INSIDE Secure – First half of 2015 results

31 JUL 2015

 

INSIDE Secure – First half of 2015 results

 

  • Q2 2015 revenue of $18.6 million is up 14% compared with low point reached in Q1 leading to a total of $35.0 million in H1 2015
  • Adjusted gross margin [1] of $16.4 million (47.0% revenue) in H1 2015
  • Adjusted operating loss of $10.8 million in H1 2015 (versus +$3.2 million in H1 2014)
  • EBITDA at -$8.6 million in H1 2015 (versus +$5.6 million in H1 2014)
  • Proactive cost structure management (closed agreement with Presto Engineering)
  • First significant contracts in software protection products as core to the company’s strategy

Aix-en-Provence, France, July 31, 2015 – INSIDE Secure (Euronext Paris: INSD), a leader in embedded security solutions for mobile and connected devices, today reported its consolidated results [2] for the six-month period ending June 30, 2015.

 

Financial results for the first half of 2015 - key figures (unaudited)

 

    Adjusted   IFRS
             
(in thousands of US$)   H1 2015 H1 2014   H1 2015 H1 2014
(en milliers de dollars)   2013 2012   2013 2012
Revenue   34 966 64 247   34 966 64 247
Gross profit   16 420 37 822   11 535 31 860
As a % of revenue   47,0% 58,9%   33,0% 49,6%
Operating income   (10 813) 3 240   (21 089) (5 699)
Net income   (9 954) 3 462   (19 723) (5 477)
EBITDA   (8 602) 5 627   - -

 

 

 

 

 

 

 

 

Commenting on these results, Rémy de Tonnac, President and Chief Executive Officer of INSIDE Secure, said:

"After the low point reached in the first quarter of 2015, INSIDE Secure returned to growth in the second quarter. However, business levels remained below our expectations in the first half of 2015 as a whole, as the build-up of our embedded security offer has not yet offset the expected decline in part of our semiconductor business. However, we have had our new commercial successes and we continue to expect our business to grow in the second half of the year, thereby validating the shift in our business model that has been underway for several months now. With regards to innovation and R&D – which account for 63% of the company's staff – INSIDE Secure continues to focus its efforts on its growth drivers, namely, mobile platform security, security for the Internet of Things and brand protection."

  

Financial information for the second quarter and first half of 2015

Revenue for the second quarter and first half of 2015 

Revenue by segment:

                       
                       
(in thousands of US$)   Q2-2015 Q2-2014 Q1-2015   Q2-2015       vs. Q2-2014 Q2-2015       vs. Q1-2015   H1-2015 H1-2014 Year on Year %
Mobile Security   6 138 25 677 5 014   -76% 22%   11 152 32 750 -66%
Secure Transactions   12 499 13 658 10 665   -8% 17%   23 163 29 984 -23%
Unallocated   0 1 513 650   - -   650 1 513 -
                       
                       
Total   18 637 40 848 16 329   -54% 14%   34 966 64 247 -46%

Revenue by category:

                       
                       
(in thousands of US$)   Q2-2015 Q2-2014 Q1-2015   Q2-2015       vs. Q2-2014 Q2-2015       vs. Q1-2015   H1-2015 H1-2014 Year on Year %
Revenue from sale of products   12 081 15 343 11 399   -21% 6%   23 480 32 161 -27%
Revenue from development and license agreements, royalties, maintenance and others services   6 555 25 505 4 930   -74% 33%   11 485 32 086 -64%
                       
                       
Total   18 637 40 848 16 329   -54% 14%   34 966 64 247 -46%

 

Consolidated revenue in the second quarter of 2015 amounted to $18.6 million, an increase of 14% compared with Q1 2015 but a reduction compared to Q2 2014, which included $16.2 million of revenue from licensing INSIDE Secure's NFC technology and patents to Intel.

 

In the first half of 2015, the expected decline in revenue from INSIDE Secure's legacy businesses was not offset by the gradual build-up of its embedded security solutions for mobile applications and connected devices. However, in the second quarter, the company decisively won some new contracts for its software and intellectual property (IP) solutions which should -- as previously announced -- result in effective business growth in the second half of the year.

 

Adjusted operating income

       
(in thousands of US$)   H1 2015 H1 2014
       
Revenue   34 966 64 247
       
Adjusted gross profit   16 420 37 822
As a % of revenue   47,0% 58,9%
Research and development expenses   (12 375) (18 133)
Selling and marketing expenses   (8 377) (10 569)
General and administrative expenses   (5 036) (6 363)
Other gains / (losses), net   (1 445) 482
Total adjusted operating expenses   (27 233) (34 582)
Adjusted operating income / (loss)   (10 813) 3 240
Note: Sums may not equal totals due to rounding.      

Adjusted gross profit was $16.4 million (47% of revenue) in the first half of 2015, as opposed to $37.8 million in the first half of 2014 which benefited from a high-margin agreement to license INSIDE Secure's NFC technology and patents to Intel.

Adjusted operating expenses amounted to $27.2 million in the first half of 2015, down 21% year-on-year and down 14% compared with the second half of 2014. The decrease in expenses is partly due to the company's shift to a business model more focused on high-value-added security activities, as exemplified by the licensing agreement formed with Intel in June 2014. As part of that agreement, an R&D team was transferred to Intel in June 2014.

Lower expenses also resulted from the US dollar's rise against the euro [3] which, as expected, reduced the company's adjusted operating expenses by an estimated $3.4 million. Taking into account movements in the exchange rate and INSIDE Secure’s currency hedging policy, the company expects this positive impact on its adjusted operating expenses to continue in the second half of 2015. 

(in thousands of US$)   H1 2015   H1 2014   2015         vs. 2014
             
EBITDA   (8 602)   5 627   (14 229)
Amortization and depreciation of assets (*)   2 210   (2 387)   4 597
Adjusted operating income   (10 813)   3 240   (14 053)
Business combinations (**)   (5 815)   (8 729)   2 914
Other non recurring costs (***)   (4 172)   28   (4 200)
Share based payments   (289)   (239)   (50)
Operating income   (21 089)   (5 699)   (15 390)
Finance income / (losses), net   1 321   538   783
Income tax expense   45   (315)   361
Net income   (19 723)   (5 476)   (14 246)
             
(*) excluding amortization and depreciation of assets acquired through business combinations.
(**) amortization and depreciation of assets acquired through business combinations and acquisition related external expenses.
(***) Restructuring expenses and, for 2015, impact of the transfer of a business            
Sums may not equal totals due to rounding.            

 

EBITDA

In the first half of 2015, the company reported an EBITDA loss of $8.6 million as opposed to income of $5.6 million in the first half of 2014.

Net financial income / (expense)

Net financial income totalled $1.3 million as of June 30, 2015 ($0.5 million as of June 30, 2014) mostly generated by the impact of EUR/USD exchange rate evolution and the reversal of an unused provision on a license agreement.

Consolidated net income / (loss)

The consolidated net loss (IFRS) in the first half of 2015 was $19.7 million compared with a $5.5 million loss in the first half of 2014. Consolidated net income was negatively impacted by the company's weak operational performance, but also by:

 

  • A high level of residual amortization charges on assets (with no cash impact) resulting from the Group's acquisitions in recent years (SMS in 2010, ESS in 2012, and Metaforic in 2014). This amounted to $5.8 million in the first half of 2015 [4] compared with $8.4 million in the first half of 2014;

 

  • A $4 million non-recurring charge (with no cash impact) in relation with the partnership arrangement formed on June 30, 2015 under which INSIDE Secure outsourced its semiconductor engineering and supply-chain management services to Presto Engineering Inc.

 

Outsourcing to Presto Engineering will mainly benefit INSIDE Secure's Secure Transactions segment. This will structurally reduce the cost of sales of its products while positively impacting INSIDE Secure's gross margin and operating income beginning in the second half of 2015. This will bring an estimated saving of $0.4 million in the second half of 2015.

Business segment analysis 

as at June 30, 2015
(in thousands of US$) Mobile Security Secure Transactions Unallocated (*) Total              2015
         
Revenue 11 152 23 163 650 34 966
Contribution to revenue 31,9% 66,2% - 100%
Adjusted gross profit 9 999 5 771 650 16 420
As a % of revenue 89,7% 24,9% - 47,0%
Adjusted operating income (5 493) (4 525) (794) (10 813)
As a % of revenue -49,3% -19,5% - -30,9%
EBITDA (5 074) (2 734) (794) (8 602)
As a % of revenue -45,5% -11,8% - -24,6%
         
as at June 30, 2014
(in thousands of US$) Mobile Security Secure Transactions Unallocated (**) Total              2014
         
Revenue 32 750 29 984 1 513 64 247
Contribution to revenue 51,0% 46,7% - 100%
Adjusted gross profit 28 444 7 865 1 513 37 822
As a % of revenue 86,9% 26,2% - 58,9%
Adjusted operating income 6 749 (5 504) 1 995 3 240
As a % of revenue 20,6% -18,4% - 5,0%
EBITDA 7 201 (3 570) 1 995 5 627
As a % of revenue 22,0% -11,9% - 8,8%
(*) unallocated amounts correspond mainly to non-recurring revenue.      
(**) unallocated expenses correspond mainly to unused capacity not allocated to business segments.  
Sums may not equal totals due to rounding.        

 

Mobile Security

Segment revenue amounted to $11.2 million in the first half of 2015. Embedded security solutions performance was disappointing, although the outlook for the rest of 2015 is better as a result of contract wins which will bring revenue in the second half of 2015. In the first half of this year, the company did not record revenue from the licensing program of INSIDE Secure's NFC patents managed by France Brevets but remains confident about its ability to continue generating significant revenue from the program.

Software protection products based on technology acquired from Metaforic continue to see very firm business activity. In the second quarter, the Group signed a significant licensing agreement with a leading US health insurer to enhance the security of its mobile apps used by its customers. In addition, INSIDE Secure is actively marketing its HCE mobile payment solution [5] to banks and an expanding ecosystem of major specification drivers and integrators. In this context, initial distribution and licensing contracts have been signed, including one with a world leader in digital security. These contracts will generate revenue – mainly in the form of royalties – by the beginning of 2016 when customers will deploy solutions incorporating INSIDE Secure's technology.

The segment's adjusted gross margin was at 89.7% of revenue in the first half of 2015. This reflects the favourable product mix consisting mainly of licences, royalties and maintenance revenue.

The Mobile Security segment reported an adjusted operating loss of $5.5 million in the first half of 2015 despite a 29% reduction in operating expenses. It had reported an adjusted operating income of $6.7 million in the first half of 2014 thanks to revenue and margin that was boosted by the Intel licensing agreement

The segment reported an EBITDA loss of $5.1 million in the first half of 2015 (as opposed to positive EBITDA of $7.2 million in the first half of 2014).

 

Secure Transactions

Revenue in the Secure Transactions segment amounted to $23.2 million in the first half of 2015. This is substantially lower than the previous year despite firm business levels in secure access products and secure modules. INSIDE Secure's EMV chip and module sales in the US remained well below expectations, and therefore failed to offset the expected decline in the company's legacy EMV chip and identification business in Europe.

Although new agreements and design-ins won in the first half of 2015 did not materially contribute to revenue, they are promising in terms of the company's future growth, particularly in the Internet of Things, brand protection and anti-counterfeiting solutions. This is illustrated by INSIDE Secure’s partnership with Selinko to launch the first 100%-secure connected spirits bottle marketed by the Rémy Martin group.

Segment adjusted gross margin fell from 26.2% in the first half of 2014 to 24.9% in the first half of 2015 because of a provision on excess inventories of $1.8 million resulting from the Group's slower-than-expected growth in the US EMV card market. Excluding that provision, gross margin in the first half of 2015 rose significantly thanks to the improved product mix.

The segment reduced its adjusted operating loss to $4.5 million from $5.5 million in 2014 through lower operating expenses and despite a lower gross profit. The segment reported an EBITDA loss of $2.7 million in the first half of 2015 compared with a $3.6 million loss in 2014.

 

Cash and other key figures

As of June 30, 2015, the Group's available cash was $23.8 million, as opposed to $36.3 million on December 31, 2014 and $38.8 million on June 30, 2014.

Net cash [6] amounted to $22.5 million on June 30, 2015, compared with $28.6 million on December 31, 2014 and $38.1 million on June 30, 2014.

The main movements in cash during the first half of 2015 were as follows:

  • Ongoing operations [7] absorbed $6.9 million;
  • An increase in the working capital requirement (net from financing in June 2015 of the 2014 research tax credit) absorbed $4.9 million mostly due to an increase in inventories;
  • Capital expenditure and expenditure on intangible assets remained low in the first half of 2015, amounting to $0.8 million (as opposed to $1 million in the first half of 2014).

The company maintained a solid financial position with consolidated equity at $71.8 million on June 30, 2015.

In April 2015, INSIDE Secure announced the arrangement of an equity line of financing with Kepler Cheuvreux. This funding mechanism combines flexibility and security complementing the other financing sources already in place and the existing cash position. Under its agreement with INSIDE Secure, Kepler Cheuvreux has undertaken to subscribe for new shares, over a period of two years, up to a maximum 3,400,000 shares, subject to compliance with the terms defined by both parties. In April and May 2015, 400,000 new shares were issued under this agreement. The company retains the ability to issue a further 3,000,000 shares through April 2017.

 

Outlook for 2015

The software protection and HCE mobile payment product lines benefit from a favourable momentum. In July 2015, INSIDE Secure executed a multi-million dollar software protection licensing agreement with one of the three largest banks in the US to increase the security of the mobile apps provided by the bank to its customers. Also in July, Visa granted the Visa Ready status to INSIDE Secure MatrixHCE product. This status will ease the Visa HCE payment certification process for banks and card issuers, thereby reducing their development efforts and time-to-market.

As announced in the first quarter, INSIDE Secure expects an increase in sales relating to its embedded security offering for mobile platforms and connected devices in the second half of the year, although visibility regarding sequential quarterly performance remains limited.

 

Conference call

The company will hold a conference call at 10 a.m. (Paris time) on August 3, 2015 regarding the release of its half-year 2015 results. The call can be accessed by dialling one of the following numbers: +33 (0)1 70 77 09 40 (France), +44 20 7107 1613 (United Kingdom), or + 1 855 402 77 61 (USA). The presentation will be available on our website: www.insidesecure.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 call and will remain posted there for one year.

 

Financial calendar

Publication of third-quarter 2015 revenue: October 22, 2015 (after market close).

INSIDE Secure also announces that it has made available to the public and submitted to the AMF its interim financial report as of June 30, 2015 ("rapport financier semestriel"). The report can be viewed on the Company's website: http://www.insidesecure-finance.com/en.

 

Press and investor contacts

 

INSIDE Secure

Corporate communication

Géraldine Saunière

Marcom Director

+33 (0) 4 42 905 905

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Brunswick

Financial communication

Jérôme Biscay, Candice Baudet

+33 (0) 1 53 96 83 83

SU5TSURFQGJydW5zd2lja2dyb3VwLmNvbQ==

 

INSIDE Secure

Investor relations

Richard Vacher Detournière

General manager & CFO

+33 (0) 4 42 905 905

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About INSIDE Secure

INSIDE Secure (Euronext Paris FR0010291245 – INSD) provides comprehensive embedded security solutions. World-leading companies rely on INSIDE Secure’s mobile security and secure transaction offerings to protect critical assets including connected devices, content, services, identity and transactions. Unmatched security expertise combined with a comprehensive range of IP, semiconductors, software and associated services gives INSIDE Secure customers a single source for advanced solutions and superior investment protection. For more information, visit www.insidesecure.com.

 

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. The Group's actual results may differ materially from those anticipated in these 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 registration document dated April 30, 2015 (R15-030), available on www.insidesecure.com.

 

[1]Some financial measures and performance indicators are presented on an adjusted basis as defined in Appendix 2. They should be considered additional information, which cannot replace any other strictly accounting-based operating or financial performance measure as presented in the consolidated financial statements in Appendix 1.

[2]The consolidated first-half financial statements have been prepared by the management board and reviewed by the supervisory board, and have also been subject to a limited scope audit by the statutory auditors.

[3]The company adopted the US dollar as the reporting currency for its consolidated financial statements; the US dollar is the currency in which the majority of its transactions are denominated, contributing almost all of its revenue. The majority of its operating expenses are denominated in euros. This leaves the company with exposure to trends in the euro against the US dollar.

[4] In 2016, amortization charges resulting from acquisitions should be reduced significantly, barring any impairment, since the amortization of assets transferred through the acquisitions of SMS (2010) and ESS (2012) will be mostly complete.

[5] Host Card Emulation. Introduced on Android 4.4 (KitKat) and recently supported by major payment brands, HCE allows for contactless payments (and other services including loyalty programs, building access and transit passes) to be made directly between the mobile application of consumers' banks and retailers' point-of-sale terminals using NFC technology. It allows sensitive data used to facilitate transactions to be securely stored on, and accessed from, cloud servers rather than a mobile device and without the use of a secure element or a SIM card.

[6] Net cash consists of cash on hand, cash equivalents and short-term investments and the net amount of derivatives, less obligations under finance leases, bank overdrafts, bank loans, and any earnout payments due in connection with business combinations. Debt related to the financing of research tax credit claims with a maturity equivalent to that of the research tax credit they finance is not taken into account because it will be extinguished when the research tax credit claims are repaid by the French government.

[7] Cash generated by operating activities before changes in working capital.

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