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STONESOFT CORPORATION INTERIM REPORT FOR JANUARY-JUNE 2011


August 12, 2011 - London

Stonesoft Corporation Stock Exchange Release 12 August 2011 at 9:15 a.m.

 

StoneGate product sales grew strongly
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
Stonesoft Corporation's StoneGate product sales grew by 53% and net sales by 29% compared to the corresponding period in the previous year. Operating result remained negative and was MEUR -0.7, which is MEUR -0.5 better than in the corresponding period in the previous year.

 

The comparable figures from the corresponding period in the previous year are in brackets and refer to the figures of continuing operations.

 

April-June 2011
- Net sales MEUR 6.5 (5.1), growth 29%
- Product sales MEUR 3.3 (2.2), growth 53%
- Operating result MEUR -0.7 (-1.2)
- Operating result as percentage of net sales -12 (-25)%
- Earnings per share -0.01 (-0.02) EUR
- Operative cash flow MEUR -0.5 (0.0)
- Liquid cash funds at the end of the fiscal period MEUR 9.3 (11.5). The corporate had no interest-bearing debts.

 

January-June 2011
- Net sales MEUR 13.0 (11.2), growth 16%
- Product sales MEUR 6.9 (5.4), growth 27%
- Operating result MEUR -1.6 (-1.4)
- Operating result as percentage of net sales -12 (-13)%
- Earnings per share EUR -0.02 (-0.02) EUR
- Operative cash flow MEUR 1.2 (0.7)

 

 

CEO ILKKA HIIDENHEIMO

 

During the second quarter of the year 2011, StoneGate product sales grew by 53% and net sales by 29%. The growth was strong, even though some expected fairly large orders were postponed. The company increased its investments in customer acquisition and sales promotion from the previous level, which is why expenses grew compared to the previous year. These investments are expected to contribute positively during the second half of the year.

 

The series of serious security breaches that came to publicity during the first quarter of the year continued on an almost daily basis during the second quarter of the year.
Security breaches against Pentagon, Lockheed Marting and Citibank, among others, demonstrate that the current method of protecting networks is insufficient. Until now, network protection has largely been based on previous experience and knowledge; since some protection methods have worked before and are well-known, their use has continued.

 

The challenge posed to network security by Advanded Evasion Techniques that were discovered by Stonesoft has not decreased since our knowledge has grown. In practice, 24/7 monitoring is useless, if security devices and alarm systems do not discover attacks.

 

The paradigm shift of network security is such a serious issue that every organization with critical or valuable data assets should review their current security policy and operations at board level as part of risk management in order to make sure they are up to date.

 

Previously, while building security devices, the aim has been to optimize speed at the expense of security, and low-cost special-purpose processors have been used to maximize performance. The increased efficiency of standard processors, together with the change of the threat landscape has proven our vision about dynamic security correct. This has also become evident in tests requiring extremely high performance and security, where our security systems have achieved excellent results.

 

In several competition situations where potential customers have organized third-party evaluations the measurement results have proven that the competitiveness of our appliances in handling real-world traffic is excellent. The nominal speed rates of some competitors drop to a fraction of what has been reported, for example when the packet size is smaller or when the actual security features of the appliances are switched on. Similar to what happened earlier with the so-called engineering work stations, we have now reached the point where the capacity of standard PC components is the same or even higher than that of special circuits. From security point of view, standard components are superior thanks to their modifiability and programmability, enabling swift reactions to dynamic challenges.

 

The above-mentioned factors strengthen our view about the necessity of dynamic security and we see the possibility of strong organic growth in the future.

 

 

NET SALES AND RESULT

 

April-June 2011 (hereinafter 'reporting period')

 

The Group's net sales in the fiscal period were MEUR 6.5 (5.1). Increase compared to the corresponding period in the previous year was MEUR 1.4, or 29%. The operating result (EBIT) was MEUR -0.7 (-1.2) and the result after taxes was MEUR -0.8 (1.3).

 

Product sales were MEUR 3.3 (2.2), growth by 53% compared to the corresponding quarter in the previous year.

 

The geographical distribution of net sales was as follows: Europe 63 (62)%, Emerging Markets (Russia, North Africa and Middle East) 22 (11)%, Americas (North and South America) 12 (19)% and APAC (Asia-Pacific) 3 (3)%.

 

 

January-June 2011 (hereinafter 'fiscal period')

 

The Group's net sales in the fiscal period were MEUR 13.0 (11.2). Increase compared to the corresponding period in the previous year was MEUR 1.8, or 16%. The operating result (EBIT) was MEUR -1.6 (-1.4) and the result after taxes was MEUR -1.4 (-1.3).

 

Product sales were MEUR 6.9 (5.4), growth by 27% compared to the corresponding quarter in the previous year.

 

The geographical distribution of net sales was as follows: Europe 59 (62)%, Emerging Markets (Russia, North Africa and Middle East) 25 (17)%, Americas (North and South America) 13 (19)% and APAC (Asia-Pacific) 3 (2)%.

 

 

FINANCE AND INVESTMENTS

 

At the end of the fiscal period, the Group's total assets were MEUR 18.8 (19.0). The equity ratio was 40 (60)% and gearing (the ratio of net debt to shareholders' equity) was -2.89 (-1.96).

 

The comparable cash flow during the fiscal period was MEUR 1.2 (0.7). The Group has no interest-bearing debt. The consolidated liquid assets at the end of the fiscal period totalled MEUR 9.3 (11.5).

 

Investments in tangible and intangible assets totalled MEUR 0.4 (0.2).

 

 

DEVELOPMENT OF BUSINESS OPERATIONS

 

Main business events in the fiscal period

 

In April, Stonesoft announced it had expanded its partnered offering with Optimesys, a Finnish specialist company focused on producing information security services.

 

In May, Stonesoft introduced two new firewall appliances specifically designed to meet the security needs of today's most demanding high-capacity environments. The new StoneGate(TM) FW-5201 and FW-5205 appliances are Stonesoft's latest addition to its family of modular network security appliances.

 

In June, Stonesoft introduced the world's first Anti-Evasion Readiness Test(TM) service. This service tests how well an organization's critical digital assets are protected against advanced evasion techniques (AETs). The service will be provided by selected, independent IT service organizations around the world.

 

In June, Stonesoft made its public website www.stonesoft.com and corporate blog StoneBlog http://stoneblog.stonesoft.com available over IPv6 to demonstrate their readiness to help their customers migrate securely into IPv6.Both web services are IPv6 enabled and protected by StoneGate Firewall/VPN.

 

In June, Stonesoft introduced a new solution for the mass deployment, tuning and upkeep of network security. The StoneGate Mass Security solution has been designed to meet the security needs of small branch and remote offices such as retail and hotel chains as well as unattended locations, for example ATMs.

 

In June, Stonesoft announced its StoneGate network security solutions had received Common Event Format (CEF) Certification from ArcSight, Inc., an HP company and a leading global provider of security and compliance management solutions that protect enterprises and government agencies. Stonesoft is one of the first security vendors worldwide to offer full support for CEF.

 

In June, Stonesoft encouraged organizations to re-evaluate their existing risk management and security architecture. Recent phenomena such as Wikileaks, Stuxnet, Advanced Evasion Techniques and the latest security breaches have changed the security landscape permanently and acted as wake-up calls also in the strategic aspect.

 

In June, Stonesoft introduced the StoneGate Firewall/VPN 5.3 and StoneGate Management Center 5.3. The new version offers enhanced access control, authentication and mass security as well as a broad range of additional features and improvements.

 

We estimate the above-mentioned operations and achievements to strengthen the company's competitiveness.

 

 

Main business events after the fiscal period

 

In August ECCT, a leading US-based managed security services provider (MSSP), will deploy the StoneGate IPS across 50 regional and community banks and credit unions by end of year. The MSSP has already successfully deployed or is in the process of deploying the StoneGate IPS solution in 33 financial institutions.

 

 

RESEARCH AND DEVELOPMENT

 

Stonesoft continued its strong investments in R&D. Investments during the fiscal period totalled MEUR 3.0 (2.9). This represented 23 (25)% of operating expenses.

 

R&D employed 76 (70) persons at the end of the fiscal period. Stonesoft has booked 0.3 MEUR R&D funding from Tekes, the Finnish Funding Agency for Technology and Innovation during the fiscal period.

 

 

SHARE CAPITAL AND STOCK OPTION PROGRAMS

 

Stonesoft has one class of shares and all shares have equal rights. At the end of the fiscal period, the share capital recorded in the Trade Register was 1 150 574.64 Euros. The number of shares was 63 312 482. Stonesoft or its daughter companies do not own its shares. There were no changes in the share capital during the fiscal period.

 

Stock Option Programs

 

The company had one valid stock option program, Stock Option Program 2008-2014, under which the subscription price is EUR 0.30 and the total number of stock options to be granted based on this program is 3 000 000 at the maximum. The subscription period of the shares is graded and will end for all stock options on December 31, 2014.
 
During the fiscal period no subscriptions were made on the basis of the Stock Option Program 2008-2014.

 

 

DEVELOPMENT OF SHARE PRICES AND TURNOVER

 

In the beginning of the fiscal period on January 3, 2011, the price of Stonesoft share was EUR 0.58 (0.70). At the end of the fiscal period on 30 June 2011 the price was EUR 0.60 (0.72). The highest price was EUR 0.65 (1.19) and the lowest EUR 0.51 (0.69). During the fiscal period the total turnover of Stonesoft shares amounted to MEUR 3.8 (17.0) and 6.5 (11.1) million shares, which is 10.3 (19.4)% of the total amount of the shares. Based on the share price at the end of the fiscal period, Stonesoft's market value was MEUR 38.0 (45.5).

 

The company gave no notices in change of ownership during the fiscal period.

 

 

ACQUISITIONS AND CHANGES IN GROUP STRUCTURE

 

No acquisitions were made during the fiscal period and there were no changes in the Group structure.

 

 

PERSONNEL

 

At the end of the reporting period, the Group's personnel totalled 203 (192).

 

 

AUTHORIZATIONS OF THE BOARD OF DIRECTORS

 

The AGM decided on 13.4.2011 to authorize the Board of Directors of the company to decide about one or more share issues as well as the issuance of option and other special rights so that the total number of new shares may be 12 600 000 at the maximum.

 

Based on the authorization the Board of Directors may decide on issuance of shares to the shareholders according to the shareholders' pre-emptive subscription rights as well as in a directed issuance of shares or stock options or other special rights in deviation from the shareholders' pre-emptive subscription rights in case the deviation is justified by a weighty financial reason for the company, such as financing of an acquisition, other arrangement concerning the business of the company or development of its capital structure, or incentive to the company's personnel.

 

The Board of Directors was authorized to decide on other terms and conditions related to the share issues and to the issuance of option or other special rights.

 

The authorization is in force until the end of the 2012 AGM.

 

The Board of Directors is not authorized to purchase the company's own shares.

 

 

SHORT-TERM RISKS AND BUSINESS UNCERTAINTIES

 

During the fiscal year 2011, Stonesoft's main risks and business uncertainties relate to the realization timetable of the sales projects and possible production disruption of our subcontractors and suppliers. In addition, the recent political restlessness in North Africa and Middle East may have a negative impact on the company's business operations in these markets. Also insecurities related to public economies in the United States as well as in the European Union may have a negative effect on the public sector projects in these areas. The company has no risks related to the order book, because it normally can process incoming orders within a couple of work days.

Stonesoft's risk management and its principles are discussed more extensively at the company website and in the Annual Report 2010.

 

 

FUTURE OUTLOOK

 

According to the research company Infonetics, the enterprise network equipment and software market is estimated to grow by 4% during 2011.

 

Stonesoft's products meet the new security challenges brought by cloud services, virtualization and outsourcing of security.

 

Advanced Evasion Techniques

 

In 2010 Stonesoft announced it had discovered anew network security threat category, Advanced Evasion Techniques (AETs).
 
As we have continued our research, this area has become an even more challenging problem than initially estimated. We have reported additional findings to CERT-FI, who is in charge of international vulnerability coordination. Due to wrong technology choices, many competitors seem to have great difficulties in amending their solutions to provide protection against AETs. Stonesoft estimates that there will be additional findings for years to come. In June 2011, the company introduced a tool which security experts can use to help their customers evaluate their own situation.
 
The most efficient protection against the threat posed by advanced evasions techniques is provided by flexible software-based systems, which can detect advanced evasion techniques and are remotely updated and centrally managed. Stonesoft's network security solutions fulfill these criteria.

 

The latest security breaches around the world have made many parties understand the importance of security and demand organizations to take additional measures to strengthen their security. Instead of speed or performance, the ability of security systems to protect organizations' critical data capital and systems has become increasingly important.

 

Based on Stonesoft's view, the above mentioned issues will open new business opportunities for the company, have a positive effect on its net sales and profitability and strengthen its competitiveness and market position as general understanding and knowledge about advanced evasion techniques grow. In 2011, Stonesoft aims for faster-than-market growth of net sales and improved profitability.

 

With regard to the development of the turnover and the operating result, variation is expected between the quarters in comparison to the corresponding quarter during the previous year as well as to the previous quarter as a consequence of, among others, long sales cycles and the relatively big impact of individual deals on the development of net sales and operating result.

 


SUMMARY OF FINANCIAL STATEMENTS AND NOTES JANUARY 1 - JUNE 30, 2011

 

Basis of preparation

 

The Interim Report has been prepared in accordance with the IAS 34 Interim Reports standard.

 

The company has adopted certain new or revised IFRS standards and IFRIC interpretations at the beginning of the financial period as described in the Financial Statements for 2010. However, the adoption of these new and amended standards has not yet had an effect on the reported figures in practice. In other respects, the same accounting policies have been followed as in the Financial Statements for 2010. Key indicator calculations remain unchanged.

 

The figures presented in this release are unaudited.

 

Stonesoft Group          
Income Statement 4-6/2011 4-6/2010 1-6/2011 1-6/2010 1-12/2010
(1000 Euros)          
           
Net sales 6 506 5 060 13 015 11 216 24 341
Other operating income 279 219 398 460 847
Materials and services -862 -610 -1 941 -1 445 -3 640
Personnel expenses -4 007 -3 538 -8 038 -7 340 -14 744
Depreciation -124 -108 -248 -215 -437
Othe

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