Quick Heal Technologies Limited (QUICKHEAL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. And welcome to the Quick Heal Technologies Limited Q3 FY '20 Earnings Conference Call. We have with us today from the management, Mr. Kailash Katkar, Managing Director and CEO; Mr. Sanjay Katkar, Joint Managing Director and CTO; Mr. Nitin Kulkarni, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Kulkarni, Chief Financial Officer. Thank you, and over to you.

Thank you, Steven. Hello, everyone. I'm pleased to welcome you to our call to discuss our Q3 and 9 months financial year '20 earning results. Please note, a copy of all our disclosures are available on the Investors section of our website as well as stock exchanges. Please note anything said on this call which reflects our outlook for the future or which could be constitute as a forward-looking statement must be reviewed in conjunction with the risk that the company faces. Let me now hand over the floor to our MD and CEO, Mr. Kailash Katkar to talk about major developments and key initiatives for this quarter. Over to you, Kailash.

Thank you, Nitin. Good evening, ladies and gentlemen. I -- thanks for joining us today to discuss Quick Heal's financial results for the Q3 and 9 months financial year 2020. I would like to take this opportunity to update you about major developments and initiatives for the quarter. We have started to develop and strengthen our human capital. We have CHRO, Ms. Reetu Raina joined us this quarter, who will be responsible for driving HR functions and steering the company's people operation, culture and recruitment initiatives. On the same lines, we are adding a few experienced people at the senior management table to focus on specific business function as well as to device a long-term strategy and growth part for the company. We hope to complete some of these key hiring in the coming quarters. This quarter, we have been recognized as a Cyber Security Product Pioneer in India by NASSCOM DSCI. This is a testimony to our commitment, our position as a domain leader leading cybersecurity company in India. We complete our investment in Israel-based company L7 recently and are pleased with the progress. We are also looking at a few more inorganic opportunities to drive our business growth. I will let Sanjay speak this in detail. Finally, I am happy to inform you that the Custom, Excise Service Tax Appellate Tribunal, CESTAT has set aside service demand issued by the additional Director General Commissioner of Service Tax, Delhi on Quick Heal Technologies Limited. Nitin will explain more on these thing. I would now hand over the floor to our CTO. Over to Sanjay.

Thanks, Kailash. Good evening, everyone. Quarter 3 and 9-month performance has been muted as we continue to see pricing pressure in the market due to overall slowdown in the economy, which has dampened consumer sentiment as well as challenges based on the distribution side. Even though we see some sluggishness in the market, cyber attacks continue to grow in scale and sophistication, along with the rapid digital adoption in India. So Quick Heal detected around 1.1 billion Windows malware in 2019, which is up 11% as compared to 973 million detections made in 2018. On enterprise side, 2019 ended with a staggering 48% increase in malware as compared to 2018. And the threat trends does not show any sign of slowing down, and therefore, I reiterate that we believe market slowdown can impact only to the level of delayed decisions on cybersecurity product purchases. And the overall demand for cybersecurity products and solutions will still be there in long term. We see cybersecurity needs permitting all users given the rise in Internet penetration, growth in connected devices and an overall greater move to transacting digitally. To elaborate more on inorganic opportunities, as Kailash mentioned, even though we are actively looking for opportunities in the cybersecurity space and the investment in L7 defense is testament to the same, we want to highlight that we remain cautious and calibrate in our approach. This is very time-consuming process and many decisions and discussions do not result into a transaction. So Quick Heal adheres to a very high standards of technological practices in our domain and evaluate every opportunity at such high standards. So we also need to invest significant time and resource in validating and testing solutions and their applicability in an Indian context and with respect to -- in combination with our products. So all of which makes us very conservative in our approach. We will continue to evaluate opportunities and make announcements as and when relevant. With this, I now hand over the floor to Mr. Nitin Kulkarni, our CFO, for his comments on the financial performance.

Thank you, Kailash, and Sanjay, and good evening to all of you. Let me take you through the financial highlights for the third quarter and 9 months ended December 31, 2019. I will start with 9-month financial year '20 consolidated revenue. I'll start with 9-month year financial '20. Consolidated revenue from operations stood at INR 2,219 million down 3.1% as compared to INR 2,289 million in 9-month financial year '19. Our EBITDA stood at INR 838 million, down 6.1% compared to INR 892 (sic) INR 893 million in 9-month of financial year '19. EBITDA margins were slightly down at 37.8% as compared to 39% in 9-month financial year '19. PAT for 9 months stood at INR 664 million, up 3.7% compared to INR 641 million in 9-month of financial year '19. PAT margin stood at 29.9%, up 190 basis points from 28% in 9 months of last year. For the quarter, consolidated revenue from operations stood at INR 657 million, slightly down as compared to INR 667 million in 9 months of last year. In terms of segmental performance, the Retail segment revenue for the quarter stood at INR 540 million slightly lower than INR 540 (sic) INR 545 million in 9 months of last year. Our Enterprise segment registered a revenue of INR 151 million, slightly lower as compared to INR 155 million in Q3 of financial year '19. EBITDA for the quarter stood at INR 232 million, up 12% compared to INR 207 million in Q3 of financial year '19. EBITDA margins for the quarter stood at 35.4%, up 430 basis points compared to the same period last year. Net profit for the quarter stood at INR 178 million, up 12% as compared to INR 159 million in Q3 of financial year '19. PAT margins stood at 27.1%, margin is up by 330 basis points from the same period last year. As Sanjay mentioned earlier, that overall revenue is muted for this quarter and 9 months due to slowdown in economy and challenges faced on distribution which has resulted in lower number of license sold this quarter. But despite degrowth in licenses sold, our average revenue per license in both Retail and Enterprise segment has improved. This improved, given our strong product portfolio across various price points. On margin side, we are able to deliver on better EBITDA and PAT margin for this quarter, owing to a continuous efforts on cost optimization coupled with lower depreciation and tax expenses. We exercised the option permitted under Section 115BAA of Income Tax Act 1961, which has resulted in lower corporate income tax during the quarter. And going forward, we expect the tax rate will be in the range of 26% to 27%. Our current cash and cash equivalents stands at around INR 4 billion, including investment in mutual funds, tax free bonds and fixed deposits. Kailash has referred to this earlier, but I would like to highlight this again, that we are cautiously looking for inorganic opportunity in order to better utilize the cash on our balance sheet. The cash equivalents also includes IPO money of INR 734 million invested in fixed deposits, the utilization of proceeds is as per the object, as stated in the IPO. Coming to the working capital. On the working capital side, as of December 31, 2019, our overall net working capital was 108 days, with receivable days of 143 days, a little higher than last quarter. Since retail business is stock and sale model, we expect data days to remain in this range. Now I would like to give update, very important update from our point of view on service tax. On service tax, just to give a little background, a show cause notice dated February 2, 2015, was issued by the Additional Director General, DGCI, New Delhi on Quick Heal Technologies demanding service tax with interest and penalty on supply of Quick Heal brand packaged antivirus software to end users through its dealers and distributors. The Delhi Additional Director General had confirmed the demand of service tax of INR 561 million, the order dated January 18, 2016 -- January 28, 2016. Quick Heal has always maintained its approach that supply of Quick Heal brand package antivirus software falls under Central Excise tariff, attracting Central Excise duty as goods. Therefore, service tax was not applicable. The Honorable CESTAT Principal Bench New Delhi comprising of honorable members Justice Shri. Dilip Gupta, President, and honorable Justice Shri. Vijay Kumar has set aside the service tax demand with interest and penalty issued to us on January 9, 2020. With these updates, now we'll open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of [ Sonia Bindra ], an individual investor.

Sir, if you could just give us some more information about the performance of Government segment this quarter? And the breakup of Government and Enterprise?

So yes. This is Nitin. So we do track this internally about the progress of Government segment on a regular basis. However, because of confidentiality reasons, we will not be able to share these details on the call.

Okay. Anything if you can talk about the mobile segment this quarter?

So on mobile segment, at this point of time, see, mobile segment contributes a very small portion to our pie of revenue. However, with new challenging threats targeting mobile users this business is definitely expected to pick up in future.

But I would like to add here that the threats in mobile device management is picking up. And quarter-on-quarter, we have started getting a good number of enterprise customers on this mobile device management. And if I have to tell you about the consumer mobile security, the consumers who are using, they are also growing. Number of licenses are growing into 2 digit number actually.

The next question is from the line of [ David Potter from HSBC ]

I have a question regarding your distribution model on the retail side. Can you give me a percentage ratio of what sales are generated through stock and sale versus what percentage is direct-to-consumer?

So direct-to-consumer, you mean to say, actually, yes -- so our distribution model is such that complete sale -- the 100% sale goes through channel partners to the consumer. There is no direct sale. It's like an online sale, which happens through our website, does happen directly, which is -- 3% of our online sales happens -- all our online sale contributes around 3% of our revenue, actually, which is direct.

Okay. So if you can just help me understand. So at the end of the year, when the subscription comes to an end, do you expect the consumer to go back into a retail distribution outlet to renew his subscription or does he renew it online?

Yes. There's an option for customers to do both. I mean either he can renew it online directly from his PC or he can also get it renewed from the local retailer.

And retention of consumer -- customer is close to around 35% to 40%.

So don't you find that, that strategy is difficult in the current environment where consumers would prefer to order and renew their subscriptions online year after year?

They are doing it.

Yes. So the renewal, actually, there is a way for a customer to do it both. It's like they can renew it online as well as they can also go to retailers, like it's on their choice. So what we see at least 40%, 45% of the customers who renew, they go online, and retailers are something that some retailers would go and push the renewal in advance proactively, then only it becomes retailer's case. So most of the time, it's like -- it depends on the customer on how to choose it actually. So we have kept all the options open actually.

Okay. And one final question. If you look in the western world, a lot of the Internet cybersecurity products are usually bundled up by Internet service providers, when they install broadband. Is this something that you are looking at actively to do that in the Indian market?

Not in Indian market, we are currently not doing that because it's mostly OEM deals are at very negligible prices actually. And most of the ISPs that are bundling the products, they are having the least featured products. So what we have seen is people still move to our full featured product once they realize the difference. So currently, we are not doing any OEM deals in India for ISPs.

Okay. And if you can just give me a bit of flavor on who are your main competitors in the retail market?

In the retail market, competition is Kaspersky and in some regions, it is regional players like K7 actually.

The next question is from the line of Kranthi Bathini from WealthMills Securities.

I want to know how the sales of Quick Heal are directly related to sales of PCs that are sold in India? How it is impacting? And can you just give a figure how the market is looking forward in the next 6 months to 9 months period, it is -- the sales of PCs are, how it's directly impacting the sales of Quick Heal Technologies? I want to know.

So -- yes. There is definitely a correlation between the PC sales to our sales. And if PC sales goes down, then that will also have impact on our sales.

How the market is looking going ahead?

So at present, PC sale is down. But like sometime like the Quick Heal sale keeps on growing. But it totally -- because the antivirus subscription is either for 1 year or a 3 year. And PC life is at least minimum 5 to 6 years in India. So based on that, you cannot exactly correlate with the PC sale actually.

Okay. Just want to know, suppose, if you are selling on a -- 10 licenses for 1 year. What is the quantum of the second year renewal -- that is the AMC second year renewal you will be getting?

Which I mentioned in previous answer, it is close to 35% to 40%.

So what are the steps you are making to increase this percentage? Yes, do you have any backup plan to increase this percentage of renewals?

Yes. So steps -- we have already taken a lot of steps. Actually, what we have observed is this percentage grows as the number of days passes after the expiry. So if you calculate the retention after, say, 3 months or 4 months after the expiry, the percentage reaches 50% and beyond actually, renewal percentage. The thing is -- the gap is of about the unprotected period of the person. Once the expiry is done and the time when he renews the product actually. So that gap we are trying to fill by aggressively pushing the users to renew before expiry or even during the week of expiry, that push we are constantly doing.

[Operator Instructions] The next question is from the line of [ Vibha Sharma ], an individual investor.

I just wanted to check if -- are you in talks with any companies for any acquisition? Are we going to -- are we looking to close any acquisition this quarter?

So -- we are continuously evaluating opportunities in the cybersecurity space, both in India on a -- and at a global level. And this is more of a continuous activity. This is what I can comment.

We have completed the strategy investment in L7 Defense in last quarter, and we see that the progress is going on. And we are also looking for more companies from inorganic growth point of view.

Okay. And if I could also ask that you mentioned something about the top level hiring. If you could give us more information regarding that? Any details about the hiring at top level?

See, basically, as a part of our capability building exercise, we are looking at strengthening the overall team. And this hiring will happen over the next few quarters.

[Operator Instructions] The next question is from the line of Neerav Dalal from Maybank.

In terms of the acquisitions that you're looking at, what is the size of the acquisitions? And second is the investment that you did last quarter. How do you -- how are you looking at monetize -- how are you looking at using that? Or what is the strategy ahead?

So basically -- see we have to find the right candidate, which is in the cybersecurity space and it is very difficult, really, to put a real number to this, what is going to be the acquisition size. So it all depends. There are many variables when you look at M&A. And for us, it is very difficult to really comment what kind of size we are looking at. And the question on L7. So L7 acquisition, it was more of a strategic investment, which just happened 2 months back. And we are tracking the progress. And we are -- so far, we are pleased with the progress of L7.

Yes. The idea is to, like, take their products into Indian market, and their product are yet to get released, but trainings and product demos are happening actually.

Yes. And so this would be more towards the enterprise side of the business?

Yes, yes. It's all enterprise products actually. Yes.

All of those will be enterprise products.

Yes.

And what would be the investment that you have done in the company?

So we have invested about USD 300,000.

Okay, okay. No, why I was asking this is that, currently, you are sitting on a cash of about INR 400 crores?

Yes.

And in terms of distribution of the cash, is there any plan on that side?

So we have earlier also mentioned that. So this was more of a strategic investment, and we are definitely looking at few more opportunities. And we will utilize this cash accordingly.

Right. And then in terms of the business, when do you see improvement happening and what are the difficulties that you are facing at the moment?

So basically, if you look at the overall economy slowdown, I think that is impacting most of the players. And if we had to talk about us, we continue to invest in growing and enhancing our core capabilities and work closely with the partner ecosystem. And we definitely are optimistic about future. This is what I can comment at this stage.

So when you say that you are facing issues in terms of distribution that is squarely -- that is entirely on the business environment, nothing other than that, right?