Greetings! Welcome to the SideChannel fiscal year 2024 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Brian Haugli. You may begin.
Thanks, John. Hello, everyone. Brian Haugli, CEO of SideChannel. You can find us online, SideChannel.com, or under ticker symbol SDCH. I'm joined today with our CFO, Ryan Polk, and we just wanted to briefly cover our Q1, have some comments on our go forward, and some numbers, and then we will go to questions from the phone line. So, John will take over on that, and dial you in, and you can ask your question, and then we will respond. So overall, you know, another quarter under our belt. You know, we close out the calendar year 2023, but we start our fiscal year 2024.
Traditionally, this time of year is an interesting time when you're working in IT. If anybody has, you see quite a bit of activity, and then you see lulls. So this was not an uncommon quarter for SideChannel and a lot for IT. You're seeing kind of a ramp down on people working or scheduling work to be done at the end of the year, mostly because they are doing getting things set up for the calendar year coming up, where budgets reset January 1. So we'll go over some of those numbers.
Ryan will hit those highlights but, overall, pretty pleased with the clients that we were able to start working with, relationships that we started building and setting ourselves up and our pipeline for this year. You know, on the services side, you know, it's been great. David and the operations team, now, as you saw in a press release recently, as we've promoted Matt Klein, Eric Gauthier, and Dele to new roles to lead the operations and delivery. Obviously, we're focusing a lot on customer success, customer happiness, and a lot of that is due to how our folks are managing and leading and delivering. So, very excited about the growth there and what we're setting ourselves up for as we expand to meet new client demand.
You know, we need the leadership in place to be able to support our delivery teams and elsewhere. So, having these three new folks underneath David's leadership is just a step in the right direction and setting us up for more growth and success. So very happy with that on the services side. On the, you know, engineering and expansion, you know, we're constantly looking for new opportunities. We've put a lot of effort into looking into our current client base and trying to figure out ways to figure out where to expand in current clients, looking for new opportunities, things like that, trying to make sure that we're meeting the needs that our CISOs are identifying, our clients are asking about.
Also, you know, we see a big change in regulatory landscape, new SEC rules impacting publicly traded companies and the new requirements for public companies to meet those cyber requirements. That's been, that's been a big, big kind of growing discussion, and it's something that we're positioning ourselves to, you know, be able to work with clients in, and, you know, we're very excited about it. If you read our 10-K, you'll see that we actually completed one of the first ones to publish the new disclosure statements and language in a 10-K. We've gotten some really good feedback that, you know, we, we might have set a bit of a standard on that, or at least a good way about how to look at what that is.
All of that type of work is the type of work that SideChannel stepping in and fulfilling for, for customers, and we're looking for more customers that are, in need of that. And I think we're just gonna see that really kind of expand as we, as we move forward. So, overall, you know, I'm very happy with, with where we are and what we're doing. On the product side, we've seen some good adoption and movement on Enclave. You'll, you'll note that in the press release, you know, we're still kind of really viewing it in, a beta phase, but we've had a number of solid proof concepts, adoptions, by clients and interest that, you know, we're just establishing and building out that pipeline for Enclave. Overall, you know, you gotta look at the whole industry as a whole.
Zero Trust is new. The concept is generally new from an adoption standpoint across organizations. Traditionally, 10,000, 25,000+ employee enterprises are at the forefront of adopting any type of Zero Trust technology. We feel very confident in the tech that we have built. You know, kudos to Nick, our CTO, and Don and the development team on what they've done with this and what we're bringing to market and showcasing in demos and discussions. So again, we feel very positive about the product. We know we've got a good solution that meets the need from our years of experience, having been cybersecurity professionals.
We're starting to see that, that interest get an uptake from from clients as well as non-current clients, you know, just net new folks that we're talking with. So again, overall, just kind of a recap of, you know, what we've been working on, what we've been looking at, and we're gonna continue on the same track through 2024 and forward. So with that, I'll hand it over to Ryan, and he'll touch on some of the financial aspects, and then we'll try to get into some questions. Ryan?
Yeah. Thanks, Brian. Yeah, so, we mentioned in May of 2023, that our focus was on achieving a cash-positive cash flow from operations. We've been working diligently on that through a couple of different initiatives. One is obviously growing our client count, growing our revenue, and Brian touched on, and you can see in our results, we continue to increase revenue through our success there. The second thing that we focused on was just optimizing our expenses or really rationalizing our expenses for the maturity level, you know, for our current maturity level and really for the activities that we had underway at that time.
We ended up over the last seven or eight months, we've ended up reducing our annual operating expenses by over $1.2 million. You saw that in the results this quarter. We noted in our press release that we had a year-over-year reduction in operating expenses of $368,000. We expect there to be another quarter of sequential operating expense reduction, meaning we expect our second quarter, our fiscal year second quarter, to be maybe equal to or slightly lower than the operating expenses that we had in our first quarter.
So we have not yet fully realized, but the takeaway from what I'm saying is we have not yet fully realized the full extent of our operating expense reductions, and so that we think will have further boost to our cash flow and earnings in our fiscal second quarter. We see continued strength in the top line, and so we're expecting our top line to continue growing. And so in the middle then, you've got gross profit, you've got increasing revenue, we've got decreasing expenses, and so the question, the only remaining question is what's happening on the gross profit line? We had excess capacity on our delivery team in Q1. We had indications that some new clients were going to come online during Q4. Those engagements got pushed into Q1.
We were carrying some capacity to serve those engagements in Q4. I'm sorry, in, I said Q4, I was thinking calendar year. Let me speak in terms of fiscal year. We had some engagements we thought were going to start in our first in the first quarter of our fiscal year. Those got pushed into our second quarter fiscal year. And so we had a lower gross margin. We had a higher cost of goods sold in fiscal year quarter one than we were anticipating, and so we did not have the type of performance on the margin line that we were looking for. We do not expect that to continue.
We expect the utilization to increase in Q2, and so we're gonna add to our growing revenue line, an improving margin line, as well as the decreasing OpEx. So we're gonna continue inching closer toward being cash flow positive, cash flow positive from operations, on a quarterly basis. And like Brian indicated in our press release, we believe we will accomplish that during this fiscal year. We had a big boost to our strategic objectives during this last during the first quarter, in the form of over 70 shareholders, over 70 stockholders supporting a warrant exchange. I say it's a big boost to our strategy because one of the things that we are constantly presented with are strategic partnerships.
The warrants that were held by these 70+ investors present some roadblocks to us, really having the flexibility that we need to take advantage of those opportunities. And while we weren't able to convert all of those warrants into securities that are friendly to both the investors and to the company, we did make quite a bit of progress down that road and believe we have line of sight to how we might be able to finish up that work during the next 3-6 months. So we really appreciate each of the investors that spent time getting to know us during that exercise, listening to what we are trying to do, and expressing their support for our strategy, or excuse me, this element of our strategy to create value through exchanging these warrants.
Just a few other things I wanna make sure don't get lost, a few non-financial measures that may not show up, may not be as prevalent in your review of our statements, and that is one, retention. Our revenue retention is continuing to increase. We're reporting 12-month revenue retention of just under 73%. What that means is that we are this year, in this fiscal year, we're recognizing $0.73 of revenue for every $1 of revenue we recognized one year ago. We mention that because we wanna make sure everyone understands that we are a relationship-driven company. We're not a project-driven company. We do have some project engagements, but it's very important for us, as Brian mentioned, to deliver a great customer service, a great customer experience.
And that's really something that is an enduring activity in most of our engagements, and that's why we have a 73% revenue retention. So we don't call it ARR. It's similar to that, but that's not what we're gonna call it, 'cause that's not really true ARR. We think that's a pretty good accomplishment for a company of our size, especially in the services industry. And I think another thing that everyone on the call well needs to understand about our business is that in addition to having leadership, cybersecurity leadership in place at our clients, we're also surrounding that leadership with a lot of services and software that create the kind of stickiness that allows us to have a 73% revenue retention.
And another one of our strategic initiatives is to continue growing the adoption of the services and software that we offer by our clients to obviously to further increase our revenue, but also to make sure that we have a tighter relationship with those clients. And probably most important to all of that is our effort to make sure that our clients have the best risk profile possible for cybersecurity exposure. And all of the work that happens from a leadership on down into the software and services we provide are key to making sure that we're meeting and delivering a great risk management experience for our clients. So we've covered some highlights.
Most of the information I think that you're interested in, you can see through the Form 10-Q that was filed with the SEC this morning, and we're happy now to go to Q&A.
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Once again, please press star one if you have a question or a comment. Once again, please press star one if you have a question or a comment.
John, I think we've got one question in the queue.
Absolutely. Your first question comes from Jack DePeppe, private investor. Jack, please proceed.
Yeah. Hi. The revenue that you were anticipating realizing in the first quarter or the last quarter of 2024... 2023, do you anticipate it being realized in the second quarter, or are we gonna push it down to the third, you know, the third quarter?
So, Jack, the new engagements that I mentioned that we expected to happen during our first quarter, those are happening in our second quarter. Of all the deals that we had scheduled to start in the quarter we're currently reporting on, all of those have engaged in the current quarter.
Oh, okay. Cool.
Nothing is, nothing is being deferred. None of those engagements are being deferred into, into a third quarter start.
Okay. Thank you.
Jack, this is Brian. Generally what you see-
Yeah.
You know, companies are... They're kind of hesitant sometimes in November, December of every year, whether or not they want to pull the trigger, sign the contract, or if they wanna know for sure that their own company has given them the budget to be able to then go procure services. So they'll start, they'll wait till January.
Correct. Correct.
Yeah.
Yeah.
We've had a joke internally for the last couple of years that, you know, how much are we gonna actually sign the first, you know, business week of January?
Okay.
Because every year it's the same thing. We, we talk with clients, November, December, sign-
Well, yeah, because their budgets all used up by December, and they're like, "Eh, we gotta do this, but...
Right. Right. Yeah, so that's... It's, it's a natural thing. It's not unknown to us, so we kind of, you know, expect this. But yeah, we did see everything that we were expecting to get signed and start and begin in January. And, and we've seen... I, I think we've seen a pretty healthy January and February to date. You know, so it's—this is just the nature of services and the nature of budget cycles. You know, it just so happens that our fiscal year is, is a quarter off from calendar year, so we report it, you know, a little differently, and I think that's what you're seeing come out.
Yeah. Okay.
Thanks for the question.
Thank you.
Once again, if you have a question or a comment, please indicate so by pressing star one on your touchtone phone. Okay, there are currently no questions in queue. I'd like to turn the call back to management for any closing remarks.
... Yeah, thank you. And again, thank you everybody for for joining. You know, I think the format that we're gonna take for these earnings calls going forward is, is gonna be what you just heard here. You know, I'll, I'll really try to keep it brief on, you know, how things have been going, what I'm seeing that's gonna happen. Ryan will hit some key points, but, you know, we realize that, you know, you all can read the, the filings, and the press releases. We don't need to regurgitate all of that. So we really wanna open this up for questions and have, you know, start really more of a discussion with, you know, either interested investors, current investors, analysts, really whomever, on these calls.
You'll notice that we published, I think a press release was last week, what our earnings, and our release schedule will be for this year, so you can anticipate, when we're gonna talk about that. That's our commitment to you in transparency, that this is when we wanna discuss this. We wanna start setting some expectations around timelines, on filings, and on earnings calls, so that, really we just don't get those questions. And it's just, let's just set a schedule, let's stick to it, and then we can just all work off of that going forward. So, look, overall, still very excited about what we're doing with this company. I believe very much in SideChannel.
You know, this is, this has taken to another level that, you know, we originally all thought, and it's been, it's been, you know, just a really great journey. And we're, and, you know, deep down, we're really helping out a lot of organizations. I mean, the logos and the new clients that we have are, you know, in a position where they really do need, you know, cost-effective services at the level that we're able to bring them, and we're just not seeing it elsewhere in the market. We've, you know, we've kind of figured out that we're probably now the largest virtual CISO or vCISO service provider in North America. We're just not seeing anybody else out there at the magnitude and the scale that we have, to be able to deliver what we're delivering.
And we're very proud of that. And I'm very proud of the team. Everybody who's worked on everything from delivery to administration to accounting, kudos to Ryan and his team for everything that they've done. So it's just, you know, I feel like we're just really getting going. You know, this is just the beginning of something really special to me, and I think something that, you know, the team, as you see them join, whether you follow us on LinkedIn or just through the blog or just on the press releases, who's joining and why, I think it's just another reason to just pay attention to what we're able to do. Ryan, do you have any closing comments?
No, Brian, none. Thank you for asking, though.
Yeah. No worries. Keep crushing it. All right. Thank you, everybody.
Yep, thank you.
Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.