Intercede Regulatory News (IGP)

1 Jun 2006 07:01

Intercede Group PLC01 June 2006 INTERCEDE GROUP plc ('Intercede', 'the Company' or 'the Group') Preliminary Results for the Year Ended 31 March 2006 Intercede, a leading developer of identity management software, today announcesits preliminary results for the year ended 31 March 2006. SUMMARY - Sales increased by 18.6% from £1.8m to £2.1m, with sales of core MyID licenses up 21%. - Further improvement in gross margin to 95% (2005: 94%). - Operating loss reduced to £0.3m (2005: £0.4m), notwithstanding increased investment in sales and after-sales staff. - Full year cash inflow of £0.4m (2005: cash outflow of £0.4m). Cash balances of £1.1m (2005: £0.7m) at financial year end. - Convertible loan stock extended through to 31 May 2009. - Licences granted to date will enable the issue of more than 1 million smart cards. - $0.5m of advance licence fees secured from the delivery of products compliant with the US Government's Homeland Security Presidential Directive- 12 ("HSPD- 12"). - RSA Security, SafeNet and VeriSign added to growing OEM partner list, which now includes most of the world's leading industry participants. - Growing worldwide corporate and governmental awareness of the need for technological solutions to major security issues. Richard Parris, Chairman & Chief Executive of Intercede, said today: "We are close to the point where the need for suitably robust systems to protectemployees and citizens is no longer a matter of choice for large organisationsand governments. The debate over the UK National ID Card Scheme and the USGovernment's HSPD- 12 are only two examples of many around the world. We aresure that there will be more and more investment in this area and we believe weare well placed to benefit from the anticipated market growth." About Intercede Intercede Group plc is a leading developer and supplier of smart card andidentity management software listed on the London Stock Exchange (IGP LN)(IGP.L). The Group's MyID software manages the secure registration, issuance andlifecycle of digital identities for a wide range of uses. This requires theintegration of multiple technologies and products from many different vendors,including smart cards, biometrics, digital certificates and Open Platformapplets. Intercede's customers cover a range of industries and include Athena SmartcardSolutions, Department of Transport Ireland, Fujitsu, Getronics PinkRoccade,GemPlus, Lloyds TSB, National Health Service (NHS), Metropolitan Police,Oberthur Card Systems, RSA Security, Royal Bank of Scotland, SafeNet, Siemens,Thales, Ubizen, VeriSign and various US and UK Government agencies anddepartments. For more information, visit www.intercede.com Intercede and MyID are registered trademarks or trademarks in the UK and/orother countries. ENQUIRIES Intercede Group plc Tel. +44 (0)1455 558111Richard Parris, Chairman & Chief ExecutiveAndrew Walker, Finance Director Pelham Public Relations Tel. +44 (0)20 7743 6679Archie BerensKate Catchpole Tel: + 44 (0)7803 033 431 Chairman's Statement Introduction Intercede has delivered on all fronts in its drive to exploit the fast emergingidentity management market. Specifically, Intercede is leading its sector of themarket in terms of penetration, technology adoption, reference sites and overallindustry reputation. This is a market that Intercede anticipated some time agoand has since been steadfastly pursuing. There is a growing requirement for alltypes of organisation, both governmental and corporate, to protect themselvesand their people in an age of so much uncertainty posed by multiple threats fromfraud to terrorism. Increasingly, organisations are investing in technology tocounter these threats and improve security. Intercede is a leading developer of software to issue and manage smart cards anddigital identities. The Company is highly focused on the family of technologiespowering its core MyID software platform. In my report last year, I indicated that the market for MyID would continue toaccelerate as the use of smart cards and digital identities increases around theworld. I am pleased to say this has proven to be the case. Long project leadtimes have delayed the immediate revenue benefits and disguise the impressiveachievements of the last 12 months in terms of market penetration andaccreditation. Despite this, we have nevertheless grown revenues and furtherimproved our gross margins. Results Year ended 31 March£000 2006 2005 2004Turnover 2,142 1,806 1,605Gross Profit 2,027 1,693 1,339Operating loss (344) (386) (661) In the year ended 31 March 2006, turnover increased from £1.8m to £2.1m andgross margins increased from 94% to 95%. Over the past five years, Intercede has significantly reduced operating lossesfrom £2.2m to £0.3m and the cash outflow before financing from £1.2m to a netcash inflow of £0.4m. As at 31 March 2006, the Group had a cash balance of£1.1m. The Group's strategy of continuing to develop and promote its own products,while maintaining tight control over costs, delivered breakeven performance inthe first half of the year. The second half was not profitable due to acombination of factors. The Group's results in the short term continue to bedependent on the timing of a small number of relatively large prospects. Inaddition, the excellent progress made with channel partners during the periodhas necessitated an expansion in the workforce to ensure that Intercedecontinues to provide the level of support required to take full advantage ofexisting and future market opportunities. We believe that this strategicinvestment will yield long term benefits as the market develops, and demand forour technology increases, resulting in a more visible and predictable flow ofrevenue. Already we see evidence that this is beginning to happen. Smart card-basedidentity cards for government, banking and corporate use have moved into thepopular consciousness. This has been driven by the public debate about the UKNational ID Card Scheme, the universal switch to Chip & PIN cards by Europeanbanks, the US Government's plan to issue smart cards to all Federal employeesand contractors, and the overall convergence of IT and physical access controlsolutions. As a consequence of these developments, and underpinned by a growingneed to authenticate citizens and employees, I expect to see a step change indemand for smart card management products over the next two to three years. Business and Product Development A major development during the year has been the recognition, by large USsoftware vendors, that Intercede's smart card management technology is amissing, yet vital, component within their broader identity managementsolutions. As a result of the barriers to entry (technical complexity and longdevelopment lead times), several leaders in the IT security market haveconcluded that licensing Intercede's MyID technology, on an OEM basis, is thebest option for servicing their customers' future requirements. During theperiod, Intercede added RSA Security and VeriSign to its growing OEM partnerlist. Additionally, SafeNet has been added as an active OEM partner followingits acquisition of Datakey, another long term partner. This representsremarkable penetration of the three main supply chains servicing Intercede'starget market. By channelling its product through large industry players,Intercede is increasing its capability to win a significant share of thismarket. It also avoids the costs and risks normally incurred by small softwarecompanies trying to sell products to major global corporations. Working with these and other partners, Intercede has expanded the number ofreference sites in the UK, Europe and US, with additional contract wins in theMiddle East and Africa. Although, for confidentiality reasons, Intercede doesnot have complete visibility of its partners' customer lists, I can confirm thatMyID is currently deployed in major Banks in the UK and US, in European and USPatent Offices, in telecommunications companies in Russia, Israel andSwitzerland, in leading European and US aerospace companies, in a major UKPolice force, in the John Lewis store group, in the British Library, in severalEuropean and US government departments, in the Cairo Stock Exchange, in OberthurCard Systems' UK National ID demonstrator, and a number of large healthcareinitiatives. I am pleased to report that Intercede has now granted MyID licenses to enablethe issuance of more than 1 million smart cards. However, given the relativeimmaturity of the market as noted above, the number of licenses sold in the last12 months is only a small proportion of the licenses that can potentially bepurchased by the same customers over the coming years. Along with recurringsupport and maintenance revenues, Intercede expects to build an annuity streamfrom these additional licenses. A number of Intercede's customers havecontracted for a minimum of between 5 and 10 years' annual support andmaintenance, with the potential for additional year-on-year licence sales. The scalability of Intercede's business model is demonstrated by its maturingnetwork of business partners who have now established MyID as a de factostandard across many sectors of the worldwide security industry. For example,MyID is the only product of its type that can be purchased through: • Major Security Systems Companies: e.g. RSA Security, SafeNet, Thales. • Smart Card Manufacturers: e.g. Athena, Axalto, Gemplus, Giesecke & Devrient, Oberthur. • Major Systems Integrators: e.g. Atos Origin, EDS, Lockheed Martin, Northrop Grumman, Siemens. • Managed Service Providers: e.g. Getronics PinkRoccade, RBS Trust Assured Services, VeriSign. These different channels offer Intercede unparalleled access to most of thesmart card initiatives currently emerging around the world. While the majorityof projects are yet to yield significant revenues, Intercede's expanded channelnetwork and superior technology place the Group in an excellent position toexploit the anticipated market growth. Strategy In my statement last year, I highlighted that in the 2005/06 year the Groupwould be focusing on executing its strategy to achieve profitability by: • Exploiting Intercede's existing channel network to generate MyID licence sales in Europe, the US and Asia. • Establishing a significant revenue stream from the US Federal Government HSPD-12 initiative. • Increasing the sales and support bandwidth by making Intercede's partners more self-sufficient through the delivery of training, configuration and integration capability. After 12 months of further progress the Group has been successful in executingthis strategy as demonstrated by the following milestones: • The sale of an additional 500,000 MyID licenses through partners in Europe and the US. • The delivery of HSPD-12 compliant products to Intercede's OEM partners in the US, including the payment of $0.5m for advance licence fees. • The training of more than 500 sales and 50 technical personnel in various partner companies, complemented by the development of a MyID Toolkit for integrators. The Group's business plan in the coming year is to build on this year's successby executing the following strategy: • Position Intercede's MyID platform as the critical product that enables convergence of IT and physical security systems. • Consolidate the value of the Intercede technology proposition by helping its OEM partners to integrate MyID into the core of their product suites. • Exploit the commercial potential of the MyID offering by enabling Intercede partners to move a number of key pilot projects into volume production. • Deliver the highest quality products and customer support to Intercede's partners and customers by sustaining and expanding a truly world-class team of software development, testing and support professionals. The effectiveness of this strategy is dependent on the ongoing high calibre ofIntercede's products, the dedication and professionalism of its staff, thequality of its partners and the ongoing support of the Group's shareholders. Inall of these respects, Intercede has an impressive track record. Furthermore, aprogram of continuous product improvement and new innovation continues to ensurethat Intercede remains a leader amongst a small number of global competitors. Outlook According to Forrester Research, European and North American spending on IT andphysical security systems convergence is conservatively set to increase from$1.1bn in 2005 to $11.3bn in 2008, representing a 10-fold increase in only 3years, as shown in the table below: US$ millions 2004 2005 2006 2007 2008 Large-scale convergence projects in NA and Europe 19 68 175 382 856 Physical/logical access control projects in NA and Europe 50 150 413 903 1,656 Other projects performed jointly by IT and physicalsecurity departments in NA and Europe 13 45 118 246 406 Public sector: border control convergence systems, lawenforcement projects in NA and Europe 410 820 1,899 4,202 8,003 Small projects (data center security, communicationssecurity, etc.) in NA and Europe 14 40 108 229 369 TOTAL 506 1,123 2,713 5,962 11,289 Reference 1 - Hunt, Steven. "Trends 2005: Security Convergence Gets Real."Forrester Research. January 11, 2005. http://www.opensecurityexchange.org/downloads/forrester_trends_2005_convergence.html Smart card management is a key technology in enabling this convergence. As aresult, given its market position, Intercede anticipates proportionately stronggrowth potential for its MyID technology. The outlook for the next two to three years is thus one of continuing growth inthe number of software licenses sold to an increasing number of end-customersaround the world. Intercede is well positioned, through its establishedproducts and distribution network, to take advantage of this emerging growth.The management team is committed to maintaining the Group on its current,focused course and I look forward to reporting further commercial progressduring the current year and beyond. 31 May 2006Richard ParrisChairman & Chief Executive Operating and Financial Review Introduction As outlined in the Chairman's Statement, Intercede has continued to makesignificant progress. A number of important milestones have already beenreached and a strong position thereby established. This is in anticipation ofthe identity and smart card management market entering what we believe will be aperiod of rapidly accelerating growth. Many leading industry players andcommentators share this optimism. Over the last few years, Intercede has evolved from the direct sale andcompletion of UK based contracts with early adopters to an increasinginvolvement in projects of this nature throughout the world harnessing thestrength of major players in the IT security industry. Business Development During the financial year, we have added RSA Security and VeriSign to ourgrowing OEM partner list. SafeNet has also become an active OEM partnerfollowing its acquisition of Datakey, a long term Intercede partner. RSASecurity, SafeNet and VeriSign are the top three corporate IT security solutionscompanies in the world. It is an outstanding achievement for Intercede to havepenetrated the main supply chains which service its target market. The fact thatlarge, global entities such as these are choosing to partner with Intercede is amajor endorsement for its MyID identity and smart card management software. The US Federal Government's, Homeland Security Presidential Directive-12, knownas HSPD-12, is creating a major new and specific market opportunity forIntercede's MyID technology. This directive stated that smart card identitybadges will be issued to all US Federal Government employees and contractorsstarting in October 2006. HSPD-12 is also accelerating the use of smart cards inthe rest of the US market. Through its partner network, Intercede is in anexcellent position to exploit this rapid growth as the US becomes the largestsingle market for smart card technology. It is too early to say with certaintywhen the contracts to procure the necessary technology will be awarded.However, Intercede has developed strong links with a range of partners who willbe actively involved in this process and is therefore well placed to exploitthis market opportunity at its earliest stages. Against this backdrop, technical development efforts have been focused ongreater interoperability with OEM partners' technology and the work required toachieve compliance with FIPS 201 which sets out the requirements mandated underHSPD- 12. A substantial amount of effort has also been expended to ensure thatpartners are able to sell, deliver and maintain the Group's technology. Thiseffort will be ongoing for the foreseeable future. Financial Results The financial results outlined below reflect a further year of increasedactivity in support of a growing partner list and a widening range of prospectsthroughout the world. As more and more projects commence, and move beyond proofof concept and pilot phases, Intercede's current short term dependency on asmall number of relatively large value projects will disappear. Year ended Year ended 31 March 2006 31 March 2005 Change £000 £000 % Sales 2,142 1,806 18.6 Gross margin (%) 2,027 (95%) 1,693 (94%) 19.7 Operating costs (2,371) (2,079) 14.0 Operating loss (344) (386) (10.9) Loss per share (0.9)p (0.7)p 25.0 Sales have increased by 19% year on year with an underlying 21% increase in MyIDlicense sales. Gross profit margins have increased from 94% to 95% as theproportion of own technology related sales has increased from 87% to 91%. Whilst costs have continued to be tightly controlled, additional employees havebeen taken on particularly in the pre and post sales areas to assist partners inbidding for and completing projects. As at 31 March 2006, Intercede had 39employees (2005: 33 employees). The average number of employees increased from30 to 35 year on year. The combined effect of higher sales and margins coupled with continued controlover costs has resulted in a further reduction in full year losses. The increase in loss per share reflects a reduction in the level of research anddevelopment expenditure which was agreed with the Inland Revenue and received asa tax refund during the period ie £76,000 (2005: £182,000). Funding As at 31 March 2006, the Group had cash balances totalling £1,112,000 (2005:£672,000). This represents a full year cash inflow of £440,000 (2005: £396,000cash outflow). As at 31 March 2006, both of the Group's loan stock agreements totalling£1,432,000 had become due for conversion or repayment at the option of the loanstockholders within the next 12 months. However, following discussions with theloan stockholders, agreement was reached on 31 May 2006 for both of the loans tobe extended through to 31 May 2009. In return, the conversion prices, asadjusted for the effect of the July 2003 Placing warrants, have been reducedfrom 33.06p to 20.0p (for the £982,000 loan) and from 23.52p to 15.0p (for the£450,000 loan). Interest will be charged at 6% per annum with effect from 1April 2006, with the loan stockholders also being able to choose to convert alloutstanding interest. Whilst this variation of terms will result in additional potential dilution ofup to 12% for the Group's shareholders, it removes the risks and costspotentially involved from having to secure alternative funding prior to the endof 2006 and, in addition, significantly increases the likelihood of both loansultimately being converted. Summary Intercede is continuing to take the action necessary to establish its positionin a new and exciting market. We will continue to balance the importance ofshort term profitability against the need to ensure that resources are in placeto meet partner and customer demands, thereby underpinning both our marketposition and the potential for longer term revenues. It is important that weremain sufficiently responsive to make the most of the market opportunity wehave created for ourselves. Andrew WalkerFinance Director31 May 2006 INTERCEDE GROUP plc Consolidated Profit and Loss Account for the year ended 31 March 2006 Notes 2006 2005 £'000 £'000 Turnover 2,142 1,806Cost of sales (115) (113) 2,027 1,693 Gross profitOther operating expenses (2,371) (2,079) (344) (386) Operating loss 34 32 Interest receivable and similar incomeInterest payable and similar charges (72) (72) (382) (426) Loss on ordinary activities before taxationTaxation 2 76 (182) (306) (244) Retained loss on ordinary activities after taxation and for the yearBasic and diluted loss per ordinary share 3 (0.9)p (0.7)p All operations of the Group continued throughout both years and no operationswere acquired or discontinued. There are no recognised gains or losses in either year other than the loss forthe year. INTERCEDE GROUP plc Consolidated Balance Sheet at 31 March 2006 2006 2005 £'000 £'000Fixed assetsTangible assets 27 25 Current assetsDebtors 317 379Cash at bank and in hand 1,112 672 1,429 1,051 Creditors: Amounts falling due within one yearConvertible debt (1,432) - Other creditors (1,555) (869) Net current (liabilities)/assets (1,558) 182 Total assets less current liabilities (1,531) 207 Creditors: Amounts falling due after more than one year Convertible debt - (1,432) Net liabilities (1,531) (1,225) Capital and reservesCalled-up share capital 4,271 4,271Share premium account 2,107 2,107Other reserves 1,508 1,508Profit and loss account (9,417) (9,111) Shareholders' deficit - all equity (1,531) (1,225) Attention is drawn to a significant event which took place subsequent to 31March 2006 as outlined in note 7. The convertible debt has been extended throughto 31 May 2009 which means that £1,432,000 of convertible debt and £301,000 ofassociated interest, both of which are included above within creditors fallingdue within one year, has now become due within two to five years. INTERCEDE GROUP plc Consolidated Cash Flow Statement for the year ended 31 March 2006 Notes 2006 2005 £'000 £'000 Net cash inflow/(outflow) from operating activities 5 347 (604) Returns on investments and servicing of financeInterest received 33 35Net cash inflow from returns on investments and servicing of finance 33 35 Taxation received 76 182 Capital expenditure (16) (7) Cash inflow/(outflow) before financing 440 (394) FinancingRepayment of secured loan - (2) Net cash outflow from financing - (2) Increase/(decrease) in cash in the year 6 440 (396) INTERCEDE GROUP plc Preliminary Results for the Year Ended 31 March 2006 NOTES 1. The financial information set out in this announcement does notconstitute the Group's Statutory Accounts for the years ended 31 March 2005 or2006, but is derived from those accounts. Statutory Accounts for 2005 have beendelivered to the Registrar of Companies and those for 2006, which have beenapproved by the Board of Directors, will be delivered following the Group'sAnnual General Meeting. Accounting policies have been consistently appliedthroughout both accounting periods. The Company's auditors have reported onthose accounts; their reports were unqualified and did not contain statementsunder Section 237(2) or (3) of the Companies Act 1985. 2. TAX ON LOSS ON ORDINARY ACTIVITIES The tax credit comprises: Year ended 31 March 2006 2005 £'000 £'000 Current year - UK corporation tax - -Adjustment in respect of prior periods 76 182 76 182 There is no charge in respect of corporation tax in either year due to theavailability of losses. An adjustment has been made in respect of research anddevelopment claims which have been agreed by the Inland Revenue. 3. BASIC AND DILUTED LOSS PER ORDINARY SHARE The calculations of loss per ordinary share are based on the loss for thefinancial year and the weighted average number of ordinary shares in issueduring each year. Year ended 31 March 2006 2005 £'000 £'000 Loss for the year (306) (244) Number Number Weighted average number of shares 33,963,438 33,963,438 Pence Pence Basic and diluted loss per ordinary share (0.9) (0.7) 4. DIVIDEND The Directors do not recommend the payment of a dividend. 5. RECONCILIATION OF OPERATING LOSS TO OPERATING CASH FLOW 2006 2005 £'000 £'000 Operating loss (344) (386)Depreciation charge 13 24Decrease/(increase) in debtors 64 (263)Increase in creditors 614 21 Net cash inflow/(outflow) from operating activities 347 (604) 6. ANALYSIS AND RECONCILIATION OF NET DEBT 2005 Cash flow 2006 £'000 £'000 £'000 Cash at bank and in hand 672 440 1,112 Debt due within one year - (1,432) (1,432)Debt due after one year (1,432) 1,432 - (1,432) - (1,432) Net debt (760) 440 (320) Subsequent to the Balance Sheet date, as outlined in note 7, a variation ofterms was agreed with the loan stockholders. The loan periods were both extendedto 31 May 2009 and, as a result, all of the convertible debt totalling£1,432,000 will now become due within two to five years. The reconciliation of net cash flow to the movement in net debt is as follows: 2006 2005 £'000 £'000 Increase/(decrease) in cash in the year 440 (396)Cash outflow from decrease in debt and lease financing - 2 Movement in net debt in the year 440 (394)Net debt at beginning of year (760) (366) Net debt at end of year (320) (760) 7. SUBSEQUENT EVENT Subsequent to the Balance Sheet date, on 31 May 2006, a variation of terms wasagreed with the holders of both of the convertible loan stock agreementstotalling £1,432,000. The loan periods have both been extended through to 31 May2009. Interest will be charged at 6% per annum with effect from 1 April 2006 andthe loan stockholders will now be able to convert the loans and associatedinterest outstanding at a price of 20.0p per ordinary share (for the £982,000loan) and 15.0p per ordinary share (for the £450,000 loan). The loans andassociated interest totalling £2,005,000 will be repayable as at 31 May 2009 ifthey choose not to convert. 8. ANNUAL GENERAL MEETING The Annual General Meeting of the Company will be held at 9.00am on Wednesday(5) July 2006 at Lutterworth Hall. 9. ANNUAL REPORT AND ACCOUNTS Copies of the full Statutory Accounts will be despatched to shareholders in duecourse. Copies will also be available on the website (www.intercede.com) andfrom the registered office of the Company: Lutterworth Hall, St. Mary's Road,Lutterworth, Leicestershire, LE17 4PS. This information is provided by RNS The company news service from the London Stock Exchange