a presentation by Andrew, who'll go through the results for the quarter and provide an update on our business going forward, followed by which there will be a Q&A session. [Operator Instructions] I will moderate the questions at the end. I will save those questions until the end of the presentation and then ask them to Andrew. And now before I turn it over to Andrew for the presentation, please take a quick read of our disclaimer, our forward-looking statements. And with that, I'll now turn it over to Andrew. Andrew, over to you.

Thank you, Brian. Welcome, everyone. My name is Andrew Cheung, President and CEO of 01 Communique. Again, welcome to our 2022 first quarter financial results and corporate update. Now the world has certainly changed a lot since my last presentation 2 months ago in January. Increased cyberattacks often coincide with military actions. The risk of cyberattacks now is very high and is rising. Some of the most recent victims of hacks include Samsung, where they lost a lot of source codes. And then another one is a large gaming company called Ubisoft. Last but not least, there was the $330 million theft of Solana blockchain less than a month ago. So having said that, cybersecurity is front and center. I don't need to explain any more the threat of quantum computing because it is already a fact these days. All I can say is that for those who are denying it will pay a huge price very soon. History has taught us that the most advanced weapon are often kept in secret until they are forced to be revealed at the time of the war, and unfortunately, we are in such a situation now. The only difference this time is that the secret weapon is not the nuke but quantum computers. Whether you like it or not, a cyberwar is coming and maybe already happen, and we want the world to be prepared. On March 2, only about less than 2 weeks ago, Konrad Wrona, the Principal Scientist of the NATO Cyber Security Centre, NCSC, said, "Securing NATO's communications for the quantum era is paramount to our ability to operate effectively without the fear of interception." And I am a strong believer again -- over again that Q-Day has already arrived at the national level. And people who are burying their head in the sands are just hoping that it takes a longer time for the quantum computer to fall into the hands of a regular hacker. Now would you believe -- the very fundamental question is, would you believe a country like U.S., Russia and China will not go into one of the quantum computer vendors and say something like, "Here's $2 billion. Just create for me a special-purpose quantum computer that does nothing than factorization." In other words, the world must prepare for quantum safety. So our strategy set 5 years ago basically are now paying dividends. The world stage has simply accelerated a bit. So besides the continued flow of revenue from our partner in Japan, Hitachi, they are mainly for additional achievement in this quarter. Now first of all, in February, we have signed up the largest HSM manufacturer in the world, Thales. And I'll elaborate a little bit more in the next slide. And second, the U.S. patent of our IronCAP technology has been granted about a week ago on March 8. And another one -- another patent application has been just filed shortly and more to come. Last but not least, a partnership that we have been cooking for more than a year is coming to a closing stage that will give us lucrative compensation potential and so stay tuned for that. Now I think -- talking about Thales, I bet not too many of our investors have heard of Thales. And most of you guys probably cannot even pronounce the name properly. Thales is a French company. They are indeed the largest HSM, hardware security module, HSM manufacturer in the world with over 80,000 employees. And the sales are pushing EUR 20 billion. You may not know them, but you are using their product on a daily basis because virtually all the commercial banks, central banks, government agencies, national defense, et cetera, et cetera, are using their HSM to secure their infrastructure. Our partnership with Thales is actually taken into the inner circle. It is like a dream come true for us. Now this partnership technically requires us to create a functional module, we call FM, of IronCAP that is compatible with their Luna HSM machine. This way, their clients can easily purchase an IronCAP FM to upgrade their infrastructures to become quantum safe. Now since the Thales HSM machines are already approved by virtually all security-sensitive organization, this serves as a shortcut for us to reach the high-sensitive end-user customers. And a POC, proof of concept, is slated to be completed in about 3 months' time. Now another great milestone, as how I briefly mentioned, is the patent portfolio. You may remember in November that we have announced the notice of allowance status of our main patent, but the patent hasn't been granted -- officially granted yet at that time. Now this big day just came last week on March 8, and the patent number is 11/271/715. This is a very important flagship patent that we have been granted. Now besides that, it is worthwhile bringing you up to speed on our patent portfolio. In addition to this newly granted patent, we have also got 4 other in pending book. One is related to our quantum-safe e-mail security product, and another one is related to our engine. And 2 more are related to blockchain and e-wallet security, respectively. And we expect more as we move on. As a result, we cannot be more excited about 2022 and beyond. Now first of all, our long-time partner, as I did mention is Hitachi, continue to generate recurring revenue for us as the norm of work from home carries on in Japan. We expect this remote work trend to expand in 2022 and beyond. In addition to that, our IronCAP X business version is expected to be available around Q3, which is not far from now. This is the first -- I keep saying this is the first-ever quantum-safe e-mail security product for the business in the world. And I'd like to bring to your attention that, best time to talk about it now, is that a paper co-authored with PricewaterhouseCoopers is about how IronCAP X can resolve the infamous e-mail phishing problem will be published within about a week or so. This is important because 91% of all the ransomware happening simply started from a phishing e-mail. Now the number that we have, the Q1 number, is indeed reflecting all these kind of things. Now nothing happened overnight. Every partnership we have signed is a result of funnel stuffing from over 12 months ago. And the funnel is now bearing fruit. They generate opportunity for us to reach more customers, potential end users, and we expect a deal, as I mentioned earlier as a very lucrative compensation potential, to be closed very shortly. So please stay tuned for that. And the war in Ukraine has just expedited the awareness and the need to become quantum safe. So again, all these are thus showing into our Q1 number, reflecting, again, the situation. While revenue is 15% more than the previous quarter, Q4 of 2021, more importantly, capital loss continued to reduce as expected. Now as a result, reduction of cash burn is also in the right direction. And more importantly, we are achieving all these with the increased R&D and sales and marketing expenses. So with this trajectory at 0 debt, we are very comfortable with our cash position. So now let me summarize. I'm very happy with the achievement in 2022 so far. It is exceeding our plan. First of all, we will access user on the rise. The strategy we made 5 years ago has proven to be paying on and is beginning to bear fruits. We're also dovetailing perfectly into our expectation of a substantial revenue and profitability growth between now and the next few years. So I think I would like to take a quick pause from here because I know that you would have a lot of questions. So answering your question probably is more important, so I try to save more time for the question-and-answer session. So earlier on, when Brian was introducing that, you can use the Zoom Q&A section to post a question, and I will answer them on a first come, first served basis. And Brian will be moderating the questions. So yes, Brian, please feel free.

Okay. I can see some questions coming through, Andrew. Just give it a couple of seconds here. Okay. The first one, Andrew, in the release, you seem very excited about the prospects in Asia Pacific. Can you elaborate on what's happening in Asia Pacific and if there is any update on your partnership with PwC?

Yes. Thank you. This is actually a good question. I think I briefly mentioned in the presentation that a paper co-authored with PricewaterhouseCoopers in Asia is about to be released. And this paper is exactly talking about end-to-end quantum-safe e-mail encryption and digital signature products and how the world should be using this type of product in order to solve the phishing problem. Now phishing e-mail is an initial thing. And unfortunately, this is 91% of the source of all ransomware attacks in the world, so it's a very important thing. So this paper has been in development with PricewaterhouseCoopers for more than 2 months, and this is now going through all the approval process and in the final stage in the release process. And we expect that will be published within about like a week or so. So that's number one about PricewaterhouseCoopers. And again, I keep mentioning that the partnership that we have with Hitachi in Japan is very reliable, and they are generating recurring revenue and it's increasing. So yes, I'm very excited about that aspect of growth for the company.

Okay. The next one involves our patents. And since we received the patent number, yes, you also have a patent application still outstanding. And I think you covered this but maybe to clarify, just how important is the patent applications, the receipt of the patent number and what else do you have up your sleeve?

Thank you, again, for this question. It is extremely important. The short answer is it's extremely important. In patent strategy, it is like you have the mother ship. And you move the mother ship on, and then you have other side, the battleship beside you. This is exactly the same thing. And our mother ship has been granted. So this is the important step number one. And then the rest of the things will be actually riding on the mother ship and expanding the patent. So it is the first time that I stress on this point because before this quarter, we haven't got the mother ship officially granted yet, so there's not much I can say. But now it's the perfect time because the mother ship has been granted. So alongside with that, we have another like 4 patent applications going with it. Again, going a little bit more detail, the first one is about our e-mail security products. It is actually a breakthrough of end-to-end e-mail encryption. Because in the end-to-end e-mail encryption, the problem is the first e-mail, like the chicken and egg situation, and we have invented a very slick way to get around that first e-mail encryption product. So we filed, and it is also at a late stage in the prosecution process. And then there are another 2 that we have filed. One is related to blockchain. If you remember, blockchain is actually very secure, but the endpoint are still quantum computer vulnerable. And we have found the inventive way to help quantum secure all existing blockchains in the world, and we have filed a patent related to that. And then another one is related to e-wallet. If you remember, all these e-wallets that whether you have bought cryptocurrency or not, e-wallet is a very important aspect in today's economy. And to secure e-wallets, we have found a way to do it in a very slick fashion that -- this one hasn't been published yet, so we cannot disclose too much, but it is related to e-wallet security. So yes, so this patent portfolio moving forward is very, very powerful, and I am very comfortable with it. So, so far, we have the mother ship, 4 in prosecution mode, and we expect more to join the fleet.

Okay. And the next one, Andrew, involves around Thales, your partner in France Thales. Your comment in your press release that you expect further developments in Europe, can you expand?

Yes. In fact, I keep joking that not too many people can, let alone knowing them, that they could not even pronounce them properly. And actually, they are called Thales. It is a French company. And so it is a very important partnership because simply their product is already the product of choice of almost all of the commercial, central banks, national defense and government agency and et cetera, et cetera, in the world. Like all the countries, major countries you know are using their products. So it has already been a de facto standard. It's like the Microsoft Windows in your computer in the cybersecurity world. So to be able to partner with them means a lot because this is like a shortcut into their customer list and also because their customers are all the cybersecurity-sensitive companies. So it is the biggest, the biggest partnership we had so far in a few years marketing the product. So not -- well, since they are a French company, it doesn't mean the development is focused on just Europe. It only means basically their competitors are also paying attention and talking to us also. And their products or their customer base are basically worldwide. And they have already -- since only a few weeks signing up the partnership, they have already opened some doors for us in some really big global end-user companies. So this is extremely exciting time. I cannot be more happier about that.

Okay. I've got 2 more questions here. First one has to do with R&D product development. You increased your product development expenses. What new products can we expect going forward?

They are quite a bit. It's a short question, but it's a loaded question because, first of all, we have committed to Thales that we have to build the FM, the IronCAP FM for them. So that this is kind of like a -- you can imagine that it is kind of like the iOS, the Apple iPhone, iOS and the app, right? So the FM is actually an app that can operate inside of the Thales HSM machine. So that their customers can simply purchase the IronCAP FM and load it into the existing Thales machine and, in turn, their system to become quantum safe. So this is a very important R&D that we have to expand in order to work with their customers. That's number one. And then number two is blockchain. We actually have found -- again, the patent portfolio has indicated a little bit already that we have found some inventive ways of helping existing blockchain to become quantum safe. And there are some developments in that area and also e-wallet. So mainly are these like 3 areas that we have expanded our R&D. In addition to our existing ones that we have with Hitachi, we are building the IronCAP X and we keep improving the IronCAP engine. So there are many, many different R&D cylinders being fired at 01, and they're running very smooth at this point. I couldn't be happier.

Got it. Okay. Got another one is here. I've got 2 financial questions. I think we've got time for them very quick. First one has to do with revenue. And his question is, you slipped a bit quarter-over-quarter, yet you say subscriber numbers in Japan are increasing. Is this revenue from the remote access business? And what do you expect going forward?

Yes. Comparing with last year, yes, it was -- we slipped about like 8% or so. But actually, the revenue was growing from the last quarter, from Q4 of 2021. Our subscriber number has gone up, which is the more important revenue because they are a recurring revenue. People keep saying that recurring revenue is one of the biggest wonder in the world, and I couldn't agree more because it's very reliable. So our recurring revenue has actually gone up from quarter-to-quarter and from last quarter to this quarter. And the onetime engineering fee sometimes come and go because they are onetime. So it so happened that the same quarter from last year, we received a little bit more onetime engineering fee, and that's why the overall revenue has been a little bit higher than this quarter. But the actual recurring revenue, I keep mentioning, has actually gone up from the last year to this year or from last quarter, Q4 2021, to this year. So those are happening in the right direction that I'm happy about. So moving forward, we expect the recurring revenue to continue to go up. And engineering fee will still come in, but they are all onetime. So -- but we expect more engineering fee coming in the coming quarters.

Okay. And the last question, there's been several people asking this, curious on everybody's mind, so I'll just put them together. The share price has been flat with little volume recently. Andrew, what are you doing with respect to investor relations?

That's a loaded question. I wish I have a better crystal ball than the market. And -- but I think, first of all, the war is really not helping. It's really creating a lot of uncertainty. But having said that, we have a lot of good things happening. And also, it's about to happen, too. So we don't want to waste those opportunity because they are really good for the company. So we have decided -- the Board has decided to increase the IR, investor relations, activities. And we didn't want to do that 3 months ago, we talked about that, because we know a bit was coming, but they are not as close, those opportunities are not at the final closing stage as we are now. So we have been waiting a little bit. And then the war broke out, and we keep waiting a little bit. So now we are at the final closing stage that we have decided to press the button and move forward with our heavy investor relationship program. And so stay tuned. We would make announcement about that very, very quickly.

Okay. Thank you, Andrew. And that's it for Q&A., so I'll turn it back to you for closing comments.

Okay. Yes. Thank you very much. So yes, thank you, again for joining our 2022 Q1 business update. We are completely prepared to capitalize on Q-Day, and so do you as an investor of 01. I can't wait to see you in the next quarter and give you more good news. So bye for now. Have a good day.