Quick Heal Technologies Limited

Quick Heal Technologies Limited (NSE:QUICKHEAL) Q3 FY23 Earnings Concall dated Jan. 25, 2023.

Corporate Participants:

Anuj Sonpal — Chief Executive Officer

Kailash Katkar — Managing Director & Chief Executive Officer

Sanjay Katkar — Chief Technology Officer

Navin Sharma — Chief Financial Officer

Analysts:

Sumit Vardeman — Quick Heal Technologies Limited — Analyst

Karan Bhanushali — — Analyst

Jatinder Agarwal — — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Quick Heal Technologies Limited Q3 FY’23 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you. And over to you, Mr. Sonpal.

Anuj Sonpal — Chief Executive Officer

Thank you, Michelle. 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 nine 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 purely to educate and bring awareness about the company’s fundamental business and financial quarter under [Phonetic] review.

Let me now introduce you to the management part of [Indecipherable] 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.

Kailash Katkar — Managing Director & Chief Executive Officer

Thank you, Anuj. Good afternoon, and warm welcome to you all to our quarterly earnings conference call to discuss the result and business update 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 [Phonetic]. Right. We are the pioneer of India’s — Indian cyber security 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 and point [Phonetic] market segment by now. We have on-boarded Mr. Venkat as a Senior Vice-President 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 while developing future lever of growth.

As I have also mentioned in earlier calls, we are increasing our digital efforts 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 the right industry where the world easily absorbs [Phonetic] natural 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 pivot ourselves from the consumer antivirus player to the holistic cyber security player with new age products under the products — under our umbrella.

Now I request Sanjay to take you all through the business segments and our strategic direction. Over to you, Sanjay.

Sanjay Katkar — Chief Technology Officer

Thank you, Kailash. And good afternoon, everyone. Let me give you some more insight into both the segment of our business. 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, so endpoints, 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 offerings by complementing it with EDR and XDR, which adds detection and response layer to the protection for enhanced security.

In this quarter, we also on-boarded 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 revenue 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 100 crore revenue on a TTM basis in the segment. The accelerating growth in the enterprise segment is making our conviction 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 evidenced from our financial performance. While it is too early to make a judgment, we are experiencing downtime in the market for the short-term. We are foreseeing this trend to continue for the next couple of quarters. And 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 cyber security domain.

I would now request Navin to take you through the financials of the quarter. Over to you, Navin.

Navin Sharma — Chief Financial Officer

Thank you, Sanjay. And good afternoon, everyone. Let me take you through the financial highlights for third-quarter of FY’23. The consolidated revenue for the quarter stood around INR67 crores, which de-grew by 16% on a Y-o-Y basis. For nine months, the consolidated revenue stood around INR229 crores, which represents a de-growth 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 result 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 nine months, FY’23, stood at INR76 crores as compared to 59 crores in the same-period of the corresponding year, up 27% y-o-y.

As I have mentioned in previous calls, the segments 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 de-growth in the consumer business, where we’ll 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 nine months continue to gain — continue to remain strong, and content versus previous year at over 95% level. While the impact of industry headwinds are short-term in nature, we are taking corrective action against our expenses. Our key focus in the next couple of quarters is to revise profitability by trimming down our costs 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 verdict, judgement dated August 5 ’22 has passed orders in all service tax matter in company’s favor. All the related spending service tax matters in different tribunals amounting to INR161 crores has also been disposed off in this quarter and decided in company’s favor. During the quarter, we also completed the buyback worth INR105 crores — 185 crore inclusive of taxes.

With this, I would like to open the call for questions-and-answers session.

Questions and Answers:

Operator

Thank you very much, sir. We will now begin the question-and-answer session. We have the first question from the line of Sumit Vardeman from Quick Heal Technologies Limited. Please go-ahead.

Sumit Vardeman — Quick Heal Technologies Limited — Analyst

Good afternoon. I have two questions. Quick Heal Technologies have a great business model and good branding. We’re able to maintain 35 to 40bps — 40% margin, EBITDA margin in our business. Majority of our expenses are fixed expenses like employees cost, R&D and product development. But from FY 2016 to FY 2022, we are not able to grow our sales, what is the reason behind that? And what is your future outlook over the period of next five to ten years? We are able to — if we are able to deliver 1,000 crores of sales, we can easily earn 300 crore to 400 crore of EBITDA. And my second question is about what is your — your trade receivables is increasing consistently, is there any particular reason for that?

Kailash Katkar — Managing Director & Chief Executive Officer

So thank you, Sumit, for this question. So let me just 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 cyber security products, and that is a [Indecipherable] part of it. And most of these products are going to get released in this year starting from this product itself. So after getting these products for release into the market and getting the product stability at a customer level, the revenue will start coming to this — across these products. And to the second question?

Navin Sharma — Chief Financial Officer

So, Sumit, with respect to receivables, largely the COVID has impacted the receivable because during this period, the liquidity — so there was issues with respect to liquidity, et-cetera. In last couple of quarters, we already have started taking right steps, and if you’d 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 three FY ’23, we have reduced our receivables by 16 days, and currently it is at 133 days. In the next two to three quarters, we would like to bring it below 100 days, and in next quarter, probably this will — this should be below 120 days. Hope I was able to address your second part — the second part of the question.

Sumit Vardeman — Quick Heal Technologies Limited — Analyst

Okay. What’s your future outlook over the period of next five to 10 years?

Navin Sharma — Chief Financial Officer

You yourself said that we are planning to move the revenue from 300, 350 crores to 1,000 crores in next three years. This is what we are aspiring for. Aspire big.

Sumit Vardeman — Quick Heal Technologies Limited — Analyst

Okay. Okay. Thank you.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Karan Bhanushali, an individual investor. Please go-ahead.

Karan Bhanushali — — Analyst

Hi, sir, good afternoon. Sir, what is the reason for decline in EBITDA, can you please shed some light?

Navin Sharma — Chief Financial Officer

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 de-growth, more so the de-growth in EBITDA in current quarter is mostly on account of de-growth in revenues, which was quite sudden against increased R&D and sales and marketing efforts, which were planned and committed already. As I’ve mentioned in my earlier part of commentaries, 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 to revive profitability by trimming down our costs 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 represents that all — that any incremental revenue will directly flow into bottom-line. So this is I think because of the EBITDA is impacted in the quarter. So, let’s see how future comes.

Karan Bhanushali — — Analyst

Sir, also, follow-up question. Are we looking at some layoffs like other IT companies are doing?

Navin Sharma — Chief Financial Officer

So, key for cost-reduction exercise we are evaluating all cost items under various framework; the zero-based costing, the productivity matching 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 to affect the core asset of the company, putting it simply, we are not contemplating layoffs in the organization.

Karan Bhanushali — — Analyst

Okay, sir, thank you. That was it from my side.

Operator

Thank you. [Operator Instructions] we have the next question from the line of Jatinder Agarwal, an Individual Investor. Please go-ahead.

Jatinder Agarwal — — Analyst

Hi, good evening. So I just wanted to understand in terms of now that the product is ready and we saved some initial gain. Individually, for the each of the product, which is Seqrite, your HawkkHunt, HawkkProtect and HawkkScan, could you give some idea as to what type of market size is currently that we are looking to capture? Maybe you could give that thought process, over a three-year, five-year timeframe, that should be good.

Kailash Katkar — Managing Director & Chief Executive Officer

Hello. Sanjay, would you like to take this question?

Sanjay Katkar — Chief Technology Officer

Yes. So, the market potential for the new products is quite, quite good. I mean to say, there are — there is a gradual transition that is happening in the market from as we know that people are moving, who are seriously into cyber security investment are moving from traditional security to zero trust and platforms. But this transition is happening gradually. And so, if you see HawkkEye, which is our EDR product, it is already — we launched almost two quarters back and it has — in this quarter it has achieved market frequent by on-boarded customers, five new customers in EDR.

Jatinder Agarwal — — Analyst

Right.

Sanjay Katkar — Chief Technology Officer

So this is quite encouraging for us and we do see that this — this is the first product of our newly released products that is going to start pushing revenue into our revenue streams, and then the products which you said for the HawkkProtect, HawkkScan, these are pretty much new in their targeting areas which are yet to — I mean to say, yet to start see the demand. I mean, for example, the HawkkProtect is all about data privacy and data protection wherein every organization in India and even in government departments, it has been discussed, it has been talked about, but the regulations are not yet clear and the bill is yet to happen and investments are yet to start flowing. And so, we do see this as a huge potential, but I’m not able to put it in figures here because we do see quite a good interest from our existing customers as well, whether we are developing this product or not. And that’s where we are seeing good enough candidates for our beta test for these products and that’s where we are hopeful for these products to perform well as and when the demand starts.

Jatinder Agarwal — — Analyst

But sir, as an outsider, right, so when I look at those presentations that you said that you mentioned that the global security market is like 233 billion and out of that something close into India, which is still somewhere about $2 billion to $3 billion. How do we make a sense out of those numbers, right? We are running annual run-rate maybe of about 100 odd crores, even if I exclude the retail segment. So as an outsider, how do I look at those numbers? At 100 crores, where are we from the market?

Kailash Katkar — Managing Director & Chief Executive Officer

Let me give you some clear idea about things. One is, let’s see, we are targeting a segment of market which is mid-size. We had been targeting SMB, where we are quite comfortably having certain market-share. And then, now we are, with these new releases we are targeting mid-size organizations. Now, the size of the mid-size market is further below than what is the overall global market.

Jatinder Agarwal — — Analyst

Exactly.

Kailash Katkar — Managing Director & Chief Executive Officer

[Speech Overlap] globally is more investment is done by a very large enterprise. And for us, right transition is to move towards the mid, which is we are in that transition, and we are very hopeful that we’d be successfully doing that, and from mid to large is our next step, wherein are our smaller investments. And we have already started scaling up our full [Phonetic] products to for the large enterprises, as well as we are talking to MFPs, as well as MSSPs and getting ready our platform so that these large enterprise aside, we’ll be integrating our products into their platforms and pushing into the larger enterprise. So that’s the transition that we are into.

At the same time, we are releasing these product to the mid-size organizations, wherein we are trying to capture the feedback, as well as strengthen our products with these releases and also start revenue streams for this group. So we do see that we’ll be able to capture at least 7% to 10% of the market-share from this at least in next financial year as the product starts capturing at least for HawkkHunt and for HawkkProtect and HawkkScan it should be in the H2 — the revenue should start flowing from the H2 of FY’24.

Jatinder Agarwal — — Analyst

So, exactly my question. So when you’re saying that we should get about 7% to 10% market-share. How big is this market? In absolute amount, if you could give that answer?

Kailash Katkar — Managing Director & Chief Executive Officer

Yes, it’s like, if you see — when I’m saying 7% to 10%, it should be around 40 to 50 crores when we are targeting — and I’m talking about the India market, where we are having our present integrated parent. So at least it should be 40 to 50 crores of the market from these products actually.

Jatinder Agarwal — — Analyst

So this is over and above the 100 crore run-rate that we — [Speech Overlap]

Kailash Katkar — Managing Director & Chief Executive Officer

That’s right. Yes.

Jatinder Agarwal — — Analyst

And so, you mean to say that the market for the new products, the total market, not just quickly, then that is anywhere between 400 to 500 crores, is that correct?

Kailash Katkar — Managing Director & Chief Executive Officer

Yes. This upward potential is quite high, but current — looking at the current rates, it is — we’re just hopeful that it should be at least reached that way actually. Yes.

Jatinder Agarwal — — Analyst

Okay. That is useful. Thank you, sir.

Operator

Thank you. [Operator Instructions] we have the next follow-up question from the line of Sumit Vardeman from Quick Heal Tech. Please go-ahead.

Sumit Vardeman — Quick Heal Technologies Limited — Analyst

Sir, as an open [Phonetic] investor, can you please guide us, what kind of products we are launching in FY’24?

Sanjay Katkar — Chief Technology Officer

Yes, I’ll take this. This is Sanjay Katkar. So, see, our focus for new products has been in the enterprise segment for last at least four-five quarters and we have invested heavily into the Seqrite platform, Hawkk platform of our products. So the products that we plan to launch in these coming two quarters, is one is HawkkProtect, which is about data protection product, which is about making organizations ready for data protection bill actually, which is about to come into the parliament. And so that will help the organizations to follow the regulations, comply to the rules that are going to come. So this product is all about that. We have facilitate those things through that HawkkScan and HawkkProtect. This was all about HawkkScan.

And then, HawkkProtect is about zero trust, user access and zero trust network access, which makes people or employees from the organizations to connect to the internet and organization platforms through regulated — I mean say compliances which can be distributed — I mean, which can be applied and distributed to the devices, which can work from anywhere. I mean to say it’s not, it’s going to be a replacement of VPN in a much advanced fashion which will be tackling all the needs of — current needs of employees working from anywhere and connecting to any device through any network and still having the security compliances followed remotely, I mean to say. Yes. So these digital products are going to make the organization’s cyber security posture much easy to maintain, and CEO’s job much easier after that I guess. So it’s all about mid-size and large enterprises, the products are all about that. Yes.

Sumit Vardeman — Quick Heal Technologies Limited — Analyst

Thank you.

Operator

Thank you. [Operator Instructions] As there are no further questions. I would now like to hand the conference over to the management from Quick Heal Technologies Limited for closing comments.

Kailash Katkar — Managing Director & Chief Executive Officer

Thank you all for participating in this earnings conference 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 Investor Relations Manager at Valorem Advisors. Thank you. Stay safe and healthy. Happy Republic Day to you all — to each of you in advance. Thank you.

Operator

[Operator Closing Remarks]