Kape has announced the acquisition of ZenMate, a digital privacy company based in Germany focusing on virtual private network (VPN) provision. With 50,000 software-as-a-service (SaaS) customers, the move strengthens Kape’s position in VPN, a standout growth area for the company currently. By utilising its digital marketing experience, Kape is confident it can accelerate ZenMate’s growth. We raise our FY19e EBITDA forecasts by $0.5m and adjusted EPS by 4%.
ZenMate is a multi-platform security software business with a focus on VPN solutions. It currently has 50,000, predominantly consumer, customers on an SaaS model and its main market is Germany. We estimate that these customers currently pay between $40 and $50 annually. To date, most of ZenMate’s customer acquisition has been organic and it claims a high retention rate (slightly below Kape’s current 74%).
This deal fits neatly within Kape’s consumer cybersecurity focus and should be highly complementary to its existing VPN business (CyberGhost). It increases its exposure to this high-growth segment and consolidates Kape’s position in the German market. Using its digital marketing platform, Kape has doubled CyberGhost’s subscriber platform in 18 months. It sees a similar opportunity to accelerate ZenMate’s growth.
We estimate ZenMate could add c $0.5m in revenues in FY18e and c $2.5m in FY19e. Restructuring (incurring $0.3m of costs) should ensure profitability within a year and we pencil in a $0.5m uplift to Kape’s FY19e EBITDA and a 4% increase in adjusted EPS (from 7.0c to 7.3c). The €4.8m consideration (100% cash) implies $111 per subscriber, similar to the Intego deal ($107), and 10x our estimate of ZenMate’s FY19e EBITDA contribution.
This deal highlights the strategic opportunity for Kape to use its balance sheet to build a high quality (ie growth, margins and visibility) consumer security business. We see scope for further value accretive deals that leverage its distribution network and a return to organic growth in FY19e. Factoring in the uplift to forecasts and the recent market sell-off, the shares trade at 16x FY19e adjusted EPS.
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