Trend Micro FY2005. 4Q / Annual Results Mahendra Negi, COO/CFO, Representative Director February 9, 2006
Forward Looking Statements Certain Statements that we make in this presentation are forward-looking statements. These forwardlooking statements are based upon management s current assumptions and beliefs in light of the information currently available to it, but involve known and unknown risks and uncertainties. Many important factors could cause our actual results to differ materially from those expressed in our forward-looking statements. These factors include: difficulties in addressing new virus and other computer security problems; timing of new product introductions and lack of market acceptance for our new products; the level of continuing demand for, and timing of sales of, our existing products; rapid technological change within the anti-virus software industry; changes in customer needs for anti-virus software; existing products and new product introductions by our competitors and the pricing of those products; declining prices for our products and services; the effect of future acquisitions on our financial condition and results of operations; the effect of adverse economic trends on our principal markets; the effect of foreign exchange fluctuations on our results of operations; an increase in the incidence of product returns; the potential lack of attractive investment targets; and difficulties in successfully executing our investment strategy. We assume no obligation to update any forward-looking statements. For more details regarding risk factors relating to our future performance, please refer to our filings with the U.S. Securities and Exchange Commission. Copyright 2006 - Trend Micro Inc. 2
FY2005 4Q Financial Highlight Copyright 2006 - Trend Micro Inc. 3
Consolidated Results Three months ended Dec 31, 4Q2004 4Q2005 YoY growth Net sales 17,735 20,565 16% Cost of sales 2,943 3,312 13% Operating expenses 6,912 9,314 35% Operating income 7,880 7,939 1% Operating income margin 44% 39% Income before taxes 7,632 8,553 12% Net Income 4,738 5,795 22% If currency exchange rates used for 4Q2004 were used for 4Q2005: Net sales YoY change 17,735 19,716 11% * The JPY amount for 4Q2005 shown above has been calculated by applying to each foreign currency net sales amount for 4Q2005 the weighted average exchange rate between such foreign currency and JPY that was used to convert the net sales amount denominated in such foreign currency for 4Q2004 into a JPY net sales amount for U.S. GAAP reporting purposes. (Non-GAAP) Copyright 2006 - Trend Micro Inc. 4
USD based Results (Non-GAAP) Three months ended Dec 31, 4Q2004 4Q2005 (in thousand USD) YoY change Net sales 167,902 4% 175,129 Cost of sales 27,862 1% 28,207 Operating expenses 65,437 79,316 21% Operating income 74,603 67,606-9% Income before taxes 72,248 72,833 1% Net Income 44,858 49,346 10% (Non-GAAP) For each of the quarters shown in the table above, JPY U.S. GAAP amounts have been converted to USD amounts using the exchange rates of USD=105.63 JPY for 4Q2004 and 1 USD =117.43 JPY for 4Q2005, respectively, which are the respective weighted average exchange rates used to convert USD net sales to JPY for these quarters. Copyright 2006 - Trend Micro Inc. 5
Change in Classification for Maintenance cost and Customer support cost Following US SEC guidelines, we now classify Maintenance and Customer Support costs as Cost of sales instead of operating expenses. No impact to Operating income. Comparison of Cost of sales at case to before / after change for each quarter in FY 2005 Cost of sales Gross profit margin Q1 581 Before Gross profit 16,720 16,579 17,335 19,798 70,431 97 Q2 610 96 Q3 640 96 Q4 768 96% FY 2005 Total 2,599 96% Amortization of capitalized software, and Material 581 610 640 768 2,599 Maintenance 373 322 412 564 1,671 After Customer Support Cost of sales 1,456 2,409 1,735 2,667 1,687 2,739 1,981 3,312 6,858 11,128 Gross profit (for reference 14,891 14,522 15,236 17,253 61,902 Gross profit margin (for reference 86 85 85 84 85 Copyright 2006 - Trend Micro Inc. 6 (Non-GAAP)
Comparison of Consolidated results before / after change Comparison of Consolidated results before / after change for each quarter in FY 2005 Q1 Q2 Q3 Q4 FY 2005 Total Net sales 17,301 17,189 17,975 20,565 73,030 Before Cost of sales 581 610 640 768 2,599 Operating expenses 9,419 11,109 10,473 11,859 42,860 Operating income 7,301 5,470 6,862 7,939 27,572 Net sales 17,301 17,189 17,975 20,565 73,030 After Cost of sales Operating expenses 2,409 7,590 2,667 9,052 2,739 8,374 3,312 9,314 11,128 34,330 Operating income 7,301 5,470 6,862 7,939 27,572 (Non-GAAP) Copyright 2006 - Trend Micro Inc. 7
Net Sales Growth by Region 9,000 + 20% 8,226 8,000 4Q2004 7,000 6,867 4Q2005 + 2% 6,000 5,000 + 31% 5,070 5,160 4,350 4,000 3,000 3,316 + 18% 2,000 2,201 1,871 + 3% 1,000 610 628 0 Japan US Europe Asia Pacific Latin America Copyright 2006 - Trend Micro Inc. 8
Net Sales Growth by Region If currency exchange rates used for 4Q2004 were used for 4Q2005: * ( ) : difference from GAAP base 9,000 8,226 + 20% 8,000 (0) 4Q2004 7,000 6,867 4Q2005 + 0% (-80) 6,000 + 18% 5,070 5,080 5,000 (-437) 4,000 3,913 3,316 + 7% (-206) 3,000 1,871 1,995 2,000-18% (-126) 1,000 610 502 0 Japan US Europe Asia Pacific Latin America * Each JPY amount for 4Q2005 shown above has been calculated by applying to the relevant foreign currency net sales amount for 4Q2005 the weighted average exchange rate between such foreign currency and JPY that was used to convert the net sales amount denominated in such foreign currency (Non-GAAP) for 4Q2004 into a JPY net sales amount for U.S. GAAP reporting purposes. Net sales in Europe were all reported in Euro. Net sales in Asia Pacific and Latin America were reported in more than one foreign currency. Copyright 2006 - Trend Micro Inc. 9
% share by region 4Q2004 17,735 million Yen Latin Asia America Pacific 3% 10% 4Q2005 20,565 million Yen Asia Pacific 11% Latin America 3% Europe 29% Japan 39% Europe 25% Japan 40% US 19% US 21% Copyright 2006 - Trend Micro Inc. 10
Q4 Highlights Highest ever revenues and profits Deferred revenues up 13% QoQ and 27% YoY Network product revenues up 56% QoQ and 26% YoY Copyright 2006 - Trend Micro Inc. 11
Q4 Lowlights EMEA and APAC growth still not satisfactory Cost growth still faster than revenues Copyright 2006 - Trend Micro Inc. 12
Sales by Product 20,000 317 Network 4Q2004 2% 4Q2005 2% 15,000 251 5,267 5,186 3,882 Internet Server Gateway Suite * 30% 25% 20% 19% 10,000 5,000 0 3,614 6,703 4,809 3,794 4,477 4Q2004 4Q2005 Client/Server Solution, others Consumer PC Total 27% 32% 21% * Composed of Internet Server products and Client/Server Solution products 22% 100% 100% e.g. Neat Suite, Client/Server/Messaging Suite, etc. Copyright 2006 - Trend Micro Inc. 13
Sales by Customer 9,000 4Q2005 8,000 7,000 6,000 3,180 Consumer Enterprise 5,000 238 4,000 714 3,000 2,000 5,046 3,636 4,921 336 1,000 0 1,865 9 619 Japan US Europe APAC Latin America Copyright 2006 - Trend Micro Inc. 14
Cost of sales & Operating expenses 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Cost of sales (old) Maintenance Support Sales, Marketing R&D ADM 659 581 373 710 1,456 1,574 4,593 4,615 Amortization of capitalized software, and Material 610 322 1,735 5,723 640 412 1,687 5,073 576 1,027 1,170 1,157 1,743 1,948 2,159 2,144 768 564 1,981 5,533 1,042 2,740 4Q2004 1Q2005 2Q2005 3Q2005 4Q2005 Copyright 2006 - Trend Micro Inc. 15
Headcount Sep - 2005 2,965 Dec - 2005 2,982 ADM, Business Process Technical Support 849 480 Sales, Marketing Research, Development 828 808 +17 (+ 1%) ADM, Business Process Technical Support 860 494 Sales, Marketing 828 Research, Development 800 Copyright 2006 - Trend Micro Inc. 16
Non-operating operating Items Others Gain on sales of securities 239M Exchange gain Interest income 73 M 300M 3M Income before taxes Operating income 7,939 M 8,553 M Copyright 2006 - Trend Micro Inc. 17
Deferred Revenue 35,000 30,000 25,000 27,904 28,949 29,666 31,250 35,381 20,000 15,000 10,000 5,000 0 Dec-'04 Mar-'05 Jun-'05 Sep-'05 Dec-'05 * Total of current and long term Copyright 2006 - Trend Micro Inc. 18
Deferred Revenue by Region 14,000 12,000 10,000 8,000 13,972 13,319 + 5% + 15% 8,387 7,282 7,321 9,068 + 24% Sep-05 Dec-05 6,000 4,000 2,000 0 + 14% 2,428 2,766 + 32% 1,189 900 Japan US Europe Asia Pacific Latin America * Total of current and long term Copyright 2006 - Trend Micro Inc. 19
Deferred Revenue by Region If currency exchange rates used as of the end of 3Q2005 were used as of the end of 4Q2005: 13,972 14,000 13,319 + 5% 12,000 10,000 8,000 6,000 4,000 2,000 0 (0) + 10% 8,041 7,282 (-345) * ( ) : difference from GAAP base 7,321 + 20% 8,821 (-247) * Total of current and long term Jun-05 2,428 + 11% 2,686 (-79) Dec-05 900 + 30% 1,168 (-21) Japan US Europe Asia Pacific Latin America (Non-GAAP) * Each JPY amount as of the end of 4Q2005 shown above has been calculated by applying to the relevant foreign currency deferred revenue amount as of the end of 4Q2005 the exchange rate between such foreign currency and JPY that was used to convert the deferred revenue amount denominated in such foreign currency as of the end of 3Q2005 into a JPY deferred revenue amount for U.S. GAAP reporting purposes. Deferred revenue of Europe were all reported in Euro. Copyright Deferred 2006 revenues - Trend Micro Inc. of Asia Pacific and Latin America were 20 reported in more than one foreign currency.
Assets Cash & cash equivalents Balance Sheet Sep-2005 54,161 change Account receivable (less allowance for doubtful accounts and sales returns) 14,484 + 4,715 19,199 Marketable securities & Securities investments 30,322 + 3,233 33,555 Liabilities Deferred revenue (total of current and long-term) 31,250 + 4,131 35,381 Shareholders Equity Common Stock & Additional paid in capital Treasury Stock 30,153-7,313 Dec-2005 + 5,452 59,613 + 904 31,057 + 30-7,283 Copyright 2006 - Trend Micro Inc. 21
FY2005 Annual Financial Highlight Fiscal Year ended December 2005 Copyright 2006 - Trend Micro Inc. 22
Consolidated Results Fiscal year ended Dec 31 FY2004 FY2005 YoY growth Net sales 62,049 73,030 18% Cost of sales 11,221 11,128-1% 24,751 34,330 Operating expenses 39% Operating income 26,078 Operating income margin 42% Income before taxes Net Income 26,325 15,875 If currency exchange rates used for 2004 were used for 2005: 27,572 6% 38% 29,108 18,670 11% 18% YoY change Net sales 62,049 71,758 16% * The JPY amount for 2005 shown above has been calculated by applying to each foreign currency net sales amount for 2005 the weighted average exchange rate between such foreign currency and JPY that was used to convert the net sales amount denominated in such foreign currency for 2004 into a JPY net sales amount for U.S. GAAP reporting purposes. (Non-GAAP) Copyright 2006 - Trend Micro Inc. 23
Net Sales Growth by Region 30,000 29,416 + 16% 25,000 20,000 15,000 10,000 5,000 0 25,443 11,891 + 30% 15,417 + 12% 18,379 16,418 + 25% 7,910 6,305 FY2004 FY2005 1,992-4% 1,908 Japan US Europe Asia Pacific Latin America Copyright 2006 - Trend Micro Inc. 24
30,000 25,000 20,000 15,000 10,000 5,000 0 Growth by region If currency exchange rate used for FY2004 were used for FY2005: 29,416 + 16% 25,443 (0) 11,891 + 27% 15,082 (-335) * ( ) difference from GAAP base + 10% 16,418 18,078 (-301) 6,305 + 19% 7,490 (-420) FY2004 FY2005 1,992-15% 1,692 (-216) Japan US Europe Asia Pacific Latin America (Non-GAAP) * Each JPY amount for FY2005 shown above has been calculated by applying to the relevant foreign currency net sales amount for FY2005 the weighted average exchange rate between such foreign currency and JPY that was used to convert the net sales amount denominated in such foreign currency for FY2004 into a JPY net sales amount for U.S. GAAP reporting Copyright 2006 purposes. - Trend Micro Net Inc. sales in Europe were all reported in 25 Euro. Net sales in Asia Pacific and Latin America were reported in more than one foreign currency.
% share by region FY2004 FY2005 62,049 million Yen 73,030 million Yen Latin Asia America Pacific 3% 10% Latin Asia America Pacific 3% 11% Europe 27% Japan 41% Europe 25% Japan 40% US 19% US 21% Copyright 2006 - Trend Micro Inc. 26
Sales by Product 70,000 60,000 559 1,098 18,492 Network Internet Server FY2004 1% FY2005 2% 31% 25% 50,000 40,000 30,000 20,000 19,078 11,504 17,393 14,092 23,612 Gateway Suite * Client/Server Solution, others Consumer PC Total 18% 28% 22% 100% 19% 32% 22% 100% 10,000 0 13,515 15,736 FY2004 FY2005 * Composed of Internet Server products and Client/Server Solution products e.g. Neat Suite, Client/Server/Messaging Suite, etc. Copyright 2006 - Trend Micro Inc. 27
Cost of sales & Operating expenses 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 3,236 2,261 5,723 16,009 2,597 6,144 FY2004 2,599 1,671 6,858 20,944 4,395 8,991 FY2005 Cost of sales (old) Maintenance Support Sales, Marketing R&D ADM Total * FY 2004 FY 2005 9% 6% 6% 4% 16% 15% 45% 46% 7% 10% 17% 20% 100% 100% * Amortization of capitalized software, and Material Copyright 2006 - Trend Micro Inc. 28
Non-operating operating Items Gain on sale of securities Exchange gain 370M Others 6M Interest expense 4M Interest income 327 M 837M Income before taxes Operating income 29,108 M 27,572 M Copyright 2006 - Trend Micro Inc. 29
Cash is King Asset composition 100% 75% 58% 54% 50% 45% Cash - Bond 50% 6% 15% 24% 26% Securities+Time Deposits 25% 18% 16% 14% 14% Accounts receivable (less allowance for doubtful accounts and sales returns) 0% 18% 15% 12% 14% Dec 02 Dec 03 Dec 04 Dec 05 Other assets Copyright 2006 - Trend Micro Inc. 30
Impact of Stock Option Expense Fiscal year ended Dec-31, FY2004 FY2005 Operating income Net income 26,078 27,572 15,875 18,670 Revaluation of Pro forma stock option expense under SFAS 123 Pro forma Option expense 3,249 3,772 Pro forma Operating income Pro forma net income 22,828 12% decline 12,626 20% decline 23,800 14% decline 14,898 20% decline Copyright 2006 - Trend Micro Inc. 31
Impact of Stock Option Expense on Accounting(1) Comparison of cash flows with and without stock option expensing in FY2005 Account Without option costs With option costs Cash flows from operating activities 20,646M 20,646M Cash flows from investing activities Cash flows from financing activities Effect of exchange rate changes on cash and cash equivalents - 12,738M - 2,406M 1,202M - 12,738M - 2,406M 1,202M Net increase(decrease) in cash and cash equivalents 6,704M 6,704M Cash and cash equivalents at beginning of period 52,908M 52,908M Cash and cash equivalents at end of period 59,613M 59,613M - Stock option cost is a non cash-out expense. - Cash flow does not change even with expensing option costs - Corporate Value arrived at by DCF model does not change Copyright 2006 - Trend Micro Inc. 32
Impact of Stock Option Expense on Without option costs Accounting (2) Comparison of B/S with and without stock option expensing in FY2005 With option costs Total Liabilities 51,068 Total Liabilities 51,068 Total Assets 132,935 Minority Interest Shareholders Equity 81,863 4 = Total Assets 132,935 Minority Interest Shareholders Equity 81,863 4 ( details ) Common stock 12,485 Additional paid-in capital 18,572 Retained earnings 55,972 Accumulated other comprehensive income 2,117 Treasury stock - 7,283 ( details ) Common stock 12,485 Additional paid-in capital 22,344 Retained earnings 52,200 Accumulated other comprehensive income 2,117 Treasury stock - 7,283 Shareholders Equity 81,863 Shareholders Equity 81,863 Option costs accounted for by an internal transfer between accounts comprising Shareholder s equity. Total balance of B/S remains exactly same amount in both cases. Copyright 2006 - Trend Micro Inc. 33
Approximate estimate for FY2006 Stock Option Expense Assumption : *The issue of FY2006 stock options has not been decided yet *Based on the assumption that issuance in 2006 will be half of 2005 actual -Stock options are issued twice in a year of 2006, April and October. -Total issuance will be about 3,000,000 shares -Estimating same fair value as in FY2005 Approximate estimation for FY2006 cost of stock options at the each quarter Q1 Q2 Q3 Q4 FY2006 Total Cost of Stock Option 1,189 1,318 1,213 1,209 4,930 (Non-GAAP) Copyright 2006 - Trend Micro Inc. 34
Cash Dividends for FY2005 40% Net Income 18,670M Dividends for FY2005 Total : 7,509 Million Yen Per share : 56 Yen * Subject to the approval at the Ordinary General Meeting of Shareholders scheduled in late March, 2006 Copyright 2006 - Trend Micro Inc. 35
Cash Dividends in the Future To maintain a real pay-out ratio of 40% excluding the impact of non-cash stock option expenses, we will be adding these expenses back to accounting Net Income for pay-out calculations. Trend Micro s Policy (standard base) 40% X Net Income 40% X (Net Income + Stock Option Expense) Stock Option Expense Stock Option Expense 40% 40% 100% Net Income 100% Net Income Because of the add-back of stock option expenses, the payout ratio will appear to be higher than 40% of net income base. * subject to shareholder approval in the ordinary general meeting of shareholders Copyright 2006 - Trend Micro Inc. 36
1Q2006 forecast assumptions Revenue growth- US, Japan above Total company average, EMEA below COGS & Operating Expense will be 11.5 Bn yen *(excluding Amortization of capitalized software, and Material and stock option expense) One time payment (receipt) related to intellectual property usage about 1.7 Bn yen Stock option expense will be about 1.2 Bn yen Estimated exchange rate: 1USD = 118 yen 1EUR = 139 yen Copyright 2006 - Trend Micro Inc. 37
Projection for 1Q2006 For 1Q2006 Jan - Mar, 2006 Expected YoY growth Net Sales 19,500 13% Operating Income 7,800 7% Net Income 4,400-3% * Including stock option expense 1,189M Yen Copyright 2006 - Trend Micro Inc. 38
Thank you! Copyright 2006 - Trend Micro Inc. 39
Appendix Sales by Customer (1) 1Q2004 Japan US Europe Asia Pacific Latin Am erica Enterprise 3,616 2,290 3,378 966 365 Consum er 2,161 345 212 286 3 total 5,777 2,634 3,590 1,252 368 2Q2004 Japan US Europe Asia Pacific Latin Am erica Enterprise 3,718 2,443 3,583 1,250 489 Consum er 2,572 264 202 320 3 total 6,290 2,707 3,785 1,570 492 3Q2004 Japan US Europe Asia Pacific Latin Am erica Enterprise 3,966 2,864 3,761 1,315 517 Consum er 2,543 370 212 297 5 total 6,509 3,233 3,973 1,612 522 4Q2004 Japan US Europe Asia Pacific Latin Am erica Enterprise 4,074 2,876 4,857 1,532 603 Consum er 2,793 441 214 340 7 total 6,867 3,317 5,071 1,872 610 Copyright 2006 - Trend Micro Inc. 40
Appendix Sales by Customer (2) 1Q2005 Japan US Europe Asia Pacific Latin Am erica Enterprise 4,509 2,876 3,953 1,426 465 Consum er 2,857 525 361 322 7 total 7,366 3,401 4,314 1,748 472 2Q2005 Japan US Europe Asia Pacific Latin Am erica Enterprise 4,475 3,047 4,250 1,701 284 Consum er 2,406 437 265 317 7 total 6,881 3,484 4,515 2,018 291 3Q2005 Japan US Europe Asia Pacific Latin Am erica Enterprise 4,276 3,637 4,129 1,670 508 Consum er 2,666 544 263 272 9 total 6,942 4,181 4,392 1,942 517 4Q2005 Japan US Europe Asia Pacific Latin Am erica Enterprise 5,046 3,636 4,921 1,865 619 Consum er 3,180 714 238 336 9 total 8,226 4,350 5,159 2,201 628 Copyright 2006 - Trend Micro Inc. 41