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By Team Ace Investors

Company Overview

Tesserent is Australia's #1 ASX-listed Cybersecurity provider. Tesserent is well-positioned to deliver its customers with in-house software monitoring solutions and access to a range of products from world-leading Cybersecurity vendors and a sovereign Aust/NZ workforce of over 450 skilled Cybersecurity professionals. Tesserent now provides products and services to over 1,200 clients, including 53 Federal and State Departments and Agencies and 8 of the 12 Largest Banks in Aust/NZ. TNT's Cyber 360 utilizes a range of products from world-leading Cybersecurity vendors, delivering a comprehensive solution to prevent, detect and mitigate potential cyber-attacks. Tesserent is delivering on its Cyber 360 strategy to build an end-to-end Cybersecurity capability and become a pure-play Cybersecurity firm with a 360-degree approach to solutions. The underlying core philosophy of the company is to acquire quality Cybersecurity assets that are incrementally EPS accretive. During FY21, the company gained control over six entities, viz. Seer Security, Airloom Holdings, Ludus Information Security, iQ3, Lateral Security (IT) Services, and Secure Logic to build an end-to-end Cybersecurity capability. In Oct 2021, the company acquired the leading Australian Cybersecurity firm Loop Secure providing Managed Security Services, GRC, and Offensive Security services. The acquisition strengthened TNT's Cyber 360 capabilities with significant synergy benefits and cross-sold opportunities. In Dec 2021, the company announced the strategic acquisition of Pearson Corporation Pty Ltd and Claricent Pty Ltd. These acquisitions further strengthened its position and delivered large multi-year projects, supporting the Federal Government in achieving its Cybersecurity goals. During the half-year, TNT consolidated the businesses of the last three acquisitions (Loop Secure, Claricent, and Pearson), integrating the public and private sector consulting services, managed services, and specialized product expertise.

Investment Rationale

The growing number of retail and financial transactions processed online and on e-commerce platforms is driving the growth of Cybersecurity

Increasingly, organizations are coming under cyber attack from sophisticated state-based actors, hacktivists, and cyber-criminals. Targeted intrusions are expected to continue to increase, leveraging trends in technology and the broader threat landscape throughout 2022 – such as a likely increase in the use of ransomware from ransomware-as-a-service. Increasing reliance on mobile devices is enabling attackers to continue to diversify their exploitations to include mobile malware — either to make money or collect sensitive information. Cloud-related threats are particularly likely to become more prevalent and evolve, given that targeted intrusion adversaries are expected to continue prioritizing targets that provide direct access to large consolidated stores of high-value data. Following the significant disruption and technological shifts brought about by COVID in 2020 and 2021, organizations have been compelled to continue to adapt their operating systems and IT security to protect supply chains and interconnected systems in the face of increasingly sophisticated attacks. The impact of COVID-19 has accelerated cyberattacks faced by many organizations due to the security vulnerability of remote work and virtualized IT environments. The Global Cybersecurity market was valued at US$139.8 billion in 2021 and is forecast to grow at a 13.4% compound annual growth rate over 2022-2029. The Cybersecurity market is expected to continue showing strong growth, driven by the increasing number of retail and financial transactions processed online and through e-commerce platforms, plus the increasing integration and interconnection of business and government-controlled systems and infrastructure. Cloud computing, edge computing, and public cloud security are the fastest-developing market subsegments.

Delivering on its strategy to enhance its value proposition to existing and new clients

During the year, Tesserent completed acquisitions of three separate businesses (Loop Secure, Claricent, and Pearson) covering both public and private sector consulting services, managed services, and specialized product expertise. The integration and reorganization of these business acquisitions continue to strengthen the Group's trading performance and its commercial position in the market, enabling the Group to enhance its value proposition to existing and new clients and improve gross margins and net margins reported across the business. For the half year ended 31 Dec’2022, the company delivered a +10% YoY growth in operating EBITDA to $5.0 million. The re-organization of the business units acquired over the last two years was aligned with the go-to-market channels and formed the basis of evaluation. As a result, the Group developed eight major service lines, with promising cross-selling results to date. The company's focus is now to continue to market these service lines to more than 1,200 existing clients across commercial and government sectors, as well as using the offering to add net new clients. For the half-year ended 31 Dec’2022, Tesserent achieved the following strategic goals.

Implemented a second phase re-organization program, which achieved the integration of the three business units acquired at the end of 2021, to streamline the business operations and customer service offering.
Increased the number of inter-divisional cross-selling opportunities and won through its Enterprise, Commercial, and Federal divisions.
Continued to grow its Annual Recurring Revenue (ARR) – both in value and as a percentage of revenue – now at 50% (up 6% from the prior year).
Launched a new Incident Response service offering - providing a Cyber Incident Response Team and procedures covering incident response planning, incident analysis and data protection measures, containment, incident data collection, and remediation steps.
Reached an agreement to acquire the business of ALC Group, a prominent Australian Cybersecurity training business, which will be integrated into the Tesserent Academy business division.
Completed a further investment in Daltrey – Tesserent invested a further $1m into the Daltrey business alongside other third-party investors to drive Daltrey's continued growth.
Delivered positive operating cashflows for the half-year period.
Appointed new Board member, Tony Sheehan, adding significant cyber experience and knowledge to the Board's current capabilities

Added another service line with the acquisition of ALC training business

On 23 Mar’2023, the company completed the strategic acquisition of ALC Group (ALC) by Tesserent Academy, announced in Jan '23. ALC is a prominent training business in the Australian market, providing certified Cybersecurity, IT, Project Management, and Governance training from entry-level to advanced levels through its operations in Australia, New Zealand, Singapore, and Malaysia. The acquisition is a key part of the Academy's strategy to (i) build a profitable growth business in the Cybersecurity training space in the Australasian market; (ii) develop a pipeline of high-quality Cybersecurity talent to the Tesserent business and key clients by delivering foundation training programs and advanced training programs to graduates and lateral members entering the Cyber industry; (iii) further enhance Tesserent's profile by addressing a talent shortage in the cyber market by providing additional work experience services to bridge the gap between client needs and Cyber talent. ALC currently provides certified training courses to approximately 3,600 delegates per annum and administers the associated exams across ten accreditation bodies.

Q3 FY23 review:

The Group reported continued top-line growth for the third quarter of FY23, with a 14% YoY growth in Sales revenue to $47.5 million versus Q3 FY22. Operating EBITDA for the quarter remained flat at $3.9 million against the comparative third quarter last year, reflecting the margin impact of some continued underperformance in the SOC, which is currently being addressed, plus some investment/growth in resourcing and operational structure. The management expects the Security Operations Centre (SOC) to be back to delivering on its financial targets by Q4 FY23. However, the EBITDA margin has improved from the previous quarter as utilization rates across the business have increased and with improved leverage through the P&L. Tesserent is continuing to invest in, and expand, its service offering to its clients through its new Incident Response service offering and its Security Operations Centre (SOC) business. The Group recorded an operating cash outflow of $2.0m in the third quarter FY23 ($1.6m YTD), primarily as a result of growth in the Group's unbilled WIP during the quarter. Tesserent's longer-term objective is to double the business through accelerated organic growth, improved functional and scalable capabilities, and cost efficiencies. In Feb’2023, the company set out its ambition for FY24 to FY26, with a Turnover Run Rate of $500m by the end of FY26 following a recently concluded strategic review.

ACE's Recommendation

Tesserent is extremely well placed to provide its existing and new customers with full-service cyber security assessment and protection solutions with in-house software monitoring solutions and access to a range of products from world-leading Cybersecurity vendors and a sovereign Aust/NZ workforce of over 450 skilled Cybersecurity professionals. During the year, Tesserent completed acquisitions of three separate businesses (Loop Secure, Claricent, and Pearson) covering both public and private sector consulting services, managed services, and specialized product expertise. The integration and reorganization of these business acquisitions continue to strengthen the Group's trading performance and its commercial position in the market, enabling the Group to enhance its value proposition to existing and new clients and improve gross margins and net margins reported across the business. During the half year ended 31 Dec'2022, the company undertook several initiatives to enhance its value proposition to existing and new clients. During that period, the company implemented a second phase of its re-organization program, increased the number of its inter-divisional cross-selling opportunity, and launched a new Incident Response service offering. The company further added another service line with the acquisition ALC training business in Mar’2023. We believe that the newly created service lines and organic growth initiatives adopted are expected to drive growth going forward. We would like to recommend a SPECULATIVE BUY rating on the stock.

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