(Unless otherwise stated comparisons are made to the same period
one year ago.)
Q3 Highlights
- Total revenues increased by 23% to a record level of
15.7m
- Anti-virus and intrusion prevention revenues increased by 44%
to a record level of 15.2m
- Corporate business increased by 16% to 8.5m
- Service provider business increased by 98% to 4.4m
- Consumer business increased by 131% to 2.3m
- EBIT 3m (2.7m)
- Deferred revenues decreased by 0.4m to 19.9m
- Cash flow 4.2m positive
Business at the Group level in the first nine months
Steady and profitable growth continued across all business
segments in anti-virus and intrusion prevention. For the first nine
months of 2005 total revenues were 43.7m (34.7m), representing 26%
growth. EBIT was 5.3m (4.9m). Cash flow was 9.7m positive (7.1m)
and deferred revenues were 19.9m at the end of September
(16.1m).
The geographical breakdown of the business was as follows:
Nordic Countries 35% (34%), Rest of Europe 44% (47%), North America
11% (10%) and Rest of the World 10% (9%). Anti-virus and intrusion
prevention represented 95% of the business (85%), encryption 4%
(14%) and other products and services less than 1% (1%).
During the first nine months of 2005 anti-virus and intrusion
prevention business grew by 44%. The gradual exit from the
encryption business continued steadily and encryption revenues
declined by 65%. In anti-virus and intrusion prevention growth was
good overall, but particularly strong in the ISP and consumer
segments.
The development is fully in line with the Group’s communicated
strategy to strengthen its position in the key European markets and
to focus on the anti-virus and intrusion prevention business The
Group has also been successful in anti-virus and intrusion business
in North America where the growth has been very strong during 2005
especially in ISP segment.
The total fixed costs during the first nine months of 2005 were
35.3m (27.6m), representing 28% growth. The Group now capitalizes
some of its development expenses according to the IFRS rules. This
decreases costs by approximately 0.5m. The proportional growth of
costs has been a bit faster than the growth of revenues that
reflects the Group’s strategy to prioritize growth over
profitability for the short term and invest into achieving a strong
sustainable position in the fast growing security service
provisioning market. The cost increase was due to new product
development and the increase in sales resources in the field.
Third quarter cost levels are normally well below an average
quarter’s cost level due to reduced business activity during the
summer holidays and 3Q2005 was no exception when the costs were
11.7m, down 0.4m from 2Q05.
According to the latest survey customer satisfaction has
stabilized at good levels (overall satisfaction 4.26; 2004: 4.29 on
a scale of 1 to 5). Continuous following of customer satisfaction
is one of the Group’s core values.
Business in different segments in Q3
In the third quarter of 2005, corporate customer revenues
through resellers and IT services companies were 8.5m (7.3m),
representing 56% of the anti-virus and intrusion prevention
business. Competitive solutions, a strong focus on support and a
renewed partner program have all contributed to the growth in this
segment. Annual growth in this segment was 16%. Business on the
Linux platform represented ca. 15% of the overall corporate
business.
Growth in the corporate reseller channel remained above market
average. New reseller recruitment and continuous work with the
existing ones are equally important ongoing activities necessary to
maintain the momentum.
Revenues through the service provider channel were 4.4m (2.2m),
representing 29% of the anti-virus and intrusion prevention
business. Annual growth in this segment was 98 %.
Consumer revenues were 2.3m (1m), representing 15% of the
anti-virus and intrusion prevention business. Revenue growth rate
continued strong, 131% from previous year. Sales were boosted by a
large number of new retail and reseller partners, positive press
visibility through review wins, increased web sales and the release
of new products alongside with the “All in One” marketing campaign.
Germany continued to be a particularity strong geographical area in
this segment in Q3, while there were positive signs of consumer
channel development in the US.
Mobile security revenues represented less than 1% of the
anti-virus and intrusion prevention business. The interest in the
Group’s solutions among phone vendors, mobile operators and
corporate customers remained at a high level. The Group continued
to receive numerous RFPs/RFIs (Requests for Proposal or
Information) from operators in this area.
Antivirus and intrusion prevention market and competitive
situation
In the Consumer segment, the growth is driven by an increasing
number of high-speed Internet connections and continuously growing
threat awareness. Based on various market analyses, the Group
estimates the overall market growth in this segment to be 25-30%
annually until 2008.
In the Small and Medium Business segment annual market growth is
expected to be 10-15% until 2008. The large Enterprise segment is
over 95% satisfactorily protected and new business comes mostly
from replacements, either from switching vendors or buying security
as a service. As corporate software purchasing patterns evolve
towards a service model, the latter is expected to become a
significant new market opportunity for the Group in the coming
years.
Competitive situation in the anti-virus and intrusion prevention
business has remained unaltered and price levels have remained
relatively stable. Some competitors have even been raising their
prices moderately. However, in some countries there have been signs
of increasing price competition. The Group has successfully flanked
these attacks through offering a premium product with richer
functionality.
Microsoft’s Onecare “PC health service” looks likely to become a
competing antivirus solution in the consumer segment later on as
the concept matures. The Group believes that there continues to be
an ever growing demand for more comprehensive security solutions,
including anti-spyware and parental control, from independent third
parties. Also, there is a growing number of service providers with
more ambitious “all in one” service aims. Staying one step ahead
both in product feature richness and service channel development is
the cornerstone of the Group’s competitive positioning.
Security as a Service
The Group has launched various F-Secure Service Platforms™ that
take into account the different business models and needs that the
different types of service providers have. There are five different
platforms for Enterprises, Businesses, Consumers, Gateways and
Mobile Phones. These platforms cater for the needs and provide new
business opportunities for the Security Service Provider, the
business-focused Internet or IT service provider, the
consumer-focused ISP and the mobile operator.
During Q3 the Group launched 13 ISP partnerships.
The number of ISP partners is currently 74. The Group is clearly
the leading vendor in Europe in this category. The ISP channel
represents an easy way to buy anti-virus and intrusion prevention
for consumer customers.
Deutsche Telekom’s (DT) is restructuring and consolidating its
operations which may lead to changes in their vendor relations and
may impact F-Secure revenues from DT during the first half of
2006.
The Group has progressed well in creating solutions to provide
Security as a Service for the SMB and Enterprise segments. In these
segments, the partners are facilities management and outsourcing
companies and various types of service providers. During Q3, the
Group has signed more partnerships with these types of
companies.
Mobile security
The Group's ambitions lie in capturing a large market share in
the operator market. The current track record of being the chosen
partner in more than half of the announced deals globally in this
domain has been further amplified by a large number of ongoing
RFP/RFI processes with operators.
The Group's mobile security is preinstalled with two
TeliaSonera's phone models and with one T-Mobile's phone model.
The key vendor partner is Nokia. The Group’s current
relationship enables Nokia to preinstall F-Secure solutions in
Symbian based devices. Nokia has shipped multiple models over the
last 12 months with F-Secure software. In addition, the corporate
and consumer channels are already selling the Group’s anti-virus
solutions for mobile and handheld devices.
Product Leadership
For consumers, the key product announcements in Q3 were F-Secure
Anti-Virus 2006 and F-Secure Internet Security 2006 that is
comprehensive, “all in one” security solution. It includes
antivirus, integrated antispyware, rootkit detection, a personal
firewall, spam filtering and parental control.
For corporate customers the Group released the F-Secure
Messaging Security Gateway™, a security solution for e-mail
combining an enterprise-class messaging platform with perimeter
security, antispam, antivirus, secure messaging and outbound
content security capabilities in an easy-to-deploy appliance.
The leading US IT magazine Infoworld tested various antispyware
products in its September 19 issue. F-Secure Client Security 6.0
was the only product ranked “excellent” with the highest points by
a wide margin.
SRV Viitoset Oy
In September, by the decision of Helsinki District Court,
F-Secure was sentenced to pay the amount of EUR 793,230.53 and
litigation costs plus interest to SRV Viitoset Oy for the
additional construction and refurbishment work at the Group’s
headquarter premises.
F-Secure considers the work was already covered by the original
rental agreement and is appealing to change the verdict.
Even though the process is still open F-Secure has decided to
start accruing the costs. In Q3, this impacts on financial costs
where the accrual is ca 250k. Construction costs are periodized for
the duration of the rental period until the year 2010 starting
September 2005.
Personnel and Organization
The Group's personnel numbered 374 at the end of Q3 (295).
The Group’s Executive Team consists of the following persons:
Risto Siilasmaa (President and CEO), Pekka Kuusela (Executive Vice
President, Sales and Marketing), Pirkka Palomäki (Executive Vice
President, Research and Development), Aki Mänttäri (Director, Human
Resources) and Taneli Virtanen (Chief Financial Officer).
Financing
The Group’s financial position remained strong throughout the
year. The Group’s equity ratio on September 30, 2005, was 84%
(77%). Financial income for the first nine months was 0.7m (0.8m)
including SRV accrual for interest.
During 2005 cash flow was 9.7m positive (7.1m). The market value
of the liquid assets of the Group was 60.4m on September 30, 2005
(47.1m).
The change in the USD-EUR exchange rate has had a negative
effect on both revenues and results.
Capital Expenditures
The Group’s capital expenditures for the first nine months were
1.7m (0.9m). These consisted mainly of IT hardware, software and
capitalization of development expenses.
Shares, Shareholders' Equity, and Option Programs
In Q3, A total of 467,323 F Secure shares were subscribed for
with the 1999D, 2001B, 2001C, 2001D, 2002A and with 2002B warrants
attached to the F Secure 1999 II Warrant Plan. A total of 56,047
F-Secure shares were subscribed for with the 2001B, 2001D, 2002A,
and with 2002B warrants attached to the F-Secure 1999 III Warrant
Plan. A total of 12,300 F-Secure shares were subscribed for with
the A1/A2 warrants attached to the F-Secure 2002 Warrant Plan.
These were registered in the Finnish Trade Register on August 17,
2005.
After the reporting period a total of 205,462 F Secure shares
were subscribed for with 1999B, 1999C and with 1999D warrants
attached to the F-Secure 1999 I Warrant Plan. A total of 1,072,862
F Secure shares were subscribed for with the 1999D, 2001B, 2001C,
2001D, 2002A, 2002B and with 2002C warrants attached to the F-
Secure 1999 II Warrant Plan. A total of 156,466 F-Secure shares
were subscribed for with 1999D, 2001B, 2001D, 2002A, and with 2002B
warrants attached to the F-Secure 1999 III Warrant Plan. A total of
13,650 F-Secure shares were subscribed for with A1/A2 warrants
attached to the F-Secure 2002 Warrant Plan. These were registered
in the Finnish Trade Register on October 7, 2005.
As a result of the increases, the share capital of F-Secure
currently is EUR 1,539,060.12 and the total number of shares is
153,906,012.
IFRS Reporting
F-Secure publishes interim reports and annual financial
statement in accordance with the IFRS standards for 2005. The group
has published on February 15, 2005 its IFRS impacts and comparison
data for 2004.
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 company’s web
pages.
Future Outlook
The Group’s key goal is to continue to grow its anti-virus and
intrusion prevention business significantly faster than the
industry. The recent estimates for market growth vary between
10-15% in the corporate segment and between 25-30% in the consumer
segment.
This growth will be pursued through systematically growing
various channels in the key European markets and an increasingly
comprehensive product offering. The Group also sees tangible
business opportunities in North America and Asia.
The breakthrough for Security as a Service (SaaS), both with
consumer and corporate end customers, is expected to continue.
Partnership recruitment will continue vigorously in all service
platform segments and the Group is well positioned to benefit from
the development of Security as a Service trend with a
comprehensive, leading product offering and an ever-stronger
position with service providers in Europe, North America and
Asia.
The visibility in mobile security business is improving
constantly through increased operator and corporate customer
awareness in mobile security issues and increased vendor interest.
The Group expects to see the number of mobile malware outbreaks
continue growing steadily. This will further underline the value of
an up-to-date security solution for smartphone and PDA users and
will gradually escalate the uptake of mobile security
solutions.
The Group’s highly competitive consumer offering is expected to
keep the revenue growth for this market segment at a high
level.
During the course of 2005 the encryption business is expected to
continue to decline as the group is gradually completing its exit
from the business.
The management estimates 4Q05 total revenues to be around 17m,
with an error margin of +-10%. The estimate is based on the sales
pipeline at the time of publishing, existing subscriptions and
support contracts, previous experience on purchasing patterns and a
EUR/USD exchange rate of 1.25.
Based on its strategy to prioritize growth over short term
profitability, the Group is investing in new sales and marketing
activities as well as in major new development efforts and new
projects expanding the Group’s offering to service providers and
facilities management companies. The actual cost level due to made
recruitments is still increasing though the pace should be slowing
down. Costs are estimated to be around 13.5m in Q4.
This interim report is prepared in accordance with IFRS
standards. The change in accounting standards has been reported on
15th February 2005.
Key figures (unaudited):
Euro million
INCOME STATEMENT 2005 2004 2005 2004 Chge 2004
7-9 7-9 1-9 1-9 % 1-12
Revenues 15.7 12.8 43.7 34.7 26 47.3
Cost of revenues 1.2 1.0 3.8 2.8 39 3.7
Gross margin 14.5 11.8 39.9 32.0 25 43.5
Other operating income 0.2 0.2 0.7 0.6 5 0.9
Sales and marketing 7.4 5.9 22.5 18.0 25 24.6
Research and development 3.7 2.7 10.5 7.7 35 10.7
Administration 0.6 0.6 2.3 1.9 21 2.7
Operating result 3.0 2.7 5.3 4.9 7 6.5
Financial net -0.1 0.3 0.7 0.8 1.2
Result before taxes 2.9 3.0 6.0 5.7 7.7
Income taxes -0.8 -1.0 -1.4 -1.2 5.8
Result for the period 2.2 2.0 4.6 4.6 13.5
Earnings per share, e 0.03 0.03 0.09
EPS, diluted, e 0.03 0.03 0.09
BALANCE SHEET
ASSETS 30/9/2005 30/9/2004 31/12/2004
Non-current
Intangible assets 3.6 0.8 2.4
Tangible assets 2.0 1.6 1.7
Other financial assets 5.6 0.6 6.6
Current
Other receivables 12.4 11.7 11.2
Available-for-sale
financial assets 52.5 41.9 42.4
Cash and bank accounts 8.0 5.3 7.8
Total 84.2 61.8 72.1
SHAREHOLDERS' EQUITY
AND LIABILITIES 30/9/2005 30/9/2004 31/12/2004
Equity 54.1 35.3 45.2
Non-current liabilities
Other non-current 1.5 0.3 0.4
Deferred revenues 3.0 2.3 2.7
Current liabilities
Other current 8.7 10.2 8.1
Deferred revenues 16.9 13.8 15.7
Total 84.2 61.8 72.1
Cash flow statement 30/9/2005 30/9/2004 31/12/2004
Cash flow from operations 8.0 7.7 11.7
Cash flow from investments -1.7 -0.8 -2.8
Cash flow from financing
activities 3.4 0.3 1.0
Change in cash 9.7 7.1 9.9
Cash and bank at 1 Jan 50.2 39.7 39.6
Change in net fair value of
Available-for-sale 0.5 0.3 0.6
Cash and bank at 30 Sep 60.4 47.1 50.1
Statement of changes in shareholders’ equity
share
share premium transl. reval. retained
capital fund diff. reserve earnings total
Equity on
31.12.2004 1.5 28.6 0.0 0.5 14.7 45.2
Available-for-sale
financial asset, net 0.4 0.4
Translation diff. 0.0 0.0
Cost of share
based payments 0.4 0.4
Profit 4.6 4.6
Exercise of options 0.0 3.4 3.5
Equity on
30.9.2005 1.5 32.0 0.0 0.9 19.7 54.1
Key ratios 2005 2004 2004
9 m 9 m 12 m
Operating result,
% of revenues 12.1 14.2 13.8
ROI, % 17.2 24.0 21.3
ROE, % 12.3 18.6 35.9
Equity ratio, % 84.1 77.1 84.2
Debt-to-equity ratio, % -111.6 -133.6 -110.7
Earnings per share (EUR) 0.03 0.03 0.09
Earnings per share diluted 0.03 0.03 0.09
Shareholders' equity
per share, e 0.35 0.24 0.30
P/E ratio 45.0 39.8 19.8
Capitalized expenditures (Me) 1.7 0.9 2.9
Contingent liabilities (Me) 12.9 15.2 14.6
Personnel, average 345 287 291
Personnel, Sep 30 374 295 306
Segment information
The Group has only one primary segment, data security.
Quarterly development
1/04 2/04 3/04 4/04 1/05 2/05 3/05
Revenues 10.4 11.6 12.8 12.6 13.3 14.7 15.7
Cost of revenues 0.8 1.0 1.0 1.0 1.3 1.3 1.2
Gross margin 9.6 10.6 11.8 11.6 12.0 13.4 14.5
Other operating income 0.2 0.2 0.2 0.3 0.2 0.3 0.2
Sales and marketing 6.0 6.0 5.9 6.6 7.4 7.7 7.4
Research and
development 2.4 2.6 2.7 3.0 3.2 3.6 3.7
Administration 0.7 0.6 0.6 0.8 0.8 0.8 0.6
Operating result 0.7 1.5 2.7 1.6 0.8 1.5 3.0
Financial net 0.4 0.1 0.3 0.4 0.5 0.3 -0.1
Result before taxes 1.0 1.7 3.0 2.0 1.2 1.8 2.9
Financial Reporting
A press and analyst conference will be arranged today, October
25, 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 14.00 Finnish time (1300
CET, 12.00 UK time). Instructions can be found on our Investor
pages.
The Q4 and full year 2005 financial report will be published on
February 14, 2006, and the Annual Report on March 15. Annual
General Meeting will be held on March 22.
Quarterly reports for 2006 will be published on April 27 (Q1),
August 1 (Q2) and October 24(Q3). A Stock Exchange bulletin will be
sent at 9 am 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
Additional information:
F-Secure Corporation
Risto Siilasmaa, President and CEO
tel.358 9 2520 5510
Taneli Virtanen, CFO
tel.358 9 2520 5655
