Crowded data

Alan Kohler here with today’s CEO and it’s Ted Pretty from Covata, which is the data security company. Ted has been there for 12 months. I interviewed him last August and the shares were 7.5 cents, things seemed to be going well. Since then the shares have fallen to 2 cents, back to where they were when Ted took over, so a bit disappointing for everybody concerned. Ted reckons it’s cheap at 2 cents and he has been buying as has Fidelity International, the big global fund manager which is their biggest shareholder, he reckons they’re buying as well. This is a company that is really struggling to get some headway into data security, it’s obviously a growth area, this business of data, it’s the hot topic everyone is talking about it but it’s also incredibly competitive so it’s just hard to get anywhere. 

Covata is burning cash quite a lot actually, about 1.4 million per quarter, it’s got 4 million in the bank, it is going to have to raise more money at some point. Ted says they’ve got enough cash to get through 12 months, I would say they’ve got just enough cash to get through 12 months, they’ll have to raise some more probably this time next year I’d say. He says on current trajectory they make cash flow break even in 2020, so maybe. It’s risky but potentially the leverage is phenomenal to get this stock at 2 cents, a market cap of 13 million, if it actually does get somewhere there’ll be big gains there but there’s no doubt that it’s not without risk, that’s for sure. Ted Pretty used to be a senior executive at Telstra and he has been kicking around this area for a long time, knows what he’s doing and he says he’s putting his own money into Covata so I think it’s worth listening to him.  

Here's Ted Pretty, the CEO of Covata Limited. 

Ted, the reason I wanted to talk to you now is because as I mentioned we talked to you August last year and things seemed to be going really well then, the share price was 7.5 cents, you’d just done a deal with Microsoft, Azure and also Macquarie Telecom, and you’ve made this takeover offer in the US of a business called CipherPoint.  Things looked to be going great and I’m not sure whether any of my subscribers bought the shares but bugger me they’re back down to 2 cents so I thought we’d better check in to see what’s going on and why you think the share price has fallen so much again and whether things are looking up still again.

Yeah, as you know when we spoke around last August you would have seen we were about three months into the turnaround then.  The company had modest overall revenues at the time and cash receipts were almost non-existent so if you look at FY18 now based upon what we’ve done in the last 12 months on FY17 when we took over, late FY17 when we took over the business the FY18 revenues we disclosed about 1.44 million, so that’s up 240% on FY17 and cash receipts were up 1,000%.  From our point of view we took a business that was making a lot of glossy and flossy announcements and no real revenue or cash receipts and grew it into a business that’s now pretty solid and has got good revenues in growing cash receipts so it’s a solid revenue uplift and issued new products, made new sales but the share price, as you point out, is down at the 2 cent mark.  In my opinion the share price if very cheap and the way I look at that is that we’re still very well supported by Fidelity, one of the big global funds, who were the biggest subscriber in the recent capital raise.

I suppose that gives me some confidence that the story is right and the settings are right but I can’t do much about low volume sort of trading in the stock.  A few hundred bucks of trading in the stock moves the share price because most of the other shareholders are rusted on.  Can’t do much about that at the moment other than I think improve our IR, investor relations comms and get out there and tell the story a lot clearer but if you look at all the metrics on FY18 over FY17 it’s been a massive turnaround and we completed the CipherPoint acquisition which was great, which pushed us into being able to secure Microsoft SharePoint installations.  We announced to the market just recently we were about to launch our SharePoint online product, securing SharePoint online, so that’s all going according to plan.  We picked up some additional technology around data discovery and classification from a partner company in Germany called Data Global which is the biggest data archiving and classification business in the DACH region, Germany, Switzerland and Austria.

From our point of view all the settings were right.  I suppose if we were fronting new investors today I suppose the key messages we’d say are technology is great, it’s competitive, it covers secure data sharing for governments and secure SharePoint installations for governments and enterprise and we’ve got some new data discovery products.  Turnaround has worked, revenues are up, cash receipts are up.  We know we’ve still got a way to go but we’re looking to close some bigger deals in the next two quarters and we’ve got a solid cash position and we’re controlling costs.  The final point would be our biggest shareholder, Fidelity, has stepped up again in the most recent raise so it is a bit frustrating.

It must be frustrating.  Are you buying at 2 cents, are you in there?

Yeah, I actually subscribed, I’ve subscribed on every issue.  Management have been there and we’ve communicated that to the market so we’re doing it.  We can’t buy outright on this date for the obvious reason we’re in the blackout period prior to release of the audited accounts but we run the business so tightly around our numbers and our reporting that just at the beginning of July we issued what the numbers are going to be subject to final audit.  We’re that on top of the numbers we know what we’ll be reporting.

Yeah, I saw those.  Take us through those numbers, Ted, because I think the cash situation is really kind of important.  You’re still burning quite a lot of cash as I can see.

We’re still burning cash.  I think when you look at our cash position we make sure at any one point in time that we have 12 months cash in the bank.  Given I’ve only started here March last year, February last year, it’s important to make sure that you’re going for a company that’s sort of turnaround that you’ve got your going concern issues covered.  Every time at the half year, at the full year, you want to make sure you can point to 12 months of cash out there.  We did a small cash raise last year, share SPP, we did a rights issue this year, we’ve topped it up again.  Then of course we get back 43% of all the cash we spend on approved R&D under the government’s tax rebate.  That means a large chunk of our R&D spend, which is our biggest expenses on labour on R&D, is 43% and that comes back as part of the R&D. 

When you’re looking forward as to your cash position you pay current cash at bank at the beginning of the financial year which we indicated was over 4 million at the beginning of July.  You add to that your expected refund which you get in the October to December period from the R&D and you add to that a conservative level of cash and revenue from sales that you’re going to receive in the forward financial year and that gives you the confidence to say we’re well funded.  We’re in that situation so that’s not the issue for us.  If I said why is the share price where it is it could be a couple of factors.  There was a lot of bad sentiment around tech there for a while on the back of the likes of GetSwift and OnePage and a whole range of those players that didn’t help and was a bit on the nose with the brokers and other things like that, the tech sector.  It’s kind of starting to come back but I think what’s happening now is the shareholders that have been there are saying look, we see the turnaround has worked, we see the revenue uplift in your products and now we want to know when you’re going to close some bigger deals so that we get line of sight to cash flow breakeven.

What is that line of sight to cash flow breakeven?

We haven’t given a date for that but clearly we would see the 2020 year as sort of the determinative year around that, that that would be a reasonable objective for us to get to that number but we haven’t issued that as a forecast.  We said that that 2020-2021 year is one where based on the outlook I think investors would probably want to see us being able to do that.  That’s why we run a fairly lean shop.  When I took over we had 46 people, of those one in sales, today we have 23, 10 in dev but six are in sales, sales and marketing.  We’ve changed the organisation around substantially, we spend less but we’re getting the revenues.  I think the investors are just now waiting for us to demonstrate that with a couple of big sales.

The way you’re going, the cash that you’ve got in the bank, isn’t going to last you until 2020 is it?

We’re only looking at 12 months, so we’re only looking forward 12 months.

You’ll have to raise some more.

It’s likely we will but we want to be doing that obviously at a higher price based upon kicking some goals on sales in the next few quarters.

You’ve got, I think, three main products.  You’d better explain to us what they are because you’ve talked about SharePoint and CipherPoint and so on.  Just take us through the products that you’ve got.

The first set of products was the original one the company had when I got here which was a single product, it’s like a secure file sharing platform or secure vault.  A good example is we sell that product called Safe Share, in Australia we sell it through Macquarie Telecom, and it’s sold as a white label product and 24 government agencies use it, what they use it for is to encrypt sensitive documents and then give limited access to people for their eyes only.  It’s a secure file sync and sharing product, we call it Safe Share, Macquarie market it as SIGBOX and that’s got over 24 agencies on it and many thousands of users on that platform, that’s the first one.  We’ve just subsequently deployed that platform to solve another problem which has come up in the US market where any company involved in the defence industry, the ITARs or international traffic and arms regulations, has to be able to assure the US government that they keep their data secured and encrypted.  We’ve now started to see early sales and selling that product to defence subcontractors and things, that’s one product.

The second one is the business we bought from Eclipse which is really unique globally and that is a product that secures SharePoint installations and data, so it provides a layer on top of Microsoft’s own security and that’s the business we bought from CipherPoint and that’s going quite well.  That’s the one that’s going to be, I think, the product in the future for us that’s going to have the big licks of revenue out of it because we spent the last six to nine months since acquiring that business building the next generation of that product for SharePoint online or Cloud.  The first product was on premises product, the second product is cloud enabled, so that’s the big play there.  The third category of product is we did this agreement with Data Global in Germany because people quite often want to buy products that secure their data but quite often they don’t know where the sensitive data or how much is out there.  We acquired some technology that will enable us to do data discovery and data classification.  You go into an organisation, you say let’s do a quick diagnostic on where your most sensitive data is, did you know it’s here, here and here, and then let’s sell you a product, let’s classify that to ensure in the future it’s automatically secured and let’s provide you the products that enable that security to happen, that’s the third product stream that we’re developing.  We call that effectively data protection life cycle products, so you discover, you classify, you control and protect your data and then you securely archive it if you want to do that.

That’s the game plan, moving from a one product company to a multi-product company and then we’re selling those with a very small team, we’ve got a couple of people in Europe, two in the UK and one in Germany, we’ve got three in the US on the sales side and we’ve got a couple in Australia.  For a small company we’ve got to be like that because the products have that sort of international application.

Would it be fair to say that you expanded your product range because you weren’t making enough per sale from the original product?  Because if you’ve got a couple of dozen government agencies and thousands of seats on that you’re obviously not getting a million bucks per government agency or something, it’s obviously not a very expensive product.

In the past they were sold on a per seat basis and usually when it was picked up by government agencies or other enterprises they bought say for example their first hundred seats.  Because it was only those people that were in particularly secure or sensitive roles that were using the platform.  What was happening is because data security has attracted the attention of regulators in the market generally based upon either regulatory risk or compliance or really the concern around data loss, and hacking and all of these breaches, what’s happened is that the issues like notifiable data breach legislation here, the ITAR stuff I mentioned in the US and the GDPR, General Data Protection Law in Europe, has meant that organisations are starting to look at enterprise all you can eat type licenses.  We’re just in that point where the market is pivoting and people will start to look at instead of saying okay the only thing we want is the finance department to be on the system or the only thing we want is for HR department to be on the system is to say we may want to secure a lot more information across the organisation than just those limited groups. 

The government agency work is growing roughly at 6% compound month on month so that’s coming together quite well.  It will continue to grow, it’s not going anywhere soon but the only issue around that original product is that when this business was started well before my time and listed in 2014 there weren’t that many of those sort of products around.  Now there’s a huge number of them around so it’s a lot more competitive and we wanted to diversify the product base so that we weren’t just in a race for the bottom on pricing on that product.

I suppose that’s the problem with the game that you’re in, is that although data is the hot topic now, everyone is talking about it, everyone is interested in it, as you point out you’ve got the GDPR in Europe but it’s also at the same time become very competitive.

Yes, it is a competitive market and that’s why it was important for us to buy that CipherPoint Eclipse business last year because it had a very unique product around securing SharePoint, albeit they were only securing it on premise installation to SharePoint.  That has played out very well in our marketing into Europe because GDPR has tightened the focus in Europe because of the levels of fines and other things that are available to it.  In Europe we’re focussing on UK and then just the DACH region, Germany, Switzerland and Austria.  You’d say well why only those?  The Germans would say that Portugal, Italy and Greece don’t care and can’t afford it and they’d probably say sometimes the French just don’t care and are not as high bound by EU requirements.  It’s the Germans and the Austrians and Swiss who are far more plugged into that and far more sensitive to compliance issues.  That’s why we announced in our full year statement that I made early July that we are focussing on investing more resources in pitches and lead gen in Europe because we’re getting a better number of qualified leads coming out of the European market particularly the DACH region.

Yes, it is very competitive so we’ve got to take the products we’ve got, be very judicious about our spend and funnel them into markets where there’s a growing appetite.

You’re obviously confident you’re going to make it.

You’ve got to be and everyone in the management team has invested in each of these rounds, so we are.  It’s like all things in the tech space, you’ve got to keep at it every single day and whilst we have great support from Fidelity as a major shareholder and great input support from the board members like Lindsay Tanner and Dave Irvine and Bill McCluggage out of the UK, it’s a very simple proposition and that is sales solve all problems.  We’ve just got to show more solid and continuing revenue growth and then we’ll see a turnaround in that share price.

Can you tell us what each sale is worth in rough terms?

If you’re selling a Safe Share type secure file share product on a per seat basis depending on whether it’s a high-volume transaction or a low volume number of seats that will range anywhere from $7 to $20 per user per month.  If you’re selling the Eclipse product that’s sold differently, it’s a traditional enterprise licensing model, then those transactions are based on – depending on the size of the business it could be anywhere from 50,000 into the millions.  When we bought CipherPoint they were focussing on very small end business and enterprise contracts, we’ve started to focus on these larger opportunities and spending a lot more time on them.  The sales cycles unfortunately when you’re pursuing big contracts can be six to nine months.  Having only just acquired the business late last year and started re-engineering the software we’re in that period now where we’re out doing multiple presentations and multiple pitches to each of these large scale enterprises particularly in Europe and we know that as soon as we clinch the first of those bigger deals that firstly other major companies will have the credibility with other major companies and that will open up the pipeline even more.  More importantly it will give shareholders, or potential shareholders, the confidence to put some money at risk.

Trading down where we are at two cents a share I think we’re very cheap anyway compared to quite a number of other techs who have listed in the last two years and they’ve got significantly less revenues.  At least we’ve faced our demons and come through in the last 12 months, I’m not sure all of those have.

You need a couple of those million dollar sales.

At the end of the day that’s it, it’s always been like that with software companies.  It’s always been like that.  Is it without risk?  Of course it’s not, we’re in high tech, we’re in a competitive market, we’re trying to secure international sales with a total compliment across US, Australia and UK-Europe of only 23 people and 10 of those are in dev anyway and then we’ve got six in sales and marketing and then we have some pre-sales resource, a couple of accounting people and myself.  It’s as lean as it can be.  I suppose the other issue is could we even cut the staff further?  Well we’ve cut it less than half than it used to be but you’ve got to have a certain critical mass to be able to generate the product, do the marketing, lead gen, sales presentation and then execution.  We’re down to the point now of it’s all about sales execution.

I suppose the problem with the $7 to $10 a month product is that you need those fish to jump into the boat, and that’s not enough money to go and pay someone to sell it.

You’re right.  That sort of Safe Share product has got to be sold through channels, that’s different.  That product is sold through channels like Macquarie Telecom and we’ve just done another deal with another telco offshore to start that process and so we will be packaging that model, you can call it sort of a Safe Share in a box, for each of the telcos to resell that model.  You’re right, we probably need internationally five companies like Magtel to make that worthwhile.  If we had five of those we’d get close to cash flow break even and that’s without talking about CipherPoint.  In the short term while we build that out we’ve still got to sell the larger scale enterprise licences to the major customers who are using SharePoint but when you do that of course you’re pitching to the CIO, you’re pitching to the Chief Information Security Office, you’re going through normal large company procurement, it’s a longer sales cycle.

Yeah.  It’s great to talk to you, Ted, I look forward to talking in another 12 months to see how you’re going then.

Yeah, well that will be the proof in the pudding and we know that, if it was easy everybody would be doing it so we’ll just keep at it.

That was Ted Pretty, the CEO of Covata.