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

Ladies and gentlemen, good day, and welcome to the Quick Heal Technologies Limited Q4 FY '23 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Anuj Sonpal, CEO, Valorem Advisors. Thank you, and over to you, sir.

Thank you. 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 fourth quarter and full year 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 solely 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 hand it over to them for opening remarks. We have with us today Mr. Kailash Katkar, Managing Director and CEO; Mr. Sanjay Katkar, Joint Managing Director and CTO; Mr. Navin Sharma, Chief Financial Officer. Without any further delay, I request Mr. Kailash Katkar to give his opening remarks. Thank you, and over to you, sir.

Thank you, Anuj. Good afternoon, and a warm welcome, everyone, to our quarterly earnings conference call to discuss the results and the business update for the fourth 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 offering of Quick Heal and Seqrite. Our purpose is clear, simplifying cybersecurity. This is not only a business objective for us, but also our moral responsibility that we carry on our shoulders. In Q4 financial year '23, our enterprise business continued to grow sustainably, while making -- marking 11 straight quarter delivery year-on-year growth for the segment. We believe to command a dominant market leadership in the sub-500 endpoint market segment by now. Very recently, we became the first and the only Indian company to have collaborated with National Institute of Standards and Technologies, that is NIST, which is a U.S.-based National Cybersecurity Center of Excellence, that is NCCoE, for the data classification project, alongside technology gains like -- giants like Google and [ Adobe ]. NIST is a U.S. government organization focused on cybersecurity, which is the remarkable achievement as we take India to the global state and inspire many other companies to follow suit it. Half year 2, that is H2 of the year, financial year '23 for a sudden contraction of spend in the IT software category, majorly due to instability of macroeconomic variables. 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 while developing future levers of growth. We are in the right industry where the world is seeking massive digital evolution, while some part of the businesses -- some part of the business might be under stress for one more quarter. We will continue to invest in R&D and sales and marketing for our long-term success. Through these efforts, we have devoted ourself from the consumer antivirus player to the holistic cybersecurity player with new-age products under our umbrella. Now I request Sanjay to talk through the business segment and our strategic direction. Over to you, Sanjay.

Thank you, Kailash. Good afternoon, everyone. The core of our current enterprise business is EPS as a product or the [ SMBs ] in the Indian geography. So we have created a dominant leadership in our core and looking to expand through 2 levers initially. So one is like increased wallet share within the consumer -- our customers -- existing customers and expanding the customer segment. So our flagship, EPS, achieved perfect score in all 6 cycles around the year in the areas of [Audio Gap] lines are broadly bucketed into 3 categories: endpoint, zero trust and data privacy. We have onboarded more than 20 customers for our newly launched products in the space of EDR and XDR. And we are looking to address a large file of customer needs through these expanded offerings and grab a greater share of wallet within the customers' overall cybersecurity spend. We are in the process of attending a similar product market fit for our zero trust and data privacy products. 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, and we have delivered over INR 100 crore revenue in this segment for FY '23, growing at over 20% CAGR in the last 3 years. We are looking at expanding organically in the midsized Enterprise and Government segment, which represent similar opportunity size individually for us to cater to. Through both the levers combined, our addressable opportunity increases to 5 to 6x, which we would be looking to capture gradually. 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. And we are witnessing a temporary downside in this business as evident from our financial performance. I would now request Navin to take out -- to take you through the financials for the quarter. Over to you, Navin.

Thank you, Sanjay, and good afternoon, everyone. The financial results for the quarter may not be exciting, but was expected as we had mentioned on our previous calls. If we delve deeper into both the segments, the enterprise business continues to be in the growth path, delivering Q-o-Q growth for nearly 3 years now, and the consumer business experiencing a temporary contraction. The consolidated revenue for the quarter stood around INR 49 crores, which degrew by 52% on a Y-o-Y basis. For full year FY '23, the consolidated revenue stood around INR 278 crores, which represents a degrowth of 19%. Approximately 2/3 of the revenue for the year came from consumer segment, whereas 1/3 from Enterprise and Government. As I have mentioned in previous calls, the stagnancy in the market, coupled with low demand pull from the consumer, is creating a period of stress in the distribution channel. We believe this to be temporary in nature, and we'll start to see positive sign starting Q2 of FY '24. During the period, we have been working on improving the quality of revenue in terms of receivable outstanding and cost optimization. We have been able to reduce our receivables by 29 days to 114 days this year and now stands at prepandemic levels. With all the cost optimization measures that we have taken in the organization, our total expenditure for the quarter saw a reduction of INR 12 crores on a Q-o-Q basis. We will continue to work on these measures going forward to revive profitability. EBITDA for the quarter stands negative, 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 has strength -- as our balance sheet is strong, and we are a zero-debt company. It is important to note that our gross margins for the quarter and full year continue to remain strong and constant versus previous years at over 95% level. We have proposed a dividend of INR 2.5 per share to continue rewarding our shareholders for the trust that they have bestowed on us. With that, I would like to open the call for question-and-answer session.

[Operator Instructions] Our first question is from the line of Sameer Dalal with Natverlal & Sons Stockbrokers Private Limited.

So actually, I had a question. You talked about the fact that you had expected the retail side of the business to slow down, and that is where the problem lies. Can you give us reasonings why you believe that the value you are expecting, one, the retail price to slowdown? And two, what is the reason for the slowdown? Because at the end of the day, you have a yearly renewal kind of a situation. So are you saying that people are not renewing. So is your market share contracting? What exactly is going on? And why such a drastic drop that is there in this segment?

So we believe -- this is Sanjay here. We believe that there is a temporary contraction in the market due to lower IT spending across globe owing to like microeconomic worldwide, but this is deemed to revive. Regarding the market share...

But this is the retail segment. This is not the corporate segment. The IT spending reduction you're talking also on the corporate side. We are talking of retail side here.

Yes, yes, I can understand. The thing is, see, when I'm saying overall category itself has [ reduced ] and the decline in this spending on PC segment has affected the overall sale of our product. See even though it is enterprise category, our consumer products also caters to micro segment wherein there are 4, 5 or 8, 9, 10 PCs, small offices, they still go for consumer products, which has also affected us. And regarding the market share, there is no data available readily, but I'll say we do still command a market-leading position. And it is too early to comment on this. Like we are experiencing this for the first time, but we have been seeing this from last quarter, and we are taking all the steps to make sure what we can do to overcome the situation.

So you are saying that even in the renewal side because of whatever difficulties, people are using the computers without anti-viruses you're saying? The renewals for you have been that low.

No. Renewals are happening, but renewal happening is delayed, actually. They are like not immediately after expiry.

Okay. And when do you say you expect these two -- this to bounce back? Or do you think that a lot of these smaller businesses will now come into your enterprise side or they continue to take your retail side? And how does the pricing differ for the two?

Pricing overall remains the same. In fact, enterprise a little bit on -- the pricing is improving the ARPU on the enterprise side. But the point is people or businesses, which are of the micro side, which are like, I'll say, less than 10 PCs, I don't see them moving to enterprise side, they'll still remain on consumer side itself because their needs and demand for the features is basically handled by the individual consumer products, actually. And this -- I think we should -- we are anticipating this to bounce back in Q2 of this financial year.

So one more quarter you're going to have probably have similar kind of -- I mean if you can give some thought process on how the first 15 days of the current quarter have gone. Are you seeing any change or it's still the same?

Usually, first 15 days, you don't see because most of the time, March ending, because when it comes to the consumer product, most of the -- it passes from Tier 1, Tier 2 to Tier 3. So there is a shelf life for the product. And most of the buying happens in the quarter, like Q4, it has a big buying process. So immediately after completing the year, like after completing the 31st March, you don't see any change in the buying. It takes a bit time to pick up the sales in consumer market actually.

[Operator Instructions] Our next question is from the line of Gunit Singh with -- from CCIPL.

So in FY '23, 2/3 of revenue came from the consumer business. And I just have a concern regarding the direction of antivirus business because if we look at the technological advancements and like if we talk about the antivirus business 10 years ago, then everyone was familiar with antivirus and even I was a purchaser of antivirus and used it on the personal commuter. But right now, with the kind of updates in -- if you talk about the Windows or an Apple computer, they come up with regular bug fixes and updates. And even if we talk about the Internet Explorer or Google Chrome, they are mostly immune to Internet. So I mean, for example, if you ask someone who started using computers recently, they would not even be aware of the concept of antivirus. So going forward, I think the only major target or the major concern for someone taking up antivirus would be corporates, who would want data protection or would want to protect their data because that is the only target that we see these days. So I mean, per se, the consumer business looks like it might get redundant in the coming years because of the factors I mentioned. So I mean, what are your thoughts on this? And what is the way forward for consumer business because it still contributes 2/3 of our revenues.

Yes. So you rightly mentioned about the situation that currently the consumer business is going through. But on the future of this, I'll say we have seen this business for more than 25 years now. There is always such a cycle where the operating system starts delivering updates and things wherein it makes it more secure. But it's like a -- after a certain time, again, the trades catch up and they come up with the technology. I mean to say, ways to penetrate the well-secured OS, and so malware industry also keeps on evolving. So I mean to say, if you see their history, it was -- earlier, there were viruses, then worms, then started seeing different attacks, like phishing attacks or ransomware. And now if you see there are a lot of different kind of threats that are coming up. And this is -- I meant to say we are going through evolution phase. So it's not going to be like a consumer market will completely diminish. It will evolve into a newer segment or a completely different kind of threat we start seeing. And then again, operating system protection will still not be enough because threats are not going to be only towards like protecting the operating systems. So there will be threats like, currently, as we see the evolving ransomware attacks or evolving fraudulent activities, which are about like scam-related things. So this will evolve and products will also evolve. And accordingly, the market will evolve. So that's what we believe, and we are on to that, wherein we are having good enough research and analysis team, which works on that part of the evolving business and trying to evolve our product line as well to make sure that we remain on top of the threats that are going to come. So that's what I feel for the consumer market. And at the same time, yes, our enterprise is still a big market for us, and we have a lot to achieve on the enterprise front as there are different segments, and we have more product lines to come out actually.

Okay. Good. But one biggest concern is that if -- you spoke about it 10 years ago, everyone used to use an antivirus. But right now, I hardly hear someone subscribing to an antivirus subscription, or -- I mean, opting for it. So -- and most of the attacks that we have, cybersecurity attacks, are basically on bigger enterprises only for data, which is sold in the black market or like you mentioned, most of the attacks by hackers are on big enterprises. So -- I mean, going forward in terms of your revenue contribution, what do you expect the contribution from the consumer business and the enterprise business per se? Because even if we look at the growth for Quick Heal, it has mostly been driven by the enterprise segment. So I mean, what kind of contribution do you expect going forward?

Yes. So as we are seeing enterprise has been giving us a growth. For even last for 3 years, if you see, it has grown 20% CAGR. So definitely, we see more scope for enterprise, and that's where in last, at least, 18 months, we have been investing heavily into enterprise products and a lot of new product launches we have done in the last couple of quarters. And we are quite -- with respect to enterprise, I mean, grabbing more market share from the enterprise cybersecurity market and the product lines that we have already launched. So gradually, we are seeing products are achieving market fit, and we have started also getting customers onboard for the newer product that we launched a couple of quarters back. And we see enterprise to reach at least 50% or more in, at least next 4 to 6 quarters, tentatively.

[Operator Instructions] Our next question is from the line of Aditya Sen from RoboCapital.

I'll just start from the follow-up of the previous question that the previous participant asked. I'm audible, right?

Yes.

Yes. So we'd like to know what would be the net revenue for FY '24 and FY '25 because we've been struggling with the INR 300 crores revenue mark since quite a long time. So is this the year FY '24 that we'll see this benchmark crossing INR 300 crores?

Aditya, this is Navin. Fundamentally, we don't give guidance on any of the numbers, be it revenue or cost, et cetera. But one thing, what I can say that this year, H2, particularly, the slowdown was something which was unexpected. It was while we're -- while we're expecting but we were not expecting the tune to which the slowdown has happened in H2. Next year would be year of revival. And we will -- INR 300 crores certainly it will cross. It will have decent numbers.

Okay. And now I'd like to come to the research and development expenses. Like obviously, these are investments, and these are CapEx for Quick Heal. So I assume that once the products are launched, that is all the products will be launched in H2 FY '24. So post that, what will be the research and development expense in absolute terms?

So some of the products will get launched in H1 and some of the products will get launched in H2 [indiscernible]. This is something like the 1.0, 2.0 version. And to really make product full-fledged, you need to keep on adding a lot of features to make sure that you are compatible with international players. I'm talking about the new products, which we are developing. So I think we -- so we will continue to invest in R&D for all the business directions that we take, that is product, customers, geographies, et cetera. FY '23 was exceptionally due to sudden drop in revenue in H2. We will be looking at R&D spend in terms of percentage of revenue rather than overall spend, and we'll be working to maintain it at level of 25% to 30%.

That 25% to 30% [ looks ] fair number for us.

Of revenue. Of revenue actually.

Also, like last year in FY '23, we did [ INR 125 cr ] of research and development expenses. So can you please give us what are the top 3 components of this? Any broad like broad sales, what are the top 3 components?

Aditya, say your voice is not very clear. Probably we'll need to ask the -- repeat the question.

Am I audible better now?

No.

Still no?

There is a disturbance actually. Voice is cracking actually.

Can you come closer to the mic and...

I'll fall back in the queue. Yes. I'll fall back in the queue. I'll join it later.

[Operator Instructions] Our next question is from the line of Jatinder Agarwal, individual investor.

So I have 2 questions. One, can you quantify in terms of number of corporates that would be there for this [ SMB ] business? Like you said, your target market is around that 500 endpoints. So how many such corporates are there in India? And what type of revenue run rate do you get from each of these corporates, at least, on average for us as an outsider to understand what type of ticket size do we build on individual corporate size?

So if I have to tell you -- if I have to tell you about the enterprise product customer side. At present, I don't have the figures, but I would say that when it comes to the consumer business, we are definitely market leader. But when it comes to the enterprise business, there is a big potential for Quick Heal to grow. So big potential for Quick Heal to grow. And since we have come out with so many different kind of products, we will able to grab more and more customers on board. At present, I don't have the numbers of total number of customers size actually.

So we are already clocking somewhere about INR 100-odd crores, right, so on the enterprise side. If you could quantify what is the market size for the products that have already been launched and one that you think will come online in FY '24?

So in the SMB space, actually in the endpoint [ security ] space, we will be having a market share of roughly around 20% to 25%.

So you're saying that the total market is anywhere about INR 500 crores to INR 600-odd crores. Is that a good estimate?

That is the [ SMB ] part.

Yes. Yes, the SMB part.

And there is still another vertical, which is a midsized part.

Right.

And there is a big potential for Quick Heal to grow.

Okay. But do we already have products now launched for the mid...

Yes, yes, yes. We already have a few customers from midsize onboard.

And what is the ticket size -- sorry, the endpoint numbers that you are having in the mid-corporate?

No, that number -- bifurcation, we don't have at present.

500 to 1,500, roughly, endpoints that we can categorize as midsized market.

1,200 to 1,500.

Yes.

Perfect.

500 to 1,500.

Perfect. And my second question is related to this U.S. where we have a lot of corporates that have got selected and you have other corporates. Can you give us a thought process how we, as outsiders, should look at this initiative? Is it something just on the R&D side? Or is this something which will eventually become monetizable in terms of efforts that you take? [indiscernible] 3-year period, even I'm okay with it.

No. See, I'll explain. So NIST collaboration is all about collaborating as an industry leader onto a segment where this is a U.S. government entity where they work collaboratively with the industry experts and wherein even if they take input from industry -- cybersecurity industry to form the best practices and even the -- or I mean to say, compliances and law for the -- across government as well as the industries, and they are -- they have invited for such companies who are working in data privacy or data privacy related technologies. And we had a product which we recently launched, the 1.0, for our data privacy, which is HawkkScan and which was sent there, and they really liked it. So they consider it as one of the collaborator for their future discussions on these best practices into the industry. And this will help us in terms of reaching the right audiences and be visible to the industry in different countries because it's a very known entity, which works on different compliance-related document as well as they are, I mean to say, policy makers for different verticals across the industry. And this will definitely give us a good visibility across different industries. And we are marketing. Definitely, we'll try to make use of this opportunity to convert it into a good opportunity to showcase our skills and grab the business actually.

And one very small stupid question to add on to this. So this is B2B and B2G also, is it?

Right. Right.

Sorry?

Yes. Yes, that's right. B2B as well as B2G, right.

[Operator Instructions] Our next question is from the line of Aditya Sen from RoboCapital.

So I'd like to continue with the research and development part. Last year, FY '23, we did INR 121 crores of research and development expenses. So what will be the top 3 components of this research and development expense. Can you please explain this?

Research and development largely includes manpower cost. Then we have certain technical collaboration charges. And since most of the development happened over cloud, then the cloud cost also is part of research and development. But largely, you can say the single largest element would be manpower cost.

Okay. Understood. And the last question, how will the sales and marketing cost trend going forward? Like, it should -- I really -- we believe that it should increase because the products will be launched. And once the products are successfully based in the market, then it should decrease. So is this understanding correct?

Yes. So your understanding for -- so basically, it will have 2 elements. Your understanding for new products would be -- is correct, since new products or new thing would require incremental additional effort, hence the cost will be higher. But at similar cost, our standard product can be sold higher even at our existing cost. So broadly, whatever the spends we have incurred on account of sales and marketing in this year, next year, also, it will remain similar, but with substantially higher sales number.

[Operator Instructions] Our next question is from the line of Ramakrishnan V from Equity Intelligence.

So can you give us a breakup of what is the number of license you have sold? And what is the average realization? Is it volume driven? If there's an impact in the volume? Or if it's the impact on the price? And also, in case of this -- your enterprise?

So basically, our ARPU has increased during the year, and it has been increasing -- increasing over last few years. But as a matter of practice, we don't share the number of licenses or ARPU in absolute terms.

Okay. ARPU has increased in case of retail as well as in the enterprise?

Yes.

Okay. And what is the cash in the book as of now after the buyback and all that we have done?

We have close to INR 200 crores as in -- as cash and cash equivalent in our books.

[Operator Instructions] Our next question is from the line of Aditya Sen from RoboCapital.

Sir, I would like to understand the revenue composition of INR 100 crores of the enterprise segment. Like what architecture bring how much revenue? I would like to understand this part.

So Aditya, predominantly, 90% plus revenue comes from our hero product, which is endpoint protection.

Okay, okay. And one more question. Like it's not a question, just a concern that I'd like to share. What we believe is that CD drive from the laptop is now -- has now completely vanished, I believe. So I guess, pushing the product, while the laptop is being sold at the store, would be difficult. So don't you think this is a concern for us for the distribution channel? And also, why aren't you emphasizing enough on selling these retail product online? Because when I Google, it's -- I barely find Quick Heal anywhere. McAfee is there and other products are there, even free products are there. But it's difficult to find Quick Heal easily on Internet. Like obviously, jumping to website and Flipkart works, but I don't see any other optimization else.

So the answer to your second question first, that we are clearly available in online, be it our own website, which is quickheal.co.in as well as we are market leader in marketplaces, which include both Flipkart as well as Amazon. This is part one. Second, your first question was with respect to CD drive. See, the way everything has digitalized in similar fashion, our products also get burned basis the available code. So from that perspective, I don't think that -- and in fact, none of our competition also provides their antivirus in CDs.

So even we are not providing our products in CDs?

Yes. No, we are not providing. No one provides. No one provides.

Sorry, my bad then. It's my bad. Okay. Extremely sorry.

[Operator Instructions] As there are no further questions, I now hand the conference over to the management 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 satisfactorily. If you have any further questions or would like to know more about the company, please reach out to our IR managers at Valorem Advisors. Thank you. Stay safe and healthy.

On behalf of Quick Heal Technologies Limited, that concludes this conference.