Plurilock Security Inc. (PLUR) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for Plurilock Security conference call to discuss its financial results for the quarter ending June 30, 2025. I'm Ryan Freemantle from Sophic Capital, and we handle Plurilock's Investor Relations. On the call today, we have Plurilock's CEO, Ian Paterson; and CFO, Scott Meyers. [Operator Instructions] Before management discusses the results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. For caveats about forward-looking statements and risk factors, please see Plurilock's MD&A for the quarter ending June 30, 2025, which can be found on our company profile at SEDAR+. And unless otherwise stated, all dollar amounts referred to on this call are Canadian dollars, the company's reporting currency. I will now pass the call over to Plurilock's CEO, Ian Paterson. Ian?

Thanks, Ryan. Good morning, everybody, and welcome to Plurilock's Financial Results Conference Call for the Second Quarter of 2025. I'm Ian L. Paterson, CEO of Plurilock. Today, as we review the quarterly results, I will provide highlights along with the business update. Then we'll go through some financial performance and then finally, we'll conclude with the prepared remarks by discussing our outlook and we will leave some time at the end for Q&A. Before getting into business specifics, I'd like to give a high-level overview of the global cyber threat environment. In the second quarter of 2025, organizations faced nearly 2,000 attacks per week on average, up more than 20% year-over-year and close to 60% higher than 2 years ago. Europe saw the sharpest rise reflecting geopolitical tensions, regulatory fragmentation while North America experienced a 20% increase in weekly attacks. These incidents are being driven by AI, nation-state actors and supply chain vulnerabilities as cyber criminals continue to target high-value and highly visible sectors, including government, education, manufacturing. In this environment, cyber security is a boardroom and national security priority. Plurilock remains focused on meeting this rising demand with real-world solutions and a more selective strategic bidding approach serving organizations across North America and NATO aligned markets, where the cost of failure is simply unacceptably high. We have a healthy growth pipeline built on long-standing relationships, partner collaboration and targeted business development with line of sight to second half activity benefiting from seasonal budget flows and ongoing strategic initiatives. During the conversation today, we will be talking about 2 interconnected business segments. Our Solutions Division provides technology and cybersecurity products through an extensive network of partners and customers, it also serves as a key entry point for our Critical Services. Secondarily, our Critical Services consists of a specialized team that delivers tailored cybersecurity services to help clients address security challenges and build long-term resilience. Here's how we're positioning Plurilock for the next phase of growth. To better reflect the full breadth of our capability and our focus on mission-critical cyber challenges Plurilock is now clearly articulating its identity as services led, product enabled and AI native, a delivery framework that defines how the company operates and delivers positive outcomes for clients. Plurilock's unique positioning at the intersection of critical infrastructure and Critical Services enables it to mobilize rapidly in support of federal, enterprise and defense sector clients. Critical Services has become our core growth engine since its launch a couple of years ago. It carries higher margins, creates long-term client relationships and positions us as a trusted adviser on compliance, security architecture and technology integration. Our strategy is to grow these engagements into recurring managed services while adding adjacent high-value offerings that deepen customer relationships and boost profitability. Looking ahead, we are scaling this model internationally, building on our track record with Canadian and U.S. federal clients to pursue NATO, Middle East and other allied defense and commercial opportunities in partnership with major integrators as Plurilock seeks to capture a share of accelerating global cybersecurity. Let me walk through a few highlights from the quarter. With the implementation of our new accounting policy in Q4 2024, which focuses on recognizing revenue from software and services over time rather than upfront. Recognized revenue for the second quarter of 2025 was $16.4 million, which was an increase of 15% over the new adjusted Q2 2024 revenues of $14.3 million. Our Critical Services business grew 159% year-over-year to $4.3 million. This business line remains a core strategic priority, and we will continue to keep it front and center as well by shifting our revenue mix and growing recurring service relationships were driving margin improvement. Gross profit decreased $100,000 from $2.1 million to $2 million, with a slight dip in gross margins, 12% from 14.7%. This was largely due to a onetime larger -- lower margin resell order impacted overall margins this quarter. Our higher margin offerings led by Critical Services remain strong, and we are positioned for expansion in the second half. The company had $1.7 million in cash and access to an additional $8.5 million in unused credit facilities on June 30, 2025. The balance sheet remains stable with cash on hand and unused credit capacity, providing sufficient liquidity. And like previously mentioned, while occasional large resale orders may create quarter-to-quarter variability in blended gross margins, Critical Services remains, again, the primary driver for recurring higher-value revenue. In the second quarter of 2025, we announced nearly $10 million in new business across a range of high-value clients. Several of these include 5- to 6-figure contracts as part of our land and expand strategy, which is things that we've seen in the past, where those land and expand deals ultimately are thin end of the wedge, they get us into a client. We get very sticky engagement. The client sees our delivery success and ultimately, that leads to 6, 7 or even potentially 8 figures worth of business over the lifetime of that account. And I'd encourage folks to refer to our investor deck where we have actually a case study of what that looked like. So we continue to leverage long-standing relationships with U.S. and Canadian government agencies while accelerating into commercial markets where enterprises face equally complex challenges. Partnerships with global leaders such as CrowdStrike and Forcepoint extend our reach, strengthen our credibility and continue generating direct referrals and new business. During the quarter, high-level engagements in Ottawa and Brussels reinforced our credibility and highlighted the unprecedented levels of allied government investment flowing into cybersecurity and defense, as we have seen with all of the news around increased levels of commitment to NATO as just 1 example. At this point, I'd like to walk you through some of the Q2 2025 financial results. As Ryan stated at the beginning of the call, all dollar amounts I'll refer to are in Canadian dollars, which is Plurilock's reporting currency. As well for more detailed information, please refer to the financial statements and management discussion and analysis document that we filed on SEDAR+. Turning to our second quarter financial results for the 3 months ending June 30, 2025, total revenue for Q2 increased 15% to $16.4 million as compared to $14.3 million for the second quarter ended June 30, 2024. Hardware and system sales revenue for Q2 totaled $1.4 million compared to $2.2 million in Q2 last year, which accounted for 8.2% of total revenues, compared to 15.2% in Q2 2024. Software license and maintenance sales revenue for Q2 totaled $10.8 million compared to $10.5 million in Q2 of last year, accounting for 65.7% of total revenues compared to 73.7% of total revenues in Q2 2024. Professional services revenue for Q2 was $4.3 million compared to $1.6 million in the prior quarter ended June 30, 2024, accounting for 26% of total revenues, up from 11.5% in 2024. And so again, these last 3 bullets really speak to the change in revenue mix as we move more towards Critical Services. Finally, gross margins for Q2 2025 was 12% compared to 14.7% in Q2 2024. And lastly, adjusted EBITDA, which is a non-GAAP measure improved 42% for Q2 to a loss of $1.4 million compared to a loss of $2.4 million in Q2 2024. Lastly, cash and cash equivalents and restricted cash on June 30, 2025, was $1.7 million, which is up from $1.4 million at March 31. And the company has an additional $8.5 million of unused credit facilities. Our balance sheet remains stable with cash on hand and unused credit capacity. We've also strengthened our working capital profile by shortening payment terms with the customers pulling forward cash and tightening contractor payments Importantly, we've reduced focus on low-margin hardware resale, and we've reallocated those resources and that selling time towards Critical Services and higher-margin opportunities. Combined with selective bidding and changes in revenue recognition, these steps are ultimately smoothing revenue and setting us up for healthier margins over time. So this concludes the financial summary for the second quarter of 2025. We'll now move to the outlook. Before we do that, I'd like to add a few comments about the sale of our CloudCodes business to scope technologies that we announced earlier today. We had originally acquired certain assets of Indian-based CloudCodes in August of 2022 in order to access some 0 trust cybersecurity solutions and enter the cloud access security market. Over the past 3 years, our business has undergone a significant evolution at the time, CloudCodes is focused on -- was on the small and medium-sized enterprise market, which aligned with Plurilock's strategy at that point. However, as Plurilock has matured, and building on the success of Critical Services, we've moved upmarket from the SMB and SME space to really concentrate on larger enterprise, which includes both government -- or government clients, as well as large Global 2000 commercial enterprises. Today, that really has become our focus and is a key part of our Plurilock Phase II of growth, which we are now in. As a result, the SMB segment has become noncore for us and continuing to operate in that space would not have supported our mission of streamlining operations and driving growth in enterprise and government markets through Critical Services. Ultimately, that's why we made the decision to sell CloudCodes. The type of consideration was largely stock, meaning that we will benefit from any growth that the new owners are able to generate as they scale that platform. And this allows us to stay laser-focused on enterprise and our government clients while still sharing on the upside of CloudCodes' future success in that market. So moving on to the outlook for the year. As we look ahead, our strategy for 2025 remains clear, continue expanding our margins. led by Critical Services and a more strategic approach to commercial resell while preserving a strong liquidity profile. We have built and continued to broaden a healthy pipeline across enterprise, defense and public sector markets. And we see strong line of sight into second half activity as seasonal budgets reset and strategic initiatives come into play. While select resale orders may create some quarterly margin variability Critical Services continues to drive recurring higher value revenue, and we remain confident in delivering sustained growth through the end of this year and into next. Internationally, we're making steady progress entering Europe, NATO, the Middle East and other non-U.S. defense markets, leveraging the credibility that we built with Canadian and U.S. federal clients. Recent meetings with senior cybersecurity and procurement officials in Ottawa and Brussels reinforce that Plurilock is well positioned to capture a share of the unprecedented cyber and defense investments we're seeing from allied governments. Plurilock's growth strategy is anchored by 3 pillars. First, the company is driving organic growth in its high-margin recurring Critical Services business, fueled by rising demand across U.S. commercial, federal and allied government sectors, as well as increasing inbound leads from referrals and strategic partnerships. Second, Plurilock continues to pursue accretive M&A in enterprise and federal verticals, leveraging deep acquisition expertise built over 4 completed transactions since 2020, with a focus on profitable services-led businesses that have trusted customer relationships and exploring non-dilutive capital-efficient deal structures. Third, the company is expanding through strategic joint ventures and alliances in quantum, AI and defense technologies, looking to partner with AI native post-quantum and secure infrastructure providers pursuing joint defense bids with large primes and integrators and ultimately deepening penetration into Europe, the Middle East and other non-U.S. defense markets. And with that, I'd like to pass back to Ryan for the Q&A portion of the conversation.

[Operator Instructions] So we'll start with, can you talk about what drove your Q2 2025 revenue? And sort of the outlook for the rest of the year and if that growth will continue?

Sure. So thank you for the question. So year-over-year revenue was higher due to the timing of a few large orders as well as our Critical Services growth. And so we've benefited from revenue recognition of software over time. I'll remind folks also that we have a new measure, which is backlog, which historically we had not had. And so we are benefiting both from new sales as well as the backlog of contracts that we've already signed. And so we historically have seen an uptick in the second half of the year, and this is as a result of year-end budgets, both in the public sector space. So as an example, the U.S. federal government their budgets end at the end of September, so calendar Q3. And then large commercial clients who are aligned with the calendar year, they also tend to have end of year spending as well. And so it's important to note that a key pillar in our Phase III strategy is realizing margin expansion, which we can achieve by remaining selective in which opportunities we pursue and favoring those with higher margins. And so those items put together really speak to how we see the rest of 2025 and then 2026 shaping up.

How are your cash needs?

Our cash is stable through a combination of cash, credit facilities, we've also improved collections and working on our payments with our vendors and getting extended terms. We're improving our cash management significantly. For example, for our government accounts, we've been increasing our efforts there to significantly reduce how much time it takes for us to get collection there, governments and enterprises are under attack, and these attacks are driving more business to us and more frequently. So customers are willing to pay us to ensure that we get -- give them the best cybersecurity options that are out there.

A few questions here about the press release this morning with involving CloudCodes. If Critical Services is Plurilock's core focus, can we expect more divestitures to further align with the business?

So just I want to start by saying CloudCodes is a great technology. For us though, it doesn't align with our core focus. So we've been evaluating how best to unlock value from noncore assets. So while looking at this, we're also working on our strategic initiatives that could expand our Critical Services footprint. So all these opportunities we've evaluated and we'll look through the lens of what is operationally fitting in what we want to do as well as how well we are accretive financially to the company. We're finding great traction in large enterprises and governments. So it makes sense for us to focus our efforts in targeting these markets. As a company, we've always seen M&A as a core pillar, which includes both the buy side and now the sell side of CloudCodes and also strategic partnerships, joint ventures, which is something we may pursue if it will be accretive to shareholder value.

One more on CloudCodes. With your CloudCodes divestiture, does this mean that acquisitions are on hold?

No. I mean, this transaction represents actually the bench strength that the company has in regards to M&A. I mean, historically, we've been on the buy side and now on the sell side. I think Plurilock has proven a track record of value creation through M&A having successfully completed 4 acquisitions to date, 5 if you include the [ RTO ] through the go public, now we have sell-side transactions. So Plurilock ultimately is backed by a very experienced team with both operational depth, capital markets expertise and M&A expertise. And so the company continues to explore a range of strategic opportunities, including acquisitions, joint ventures, which we mentioned earlier. And so that can take many forms as well as other value-enhancing initiatives.

5 Okay. Where do you think your Critical Services margins can top out?

Thanks, Ryan. It's a hard number to pin because we don't know exactly what opportunities will present themselves and what services we will offer going forward or where we can find experienced talent at the same or lower expenses. So we can emphasize that our growth is focused on higher-margin offerings. And we aren't going to onboard a business that meets our internal hurdle rate. So if we're not going to make a certain margin on it, we just won't entertain it. You're seeing that we're getting a lot better margins on our services versus the solution side of the business, and that's why we're focusing there in terms of topping out. Again, it will depend on the expertise, generally stuff that's emergency in high demand, demands a lot more margins and stuff that's a little bit more regular is, I wouldn't say lower, but very good, but not as high as the on-demand emergency stuff.

Can you discuss where your R&D spend will be focused going forward? Should we think of you as a software reseller? Or are you working on internal new solutions?

Yes. So that's a great question. So if I think about the business today, the Solutions Division is largely focused around reselling third-party commercial off-the-shelf technology. And so that's a mixture of hardware and software. We've talked about partnerships like CrowdStrike and Forcepoint as well as other strategic cybersecurity platforms. So that's really what the Solutions Division is focused on. Critical Services is really where we're seeing a lot more focus around both R&D as well as just focus from a go-to-market perspective. So today, Plurilock still maintains its patent portfolio of approximately half a dozen patents. We do continuously look for opportunities to patent new innovation which can be as a result of specific software innovations or it could be more process innovation, leveraging software as well. So we believe that there is great opportunity to bolster the moat around how we deliver Critical Services. And this is also somewhat evident in the new tagline that you saw when you first joined the call, which was that Plurilock is a services-led product enabled and AI native. And so really, what we're trying to convey there is the fact that we have a very innovative team. We're going to continuously look for ways of securing those innovations. It may or may not show up as dedicated R&D expense in terms of those line items on the financial statements, but there is absolutely a focus and a heritage of us being able to identify new innovations and then secure those.