Analyst report, July 2016 on Tesserent - Executive summary...

Analyst report, July 2016 on Tesserent - Executive summary contained in report below.

EXECUTIVE SUMMARY

Tesserent has developed a cloud-based platform for the delivery of comprehensive cyber security services in commercial and institutional environments. It is an innovative platform that centralises the security management of critical IT infrastructure by leveraging established industry technologies. Service delivery through the cloud markedly lowers operating costs compared with the traditional managed service delivery model providing Tesserent with considerable competitive advantages. By leveraging established technologies and protocols, Tesserent has been able to develop an alternate business model that doesn’t challenge or threaten decision makers comfort zones whilst providing accessibility to businesses and institutions who may not otherwise afford the infrastructure and support that is now available. Cyber security is an enormous, rapidly growing market which is increasingly delivered by consultants, integrators and IT security specialists through managed services business models. Reflecting the enormous cost to the global economy from IT security breaches, which is estimated at over US$400 billion annually, the cyber security managed services market has grown by about 66% over the past three years to be an US$18 billion industry and is expected to grow by another 50% over the next three years to US$27 billion. Whilst there are a relatively small number of key software and hardware technology providers who specialise in various components of the supply chain, there are numerous providers who package these components into business solutions. Tesserent’s solution stands in marked contrast to the standard distributed model where every network will have its own set of hardware and software which is individually managed and supported. Tesserent has built a single platform and centralised solution that incorporates key technology protocols from a range of leading suppliers which provides all the security services expected from a comprehensive, complex solution. Client access to the internet can be routed through Tesserent’s severs or those of its channel partners thereby providing high end cyber security services at markedly lower cost. With with well over 200 clients managed directly or through channel partners, Tesserent has validated the technology and demonstrated a capability of being able to operate profitability. The strategy is now to rapidly scale up the business globally and to this end the company has developed a two-pronged go-to-market strategy around direct clients and partners. Tesserent’s platform is an attractive solution for systems integrators, IT security specialists and consultants who are now able to offer a simple, managed security solution to their own clients, usually as part of a broader service and support relationship. Channel partner relationships have been developed to accelerate the global roll-out of the platform with partners currently in place in the UK, South Korea, Gordon Capital Pty Ltd Page 4 of 25 Direct client relations will continue to be developed although partner driven revenues will become increasingly important. Acquisitions will accelerate growth and add to the product and technology portfolio. Revenue to grow rapidly, off a low base, over the next few years… although investment in business development will grow in FY 2017. UAE and Hong Kong and the focus of business development is to rapidly expand this network. Tesserent has built a strong direct client base, including a significant number of well- recognised companies, through its initial commercialisation and business model validation strategy and will continue to develop its own client relationships in Australia and in selected offshore markets to leverage its infrastructure costs and for reference purposes. Nonetheless, we expect the growth in revenue from partners, in the medium to long term, to exceed that from the direct clients. Acquisitions will also be a key element in the company’s growth strategy as an effective means of achieving quantum leaps in the client base, gaining access to new verticals and adding to its technology platform and internal management capabilities. To this end, the May 2016 acquisition of the business of Blue Reef ticked all of these boxes. Our research indicates that annual fees in the education sector range between $10K and $20K for services similar to those provided by Blue Reef. Accordingly, assuming an average of about $15K per client, we estimate that Blue Reef’s 150 clients in the education sector, will boost Tesserent’s overall revenue by around $2.3 million. Blue Reef is expected to contribute to over group profitability in FY 2017. Based on the successful implementation of these strategies, we expect revenue in FY 2016 to increase by about 35% to around $5 million before rising by 80%, to around $9 million, in FY 2017 and a further 65%, to around $15 million, in FY 2018. The impact of the Blue Reef acquisition will be most apparent in FY 2017, with client and partner acquisition, led by several recently appointed highly experienced sales and marketing executives, being the other key factors driving revenue growth over this period. The company has not provided any earnings guidance, but from information released to the market, we expect a relatively small net loss of around $1.5 million in FY 2016 as the company absorbs the costs of the IPO and listing on the ASX and focusses on building its sales, marketing, business development and customer support infrastructure. We believe that the company will continue to invest heavily in sales, marketing and business development in FY 2017 which will probably result in a similar loss in that year, albeit from a much high revenue base. With around $4 million in cash, we believe the company has adequate resources to cover anticipated operating cash flow deficits over the next 12 to 18 months. However, additional capital may be required to fund any further acquisitions that may be undertaken through this period.