Appendix 4E | ||||
Senetas Corporation Limited | ||||
Results for announcement to the market | ||||
ACN 006 067 607 | ||||
1. Details of the reporting period and the previous corresponding period | ||||
Reporting Period | Previous Corresponding Period | |||
Financial Year ended 30 June 2017 | Financial Year ended 30 June 2016 | |||
2. Results for announcement to the market | ||||
30-Jun-17 | 30-Jun-16 | Change | ||
$ | $ | $ | % | |
2.1. Revenues from ordinary activities | 17,591,114 | 18,920,384 | (1,329,270) | (7.03%) |
2.2 Net profit after tax | 2,879,103 | 5,218,430 | (2,339,327) | (44.83%) |
2.3 Other comprehensive income for the year (foreign currency translation) | (12,056) | (3,068) | (8,988) | (292.96%) |
3. Net comprehensive income after tax attributable to members | 2,867,047 | 5,215,362 | (2,348,315) | (45.03%) |
4. Record date for determining entitlements to the final dividend | Final dividend: not proposed | |||
Appendix 4E (continued) |
Brief Explanation of Figures 2.1 to 2.3 |
FY2017 highlights: |
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OPERATIONAL HIGHLIGHTS: |
Development of the 100GB encryptor, custom algorithm products, and version 1 of Senetas' virtual software encryption product were completed during FY2017: |
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Whilst the sales disruption in FY2017 was unfortunate, the business made significant progress during the year on developing the pipeline of new product and new market opportunities that will drive growth for Senetas in FY2018 and beyond. |
As announced in February 2017, the normal ordering patterns of some of our largest customers were disrupted as they undertook reviews and upgrades to their existing networks, however, as expected the impacts of the disruption have been temporary and those customers recommenced ordering before the end of FY2017. We expect no ongoing impacts in FY2018. |
While orders for new products were delayed during the year, maintenance revenue was a stabilising factor. Maintenance revenue increased by 16% to account for 46% of total operating revenue. This revenue stream helps us support our customers post sale, ensures that any issues are proactively addressed and improves our alignment with our partner organisations. As more encryptors are sold and remain in operation the revenue stream will provide a level of earnings predictability and reliability. |
Appendix 4E (continued) |
During the year we have continued to invest in our relationship with Gemalto and are working closely with them to improve sales of our product to government and corporate customers. Our products are a key component of the Gemalto product suite and Senetas staff continue to be actively engaged in supporting the sales process. |
The enhancement of our hardware encryption products, through the 100GB product and custom algorithm offering has seen a very positive response from both Gemalto and our end customers. These market leading products continue our commitment to security without compromise, and were developed in direct response to customer requests to better secure their ultra-high- speed Layer 2 networks. |
Further we have seen recently that Senetas' crypto agile technology is becoming more important from a cyber security standpoint given the introduction of quantum computing in the near future. Any business that bases its security on encryption that is embedded in silicon and multipurpose hardware devices will rue the day when its encryption algorithms have been cracked and they cannot replace them in real time. Senetas has always had an architecture that allows for such an eventuality. |
This investment in the future has been enabled through Senetas' strong financial position, with net assets up 16% during the period, with no debt, and cash on hand of more than $20 million. |
R&D and New Product Development |
Senetas' highly innovative and responsive R&D capability remains the Company's core focus and will be the major driver of growth prospects and increased profitability going forward. |
FY2017 marked the commercialisation of development on the 100G encryptor, the custom algorithm products, and version 1 of Senetas' virtual encryption product. Total R&D expenditure moderated during the year due to lower external contractor costs as the 100G and custom algorithm developments wound down. |
Hardware Encryption Solutions |
100G encryptor |
Our 100Gbps encryptor received FIPS certification in April 2017 and has now successfully completed customer trials with 2 large multinationals. We are expecting our first sales of this product in FY2018. The product was developed to satisfy the increasing needs of our largest corporate customers who have been looking to upgrade their network speed and infrastructure from 10Gbps to 100Gbps. This transition to faster networks will be a natural progression for many organisations that handle and move a lot of sensitive information and Senetas is well positioned to capitalise on this opportunity.. |
Interest in the 100G encryptor is increasing, with potential customers including cloud service providers, global telecommunications companies, large government agencies and other large corporates. Encouragingly, a number of the interested parties have not previously been customers of Senetas. |
Custom algorithm products |
Our custom encryption algorithm product development has been completed and prototypes have been exported for testing and certification. This product allows customers to select their own encryption algorithm, thereby giving security control to our clients. Whilst the certification process may take up to 2 years to complete, sales can commence once customer testing is complete. This is a new and potentially very large market for Senetas and there are currently no competing products that match our product capabilities. |
Software Encryption Solutions |
Virtual encryption |
Trials of Senetas' first software based virtual encryption technology was successfully undertaken in the first half of FY2017 and customers have now included the solution in tender proposals to end users. |
Software based virtualised encryption is an emerging technology, and Senetas' developers are continuing to work with customers to further develop the scale and use cases for the product (version 2), including larger scale opportunities (+10,000 users) with 'zero-touch' deployment. Sales of version 1 are expected in FY2018 although sales volume is not expected to be significant until version 2 is released. Senetas expects version 2 to be completed before the end of FY2018 and for it to potentially open up a significant revenue opportunity for Senetas in FY2019 and beyond. |
Appendix 4E (continued) |
Hybrid networks |
A number of Senetas customers run hybrid Layer 2 and Layer 3 networks and have made enquiries of Senetas to provide an integrated solution with capabilities across both networks. To better serve existing and potential customers Senetas' engineers are investigating the possibility of re-engineering encryptors - both hardware and virtual - to enable this capability. Achieving this has the potential to substantially expand the addressable market for Senetas products. |
We are also working to further develop Senetas' software virtual encryptor to operate across Layer 3 and 4 markets, which make up over 70% of all networks. Importantly, it will allow our existing Layer 2 clients to now secure even more of their network traffic. While development of this product is still at a relatively early stage, we expect the capability, when ready, to increase the addressable market for our encryption solutions. |
Security Tools |
SureDrop |
SureDrop was acquired by Senetas in February 2017 and is now market ready. The product is being trialled by customers in partnership with a large Australian telecommunications company and it is expected to be revenue producing in the second half of FY2018. As the revenue model is based on user subscription it will add another source of recurring revenues. |
European Certification |
Senetas has commenced obtaining an additional certification in the European market which the Company expects will open up additional sales opportunities in markets where Senetas currently cannot compete. The expected cost for undertaking the European certification will be $0.40m - $0.50m in FY2018 with the process expected to be completed prior to June 2018. Once obtained, the certification will allow sales to customers in relevant markets from FY2019. Certification in multiple jurisdictions is a measure of the quality and technical advancement of our devices. It is also a key criteria for government contracts and many corporates that deal with government agencies. |
Expected FY2018 R&D Expenditure |
R&D expenditure in FY2018 is expected to increase by approximately $0.80m. The expense increase is associated with costs of a new European certification and increased engineering staff working on virtualised encryption software. |
Balance Sheet and Cash Flow |
Senetas' balance sheet continues to strengthen and provides significant capacity to support both organic growth and investment. Net assets increased 16% to $21.48 million and the cash balance at 30 June 2017 was $20.09 million. |
Net operating cash flow was $1.70 million in FY2017 which was lower than FY2016 reflecting lower sales. |
The Board periodically reviews its capital management policy and in so doing takes into account a variety of factors including R&D and other investment opportunities, financial returns, risk and liquidity considerations which might impact Senetas' business. |
As a rapidly growing R&D technology company, the Board continues to implement a conservative capital management policy in order to conserve capital for continued investment in attractive R&D product development, as well as to ensure that Senetas is well positioned to take advantage of other compelling investment opportunities. |