FirstWave Cloud Technology Limited (FCT) Earnings Call Transcript & Summary

Welcome, everyone, to the FirstWave Q4 FY '23 shareholder update. We've got on the call, for everybody, but the actual presentation will start at 9:30.

And Ruth, with that introduction, being 9:30, good morning to all on the call, and welcome to FirstWave's FY '23 Q4 update. Those of you who haven't been on one of these updates before, my name is John Grant, and I'm Nonexecutive at FirstWave. I'm joined again today by CEO, Managing Director and major shareholder, Danny Maher; and Chief Financial Officer and Company Secretary, Iain Bartram. You can see the agenda from that. I'll make a few introductory comments before handing over to Danny to take you through the highlights for the quarter. Iain will then deal with the financial performance before handing back to Danny for a broader update. We'll then going to open the call for questions. If you recall, I have the 3 key elements of the Strategy Day to the Board in July last year, sales-led culture, grow faster and be capital efficient. He and the Board have applied this lens increasingly across each area of the business. We know the limitations about financial and human resources, and we also know that it's vital that be applied to greatest advantage. That means we need to make considered and data-driven choices. You'll see some of these stuff play out on what Danny and Iain have to say to you today. Also, it's fair, I think, to describe our fourth quarter as solid, if not spectacular. Significant U.S. opportunity, Danny spoke about some time ago, remains exactly to that, significant opportunity. The timing of which is not entirely in our control, clearly. The revenue growth quarter-on-quarter was solid. Cash management is excellent. And operationally, the businesses is as close to optimize as the capital we're prepared to apply can get it to be. Danny and Iain will elaborate first. And with that, let me hand over to Danny. Over to you, Danny.

Hey. Thanks, John. Hi, everyone, wherever you are in the world, and welcome to the update. I can just hear my croaky voice. I've just returned from a trip to Mexico visiting some key clients, spending some time with our team there. It took -- it take me 37 hours to get back, which was a bit of a nightmare, so apologize if my voice cracks up a little bit. And I guess should comment that it was a fantastic trip. We've got some really good opportunities there in Mexico, and I enjoyed spending some time with those clients and the team. So on to the update. I'll just run through some quick highlights before Iain runs through the financial results, which is the main focus of today's session. It's been a busy quarter for us with further [ reformations ] to the business, some of which you'll hear about in this update. But in summary, our revenue is up 9.2% quarter-on-quarter, which we regard as a good result. A lot of this is a one-off revenue, and Iain will detail that a bit further. Our gross profit also very pleasingly, up 13.3% quarter-on-quarter. Our cash usage was approximately $480,000 per month, which exceeds our cash objectives. I will flag that our trade debtors went up significantly due to a pleasing level of sales at the back end of the quarter, so we'll listen to Iain's update, have to think about our working capital, which is better than our cash result due to the increase in trade debtors as well. We've been focusing on biasing our strategic investments towards the network management part of the business, and we'll talk a little bit about more -- a little bit more about that in the update. And somewhat in line with that, we've also been continuing our CyberCision platform consolidation, which is making us more efficient and making that area of the business more profitable. So to me, that's the main highlights, and I'll hand over for now to Iain through the financials in more detail, and then I'll be back to speak again before we take some questions.

Thanks, Danny. Picking up on these points and then expanding on some key financial results in the quarter. The revenue recognized grew by 9.2% to $3.1 million. This revenue includes $350,000 in nonrecurring or one-off revenue, which continues the pattern of one-off revenues important in the total makeup of FirstWave's revenue profile. There was some customer churn towards the end of the quarter that resulted in lower recurring revenue in June than prior months. And given the ARR, it's calculated multiplying the recurring revenue and the last month of the quarter by 12, and ARR was down 5% to $9.33 million. However, there was a customer win at the end of June and an uplift to a long-term client contract that was also signed in June, where both the new and the uplifted revenue started on the 1st of July, and the ARR increase from these 2 deals combined will lift the ARR in July higher than the Q3 level. In parallel to this quarterly update, we're working through year-end adjustments, including a review of various accruals and provisions on the balance sheet. We anticipate a reduction in provisions of third-party costs for products that were announced as end of life in the year. These reductions will have a positive impact on gross profit, but they do not specifically relate to the quarter and are yet to be finalized, and so we have reported gross profit on a pro forma basis to ensure a like-for-like comparison of the business' quarter-on-quarter performance. The pro forma gross profit grew by 13.3% with the mix of revenues having shifted towards the higher-margin products and hence, the overall margin increasing by nearly 3 percentage points to 79%. The financial statements will show further improvement in gross profit when the adjustments I mentioned earlier are finalized, and these will be released to the market towards the end of August. So in summary, ARR is down. However, this reduction has already been recovered. Revenue is up and the gross profit margin has improved. So moving on to the cash position. The business finished the quarter with $5.61 million in cash and cash equivalents, having used $1.45 million in the quarter. This included trade debtors having grown by over $860,000, and trade creditor is also growing but only by $220,000. This means there is additional $640,000 of working capital at the end of the quarter than there was at the start, which is currently held in the net balance of debtors and creditors. Another way of looking at this is if trade debtors and creditors have remained consistent across the quarter, the cash balance at the 30th of June would have been $6.25 million and cash usage of the quarter will be down to $905,000. To get a true picture of the current health of the business, cash usage over a quarter needs to be adjusted for the timing of various items such as the R&D and tax offset grant. The R&D grant is received annually, and the most recent grant, being approximately $1.2 million, we should attribute $100,000 of income to each month to get a normalized view. The annual insurance renewal process has been shifted from the 30th of June to the 31st of March. And hence, there is a significant annual insurance cost of over $400,000 that has been paid in Q4, when only 1/4 of that payment should be attributed to normalized cash usage in the quarter. As communicated in previous these updates, to reduce any subjectivity around the inclusion of one-off revenues, we adopt a fixed methodology for calculating the amount of one-off revenue to be included in the normalized figure. The methodology is to take the monthly average of the actual one-off revenues over the last 12 months, which was $110,000 per month at the end of Q4. These adjustments and assumptions result in a normalized monthly cash usage figure for Q4 of $470,000, which is $90,000 per month improvement over the estimate of the end of the previous quarter. And looking across the full financial year for FY '23, we actually used an average of $400,000 per month, which is 1/2 of the $1 million per month cash usage that was being reported 12 to 18 months ago. I will now hand back to Danny to provide some further commentary on the business' performance.

Thanks, Iain. Some good color there, I think. Each of these updates, I'd like to recap on the strategic priorities of the company. They remain the same as they've been for around 18 months now, and that is to pursue a sales-lead culture, to grow our revenues faster and to be capital efficient. We continue to drive the company activity at those objectives, and we continue to progress all of those objectives. Each one of these areas has had significant progress and also has further progress to come. In relation to growing our revenues faster, I'm pleased to let you know that we did quite a few deals at the end of last quarter. And there are 2 larger ones, which I wish to highlight. Firstly, we renewed a significant Australian government clients for a partner. That is a CyberCision deal. And that renewal came with some nice level of uplift, which was great. We also signed a new U.S. government clients for a partner in the U.S., and that was a nice win for us, and they'll be using our network management products. We continue to be negotiating with a significant U.S. organization around the network management products. I know we've mentioned this before. These negotiations have been going slower than what we would have liked, but it's not really in our control. They have had some procedural changes in the way they engage the players, and that's what slowed us up a bit. But we're pleased that this has now progressed into procurement. It will take some time to pop out, but we remain comfortable that it's coming. While of course I know that a deal isn't a deal until it's done, and for me, I like to see the money in the bank and the product is delivered and be as deep into it as we can, but we are still confident in that. We're focusing our sales efforts around service providers and larger organizations in our strongest markets, which are the U.S., Latin America and Australia. And we're focused on our highest margin products, in particular, [indiscernible] management products. I also thought that you know that we've hired another new account manager. And this time, the [indiscernible], the team with Hector in Mexico. So we continue to invest in the growth in our sales and marketing. Hector's going to do very well for us, I'm sure. In relation to being capital efficient, we continue to prioritize cash management while making strategic investments, which are biased towards the strong potential in our network management products. We feel we're doing a good job of managing our cash. The CyberCision platform consolidation process continues. We saw the decommissioning of 2 platforms in this quarter and a successful migration of all the clients to a single platform in Sydney. So that's creating efficiencies for us, and that's going well. Pleasingly, we've also renegotiated some third-party supply agreements, and that will generate some further efficiencies and improving margins for the company moving forward. So some really good things happening the use of capital. In close, we have a pipeline of new opportunities, and that pipeline remains healthy. There are some protracted purchasing cycles, particularly with the large U.S. client, which I've highlighted. But I do want to make the point that the business has the flexibility and levers to deal with a range of eventualities, and also that in particular, we don't need the large U.S. client to execute our plans, which, in a way, what makes it even exciting once we close them. Our full year results will be released at the end of August. But of course, we had now delivered updates for each of the quarters, so we can all get a fairly good visibility into what the year looks like and that it has been a highly transformational year for the company, and we're looking at a very different company now to what we were 12 months ago. So overall, I just want to thank you all for your patience. I'm an excited investor. I know I get to see a bit more as CEO than you all do, but I hope this update has helped share some insights, and I expect to have some nice announcements coming for us all this quarter. And with that, I'll hand over to John to facilitate some questions, so he can let us all know anything else you'd like to hear about.

Thanks, Danny, and thanks also, Iain. Let's now move to your questions. [Operator Instructions] Over to you. There is one question, Danny, or there's three questions, now [ John ]. So thank you. So just from the top, [ John Lanviado ]. I hope I got that right, John. John says, how does and will AI affect the company? And what are you doing to be part of this new wave of AI? Danny.

Okay. Good question, which I'm glad you asked as they used to say the Curiosity Show if anyone is old enough for that. They -- we have AI within our network management products, and we also have some algorithms leveraged by our third parties within the CyberCision portfolio. We're looking at how we bring those forward in our marketing with the specific area of AI that we mostly deal with is in machine learning, but we do have elements of that, and we are interested in developing those things further. There's a particular product we have called [indiscernible], which not a lot of development efforts gone into. We're looking to ramp that up further. But yes, so we do have some AI, and we're looking at bringing that more forward in our marketing is the summary. Yes.

And maybe I can add to that, what we have done before for all of our investors and shareholders or interested parties and shareholders, we've done a technology road map update. I'm going to talk to Danny after this call, but I think it's appropriate to do that. I think there's products in our portfolio that we have in the AI profile and therefore, you don't know where they sit and though you don't know what the advantage of doing them is. That requires to talk in detail about that product structure and the product strategy road map. And I think we'll try and scheduled session to do that maybe even on full year results [indiscernible] with me and Danny. If I can just add something -- another comment on AI. Unfortunately, I've been around too long, and I've seen too many next great things. And AI is going to be a really great thing, and it's going to really revolutionize the way the world works. But -- and in order to do that, has to revolutionize the way software works. So Danny is kind about already dealing with AI and certainly having it on our road map and get into the more, if you like, more commercial aspects of AI, bringing that AI already innovating. And that's sort of how that will fit together, but this will take time to change. And that's what happens with these sorts of things. And many of you who are familiar with the Gartner Hype Cycle, what I understand -- what I mean by that at the time. So John, if you have a number to the Hype Cycle, we go to have and look at it. AI is in the first part of the curve to the new adopter, [ Sage ]. That's where a lot of money is going into the new adopters who are getting a [ white ] big flag, which is the job particularly in this industry. It then needs to move through that curve. So we see it absolutely moving through that curve. We've also seen a time line for these sorts of innovations is changing dramatically from what it might have been. So we're in there and we're being [indiscernible] as we should be to the need to have an opportunity with AI. And the second one, Nick, has -- John, I hope that answer your question. Come back if you need more. Nick, thanks for the call. Can you please provide a bit more color only the interest in sales people over the last 6 months, [ e.g., 30 ] people now versus 6 to 12 months ago. [ What are plans ] should we expect that can help with sales over 6 months or how do we quantify [indiscernible]?

So just pick up on the numbers, so to me, we've increased the number of people in sales from 7 to 11. And there are some people are part time and some full-time equivalent there but an additional 4 resources, which is between 30% and 40% increase, which is quite a big increase. One of those is a person returning from maternity leave. The others were new hires, but one of them have previously worked for the business and is a known quantity. So that's the sort of level of increase. There also has been some shifting around in terms of priorities. And as Danny mentioned, some of the sort of change focus. That's not just across products. Some of that is moving people might have been in a development capacity previously into a presales capacity or even in a sales capacity. So there's been some change of focus as well as some change in total number of resources.

Yes. And there's an extra couple in marketing as well. So yes, I think that thinking about that 40% number as an increase is pretty good illustration of how to think about it. It's pretty significant.

I think to add to that, what happens when you recruit people is they need to get their feet on the ground and it takes time. So just dealing in with the second part of next question, which says all going to plan, should we expect that can help the sales in the span of 6 months? Danny.

Yes. So -- yes, there's a couple of aspects to it. I mean people do -- good salespeople can do a bit of their own hunting, whether it's from their own book that they just find ways to come at those opportunity. And there's also the marketing aspect, which is heavily focused on providing them leads. So really, both those things working together, and it's a big focus for us to get the metrics around that, how long does it take a rep to come up to the stage, how many -- how much of the costs to get them lead so that they're fully utilized. So yes, we're continually looking at the financials around that, and they're improving for us, so we're getting better at it. And the better and better we get at it, potentially, the more we can put into it if we know we're going to get the money back within 6 to 12 months. But yes, you're probably looking in our case -- yes, looking back, period for a rep to ramp up, 6, 12 months is -- it's more than 6 months.

I think it's also just on that. It's a bit below market, Nick, also. What Danny is referring to is an enterprise sales process led by a sales executive, and that's the latest modus operandi that we've dealt with forever, whether we've been -- whether it be in the pre-Opmantek, whether it be in the CyberCision days where we needed to talk to the big telcos. The big telcos then needed to talk to their downstream distributors, et cetera. In that situation, we're still doing in an enterprise sales environment and trying to sell to that telco, and it's the same with the network management software. So we are an enterprise sales organization. That's the way we engage with our customers, and that's where we drive revenue, and that takes time. So that is to answer your question about you say, over 6 months. Yes. That's certainly what the Board's wish and hope would be. And in 6 months' time, Nick, will know. And in terms of quantifying the expected return, how would you answer that part, Danny?

Well, I tried to touch on it like we -- it does take more than 6 months to get a return from account managers, but you've got a couple of good marketing spend as well, and we're constantly working on those metrics. And those metrics are getting better and better for us. We -- on the network management side, you get [ paid ] 12 months up-front typically. So that's say buy a subscription and they may pay 12 months in advance. So it can be self-funding within 6 to 12 months and get your returns in under 12 months.