News & Events

September 15, 2005

Cambridge UK — 15 September, 2005

nCipher plc (LSE: NCH), a leading provider of IT security solutions, announces its unaudited financial results for the three months to 30 June 2005 and the six months to 30 June 2005. In order to meet best practice for technology companies nCipher reports its results both Quarterly and Six-monthly, presented in both US GAAP and, for the first time, IFRS formats together with a reconciliation of the significant differences between the two methodologies.

Financial Highlights

Financial summary (US GAAP) for the quarter ended 30 June 2005
• Operating profit of £0.5 million (Q1 2005: £0.2 million)
• Net profit after taxation £0.8 million (Q1 2005: £0.5 million)
• Revenue £4.1 million (Q1 2005: £3.9 million) up 6%

Financial summary (US GAAP) for the six months ended 30 June 2005
• Operating profit £0.7 million (H1 2004 £0.8 million loss)
• Total revenue £8.0 million (H1 2004: £6.4 million) up 25%
• Strong closing cash balance of £43.2 million

Operational Highlights
• Volvo Group selects nShield to protect keys for global employee PKI
• Irish Department of Defence selects SecureDB to protect personnel records
• Significant sales to UK Passport Service
• nCipher highly commended in Jericho Forum’s first Jericho Challenge

Commenting on the results Alex van Someren, Chief Executive Officer, said:

"I am delighted that nCipher has achieved significant year-on-year sales growth during the period, enabling it to deliver a satisfying level of operating profit.

"Our cash reserves remain strong and we currently intend to retain them in order to allow us to exploit strategic opportunities as they arise.

"Overall we remain confident that we can continue to grow our revenues and thereby achieve growth in operating profits for the full year 2005."

About nCipher

nCipher is a leading provider of cryptographic security, enabling our customers to meet the challenges of verifying identity, protecting data and complying with security regulations. nCipher's solutions provide a unified approach to cryptographic management providing strict access controls and high assurance trusted processing, overcoming traditional issues of scalability, performance and weak platform security. The world's leading organizations work with nCipher to protect security critical systems such as web site infrastructure, online banking and payment processing networks, PKI, web services, databases and digital rights management schemes.

nCipher is the winner of the Microsoft Security Solution of the Year award 2004. The company is listed on the London Stock Exchange (LSE:NCH) and is a member of the FTSE TechMARK index with offices in Cambridge, UK; Boston, Washington, Hamburg and Tokyo. For more information on nCipher, visit www.ncipher.com

Chief Executive Officer's review

The comments in this review refer to the US GAAP figures unless otherwise stated.

nCipher delivered revenues of £8.0 million for the first half of 2005, some 25% higher than the same period last year (H1 2004: £6.4 million). We also delivered a profit of £0.7 million (H1 2004: £0.8 million loss). In addition, our cash position remained strong, with the closing balance being £43 million.

Business update

nCipher remains focused on the application of cryptography to the real-world problems of identifying and protecting people, businesses, and the transactions which occur between them. Over the coming years we expect customers' IT security interest to focus increasingly on how to deliver and manage security for their employees and the personal computing devices they use, whilst at the same time meeting their obligations to comply with legislation surrounding the auditing and protection of corporate and personal data. nCipher’s portfolio of products and solutions which address these requirements and help to control the costs of doing so continues to expand on several fronts.

Our core business is the sale of security hardware products which protect and process cryptographic algorithms and the critical keys required to activate them. In addition, we offer support and maintenance contracts which enable our customers to implement high-availability business solutions with our products. nCipher's products support industry-standard cryptographic algorithms enhanced by our proprietary Security World™ key management technology, validated with regular independent testing to national and global security standards.

Encryption and other cryptographic techniques have rapidly become the de-facto means of protecting sensitive information as it crosses the internet and now these same techniques are being extended and deployed across enterprise networks. The result is an explosion in the number and diversity of applications that employ cryptography and therefore in the scale and complexity of managing cryptographic keys, creating a significant challenge for IT organizations. Key management raises a number of important and unique administrative issues, which include:

• Keys must remain completely secret, accessible only under highly specific usage rules, in order to deliver effective protection
• Keys must be made available to authorized users and applications whenever needed, potentially over extended periods of time, or otherwise risk halting whatever business process is being performed
• Keys must be able to be withdrawn, as a way to enforce the revocation of individual user rights, when employees leave organizations or as systems are decommissioned
• Key usage must be auditable, by establishing an irrefutable record of when sensitive data was accessed or transactions executed, in order to demonstrate compliance with legislation or policy

Deployments of public key infrastructures (PKIs), in which digital certificates are issued by a central authority to identify people or devices, are becoming an increasingly regular feature of the IT security arsenal both within enterprises and across consumer communities. We believe we have leadership in the market for the hardware security modules (HSMs) used to safeguard the cryptographic keys which are central to a PKI, and during the first half 47% of our revenues arose from such business. An example of a customer using our products in a PKI implementation is Volvo Group. We announced during the quarter that they are using nCipher’s nShield HSMs to underpin the security of digital certificates used by their global email system servicing more than 80,000 employees.

Other nCipher products are used to protect and manage the keys behind secure internet websites typically used for electronic commerce, retail and investment banking and supply chain management. In addition to our core business, we have a number of new business areas in which we are developing market share and which we anticipate will contribute additional growth to our business in the medium to long term.

Strategic trends: The need for data-centric security

IT security is changing. The 21st century enterprise increasingly connects employees, customers, partners and suppliers over open networks. The business advantage for organizations that move away from the traditional reliance upon a security perimeter, or wall around their business, is clear. Transacting over open networks offers significant cost advantages and faster time-to-market, provided that organizations do not allow open networks to expose their business to unacceptable risk or weaken their adherence to increasingly stringent data privacy regulations. At a time when the frequency of high-profile, insider attacks is increasing dramatically, any move to soften the traditional network security perimeter can only be considered if other controls are in place.

An international group of Chief Information Officers from organisations including many of nCipher's customers, known as the Jericho Forum, is gaining wider participation and recognition: its membership includes Barclays, Boeing, BP, HSBC, ICI, Rolls Royce and Royal Mail. The Jericho Forum aims to drive the standards for a new security architecture that will align technology and business more closely with an open, internet-connected world in which organizations rely less on their network perimeter for protection – hence the scriptural reference to 'the walls coming down'. Earlier this year membership of the Jericho Forum was extended to include security vendor organizations and nCipher was amongst the first vendors to join. nCipher also submitted a highly-commended white paper to the first 'Jericho Challenge', an opportunity to design and describe a secure architectural solution that is open, interoperable, viable and operates in a de-perimeterized environment.

In order to reap the benefits of open, interconnected systems while at the same time managing risk and meeting compliance requirements, the new goal must be strong protection of the data itself so that it can move around freely and yet still remain secure. To achieve this, enterprises must first be able to accurately and reliably confirm the identity of authorised people and the IT equipment such as desktop PCs, laptops and PDAs which they use to communicate. As a result, enterprises are turning to security industry initiatives such as identity management, strong authentication, digital rights management and trusted computing. These technologies form the cornerstones of the new de-perimiterized approach and each in turn rely heavily on the use of cryptography, which is nCipher's core area of expertise.

Further momentum is evident in the development of the 'trusted computing' technology championed by the Trusted Computing Group (TCG), of which nCipher is a also member. During 2005 Dell and Fujitsu Siemens both announced that they would begin to ship laptop and desktop PCs which include TCG-compliant embedded security devices on their motherboards. These devices provide a safe repository for key information which uniquely identifies the computer and protects secret information belonging to the primary user, rather like the SIM card does in a mobile phone. This wider deployment of hardware-based security will increase the demand for scalable enforcement of security policies, which will in turn increase the need to manage large numbers of sensitive cryptographic keys. nCipher’s core expertise in cryptography positions us particularly well to service this increasing demand, and we anticipate it will be a significant driver of growth for us in 2006 and beyond.

Product launch – nCipher keyAuthority

Since the end of the period, nCipher has announced the first element of its strategy to address the implications of the de-perimeterized environment discussed above. nCipher keyAuthority is a software solution which centralises the administration and distribution of sensitive cryptographic key material to servers within enterprise IT environments. keyAuthority satisfies the need to deliver keys to a wide variety of end-point systems, on demand and in a highly resilient and scalable manner without requiring modification of the applications that actually use the keys. keyAuthority manages both symmetric and asymmetric keys and is the perfect complement to existing PKI deployments.

We expect to make further announcements about the technologies and partnerships which can help to deliver our vision of comprehensive data protection within both traditional and more de-perimiterized IT architectures over the coming quarters.

Market environment

Through the course of the year we have seen several high profile announcements from companies such as ChoicePoint, LexisNexis and Time Warner, all of whom have been required to publicly disclose the loss of confidential data due to theft or loss of 'data at rest'. nCipher’s SecureDB™ database encryption solution, introduced during 2004 and further developed during 2005, addresses exactly this kind of problem by providing additional levels of access control and selective encryption of only the truly sensitive information directly within the database itself. We have made initial shipments of SecureDB™ systems during the first half, one of which was to the Irish Department of Defence to protect military personnel records and sensitive inventory information.

In recognition of the growing problem of identity theft, the Payment Card Industry (PCI) data security standard defined by the leading card associations specifies the use of encryption to protect payment card numbers in databases and a secure means to store and manage secret cryptographic keys. For organisations working to comply with the PCI standard nCipher is able to provide high levels of security to protect sensitive data both with our HSMs and our SecureDB product. Monster Commerce, a US company that hosts e-commerce systems for more than 5,000 organisations is one customer that has deployed nCipher products to help it comply with the PCI regulations.

Addressing this issue from another perspective, nCipher's payShield™ HSM was selected to play a key role in the MasterCard® Chip Authentication Programme™ implemented by Banka Koper in Slovenia. This deployment follows on from last year’s successful trials by Barclaycard of the new initiative to provide stronger authentication of cardholders performing transactions online with the use of a one-time only dynamic password, thereby rendering virtually useless any basic cardholder information that may have been disclosed elsewhere.

Strengthening the US sales organisation

As a European company nCipher has historically achieved a satisfyingly large proportion of its sales revenues in the United States. The US represents the world’s largest single IT market and we consider that it offers further opportunities for sales growth if we are prepared to focus more of our resources there. Therefore, following the end of the period we have enhanced our sales management in North America by relocating our VP Worldwide Sales, Colin Bastable, to the United States where he will directly supervise the growth of our business.

Prospects

We remain confident that we can continue to grow our revenues and thereby achieve growth in operating profits for the full year 2005.

Alex van Someren
Chief Executive Officer
nCipher plc

Financial Review of the six months to 30 June 2005

The comments in this review refer to the US GAAP figures unless otherwise stated.

Revenue for the first half of the year is up 25% at £8.0 million in comparison with the same period last year (H1 2004: £6.4 million) and 1% higher than the six months to 31 December 2004 (H2 2004: £7.9 million).

In H1 2005 the revenue was split between North America (NA) 35% (H1 2004: 44%), Europe Middle East and Africa (EMEA) 53% (H1 2004: 47%) and Asia-Pacific Rim (APR) 12% (H1 2004: 9%).

Revenue from the EMEA region is up 40% and revenue from the APR region is up 64% in comparison with the same period last year (H1 2004). Revenue from the NA region is at a similar level to H1 2004.

Product revenue is up 19% in comparison with H1 2004, driven by an increase in sales of hardware security modules (HSMs), in particular the netHSM product, and initial sales of database encryption products. Service revenues have increased by 38% over H1 2004, with service maintenance revenue up 13% in comparison with H1 2004, due to the increasing size of the installed base and £0.5 million of revenue from custom development work related to HSM product sales. During H1 2005 one customer accounted for more than 10% of total revenues.

Gross margins at 79% are lower than the high margins achieved in H1 2004 (84%). This is due to stronger product margins in 2004 that were a result of favourable product mix and the use of the inventory that had previously been provided for as in excess of planned requirements.

Sales and Marketing expenses have increased to £3.3 million (H1 2004: £2.9 million) as a result of investment in the headcount required to grow revenues from both existing and new products.

Research and Development costs of £1.4 million are lower than the £1.5 million reported in H1 2004. The business has maintained its commitment to development and this reduction arises from reorganising the cost base in 2004 (more development resource in the UK, less in the USA), rather than a reduction in resources.

General and Administrative expenses have decreased from £1.7 million (H1 2004) to £1.0 million as a result of the reorganisation costs incurred in H1 2004 and the resulting cost reductions which continue to be realised in H1 2005. H1 2005 also benefited from favourable exchange rate effects, with an impact of £0.1 million compared with H1 2004.

People remain our key resource and therefore form a significant part of our cost base. At 30 June 2005 headcount stood at 119 (H1 2003: 106), an increase of 10 (of which 7 were in Sales and Marketing) since the beginning of the year. The reported operating profit at £0.7 million for H1 2005 compares with a loss of £0.8 million in H1 2004 (which included exceptional costs of £0.7 million). Interest income has increased from £0.7 million (H1 2004) to £0.9 million reflecting higher interest rates on a higher average cash balance. The estimated tax charge for the period is £0.2 million compared with £0.1 million for H1 2004. A tax charge estimate is required because the group’s brought forward tax losses cannot be used to offset current year interest income.

The net profit for the period is £1.4 million compared with a loss of £0.1 million for H1 2004.

The Balance Sheet included £43 million of cash at 30 June 2005, with total assets of £50 million. The non-cash assets principally comprise inventory, which has increased from £0.4 million (H1 2004) to £1.7 million due to investment in inventory to reduce the risk of stock shortages, and receivables, which have increased from £2.8 million (H1 2004) to £4.0 million as a result of increased revenues with the collection rate (measured in days sales outstanding) remaining at a similar level.

In the six months to 30 June 2005 net cash generation was £0.9 million (H1 2004: £0.4 million). Net cash generated excluding interest was approximately nil (H1 2004: £0.4 million outflow). This was lower than the operating profit due mainly to the increased investment in working capital (inventory and receivables). Cash per issued ordinary share (after allowing for the redeemable value of outstanding B Preference shares) was £1.53 based on the 27,956,996 ordinary shares in issue at 30 June 2005.

On an IFRS basis there was a profit for the period attributable to common shareholders of £1.3 million, compared with a US GAAP net profit of £1.4 million. This difference arises due to the different treatment of share option expense and employer national insurance expenses on option exercises. A more detailed explanation of the significant differences arising between US GAAP and IFRS is contained in the Interim Financial Statements.

Financial Review of the second quarter from 1 April to 30 June 2005

Total revenues for the quarter ended 30 June 2005 (Q2 2005) were up 6% to £4.1 million, from the £3.9 million reported in the previous quarter (Q1 2005) and were 27% higher than the same quarter one year ago (Q2 2004). In the EMEA region, nCipher’s revenues increased by 39% compared with Q1 2005. Revenues from the United States decreased by 12% in Q2 2005 compared with Q1 2005. Revenues in the APR region were approximately £0.3 million compared with £0.6 million in Q1 2005. During the quarter one customer accounted for more than 10% of total revenues.

Gross margin was 79%, the same as that reported in Q1 2005 and 7 percentage points lower than the gross margin reported in Q2 2004 which was the result of favourable product mix and the use of the inventory that had previously been provided for as in excess of planned requirements.

Operating overheads at £2.8 million were lower than in Q1 2005 (£2.9 million) and higher than overheads reported in Q2 2004 (£2.7 million). The operating profit at £0.5 million compares with an operating profit of £0.2 million in Q1 2005 and an operating profit of £0.1 million in Q2 2004. Net cash generation in the quarter was £0.3 million compared with £0.6 million generated in Q1 2005 and nil generated in Q2 2004. Net cash generated in Q2 2005 is net of £0.4 million outflow in relation to the purchase of own shares to cover option grants.

On an IFRS basis there was a profit for the period attributable to common shareholders for the quarter of £0.82 million, compared with a US GAAP net profit of £0.84 million. This difference arises due to the different treatment of share option expense and employer national insurance expenses on option exercises.

Click here to read financials

Back to News