Corero Network Regulatory News (CNS)

25 September 2019

Corero Network Security plc (AIM: CNS)

("Corero", "Company" or the "Group")

Unaudited interim results

Corero Network Security plc (AIM: CNS) announces its unaudited interim results for the six months ended 30 June 2019.

Financial Summary:

·; Revenue of $4.2 million (H1 2018: $5.0 million)

o Recurring revenue increased to 66.9% of total revenue (H1 2018: 47.7%)

o Revenue from DDoS protection as-a-service contracts increased by 57.1% to $0.5m (H1 2018: $0.3 million)

·; Gross margins remained strong at 79% (H1 2018: 77%)

·; EBITDA* loss of $2.0 million (H1 2018: loss $1.4 million)

·; Adjusted operating costs** of $5.3 million (H1 2018: $5.3 million)

·; Loss before tax of $3.9 million (H1 2018: loss $3.0 million)

·; Loss per share of 1.0 cent (H1 2018: loss per share: 0.9 cents)

·; Net cash at 30 June 2019 of $3.6 million (30 June 2018: $5.1 million)

* EBITDA loss is defined as loss before depreciation, amortisation, financing, tax and unrealised foreign exchange differences on an intercompany loan

** Adjusted operating costs is defined as costs before depreciation, amortisation, financing, tax and unrealised foreign exchange differences on an intercompany loan

Operational Highlights:

·; High levels of customer satisfaction

o Services renewal rate remained strong at 99% (H1 2018: 98%), including a $0.5 million one-year customer support renewal

o Follow-on orders from existing customers of $2.1 million (H1 2018: $2.3 million), including $1.0 million from an existing customer for global roll-out

·; Progress achieved with Juniper Networks resale partnership

o First revenue generating order secured

o Investment in Juniper sales and support training

o Addition of Corero product to the Juniper global price list

o Growing pipeline of opportunities and proof of concepts

·; Strengthened Corero's sales function

o Appointment of Michael Connolly as US-based Vice President Worldwide Sales

Outlook

·; Juniper resale partnership set to deliver incremental revenue growth in H2 2019 and beyond

·; DDoS mitigation market fundamentals remain strong with market analysts forecasting double-digit growth

·; The Board continues to believe the business is well-placed for growth

Ashley Stephenson, CEO of Corero, commented: 

"We continue to make progress with the Juniper partnership, but as previously announced, the anticipated conversion of the pipeline into revenue in the first half of the year has been slower than previously expected. However, we have a growing pipeline of opportunities through the partnership and a number of trials in process, which are progressing well.

I am also confident that our ongoing investment in our sales function and the execution of the sales strategy will accelerate the development of our routes to market, which ultimately will underpin Corero's future growth."

The information contained within this announcement was deemed to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 prior to release of this announcement. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Enquiries:

About Corero Network Security

Corero Network Security is a leader in real-time, high-performance DDoS defense solutions. Service providers, hosting providers and digital enterprises rely on Corero's award winning technology to eliminate the DDoS threat to their environment through automatic attack detection and mitigation, coupled with complete network visibility, analytics and reporting. This industry leading technology provides cost effective, scalable protection capabilities against DDoS attacks in the most complex environments while enabling a more cost effective economic model than previously available. For more information, visit www.corero.com

Interim review

Overview

Revenue for the six months to 30 June 2019 was $4.2 million (H1 2018: $5.0 million), comprising almost entirely of sales from the SmartWall Threat Defense System ("SmartWall") family of products, Corero's market leading DDoS mitigation solution. Revenue in the first half was impacted by a lower than expected conversion of the pipeline of Juniper opportunities into orders and revenue. However, Corero management expect that, based on the strong growth in the pipeline and the number of proof of concepts currently in process, the Juniper partnership will contribute to the second half of the year.

Recurring revenue (comprising revenues from security maintenance and support services and DDoS protection as-a-service revenue) increased to 66.9% of total revenue versus 47.7% in H1 2018. Revenue from DDoS protection as-a-service contracts increased by 57.1% to $0.5 million (H1 2018: $0.3 million).

Gross margins remain strong at 79% (H1 2018: 77%) and Corero continued to manage costs in the first half, with adjusted operating expenses** of $5.3 million (H1 2018: $5.3 million).

The EBITDA* loss for the six months ended 30 June 2019 was $2.0 million (H1 2018: $1.4 million).

* EBITDA loss is defined as the loss before depreciation, amortisation, financing, tax and unrealised foreign exchange differences on an intercompany loan

** Adjusted operating costs is defined as costs before depreciation, amortisation, financing, tax and unrealised foreign exchange differences on an intercompany loan

Strategic progress

Corero continued to make operational progress in the first half of the year and has sustained high levels of customer satisfaction, as evidenced by the strong service and support contract renewals as well as existing customer follow-on purchases that the Company has secured.

Corero management remain focused on growing high-margin SmartWall revenue as a means to reaching profitability. Central to this, are the Corero's strategic priorities, which are our:

·; Three-pronged go-to-market focus;

·; Investment in sales and marketing to drive growth; and

·; Maintaining our competitive advantage in real-time DDoS mitigation.

Go-to market focus

Corero has strengthened its direct sales and indirect sales efforts in the first half of the year, with the appointment of Michael Connolly as US-based Vice President Worldwide Sales in June 2019. Michael has significant expertise in leading global technology sales functions and will be core to driving growth in the US - a key market for Corero.

Corero achieved high levels of customer satisfaction, an important metric for the Company, as satisfied customers are more likely to generate follow-on business and renewals and will typically provide positive references for new customers. This is demonstrated by the strong levels of services and support renewals of 99% (H1 2018: 98%), including a $0.5 million one-year customer support renewal, and follow-on orders from existing customers of $2.1 million (H1 2018: $2.3 million), including $1.0 million from an existing customer's ongoing global roll-out of SmartWall.

Corero made significant progress with the Juniper Networks global resale partnership in the first half of 2019. This included:

·; Securing the first revenue generating order through the partnership demonstrating the value of Corero's SmartWall software when coupled with Juniper's MX Series router;

·; Significant joint engagement including Juniper sales and support training, marketing collateral development and customer account opportunity mapping; and

·; The addition of SKUs to the Juniper global price list for Corero's SmartWall TDD products and services.

Investment in sales and marketing

Following the appointment of Michael Connolly, Corero plans to increase investment in the Company's sales functions in the second half of 2019 to deliver on the Company's revenue growth plan.

Maintaining competitive advantage

Corero continued to invest in the development of SmartWall, including the delivery of a major new software release in the first quarter of 2019, which introduced several new enhancements to automatic DDoS protection efficacy and advancements in the ease and flexibility of deploying the solution, including increased support for virtualised Software Defined Networking (SDN) and public cloud environments.

Strong Market Drivers

Corero's key target market, cybersecurity, is high-growth and the market for DDoS protection and mitigation is forecast by MarketsandMarkets to grow from $2.4 billion in 2019 to $4.7 billion in 2024 (a compound annual growth rate of 14.0% over the forecast period).

The major factors that are expected to drive this growth include the increase in the number of DDoS attacks, ease of availability of DDoS-for-hire services, impact of growth in IoT devices and the roll-out of 5G services.

Financial Summary

The Group reported revenues of $4.2 million (H1 2018: $5.0 million). 

Total operating expenses were $7.1 million (H1 2018: $6.8 million).

·; Operating expenses net of capitalised R&D costs and before depreciation and amortisation of intangible assets were $5.3 million (H1 2018: $5.2 million). Capitalised R&D costs were $0.8 million (H1 2018: $0.9 million)

·; Operating expenses include an unrealised exchange gain of $0.03 million (H1 2018: gain of $0.1 million) arising from an intercompany loan

·; Depreciation and amortisation of intangible assets was $1.8 million (H1 2018: $1.6 million).

Losses before taxation were $3.9 million (H1 2018: loss of $3.0 million) including amortisation of capitalised R&D of $1.6 million (H1 2018: $1.4 million) and amortisation of acquired intangible software assets $0.01 million (H1 2018: $0.01 million). The reported loss per share was 1.0 cents (H1 2018: loss per share 0.9 cents).

As at 30 June 2019, Corero had cash at bank of $6.9 million (H1 2018: $9.0 million) and debt of $3.2 million (H1 2018: 4.0 million).

The net increase in cash from operating activities in the 6 months ended 30 June 2019 was $0.4 million (H1 2018: net reduction of $0.2 million) reflecting the loss for the period and decrease in working capital investment of $2.2 million (H1 2018: working capital decrease of $1.0 million).

Outlook

The Board remains confident about Corero's prospects in the medium term, with the DDoS mitigation market fundamentals remaining strong with market analysts forecasting double digit growth. The Company will continue to execute its growth strategy and optimise routes to market, and remains well-placed to capitalise on the market opportunities and generate future growth.

In order to strengthen the Company's balance sheet, to provide the Company with additional working capital prior to being cash generative and to support the planned investment in sales and marketing, the Company plans to undertake an equity fund raise before the end of the current financial year to raise approximately £3 million. The Company's Chairman and major shareholder has indicated his support for this equity fund raise.

Consolidated Interim Statement of Comprehensive Income

for the six month period ended 30 June 2019

Consolidated Interim Statement of Financial Position

as at 30 June 2019

*restated to reflect the adjustment for contract assets as required by IFRS15 and borrowings being net of costs

Consolidated Interim Statement of Cash Flows

for the six month period ended 30 June 2019

*restated to reflect the adjustment for contract assets as required by IFRS15 and borrowings being net of costs

Consolidated Interim Statement of Changes in Equity

for the six month period ended 30 June 2019

Notes to the interim financial statements

1. General information and basis of preparation

Corero Network Security plc (the "Company") is a company domiciled in England. The condensed consolidated interim financial statements of the Company for the six months ended 30 June 2019 comprise the Company and its subsidiaries (together referred to as the "Group").

These condensed consolidated financial statements have been prepared in accordance with IAS 34,

"Interim Financial Reporting", as adopted by the European Union. They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the Annual Report and Accounts for the year ending 31 December 2018 ("2018 Annual Report and Accounts"). The financial information for the half years ended 30 June 2019 and 30 June 2018 do not constitute statutory accounts within the meaning of Section 434(3) of the Companies Act 2006 and have neither been audited nor reviewed.

The annual financial statements of Corero Network Security plc are prepared in accordance with

IFRSs as adopted by the European Union. The statutory Annual Report and Financial Statements for 2018 have been filed with the Registrar of Companies. The Independent Auditors' Report on that Annual Report and Financial Statement for 2018 was unqualified, drew attention to a material uncertainty relating to going concern and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

The comparative financial information for the year ended 31 December 2018 included within this report does not constitute the full statutory accounts for that period. The comparative financial information for the six months ended 30 June 2018 has been restated to reflect an adjustment for contract assets per IFRS 15 and borrowings being net of costs.

The consolidated financial statements have been prepared on a going concern basis as the Directors believe, based on internal forecasts and cash flow projections, that the current sales prospects, combined with the Group's existing cash resources should ensure that the Group has adequate working capital to service its existing business for the foreseeable future. However, the ability of the Company and Group to achieve the future profit and cash flow projections cannot be predicted with certainty. Failure of the Company and the Group to meet these projections may adversely impact the achievability of the bank loan covenants which may result in the bank loan being required to be repaid before the maturity date if the covenants are not met and cannot be renegotiated.

In order to strengthen the Company's balance sheet, to provide the Company with additional working capital prior to being cash generative and to support the planned investment in sales and marketing, the Company plans to undertake an equity fund raise before the end of the current financial year to raise approximately £3 million. The Company's Chairman and major shareholder has indicated his support for this equity fund raise.

These consolidated interim financial statements were approved by the Board on 24 September 2019 and approved for issue on 25 September 2019.

2. Significant accounting policies

Corero has applied the same accounting policies and methods of computation in its interim financial statements as in its 2018 Annual Report and Accounts, except for those that relate to new standards and interpretations effective for the first time for periods beginning on (or after) 1 January 2019 ("New Standards"). The New Standard which impacts the Group's financial reporting and represents a change in accounting policy, is IFRS 16 (Leasing).

Details of the impact of the new standard IFRS 16 are given below. Other new and amended standards and Interpretations issued by the IASB applicable for the current financial year are not expected to impact the Group as they are either not relevant to the Group's activities or require accounting treatment which is consistent with the Group's current accounting policies. In addition, certain other new and amended standards and Interpretations issued by the IASB are only applicable for the first time after 31 December 2019 and will, if applicable to the Group, be incorporated in the Annual Report and Accounts for year ending 31 December 2020.

The Company applied the modified retrospective adoption method under IFRS16 and recognised leases on the balance sheet as at 1 January 2019. The right-of-use assets measure was determined by reference to the lease liability on that date. The Company used the practical expedient not to recognise leases whose term ended within 12 months of the initial application and accounts for these leases as short-term leases. For the Company's one applicable lease at 1 January 2019, an office premises lease, the right-of-use asset and lease liability were recorded at a value of $78,000. For the six months period to 30 June 2019 right-of-use assets depreciation of $12,000 and interest of $2,000 was charged to the Statement of Comprehensive Income.

3. Loss per share

Loss per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. At the reporting dates there were no potentially dilutive ordinary shares. Therefore, the diluted loss per share is equal to the loss per share.

4. Segment reporting and revenue

The Group is managed according to one business unit, Corero Network Security, which makes up the Group's reportable operating segment. This business unit forms the basis on which the Group reports its primary segment information to the Board, which management consider to be the Chief Operating Decision maker for the purposes of IFRS 8 Operating Segments.

The Group's revenues from external customers are divided into the following countries:

Revenues from external customers are identified on the basis of invoicing systems and adjusted to take into account the difference between invoiced amounts and deferred revenue adjustments required by IFRS.

The revenue is analysed for each revenue category as:

The revenue is analysed by timing of delivery of goods or services as: