Ann: Investor Presentation, page-27

"I wonder what your updated views are post the quarterly update, and Microsoft announcing a competing solution @madamswer . Thank for your time as always."

In summary, clearly unhelpful, but hardly terminal for DSE, I don't think.

It is obviously a major sentiment shock, which will hang over the stock for some time.

But will it prevent DSE from getting to where it was heading, i.e., to servicing a mere small fraction of the addressable market from currently servicing a minute part of the market?
I don't believe so.

I don't know how big the market is for data security and protection (I suspect it is today in the many tens billions of dollars, probably even in excess of 100 billion dollars, and growing)

The investment case for DSE was never about it getting to 10% market share (or even 5% or 1% share for that matter).

It was merely for the business to keep growing to reach a Revenue base of say, $50m, at which time it would be generating in excess of $15m in Free Cash Flow.

And to reach that $50m Revenue milestone won't take too long, either: even if the growth rate dropped by half its current >50% run-rate, to "just" 25%, that Revenue threshold will be reached in two years' time. In reality, it is highly likely to be sooner than that.

Will Microsoft crowd out the likes of DSE instantaneously?
No way it will; instant market penetration from a standing start isn't possible; these things take time (even for the absolute industry gorilla) and time is all that is needed when a land grab is is underway.

Admittedly, what Microsoft's arrival on the scene will certainly do is it will significantly truncate the ultimate addressable market for non-Microsoft participants.

So whereas the revenue pie that was up for grabs might have initially been $x, with Microsoft entering the fray it might now only be 0.7 of $x (and for a number of reasons, for Mircosoft to get 30% of the data protection market will be an achievement!)

But DSE was never going to be constrained by the ultimate market size; all it needs to do is to get to a teeny slither of that "0.7 of $x" market within the next 18 to 24 months.

In DSE's eyes, there's not much practical distinction between a TAM of $x and 70% of x, when DSE is aiming for a mere 0.05% of $x.

I don't believe the Microsoft news suddenly makes that unattainable.

It might slow the pace of growth down a bit, which means DSE would get to where it needs to be 6 or 12 months later, but in valuation terms, a free cash flow stream that shifts forward or backwards by 6 or 12 months doesn't alter the valuation all that much.

Valuation-wise, I think that, at 0.35c ($250m Market Cap), where it was when the Microsoft news broke, represented an element of frothiness in the valuation - to wit, based on my $15m FCF milestone, it was a 17x FCF multiple (or, if you like, a 6% FCF yield, pre-tax).
Which, I think is a bit skinny.

What has happened since is that some of the heat has come out of the stock, and it is now valued at around 12x FCF (8.5% FCF Yield), which feels more like it to me.

Conclusion:

I don't believe the investment case for DSE is at all broken.
The ultimate pie size is smaller, but DSE was never aiming for the ultimate size.
The TAM is large and still very under-penetrated.
DSE (and others like it) still have ample wiggle room in which to grow.

I think we will continue to see strong ARR from DSE for several years to come.
So I have basically done nothing in terms of my DSE shareholding in the wake of all this(in hindsight, I probably should have sold some of my holdings when the news broke, but second-guessing short-term market ructions is not something to which I devote much effort.

A month ago, it was a two-year investment journey for me, and that remains the case today.

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