Company Overview: Dropsuite Limited (ASX: DSE) is a software company that provides a Cloud Platform which allows its clients to backup, archive, discover, and recover their data to protect. This enables them to protect themselves from any data loss and also assists in complying with various regulations.

DSE Details

Improving ARR On the Back of Sector Tailwinds & Solid Business Model: The company has a global presence with over 500k users across more than 100 countries. Its business model is scalable in nature and underpinned by growth in SaaS revenue stream.

Business Model Aiding in Growth:

• Partner Led: The Group reported 395 IT reseller partners globally as of 30 September 2021, in addition to hundreds of Managed Service Providers. This enables the company to reach out to a wider customer base with minimal marginal cost.
• Key Advantages: The company's business model allows it to seamlessly integrate with its partners' infrastructure. The platform also provides an enhanced user experience which includes insights and analytics.

Look At Q3FY21 Results:

The company has delivered decent performance during the quarter with decent momentum witnessed across the business.

• Annual Recurring Revenue grew by ~81% to $13.1 million, when compared to the previous corresponding period.
• There was a growth of ~19% on the Average Revenue Per User to $1.90/month, compared to Q3FY20.
• The Group reported normalised operating cash flow of $0.09 million during the quarter, reflecting a ~505% increase on Q2FY21. The cashflow performance also reflects the first quarter of positive cashflow for the company.
• There was also an uplift in the reseller partners by ~35% to 395, from pcp levels.
• DSE ended the period with a cash position of $21.4 million as of 30 September 2021, with no debt on the balance sheet.

Revenue Trend (Source: Analysis by Kalkine Group)

Capital Raise to Accelerate Growth:

During Q3FY21, the company received binding commitments from institutional and sophisticated investors to subscribe for 95,238,096 shares at an issue price of A$0.21 per share to raise $20.0 million.

• The proceeds will be directed to accelerate DSE’s growth objectives, explore M&A opportunities and for working capital needs.
• The placement was well supported by the investors and represents ~16% of the existing shares on issue.

Top 10 Shareholders: The top 10 shareholders together form around 37.45% of the total shareholding, while the top 4 constitute the maximum holding. Topline Capital Management, LLC  and Fearon (Tracy Anne)  are holding a maximum stake in the company at 16.40% and 5.49%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:   The company reported an improvement in the ROE performance to negative 2.9% in H1FY21, compared to negative 49.3% in the prior corresponding period. Cash cycle of the Group stood at 58.4 days in H1FY21.

Profitability Metrics & Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Cyber Security Risk: The Group’s line of business makes it prone to the risk of cyber security breach by other parties, and as such it has to take care to safeguard the data back up and important client information in a safe & secured way.
• Foreign Currency Risk: The company undertakes certain transactions denominated in foreign currency and thus is exposed to volatility in currency fluctuations.
• Technology Risk: It is also prone to technology risk given that its business activities is mainly driven by data & technology demand, and any downturn in the sector could be a challenge for the company too.

Outlook: The company seems to be well-positioned to continue with its growth trajectory, driven by the favourable tailwinds from the industry which is expected to grow to $22.2 billion by 2025. It will also look to explore M&A opportunities in order to drive inorganic growth, along with internal growth through favourable market opportunities. DSE is on track to achieve operating EBITDA profitability for FY21, augmented by the growth in ARR levels.

Stock Recommendation:   The stock of DSE is currently trading above its 52-weeks’ average levels of $0.100 -$0. 285. The stock has delivered a positive return of ~15% in the past three months. Considering the improvement in financial performance, increase in ARR & revenues, positive sector outlook, strong balance sheet, recent capital raise event, and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating at the closing price of $0.225, down by 2.17% as on 26 November 2021.

Technical Insights:

On the daily chart, DSE stock prices are sustaining above an upward sloping trend line support at AUD 0.197 level. Moreover, the leading indicator RSI (14-period) is trading at ~47.67 level, which supports a positive stance. An immediate support level for the stock is at AUD 0.197 while immediate resistance level is AUD 0.25.

DSE Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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