ISP growth accelerated to 11% Q over Q, solid profitability, strong cash flow,
full year guidance revised
(Unless otherwise stated comparisons are made to the same period one year ago.)
Q2 Highlights
- Total revenue increased by 18% to a record level of 23.3m
- ISP business growth accelerated to 11% quarter over quarter, and 37% year
over year, to 8.6m
- EBIT increased by 31% to 3.7m, 16% of revenues
- Strong cash flow, 5.6m positive
Business at the Group level during the first half of 2007
For the first six months of 2007 total revenues were 46.5m (38.6m),
representing 20% growth. EBIT was 7.8m (5.8m), representing 34% growth. Cash
flow was 10.9m positive (4.5m negative). Deferred revenues were 30.2m at the
end of the quarter (30.1m at the end of 1Q2007).
The total costs were 35.3m (29.8m), representing 18% growth. The Group
capitalizes some of its development expenses according to the accounting rules.
This had no material impact on the cost level.
The geographical breakdown of the business was as follows: Nordic Countries 39%
(37%), Rest of Europe 43% (43%), North America 9% (11%) and Rest of the World
9% (9%). Anti-virus and intrusion prevention represented 99% of the total
revenues.
ISP channel during Q2
In the second quarter of 2007, revenues through the Internet Service Provider
(ISP) partners were 8.6m (6.2m), representing 37% of the total revenues (32%)
and a growth of 37% from the previous year. The quarter-over-quarter revenue
growth accelerated to 11% (6% in 1Q2007).
Strong development in the Service Provider business continued and a total of 7
new ISP partnerships were signed. The total number of ISP partners was 150
operating in 35 countries at the end of Q2.
Most significant new service provider partnerships in Q2 and early Q3 were
Optus (Australia), SingTel (Singapore) and NextGenTel (Norway).
The Group's overall share of the entire broadband ISP market is strong. At the
end of 2006 the Group's partners held approximately 34% market share in Europe
and approximately 10% in North America (Source: Dataxis and F-Secure).
Other channels during Q2
Other channels, including Value Added Resellers, IT Service Providers, Managed
Security Service Providers, e-Store and Retail channels performed at the lower
end of the range of expectations with a revenue of 14.8m (13.6m). This
represented 63% of the total revenues (68%) and a growth of 9% from the
previous year.
Mobile security during Q2
The amount of trial users for F-Secure's mobile solutions showed a healthy and
accelerating growth, indicating a growing interest in the market.
Despite the growing amount of trial users, and the gradual growth of sales the
revenues for mobile security solutions were still a small part, over 1% of the
Group's total revenues. They are included in the above mentioned channel
revenues and the percentage figure is shown as an indicator only.
Close co-operation with Nokia and the current operator partnerships, such as
Orange UK, Orange Switzerland, T-Mobile Germany, T-Mobile UK, Swisscom,
TeliaSonera and Elisa, are the prime vehicle to make mobile security
applications available to a large number of end users.
F-Secure's co-operation with Nokia continued strong. F-Secure Mobile Anti-Virus
was the first antivirus software for the S60 3rd edition operating systems and
it will be available for majority of the currently shipping or upcoming Nokia
S60 3rd edition devices, Nseries & Eseries.
Products & Services
The latest version of the primary platform product for ISP's, F-Secure
Protection Service for Consumers 7, was launched during Q2. It provides a
comprehensive set of security applications, including antivirus, antispam,
antispyware, firewall and parental control, to be offered as a service by ISPs.
The new solution has been well received by F-Secure's ISP partners, and the
launch has progressed according to plan.
Another significant launch was the F-Secure Internet Security 2007 2nd Edition,
which added support for the Microsoft Vista operating system. F-Secure has also
continued its co-operation with Microsoft, and, for instance, the Group was
announced the first security partner for Microsoft's upcoming Windows Home
Server platform.
Competitive situation
There were no major changes in the competitive situation during the period.
Price levels have remained relatively stable. The latest analyst estimate for
the antivirus market overall growth rate is 11% (source: IDC).
Customer satisfaction
According to the latest annual global survey made during the summer months of
2006 customer satisfaction has remained at strong levels. Overall satisfaction
was 4.26 (4.27) on a scale of 1 to 5. High customer satisfaction is important
for the Group.
Personnel and Organization
The Group had 540 employees at the end of Q2 (454).
The Group's Executive Team consists of the following persons: Mr. Ari Alakiuttu
(Vice President, Products and Services), Mr. Kimmo Alkio (President and CEO),
Ms. Eila Mustala (Vice President, Human Resources, as of April 26th), Mr. Trond
Neergaard (Vice President, Marketing), Mr. Pirkka Palomäki (Executive Vice
President, Research and Development), Mr. Antti Reijonen, (Vice President,
Strategy), Mr. Taneli Virtanen (Chief Financial Officer) and Mr. Travis
Witteveen (Senior Vice President, Sales and Geography Operations).
Financing
The Group's financial position remained strong. The Group's equity ratio on
June 30, 2007, was 79% (80%). Financial income for 1H2007 was 0.5m (0.3m).
During 1H2007 the cash flow was 10.9m positive (4.5m negative). The market
value of the Group's liquid assets on June 30, 2007 was 78.1m (56.9m).
The change in the USD-EUR exchange has had some negative effect on revenues and
results.
Capital Expenditures
The Group's capital expenditures during first six months 2007 were 1.2m (2.2m).
These consisted mainly of IT hardware, software and capitalization of some
development expenses.
Shares, Shareholders' Equity, and Option Programs
During Q2, A total of 4,400 F-Secure shares were subscribed for with the A1/A2
warrants attached to the F-Secure 2002 Warrant Plan.
The corresponding increase in the share capital, in total EUR 44.00 has been
registered in the Finnish Trade Register.
As a result of the increases in Q2, the share capital of F-Secure currently is
EUR 1,550,383.18 and the total number of shares is 155,038,318. F Secure
received as additional shareholders' equity a total of EUR 2,596. The
corresponding number of shares fully diluted would be 161,464,443 including all
stock option programs.
Corporate Governance
F-Secure complies with the Corporate Governance recommendations for public
listed companies published in December 2003 by HEX Plc, the Central Chamber of
Commerce of Finland and the Confederation of Finnish Industry and Employers as
explained on Group's web pages.
Risks and Uncertainties in the Near Future
The Group's risks and uncertainties are related to, among other things, the
competitiveness of the Group's product portfolio, competitive dynamics in the
industry, the impact of changes in technology, timely and successful
commercialization of complex technologies as new products and solutions, the
ability to protect own intellectual property (IPR) in the Group's solutions as
well as the use of third party technologies on reasonable commercial terms,
subcontracting relationships, regional development in new growth markets,
sustainability of partner relationships, service quality level requirements and
the overall development of value added security solutions in the Service
Provider and mobile operator market.
During the first half of 2007, the Group did not identify material changes in
this area.
In December 2006, Diagnostic Systems Corporation filed a patent infringement
lawsuit against F-Secure, Inc. and six other co-defendants in California, and a
trial was recently scheduled to October 2008. The Group strongly believes that
these claims have no merit and does not expect any material impact on the
Group's financials.
Future Outlook
The Group's first priority is to drive strong growth. The core growth driver is
the ISP channel. Based on 1H performance and current outlook, the management
expects full year 2007 revenues to be between 94m and 100m and an EBIT between
16% and 19% of revenues. Guidance given in January for the full year was
following; revenues 95m +/- 10% and EBIT of 14%-18% of revenues.
The Group continues to invest in new sales and marketing activities, technology
innovation and new solutions to build scalability for future growth especially
for the service providers and in the mobile segment.
The quarter-over-quarter growth rate in the ISP business is expected to remain
at a good level, around 10%, during 2H 2007. In the mobile security business,
revenue continues to grow, but slower than anticipated at the beginning of the
year. Mobile security is expected to remain a small part of the Group's
revenues during 2007.
In the 3-5-year horizon the Group aims to exceed market growth rates in
revenues and seeks EBIT level around 25%.
The third quarter 2007 revenues are estimated to be between 23.5m and 25.5m.
The estimates are based on the sales pipeline at the time of publishing,
existing subscriptions and support contracts and a EUR/USD exchange rate of
1.35.
The actual cost level is still increasing. However, due to seasonality cost
level is traditionally lower during summer time. Fixed costs are estimated to
be below 17.5m in Q3.
Financial Reporting
A press and analyst conference will be arranged today, July 31st, at 11 am
Finnish time at the Group's Headquarters, Tammasaarenkatu 7, Helsinki. A
conference call for international investors and analysts will be arranged at
15.30 Finnish time (14.30 CET, 1.30 pm UK time). Instructions can be found in
investor pages.
The next quarterly report will be published on October 23rd (Q3). A Stock
Exchange bulletin will be sent at 9am Finnish time to the Helsinki Exchanges, a
press and analyst conference will be arranged at 11 am Finnish time in
Helsinki, and an international conference call will be arranged in the
afternoon. Full details will be provided later on the Group's web site.
F-Secure Corporation
Board of Directors
This interim report is prepared in accordance with IAS 34 standard.
Key figures (unaudited):
Euro million
INCOME STATEMENT 2007 2006 2007 2006 Chge 2006
4-6 4-6 1-6 1-6 % 1-12
Revenues 23.3 19.8 46.5 38.6 20 80.7
Cost of revenues 1.8 1.6 3.6 3.4 8 7.3
Gross margin 21.6 18.2 42.8 35.2 22 73.4
Other operating income 0.1 0.2 0.2 0.4 -36 0.6
Sales and marketing 11.1 10.3 21.7 19.8 9 38.6
Research and development*) 5.3 4.3 10.6 8.0 32 22.5
Administration 1.6 0.9 3.0 1.9 55 4.1
Operating result 3.7 2.8 7.8 5.8 34 8.9
Financial net 0.3 0.1 0.5 0.3 1.5
Result before taxes 4.0 2.9 8.2 6.1 10.4
Income taxes -1.0 -0.8 -2.1 -1.7 -3.1
Result for the period 3.0 2.1 6.1 4.5 7.3
Earnings per share, e 0.04 0.03 0.05
EPS, diluted, e 0.04 0.03 0.05
*) 1-12/2006 includes impairment loss of 4.8
BALANCE SHEET
ASSETS 30/6/2007 30/6/2006 31/12/2006
Intangible assets 4.2 9.6 4.5
Tangible assets 3.3 3.2 3.2
Other financial assets 0.8 3.2 0.9
Non-current assets total 8.4 16.1 8.7
Inventories 0.4 0.2 0.2
Other receivables 17.0 15.9 19.4
Available-for-sale
financial assets 62.4 48.7 54.7
Cash and bank accounts 15.8 8.3 12.2
Current asset total 95.6 73.1 86.4
Total 104.0 89.2 95.1
SHAREHOLDERS' EQUITY
AND LIABILITIES 30/6/2007 30/6/2006 31/12/2006
Equity 58.0 50.9 54.2
Other non-current 0.2 1.2 0.1
Provisions 1.2 1.1 1.2
Deferred revenues 3.4 4.1 4.4
Non-current liabilities total 4.9 6.4 5.7
Other current 14.3 10.6 12.1
Deferred revenues 26.8 21.3 23.2
Current liabilities total 41.1 31.9 35.2
Total 104.0 89.2 95.1
Cash flow statement 30/6/2007 30/6/2006 31/12/2006
Cash flow from operations 15.1 8.4 19.5
Cash flow from investments -1.2 -2.1 -3.5
Cash flow from financing
Activities* -3.1 -10.8 -10.6
Change in cash 10.9 -4.5 5.4
Cash and bank at 1 Jan 66.6 61.8 61.7
Change in net fair value of
Available-for-sale 0.5 -0.4 -0.4
Cash and bank at 31 Jun 78.1 56.9 66.7
* dividends paid/increase in share capital
Statement of changes in shareholders' equity
share
share premium transl. reval. retained
capital fund diff. reserve earnings total
Equity on
31.12.2006 1.5 33.7 0.0 -0.1 19.0 54.2
Available-for-sale
financial asset, net 0.4 0.4
Translation diff. 0.0 0.0
Cost of share
based payments 0.5 0.5
Profit 6.1 6.1
Dividend -3.1 -3.1
Exercise of options 0.0 0.0 0.0
Equity on
30.6.2007 1.5 33.7 0.0 0.3 22.4 58.0
Key ratios 2007 2006 2006
6 m 6 m 12 m
Operating result,
% of revenues 16.7 15.0 11.0
ROI, % 30.2 23.6 19.3
ROE, % 21.6 16.5 13.1
Equity ratio, % 78.7 79.7 80.2
Debt-to-equity ratio, % -134.5 -111.9 -123.2
Earnings per share (EUR) 0.04 0.03 0.05
Earnings per share diluted 0.04 0.03 0.05
Shareholders' equity
per share, e 0.37 0.33 0.35
P/E ratio 32.9 44.9 47.6
Capitalized expenditures (Me) 1.2 2.2 3.7
Contingent liabilities (Me) 10.0 11.8 11.2
Personnel, average 511 418 439
Personnel, Jun 31 540 454 479
Segment information
The Group has only one primary segment; data security.
Quarterly development
1/06 2/06 3/06 4/06 1/07 2/07
Revenues 18.8 19.8 20.0 22.1 23.1 23.3
Cost of revenues 1.7 1.6 1.7 2.2 1.9 1.8
Gross margin 17.0 18.2 18.4 19.8 21.3 21.6
Other operating income 0.2 0.2 0.1 0.2 0.1 0.1
Sales and marketing 9.6 10.3 9.0 9.8 10.6 11.1
Research and
development 3.7 4.3 4.7 9.8 5.3 5.3
Administration 1.0 0.9 0.9 1.2 1.4 1.6
Operating result 2.9 2.8 3.8 -0.7 4.1 3.7
Financial net 0.2 0.1 0.1 1.0 0.2 0.3
Result before taxes 3.2 2.9 3.9 0.3 4.2 4.0
Additional information:
F-Secure Corporation
Kimmo Alkio, President and CEO tel. +358 9 2520 0700
Taneli Virtanen, CFO tel. +358 9 2520 5655
Jukka Kotovirta, IR tel. +358 40 5883 933