Company Overview: Dropsuite Limited (ASX: DSE) is an Australia-based company providing a cloud software platform that enables businesses and organizations globally to backup, recover and protect their business information. Its cloud products include Office 365 Backup, Email Archiving, Google Workspace Backup and Website Backup. With onboarding 12 new direct and 197 indirect transacting partners, the company added 81k paid users totalling 730k users as of 31^st March 2022. The company started trading on ASX on 12^th December 1985.

DSE Details

This report is an updated version of the report published on 27 May 2022 at 3:55 PM GMT.

Q1FY22 Operational and Financial Updates:

• Rising Gross Margins: The company initiated cost cutting methods in storage, which made the gross margins expand from 62% to 63%.
• Increasing User Base Catalyzing ARR: With the addition of 81k paid users, a 55% (on pcp basis) & 13% Q-o-Q rise was witnessed in the users, reaching to 730k. The FY21 momentum was continued in the quarterly ARR results and demonstrated ~15% hike Q-o-Q and ~71% increase on pcp (constant currency basis).

Annualised Recurring Revenue (Source: Analysis by Kalkine Group)

• Cash Balance: With the cash receipts of $3.72 million (~9% hike on Q-o-Q basis and ~63% Y-o-Y), DSE showed negative cash flow from operations of ~$518k, primarily arising from annual bonus and insurance payments, other off-items and working capital. It closed the quarter with a cash balance of $21.07 million and is well-financed to proceed with acquisitions and internal product development initiatives.

FY21 Financial Highlights:

• The company showed an outstanding year of 2021 backed up by the strength, scalability, and sustainable growth (organically & inorganically). Due to the growth in its reseller partner-based and associated end-users, the company’s revenue grew ~66.3% to ~$11.69 million as compared to $7.03 million. The Annual Recurring Revenue (ARR) increased at a CAGR of~77% from FY17 to FY21 (5 years). DSE turned reported a maiden positive EBITDA of $0.003 million and decreased the net losses substantially in FY21, as depicted below:

Top 10 Shareholders: The top 10 shareholders together form around 41.59% 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 20.88% and 5.49%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: DSE turned around its negative EBITDA margins and resulted in maiden positive EBITDA margin for FY21. On the other side, its cash cycle (days) has slightly increased over the years to 55.7 days in FY21.

Profitability Profile with Cash Cycle Days (Source: Analysis by Kalkine Group)

Key Risks:

• Regulatory Risk: The company is exposed to a more complex regulatory environment; any failure in the same could lead the business to fines, penalties, etc.
• COVID-19: Travel restrictions and lockdowns due to COVID-19 might hold down its operations and thereby affect its earnings, cash flow and financial position.
• Market Tailwinds: The company’s business could be affected by the loss of users as there is no guarantee that users would continue to take service. In addition, its business growth could also be impacted by a failure in maintaining cybersecurity.

Outlook: Having a strong partner base and a budding pipeline, DSE seems fairly positioned to continue in the delivery of decent ARR growth and sales pipeline. The growing pool of Microsoft 365 and Google Workspace users is anticipated to reach ~570 million by 2026 thereby providing an enormous growth opportunity. However, the market tailwinds related to data security and regulation still look to be around in the near future. The company is confident and working towards:

• Attaining continued operating profitability and positive cash flow in 2022.
• Maintain a leading position as a backup vendor of choice, driven by product innovation
• Investment in talent bench-strength as well as sales and marketing expansion.
• Proceeding M&A opportunities with high conviction, at the same time leveraging the existing internal growth and taking advantage of strong market tailwinds around data protection.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of DSE is trading below its average of 52-week low and high levels of $0.155 and $0.285, respectively, offering a decent opportunity for accumulation. The stock has been corrected by ~20.93% and ~8.10% in the past one and three months, respectively. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average EV/Sales multiple, considering the existence of tailwinds related to data security and regulation and negative ROE. For the purpose of valuation, peers such as Iress Ltd (ASX: IRE), Altium Ltd (ASX: ALU), TechnologyOne Ltd (ASX: TNE), and others have been considered, which comes under application software space. Considering the growing users with the anticipated number of 570 million by 2026, ambition of adding new partnerships, indicative upside in valuation, climbing ARR, hopeful outlook of EBITDA & operating cashflow positive, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.170, as on 27 May 2022, 3:30 PM (GMT+10), Sydney, Eastern Australia.

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.

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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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