Q4 & Full Year Results

RNS Number:5321P
Surfcontrol PLC
09 September 2003

                                        
SurfControl announces record results for the fourth quarter and full year ending
                                  June 30 2003


  Annual revenue growth of 35% and improved forward revenue visibility for FY04


London, England (September 9, 2003) - SurfControl plc (London:SRF, Nasdaq
Europe:SRFC), the world's Number One Web and E-mail filtering company, today
reported its un-audited results for the fourth quarter and full year ending June
30, 2003.


Highlights:


-          Record quarter invoicing: Q4 $30.0m or 43% year on year growth

-          $73.2m annual revenues in line with 35% year on year growth
           expectations

-          EBITDA for the year up from $1.7m to $11.0m

-          First full year of pre tax profit of $8.9m

-          Record levels of operating cash flow at $8.2m in Q4 and closing cash
           of $61.7m

-          Significant improvement in forward revenue visibility with deferred
           revenue increasing 60% year on year

-          Continued growth in new customers with over 1,700 signed in Q4.  New
           customers include Zippo, Reebok, CSC, Motorola and Sodexho

-          Business generated by the channel exceeds 50% for the first time, at
           53% in Q4

-          Board restructuring to oversee the next phase of the Company's growth



                       Year to    Year to               Q4 FY     Q4 FY        
                          date       date                2003      2002
FY03 and Q4 2003                                 %                           %
                      30/06/03   30/06/02   change                      change

                            $m        $m                   $m        $m
Revenue                   73.2       54.2      35%       20.4      15.6    30%
Gross margin               99%        99%                 99%       99%

EBITDA                    11.0        1.7                 3.2       1.4
PBT/ (LBT)                 8.9      (69.4)                2.7     (15.1)
Basic EPS (per share      20.9     (225.9)                6.7     (47.1)
in US cents)

S&M spend as % of          54%        61%                55%        58%
overall rev.
Indirect invoicing %       49%        36%                53%        36%
Non US revenue %           28%        25%                30%        25%

Deferred revenue          54.3       33.9      60%      54.3      33.9     60%
balance

Operating Cash Flow       24.1       11.7                 8.2       4.7
Cash balances             61.7       35.5                61.7      35.5
Invoicing                 92.1       65.2       41%      30.0      20.9    43%
---------------         ------  ---------    ------   -------  --------  ------

Commenting on the results, Steve Purdham, CEO said, "The results for this year
are an outstanding achievement and reflect the investment we made in laying the
foundation for growth in the early years of the business. They are also
testament to the strength of the Company, its brand, its customers and its
people and proof of the continued demand for filtering tools to enable companies
to stop unwanted content.


This has enabled SurfControl to generate record levels of revenue, profits and
importantly, cash which will be used to fund expansion, corporate investment and
acquisition opportunities.


The Internet has changed the way we live and work. Never before has so much
information, in the form of Internet content, been available to us so easily and
so quickly. Unfortunately, unwanted content, such as pornography, viruses, Spam
and junk e-mail, has come along for the ride, and threatens corporate
productivity, resources, liability and security.


SurfControl helps businesses stop this unwanted content. Our highly
sophisticated Content Filters understand Internet content, and are able to
filter out unwanted material, so that customers can get to what they want, when
they want it."


Commenting on future trading, Steve Purdham continued, "Going forward, the
explosive growth in unwanted content, in all its forms, provides a wealth of
opportunity both in terms of selling our existing product range into new
customers and developing new products to manage digital content, wherever and
however it is transmitted. It is a competitive market and budgetary controls are
still tight, but our drive is aimed at improving all aspects of our business to
keep us ahead of our peers. With high levels of deferred revenue providing good
forward revenue visibility, and with trading to date progressing according to
management expectations, we look forward to FY 04 with our usual cautious
optimism and expect a satisfactory outcome for the year."


For further information:

SurfControl plc                               [phone]

Steve Purdham , Chief Executive Officer       [e-mail]
Simon Wilson, Chief Financial Officer         [e-mail]
Tom Moriarty, SVP Corporate Communications    [e-mail]


ICIS                                          [phone]

Caroline Evans-Jones                          [e-mail]


Fourth quarter and full year financial highlights:

Revenues for the quarter increased 30% to $20.4m compared to $15.6m for the
fourth quarter last year. Revenues for the year ended June 30, 2003 increased
35% to $73.2m from $54.2m in the prior year.  License revenue represented 27% of
total revenue in the quarter and for the year as a whole (Q3 FY 03: 24%) (Q4 FY
02: 29%).  US revenues represented 70% of overall revenues in the fourth quarter
(72% for the year ended June 30, 2003), down four percentage points from the
same quarter last year as a result of higher growth rates in the UK and Rest of
the World regions.  Corporate revenues represented 85% of overall revenues in
the fourth quarter (84% for the year ended June 30, 2003), up two percentage
points from the same quarter last year as a result of higher growth rates in
corporate sales compared to Education sales.


EBITDA for the quarter increased 121% to $3.2m compared to $1.4m for the fourth
quarter last year. EBITDA for the year ended June 30, 2003 increased 547% to
$11.0m from $1.7m in the prior year.  This significant increase in
profitability, as measured by EBITDA, is a direct consequence of the achievement
of cost efficiencies, as revenues continue to grow at a higher rate than costs.


Profit before tax for the quarter was $2.7m (2002 Q4: loss of $15.1m) and $8.9m
for the year ended June 30, 2003 (2002: loss of $69.4m).  The slight decline in
sequential pre-tax profit of $0.2m (2003 Q3: $2.9m) was primarily a result of
higher commission costs in our peak fourth quarter invoicing period and a stock
option charge reflecting the increase in the stock price during the fourth
quarter.  The effective tax rate for the fourth quarter and year ended June 30,
2003 is 25%, which produced profit after tax of $2.1m in the fourth quarter
(2002 Q4: loss of $14.3m) and $6.4m for the year ended June 30, 2003 (2002: loss
of $68.4m). Basic earnings per share were 6.7 cents in the fourth quarter (2002
Q4: loss of 47.1 cents) and 20.9 cents per share for the year ended June 30,
2003 (2002: loss of 225.9 cents).


Overall Group invoicing in the quarter was $30.0m representing a 43% annual
increase over the same period last year.  Invoicing for the year ended June 30,
2003 was $92.1m representing a 41% annual increase.  This outstanding fourth
quarter performance represents a continuation of the historical seasonal trend
of high Q4 invoicing followed by a sequential decline in Q1. In FY 03 the
sequential decline from Q4 02 to Q1 03 in invoicing was 24%. As these seasonal
trends have become more pronounced over time, it is expected that Q1 invoicing
in FY 04 will decline sequentially by up to 30%, before resuming growth in Q2
04. However, due to the Company's conservative revenue recognition policy, it is
expected that revenues in Q1 04 will be sequentially flat or slightly decline,
also consistent with historical trends.


A portion of the Q4 and annual FY 03 increases in invoicing is due to a higher
proportion of longer-term contracts.  In the fourth quarter the average contract
length was 1.6 years compared to 1.2 years in the fourth quarter last year.  The
average US Corporate invoice value increased to $7,200 in the quarter (2002 Q4:
$5,200), and the average US Education invoice value increased to $5,900 (2002
Q4: $3,900).  These increases reflect both the increase in average contract
length as well as increased sales of bundled products.  Sales of bundled
filtering products were 17% of invoicing in the quarter.  Sales to new customers
represented 42% of invoicing, new sales to existing customers 11%, renewals,
41%, and OEM/home sales 6%.


The record fourth quarter in invoicing drove a significant increase in deferred
revenue to $54.3m representing a 60% year on year increase (2002 Q4: $33.9m) and
a 23% sequential increase (2003 Q3: $43.9m).  This progress in deferred revenue
growth continues to increase both short and long term forward revenue visibility
with $37.5m, or 69% of total deferred revenue, due to fall into revenue within
the next 12 months.  This represents approximately 41% of the mid range of
current analyst expectations for revenue for the 12-month period ended June 30,
2004.


Also reflective of the record invoicing, the Company continued to maintain the
trend of generating significant cash from operations with $8.2m generated during
the quarter (2002 Q4: $4.7m) and $24.1m for the year ended June 30, 2003 (2002:
$11.7m).  Total cash balances as at June 30, 2003 were $61.7m.  Days Sales
Outstanding (DSO), based on invoicing, remained within the target range of 45 -
50 days.


The indirect channel contribution in the quarter increased to 53% (2002 Q4: 36%)
and for the first time, exceeded management's target of 50%. During the quarter,
the Company added 1,753 new customers including two new OEM contracts.  The OEM
order book of OEM contractual commitments decreased to $1.9m and OEM revenue
increased slightly to $1.2m (2003 Q3: $1.1m). Customer renewal rates vary across
sales channels, customer segments, product life cycles, and geographic regions.
During the quarter renewal rates across these various areas, calculated on a
customer count basis, ranged from 70 - 75%.


Full-time Equivalent (FTE) headcount increased to 435 from 432 in the sequential
quarter (2002 Q4: 397).


Corporate Highlights


Expanding and growing market


* Spam


Spam fever has gripped the world both in terms of the amount being generated and
the numbers of companies aiming to prevent it. The market opportunity has
therefore increased significantly, with the latest forecasts indicating a CAGR
of 53% in the growth of the e-mail scanning market over the next 5 years (Janney
Montgomery Scott: 2003). Given our leading position in the market, we fully
expect to benefit from this growth.


The technologies to fight SPAM range from the many SPAM blockers to fully
automated intelligent Content Filters, such as the type produced by SurfControl.
However, due to the level of sophistication and functionality needed to fight
SPAM, the days of simple SPAM blockers are numbered and Content Filters such as
SurfControl's Email Filter are in a strong position to capitalise upon the
overall demand to stop SPAM.


A further and perhaps more important driver for increased demand for
SurfControl's technologies lies in the territory 'Beyond SPAM'. Spam is just one
aspect of e-mail usage and even when the problem is managed, such varied issues
of liability, friendly Spam, hostile jokes, confidentiality, non-compliant email
and "bandwidth hogs" still need to be addressed. SurfControl's ability to
provide filtering software that manages all aspects of e-mail usage means that
this market opportunity is further enhanced.


Our focus is to be THE Spam filter for the enterprise.


* Web filtering


Whilst the market has now accepted the use of filtering as standard practice,
there still remains a vast market opportunity as organisations adopt
enterprise-wide web filtering practices. Latest figures suggest a growth rate of
27% CAGR (IDC: 2003) for a market in which we have a leading position.


The combination of e-mail and web filtering constitutes the content security
market, in which SurfControl occupies the Number One position, with 13% of the
market (IDC: 2003).


* Evolution of Filtering


Historically people have looked at web filtering or email filtering as separate
markets. However, this is continuing to evolve, with filtering, i.e. Stopping
Unwanted Content, becoming the focus. There will continue to be increasing focus
on the overall Content Security market, which is set to grow at a CAGR of 31%
and is estimated to be worth almost $2bn by 2007. Due to the significant
investment in filtering R&D, our ability to deliver filtering solutions rather
than point products will increase over time.



Competition

There have been a number of competitive developments in the market throughout
the year, with many companies moving into the filtering market, either through
partnerships or by acquisition. Such developments are serving to increase the
level of demand within the market and focus customers' attention on finding the
best products available to solve the current Spam problem - inevitably leading
customers to us. In addition, we are seeing a trend towards the provision of a
complete suite of network security products which will be a driver to further
market consolidation as companies acquire those products that they do not
already have in their product suite. In this way, the market is evolving with
acquisition opportunities increasingly presenting themselves. With its market
leading position, SurfControl is well placed to take full advantage of
consolidation opportunities created in this dynamically changing market place
where it is believed to be of overall value to our future growth and
profitability.


Products and R&D

This year has seen the Company make great progress in the advancement of content
filtering technology. We improved both our web and e-mail filtering
technologies, enhanced the artificial intelligence that complements them and
launched new products to address the Instant Messaging and Peer-To-Peer
networking market. In particular, we have made it easier for users to operate
our software by making significant improvements to the user interface. Most
recently, we announced that our suite of filtering products, containing: Web,
E-mail and Instant Message (IM) Filters, won 'Editor's Choice' in the latest
issue of Personal Computer World magazine which undertook a comparative review
of the best filtering suites from all the popular vendors. SurfControl's
solutions outperformed all competitive products to clinch the title.


The key to our success has always been our ability to anticipate concrete demand
for a particular solution and then to provide a market-leading product to meet
this demand. We are therefore, as ever, investing in the development of future
products to address evolving markets. It is clear that going forward we are
going to see a much greater increase in the amount of information that is
accessed or sent from beyond traditional corporate boundaries and also from more
non-PC platforms.


In medium to large Enterprises (> 100 employees), it is expected that the number
of Internet enabled business seats is set to rise from 81m in 2000 to 200m seats
by 2006. Also Small Businesses (