Corero Network Security: Equity Development
Corero has already secured over $8m of orders in the first four months of FY24E. This level of momentum in orders not only supports our double-digit % growth forecasts, but also validates the Group’s go-to-market strategy. The share price is only just beginning to wake up to the progress made in bringing the business model to maturity, in our view. Trading at the top of its 12 months price range, the stock’s forward rating of only 2.7x EV/Sales in FY24E continues to support our fair value assessment of 14p price/share.
Recent wins. Corero has secured $8m of orders from both existing and new customers in the first four months of FY24E. The group reported a 17% YoY growth rate in annualised recurring revenue (ARR) last year. The reported level of new order momentum to April is consistent with our double digit forecast growth rate in FY24E and beyond.
9x`8% renewal rates
Delivering on the strategy. Corero has a coherent strategy of generating incremental business from new customer mandates, expanding its global partnerships to increase overseas revenues, upselling its installed customer base and maintaining a strong renewals profile. Corero has recently reported an outstanding contract renewals rate of 98%, maintaining a double-digit % growth rate is made substantially easier when there is negligible drag on growth from customer churn.
Highlights. Corero signed an expansion and renewal contract with a US SaaS provider worth $2m over three years in April. This was one of the company’s largest single transactions to date. The increased scope of work reflects Corero’s expansion alongside its customer as it expands internationally requiring greater infrastructure protection against DDoS attacks as it grows.
New partnership and services. New partnerships are instrumental to Corero’s strategy. A new partnership with TierPoint, a provider of connected data centre solutions, was announced in April. TierPoint has 40 data centres across the US and offers a consultative approach to customer hosting and security needs including protection against DDoS attacks. Corero also recently launched a new DDoS hybrid cloud backup service in conjunction with new partner Akamai.
Strong gross margins
Debt free. We are forecasting +13% growth in revenues in FY24E to $25.3m (unchanged), With gross margins high at 90%, the drop through rate of incremental revenues to earnings means that EBITDA margins should reach double digits this year. The stock is free cash flow positive with a forecast FCF margin of 6.7% in FY24E. Net cash balances will continue to grow as a function of this free cash flow growth (+33% to $6.9m in FY24E). The stock has both defensive and growth qualities which should support a higher rating going forward and we reiterate our fair value of 14p price/share.
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