September 6, 2007

nCipher plc

Interim results for the six months ended 30 June 2007

 

Cambridge, UK – 6 September 2007 – nCipher plc (LSE: NCH), a leading provider of IT

security solutions, announces its unaudited financial results for the six months to 30 June 2007.

 

Financial summary for the six months ended 30 June 2006

• Revenue increased by 15.5% to £12.1 million (H1 2006: £10.4 million)
• Operating profit of £1.0 million (H1 2006: £0.3 million loss)
• Profit before tax of £2.0 million (H1 2006: £0.7 million)
• Balance sheet includes £11.1 million of cash and cash equivalents
• Positive operating cash flow of £1.3 million generated (H1 2006: £0.6million)
• £34 million cash returned to Shareholders in June 2007

 

Operational Highlights

• Major contract win for keyAuthority™ with a global financial institution
• nCipher helps secure miSense biometric airport security system at Heathrow Airport
• nCipher’s hardware security modules to be validated under international Common Criteria security standards

 

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

 

“I am pleased to report a strong set of interim results showing further revenue growth and

operating profit, compared with an operating loss during the same period a year ago. Continued investment in the product portfolio has reaped benefits during the first six months of the financial year with some high profile contract wins for nCipher’s keyAuthority software solution and the establishment of our Professional Services organisation.

 

“Our breadth of security solutions, high levels of compatibility and our continued commitment to achieving product validation to the most demanding global technical standards have given rise to many recent high profile endorsements of our products. I therefore believe nCipher will enjoy continuing success during the second half of the year. The Board remains confident that the Company will continue to grow in line with the market’s expectations for the full year 2007.”

 

Commenting on the Company’s recent strategic developments Robert Jeens, Chairman, said:

 

“The Board is pleased with the growth and development of the Company. These results are a testament to the quality of the technology and people within nCipher, and further proof of the benefits of our strategy to invest significantly in maintaining our technological lead.

 

“During the period we also successfully completed the tender offer, returning £34 million to those shareholders who chose to tender their shares, and the Abridean operations have been stabilised, with it contributing expertise and software development resources. The progress over the last six months gives us confidence in the momentum behind the nCipher Group and its future growth.

 

“With this in mind, the succession plan ahead of Alex van Someren’s departure as Chief

Executive Officer remains of paramount importance to the Board. While we are confident that

Alex remains fully committed to the Company and its future, the search for a suitable 

replacement continues apace. The Board intends to resolve this matter in the near future."

  

Chief Executive Officer’s review

 

I am pleased to report that nCipher has once again achieved record sales during the first six months, delivering revenue of £12.1 million and profit before tax of £2.0 million, compared with a profit of £0.7 million for the same period last year. Gross margin remained strong at 85.3% and

the company generated £1.3 million of cash from operating activities, bringing the total of cash

and cash equivalents to £11.1 million at 30 June 2007.

 

Significantly, during the period nCipher received the first major order for its recently-introduced keyAuthority software solution from a major global financial institution, establishing the Company as a preferred provider with a leading product in the nascent market for Enterprise Key Management.

 

nCipher has been selected as a supplier to several Government projects associated with

improving the security of international travel, and our recent participation in the miSense trials at London Heathrow, Hong Kong and Dubai airports is one example of this. In addition, nCipher’s recently-established Professional Services team has won some significant new contracts, both

in this field and more generally in support of our customers and their need for complete security solutions using our products.

 

Our obligation to provide financial support to Abridean (US) Inc., in which we hold a 61% equity position, expired in April 2007. Since then Abridean has established a new business plan and begun to develop software for us on a contract basis. While this inter-company contract significantly improves Abridean’s operational stability, it remains dependent on the maintenance of short term financial support from the Group. We now intend to review Abridean’s financial

position with a view to considering how we may help it move to a sounder financial footing going forwards.

 

Business strategy and market environment

 

Our strategy remains unchanged. We are exploiting our position as globally respected experts in the deployment and use of encryption to protect critical enterprise data. We offer an increasingly broad range of solutions to control who can access sensitive data, to protect that data whether

in transit or at rest, and to achieve compliance with the growing number of legal- and

privacy-driven regulations.

 

As previously announced, during the first half of 2007 we have taken steps to increase our investment in Research and Development still further, and the impact of this will begin to be felt

in the second half of the year. Such investment is intended to enable us to develop new

solutions to meet customers’ requirements for credential management and data protection,

whilst continuing to evolve our existing products for enterprise key management and

cryptographic hardware still further.

 

nCipher’s customers

 

nCipher is obliged to respect our customers’ requirements for confidentiality. However, in the

first six months of 2007 we have been granted permission to publicly announce several contracts which help demonstrate the breadth of the security solutions in which nCipher is involved:

 

• A major New York-based global financial institution awarded nCipher a contract for its keyAuthority enterprise key management solution. Following demanding proof-of-concept trials keyAuthority was selected ahead of competing products for this prestigious contract win and will provide a common key management infrastructure throughout the organisation. keyAuthority centralizes the storage and administration of sensitive cryptographic key material which can then be automatically distributed on-demand to servers and applications anywhere across the extended global enterprise. keyAuthority also replaces costly and error prone manual key management processes and avoids the complexity and inconsistency of using the native key management features of individual applications or devices. We are confident that the opportunities keyAuthority addresses will become an increasingly significant contributor to nCipher’s business in the future.

 

• The miSense biometric airport security trials at London Heathrow, Hong Kong and Dubai airports using nCipher encryption and database security technology have now concluded and received a strongly positive response from passengers. nCipher’s Hardware Security Modules (HSMs) were deployed in the miSense system to generate and protect the unique cryptographic keys used to identify and validate each traveller based on their biometric information. In addition, nCipher’s database encryption solution was used to protect stored passenger information and passport details in order to ensure compliance with data protection legislation. Many similar projects are underway around the world as governments seek to enhance travellers’ security, and nCipher is presently involved in several others.

 

• nCipher’s payShield™ HSM was selected to play a key role in the MasterCard® Chip Authentication Programme™ implemented by Privredna Banka Zagreb, one of the largest financial institutions in the Republic of Croatia and a member of Intesa Sanpaolo group. In a drive to reduce fraud, the solution provides stronger authentication for customers performing transactions online or over the telephone with the use of a one-time dynamic password, thereby rendering virtually useless any basic cardholder information that may have been disclosed elsewhere. nCipher’s business in the banking industry is a significant element of our hardware product revenue, and we are considering further investment in products in this area during the second half of the year.

 

Products and solutions

 

nCipher continuously invests in the evolution of its product portfolio to ensure that the highest

levels of compatibility and technical standards are maintained. Additional investment in the first

half of 2007 has resulted in the recruitment of additional software engineers in the UK, and in the co-development of software applications with Abridean (US) Inc.

 

nCipher products undergoing validation for Common Criteria security approval

nCipher’s family of industry-leading nShield™ HSMs has begun the process of Common Criteria evaluation. The international Common Criteria standard was developed to unify and supersede national IT security certification schemes from several different countries, including the US,

Canada, Germany, the UK, France and the Netherlands. Under Common Criteria a product is evaluated to one of seven specific Evaluation Assurance Levels (EALs). nCipher is evaluating nShield at EAL4+, the highest level permitted by international mutual recognition arrangements, ensuring customers have the utmost confidence in nCipher’s range of advanced cryptographic solutions.

 

nCipher keyAuthority gains integration support for IBM System i (AS/400)

Taking advantage of encryption has always been a particular challenge on platforms such as System i where there has been a reliance on manual techniques for the management of cryptographic keys. Through a partnership with Patrick Townsend & Associates, a leading

software development and consulting firm, keyAuthority enterprise key management suite

now supports IBM System i platforms (AS/400). This support removes the barrier to the

deployment of encryption on these types of transactional systems and distributed networks

making keyAuthority one of the most comprehensive general purpose key management

solutions on the market.

 

Co-development of software applications with Abridean

A contract was established in June 2007 between nCipher and Abridean (US) Inc. under which Abridean will develop certain application software for nCipher on standard commercial terms. Progress against this contract by Abridean has so far been made on schedule, with several software development milestones successfully achieved to date. This project will ultimately

deliver new software applications which will form part of the nCipher product portfolio in 2008.

 

Professional services

 

The mission-critical role that nCipher’s products play for many of our customers requires us to provide a high quality, ‘round the clock’, global support and maintenance service. As the Company’s product portfolio has expanded to include more complex software-oriented solutions there has been a growing opportunity to provide a range of configuration, customization, and contract development services. In the past, nCipher has delivered Professional Services through

a number of partnerships around the world with organisations that are specialist within their respective fields. nCipher has recently established a professional services capability to

supplement these external resources and to provide technical services for which nCipher is

uniquely qualified. We expect this part of our business to continue to grow and become a

valuable contributor to revenue in due course.

 

Tender Offer

 

It was announced on 22 February 2007 that, following a strategic review of nCipher’s business,

the Company’s cash reserves were considerably in excess of its requirements for the short- to medium-term execution of its strategy and therefore would return up to £34 million to

Shareholders by way of a Tender Offer. Tender Offer documentation was posted to Shareholders on 1 May with an offer from Panmure Gordon to purchase up to 11,929,675 Ordinary Shares at a

price of 285 pence per Ordinary Share.

 

All conditions of the Tender Offer were met and on 26 June completion of the Tender Offer was announced with Panmure Gordon acquiring 11,929,675 Ordinary Shares in nCipher at a price of

285 pence per Ordinary Share. The Company repurchased for cancellation all the Ordinary

Shares acquired by Panmure Gordon under the Tender Offer at the same price. Proceeds due to Shareholders in respect of the Tender Offer were settled through CREST, or cheques

despatched, by 29 June 2007.

 

Executive appointments

 

In May 2007 George Ralph was appointed acting Chief Financial Officer and Company Secretary. George, who is an experienced Company Secretary and Finance Director, was most recently the Finance Director for the European businesses of Abacus Group plc and prior to that was the Company Secretary and Group Financial Controller of Deltron Electronics plc before their acquisition by Abacus Group plc.

 

Prospects

 

Our breadth of security solutions, high levels of compatibility and our continued commitment to achieving product validation to the most demanding global technical standards have given rise to many recent high profile endorsements of our products. I therefore believe nCipher will enjoy continuing success during the second half of the year. The Board remains confident that the Company will continue to grow in line with the market’s expectations for the full year 2007.

 

Alex van Someren

Chief Executive Officer, nCipher plc

Financial Review of the six months to 30 June 2006

 

Revenue for the first half of 2007 increased by 15.5% to £12.1 million compared with the same period last year (H1 2006: £10.4 million) and is 13.7% higher than the immediately preceding six months to 31 December 2006 (H2 2006: £10.6 million). This has been achieved despite the

impact of the weaker US $ on our revenue. The average exchange rate used in the first half of

2007 was 10.6% weaker than in H1 2006 and 4.2% weaker than H2 2006. In the first half of 2007 approximately 68% of revenue was billed in US $ (H1 2006:  68%). In fact US $ denominated revenue increased by 27% when compared with H1 2006 and if we applied consistent exchange rates then overall revenue would have been £12.9 million an increase of 24% from H1 2006.

 

First half 2007 revenue is split geographically between North America – 45.2% (H1 2006: 43.1%), Europe Middle East and Africa – 45.9% (H1 2006: 42.2%) and Asia-Pacific Rim – 8.9%

(H1 2006: 14.7%). Compared with the same period last year, revenue from the North America region has increased by 21.4%, revenue from the Europe Middle East and Africa region has increased by 25.5%, but revenue from the Asia-Pacific Rim region is down by 30.2%.

 

The impact of keyAuthority and Professional Services in the period was to generate £0.7 million

of revenue. Product revenue has increased by 10.6% compared with H1 2006, driven by an

increase in sales of hardware security modules (HSMs), in particular the netHSM™ product, and sales of database encryption products. Maintenance and support revenue has increased by

5.7% over H1 2006.

 

Gross margins of 85.3% are marginally higher than those achieved in H1 2006 (84.9%) and benefited from lower purchase cost for some components due to the weaker US$. The

increasing element of Professional Services income will produce a lower gross margin

percentage for the remainder of the financial year and gross margins are expected to reduce over time as the proportion of lower margin Professional Services income increases.

 

Sales and Marketing expenses have increased to £4.7 million (H1 2006: £4.3 million) as a result of investment in the headcount required to grow revenues from both existing and new products. Further investment in headcount is planned during H2 2007 to maintain the sales growth momentum.

 

Research and Development costs of £2.0 million are flat when compared with H1 2006. These

will increase in H2 2007 as we make the additional investment required to develop next

generation products. The Abridean share of this was £508,000 (H1 2006: £605,000).

 

General and Administrative expenses have increased to £2.6 million (H1 2006: £2.4 million). This increase comes from a number of factors including foreign exchange losses, bad debt

provisioning and payroll related items.

 

Our employees are fundamental to our success and remain our key resource, reflected as a significant part of our cost base. At 30 June 2007 our total headcount stood at 185

(30 June 2006: 175), including 37 employees at the majority-owned Abridean operation (30 June 2006: 45).

 

The operating profit of £1.0 million compares favourably with a loss of £0.3 million in the same period last year, reflecting the combination of strong sales growth, improved gross margins, and

a modest increase in total operating expenses.

 

Interest income of £1.0 million (H1 2006: £1.1 million) reflects broadly unchanged cash balances for most of the period. Following the return of £34 million to shareholders at the end of June 2007 interest income will reduce significantly in H2 2007 and thereafter.

 

The estimated tax charge for the period was £762,000 compared with £575,000 for H1 2006. The charge is based on the estimated tax position for the financial year and represents an effective

tax rate of 37.2% (H1 2006: 80.0%). This is higher than the UK tax rate mainly because the

group generates taxable profits in the UK and has losses outside the UK which cannot be offset against these profits.

 

The net profit for the period is £1.3 million compared with a profit of £0.1 million for H1 2006.

 

The Balance Sheet has changed significantly due to the successful return of £34 million to shareholders in June. Net assets are now £8.4 million compared with £41.4 million at 31

December 2006.

 

Apart from the return to shareholders the most significant change to the balance sheet is the increase in inventories. We have reviewed our stockholding policy, particularly in respect of key components and taken the decision to increase stock holding levels. The full impact of this

change in policy has yet to be reflected in reported inventory levels.

 

We continue to manage our investment in working capital and, as can be seen from the table below, this has only increased by £0.6 million from December 2006 despite the £0.8 million increase in inventory.

 

	June 2007	Dec 2006
	£000	£000
Inventory	2,041	1,238
Trade and other receivables	6,695	6,821
Trade and other payables	(372)	(640)
Deferred service contract revenue	(5,598)	(5,246)
Net investment in working capital	2,766	2,173

 

 

In the six months to 30 June 2006 net cash generated by operations more than doubled to £1.3 million (H1 2006: £0.6 million).

 

 

George Ralph

Chief Financial Officer, nCipher

To read the full release and financials please click here

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