Corero Network Security (LSE:CNS) — Full Year Results

0:01 Good afternoon, and welcome to the CORERO NETWORK SECURITY PLC Full Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the q and a tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, company will review all questions submitted today and publish responses where appropriate to do so.

0:30 Before we begin, I would like to submit the following poll. And I would now like to hand you over to Executive Chairman, Jens Montanano. Good afternoon, sir. Hi. Thanks, Alex. Good day, everyone. Today, we're going to be covering our financial year end results ended December 2022. To assist me here in the room today, I have Phil Richards, our CFO, who will cover the financial section and Tanya Alfonso, our Chief Revenue Officer, to present our market opportunity and strategy. And at the very end, I'll come back on with some closing comments and then hand over to Q and A. This is our agenda for today.

1:18 Moving on to what we're all about. CORERO is entirely focused in the distributed denial of service referred to as DDoS segment within the network security market. We have our own proprietary technology and continual services capability providing both providing monitoring and surveillance for our customers. Our main addressable customer areas are organization organizations characterized as service providers in many categories. Our technology is well proven and integrated with key partners such as Juniper Networks and GTT, where it is sold either as a solution or as part of a service provision.

2:09 Being involved with the full life cycle of our customers' needs for DDoS protection is a key part of our business. DDoS has been in existence since mainstream commercial use of the Internet flourished in the 90s. In early 2000s, it gained prominence with high profile attacks from rogue groups such as anonymous and public outages on sites such as Mastercard. As the years have progressed, so has the level of sophistication of DDoS attacks, which is consistent with all threats emanating from cyberspace and the security industry overall. Our journey will be a continual development of the technology to counteract the growing threats.

2:58 In this regard, our focus is to balance our commercial progress with continual R and D to remain at the forefront of innovation.

3:09 This is an example of something that we've seen a fast pickup in new threat trends. Carpet bomb attacks, also known as spray or spread spectrum attacks, have no specific targets and seek to hit all IP addresses active on a network.

3:29 Traditionally, attacks and early DDoS protection technologies were aimed at targeting specific domains and individual IP addresses. We cover all aspects, whether attacks are aimed at specific targets or in general in a network neighborhood.

3:48 We have evolved with a single technology platform using a modular and adaptive approach to addressing different DDoS implementations. Our appliance configurations allow for detection and mitigation to be designed separately. The mitigation or protection can be either real time in line, redirected out of the network, which is called scrubbing, or implemented in a nondisruptive configuration as a separate parallel data pass. Around our technology, we also provide always on services from our own security operations center. We refer to those as SecureWatch.

4:38 Last year, we added 32 new customers, CORERO, directly. This does not include customers added through the Juniper strategic relationship nor customers served through GTT. Order intake and growth in annual recurring revenue was 13%. We continue to have a very high renewal rate, and that is reflected in, obviously, the ARR, which Phil was going to touch on now in his financial presentation. I'll hand over to you, Phil, for the next segment. Thanks, Jens. So in this segment, I'm going to talk through the financial highlights. We're going to take a look at the income statement, the balance sheet or statement of financial position, and then we're going to finish up looking also at the cash flow and a waterfall through that.

5:28 So our way of financial highlights. For the year, we had 20,100,000 revenue this year. This was slightly down but close on the year before. Our EBITDA was 2,600,000 positive, prior year 4,000,000. I'm very pleased with these numbers given that we are profitable for the second year in a row, given that CORERO's operations previous to that were not profitable. So it's good to see also EBITDA. However, we're obviously slightly disappointed that revenue has not increased from year on year, we talked through this in our training update that there were various headwinds that we met throughout 2022 that meant that the macroeconomic conditions so indirectly affected us. However, saying that and Jens alluded to it before, the increase in ARR 13% year on year up to 14,400,000.

6:18 It's a very good sign of how strong the underlying business is and how it continues to grow in that section as well. We ended the year up with net cash of $4,400,000 gross cash of $5,600,000 slightly down prior year of $8,400,000 net cash, and I will talk about the cash flows in more details in the following few slides.

6:41 So if I go down to the income statement and the flow through to EBITDA. As I said, we had revenues of GBP 20,100,000 for the year with very high gross profit margins, which we continue to maintain with 87% gross profit margin in 2022 compared to 85% in 2021, leaving gross profit of 17,500,000. Our operating expenses, where we're excluding share based payments, 14,500,000 in comparison in 2021 to $13,900,000 and this reflects continued investment in R and D and in our sales force and those costs coming through into 2022. All of this resulted in our EBITDA for the year being 2,600,000 in comparison to $4,000,000 for the prior year.

7:28 If we look now at our balance sheet or our statement of financial position. So we finished up the year with 26,800,000 of assets compared to last year of 29,800,000. As we've within that, we have significant increases in trade receivables and a slight decrease in significant decrease in cash and cash equivalents. Trade receivables increase reflects the seasonality of our sales cycle, and we're pleased to say that all of this has been recovered post year end. These were due in January and February, and this is just the cyclical nature of the business. Therefore, the cash and cash equivalents balance has increased post year end accordingly as well. We, during the year, also repaid 1,600,000 of our term loan facility, and we are left then with $1,200,000 outstanding in this term loan facility as well. That will be repaid by the end of Q1 twenty twenty four.

8:23 If we look now at the cash flow from 2022, first of January to the end of December twenty twenty two, you can see there's significant capital expenditure, which is our continued investment in r and d, offset by our depreciation and amortization charge. The most significant movement resulting in a lower cash balance from the start of the year being our working capital movements, as I've alluded to before, it's predominantly due to the the impact of the sales cycle, and this has been recovered post year end. And therefore, the cash balance is significantly higher at the end of q one than it was at the end of December. And with borrowings, repayment also impacting our cash balance year on year. I'm now going to hand over to Tanya to talk through big markets and CORERO's strategy.

9:17 DDoS protection is no longer a nice to have. It is essential. The market, including both on premise and cloud based solutions, is growing at a steady rate due to the increase in volume, sophistication and damaging impact of DDoS attacks. It is expected to reach $7,300,000,000 by 2027. Today, for Carrera, there is a sizable addressable market within our ideal customer and solution profile.

9:46 When we look at the business strategy for 2023, we have clear alignment on the strategy this year, and we are all about focus and execution. Our ideal client profile comprises organizations that bring Internet service to their customers and offer software and application services over the Internet. It's made up of three markets. This includes Tier two, Tier three service providers, the hosting providers and SaaS providers. We continue to serve this market. I want to just take a moment and thank our customers for your ongoing partnership and for trusting us with your business. Investing in our resources and routes to market has proven invaluable in broadening our customer reach. We continue to cultivate relationships with our channel partners and also with our strategic alliances with Juniper and GTT.

10:33 When it comes to business drivers, I do speak with many companies about why DDoS protection is important to them, and there are three primary reasons: One, they've been attacked and they need to manage risk. Two, brand reputation and customer experience are critical to their success. And three, they are looking for new revenue streams for their organization.

10:55 It's always one or two or sometimes all three of these factors, and all of our messaging into 2023 is centered around bringing thought leadership and support in these areas. Companies choose CORERO because of our solid technology that we know that we have unparalleled service from pre to post sale support, and we are going to continue to offer best in class service to our customers. To execute our strategy in 2023, we have laid the foundation and have a system in place to support our work. Most importantly, we have a talented team that is engaged and motivated to deliver on our goals. Related to our product positioning, CORERO takes a consultative approach and solutions oriented approach to helping organizations with DDoS protection depending on where they are on their journey.

11:43 Many organizations today have no protection. They're focused on building, maintaining, and delivering services on their infrastructure. They're often alerted to possible DDoS events from their customers or via network or device outages with limited to no visibility.

11:58 As they look to bring on DDoS protection, there are several options. DDoS mitigation. This is aimed at reducing the impact of the event. The goal here is to know that you are under attack and to have an automated way to reduce collateral damage and minimize the impact of your overall service. DDoS protection, this is CORERO's sweet spot offer of always on capability, providing simultaneous detection and protection, no false positives, fully automatic with low operational impact. And lastly,

12:30 a growing trend we are seeing as organizations look for new revenue streams is monetizing DDoS protection as a service. CORERO makes it easy to evolve the advanced protection solution into a revenue machine with tight integration to the CORERO services portal. When companies make an investment in protecting their infrastructure, they also have a way here to differentiate their services from others to provide optimal service to their customers and open up new revenue streams. With that, I'll pass it back to Jens.

13:01 Thanks, Tanya, and thanks, Phil. So just a couple of closing remarks. While the absolute growth in our financial performance has been slower than expected, the longer term prospects are encouraging, as is the progress in the development of our business model.

13:22 Our focus is to balance our commercial progress with continual investment in development and remain at the forefront of DDoS solutions. So with that, I will hand over to the moderator, and we can hand we can answer any questions. Perfect. Jens, Phil, and Tanya, thank you very much indeed for your presentation this afternoon. And if I may now bring your cameras back up. Ladies and gentlemen, please continue to submit your questions using the q and a tab situated on the top right corner of your screen. While the company take a few moments to review those questions submitted today, I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A can be accessed via investor dashboard.

14:13 Jens, Phil and Tanya, as you can see, we have received several questions throughout today's presentation, and thank you to our investors for submitting their questions. I'd like to start off the Q and A session with the following question. What is the level of operational gearing we can expect from the baseline profitability that this year has delivered? Yes. I will begin that answer, then I'll hand over to Phil. As you can see those that have followed Carrera in the last few years will see that the year before last, we delivered $4,000,000 of EBITDA on $20,000,000 of revenue. And last year, we delivered approximately $2,000,000 of EBITDA on similar revenue. And the reason, obviously, for that was we had a expectation of higher business last year and as a result had slightly higher operating expenses.

15:05 But the leverage in our business model going forward, if you extrapolate future growth,

15:12 is quite highly it's quite leverageable because obviously, at 85% plus gross profit, there are little other fixed costs which go into the business if we have any upside surprise on our top line revenues. And maybe you could

15:31 segue to you, Phil. Yeah, absolutely. So we are going to continue to invest in our products and and making sure that we're we're selling appropriately to the market. We we had significant investment in 2022, but we still maintain a profitable EBITDA because we do also have, amongst our cost base, significant variable costs that will will see increase or decrease depending on our revenue numbers as well. So it is a highly scalable model whereby the cost also will reflect how the business is doing and continue to deliver profitable EBITDA on base case revenue figures as well, and and you can see that from from the analyst notes as well. So basically, our growth, if we have growth

16:13 which is above expectation, the only thing that the only cost, as Phil mentioned, the variable cost for us is commissions. The rest of that flows, the rest of that GP contribution flows straight to EBITDA. Perfect. Thank you. And the next question here is, what's the model revenue profile of client contract? Any upsells you have seen?

16:36 Tanya, what is the what is the the revenue profile of a client?

16:43 So just to clarify the question, are you looking to understand the size of the client's core? This is growth in wallet share, upsell. So if you have a customer, the revenue profile of where they start and where they might end up. So we have a very strong revenue profile with our customer base. Of the customers we have, there's a 98% retention rate, so very little churn within our customer base. And what we often see is increased opportunity for expansion when it comes to network expansion within our customers and then growth as they grow, we grow, essentially. And so we we have a very strong relationship and correlation to that. Most of our customers are network providers, hosters, data center, infrastructure are basically companies that provision

17:37 network and other infrastructure for networks. So, basically, our customers are driven by the growth of their ultimate customer. So it's we have very few customers that buy from us and never grow. That's that's very, very rare. Next question. That's great. Given the relevance of this product, why do you only have $14,400,000 ARR? Are there bigger competitors?

18:10 And what is the addressable market size? Have you missed the boat? Yeah. We whatever numbers Tanya touched on this. Whatever numbers you pick for our addressable market, the overall industry that we're operating in is a couple of billion and forecast to grow to much more than that. And even if you take different cuts of that in terms of what we can immediately address, we are still a tiny, tiny pinprick in the total opportunity. So that's where is our opportunity going forward. Why are we of this size now is it's we've been a very technically focused and engineering driven business for the for almost ten years. We've stepped out commercially in the last two years.

18:57 And obviously, for us, it's a combination of our own direct business development efforts, developing channels, and growing our share of that robust market. But we haven't missed we don't think we've missed the boat at all. As I mentioned in one of the timeline of DDoS, an industry that's been going for twenty years, and DDoS is not is not going away. Sorry, Tammy. No. No. No. Not a problem. I would say I I also you know, we have not missed the boat, and there are big competitors that are out there, and we serve a market with the within the database or data center services. Yeah. And we most probably whilst we're small, we most probably need to be positioned as a disruptor. Most of our large legacy competitors come from a very rigid hardware background. We are basically a disruptor in the sense that, hence, some of our other strategic partnerships, we are moving towards a software only configuration of our product, which we think will be which will enable us to continue to be nimble and aggressive in in in moving the business forward.

20:09 That's great. On the 14.4. Well, that rises every month. Yes. Was gonna say, honestly. Yeah. Annual recurring revenue rises every month. That was where it was in December. Next question. That's great. Thank you. Is the focus on AES rather than perpetual? Do you think the market values this year in the share price? Well, that's for the market to decide. We focus, obviously, on the business every day, notwithstanding our share price. We don't in our business model, we don't have we're not a perpetual model. We have term licenses, which are typically you can comment on this, Phil, which I think are typically about three years. Three years or so. Three years. What we have as a service where it's subscription or revenue share model with the with the with the operator.

21:02 So we don't have every everything at some point everything is supported through the life of the use Mhmm. And everything is renewable at some point. That's that's great. And the next question here is, what is the seasonality of new business expected in 2023? Yeah. Typically, in in in new business, in general, the cyclicality of the business and seasonality, we expect to see stronger q two, slightly lighter in q three, and then stronger again in q four. So overall, though, how that will play out for the year is approximately half, slightly under half in the first half of the year and then a little bit over 50% in the back half of the year.

21:52 That's great. Thank you. And perhaps the last question here is why was revenue down in Asia Pac? We have a very small presence in Asia Pac, which obviously includes Australia. I think the prior year, we actually had we had a meaningful transaction in Australia, which didn't show up last year. So it's not really it's not really a trend. It's a small a small region. We we we support it remotely. And, obviously, it's lump the the opportunities are are lumpy. And when they come, they're obviously meaningful. And when they when they're not, it obviously reflects in the it's not really a trend. It's really a reflection on a business that in a region that we have a very small business.

22:43 Jens, Phil and Tanya, thank you for being so generous with your time today. And I think you have addressed those questions you can for investors. And, of course, the company will review all questions submitted today, and we will publish those responses on the Investor Me company platform. Before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Jens, could I please ask you for a few closing comments? Well, thanks for everybody's participation today. We will be reporting our results, I think, in the second half similar format. When might be which month? No. I think. September. End of end of September. We look forward to addressing you again then. Thanks for your time today. Jens, Phil, and Tanya, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations?

23:39 This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of CORERO NETWORK SECURITY PLC, we would like to thank you for attending today's presentation. That concludes today's meeting. Good afternoon to you.