Inside Secure: FY 2018: Strong Operational and Financial Performance

2021 targets confirmed: revenue of $150 million and EBITDA margin of
25%

  • FY2018: Strong performance

    • Revenue of $42.1 million (+8% vs. 2017)
    • EBITDA1 of $6.6 million (15.6% of
      revenue)
    • Net income (IFRS) of $3.4 million in 2018
    • Cash flow generated by operating activities of $4.5. million in
      2018
      2
  • Acquisition of Verimatrix closed on February 28th
    to scale to a new business dimension with $124.2 million of adjusted
    revenue and $22.2 million of EBITDA in 2018
    3
  • Objectives

    • 2019: strong focus on integrating Verimatrix and delivering
      first cost synergies
    • 2021 target confirmed: revenue of $150 million and EBITDA
      margin of 25%

AIX-EN-PROVENCE, France & SAN DIEGO, Calif.–(BUSINESS WIRE)–Regulatory News:

Inside Secure (Euronext Paris:INSD), at the heart of security
solutions for mobile and connected devices, is today reporting its
results4.

       
       
(in thousands of US$) 2018   2017
 
Revenue 42 080 38 816
EBITDA 6 585 8 773
Revenue of core business 40 274 38 816
EBITDA of core business 5 313 8 773
 

Commenting on these results, Amedeo D’Angelo, chairman and chief
executive officer of Inside Secure, stated: 2018 was another
year of robust operational and financial performance for Inside Secure.
We successfully delivered strong top line growth in spite of an expected
unfavorable base effect on a year-on-year comparison thanks to strong
sales activity, bringing new customers and diversifying our revenue base.

We continued to make significant progress in tackling high potential
markets such as data centers, mobile networking and IoT, leveraging our
proven end-to-end software security solutions from embedded security
into chips to secure communications and applications.

Beyond our organic development, we are adding significant
capabilities with the acquisition of Verimatrix to strengthen scale and
reach of our value proposition in end markets that are fast shifting
towards software and cloud-based security solutions while video content
consumption is becoming multi-device and multi-format.

In this context, we will focus in 2019 on combining both businesses
and teams to deliver first cost synergies while building for our clients
the best value proposition in security, starting with entertainment and
moving towards Internet of Things and connected cars.”

_______________________

1 Inside Secure uses performance indicators that are not
strictly accounting measures in accordance with IFRS ; definitions and
reconciliations of adjusted financial measures with IFRS are presented
in Appendix 2 hereof.
2 excluding payment of fees and
other expenses in relation with the project to acquire of Verimatrix,
Inc.
3 Unaudited preliminary IFRS pro forma accounts.
4
Prepared in accordance with IFRS. Figures for 2018 and 2017 have been
prepared in accordance with IFRS 15 “Revenue from Contracts with
Customers”. The consolidated financial statements were approved by the
board on March 5, 2019; the audit procedure has been completed by the
statutory auditors.

Inside Secure / FY 2018 Financial Results – Key figures

2018 revenue is unchanged compared with the estimate communicated on
January 15, 2019 and EBITDA is at $6.6 million, slightly higher than the
unaudited $6.2 million communicated at that time due to lower operating
expense.

   

Core Business

Adjusted

  Consolidated

Adjusted

  IFRS
(in thousands of US$) 2018   2017 2018   2017 2018   2017
(en milliers de dollars)   2013   2013 2013   2013
Revenue 40 274 38 816 42 080 38 816 42 080 38 816
Gross profit 38 946 37 624 39 717 37 048 39 649 35 554
As a % of revenue 96,7% 96,9% 94,4% 95,4% 94,2% 91,6%
Operating expense (34 055) (29 334) (34 130) (29 334) (38 419) (33 909)
Operating income 4 891 8 290 5 587 7 714 1 230 1 645
As a % of revenue 12,1% 21,4% 13,3% 19,9% 2,9% 4,2%
Net income/(loss) from continuing operations (i) 3 418 (798)
Net income/(loss) from discontinued operations (ii) (278)
Net income/(loss) (i) + (ii) 3 418 (1 076)
EBITDA 5 313 8 773 6 585 8 773
As a % of revenue 13,2%   22,6% 15,6%   22,6%  
 

The reconciliation of adjusted financial measures with IFRS is presented
in Appendix 2 hereof.

Inside Secure and Verimatrix combined / Unaudited 2018 preliminary
IFRS pro forma key figures

On February 28, 2019, Inside Secure completed the acquisition of
Verimatrix. The Inside Secure and Verimatrix combined entities would
have generated in 2018, $124.2 million in adjusted revenue ($119 million
in 2017) and $22.2 million in EBITDA ($21.5 million in 2017) on an
unaudited preliminary IFRS pro forma basis (see Appendix 2).

Inside Secure / Q4 2018 revenue

                         
(in thousands of US$) Q4-2018   Q4-2017

Q4-2018

vs. Q4-2017

12-mois

2018

 

12-mois

2017

2018

vs. 2017

Licences 2 665   1 884 41% 13 538   9 748 39%
Royalties 6 471 9 673 -33% 21 170 24 184 -12%
Maintenance and other 1 375 1 344 2% 5 566 4 884 14%
Total revenue of core business 10 511 12 901 -19% 40 274 38 816 4%
 
Unallocated revenue (*) 1 806
                 
 
Total consolidated revenue 10 511 12 901 -19% 42 080 38 816 8%
 
(*) unallocated amounts correspond to non-recurring revenue, in
particular patent licenses
 

In Q4 2018, the company generated $10.5 million in revenue. As
anticipated, revenue was lower in Q4 2018 as compared to Q4 2017 due to
a particular strong base effect driven by exceptionally high royalties
revenue in Q4 2017 from a historical U.S. customer in the defense
industry.

Licence revenue was $2.7 million in Q4 2018, up 41% vs. Q4 2017 and
royalties revenue was $6.5 million.

In Q4 2018, the company continued to leverage its customer base to
expand its footprint while attracting new customers, thanks to its
portfolio of products to support customers’ demanding security
challenges and help them accelerate time-to-market.

In datacenters, mobile networking infrastructure and IoT, the company
continued to leverage its differentiated value proposition with embedded
security into general purposes chips to close new design wins, with
applications such as smart metering, sensors and printers.

In the entertainment space, the company continued to innovate with the
launch of the first software-only High-Bandwidth Digital Content
Protection (HDCP) 2.35 solution offering a simpler,
modernized approach to protecting content. The company has already
closed a first deal to sell this new high-end solution to a major car
manufacturer for an infotainment application.

_________________________

5 The Inside Secure HDCP (High-bandwidth Digital Content
Protection) toolkit software solution provides all the required features
(cadvanced cryptographic functions, incorporating authentication,
digital signature algorithms, key storage and management) for a complete
content protection solution and includes all control and management
software for the HDCP2.3 specification.

Inside Secure / FY 2018 Revenue

Consolidated revenue

In 2018, consolidated revenue was $42.1 million, up 8% compared to 2017,
more than offsetting the anticipated decline from a historical U.S.
customer in the defense industry. As a reminder, contribution from this
customer was nil in the second half of 2018 and the company does not
expect any more royalty revenue from this customer going forward.

Excluding this customer, year-on-year revenue gowth was up 41% mainly
driven by strong business traction of the core business over the period
and marginally by a new licence signed for its NFC patent licensing
program.

Core business revenue

Core security software and technology licensing business revenue was
$40.3 million in 2018, up 4% year-on-year. Excluding the contribution of
the historical U.S. customer, core business revenue was up 35% based on
strong business traction and new deliveries to significant existing
customers in Silicon IP and secure communications core technology,
driving accelerated revenue recognition under IFRS 15.

In 2018, the company continued to renew contracts and upsell its
customer base with new products and solutions while successfully
diversifing its customer base: top10 customers accounted for 43% of core
business revenue in 2018, against 58% in 2017.

During the period, license revenue grew significantly to $13.5 million,
up 39% vs. 2017, leveraging strong sales activity with both existing and
new customers across all its product lines.

In 2018, the company signed significant contracts to embed security
functions into general purposes chips, notably in IoT, cloud
connectivity and Automotive (through it Silicon IP solutions) while
continuing to gain traction in implementing secure communications and
application protection in markets such as data center and Financials
(mobile payment applications). The company also signed new contracts to
help telcos and video service operators to protect video content
over-the-top.

In 2018, revenue from royalties was $21.2 million and revenue from
maintenance and other agreements was $5.6 million, in line with the
company’s business perimeter.

NFC patent revenue

In 2018, the Company recorded $1.8 million of revenue from its NFC
patent licensing program thanks to a new license with a major Chinese
handset and telecom equipment company signed in Q2 by France Brevets
which manages the program (vs. no revenue in 2017).

Core business adjusted gross profit at >95%

Adjusted gross profit of the core business grew from $37.6 million in
2017 to $38.9 million in 2018, in line with revenue growth with a gross
margin of the core business stable at 96.7% of revenue.

Consolidated gross profit increased from $35.6 million in 2017 to $39.6
million in 2018. Gross margin increased from 91.6% to 94.2% of revenue
due to the ending in 2017 of the amortization of intangible assets
recognized in the context of the acquisition of the ESS business in 2012
(amortization expense of $1.5 million in 2017).

Disciplined management of operating expenses

Operating expenses increased from $29.4 million in 2017 to $34.1 million
in 2018 as the company accelerated its R&D efforts and consolidated
operating expenses derived from the two acquisitions completed in 2017
($2.8 million). In 2018, the company leveraged its resources to pursue
its investments notably in research & development to expand its offer to
serve high growth potential markets such as IoT and automotive.

All in all, operating expense remained below the previously announced
$36 to $37 million range, as a result of disciplined management of
expenses, reprioritization of projects, better than expected R&D tax
credit in France ($0.2m) and in the UK ($0.2m) and to a lesser extent
better EUR/USD exchange rate in the second half of 2018.

Adjusted operating income and EBITDA reflecting operating leverage

As anticipated, adjusted operating income of the core business decreased
from $8.3 million in 2017 to $4.9 million in 2018 and EBITDA from $8.8
million in 2017 to $6.6 million in 2018 (higher than the estimated
EBITDA of $6.2 million communicated on January 15, 2019 due to lower
operating expense).

(in thousands of US$)   2018   2017
 
EBITDA 6 585 8 773
Amortization and depreciation of assets (*) 998 1 059
Adjusted operating income 5 587 7 714
Business combinations (**) (1 886) (2 426)
Other non recurring costs (***) (1 761) (3 122)
Share based payments (710) (521)
Operating income 1 230 1 645
Finance income/(losses), net 3 180 (1 879)
Income tax expense (992) (564)
Net loss from discontinued operations (278)
Net income/(loss) 3 418 (1 076)
 
 

(*) excluding amortization and depreciation of assets acquired
through business combinations. Items without cash impact

(**) amortization and depreciation of assets acquired through
business combinations
(***) Restructuring and acquisition-related costs
Sums may not equal totals due to rounding

Operating income (IFRS) impacted by non-cash items

The company generated an operating income of $1.2 million in 2018,
compared with $1.6 million in 2017.

The operating income is explained mainly by:

  • the adjusted operating income of $ 5.6 million;
  • net non-recurring expense in relation with acquisitions (in particular
    Verimatrix, Inc.) and past restructuring for $1.8 million;
  • non cash items of $2.6 million including: amortization expense related
    to intangible assets arising upon the company’s acquisitions in recent
    years (Metaforic in 2014 and Meontrust and SypherMedia in 2017) for
    $1.9 million and share-based payment expense for $0.7 million.

Financial income/expense

Net financial income was $3.2 million in 2018, the interest expense of
the convertible bonds due 2022 being offset by a non-cash financial
income of $3.8 million following the change in fair value of the
conversion option on the convertible bonds, and interest earned on
investments and foreign exchange gains.

Consolidated net income

In 2018, the company generated a consolidated net income (IFRS) of $3.4
million against a loss of $1.1 million in 2017. It is derived from the
operating income of $1.2 million, net financial income of $3.2 million
and income tax expense of $1.0 million.

Strong cash position

As of December 31, 2018, the company’s consolidated cash position was
$47.4 million, compared with $45.9 million at December 31, 2017.
Operating activities generated $2.8 million of cash flow in 2018 ($4.5
million excluding payment of fees and other expenses in relation with
the project to acquire of Verimatrix, Inc).

(in thousands of US$)   2018   2017
 
Cash generated by operations before changes in working capital 3 268 5 148
 
Cash generated by / (used in) changes in working capital 586 (1 559)
Interest received, net and Income tax (1 074) (1 112)
Net cash generated by operating activities 2 781 2 477
Cash flows used in investing activites, net (303) (862)
Cash flows from financing activities, net (978) 17 222
     
Net increase in cash and cash equivalents 1 500 18 837
 
Cash and cash equivalents at beginning of the period 45 874 27 081
Foreign exchange impact 8 (44)
Cash and cash equivalents at end of the period 47 381 45 874
 

Post closing event – Completion of the acquisition of Verimatrix

Inside Secure closed the acquisition of Verimatrix Inc. on February 28
2019. At closing, Inside Secure paid $138.1 million in cash in
consideration for 100% of the shares and an additional amount of $9.8
million set in escrow to cover potential post-closing adjustments and an
earn-out, estimated to $8 million, final amount of which will be known
in the second quarter of 2019 following completion of year-end audit of
Verimatrix earnings.

Business outlook

In 2019, the Company will focus on integrating Verimatrix to create a
leader Software-based security powerhouse. The combined Group will
benefit as early as this year from its new scale and leverage the
Verimatrix resilient revenue base and from the mix of both recurring and
repeat revenue from both companies.

This year, the company will focus on implementing first cost synergies
of $4 million (out of the targeted $10 million per year on a run rate
basis) and leveraging key assets – a strong technology and product
portfolio as well as a complementary customer base – to build the best
value proposition in security for our customers, starting with
entertainment and moving towards Internet of Things and Connected Cars.

Adding Verimatrix to its core business, Inside Secure should deliver in
2019 higher reported EBITDA, primarily due to the incremental earnings
brought by Verimatrix and the generation of first cost synergies.

On a longer term, Inside Secure confirms its objective to achieve a
revenue6 of $150 million in 2021 while generating an EBITDA7
margin of 25% of revenue.

__________________________

6 on a like-for-like basis by integrating only Verimatrix,
excluding any acquisitions or disposals of businesses or companies.
7
including the full impact of the $10 million annual expected cost
synergies from the combination of Inside Secure and Verimatrix. Target
revenue and operating expenses are based on a dollar/euro exchange rate
of $1.17, i.e. the conversion rate used for the operating budget for the
year 2019.

Conference call

Inside Secure will hold a conference call to discuss its earnings
results on March 7, 2019, at 8:30 am CET. Access to the call will be by
dial-in on one of the following numbers: +33 1 72 72 74 03 (France) or
+44 20 7194 3759 (UK), PIN 2342366#.

The presentation is available online at www.insidesecure-finance.com.
An audio webcast of the presentation and the Q&A session will be
available on the Inside Secure website approximately three hours after
the end of the presentation and will remain posted there for one year.

Financial calendar

First-quarter 2019 revenue           April 18, 2019 before market opening
 

About Inside Secure

Inside Secure (Euronext Paris – INSD) is at the heart of security
solutions for mobile and connected devices, providing software, silicon
IP, tools, services, and know-how needed to protect customers’
transactions, ID, content, applications, and communications. With its
deep security expertise and experience, the company delivers products
having advanced and differentiated technical capabilities that span the
entire range of security requirement levels to serve the demanding
markets of network security, IoT and System-on-Chip security, video
content and entertainment, mobile payment and banking, enterprise and
telecom. Inside Secure’s technology protects solutions for a broad range
of customers including service providers, operators, content
distributors, security system integrators, device makers and
semiconductor manufacturers. For more information, visit www.insidesecure.com

Supplementary non-IFRS financial information

Some financial measures and performance indicators used in the press
release are presented on an adjusted basis. They are defined in Appendix
2 of this press release. They should be considered as additional
information, which cannot replace any other strictly accounting-based
operating or financial performance measure, as presented in the
consolidated financial statements, including the income statement set
out in Appendix 1 hereof. The reconciliation of adjusted financial
measures with IFRS is presented in Appendix 2.

Forward-looking statements

This press release contains certain forward-looking statements
concerning Inside Secure. Although Inside Secure believes its
expectations to be based on reasonable assumptions, they do not
constitute guarantees of future performance. Accordingly, the company’s
actual results may differ materially from those anticipated in these
forward-looking statements owing to a number of risks and uncertainties.
For a more detailed description of these risks and uncertainties, please
refer to the “Risk factors” section of the 2017 registration
document filed with the French financial market authority (the Autorité
des marchés financiers – the “AMF”) on April 10, 2018 under number
D.18-0307, available on www.insidesecure-finance.com/en

Appendix 1 Consolidated income statement,
balance sheet and cash flow statement (IFRS)

The following tables are an integral part of the consolidated financial
statements prepared in accordance with IFRS.

Consolidated income statement

 
(In thousands of US$) as at December 31,
    2018   2017
 
Revenue 42 080 38 816
Cost of sales (2 431) (3 262)
         
Gross profit 39 649 35 554
 
Research and development expenses (16 660) (12 674)
Selling and marketing expenses (13 821) (12 608)
General and administrative expenses (7 275) (7 270)
Other gains / (losses), net (663) (1 357)
         
Operating profit 1 230 1 645
 
Cost of financial debt, net (1 217) (975)
Other financial income / (loss) 4 397 (904)
         
Profit (Loss) before income tax 4 410 (234)
Income tax expense (992) (564)
Net income/(loss) from discontinued operations (278)
         
Net income/(loss)   3 418   (1 076)
 

Consolidated balance sheet

 

   
(In thousands of US$)  

December 31,

2018

 

December 31,

2017

 
Goodwill 29 530 29 563
Intangible assets 5 896 8 478
Property and equipment 1 185 1 269
Other receivables 5 084 1 676
 
Non-current assets 41 695 40 986
 
Inventories 34 219
Trade receivables 11 169 15 531
Other receivables 4 213 3 390
Derivative financial instruments 28 215
Cash and cash equivalents 47 381 45 874
 
Current assets 62 826 65 230
         
Total assets 104 521 106 216
 
Equity and liabilities
(In thousands of US$)  

December 31,

2018

 

December 31,

2017

 
Ordinary shares 22 504 22 056
Share premium 227 760 228 209
Other reserves 13 581 13 385
Retained earnings (196 814) (195 738)
Income / (loss) for the period 3 418 (1 076)
Equity attributable to equity holders of the Company 70 449 66 836
 
Non-controlling interests
 
Total equity 70 449 66 836
 
Derivative financial instruments – Non-current portion 790 4 759
Convertible bonds – Non-current portion 14 208 13 970
Borrowings 399 575
Other financial debts 2 000 3 000
Provisions for other liabilities and charges – Non-current portion 166 284
Non-current liabilities 17 562 22 589
 
Financial instruments 14
Trade and other payables 9 003 8 779
Borrowings 154 382
Provisions for other liabilities and charges 3 602 4 084
Unearned revenues 3 737 3 547
Current liabilities 16 510 16 791
 
Total liabilities 34 072 39 380
         
Total equity and liabilities   104 521   106 216
 

Consolidated cash flow statement

   
(In thousands of US$) December 31,

2018

  December 31,

2017

 
Income / (loss) for the period from continuing operations 3 418 (1 076)
Adjustments for:
Depreciation of tangible assets 342 194
Amortization of intangible assets 2 542 3 292
Reversal of unused provision on intangible asset – SMS 29
Impairment of receivables (91) 78
Financial result (3 180) 1 879
Profit / (loss) on disposal of assets 38
Share-based payments 710 520
Change in retirement benefit obligation 23 (172)
Income tax 992 564
Variation in provision related to the earn-out SMI (1 000)
Variation in provisions for risks (556) (131)
Cash generated by operations 3 268 5 148
 
Changes in working capital :
Inventories 185 (154)
Trade receivables 496 (2 251)
Other receivables 594 (648)
Research tax credit and grants 311 2 392
Trade and other payables (135) (1 312)
Other payables (865) (2 086)
Cash generated by changes in working capital from discontinued
operations
2 500
Cash generated by / (used in) changes in working capital 586 (1 559)
 
Cash generated by operations 3 854 3 589
Interest received, net (292) (579)
Income tax paid (782) (533)
     
Net cash generated by operating activities 2 780 2 477
 
Cash flows from investing activities
 
Cash received from semi-conductor activities sales 11 202
Acquisition of subsidiaries, net of cash acquired -Meontrust (4 814)
Business Acquisition, net of cash acquired -SMI (7 000)
Purchases of property and equipment (303) (250)
     
Cash flows used in investing activities (303) (862)
 
Cash flows from financing activities
Proceeds from issuance of ordinary shares, net of issuance costs 212
Debt repayment (396)
Convertible bonds (OCEANE) 17 260
Repayable advance (250)
Transaction costs related to the capital increase or the debt
issuance
(582)
     
Cash flows from financing activities (978) 17 222
 
     
Net increase in cash and cash equivalents 1 499 18 837,8
 
Cash and cash equivalents at beginning of the period 45 874 27 081,0
Effect of exchange rate fluctuations 8 (44,0)
 
     
Cash and cash equivalents at end of the period 47 381 45 875
 

Appendix 2 Non-GAAP measures –
Reconciliation of IFRS results with adjusted results

The performance indicators presented in this press release that are not
strictly accounting measures are defined below. These indicators are not
defined under IFRS, and do not constitute accounting elements used to
measure the company’s financial performance. They should be considered
as additional information, which cannot replace any other strictly
accounting-based operating or financial performance measure, as
presented in the company’s consolidated financial statements and their
related notes.

Contacts

Press and investor contacts
Inside Secure
Investor
relations

Richard Vacher Detournière
General Manager & CFO
+33
(0) 4 42 905 905
contactinvestisseurs@insidesecure.com

Inside Secure
Corporate communications
Brigitte
Foll
Marcom Director
+33 (0) 4 42 905 905
communication@insidesecure.com

Brunswick
Julien Trosdorf
Jérôme Biscay
+33 (0)1
53 96 83 83
Insidesecure@brunswickgroup.com

Read full story here

error: Content is protected !!