Company Interview / Lining-up the next catalysts

Key points:

Dropsuite (ASX: DSE) reports a 67% drop in profit but a 34% rise in revenueStrong focus on reinvesting in R&D and internal securityPlans to leverage M&A opportunities to drive future growth

Charif El-Ansari from Dropsuite (ASX: DSE) discusses the company's recent performance. Despite a 67% drop in first-half profit, revenue rises by 34% to $18.9M, driven by increased user numbers. Dropsuite (ASX: DSE) expects robust market growth, fuelled by cybersecurity and regulatory factors.

Charif highlights the importance of reinvesting in R&D and internal security to maintain Dropsuite’s technology edge. The company balances investments between R&D and marketing, with a focus on supporting small and medium enterprises through its extensive partner network.

On future prospects, Charif mentions Dropsuite’s plan to capitalise on strong tailwinds by pursuing high conviction M&A opportunities. He points to steady execution, new product introductions, and strategic acquisitions as key catalysts for driving the share price higher.

Full unedited transcript below:

0:11

And next on the list is Dropsuite , which just yesterday reported a 67% drop in first half profit to $273,000, but revenue was up 34% to $18.9 million, driven by an increase in user numbers. It's a software services company, and it expects strong market tailwinds for the second half coming from cybersecurity and regulation. So its chief executive, Charif El-Ansari joins me now to discuss. Hi there. Welcome to the program. Nice to have you back. Hi, Nadine. So tell me, what have been the big drivers? What were the big drivers through the full year?

0:53

It is really important. Like you mentioned, we are and have been Experiencing tailwinds for the last several years. If you think about, uh, all kinds of cyber threats, the landscape has not improved. It keeps on getting worse and worse. I'm sure you've heard about the Microsoft CrowdStrike incident recently. Uh, that's very important driver of our growth. The second one is we are a partner centric company. We have about 4500 partners driving that growth. And that type of channel that we service is in really rude health. These are the IT service consultants and providers who are supporting small and medium businesses and mid enterprise for all their IT needs. So combining external tailwinds from cybersecurity with the growth of the channel that we service,

1:51

plus strong execution from our team and you get good results. Yeah I mean we continually hear that one thing enterprise is not cutting back on is spending on cybersecurity. So how have you worked within the company to make hay whilst the sun is shining, so to speak? You did mention the team, you know. How much are you putting into R&D? How important is it that you, you know, maintain the reputation of being really on the forefront of this technology?

2:20

It is really critical for us to continue reinvesting in the business. While I can see on the screen and path going down by 67%, you saw revenue going up by 34%, and actually our cash went up by 51% year on year. We've been generating since 2022. So major part and the major recipient of the investment is really going to be we are reinvesting into the team. We are investing into new technologies. We're strengthening our own internal security. Remember, as a backup company We are a data bank as well, so it's really critical for us to strengthen our own security. Combine all those together with a strong pipeline of new products. And you. I think you will understand the reason why we are reinvesting back into the business. I also want to add that given that we're still the results of $50 million a year company where we're just at 40 million a year,

3:21

but our latest quarterly announcement, we still have a long way to go. Hence, we continue to invest in the business. Yeah, and investing in sales and marketing as well. How much focus do you put on, you know, getting it to market, getting the product to market, making sure that you're expanding because there is a huge total addressable market out there?

3:43

Totally. We our primary focus continues to be R&D. We do selective investment in customer facing team members and of course in marketing as well. It's important to note that the way we run our business is through the channel, meaning that it is the channel partners who are selling, who are marketing, who are building the customer and also supporting the customers. So when you compare the extent by which we are reinvesting in R&D versus go to market, and the R&D part takes the lion's share.

4:21

Now how expensive is it to get people for drop sweet? How much of an employee incentive program do you have to have? How do you think about that heading into the future?

4:34

We have a really good culture, actually. What you see behind me is a bit blurred out our values as a company. We have super strong engagement survey that we do, results that we do every year, very low single digit attrition. So culture is really important. At the same time, we drive performance like there's no tomorrow. The other thing that we do is we ensure every single employee has long term incentives. And actually internally, we call ourselves hungry owners. We're hungry because we want to win. At the same time, we're owners so we don't cut corners to deliver the the good results. Now, when you talk about expenses, we are a really very global company. So of course when you, when you hire, um, uh, talented team members in the United States, it's going to be very expensive. But we also have a significant amount of our team members in lower cost locations like Indonesia.

5:31

Okay. That's interesting as well. Now, in the outlook, you said that you will continue to pursue high conviction M&A opportunities to take advantage of, you know, the strong tailwinds that you referenced earlier around data protection, where where are those opportunities most likely to present themselves?

5:53

Maybe I'll take a step back. First of all, we have to keep in mind that we we have the cash in the bank to to make these high conviction acquisitions. The other thing to keep in mind, which is I think really important here, is that in the last six, seven years, we have amassed, uh, an, a large channel base. As I mentioned earlier, we have north of 4500 partners. So the rationale for M&A is to identify bolt on acquisitions, products that totally resonate with the with the channel community that we service every single day, products that complement our backup capabilities. And then cross-sell and upsell becomes so much easier. The minute you do the integration. On the other hand, we continue to see a mismatch in valuation expectations between private companies and public companies. Private companies today are valued are actually more valuable from a valuation standpoint versus public So we really

6:53

taking our time to ensure that we we acquire that company at a fair price.

7:00

The drop suite share price did suffer last year, I think it was back in August when Microsoft unveiled its 365 backup archive solution. So, you know, a proprietary solution that, you know, I guess theoretically could really cut into drop suites business on that same sort of front.

7:20

Uh, you know, any developments there? What's your take? Obviously, you would not believe that what they can do is better than what drop seat can provide. But have you had any feedback from enterprise customers?

7:31

Um, we serve as small and medium businesses and enterprises. So that's the market we we sell to between one employee companies all the way up to about one 1000 to 2000 companies for the most part. Um, we really have not heard any of our customers or partners looking at the Microsoft backup product. A couple of things here. Uh, we have been positioning ourselves as the independent backup provider, meaning that we take your data from Microsoft. We put it in a in a secure alternative cloud that's fully encrypted and protected. And we've been doing that since 2018. So the independence of backup is absolutely of essence here to really call it a true backup. The other thing here is that the the beautiful thing about the Microsoft backup is that enables you to restore fast because the data is is in the same environment. Um, as as the backup. Right.

8:31

So you get faster restore speeds, but you don't get the full protection. So when you think about an enterprise customer, let's think about the CIO. Even if they want to deploy a Microsoft backup, they would still need to have an alternative disaster recovery solution that complements the Microsoft solution. Last but not least. It is really expensive. Um, we estimated to be 2 to 3 x more than what we provide, and we are one of the most expensive, most premium products in the market. Okay, so you've got pricing power then as well. Um, it sounds like. So what's the next catalyst? So I'm an investor already in the company or I'm thinking about getting into drop sweet. We talk about it quite a lot on the program. It comes up on the call, you know, like in your view, what's the next catalyst for the share price to move higher? The catalyst is a combination of, uh, stronger and stronger execution. Uh, if you look at, uh, Q2 versus Q1, you saw a significant

9:31

uptick in, um, anyways, recurring revenue growth and user growth. That's number one. Number two, new product introductions that enable cross-sell and upsell, uh, to our growing base of partners. Number three, it's going to be M&A. These would be the three top catalysts for our story.