The Race For Mobile Security: How Elephant Talk's Earnings Could Be A Window Into The Future

| About: Pareteum Corporation (TEUM)

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Mobile security has become increasingly important and is of particular concern as it relates to the security of personal information stored on smartphones and other mobile devices. ABI Research, a market research and market intelligence firm, identified that the Mobile Security Services market will total around $1.88 billion by the end of 2013 and in the same report, explained that the number of unique mobile threats grew by 261% in just two quarters (as of March 2013). "Isolated and standalone security solutions will work for the individual consumer, but for organizational applications and carriers, mobile security services will take the lead," says Michela Menting, ABI Research's senior analyst in cyber security.

I focus on small caps and of course there's always risk involved. Volatility in the market and the daunting "Development Stage" stamp that many companies receive are always barriers to entry for making investment decisions. However, the recent earnings published by Elephant Talk Communications Corp. (ETAK) warranted me to take a closer look, not only at the company's operations but at the direction of the mobile security market as a whole. Elephant Talk is an international provider of mobile proprietary Software Defined Network Architecture (Software DNATM) platforms for the telecommunications industry that empower Mobile Network Operators (MNOs) and Mobile Virtual Network Operators (MVNOs), Enablers (MVNEs) and Aggregators (MVNAs). Additionally, the company has positioned itself to provide solutions to counter electronic fraud in the cloud.

An asset for Elephant Talk in the mobile security space is its wholly owned subsidiary, ValidSoft. The subsidiary provides solutions to counter electronic fraud relating to a variety of bank, card, Internet, and telephone channels. ValidSoft has a suite of integrated technology products that improve mobile security through many different channels; these include voice biometric technology as well as fraud prevention technology for payment processing. ValidSoft has also been the recipient of several industry awards including its third European Privacy Seal for the company's VALid-SIM product. This subsidiary has allowed Elephant Talk to further enter into the mobile security industry and away from its original model as a telecommunications.

During early August 2013, Elephant Talk released earnings, which have outlined and confirmed increased growth for the company resulting from progress in the mobile security space. The results include revenues of $5.0 million for the second quarter ended June 30, 2013 and of this total, 90% was directly related to the company's mobile and security revenues ($4.5 million). Compared to 2012's Q2 results, this represented a 60.5% year over year growth in mobile and security revenue ($2.8 million in 2012). In line with the Company's strategy to essentially eliminate the lower margin legacy landline revenue, the company saw a decline of 87.8% year-over-year in 2Q13 when compared to the same period a year earlier.

After looking through the industry as a whole, I've found that it's not just Elephant Talk that has started a transition away from traditional telecom to the more robust, mobile service and security applications. Among leaders in this space, Cisco Systems (NASDAQ:CSCO) has a product called "AnyConnect Mobility" which offers a comprehensive suite of VPN access features along with powerful security features. AnyConnect allows administrators to provision remote access through appropriate security policies for a variety of endpoints - from Mac or Windows environments to the latest iPad/iPhones and Android devices. Furthermore, through its acquisition of Intucell Ltd, Cisco anticipates a weighted average useful life of roughly 5 years. The company will focus on advanced self-optimizing network software for mobile carriers to add a critical network intelligence layer to manage and optimize the overall mobile experience.

Other major players in the space include both HP (NYSE:HPQ) and AT&T (NYSE:T) through their proprietary mobile security solutions. HP offers its "HP Fortify Mobile Application Security" solutions and ATT has its enterprise focused "AT&T Mobile Security". A major contributing factor in the growth of mobile security overall has been the increased dependence for individuals and businesses to rely on mobile devices for many forms of communications; including those that are confidential. Survey results published by Check Point Software Technologies, Ltd (NASDAQ:CHKP) reported that 45 percent of companies have more than five times as many personal mobile devices as they had two years ago. The report found mobile security incidents tallied up to over six figures for 42 percent of businesses, including 16 percent who put the cost at more than $500,000.

Obviously it's not just the small cap market that has started to zero in on the growing market potential of mobile security solutions; larger companies are starting to take note as well. Elephant Talk's earnings may be one of the many proof points for growth within the space and I feel that several questions arise. I pose the following: Will the growth of this space inspire network providers like AT&T, Verizon, or even Virgin Mobile opt to focus further R & D on proprietary solutions or will they go to companies like Elephant Talk to license the technology? Furthermore, could similar small cap companies be viable acquisition candidates for these mobile service providers?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.