Surfcontrol PLC
30 January 2007
SurfControl plc ('SurfControl' or 'the Company')
FY 2007 Second Quarter Earnings
On-demand services growing faster than market and accelerated transition towards
full channel model
Scotts Valley, CA (January 30, 2007) - SurfControl plc (London: SRF.L) the
leading provider of global on-demand, network and endpoint IT security solutions
, today reported financial results for the second quarter ended December 31,
2006.
Second Quarter Operational Highlights
• Q2 revenues and pro-forma profits in line with market expectations
• Overall billings growth of 11% (Q2 FY06: 3%)
• Shift in billings mix, reflecting market demand for multiple delivery
mechanisms, increased channel success and shorter contracts
• On-demand service and product growth rates were 100% and -6%
respectively, producing 2% overall growth on a like-for-like basis
• On-demand growth significantly ahead of market growth rates. Global
availability and sales channel integration progressing well
• Expectation of positive profit contribution from on-demand sales
confirmed for the fourth quarter
• Accelerated transition to full channel model: Q2 channel sales were 79%
of total billings (Q2 FY 06: 68%) and new business was 89% (Q2 FY 06: 80%)
of total new business
• Shorter contract lengths due to withdrawal of the 3-year deep discount
programme
• E-mail security sales now 34% of total billings mix
Second Quarter Financial Highlights (US $m)
Q2 and Half Year FY2007
3m 3m % 6m 6m %
31/12/06 31/12/05 31/12/06 31/12/05
$m $m $m $m
Revenue 31.6 25.1 26% 61.3 49.2 24%
Gross margin % 97% 97% 96% 97%
Restructuring and
onerous lease costs 0 3.5 0 6.9
Profit/(Loss)
before tax (0.4) (0.4) (2.0) (0.6)
Pro-forma operating
profit 3.0 4.1 4.2 7.5
Basic EPS (US cents) (1.0) (1.0) (5.3) (1.6)
Channel billings % 79% 68% 79% 68%
Non-Americas
revenue % 47% 39% 46% 39%
Billings 33.5 30.3 11% 57.3 49.9 15%
Deferred revenue 98.1 83.8 17% 98.1 83.8 17%
Cash and liquid
investments 43.5 81.5 43.5 81.5
Cash generated
from operations 1.4 1.7 4.0 7.7
Cash generated
from operations
pre-restructuring
and onerous leases 1.6 3.8 4.5 10.8
Reconciliations from the nearest IFRS measure to all pro-forma measures
contained in this RNS are provided in the financial information following this
RNS, and at www.surfcontrol.com/investors/financial_information
Commenting on the results, Patricia Sueltz, CEO said, 'I am very pleased that we
are on schedule with our strategy of building on our existing technologies and
making our on-demand services globally available. Market demand for on-demand
services and appliances continues to grow faster than software and the shift in
our sales mix directly reflects this. Our strategy of providing e-mail, web and
endpoint protection - all via either on-demand service, or appliance or software
- is being very well received by our partners and customers. We expect a
successful outcome to the year as a whole.'
For further information:
ICIS Financial PR +44 (0) 207 651 8688
Tom Moriarty tom@icisnet.com
Caroline Evans-Jones caroline@icisnet.com
SurfControl +44 (0) 1260 296 257
Pat Sueltz, CEO pat.sueltz@surfcontrol.com
Simon Wilson, CFO simon.wilson@surfcontrol.com
Second Quarter and Half Year Financial Highlights
Since SurfControl acquired BlackSpider Technologies (BST) in July 2006,
on-demand service billings have grown 44% in Q1 and 100% year-over-year in Q2.
This growth momentum and achievement of infrastructure leverage through BST's
integration into our existing operations are both ahead of management's plan. As
a result we now confirm that we expect there to be a positive profit
contribution from on-demand sales during the fourth quarter.
Billings in the quarter grew 11% to $33.5m (Q2 FY06: $30.3m). On-demand services
billings grew 100% to $5.0m with product billings declining 6% to $28.5m (Q2
FY06: $30.3m). Adjusted to recognise the prior year Q2 on-demand services
billings of BST of $2.5m, the quarter on quarter billings growth rate of the
Company is 2% on a like-for-like basis.
The continuing stability of our renewal rates, and the growing popularity of
on-demand services, provides increasing confidence of renewing customer
contracts. A decision was therefore taken to withdraw automatic deep discounting
on three year deals. This reduced three year contracts as a proportion of total
billings to 34% (Q2 FY06: 44%). This had little impact on recognised revenue in
the quarter although deferred revenue growth and operating cash flow were
slightly lower as a direct result.
In addition, during the quarter we moved further towards a full channel business
model which is in line with our commitment to our channel partners and remains a
strategic goal for the Company. The channel sold 89% of new business (Q2 FY 06:
80%) and made 79% of overall sales (Q2 FY 06: 68%). The proportion of sales made
by distributors rather than resellers also rapidly increased in Q2 compared to
the prior year. Distributors receive incremental margin over that received by
resellers.
The combined effect of shorter contract lengths and an increased proportion of
billings through our reseller and distributor partners meant that the level of
billings declined compared to last year.
On 7 December 2006 SurfControl made a regulatory-driven disclosure of an
unsolicited approach in relation to a potential offer for the Company, which
created a degree of uncertainty surrounding SurfControl's future as an
independent company. While we cannot quantify the direct impact on billings, the
Company did experience a number of instances in the last three weeks of December
where new business opportunities were deferred possibly as a result of customer
caution, coupled with opportunistic competitive activity.
During the quarter the Company won 1,151 new customers (Q2 FY06: 919) including
295 on-demand customers. Renewal rates are strong and remained steady in the
target range of 70-80%. The number of large deals >$50,000 was 73 in the quarter
(Q2 FY06: 77).
Revenue for the quarter increased by 26% to $31.6m (Q2 FY06: $25.1m) and
increased by 24% to $61.3m for the half year to December 31, 2006 (H1 FY06:
$49.2m). Q2 product revenue increased 14% and Q2 on-demand services revenue grew
98%. Adjusted to recognise the prior year on-demand services revenues of BST of
$1.6m, the quarter on quarter revenue growth rate of the Company is 19% on a
like for like basis.
Overall gross margin for the quarter was 97% (Q2 FY06: 97%) and 96% for the half
year ended December 31, 2006 (H1 FY06: 97%), reflecting an improvement in the
negotiated royalty rates payable to our anti-virus partners.
Licence revenue was 10% of total revenue in the quarter (Q2 FY06: 15%). The
lower proportion of licence revenue compared to last year reflects the shift
towards subscription pricing for our products, as well as the increasing mix of
on-demand revenue which is fully subscription-based. Deferred revenue increased
by 17% to $98.1m (Q2 FY06: $83.8m) increasing forward revenue visibility. As a
result of the reduced contract lengths in the quarter, 71% of the deferred
revenue will be recognised as revenue in the next 12 months (Q2 FY 06: 68%).
Americas' revenue for the quarter was 53% of the total (Q2 FY06: 61%). The shift
has been primarily driven by the rapid take up of on-demand services, which to
date has been largely generated by customers in EMEA.
Pro-forma operating profit for the quarter was $3.0m (Q2 FY06: $4.1m
pre-restructuring) and was $4.2m for the half year to December 31, 2006 (H1
FY06: $7.5m pre-restructuring). The year on year decrease reflects the pro-forma
operating losses arising from the on-demand services of $0.6m in Q2, and a
general increase in operating expenses compared with a year ago.
FTE headcount at the end of the second quarter was 631 (Q1 FY07: 608), with the
increases primarily arising in engineering and sales within the Americas.
Share-based payment costs, amortisation of intangible assets and depreciation
are required under IFRS to be included in the principal operating cost
categories of selling and distribution, research and development, and general
and administrative. Amortisation of intangibles increased to $1.6m (Q2 06:
$0.6m) as a result of the BST acquisition. Share-based payments were $1.1m (Q2
06: $0.6m) due to the increase in the number of employees, staff turnover, and
the provision for employer taxes linked to the increase in the share price
during the second quarter. Depreciation was $1.0m (Q2 06: $0.5m) in line with
capital expenditure on internal infrastructure, information systems and most
recently the extension of on-demand data centres.
Net interest income for the quarter was $0.5m (Q2 FY 06: $0.8m) and was $0.8m
for the half year to December 31, 2006 (H1 FY06: $1.6m). The reduction in net
interest income reflects the lower levels of cash and liquid investments
following the purchase of BST in July 2006 and interest paid on a line of credit
partially drawn in Q1 that was subsequently repaid in Q2.
After charging these costs, the loss before tax for the quarter was $0.4m (Q2
FY06: loss of $0.4m) and was a loss of $2.0m for the half year to December 31,
2006 (H1 FY06: loss of $0.6m). The effective tax rate for FY07 is estimated at
approximately 25%. Basic loss per share for the quarter was 1.0 cents (Q2 FY06:
loss of 1.0 cents) and was a loss of 5.3 cents for the half year to December 31,
2006 (H1 FY06: loss of 1.6 cents).
Pre-restructuring operating cash flow for the quarter was $1.6m (Q2 FY06: $3.8m)
and was $4.5m for the half year to December 31, 2006 (H1 FY06: $10.8m). The
decrease relative to the prior year was primarily driven by the reduced levels
of pro-forma profit and the current negative cash flow from on-demand services.
Cash generated from operations was $1.4m for the quarter (Q2 FY06: $1.7m) and
was $4.0m for the half year to December 31, 2006 (H1 FY06: $7.7m). Net cash and
liquid investments ended the quarter at $43.5m, slightly lower than the $45.8m
as at September 30, 2006 primarily due to capital expenditure outflows.
Second Quarter Corporate Highlights
Introduction
During the second quarter SurfControl made continued progress on key FY 07
objectives with strengthened channel relationships and the integration and roll
out in the Americas of its on-demand services (ODS). The Company's complete
portfolio of security solutions protect corporations from Internet threats,
deliver business and regulatory compliance, and enable business continuity. Our
'best of need' solutions offer an integrated and higher level of protection at a
lower total cost of ownership, compared to a collection of point product
offerings from different vendors. Reflecting this change in market demand,
SurfControl now has a more balanced product mix with e-mail representing 34% of
total sales.
On-demand services
Following the integration of on-demand services into our product portfolio, a
particular focus during the quarter has been the launch and roll-out of our
on-demand services in the Americas and preparation for its roll-out in the third
quarter across APAC. The significant growth in Q2 was largely achieved by our
momentum in EMEA. In the Americas the service was launched in the middle of the
quarter. Early feedback from our resellers and our US customers has been
positive and we are gaining early traction from a standing start.
MailControl, our on-demand e-mail security service, was recently awarded the
Anti-Spam Premium Checkmark Certification from West Coast Labs. This level of
certification is awarded to solutions that have a spam capture rate of more than
97 percent and MailControl successfully identified over 99 percent. SurfControl
has now received Premium Level Certification for all three of the Company's
e-mail solutions: E-mail Filter, RiskFilter and MailControl. SurfControl also
moved up in the most recent Gartner Magic Quadrant for E-mail Filtering from
'Niche' player to 'Challenger'.* These awards and recognition further underscore
SurfControl's delivery of market leading protection at all points of
vulnerability. In combination with our award-winning software and appliance
offerings, the addition of on-demand services places the Company in a unique
position: SurfControl is the only company to offer all three delivery methods
worldwide.
In addition to its award winning MailControl service, SurfControl released a new
version WebDefense, the Company's on-demand Web security service. WebDefense 1.1
includes new functionality such as new spyware and adware protection, as well as
new time-based filtering capabilities. A V2.0 release will be released in the
Spring.
The market
The market is supported by continued demand for maximum protection against all
forms of online threats. During the quarter SurfControl identified and tracked
a number of major threats such as spoof e-mail messages claiming to be from
Adobe and Microsoft as well as threats embedded in a malicious website posing as
the Italian Google site. During the last quarter, spam e-mail increased to a
reported 90% of e-mail traffic, due to new spamming techniques such as
image-based spam. MailControl successfully blocks image-based spam by using
advanced technologies including optical character recognition, and advanced
heuristics. By addressing these ever-increasing, ever-evolving threats to
corporations, SurfControl is well positioned to grow in the future.
*Source: Gartner Magic Quadrant for E-Mail Security Boundary, 2006
We have also seen a marked change in the market's appetite for the various
delivery mechanisms. Demand for appliances and on-demand services are growing
faster than the demand for software solutions - a dynamic that has been
reflected in SurfControl's business. Shipments of the RiskFilter e-mail
appliance grew 60% sequentially from Q1 and 45% year-over-year.
Infrastructure enhancements for products and services
In recognition of the global demand for SurfControl's portfolio of product and
service offerings, the Company announced in the quarter that it will host its
award winning e-mail and Web security services at Equinix Internet Business
ExchangeTM (IBX(R)) centres in the Silicon Valley, Washington, D.C., Sydney and
Hong Kong areas. These new deployments at Equinix's Internet hubs will provide
SurfControl with unmatched global coverage providing customers with unparalleled
levels of service. The new operations at Equinix are the infrastructure
foundation for the global roll out of on-demand services currently underway at
SurfControl. Since the end of the quarter the Company also announced its
partnership with Akamai Technologies, Inc. who is now providing the product
download and threat database update services to SurfControl's web, e-mail and
endpoint security product customers around the world. Both of these
infrastructure partnerships will help SurfControl provide best-in-class global
reach for Internet threat protection to its customers.
Strategic channel partnerships and OEM relationships
The Company has seen a rapid take-up by resellers who wish to sell SurfControl's
products. This is extremely encouraging and has been a key strategic goal for
the Company, supported by an ongoing programme of initiatives. Globally, the
channel partners have responded well to the increased focus, with sales of new
products and services via the channel increasing to 89% in the quarter (Q2 FY06:
68%). Key distributors in the US and the UK have also significantly increased
the volume of their business compared to the prior year. Whilst this had the
effect of reducing the level of billings in Q2 compared to the prior year, we
expect this to deliver both cost leverage and volume benefits in the near and
medium term.
The Company's recognized excellence in technology is also being well received by
existing and new OEM partners. Today SurfControl focuses on two main market
areas; Unified Threat Management (UTM) appliances and mobile carriers/ISPs with
partners such as Finjan and Juniper, and ByteMobile and Cisco CSE respectively.
SurfControl filtering technology is also integrated with many other market
leading appliance and on-demand service vendors as exemplified in the recently
announced contract with Sophos and their web security and control appliance.
Extending our reach via OEM partners is a key component of our channel strategy.
Extended customer relationships
The Company continues to win new customers and cross sell additional products
and services to its existing customers. Renewal rates remain strong. New
customer sales were 23% of billings, sales into the customer base 25%, renewals
48% and other 4% (Q2 FY06: 24%, 23%, 51% and 2% respectively). The average
invoice value in the quarter decreased to $7,100 (Q2 FY6: $7,700) as a result of
shorter contract periods, and bundled sales represented 25% of billings (Q2
FY06: 25%).
During the quarter the Company raised the level of protection for 1,151 new
customers around the world (Q2 FY05: 919) including Faulkner University,
Commerzbank, Veritas AG, Hudson City Saving Bank, Institute of Directors,
Norwich City Council, Sunguard Business Integration, Oregon Department of
Justice, Messier Dowty, Atos Origin IT Services UK LTD, State Of Maryland
Department of Human Resources and the Northern Territories Government in
Australia. New customers for our on-demand services included AGF Group, Kuoni
Travel, Legal & General, ARM Holdings, William Grant Distillers and KKH.
Corporate activity
On 7th December 2006, the Company announced that it has received an unsolicited
approach in relation to a potential offer for the Company. Discussions in
relation to the potential offer are continuing. These discussions may or may not
lead to an offer being made for the Company in due course. The Company is not
providing any further information in relation to these discussions at this
time. A further statement will be made in due course depending on the outcome of
the discussions.
Outlook
The Company is on schedule with its strategy of making on-demand services
globally available and building on its existing technologies. Market demand for
on-demand services and appliances continues to grow faster than software and the
shift in sales mix directly reflects this. The strategy of providing web, e-mail
and endpoint protection - all via either on-demand service, or appliance or
software - is being very well received by partners and customers. We expect a
successful outcome to the year as a whole.
About SurfControl
SurfControl provides a portfolio of security solutions to protect our customers
from Internet threats, deliver business and regulatory compliance, and enable
business continuity. SurfControl believes that security should be treated as a
science, delivering protection at multiple points -- 'in the cloud' with
on-demand security services, on the network with software and appliances, and on
the desktop and mobile client. All of SurfControl's solutions for Web, e-mail
and endpoint security are backed by industry-leading threat detection
technologies, delivered by SurfControl's Global Threat Experts who work 24/7 to
provide customers with dynamic zero-day protection. The company protects
approximately 16 million users in over 25,000 customers worldwide, and employs
more than 600 people in offices across Europe, the Americas, and Asia/Pacific.
For further information and news on SurfControl, please visit
www.surfcontrol.com.
Caution concerning forward-looking statements
Any statements contained in this announcement that are not historical facts are
forward-looking statements. Although the Company believes that its plans,
intentions and expectations reflected in such forward-looking statements are
reasonable, a number of important factors could cause SurfControl's actual
future results to differ materially from those expressed in any such
forward-looking statements. The forward-looking statements herein speak only as
of today. SurfControl expressly disclaims any obligation or undertaking to
update or revise such information.
Independent review report to SurfControl plc
Introduction
We have been engaged by the company to review the income statement, balance
sheet, statement of recognised income and expenditure, cash flow statement and
supporting financial information for the six months ended 31 December 2006 set
out on pages 8 to 25. We have read the other information contained in the
interim report and considered whether it contains any apparent misstatements or
material inconsistencies with the financial information.
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the company for
our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of and has been approved by the directors. The directors are
responsible for preparing the interim report in accordance with the Listing
Rules which require that the accounting policies and presentation applied to the
interim figures should be consistent with those applied in preparing the
preceding annual financial statements except where any changes, and the reasons
for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
Review of interim financial information issued by the Auditing Practices Board
for use in the United Kingdom. A review consists principally of making enquiries
of management and applying analytical procedures to the financial information
and underlying financial data and, based thereon, assessing whether the
accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review is substantially less in scope than an audit
performed in accordance with Auditing Standards and therefore provides a lower
level of assurance than an audit. Accordingly, we do not express an audit
opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 31 December 2006.
KPMG Audit Plc
Chartered Accountants
St James Square, Manchester, M2 6DS
31 January 2006
SurfControl plc
Consolidated income statement
for the six months ended 31 6 months ended 6 months ended Year ended
December 2006
31 December 31 December 30 June
2006 2005 2006
Notes $'000 $'000 $'000
Revenue 2 61,256 49,223 101,886
Cost of sales (2,226) (1,251) (2,409)
----------- ---------- --------
Gross profit 59,030 47,972 99,477
----------- ---------- --------
Selling and distribution
excluding restructuring (33,751) (24,093) (54,367)
Restructuring 3 - (2,286) (2,336)
----------- ---------- --------
Total selling and
distribution (33,751) (26,379) (56,703)
----------- ---------- --------
Research and development
excluding restructuring (12,434) (8,816) (18,180)
Restructuring 3 - (1,366) (1,366)
----------- ---------- --------
Total research and
development (12,434) (10,182) (19,546)
----------- ---------- --------
General and administrative
excluding onerous leases
and (15,514) (10,321) (22,167)
restructuring
Onerous leases 3 - (1,374) (1,254)
Restructuring 3 - (1,825) (1,945)
----------- ---------- --------
Total general and
administrative (15,514) (13,520) (25,366)
Other operating expenses (68) (113) (212)
----------- ---------- --------
Operating loss (2,737) (2,222) (2,350)
Financing income 1,293 1,619 3,213
Financing expense (532) (10) (114)
----------- ---------- --------
(Loss)/ profit before tax (1,976) (613) 749
Income tax credit/(expense) 4 544 153 (185)
----------- ---------- --------
(Loss)/ profit for the
period (1,432) (460) 564
attributable to equity
holders of the Parent
Company
Basic (loss)/ earnings per
ordinary share (cents) 5 (5.3) (1.6) 2.0
Diluted (loss)/ earnings
per ordinary share (cents) 5 (5.2) (1.6) 2.0
Consolidated income statement
for the three months ended
31 December 2006
3 months ended 3 months ended Year ended
31 December 31 December 30 June
2006 2005 2006
Notes $'000 $'000 $'000
Revenue 2 31,628 25,100 101,886
Cost of sales (1,102) (736) (2,409)
---------- ---------- ----------
Gross profit 30,526 24,364 99,477
---------- ---------- ----------
Selling and distribution
excluding restructuring (17,382) (12,603) (54,367)
Restructuring 3 - (1,371) (2,336)
---------- ---------- ----------
Total selling and
distribution (17,382) (13,974) (56,703)
---------- ---------- ----------
Research and development
excluding restructuring (6,275) (4,435) (18,180)
Restructuring 3 - (637) (1,366)
---------- ---------- ----------
Total research and
development (6,275) (5,072) (19,546)
---------- ---------- ----------
General and administrative
excluding onerous leases
and (7,668) (4,959) (22,167)
restructuring
Onerous leases 3 - (682) (1,254)
Restructuring 3 - (830) (1,945)
---------- ---------- ----------
Total general and
administrative (7,668) (6,471) (25,366)
Other operating expenses (35) 9 (212)
---------- ---------- ----------
Operating loss (834) (1,144) (2,350)
Financing income 568 770 3,213
Financing expense (114) (2) (114)
---------- ---------- ----------
(Loss)/ profit before tax (380) (376) 749
Income tax credit/(expense) 4 100 94 (185)
---------- ---------- ----------
(Loss)/ profit for the
period (280) (282) 564
attributable to equity
holders of the Parent
Company
Basic (loss)/ earnings per
ordinary share (cents) 5 (1.0) (1.0) 2.0
Diluted (loss)/ earnings
per ordinary share (cents) 5 (1.0) (1.0) 2.0
Group statement of recognised
income and expense
for the six months ended 31
December 2006
6 months ended 6 months ended Year ended
31 December 31 December 30 June
2006 2005 2006
$'000 $'000 $'000
(Loss)/ profit for the period (1,432) (460) 564
Foreign exchange translation
differences (1,498) 281 (206)
------------ ----------- --------
Total recognised income and
expense for the period (2,930) (179) 358
attributable to equity holders of
the Parent Company
Group statement of recognised
income and expense
for the three months ended 31
December 2006
3 months ended 3 months ended Year ended
31 December 31 December 30 June
2006 2005 2006
$'000 $'000 $'000
(Loss)/ profit for the period (280) (282) 564
Foreign exchange translation
differences (1,190) 261 (206)
------------ ----------- --------
Total recognised income and
expense for the period (1,470) (21) 358
attributable to equity holders of
the Parent Company
Consolidated balance sheet
as at 31 December 2006 31 December 31 December 30 June
2006 2005 2006
Notes $'000 $'000 $'000
Assets
Plant and equipment 9,980 3,164 5,476
Intangible assets 6,12 53,083 8,875 7,700
Liquid investments 2,973 4,322 4,657
Deferred tax assets 7,024 4,614 6,335
---------- ---------- ----------
Total non-current assets 73,060 20,975 24,168
Current tax receivable 797 924 1,100
Trade and other receivables 7 24,947 21,753 24,765
Cash and cash equivalents 40,487 77,221 76,278
---------- ---------- ----------
Total current assets 66,231 99,898 102,143
---------- ---------- ----------
Total assets 139,291 120,873 126,311
========== ========== ==========
Equity
Issued share capital 8 5,101 5,041 5,087
Share premium 8 6,432 4,290 5,896
Other reserves 8 2,415 4,400 3,913
Retained earnings 8 (5,027) 2,684 (5,445)
---------- ---------- ----------
Total equity attributable to
equity 8,921 16,415 9,451
holders
of the Parent Company
Liabilities
Deferred tax liabilities 5,921 73 61
Provisions 11 738 916 666
---------- ---------- ----------
Total non-current liabilities 6,659 989 727
Interest-bearing borrowings - 12 3
Deferred revenue 9 98,058 83,752 93,626
Deferred consideration on acquisition
of subsidiary undertaking - 364 -
Trade and other payables 10 16,804 11,024 14,210
Current tax payable 6,298 3,910 5,739
Provisions 11 2,551 4,407 2,555
---------- ---------- ----------
Total current liabilities 123,711 103,469 116,133
---------- ---------- ----------
Total liabilities 130,370 104,458 116,860
---------- ---------- ----------
Total equity and liabilities 139,291 120,873 126,311
========== ========== ==========
Consolidated Cash flow statement
for the six months ended 31
December 2006
6 months ended 6 months ended Year ended
31 December 31 December 30 June
2006 2005 2006
$'000 $'000 $'000
Notes
Cash flows from operating
activities
(Loss)/profit for the period (1,432) (460) 564
Depreciation 1,806 1,057 2,108
Amortisation of
intangible assets 3,148 1,175 2,350
Financing income (1,293) (1,619) (3,213)
Financing expense 532 10 114
Share based charges 1,850 459 1,780
Income tax (credit)/expense (544) (153) 185
Loss on sale of plant
and equipment - 87 105
---------- ---------- --------
Operating cash flow
before changes in working
capital and provisions 4,067 556 3,993
Decrease in operating
receivables 2,479 3,556 1,142
(Decrease)/Increase in
operating payables (2,646) 3,480 10,786
Increase in provisions 114 143 19
---------- ---------- --------
Cash generated from
operations 4,014 7,735 15,940
Income taxes recovered 828 1,305 969
---------- ---------- --------
Net cash inflow from
operating activities 4,842 9,040 16,909
Cash flows from investing
activities
Acquisition of plant
and equipment (6,197) (410) (2,864)
Proceeds from sale of
plant and equipment - - 6
Acquisition of business
undertaking 12 (38,239) (295) (659)
Cash acquired with
business undertaking 12 2,766 - -
Disposal of liquid
investments 1,897 1,591 1,599
Bank and other interest
received 1,428 1,725 3,269
Bank and other interest
paid (532) (10) (14)
---------- ---------- --------
Net cash (outflow)/inflow from
investing activities (38,877) 2,601 1,337
Cash flows from financing
activities
Proceeds from the issue
of share capital 550 312 1,964
Payment of short term
interest bearing
borrowings (2,917) - -
Purchase of own shares - (16,671) (27,145)
Payment of finance
lease liabilities (3) (9) (19)
---------- ---------- --------
Net cash outflow from
financing activities (2,370) (16,368) (25,200)
---------- ---------- --------
Net decrease increase
in cash and cash
equivalents (36,405) (4,727) (6,954)
Cash and cash
equivalents at
beginning of the period 76,278 82,951 82,951
Effect of exchange rate
fluctuations on cash held 614 (1,003) 281
---------- ---------- --------
Cash and cash
equivalents at end of
the period 40,487 77,221 76,278
Consolidated Cash flow statement
for the three months ended 31 December 2006
3 months ended 3 months ended Year ended
31 December 31 December 30 June
2006 2005 2006
$'000 $'000 $'000
Cash flows from operating activities
(Loss)/profit for the period (280) (282) 564
Depreciation 1,023 521 2,108
Amortisation of
intangible assets 1,664 588 2,350
Financing income (568) (770) (3,213)
Financing expense 114 2 114
Share based charges 1,004 414 1,780
Income tax (credit)/expense (100) (94) 185
Loss on sale of plant
and equipment - 87 105
---------- --------- -----------
Operating cash flow
before changes in working
capital and provisions 2,857 466 3,993
Increase in operating
receivables (5,814) (6,237) 1,142
Increase in operating
payables 4,476 7,358 10,786
(Decrease)/increase in
provisions (113) 151 19
---------- --------- -----------
Cash generated from
operations 1,406 1,738 15,940
Income taxes (paid)/
recovered (201) 502 969
---------- --------- -----------
Net cash inflow from
operating activities 1,205 2,240 16,909
Cash flows from investing
activities
Acquisition of plant
and equipment (4,054) (250) (2,864)
Proceeds from sale of
plant and equipment - - 6
Acquisition of business
undertaking (138) (295) (659)
Cash acquired with business - - -
undertaking
(Acquisition)/disposal
of liquid investments (2,800) (17) 1,599
Bank and other interest
received 521 727 3,269
Bank and other interest
paid (275) (1) (14)
---------- --------- -----------
Net cash inflow/(outflow) from
investing activities (6,746) 164 1,337
Cash flows from financing
activities
Proceeds from the issue
of share capital 550 288 1,964
Payment of short term
interest bearing
borrowings (13,770) - -
Purchase of own shares - (4,732) (27,145)
Payment of finance
lease liabilities - (4) (19)
---------- --------- -----------
Net cash outflow from
financing activities (13,220) (4,448) (25,200)
---------- --------- -----------
Net (decrease)/
increase in cash and
cash equivalents (18,761) (2,044) (6,954)
Cash and cash
equivalents at
beginning of the period 58,831 79,952 82,951
Effect of exchange rate
fluctuations on cash
held 417 (687) 281
---------- --------- -----------
Cash and cash
equivalents at end of
the period 40,487 77,221 76,278
Notes to the un-audited financial information
for the three months ended 31 December 2006
1. Basis of preparation
This interim financial information has been prepared under the same accounting
policies, and methods of computation, as applied in the Group's most recent full
year financial statements. In addition the following accounting policy has been
adopted for acquired intangibleassets.
* Intangible assets
During the period the Group's parent undertaking acquired the entire issued share
capital of Black Spider Technologies Limited. As a consequence of this
acquisition, the Group has recognised additional intangible assets including
brands, customers relationships and customer contacts, which have been
recognised on the basis that they are separable, arise from contractual or other
legal rights, and can be measured reliably. Future economic benefits are expected
to flow from the assets, which are carried at fair value, and are to be
amortised to the income statement over an estimated useful economic life of five
years. These additional intangible assets are subject to impairment testing, in
accordance with the Group's existing accounting policies, on an annual or more
frequent basis, and would be impaired to the extent that the recoverable
amount is less than the asset carrying value.
The comparative financial information for the full year ended 30 June 2006
is abridged, and does not constitute SurfControl plc's statutory accounts for that
year within the meaning of section 240 of the Companies Act 1985.
The financial statements for year ended 30 June 2006 have been reported on by KPMG
Audit Plc.
The report of the auditor was unqualified and did not contain any statement under
Section 237 of the Companies Act 1985.
The comparative financial information for the full year ended 30 June 2006
is abridged, and does not constitute SurfControl plc's statutory accounts for
that year within the meaning of section 240 of the Companies Act 1985.
The financial statements for year ended 30 June 2006 have been reported on by
KPMG Audit Plc.
The report of the auditor was unqualified and did not contain any statement
under Section 237 of the Companies Act 1985.
The financial information for periods ended 31 December 2006, and 31 December
2005 is un-audited.
2. Segment reporting
Segment reporting is presented in the condensed financial information
on a geographical basis, reflecting the Group's management
and internal reporting structure. Geography is therefore the
primary basis of segment reporting in the current and preceding financial
periods.
The Group had one business segment during the current and preceding
financial periods, being the development and sale of Internet security
products and managed services.
Revenue by customer location 6 months ended 6 months ended Year ended
for the 6 months 31 December 31 December 31 December 30 June 2006
2006 2006 2005
$'000 $'000 $'000
United Kingdom 15,324 9,102 22,662
Mainland Europe 6,381 4,439 8,186
Americas 32,745 29,995 61,414
Australia and New Zealand 3,615 3,256 6,671
Rest of the World 3,191 2,431 2,953
-------------- ----------- ------------
61,256 49,223 101,886
-------------- ----------- ------------
Revenue by customer location 3 months ended 3 months ended Year ended
for the 3 months 31 December 31 December 31 December 30 June 2006
2006 2006 2005
$'000 $'000 $'000
United Kingdom 7,749 4,532 22,662
Mainland Europe 3,342 2,325 8,186
Americas 16,884 15,298 61,414
Australia and New Zealand 1,843 1,669 6,671
Rest of the World 1,810 1,276 2,953
-------------- ----------- ------------
31,628 25,100 101,886
-------------- ----------- ------------
3. Restructuring and onerous
lease charges
6 months ended 6 months ended Year ended
31 December 31 December 30 June 2006
2006 2005
$'000 $'000 $'000
Rent on vacant offices - 1,374 1,254
Restructuring - 5,477 5,647
------------ ------------ --------------
- 6,851 6,901
During the preceding year the Group carried out a restructuring programme, which
involved the closure of certain sales offices, changes in management structure,
and re-organisation of department functions. Vacant possession of relevant
leases has been retained until such time as they expire or are assigned.
Amounts equivalent to the rent arising from the un-expired portion of these
leases have been charged to the income statement in the relevant period, net of
amounts receivable under sub-lease arrangements.
4. Income tax expense
6 months ended 6 months ended Year ended
31 December 31 December 30 June 2006
2006 2005
$'000 $'000 $'000
Current tax:
US Federal and state tax 397 (67) (192)
Non US Corporation tax (457) 63 (1,980)
Over provision in respect
of previous years - - 166
------------ ------------ --------------
Total current tax credit/
(expense) (60) (4) (2,006)
Deferred tax:
Tax loss
(de-recognition)/recognition (393) 50 15
Origination and reversal
of temporary differences 997 107 1,806
------------ ------------ --------------
Total deferred tax 604 157 1,821
------------ ------------ --------------
Total Income tax
credit/(expense) 544 153 (185)
5. (Loss)/earnings per share
Basic and fully diluted (loss)/earnings per ordinary share are calculated as
follows:
6 months ended 6 months ended Year ended
31 December 31 December 30 June 2006
2006 2005
$'000 $'000 $'000
(Loss)/profit after taxation
(for basic and diluted
earnings per share) (1,432) (460) 564
------------ ------------ --------------
Basic weighted average ordinary
shares in issue 27,083,366 28,822,094 28,145,589
Dilutive effect of share
based instruments 747,432 513,139 696,193
Diluted weighted average
ordinary ------------ ------------ --------------
shares in issue 27,830,798 29,335,233 28,841,782
------------ ------------ --------------
Basic (loss)/earnings per
ordinary share (cents) (5.3) (1.6) 2.0
------------ ------------ --------------
Diluted (loss)/earnings
per ordinary share
(cents) (5.2) (1.6) 2.0
6. Intangible assets
Customer
contracts Intellectual Development
Goodwill and Brands Property Costs Total
relationships
$'000 $'000 $'000 $'000 $'000 $'000
Cost:
At 1 July 2006 544 - - 18,386 391 19,321
Additions 26,984 13,891 3,561 3,698 397 48,531
(note 12) ------- --------- -------- ---------- ---------- --------
At 31 December
2006 27,528 13,891 3,561 22,084 788 67,852
Amortisation
and Impairment:
At 1 July 2006 544 - - 10,888 189 11,621
Provided
during the period - 1,273 326 1,473 76 3,148
------- --------- -------- ---------- ---------- --------
At 31 December
2006 544 1,273 326 12,361 265 14,769
Net book value
at 31 December
2006 26,984 12,618 3,235 9,723 523 53,083
Net book value
at 31 December
2005 - - - 8,633 242 8,875
Net book value
at 30 June 2006 - - - 7,498 202 7,700
Intellectual property, and other intangible assets acquired upon purchase of the
entire share capital of BlackSpider Technologies Limited on 13 July 2006, are
included at provisional fair value or replacement cost, and are included in
additions.
The acquired intellectual property at 31 December 2005 and 30 June 2006 relates
to the written down values of linux based appliance, and spyware technology
purchased during 2004 and 2005.
7. Trade and other receivables 31 December 31 December 30 June 2006
2006 2005
$'000 $'000 $'000
Current:
Trade receivables 20,664 18,449 21,262
Other receivables and
prepayments 4,283 3,304 3,503
----------- ----------- --------------
24,947 21,753 24,765
----------- ----------- --------------
8. Capital and reserves
Group reconciliation of
changes in equity
Issued Capital Share
share redemption premium Translation Retained
capital reserve account reserve earnings Total
$'000 $'000 $'000 $'000 $'000 $'000
As at 1 July 2006 5,087 882 5,896 3,031 (5,445) 9,451
Total recognised
income and expense - - - (1,498) (1,432) (2,930)
Exercise of options 14 - 536 - - 550
Equity settled
transactions - - - - 1,850 1,850
------- --------- ---------- ----------- --------- -------
As at 31 December
2006 5,101 882 6,432 1,533 (5,027) 8,921
------- --------- ---------- ----------- --------- -------
As at 31 December
2005 5,041 882 4,290 3,518 2,684 16,415
As at 30 June 2006 5,087 882 5,986 3,031 (5,445) 9,541
At 31 December 2006 the Company held 2,750,586 shares in treasury (31
December 2006: 2,750,586 shares) (30 June 2006: 2,750,586 shares).
At 31 December 2006 the Group's employee benefit trust ('EBT') held 1,505,512
shares (31 December 2005: 432,797 shares)
(30 June 2006: 1,505,512 shares). The shares held by the EBT are listed on a
recognised stock exchange, and their open market value at 31 December was
$15,345,000 (£7,832,000). The nominal value held was $295,000 (£151,000).
The EBT is a trust for the benefit of employees, and the shares are used to
satisfy certain Group liabilities in respect to share based emoluments that have
been provided to them.
The cost of own share purchases for treasury and the EBT has been charged
to Retained Earnings.
No own shares were acquired during the period.
9. Deferred revenue
Deferred revenue is due to be
recognised as revenue
in the income statement as follows: 31 December 31 December 30 June 2006
2006 2005
$'000 $'000 $'000
Current:
In less than one year 69,720 57,192 63,980
In more than one year 28,338 26,560 29,736
------------ ------------ ----------
98,058 83,752 93,716
10. Trade and other payables
31 December 31 December 30 June 2006
2006 2005
Current: $'000 $'000 $'000
Trade payables 3,722 1,498 1,422
Sales taxes & social
security costs 2,720 2,066 2,091
Non trade payables and
accrued expenses 10,362 7,460 10,697
------------ ------------ ---------
16,804 11,024 14,210
------------ ------------ ---------
11. Provisions
31 December 31 December 30 June 2006
2006 2005
$'000 $'000 $'000
Current
Revenue 1,062 500 900
Legal 1,099 - 917
Restructuring 44 2,723 122
Onerous leases 346 1,184 616
------------ ------------ --------
2,551 4,407 2,555
Non Current
Onerous leases 424 623 481
Share based employment
taxes 314 293 185
------------ ------------ --------
738 916 666
------------ ------------ --------
Total provisions 3,289 5,323 3,221
12. Acquisitions
Acquisition of Black Spider Technologies Limited ('BST')
On 13 July 2006 the Group's parent undertaking, SurfControl plc, acquired the
entire share capital of BST an 'on demand' security services company. The
provisional purchase price including directly attributable acquisition
costs was $38,239,000 paid in cash, together with the assumption of
interest bearing borrowings with a fair value of $2,296,000.
Acquiree net liabilities at the acquisition date, together with intangible
assets. and deferred tax amounts recognised on acquisition were as follows:
Provisional
fair value Provisional
Carrying values adjustments (1) recognised
values
$'000 $'000 $'000
Customer relationships
and contracts - 13,891 13,891
Brands - 3,561 3,561
Intellectual property - 3,698 3,698
Internal development
costs - 397 397
Deferred tax assets - 434 434
Deferred tax
liabilities - (6,464) (6,464)
Plant and equipment 914 - 914
Trade and other
receivables 2,108 - 2,108
Tax recoverable 373 - 373
Cash and cash
equivalents 2,766 2,766
Interest bearing
borrowings (1a) (2,216) (80) (2,296)
Deferred revenue (6,246) - (6,246)
Trade and other
payables (1b) (1,673) (208) (1,881)
--------- ---------- -----------
Net identifiable assets (3,974) 15,229 11,255
Goodwill (3) 26,984
-----------
Total consideration (2) 38,239
Unpaid or accrued acquisition costs -
-----------
Cash outflow 38,239
===========
Cash acquired from
acquisition 2,766
Notes:
(1) The provisional fair value adjustments relate to:
(a ) recognition of acquired purchase intangibles together with deferred tax
assets and liabilities.
(b ) Interest bearing borrowings acquired being restated to fair value.
(c ) Additional accruals for professional fees, employer tax obligations on
options, and bonuses.
(2) Acquisition costs were $1,331,000.
(3) Goodwill, intangible assets, and deferred tax amounts, together with the
net liabilities of BST, are denominated in GBP.
The provisional value of intangible assets, deferred tax, and the fair value
adjustments are based on management's best estimates, and will be finalised in
the Group's 2007 full year financial statements.
Goodwill represents the value of assets which cannot be separately
recognised under IFRS, or which cannot be currently recognised on the grounds
of uncertainty, including the value of the acquiree's workforce, potential
revenue from cross selling into the Group's existing customer base, leverage of
the on demand managed services outside of the UK/EMEA region, tax losses, and
operating cost synergies.
BST contributed subscription revenue of $5,881,000 and a net loss of
$2,664,000 after tax to the Group for the six month period.
The unaudited draft financial statements for the year ended 30 June 2006
under BST's UK GAAP accounting policies reported subscription revenue of
$7,087,000 and a loss after tax of $6,789,000.
Reconciliation of Operating profits to Pro-forma operating profit -
Un-audited
for the six month period ended 31 December 2006
Pro-forma operating profit for the period is as follows:
6 months ended 6 months ended Year ended
31 December 31 December 30 June 2006
2006 2005
$'000 $'000 $'000
Pro-forma operating
profit 4,193 7,495 10,921
Management define pro-forma operating profit as operating profit before the
following:
(1) Share based compensation and related employment taxes;
(2) Amortisation and impairment of intangible assets;
(3) Asset recognition and amortisation of internal development costs
(4) Depreciation of plant and equipment;
Pro-forma profit operating for the six months ended 31 December 2006 is
calculated as follows:
(1) (2) (3) (4)
Asset
Operating Share based Amortisation recognition and
payments and impairment amortisation of
costs per and related of acquired internal Depreciation of Pro-forma
income employment intangible development plant and operating
statement taxes assets costs equipment profit
6 months ended
31 December
2006 $'000 $'000 $'000 $'000 $'000 $'000
Selling and
distribution (33,751) 763 1,600 - 972 (30,416)
Research and
development (12,434) 308 1,508 40 526 (10,052)
General and
administrative (15,514) 905 - - 308 (14,301)
Other
operating
expenses (68) - - - - (68)
-------- --------- --------- ---------- ---------- ----------
Total operating
costs (61,767) 1,976 3,108 40 1,806 (54,837)
Gross profit 59,030
----------------
Pro-forma operating profit 4,193
Pro-forma operating profit- for six months ended 31
December 2005 (un-audited) 7,495
Pro-forma operating profit -Year ended 30 June 2006
(un-audited) 10,921
Supplementary cash flow information
Group operating cash flow before cash flows associated with onerous leases and
other restructuring charges, and Group free cash is as follows:
2006
6 months ended 6 months ended Year ended
31 December 31 December Un-audited
2006 2005
$'000 $'000 $'000
Cash generated from
operations 4,014 7,735 15,940
Onerous lease charges and
restructuring 454 3,079 6623
----------- ------------ -------------
Operating cash (restated) 4,468 10,814 22,563
Onerous lease charges and
restructuring (454) (3,079) (6,623)
Bank and other interest
received 1,428 1,725 3,269
Bank and other interest
paid (532) (10) (14)
Income taxes recovered 828 1,305 969
Acquisition of plant and
equipment (6,197) (410) (2,864)
Sale of plant and equipment - - 6
----------- ------------ -------------
Free cash (459) 10,345 17,306
Reconciliation of Operating profits to Pro-forma operating
profit- Un-audited
for the three month period ended 31 December 2006
Pro-forma operating profit for the period is as follows:
3 months ended 3 months ended Year ended
31 December 31 December 30 June 2006
2006 2005
Un-audited
$'000 $'000 $'000
Pro-forma operating
profit 2,999 4,081 10,921
Management define pro-forma operating profit as operating profit before the
following:
(1) Share based compensation and related employment taxes;
(2) Amortisation and impairment of intangible assets;
(3) Asset recognition and amortisation of internal development costs
(4) Depreciation of plant and equipment;
Pro-forma profit operating for the three months ended 31 December 2006 is
calculated as follows:
(1) (2) (3) (4)
Asset
Operating Share based Amortisation recognition and Pro-
payments and impairment amortisation forma
costs per and related of acquired of internal Depreciation of operating
income employment intangible development plant and profit
statement taxes assets costs equipment
3 months ended
31 December 2006
$'000 $'000 $'000 $'000 $'000 $'000
Selling and
distribution (17,382) 450 873 - 554 (15,505)
Research and
development (6,275) 215 771 20 294 (4,975)
General and
administrative (7,668) 481 - - 175 (7,012)
Other operating
expenses (35) - - - - (35)
--------- --------- --------- --------- --------- --------
Total operating
costs (31,360) 1,146 1,644 20 1,023 (27,527)
Gross profit 30,526
-------
Pro-forma operating profit 2,999
Pro-forma operating profit- for three months ended 31 December
2005 (un-audited) 4,081
Pro-forma operating profit -Year ended 30 June 2006 (un-audited) 10,921
Supplementary cash flow information
Group operating cash flow before cash flows associated with onerous leases and
other restructuring charges,
and Group free cash is as follows:
2006
3 months ended 3 months ended Year ended
31 December 31 December Un-audited
2006 2005
$'000 $'000 $'000
Cash generated from
operations 1,406 1,738 15,940
Onerous lease charges and
restructuring 152 2098 6623
------------ ----------- ------------
Operating cash (restated) 1,558 3,836 22,563
Onerous lease charges and
restructuring (152) (2,098) (6,623)
Bank and other interest
received 521 727 3,269
Bank and other interest
paid (275) (1) (14)
Income taxes (paid)/
recovered (201) 502 969
Acquisition of plant and
equipment (4,054) (250) (2,864)
Sale of plant and equipment - - 6
------------ ----------- ------------
Free cash (2,603) 2,716 17,306
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