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Guarding Data Puts Senetas In The Spotlight

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Data protection is a big deal, and Senetas is there in the market with world-leading capability that customers urgently require. In particular, it says, it gives small to medium sized organisations the same access to the high level of protection and assurance that national governments use.

If successful investing is about identifying themes, and the companies that are well-placed to benefit from these themes, Australian data protection company Senetas Limited (SEN) is a stock whose time has come.

Capitalised at $88 million, Senetas is one of the rare examples on the Australian Securities Exchange (ASX) of a world leader in its field. The company designs and makes high-speed network data encryption hardware: Senetas’ encryptors protect network transmitted data in more than 30 countries, used by customers ranging from government organisations with highly sensitive information, for example, the US defence forces, to commercial and industrial organisations, banks and global financial transactions systems providers, cloud service providers and small businesses.

Senetas says its encryptors are the world’s only products of their type certified by all four leading international certification authorities – the US government’s FIPS (Federal Information Processing Standards) certification, Common Criteria (required by Australian government and defence organisations), Communications-Electronics Security Group (CAPS) for its Ethernet IG product in the UK (the first up-to-1GB encryptor for government data networks ever certified by CAPS) and NATO (North Atlantic Treaty Organisation) information security product certification covering the 28 NATO member states.

Established in 1997, Senetas’ first job was solving a mission-critical, high-speed data network problem for an Australian federal government law enforcement organisation. It has been listed since 1999, and won its first US government and defence customer orders in 2000.

15 years later, Senetas’ focus on protecting information – and on delivering ‘military-grade' data security to businesses and other organisations – ties in perfectly with today's environment of increased risks to data being transmitted across networks. Aside from the obvious national security implications of breaches such as Wikileaks, and high-profile recent instances of cyber-attack and hacking, the stark modern reality is that any organisation or business that handles data has to reassure its customers about the integrity of their data within the cloud and other environments.

Data protection is a big deal, and Senetas is there in the market with world-leading capability that customers urgently require. In particular, it says, it gives small to medium sized organisations the same access to the high level of protection and assurance that national governments use.

While the company has always shown technological promise, it has been making losses for a number of years while it restructured. That changed, however, in the full-year 2013-14, in which Senetas lifted revenue by 44% to $11 million, and broke through for a net profit of $2.96 million, compared to a net loss of $714,000 in 2012-13. (The large number of shares on issue means that this amount equates to earnings per share (EPS) of just 0.0028 cents a share.)

Then for the half-year ended December 2014, Senetas boosted revenue by 68% to $8.12 million, and lifted net profit more than four-fold, to $1.94 million. Pre-tax profit rose more than nine times, to $2.82 million. The company has no debt: cash on the balance sheet increased from $6.8 million at the end of the full-year to $10 million at December 31. This had increased to $12 million by the time the interim report was released (24 February).

Senetas gave guidance that it expects that revenue and profit growth for the full year will “significantly exceed” the prior year, although it cautions that the rate of growth in the second half may moderate from that achieved in the first half. While the result over the first half was a very strong result, Senetas believes that there are “significantly larger global opportunities for sustainable profitable growth in the second half and beyond.”

Senetas has commenced development of new products, including:

• 100Gbps (gigabytes per second) encryptor: with customers already indicating a need for the increased data throughput and the economies of scale 100Gbps will bring;
• ‘High-density’ encryptors: through a ‘multi-port’ design providing customers with their need for cost-per-port economies and other benefits; and
• A custom encryption algorithm capability, following enquiries from customers in Asia, Europe and the Middle East.

Senetas’ master distributor, its US partner SafeNet, was acquired by Dutch firm Gemalto in January, but Senetas says Gemalto’s ownership of SafeNet actually provides its products with increased access to global markets: it says Gemalto has a large global sales force serving a customer base in 44 countries. The company is experiencing growing demand from non-Western governments, which has opened up new markets for Senetas.

As analyst Gordon Capital puts it, Senetas’ CypherNet product range can encrypt virtually nearly any LAN/WAN infrastructure with no loss of quality. The company’s layer 2 technology encrypts voice, video, or data streams at a speed of up to 10Gbps, significantly reducing the complexity – and importantly, the cost – of meeting data protection and privacy requirements. The products are purpose-built to satisfy security requirements from small branch locations to high speed corporate and data centre environments.

“Senetas CN is a complete family of high-performance purpose built encryptors for ETHERNET, SONET, FIBRE CHANNEL, LINK and ATM networks. The CN 6100 has been designed with a future road map to secure data at up to 100 Gbps, to cater for increasing data requirements of governments and corporations,” says Gordon Capital. “Senetas CS is a flexible new encryption platform, designed in a small desktop form factor to provide an integrated data security solution for point-to-point or multipoint Ethernet links up to 10 Mbps,” says the research firm.

Gordon Capital says the key growth markets for Senetas’ products are the US, where the market is forecast to reach US$65 billion ($89.8 billion) by 2020, growing at a compound rate of 6.5% a year; and the UK, where the Government in 2011 estimated the cost of cyber-crime to be running at around £27 billion ($53.4 billion) a year. Other potential growth markets include Asia, Eastern Europe and the Middle East.

According to a recent report titled the ‘Hardware Encryption Market,’ it is estimated that the global hardware encryption market will reach US$167 billion ($231 billion) by 2018, growing at a compound annual growth rate of 62%. With its range of proven data protection solutions for governments, defence departments and the commercial market – and being the only manufacturer certified to the four major global standards – Senetas is very well-placed to participate in this massive growth market, and is supported by a well-established global distribution channel. The company has major global competitors – the likes of ATmedia, Certes Networks and InfoGuard – but none of these has the level of certification of which Senetas can boast.

After languishing for almost eight years at levels under 4 cents, Senetas shares caught fire in 2014, surging from 2.7 cents in July to 9.5 cents last month. The shares have lapsed back to 8.3 cents, and low trade ($384,000 a day) might also deter investors. But the company is profitable and has a strong balance sheet, and the investment proposition is that rarely do you see a stock with such a clear-cut opportunity to sell more of its products, as organisations rapidly become conscious of their level of data security – and panic in Senetas’ direction.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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