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

Good day, ladies and gentlemen, and welcome to the Quick Heal Technologies Limited Q2 FY '23 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Ms. Chaiti Gujarati from Valorem Advisors. Thank you, and over to you, Ms. Chaiti.

Thank you. Good afternoon, everyone, and a warm welcome to you all. My name is Chaiti Gujarati, AVP, Operations at Valorem Advisors. We will represent the Investor Relations of Quick Heal Technologies Limited. On behalf of the company, I would like to thank you all for participating in today's earnings call for the second quarter and half year ended 30th September, 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 decision. The focus of today's conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now, I would like to introduce you to the management participating in today's earnings conference call and give it over to them for their opening remarks. We have with us today Mr. Kailash Katkar, Managing Director and CEO; Mr. Sanjay Katkar, Joint Managing Director and CTO; and Mr. Navin Sharma, Chief Financial Officer. Without any further delay, I request Mr. Kailash Katkar, Managing Director and CEO, to give his opening remarks. Thank you, and over to you, sir.

Okay. Thank you, Chaiti. Good afternoon, and a warm welcome, everyone, to our quarterly earning conference call to discuss the result and business update for the second quarter of financial year '23. India has become an economic powerhouse in the global landscape, thanks to its unprecedented growth in every sector, especially technology. While this has brought great convenience to the public and one cannot discount that vulnerability has grown multifold in the rising intensity of the Internet and the growth -- growing technology like 5G. As you must have -- must be aware, Quick Heal is a pioneer in India, Indian cybersecurity space, providing truly Make in India products. We are the undisputed market leader in the consumer segment in India, which constituted around 70% of our revenue in half year financial year '23. Over the past few years, the company has been investing heavily into Enterprise solutions, for which market opportunity is roughly 20x larger than the Consumer segment, commanding over 95% share of the total [ $150 billion ] market globally, and is also expected to grow 3x faster than the Consumer segment. In quarter 2 financial year '23, our Enterprise business continued to witness strong and encouraging growth and did cross INR 100 crore revenue on the trailing 12 months basis for the first time. We own 2 large government contracts where these organizations have trusted Seqrite for their security solutions. Quarter 2 marks 9th straight quarter delivery year-on-year growth for this segment. This solidifies our beliefs in the business we incubated from this crash years ago. The Consumer business witnessed decline, with the overall market growth being stagnant. The stagnant market can be attributed to the lot of factors including, but not least -- limited to lack of customer awareness, lower growth rate of PC inventory and pricing pressure due to the competition. Within this stagnant market, there is a gradual shift happening towards the online channel. We have taken focused initiatives and intervention towards our Consumer segment, which is [ degrowing ] at 11% to bring it back to the growth part. One of them being increased effort towards online and digital channels to attend our dominant market leadership in -- leadership as in the digital distribution channel. In the last quarter, we began our engagement with one of the top global management consultancy company to frutify our long-term strategic growth plan, which is ensuring the right intervention with regards to the strategic direction of the company in the -- in an agile manner. We also kicked off flagship initiatives of Cyber Shiksha for Cyber Suraksha and Earn and Learn, which aim to sanitize over 7 lakh students on cybersecurity across India. Now, I request Sanjay to take through the business segment and our strategic direction. Over to you, Sanjay.

Thank you, Kailash. Good afternoon, everyone. Let me give you some more insights into both the segments of our business. The Consumer business, which started 25 years ago, is the cash cow segment for us. We do see cyclical upside and downside in the business, as evident from our financial performance. While we have the dominant market leadership in the physical distribution channel in India, we are also increasing our efforts towards the online e-commerce and direct-to-customer channels for catering to both India and the global consumers. The Enterprise business, as we have been iterating in the growth story for us in the last few years and the years to come, this is an interesting and exciting phase for us as we are playing along multiple levers for growth in this segment, namely new products, new geography, and new customer segment. Our product lines are broadly bucketed into 3 categories: Endpoint, Zero Trust, and Data Privacy. The financial numbers which we are delivering is primarily driven from the Endpoint Security product in India, where we believe to hold the highest market share in the micro customer segment of less than 500 endpoints. We are strengthening our core offerings by complementing it with offerings like EDR and [indiscernible], which adds detection and response layer to the protection for enhanced security. Our immediate key focus and potential in the short term is to move up the Customer segment to attain similar share in the mid-customer segment of greater than 500 endpoints. In the mid to long term, our new product lines of Zero Trust and Data Privacy with geographical expansions in markets similar to India would provide large opportunities for the company. The accelerating growth in the Enterprise segment is making our conditions even stronger. We are establishing product market fit for all these products. We are expecting revenues to flow in from H1 of FY '24. I will now request Navin to take you through the financials for the quarter. Over to you, Navin.

Thank you, Sanjay, and hello, everyone. Let me take you through the financial highlights for the second quarter of FY '23. The consolidated revenues for the quarter stood at INR 101 crores, which degrew by 3% on a Y-o-Y basis. For H1 FY '23, the consolidated revenues stood at INR 162 crores, which represents a growth of 2% on a Y-o-Y basis, the flattish revenues on account of growth of Enterprise business being nullified by degrowth in Retail segment. Approximately 70% of the revenue for the quarter came from Retail segment, whereas 30% from Enterprise and Government segment during H1, reflecting on our ongoing strategy towards our revenue mix. We are also closely working towards bringing the Consumer business in the growth part, as Kailash mentioned earlier. Specific to the Consumer business, the segment in the market, coupled with low demand pull from the consumer with the liquidity crunch is creating a period of stress in the distribution channel. To offset the increasing receivables, we are working on strict credit control measures, keeping a balance between revenue and the collection. EBITDA margin for the quarter stood at 28%, and reasons for a decline in EBITDA margins was primarily due to the increased investment and efforts in R&D and sales and marketing, as Kailash and Sanjay detailed earlier. R&D investments for the quarter stood at 30% of revenues, while the sales and marketing stood at around 25%. It is important to note that our gross margin for the quarter and half year continued to remain strong and constant versus previous year at over 95% levels. The net profit stood at about INR 22 crores. Our balance sheet remains strong at zero debt, and cash and cash equivalents of [ INR 338 crores ] as on 30th September 22. We are committed to driving shareholder value by growing profitably across both of our segments and driving solid, unlevered cash flow, and constantly rewarding our shareholders through buyback and dividend distribution programs. The current buyback period started from October 4 and ended on October 18, '22. The company is on track of completing the buyback process in Q3, amounting to INR 185 crores inclusive of taxes. With this, I would like to open the call for question-and-answer session.

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

Wanted to ask that can you explain in detail as to why the Consumer business has degrown? How much was the industry growth rate, and are we losing any market share here?

Sure, [ Manav ]. Basically, the Consumer business witnessed a marginal decline with the overall market growth being stagnant. The stagnant market can be attributable to a lot of factors, including but not limited to lack of consumer awareness, lower growth rate of PC sales and pricing pressure due to competition. While the -- within the stagnant market, there is a gradual shift happening towards the online channel. We have taken focused initiatives and intervention towards our Consumer segment, which is degrowing at 11% to bring it back on growth path. One of being increased -- one of being towards increased efforts on online and digital channels to attain our dominant market leadership, like physical distribution channels. So globally, the consumer business is -- globally in India, the consumer business on market share, or let's say, on business perspective is stagnant.

Okay. Understood. And coming to the Enterprise business, can you talk about what were the key deal wins for us? How many plan projects we were executing? What are the -- maybe deal sizes here, and what would be the order book for this business as of today, sir?

So basically, we are into micro segments where our Consumer size is less than 500. Our deal size in Enterprise case is not that big. But what we are -- so there are two things. One, we won 2 big government orders in this quarter. And normally, in this business, we don't operate on order book. It's like hunting and winning orders on every quarter. But this business is growing at a good pace. So last year, we grew by 23%. Even in H1, we grew by 30%. And this is the first time that in this segment, we -- on the trailing 12 months, we have delivered a revenue of INR 100-plus crores.

Okay, understood. And my final question would be that, I think, company has hired a management consultancy firm. So can you talk a bit more about this, and what are the initiatives and findings of this assignment?

So those would be difficult to explain in this call. But a lot of initiatives, including finding right products, including finding right markets to grow beyond India, et cetera, are being co-created. A few of the things which even includes going deep into online and digital presence, et cetera. We have -- those things we already have started initiating. So these things are there. Maybe on quarters to come, we will gradually keep sharing what specific actions we are taking against those initiatives or those positions.

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

Okay. So a couple of questions. The first one is on management consultancy. I've been tracking the company for long now, so I remember we had presence across, think, African markets and another [indiscernible] market?

Vivek, if you are -- Vivek, your voice is not that clear. I hope you are using...

I'm sorry, I'm just trying to be clear. Okay. So how would you think -- why will management consultancy -- I mean, how would you think it will help us? Because going by the records of many companies, not our company, I think it did not create much value. Instead, it was a cash burn. Second -- that's first question. And second one is on the expenses. I see expenses have grown to INR 29 crores from [indiscernible] of last quarter. Is there anything -- anything specific you are doing [indiscernible]?

Sure, Vivek. See, our core purpose of appointing management consultant was to find right growth opportunities for the company. So while we know what we know. But at that same time, to know what we don't know, we have appointed this management consultant, and they are co-creating the company's strategy. And during last 3, 3.5 months or 4 months of our association with them, we have found very great insights with respect to market, with respect to products, a combination of what products should go along with other core products. And even they are helping us in identifying what type -- what key features we need to incorporate in our existing products and even whatever new products we are developing for that right geography and right product, right feature mix, et cetera they are providing. So while -- at the time of appointing those consultants, we always believe that they will be providing right value for the company, that's why we have appointed them. And we will keep evaluating their performance in times to come, so this is the way we would be working. With respect to expense, see, if you have seen our financials, we maintained a gross margin of 95%, 96%. It means whatever revenue comes, that directly flows into bottom line. Another aspect is Enterprise business, which was nothing or which was very municipal business 4, 5 years ago. If we were not investing in that business in part, probably we would not have achieved the size of revenue what we have achieved today. In last -- in trailing 12 months, we have delivered INR 100 crore revenue, and this business is growing at 30-plus percent rate and against market growth rate of 11%. And more so, but this business is equally profitable the way profits are being generated in, which means this business also comes with 90%, 95% gross margin. So from that perspective, we are creating similar pipeline for future, and we are investing heavily in R&D. About 30% of total spend for the quarter was in R&D, and 25% of the spend equivalent to revenue was in sales and marketing, which is required since we are in B2C. And our off-line channels competition is with online channel where we need to have right digital marketing presence, we need to have search engine optimization and marketing, et cetera. So from these perspectives, these 2 investments will keep happening. And even in past, in earlier quarters, we have mentioned that at least for coming few quarters, we will -- our -- an impact for FY '23 and even for a couple of quarters for FY '24, our spend in R&D would be in the range of 30% to 32% of our total revenue, and our marketing spend would be in similar range. Hope I could be able to address your -- both the questions.

Yes. So just one question. It will be helpful if you can give other expenses? Or at least R&D expenses, you can specify the numbers going forward? But again, it's management's [indiscernible] just my opinion. And one last question. So I know many companies or they have, like, multinational companies have tied up with different providers. And I remember we have asked this question even in the last few con calls, where we wanted -- investors wanted to know the company's strategy on -- are we looking at any tie-ups? But just wanted to understand, are we still with this degrowth? Are we still in the #1 pivotal position in India market? And if not, I think, apart from marketing strategies, are we looking at a future where we will mostly be in the corporate focus than consumer focus? That's the last one.