No easy cure for Quick Heal

With the market cornered and distribution sorted, Quick Heal made a big decision in 2016—it went public. Quick Heal listed on the Indian bourses, becoming the first Indian IT software security products company to do so. As the first of its kind to list in the public space, and with the market position it had, Quick Heal’s initial public offering (IPO) received a subscription call from more than a few brokerage firms. Angel Broking, Aditya Birla Money and India Infoline (IIFL) were among the firms that showed an interest.

All of them saw opportunity. Internet penetration in India is increasing, cybersecurity threats are rising globally, mobile phone security has huge potential. Poised to benefit from all of these factors, Quick Heal was an attractive prospect. But that’s not how things played out.

Quick Heal was supposed to grow with the internet in India. It hasn’t. Internet penetration in India has grown from 8.5% in 2010 to 36.5% by the end of 2017. With over 460 million users, India is now the second largest online market in the world. In comparison, Quick Heal’s growth rate, meanwhile, has been reduced to single digits since its listing.

While other players in the segment have increasingly moved towards newer business models, like Czech cybersecurity firm Avast did when it pioneered the freemium play in the antivirus space, Quick Heal has stuck to its guns. This resistance to change, though, is looking increasingly untenable. Sure, 23 years since its inception, Quick Heal continues to have the biggest chunk of the market in this segment. A 34% share. Its distribution network is larger than ever— 21,401 retail channel partners, 527 enterprise channel partners, 164 government partners and 12 mobile distributors, as per their FY18 annual report. But this isn’t reflecting in their earnings.

A flat tyre

Before listing, the company’s revenue grew at a compounded annual growth rate (CAGR) of 17% for the period FY12-FY16. Brokerage firms which initiated coverage of the stock back in 2016 had estimated the growth to continue at a similar pace. Jefferies, for instance, had estimated a growth rate of 16% for FY16-FY19. Spark Capital, which was slightly more conservative, estimated a growth rate of 13% for FY16-FY18. Both, as it turns out, greatly overestimated things. Quick Heal’s revenue growth rate for FY16-FY18 stands at merely 2.65%. Almost flat. What happened?

Disruption.

Quick Heal has a heavily concentrated business in one segment and only one geography—India. More than 80% of Quick Heal’s revenue comes from the retail segment. Only around 3% of its revenue comes from outside India.

The lack of diversity has made it massively vulnerable to disruption. Two factors have led to this disruption:

1) An increased number of both domestic and foreign competitors.

2) The availability of free, fully-functional antivirus software by nearly everyone in the market.

For FY18, Quick Heal’s profits saw some upward movement on the back of reduced expenditure, lower R&D costs and improved EBITDA margins. The growth in number of licences sold has also dipped. For the period, FY13-FY15, the growth rate in active licenses was 20%. This has dropped to around 7% for FY16-FY18.

The company blames demonetisation and GST for the slowdown. “The channel community, which drives majority of our business, was also severely impacted by these moves. This ultimately resulted in slower revenue growth than what was initially expected,” says Sanjay Katkar, Joint MD and CTO at Quick Heal, in an email reply.

The Growth

Katkar goes on to argue that the company’s financial performance has improved since, with revenues in Q1 of FY19 in line with internal growth projections. Quick Heal, he says, expects this to continue. Indeed, compared to the same quarter in FY18, Katkar points out, Quick Heal’s revenue grew 75% to Rs 53 crore (~$7.6 million), and profits stood at Rs 6 crore (~$868,380), a jump of 154%. But this is little more than a clever sleight of hand. What Katkar is doing is cleverly benchmarking against one of Quick Heal’s worst quarters—Q1 FY18, when the company was still suffering the effects of GST—to make the present results seem more impressive than they actually are.

This reality has reflected in the performance of Quick Heal’s stock after it announced the company’s results. Quick Heal announced its result post market hours on Wednesday. It saw no buying over the next two days. The price dropped by around 6.7% from its Wednesday closing to end the week at Rs 261($3.78)/share.

 

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