Tech is the Best Way

Quick Heal has to face difficult times ahead!

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.

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.

The age of free! free! free!


In the book, Free: The Future of Radical Price, Chris Anderson, the editor-in-chief of Wired magazine, wrote that “every industry that becomes digital, eventually becomes free” because of the development of the internet economy. The cost of reaching customers is becoming really cheap, rapidly moving towards a new kind of free-dom.

This has very quickly become the norm in the antivirus industry.

The age of the freebies began with Avast, which, in 2001, disrupted the market by taking the risk of offering the full version of its flagship antivirus software for free. “Avast’s business model is built on freemium,” says Ondrej Vlcek, EVP and CTO at Avast. “This decision paid off, as we quickly gained millions of users who enjoy free protection from digital threats.”

The world quickly started to follow Avast’s footsteps. In China, Qihoo 360—a local internet security company founded in 2005—had great success in the retail antivirus market by offering its antivirus software for free. As per US-based cybersecurity firm Opswat’s latest global market share report for July, Avast stood at the top with a 17.23% share, of which 14% came from Avast free antivirus.

Opswat does not include Microsoft in its report because they feel that its “products do not accurately represent the user’s product of choice as they come pre-installed on many Windows systems and cannot be removed.”

“This changed the entire market in China, and everyone moved from paid to freeware solutions,” says the marketing manager of a leading antivirus software company. He requested not to be named as he is not allowed to talk with the media.



Qihoo made its antivirus solutions free in 2008. Within a few years, it became the top antivirus software vendor in the Chinese retail segment based on the number of their monthly active users (MAUs), which stood at over 460 million.

As the market became increasingly reliant on this free antivirus solution, the retail market in China collapsed around 2014-15, he says. This, he adds, wasn’t just limited to the B2C segment but also crept into the B2B space.

But how commercially viable is the freemium model? Quite. Apparently, viability can be achieved in two basic ways. 1) By getting people to upgrade from the basic product to the premium product like Avast, or 2) Through online advertising and internet value-based services like Qihoo.

Vlcek says that today, around 75% of consumers use a freemium antivirus solution on their PC. “Avast’s 2017 revenue numbers were $780 million, with the major source of income being paid product sales. Out of our user base, about 4% use our paid products, which is a high amount given we have more than 400 million users,” he adds.

Here lies the gamble with this approach. You capture a humongous user base and hope that even a small percentage of that enormous set will pay for premium services. The large user base also throws up another advantage—lots of free data. This helps security firms stay ahead of the bad guys. “This is key to the success of our artificial intelligence/machine learning technology,” Vlcek says.

Last year, Russian internet security giant Kaspersky joined the bandwagon and released a basic version of its antivirus software. Microsoft, too, has begun bundling its homegrown Windows Defender Antivirus with its latest operating system, Windows 10.

Quick Heal also faces a massive freemium threat in the mobile security segment, a nascent market where Quick Heal sees huge future opportunity, and which, at present, contributes just 0.75% to its revenue. Reliance Jio, a company that seems intent on disrupting each and every sector in India, has entered this space. It has partnered with Norton, an antivirus program manufactured by American software firm Symantec, to provide a mobile security software called JioSecurity to its users. This will instantly get Jio a huge market share in the space, with Jio accounting for over 18% of India’s cellphone users.

Quick Heal feels that with the mobile security market being practically non-existent, the launch of JioSecurity doesn’t really impact the market share. Katkar remains defiant that the freemium threat does not spell doom for Quick Heal. He says that freeware does not provide the same level of advanced security that paid products do, and the growing awareness about the need for cybersecurity among Indian users makes them more likely to opt for a paid product. The same, he says, applies to the mobile security market.

Creeping changes for Quick Heal


To have a better understanding of how the market is shaping up in India, The Ken went to Lamington Road, the main electronics market in Mumbai. It’s the city’s own Silicon Valley as well as a wholesale market to purchase security software.

After visiting around two dozen shops and asking some basic questions, it became clear that Quick Heal was still the first product pushed by most shopkeepers. Its sales have largely remained the same, but a few things in the market have changed.

Though Kaspersky and Quick Heal continue to be the most sold antivirus software in the market, there are now way too many competitors in the segment. In addition, as more of these software are listing on e-commerce websites, margins have dropped drastically for these shopkeepers. Taking the example of Quick Heal’s AntiVirus Pro, a package which provided three years of security to one PC, the shopkeeper said that the MRP on the box is of around Rs 2,000. Earlier, they would sell it in the range of Rs 1200-1500. But since the product is listed on e-commerce sites like Amazon for as low as Rs 950, customers demand similar pricing.

“Selling in bulk is still profitable, but a single item sale brings us nothing as people now check the prices on Amazon and Flipkart and bargain accordingly,” says one shop owner. This has reduced some shopkeepers to selling antivirus software at their purchase prices to hold on to customers. As margins dwindle, shopkeepers have begun pushing software of companies which draw the best margins. One such product is Net Protector Total Security, from a small Pune-based company called Indiaantivirus.

E-commerce sites aren’t just hurting Quick Heal’s retailers, they’re directly affecting Quick Heal. “This [competitors listing on e-commerce sites] has resulted in pricing pressures due to increased competition from both global and local players,” Savi Jain, co-founder of portfolio management service 2Point2 Capital, explains.

The practice of bundling antivirus software with the purchase of a computer has also stopped, the marketing manager mentioned earlier said. Earlier, software creators would tie up with laptop manufacturers for this, but after American chipset maker Intel acquired McAfee, now called Intel Security company, this has substantially reduced. Intel, it seems, is now pushing its own product, he adds. Sachin Sharma, one of the shopkeepers in Lamington, seemed to confirm this. He told The Ken that this kind of distribution is now confined only to computer manufacturers like Dell, HP and Lenovo, which all come with McAfee.

Going forward, as awareness grows, customers will realise the need for security for their devices. The pull model—where customers come to channel partners for a product—will come into play, and more purchases will move to e-commerce sites. This will make Quick Heal’s push-based model—where the manufacturer is taking the product to the customer—obsolete.

A belated response
To stay relevant, Quick Heal is taking baby steps into new segments and geographies. In 2015, it launched Seqrite, its enterprise security product. In three years, 31,000 enterprises have switched to using various products offered by Seqrite. Unlike retail, the renewal rate in this segment is a solid 75%. Seqrite contributed around 19% of the total revenue in FY18, up from 13% in FY16. Katkar expects to make further inroads into the enterprise segment, with the company investing heavily in branding, promotion, and R&D for its enterprise offerings. The Ministry of Electronics and Information Technology order which stated that preference will be given to domestic cybersecurity products in all public procurement is likely to be a shot in the arm for its enterprise business as well.

$1.7 billion

According to a Gartner forecast, India's spending on security products and services is expected to grow to $1.7 billion in 2018

The company is also going global. It now has global offices in Japan, Kenya, USA, UAE, and claims to have a presence in over 40 countries. But just as MNCs struggled to make inroads in India, Quick Heal will face an uphill battle in foreign markets as well.

Born at the advent of public internet in India, Quick Heal was truly a product in line with the times. However, decades later, Quick Heal’s refusal to get with the times and adapt has cost it dearly. To avoid becoming a relic of the past, it has now woken up to the realities of its segment. A segment vastly changed from the one in which it grew and thrived. The march of time stops for no one. Now that Quick Heal is awake to the challenges it faces, can it keep pace?
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