Can Corero Network Security keep up momentum?

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Selling software to the financial services sector was a pretty brutal market for any business to be in during the dark years of the economic slump – as investors in AIM quoted Corero Network Security (LON:CNS) could testify. Long term holders in the business haven’t had much to cheer about over the last three years but the influence of a new management team (and a new strategy) appears to be breathing new life into the shares.

Chairman Jens Montanana and operations chief Andrew Miller took Corero by the scruff of the neck in July 2010; first selling the flagging Financial Markets division and then raising £6.5 million for new projects. The remaining Business Systems arm continues to turn a profit by selling finance and admin software to education institutions, notably Academies, which have been unhooking themselves in increasing numbers from the central command of Local Education Authorities.

Perhaps of more interest, Montanana – who co-founded AIM and Jo’burg listed Datatec (LON:DTC) – set out to forge a future for Corero in network security, in other words helping mid-market business customers protect themselves from hackers and viruses. A year after his arrival, the company snapped us US-based Top Layer Security to give it the initial platform that was needed and renamed it Corero Network Security. So far, so good but the shares didn’t budge from sub-50p until earlier this month when the company raised another £4.5 million to develop the new division and produced a set of results that appears to have inspired more confidence.

While it remains loss making, Corero’s revenues jumped to £11.3 million from £3.0 million with interim sales growth of 308% amidst surging customer numbers: up 78 on the Network Security side plus another 192 Academies for Business Systems.

Unsurprisingly, the fundamentals deliver a mixed picture on Corero’s Stockopedia Stock Report . The long history of losses quite rightly raise a few red flags, although , Montanana and Miller’s new strategy may take some time to filter through to the numbers. But optimists might say that the market is a forward looking mechanism and cite the strong share price momentum as a signal of things to come. Corero’s recent run propelled the stock to within touching distance of our 52 Week High Momentum Screen this week – a screen that has produced over double the FTSE return over the last three months.

We spoke to Andrew Miller about the company’s operations and its plans for future development:

Andrew, between Business Systems and Network Security where is Corero’s main focus?

There isn’t one side that is more important, but the Network Security business is where we see the opportunity in terms of significant growth of that asset, given the market. That is an international market as well. All of our investment has been directed at the Network Security side of the business. But the other side is very profitable and has more of a captive market in education. It is basically an organic development play whereas the other business is more likely to acquire assets to extend it and also has a considerable R&D business, which is based in Boston, US.

What is your business model in the Business Systems division?

The market that we operate in are schools and what are known as Academies. As these schools become unplugged from Local Education Authorities they have to stand on their own two feet from a business, and financial management perspective and they require financial, genera ledger and software. So we effectively are a Sage equivalent and we have a 25% market share in that space. We sell a licence, which historically was a perpetual licence and we are looking to change that model to more of a term licence, as well as selling support.

In Network Security, you recently launched a service to combat distributed denial of service – or DDoS – attacks. Where does that fit in to your overall service offering?

We have two core products, including a historic product which is called the Intrusion Prevention System, which is where Top Layer were focused historically. That market is more competitive than the DDoS protection market, which is a new, emerging market. In the intrusion prevention market we have some large competitors, such as Cisco, HP and IBM and we generally see them in most sales situations. But we are able to compete against those companies in terms of our technology and what we are able to do. On the DDoS side, that is a relatively new market and we are starting to see a nice increase in terms of opportunities and companies actually looking for protection for this very real phenomenon.

This whole phenomenon of cyber crime is increasing in terms of prevalence and the number of these attacks. We recently did some research and talked to a couple of hundred customers in organisations in the UK and the US, and this whole distributed denial of service phenomenon is increasing in prevalence. A large percentage of the people that we surveyed – and similar surveys have been conducted by a number of companies – have experienced at least one form of DDoS attack. Cyber crime, which varies from the criminals looking for monetary gain, to the ‘hactivists’, the likes of Anonymous, is a phenomenon that is growing and is almost an industry in its own right.

Do you customers come to you after encountering problems or are they more proactive in attempting to avoid the problem before it occurs?

Some of them take a more proactive approach, and obviously the increased awareness of security and the threats to security is forcing companies to be proactive. Others are less proactive and we have a number of examples of customers calling us in where they have been subject to financial extortion or they are having issues with attacks. We have had numerous examples in the last 12 month where we have been called in to customers where they have had technology that isn’t working and they have implemented our technology and they have been able to resolve the particular issued that they were facing.

You recently raise money for the Network Security division. How will that money be spent?

The cash that we have raised is for organic growth in terms of investing in the development side as well as sales and marketing. Following the acquisition of Top Layer we have been focused on getting that business structured in the right way and investing in the development side. We have gone a long way down the road in terms of doing that and we will start this year looking at additional acquisitions, principally adding new technology which compliments our existing products focus.

Are there particular geographies where you see specific opportunities to grow?

Historically, Top Layer was ostensibly US focused and in 2011 we started to build out our international presence. We have sales teams in France, Italy, Spain and in the Far East in Taiwan and Malaysia, which came on board in the latter half of 2011. Our model is very much working and selling our technology through what is called a channel-based sales model. Our customers are intermediaries, distributors and resellers of information technology and generally specialist security providers who then sell on to end-user customers. That is a key part of our strategy, moving from what was historically a direct sales model in Top Layer to a channel based sales model where we get the leverage and the benefit of other organisations and their sales teams.

Turning to the latest results, what do they say about the business, where it is positioned and how it is performing?

There are a number of core messages. We have got a strong balance sheet in terms of cash; we had £4.3 million at the end of 2011 and we have raised another £4.5 million, which will allow us to execute on our organic growth plans. We are investing in the Network Security side and we are seeing good progress there. We think we have the right platform and the right product and the sales team to generate strong growth in 2012 although we will continue to be loss-making in that business as those investments continue. On the Corero Business Systems side, we see strong growth prospects from a business that is producing 30% profit margins and we see further opportunities for growth in that business over the next few years.



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