‘Fast-growing top-line growth’: Family Zone Cyber MD Tim Levy on the mammoth US market opportunity
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Over the past couple of years, internet safety company Family Zone Cyber Safety (ASX:FZO) has achieved an objective shared by many Aussie tech plays – finding traction in the US market.
The company first landed a US patent for its cloud-based internet monitoring service back in mid-2019.
Over the past 12 months, it’s gained momentum with parents and schools.
Late last month it closed a $23m share placement to fund the acquisition of US company Net Ref, and set it up with a capital buffer to pursue further deals.
In light of that announcement, Stockhead spoke with FZO managing director to get his thoughts on the latest capital raise and the company’s near-term outlook.
As a tech platform, FZO now generates around 95% of its revenue from the US market.
Levy said the the $23m share placement in June is, in one sense, an extension of FZO’s engagement with its sophisticated investor base going back to April last year.
After booking strong US growth into the second half of 2019, FZO completed two other placements in April ($10m) and October ($20m) of 2020 to capitalise on its US opportunity.
“At that time we were seeing these really strong sales in the US, and the discussions were centred around the market dynamics and the billions of dollars in funding for US education,” Levy said.
Since then, FZO’s share of the US schools market has risen to more than 5% in just a little over two years of operation.
So the June placement was really about “two things”, Levy said – M&A and balance sheet strength.
“Firstly, there’s a broad thematic in our industry where smaller companies that don’t have scale are looking for opportunities to exit, and we want to be in the box seat to participate in those transactions.”
The other core rationale is that off the back of its rapid growth, FZO has been invited to tender for some “massive deals”, Levy said.
“These are state-wide deals million-student type deals and having humble balance sheet could put them at risk. So when we explained that to our investors they immediately got right behind us.”
In that context, the Net Ref acquisition falls within the M&A component of FZO’s fund-raising rationale – a class management tool that complements its core content filtering software.
Along with its product set, Levy said Net Ref brings a strong management and sales team and will give FZO a chance to cross-sell products.
And as the company looks to leverage its US market footprint, Levy said transactions that result in increased scale will be key to FZO’s longer-term growth ambitions.
“We’re a tech service, and the primary variable cost to our business is data hosting expenses,” he said.
“If you look at our business two years, that cost amount to around $4 per student. Now it’s $1.60 and we expect this time next year it will be under $1,” Levy said.
“So there’s a massive amount of leverage that creates. And with a SaaS model that’s what our business is based around – fast-growing top-line growth with an improving service margin.”
The other growth opportunity Levy flagged is the sheer size of the US addressable market, now FZO has traction with multiple school districts.
Previously, Family Zone Cyber had flagged its intention to the market to reach 10% of US school districts by the end of 2023, he added.
However, “we announced to the market in March that we’d hit 3% of (US) school districts and by June we were at 5%,” Levy said.
As at June 30, the company had another two million students in its deal pipeline – equivalent to another US$12m in annual recurring revenues (ARR).
If Family Zone can convert on those deals, then “we’re almost there”, Levy said, with reference to its year-end 2023 target of 10%.
“So with my discussions with investors, most of them tell me our aspirations are too low. I think we can outperform that.”
While the US schools market will remain central to Family Zone Cyber’s growth strategy, Levy said it still only represents the B2B component of Family Zone’s business model.
In that sense, the company is looking to leverage its US school footprint to expand its B2C platform for individual families.
“In terms of the metrics, we’re currently generating around $6.50 per student per year from schools,” Levy said.
“But for individual families, our cyber safety platform generates around $7 per month. So it’s a 15x improvement if you can on-sell your school product to parents in that school community.”
Levy said trials in the Australian market have been promising, with a conversion rate of 40-50% for private schools, and 15-17% for public schools.
And those are “pretty high numbers in context”.
If FZO can hit its 10% target for the US school’s market, that will flow through to around $40m of ARR from students at $6-7 per year.
“So if we can convert that to 10% of parents at closer to $100 per year, that equates to another $60m in ARR,” Levy sad.
He said the company is currently running trials for its family-based model in three US districts during the summer school season, and plans to launch the model as part of back to school programs in September.
“The goal is to overlay those parental control products onto our schools model. And if we can do that I think it will result in a quick acceleration of our top-line revenue,” Levy said.