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

Hello, and welcome to the FirstWave Q2 FY '25 Shareholder Update. We'll be opening the call shortly. Welcome to the Q2 FY '25 shareholder Update. Handing over to John.

Well, good morning, everyone, and welcome to FirstWave Shareholder Update for the Second Quarter of the 2025 Financial Year. For those who haven't joined one of these updates before, my name is John Grant, and I'm Non-Executive Chair of FirstWave. I'm joined again today by CEO, Managing Director and major shareholder, Danny Maher; CFO and Company Secretary, Iain Bartram; and Non-Executive Director, Daniel Friel is also on the call from the U.S. You can see the agenda for today on the slide. I'll make a few opening comments before handing over to Iain to deal with the financial performance in the quarter. He'll then hand over to Danny to build on his comments and on our outlook for the next quarter and beyond. And finally, we'll take your questions. So to my opening comments. Three points. Firstly, we had another quarter [ in which we didn't use ] our cash. As there is in every quarter, there were a number of items that fell our way and a number that didn't, but this is a insignificant part, the result of working consistently over the last 13 quarters to reduce our cash burn. As we've said previously, we also have sufficient cash to operate. My phone just spoke to me. I'm a bit worried about that. As we've said previously, we have sufficient cash to operate through to the end of the current quarter. We've also said we are actively exploring all options to extend this cash runway, and we'll talk more to this today. Secondly, we had a significant sales quarter for contract renewals, which will largely play into cash terms into the current quarter. But the continuing delay in converting what I assure you remains a strong pipeline to revenue in a substantial and meaningful way will be as frustrating for you as it is for us. The Board has looked in detail at the pipeline, and I can only say the deals continue to be real, they are progressing, but they're not home yet. And thirdly, we announced a very significant new product release in the quarter. Danny would elaborate, but this is quite astounding when the relatively small levels of investment we make in product development are considered, much bigger companies with much bigger development budgets would struggle to deliver such an innovation. And credit needs to be given to our hardworking and expert development team. Let me now hand over to Iain to talk to our Q2 financial performance. Over to you, Iain.

You're on mute, Iain.

Sorry, guys. I was on mute. I'll start again. Thanks, John. I will start with Q2's revenue results that reflect the continued impact of Telstra decommissioning both its GPA firewall product and its CSX2 hosting platform. The stickiness of these solutions and their importance to the end customers is evidenced in the longer-than-expected timeframes to migrate these customers to alternative solutions. This has resulted in some additional revenues to FirstWave from Telstra and is the main driver in the revenue increasing slightly in the quarter, even Though ARR has declined. This revenue included more CSX2 platform recharges, that FirstWave doesn't make a margin on, and hence the gross profit has declined in line with the fall in ARR rather than tracking with revenue. And although later than anticipated, this reduction in gross profit is in line with the announcements previously made to market. The additional zero margin recharged in Q2 resulted in a fall in the overall gross profit margin, which dropped 6 percentage points from 88% to 82%. This margin will rebound in Q3 now that the recharge revenue was all but finished, with a final small AUD 30,000 platform recharge in January and no further revenue or COGS anticipated in Q3 from GPA firewalls or CSX2 platform. Now looking at the cash position, Danny will comment further on the cash usage, but let me summarize some key points before handing over to Danny. Firstly, you might assume it's a typo that we have exactly the same number, AUD 1.68 million, as the opening and closing cash for the quarter. Amazingly, we have to go to 4 decimal places to see the difference, which was only AUD 27 across the quarter. This comes after Q1's small AUD 800 increase in cash, resulting in 2 consecutive periods where the business has not reduced its cash reserves. The normalized cash usage increased in the quarter by AUD 22,000 a month to AUD 273,000. The main driver of this was the fall in gross profit noted on the previous slide, which was more than AUD 22,000 a month. However, there were other operational savings and efficiencies realized in the quarter that allowed the business to minimize the impact to monthly cash usage from this decrease in GP. Normalized cash usage remains below the 2025 -- the financial year '25 opening level of AUD 283,000. The normalized cash usage also excludes nonrecurring revenue, which over the last 12 months has averaged AUD 35,000 per month. Now let me hand over to Danny for further commentary.

Thanks, Iain, and may I say how thrilled I am to have a second consecutive quarter with no cash burn. From where we've been as a company, this is just amazing. And just a quick comment on Iain's presentation there, when he's mentioning the removal of the zero margin recharges at Telstra and things like that, although it's a bit painful to see the ARR drop because of that, it's at no margin, and I'm thrilled to get that stuff out because this is what lays the foundation for us to have a visible business that's growing well. So our FY '24 operational efficiencies have been maintained. We're operating very well. We did receive our R&D grant in line with our cyclical cash flows. I note that this R&D payment is a reimbursement of cash that we've already spent. And I also note that we do have cycles of cash in the business. And so, for example, with our network management software renewals, in particular, they're also commonly 12 months in advance, and December is a big month of renewals for us. And on that, we received all our major renewals in December, which is great. Some of that cash flowed into this quarter and some of that cash will flow into next quarter, which will be a great boost for next quarter. This includes Telmex; ISSSTE, which is the Mexican Government's institute for social security, similar to Services Australia here, who is also a client; NASA; Claro Dominican Republic. So yes, it was a pretty hot month in December as those countries had their financial year-end, and we were thrilled to renew all of those, most of them had uplift. As Iain mentioned, our normalized cash burn is AUD 273,000 per month. We give you that number because we do have cycles in our cash. And basically, you can look at that number as how much we were burned if we didn't make any sales at all, okay? So our challenge is to make the sales to cover that gap, assuming we renew all the agreements. I'm also excited to let you know about a major product release that we've had, which is opHA Message-Bus. It relates to our network management software. And I've broken down just a few things for you. The implications of this product are quite broad, but here's a few highlights for you. High availability. So this enables our systems to cut over live with no downtime for clients and no loss of data. You may notice other technologies in other fields doing this. But in this particular field, it's highly significant as there are enormous amounts of data, constantly inbound and outbound queries from the servers. So there's this constant flow of data. So to be able to cut over live from one system to another with 0 data loss is really, really cool. It also gives us infinite scalability, which means clients can deploy servers of any power, even a PC or Raspberry Pi, physical or virtual. And these things can operate together and work off the same data live, acting as one system, very, very cool. There's multi-customer functionality. So this will allow our telcos and MSPs to provide their customers with individual views of their customers' data, while the telco and MSP maintains a single consolidated view of all their customers and all their devices. That's really, really cool. So if you're a client of one of our telcos or MSPs, they can give you a view of your own environment. So you can just see your own environment, whereas they can see a consolidated view, a single view of all their customers live, okay? This is a great commercial opportunity for us, which we're beginning to investigate. The first thing, of course, is to upsell it to our existing clients, and we've commenced that, and it's being received very well. And it's also going to open new opportunities for us, especially with larger clients, telcos and MSPs. You're going to hear a bit more about this technology as we start to commercialize it, but it's really, really cool. So moving on to outlook for the second half of the year. So we will continue to benefit from the significant transformation we've undertaken over the last 18 months, which saw the first half of this financial year using no cash, and in fact, generating a little cash. As we've communicated previously, the company has sufficient cash to operate through the end of Q3 without any significant sales. But from March, we do enter a cycle where some cash is used. This will be less than the business has traditionally used because of these transformations. But nonetheless, it needs management, and we've been communicating that. The business has advanced its options to derisk this cycle, and we've listed those options as new capital and also that may include strategic capital and/or R&D advance, new sales, asset sales, operational efficiencies. The company could opt to receive a portion of our annual R&D grant earlier by leveraging an R&D advance. This would provide approximately AUD 600,000 in March-April if we did that, as opposed to waiting until November of next year, and would actually align the receipt of the funds closer to the time of the R&D expenditure. We're expending on R&D now, but we typically have to wait until November to get that money back. So we could advance it to align that R&D grant with our expenditure more closely. We continue to work with the Board's independently appointed consultant to consider and investigate strategic interest in the company from a number of parties, together with the capital requirements for the upcoming seasonal period. And we'll update you as appropriate. So in summary, it's just fantastic to not have used any cash in the first half of this year and indeed generate a small amount of cash. It's just not a position this company has been in, and it's just wonderful. We've released a promising new technology. We've received renewals for all our major clients in December, most of them with an uplift. As mentioned, our cash usage will likely increase in March, which is a cycle for us. And the Board is actively managing our requirements, including activating the R&D advance for AUD 600,000 if we need to. So that's as succinct as a summary of the position and the outlook as I can give. And with that, I'll hand back to John to facilitate some questions.

Yes. Thanks, Danny. I think it is succinct, I should say. And I hope that, Iain, Danny, have added to the 3 points that I made at the start. But I think the last point is worth repeating that we had a cash flow neutral quarter, our cash runway can now be extended by activating the R&D advance of approximately AUD 600,000 in March-April. This also gives us a little more time to conclude the other options we have in play, some of which are imminent. So let me now hand over to your questions. You can type them in either on the chat or the Q&A function, or raise your hand to speak. Let's go.

So we've got 3 questions in the chat already, John.

Thank you very much. One of our attendees, why is the market not recognizing the success of the last 2 quarters? What is the Board planning to do about this? Well, the Board is doing everything it can about this through these updates and by announcements that we make during the quarter. I think the information has been -- we need developments, and we need developments in our sales, and we need developments on the capital front. They are imminent. When they occur, then I expect we'll get a response. There is -- we have done some other work, which I'm prepared, I think, to say a little bit about, in that we've sought independent research on the company, I guess, for this very reason as well. That's advanced as well. We hope to be able to release that pretty quickly. But those -- they're the sorts of tools that we have, and they're the sorts of tools that we're using. Danny or Iain, do you want to add to that?

I'll add a little bit. Yes, there's no doubt as shareholders, we want more liquidity, more eyes on the stock, new investors. We are receiving interest from new investors, I can say that, and our independent consultant is dealing with some of that, as are all of us. But, yes, it's hard to know. But there's a bit of a long tail to this company, I guess, and it's going to take a little while for people to see the transformation that has occurred. We are a very, very different company to what we were a couple of years ago. So hopefully, the market starts to realize that. As John indicated, we think if we couple this transformation with a few key deals, hopefully, that's the moment. But we are ramping up our investment relations activities, and you'll start to notice that. And why we're ramping them up at this time? We believe it's the right time. We had to get this company in the shape it's in. So we're ramping up the investment relations activity. We do have interest from new investors who are interested in this company, and that activity will increase. And hopefully, we can pop through a few of these sales at the same time. So watch this space, I think.

So, Danny, have you finished commenting there?

Yes.

Iain, you got anything to add to that?

I think we've said that all and both of the questions kind of relate to the -- both of the first 2 questions relate to that same issue.

Yes. Look, there are things we'd love to turn our attention to, quite frankly. But we've spent so much -- we spend the effort that we've got and the time that we've got on making the business work as well as it possibly can. And we've done an excellent job in terms of rationalizing the cost structures and putting in place an organizational structure that works best and then working on the pipeline, which is still significant, and we'll come to that in a moment if there's another question down the track, and I want to talk to that. But they're the things that we're focused on doing, because if you can do those and get the outcomes there, then everything flows from that. Kim's asked, how are we leveraging off the AI craze? It is a craze, Kim. That's what I'd say first. And I'm not discounting it at all. I personally -- I've been in this business a long time. I personally think it's the biggest thing that I've seen that's going to change the landscape, and that goes way, way back to relational databases. So this is very significant. And the bottom line is we are, but again, our development budget is as it is, and we continue to release significant innovations within that. But the AI step is another step further. Danny, you might just elaborate because we do have AI embedded in some of our products already.

We do. So we actually have some AI in our software, and we don't market it probably well enough, specifically in the area of machine learning. We deal with enormous amounts of data, huge amounts of data. And we're actively planning right now about how to leverage external leading AI sources to enrich that data. And that's the approach in our field. So our software is smart and scalable enough to gather data that other software can't at high scale, and we're actively going to plug that into artificial intelligence solutions to enrich and filter that data. And that's going to be a really cool step for us. It's going to take some time with a limited team of developers, but we're actually planning that out and designing it right now. [indiscernible]

Yes. Let me add a bit more fuel to that, Danny, just so our shareholders and other interested parties understand. Our software knows every device and every piece of software and everything that is operating on every one of our customers' networks. And they can be millions of devices or pieces of software. Our software knows those. We also know through the 3 premium software versions that we've got, and we estimate 150,000 organizations have downloaded. We also know who's doing that. So we've got an enormous amount of data. And it's not proprietary data. It's just data that we have that can be used, and that's where Danny refers to the AI opportunity. But again, we come down to, where do you spend your money to get the greatest thing. And we'd like to spend more money on that. We'd also like to be able to market it better, Kim, but you know that we haven't got the money to do that. So we're doing everything we need to do to try and get the best outcomes that we can. And there's some things that we just have to put on the to-do list. The last point...

Yes.

Sure. Go ahead, Dan.

Yes. No, you'll definitely hear our moves in that space coming up. But I can't give you a time line on it because we're actually designing it right now.