Firstwave Cloud Technology (ASX:FCT): A changed company with a plethora of market opportunities

It seems the Tech Wreck is finally over as plenty of technology stocks have been rebounding, although Firstwave Cloud Technology (ASX:FCT) hasn’t. One of the arguable reasons is that investors think the company has not changed from what it was a few years ago. The reality is that even though the company has the same name and it still has its legacy a ‘cybersecurity-as-a-service’ platform CyberCision, FCT went to the next level when it bought network management software company Opmantek.

 

The evolution of Firstwave Cloud Technology

Firstwave’s Cybercision platform provided an automated cybersecurity-as-a-service orchestration and management platform for service providers that virtualized, multi-tenanted and integrated enterprise-grade email, web and firewall virtual appliances, and endpoint protection services from global security leaders into a complete cost-effective, scalable and flexible perimeter security solution for end-user customers.

However, the company lacked the growth capital to build an international sales and partner support network and to maintain product leadership and by 2021, this strategy was languishing. The acquisition of Opmantek in 2021 breathed new life into FCT providing an additional suite of products compatible with CyberCision, and new channels to Telcos and managed services providers in the US, Canada and Latin America. The brand has been phased out and consolidated under the FCT brand.

The Opmantek acquisition bought 2 software solutions into the fold: NMIS and Open Audit. NMIS helps administrators of networks to better manage and monitor their networks. Open-AudIT is a discovery, audit, asset tracking and reporting system. It audits everything attached to a network cost-effectively and tells customers what is on their network, how it is configured and when it changes

Secure Traffic Manager (STM) joined the product suite when FCT acquired Saisei Networks in September 2023. STM provides network managers with the ability to have deep network insights and manage their customers bandwidth and quality of service in real time.

FCT’s clients may use only one, multiple, or all of these products. Through these products, FirstWave offers an end-to-end solution for network discovery, management and cybersecurity.

 

Who wants FCT’s services and why?

FirstWave’s network management software clients are mostly Telcos and Managed Service Providers as a channel, and medium-to-large enterprises as direct clients that typically employ more than 300 staff. Notable enterprise clients include Microsoft, Telmex, Claro, NextLink and NASA.

Organisations such as these use them to monitor the status and performance of the IT environment by identifying faults, automating provisioning, reviewing current and historical network performance, and predicting where future failures are likely to occur. In doing so, the IT departments of FCT’s customers can respond to issues quickly and proactively work to prevent issues arising in the first place, and plan IT changes and expenditure.

FCT’s solutions are not the only options available, but they are quick to deploy, are lower cost, higher scale and have greater flexibility to be employed. They also have certain features that are not available in other competing products. Open-AudIT was last year declared the best agentless discovery tool in the world for IT asset management by pro-consumer website Comparitech. These features were crucial in being selected as the best platform.

FCT’s clients run the software on-premise in their data centres, and the Telcos/MSPs combine it with further services to onsell to their own clients. The Telco/MSP pays a base subscription fee and then a usage-based fee dependant on how many clients and the size of the clients they add to the system. Most NMIS and Open-AudIT licenses are for 12 months and paid upfront. Some customers pay for multi-year licenses upfront to secure discounts (~20% for a 3-year license).

The company achieves very high gross margins given the development and licensing model, and the fact that the software is managed on-premises by their clients not by FirstWave. With CyberCision, given licence fees paid to global security vendors, gross margins are 50-90%, whereas NMIS and Open Audit are 100% margin.

 

The market awaiting Firstwave

FirstWave’s software is addressing two major markets: Network Management and cybersecurity. In both instances, it is difficult to estimate the exact market size and many of the estimates out there are contentious. However, Gartner estimated in 2023 that worldwide enterprise network connectivity services would exceed US$260bn in 2023. It also estimated that cybersecurity spending will reach US$183.9bn in 2024 and this figure will grow 15.1% in 2025 alone.

The high amount of spending is due to increasing reliance on networks – especially due to IoT, cloud services and the expansion of data sources together with the convergence of security operations and IT operations. There is a particularly strong opportunity amongst regional telcos in the Americas, particularly in Latin and Southern America. There are 121m telco subscriptions in Mexico alone, and this is with 11% of the population lacking connectivity to the Internet.

Major telco and FCT customer Telmex is the dominate provider of telecommunications services in the country as part of the America Movil group. Telcos like Telmex use a wide variety of technology –  not just mainstream – and have transitioned much of their infrastructure into the cloud, and this is a place where FCT’s network management systems excel.

 

Why FCT is at a pivotal point

Beyond the general growth in the market, 2025 should be a particularly strong year as interest rates decrease. For FCT specifically, the company anticipates cash-flow break even in FY25 and is on track to achieve that milestone, having recorded a cash-flow positive half in the first half of FY25. This is being achieved through optimised spending and through some increased customer adoption, particularly of higher gross-margin products. The past two quarters represent the first time the company has not used any cash.

We also see potential demand, not just from customers for FCT’s services, but even from acquirers. IT players are engaging in frenetic M&A activity to stand out in a competitive market, from local players like the aforementioned Atturra and Cosol, to even giants like IBM. IBM spent US$34bn to acquire open-source software provider Red Hat back in 2019, and there’s little argument that it has paid off with IBM’s market capitalisation having doubled since, and the world’s oldest IT company finding modern relevance.

In March 2024, Cisco spent US$28bn to acquire Splunk, a company with a technology platform that makes machine data accessible by identifying data patterns, providing metrics, diagnosing problems and providing intelligence for business operations. The price of this deal represented a 7x EV/Revenue multiple and a staggering 104.6x P/E.

We would note that the value to any acquirer would not be restricted to money FCT makes from existing products, but from its entire customer base (both paid and unpaid) and the potential ability to sell them the acquirer’s own technology products. A suitor may even value the business on the basis of its users with multiples using metrics such as Average Revenue Per User (ARPU) or Lines of Code (LOC) – which should be self-explanatory.

Our friends at Pitt Street Research have speculated that FCT could potentially be bought for $103.1-150.8m in an M&A scenario, using 11x EV/EBITDA as Tesserent was bought for in 2023.

 

Conclusion

Firstwave has many things going for it. Above all, the has important network management and cybersecurity products that are used by Blue-Chip clients and which generate sticky recurring revenues for the company. It has a large individual pipeline as well as a growing market opportunity. And the company is reaching bottom line positivity too. With a market capitalisation of under $40m, it is significantly under-rated.

 

Disclosure: Firstwave is a research client of Pitt Street Research, and Pitt Street directors own shares.

 

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