With deep connection to US government organisations, proven ability to sign big contracts with big organisations
Opened: 25-Feb-2022
Closed: 18-Dec-2023
Shares Held at Open: 4,385,547
Shares Held at Close: 8,406,087
Reason Memo Closed: It’s been over 18 months since our last WHK memo.
What does WHK do?
WhiteHawk (ASX:WHK) is an ASX-listed, USA based cybersecurity company, providing cyber risk products, services and solutions.
What is the macro theme?
Global cybersecurity threats are growing and businesses and governments are ramping up spending on their cybersecurity defences. Increasingly state sanctioned, or state-tolerated actors are involved in major attacks, meaning cybersecurity has never been more important.
[Memo Assessment - 18-Dec-2023]: Sentiment = Strong
Cybersecurity risks have only increased since this Investment Memo was launched, with a number of major attacks transpiring over the last two years.
Why did we invest in WHK?
Strong management team
With deep connection to US government organisations, proven ability to sign big contracts with big organisations
[Memo Assessment - 18-Dec-2023]: Sentiment = Unchanged
Large contract sizes
WHK is slow to progress deals, but when they happen they are generally for large $ contracts, with big organisations that are sticky customers.
[Memo Assessment - 18-Dec-2023]: Grade = D
WHK’s half year 2023 results underwhelmed with the company reporting around half as much revenue as in the same period in 2022. We think this was in large part due to the delays resulting from the Sontiq-Transunion merger and not many new contracts announced.
Partner deals to deliver revenue
Key partner deals signed with more in the pipeline, yet to deliver revenue
[Memo Assessment - 18-Dec-2023]: Grade = D
Again, we think the Sontiq-Transunion merger hurt channel partner sales and other channel partner sales failed to materialise.
Tiny market cap
Around $25M with US$2.3M revenue in 2021 and a growing presence in a high-growth industry, the share price could re-rate if WHK announces sizeable contracts with major partners
[Memo Assessment - 18-Dec-2023]: Grade = D
WHK’s market cap diminished further due to a combination of delays in new contracts, a bad market and a Lind convertible note to maintain funding for operations. Revenue went backwards over FY2023.
What do we expect WHK to deliver?
Objective #1: More contracts, partnerships and proofs of concept
WHK management has proven they can sign contracts and partnerships with top tier large organisations, but the deals are slow to be delivered. We want to see the effort of the last few years in building the pipeline come to fruition in 2022, with WHK delivering the following:
[Memo Assessment - 18-Dec-2023]: Grade = D
Same problems as above, but in a positive sign, WHK appeared to shift from Proof of Concept (POC) to Proof of Value (POV) contracts which we see as a more robust type of contract based on use cases as opposed to simply demonstrating the potential of products.
Objective #2: First revenue from channel partnerships
WHK has already signed some interesting partnerships deals (Dun & Bradstreet, Amazon web services) which have great potential, we want to see the first revenue coming in from these partnerships.
[Memo Assessment - 18-Dec-2023]: Grade = D
Cybersecurity Maturity Model Certification 2.0 (CMMC 2.0) was delayed which would have helped deliver more revenue from these channel partnerships. CMMC 2.0 was a new regulatory framework that could have required many of WHK’s customers and potential customers to update their cybersecurity risk processes. In turn we were hoping this would drive new customers to WHK’s products and services - A complete implementation of the new rules is targeted for late 2025.
Objective #3: Proofs of Concept (POC) increase to full, multi-year contracts
WHK is signing proofs of concept (small paid contracts to try the product, that lead to bigger contracts if successful) - we want to see WHK successfully convert several POCs to large contracts.
[Memo Assessment - 18-Dec-2023]: Grade = C
As before, it is positive that WHK appeared to shift from Proof of Concept (POC) to Proof of Value (POV) contracts. However these have yet to evolve into large multi-year contracts.
Objective #4: Double revenue in the next annual report
Objectives 1, 2 and 3 will lead to the ultimate goal of growing revenue, for a strong share price performance we want to see WHK double its revenue this US financial year - targeting a topline revenue of US$4.6M (which is double the recently released US FY21 financials at US$2.3M).
[Memo Assessment - 18-Dec-2023]: Grade = D
Again, half year 2023 results underwhelmed with the company reporting around half as much revenue as in the same period in 2022, notwithstanding a US Federal Government Cyber Risk Radar contract renewal valued at US$672k which came after the reporting period. We’re hoping WHK can improve significantly in the 2024 annual report.
What could go wrong?
Sales Risk
Deals continue take a long time and investors lose interest, alternatively loss of key contracts
[Memo Assessment - 18-Dec-2023]: Risk = Materialised
Market Risk
Covid resurgence delays government spending once again
[Memo Assessment - 18-Dec-2023]: Risk = Materialised
Competition Risk
The cybersecurity industry is a competitive space. Other companies may step in and take key clients
[Memo Assessment - 18-Dec-2023]: Risk = Materialised
What is our investment plan?
We have been holding WHK for a few years now, we announced it to our portfolio in May 2019. We really back the management team to deliver and are happy holders into 2022 despite recent share price weakness.
We will likely look to further increase our position in WHK over the next few months if prices remain around current levels.
We will hold a position in WHK for at least another 3 years. If the share price reaches near previous highs we will look to take some profit and reduce total position by up to ~25%.
[Memo Assessment - 18-Dec-2023]: Grade = D
We increased our position in WHK twice, first at 10 cents and then again at 3.2 cents in the mid-year 2023 rights issue.
We did not take any profit on our position due to ongoing share price weakness.
Disclosure: Disclosure: The authors of this memo and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 4,385,547 WHK shares at the time of writing. S3 Consortium Pty Ltd has been engaged by WHK to share our commentary on the progress of our investment in WHK over time.
Opened: 18-Dec-2023
Shares Held at Open: 8,406,087
What does WHK do?
WhiteHawk (ASX:WHK) is an ASX-listed, USA based cybersecurity micro cap, providing cyber risk products, services and solutions.
What is the macro theme?
Global cybersecurity threats are growing and businesses and governments are ramping up spending on their cybersecurity defences.
Increasingly state sanctioned, or state-tolerated actors are involved in major attacks, meaning cybersecurity has never been more important.
We expect capital to continue to flow towards cybersecurity companies that can seal long term contracts with large companies.
Why did we invest in WHK?
Six years to work out the kinks and build a pipeline of sales
We have been Invested in WHK since the company’s IPO in 2018.
In this time WHK has developed its product, reputation and relationships in the market.
Importantly, over this time WHK has developed a pipeline of sales, for contracts that take time to deliver.
WHK has recently said that its sales pipeline is worth US$22M. If WHK can convert roughly a quarter of that pipeline over 2024 we think that would put it on a good footing for sustained financial performance.
Coming off a low base WHK is primed for a re-rate
As of writing this note WHK is capped at just ~$6.6M.
At these levels, we feel that the company is coming off a low base and has a chance to significantly re-rate if it can finally deliver a string of material contracts.
Strong management team
With a deep connection to US government organisations, WHK’s team has a proven ability to sign big contracts with big organisations
Large Contract Sizes
WHK is slow to progress deals, but when they happen they are generally for large $ contracts, with big organisations that are sticky customers.
Cybersecurity continues to be a strong thematic
In the 2024 Australian CEO survey, “Cyber risk” was classified as the number one thing keeping CEOs awake at night.
The rate and frequency of cyber attacks is increasing, and we expect that large organisations will be allocating more resources to cyber protection.
What do we expect WHK to deliver?
Objective #1: More Contracts, follow through
WHK management has proven they can sign contracts and partnerships with top tier large organisations, but so far new deals have taken a long time to get signed. We want to see the effort of the last few years in building the pipeline come to fruition, with WHK delivering the following:
Objective #2: First material revenue from channel partnerships
WHK has already signed some interesting partnership deals (Dun & Bradstreet, Amazon Web Services, Sontiq, Peraton) which have great potential. We want to see the first revenue coming in from these partnerships.
Objective #3: Proof of value (POV’s leading to larger multi-year contracts)
WHK is now signing proof of value contracts (smaller contracts which identify product value based on customer use cases) - we want to see WHK successfully convert several POV’s to larger contracts.
Objective #4: Deliver ~US$4M in the 2024 annual report
Objectives 1,2 and 3 will lead to the ultimate goal of growing revenue, for a stronger share price performance we want to see WHK grow its revenue.
With US$672K in receipts from customers in the September 2023 quarter and a new US$1.2M a year contract with a US “Top 5 Global Social Media Company”, as a baseline we want see WHK deliver at least ~US$4M in its 2024 report and be operating cashflow positive for at least two quarters.
What could go wrong?
Sales Risk
Deals continue take a long time and investors lose interest, alternatively loss of key contracts
Market Risk
The market could sell off or a bear market could continue for longer than expected taking the WHK share price down with it.
Competition Risk
The cybersecurity industry is a competitive space. Other companies may step in and take key clients.
Funding / Dilution risk
WHK like all small caps is subject to funding and dilution risk.
Capital raises can lead to dilution and may take place at a discount, reducing the value of WHK shares.
Capital may not be available depending on the market, and may need to be secured through a variety of instruments which can undermine the financial and share price performance of the business.
What is our investment plan?
We have been holding WHK for a few years now, increasing our position on multiple occasions since we announced it to our Portfolio in May 2019.
While it has been a disappointing journey over the last two years, we believe WHK can finally turn things around, and deliver a re-rate on one or more large long term contracts and follow through with increased sales from its large pipeline.
Our plan is to increase our position if WHK do another equity capital raise, “averaging down” on our Entry Price, and we will look to top slice if WHK can deliver a re-rate from these lows.
Disclosure: Disclosure: S3 Consortium Pty Ltd (The Company) and Associated Entities own 8,406,087 WHK shares at the time of publishing this memo. The Company has been engaged by WHK to share our commentary on the progress of our Investment in WHK over time.
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