Verimatrix Announces Strong First-Half 2019 Results

  • $32.5 million: consolidated (IFRS) revenue in Q2 2019, up 162% year-over-year due to the addition of the Verimatrix, Inc. business acquired on February 28, 2019
  • $60.8 million: pro forma1 adjusted2 revenue in H1 2019
  • +68%: year-over-year growth of pro forma EBITDA2 in H1 2019 at $10.0 million (16.5% of revenue)
  • New organization, streamlining and cost synergies plan fully implemented
  • Cost synergies expected to be $12.5 million on an annual basis, 25% above plan
  • Objectives upgraded:

    • 2019: strong focus on integrating Verimatrix, Inc. and delivering higher cost synergies
    • 2021: revenue of $150 million and EBITDA margin of 26.5%3

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

Verimatrix (Euronext Paris: VMX), a global provider of security and analytics solutions that protect devices, services and applications, is today reporting its IFRS unaudited4 consolidated results and unaudited pro forma adjusted results, for the six-month period ended June 30, 2019.

(in thousands of US$)

H1 2019

H1 2018

 
Pro forma adjusted revenue

60,793

 

58,530

Pro forma EBITDA

10,015

 

5,952

Consolidated revenue IFRS

52,874

 

22,492

Operating income IFRS

(6,037

)

803

Adjusted operating income

11,142

 

2,670

Commenting on these results, Amedeo D’Angelo, chairman and chief executive officer of Verimatrix, stated: “The first half of 2019 was very intense. We closed the acquisition of Verimatrix, Inc. on February 28th and implemented our new organization on April 1st to combine forces and get the most of our combined security expertise and solution portfolio that span multiple industries shifting towards software and cloud-based security solutions.

At the same time, the Company successfully recouped with growth on Verimatrix, Inc. business after an usually low performance in the first quarter, while leveraging on-going momentum on Inside Secure historical business. During the first half of the year, we leveraged our combined positions to continue to address new security needs in the Entertainment space while reaping the benefit of our differentiated and advanced portfolio of Silicon IP products to tackle growth markets such as data centers, networking and IoT.

We also conducted a thorough review of our targeted cost synergies plan, which has now been fully implemented, both ahead of schedule and with greater savings than anticipated. Our organization is now in place and we expect to generate $12.5 million annual cost savings on an annual basis starting 2020.

Finally, with our new corporate name, Verimatrix, we are more than ever reflecting our broader vision and solutions offer to bring the best value proposition for our customers while capturing business opportunities to build a major player in software-based security solutions.

Financial Results – Key figures

Pro forma IFRS
Core Business Company
 
(in thousands of US$) H1 2019 H1 2018 H1 2019 H1 2018 H1 2019 H1 2018
(en milliers de dollars)

2013

 

2013

 

2013

 

2013

 

Revenue

57,245

 

56,724

 

60,793

 

58,530

 

52,874

 

22,492

 

Gross profit

47,225

 

47,303

 

49,402

 

48,364

 

44,452

 

20,764

 

As a % of revenue

82.5

%

83.4

%

81.3

%

82.6

%

84.1

%

92.3

%

Operating expenses

(43,192

)

(45,895

)

(43,316

)

(45,999

)

(50,489

)

(19,961

)

Operating income

4,033

 

1,407

 

6,086

 

2,364

 

(6,037

)

803

 

As a % of revenue

7.0

%

2.5

%

10.0

%

4.0

%

-11.4

%

3.6

%

Net income/(loss) from continuing operations (i)

 

 

 

 

(8,110

)

1,803

 

Net income/(loss) from discontinued operations (ii)

 

 

 

 

1,650

 

 

Net income/(loss) (i) + (ii)

 

 

 

 

(6,460

)

1,803

 

EBITDA

7,676

 

4,709

 

10,015

 

5,952

 

 

 

As a % of revenue

13.4

%

8.3

%

16.5

%

10.2

%

 

 

Basis of preparation

Inside Secure (renamed Verimatrix following shareholders’ vote on June 24, 2019) completed the acquisition of Verimatrix, Inc, on February 28, 2019.

Verimatrix (the “Company”) has prepared its results in accordance with IFRS (which account for 4 months of activity of Verimatrix, Inc. in 2019 and nil in 2018). Comments on IFRS results for the first half of 2019 – from revenue to operating income – are presented in Appendix 1 hereof and IFRS consolidated income statement, balance sheet and cash flow statement are presented in Appendix 2.

The Company has also prepared unaudited pro forma results as if the acquisition of Verimatrix, Inc. had been completed on January 1st to enable year-on-year comparison of the combined businesses while reflecting the new company organization implemented in April 2019. Pro forma are deemed “adjusted” compared with IFRS since, consistent with the Company’s prior financial communications, they exclude (i) non-recurring adjustments on revenue due to purchase accounting (deferred revenue), (ii) the amortization of intangible assets related to business combinations, (iii) any potential goodwill impairment, (iv) share-based payment expense and (v) non-recurring costs associated with restructuring and business combinations. Definitions of adjusted measures are provided in Appendix 3 hereof.

Two business units: Software and Silicon IP & Secure Protocols

Subsequent to the acquisition of Verimatrix, Inc. and effective April 1, 2019, the Company is organized around two business units making up its core business: (i) Software and (ii) Silicon IP and Secure Protocols, each with their own R&D resources, product marketing and sales force. Support functions are shared between the two business units and the Company’s NFC patent licensing program remains managed at corporate level.

The Software business unit comprises (a) Inside Secure Content and Application Protection product lines, (b) Verimatrix Conditional Access product line, offered to customers as a license for on premise use and as a service (SaaS), with Verimatrix in some cases managing the hosted service, and (c) Verimatrix SaaS big data analytics offering.

The Silicon IP & Secure Protocols business unit provides intellectual property components (silicon IP), software toolkits and provisioning solutions, to enable semiconductor manufacturers and fabless companies, device manufacturers and security software integrators to meet the critical needs for authentication, secure communication, information protection and user privacy for the Internet of things and network security markets.

1- Pro forma financial results: from revenue to EBITDA

Q2 2019 and H1 2019 pro forma adjusted revenue

(in thousands of US$)

Q2-2019

Q2-2018

Q2 2019

vs. Q2 2018

H1-2019

H1-2018

H1 2019

vs. H1 2018

Software business unit

27,475

23,709

16

%

46,870

44,348

6

%

Silicon IP business unit

5,856

6,279

-7

%

10,375

12,376

-16

%

 
Total pro forma adjusted revenue of core business

33,331

29,988

11

%

57,245

56,724

1

%

 
NFC patent licensing program

1,806

 

3,548

1,806

 

 
Total pro forma adjusted revenue

33,331

31,794

5

%

60,793

58,530

4

%

Q2 2019 pro forma adjusted revenue

In the second quarter of 2019, pro forma adjusted revenue was $33.3 million, up 5% compared with the second quarter 2018 including $10.4 million for Inside Secure business and $23.0 million for Verimatrix business. Revenue in the second quarter of 2019 did not include any revenue from the Company’s NFC patent licensing program managed by France Brevets (compared with $1.8 million in the second quarter of 2018).

As expected, in the second quarter of 2019 Verimatrix revenue significantly increased over the first quarter (+61%) more than offseting the unusually low first-quarter 2019 revenue performance and recouping with year-on-year growth. This quarter, Verimatrix revenue grew by 18% year-on-year.

Pro forma adjusted revenue for the core business was $33.3 million, up 11% vs. the second quarter of 2018 mainly driven by a 16% year-on-year growth of the Software Business Unit.

This quarter, the Software business unit generated a pro forma adjusted revenue of $27.5 million. The double digit growth was mainly driven by the Conditional Access product line.

In the entertainment space, the Company’s combined strong positions in conditional access and content protection enabled increased royalties and maintenance fees with existing customers using cardless set top boxes and MultiRights OTT (Over-the-Top) solutions.

The Company also signed its first large deal for Strong Authentication with an existing customer in Europe for the Datacenter and Facilities Management market using the technology for smart locks that open with a NFC-enabled phone.

In the second quarter of 2019, the Silicon IP business unit (SIP) generated a pro forma adjusted revenue of $5.9 million, down by 7% compared with the second quarter of 2018 which had been a very strong quarter. SIP business unit activity grew 31% sequentially, keeping on benefiting from strong deal momentum with both existing and new customers, reaping the benefit of its differentiated and advanced portfolio products and strong market positions in particular in the fields of networking and storage markets.

H1 2019 adjusted pro forma revenue

On a pro forma and adjusted basis, revenue for the first half of 2019 was $60.8 million, up 4% compared with first-half 2018 including $23.6 million revenue from Inside Secure historical business (+5%) and $37.2 million revenue from Verimatrix historical business (+3%). Revenue in first-half 2019 included $3.5 million revenue from its NFC patent licensing program managed by France Brevets (compared with $1.8 million in the first half of 2018).

Pro forma adjusted revenue for the core business was $57.2 million, up 1% vs. first-half 2018, with Software Business Unit revenue up 6%, partially off set by Silicon IP Business Unit impacted by high year-on-year comparison basis.

In the first half of 2019, the Software business unit generated a pro forma adjusted revenue of $46.9 million, up 6% vs. 2018 as the company successfully offset unusally low performance of Verimatrix, Inc. business activity in the first quarter of 2019. The Company primarly managed to leverage its position in the Entertainment market to support customers in protecting the content they deliver under new forms and operating systems.

The Silicon IP business unit generated pro forma adjusted revenue of $10.4 million in the first half of 2019, down year-on-year primarily due to the absence of royalties from the company’s historical U.S. customer as compared to $1.5 million in first-half 2018 before phasing out that year. In the first half of 2019, the Company maintained strong business momentum, leveraging its portfolio of products to enable its customers to manage new demanding security challenges. The Company notably signed new licenses with existing sizeable customers either for new generation of their products or to extend the use of the Company embedded security technology within their product offering.

 

Pro forma

(in thousands of US$)

H1 2019

H1 2018

 
Adjusted evenue

60,793

 

58,530

 

 
Adjusted gross profit

49,402

 

48,364

 

As a % of revenue

81.3

%

82.6

%

Research and development expenses

(16,756

)

(19,011

)

Selling and marketing expenses

(15,345

)

(17,132

)

General and administrative expenses

(11,117

)

(9,795

)

Other gains / (losses), net

(98

)

(61

)

Total adjusted operating expenses

(43,316

)

(45,999

)

Adjusted operating income from continuing operations

6,086

 

2,364

 

 
EBITDA

10,015

 

5,952

 

 

Adjusted gross profit (pro forma)

On a pro forma basis, adjusted gross profit for first-half 2019 was $49.4 million, compared with $48.4 million in first-half 2018.

Excluding the contribution of the Company’s NFC licensing program, core business adjusted gross profit was stable at $47.2 million. Gross margin slightly decreased from 83.4% to 82.5% of revenue in first-half 2019 due to product mix.

Adjusted operating expenses (pro forma)

On a pro forma basis, operating expenses decreased from $46.0 million for the first half of 2018 to $43.3 million for the first half of 2019 as the Company started to reap the first benefits from the cost synergies plan implemented in the second quarter of 2019, while benefiting from a stronger US Dollar year-over-year.

Following the implementation of its new organization on April 1, 2019, the Company executed its plan to streamline operations in the second quarter of 2019 while preserving core R&D and sales and marketing capabilities to invest in future growth. Savings in operating expenses for the first half of 2019 related to the implementation of the plan are estimated to $1.5 million (excluding the one-off restructuring charge – see below).

The Company also benefited from a stronger US dollar in the first half 2019 (average rate of USD 1.1298 for EUR 1) compared with the same period of 2018 (average rate of USD 1.2108) reducing the operating expenses denominated in euros for an estimated amount of $1.2 million.

Adjusted operating income and EBITDA (pro forma)

Pro forma operating income for the first half of 2019 was multiplied by 2.6 at $6.1 million compared to the first half of 2018 reflecting operating leverage, first impact of cost synergies plan and a stronger USD vs. EUR reducing the operating expenses denominated in EUR when reported in USD.

First-half 2019 pro forma EBITDA increased by 68% to $10.0 million (from $6.0 million for the first half of 2018) and pro forma EBITDA margin increased by more than 600 basis points year-on-year to 16.5% of revenue.

2- IFRS operating and net income impacted by one-off expenses and non-cash charges

 
(in thousands of US$)

First half

2019

First half

2018

 
Adjusted operating income/(loss)

11,142

 

2,670

 

Amortization and depreciation of assets acquired through business
combinations (Items without cash impact)

(2,455

)

(1,150

)

Acquisition related expenses

(2,908

)

(491

)

Restructuring costs

(4,492

)

41

 

Impairment of assets (unused building)

(6,779

)

 

Share based payments

(545

)

(267

)

Operating income/(loss)

(6,037

)

803

 

Finance income/(loss), net

(2,158

)

1,437

 

Income tax expense

85

 

(437

)

Net income/(loss) from continuing operations (i)

(8,110

)

1,803

 

Net income/(loss) from discontinued operations (ii)

1,650

 

 

Net income/(loss) (i) + (ii)

(6,460

)

1,803

 

 
Sums may not equal totals due to rounding
 

Operating income/(loss)

Company generated a consolidated operating loss of $6.0 million in the first half of 2019, compared with an operating income of $0.8 million in the first half of 2018. The operating loss is explained mainly by:

  • one-off expenses in relation with the acquisition of Verimatrix, Inc. for $2.9 million (fees and commissions for $2.4 million and accruals for retention bonuses for $0.5 million) and the implementation of the cost synergies plan for $4,5 million;
  • impairment of assets5 for $6.8 million;
  • non cash items for $3 million including the amortization charge related to intangible assets arising upon the Company’s acquisitions in recent years (Metaforic in 2014, Meontrust and SypherMedia in 2017 and Verimatrix, Inc. in 2019) for $2.5 million and share-based payment expense for $0.5 million.

Excluding these one-off items, the Company’s would have generated an adjusted operating income of $11.1 million, i.e. 21.1% of consolidated revenue (compared with $2.7 million in the first half of 2018).

Finance income/(loss)

Net financial expense was $2.2 million in the first half of 2019, mainly driven by the interest expense of the $54 million loan note in connection with the financing of Verimatrix acquisition (bullet loan note due 2026) for $1.8 million and of the convertible bonds due 2022 for $1 million.

Net income/(loss)

In the first half of 2019, the Company generated a consolidated net loss (IFRS) of $6.5 million against a net income $1.8 million in the first half of 2018. It is derived from the operating loss for the continuing business for $6.0 million, net financial expense of $2.2 million and a one-off non-cash profit of $1.7 million from the discountinued semiconductor business due to the reversal of a provision recorded in 2016 following the sale of the Company’s semiconductor business and that was no longer necessary.

3- Financial position

As of June 30, 2019, the company’s consolidated cash position was $14.1 million, compared with $47.4 million at December 31, 2018.

Net debt stood at $61.1 million at June 30, 2019, compared with a net cash position of $32.8 million at December 31, 2018. Net cash/debt is a non-FRS measure defined as cash on hand, cash equivalents and short-term investments, less bank overdrafts, financial debt including notably obligations under IFRS 16 for finance leases, bank loans, private loans, and the debt component of the “OCEANE” convertible bonds due 2022 (see reconciliation with IFRS in Appendix 2 hereof).

Operating activities before changes in working capital generated $6.4 million of cash flow in the first-half of 2019, compared with $2.1 million in the first half of 2018 which excluded the Verimatrix business. Changes in working capital used $15.7 million to due the addition of Verimatrix, Inc. working capital items which are consolidated since March 1, 2019.

At closing of the acquisition of Verimatrix, Inc, Inside Secure paid out $129,1 million, net of $18.8 million transferred cash. To finance the acquisition, the Company used $33.9 million of its own cash (excluding costs related to the transaction and its financing), raised $60.0 million (€52.5 million) of equity and equity-like instruments, and contracted a private debt for $54 million (bullet loan note due 2026).

 
(in thousands of $)

H1 2019

H1 2018

 
Cash generated by / (used in) operations before changes in working capital

6,390

 

2,139

 

 
Cash generated by / (used in) changes in working capital

(15,718

)

1,926

 

Interests and Income tax

(2,615

)

(444

)

Net cash generated by / (used in) operating activities

(11,943

)

3,622

 

Cash flows from investing activites, net

(129,631

)

(95

)

Cash flows from financing activities, net

108,251

 

 

 
Net increase in cash and cash equivalents

(33,323

)

3,527

 

Cash and cash equivalents at beginning of the period

47,381

 

45,874

 

Foreign exchange impact

41

 

(326

)

Cash and cash equivalents at end of the period

14,098

 

49,075

 

 

4- Business outlook for 2019

In the first half of 2019, the Company focused on integrating Verimatrix with the implementation of a new organization effective since April 1st and a deep review before the implementation of targeted cost synergies plan while recouping with growth after an unusually low revenue performance of Verimatrix, Inc. historical business in the first quarter.

In light of all the work done on the cost synergies plan implemented in the second quarter of 2019, the Company now expects that the cost synergies would have a positive impact of $12.5 million per year on a run rate basis and starting 2020 (compared with $10 million target communicated in December 2018) and of $7.0 million in 2019 overall (compared with $4 million target) including $1.5 million achieved in the first half of 2019 and $5.5 million expected for the second half of the year. These cost synergies are net of the expenses implied by new hires currently planned for 2019.

In this context, Verimatrix upgraded its 2021 EBITDA margin objective6 to 26.5% of revenue (compared with 25% initially), with an unchanged revenue target of $150 million in 2021.

Conference call

Verimatrix will hold a conference call to discuss its earnings results today July 29, 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 81002603#.

The presentation is available online at www.verimatrix-finance.com. An audio webcast of the presentation and the Q&A session will be available on the Verimatrix investor website after the end of the call and will remain posted there for one year.

Financial calendar

  • Third-quarter 2019 revenue: October 15, 2019

About Verimatrix

Verimatrix (Euronext Paris – VMX) is a global provider of security and analytics solutions that protect devices, services and applications across multiple markets. Many of the world’s largest service providers and leading innovators trust Verimatrix to protect systems that people depend on every day for mobile apps, entertainment, banking, healthcare, communications and transportation. Verimatrix offers easy-to-use software solutions, cloud services and silicon IP that provide unparalleled security and business intelligence. Proud to empower and protect its customers for more than two decades, Verimatrix serves IoT software developers, device makers, semiconductor manufacturers, service providers and content distributors. For more information, visit www.verimatrix.com.

Forward-looking statements

This press release contains certain forward-looking statements concerning Verimatrix. Although Verimatrix 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 2018 annual financial report filed with the French financial market authority (the Autorité des marchés financiers – the “AMF”) on April 30, 2019, available on www.verimatrix-finance.com.

In particular, Verimatrix has the objective to achieve a revenue of about $150 million in 2021 while generating an EBITDA margin of approximately 26.5% of revenue (compared with 25% announced initially by the Company in December 2018). The revenue objective is on a like-for-like basis by integrating only Verimatrix, Inc.; it does not include any acquisition or disposal of businesses or companies. The EBITDA margin target includes the full effect of the $12.5 million annual expected cost synergies from the combination of Inside Secure and Verimatrix, Inc. (compared with $10 million announced previously). The revenue and operating expenses objectives of the business plan are based on a fixed euro/dollar rate of $1.17 for €1, ie the rate being used for the operating budget for the year 2019. The objectives presented above are based on data, assumptions and estimates considered reasonable by the Company as at the date hereof. These objectives, which result from the Company’s strategic planning, do not constitute a forecast or an estimate of the Company’s earnings and do not constitute a forecast resulting from a budget process. The figures and assumptions presented below are likely to change or be modified according to the evolution of the economic, competitive, financial or accounting environment or other factors that the Company would not have had been anticipated at the date hereof.

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 3 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 definitions of adjusted financial measures are presented in Appendix 2 hereof.

Appendix 1 – IFRS first-half 2019 financial results

Q2 2019 and H1 2019 consolidated revenue

 
(in thousands of US$)

Q2-2019

Q2-2018

Q2 2019

vs. Q2 2018

H1-2019

H1-2018

H1 2019

vs. H1 2018

Software business unit

26,624

4,291

520

%

38,951

8,310

369

%

Silicon IP business unit

5,856

6,279

-7

%

10,375

12,376

-16

%

 
Total revenue of core business

32,480

10,570

207

%

49,327

20,686

138

%

 
NFC patent licensing program

1,806

 

3,548

1,806

 

Total consolidated revenue

32,480

12,376

162

%

52,874

22,492

135

%

 

In the second quarter of 2019, consolidated revenue was $32.

Contacts

Investor and media

Investor Relations

Richard Vacher Detournière

General Manager & CFO

+33 (0)4 42 905 905

[email protected]

Contact Media

Kelly Foster

+1 619 224 1261

[email protected]

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