Final Results

Artilium plc

("Artilium" or the "Company")

Results for the year ended 30 June 2012

Artilium (AIM:ARTA), the developer of advanced software for telecoms companies and service providers, announces its audited results for the year ended 30 June 2012.

Commenting on the results, Adrie Reinders, Executive Chairman of Artilium said: 

"The telecom markets in Europe have had a volatile year. Artilium responded to these market conditions by moving its business model from a Capital Expenditure ("CAPEX") model to an Operational Expenditure ("OPEX") model, Artilium is still dependent on customer projects for its Core Software business. We are very pleased with the successful launch of two new Mobile Virtual Network Enablers ("MVNEs") in Belgium (Interfon on Mobistar) and the Netherlands (NarrowMinds on T Mobile). Our main contracts are now based on an active subscriber model and, as a consequence, we benefit from the growth strategy of our customers. We are building our customer relationships to address their needs in the future.

Together with the strategy of extending market reach through adding multiple MVNEs Artilium has, with the acquisition of United Telecom on 27 June 2012, added distribution capabilities and end-customers in the segments of voice, broadband access and mobile. This extends Artilium's capabilities in the future.

With the acquisition of United Telecom the Shareholders of Artilium have welcomed Willem van den Brink as the new Chief Executive Officer to the board of Artilium. I would like to wish him and my fellow board members success in implementing our extended strategy in the turn-around of Artilium's business.

As I have decided to focus on my activities as CEO of E-Factor, I have informed my fellow board members of my intention to step down as Chairman as of January 1st 2013. I would like to thank all employees and directors for pleasant cooperation over the last three years and wish them all best for a flourishing future with Artilium as the outlook is now promising."

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CEO STATEMENT

Overview

Within the general economic crisis, telecom markets across Europe have proven to be a difficult marketplace. In general, Business-to-Business customers are delaying their decisions for new investments. These decisions have impacted Artilium's financial results in the current financial year. We are however confident that they will have a positive effect on the coming financial years since orders which were delayed during the year have now crystallised.

Artilium acquired United Telecom on 27 June 2012 with its end-customer distribution capabilities and direct revenues in fixed voice, broadband access and mobile customers. The Artilium core software capabilities can now be directly offered to the Artilium (United Telecom) end-users. This reduces the time-to-market and we expect that this will positively contribute to the results of Artilium. The direct access to end users will likely have a positive effect on the quality of our software as the market feedback loop is now significantly shortened.

Operations

The continuous focus on improving the quality of service to our existing customers has led to an increased stability of the "ARTA" platform. The R&D activities in Belgium and Scotland have been focussed on developing, building and testing extended functionalities for the ARTA Software. This latest software version is a good basis from which to offer extended functionalities for the acquired United Telecom end-consumers. Due to the enablement of the software for delivery of our solutions 'from the Cloud' we expect to lower the barrier for market entry of new communities using the ARTA software suite. The Location-Based-Services and Continous-Location-Client now are in a full production environment and are now contributing to the revenue as of the second quarter of the year ending 30 June 2013.

The next phase - managing the turn-around

The Artilium turn-around creates future revenue growth that will come both from expanding the customer base for the Artilium software products as well as growing the end-consumers by expanding the (Mobile) Virtual Operator Services. This will also mean offering new services to the MVNE's and MVNO's end-consumers. Since the stabilisation phase lies behind us, Artilium will also focus on carefully expanding its services internationally. New initiatives have been developed to speed up our growth. We engaged a reliable and well-connected partner to develop the market in Eastern Europe and the first results look promising. Given that the market for MVNO's in Eastern Europe is just starting to develop, we believe we are in a good position to be successful.

Market Dynamics

Markets continue show decreasing volumes in relation to standard traffic related items. This forces operators to seeking new ways of reducing total cost of ownership in relation to their it-core services. This is exactly what Artilium with its fully integrated offering can do. Next to this market development it is apparent that there is an increased need for new functionality providing added value to end-customers. The Artilium disruptive voice-over-ip and mobile-over-ip service, location based services and the intended extension towards loyalty and payment services are within the new growth domains. Artilium has with the acquisition of United Telecom strongly improved its position in the new growth domains.

Board Changes

Our Chairman has indicated that he intends to leave the company as of 1 January 2013. I would like to take the opportunity and thank Adrie Reinders for guiding the company through its most difficult period. He has been contributing very constructively in using his network and capabilities to create the turn-around process that Artilium is currently undergoing. 

I am also pleased to announce that we intend to appoint Patrick Morley Msc as the new Chairman of the board as of 1 January 2013. Patrick Morley is the former COO of the Telegraaf Media Group, CEO Wolter Kluwer Netherlands and Skandinavia, CEO of Bwirelezz and CTO and member of the board of Royal KPN Netherlands. He currently serves as board-member of Trans Link Systems and TKH Group. A further announcement including the information required by the AIM Rules in relation to Patrick Morley will be made in due course.

Financial Results

In line with the Group's long term strategic plan, Artilium moved to an OPEX business model (predictable recurring revenue) and implemented significant cost saving measures (significantly reducing operating expenses).As reported in the earlier published trading update the current financial year results have been impacted by the deferral of revenue on the new KPN contract required under International Financial reporting Standards (IFRS),some delays in customer orders and the decision to recognize an impairment deriving from a bad debt.

Exceptional items had an impact on the revenues for both the years 2011 and 2012. Revenues for the year ended 30 June 2012 were €3.5 million (2011: €6.1 million) In the prior year revenue comprised an exceptional item, namely the full recognition of the deferred income with respect to the previous KPN deal which expired in March 2012 for €2.1 million. Also in that financial year a deferred income of €0.5 million was recognised in relation to prepaid projects. At 30 June 2012 we have deferred income of €0.7 million relating to software licenses sold within the year and had a delayed order impact of €0.6 million. This revenue will be recognised in future financial years. Taking into account all of these effects (excluding the release of the remaining deferred income of the KPN contract last year and the current year deferred income on our software licenses sold), revenue billings show a slight improvement of about 8% compared to the previous year (see table below).

Revenues for the period derived from professional services, relating to project management and implementation services and an increasing proportion is now represented by recurring revenue coming from maintenance and support contracts, including monthly subscriber fees. As planned, we decreased activity in the low margin area of resale of hardware last year and as a result revenues from this activity have decreased to €0.3 million versus €0.4 million in the previous year.

The Group generated a gross profit of €2.7 million or 77.5% of revenues (2011: €5.3 million or 86.4% of revenues) and incurred an operating loss of €3.3 million (2011: €0.9 million), inclusive of operating expenses of €6.0 million (2011: €6.3 million).

The administrative expenses were impacted by favourable exchange rate fluctuations of €0.3 million while in 2011 there was negative impact of €0.6 million. Depreciation and amortisation included in administrative expenses was €0.3 million (2011: €0.6 million). In the current financial year, the operating loss includes a charge for share-based payments, bonus settlements and other professional fees of €1.1 million (2011: €0.1 million) mainly relating to the acquisition of United Telecom and external consultants. Additionally, Artilium was confronted with bad debts from clients which impacted the administrative expenses in the current financial year by €0.3 million (2011: €nil). Stripping all of these items from the administrative expenses provides a better view of the underlying result of the Group's operations. The underlying operating costs of the business before non-operational items, share-based payment expenses and one-off items are €4.6 million (2011: €4.9 million). This cost saving is not only an improvement versus last year but is, more importantly, fully in line with our strategic plan.

Even though we improved the operational excellence of our organisation, significant cost savings have been made and are thus proven to be sustainable. This indicates the Company is still on track to successfully complete its transition to an OPEX model as set out in its business plan.

Outlook

Despite the above one-off effects, management expects 2012/13 to be a positive turning point in Artilium's software business and is therefore optimistic on the outlook and the Group remains sufficiently funded on an operational basis. Even after the year ending 30 June 2012, further progress on cost savings and finding new promising sales leads has been made.

We expect to continue our revenue growth path. We are focused on delivering new revenue streams with direct end-customers invoice, broadband and mobile traffic through the acquisition of United Telecom on 27 June 2012 and on expanding our business by rolling out further technological advancements under the ARTA family of products.

Our presence capabilities have now been ported to be smart-phone-connected and are commercially launched. We now offer our presence solutions independent of the operator and are also able to deliver our intelligent routing and community-services directly to smartphone users. This will open up a complete new potential, customer base and distribution approach in addition to operators and resellers and we can now address our customers via existing ICT delivery channels to large enterprises. We have taken the position that our solution will be a multi-vendor support strategy. The ARTA platform will therefore be the linking pin between the different smart phone platforms for location, state, presence and loyalty and payment solutions. ARTA will also open the possibility to the enterprise market to make the smart- phone a tool in the business process and integrate it with existing ICT solutions like ERP systems. With a standard integration with Microsoft Dynamics planned to be delivered in 2013, the ARTA software suite will provide a unique end-to-end Microsoft based telecoms IT solution with unique selling points on flexibility, resilience, features and Value Added Services like Location Based Services and an integrated (mobile) payment handling engine. The Microsoft architecture allows for a cost effective and easy to scale out platform. The structure of the ARTA software and the improvement we have made over the last year addresses the worries of traditional telecoms engineers on using Microsoft as a basis for delivery of telecommunications services.

Artilium plc

Consolidated income statement

Year ended 30 June 2012

Artilium plc

Consolidated statement of total comprehensive income

Year ended 30 June 2012

Artilium plc

Consolidated statement of financial position

As at 30 June 2012

Artilium plc

Consolidated statement of financial position (continued)

As at 30 June 2012

Artilium plc

Consolidated statement of changes in equity

Year ended 30 June 2012

Artilium plc

Consolidated cash flow statement

Year ended 30 June 2012

Artilium plc

Notes to the consolidated financial statements

Year ended 30 June 2012

1. General information

Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs.

The financial information contained in this announcement does not constitute statutory accounts as defined by Section 434 of the Companies Act 2006. 

The directors approved this preliminary announcement on 6 December 2012.

This announcement is prepared on the basis of the accounting policies as adopted in the full set of financial statements for the year ended 30 June 2012.

The financial statements have been prepared on the historical cost basis, except that they have been modified to include the revaluation of certain financial assets and liabilities.

The consolidated financial statements incorporate the financial statements of the Company and the entities controlled by the Company (its subsidiaries) made up to 30 June each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

Where necessary, adjustments are made to the financial statements of the subsidiary to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Going concern

The Directors have adopted the going concern basis in preparing the financial statements, having carried out a going concern review. Given the nature of the Group and the way in which business is managed. Cashflow forecasts have been prepared for both of the Group's two trading companies, Artilium NV and United Telecom NV. These forecasts are considered in conjunction for the directors to satisfy themselves that the going concern assumption is appropriate.

United Telecom NV

The directors have prepared and reviewed cash flow forecasts from the date of the accounts approval to December 2013. Due to the nature of the Company's customer base, contracted income and cost base the directors do not consider there to be a material uncertainty in relation to the amount of revenue that the company will generate, or costs that it will incur. This is supported by the historic experience of forecasting within the United Telecom NV business.

Artilium NV

A worst-case scenario cashflow forecast (which represents a significant downgrade compared to internal budgets and targets) has been prepared from the date of the accounts approval to December 2013. In carrying out the review the Directors have had to make significant assumptions about the revenue that will be generated to December 2013.

The Group has now secured 76% (€5m) of its expected revenue per the worst case scenario forecast, the remaining revenue for the forecast period is a combination of expected recurring revenue included within concluded contracts and proposals to existing and new customers based on the directors' assessment of the likelihood of winning these on a project by project basis, revenue has only been included in the forecasts where the directors are at least 80% certain that the revenue will be secured. Therefore the directors would like to highlight that 24% (€1.6m) of forecast revenue per the worst case scenario is not committed or contracted. As a result there is a material uncertainty related to revenue that the company will generate.

In preparing their forecasts the directors have also had to estimate the timing of expected cash flows for both secured and unsecured revenue. Due to the limited headroom in the worst case scenario cash flow forecasts, delays in the timing of cash flows have a significant impact on the Group's cash position. The going concern assumption is based on the forecast cash flows being achieved, therefore a delay in the timing of cash flows may require the company to raise alternative finance and manage cash outflows accordingly and therefore is considered to be a material uncertainty.

As highlighted above, there is a material uncertainty related to events or conditions, related to Artilium NV revenues, which may cast significant doubt on the entity's ability to generate sufficient cash flows to continue as a going concern, and, therefore that it may be unable to realise its assets and discharge its liabilities in the normal course of business. However the directors consider that the assumptions made are appropriate and are satisfied that the Group is a going concern. The directors monitor the cash position of the business on a regular basis and consider the various sources of finance available to the Group, the directors would seek to access these sources of finance as necessary.

Carrying value of long term assets

The Directors have carried out impairment tests on the carrying value of the Group's intangible assets and goodwill and concluded that these assets are not impaired. In arriving at this conclusion the Directors have used value-in-use calculations and made assumptions about revenue in the near and longer term, which, due to the nature of the Group sales and the time-scales involved are not supported by sales contracts. There is thus material uncertainty as to the amount of revenue that will be generated, which may cast significant doubt as to the carrying value of these assets.

For the purpose of impairment testing the Group as a whole is considered as two cash-generating units because of the way it is structured, managed and measured by management. The Group tests goodwill and other intangible assets annually for impairment or more frequently if there are indications that it might be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill. The cash generating units are Artilium NV and United Telecom NV, which was acquired on 27 June 2012.

Artilium NV

Cash flows for the impairment tests have been forecast for five years and a terminal value has been calculated for the years beyond that. The terminal value is based on the average over the five year net cash flow forecast to perpetuity using a pre-tax discount rate of 18.57 % (2011: 21%), which is appropriate for the CGU. The WACC would need to increase to more than 20.84% for the goodwill to be impaired. The growth rate factor used in perpetuity in the discounted cash flow model is estimated to be 2.5% (2011: 3%) in line with long-term forecasts for economic growth expected in Belgium as this is the company's principal market. The sales growth rate used during the five year forecast is estimated to be 5%-10% (2011:10%-20%) based on management's best estimate of the market opportunities. Based on these assumptions the recoverable amount exceeds the carrying amount by €1.6 million (2011:€5.4 million).If the net present value of forecast future cash flows decreased by 14% the recoverable amount will be less than the carrying amount.

The Group's cost base is forecasted to increase at the rate of 3% (2011:10%) per year for the five year forecast period. This is based on management's historic experience of cost increases, and the forecasted increases in revenue.

As a consequence of the material uncertainty on revenue highlighted under the going-concern policy above the auditors have issued an opinion that includes an emphasis of matter paragraph related to this uncertainty, which may cast significant doubt on the Group's ability to continue as a going concern and the carrying value of the Group's non-current assets. However the Directors consider that the assumptions made are appropriate and are satisfied that the Group's non-current assets are not impaired.

United Telecom NV

The goodwill arising on acquisition of United Telecom on 27 June 2012 was tested for impairment at 30 June 2012. Cash flows for the acquired business, for the purpose of impairment test, have been forecasted for five years and a terminal value has been calculated for the years beyond that. The terminal value is based on the average over the five year net cash-flow forecast for perpetuity using a pre-tax discount rate of 22.67% which is appropriate for the company. The discount rate would need to increase to more than 24% for the goodwill to be impaired. The growth rate factor used in perpetuity in the discounted cash flow model is estimated to be 2.5% in line with long-term forecasts for economic growth expected in Belgium as this is the company's principal market. The sales growth rate used during the five year forecast is estimated to be 3% - 11% based on management's best estimate of the market opportunities. Based on these assumptions the recoverable amount exceeds the carrying amount of the goodwill and identified intangible assets by € 0.2 million. If the net present value of forecast future cash flows decreased by 3.4% the recoverable amount will be less than the carrying amount.

2. Loss for the year

Loss for the year has been arrived at after charging/(crediting):

3. Segmental information

An analysis of the Group's revenue is as follows:

4. Taxation

5. Loss per share

The share options in issue do not have a dilutive effect due to the result for the year being a loss, and as a result diluted loss per share is the same as basic earnings per share.

The weighted average number of ordinary shares is calculated as follows:

Basic and diluted earnings per share is calculated as follows:

6. Goodwill

The Directors have carried out impairment tests on the carrying value of the Group's intangible assets and goodwill and concluded that these assets are not impaired. In arriving at this conclusion the Directors have used value-in-use calculations and made assumptions about revenue in the near and longer term, which, due to the nature of the Group sales and the time-scales involved are not supported by sales contracts. There is thus material uncertainty as to the amount of revenue that will be generated, which may cast significant doubt as to the carrying value of these assets.

For the purpose of impairment testing the Group as a whole is considered as two cash-generating units because of the way it is structured, managed and measured by management. The Group tests goodwill and other intangible assets annually for impairment or more frequently if there are indications that it might be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill. The cash generating units are Artilium NV and United Telecom NV, which was acquired on 27 June 2012.

Artilium NV

Cash flows for the impairment tests have been forecast for five years and a terminal value has been calculated for the years beyond that. The terminal value is based on the average over the five year net cash flow forecast to perpetuity using a pre-tax discount rate of 18.57 % (2011: 21%), which is appropriate for the Company. The discount rate would need to increase to more than 20.84% for the goodwill to be impaired. The growth rate factor used in perpetuity in the discounted cash flow model is estimated to be 2.5% (2011: 3%) in line with long-term forecasts for economic growth expected in Belgium as this is the company's principal market. The sales growth rate used during the five year forecast is estimated to be 5%-10% (2011:10%-20%) based on management's best estimate of the market opportunities. Based on these assumptions the recoverable amount exceeds the carrying amount by €1.6 million (2011:€5.4 million). If the net present value of forecast future cash flows decreased by 14% the recoverable amount will be less than the carrying amount.

The Group's cost base is forecasted to increase at the rate of 3% (2011:10%) per year for the five year forecast period. This is based on management's historic experience of cost increases, and the forecasted increases in revenue.

As a consequence of the material uncertainty on revenue highlighted under the going-concern policy above the auditors have issued an opinion that includes an emphasis of matter paragraph related to this uncertainty, which may cast significant doubt on the Group's ability to continue as a going concern and the carrying value of the Group's non-current assets. However the Directors consider that the assumptions made are appropriate and are satisfied that the Group's non-current assets are not impaired.

United Telecom NV

The goodwill arising on acquisition of United Telecom on 27 June 2012 was tested for impairment at 30 June 2012. Cash flows for the acquired business, for the purpose of impairment test, have been forecasted for five years and a terminal value has been calculated for the years beyond that. The terminal value is based on the average over the five year net cash-flow forecast for perpetuity using a pre-tax discount rate of 22.67% which is appropriate for the company. The discount rate would need to increase to more than 24% for the goodwill to be impaired. The growth rate factor used in perpetuity in the discounted cash flow model is estimated to be 2.5% in line with long-term forecasts for economic growth expected in Belgium as this is the company's principal market. The sales growth rate used during the five year forecast is estimated to be 3% - 11% based on management's best estimate of the market opportunities. Based on these assumptions the recoverable amount exceeds the carrying amount of the goodwill and identified intangible assets by € 0.2 million. If the net present value of forecast future cash flows decreased by 3.4% the recoverable amount will be less than the carrying amount.

7. Note to the consolidated statement of cash flows

8. Report and financial information

The audited statutory accounts for the year ended 30 June 2012 will be published on the company's website at www.artilium.com and will be available from the registered office of the Company at the offices of Morrison & Foerster (UK) LLP at 7th Floor, CityPoint, One Ropemaker Street, London EC2Y 9AW in the course of December.

Shareholders who have not signed up to the receipt of electronic communications from the Company will be notified in writing that the accounts and notice of annual general meeting, to be held at the offices of Morrison & Foerster (UK) LLP at 7th Floor, CityPoint, One Ropemaker Street, London EC2Y 9AW at Midday on 2 January 2013, have been published to the website; shareholders who have signed up to the receipt of electronic communications from the Company will be notified by email in the usual way.

The above does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. It is an extract from the full accounts for the year ended 30 June 2012 on which the auditor has issued a qualified opinion including the following limitation of scope regarding the assessment of the fair values of delivered elements on the KPN contract.

With respect to an individual contract, which concluded during the year, an amount of €0.333 million (2011: €2.570 million) has been included in total group revenue of €3.477 million (2011: €6.121 million) in the year ended 30 June 2012. The audit evidence available to us in respect of this individual contract was limited because we were unable to ascertain whether management's estimate of the fair value of both the delivered and undelivered elements of the contract were reasonable. As a result of this we have been unable to obtain sufficient appropriate audit evidence concerning revenue in respect of this individual contract.

The auditor has also included the following emphasis of matter paragraphs in relation to the uncertainties regarding going concern and the carrying value of intangible assets in the financial statements.

In forming our opinion on the financial statements we have considered the adequacy of the disclosures made in note 3 concerning the group's ability to continue as a going concern. The group incurred a net loss of €3.724 million during the year ended 30 June 2012.

As explained in Note 3, the directors' assessment as to the appropriateness of the going concern basis includes an expectation of future revenues which is only partially supported by sales contracts or confirmed sales orders, and as such is inherently uncertain. If future revenue does not meet expectations in terms of value and timing, the group may not be able to generate sufficient cash flows to pay debts as they fall due or continue as a going concern.

We also draw attention to the disclosures made in note 3 concerning the carrying value of non-current assets of €10.727 million included in the consolidated statement of financial position relating to Goodwill and Intangibles allocated to the Artilium NV segment. The assessment that these assets are not impaired includes an expectation of future revenues which is only partially supported by sales contracts or confirmed sales orders, and as such is inherently uncertain.

These conditions, as set forth in note 3, indicate the existence of a material uncertainty, which may cast significant doubt about the group's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the group were unable to continue as a going concern.