15 September 2020

Corero Network Security plc (AIM: CNS)

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

Unaudited H1 2020 Interim Results

Corero Network Security plc (AIM: CNS) announces its unaudited interim results for the six months ended 30 June 2020.

Financial Summary:

·      Group revenue up 48% to $6.2 million (H1 2019: $4.2 million)

·      Annualised Recurring Revenues¹ ("ARR") up 54% to $8.8 million (H1 2019: $5.7 million)

·      Revenue from DDoS protection as-a-service ("DDPaaS") contracts increased to $1.2m (H1 2019: $0.5 million)

·      Gross margins of 75% (H1 2019: 79%)

·      EBITDA² loss of $1.2 million (H1 2019: loss of $1.9 million)

·      Loss before taxation of $2.7 million (H1 2019: loss of $3.9 million)

·      Loss per share of 0.5 cents (H1 2019: loss per share of 1.0 cent)

·      Net cash at 30 June 2020 of $3.3 million (31 Dec 2019: $5.4 million; 30 June 2019: $3.6 million)

¹ Defined as the normalised annualised recurring revenue and includes recurring revenues from contract values of annual support, software subscription and from DDoS Protection-as-a-Service contracts.  ² Defined as Earnings before Interest, Taxation, Depreciation and Amortisation. 

Operational Highlights:

·      Order intake increased by 58% to $7.9 million (H1 2019: $5.0 million), including 18 new customer wins

·      Global increase in remote working and internet usage as a result of COVID-19 restrictions have further emphasised the on-going relevance of Corero's solutions

·      Strong growth in DDPaaS and software subscriptions, with new orders and follow-ons of $3.0 million

·      High levels of customer satisfaction underpin $3.5 million of successful follow-on orders from existing customers (H1 2019: $2.1 million)

·      Maintained investment in sales and marketing to leverage both direct and channel sales opportunities

·      Lionel Chmilewsky appointed Chief Executive Officer and Neil Pritchard as Group Finance Director, with Ashley Stephenson appointed Chief Technology Officer

·      The new management team is focused on the following strategic growth priorities:

o  Increasing Corero's international presence

o  Leveraging existing sales partnerships

o  Amplifying the Group's services offering

o  Intensifying relationships with Global and Tier 1 accounts

o  Continuing to focus on technical innovation

Outlook

·      Order intake, including Juniper resale partnership, building across H2

·      Demand for DDoS solutions remain strong giving the Company solid foundations for 2021 and beyond

·      Management continues to monitor global COVID-19 guidance closely, with the health and wellbeing of Corero's workforce being of the utmost importance 

Lionel Chmilewsky, Chief Executive Officer of Corero, commented: 

"Having joined Corero in May 2020, I am very impressed with both the team's capabilities and the positive momentum we have generated throughout the first half of the year. Despite the challenges presented by the COVID-19 pandemic, the Company has remained highly responsive to our existing clients' needs as well as maintaining an encouraging level of new business activity, which includes securing 18 new customers since the turn of the year.

"As a management team, we are not only focused on maintaining the Company's real-time, high performance, automatic protection leadership position within the DDoS arena, but, more importantly, creating a wider and deeper sales network through which to fully capitalise on our solutions.

"Whilst the Board and I continue to be vigilant of the uncertainty that still exists across the global economy as a result of the COVID-19 pandemic, we remain confident in the medium and long-term prospects of the Group."

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

Introduction

The Group has made a strong start to 2020, generating revenues in the first half of $6.2 million (H1 2019: $4.2 million), an increase of 48%. This solid performance continued to be underpinned by the Group's strong order intake, which increased 58% in H1 2020 to $7.9 million (H1 2019: $5.0 million). 

61% of revenue in the period was recurring, comprising revenues from security maintenance and support services and DDoS Protection-as-a-Service ("DDPaaS")) versus 67% in H1 2019 with DDPaaS revenues increased to $1.2 million (H1 2019: $0.5 million). Annualised Recurring Revenues ("ARR"), which is an important measure for the Group in helping to determine visibility over future earnings, increased in the first half to $8.8 million on 1 July 2020, driven by growth in DDPaaS and software subscription orders. 

Gross margins were 75% in the first six months of 2020 (H1 2019: 79%) as a result of the trading solutions mix.  Adjusted operating expenses, being those excluding depreciation and amortisation of intangible assets, were $5.9 million (H1 2019: $5.2 million). The EBITDA loss for the six months ended 30 June 2020 was $1.2 million (H1 2019: $1.9 million), and after adjusting for share-based payments, adjusted EBITDA loss was $1.1 million (H1 2019: loss of $1.8 million). The loss before taxation was $2.7 million (H1 2019: loss of $3.9 million).

The restrictions imposed globally as a result of the COVID-19 pandemic have increased internet usage and in-turn the number of opportunistic DDoS attacks. This alarming trend has highlighted both the relevance and awareness of Corero's solutions globally in recent months as well as the resilience of the Company's business model. In addition, and as stated in the Company's full year results, Corero successfully moved its workforce to remote working in mid-March and has delivered seamless business continuity throughout lockdown. Our employees have worked tirelessly throughout this period and we thank them for their commitment and dedication. 

During the first half, Corero, through our SmartWall solutions added 18 new customers (H1 2019: six), including five in our global resale partnership with Juniper Networks (H1 2019: one new customer).  We are strengthening relationships with all of our partners, with increased sales and support training and ongoing development in our joint marketing collateral. 

Corero continues to achieve 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. However, as uncertainty created by COVID-19 restrictions has taken effect, budgetary pressures from a small number of corporate clients resulted in some attrition to our previously exceptionally high levels of services and support renewals, with renewals in H1 2020, albeit over an increased customer and revenue base, of 86% (H1 2019: 99%). Nevertheless, follow-on orders from existing customers achieved in the period of $3.5 million (H1 2019: $2.1 million), continue to demonstrate the significant momentum in the business.

Strategic update

In April 2020, the Company announced my appointment as an Executive Director and CEO of the Company, with Ashley Stephenson, Corero's previous CEO being appointed Chief Technology Officer and remaining on the Board. Neil Pritchard was also appointed Group Finance Director and brings with him many years of valuable listed company experience. I join with over 30 years' international experience in the technology and telecommunications industries and see great potential in Corero and its global solutions. The transition period to Corero's new management is now complete, with the team fully focused on maximising the global opportunity that exists for Corero's products and services.

As previously stated, the Company has invested in ongoing sales and marketing activities with progress achieved to increase momentum via its channel partners across more regions, including beyond the North American market, which it has historically focused on.

Management is focused on driving further international sales momentum with a customer-centric approach. This approach is centred on five core strategic drivers, namely:

·   Increasing our international presence by continuing to grow the Group's sales team and marketing initiatives in various geographies;

·  Leveraging Corero's existing partnerships with Juniper, GTT and Neustar, and adding complementary go-to-market partners in the medium term;

·  Amplifying Corero's service offering by adding new pre-sales, post-sales and managed services in order to generate incremental revenue growth;

·    Intensifying our relationships with Global and Tier 1 accounts, in order to establish long-term business partnerships; and

·  Increasing the Group's technological edge by continuing to focus on innovation and investment in R&D.

The impact of COVID-19 on corporate purchasing undoubtably generates uncertainty in the near-term. However, significant progress has been made in re-focusing the sales team on its renewed strategic priorities with a number of task forces established. Management believes these initiatives will build on the strong foundations that are already in place and reinforces our optimism for the Group in the long-term.

Increasing competitive advantage

Corero continues to invest in its market leading solutions through its research and development efforts, its engineering practices and customer service teams.  During the half, Corero further strengthened its portfolio of SmartWall products with major software releases and new platform configurations.

As DDoS attacks grow in size, frequency and sophistication, they reinforce the need for scalable, accurate and automated DDoS mitigation solutions. Our mission to protect the increasing importance of our customers' internet facing networks and services drives our product roadmap. New network topologies including Cloud and Edge offer greenfield opportunities for innovative DDoS protection techniques. Corero has established itself as a pioneer in bringing real-time DDoS detection and mitigation into the Terabit era. Insights gained from observing millions of DDoS attacks via our SecureWatch service not only inform our customers but also serve to provide unique insights into what Corero should build next to stay at the forefront of our industry.    

Total addressable market and market drivers

Corero's key target market, cybersecurity and networking, is high-growth and the market for DDoS protection and mitigation was forecast in June last year 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). Market drivers and factors behind this growth include a rise in multi-vector attacks, availability of DDoS-for-hire services, the impact of growth in IoT devices, the roll-out of 5G services, and growing demand from hybrid DDoS protection and mitigations services and solutions.

Financial summary

The Group reported revenues of $6.2 million in the six months ended 30 June 2020 (H1 2019: $4.2 million). 

Total operating expenses were $7.1 million (H1 2019: $6.9 million), with the following components:

·      Adjusted operating expenses (operating expenses excluding depreciation and amortisation of intangible assets) were $5.9 million (H1 2019: $5.2 million) - the increase reflects the full-year effects of prior and continued increases in sales and marketing resources together with increased central management costs;

·      Depreciation and amortisation of intangible assets of $1.2 million (H1 2019: $1.8 million);

·      Capitalised R&D costs of $0.7 million (H1 2019: $0.8 million); and

·      Operating expenses including a realised (trading) and unrealised (intercompany loan) exchange gain of $0.3 million and $0.5 million (H1 2019: total exchange gain of $0.1 million).

Loss before taxation was $2.7 million (H1 2019: loss of $3.9 million), an improvement of 31%. Loss after taxation was improved by the inclusion of a UK government R&D tax credit in the period of $0.1 million (H1 2019: $Nil) - to reduce to $2.6 million (H1 2019: $3.9 million). The reported loss per share was 0.5 cents (H1 2019: loss per share 1.0 cent).

As at 30 June 2020, Corero had net cash of $3.3 million (31 Dec 2019: $5.4 million; H1 2019: $3.6 million). This consists of cash at bank of $6.2 million (31 Dec 2019: $8.3 million; H1 2019: $6.9 million) and borrowings of $2.9 million (31 Dec 2019: $2.9 million; H1 2019: $ 3.3 million). Both the cash and borrowings figures include the effects of the Paycheck Protection Program Loan ("PPPL") described below (31 Dec 2019: $Nil; H1 2019: $Nil).

Net cash from operating activities in the first six months was a reduction of $0.6 million (H1 2019: net increase of $0.4 million) reflecting the loss for the period and positive working capital of $0.4 million (H1 2019: positive working capital of $2.2 million), itself a reflection of increased sales levels towards the end of the half and more commitments to suppliers ahead of increased business activity.

The Company's US trading subsidiary received a PPPL for $637,000 in early May. The PPPL is a component of the US CARES Act which is offering help to businesses in the US during the COVID-19 crisis. The PPPL, approved under waiver from the Group's borrowing providers Clydesdale Bank, may (either in total or in proportion) be forgivable if the use of the proceeds meets certain criteria, including employee retention and payroll purposes and it is the Company's intention to pursue this measure followed by early repayment of any amount not forgiven thereafter. 

During the period, to continue to attract and retain the Company's employees, and with the approval of the Company's significant shareholders, a share option re-pricing, cancellation and re-grant took place in June.

Outlook

The Board continues to evaluate the ongoing impact of COVID-19, however, the significant increase in internet usage globally has generated a proportionate higher volume of DDoS attacks. As a result, Corero's global suite of solutions remains highly pertinent to our clients' needs and management's focus on driving deeper and closer customer relationships is more relevant than ever.

As a management team, we are not only focused on maintaining the Company's real-time, high performance, automatic protection leadership position within the DDoS arena, but, more importantly, creating a wider and deeper sales network through which to fully capitalise on our solutions.

Whilst the Board and I continue to be vigilant of the uncertainty that still exists across the global economy as a result of the COVID-19 pandemic, we remain confident in the medium and long-term prospects of the Group which is well-placed for growth.   

Lionel Chmilewsky

Chief Executive Officer

14 September 2020

Condensed Consolidated Income Statement

for the six months ended 30 June 2020

   ¹ See note 6 for definition and reconciliation. 
 

Condensed Consolidated Statement of Total Comprehensive Income

for the six months ended 30 June 2020

Condensed Consolidated Statement of Financial Position

as at 30 June 2020

Consolidated Interim Statement of Cash Flows

for the six month period ended 30 June 2020

Consolidated Interim Statement of Changes in Equity

for the six month period ended 30 June 2020

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 2020 comprise the Company and its subsidiaries (together referred to as the "Group"). 

These condensed interim 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 2019 ("2019 Annual Report and Accounts"). The financial information for the half years ended 30 June 2020 and 30 June 2019 do not constitute statutory accounts within the meaning of Section 434(3) of the Companies Act 2006 and have neither been audited nor reviewed by the Group Auditor.

The annual financial statements of Corero Network Security plc are prepared in accordance with IFRSs as adopted by the European Union. The comparative financial information for the year ended 31 December 2019 included within this report does not constitute the full statutory accounts for that period.  The statutory Annual Report and Financial Statements for 2019 have been filed with the Registrar of Companies. The Independent Auditors' Report on that Annual Report and Financial Statement for 2019 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 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.

There have been no related party transactions or changes in related party transactions described in the latest Annual Report and Financial Statements that could have a material effect on the financial position or performance of the Group in the first six months of the financial year. 

These consolidated interim financial statements were approved by the Board on 14 September 2020 and approved for issue on 15 September 2020.

A copy of this Interim Report can be viewed on the company's website: www.corero.com. 

2. Significant accounting policies

The basis of preparation and accounting policies used in preparation of these interim financial statements have been prepared in accordance with the same accounting policies set out in the Corero 2019 Annual Report and Accounts. 

3. 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. Consequently, there are no separable 'other segmental information' not otherwise showed in these Condensed Consolidated Financial statements. 

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

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

The revenue is analysed for each revenue category as:

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

4. Taxation

The Group is currently loss making and consequently does not recognise a material taxation - income tax expense or credit. The tax receipt in the period relates to a research and development expenditure tax credit. 

5. Earnings 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.

6.  Key performance measures

EBITDA and Adjusted EBITDA for share based payments

Earnings before interest, tax, depreciation, and amortisation ("EBITDA") is defined as earnings from operations before all interest, tax, depreciation, and amortisation charges.  "Adjusted EBITDA" is EBITDA before share-based payments.  The following is a reconciliation of EBITDA and further adjustments for all three periods presented:

* This consists of depreciation of DDoS Protection-as-a-Service assets owned by the Company which is charged to cost of sales as well as depreciation charged within operating expenses. 

Annualised recurring revenues

Annualised recurring revenues are defined as normalised recurring revenues from contract values of annual support, software subscription and from DDoS Protection-as-a-Service contracts.  

7. Analysis of changes in net cash (cash and cash equivalents, and borrowings) 

The movement in the period is a combination of the actual flow (from operating, financing and investing activities) and the exchange rate movement. 

Paycheck Protection Program Loan ('PPPL')

The Company's US trading subsidiary, Corero Network Security, Inc was advanced, via its US bank, a Paycheck Protection Program Loan for $637,000 on 11 May 2020. The PPPL is a component of the US federal stimulus package known as the Coronavirus Aid, Relief and Economic Security Act, which offers help to businesses in the US during the COVID-19 crisis. The loan, approved under waiver from the Group's borrowing providers Clydesdale Bank, represents allowable US payroll costs, together with a smaller element of associated rent and utility costs.   

The terms of the PPPL are 1% interest, 2-year term, no early repayment penalties, no collateral/guarantees and no fees.  Loan repayments are deferred for 6 months but interest accrues.   Under PPP, the loan, or a proportion of it, may be forgivable if the use of the proceeds meets certain criteria, including employee retention and payroll purposes and it is the subsidiary and Company's intention to pursue this measure followed by early repayment of any amount unforgiven thereafter.