KAPE.L Regulatory News (KAPE)

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014

24 September 2018

Kape Technologies plc

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

Interim results for the six months ended 30 June 2018

Kape (AIM: KAPE), the consumer security software business, today announces its unaudited half year results for the six months ended 30 June 2018.

Financial highlights

· Revenue of $27.8 million (H1 2017: $30.1 million)

o Revenue from core activities up by 14.2% to $24.1m in H1 2018

· Adjusted EBITDA1 up 45.1% to $4.3 million (H1 2017: $2.9 million)

o Strong underlying growth in Adjusted EBITDA of 178%2

· Adjusted cash from operations excluding the Web Apps and License of $2.1 million (H1 2017: $1.1 million) representing 90% underlying growth

· Increase in Media and App Distribution combined segment results3 to $13.1 million (H1 2017: $10.1 million)

· Significant increase in Segment margins to 47.1% (H1 2017: 33.3%) and EBITDA margins to 15.3% (H1 2017: 9.7%)

· Strong balance sheet with $62.7 million cash (31 December 2017: $69.5 million), after $6.8 million of dividend distribution in the period

Operational highlights

· Achieved significant progress in developing the Group's SaaS revenue model

o Expect to deliver $18 million revenue from existing users in future periods 

o Growth of 116% in premium subscribers to 561,400

o 40% of new Reimage sales sold on subscription

o Improvement in customer retention ratio from 69% to 74%

· Launched CyberGhost 7.0 app and developed plug-ins for Chrome and Firefox browsers

· Post period-end, in July 2018:

o Acquired Intego, a leading Mac and iOS cyber security and malware SaaS business

o Divested the Company's non-core Media assets to Ecom Online Ltd, enabling management to focus solely on Kape's own Cybersecurity products

· The board remains confident in delivering year-on-year growth in 2018, in-line with market expectations

Ido Erlichman, Chief Executive Officer of Kape, commented:

"I am delighted to report excellent progress was achieved in the first half of 2018, with a significant rise in subscriptions sales as well as growth in Adjusted EBITDA. Post the period-end, in July 2018, we acquired Intego, a highly complementary business that delivers against all our key growth priorities.

"We expect the momentum achieved in H1 to continue into the second half of the year, as we integrate Intego and begin to realise the synergies this acquisition presents, as well as continue to execute on organic growth initiatives and evaluating select acquisition opportunities. Kape is now in an excellent position to become a leading provider of online security and privacy in the growing consumer cybersecurity market. "

1 Adjusted EBITDA is a non GAAP measure and a company specific measure which excludes other operating income and expenses which are considered to be one off and non-recurring in nature.

2 The Adjusted EBITDA attributable to the Web Apps and License division for H1 2017 was $1.4 million. This division was discontinued as of September 2017; as such no revenue was recorded in H1 2018. Underlying Adjusted EBITDA from core activities, excluding the discontinued Web Apps and License division for H1 2018 is $4.3 million (H1 2017: $1.5 million)

3The segment result has been calculated using revenue less costs directly attributable to that segment.

Enquiries:

Chief Executive Officer's review

Overview

Kape continued to make excellent operational progress in the first half of 2018, following a transformational 24 months. This is reflected in the strong performance achieved in the period, with Adjusted EBITDA1 up 45% to $4.3 million (H1 2017: $2.9 million) and significant growth in underlying Adjusted EBITDA1 of 178%.

I am delighted to report that significant progress has been achieved across all key growth drivers. What is particularly pleasing is our focus on transitioning to a SaaS-based business has led to a growth in our recurring revenue base and we expect to deliver $18 million revenue from existing users in future periods (Dec 2017: $8 million). This is a key metric for the Group, as it reflects on our customers' satisfaction, in addition to providing quality, highly visible earnings for the Company moving forward.

An important initiative for management has been to increase retention rates across our product mix at a time when we have significantly scaled-up our user acquisition efforts. This has been successful, and we are pleased to report that retention levels grew to 74% in H1 (H1 2017: 69%). In the first half of the year, we were able to grow the number of subscriptions by 116% to 561,400 premium subscriptions sold. This, coupled with an increasing contribution from CyberGhost's SaaS-based revenues, has resulted in significantly better revenue visibility. This will be further strengthened following the full integration of Intego, which is a pure SaaS solution.

Our progress has been underpinned by strong demand for our consumer cybersecurity products. This, coupled with our proprietary customer acquisition capabilities, allowed us to generate double digit growth in our privacy vertical in the first six months of the year. This performance highlights the quality of our digital marketing arm as well as our ability to integrate products.

An important initiative that supports our growth ambitions is our R&D efforts. We have expanded our existing R&D centres in Germany, Israel and Romania, and through the acquisition of Intego established new R&D centres in the US and Paris, enabling us to build on and enhance our global presence and access to talent:

· to provide next generation infrastructure to support our growing customer base;

· to develop new products, as well as add innovative features to our existing products, in order to provide our customers with the best in class online security; and

· to further leverage cross company business intelligence and marketing tools, enabling Kape to reach our growing global customer base efficiently and at scale.

In the first half of the year, we launched the CyberGhost 7.0 app for iOS and Android. This new app focuses on increased accessibility for new customers and usability features, including a one-click activation button to immediately turn on and off privacy mode in seconds. Concurrently, Kape launched a CyberGhost Google Chrome and Mozilla Firefox plug-in. We are already seeing significant traction for CyberGhost 7.0 globally, demonstrating Kape's standing in the privacy market.

Post period-end

Our core focus on developing and acquiring B2C cybersecurity products has gathered significant momentum and culminated in the acquisition of Intego, a leading Mac and iOS cybersecurity and malware SaaS business, in July 2018.

The acquisition is directly in-line with Kape's core strategy and is a highly complementary fit to the Company's existing product suite. Intego provides the Group with a strong foothold in the malware protection and security solutions markets. It also brings over 150,000 paying users and we believe there is considerable potential to generate cross-selling opportunities across the newly combined customer-base. Finally, the newly enlarged group will enable Kape to expand into additional software solutions, supported by Intego's strong development skills and knowhow. Intego was acquired for a total consideration of $16.0 million cash, from internal cash resources. Intego's senior management team are under a two-year obligation period to the Company following completion of the acquisition.

Once Intego is fully integrated into the Group and is able to be marketed alongside our existing portfolio of products, we believe Kape's digital marketing expertise will accelerate both Intego's user acquisition strategy and foster greater levels of cross-selling opportunities. This, management believe, will lead to higher profit margins.

In July 2018, Kape announced the divestment of its non-core Media division to Ecom Online Ltd, signalling the completion of Kape's transformation into a cybersecurity company focusing on owned products.

As consideration, Kape will receive a 50% share of EBITDA from the Media division for the five years following the sale, which will be reinvested in Kape's core App Distribution segment, to which all Media division employees will be transferred.

Outlook

The Group remains keenly focused on three key drivers to underpin future growth, these are to:

· continue to broaden the Group's cybersecurity product base;

· further develop Kape's SaaS revenue model - migrating customers onto an annual subscription model; and

· generate greater levels of cross-selling opportunities across Kape's global customer base.

As the integration of Intego continues to progress, we expect to capitalise on our digital marketing expertise to expand its existing user base, foster higher levels of cross sell opportunities, in addition to delivering operational synergies.

Across the business, we continue to experience strong organic growth and remain well positioned to accelerate this during the second half of the year, supported by expanding our existing customer base and enhancing our recurring revenue base. The board therefore remains confident in delivering year-on-year growth in 2018 and beyond, in-line with market expectations.

As already demonstrated, we expect to continue to evaluate and execute on select acquisition targets where we see strong product synergies or opportunities to extend our market reach.

Ido Erlichman

Chief Executive Officer

24 September 2018

Chief Financial Officer's review

Overview

Total reported revenues in the first half of 2018 decreased by 7.6% to $27.8 million (H1 2017: $30.1 million), however revenues of the core App Distribution segment were up 14.2% to $24.1 million in the first half of 2018 (H1 2017: $21.1 million). Segment results increased by 30.4% to $13.1 million (H1 2018: $10.0 million) driven mainly by the App Distribution segment result which increased by 71.1% to $11.5 million. Adjusted EBITDA increased by 45.1% to $4.3 million (H1 2017: $2.9 million), and excluding the discontinued Web apps and license segment, underlying EBITDA significantly increased by 178%.

Kape remains cash generative with $2.1 million of cash generated from operations after adjusting for one-off non-recurring items in the period (H1 2017: $2.6 million), which represents cash conversion of 49% (H1 2017: 90%). The decrease in cash conversion is attributable to the Company investing $3.4 million in subscription user acquisition (H1 2017: Nil) which is expected to have a positive impact on operational cash flow in future years. The Group's balance sheet remains strong with a cash balance of $62.7 million at 30 June 2018 (31 December 2017: $69.5 million) and no debt.

Segment Result

The Segment Results have been calculated using revenue less costs directly attributable to that segment. Cost of sales comprises commissions paid to publishers and payment processing fees. Direct sales and marketing costs comprise traffic acquisition costs.

During the period, the App Distribution segment has seen continued growth with a significant increase in revenue of 14.2% to $24.1 million (H1 2017: $21.1 million) and 71.1% in segment result to $11.5 million (H1 2017: $6.7 million). The segment margin has significantly improved to 47.6% (H1 2017: 31.7%). The increase in segment result and margin was underpinned by a solid performance of Kape's core software solutions, and a bigger portion of revenue coming from subscriptions rather than licences.

Revenue from the Media segment decreased to $3.7 million, while the segment result remained stable in the period with a margin increase of 20.4%. The decrease in revenue is mainly attributed to the Company's programmatic video activity which suffered from a decrease in demand during the period. As a result, the Company decided to focus on the most profitable media campaigns, which resulted in the margin increase. On 26 July 2018, the Group sold the Media division, including its holdings in Clearvelvet Trading Limited, to Ecom Online Ltd.

In accordance with the board's decision to cease investment in the Web Apps and License segment, which Kape reported in 2016, revenue in H1 2017 came solely from a software licence and services agreement between Kape and Playtech Software ("Playtech"), pursuant to the terms of which Kape granted Playtech a license to use certain software modules for Playtech's licensees' branded casino software. The agreement expired on 18 September 2017. Following the expiration of the license and services agreement, no further revenue was generated from this segment.

Adjusted EBITDA

Adjusted EBITDA for the six months to 30 June 2018 was $4.3 million (H1 2017: $2.9 million). Adjusted EBITDA is a non-GAAP company specific measure which is considered to be a key performance indicator for the Group's financial performance. It excludes other operating income, share based payment charges and expenses which are considered to be one-off and non-recurring in nature and are excluded from the following analysis:

Operating profit/ (loss)

A reconciliation of Adjusted EBITDA to operating loss is provided as follows:

Exceptional and non-recurring costs in H1 2018 comprised non-recurring staff costs of $0.5 million (H1 2017: $0.1 million) mainly due to payments made to option holders in parallel to the special dividend paid in June, $0.1 million (H1 2017: $0.2 million) for professional services for acquisitions and rebranding expenses and $0.1 of onerous lease contract (H1 2017: Nil). The decrease in Employee share-based payment charge is due to the repurchase of the share-based option consideration from the founder of CyberGhost, which completed on 20 November 2017. 

Profit/ (loss) before tax

Profit before tax was $1.7 million (H1 2017: loss of $0.9 million). Finance costs of $0.7 million comprise mainly of foreign exchange differences derived from the Company's subsidiaries. The finance costs are offset by $0.4 million interest income generated from short-term deposits.

Profit/ (loss) after tax

Profit after tax was $1.3 million (H1 2017: loss $1.1 million). The tax charge derives mainly from group subsidiaries' residual profits.

Cash flow

Cash flow from operations was $1.4 million (H1 2017: $2.1 million). Adjusted cash flow from operations after adding back one-off payments was $2.1 million (H1 2017: $2.6 million and $1.2 million excluding the Web apps and License segment). This represented a cash conversion of 49% of Adjusted EBITDA (H1 2017: 90%). The decrease in cash conversion is attributable to the Company investing $3.4 million in subscription user acquisition (H1 2017: Nil) which is expected to have a positive impact on operational cash flow in future years. Excluding the investment, adjusted operating cash flow amounts to $5.5 million, which represents a cash conversion of 130%.

Net tax payments in the period were $0.3 million (H1 2017: Tax refunds of $0.03 million).

Cash spent in the period on capital expenditure of $0.9 million (H1 2017: $1 million), comprises capitalised development costs, fixed asset purchases and intangible assets acquired.

Cash outflows from financing activities included $6.8 million (H1 2017: Nil) of dividend paid to the Company's shareholders and payment of $0.5 million (H1 2017: Nil) resulting from the repurchase of share-based consideration. Cash inflows from financing activities included $0.1 million (H1 2017: $0.3 million) of proceeds from the exercise of employee options.

As a result, net cash outflow from investing and financing activities was $8.1 million (H1 2017: $5.3 million).

Financial position

At 30 June 2018, the Group had cash of $62.7 million (31 December 2017: $69.5 million), net assets of $74.2 million (31 December 2017: $79.4 million) and is debt free. At 30 June 2018, trade receivables were $4.7 million (31 December 2017: $8.5 million) which represented 36 days outstanding (31 December 2017: 42 days).

Subsequent events

On 24 July 2018, the Group acquired the entire issued share capital of Neutral Holdings Ltd, trading as Intego ("Intego"), a company incorporated in United States of America, for total consideration of $16 million. Intego is a leading Mac and iOS cybersecurity and malware protection SaaS business, with a focus on provision of malware protection, firewall, anti-spam, backup, data protection and parental controls software for Mac.

On 26 July 2018, the Group sold its Media division, including its holdings in Clearvelvet Trading Limited, to Ecom Online Ltd. The Company will receive earn-out consideration of 50% of the Media division's EBITDA for the next five years following the sale. In the year ending 31 December 2017, the Media division generated revenues of $15.8 million, with Adjusted EBITDA of $0.2 million.

Moran Laufer

Chief Financial Officer

24 September 2018

Consolidated statement of comprehensive income

For the six months ended 30 June 2018

*Adjusted EBITDA is a non GAAP measure and a company specific measure which is earnings before interest, tax, depreciation, amortisation share based payment charges and exceptional and non-recurring costs.

Consolidated statement of financial position

As at 30 June 2018

Consolidated statement of cash flows

For the six months ended 30 June 2018

* Reclassified

Notes

1. General information

The financial information set out in this document is for Kape Technologies plc (the "Company") and its subsidiary undertakings (together the "Group") in respect of the six months ended 30 June 2018.

Kape distributes and develops digital products in the online security space. The Company utilises its proprietary digital distribution technology to optimise its reach and create a superb user experience. The Company offers products which provide online security, privacy and optimal online experience. Kape's vision is to provide and develop best-in-class digital products for its customers and partners globally.

The Board of Directors approved this interim financial information on 21 September 2018.

2. Basis of preparation

This interim consolidated financial information has been prepared using accounting policies based on International Financial Reporting Standards (IFRS and IFRIC Interpretations) issued by the International Accounting Standards Board ("IASB") as adopted for use in the EU. 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 31 December 2017 Annual Report. The financial information for the half years ended 30 June 2018 and 30 June 2017 does not constitute statutory accounts.

The annual financial statements of Kape Technologies Plc ('the group') are prepared in accordance with IFRS as adopted by the European Union. The comparative financial information for the year ended 31 December 2017 included within this report does not constitute the full statutory Annual Report for that period. The statutory Annual Report and Financial Statements for 2017 have been filed with the Registrar of Companies. The Independent Auditors' Report on the Annual Report and Financial Statements for the year ended 31 December 2017 was unqualified and did not draw attention to any matters by way of emphasis.

The Group has applied the same accounting policies and methods of computation in its interim consolidated financial statements as in its 2017 annual financial statements, except for those that relate to new standards and interpretations effective for the first time for periods beginning on (or after) 1 January 2018, and are adopted in the 2018 financial statements. IFRS 9 Financial Instruments were adopted in this interim financial information for the period ended 30 June. IFRS 9 has replaced IAS 39 Financial Instruments: Recognition and Measurement, and has had an effect on the Group in the following areas:

· The impairment provision on financial assets measured at amortised cost (such as trade and other receivables) have been calculated in accordance with IFRS9's expected credit loss model, which differs from the incurred loss model previously required by IAS 39. This has not resulted in a change to the impairment provision at 1 January 2018

Other new and amended standards and interpretations issued by the IASB that will apply for the first time in the next annual financial statements are not expected to have a material impact on the Group.

There are a number of standards and interpretations which have been issued by the International Accounting Standards Board that are effective for periods beginning subsequent to 31 December 2018 (the date on which the company's next annual financial statements will be prepared up to) that the Group has decided not to adopt on the interim report.

Effective March 31, 2018, the functional currency of one of the Company's subsidiaries, CyberGhost SRL, has changed to US dollar ("USD" or "$") from Romanian Lei ("Lei"). The change was following an assessment by company's management that found that the USD is the primary currency of the economic environment in which the subsidiary operates. The exchange rate at that date was Lei 1= $0.2646.

After making enquiries, the directors have concluded that the Group has adequate resources to continue operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the half-yearly consolidated unaudited financial statements.

3. Revenue disaggregation of revenue

The following table presents our revenues disaggregated by the timing of revenue recognition in accordance with our reporting segments:

4. Segmental information

Segment revenues and results

Based on the management reporting system, the Group operates three reportable segments:

· App distribution - comprising the Group's own software and SaaS products and distribution platform;

· Media - comprising the Group's ad network activities and associated technology platforms; and

· Web Apps and License - comprising revenue generated from monetising web apps and licencing the associated technology

5. Operating Profit / (loss)

Adjusted EBITDA

Adjusted EBITDA is calculated as follows:

Operating costs

Operating costs are further analysed as follows:

Adjusted operating costs exclude share based payment charges, exceptional and non-recurring costs, amortisation of acquired intangible assets and other operation loss which resulted disposal of fixed assets.

6. Shareholder's equity

Ordinary share capital as at 30 June 2018 amounted to $14,850 (30 June 2017: $14,164; 31 December 2017: $14,850).

The number of shares in issue as at 30 June 2018 was 148,496,073 (30 June 2017: 148,496,073; 31 December 2017: 148,496,073).

As at 30 June 2018, the Company held in the treasury a total of 6,561,685 of ordinary shares of $0.0001 per value (30 June 2017: 6,867,397; 31 December 2017: 6,650,248). During the six months ended 30 June 2018, 88,563 of ordinary shares of $0.0001 per value were transferred out of treasury to satisfy the exercise of options by the Company employees (30 June 2017: 584,026).

On March 13 2018, the Company's board of directors declared a special dividend of 3.55 pence per share, amounting to $6,763. The special dividend was paid on 13 June 2018 to those shareholders on the Company's register as at the record date of 25 May 2018.

7. Profit per share

Basic profit (loss) per share is calculated by dividing the profit (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

Adjusted earnings per share is a non-GAAP measure and therefore the approach may differ between companies. Adjusted earnings have been calculated as follows:

The diluted denominator has not been used where this has anti-dilutive effect. Basic and diluted loss per share are therefore the same for reporting purposes.

The difference between weighted average number of Ordinary shares used for basic earnings per share and the diluted earnings per share is 346,979 (H1 2017: 670,728) being the effect of all potentially dilutive Ordinary shares derived from the number of share options granted to employees.

8. Related party transactions

The Group is controlled by Unikmind Holdings Limited incorporated in British Virgin Islands, which owns 73% of the Company's shares. Mr. Teddy Sagi is the sole ultimate beneficiary of the Unikmind Holdings Limited.

During the period the following transactions were carried out with related parties:

9. Subsequent events

(a) Acquisition of Neutral Holdings Ltd ("Intego")

On 24 July 2018 the Group acquired the entire issued share capital of Neutral Holdings Ltd trading as Intego ("Intego"), a company incorporated in United States of America, for total consideration of $16 million. Intego is a leading Mac and iOS cybersecurity and malware protection SaaS business, with a focus on the provision of malware protection, firewall, anti-spam, backup, data protection and parental controls software for Mac. The acquisition is directly in-line with Kape's core strategy to accelerate its growth in the cybersecurity market through selected acquisitions and brings significant strategic benefits to the company.

The detailed acquisition accounting is in progress and yet to be complete. It is anticipated that the acquisition will be accounted for in full in the annual financial statements for the period ending 31 December 2018.

(b) Sale of the Media division

On 26 July 2018, the Group sold the Media division, including the entire share capital of Clearvelvet Trading Limited, to Ecom Online Ltd. The Company will receive a deferred consideration of 50% of the Media division's EBITDA to be paid on a quarterly basis over the next five years following the closing. In the year ending 31 December 2017, the Media division generated revenues of $15.8 million, with Adjusted EBITDA of $0.2 million.

The detailed disposal accounting is in progress and yet to be complete. It is anticipated that the sale will be accounted for in full in the annual financial statements for the period ending 31 December 2018.

10. Cautionary statement

This document contains certain forward-looking statements relating to Kape Technologies plc ('the Group'). The Group considers any statements that are not historical facts as "forward-looking statements". They relate to events and trends that are subject to risk and uncertainty that may cause actual results and the financial performance of the Group to differ materially from those contained in any forward-looking statement. These statements are made by the directors in good faith based on information available to them and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.