HUB Cyber Security Ltd. (HUBC) Q2 2024 Earnings Report, Transcript and Summary

Good morning, and welcome to the HUB Cyber Security’s First Half 2024 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ben Shamsian with Lytham Partners. Please go ahead.

Good morning, everyone and thank you for joining us for HUB Cyber Security's first half 2024 financial results conference call. Joining us on today's call is Noah Hershcoviz, CEO of HUB. At the conclusion of today's prepared remarks, we will address some questions that were sent to us by investors, as well as questions we believe are important to us. Today's event is being recorded and will be available for replay through the webcast information provided in the press release. Finally, I'd like to call your attention to the customary safe harbor disclosures regarding forward-looking information. The conference call today may contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, expectations, and future operating results of HUB Cyber Security. Although management believes these statements are reasonable based on reasonable estimates, assumptions and projections as of today, these statements are not guarantees of future performance, nor shall be taken as such. Time sensitive information may no longer be accurate at the time of any telephonic or webcast reply. Actual results may differ materially as a result of risks, uncertainties and other factors, including, but not limited to factors set out in the company's filings with the SEC. HUB is under no obligation to update or revise any of these forward-looking statements. With that said, I would like to now turn the call over to Noah Hershcoviz, Chief Executive Officer of HUB Cyber Security. Noah, please proceed.

I'm pleased to be conducting our very first financial results conference call. I look forward to holding these calls going forward to update you on our progress. During today's call, I will highlight our recent accomplishments that demonstrate our continued execution in offering our clients unifying data fabric embedded in a military-grade security environment. In addition, we will speak about some of the operational efficiencies that new management team has achieved in our effort to turn around HUB and provide shareholders value. I will also discuss our plans to grow our top and bottom lines further, while managing our capital efficiency. Finally, we will discuss the financial results for the first half of 2024. But before that, with this being our first call, I wanted to provide a broad overview of HUB and opportunities that we believe will drive growth for the company going forward. HUB Security is an exciting story to share, not just as a pioneer in the Secure Data Fabric market, but as a company that has successfully navigated challenges and emerged stronger and determined. Over the past year, we've made bold decisions to streamline operations, focus on high-margin business and position ourselves for sustainable growth. At a high level, HUB operates two complementary business units: our Secure Data Fabric platform, our main product [SaaS] (ph), which serves as primary growth engine and transformative solution for financial institutions and enterprises; and second, our legacy professional services and cyber consultancy business, provide a stable revenue stream with strong long-term relationship with blue chip clients like Visa and Boeing that goes back several decades. These two businesses are not siloed, but synergetically aligned with every unit working together to create the most advanced Secure Data Fabric platform in the market. This integrated approach enhances our technological capabilities and ensures seamless delivery and unparalleled value for our clients. Let me start with our secured data fabric platform, which embodies the future of app security. This innovative technology addresses the growing complexity of data management in today's financial and enterprise environment. Banks and other institutions are under immense pressure to manage vast amount of data from multiple sources, comply with increasing regulations and safeguard against escalating security threats. Our platform automatically consolidates data from diverse silos into a unified scalable and secure system. It enables our clients to navigate and cross-reference data pools with ease, meet and exceed regulatory compliance standards and protects sensitive information with our proprietary military-grade cybersecurity. Unlike traditional data lake solutions, which require costly, time-consuming, and risky data migration, our approach overlays a software layer that securely fetches data in real time. It not only reduces the manpower and operational costs required in consolidating data from separate silos, but also minimizes the chances of external security threats to our customers. Our competitive edge lies in what we believe is our unmatched combined combination of advanced technology and industry-specific expertise. At the core of our offering is a confidential compute capability, leveraging military-grade encryption to protect data whether in transit, at rest, or during processing. The additional data lake solutions fall short in providing this level of protection. Our advanced security safeguards even the most sensitive information against breaches, while fully complying with the latest global data protection and cybersecurity regulation, a critical requirement for companies in the financial services sector worldwide. Since the deployment of our Secure Data Fabric, we've seen remarkable demand for the product. It's evident that the market recognizes the value we bring and foresee steady growth and market penetration sector by sector as we continue to execute on our strategy. Our legacy professional services and cybersecurity consultancy business is a cornerstone of HUB's operations, staffed by over 300 professionals delivering advanced software development, cybersecurity and ICT services. These services are critical to fortifying the critical information and assets of some of the world's most prestigious companies. What truly sets this business apart is the trusted advisor relationship we have been cultivated with our client base. Many of these relationships span decades with some going back as far as the 1990s. This enduring trust is a testament to the quality, reliability, and innovation we bring to our clients, which includes global blue chip names like Visa and Boeing. Our legacy professional services business puts us in a key position as a trusted advisors to the customers we've served and we believe that it will provide HUB with plenty of opportunities to cross-sell our Secure Data Fabric solution as well, platform into some of the most prestigious organizations worldwide. 2024 has been a year of major transition for HUB Security, we've taken bold decisive steps to reposition the company for long-term success. Restructuring and efficiency, as we closed our underperforming businesses, reduced headcount and streamlined operations to focus on our core strength in higher-margin businesses. These actions have resulted in a leaner, more agile organization with a clear path to profitability. We've also been strengthening our financials by significantly reducing liabilities. We’ve improved our balance sheet and created greater flexibility for strategic investment in high-margin business like our Secure Data Fabric platform. With regards to client retention and expansion, despite past challenges, we've maintained and even strengthened our relationship with blue-chip clients. As mentioned, we believe that this trusted relationship built over decades will be key to driving our Secure Data Fabric business as well. Our Secure Data Fabric platform has already been validated and endorsed by a leading financial services firm. The revival story is not just about the ability to navigate adversity. It's about positioning HUB Security as a stronger, more focused company ready to capitalize on the immense opportunities ahead. We are on a mission to make every transaction safer. Let those who trust us with our world-class solution know that they can depend on us. Since I became CEO, a key focus has been building the right team to drive our growth strategy. HUB has recruited top tier talents bringing industry experts who share our vision. The exact talents needed to execute our market penetration effort. These executive appointments reflect our commitment to innovation, operational excellence, and client success. The combination of technology -- the combination of our technology, market demand and exceptional talent we've brought on board gives me great confidence in our ability to expand our footprint and strengthen our competitive position. In closing, HUB Security is emerging stronger, leaner and more focused. Our two complimentary business units, the stable foundation of our professional services business and the high growth potential for a Secure Data Fabric platform position us for long-term success. Since taking the role of CEO, I've been inspired by the resilience of our team and the market's response to our innovative solution. We've put the past behind and have shown that through this all we continue to make the business world a safer place. Large global companies depend on us and we take the responsibility seriously. By synchronizing every unit to support our Secure Data Fabric, we've created a powerful engine for growth. This transformation is not just a revival story, it's a testament to our commitment to driving value for our clients, shareholders and stakeholders. Thank you for your time today. Let's move directly to the financial update before opening the floor for questions. The financial results for the six months ended 2024 will be provided in detail within our form of 20F. I will aim to provide some color on key areas of financial results as well as an outlook on certain areas where I can. Revenue for the six months ended June 30, 2024 was $15.7 million compared to $25 million for the same period in 2023. The decline in revenues of $9.3 million or 37% is mainly driven by terminated and less profitable contracts in our professional services business. With regard to gross margin, our gross profit margin for the six months ended in June 30, 2024 improved to 9.5% compared to the negative 7.9% for the same period. The significant improvement reflects the effective management of operations and efficiencies implemented during the year, as well as absence of one-off costs that were recorded in the first half of 2023. Operating expenses, total operating expenses for the six months ended in June 30, 2024 was $16.5 million, a roughly 90% decline compared to $57.5 million reported for the same period in 2023. We expect operating expenses going forward to be on a yield level of around $18 million. G&A expenses decreased in 63% or by $22 million for the six months ended in June 30, 2024. Compared to the same period in 2023, the significant decline is due to more efficient and effective management of operations and overall reduction in the headcount of the group as well as not having all the one-off expenses as we did last year, mostly related to the reverse merger into the SPAC. Sales and marketing expenses declined by 43% or $2 million as compared to 2023. The decrease in S&M is due to one-off expenses recorded in 2023, as well as overall reduction in the group headcount. R&D expenses for the first half of 2024 declined by 77% or $2 million as compared to the same period in 2023. Other expenses for the first half of 2024 declined by roughly $14.3 million, 100% improvement compared to the first half of 2023. The reduction is solely associated with the entry recorded was subjected to the SPAC merger. Cash flow. The decrease in cash of $2 million is due to a mix of reasons. While our financing activities generated $8 million in cash this year, our cash outlay for operating expenses was $10 million. We believe that a large chunk of this cash outlay will prove itself in 2025 in the form of increasing business and revenue.

Thank you, Noah. We have some questions that were sent to us by investors. First, I want to start with, can you talk about your competitors and the advantages that you have over them? You mentioned Palantir. Can you elaborate on your product versus theirs?

Yes, Palantir is one of the competitors or one company that we see in the market. Our competition and our competitors often take years to implement, cost billions to deploy and maintain, and are highly vulnerable to cyberattacks. Once deployed, many require extensive involvement from data engineers to process manually and massage the data to achieve meaningful analytics outcome. HUB Secure Data Fabric can be implemented in just a few months. With deployment and maintenance costs that are relatively low, as we are pure software. It is powered by military-grade cybersecurity, ensuring robust protection. Once deployed, our AI platform enables near-real-time analytics generation, requiring minimal to no manual intervention, and leveraging advanced technology for maximum efficiency. We do not require our clients to replace any current solution, so no forklift is required. Rather, HUB Secure Data Fabric can be added as a layer above existing infrastructure, moving the need for large CapEx investments and lengthy replacing of existing tech infrastructure. We're making the system better by enhancing every aspect of it.

Okay, thank you. We have another question. HUB has historically been a services and hardware company, but it seems like HUB is moving towards a more software-centric company with AI driving the data fabric component. Can you explain the software versus hardware segment of the business?

Yes, sure. So HUB has undergone a strategic evolution. While hardware and services were historically a significant part of our business, we've transitioned to focus on high-margin software-driven solution that align with our long term growth objective. Our Secure Data Fabric powered by proprietary AI integrates advanced data analytics with our deep cyber security expertise to address both the security priorities of the CESL and broader operational needs of our clients. With a trusted advisor relationship cultivated across hundreds of clients, we are positioned to engage early and deliver solutions that drive resilience and business growth.

Okay, thank you. Another question regarding margins. How do you see the long-term margin profile of the company and looking ahead which business unit, the Secure Data Fabric or the IT services you consider to be the main vertical for HUB?

Great question. So our long-term margin profile reflects our commitment to disciplined management and operational efficiency. Historically, our IT services, or what we call the professional services business has delivered margins in the 50% to 20% range. Through deliberate efforts to streamline operation and exit lower-margin services, we've shifted focus to higher-value opportunities, achieving improved margins of between 30% to 40%. Although our Secure Data Fabric, on the other hand, is a software-centric business with margins in the 80% to 90% range, it's like pure SaaS in essence, aligning with our strategic direction. Looking ahead, the Data Fabric segment is poised to be the primary growth drive for HUB. You should expect to see this in the blend of revenues, significantly out-passing the professional services and percentage of the total revenue. This shift is already well underway. And as I mentioned, we anticipate a marked transformation in our business mix trials starting in 2025.

Okay, thank you. We have another question. The theme of big data seems like a perfect storms for a HUB’s Data Fiber product. What are the main drivers behind the demand for HUB’s product and how does big data play into this?

So demand for Data Fabric product is fueled by the explosion of AI-driven data, overwhelming traditional systems, rising regulatory pressures, requiring secure solutions -- secured solutions and high cost of maintaining legacy -- of maintaining the legacy systems, right? So dealing with data is expensive. Highly regulated sectors are spending billions on compliance and data management. They need efficient, scalable solution like ours to reduce the cost of ownership while meeting their demanding requirements of the regulator, right? By breaking down data silos and enabling real-time insights, we're addressing critical needs and delivering significant value to this industry.

Okay, thank you. We have another question on your customer base. Can you elaborate on HUB's secure data customer base and what it's currently being used for?

Yes, sure. HUB Secure Data Fabric is a platform that’s designed to address the critical challenges of managing and unifying massive volumes of fragmented data. While we are currently working with leading European banks on KYC processes and exploring expansion into other products like transaction monitoring and the like, we're supporting a top -- we're supporting top European asset manager with like data integration and analytics and it's just the beginning. Those are all just the beginning. Banks and financial sectors are just the low-hanging fruits for us and key focused in demonstrating our ability to quickly establish leadership in highly regulated markets. However, we are not limited to KYC or banking, the FinTech company in essence. Our pipeline includes industries like payments, tourism, ESG and healthcare, any sector technically that is grappling with large scale data and regulatory pressures. Looking ahead, my priority as CEO is to position HUB as a fully channel ready leader poised for scalable growth and market expansion by the close of 2025.

Okay. It looks like we don't have any further questions. Thank you everyone for participating in today's call. We look forward to speaking to you all again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.