Fool's Eye View

[ February 23, 2000 ]

Baltimore Results

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- Baltimore's (LSE: BLM) full year results have been eagerly awaited by all of Balti's Foolish fans, and so today I decided that rather than have my regular Wednesday off from the Fool I would pop in and have a quick look through them.

First reaction is that the results are pretty much in line with what we were all expecting: annual sales increased by 28% to £23.3 million, sales of software were up by 391% to £9.0 million, and software sales now represent 39% of total revenue compared to 10% in 1998. Losses continue to mount, reaching £31.4 million in 1999 compared to £17.8 million in 1998, but we are told by the company not to worry about "losses today" as they are "all part of the plan"! The company is investing heavily in both sales and marketing as well as research and development in its aim for global domination -- or, at least, towards its objective of becoming the global leader in the provision of e-security infrastructure solutions.

In quarter 4 the sale of software represented 58% of sales compared to just 11% of sales in quarter 1, which is reflection of the company's new business model: it has changed from being a security project engineering company to an international PKI product company.

Software sales are significantly more profitable for the group, and the growth of software sales is reflected in the increase in gross margin in the year from 55% in 1998 to 65%. In quarter 4, the gross margin had increased to 74%.

1999 was a momentous year for the company, and for shareholders. Baltimore and Zergo were merged, the new company Baltimore listed on Nasdaq, it raised £96 million through an offer of shares, and then just after the year-end it announced the acquisition of CyberTrust Solutions from GTE for $150 million.

As well as publishing its results, the company announced that it had signed a global agreement with Compaq (NYSE: CPQ) to promote and deliver information security products and solutions. Compaq will become a TrustedWorld Partner, and will resell Baltimore's UniCERT Certificate Authority system, Public Key Infrastructure enabled applications and cryptographic toolkits.

What is really important is the future vision of the company, and how the expansion into the USA is going. Look at this table:

                     Sales in year to
                      31/12/99 (£000)
United Kingdom                 11,859
Ireland                         9,682
Netherlands                       454
Australia                       1,159
North and South America           118

Total                          23,272

You can see that sales in the Americas are still very low, and how vital the CyberTrust acquisition is to the company's aims for expansion in the USA. CyberTrust will add about £12 million of revenues based on sales in 1999, and hopefully significantly more as the sales and marketing effort is stepped up.

The one bit of news that was missing was anything about a share split: the shares are now trading at about £125 a share, which is by some way the highest price of any individual share traded on the London Market. Now we all know that a share split makes not one bit of difference to the future performance of the company, but it is something that is eagerly awaited by many investors. It is also expected that Baltimore will be promoted to the FTSE 100 at the next review on 7th March. If I remember rightly it was only promoted to the FTSE 250 at the end of 1999; this must be one of the shortest periods any company has spent as a FTSE 250 company! The company is currently in the top 70 by market capitalisation in the UK: if it maintains this then promotion to the FTSE 100 will be automatic.

In an interview with Reuters, Fran Rooney was asked about further acquisitions: he is reported as having said "we've nothing specific at this stage. We are looking at a couple of different routes but this could be something quite substantial... We are not putting any particular timeframe to this but we are exploring opportunities constantly. We have to be patient because we want to do the right deals, smart deals."

Rooney said Baltimore's merger and acquisition strategy was focused on three areas. The first, broadening the customer base, would be geographical or vertical, possibly through healthcare or wireless business. He said that he said he saw little point in doing a deal simply to give Baltimore scale, so all those Baltimore Fools crying out for the company to buy Entrust are probably likely to be disappointed.

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