Corero Network Security plc (NYA1.F) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Corero Network Security plc H1 Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Carl Herberger. Good afternoon to you.

Good morning, everyone, and thanks for joining the Corero Network Security's Half Year Results Presentation for the 6 months ending 30 June 2024. For those of you new to the Corero story, we deliver advanced software mostly adaptive DDoS defense through automatic detection and mitigation solutions designed to protect organizations from the growing threat of denial-of-service or what's called routinely DDoS attacks. Our tech stack effectively safeguards thousands of leading Internet service providers, hosting and cloud providers as well as large SaaS platforms and providers against attacks that result in disruptive and harmful cyber events. Essentially, we keep companies that need to be up, up and available. For those -- so I'm pleased to report that Corero had a very strong first half of the year, delivering robust sales growth, reflecting the strength of our business and ongoing demand of our solutions. Our group revenue increased 16% year-over-year, driven by new multiyear channel partnerships, significant customer wins and strategic enhancements to both our tech stack and services portal. The order intake for our group will increased by 10%, demonstrating strong market confidence in our ability to deliver value in an increasingly volatile threat landscape where DDoS attacks continue to rise at an unprecedented pace. Our ARR also was up 12%, while EBITDA remains healthy and our cash position stands at a record high. We're achieving remarkable momentum. Since stepping into the CEO role, my focus has been on enhancing operational execution through the change into 4 key revenue-generating pillars as part of our overall go-to-market strategy. We've made excellent strategic progress against each of these pillars in the first half and will continue to provide us with significant opportunities to drive future growth and deliver meaningful results. Early this year, we restructured our sales and marketing teams to create a more unified growth team with a shared goal of closing new logos, new deals, new customers to Corero. An early success of this alignment was this Corero Security Leadership Summit. It was essentially a new summit that was held in Edinburgh which is our location of our R&D centers of excellence, and it was held in Q2. This event brought together industry leaders from all around the world who are both customers and new prospects and generated over $1 million in new deals for Corero. It's something that we'll continue to do ongoing. We have new partnerships and renewals through the half. Continued investment in our strategic channel partnerships with Akamai and Juniper and GTT, what we call our alliance partnerships, continues to pay off, providing great dividends and great momentum. These partnerships, especially our close collaboration with Akamai Technologies, who uses our technology to protect their infrastructure and resells in a sell-through model to their customer base are key to our accelerated growth strategy and will continue to position us for long-term market leadership. On new customers, the demand for our solutions remained very strong, and we successfully secured key customer wins and renewals in Canada, Hong Kong, Israel, U.K. and the U.S., including 4 7-digit deals directly through our own sales team and through our channel partnerships. In products and services and updates on our research and development efforts, we continue to make strong ongoing strategic investments to protect our customers from the evolving DDoS threats and remain in the forefront of cybersecurity evidenced by our teaming agreement with the U.S.-based 5G security provider, SEMPRE. This collaboration will advance the deployment of military-grade resilient communication nodes, ensuring critical information remains accessible even during various forms of attacks. Additionally, we've unveiled several product and service enhancements, including supporting 400-gig connected environments, which is the next generation of connectivity. We've also launched DDoS cloud backup protection powered by our alliance partner, Akamai. So we bring that capability into our fold, which provides a hybrid capability for on-premises and cloud solutions for comprehensive defense among other product and service enhancements. I'll now go to the next slide, where we'll actually go through our key highlights of significant deal flow. You'll see here, we've scaled our global presence through new sales, channel partnerships as well as secured significant renewals broadening our sales footprint in Latin America, Europe and in the U.S. In April, we announced a $1.8 million partnership with TierPoint, a leading provider of secure IT platform solutions with thousands of customers across the U.S., displacing a very serious competitor. This partnership demonstrates the critical importance of Corero's advanced DDoS protection and safeguarding the vast services and infrastructure that TierPoint manages and the trust of customers like TierPoint in the Corero solution, especially removing a competitor in the process. Building on that momentum, we also secured a $2 million contract renewal and expansion with a leading U.S. very large Software-as-a-Service provider, showcasing our ability to seamlessly support the global operations of top IT service management companies. This is a table stakes kind of company. We extended a 3-year $1 million-plus contract with DigitalOcean, which is a hyperscaler company to continue to protect its extensive network infrastructure and a new partnership agreement with RoyaleHosting in the Netherlands to provide DDoS mitigation technology across its global network of solutions. In addition to these significant milestones, we announced a key strategic partnership with a company named TechEnabler in Brazil. They're a well-established Brazilian network solutions distributor. This partnership marked an important step in our ability to have presence in Latin America, which is an important growth market for us. In closing, we've been successfully executing on a 4-pillar revenue-generating strategies demonstrated by our strong performance in the first half of the year. Instrumental to our success is the incredible execution of our skilled and dedicated teams backed by our market-leading technology. Looking ahead, we remain optimistic about achieving our ambitious but very doable growth targets for the remainder of the year. I'll now turn over the call to our CFO, Chris Goulden, who will details of our first half results and outlook for the rest of the year. Chris joined Corero this May and has done an incredible job as the CFO thus far. Chris, over to you.

Thank you, Carl. Good afternoon, good morning, everybody. I'm pleased to present a strong set of financial results for Corero for the first 6 months of 2024. Corero continues to deliver strong improvement across all key financial metrics. As Carl mentioned, group revenue for the period was $12.2 million, representing a 16% year-over-year increase against the same period in 2023. Continued demand for Corero's SmartWall ONE solution delivered 10 additional new customers in the period, half of which were contracts that were won directly from our competitors acting as an incumbent provider. Annual recurring revenue, which represents our support, managed services and DDoS, Protection-as-a-Service revenue, that grew 12% in the period to $17.2 million. Gross margin remained consistent at 91%, reflecting our kind of software-led approach to our product delivery, and this led to an EBITDA of $0.7 million for the first half of 2024. In addition to the previous highlights, I'd like to call out order intake of $14.2 million, which is a 10% year-over-year growth rate. That's versus a very strong comparator in the first half of 2023. So we're very pleased with that growth. Corero has a strong balance sheet underpinned by the continued generation of cash. H1 cash balance of $7.9 million represents $2.7 million of free cash flow in the period. The chart on the right-hand side here represents our annual recurring revenue trends for the half 1 period going back to 2019. And you can see a 25% compound annual growth rate in our annual recurring revenue over that 5-year period. This annual recurring revenue growth underpins future revenue predictability and provides a stable and scalable base from which to continue to grow the business. Just a breakdown here then of some of our revenue streams. So geographically, U.S. revenue grew at 8% to roughly $9 million in the period. And rest of the world revenues grew over 40% to $3.1 million, driven by expansion in key regions for us such as the Middle East and Asia Pacific. Software license revenue contributed 42% of the total revenue in half 1. This is slightly higher than we've seen in previous years, but management expects this percentage to normalize to just below 40% for the full year. The strong first half of 2024 financial results support the accelerated go-to-market strategy that's been deployed since the arrival of the new management team coming into 2024. The cyberattack landscape continues to evolve and the continued growth of the cybersecurity market follows that. Management expects that the first half momentum will continue through the second half, and we remain confident that full year 2024 results will be in line with market expectations and that Corero is well placed for future growth. Thank you. That concludes today's presentation, and we'll happily move to any questions.

That's great, Carl, Chris. Thank you very much indeed for your presentation. [Operator Instructions] Carl, Chris, as you can see, we have received a number of presubmitted and live questions for today's presentation. And if I may now hand back to you and kindly ask you to read out the questions, give responses where appropriate to do so, and I'll pick up from you both at the end.

Okay. And so the first question is, is Corero's recent new business momentum a feature of your new approach to sales and marketing or simply market-driven demand?

Yes. So predictably, I would imagine a question like this, you would understand that it's both of those things. So if we look at the market, the DDoS marketplace, the need for DDoS products is doing nothing but growing. But why? There are fundamentally 2 major reasons. One is the amount of companies that are relying on the Internet or delivered technology services to be able to be the core of what they do, it continues to increase. I think we all know that just about every business in this world has some attribute or aspects or relies more and more on a software product that's delivered through the Internet. These have to be up and available. So that space is growing. The market is growing. The second piece is that the threat to that, the availability threat to that space continues to grow. I think we can all agree that the geopolitical environment, the tool sets that people use and the criminal incentive have all risen in the period and continue to rise and the trend is quite heinous. And with the idea of a U.S. election in the back half of this year, it will only continue to grow. And every time you see either a major geopolitical event or war or in many cases, large financial events or even sporting events, you find a big peak in rise on it. Second piece of this is our execution strategy on it. With the market generally accepted to be growing in the neighborhood between 10% and 15% CAGR and our production being over that, we're showing share growth in the very early shoots of the market. So our approach to sales and marketing, we believe, is beginning to demonstrate that we're outperforming the market overall. And we think that, that momentum will continue.

Next question then is directed to Carl. And it's, Carl, how would you assess your first 9 months in the role? And is there more to come for the team?

I'm very, very excited about the transition and the team at large. So the first part is that I believe very strongly and more so resolutely today than at any other point in my first 9 months that the company has exceedingly, the right products at the right time for the right offerings in the right markets. And we will continue to grow that powerfully as we move forward. Having said all of that, the company has rightfully a strong ability to be a challenger in the market and has strong ability to take share in the marketplace. So there's a lot more ambition that I have for this company to produce and to accelerate momentum behind it. And I think that you hopefully see is just the first tranche in what will become very, very numerous tranches of momentum success.

Next question then. Should we expect Corero to continue to sign channel partnerships to further boost its geographic reach? Or is the company's focus more on direct business wins?

Yes. So the strategy that I have, the 4 revenue strategy or piston strategy in developing revenue for the company has one strategy that's focused on alliances. When we use the term channel partnerships, some might view that as an alliance partnership and some view that as a channel partnership. So the alliances will continue to grow. That means companies that we sell through our product portfolio, much like an OEM provider. So these are the Juniper, Akamai and GTT relationships, and those relationships will continue to grow on the alliance side. On the channel side, which is what we consider to be value-added resellers and distribution providers, that has already continued to grow. We have signed, if you review the press releases, new partnerships and new geographies such as South America, and then we'll have more as we continue a geographic expansion of our business. Lastly, what you'll start to see is more integration with both vendors like SEMPRE, that we mentioned in today's call, and with system integrators, that's a very large category that we have had yet to actually open up and foster. So the answer is you should expect to see Corero continue to sign channel partnerships, system integrators, technology integration solutions and more alliance partnerships as we move into 2025.

Next question is quite similar, actually, focusing more on kind of Akamai and the other alliance partnerships. I don't know if there's anything else you want to talk about that.

The alliance partnerships, each of them are in a healthy spot and growing in health. I would say that we have doubled our efforts and renewed our ability to do selling enablement programs and processes. with our channel partners and finding good reasons to be able to harvest, get even more capabilities with each other. Akamai is the most new partner to our portfolio. In some ways, maybe some of the biggest potential because of the size of the company relative to our other partners. And that pipe has never been bigger. The pipeline for our ability to go to market together and the ability to win business together has been gigantic. You probably recognize that we have in the neighborhood of 8 to 10 direct selling resources. Akamai has in the neighborhood of 800 direct selling sources. So that has, in some ways, a strong ability for us to go to market with them, but it has also a burden for us to be able to educate on the solution sets. So it's a large -- it's a large partner that we're continuing to integrate into their sales cycle and into their selling abilities, and we think that the premise has never been better.

Thanks, Carl. Next question is, why was the ARR growth lower versus H1 last year when order intake was up 10%? I'll take that one. So in terms of our annual recurring revenue, there's 2 factors really. The first is the timing and the mix of what we're selling. So when we sell our product license, we often sell support and maintenance services alongside that. But the mix of that is not certain. It really depends on the requirement of the customer and the best solution to kind of service that requirement. Secondly, customers' buying behavior and where their budget is derived from can also affect the mix. So what we've seen in the first half of this year is, more of the customers than we anticipated have really grown their CapEx budgets. And on that basis, they are buying kind of more license upfront as the mix as opposed to our DDoS protection-as-a-service. Now what I would say is from what the projections and what we can see looking on an annual basis, there's no suggestion that ARR will grow significantly lower or different to previous years. It's really just kind of the timing and the mix that we've seen in the first half of the year. The next question then says, you introduced AI-assisted solutions like the Corero DDoS Intelligence Service. How has customer adoption been so far? And what future enhancements or AI-driven innovations can we expect in your product pipeline?

Yes. So a wonderful question, and I'm happy to have fielded this question. First of all, the introduction has been excellent. The adoption has been excellent. It's only been about 3 or 4 months that we've had this service in the marketplace, and we have in the neighborhood of 6 to 12 revenue-generating customers on it, and there's good reasons for it. The capabilities on this service allow for a customer to essentially predict attacks, forgoing the need to detect and respond to attacks. This predictive element is much like weather predictions, allows a customer to essentially batten down on their security portfolio before the attacks actually occur. And there are many reasons why we can do this predictive AI-driven assisting both predictive analysis as well as predictive protection sets. So it provides for tremendous high-value capability on top of the portfolio that we have already provided these customers. So there's a tremendously easy sale for us, and that's because it's high, high value. This leads us into the harbinger of our product portfolio to come. And what you should hope to understand is over the next 18 months, Corero will be continuing to provide in the marketplace unique, capable sidecar solutions that are innovative, that are meaningful to the marketplace and will drive our momentum into 2025. So innovation will challenge the market because our solutions will be unique and meaningful to the customers, not unlike this DDoS Intelligence Service.

Next question. Does your software only work with Corero hardware?

I love this question. We are the only provider in the marketplace that is independent of hardware requirement. So in our technology, in the core, our technology does not require very specific sets of technology stacks. Of course, it makes sense for you to invest in a technology stack so you can get very strong performance from the technology. We do make and ship hardware from time to time for our customer. But largely, what we do is software. We set in place motions years ago to make sure that our software was extensible and ephemeral if need be within environments, unlike products from other vendors that require hardware lock-in and hardware upgrades. Otherwise, you must change your hardware with your vendor, essentially, you're locked in on it. With us, you are not. Also, it means that you can change your vendor to us, you can renew to us quite easily as a result.

Thanks, Carl. Okay. This looks to be the last question on the screen then. How many sales and marketing heads are based in the U.K., serving the U.K. market, given the U.K. revenue in the 6 months to June 2024 was only $402,000?

I'm not sure about that number. That's a correct number or not. I'd have to review that. But the nature of the question is how many salespeople that we have that are focused on the U.K. Overall, worldwide, outside sales reps -- this is outside non-sales engineering reps or business development reps essentially outside sales reps. We have 10 overall people covering the entire globe. And of that, we have one individual that is responsible for the U.K. and Ireland selling region. And I'm pretty sure that, that person produced -- I think, produced more than that from my recollection.

From a bookings perspective, they would have done the revenue conversion.

Revenues conversion, that could be. So on the other side of the house is that you have to think about our business, not just as how many outside sales reps do we have. We have alliance partners that are selling also. Juniper, GTT is very heavy in U.K. as well as Akamai, as you know. And they have many, many reps that actually sell our solutions also inside of the U.K. marketplace and the revenue we be recognized through those relationships, not necessarily through the geography in the results. And then lastly, we have also an installed base in the U.K. and Ireland that we do many renewals, add-ons and upgrades, some -- and I'd say on top of that, we deal with many companies that are headquartered in different geographies such as the U.S. or otherwise, that have presence in the U.K. and that portfolio where they're purchasing for the U.K. may be recognized in their headquarter domicile.

That's great, Carl, Chris. I believe you have addressed all those questions from investors today. So thank you very much for that. And of course, if there are any further questions that come through, the team can review all questions submitted today, and we'll publish those responses on investor link company platform. But before we direct investors to provide you with their feedback, which I know is particularly important to the company, Carl, could I please ask you for a few closing comments?

Sure. I just want to reiterate the fact that the early results and the shoots of our business momentum success continues to be pleasing to us. It's really demonstrating to us that the changes that we've made in the beginning of the year, both with go-to-market and personnel and the changes that we've made with the product portfolio and the engineering are just the beginning of the momentum story here at Corero and the change in the management team that we have. We believe that the momentum of our business is fundamentally weighted towards the second half. And as we move into 2025, we think we'll have a formidable management team and strategy that will continue to execute and pervade. Chris?

I'd just like to thank everybody for their time today. And if you have any questions, you can reach out to Carl or myself, details in the slide deck that we published or via the website.

Thank you very much for your time today.

Fantastic, Carl, Chris, thank you once again for updating investors today. [Operator Instructions] On behalf of the management team of Corero Network Security plc, we would like to thank you for attending today's presentation, and good afternoon to you all.