F-Secure Group January 1 - September 30, 2009 Financial Results

Oct 22, 2009:

Solid profitability, Software as a Service business continued to drive growth, integration of the acquired Steek SA proceeding on schedule

Highlights in Q3

Total revenues grew by 9% reaching revenues of 31.1 million (Q308: 28.6m)

Revenues from the operator business (ISPs, mobile operators and cable operators) including Steek grew by 25% from Q308, reaching revenues of 15.4 million (12.3m)

EBIT was 6.6 million; representing 21% of revenues (7.1m)

Earnings per share was EUR 0.03 (EUR 0.04)

Cash flow was 3.1 million positive excluding the acquisition cost and share buy backs (5.3m positive)

Acquisition of online storage company Steek SA was announced in July, integration proceeds on schedule

New version of F-Secure’s internet security product, F-Secure Internet Security 2010, was successfully launched to the markets in September

(This report is unaudited. Unless otherwise stated the comparisons refer to the corresponding period a year ago. The currency is euro.)

Key figures                    2009        2008        2008
Eur million                     7-9         7-9        1-12
Revenues                       31.1        28.6       113.0
Operating profit                6.6         7.1        24.3
 % of revenues                 21 %        25 %        22 %
Profit before taxes             6.7         7.5        26.4
Earnings per share (EUR)       0.03        0.04        0.13

At the end of period:
Deferred revenue               33.7       33.7         37.2
ROI, %                          51%        37%          52%
ROE, %                          36%        26%          36%
Equity ratio, %                 70%        83%          71%
Debt-to-equity ratio, %        -67%      -125%        -148%
Personnel, September 30         818        710          718

CEO Kimmo Alkio:

"We are pleased to deliver solid profitability also for the third quarter of 2009 even as our revenue growth was on the lower end of our guidance mainly due to slowdown in traditional license business. Our Software as a Service (SaaS) business through operators continues to be a solid growth driver. Integration of the acquired Steek SA is proceeding well and is expected to strengthen our position as the leading SaaS partner for operators in the long run. During the quarter, our offering and market reach was strengthened through the launch of our totally renewed Internet Security solution and through the collaboration announced with Nokia’s Booklet 3G mini-laptops."

F-Secure business during January-September of 2009

For the first nine months of 2009 the total revenues were 93.4 million (Jan.-Sep. 2008: 82.4m), growth of 13%. Revenue growth continued solid in the operator business (including revenues from ISP’s, cable, mobile operator business and Steek business), up by 27% and totally 44.3m, and in the business through the traditional channels, up by 3% and totally 49.1m. EBIT was 19.8 million (17.1m), representing 21% of revenues; 16% growth from the corresponding period in 2008. Earnings per share were EUR 0.10 (EUR 0.09). Cash flow from operations was 30.3 million negative (4.3m positive) and 12m positive (15.2m) when excluding a paid dividend, share buy backs and the acquisition cost. The Group deferred revenues decreased further to 33.7m at the end of September (36.3m at the end of June 2009).

The Group total costs were 66.7 million (59.5m), representing 12% growth. The Group also capitalized some of its R&D expenses according to accounting rules, totaling 0.9m for the first nine months of 2009.

The financial results for the third quarter of 2009 were in line with the guidance given in July (revenues 31-33 million, cost level not to exceed 23 million, excluding amortization from Steek acquisition); revenues for the third quarter were 31.1, showing growth of 9%. The costs were 22m, an increase of 14%, including Steek’s running costs, amortization and integration activities. EBIT was 6.6m; 21% of revenues.

The geographical breakdown of the revenues split as follows: Finland and Scandinavia 35% (39%), Rest of Europe 46% (43%), North America 9% (9%) and Rest of the World 10% (9%).

Operator channel in Q3

The Group’s operator (ISPs, mobile operators and cable operators) business continued to perform well. In the third quarter of 2009, the revenues through the operator business partners totaled 15.4 million (Q308: 12.3m), representing currently 49% of the Group total revenues (43%). Revenue growth was 25% compared to the previous year. Revenues from the acquired Steek SA are included in operator channel.
The Group’s position in the operator business has remained strong. The company currently has more than 200 partners in over 40 countries with an addressable market of over 55 million broadband consumer customers. The Group has not lost any of its existing partnerships, however, the number of partners may vary subject to merger activity in the operator market. New partnerships gained were mainly in Asia, including MTNL (India) and Smartone Vodafone (Hong Kong). The main growth driver is increasing the take-up rates within the customers of the Group’s existing operator partners.
 
The Group’s offering in Software as a Service model includes PC and mobile security and after the acquisition of Steek SA, also a broad range of storage based services. The Group sees that the acquisition of Steek improves the Group’s position in partnering with major operators globally. The acquisition is also expected to strengthen the Group’s portfolio of more attractive Value Added Services to be offered to consumers through operators.

The total number of the Group’s operator partners is significantly larger than that of any other security service vendor. At the end of 2008 the Group’s operator partners held approximately 39% (37%) market share of total broadband consumer connections in Europe, approximately 10% (10%) in North America and approximately 13% (9%) in APAC excluding China (Source: estimates by Dataxis and F-Secure).

Other channels in Q3

The traditional sales channels performed at the lower end of expectations. The revenues were hit in addition to shortened renewal periods by a slowdown in new license sales. This impact can also be seen in the decrease of deferred revenues. There have not been any material changes in renewal rates during the period. However, the current economic environment seems now to have more impact on these channels than before.

During Q3, the revenues through traditional channels were 15.7 million (16.3m), showing a decline of 3% from the corresponding period in 2008. These channels represented 51% of the Group’s total revenues (57%).

Mobile security in Q3

Co-operation with major handset manufacturers, including Nokia, and operators such as Vodafone Group, TeliaSonera Group, T-Mobile International, Swisscom and Elisa continued well during Q3. Currently, there are mobile operator partnerships with more than 20 operators worldwide.

The investments for mobile security products development continues. F-Secure Mobile Security product includes anti-virus and malware protection and firewall capabilities as well as an anti-theft feature with remote lock, remote wipe and theft control functionalities.
 
The revenues from the Mobile Security business are included in the above mentioned channels and were about 3% of the Group’s total quarterly revenues.

The acquisition of Steek SA

On July 10, 2009 the Group announced the acquisition of Steek SA, a leading European software provider for online storage and data management solutions to operators. Steek SA is recognized for its services that enable consumers to store, share and manage personal digital content with PCs and mobile phones.

The acquisition is according to F-Secure’s strategy to broaden Value Added Service (VAS) offerings to consumers. This further strengthens F-Secure’s position as the leading Software as a Service (SaaS) partner for operators globally. Both the acquired solutions and operator partnerships are highly complementary to F-Secure’s existing business. The combined operations are expected to extend F-Secure’s growth opportunities within the rapidly developing fixed and mobile broadband services market.

Under the terms of the agreement, the cash and debt free price was EUR 27.5m and an additional purchase price of a maximum of EUR 2.5m based on the performance of the acquired business. The financial results of Steek have been consolidated to the F-Secure’s accounts from July onwards. The purchase price allocation is based on valuation of intangible and tangible assets consisting of e.g. software technology, workforce and customer relationships. More detailed information on goodwill can be found in the financial tables below.

In the acquisition announcement in July, the management estimated that Steek would improve the Group’s operator revenues by 2-3 million and be slightly EPS dilutive during the second half of 2009. For the longer term, the management estimated the acquisition to improve the Group’s operator revenues significantly and to be EPS accretive already during 2010. Currently the management estimates Steek’s impact on Group’s revenue growth to stay around 1.5 million and EPS dilutive in the second half of 2009.

The operator project pipeline has developed favorably; while the lead times have been longer than anticipated, which is postponing revenues. Several cross selling opportunities have already materialized, thus strengthening long term growth opportunities.  The Steek integration is proceeding well and on schedule. In the long run, the management believes that the acquisition will strongly support F-Secure’s strategy to broaden Value Added Service (VAS) offerings to consumers via operators.

During Q3 the Group has signed a new contract with Orange to provide a broad range online storage related services across several countries. This contract is expected to contribute to business as of 2010 and onwards. In addition, Steek’s operator partner network includes SFR (France), Virgin Media (UK), TDC (Denmark), Singtel (Singapore) and Terra (Spain).

Products & Services

 
In September, F-Secure launched F-Secure Internet Security 2010, which is a complete security solution to protect users from threats and to enable the safe use of the Internet. According to performance tests by the independent testing organization AV-Test.org, F-Secure Internet Security 2010 has 80% less overall system impact and 60% faster virus scans than the previous version. The new product also includes a new interface design. In connection with the launch of Internet Security, F-Secure also renewed its brand commitment to "Protecting the irreplaceable", reflecting the importance that security of digital content has in people’s lives today.

In September, F-Secure and Nokia announced the extension on their collaboration to include Internet Security on computers. Nokia Booklet 3G mini-laptops have been preinstalled with F-Secure Internet Security 2010, the newest version of F-Secure’s flagship solution.  

In June, F-Secure Mobile Security and its new advanced anti-theft feature was made available for Windows Mobile phone users. The anti-theft feature includes remote lock, remote wipe and theft control functionalities.

In May, F-Secure launched Online Backup to consumer customers through the F-Secure eStore and retailers in Europe and North America. Online backup has been available through selected Internet Service Provider partners since autumn 2008. In May, F-Secure Safe, a new value added offering that combines both internet security and online backup as a new service, was launched in Germany.

In April, F-Secure launched a new version of its Protection Service for Business (PSB), which is a comprehensive Security as a Service solution specially designed for the needs of small and medium-sized companies. PSB 4.0 includes "in-the-cloud" technology to protect desktops and laptops. It also provides comprehensive protection for servers, including rootkit detection. This release also introduces high quality e-mail protection and spam control.

In February, F-Secure launched its F-Secure Mobile Security 5, which enables smartphone users to experience the full potential of their devices without fear of mobile threats. F-Secure Mobile Security includes combined real-time antivirus functionality with a firewall, antitheft and antispyware for S60 5th and 3rd Edition smartphones.

Market situation

There were no significant changes in the competitive landscape or in the pricing levels during the third quarter. However, there have been signs of increasing price competition in some countries. The Group's competitive position in the operator channel has remained strong though the slower growth in sales of fixed broadband connections by operators may have slowed down growth of the Security as a Service business. The broadband market is at the same time experiencing a shift from fixed to mobile broadband access. The combined broadband business is anticipated to continue as a healthy growth driver for Security as a Service.

Personnel and organization

The Group's personnel totaled 818 at the end of September (Q308: 710, Q209: 752). The Group’s number of personnel increased during the quarter, mainly because of the recent acquisition and personnel increase in mainly sales and marketing.
 
The Executive Team as of end of September consists of the following persons: Kimmo Alkio (President and CEO), Ari Alakiuttu (Vice President, Human Resources), Christophe Camborde (Vice President, Storage and Digital Content business unit), Samu Konttinen (Vice President, Sales and Geographical Operations), Pirkka Palomäki, (Chief Technology Officer), Antti Reijonen (Vice President, Consumer Business and Marketing) and Taneli Virtanen (Chief Financial Officer).

Financing and capital structure

The Group's financial position continued strong. The Group's equity ratio at the end of June was 70% (83%). Gearing ratio was 68% negative (125% negative).
Cash flow for the first nine months of 2009 was 30.3 million negative (4.3m positive) and 12m positive (15.2m) when excluding a paid dividend, share buy backs and the acquisition cost. The financial income for the first nine months was 0.9 million (1.3m).
The market value of the liquid assets of the Group on September 30, 2009 was 31 million (88.9m). The acquisition cost of Steek SA was paid from the Group’s liquid funds in July.  
The changes in exchange rates of JPY had some positive impact and changes in USD, GBP and SEK had some negative impact on revenues and results for the first nine month of 2009.

Capital expenditure

The Group's capital expenditure for the first nine months was 35.3 million (2.4m), consisting mainly of the acquisition cost, IT hardware and software as well as capitalization of some research and development expenses.

Capital management and repurchase of own shares

The objective of the Group’s capital management is to aim at an efficient capital structure that ensures the functioning of business operations and promotes the increase of shareholder value.
In its meeting on August 26, 2009, F-Secure's Board of Directors decided to start repurchase of its own shares based on the authorization of the Annual General Meeting of 2009. The maximum number of shares to be repurchased is 1.500.000 shares, representing 1% of all the shares issued by the Company.

The shares are purchased through public trading on the NASDAQ OMX Helsinki Ltd. in accordance with its rules and at market price. The own shares will be purchased to be used for making acquisitions or implementing other arrangements related to the Company's business, to improve the Company's financial structure, to be used as part of the incentive compensation plan or for the purpose of otherwise assigning or cancelling the shares.

Since the end of August, F-Secure has bought 172 750 shares. At the end of September, F-Secure held a total of 1 163 682 own shares including all own shares bought.

 

Shares, shareholders' equity and option programs

In September, a total of 54,625 F-Secure shares were subscribed for with the A warrants attached to the F-Secure 2005 Warrant Plan. The issue of the 2005 Warrant Plan was approved by the Annual General Meeting on March 23, 2005. In aggregate the number of shares was increased by 54,625. The corresponding increase in the share capital was registered in the Finnish Trade Register on September 2, 2009. F-Secure received as subscription price a total amount of EUR 74,290.00, which was recorded in the fund for company’s distributable equity. As a result of the registering the total number of shares is 156,825,032. The trading with the new shares will commence on September 3, 2009. The subscription period for the 2005A warrants began on March 3, 2008.

In January, a total of 3,333 F-Secure shares were subscribed for with the A3 warrants, a total of 171,340 F-Secure shares were subscribed for with the A1/A2 warrants, a total of 162,650 F-Secure shares were subscribed for with the B1/B2/B3 warrants and a total of 355,923 F-Secure shares were subscribed for with the C1/C2/C3 warrants attached to the F-Secure 2002 Warrant Plan. In aggregate, the number of shares was increased by 693,246. The Group received as a subscription price a total amount of EUR 661,219.02, which was recorded in the fund for the company’s distributable equity.

The F-Secure 2005A stock option program is listed on the NASDAQ OMX Helsinki Ltd. The total number of shares is currently 156,825,032. The corresponding number of shares diluted would be 161,207,470 including all stock option programs. The company’s registered shareholders’ equity is EUR 1.551.311,18.

Corporate Governance

The Group complies with the Corporate Governance recommendations for public listed companies published in October 2008 by the Securities Market Association, a body established by the Confederation of Finnish Industries EK, the Central Chamber of Commerce, and NASDAQ OMX Helsinki Ltd., as explained on the Group’s web pages.

Risks and uncertainties

Despite the current economic conditions, the Group has not seen material changes to the risks and uncertainties during the reporting period. However, the current situation in the global economy has impacted the traditional license business sales more than in previous quarters. This is seen as slow down in new license sales in addition to shortened renewal periods. The slower growth in sales of fixed broadband connections by operators may also have impact on security service sales. As the uncertainty in the economic environment has continued, the Group continues to monitor closely the development in the economic and financial markets.
 
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, pricing models (e.g. free services), 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 Internet Service Provider and mobile operator market.

As stated in the previous interim releases, F-Secure Inc. the U.S. subsidiary of F-Secure Corporation has been named as a defendant in a patent infringement lawsuit filed in a state court in the U.S in December 2008.

F-Secure investigates the claims and will defend itself accordingly. The Group does not expect any material impact on its financials from this lawsuit.

 

Long-term objectives

The Security software market as a total is attractive globally. The market is over $10 billion industry (Source: Gartner, 2008). Longer term security market growth is expected to be around 10% annually between 2007 and 2012 (Source: IDC).

The market opportunities for Internet security and other related services is driven by the expansion of the Internet, with its increasing number of security threats against users and the growing number of Internet broadband connections for both PC’s and mobile phones. The global Internet penetration is around 24%; in Asia it is below 20%, in Europe below 50%, and in North America over 70% (Source: Internet World Stats, U.S. Census Bureau). The growing number of smart phones which have internet browser increases the number of mobile internet users (number of smart phones 2009: 200m and 2012 more than 500m; Source: Gartner).

The Security as a Service (SaaS) business has been a strong growth driver for the Group since the year 2000. Based on the company’s pioneering role in offering Software as a Service, the Group continues to expand its offering to augment traditional security services. The Software as a Service business model continues to gain further market share in the software industry at large (Source: IDC Nov. 2008). Based on experience of the SaaS business model, the Group anticipates that both the customer benefits (e.g. lower total cost of ownership) and attractive partner business benefits (e.g. lifetime revenue share) will accelerate the adoption of the SaaS business model compared to traditional software acquisition as a product. Currently the Group offers both Security as a Service and Online Backup as a Service. The acquisition of Steek SA, a leading European software provider for online storage and data management solutions to operators, enables the Group to develop more comprehensive and innovative Value Added Services to consumers to be sold through its large operator network.

The Group’s first priority is to drive strong growth. The core growth driver is the Security as a Service (SaaS) sales through the operators. In the operator channel the Group has a strong foothold globally with over 200 operator partners. The Group’s potential customer base, i.e. partners’ market share of residential broadband at the end of 2008, was significant in Europe (39% of all European broadband subscribers) and good in Asia (13%) and in North America (10%) (Source: Dataxis and F-Secure).

The Group is focusing on increasing the penetration within the current operator base and continues to selectively seek partner expansion globally. In addition, the Group is developing its operations in other channels, such as electronic sales, to offer value-added services to consumers and other segments.

The Group’s close co-operation with major mobile phone vendors and mobile phone operators provides good opportunities to benefit from the growth of the mobile Internet. Over time, the Group anticipates synergies across the value added Services being developed and offered both for PC’s and mobile phones.

The Group’s target is to be the leader in providing security and related value added services to consumers through operators. The Group pursues investments in new value added services for both PC and mobile users to augment the existing security services. The Group continues to drive innovation also in traditional IT security, enabling the secure use of internet.
During the next three years, the Group aims to continue to exceed the average market growth rates in revenues and seeks the EBIT level to be around 25%.

Short-term outlook

Markets for Security as a Service are expected to continue to grow. During the year 2009 the Group seeks to continue to exceed average market growth. For 2009 the security market growth is anticipated to be around 8% (source: IDC).

For the fourth quarter of 2009 the management estimates total revenues to grow at single digit rate. This lower growth is driven primarily by the slowdown in the traditional license business. The Software as a Service business is expected to continue to be the growth driver. The Group continues to invest in sales and marketing activities especially with operators to drive long term consumer awareness and volumes. End-user acquisition programs are anticipated to drive short term subscriber growth and sustainable long term revenue growth.
 
F-Secure revenues for the fourth quarter of 2009 are estimated to be between 31 million and 33 million. Costs are estimated to be below 26 million including also amortization from the Steek acquisition.
The revenue estimate is based on the sales pipeline at the time of publishing, existing subscriptions and support contracts as well as current exchange rates.

News conference today at 11 am

A news conference for press and analysts will be arranged today, on October 22, at 11 am Finnish time at Group headquarters, address: Tammasaarenkatu 7 (Ruoholahti), Helsinki. A conference call for international investors and analysts will be arranged at 15.00 Finnish time (14.00 CET, 1.00 pm UK time). Instructions on how to attend the conference call are available on the investor pages of the Group's web site at http://www.f-secure.com/en_EMEA/about-us/investor-relations/.  

On November 18th 2009, F-Secure Corporation will arrange a Capital Markets Morning for analysts and capital market representatives in Helsinki.

Financial calendar for 2010

During 2010, F-Secure Corporation will publish three interim reports and a financial statements bulletin. The financial statements bulletin will be published on February 3, the interim reports on April 28 (Q1), on July 29 (Q2), and on October 27 (Q3). On the publication dates a stock exchange release will be sent at 9 am Finnish time to the NASDAQ OMX Helsinki Ltd., 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. The Annual General Meeting of 2010 is scheduled to be held on March 24, 2010 and the annual report for 2009 will be published in the beginning of March. Full details will be provided at a later date on the Group's website.

F-Secure Corporation


Additional information

F-Secure Corporation
Kimmo Alkio, President and CEO      
tel. +358 9 2520 0700

Taneli Virtanen, CFO     
tel. +358 9 2520 5655

Mervi Pohjoisaho, IR     
tel. +358 40 535 8989

Full release with table data available in PDF format: F-Secure Group January 1 - September 30, 2009 Financial Results