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

Ladies and gentlemen, good day, and welcome to the Quick Heal Technologies Limited Q4 and FY '22 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, sir.

Thank you, Ryan. Good evening, everyone, and a very warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the Investor Relations of Quick Heal Technologies Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for the fourth quarter of financial -- and financial year ending 2022. Before we begin, I would like to mention a short cautionary statement. Some of the statements made in today's conference call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now let me introduce you to the management participating with us in today's earnings call, and then I'll hand it over to them for opening remarks. We firstly have with us Mr. Kailash Katkar, Managing Director and CEO; Mr. Sanjay Katkar, Joint Managing Director and CTO; Mr. Navin Sharma, Chief Financial Officer. Without much delay, I request Mr. Kailash Katkar to start with his opening remarks. Thank you, and over to you, sir.

Thank you, Anuj. Good evening, ladies and gentlemen. The economy is quickly catching up of the COVID-19 impact and I hope the same for you. Thank you for making the time to join us today for the company's earnings conference call of Q4 and financial year ending 2022. As you might be aware, Quick Heal is a pioneer in India in cybersecurity products and truly Make in India. Quick Heal products considered to secure individuals, countries, cities and companies across platforms. We are the undistributed market leader in the consumer segment in India, which constitutes about 75% of our overall business. Over the last few years, we have been investing heavily into enterprise solutions, which offer roughly 20x larger market opportunity than the consumer segment. Enterprise cybersecurity solutions command over 95% share of the total $150 billion market globally. It is also expected to grow 3x faster than the consumer market. Our investment into this space has already caught momentum. Our enterprise business has been growing by 23% while the industry is moving at 11% globally. At the consumer front, we are growing modern channels of online direct-to-consumer and e-commerce platform and open up new channels of large format retail stores. Our online direct-to-consumer business has grown over 11% through the year. We have delivered good results despite the year being rigged by 2 waves of COVID impacting our traditional channel distribution network. We are looking at multiple growth in the years to come through our investment in R&D, sales and marketing, people and global experts. We are developing new line of enterprise solutions to cater the evolving demand of the industry. We are expanding our footprint beyond India with strong current focus on developing economic countries. We have onboarded global industry experts across functions. We are engaging with one of the top global management consultancy company to fructify our long-term strategic growth plan. Now I request Sanjay to take you through the technology updates and current developed products. Over to you, Sanjay.

Thank you, Kailash, and good evening, everyone. I'm happy to report to you that our enterprise solutions is making great inroads in the SME and enterprise segments. In Q4 of FY '22, our enterprise business showed a strong year-on-year growth of around 33% to reach around INR 27 crores, surpassing the ARR of INR 100 crores. We added more than 30 new customers in the enterprise solutions segment during the quarter. Through the year, FY '22, we have launched 2 new enterprise products, namely HawkkEye and HawkkHunt, which are currently in the beta phase and has been deployed and been tested by our beta customers. HawkkEye is a centralized security management platform offering holistic cybersecurity posture through a single dashboard, where the current customers are burdened with multiple products and dashboards. And HawkkEye is our endpoint detection and response product moving beyond our traditional protection capabilities to identify, investigate and respond to advanced cyber threat exchange. Seqrite also got certified and approved for its endpoint antivirus malware solutions by ICICI Labs in this quarter. Seqrite endpoint security even passed the AV-TEST, Jan-Feb Test and was listed among the top products in the list of the selected products in the Jan-Feb Test of AV-TEST product line. We would continue our efforts towards building new offerings to the customers through the next couple of years. In a typical product life cycle, the revenue started to flow in post 4, 6 quarters of the beta release. Here, I mean to say the initial beta release and then minimum viable product is something that we keep releasing to our existing and beta testers, where it is further enhanced based on the customer feedback so that we start getting and we start competing with the mainstream competition in the same product line. On the retail business segment for Q4 financial year '22, we had a decline in revenues of 8% against previous years due to lower sales on account of COVID-related lockdown in January. Our direct online sales for financial year '22 grew by 11% year-on-year and also faster than other sales channels. We are making continual upgrade to our existing lines of products, adding more protection and features for our customers. I would now request Navin to take you through the financials. Over to you, Navin.

Thank you, Sanjay, and hello, everyone. Let me take you through the financial highlights for fourth quarter and financial year ended 31st March '22. For the financial year ending '22, the consolidated revenues stood at INR 342 crores, which grew by around 3% on a Y-o-Y basis. After adjusting for spillover of revenue in FY '21, the company saw a growth of 10% on a Y-o-Y basis. While the retail segment grew by 6% as against industry growth of 4%, the enterprise segment saw a growth of 23% for the full year, which is more than level of the global industry growth. FY '22 has been a year of our investment for future growth. We have invested more than 50% of our revenues towards R&D and sales and marketing programs. with an increase of around 30% on a Y-o-Y basis. R&D investments for the year stands at 26%, while the sales and marketing stands at 24%. EBITDA for the year stood at 31%, which is aligned with 30% to 32% EBITDA range in the near term. The net profit stood at about INR 83 crores, declined by 22%, and the net margin -- net profit margin for FY '22 was 24%. Q4 revenues saw a marginal dip of 1.5%, largely due to the latest wave of COVID impacting sales in the month of January. Approximately 77% of the revenue for the quarter came from retail segment, whereas 23% from enterprise and government segment. Our balance sheet remains strong with 0 debt and cash and cash equivalents of INR 359 crores as on 31 March '22. We are committed to driving shareholder value by growing profitably across both of our segments and driving solid unlevered cash flow. Over the last 3 financial years, we have rewarded our shareholders with over INR 400 crores through buyback and dividend distribution programs. A dividend of INR 4.5 per share was also proposed in the Board meeting in line with our dividend distribution policy. In the last call, we had mentioned to update you on our 3-year road map. We have taken significant efforts towards building the same. However, we would require some additional time. As Kailash mentioned earlier, we are engaging with global experts from top management consulting firms to help us shape and drive the strategic growth plan. We will keep updating you on the developments in the coming quarters. With this, I would like to open the call for question-and-answer session.

[Operator Instructions] Our first question is from the line of [ Prashant Mothe ], an retail investor.

Congratulations on the great set of results. So sir, my first question is, most IT companies are facing this issue of attrition. So is this an issue that Quick Heal is facing too? And if so, how are you guys handling the issue along with the rise in employee costs?

Sanjay?

Yes. So you're right. So the entire software development industry is facing a lot of challenge about attrition, and we are not different. Regarding software developing engineers and customers support engineers, which is close to 50% of our employees. The attrition rate has gone up in comparison to previous year. So we are taking all the measures to make sure to retain the existing strength in engineering as well as support. But at the same time, we are also -- I mean, rolling out a lot of things which help us to create more engagement among the R&D engineers and make sure that they are retained. Yes. But I'd also say, but if we benchmark ourselves with the industry, which is close to 40%, we are better off with our attrition rate close to 29%.

All right, sir. Sir, the next question I have is that, sir, Seqrite, which is the enterprise product contributes to almost 1/4 of the total revenues. Sir, where do you see this growing in the next 3 to 5 years?

So yes, as you know, we are having most of our new investment focus on to enterprise segment. Seqrite is all about our enterprise product offering, and we are having quite a good pipeline for our products, which -- and also a good plan for marketing and sales of those things. So our plan is to increase the revenue pie from Seqrite to at least 50% in next 3 to 4 years.

All right. And sir, the last question I have is that, sir, Quick Heal is basically a household name in India, right? Sir, how are you planning to increase the share of revenues from outside of India?

Are you talking about consumer products beyond the outside market?

Yes, sir.

For a consumer product from outside market, we are focusing on e-commerce platforms like Amazon.

Yes. So apart from -- that is -- the major focus is e-commerce platform because the traditional platforms out of India are more costly. I mean to say the marketing and branding towards that actually. So we are gradually expanding our presence on retail front in the countries similar to India. If you see we are having a good presence of retail products in neighboring countries out of India and then certain African countries as well. But at the same time, as Kailash, we are focusing more towards capturing that market through e-commerce.

I would also like to add, as Sanjay said, that our consumer products are like, as you mentioned, household name in India. In some countries, again, it is the same like Bangladesh, even in Italy, the consumer products are getting sold through the shops. So some of the countries, it is already there, like Kenya, Nigeria, some of the African country. So you will find Quick Heal boxes in the shops, actually.

All right. Understood, sir. That's it from my end. Thank you so much.

Thank you. Our next question comes from the line of Sanjay Awatramani with Envision Capital.

So I just wanted to ask you, I mean, which are the geographies you are focusing, as you said that you will be moving ahead with developed geographies. So if you can highlight some names of these countries? And are there any other plans to move ahead other than cybersecurity or the existing products?

So to answer to your question, we are cybersecurity experts, and there is a lot many things to do in cybersecurity itself. So we are not going to diversify our business. We are going to focus on cybersecurity part of it. And as I said in my speech, I'm talking about these enterprise solutions, which is already there with us. And plus what Sanjay has updated you about our new products and solutions in enterprise. We would like to take those products to some of the economically strong and where we feel that market is ready to pay for that products and solutions. So to those countries, we would like to take our products and solutions, to those countries like South Africa, African countries, Southeast Asia countries, some of the Europe countries, not all Europe countries where we have a good channel network, some of the -- even in like Korea and all this comes in Southeast Asia only. So these are the countries I meant to say.

Okay. This is very helpful, sir. And can you highlight the attrition rate for FY '22, if it is possible for you?

As Sanjay had answered the question is...

So the attrition rate for this year is around 29%, which is less than industry average.

Okay, okay. So any guidance for FY '23 on revenues or EBITDA margin, if you can help us with that?

No forward looking this thing. But let me tell you, we are very much confident about our new products and solutions, which are moving to the customer as a beta testing part of it. And some of the products have already reached to our customers. And we are also very excited and happy to see the customers are happy with what we have developed the products, and this is definitely going to generate good revenue in coming years actually. I can only say that we can see a similar growth in enterprise front. The growth base issue, we have seen almost more than 20% growth in enterprise. And then on the consumer, we are now like markets open and hope that there should be no more COVID wave, which can distort the market, then this should also help us in bringing back the consumer market or the activations on the consumer front as well, actually. So we hope to have a good year FY '23.

Okay. That's all from my side. Thank you so much.

Our next question is from the line of [ Deepesh Kasliwal ], an retail investor.

Am I audible?

Yes.

Yes.

Yes. So actually, I just wanted to get some idea on the enterprise solutions market. In India, the overall market size and the scope that we have going forward as well as like overall, in general, who are our key competitors in this space?

So on the enterprise front, yes, I mean, see, I'll divide the market into 2 segments. And one is SMBs and then there's the large enterprises. And Seqrite has products for both the segments. We traditionally like we started with SMB. So we have very strong product offering for SMB segment, and I'm quite sure that we'll be able to increase our market share with respect to the SMB market, with respect to our products. And on the large enterprise front, since couple of years, we have been releasing products which are supporting the scale for large enterprises, and we have planned for further new products for the large enterprises as I've been keeping announcing and will be announcing them as and when they are launched. So that's the plan. At the same time, if you see your next question was about who is the competition. So most of the competition that we face for SMB segment is from players like Kaspersky and Sophos. And in very large enterprises, we do face competition from Trend Micro and companies like Crowdstrike and Symantec actually.

Okay. Okay. And another question that I had was in the retail segment, we primarily these -- our entire business is in India. So there are many global players like Norton, McAfee, who are able to actually sell online. So because of that, there are a lot of sales that can happen outside their individual countries. So what is actually restricting us to do the same thing like can we enter into other markets? Or is this -- is there some type of a restriction or some kind of a strategy that we are following right now?

So no, there's no restriction on that front. If the means that you took the players like Norton and McAfee, they are there, since this market started actually like more than 30 years actually, and they are global brands. Quick Heal started in India. So the currently -- Quick Heal is the market leader in Indian market. But for global market to capture, it takes a lot of branding activities and a lot of expenses. So we are gradually doing that based on the countries where we can -- we feel that it's the right market for our products because see, technology-wise, product is ready for all the markets, but the developed countries have -- this consumer market -- consumer antivirus market has moved towards freemium. Actually, most of the products are having free products throughout the countries like U.S. and Europe. But that's the case in developed countries where the sales is going down, but the countries like Middle East or even European countries and developing countries like India and countries like Southeast Asia, the markets are growing in single digits. So that's where our focus is, we are focusing in those countries and even focusing through online channels actually, yes.

So primarily right now for the next 2 to 3 years, our main focus will be India. And then going forward...

Yes, and similar countries like Southeast Asia and African countries, yes.

Okay. Okay. Thanks a lot, sir. Then that's it from my side.

Our next question comes from the line of Dhwanil Desai with Turtle Capital.

So this is my first call so maybe some of my questions may be basic. But sir, the first question is, I think you mentioned that R&D and sales and marketing currently for this year constituted almost 50% of the revenue. So is this run rate on R&D and sales and marketing likely to continue going forward also? If you can elaborate on that?

Dhwanil, good question. See, as we said that we are at growth phase, we are developing both new products as well as we are venturing into new markets and to increase our sales and product presence, these costs will be higher. But at the same time, when we have given this 30% to 32% EBITDA range in the newer product, even with these trends -- with increased trend, we will try to deliver this 30% to 32% EBITDA in the near term.

Okay. So the normalized margin range that we can expect even with this kind of spend is around 30% to 32%. That's right way to think, right?

Right, right. But just to give you a caution sense our business has a lot of seasonality. In a full year basis, you can expect -- means we are determined and we are working to make sure that 30% to 32% EBITDA ranges for -- on a full year basis.

Okay. Got it. My second question is slightly more broad-based. So I was looking at our numbers. And almost since the last 6, 7 years, we have been in the range of INR 300 crore to INR 350 crore revenue while the digitization is growing, the industry is growing. So what are the key challenges that we have faced and what will change going forward in next 3, 4 years so that we can get, let's say, maybe INR 500 crore to INR 600 crore kind of a revenue?

See, if I talk about current year, means in FY '22, we have grown on revenue by 10%. And first, we need to understand it from different segments. Retail segment globally has been growing at 4% run rate. And this is -- so there is some industry analysis and it says that from '20 -- FY '20 to FY '25, the growth would be in the range of 4% only and which is single -- which is lower single digit and we are growing at the same rate. With respect to enterprise, while industry is growing at 11%, we are growing at double of that, more than double of that growth, and we expect to grow in coming years with higher double digits. As of now, we would not like to give any, let's say, guidance on exact numbers when we will be able to archive or deliver the INR 600 crore revenue. But we expect in future also to grow on retail at lower single digits, and enterprise segment with higher double-digit growth.

Okay. Got it. Sir, the only question is that if you can talk about the challenges that we faced in last 4, 5 years, which kind of tempered our growth last year, I understand COVID for last couple of years. But even before that, we were kind of stagnated around a single number. So is it because of the product mix? Is it because of the product readiness, if you can expand on that, what were the challenges? And what -- how are we addressing those?

So predominantly, Dhwanil, in early areas, retail product was our core products. And in the last 5, 6 years, there have been several events, which is -- to one part that industry itself is growing at lower single-digit rate. And second, since we are more focused on India, there was 2, 3 India specific events, like one, demonetization happened. Second, GST came. If you're not aware, let me help you understand that. Previously, this product used to attract barely 5% to 7% service tax where it used to attract 5% to 7%. With GST, this VAT has increased to 18%. And at the end of the day, customer -- this entire cost of VAT has resulted into lower revenue because the same gross revenue was reduced by 18% tax, which was 5%, 6% earlier. That was another aspect. And in addition to that, this COVID also has impacted. So broadly, you can say 3, 4. One, the market itself is not growing. In India, we had these 3 events, India-specific 2 events, COVID and -- sorry, demonetization and GST and this COVID has impacted. That is the only reason that while we shifted -- I will not say shifted while we have increased our focus on enterprise segment, which is a high-growth business. And in last 4, 5 years, the business has grown to currently on ARR basis, it was -- in this quarter, it was more than INR 100 crore annual business. And in this year itself, we have delivered INR 82 crore revenue on enterprise. So broadly, we do not expect a major shift in revenue or business in retail. That is a large reason why we are increasing our focus and in fact, the 2 beta products, which was released in this year, all -- both the products are enterprise business focused. And in similar section, in the coming year also, we would be generated. We would be -- a couple of products are on pipeline that will help us in growing our business further.

Okay. Got it. Very helpful. And sir, last question. So I think as per your presentation, you have distributed INR 200 crores as dividend and buyback. And our cash flow as a company and other business model will always remain very strong. We have a very strong cash balance. So in terms of capital allocation, the incremental capital will return to shareholder in some form or the other? Is that the right way to think?

It will be mix of both. As earlier in this statement, Kailash said that we are working with global management consulting firm who will be helping us in building our strategy. And in that strategy, whatever capital allocation required to go for, let's say, organic as well as inorganic acquisition that part will be there. And balance money certainly will go to shareholders the way we have -- and in fact, in this year also, we have given -- we would be distributing more than 30% of our profits in form of dividend. And needless to say that dividend once approved by Board.

Our next question comes from the line of [ Rajeev Pandya ], an investor.

I had a couple of questions. And my first question is, where do we see our enterprise solution revenue in FY '23? And what kind of margins will we make in this business? Would it be better or similar to the retail or less than it?

Revenue for enterprise business was INR 82 crore on full year basis. And since -- and broadly, margin on retail as well as enterprise business remains in same range.

Okay, sir. Sir, I understand that. So consumer segment has degrown because of the COVID impact. But where do you see the results that will grow in FY '23?

[ Rajeev ], unable to hear you properly.

So he wanted to understand how the retail is going to grow, as Navin had mentioned in his speech that when it comes to the consumer revenue, we will be growing in a single digit. And when it comes to the enterprise solutions, we will be growing in a double-digit.

Higher double digits.

higher double digit.

Sir, can you answer this?

What question means. I think...

Okay, [ Rajeev ], if you could not able to hear Kailash, so what he's trying to say. In our retail business, we will be growing in FY '23, we are -- we should be growing at lower single digit. And enterprise business, we should grow at higher double digit.

So my next question was that like how the retail sales are going to happen like...

Retail sales?

Sorry, sir, like, can you update about the scenario of the government business as there is a focus on cybersecurity products and in the government department, are you benefiting out of it?

So see, these are some confidential things probably it would be difficult for us to answer in this call. Not only this call, it would be difficult for us to answer this question.

[Operator Instructions] Our next question is from the line of Dhwanil Desai with Turtle Capital.

Sir, if you can help me understand how does the pricing part was both on retail side and on enterprise side. So my question is more -- to elaborate my question, so as the volumes go up and as our products mature, do the price go down significantly? And how do we ensure that at least we are able to protect pricing at a certain level?

The first and most important thing that when it comes to the consumer product and enterprise product, we don't have a single version. We have a range of products, even in consumer products, we have a AV Pro, we have a Internet Security, we have a Total Security. So Total Security is a premium product, which is at a bit higher cost and the AV Pro is at a lower cost. So it totally depends upon the customer behavior. If a customer is looking for a low-cost product, we have the products available, and if customer is looking for a better quality protection and multiple layer protection, then we have our premium products. So here, the question is like we don't want to lose any customer. Let it be an elite customer or let it be a price-sensitive customer, we don't want to leave any customer, and that's the reason we have a range of products not only in the consumer sector, but even for the enterprise sector also, the key product which we are talking about Endpoint Security. Even in Endpoint Security, we have a range of prices with the layer of protection. So that is how we take care of the customer without reducing or increasing the price of the product. And that's the reason you always see that ARPU on a quarter-on-quarter basis, it keeps on varying because the number of licenses sold of AV Pro or Internet Security or Total Security, it varies from quarter-to-quarter, actually.

Just to add exactly what Kailash said that basically price is decided upon multiple factors, such as competition product, et cetera. So as you must be aware that our products are already priced premium in the market with respect to competition. And we are available in all range of products available in the market. So while these things are there, but in place of increasing the price of any of the products, our largest focus is to shift the market from cost conscious to premium products. And this is the way how we would like to drive the market.

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now hand the conference over to Mr. Navin Sharma, CFO from Quick Heal Technologies Limited for closing comments.

Thank you all for participating in this earnings con call. I hope we have been able to answer your questions respectfully. If you have any further questions or would like to know more about the company, please reach out to our Investor Relations managers at Valorem Advisors. Thank you. Stay safe and healthy. Thank you.

Thank you, sir. On behalf of Quick Heal Technologies Limited, that concludes this conference. You may now disconnect.