Accelerating Service Provider revenue growth towards the end of
the year
(Unless otherwise stated comparisons are made to the same
period one year ago.)
Q4 Highlights
- Total revenue increased by 22 % to a record level of
22.1m
- Service provider business increased by 39 % to 7.3m;
quarter-over-quarter growth 10 %
- Keeping leading market position in ISP business; partners’
share of the consumer broadband market 34 % in Europe, 10 % in
North-America
- Corporate business increased by 7 % to 9.5m
- Consumer business increased by 37 % to 4.4m
- Other revenues 0.9m
- EBIT 0.7m negative (2.1m); without impairment loss of 4.8m
from Network Control EBIT was 4.1m (2.1m), 19 % of revenues.
- Deferred revenues increased by 2.8m to 27.6m during Q4
- Cash flow was 5.4m positive
- New CEO into office
2006 Highlights
- Total revenue increased by 31 % to a record level of
80.7m
- Service provider business increased by 57 % to 26m
- 51 new service provider (ISP) partners
- Corporate business increased by 13 % to 36.7m
- Consumer business increased by 59 % to 15.2m
- EBIT 8.9m (7.4m); without impairment loss of 4.8m from
Network Control EBIT was 13.7m, 17 % of revenues
- Deferred revenues increased by 4.4m to 27.6m during 2006
- Cash flow was 5.4m positive; a dividend of 10.8m was paid in
April
- Strengthening operations in Asia Pacific through Malaysia
office
Business in 2006 at the Group level
Steady and profitable growth continued across all business
segments in anti-virus and intrusion prevention. In 2006 total
revenues were 80.7m (61.8m), representing 31 % growth. EBIT was
8.9m (7.4m), representing 20 % growth. Without the impairment loss
of 4.8m from Network Control EBIT was 13.7m (7.4m). Cash flow was
5.4m positive including paid dividend of 10.8m in April (12.1m with
no dividend). Deferred revenues were 27.6m at the end of the year
(23.2m).
The strong development in Service Provider business continued
and a total of 51 new ISP partnerships were signed. Mobile security
showed steadily increasing interest and continuously growing but
still modest sales traction.
The total fixed costs were 65.2m (49.4m) including the
impairment loss of 4.8m from Network Control, representing 32%
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 Group capitalizes some of its development expenses according
to the accounting rules. This decreases costs by approximately
0.9m.
The geographical breakdown of the business was as follows:
Nordic Countries 37 % (36 %), Rest of Europe 44 % (45 %), North
America 10 % (10 %) and Rest of the World 9 % (9 %). Anti-virus and
intrusion prevention represented 98 % of the total revenues.
According to the latest 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 one of the Group’s core values.
Business in different segments in Q4
In the fourth quarter of 2006, revenues through the service
provider channel were 7.3m (5.3m), representing 35 % of the
anti-virus and intrusion prevention business and a growth of 39 %
from the previous year. The quarter-over-quarter revenue growth
improved to 10 % (6 % in Q3).
Revenues in the corporate customer segment through resellers and
IT services companies were 9.5m (8.9m), representing 44 % of the
anti-virus and intrusion prevention business and a growth of 7 %
from the previous year. New license sales continued weaker than
expected, while renewals of old licenses exceeded expectations.
Consumer revenues were 4.4m (3.2m), representing 20 % of the
anti-virus and intrusion prevention business and growth of 37 %
from the previous year. Comprehensive products and solutions along
with continuing successes in online sales were key contributors to
growth.
Mobile security revenues represented approximately 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. F-Secure Mobile
Anti-Virus showed an increase in both consumer and corporate
channel sales in the Nordic market.
Competitive situation
Competitive situation in the anti-virus and intrusion prevention
business has remained mostly unaltered and price levels have
remained relatively stable. Competitiveness of the Group’s service
provider solutions has remained very high.
The consumer market has seen new entrants, who follow
traditional retail license sales models. The entrants have not had
a material effect to the Group’s competitive position. However,
there have been signs of price competition in individual countries,
especially during competitors’ product launches. In the consumer
market it has become increasingly common to offer three licenses as
a basic “family pack” offering for a discounted price.
Based on analyst estimates, Microsoft, with its OneCare
security product, is expected to become an active player during
2007 especially in the traditional consumer market.
The Group will provide its security solutions on Microsoft’s new
Vista operating system. F-Secure was one of the first three
anti-virus vendors whose product beta for Vista could be downloaded
from Microsoft’s web site.
Security as a Service
The Group’s Security as a Service offering has been very
successful with Internet Service Provider (ISP) partners serving
the consumer and small businesses market. In the corporate segment
the Security as a Service model is still at an early stage of
development.
The total number of ISP partners was 136 operating in 34
countries at the end of the year, an increase of 11 partners from
Q3. In addition, the Group has some tens of corporate security
service provider partners and mobile operator partners.
As stated in Q3 financial results, the Group has strengthened
its service provider account management resources to facilitate
fast service rollout and to increase service adoption rate among
ISP partners. The quarter-over-quarter revenue growth rate
improvement to 10% was partly due to this investment.
The Group continued to have a strong market share globally, an
excellent partner retention track record and the fastest speed of
signing new partners in the industry. The overall share of the
entire broadband ISP market of the Group’s current partners is
approximately 34 % (34 % in Q3) in Europe and approximately 10 % (9
% in Q3) in North America (Source: Dataxis and F-Secure, based on
the most recent estimates. Historical comparative data has also
been revised).
New service provider partnerships in Q4 include Brazil Telecom
and the U.S. operators Cincinnati Bell and Echostar.
Mobile security
The Group has maintained its leadership in the gradually
developing mobile security market. Revenues for mobile security
solutions continued to grow at a steady pace.
F-Secure Mobile Anti-Virus showed an increase in consumer and
corporate sales through the traditional reseller channels in the
Nordic countries.
The Group’s mobile antivirus service to T-Mobile UK customers
was launched in Q4.
The current operator partnerships, such as Orange UK, Orange
Switzerland, T-Mobile Germany, Swisscom, TeliaSonera and Elisa, are
a prime vehicle to make security applications available to a large
number of end users. The adoption rate among end users is expected
to steadily increase over the coming years.
F-Secure continued close cooperation with Nokia. 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,
including Nokia Nseries & Eseries devices.
Products & Services
F-Secure Client Security 7, which offers deep proactive
protection for the corporate customers, was pre-released in Q4 with
a full release due in early 2007. A new version of F-Secure
Protection Service for Businesses was released, as well as beta
versions of F-Secure Anti-Virus for the Vista operating system.
The Group’s Internet Security 2007 product received high marks
in various product reviews, such as the PC Pro Recommended and A
list awards in PC Pro magazine (UK), Editor's Choice award in
Windows News magazine (France), test winner with full points in
Windows XP magazine (France), Best in Test award in PC World
(Norway), “Sehr Gut” recommendation in PC Magazin (Germany) and the
first prize in the PC Info Magazine (Germany). The product also
received high praise for its very comprehensive protection and its
advanced DeepGuard technology from one of the key industry
authorities, the Virusbulletin magazine.
Personnel and Organization
The Group's personnel numbered 479 at the end of the year
(390).
The Group has progressed as planned to set up the Malaysia
office, which focuses on the Asia Pacific (APAC) area leadership
and carries certain global responsibilities in R&D and customer
support. The Malaysia office improves the Group’s overall
efficiency, product and support competitiveness, and commercial
presence in one of the world’s key market areas.
On November 6th, 2006, Mr. Kimmo Alkio assumed the
responsibilities of President & CEO. Mr. Siilasmaa was
appointed Chairman of the Board. Former Chairman Mr. Pertti Ervi
was appointed Vice Chairman of the Board. Other members are Ms.
Sari Baldauf and Mr. Alex Sozonoff. Mr. Ari Hyppönen is deputy
member.
During 2006, The Group’s Executive Team consisted 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 until November 5th, after that Kimmo Alkio
(President and CEO), Taneli Virtanen (Chief Financial Officer) and
Travis Witteveen (Senior Vice President, Products &
Services).
In early January 2007, the Group enhanced its Executive Team and
refined the responsibilities as follows: Ari Alakiuttu (Products
and Services), Kimmo Alkio (President and CEO), Aki Mänttäri (Human
Resources), Trond Neergaard (Marketing - effective February 15th),
Pirkka Palomäki (Research & Development), Antti Reijonen
(Strategy), Taneli Virtanen (Finance & Administration) and
Travis Witteveen (Sales and Geography Operations).
After the reporting period, the Group also launched an extension
to its Executive Team, called the Global Leadership Team, which
consists of regional and business line directors.
Financing
The Group’s financial position remained strong. The Group’s
equity ratio on December 31, 2006, was 80 % (81 %). Financial
income for 2006 was 1.5m (1.9m).
During the year the cash flow was 5.4m positive and a dividend
of 10.8m was paid in April (12.1m positive without dividend).
The market value of the liquid assets of the Group was 66.7m
(61.8m) on December 31, 2006.
The change in the USD-EUR exchange has not had material effect
on revenues and results.
Impairment loss of Network Control product
F-Secure acquired Rommon Oy in November 2005 to strengthen its
network technology competencies and the offering to the ISP
customer segment. The technology is targeted for network security
and anomaly detection for the operators’ networks sold as F-Secure
Network Control.
Changes in the product strategy related to the Network Control
product caused a significant change in the earnings model used in
the impairment test. This resulted in a non-recurring impairment
loss of EUR 4.8m for the year 2006, impact on result being EUR 3.9m
negative. The difference was due to deferred tax liabilities. The
impairment loss is recognized on goodwill and intangible assets.
The Group will aim to utilize the technology and competencies in
its future products.
Capital Expenditures
The Group’s capital expenditures for 2006 were 3.7m (8.3m).
These consisted mainly of IT hardware, software and capitalization
of development expenses.
Shares, Shareholders' Equity, and Option Programs
In 2006, A total of 138,250 F-Secure shares were subscribed for
with the A1/A2 warrants and a total of 86,400 F-Secure shares were
subscribed for with the B1/B2/B3 warrants attached to the F-Secure
2002 Warrant Plan. In aggregate the number of shares was increased
by 224,650. The corresponding increase in the share capital, in
total EUR 2246.50 was registered in the Finnish Trade Register. F
Secure received as additional shareholders' equity a total of EUR
160,710.
After the reporting period, a total of 51,900 F-Secure shares
were subscribed for with the A1/A2 warrants and a total of 41,700
F-Secure shares were subscribed for with the B1/B2/B3 warrants
attached to the F-Secure 2002 Warrant Plan. In aggregate the number
of shares was increased by 93,600. The corresponding increase in
the share capital, in total EUR 936.00 was registered in the
Finnish Trade Register. F Secure received as additional
shareholders' equity a total of EUR 68,670.
As a result of the increases, the share capital of F-Secure
currently is EUR 1,550,300.68 and the total number of shares is
155,030,068. 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 2007 are:
1) To continue to grow the anti-virus and intrusion
prevention business faster than the industry. The Group continues
to prioritize growth over profitability.
The prime engine for the Group’s overall growth remains
Security as a Service. However, management remains somewhat
cautious about traditional license sales in the corporate and
consumer market through resellers. This is partially due to
decreased visibility with reference to the launch and adoption of
Microsoft’s new operating system, Vista.
Special emphasis is placed on the Group’s continuing
competitiveness and execution in reseller channels.
2) To continue capitalizing on the Group’s industry leadership
in the Service Provider segment, both with Internet Service
Providers and Mobile Operators.
During 2007 the Group’s Service Provider business is
anticipated to grow multiple times the overall industry growth
rate.However, the quarter-over-quarter growth is expected to be
moderate during the first quarter and accelerate towards the end of
the year. The Group aims to further increase its market share in
this segment.
Partnership development and recruitment will continue actively
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.
To accelerate the growth in the service provider segment,
special account management effort will continue with service
provider partners to ensure a fast path to full commercial rollout
and to increase adoption rate within current partners.
3) To further develop the Group’s leading 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 value of up-to-date
security solutions for smartphones will gradually increase as a
result of applications such as mobile email. Mobile security
solutions will be sold through device manufactures, resellers and
operators. The management expects to see tangible revenues at the
end of the year.
The Group continues to invest in new sales and marketing
activities and new projects expanding the Group’s offering to
service providers. The management expects total revenues to be 95m
+/- 10 % for the full year.
Profitability is anticipated to remain in line with 2006 levels,
as further investments are taking place to build scalability for
future growth in the Service Provider segment. The management
expects an EBIT of 14 %-18 % for the full year 2007.
In the 3-5 year horizon the Group aims to steadily exceed market
growth rates in revenues and seeks profitability levels around 25
%.
The estimation for first quarter 2007 revenues is between 21m
and 24m. Management remains cautious on the visibility towards new
license sales in the corporate market. 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 1.30.
The actual cost level due to recent and planned recruitments is
still increasing. Fixed costs are estimated to be around 17.5m in
Q1.
Financial Reporting
A press and analyst conference will be arranged today, January
30, 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 at
http://www.europe.f-secure.com/investor-relations/
The audited annual report for the full year 2006 will be
announced on February 15 and the report will be published on
March 12. The annual general meeting will be held on March 20,
2007. Quarterly reports for 2007 will be published on April 24
(Q1), July 31(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
This interim report is prepared in accordance with IAS 34
standard.
Key figures (unaudited):
Euro million
INCOME STATEMENT 2006 2005 2006 2005 Chge
10-12 10-12 1-12 1-12 %
Revenues 22.1 18.1 80.7 61.8 31
Cost of revenues 2.2 2.1 7.3 5.9 23
Gross margin 19.8 16.0 73.4 55.9 31
Other operating income 0.2 0.2 0.6 0.8 -26
Sales and marketing 9.8 9.1 38.6 31.6 22
Research and development 9.8 4.2 22.5 14.7 53
Administration 1.2 0.8 4.1 3.1 31
Operating result -0.7 2.1 8.9 7.4 20
Financial net 1.0 1.2 1.5 1.9
Result before taxes 0.3 3.3 10.4 9.3
Income taxes -0.5 -1.3 -3.1 -2.7
Result for the period -0.2 2.0 7.3 6.6
Earnings per share, e 0.05 0.04
EPS, diluted, e 0.05 0.04
BALANCE SHEET
ASSETS 31/12/2006 31/12/2005
Intangible assets 4.5 8.9
Tangible assets 3.2 3.0
Other financial assets 0.9 4.3
Non-current assets total 8.7 16.2
Inventories 0.2 0.1
Other receivables 19.4 15.8
Available-for-sale
financial assets 54.7 53.5
Cash and bank accounts 12.2 8.5
Current asset total 86,4 77.8
Total 95.1 94.0
SHAREHOLDERS' EQUITY
AND LIABILITIES 31/12/2006 31/12/2005
Equity 54.2 57.1
Other non-current 0.1 1.3
Provisions 1.2 1.1
Deferred revenues 4.4 3.8
Non-current liabilities total 5.7 6.2
Other current 12.1 11.3
Deferred revenues 23.2 19.4
Current liabilities total 35.2 30.7
Total 95.1 94.0
Cash flow statement 31/12/2006 31/12/2005
Cash flow from operations 19.5 14.4
Cash flow from investments -3.5 -5.8
Cash flow from financing
Activities* -10.6 3.5
Change in cash 5.4 12.1
Cash and bank at 1 Jan 61.7 50.2
Change in net fair value of
Available-for-sale -0.4 -0.4
Cash and bank at 31 Dec 66.7 61.8
* 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
31.12.2005 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 0.6 0.6
Profit 7.3 7.3
Dividend -10.8 -10.8
Exercise of options 0.0 0.2 0.2
Equity on
31.12.2006 1.5 33.7 0.0 -0.1 19.0 54.2
Key ratios 2006 2005
12 m 12 m
Operating result,
% of revenues 11.0 11.9
ROI, % 19.3 19.0
ROE, % 13.1 12.9
Equity ratio, % 80.2 80.6
Debt-to-equity ratio, % -123.2 -108.2
Earnings per share (EUR) 0.05 0.04
Earnings per share diluted 0.05 0.04
Shareholders' equity
per share, e 0.35 0.37
P/E ratio 47.6 46.9
Capitalized expenditures (Me) 3.7 8.3
Contingent liabilities (Me) 11.2 12.7
Personnel, average 439 354
Personnel, Dec 31 479 390
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 3/06 4/06
Revenues 13.3 14.7 15.7 18.1 18.8 19.8 20.0 22.1
Cost of revenues 1.3 1.3 1.2 2.1 1.7 1.6 1.7 2.2
Gross margin 12.0 13.4 14.5 16.0 17.0 18.2 18.4 19.8
Other operating income 0.2 0.3 0.2 0.2 0.2 0.2 0.1 0.2
Sales and marketing 7.4 7.7 7.4 9.1 9.6 10.3 9.0 9.8
Research and
development 3.2 3.6 3.7 4.2 3.7 4.3 4.7 9.8
Administration 0.8 0.8 0.6 0.8 1.0 0.9 0.9 1.2
Operating result 0.8 1.5 3.0 2.1 2.9 2.8 3.8 -0.7
Financial net 0.5 0.3 -0.1 1.2 0.2 0.1 0.1 1.0
Result before taxes 1.2 1.8 2.9 3.3 3.2 2.9 3.9 0.3
