1 March 2020
It’s been a tough year for shareholders in Family Zone Cyber Safety with the share price falling from around 40 cents per share a year ago to a low of 11 cents in early June. This has been despite the commercial validation of its business model and a take-off in revenue, albeit from a low base, that has been achieved. I recently caught up with Family Zone, CEO, Tim Levy to talk about its progress and outlook.
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report 20/02/19||ASX ST1|
|Price $0.058||Price Target N/A|
|Analyst Recommendation N/A|
|Sector: Technology||52-Week Range: $0.110- 0.525|
|Industry: Software - Infrastructure||Market Cap: $38.12 million|
What do you do?
Family Zone has developed a platform for protecting children from ever-present cyber security threats. It is a universal solution that can manage all device types in both school and home environments.
At its most simple level the platform is a filtering system, not unlike many others in the market. However, it’s differentiator and competitive advantage lies in its comprehensive monitoring, reporting and control features which enables teachers, school administrators and parents to understand and manage their children’s online activity. Whilst dangerous and prohibited sites are easily filtered, general screen time can be also be managed, as can social media, and in-app purchases can be blocked whilst device location can be tracked, providing important locational security for the child.
Consumers can acquire the service directly, but inertia and high marketing costs mean that a direct to consumer model is a hard, expensive haul. Consequently, the go-to-market model is currently primarily built around selling the platform to schools through which direct engagement with the parents is subsequently achieved The models vary slightly from country to country, but they centre around achieving activation of the service by parents off-the back of school accounts. This dual engagement of both schools and parents on the back of considerable value add in addition to the standard filtering, which is the extent of the offering from most competitors, makes the Family Zone solution very sticky with a very high level of recurring income.
What has been achieved?
The Family Zone platform was launched in Australia and New Zealand in 2017, in the US in 2018 and in 2019 in the UK. Over the past year, the number of paying accounts has more than doubled to over 130,000 as the number of live schools using the platform has increased from around 400 to over 700 in these four markets. In total over 600,000 children are covered by the platform. This growth in activity has been reflected in accelerating revenue, which increased by 171%, to $2.1 million, in the six months ended 31 December 2018 compared with the same period in 2018.
The company has also established a third marketing channel focussed on wholesale distribution partnerships. This channel is likely to surpass the school’s market in terms of delivering subscribers, over the next year or two, and will be particularly important in addressing the potentially huge Asian market. Wholesale distribution agreements have been secured with telcos in India, Indonesia, The Philippines and Malaysia and marketing is beginning to ramp up. Woolworths and Telstra distribute the Family Zone service in Australia.
What are the key elements to get right which will drive success?
The number of paying customers is the key value driver and the company’s models are designed to harness large numbers quickly; that is rapid scale up. Having more than doubled to 130,000 subscribers over the past year, the challenge will be to lift this to 1 million or more over the next two to three years.
Schools have proven to be a very effective pathway but in Australia that pathway is primarily through non-government schools where budgets and decision making are decentralised. The public system would be a huge breakthrough but decisions are centrally controlled and very slow. On the other hand, the massive US school system is controlled mostly at the municipal level, where public school districts can be very large and much easier to address. Accordingly, successes in the US can have a quick impact on subscriber numbers.
The wholesale market is the ultimate opportunity and the agreements with telcos in Asia are early, tentative steps. The potentially “game changing” event would be the pre-loading of the platform on mobiles devices. To facilitate this process, and ultimately easy activation by parents, the company is developing a freemium model around monitoring children’s mobile devices with a paid upgrade pathway that provides access to control functions.
Family Zone’s financials reflect a company running hard to build critical mass. Revenue is growing rapidly off a low base, but with annual operating costs of between $13 million and $15 million the cash burn is high. Operating revenue in the six months ended 31 December 2018 of $2.1 million was 171% higher than a year earlier. Although the gross margin of $1 million was boosted by grants and other income amounting to $2.8 million, the operating cash flow deficit for the period was $5.8 million. The company has subsequently announced plans to streamline its operations with a view to cutting annual cash operating costs by around $4 million.
The company’s balance sheet is debt free but $6.9 million of total assets amounting to $14.9 million was attributable to Intangibles. Most of the remaining assets were cash and receivables whilst the only significant liability was payables. Whilst the company continues to generate cash flow deficits, the capital requirement will remain relatively high. Nonetheless, in view of the cost reduction program, the company has indicated that it expects to reach cash flow breakeven during FY 2020. In April, the company raised a further $5.5 million in capital which should be sufficient to get to cash flow breakeven but if there is any slippage in this timeframe of if the company seeks to accelerate growth additional capital may be required.
What do I think?
The wheels are now spinning and sales traction is building momentum. Family Zone is now in the rapid scale up phase and we expect to see some very high subscriber and revenue growth rates over the next year or so. We are impressed with the company’s schools’ strategy and the high activation rate from parents that is being achieved. If it can build penetration into the US and UK school systems, subscriber numbers could multiply rapidly. Just as exciting is the wholesale strategy and the potential to build large numbers in Asia, especially. However, the risk and challenge is the pace at which subscriber numbers will accumulate, how quickly can they get to say 1 million and how quickly cash flow breakeven can be achieved.
If management continues to execute well, shareholders will soon be smiling again.
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