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1 August 2019

Mixed Verimatrix Q2 – Software thrives, Silicon decays, NFC vanishes

Solid growth in the software business unit was more than enough to offset continued declines in the silicon IP segment as digital security and analytics vendor Verimatrix filed its second quarter and first half 2019 results, five months since its acquisition by Inside Secure.

As expected, the merged company is reaping early rewards as Q2 revenue grew 5% year on year to $33.3 million – with the Verimatrix side contributing $22.9 million and Inside Secure $10.4 million. On an IFRS basis, first half 2019 revenue soared 162% to $52.9 million, on gross profit of $44.5 million, as a result of the combined revenue streams – primarily from conditional access which drove double digital growth.

For anyone wanting to dive in further, we warn you the results report is a minefield of confusing terms; reflecting a company unable to decide whether the merged entity is indeed one merged company or operating as two separate companies. Clearly, we are in the early stages of a teething process and it will take time for something resembling a truly unified company to arise – which hopefully doesn’t distract from core technology innovation. In all fairness, less than a month has passed since the branding transformation was completed.

But in the meantime, it’s interesting see where the money is coming from, whether legacy or new. Business from the historical Verimatrix side of the coin generated revenue of $22.1 million in Q2, while historical business for Inside Secure came in at $10.4 million. On this basis, we can see that Verimatrix generated $0.9 million worth of new business in the quarter while Inside Secure must have incurred some additional costs which dented its overall revenue contribution, while generating no new business in the process.

However, on a pro forma and adjusted basis for the first six months of 2019 (remember the merger completed with only one month left of Q1), revenue from Inside Secure’s historical business grew 5% to $23.6 million and Verimatrix historical revenue was up 3% to $37.2 million, during a notoriously unpredictable business period.

As well as conditional access, increased royalties and maintenance fees with existing customers using cardless set tops and MultiRights OTT products was cited as strong areas, offsetting unusually low first quarter 2019 revenue. It’s definitely too early for any substantial contribution from the new ProtectMyApp product unveiled earlier this month, designed to arm developers directly with mobile application security, but we expect promising things from the new cloud service given its apparent niche positioning and the fact a certain HBO is a supporter.

Verimatrix formed its two distinct product lines in April, carving out the Software division from Inside Secure’s Content and Application Protection product lines along with the Verimatrix Conditional Access product line. Meanwhile, the Silicon IP & Secure Protocols business comprises intellectual property relating to security toolkits for semiconductor makers.

Revenue in the Software business unit grew 16% to $27.5 million in the second quarter of 2019, while Silicon declined 7% to $5.9 million.

One bone to pick is that the NFC patent licensing business has mysteriously vanished, featuring only an ominous blank space in the cell where its Q2 2019 revenue should be. “Revenue in the second quarter of 2019 did not include any revenue from the company’s NFC patent licensing program,” states the results report. This business unit is managed by France Brevets and reported $1.8 million in Q1 2019, so presumably Verimatrix has given over full control to the French patents investment fund, but this begs the question of why Verimatrix would bother reporting NFC patent licensing numbers at all?

The omission is made more peculiar considering Verimatrix won its first large deal for Strong Authentication in the second quarter, relating to smart locks that open with NFC-enabled handsets. This deployment is for an existing European customer for the Datacenter and Facilities Management market.

In addition, a new plan was implemented to generate $12.5 million annual cost savings on an annual basis starting 2020.