A powerful combination with strong strategic rationale

Entertainment: creating a software-based security powerhouse with leading position

The transaction leads to the creation of a trusted global powerhouse in software-based security with significant penetration of the Entertainment market, positioned to capture a well-established, but still fast-growing, demand for security solutions in the context of:

• A major shift towards software and cloud-based security solutions;
• Growth of demand for big data analytics solutions in a landscape of multi-device and multi-format video consumption; and
• Content owners’ and service operators’ increasing anxiety to protect their digital revenue and profit margins (a total of $37bn revenue is estimated to be lost to piracy in 2018⁵).

The combination offers Inside Secure a unique value proposition within the Entertainment security market, enabling content providers and service operators to manage the most complex video security challenges leveraging:

• A robust platform addressing the entire ecosystem’s multi-network requirements;
• A proven software-centric position in the fastest growing segments within the digital content protection market;
• A broad-based solution architecture that stretches from silicon IP through rights arbitration and tracking;
• A strong and highly diversified client portfolio with Verimatrix solutions deeply entrenched and trusted by Hollywood studios and other content owners globally; and
• A unique opportunity to expand value in customers deploying integrated multi-device video solutions.

Internet of Things (“IoT”) and Connected Cars markets: reinforcing a strong position in software security

Beyond the Entertainment market, the combination provides firm foundations to accelerate penetration of other growth verticals that face a critical security challenge, notably IoT and Connected Cars, by leveraging a high-integrity device credential management platform and enabling comprehensive, end-to-end security technology and services offerings in such application verticals.

Big data and analytics business application: tackling new growth opportunities

Additionally, the transaction will enable Inside Secure to tackle opportunities in advanced cloud-based analytics beyond the Entertainment market. The company will maximize the value of data analytics technologies across all its markets to provide its customers with real-time visibility over security performance (e.g.,threat and attack detection and analysis) and user behaviour.

Increased scale with compelling value creation potential

The contemplated transaction affords Inside Secure the ability to take advantage of significantly greater reach and scale.

The combined entities would have generated $119 million in adjusted revenue and $21.5 million in EBITDA in 2017 on an IFRS pro forma basis. The new group will benefit from its new scale and leverage the Verimatrix resilient revenue base and from the mix of both recurring and repeat revenue from both companies.

Leveraging a strong technology and product portfolio as well as a complementary customer base, the combination of both companies will generate multiple up-selling and cross-selling opportunities while benefiting from economies of scale.

In addition, Inside Secure anticipates $10 million cost synergies per year on a run rate basis, once fully implemented, representing 10% of combined operating expenses base due to:

• Economies of scale with development teams, suppliers, ecosystem partners and device-provisioning costs; and
• General & Administrative optimization that takes full advantage of the combined scale, rationalization and streamlining of the organization.

The transaction is expected to be accretive³ to Inside Secure’s earnings from 2019, primarily due to the incremental earnings brought by Verimatrix and the generation of $4 million synergies in 2019 prior to full implementation of anticipated synergies.

2021 Objectives

Moving foward, Inside Secure expects to reach revenues of $150 million while generating an EBITDA margin of 25% in 2021 for the combined entities and at constant perimeter.

Fully funded transaction, strengthened shareholder base and sound financial structure at closing

Under the terms of the acquisition agreement, the transaction consideration consists of an up-front consideration for the enterprise value estimated at $125 million, plus an agreed-upon payment for transferred net cash estimated at $18 million, plus as the case may be a working-capita adjustment a closing, and, finally, an earn-out of up to $15 million subject to Verimatrix achieving a certain EBITDA target for calendar year 2018.