SOURCE: SurfControl

October 31, 2006 08:00 ET

SurfControl plc ("SurfControl" or "the Company") FY 2007 First Quarter Earnings

SurfControl plc Announces Results for the Quarter Ended September 30, 2006

LONDON -- (MARKET WIRE) -- October 31, 2006 -- SurfControl plc (LSE: SRF), the leading provider of global on-demand, network and endpoint IT security solutions, today reported financial results for the first quarter of FY07.

First Quarter Operational Highlights

-- Billings growth of 21% (Q1 FY06: -2%). Product and on-demand service
   growth rates were 6% and 44% respectively, producing 10% overall growth
   on a like-for-like basis
-- Ahead of plan on integration of BlackSpider acquisition:
      o   combined go-to-market strategy completed and launched Oct. 24th
      o   solid progress in the reduction of BlackSpider operating losses
-- Channel sales increase to 79% (Q1 FY06: 68%)
-- Improvement in both new business sales levels and new customer
   additions
-- Record high subscription revenue at 90% of total revenue.  Deferred
   revenue increase of 18% to $94.2m (Q1 FY06: $79.8m) creating
   significantly improved revenue visibility
First Quarter Financial Highlights (US$m)
Q1 FY2007                                      3m        3m        %
                                          30/9/06   30/9/05   change
                                               $m        $m
Revenue                                      29.6      24.1       23%
Gross margin %                                 96%       98%

Restructuring and onerous lease costs           0       3.3
Loss before tax                              (1.6)     (0.2)
Pro-forma operating profit                    1.2       3.4

Basic EPS (US cents)                         (4.3)     (0.6)

Channel billings %                             79%       68%
Non-Americas revenue %                         46%       39%

Billings                                     23.8      19.6       21%
Deferred revenue                             94.2      79.8       18%

Net cash and liquid investments              45.8      84.4
Cash generated from operations                2.6       6.0
Cash generated from operations before
 restructuring and onerous leases             2.9       7.0
Reconciliations from the nearest IFRS measure to all pro-forma measures contained in this RNS statement are provided in the financial statements following this RNS, as well as on SurfControl's web site at www.surfcontrol.com/investors/financial_information

Commenting on the results, Patricia Sueltz, CEO, said, "The first quarter of the financial year is seasonally the quietest, and I am therefore pleased to report solid progress in both top line growth and the integration of BlackSpider. Last week, we launched worldwide on-demand services as well as a major new release of our enterprise protection suite raising the level of protection for our customers. Given the continued general improvement in trading and the growing Secure Content Market, we are confident of delivering a solid trading performance for the year."

First Quarter Financial Highlights

Billings in the quarter grew 21% to $23.8m (Q1 FY06: $19.6m). Product billings continued their modest growth trend at 6% (Q1 FY06: -2%) and the new on-demand services added billings growth of 44% into the mix. Adjusted to recognise the pre-acquisition $2.1m prior year on-demand services billings of BlackSpider, the quarter on quarter billings growth rate of the Company is 10%.

During the quarter the Company improved new business sales levels as well as new customer additions. 915 new customers were won in the quarter (Q1 FY06: 767) including 249 on-demand customers. The number of large deals >$50,000 also increased, to 46 in the quarter (Q1 FY06: 32). Renewal rates remained in the target range of 70-80% and the value of three year contracts as a proportion of total billings was steady at 32% (Q1 FY06: 31%).

Revenue for the quarter increased by 23% to $29.6m (Q1 FY06: $24.1m). Product revenue increased 11% and the new on-demand services added revenue growth of 98% into the mix. Adjusted to recognise the pre-acquisition $1.4m prior year on-demand services revenues of BlackSpider, the quarter on quarter revenue growth rate of the Company is 16%.

Overall gross margin for the quarter was 96% (Q1 FY06: 98%) reflecting the introduction of on-demand services which produced a gross margin of 83%.

Licence revenue was 10% of total revenue in the quarter (Q1 FY06: 13%). The lower proportion of licence revenue compared to last year reflects the greater emphasis on subscription pricing initiated over a year ago, as well as the new on-demand revenue stream which is fully subscription-based. Subscription revenue of 90% is a record high for the Company, and the trend to an increasing proportion of subscription revenues is expected to continue. Reflecting this trend, as well as the first inclusion of deferred revenues from the on-demand services, total Company deferred revenue increased 18% to $94.2m (Q1 FY06: 79.8m) increasing forward revenue visibility. Seventy percent of the deferred revenue will be recognized as revenue in the next 12 months.

Americas' revenue for the quarter was 54% of the total (Q1 FY06: 61%). The shift in mix away from the Americas has been driven by the new on-demand services which to date has been almost wholly generated by customers in EMEA.

Pro-forma operating profit for the quarter was $1.2m (Q1 FY06: $3.4m). The decrease reflects both the pro-forma operating losses arising from the on-demand services of $1.0m (resulting from the acquisition of BlackSpider), and an increase in research and development and infrastructure spending across the Company.

FTE headcount at the end of the first quarter was 608 as at September 30, 2006 (Q4 FY06: 517), largely driven by the addition of 88 people from BlackSpider.

Share-based payment costs, amortisation of intangible assets, and depreciation are required under IFRS to be included in the principal operating cost categories of selling and distribution, research and development, and general and administrative. The nature and scale of each of these costs is separately disclosed at the end of the financial information contained in this RNS. In aggregate the total charge in the first quarter for each of these costs is as follows: amortisation of intangibles $1.5m (Q1 FY06: $0.6m), share-based payments $0.8m (Q1 FY06: zero), and depreciation $0.8m (Q1 FY06: $0.5m).

The acquisition of BlackSpider and its consolidation into the SurfControl Group accounts has added $21.5m of intangible assets, all of which have an estimated useful life of five years. The related amortisation charge in the first quarter is $0.9m. Goodwill of $27m has also arisen on consolidation. Goodwill is not amortised under IFRS, although goodwill and all intangible assets are the subject of impairment tests. Share-based payments have increased relative to last year because the prior year comparative was reduced by the reversal of charges for options which had lapsed. Depreciation has increased year-over-year in line with the increase in capital expenditure on internal infrastructure and information systems. The increase also reflects the addition of the on-demand infrastructure from the acquisition of BlackSpider.

After charging these costs, the loss before tax for the quarter was $1.6m (Q1 FY06: loss of $0.2m). The effective tax rate for FY07 is estimated at 25% of pre-tax profits before amortisation of non tax deductible intangible assets. Basic loss per share for the quarter was 4.3 cents (Q1 FY06: loss of 0.6 cents).

Pre-restructuring operating cash flow for the quarter was $2.9m (Q1 FY06: $7.0m). The decrease relative to the prior year was primarily driven by the reduced levels of pro-forma profit and the negative cash flow from the on-demand services. Cash generated from operations under IFRS was $2.6m for the quarter (Q1 FY06: $6.0m). Free cash flow in the quarter was $2.1m (Q1 FY06: $7.6m). Net cash and liquid investments ended the quarter at $45.8m, substantially reflecting the outflow of cash of $38.1m relating to the purchase of BlackSpider and the repayment of its debt.

First Quarter Corporate Highlights

Introduction

During the quarter, the Company continued to grow its top line and has positioned itself as the leading provider of Internet threat protection and content control solutions. A key development was the addition of on-demand services. The Company is now uniquely positioned as the leading provider of global on-demand, network, and endpoint IT security solutions. Customers, resellers, and industry analysts have immediately and positively responded to this development.

The market

A key theme in the market is the requirement for maximum protection on a multi-layered basis, protecting all points of vulnerability for the lowest cost of ownership; this is known as the "best of need" solution. This is best achieved by going to one supplier -- such as SurfControl -- for the broadest, most comprehensive level of protection. A company's need to manage and protect itself against increasingly complex threats is also driving market growth. One recent example is the recent phishing scam targeting Google users by offering a downloadable toolbar that was in fact a Trojan which converted the user's machine into a 'spam zombie.' SurfControl's global threat experts were the first to detect and warn customers of this latest threat. Backed by industry-leading threat detection technologies, SurfControl works 24/7 to provide customers with dynamic zero-day protection.

On-demand services integration

In July of this year, the Company acquired BlackSpider Technologies Ltd which positioned SurfControl as the only provider of Web and E-mail protection solutions in all three form factors: software, appliance and on-demand. The integration of on-demand services into the Company's product portfolio has now been completed; this included the amalgamation and cross training of the Company's sales, support and marketing teams. Data centre capacity has been extended in EMEA and a second data centre added in the US, making a worldwide total of eight. This extended capacity was established ahead of the October 24th global availability announcement of our global on-demand services.

Product development

A focal point for the quarter was the preparation for our major product launch on 24th October covering worldwide availability of on-demand services and new releases of SurfControl Web Filter, E-mail Filter and Mobile Filter. SurfControl is now a solutions provider rather than a point products vendor. Marketing activity included participation in three industry conferences on two different continents, extensive web and collateral enhancements and creation of a dedicated launch website. The Company is training SurfControl employees and channel partners around the world, conducting press and analyst briefings, and is reaching out to its installed base of customers.

Another important event in the quarter was the award of Premium Checkmark Certification from West Coast Labs for SurfControl E-mail Filter and Risk Filter products. This is a major endorsement of product quality for SurfControl. The Company also released Enterprise Threat Shield 3.51, which includes protection from the disruption of portable media devices; another emerging threat that organisations wish to address.

Reseller channel

During the past year the Company has increased focus on building and managing relationships with key resellers and partners. In the UK, for example, SurfControl moved to a two-tier distribution model with the appointment of InTechnology as its UK solutions distributor. Globally, the channel partners have responded well to the increased focus and sales via channel partners significantly increased to 79% of total billings in the quarter (Q1 FY06: 68%). Sales of new product and services via the channel increased to 86% in the quarter (Q1 FY06: 80%). The commitment to the channel has been further bolstered by the addition of on-demand services which BlackSpider had wholly delivered via the channel.

New customers

During the quarter the Company continued to expand its customer base, winning 915 new customers. Q1 FY07 billings breakdown was: New customer sales 26%, sales into the customer base 28%, renewals 44% and other 2% (Q1 FY06: 25%, 23%, 49% and 3% respectively). The new business sales mix has increased both year-over-year and sequentially. As a result the combination of new and base business mix is now at its highest level since FY04. The average invoice value in the quarter increased to $6,100 (Q1 FY06: $6,000) and bundled sales increased to 24% of billings (Q1 FY06: 20%).

New customers in the quarter included Banco Internacional de Mozambique, Banca di Bologna, Credit Union Australia, Dubai World Trade Centre LLC, Fujitsu General (Euro) GmbH, Johns Hopkins Health Care, Lockheed Martin VA, LVMH, Ministry of Finance Bulgaria, NASA JSC IT Security Office, North Yorkshire Police, Robins Airforce Base, Rothschild Asset Management Ltd, Smurfit Kappa Group, Toyota, Tampa Bay Federal Credit Union, and US Army-System Performance.

Outlook

The first quarter of the financial year is seasonally the quietest, and the Company is therefore pleased to report solid progress in both top line growth and the integration of BlackSpider. Last week the Company launched the worldwide availability of on-demand services as well as a major new release of the enterprise protection suite raising the level of protection for our customers. Given the continued improvement in trading and the growing Secure Content Market, we are confident of delivering a solid trading performance for the year.

About SurfControl

SurfControl provides a portfolio of security solutions to protect our customers from Internet threats, deliver business and regulatory compliance, and enable business continuity. SurfControl believes that security should be treated as a science, delivering protection at multiple points:

     "In the cloud" with on-demand security services
     On the network with software and appliances
     On the desktop and mobile client
All of SurfControl's solutions for Web, e-mail and endpoint security are backed by industry-leading threat detection technologies, delivered by SurfControl's Global Threat Experts who work 24/7 to provide customers with dynamic zero-day protection. The company protects more than 14.5 million users in over 23,000 customers worldwide, and employs more than 600 people in offices across Europe, the Americas, and Asia/Pacific. For further information and news on SurfControl, please visit www.surfcontrol.com

Caution concerning forward-looking statements

Any statements contained in this announcement that are not historical facts are forward-looking statements. Although the Company believes that its plans, intentions and expectations reflected in such forward-looking statements are reasonable, a number of important factors could cause SurfControl's actual future results to differ materially from those expressed in any such forward-looking statements. The forward-looking statements herein speak only as of today. SurfControl expressly disclaims any obligation or undertaking to update or revise such information.

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