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Verimatrix pins concerning Q3 revenue slump on seasonal norm

Something strange is going on inside Verimatrix which Faultline has been trying to put its finger on ever since the US digital security vendor went public as a result of merging with smaller rival Inside Secure earlier this year. While the headline figure from its Q3 results is an almighty 496% annual revenue increase, the quarter on quarter picture is alarming and excuses about post-merger synergies just aren’t cutting the mustard anymore.

Verimatrix made just shy of $23 million in revenue during the third quarter, rising so sharply from a little over $3.8 million a year ago due to Inside Secure absorbing the larger slice of Verimatrix revenue.

Drilling down to a quarterly basis, however, provides a clearer picture, showing total pro forma revenue declining 13.8% to $23.7 million in Q3. However, on an IFRS basis, Verimatrix reported Q2 revenue of $32.5 million in the last quarter and $23 million in Q3, meaning a quarterly revenue slump of over $9.5 million – an unexplained 29.2% drop off.

A chunk of this lost revenue can be explained from the sale of the Silicon IP business to Rambus, with Silicon IP revenues omitted from the latest report despite the deal pending completion. But the Silicon IP division only accounted for $5.7 million in revenue in the previous quarter, so a sizable leak remains unaccounted for and indeed unaddressed by executives in the most recent investor relations release.

A response to our queries from the Verimatrix executive team provided little insight, “There is no revenue loss. Our business has always been very seasonal and thus lumpy on a quarter to quarter basis (see table on the last page of the press release). We actually grew the revenue by 5% year over year on a like of like basis (i.e. excluding the discontinued Silicon IP business unit.”

This discontinued Silicon IP & Secure Protocols segment comprises intellectual property relating to security toolkits for semiconductor makers and Verimatrix expects the sale to Rambus, for $65 million, to complete in Q4.

Clutching at straws, we asked Verimatrix to provide a rare sneak peek into the three individual divisions comprising the Software business unit – the Inside Secure Content and Application Protection product lines, the Verimatrix Conditional Access product line, and the Verimatrix SaaS big data analytics offering (formerly Verspective). Unsurprisingly, the company declined our request for information, although we do have a recent interview to go on for added color.

“We’re not just talking about innovation but doing it. We have accelerated the VCAS cloud service, with one telco customer migrating from an on-premise system to a pure SaaS VCAS environment – a feat some said could never be done,” Verimatrix President and COO Steve Oetegenn told us at the recent IBC, going on to talk about the next push being analytics version 2.0 – in cloud native, cloud-only environments.

On a pro forma adjusted revenue basis, reflecting a year on year comparison of the combined businesses as if the acquisition had completed in January (instead of late February), showed total Q3 revenue down 1% year on year. It brings total pro forma revenue for the first 9 months of the year to $74.1 million, rising 5% year on year, of which the Software business unit contributed the lion’s share at $70.5 million, a 2% annual increase.

The remaining revenue was picked up by the NFC patent licensing program which magically reappeared after its Q2 vanishing act, contributing $3.5 million in revenue from the program managed by France Brevets during the first 9 months of 2019 – a healthy 96% annual increase.

“In the fourth quarter, Verimatrix anticipates strong business activity in line with historical seasonality of the new company and business pipeline, while focusing its investments and efforts on the product offering to deliver future revenue growth with innovative and award winning solutions such as ProtectMyApp or nTitleMe,” stated the company.

That said, we were informed that part of the reason for selling off the SIP division was with an eye to accelerating revenue growth through investments in ProtectMyApp. At IBC, we learned that the new developer-targeted service has picked up its first few customers in media and entertainment, as well as online banking. Our reservations remain about ProtectMyApp’s profitability potential, although we are hopeful of some exciting developments from this mix of client security and cloud-based analytics, which was developed on the Inside Secure side of the equation.

Speaking of apps, Verimatrix secured a contract expansion at existing customer Korean mobile app and IoT security company Ksmartech this week. Ksmartech “aims to begin including” the new ProtectMyApp service and Verimatrix Whitebox technology, adding to its current contract for Code Protection technologies.

So, as mentioned earlier, the larger Verimatrix side is busy working away on a major cloud overhaul, while the latest new business and product launches are being driven by the Inside Secure side – exploiting the stronger Verimatrix brand and customer base.

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