News & Events

November 8, 2005

Growth at all levels provides solid foundation for proposed acquisition of Abridean

Cambridge UK — nCipher plc (LSE: NCH), a leading provider of IT security solutions, announces its unaudited financial results for the three months to 30 September 2005.

Financial Highlights

Financial summary (US GAAP) for the nine months ended 30 September 2005
• Revenue up 22% to £12.2 million (nine months 2004: £10 million)
• Operating profit £1.2 million (nine months 2004: £0.4 million loss)
• Net profit after taxation £2.2 million (nine months 2004: £0.6 million)
• Strong closing cash balance of £44.3 million

Financial summary (US GAAP) for the quarter ended 30 September 2005
• Revenue up 4% to £4.3 million (Q2 2005: £4.1 million)
• Operating profit £0.5 million (Q2 2005: £0.5 million profit)
• Net cash generation of £1.2 million (Q2 2005: £0.3 million)

Operational Highlights

• Launch of nFast Ultra and nForce Ultra secure web server accelerators
• Launch of nCipher keyAuthority enterprise key management application
• Initial shipment of SecureDB database protection software to Irish Department of Defence

Post-period end
• nCipher announced on 21 October 2005 the proposed acquisition of Abridean (US) Inc. to broaden its product offering and thereby enhance its growth prospects

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

"nCipher, as a leader of cryptographic security, is well positioned to take advantage of organic growth in the IT security market and we have always stated that we intended to supplement this growth through acquisition. Finally, and after some years of patient market review, we have identified the right first acquisition for nCipher in the broader market opportunity of user management. This requires our expertise to be coupled with the technology for the identification and entitlement of the right users and therefore on 21 October we announced the proposed acquisition of Abridean. The management and Directors believe that nCipher can accelerate growth through this proposed acquisition and trust that our shareholders will support the proposal at our EGM on 18 November.

"I am pleased to report an increased operating profit, continuing sales revenue growth and strong positive cash flow for the nine month period and we remain confident that our strong revenue performance will continue and thereby achieve growth in operating profits for the full year 2005."

Chief Executive Officer's review

For the third quarter we are pleased to report a satisfying operating profit, continuing sales revenue growth and strong positive cash flow. Our revenues were £4.3 million, some 18% higher than the same period last year (Q3 2004: £3.6 million) and we generated operating profits of £0.5 million (Q3 2004: £0.4 million). The third quarter is traditionally a strong quarter for our US Federal Government business and this has continued to be the case in 2005 with 19% of product revenues coming from that sector during the period.

Business update

nCipher remains focused on the application of cryptography to the real-world problems of identifying people and protecting their data, their 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 growing legislation surrounding the auditing and protection of corporate and personal data. nCipher is continuing to add products and solutions which address these requirements whilst helping to control the costs of doing so.

Our business strategy remains:

• to expand from our current business of selling cryptographic key management products and, in addition, to offer solutions in larger markets which will better identify people and devices;
• to build on our initial success protecting information both in transit and at rest; and
• to help our customers easily prove that all activities within their systems comply with the stated security policies of their organisation.

New Product introductions

nCipher keyAuthority
In September we announced nCipher keyAuthority™, a software solution which centralises the administration and distribution of sensitive cryptographic key material to servers within enterprise IT environments.

Encryption has 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 the IT departments of all organisations. 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 authorised 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 organisations or as systems are decommissioned; and
• 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 corporate security policy

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.

nFast and nForce Ultra
Certain 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 August we announced two additions to our line of cryptographic accelerators for secure web servers: nFast Ultra™ and nForce Ultra™, both of which deliver plug-and-play functionality for processing all Secure Sockets Layer (SSL) and Transport Layer Security (TLS) network traffic at unprecedented performance levels of up to 10,000 connections per second.

Market environment

2005 has seen several high profile security-related announcements from companies including ChoicePoint, LexisNexis and Time Warner, all of which have been required to disclose publicly the loss of confidential data due to theft or breach of internal trust. nCipher's SecureDB™ database encryption solution addresses exactly this kind of problem by providing additional levels of access control and selective encryption of truly sensitive information directly within the database. We have made initial shipments of SecureDB™ systems, one of which was to the Irish Department of Defence to protect military personnel records and sensitive inventory information.

nCipher was named by Forrester Research as a leader in the database encryption market in its recently-released report entitled "The Forrester Wave™: Database Encryption Solutions, Q3 2005". Our leadership position in the Wave is based on Forrester's evaluation of vendors’ current offerings, strategy and market presence. nCipher also ranked number one in the strategy category, which evaluates vendors based on product strategy, corporate strategy and cost of ownership.

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 organisations 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 organisations do not allow open networks to expose their businesses 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 organisations 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 organisations 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-perimeterised 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 become 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-perimeterised approach and each in turn depends heavily on the use of cryptography, which is nCipher’s core area of expertise.

Proposed acquisition – Abridean (US) Inc.

In order to capture this broader market opportunity for identifying people and devices, our expertise in the field of cryptography must be coupled with the technology for identifying and managing those who are the right users in the first place. Abridean is a provider of user management and provisioning solutions which help businesses manage identities and entitlements in a highly flexible and auditable way. For this reason, nCipher has proposed since the end of the quarter to take the strategic step of acquiring Abridean.

By bringing together the two powerful technologies of cryptography and user management, the Directors believe that the combined company will:

• Generate a significant competitive advantage for both nCipher and Abridean products in their respective markets;
• Enable Abridean’s products to take advantage of nCipher’s sales channel and financial muscle to grow the combined business;
• Enable nCipher to more quickly establish a broader service offering to support its other product lines; and
• Make a positive contribution to the Company’s earnings (before any charge for goodwill and other intangibles) for the year ended 31 December 2007

The acquisition, which is described in more detail in our announcement dated 21 October 2005, is subject to shareholder approval. An Extraordinary General Meeting will be held on 18 November 2005 at which shareholders will vote on this proposed acquisition.

Prospects

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-perimeterised IT architectures, over the coming quarters.

I am pleased to report increased operating profit, continuing sales revenue growth and strong positive cash flow for the nine month period and we remain confident that our strong revenue performance will continue and thereby achieve growth in operating profits for the full year 2005.

Alex van Someren
Chief Executive Officer
nCipher plc

Financial review

Total revenues at £12.2 million, for the nine months to September 2005, were 22% higher than the revenues for the same period in 2004. This reflects a 27% improvement in Europe, a 40% improvement in Asia Pacific Region (APR) and a 13% improvement in revenues from the United States. Gross margin of 79.6% compared with 83.3% last year results from both weaker product and service margins caused in both cases by product mix.

In order to invest in and drive revenue growth overheads have been increased in 2005, particularly in sales and marketing, and were £8.5 million for the first nine months of 2005 compared with £8.1 million (before exceptional reorganisation costs of £0.7 million) for the first nine months of 2004. Operating profit was £1.2 million for the nine months to September 2005 compared with a loss of £0.4 million in the same period last year.

Total revenues for the quarter ended 30 September 2005 (Q3 2005) were up 4% to £4.3 million, from the £4.1 million reported in the previous quarter (Q2 2005) and were 18% higher than the same quarter one year ago (Q3 2004). In the United States region, nCipher’s revenues increased by 55% compared with Q2 2005 and were 39% higher than in Q3 2004. Revenues from EMEA region were 29% lower in Q3 2005 than in Q2 2005 and 2% higher than in Q3 2004. Revenues in the APR region were approximately £0.4 million compared with £0.3 million in Q2 2005.

Gross margin was 79.7%, a similar level to the gross margin achieved in Q2 2005 (79.5%) and 2.9 percentage points weaker than gross margin reported in Q3 2004. In Q3 2004, gross margin was higher than usual because of consumption of inventory previously provided for as “in excess of planned requirements” and this did not recur in Q3 2005.

Operating overheads at £2.9 million were higher than in both Q2 2005 (£2.8 million) and in Q3 2004 (£2.6 million). The increase in overheads compared with Q3 2004 is because of investment in sales and marketing to grow revenues, as explained above.

The operating profit at £0.5 million compares with an operating profit of £0.5 million in Q2 2005 and an operating profit of £0.4 million in Q3 2004.

Net cash generation in the quarter was £1.2 million compared with £0.3 million generated in Q2 2005 and £0.7 million generated in Q3 2004.

The closing cash balance was £44.3 million. Since the end of the quarter the proposed Abridean acquisition was announced with an initial cash outlay of approximately £5.4 million, including fixed transaction expenses estimated at £0.5 million.

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