Corero Network Security Plc (LON:CNS) H1 results release (14/092017) showed strong progress, with revenue up 51% for the flagship SmartWall product. Perhaps even more importantly the recurring revenue element for SmartWall was up 177%. This reinforces the growth profile going forward because licence fee income grows cumulatively as new customers are added.
We believe these results demonstrate that the company has essentially completed its transition from a software generalist to a DDoS protection specialist, and that the SmartWall DDoS protection product continues rapidly gaining traction in the market.
In this report we review the progress of the group. We also revisit some of the fundamental drivers, and how the DDoS protection market functions. We argue that SmartWall’s real-time threat mitigation represents a disruptive new presence in the space.
KEY INVESTMENT THEMES
Among the main attractions of Corero Network Security Plc (LON:CNS) as an investment:
• A highly differentiated product in SmartWall which offers game-changing performance compared with anything else in the market place. • Substantial headroom for further market share gains, within a continuously growing end market for DDoS protection. • An expanding range of channels to market, and technology partners including Juniper Networks, Gigamon, and McAfee to extend Corero Network Security Plc (LON:CNS) market reach. • Support of a shareholder base that includes specialist institutions such as Miton and Herald Investment Management, and also the Chairman and principal shareholder Jens Montanana.
In this report we examine some of these themes in more detail.
The shares have gained 81% since the successful fund raising in April. Still, looking forward we believe the company could reach revenues of $50m in 3-5 years. This would imply a market cap of £115m based on peer-group multiples (e.g. Radware, RDWR:NSQ), with no further fundraising required in our view, or 4x upside from the current level. If Corero continues to deliver on milestones, there is still everything to play for here for investors.
Corero continues to develop new ways to deliver its service to the customer. The different offerings are as follows:
• Perpetual/recurring. The SmartWall product is delivered as a hardware product with embedded software. The hardware is essentially a slim-line server, procured by Corero from a third-party vendor, with the SmartWall software being the real value-add. Customers can either take this as a perpetual purchase – pay up front for the system, with a separate support service contract, or take the system under a licencing agreement (recurring revenue).
• DDoS Protection as a Service. This uses the same actual mode of delivery for the DDoS protection (hardware with embedded software), but the recipient is an ISP or hosting service, who does not pay anything for the product. Instead they offer to switch on the protection for their individual end customers as a premium service. Corero’s revenue in this offering is a fixed monthly subscription fee to use the SmartWall technology (ownnership remains with Corero), a revenue share based on what the end user customers pay or a combination of both. The SmartWall system is easily scalable to expand protection as the ISP signs up more premium customers. For the ISP, the DDoS protection has become a revenue driver instead of a cost.
• Go-To-Market partners. Again the same mode of delivery, different way of selling. The partners are typically network infrastructure vendors, who will offer SmartWall as part of their package to their customers.
• Cloud. This is a whole new mode of delivery, which Corero expects to offer starting from 2018. The company is developing a virtual SmartWall that can be accessed without installing hardware. This could provide a new level of flexibility for reaching some customer groups.
The following chart gives an indicative view of how these different routes to market add to Corero’s revenues.