NCC and the technological megatrend that has stagnated
- Businesses have skimped on cybersecurity spending
- Major digital transformation projects will need to be cleaned up this year
âDigital transformationâ is a hacker’s dream. As the world moves online, it not only creates connections, but a plethora of new vulnerabilities. The massive cyberattack against FireEye (US: FEYE) last December, which was reportedly coordinated by Russia, virtually declared open season on private companies by state actors. The higher volume of risk, combined with the threat of more advanced criminals, should be great news for cybersecurity companies. But unlike other big tech companies, not all of them recovered in the last year.
The market shows a more mixed reaction. While tech companies like Zscaler (United States: ZS), Okta (United States: OKTA) and Cloudfare (US: NET) have all soared during the year to date, quite a few – including traditional players like NortonLifeLock (US: NLOK) – lagged behind the US benchmark.
This is partly due to the challenges specific to the company. But cybersecurity companies also find themselves telling two stories that don’t quite match up. First, that their services now border on the basics due to the changes brought about by the pandemic. Second, this demand is not very strong at the moment despite the changes.
UK listed cybersecurity company CCN (NCC) told a similar story this week. “I fully understand that some of our clients are more conservative in their spending,” said managing director Adam Palser, who reported that some clients were less willing to commit to large orders and long-term contracts, despite the fact that “the pirates never had is very good”.
In the six months ended November, NCC’s revenue was largely flat, with gross profits up 5% to Â£ 54.4million. This is not to be sneezed at, in a macro environment that has wiped out other companies. But compare that to the astronomical numbers from other tech megatrends such as online retail or cloud adoption: 50% sales growth at that of Microsoft (US: MSFT) Azure cloud computing company, or 47% to from amazon (United States: AMZN) equivalent.
With the rapid growth of the digital footprint of businesses, cybersecurity companies are right to insist that their services have never been more important. But for some, largely stagnant demand means corporate customers aren’t spending their money as wisely as they should.
Clearly, management teams across the market have shifted their resources elsewhere, strengthening balance sheets or perhaps even focusing IT budgets on customer-centric digital transformation projects.
Either way, it seems that corporate technology spending on security is taking a back seat. Indeed, this week ComputerWeekly found that just under a third of UK and Irish companies had put their IT staff on leave in 2020.
While these companies may have skimped on cybersecurity spending last year, they will need to clean up their growing online presence. Gartner Market Research Group predicted that IT spending will grow 6.2% this year (down from 3.2% in 2020), and that two-fifths of boards will even have a dedicated cybersecurity committee by 2025, ranking cyber risk second for large companies.
At NCC, management believes the pandemic is only temporarily restraining cybersecurity revenue from its full potential. âDelayed spending decisions in certain customer segments have created a ‘compliance debt’ that must be repaid in the future. So this year, he should be able to take advantage of modest revenue growth, as well as an improved 100% cash conversion rate, compared to his usual target of 85%. A confident commitment to the half-yearly dividend and a shift to a net cash position (excluding lease liabilities) leads us to believe that NCC can resist the broader reluctance of enterprise IT – a trend that cannot be sustained. continue for a long time as long as digital transformation projects are still featured in various earnings reports. Hold on.
Last seen IC: Hold, 187p, Sep 3, 2020
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