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Product Review Img Vertical

Date : 16/06/2021

Family Zone Cyber Safety

ASX :

FZO

Market Cap : $228.89 Million

Buy

52 Week Range : $0.145 - $0.635

Share Price : $0.605

With FZO's entry into USA, the growth potential is extremely high and they are esimated to become profitable soon. We recommend a "Buy"

Company Analysis

Family Zone Cyber Safety (ASX: FZO) is an Australian operated technology company focused on the cyber safety market. The Company is engaged in the development, technical assessment, and trials of the Family Zone platform, a universal parental control platform that works in the home, outside, within carrier networks, public hotspots, and schools. FZO operates in two segments: Cyber Safe Technology (Box Services) and corporate undertakings (Corporate). Family Zone platform is a cloud-based parental control platform, which incorporates networking and application technologies, which allow parental controls to be embedded within Home, enterprise, public, and telecommunications carrier networks and installed on mobile devices. This platform allows users to block porn and adult content; restrict access to social networks; set access and sleep times; limit application downloads and in-application purchases; restrict access to mobile games, applications and restrict YouTube content.

Family Zone has all it takes to become mainstream

Family Zone has swiftly emerged as a leader in the fast-growing global cyber safety industry in Australia. The company has a patented cyber safety ecosystem, a unique innovative platform allowing collaboration between schools, parents, and cyber safety educators. Until now, Family Zone is the only business in the world to propose such an integration concept. Cybersecurity has been a major preoccupation for businesses and governments but has been neglected by the education sector. The situation changed dramatically since COVID-19 emerged which forced schools to precipitously consider upgrading their digital infrastructure. With the advent of blended learning, schools became more exposed and at risk of cyber-attacks. The education sector is particularly attractive to criminals due to the considerable volume of valuable data it holds. Students and staff information, supplier information, alumni database, and so on. Regulatory requirements are expanding to safety and cyber education particularly in the U.S. since the COVID-19 crisis. This is a huge opportunity for Family Zone. The company reported impressive revenue growth of almost 40% CAGR since its IPO, while its share price appreciated only by 134%. Family Zone’s unique approach is delivering rapid growth in a nascent niche market. We also think that the company has all it takes to respond to the rising demand of the education sector for cybersecurity products. Family Zone exhibits a robust sales pipeline, and the firm is planning a soft launch of its consumer business into the U.S. market in the second half of FY21 via the significant “Family Zone Community network” linked with the U.S. schools that the company currently runs.

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Source: Family Zone Cyber Safety (Fig.1)

Family Zone has a terrific and very interesting business model. We like the fact that their ecosystem is completely integrated, and that it generates circular and recurring revenue. The business model consists of two key channels, the (1) direct consumer business (B2C) and the education business which comprises B2B and B2B2C (Fig.1). The education business segment is the most promising one. It provides to Family Zone multiple revenue streams including (1) School compliance, (2) school community, and (3) premium parental controls. These services are unique and there is no alternative at the moment that can provide such a level of service and integration as Family Zone. As of the first half of FY21, FZO provides its solution to more than 1.7 million students in more than 3,100 schools around the world. Despite the company being in its early stage and not yet reaching profitability, it nonetheless generates an impressive ten million dollars in recurring revenue. Furthermore, Family Zone is well funded with its A$ 26 million available cash. Recently, the group got a big cash injection through a share purchase plan (SPP). The company raised twenty-two million dollars via a twenty million dollar placement to sophisticated and professional investors and a two million dollar offer to retail investors. Family Zone intends to use the fund to accelerate its growth plans and develop its existing markets as well as to expand into new markets.

FZO is expanding its footprint at a fast pace in the strategic region of North America

North America and particularly the U.S. is the most important opportunity for Family Zone. The American regulatory requirements are expanding to safety and cyber education which opens the door to Family Zone for potential massive revenues. The U.S. is receiving substantial funding to urgently implement cybersecurity across the states, especially to district schools that are particularly prone to attacks due to a lack of proper I.T. security systems. The U.S. market represented in FY19 almost half of FZO clients and grew up to be more than 82.7% of its client base in the first half of FY21 (Fig.2). The company has recently reiterated its intention to strategically expand its footprint in the U.S., and we think that it is a wise approach that will support the company’s long-term growth. The U.S. is a key market that will eventually bring the company towards profitability. Last year, Family Zone witnessed a rapid growth in its U.S. education business segment with 2,367 schools and 1.2 million U.S. licensed students as of the first half of FY21. Revenues from US schools surged by 371% to A$ 2.4 million. The U.S. education market has driven solid growth in the group’s revenues which increased during the first half of FY21 by 85% to A$ 4.4 million.

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Source: Family Zone Cyber Safety (Fig.2)

Company Updates

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Source: Tradingview.com

Family Zone: On the path to profitability

We strongly believe that Family Zone has all it takes to reach profitability. However, there is still a long way to go. The recent acceleration in the rate of sales, the upcoming opportunities in North America and the proportion of revenue that is derived from recurring income is pushing the company towards profitability by FY2023 as per our estimates.

Recurring income is a key factor for the company to improve its net profit margin, and Family Zone has an impressive 95% of its revenue coming from it. However, the company is still in the early stage and needs to adjust its product to fit the market demand. This involves Family Zone spending money to increase its workforce capabilities and develop new products. This weighs on the firm’s net profit despite tremendous revenue growth of 40% CAGR since its IPO in FY17.

 

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Source: Family Zone Cyber Safety (Fig.3)

The First Half of FY21’s strong performance was dominated by the company’s U.S. education market which brought solid growth to Family Zone’s revenues from ordinary activities that surged by an impressive 85% to A$ 4.4 million compared to A$ 2.4 million during the first half of FY20 (Fig.3). During the period, Family Zone invested an important amount for the development of its new products and ongoing upgrades to existing products which supported continued growth in R&D revenues, up 37% to A$ 1.4 million during the period. The increase in expenses by 52% during the period was due to costs incurred from the investment in its workforce: engineering, sales, and management. The company has expanded from 85 to a team of 140 full-time employees. We assume that the reported rise in employee expenses is just affecting the short-term profitability of the firm and necessary to scale up the company to the U.S. market opportunity.

FY21 Outlook: Expansion to support sales growth

We have recognised three expansion approaches Family Zone is planning and executing which we believe will lead the company to massive growth:

  • U.S. education market expansion
  • Products expansion
  • The leverage of schools’ base to transition to consumer subscriptions.

Family Zone’s outlook appears strong with substantial funding in U.S. education for the key annual sales period of April to September. During the previous quarter, the U.S. government completed an injection of US$ 54 billion into the education sector via the 2021 Coronavirus Response Relief Supplemental Appropriations Act which is directed at supporting schools to deal with the impact of COVID-19 following the CARES Act injection of twelve billion U.S. dollars. This funding is beneficial to Family Zone and a buoyant outlook for the company’s development in America as attested by the Q1-2021 record subscriptions of 350,000 student licenses in trials and a record pipeline of more than one million student licenses. Moreover, the company has announced recently that it has started its marketing effort into the Canadian education market and won its first deal. Family Zone is also accelerating its consumer offering into the US. Throughout the first half of FY21 and Q1-2021, the firm tested a sales model which achieved an impressive 17.5% conversion from its free product to paid premium. This model will be implemented in the U.S. by September this year as part of the Family Zone Community soft launch.

Industry Analysis

Family Zone’s expansion into the U.S. market is well-timed with the recently imposed U.S. regulatory requirements to safety and cyber education. In March this year, the U.S. Congress passed a US$ 3.25 trillion coronavirus stimulus package which included US$ 21.96 billion directed for school technology to support online learning. The funding will be allocated to school districts to provide internet connectivity and internet-connected devices for students from kindergarten to year twelve. The announcement is great news for Family Zone which saw a massive injection of capital into areas key to the growth of its business.

Investment Thesis

For the six months ended of December 31, 2020, Family Zone revenues increased from A$ 2.4 million to A$ 5.4 million. Net loss increased by 12% to A$ 9.3 million. Revenues reflect the U.S. segment which increased from A$ 512 thousand to A$ 2.4 million, New Zealand segment increased by 30% to A$ 581 thousand. Higher net loss reflects an increase in employee benefits of 58% to A$ 7.4 million as a result of investment in the workforce and the development of new products.

Family Zone reported a terrific March quarter with recurring revenue continuing to improve by 92% year-over-year to A$ 11.7 million. The company also reported a record number of contracts and licenses for the period, with additional 1.64 million students contracted licenses and more than three thousand contracted schools, which is a year-over-year increase of 137% and 135%, respectively (Fig.4)

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Family Zone March quarter 2021, key metrics (Fig.4)

We assume that the increase in sales is likely to continue supported by the company’s intention to expand its footprint and to prioritise the U.S. education market which recently received significant assistance and funding from the U.S. government driving unprecedented pipeline growth. Furthermore, Family Zone has considerably invested in the development of its team of engineers and sales which will contribute to handling the upcoming growth. So far, the firm ended the last quarter with a wave of newly signed contracts with an annual value of A$ 1.8 million and a total value worth of A$ 3.6 million. The year-on-year growth in revenues has been tremendous so far. Family Zone ended the quarter with more than 3,627 schools registered on its platform which accounts for about two million students. The increase in the number of contracts and licenses represents a market share in the U.S. of more than 3.5% of U.S. school districts (Fig.4).

Record conversion rates

We are quite impressed with Family Zone’s achievement. March quarter was another outstanding sales success. The company has achieved greater than 130% year-over-year growth in the number of contracted schools and student licenses mostly from the result of its improvements in average license fees and sales conversion rates. Family Zone ended the quarter with a record pipeline of more than one million student licenses (Fig.5).

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Source: Family Zone Cyber Safety (Fig.5)

From the record sales, customer collections were in line with the previous March quarter with A$ 1.8 million despite the impact of changes in foreign exchanges movement and timing of collections. The company’s U.S. dollar collections doubled in local currency due to the appreciation of the U.S. dollar against the Aussie dollar. Family Zone exhibits good cash management with its continuous improvement in its working capital which grew by more than 30% year-over-year. The company is also well funded with cash funds of A$ 20.4 million at the end of the March quarter. Most of Family Zone’s cash funds are reinvested into the company’s growth strategies through potential acquisitions, R&D, and the development of its workforce.

Family Zone has been working on a substantial migration project to move its current platform hosting and data services from Amazon Web Services to Google Cloud Platform. The project incurred cost duplication which weighed on the company’s operating expenses throughout the first half of FY21. However, in the long-term, this operation will allow the company to substantially reduce its data and hosting cost and generate savings, estimated to be at least A$ 2.0 million per year.

Family Zone exhibits a relatively good gross profit margin of 63% as of FY20 which is expected to marginally increase by 1.28% CAGR along with EBITDA margin over the next 5-years.

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Family Zone: Revenue and EBITDA margin (Fig.6)

We estimate FZO to continue growing rapidly with growth rates of over 75% year-on-year for the next three years including FY2021. Earnings-wise, FZO’s margins will improve with scale, and the biggest factor promoting profitability will be the strong recurring revenues. The idea is that FZO will incur a customer acquisition cost when they acquire a customer for the first time, and by retaining them over an extended period, recurring revenues will increase at no additional cost – thereby increasing the profitability of the firm. Our estimates point towards FY2023 to be the year when FZO will turn in a positive EBITDA with a margin of about 15%.

Family Zone has been relatively bullish and has not been much affected by the COVID-19 crisis. FZO share price did even surpass its pre-COVID high by more than 165% reflecting the company’s massive growth outlook. Family Zone is still in an early stage, and we believe that the company is on the right track to reach profitability in the next 5-year period. Currently, Family Zone is reinvesting most of its cash funds into expanding its footprint in North America while developing new products. Furthermore, the firm’s revenue comprises +95% of recurring revenue which provides cash flow stability. That gives us strong confidence in the company.

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From a valuation standpoint, FZO is not profitable yet, however, based on our estimates, the company should become profitable by FY2023. On Forward multiple bases, FZO currently trades at an FY23 P/E of 39.9x and an FY23 EV/EBITDA of 29x, relatively modest multiples given that Revenues are projected to grow at over 75% year-on-year through to FY2023.

Technical Analysis

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Trend

Family Zone has been in a free fall since October 2017 after reaching an all-time high. FZO went down for two years in a row hitting its all-time low during the peak of the COVID-19 global market sell-off during March 2020. Since then, FZO impressively recovered by more than 160% from its all-time lows at 6.5 cents per share back to above the 50 cents level. The chart is looking good on the weekly timeframe. The price action is pretty bullish and is supported by several key levels, the 50% retracement from Oct-17 high/Mar-20 low at 56.5 cents and the upward trend line. There is a strong amount of support at the 38.2% Fibonacci level at 44 cents per share, which received a tremendous amount of volume.

Key price levels

FZO is currently well supported by the 50% retracement level at 56.5 cents per share. Furthermore, strong volumes around the 45 cents and 44 cents area may suggest that a large number of market participants entered at this level, hence providing support for further upside. The nearest resistance is at 63.5 cents which was the previous attempt in August 2020 to break the 61.8% Fibonacci level at 67.5 cents per share.

Volume and momentum

Volume remains stable since the last 200-day with the 20-day volume average slightly up by 0.79%. The price action remains bullish in the near term, evolving in a range between A$ 45 cents and 50 cents per share.

Trade consideration

  • Market participants might be interested to enter at key support level: A$ 44 cents per share
  • Primary target price above $A 84.5 cents per share
  • Secondary target price at $A 1.0 per share
  • Consider reducing exposure below A$ 40 cents per share
  • It is recommended exiting the trade below A$ 35 cents per share

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Recommendation

Family Zone Cyber Safety has a very interesting business model. The company has a patented cyber safety ecosystem, a unique innovative platform allowing collaboration between schools, parents, and cyber safety educators. Until now, Family Zone is the only business in the world to propose such an integration concept. Family Zone exhibits a robust sales pipeline, and the firm is planning a soft launch of its consumer business into the U.S. market in the second half of FY21. We expect revenues to grow at over 75% year-on-year and profitability is now in sight. Given the tailwinds in the industry and FZO launching its full integration in the USA, and modest valuation multiple of 29x FY23 EV/EBITDA, we issue a “Buy” recommendation for FZO.

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