Cyber security is a growth area and the expansion of remote working due to COVID-19 is likely to highlight its importance. AIM-quoted ECSC (LON: ECSC) is set to benefit. ECSC is still losing money, albeit a reduced amount, but it has started to generate cash.
ECSC provides cyber consulting services to organisations and businesses. Some of these clients then become managed services customers, although some sign up for managed services even though they have not received consultancy.
ECSC is an interesting comparison with Novacyt (LON: NCYT) because the share price soared on the back of high-profile cyber security events and was approaching £6 at one point. The valuation was not sustainable, and the share price has not been near those levels since. Novacyt is selling tests, but the short-term boost is unlikely to be sustained and it will be difficult to justify the valuation even if it is. However, there is underlying growth.
Cyber growth
Cyber security is not something that will go away. The UK market is estimated to be worth £8.3bn and it continues to grow at around 9% a year.
In 2019, ECSC revenues grew by 10% to £5.91m. Managed services revenues increased by 48% to £2.61m. Consulting revenues dipped slightly to £2.9m, although they did grow in the second half. The other revenues come from third party products and other services.
There are more than 100 reseller partners and these generated 17% of new clients during the year. This partner programme enables ECSC to engage with a broader range of clients.
The reported pre-tax loss declined from £1.26m to £750,000. Operating costs were maintained so most of the growth in revenues dropped through to profit.
Managed services has additional capacity and as more work is won its margins are set to continue to rise. Gross margins were 68% in 2019, up from 53% the year before.
Cash was generated in the second half. This offset the outflow in the first half. There was an inflow from operations of £52,000 with a further boost of £152,000 from a tax credit. There was a £634,000 operating cash outflow in 2018.
Capitalised AI software development costs and other capital investment meant that cash did fall from £650,000 to £351,000, although that is an increase on the June 2019 figure.
The order book was worth £2.6m at the end of 2019 and since then two three-year managed services contracts that are worth £590,000 have been won from a charity and a high street retailer.
There are tax losses of £5.67m, so future profit should be covered for many years.
Future
There are opportunities and challenges for the business during this period of uncertainty. Higher levels of remote working are likely to unearth problems with many organisations’ cyber security and the ECSC rapid response operation could benefit. However, longer-term decisions may be put on hold and delay new contracts, particularly in consultancy.
ECSC hopes to breakeven during the COVID-19 outbreak. Forecasts are impossible for any company at the moment. ECSC has made a strong start to 2019 with a 9% increase in revenues, though, and it has cash in the bank and debt facilities of £500,000. That, and £2m of recurring revenues, means that it will be able to withstand a limited slowdown.
This year’s figures may not end up as would have been hoped for – a pre-tax profit was expected for 2020 before forecasts were withdrawn. However, the underlying trend in the cyber security market will continue and ECSC will be able to progress towards a pre-tax profit even if it is not this year.
Looking at a long-term graph of the share price will not provide an accurate view of the progress made by ECSC. The share price has risen 5p to 82.5p on the back of the results, compared with a low of 62.5p. This is a growing business and the increased remote working due to COVID-19 will make it clear to businesses and organisations just how crucial cyber security is to them.
