During a recent earnings call, SideChannel's leadership, including CEO Brian Haugli and CFO Ryan Polk, outlined the company's financial performance and strategic direction.
The cybersecurity firm is prioritizing profitability and cash flow over aggressive growth, aiming to maintain a debt-free status while expanding its revenue streams.
SideChannel's Enclave product has been successful within the startup and manufacturing sectors and has piqued the interest of the US federal government.
The company is also seeing growth in the services side of its business, attracting clients from diverse industries such as Bitcoin mining and hospitality.
Despite facing lower gross margins due to the expansion of products and services, management is confident in improving margins in the latter half of the year and remains committed to achieving positive cash flow.
Key Takeaways
- SideChannel is focused on being cash flow positive and profitable, rather than solely chasing growth.
- The company aims to remain debt-free and is actively working to increase revenue.
- Enclave product has seen success in startups and manufacturing, with growing interest from the US federal government.
- New clients in the Bitcoin mining and hotel industries are contributing to the growth of SideChannel's services.
- The company has improved its revenue retention to 74.6%, with a strategic reduction in operating expenses by $1.7 million year-over-year.
- SideChannel anticipates that government contracts, particularly with the Department of Defense, could surpass current commercial contracts in value.
- David Menichello has been appointed as the Vice President of Partnerships to help expand SideChannel's offerings.
Company Outlook
- SideChannel plans to enhance its cybersecurity services through continued product expansion and partnerships.
- Management is optimistic about the revenue trend and the commitment to achieving positive cash flow quarter-over-quarter.
Bearish Highlights
- The expansion of products and services has resulted in lower gross margins for the company.
Bullish Highlights
- The company's strategic focus on cash flow and profitability is expected to build long-term value.
- Enclave product has garnered interest from significant sectors and the US federal government, indicating potential for large-scale contracts.
Misses
- There were no specific financial misses mentioned in the call.
Q&A Highlights
- The potential for large contracts with the Department of Defense was discussed, with the expectation to exceed the value of current commercial contracts.
- The appointment of David Menichello as VP of Partnerships is seen as a strategic move to drive future growth through expanded offerings.
In summary, SideChannel (ticker not provided) is taking a disciplined approach to its financial health, focusing on strong cash flow and profitability.
With the successful adoption of its Enclave product and expansion into government contracts, the company is poised to continue its growth trajectory while maintaining strategic financial control.
InvestingPro Insights
SideChannel's commitment to profitability and strategic expansion is reflected in several key metrics and InvestingPro Tips. With the company's focus on maintaining a debt-free status and improving gross margins, it’s worth noting that SideChannel is a prominent player in the cybersecurity industry with an impressive gross profit margin. This aligns with the management's confidence in improving margins later in the year.
InvestingPro Data indicates that SideChannel has a market capitalization of 13.46 million USD, showcasing its scale within the cybersecurity sector. The gross profit margin stands at a solid 48.68% for the last twelve months as of Q2 2024, which is a testament to the company's efficiency and profitability. Moreover, the revenue growth of 24.75% over the same period signals a strong upward trajectory in earnings, complementing the company's strategic focus.
InvestingPro Tips highlight that SideChannel operates with a moderate level of debt, which supports its goal to remain debt-free. The company's high shareholder yield and the fact that it has maintained dividend payments for 30 consecutive years are indicative of its commitment to returning value to shareholders.
For readers interested in a deeper dive into SideChannel's financial health and performance, there are additional InvestingPro Tips available at: https://www.investing.com/pro/. These tips provide further insights that could be crucial for investors looking at the long-term potential of the company. And for those who wish to access the full range of InvestingPro Tips, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 13 additional tips listed in InvestingPro that could provide valuable context and investment guidance.
Full transcript - Sudarshan Chemical Industries (SDCH) Q2 2024:
Operator: Good afternoon and welcome to the SideChannel Fiscal Year 2024 Q2 Financial Results Update. [Operator Instructions] It's now my pleasure to turn the floor over to your host, Side Channel's CEO, Brian Haugli. Brian, the floor is yours.
Brian Haugli: Thank you so much. Good afternoon, everybody. This is Brian Haugli of SideChannel joined today by our CFO, Ryan Polk. So today, released our second quarter 10-Q. Hopefully, everybody had a chance to read that. It went out this morning. Just want to highlight a couple of areas. Ryan will touch on some key financial aspects we're quite proud of. But I really want to kind of go over a number of aspects of the company and where we are and what we're looking to do. There's been a lot of questions about just volatility in the stock price, where we are as an OTC listed company, what our plans are for uplisting, how Enclave is looking, what's going on with the company structure and the direction. And look, overall, very confident in what we're doing. We're executing to our plan. I think our Q today and our press release this morning, highlighting the components of the Q, show that. We set out and said we were going to prioritize being cash flow positive and not prioritized on pure growth. We wanted to allow for being cash flow positive to set us up for the success of -- for the future of the company. We don't believe right now is the right time to do any type of raise, dilute shareholders, remove value from current shareholders for the sake of growth. I mean when you look at most companies that we're being compared to, we are not trying to be in the same, really category because we're not looking to run at massive losses for multiple years and not show profitability. Our focus has been on profitability, being cash flow positive, continuing to generate and increase our revenue and maintaining a stance as being debt free. We are hitting those. We're executing on those. We said we were going to do those things and we are doing those things. And I think that is what makes for a good sound, I think, as Ryan kind of keeps reminding me, it's an old school business model. But you know what, it works and it works for us and I think, it's what's going to really allow for us to be successful on a go-forward and not just be successful but ensure success. So that's really important. I think a lot of the market that we hear back from -- feedback from brokers, from folks, retail traders of what we're supposed to do as an OTC company. And we just don't fit that mold and we don't plan to. We are not going to prioritize doing a raise and getting new money into the stock, so that legacy clients and holders can just make an exit. We are building something here that is going to produce long-term value. And that is -- I don't believe is a true North Star for most OTC companies, right? Few have a legit path to profitability. The normal business model for OTC listed companies is tell a story to raise capital, advance the story, tell a story again, raise capital, repeat. We're not doing that. We haven't planned on doing that. I've never set out to do this 2 years ago when we went public with a very successful services company. I don't plan on taking that approach. With bringing Enclave further out into the market and I'll touch on what we're doing with that in a second. We just don't fit that standard OTC company. Look at anyone else that is out there in the same market cap and structure as us. We are significantly different in what we're doing and what we're executing on. Our financials show it, our marketing shows it, our team shows it. I just want to kind of put that to bed because I think we keep getting asked why we're not following the playbook of what other OTC-listed companies are doing. It's because we are not what they are. We are different. And our clients recognize it. Our team recognizes it and it's what we're building this company for and it's what I'm very excited to lead. I don't want to be -- I'm not one to just be like anybody else. So I never envisioned that we were going to run a company in a public market looking like what everybody else looks like. So that's an issue that keeps coming up and I want to just kind of put that to bed. I want to give big kudos to the folks online that continually give positive feedback and good criticism to us, asking good questions. Everybody knows I read the board. So, hello to everybody on investors hub. I'm glad that you guys keep asking questions and querying about what we're doing. So thank you. You know I read everything you guys put out there. So please continue to do that, always looking for feedback from shareholders, no matter how small they are in their positions with us or how large they are. So your opinion matters. And we do want to hear about your questions and make sure you understand what we're doing, why we're executing on it. So let's talk about Enclave. Services have been great and Ryan is going to touch on the financials and the success of that. But let's just talk about what we're doing with Enclave. We had a number of really successful proof of concepts or POCs that have actually now turned into new deployments. We've had a number of deployments at start-ups. There seems to be a really good market fit for client base inside of the start-up community for how we can use Enclave to present better asset intelligence, vulnerability discovery. We also have a good market fit for large manufacturing organizations as well. In fact, we have a very large manufacturing client as a user of Enclave. Kudos to Nick, our CTO on the recent deployment of our new Enclave hardware agent out to that client which was able to roll it out to their manufacturing floor to start doing micro segmentation as an underpinning concept to Zero Trust for that client. I mean it's a great fit. We're seeing a lot of success and interest from that sector on adopting micro segmentation. And we believe we have an incredible product that allows us to meet that need in a simple, low-cost, affordable and easily managed way. And that's what we're doing with Enclave and that's where we're seeing a good fit. I think we're also seeing some good interest and the right interest from the U.S. federal government and specifically within the Department of Defense. We just recently started a multi-month paid proof of concept with a federal DoD agency to use Enclave inside of their environment to replace legacy means to do segmentation and some aspects of networking. We believe that we have an incredible product that can meet the needs of this client and clients and agencies that look and act just like them. And again, Nick, myself, David all came out of the DoD and the IC. So we're familiar with how these organizations are structured and what they're looking for. And we feel confident in what we're able to do with Enclave. We're very happy that this is being looked at as a real player for someone in the space. So we're going to continue to make strides in the development to meet the needs for those clients but we're also going to continue to push sales and look at those opportunities within the federal government space because we know that this is an issue that needs to be solved for and we feel very good about how Enclave can solve for those issues. The services side of the business continues to grow. We've had some really great new clients coming on board. We previously had worked at 1 of the largest Bitcoin mining operations in the world. We actually just acquired as a new client, 1 of the other largest Bitcoin mining operations in the world. Our ability to go into and really know this space and deliver our services and advisory to establish governance for companies like this to protect their digital assets and protect their underlying infrastructure. I think it just shows the capability and the experience and the quality that clients expect and are looking for and they're getting it from SideChannel. We've also been able to win a number of other very interesting clients on a large hotel operation globally. Major brand that is again looked to build out and bolster their cybersecurity posture and program and they've turned to SideChannel to deliver that and we're very happy to have them as a client. And then a slew of other ones but 1 that I am actually very interested also to kind of maybe highlight is, again, large manufacturing operations. Both -- yes, obviously, a need within the manufacturing space and their floor to segment their environment from a technical standpoint but also from a governance standpoint, it's not just about the technical aspects of cybersecurity, the overarching leadership that's needed. We have a lot of clients where there is a well-informed, well-intended CIO or IT leadership. And they just don't want to also hold the burden of -- or maybe they just don't have the time or bandwidth to be able to manage the cyber security elements and requirements that their company should be addressing. And that's where they're turning to the SideChannel. So we're getting more of these clients. We've been very excited about the last quarter or so. And I'm continually impressed by what our team can do, what our message has been and it's being reflected in our sales pipeline and the conversations we're having and really pushing ourselves further and further upstream to more established brands and logos, more larger average contract value on our clients. And we're seeing our clients stay with us even longer. Ryan will, as we pointed out in the 10-Q, the retention rates that we have for our clients. there's a great story there. And when people are looking at, well, what does SideChannel do and why should I be an investor. You're investing in that experience and you're investing in that long-term play with clients and that's really where the value that they see and that's what we hope that you as investors see as well. So with that, I will turn it over to Ryan for some updates there and then we'll go to some Q&A.
Ryan Polk: Okay. Thank you, Brian. So cash flow is, I think, the big story in our second quarter results. It is the first quarter that we've reported an increase in cash flow from operations. Cash, at the end of December was just over $800,000. It was $819,000 and at March 31, 2024, we had increased cash to a balance of $851,000. So a slight increase of $32,000 has been a focal point of ours to get to a point where we can be sustainably generating cash flow from operations each quarter. Now that we've reached this moment, we do expect there to be some volatility. There'll be some quarters where we grow cash. There'll be some quarters where we're going to go negative on quarter-over-quarter cash flow, just as we work through working capital and some timing issues that we have, some seasonality, let's say, in some of our of our expenses. But we have -- we do expect to have more quarters than not where cash flow is positive from 1 quarter to the next. And so -- it's really been an across-the-board focus and effort every area. Every leader in our company has identified ways for us to reduce operating expenses. We're on pace to be $1.7 million less in operating expenses this year than we did last year. And that takes a lot of leadership and it takes a commitment to being disciplined on how we manage our operations and how we approach our spending opportunities. So I really appreciate the team that I get to work with and value their partnership and achieving good financial results. We have had a lot of success in improving our retention. We're at 74.6% on what we call retained revenue. And what that means is that 74% -- 74.6% of the revenue that we generated 1 year ago, -- we -- sorry, 74% of the revenue generated from clients we worked with 1 year ago, we're able to retain that revenue in this current fiscal year. A lot of times, I like to say that we are in -- we are not a project company. We're a relationship company and I think we can back that up with the statistics. Again, 74%-ish of the clients that we work with that we've been working with for 13 months or longer. So we're doing a good job of increasing our revenue retention. And 1 of the ways that we're doing that is by following Brian's strategy, executing Brian's strategy to add to our vCISO engagements, additional products and services that our clients need to improve their cybersecurity risk profile. As SideChannel grows in its client base and its revenue. It attracts the attention of companies that are ancillary to what we do, people that sell software, people that sell services that reduce cybersecurity risk. We are selective in which 1 of those partnership invitations we take. But every time we accept 1 of those partnerships that allows us to increase our catalog and the line items that we're delivering to our clients. So we're seeing the benefit of that in our retention line. We have revenue besides just traditional service and consulting revenue that's helping us increase our revenue retention. One of the downsides of that though is that third-party services and software revenue is typically less profitable to us on the gross margin line than our traditional services. And you're seeing a little bit of that in the margin lag that we have to the prior year. We do expect that to reverse as we go through the next 2 quarters. We have some things that are -- the service delivery team is focused on that we think will improve the margin. We think second half margin -- gross margin for us will be better than our first half gross margin. And on the revenue line, we don't see any reason why that revenue trend that you're used to seeing with us would change. We are -- for the year plus -- I think we're plus 16% just under that 15.8% for the year, 6 months ended March 31 compared to a year ago. We don't see any reason why that revenue trend is going to change drastically 1 way or the other. And so we feel like we've got a good trajectory, a committed team -- a team that's committed to achieving a cash flow positive operation on a quarter-over-quarter basis. And sort of the cornerstone to all of that is just focusing on our customer service and staying ahead of any attempts that the bad guys might be doing to weaken the cybersecurity posture of our clients. So with that, Brian, I'm going to wrap up my comments and pass it back over, I guess, to the moderator for Q&A.
Operator: [Operator Instructions] And there are no questions in queue at this time. I would now like to turn the floor back to Brian Haugli for closing remarks.
Brian Haugli: Just a quick check. Ryan, did we get any written-in questions prior to the conference call that we wanted to cover.
Operator: I do apologize, Brian, we did get a question in queue at this time. Good. And that question is coming from Richard Rider [ph].
Unidentified Analyst: I was wondering what size contracts are you going after?
Brian Haugli: Thanks, Richard [ph]. Ryan, you can help me talk about what our annual contract value has been. But the contracts that we're going after, really our target market on the services side and I'll break this down between services and product. On the services side, has really been mid-market to small enterprise. We have seen the -- we have seen the need for what we do with security leadership, governance and building out programs really sit and start on the high end outside the Fortune 1000 and just kind of go really downstream from there. So currently, our largest clients are $6 billion in revenue. Our smallest clients are $20 million VC-backed start-ups. We are really kind of targeting everybody in that space. Now the spend is highly dependent on the budget cycle that they're in, the spending that they're allotted and allowed. And that's kind of why I want Ryan to talk about what the average contract value is of our clients. But we do have, I will say, we do have and we are going and trying where we can to hit clients that are spending $200,000 to $300,000, sometimes more with us per year on just vCISO delivery as well as engineering. So where we can kind of couple in other capabilities, that value is going to grow, especially when we start layering in not just our direct services but other cybersecurity services, products, managed services, things like 24/7 monitoring, pen testing and other software capabilities that you're generally going to see inside of a cybersecurity program. We are positioning ourselves to be able to really sell and sell all of that through to a client so we recognize that top line revenue. Ryan, I don't know if you want to touch on kind of average contracts, I don't want to misstate kind of what we're doing, where we have been at.
Ryan Polk: Yes. Sure, Brian, I'll give a couple of quick stats. So Richard, the average -- we use an internal measure, we call it, annual contract value and that number is above $180,000 consistently on new deals we secure each quarter. So if we looked at average quarterly new client annual contract value, we're consistently above $180,000. Sometimes it will be much higher than that. Sometimes it will be closer to that number but that's where we're at right now. The trend line for that measure, annual contract value from new clients is increasing and it's increasing for, I think, 3 things. One is we're finding ourselves talking to larger enterprises who I think are requiring a higher number of hours from our vCISOs. We've got an uptick in the hours per agreement. Our rates are pretty steady. We haven't had an increase in our hourly rate for probably 18 months. We're very sensitive to the budgetary pressures that a lot of companies are experiencing right now. We don't want to be putting ourselves in a situation where we lose our -- where we may lose some opportunities because we're being too aggressive on price. So our rates are not necessarily driving a lot of the growth. But we are seeing this -- new deals have a higher percentage of services in addition to vCISO and third-party products. And so we are expanding catalog, the expanding internal capabilities are reasons 2 and 3, why our annual contract value is increasing on new clients.
Unidentified Analyst: Is the possibility of Department of Defense contract, a large contract or still in the same realm?
Brian Haugli: Well, Ryan was really talking about our services contract values which to date has been most of our revenue. What I was discussing about what Enclave is doing, what we're positioning with that software at the DoD client, that is different. Now we're early days with that but we've obviously gotten very favorable feedback. Whoever has the dog, mute the line please. The Enclave opportunity with the DoD agency is looking favorable, that would be a software deal and would be priced differently than what our services are. Generally, based on user count or seat count at an organization. Knowing how the DoD is structured. I don't want to sit here and say it's going to be x amount bigger than our annual contract value but software deals like that and especially if we can get further penetration beyond this first agency, we show value, we show what we can do for 1 agency in 1 environment, it will be seen as valuable and applicable in other environments. So the opportunity there is what we are looking at is positive. And the value for those contracts would be larger than our -- probably our services contracts in the commercial space. So predominantly, our services contracts and our service work that we've been doing has been focused on commercial entities. The DoD in the government space, they have different buying requirements, methods. They also have different pricing requirements and structures that we've had to follow. But knowing how large the DoD is and how large different entities are in seat counts, I would envision that our contracts for Enclave sales into those spaces would exceed our current ACV on commercial service contracts. Richard, does that answer your question, kind of help you better understand, okay.
Unidentified Analyst: Yes. Thank you.
Brian Haugli: Sure. Great question. Thank you for joining the call and for the questions as well.
Operator: Thank you. [Operator Instructions] And it appears there are no further questions in queue at this time.
Brian Haugli: Let's give it like 1 minute just in case anybody is a little slow to hit the button just in case. Give you folks 1 minute. I know we had somebody who posted online after the last investor call that she was a little slow to hitting the button and wanted to ask a question.
Operator: [Operator Instructions]
Brian Haugli: That might be it, operator. Appreciate it.
Operator: Absolutely. Thank you. Yes, and I do see no questions at this time but I would now turn the floor back to you, Brian, for closing remarks.
Brian Haugli: Thank you. Well, again, folks, another quarter in the books. I'm very excited about how we are going down the route for the rest of 2024. Again, remember, we are an end of September fiscal year. So we are now sitting in Q3. And just on the side as well and I know he is down here, our new Vice President of Partnerships; David Menichello, has joined us as well. We are -- we announced him on LinkedIn. And we're excited to be able to broaden what we are doing with partnerships and establishing what we can do at our partners for their clients. We are definitely signing up more that are looking to bring both Enclave and our vCISO and cybersecurity services through into their clients. It's an area that we are focusing on and we welcome David as a new member of our sales team to be able to basically help us drive more revenue into SideChannel through partnerships and look at that space. So excited to have him on board, excited to still have the team that we have, a lot of excitement within the delivery team, within the operations teams, even within the administrative teams and my office. So thank you to everybody on the call. Thank you to everyone at SideChannel and what we're doing. Thank you to the investors who have tuned in. And please follow us on LinkedIn for any other updates. Follow us as well on YouTube for any other content as well. And we look forward to speaking with you all very soon.
Operator: Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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