Is Big Brother Watching The Kids?

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By Tim Boreham, Editor, The New Criterion

There’s action in the family cyber protection space – and is there more to come?

The head of cyber filtering mob Family Zone ((FZO)), Tim Levy, is bemused about the lack of cyber protection policies covering schools and parents when home schooling became the norm during the pandemic.

In essence, because the schools administer the devices, the parents can’t install the filtering tools (easily at least).

Family Zone this month pulled off the purchase of UK-based Smoothwall, thus tripling its annualised recurring revenue (ARR) to circa $45 million.

The $140 million cash purchase was funded by a $146 million rights issue at 55 cents. Whilst struck at an -8% discount, the shares resumed trading on August 9 Monday at a 27% premium and remain 20% above this offer price.

Levy says home incarceration meant that more kids were developing serious online addictions. “It’s like having crystal meth in your home that your kid can use and you have no ability to control,” he says.

In the main, Aussie parents were left to their own devices (pun intended). In the US something like $US50bn of government spendoolies were splashed around to ensure that students were adequately armed with devices and the requisite cyber protection.

“There was a huge explosion of use of one-to-one devices in the US and almost a limitless amount of money available to deliver tech safely to kids,” Levy says.

Enacted well before the pandemic, the Clinton-era US Child Online Protection Act compels schools to protect children from online threats.

“If a school in the US isn’t protecting kids the school district loses funding,” Levy says. “Nothing like that exists here.”

In the UK, a “statutory guidance” called Keeping Children Safe in Education compels school councils to look actively for risks such as bullying and radicalisation.

“The UK has even stepped ahead of everyone else by lifting obligations for schools around digital citizenship,” Levy says.

In purchasing Smoothwall, Family Zone overnight has bolstered its share in the UK market and created a springboard for further expansion into the US.

Smoothwall boasts a 38% share of the UK schools market, while in the US Family Zone has carved out a 5.5% share off its own bat.

The sale came about after Smoothwall’s private equity owner Tenzing decided to close one its fund that houses the asset.

Family Zone competed with 13 other suitors, but won the beauty parade because of the parties’ mutual knowledge of – and respect for – each other.

“We are lucky because these people are fundamentally aligned with our mission,” he says. “We saw it not so much us buying a house but looking for a flat-mate, an opportunity to bring the business together.”

And the mission?

“Our approach is to offer a school all cyber safety options.  We’re not there yet and this acquisition doesn’t get us there, but it jumps it forward in a massive way particularly with the products that schools need.”

While Family Zone provides its protection directly to parents, its modus operandi is more about signing up schools – or school clusters – on a per-student subscription basis.

Locally, the company has made inroads with private schools.

But the biggest opportunity lies with school districts that can cover thousands of schools and up to half a million students. Usually, the company is involved with school districts of between 8000 and 80,000 students.

Typically the school signs the contract with us and then compels all the schools to use the product on a per-student subscription basis.

“We can then extend our platform to others responsible for safeguarding the child, such as the teacher,” Levy says. “Or a pastoral carer can be alerted if the kid is considering bringing a gun into school.”

After all, we are talking about America.

Currently Family Zone competes with a handful of substantive providers, including Lightspeed Systems, GoGuardian and Securely.

Because they are all private they are not obliged to disclose financials, but Levy reckons the Family Zone/Smoothwall combo elevates the company into the top four global providers.

“The platform can be used by mums and dads for other schools, $7-a-month type revenue.”

Sizing up the ASX landscape

As far as ASX listed stocks goes, Family Zone is often compared to cyber security providers such as Tesserent ((TNT), market $280m, Sensen ((SNS)), $73m, Whitehawk ((WHK)), $37m and Archtis ((AR9)). These companies pitch their wares at the corporate and government markets.

In the family protection space there’s a $1.4 billion market cap player hiding in plain sight: the US-based Life360 ((360)).

Working on a ‘freemium’ model, Life360 provides tracking tools which we must say borders on the Orwellian. These include a module that allows anxious parents to check the whereabouts and habits of young drivers, including average speed.

In the event of a crash, the app directly calls emergency services. Life360 claims to have facilitated more than 14,000 ambulance trips and – more happily – more than two million safe arrival notifications.

So perhaps the privacy compromises of the Brave New World are worthwhile.

Life360 claims 32m active users in 195 countries, mainly the US.

As one would expect, most users opt for the freebie version. But given Life360 expects $US110-120 million of annual recurring revenue in calendar 2021, there’s a substantial paying audience as well.

Subs range from $US4.99 a month to $US19.99/m for the platinum version, which includes perks such as free towing and medical assistance and cover for phone and identity theft.

Life360 does not operate in the schools market.

In May 2019, Life360 listed on the ASX as Chess Depositary Instruments, at $4.79 apiece. Its shares did absolutely nothing for almost two years but have doubled in the past six months on speculation of a buyout and/or a planned Nasdaq listing.

Typically for an early stage subs-based business, Life360 is not profitable, having lost -$15.5 million last year and -$29m in 2019.

Still, the revenue traction is music to the shell-likes of its high profile investors including Vanessa Bryant (wife of the late basketballer Kobe Bryant), professional skateboarder Tony Hawk and Olympic swimmer Michael Phelps and his missus Nicole.

Closer to home, Family Zone shares DNA with Spacetalk ((SPA)), which developed a tool to track student truancies before turning to smart watches for the under 12s.

While its core focus is filtering, Family Zone plans to add truancy alerts and other locations services to its repertoire.

“I would be surprised if we weren’t increasingly encroaching on what they do over time,” Levy says.

Not surprisingly, the companies have discussed merging in the past. There’s no action at the moment, but with a $31 million market cap and tidy register, Spacetalk would make for a tempting morsel.

  

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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