SideChannel, Inc. (PNK:SDCH) Q1 2025 Earnings Call Transcript

SideChannel, Inc. (PNK:SDCH) Q1 2025 Earnings Call Transcript February 5, 2025

Operator: Greetings. Welcome to the SideChannel Fiscal Year 2025 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, Brian Haugli, Chief Executive Officer. You may begin.

Brian Haugli: Thank you, and good afternoon, everyone. It’s Brian Haugli, I’m CEO of SideChannel. So I just want to cover quickly kind of our view of how Q1 went. We won’t rehash everything that’s in the – in the Q, but you will undoubtedly have some questions about it, so we can answer those in a bit. I’m joined by our CFO, Ryan Polk, and he’ll touch some highlights on the financials. Really, Q1 for us, obviously, it’s an off-calendar quarter than our fiscal quarter. So we’re looking at October, November, December. From a services standpoint, as we’ve talked about previously, there’s a bit of seasonality. There’s also some differences in how people kind of treat the end of the year, the U.S. government, a lot of governments start on October 1.

So that’s – we align with them, but a lot of other companies are ending their year and they start Jan 1. So it’s good and bad. Some companies are looking to cut costs in that last quarter and they’re not spending and they’re waiting until Jan 1 when they get a new budget cycle to start. But we also see kind of last-minute spends pop up, especially like right after Thanksgiving, start seeing – companies start saying, hey, we’ve got some extra budget. We got to spend it this year. So we’re definitely seeing all of that. It’s just the natural way that the business goes, especially with services and software purchases. So overall, I think that we started off 2025 very well. I’m excited us being already into February and what we’re working on in Q2.

But it’s kind of just looking at Q1. I wanted to touch on kind of three major aspects and focus areas for the company. We’ve debuted this to the Board, socialized this, instilled this internally in the company. And it’s really our go-forward business strategy. I’ll just hit some high points. A version of what I’m going to say will obviously be in a transcript from here, but we’ll also have one that goes out in our monthly IR newsletter. If you don’t receive that, shame on you. If you’re on this call and you’re not receiving our IR newsletter, go to our Investor page and sign up there, and you will get added to that list and we send that out monthly. Ryan and I work on that personally and then through a couple of other people in the QA – doing some QA, then push that out for everyone, really just trying to highlight some of the things that are happening from my desk, Ryan’s desk, the company as a whole.

We like to just try to keep the investors informed. So you’ll see a version of what I’m about to say, make its way into an upcoming monthly newsletter. We really have three areas for where our growth is going to sit on a go forward. We’ve aligned on this. We’ve agreed on it, and now the company is looking at resource planning to support hitting these three strategic objectives. And they are in order, growing our proprietary software revenue with Enclave. Two, increasing our vCISO and service engagements, and three, expanding program adoption at current clients. I’ll briefly touch on the first one. Why do we want to obviously push the needle on everything with Enclave? It’s reoccurring revenue for stability. It’s a scalable product across markets.

It allows us to penetrate larger markets in the space, including midsized businesses and emerging industries without a proportional increase in operational costs. If you’ve been following our story, you know that we’re very keen on keeping operational costs under control and manage. Selling software has got a higher margin for sustainable growth. Proprietary software offers significantly higher profit margins compared to services, enabling us to reinvest in R&D, other strategic initiatives while enhancing our overall profitability. These are all really good things to have as a software company, as a services company with access to software, especially if it’s our own intellectual property. The product has been making some really great rounds.

As you can see from the announcements, we’ve added some additional salespeople, a new focus on Asia Pacific, the Middle East and even looking at Latin America. So you’re going to see our spend now really kind of focused on the next 12 months on growing the sales and marketing team, looking at new markets, looking at new sectors and really focusing again on our number one business priority and objective, growing our proprietary software revenue through Enclave. Our second and third points are our business to date, and we’re not releasing ourselves from anything on what’s going on with services. We love our services. Our clients love our services. You can see that it’s growing. But again, we really want to focus our spend and any types of expenses or costs around the Enclave product.

But what we are able to do with the vCISO engagements and increasing those, you’ll see the sales team, you’ll see the marketing initiatives, again, still support what we’re doing from a services side. And that’s really kind of going downstream, too. It’s not just this top-level vCISO. We’ve really been able to do some phenomenal work through broadening our engineering services and capability, our new cloud security and architecture practice, as well as just kind of all around advisory, risk assessments, strategic assessments at clients, which are great wedges and entry points for us to start working with new logos. Why is increasing vCISO engagements important for us? Well, we’re meeting market demand for a fraction of leadership, with the increasing cybersecurity threats and limited budgets, we’re seeing this at our clients.

Organizations are seeking cost-effective leadership solutions like our vCISO and making this a high-growth market segment. We’re seeing it take off. In other industries, we are seeing an increase in competition, although we still believe that we do stand alone on quality because we believe experience matters, and that’s how we lead. We’re strengthening long-term client relationships. vCISO engagements build trust and position SideChannel as a critical strategic partner, often leading to other additional services or product adoption such as Enclave. So when you’re in the position as a vCISO client, you’re able to then say, hey, listen, this is what your program should look like. By the way, I’ve got a catalog of solutions I know works, this should work for you.

And clients are looking to adopt that. So number two here really supports our number one objective, growing proprietary software revenue. By having our services in engagements at clients, we’re in a much better position to be able to place Enclave in as the solution to address vulnerabilities, risks, gaps, whatever. We also have the ability and the focus number three, to expand our program adoption. What are we doing at our current clients? How can we broaden our client penetration? Expanding program adoption integrates multiple touch points within a client’s cybersecurity framework. It creates deeper relationships and it increases overall client value. We have the ability to cross-sell opportunities. We have a comprehensive approach to program adoption, unlock opportunities to introduce complementary products and services, boost total revenue per client.

Again, supporting initiatives one and two. We’re in a client, they trust us. We’re doing the right thing. We have solutions like Enclave that we can then position for them to benefit from. And lastly, our ultimate goal for clients is driving their overall maturity and retaining them. So by helping clients implement structured and scalable cybersecurity programs, we can address their immediate needs and create pathways for longer-term retention as their cybersecurity partner. Again, this all leads back to the growth of our brand, the revenue and the value to shareholders. So I just wanted to kind of highlight really what we’re looking at from a strategic standpoint for SideChannel going forward. And you’re going to see everything we’re doing is aligned to these three.

In fact, internally, if kind of the cadence now is you need to kind of think about if you’re working on something, is it supporting and how is it supporting one of these three initiatives. And if it’s not, we really need to have a good reason as to why we’re working on it. So this is where we centered the team. I’ll speak on behalf of the Board on the – my executive leadership team, our ELT and anyone else who’s like we’ve talked about this with, we even did this all company-wide previous week at one of our all staffs. There’s an excitement and an understanding around this. It makes sense. It aligns everyone. It gives us a really nice go forward. It’s clear, and we believe that this is going to be a substantial benefit for SideChannel’s growth.

So with that, I’ll turn it over to Ryan. We’ll go to Q&A, and then I’ll come back and close this out.

Ryan Polk: Thank you, Brian. Appreciate that. Just want to – before we get into the comments around the first quarter, I want to remind anyone on the call who has not yet participated in our annual meeting that voting is still open for our annual meeting, which is held next Wednesday, February 12 at 9:00 am Eastern Time. So please reach out to me if you need some help accessing our voting site, and I will assist you in casting your ballot in our annual meeting. We – it’s been kind of a same-story type quarter for us, revenue growth, just under 10% this quarter on a year-over-year basis, cash increased our fifth – I think, our fourth consecutive quarter, I should say, fourth consecutive quarter of cash increase, cash provided by operations.

We ended the quarter with $1.4 million of cash and cash equivalents and short-term investments. Our short-term investments, as noted in the Q, are time deposits, another way of saying certificates of deposit. We are putting our cash into some interest-bearing accounts like certificates of deposit to generate a little bit of interest income. And so that’s really the nature of our short-term investments. We’re not doing anything with mutual funds or other forms of securities. And so we – looking ahead, we’ve been saying that the cash line is – there’s plenty of things in place that would likely allow us to increase our cash from operations. Brian just mentioned three things in our strategy and some plans that are being developed to support that strategy that are likely to use some of that cash provided by operations.

So it’s – we’re not really – we don’t give guidance on any of our financial measures. And I think as if you’ve seen us grow cash for the last four quarters, just keep in mind, we are going to be making some investments using that cash to do things that we think get the word out about our products and services to more people with the intent of having that generate revenue increases in future quarters. So those conclude our summary comments on the financial statements for this quarter. John, we’ll take questions now from the phone line.

Q&A Session

Operator: Absolutely. At this time, we will be conducting a question-and-answer session. [Operator Instructions] It looks like our first question is coming from Luke Wheatley, private investor. Please proceed.

Unidentified Analyst: Hey, Brian, how’s it going?

Brian Haugli: Good. Thanks for joining.

Unidentified Analyst: Yes, sir. So just a couple of questions. I saw that [Technical Difficulty] how you thought about wanting to expand internationally before really getting things home at home. 10%, that’s a good growth number, but it’s not excellent, and I know you all want excellent. So how did you think about building out that sales team internationally before adding more salespeople at home?

Brian Haugli: Yes. So you cut out – maybe it was my phone, I apologize. I just want to make sure I get your question right because it cut out a little bit. So you’re asking about the sales team just as we’re building it, we’ve recently added DT, – his name is David Tran, but he goes by DT because it’s really beneficial for us because we have now like 3 David’s on the sales team. So DT’s focus is on APAC. Nick and I know him from just working in the industry, and he’s just very well regarded. It was kind of opportunistic, honestly. He was kind of looking around at other products from a sales standpoint and start talking to Nick, our CTO and I about what we’re doing with Enclave, and he was very intrigued. And he’s got a deep background in network engineering.

So he’s got the skill set to do this. And his entire network is Asia Pacific, South Korea, China, Japan, Kuala Lumpur, Malaysia, Australia and then also in the Middle East. So he was just like, hey, listen, I would really love to get involved. I really like Enclave. I think you could do really well. Let me bring this out into these markets. You guys aren’t really out there. And he’s got some insights into what these markets are looking for. It’s actually kind of informing our product road map. So honestly, it was kind of opportunistic. We I think we started out Enclave just trying to focus on U.S. and Canada, also, obviously, U.S. federal markets, specifically DoD markets. And look, this opportunity came up, and it just seemed like a very, very good one.

And it’s the early days. But like I said, Nick and I know him from elsewhere, and we’ve seen them in action, and he does have the network. He does have the cred. So we’re just looking to kind of capitalize on an opportunity and get out there to some of these other markets. Hopefully, that kind of answers your question because I’m still…

Unidentified Analyst: Okay. Got you. No, yeah, that definitely helps to answer the question. I really appreciate that. And then just a quick follow-up, if that’s okay.

Brian Haugli: Yeah, we’ll…

Unidentified Analyst: How do you feel about comp, yeah…

Brian Haugli: Just real quick, I kind of missed what are we doing with the U.S. team, right, and the core team here.

Unidentified Analyst: Yeah.

Brian Haugli: So you would have noticed we just brought on Rachel. We stole her from CrowdStrike, very, very motivated individual, really understands the space and just really personable and she’s just doing business development. So she’s getting us – building us kind of that top of funnel, those qualified leads. And she’s already showing a lot of promise, and she’s already actually getting things into the sales pipeline. And I think she’s on – I mean, we hired her right before Christmas. So what you’re going to see from the sales team is growing that type of role, getting more people who are going to focus on getting meetings, getting us in front of the right opportunities. And then the rest of the team that we have is obviously there to support that and then close those deals and get us into accounts, manage those accounts, grow those accounts.

And you’re going to see kind of the sales-specific strategy is focusing on direct outbound, obviously, via like Rachel and what Dave Barton are doing. But also you’re going to see kind of this channel approach where we’ve had a lot of success with building channel partnerships under David Menichello. And now we’re going to take that with Enclave and be able to bring Enclave into the channel. And that’s important because that channel is filled with managed service providers, managed security service providers, other types of VARs and service providers. And each of them have 10, 20, hundreds of clients. So we’re able to sell to one very – and effectively sell to many. Ideally, we’re able to get into any of these service providers’ tech stack and replace current technologies that they have and they start using Enclave with all their clients.

You’re going to start seeing a focus on that as well. So that’s really where – how we’re kind of nailing things down from a sales execution, but also I just don’t want to discount like what we are still growing kind of locally, if you will, if you want to say, locally from a U.S. standpoint.

Unidentified Analyst: Okay. Got it. Yeah. Thank you very much. And then just two more pieces. I’d love to hear about how you think about compensating your sales associates. What sort of mix is incentive-based and then what sort of mix is just straight salary? And then also, on the last call, we had you all – you couldn’t give a ton of background with the Department of Defense contract. I was just wondering if you could give some more background with how that’s going and what sort of revenue you all are seeing from that?

Brian Haugli: Sure. So on the comp standpoint, it’s kind of a variety. It’s base plus commissions. We try to do tiered commissions so you kind of unlock different commission levels at different levels because, look, you want these guys and girls to be hungry, you want them to be incentivized by doing better ad sales, and that’s what we’re trying to align their commission structure towards. Pretty industry standard stuff. I mean I don’t think we’re doing anything that’s outside the norm when you look at how tiered compensation structures are built for folks. And obviously, more senior level people command more senior commissions and structures than more junior level people. But yeah, I think what we’re doing is pretty standard for what you’d see.

Anybody who’s come to want to join us, it’s kind of understood where they’re going to fit and what we’re able to do because, again, we’re kind of following some standard structures. On the DoD side, yes, I mean, again, we really can’t dig into and disclose a whole lot just on the nature of the clients. But we do have two defense department clients now, completely different defense department clients. We’re doing this through subcontracts because the cost for us to be able to build a direct federal or DoD sales model, that would just be the length on that is longer and the costs just – we’re not seeing it. So through partnerships, we’re now able to do this. And actually, the second new client, which is – looks to be significantly larger than our first DoD client is actually not just a resale and an implementation, but it’s actually an integration into a solution that they – that our partner has been able to position there.

So it’s very exciting from our standpoint, the use case. You’ll notice actually the new feature of Enclave is called machine identity management or nonperson identity, where you and I have a user account that we log on to e-mail or computers. But the computer itself actually has an account, and that needs to be managed, and that’s managed through certificates. We were actually able to develop a capability into Enclave. Actually, Nick will tell you, we already had the capability. We just had to expose the dashboard in it to be able to win this client because that sector is looking for this type of solution. And believe it or not, the commercial solutions that are out there aren’t as appealing from everything we’ve heard and learned from the DoD.

So yeah, we’re up to two federal clients now with the product. That second one just started in the beginning of January, first or second week of January. But basically, initial proof of concept, paid proof of concept and with the intention of once we tick all the boxes on the technical – they got to make sure it works. It does what we say it does, which it does. Once they check all those boxes, they look to implement and roll out to their enterprise environments. So yes, hopefully, we will be able to share more on that as the year progresses. We probably won’t be able to share who or where exactly those are, but I think you will see the revenue numbers come through on Enclave to be able to then determine how big of a solution this is an opportunity this has been for us.

Unidentified Analyst: Okay. Got you. So that’s still mostly stuck in your deferred or not even yet just still getting it implemented and set up?

Brian Haugli: Ryan, actually, I don’t know. Is that…

Ryan Polk: Yes, yeah, that’s true. We – to date, are invoicing for Enclave has been done at an annual license basis. And so when that invoice goes into our deferred revenue account on the balance sheet as a liability and then we recognize 1/12 of that license fee each month as revenue.

Unidentified Analyst: Okay. Got it. I appreciate it. And then final question, if you’ll allow me. I really appreciate the back and forth here. Is that – give me one second here. Is that Carolina Advanced Digital that you all are working with when you’re selling these products to the DoD?

Brian Haugli: We have a partnership with them, but we – they are not our partner on these two opportunities that we’ve got in these two deals now. But yes, Susan and John Jetbush [ph] the 2 principals at CAD, phenomenal people, really love working with them. We did work with them to get Enclave onto the GSA and the NASA SEWP federal vehicles. But our other partners also have those opportunities. So they’re really focused on state level in the Southeast. I think some federal, but they really do quite a bit more Southeastern state level, state college, universities because they’re headquartered down there in North Carolina. So the Southeast states are really where their focus has been. But no, these opportunities have not been through them. But why are you familiar with them? Because they’re really great folks.

Unidentified Analyst: I do not know them personally, but I was just trying to learn more about your contracts with – that you can access to the GSA and that sort of thing, and I ran into them. So not familiar with them, but ran in the name.

Brian Haugli: Got it.

Unidentified Analyst: All right. Well, I really appreciate it. That’s all I had. Have a good day.

Brian Haugli: Thank you.

Operator: [Operator Instructions] We have no further questions from the phone lines. Ryan, I’d like to turn it back to you to see if you have any questions in your queue.

Ryan Polk: No questions visible to me in the webcast, the webcast console. So Brian, I think ready for closing comments.

Brian Haugli: Sure, sure. Yeah. I just checked the boards online and all my other messages, and I didn’t see anything else that we didn’t cover. So hopefully, we have covered everything around. There was a nice asked about plans for overseas, but I think we just went over that and new government contracts. So yeah, again, look, we’re excited about another quarter in the books. We’re already working well within Q2 here. So it’s kind of – I’ll be honest, it’s a little weird kind of looking back to a month and half ago when we’re honestly just kind of thinking about what we’re doing right now and going forward. So hopefully, this was valuable for everyone to kind of learn and hear about what our strategy now is, what we’re set and what we’re going to grow towards.

Obviously, if you have any questions, please reach out. There is a – excuse me, there is an IR e-mail address that you can reach out to that is obviously just ir@sidechannel.com. Feel free to – if you have any questions or you want to follow up, you can get in contact with us that way. Check out sidechannel.com, we have the newsletter, like I mentioned, please get yourself added to that list, so you can stay up to date with our weekly – or sorry, our monthly newsletter on Investor Relations, really just trying to tailor towards you as shareholders and interested parties. So with that, let’s keep going. I look forward to speaking to you in a couple of months and moving things on for 2025. Thank you.

Operator: This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.

Ryan Polk: All right, John. Thank you.

Brian Haugli: Yeah. Thanks, John.

Operator: Thank you, gentlemen,

Brian Haugli: Take care.

Operator: Take care.