Excite Technology Services (ASX:EXT) goes after a new opportunity in helping fight cybercrime: The next ‘Y2K’

Excite Technology Services (ASX:EXT) is one of the few ASX stocks specialising in cybersecurity. Only five years ago, not a lot of people in Australia were concerned about cybersecurity. Indeed, it may have seemed that data breaches were something that happened ‘somewhere else’, and not all that often. You may never have heard, for example, of the data breach at Target in America in 2013, or the MyFitnessPal breach of 2018, even though these ranked among the largest breaches in history.

 

More and more Cyber attacks

However, in 2022 suddenly everyone in Australia was talking about the potential for data breaches because of the Optus breach in September of that year with its 9.8 million customers, and then Medibank two months later and its 9.7 million affected records. No wonder, then, that Google searches from Australia using the word ‘cybersecurity’ are now about three times higher than in 2019. One could even argue it is the new ‘Y2K’.

Medibank and Optus were bad for the individuals whose data was breached, but they were good for a Sydney-based company called Excite Technology Services because that company’s selling proposition became a whole lot easier.

 

Introduction to Excite Technology Services

Excite’s business is providing cybersecurity services for SMEs, corporates, and government agencies that have between 200 and 1,000 full time employees. Specifically, it provides cybersecurity services with IT capability, so the same firm that can set your enterprise up with a new VOIP system or provide an IT support desk can also help make your systems more hack proof.

The 200-1,000 FTE segment is important because it is underserved. If you’re Medibank or Optus there’s plenty of firms ready to help, but there’s not many firms like Excite set up to serve this middle market. And what recent history has shown is the middle-market enterprises are probably more vulnerable to data breaches because they have been growing so fast, they haven’t had time to get their cybersecurity systems ‘match fit’.

 

Backdoor listed through Cipherpoint

Excite was, in effect, back-doored listed via Cipherpoint, ASX: CPT, around the time of Medibank and Optus. Cipherpoint had been built around two IT and cybersecurity platforms called Brace 168 and VITCS, but those platforms had failed to gain much commercial traction. Excite IT was, by contrast, a business that was growing rapidly under the leadership of founder Bryan Saba, because the customer focus on the middle market was compelling.

By the time of the merger announcement Excite was doing around $3m a year in revenue. Saba agreed to sell to in July 2022 and the transaction closed in November 2022. That the transaction was a good move by Cipherpoint was demonstrated just over a year later. Cipherpoint paid $2.75m in cash and scrip for Excite, but agreed to another $0.5m in scrip if Saba and his team could deliver an audited EBITDA on a standalone basis of not less than $0.8m for the 12 months ending September 2023. The EBITDA came in at $1.06m. Cipherpoint changed its name to Excite Technology Services in December 2023.

 

The success was no accident

Driving that success in 2023 was a few important customer wins, most notably Keyton, the old Lend Lease Retirement Living business, and, more importantly, two new channels partners in Trend Micro, the major Japanese cyber security software company, and Schneider Electric. The latter partner is interesting. Schneider is best known as a supplier of digital automation and energy management systems, but one of its newer businesses is Managed Security Services, and Schneider can now offer Excite services to those customers. We think the rest of FY24 and into FY25 will see steady increase in new customers wins through Excite’s own business development team as well as the channel partners that could potentially get the company to profitability at the NPAT line in FY25.

 

A culture of success

Excite’s success isn’t just about the market opportunity. Bryan Saba is a strong believer that the culture of a firm is a key determinate of its success, so that firms regarded as great places to work will produce superior outcomes for clients and shareholders. He has worked since he came back to the business full time at building that culture, and we think that focus will pay dividends in the years ahead.

 

Is history repeating?

Excite likens its current business environment to that which prevailed for IT service providers in the years leading up to the year 2000. In those days there was increasing awareness of the business risks involved in Y2K, and therefore plenty of demand for Y2K management services, but not enough people with the relevant skills and certifications. Any firm that could deliver therefore made out well until the market got saturated as 1999 moved into 2000. Substitute ‘cybersecurity’ for ‘Y2K’ and that’s the growth opportunity for Excite right now.

 

On the lookout for more acquisitions

However, Excite can see the market changing and ahead of that it wants to develop service models, processes and frameworks that can help mature its own business (and that of the industry), becoming more efficient, integrated and simpler in servicing clients with a cybersecurity lens and being an ‘enabler’ of the clients’ business. To this end, Excite has flagged that it wants to acquire other Managed Service Providers and there may be more than one that can fit into the listed company.

 

A Technology Big Wig on board

One recent investor who sees that Excite can be a lot bigger than its current $8m revenue is Geoff Lord. That’s right, the former Elders (ASX:ELD) executive who went on to a long career of building companies through his Belgravia Group. In March 2024 Excite announced that Belgravia would be investing $2m in Excite via a convertible note converting at 1 cent per share by September 2024. That’s great validation given Lord’s track record, which includes selling his former IT services business UXC to Computer Sciences Corporation for almost $430m in 2016, and more recently restructuring Tesserent, which he Chaired, ahead of its sale to Thales for $176m last year.

 

Excite is set for good times ahead

Excite stock has been mostly trending upwards since October 2023, but not in a way that is shooting the lights out yet. Let’s face it, tech-oriented stocks are still out of favour in 2024.

 

 

However, as interest rates start to decrease, potentially from later in 2024, we think profitable companies, like Excite, with clear competitive advantage will be well placed. We believe this is one to take a close look at.

 

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