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

Ladies and gentlemen, good day, and welcome to Quick Heal Technologies Limited Q3 FY'23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, Mr. Sonpal.

Thank you, Mitchell. Good afternoon, 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 call for the third quarter and 9 months ended of financial year 2023. Before we begin, let me mention a short cautionary statement. Some of the statements made in today's earnings 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 call is only to educate and bring awareness about the company's fundamental business and financial quarter under review. Let me now introduce you to the management participating with us in today's earnings call and hand it over to them for opening remarks. We 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 afternoon, and warm welcome to you all to our quarterly earnings conference call to discuss the results and business updates for the third quarter of financial year 2023. Through more than 25 years of our efforts, we have successfully been able to build trust by educating and empowering customers to protect themselves through our offering of Quick Heal and Seqrite. We are the pioneer of Indian cybersecurity industry while maintaining the market leadership position in the consumer segment for over the decade. In Q3, our enterprise business continued to grow, we believe to command dominant market leadership in the sub-500 endpoint market segment by now. We have onboarded Mr. Venkat as a senior vice present to lead the enterprise sales team towards the new leg of growth journey. The consumer business saw a decline in revenue, but are more short-term in nature, our key focus during this period is to maintain the market share that we command by developing future lever of growth. As I have also mentioned in earlier calls, we are increasing our digital effort to cater to the respective customer segment, while some of the initiatives we have taken have shown positive early signs. We will continue to govern it closely. We are in right industries where the world is in the cusp of massive digital evolution, while some parts of the business might be under stress in the short term. We will continue to invest in R&D and sales and marketing for our long-term success. Through these efforts we have pivoted ourselves from the consumer antivirus player to the holistic cybersecurity player with new age products under our umbrella. Now I request Sanjay to take you all through the business segment and our strategic direction. Over to you, Sanjay.

Thank you, Kailash, and good afternoon, everyone. Let me give you some more insight into both the segments of our business. So FY'23 has been a year of attending product market fit for our new lines of products. Our product lines are probably -- broadly bucketed into three categories: Endpoint, zero trust and data privacy. The financial numbers, which we are delivering is primarily driven from the EPS product in India. We are strengthening our core offering by complementing it with EDR and XDR, which adds detection and response layer to the protection for enhanced security. In this quarter, we also onboarded five customers for our newly developed EDR, XDR product, which makes us believe that it is now market fit and ready. We are in the process of attending a similar product market fit for our zero trust and data privacy product. We are establishing the same for all these products and are expecting revenues to flow in from Q2 of coming year. And as Kailash mentioned earlier, we believe to command a dominant market leadership in the SMB segment. We are consistently delivering over INR 100 crores revenue on a TTM basis in this segment. The accelerating growth in the enterprise segment is making our convictions even stronger. While we keep investing in new lines of products in the enterprise segment, we remain committed to protect our customers in the consumer segment in areas of privacy, protection and performance. The consumer business, which started 25 years ago, has been the cash cow segment for us. We are witnessing a downside in the business as evident from our financial performance. While it is too early to make a judgment, we are experiencing downside in the market for the short term. We are forcing this trend to continue for the next couple of quarters. One of the key priority areas for us in the next few quarters would be to drive the consumer awareness in the geography to drive consumption in the cybersecurity domain. I would now request Navin to take you through the financials of the quarter. Over to you, Navin.

Thank you, Sanjay, and good afternoon, everyone. Let me take you through the financial highlights for third quarter of FY'23. The consolidated revenues for the quarter stood around INR 67 crores, which degrew by 16% on a Y-o-Y basis. For 9 months, the consolidated revenue stood around INR 229 crores, which represents a degrowth of 4% on a Y-o-Y basis. Approximately 68% of the revenue for the quarter came from consumer segment whereas 32% from enterprise and government. The results might not be encouraging, but we are excited. If we look closely the enterprise business continues to grow sustainably even at the time when the software industry seems to struggle. Revenue for the segment -- revenue for this segment in 9 months FY'23 stood at INR 76 crores as compared to INR 59 crores in the same period of the corresponding year, up 27% Y-o-Y. As I have mentioned in previous calls, the stagnancy 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. We have taken a balanced approach of billing versus collection in our consumer business to keep our receivables in check. EBITDA for the quarter trends negative owing largely due to the top line degrowth in the consumer business. We will continue to invest for our long-term win as our balance sheet is strong, and we are a zero-debt company. It is important to note that our gross margin for the quarter and 9 months continue to remain strong and constant versus previous year at over 95% level. While the impact of industry headwinds are short term in nature, we are taking corrective actions against our expenses. Our key focus in the next couple of quarters is to revise profitability by trimming down our cost before we start seeing the uptick in the revenues. As we foresee, we do expect the next two quarters to be challenging both in terms of revenues as well as bottom line. The Supreme Court, while it's judgment dated August 5, '22, has passed orders in old service tax matter in company's favor, all the related pending service tax matters in different tribunals amounting to INR 161 crores has also been disposed of in this quarter and decided in company's favor. During the quarter, we also completed a buyback worth INR 105 crores -- INR 185 crores inclusive of taxes. With this, I would like to open the call for question-and-answer session.

[Operator Instructions] We have the first question from the line of Sumit Vardeman from Quick Heal Technologies Limited.

I have two questions. Quick Heal Technologies have a great business model and a good brand name. We are able to maintain 35% to 40% margin -- EBITDA margin in our business. Majority of our expenses are fixed expenses, like employee cost, R&D and product development. But from FY 2016 to FY 2022, we are not able to grow ourselves. What is the reason behind that? And what is your future outlook over the period of next 5 to 10 years, we are able to be -- if we are able to deliver INR 1,000 crores of the sales, we can easily earn INR 400 crores to INR 300 crores of EBITDA. And my second question is, what is -- your trade receivables are increasing consistently, is there any particular reason for that?

So when we talk about the revenue growth part of it, we are already working on a lot of new product development, which is based on next-generation cybersecurity products that is a zero-trust part of it. And most of these products are going to get released in this year starting from this quarter itself. So after getting these products released into the market and getting the product stability from -- at a customer level, the revenue will start coming to this -- across these new products. And to the second question.

See Sumit, with respect to receivables, largely the COVID has impacted the receivables because during this period the liquidity -- so there were issues with respect to liquidity, et cetera. In last couple of quarters, you already have started taking right steps. And if you have gone through my commentary, I have categorically mentioned that we are taking a balanced approach between receivables and sales. In this quarter -- in current quarter, that is quarter 3 FY'23, we have reduced our receivables by 16 days. And currently, it is at 133 days. In next 2 to 3 quarters, we would like to bring it below 100 days. And in next quarter, we -- probably this will -- this should be below 120 days. Hope I could be able to address your second part.

What's your future outlook over the period of next 5 to 10 years?

You also said that we are planning to move the revenue from INR 300 crores, INR 350 crores to INR 1,000 crores in next 3 years. This is what we are aspiring for, aspire big.

[Operator Instructions] We have the next question from the line of Karan Bhanushali, an Individual Investor.

Sir what is the reason for decline in EBITDA? Can you please shed some light.

Sure, Karan. Thanks for the question. Look, on a short-term software industry is witnessing sluggish growth due to the contraction in IT spending across the globe. Even though our enterprise business continues to outperform, the consumer business is experiencing a degrowth. More so, the degrowth in EBITDA in current quarter is mostly on account of degrowth in revenues, which was quite sudden against increased R&D and sales and marketing efforts, which were planned and committed already. As I have mentioned in my earlier part of commentary, while the impact of industry headwinds are short term in nature, we are taking corrective actions against our expenses. Our key focus in the next couple of quarters is to revive profitability by trimming down our cost through various aspects before we start seeing the uptick in the revenues. It is important to note that even in spite of all these things, we are maintaining a gross margin of 95%, which clearly suggests that all -- that any incremental revenue will directly flow into bottom line. So this is a thing because of it EBITDA is impacted in the quarter. Let's see how future comes.

Sure, sir. Also follow-up question, are we looking at any layoffs like other IT companies are doing?

So -- see for cost reduction exercise, we are evaluating all cost items under various verticals, be it zero-based costing, be it productivity, marketing, et cetera. And we already have started taking right against -- right actions against that. With respect to layoffs -- see, one thing is clear that employees are the core of the organization and help us reach where we are. We don't want to let the short-term fluctuations of the market affect the core asset of the company. Putting it simply, we are not contemplating layoffs in the organization.

[Operator Instructions] We have the next question from the line of Jatinder Agarwal, an Individual Investor.