In its first quarter financial results call for the fiscal year 2024, cybersecurity firm SideChannel Inc. (ticker: SDCH) outlined a period of strategic growth and operational efficiency. CEO Brian Haugli and CFO Ryan Polk discussed the company's progress in client relationships, service expansion, and regulatory compliance, as well as the positive reception of their Enclave product. Despite lower-than-expected engagements impacting gross profit margins, the company has increased revenue and significantly reduced operating expenses. The management team highlighted the importance of a strong customer experience and the company's leading position in Virtual CISO services in North America.
Key Takeaways
- SideChannel's leadership emphasized progress in client engagement and operational growth.
- The company successfully reduced operating expenses by over $1.2 million.
- Positive adoption of Zero Trust technology through the Enclave product was noted.
- A strategic warrant exchange was completed with over 70 stockholders.
- Future earnings calls will focus on discussion and Q&A, rather than reiterating published information.
Company Outlook
- SideChannel expects increased utilization and engagements in the second quarter.
- The company is committed to maintaining transparency in future earnings calls.
- Management is optimistic about growth potential, especially with new engagements expected to materialize in Q2.
Bearish Highlights
- Gross profit margin in Q1 was negatively affected by lower-than-expected engagements.
Bullish Highlights
- The company has seen a strong revenue retention rate.
- SideChannel is the largest provider of Virtual CISO services in North America.
- The management is excited about the company's position and ability to deliver cost-effective services.
Misses
- New engagements that were anticipated in Q1 will now take place in Q2, with no deferrals.
Q&A Highlights
- The Q&A session concluded with no significant questions or concerns from participants.
In conclusion, SideChannel's Q1 earnings call presented a picture of a company that is strategically positioning itself for future growth while managing current challenges. The management's focus on customer experience, operational efficiency, and compliance with new regulations sets the tone for the company's direction in the coming quarters. With the anticipation of new engagements and a commitment to transparency, SideChannel appears poised to maintain its leadership in the cybersecurity market.
InvestingPro Insights
In light of SideChannel Inc.'s recent earnings call, key financial metrics and InvestingPro Tips provide additional context for investors assessing the company's performance and potential. The company's market capitalization stands at 9.53 million USD, which, although modest, suggests a niche player with room for growth in the cybersecurity sector.
An impressive gross profit margin of 50.7% in the last twelve months as of Q4 2023, as reported by InvestingPro, indicates SideChannel's ability to retain a significant portion of revenue after the cost of goods sold, which is crucial for its long-term sustainability. Despite this strong margin, the company's price-to-earnings (P/E) ratio is negative, at -1.24, reflecting current earnings challenges. However, this could also signal potential for investors if the company's strategies lead to future profitability.
InvestingPro Tips highlight that SideChannel has maintained dividend payments for 29 consecutive years, demonstrating a consistent return to shareholders, and analysts predict the company will be profitable this year, which may reassure investors looking for signs of a turnaround.
For investors seeking a deeper dive into SideChannel's financial health and future prospects, there are additional InvestingPro Tips available. These include insights on the company's shareholder yield, its position as a prominent player in the Chemicals industry, and its moderate level of debt, which could be pivotal in understanding the company's strategic financial management.
To access these insights and more, consider using coupon code SFY24 to get an additional 10% off a 2-year InvestingPro+ subscription, or SFY241 to get an additional 10% off a 1-year InvestingPro+ subscription. With 9 additional tips listed in InvestingPro, investors can gain a comprehensive understanding of SideChannel's financial landscape and make more informed investment decisions.
Full transcript - Sudarshan Chemical Industries (SDCH) Q1 2024:
Operator: Greetings. Welcome to the SideChannel Fiscal Year 2024 Q1 Financial Results Update Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Brian Haugli. You may begin.
Brian Haugli: Thank you, John. Hello everyone. Brian Haugli, CEO of SideChannel. Find us online at sidechannel.com or under ticker symbol, SDCH. I’m joined today with our CFO, Ryan Polk and we just wanted to briefly cover our Q1. I have some comments on our go-forward and some numbers, and we will go to questions from the phone line. So, John can take over on that and dial you in, and you can ask your question, and then we will respond. So, overall, another quarter under our belt. We closed out the calendar year 2023, but we start our fiscal year 2024. Traditionally, this time of year is an interesting time when you're working in IT. If anybody has, you see quite a bit of activity and then you see lulls. So, this was not an uncommon quarter for SideChannel and a lot for IT. You're seeing kind of a ramp down on people working or scheduling work to be done at the end of the year, mostly because they are doing -- getting things set up for the calendar year coming up or budgets reset January 1. So, we'll go over some of those numbers. Ryan in hit those highlights, but overall, pretty pleased with the clients that we were able to start working with, relationships that we started building, and setting ourselves up in our pipeline for this year. On the services side, it's been great. David and the operations team now, as you saw a press release recently as we promoted Matt Klein, Eric Gauthier, Dele to new roles to lead the operations and delivery. Obviously, we're focusing a lot on customer success, customer happiness and that -- a lot of that is due to how our folks are managing and leading and delivering. So, very excited about the growth there and what we're setting ourselves up for as we expand to meet new client demand. We need the leadership in place to be able to support our delivery teams and elsewhere. So, having these three new folks under David's leadership is just a step in the right direction and setting us up for more growth and success. So, very happy with that on the services side. On the engineering and expansion, we're constantly looking for new opportunities. We put a lot of effort into looking into our current client base and trying to figure out ways to figure out where to expand in current clients, looking for new opportunities, things like that, trying to make sure that we're meeting the needs that our CISOs are identifying and clients are asking about. Also, you see a big change in regulatory landscape. New SEC rules impacting published companies and new requirements for public companies to meet those cyber requirements. That's been a big kind of growing discussion, and it's something that we're positioning ourselves to be able to work with clients in. And we're very excited about it. If you read our 10-K, you'll see that we actually completed the first ones to publish a – the new disclosure statements and language in the 10-K. We've got some really good feedback that we might have set a bit of a standard on that or at least a good way about how to look at what that is. All of that type of work is the type of work SideChannel stepping in and fulfilling for customers. And we're looking for more customers that are in need of that. And I think we're just going to see that really kind of expand as we move forward. So overall, I'm very happy with where we are and what we're doing. On the product side, we've seen some good adoption and movement on Enclave. You'll note that in the press release, we're still kind of really viewing it in a beta phase, but we've had a number of solid proof concepts, adoptions by clients and interest that we're just establishing and building out that pipeline for Enclave. Overall, you got to look at the whole industry as a whole. Zero Trust is new. The concept is generally new from an adoption standpoint across organizations, traditionally 10,000, 25,000 plus person, our employee enterprises are at the forefront of adopting any kind of Zero Trust technology. We feel very confident in the tech that we have built. Kudos to Nick, our CTO and Don and the development team on what they've done with this and what we're bringing to market and showcasing in demos and discussions. So again, we feel very positive about the product. We know we've got a good solution that meets the need from our use of experience, having inside distributed professionals, and we're starting to see that interest get an uptake from clients as well as non-current clients, just net new folks that we're talking about. So again, overall, just kind of a recap of what we've been working on, what we've been looking at, and we're going to continue on the same track through 2024 and forward. So with that, I'll hand it over to Ryan, who'll touch on – so the financial aspects, and then we'll try to get some questions. Ryan?
Ryan Polk: Yes. Thanks, Brian. Yes. So we mentioned in May, May of 2023 that our focus was on achieving cash -- positive cash flow from operations. We've been working diligently on that through a couple of different initiatives. One is obviously growing our client count, growing our revenue. And Brian touched on, and you can see in our results, we continue to increase revenue through our success there. The second thing that we focused on was just optimizing our expenses or really rationalizing our expenses for the maturity level that for our current maturity level and really for the activities that we had underway at that time. And so we ended up over the last seven or eight months, we've ended up reducing our annual operating expenses by over $1.2 million. And you saw that in the results this quarter. We noted in our press release that we had a year-over-year reduction in operating expenses of $368,000. We're going to -- we expect there to be another quarter of sequential operating expense reduction, meaning we expect our second quarter, our fiscal year second quarter to be maybe equal to or slightly lower than the operating expenses that we had in our first quarter. So we have not yet fully realized that the takeaway from -- what I'm saying is we have not yet fully realized the full extent of our operating expense reductions. And so that we think will have further boost to our cash flow and earnings in our fiscal second quarter. We see continued strength in the top line. And so we're expecting our top line to continue growing. And so in the middle, then, you've got gross profit. You've got increasing revenue. We've got decreasing expenses. And so the question -- the only remaining question is what's happening on the gross profit line. We had excess capacity on our delivery team in Q1. We had indications that some new clients were going to come online during Q4. Those engagements got pushed into Q1. We were carrying some capacity to serve those engagements in Q4 -- I'm sorry, in Q4, I was thinking calendar year. Let me speak in terms of fiscal year. We had some engagements that we thought were going to start in our first -- in the first quarter of our fiscal year, those got pushed into our second quarter fiscal year. And so we had a lower gross margin. We had a higher cost of goods sold in fiscal year quarter one than we were anticipating. And so we did not have the type of performance on the margin line that we were looking for. We do not expect that to continue. We expect the utilization to increase in Q2. And so we're going to add to our growing revenue line an improving margin line, as well as the decreasing OpEx. So we're going to continue inching closer towards being cash flow positive on -- cash flow positive from operations on a quarterly basis. And like Brian indicated in our press release, we believe we will accomplish that during this fiscal year. We got a big boost to our strategic objectives during this last -- during the first quarter in the form of over 70 shareholders -- over 70 stockholders supporting a warrant exchange. I say, it's a big boost to our strategy, because one of the things that we are constantly presented with are strategic partnerships. The warrants that were held by these 70-plus investors present some roadblocks to us really having the flexibility that we need to take advantage of those opportunities. And while we weren't able to convert all of those warrants into securities that are friendly to both the investors and to the company, we did make quite a bit of progress down that road and believe we have line of sight to how we might be able to finish up that work during the next three to six months. So we really appreciate each of the investors that spent time getting to know us during that exercise, listening to what we are trying to do and expressing their support for our strategy -- or excuse me, this element of our strategy to create value through exchanging these warrants. Just a few other things I want to make sure I don't get lost a few financial -- non-financial measures that may not show up may not be as prevalent in your review of our statements. And that is one retention. Our revenue retention is continuing to increase. We're reporting 12-month revenue retention of just under 73%. What that means is that we are -- this year, in this fiscal year, we're recognizing $0.73 of revenue for every dollar of revenue we recognized one year ago. We mentioned that because we want to make sure everyone understands that we are a relationship-driven company. We're not a project-driven company. We do have some project engagements but it's real important for us, as Brian mentioned, to have -- deliver a great customer service, a great customer experience. And that's really something that is an enduring activity in most of our engagements. And that's why we have a 73% revenue retention. So, we don't call it ARR. It's similar to that, but that's not what we're going to call it because we're not -- that's not really true ARR. We think that's a pretty good accomplishment for a company of our size, especially in the services industry. And I think another thing that everyone on the call needs to understand about our business is that -- in addition to having leadership -- cybersecurity leadership in place at our clients, we're also surrounding that leadership with a lot of services and software that create the kind of stickiness that allows us to have 73% revenue potential. And another one of our strategic initiatives is to continue growing the adoption of the services and software that we offer by our clients to obviously to further increase our revenue, but also to make sure that we have a tighter relationship with those clients and probably most important to all of that is the -- is our effort to make sure that our clients have the best risk profile possible for cybersecurity exposure. And all the work that happens from a leadership on down into the software and services we provide are key to making sure that we're meeting and delivering a great risk management experience for our clients. So we've covered some highlights. Most of the information, I think, that you're interested in, you can see through the Form 10-Q that was filed with the SEC this morning. And we're happy now to go to Q&A.
Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]
Ryan Polk: John, I think we've got one question in the queue.
Operator: Absolutely. Your first question comes from Jack Depepe [ph], Private Investor. Jack, please proceed.
Unidentified Analyst: Yeah. Hi. The revenue that you were anticipating realizing in the first quarter or the last quarter of 2023, do you anticipate it being realized in the second quarter? Or are we going to push it down to the third quarter?
Ryan Polk: So Jack, the new engagements that I mentioned that we expected to happen during our first quarter those are happening in our second quarter. We of all the deals that we had scheduled to start in the quarter, we're currently reporting on. All of those have engaged in the current quarter.
Unidentified Analyst: Okay. Cool.
Ryan Polk: Nothing is being deferred. None of those engagements are being deferred into a third quarter start.
Unidentified Analyst: Okay. Thanks.
Brian Haugli: This is Brian. Generally, what you see is companies are -- they're kind of hesitant sometimes in November, December of every year, whether or not they want to pull the trigger, sign the contract, or if they want to know for sure that their own company is giving them the budget to be able to then go procure services. So they'll start -- they'll wait till…
Unidentified Analyst: Correct, correct.
Brian Haugli: Yeah. We've had a joke internally for the last couple of years that how much are we going to actually sign the first business week of January, because every year, it's the same thing. We talk with clients November, December…
Unidentified Analyst: Well, yeah, because their budget – they use their budget by December, and they're like, we got to do this, but…
Brian Haugli: Right. Yeah. So it's a natural thing. It's not unknown to us. So we kind of expect this. But, yeah, we did see everything that we were expecting to get signed and start and begin in January. And we've seen -- I think we've seen a pretty healthy January and February to date. So this is just the nature of services and the nature of budget cycles. It just so happens that our fiscal year is a quarter off from calendar year. So we report it a little differently. And I think that's what you're seeing come out.
Unidentified Analyst: Yeah. Okay.
Brian Haugli: Thanks for the question.
Unidentified Analyst: Thank you.
Operator: [Operator Instructions] Okay. There are currently no questions in queue. I'd like to turn the call back to management for any closing remarks.
Brian Haugli: Yeah. Thank you. And again, thank you, everybody, for joining. I think the format that we're going to take for these earnings calls going forward is going to be what you just heard here. I'll really try to keep it brief on how things were going, what I'm seeing that's going to happen. Ryan will hit some key points, but we realize that you all can read the filings and the press releases. We don't need to restate all of that. So we really want to open this up for questions and have start really more of a discussion with either interested investors, current investors, analysts, really whomever on these calls. You'll notice that we published, I think, a press release this last week, what our earnings and our release schedule will be for this year. So you can anticipate when we're going to talk about that. That's our commitment to you in transparency that this is when we want to discuss this. We want to start setting some expectations around time lines, on filings and on earnings calls, so that really we just don't get those questions. And it's just -- let's just set a schedule, let's stick to it, and then we can just all work off of that going forward. So, look, overall, still very excited about what we're doing with this company. I believe very much inside channel this has taken to another level that we originally all thought, and it's been -- it's a really great journey, and deep down we're really helping out a lot of organizations. I mean, the logos and the new clients that we have are in a position where they really do need cost-effective services at the level that we're able to bring them. And we're just not seeing it elsewhere in the market. We've kind of figured out that we are probably now the largest Virtual CISO or vCISO service provider in North America. We're just not seeing anybody else out there at the magnitude and the scale that we have to be able to deliver what we're delivering, and we're very proud of that. And I'm very proud of the team. Everybody who's worked on everything from delivery to administration, to accounting. Kudos to Ryan and his team for everything that they've done. So, it's just -- I feel like we're just really getting going. This is just the beginning of something really special to me. And I think something that the team, as you see them join, whether you follow us on LinkedIn or just through the blog or just on the press releases, who's joining and why, I think it's just -- it's another reason to just pay attention to what we're able to do. Ryan, do you have any closing comments?
Ryan Polk: No, Brian. None. Thank you for asking though.
Brian Haugli: No worries, keep crushing it. All right. Thank you, everybody.
Ryan Polk: Thank you.
Operator: Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
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