(Unless otherwise stated comparisons are made to the same period
one year ago.)
Q2 Highlights
- Total revenue increased by 35% to a record level of
19.8m
- Corporate business increased by 16% to 9.1m
- Service provider business increased by 67% to 6.2m
- Consumer business increased by 63% to 3.6m
- Other revenues 0.8m
- EBIT increased by 88% to 2.8m (1.5m); 14% of revenues
- Deferred revenues increased by 0.2m to 25.3m during Q2
Business at the Group level
Steady and profitable growth continued across all business
segments in anti-virus and intrusion prevention. For the first six
months of 2006 total revenues were 38.6m (28.1m), representing 38%
growth. EBIT was 5.8m (2.3m), representing 153% growth. Cash flow
was 4.5m negative due to paid dividends of 10.8m (5.5m positive)
and deferred revenues were 25.3m at the end of June (20.3m).
The strong development in Security as a Service, especially
establishing a strong foothold in Asia, continued during the first
six months of 2006. Mobile security showed steadily increasing
sales traction.
The total fixed costs were 29.8m (23.6m), representing 27%
growth. The Group’s short-term strategy continues to be to
prioritize growth over profitability. Above all, investments into
achieving a strong sustainable position in the fast growing
security service market are seen as vital for the Group’s future
growth.
The Q2 costs were slightly greater than expected. This was
mainly due to strong sales (revenues were in the upper end of the
guidance range), successful recruitments during the period (44 new
employees) and the write-off of some development costs based on
impairment rules. The write-off increased costs by approximately
0.2m. The Group capitalizes some of its development expenses
according to the accounting rules. This decreases costs by
approximately 0.3m.
The geographical breakdown of the business was as follows:
Nordic Countries 37% (36%), Rest of Europe 43% (44%), North America
11% (11%) and Rest of the World 9% (9%). Anti-virus and intrusion
prevention represented 97% of the total revenues.
According to the latest global survey made in the autumn of 2005
customer satisfaction has remained at strong levels. Overall
satisfaction was 4.27 (4.30) on a scale of 1 to 5. Relentless focus
on customer satisfaction is one of the Group’s core philosophies.
Our target remains to reach 4.50 in customer satisfaction.
Business in different segments in Q2
In the second quarter of 2006, revenues in the corporate
customer segment through resellers and IT services companies were
9.1m (7.9m), representing 48% of the anti-virus and intrusion
prevention business and growth of 16% from the previous year.
Competitive solutions, a strong focus on partners and support
continued to contribute to the growth in this segment.
Revenues through the service provider channel were 6.2m (3.7m),
representing 32% of the anti-virus and intrusion prevention
business and growth of 67% from the previous year. Service-like
security is the prime F-Secure way to deliver value to its
customers. The revenue growth in this segment in Q2 was slightly
slower than expected. This was due to declining revenues from
T-Com, promotional campaigns made by some major service provider
partners and some key ISP partners reaching high market penetration
levels. Service provider partners can be categorized in two
groups based on size, growth and duration of partnership. The first
group consists of long term partners whose revenues are growing but
the growth rate is declining due to higher market penetration
levels. The second group consists of newly signed partners that are
growing fast but starting from small revenues. At the moment, the
second group, although growing fast, represents a relatively small
absolute portion of our overall revenues and, consequently, do not
offset the decline in growth from the first category.
Consumer revenues were 3.6m (2.2m), representing 19% of the
anti-virus and intrusion prevention business and growth of 63% from
the previous year. Comprehensive products and solutions along with
continuing successes in pc integrator recruitment and online sales
were key contributors to growth. The Group is investigating new
types of channels to consumer market. A promising category is
online banking where the group announced a partnership with
Barclays Bank.
Mobile security revenues represented 1% of the anti-virus and
intrusion prevention business. The interest in the Group’s
solutions among phone vendors, mobile operators and corporate
customers was at a high level. F-Secure Mobile Anti-Virus showed an
increase in consumer and corporate channel sales.
Competitive situation
Competitive situation in the anti-virus and intrusion prevention
business has remained unaltered and price levels have remained
relatively stable. However, there have been signs of price
competition in some countries, especially in the consumer segment.
The Group’s outstanding support and high customer satisfaction have
helped the group maintain a high level of competitiveness.
Security as a Service
The Group sees that there is an ongoing, fundamental change in
customers’ buying behaviour. Consumers and businesses will prefer
to purchase security as a subscription service to all other
alternatives. The Group has been a leader in supporting this change
with a dedicated Service Platform offering for different target
audiences: Enterprises, Businesses, Consumers, Gateways, Mobile
Phones and Operator Networks.
The total number of ISP partners has exceeded 100 and is
currently 111 in 29 countries. The Group is clearly the global
market leader in providing Security as a Service solutions through
ISPs. The Group’s strength in the ISP market is clear:
leading market share globally, excellent partner retention track
record and fastest speed of signing new partners. F-Secure’s market
share in the combined North-American and European broadband ISP
markets based on number of subscribers is approximately 25% and
approximately 36% in Europe (source: Dataxis and F-Secure).
In Q2 the Group launched several partnerships (Service Platform
for Consumers), e.g. Reliance Communications (India), Exattnet
(India), Gamania (Taiwan), UPC (several European countries) and
Liwest (Austria). The Group has succesfully expanded its offering
for the SMB segment (Service Platform for Businesses) with current
partenrs like TeliaSonera (Finland) and Bredsbandbolaget
(Sweden).
Mobile security
The Group’s long-term pioneering investment to provide solutions
for mobile security continued to yield results.
The sales of F-Secure Mobile Anti-Virus increased during the
quarter signaling increased end user awareness of security
threats.
In Q2 the Group announced partnership with ONE (Austria) to
offer antivirus service from ONE’s mobile portal and with Mobitel
(Slovenia).
The German magazine c’t announced F-Secure as the clear winner
over five other mobile data security products. The tests were
conducted by AV-Test.org, an independent company specializing in
testing antivirus and security products.
At the end of Q2, the group also signed an agreement with
Orange to provide a mobile antivirus service to Orange smartphone
users. At first, the service will be available through Orange UK in
Q3.
F-Secure continued close cooperation with Nokia. F-Secure
Mobile Anti-Virus was launched also for the new S60 3rd edition,
making it the first antivirus software for this platform. F-Secure
Mobile Anti-Virus will be easily available for majority of the
currently shipping or upcoming Nokia S60 3rd edition devices,
including: N71, N73, N80, N92, N93, E50, E60, E61 and E70.
Products & Services
During Q2 there were some minor releases like Japanese F-Secure
Internet Security 2006 and F-Secure Internet Gatekeeper for
Windows. The next major launches are scheduled for Q3.
The Group has set up a support center in Malaysia as one key
entity in the Group’s global 24/7 support organization for its
customers and partners.
Personnel and Organization
The Group's personnel numbered 454 at the end of the quarter
(366). The Group has successfully managed to employ new resources
in sales, R&D and support functions.
The Group’s Executive Team consists of the following persons:
Pekka Kuusela (Executive Vice President, Sales and Marketing), Aki
Mänttäri (Director, Human Resources), Pirkka Palomäki (Executive
Vice President, Research and Development), Risto Siilasmaa
(President and CEO), Taneli Virtanen (Chief Financial Officer) and
Travis Witteveen (Senior Vice President, Products &
Services).
Financing
The Group’s financial position remained strong. The Group’s
equity ratio on June 30, 2006, was 80% (84%). Financial income for
first six months was 0.3m (0.8m).
During first six months cash flow was 4.5m negative (5.5m
positive). This is due to paid dividends of 10.8m in April. The
market value of the liquid assets of the Group was on June 30, 2006
56.9m (56m).
The change in the USD-EUR exchange has not had material effect
on revenues and results.
Capital Expenditures
The Group’s capital expenditures for the first six months were
2.2m (1.3m). These consisted mainly of IT hardware, software and
capitalization of development expenses.
Shares, Shareholders' Equity, and Option Programs
In Q2, A total of 69,800 F-Secure shares were subscribed for
with the A1/A2 warrants and a total of 39,550 F-Secure shares were
subscribed for with the B1/B2 warrants attached to the F-Secure
2002 Warrant Plan.
In aggregate the number of shares was increased by 109,350. The
corresponding increase in the share capital, in total EUR 1093.50
was registered in the Finnish Trade Register during Q2. F-Secure
received as additional shareholders' equity a total of EUR
77,475.
As a result of the increases, the share capital of F-Secure
currently is EUR 1,548,815.68 and the total number of shares is
154,881,568. 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 company’s web
pages.
Future Outlook
The Group’s three key goals in 2006 are:
- To continue to grow the anti-virus and intrusion prevention
business significantly faster than the industry. The recent
estimates (gathered by F-Secure from various industry analysts)
for market growth vary between 10-15% in the corporate segment
and between 25-30% in the consumer segment.
- To continue capitalizing on the Group’s industry leadership
in Security as a Service, both with consumer and corporate end
customers.
The prime vehicle for the Group’s future growth is Security
as a Service. This growth will also be pursued through
systematically growing various channels in the key European
markets, an increasingly comprehensive product offering,
impeccable service and a carefully increased geographical scope.
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. F-Secure Network Control will present new opportunities in
this segment.
- To further develop Group’s position in mobile security, and,
as the market matures, start turning the leadership into
revenues.
The visibility in mobile security business is improving
constantly through increased operator and corporate customer
awareness in mobile security issues. 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 handheld multimedia terminals and will gradually
escalate the uptake of mobile security solutions.
The management estimates the strong growth in anti-virus and
intrusion prevention to continue, especially in Security as a
Service businesses. 2006 total revenues are expected to be around
85m, with an error margin of +-10%.
Based on its strategy to prioritize growth over short term
profitability, the Group continues to invest 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 management is
aiming at an EBIT slightly below 20% in 2006. The latter half
of 2006 is expected to be stronger than the first half.
The estimation for Q306 revenues are 19-21m. The estimate is
based on the sales pipeline at the time of publishing, existing
subscriptions and support contracts and a EUR/USD exchange rate of
1.25. The quarter-over-quarter growth of the ISP business is
expected to remain weak in the seasonally challenging third quarter
and improve again for the fourth quarter.
The actual cost level due to recent recruitments is still
increasing. However, due to seasonality cost level is traditionally
lower during summer time. Fixed costs are estimated to be below 16m
in Q3.
This interim report is prepared in accordance with IAS 34
standards.
Key figures (unaudited):
Euro million
INCOME STATEMENT 2006 2005 2006 2005 Chge 2005
4-6 4-6 1-6 1-6 % 1-12
Revenues 19.8 14.7 38.6 28.1 38 61.8
Cost of revenues 1.6 1.3 3.4 2.7 27 5.9
Gross margin 18.2 13.4 35.2 25.4 39 55.9
Other operating income 0.2 0.3 0.4 0.5 -18 0.8
Sales and marketing 10.3 7.7 19.8 15.1 31 31.6
Research and development 4.3 3.6 8.0 6.8 18 14.7
Administration 0.9 0.8 1.9 1.7 17 3.1
Operating result 2.8 1.5 5.8 2.3 153 7.4
Financial net 0.1 0.3 0.3 0.8 1.9
Result before taxes 2.9 1.8 6.1 3.0 9.3
Income taxes -0.8 -0.4 -1.7 -0.6 -2.7
Result for the period 2.1 1.4 4.5 2.4 6.6
Earnings per share, e 0.03 0.02 0.04
EPS, diluted, e 0.03 0.02 0.04
BALANCE SHEET
ASSETS 30/6/2006 30/6/2005 31/12/2005
Intangible assets 9.6 2.7 8.9
Tangible assets 3.2 2.1 3.0
Other financial assets 3.2 6.2 4.3
Non-current assets total 16.1 11.0 16.2
Inventories 0.2 0.0 0.1
Other receivables 15.9 12.1 15.8
Available-for-sale
financial assets 48.7 52.2 53.5
Cash and bank accounts 8.3 4.0 8.5
Current asset total 73,1 68.3 77.8
Total 89.2 79.3 94.0
SHAREHOLDERS' EQUITY
AND LIABILITIES 30/6/2006 30/6/2005 31/12/2005
Equity 50.9 49.7 57.1
Other non-current 1.2 0.4 1.3
Provisions 1.1 0.1 1.1
Deferred revenues 4.1 3.1 3.8
Non-current liabilities total 6.4 3.5 6.2
Other current 10.6 8.9 11.3
Deferred revenues 21.3 17.2 19.4
Current liabilities total 31.9 26.1 30.7
Total 89.2 79.3 94.0
Cash flow statement 30/6/2006 30/6/2005 31/12/2005
Cash flow from operations 8.4 5.4 14.4
Cash flow from investments -2.1 -1.3 -5.8
Cash flow from financing
activities -10.8 1.5 3.5
Change in cash -4.5 5.5 12.1
Cash and bank at 1 Jan 61.8 50.2 50.2
Change in net fair value of
Available-for-sale -0.4 0.4 -0.4
Cash and bank at 30 Jun 56.9 56.0 61.8
Statement of changes in shareholders’ equity
share
share premium transl. reval. retained
capital fund diff. reserve earnings total
Equity on
31.12.2005 1.5 33.5 0.0 0.2 21.8 57.1
Available-for-sale
financial asset, net -0.3 -0.3
Translation diff. 0.0 0.0
Cost of share
based payments 0.3 0.3
Profit 4.5 4.5
Dividend -10.8 -10.8
Exercise of options 0.0 0.1 0.1
Equity on
30.6.2006 1.5 33.6 0.0 0.0 15.7 50.9
Key ratios 2006 2005 2005
6 m 6 m 12 m
Operating result,
% of revenues 15.0 8.2 11.9
ROI, % 23.6 13.5 19.0
ROE, % 16.5 10.1 12.9
Equity ratio, % 79.7 84.2 80.6
Debt-to-equity ratio, % -111.9 -112.7 -108.2
Earnings per share (EUR) 0.03 0.02 0.04
Earnings per share diluted 0.03 0.02 0.04
Shareholders' equity
per share, e 0.33 0.33 0.37
P/E ratio 44.9 58.9 46.9
Capitalized expenditures (Me) 2.2 1.3 8.3
Contingent liabilities (Me) 11.8 13.4 12.7
Personnel, average 418 336 354
Personnel, Jun 30 454 366 390
Segment information
The Group has only one primary segment; data security.
Quarterly development
1/05 2/05 3/05 4/05 1/06 2/06
Revenues 13.3 14.7 15.7 18.1 18.8 19.8
Cost of revenues 1.3 1.3 1.2 2.1 1.7 1.6
Gross margin 12.0 13.4 14.5 16.0 17.0 18.2
Other operating income 0.2 0.3 0.2 0.2 0.2 0.2
Sales and marketing 7.4 7.7 7.4 9.1 9.6 10.3
Research and
development 3.2 3.6 3.7 4.2 3.7 4.3
Administration 0.8 0.8 0.6 0.8 1.0 0.9
Operating result 0.8 1.5 3.0 2.1 2.9 2.8
Financial net 0.5 0.3 -0.1 1.2 0.2 0.1
Result before taxes 1.2 1.8 2.9 3.3 3.2 2.9
Financial Reporting
A press and analyst conference will be arranged today, August 1,
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 1530 Finnish time (1430 CET, 1.30 pm
UK time). Instructions can be found on the
Investor
Relations section.
Quarterly report for Q3 2006 will be published on 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
