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

Good day, and welcome to the Quick Heal Technologies Limited Q2 FY '21 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. Thank you, and over to you, sir.

Thank you, Faizan. Hello, and good evening, everyone. I am pleased to welcome you to all -- our earnings call to discuss our Q2 '21 and H1 '21 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 construed as a forward-looking statement must be reviewed in conjunction with the risks 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. Over to you, Kailash.

Good evening. Good evening, ladies and gentlemen. Thank you for joining us today to discuss the company's financial results for Q2 '21. I would like to take this opportunity to update you about the development and initiatives for the quarter. We have delivered a strong financial performance in Q2 as we came out of the lockdown. If you ignore the uncertainty of COVID-19 it still improves. I will let Nitin discuss our financial performance in detail later. In the previous quarter, we launched our next generation in consumer products powered by like privacy, protection and performance. We have received highly encouraging response from partners and customers for the same. On the enterprise side, we have been working on our next generation products that will enable us to target large enterprise customers. I'm excited by progress so far, and we expect to release this in next financial year. To accelerate the development of these products, we have appointed 2 senior global expert leaders in research and development. First, Mr. Sanjay Agarwal as our CPO, or CTO, our Chief Product Officer. Sanjay will be responsible for driving the overall product vision and strategy in the line with our market expectations. And Mr. [ Vibuthi ] Kaur as VP and Engineering Head for R&D. [ Vibuthi ] will lead our development efforts, a team of talented security research and engineering. With these 2 new additions, our R&D leadership has become stronger than ever. Now I would like to hand over the floor to Sanjay. Sanjay Katkar, our Joint Managing Director and CTO, to discuss the trend in cybersecurity market. Over to you, Sanjay.

Thanks, Kailash. Good evening, everyone. I would like to discuss a couple of points before I speak about trends in cybersecurity market. During the quarter, security researchers at Quick Heal Security Labs uncovered a new APT targeting India's defense forces. Thus that operation side copy, threat factors behind this campaign were found misleading the security community by copying tactic and techniques and procedures that pointed at the side wind APT group. However, researchers at Quick Heal Security Labs discovered strong evidence of operation side copy having potential links with Pakistan-backed transfer and threat group. This is a breakthrough discovering making us the first cybersecurity company to export the real identity of these threat factors. Upon revelation, we immediately informed the government authorities to have a precautionary measure. And this discovery, once again, reinforced our robust set intelligence and our ability to detect previously unseen and highly sophisticated threats. On the product development part to which Kailash referred earlier, we are developing a few new products, which will open a much larger total addressable market for us and more importantly, will help us enter the lucrative large enterprise market. With the addition of industry veterans like Sanjay Agarwal and [ Vibuthi ] I'm confident that we'll be able to deliver the right solutions in the line with market requirements and continue to innovate and deliver the best-in-class protection against advanced threats. Now coming to the trends in cybersecurity market. As we come out of the lockdown, we have noticed demand coming to pre-COVID levels on the consumer side of our business. Demand for laptops and computer continues to remain strong. Even though government has lifted the lockdown, schools, colleges and many offices are still shut and work-from-home and work-from-online learning are becoming a new norm. You must have heard the news that some large organizations had shut some of their offices and asked employees to work from home permanently. We believe that work-from-home and remote working will continue to remain a part of our lifestyle over the next few quarters. Due to actions of robust security measures, this has created a new found opportunity to target users and steal sensitive data and hold it for ransom. This in turn has resulted in increased cybersecurity awareness across the country. Government business has been slow since the last 2 quarters due to shift in spending focus as the COVID-related issues take the priority. On enterprise side, we have seen good recovery, which has been reflected in our enterprise sales for this quarter. I would like to conclude my remarks by stating that demand is gradually coming back to normalcy in the enterprise business. Physical meeting is key to cracking deals in the enterprise segment. And with lockdown norms now being related, our sales team is back on the field to develop strong relations with our customers and partners and penetrate further in the market. On the retail side, we will continue to work with our partner network on exploring various revenues to establish a strong connect with the customer and create a strong pull for the brand in the offline market. Online sales has seen record growth during the lockdown, and we will continue to push our product on e-commerce platforms and our website as well. I would now hand over floor to our CFO, Mr. Nitin Kulkarni to discuss our financial performance with you.

Thank you, Sanjay, and again, good evening to everyone. Let me take you through the financial highlights for the second quarter as well as half year ended September 30, 2020. As Kailash mentioned earlier, we were able to deliver good growth in the second quarter, which has always been seasonally one of the stronger quarter for us. However, on the half yearly basis, also, we are happy that we were able to marginally do better than last year despite so many uncertainties around the pandemic. Let me elaborate more on financial performance. I will speak about some of the developments for the quarter and then H1. In Q2, consolidated revenue from operations for the quarter stood at INR 844 million, up 15% as compared to INR 735 million in Q1 of '21 and down 14% as compared to INR 986 million in the same quarter last year. If you recall, Q2 financial year '20 was our strongest quarter during financial year 2020. While the current quarter still ha some impact due to COVID-19 crisis that we all are going through. However, we believe, given the consents, the teams have performed well. Revenue fees for the quarter. 81% of our revenue came from retail segment and 19% from enterprise and government. Enterprise has seen a 5% Y-o-Y growth in both licenses and revenue as the teams and process we put in place a few quarters ago are slowly beginning to bear rewards. I will talk about this in more detail shortly. EBITDA for the quarter was up 22% quarter-on-quarter at INR 391 million, and down 18% Y-o-Y. While PAT stood at INR 288 million, up 15.5% quarter-on-quarter and down by 22% Y-o-Y. PAT margin was at 34.16%, almost flat compared to previous quarter. For H1 financial year 2020, consolidated revenue was at INR 1,579 million. It was marginally higher compared to INR 1,562 million for the same period last year. For the first half of this year, 83% revenue came from retail and balance 17% came from enterprise and government. Enterprise sales for the first half of this year was impacted due to the lockdown in Q1 and also a number of government enterprises reallocated some of their budgets to more facing pandemic-related expenditure. In Q2, we have seen this trend change with a good pickup in demand. For H1 of 2021, R&D costs have gone up by 8.6% Y-o-Y, and this is mainly on account of increase in headcount, which will help us accelerate product innovation and drive expansion of next-generation enterprise security solutions. Both sales, marketing and general and administrative expenses, costs are down due to lower sales promotion and traveling expenses, along with the lower overhead cost. We have physical dealer leads for our retail vertical in last year of H1, which were not possible during the current H1 due to pandemic situation. We also reversed some part of the output date provisions, which we did in Q4 of last year. If you recall, we made these provisions as a matter of abundant precaution despite the fact that we have had business dealings with these distributors for decades. EBITDA for the first half was at INR 712 million versus INR 606 million in last year. Due to lower operating costs, we were able to deliver a strong 17.6% Y-o-Y growth in EBITDA. We were able to quickly implement remote working systems and also reassess some of the operating overheads. Our EBITDA margin for H1 were at 41.1% versus 38.8% in last year. In the previous quarter, we had informed you that as preventive measure due to volatility in the market, we had shifted our investments into fixed deposits. And this has led to lower other income for the second quarter. But as the markets are consequently stabilized, we have reinvested our funds back to mutual funds and tax-free bonds. The overall returns on investments have gone down compared to last year. While we do not seek to achieve profit from treasury operations, the move to fixed deposit was with a view to protect the capital and other any kind of volatility. PAT was up 11% at INR 538 million versus INR 486 million last year. PAT margins for H1 of current year, were at 34.1% as against 31.1% in last year. Licenses sold in retail segment during H1 '21 were up 17.8% compared to H1 of last year. While the revenue from the retail segment is up only 7.4% Y-o-Y basis. This is mainly on account of change in the product mix, which has resulted in lower ARPU for the first half of this year. As explained in all earlier calls, while we report ARPU as a simplified measure of our performance, our business is very dynamic and the nature of bundling the products changes and helps the simple ARPU metrics does not fully capture the movement in the business. On enterprise side, licenses sold during H1 were down 15.3% Y-o-Y while revenue for H1 '21 was down 10.5%. We have seen a great recovery on the enterprise side during second quarter of this year, but demand is yet to come back to pre-COVID levels. Another major reason for mutate performance, as Sanjay mentioned earlier, is the lower traction in the government segment. But even with the lower number of licenses sold in H1, we have seen ARPU for the enterprise side going up by 5.8%, which is a good sign of progress for us as our enterprise business teams are getting better traction for their customers and able to sell our range of products more effectively. Now coming to balance sheet items. Due to better working capital management, the overall net working capital days has been down to 93 days versus 104 days in September 2019. Our receivable days, which is a major component of net working capital remains slightly elevated at 141 days. But we have taken a number of steps to deal with it. As you might know, several small and medium-sized enterprises are currently impacted with lower liquidity as the nearly 4 months of lockdown has severely impacted their businesses. However, the positive for us remains that we have a long relationship with these customers and do not see the need to make any additional provision at this stage. Our current cash and cash equivalents stands at around INR 4,479 million, including investment in mutual funds, tax-free bonds and fixed deposits. I would like to highlight this again that we are cautiously looking for opportunity to better utilize the cash on our balance sheet. On the reminder side, we again remain very cautious and calibrated in our investments. And we'll be looking at smaller and midsized investments. We have had 2 small investments in last 6 months to 1 year, and they are progressing well. To sum up, we are seeing a recovery in the demand environment, especially on the enterprise side. And that has been visible in our second quarter numbers as well. We continue to believe the demand environment will remain strong as the economy slowly starts coming out of lockdown and need for cybersecurity becomes even more evident. Overall, the first half has been good, and we are well set for the next leg of growth. With this, we'll open the floor for questions. Thank you, and back to you, moderator.

[Operator Instructions] The first question is from the line of Kranthi Bathini from WealthMills Securities.

I just want to know as we are talking about the pent-up demand. In the Q2, you could be able to reflect the same kind of pent-up demand of sales that is coming from retail and enterprise? And as to how the business environment is looking forward, I think for the next Q3, Q4, we can expect clear visibility of demand in the pricing?

So you rightly said, we are seeing the recovery in sales, but the thing is it's not yet to the pre-COVID levels. But we do hope by the end of quarter 3, we should be closer or maybe almost close to pre-COVID-19 level. So that's what our observation is. And the demand on the enterprise front where we -- where SMB is a more focused target and then even the government segment, SMB has started opening up and we have started seeing some demand coming from there as well. But on the government front, we are seeing yet the priority for spending on cybersecurity is still lower, and they are like taking a long time for closing the cybersecurity-related orders. But we feel that quarter 3 will still be low for the government segment, but somewhat would come back for SMB segment as well.

Yes. With respect to Quick Heal brand is concerned, of course, you are a #1 retail brand. But enterprise somewhere, you could not be able to cope up with the market expectation. So what is your plan with respect to enterprise model is concerned? Are you going to employ the increase the team size? And what is your plan? What is your view on this?

Yes. So see, the products for very large enterprises are in a different category. And those products, we have been like dealing with a small, medium and midsized organizations. But at the same time, we are investing heavily into scaling up our products for the very large enterprises. At the same time, we are also investing into increasing our product basket by investing into new products, which we have just announced in the call discussion that we'll be coming out with a couple of products by next financial year, which will target purely very large enterprises, and this will add up from major market segment to our revenue. So that's the plan actually. And let's hope we work on that. That's where our current investments are going on right now.

Yes. What is the -- in Q2 compared to Q1, what is your marketing expenses? Have you increased or you kept it stable?

No. So see, if you compare it with -- if I talk about H1 overall, if you compare it with last year H1, marketing expenses have gone down. Primarily, we had 2 dealer needs for our retail vertical in last year of H1. And because of the current situation, we were not able to do physical dealer needs, plus our traveling also is restricted. So there is definitely some dip in the sales and marketing expenses.

And also any kind of ad expenses you are incurring? You are increasing the brand visibility through ads?

Yes. So we are doing a lot of advertisement and we are incurring expenditure on advertisement also. So the only thing is with the current situation, it is not up to the full scale, which will definitely pick up from when how things are -- have started coming back to normalcy. So these expenses should pick up from Q3 onwards.

Okay. Commendable effort on how we have done our study with the dealers. How the Quick Heal brand and all. We visited a couple of shops also. They've given us a beautiful feedback. In fact, in our offices also, and we are encouraging people to have Quick Heal products, okay? The feedback is very good.

The next question is from the line of Ankit Kumar from AB Capital Advisors.

So first question is on what percentage of revenue is contributed through outside India for H1?

So H1 is -- currently, the number is very small. It should be about 2%.

Okay. So we do have multiple subsidiaries outside of India. So what are these for? These are like a technology part of something?

So basically, these are all front-end subsidiaries who are doing marketing for our products and selling these products into retail office.

So these are selling in India itself? Or in the specific countries that they are presenting?

No. So they -- so India, definitely, India is a different team. So the subsidiaries are present in 4 geographies, where they are selling our parts.

Okay. And sir, as you know, the cybersecurity is a very effective market in many parts of the world and in India as well. So what are the plans of increasing our expansion beyond India? Because as you said that we have this 2% contribution concurrently. So any plans of expanding our reach in these distribution?

Yes, there are definitely plans for increasing our reach in the other geographies since we have presence in the geographies value of subsidiary. So definitely, we would -- we are anyway holding -- in retail, we are holding highest market share in India. And there are plans for these overseas geographies. And as Sanjay mentioned, since we are working on these spots, which will cater to mid and large-sized enterprises, which are expected to get rolled out into the next year. So definitely, with this, we will be able to tap this overseas geographies very well. And there is definitely a plan for increasing the presence in these overseas geographies.

Okay. Another question, sir, how have you growth in digital channel since lockdown? And any -- what kind of changes have been done in our strategy to capitalize on the opportunities going -- coming during the lockdown and when lockdown ends?

No. So definitely, locked down, if you look at strategy, yes, we have this work-from-home. Definitely, we also have adopted to the new style of work. And definitely -- so on retail -- enterprise side, we are talking to regular these customers as on a regular basis and with the secure -- increase in awareness for security, definitely, there is -- we are seeing a lot of traction coming into enterprise side. And on the retail side, also with increase in sale of PCs and laptops, definitely, we see a big potential on the retail side as well.

Okay, sir. And has there been the price change since the pre-COVID and during lockdown? And since the lockdown has been eased. So has there been any price variation during this time?

So price, definitely pricing is under pressure. And it is applicable for all the industries, and we have no exception to that. With the entire partner ecosystem, dealers, customers, there is definitely a price pressure, and we are dealing with it. I think that is what I can talk at this stage. But yes, there is a pricing pressure.

Okay. Any quantified number like...

Sorry to interrupt you, sir. May I request that you come back in the question queue. The next question is from the line of Kanika Sina from CBS Capital.

Would you please share the online sales figure for Q2? And what is the proportion of online sales and overall sales? Additionally, I would like to ask what is your overall online strategy?

Yes. So if you look at the online sale number for the quarter, these online sale includes, right, on sale on our side plus what we are selling into e-commerce platform. So Q2 number is about INR 20 crores of online sales. And if you look at overall, definitely, I mean with -- there was a lockdown in first quarter, physical dispatches were not at all possible. So most of the sales came through online channel, and we are definitely seeing increase in online sales. And if you -- if I see online sales with H1 compared to H1 of this year, there is an increase of about 20%, 22%, 23% in overall online sales. So definitely, we have a clear-cut strategy for this, and there is definitely increase in online sales.

The next question is from the line of Parimal Mithani from Credential Investments.

Sir, I have 2 questions for you. One is we have seen a reduction in other expense from INR 20-odd crores to INR 14 crores in this quarter. Can you explain what the reduction is because of? And the second question is channel checks, you have found that the inclination of the companies have promoted more sales to distribution channel compared to the online channel. And there's a price differential in terms of customer reviews -- the -- renews 3-year pack with the company. So there a substantial price difference between the online and distribution channel. Why is that if you can explain? And the third question is on your service tax demand, what is the status? Because you've been getting this notice again and again from the government.

Okay. So Parimal, this is Nitin. So reduction in other expenses. Basically, if you see last year, we did a buyback. So there was a buyback cost of INR 2 crores, which was incurred in H1 of last year. And during the year, during the first half, we have also reversed some doubtful debt provision, which we made in Q4 of last year. And we also mentioned in the last Q4 call that this provision was made on abandon -- based on abundant precaution, more on a conservative basis. So we have been able to collect that money from the customer. So these are the main reasons for reduction in expenses. And on your last question on the service tax. So I -- see this 11% to 14%, we have already won that case. And this [indiscernible] has clearly given the order in favor of us. And that is -- so there is no further movement on this. But then the order, which was given to us for 11% to 14%, that order was clearly given purely based on the merits of the case. And based on that, we are quite confident that we'll be able to set aside the demand for subsequent years based on that 11% to 14% wallet.

Okay. And the third one channel is channel check, which I've seen in terms of pricing deferral between online and offline. If you can highlight there what the difference is? Why is there such a big difference in terms of renewal at least for the customer who reviews your [ CRISIL ] your packages after 3 years? Since you see the 3 other customers. Why is the difference there, sir?

So what is the difference because I don't know...