Final Results

21 October 2010

Artilium plc

("Artilium" or the "Company")

Preliminary results for the year ended 30 June 2010

Artilium (AIM:ARTA), the developer of advanced software for telecoms companies and service providers, announces its unaudited preliminary results for the year ended 30 June 2010.

Financial Highlights

§ In line with the new strategic plan agreed at the outset of the financial year ended 30 June 2010, revenue was €3.2 million (2009: €6.6 million), reflecting a switch to charging revenue on usage and a move away from hardware sales

§ Gross profit of €2.2 million, with gross margin up 14.6% to 68.1% (2009: €3.5 million, gross margin of 53.5%)

§ Administrative expenses reduced 56.3% to €6.2 million (2009: €14.2 million)

§ Underlying operating loss (before share-based payment expenses and one-off items) of €2.7 million (2009: €4.8 million)

§ No further revenue released in the current period with respect to the 2008 restatement

§ Cash at the end of the period of €1.4 million (2009: €2.3 million)

§ Raising a maximum of a further €0.8 million of capital pursuant to the issue of further convertible loan notes

Operational Highlights

§ Implemented new strategic plan to develop the strong potential of ARTA platform

§ Switch from Capital Expenditure ("CAPEX") to Operational Expenditure ("OPEX") based charging in line with usage by clients

§ New contract wins include Interfon and Lebara

§ Increased visibility on over 50% of revenues for current financial year

§ Agreement on implementation of showcase platform with T-Mobile NL and NarrowMinds (see separate RNS)

Commenting on the results, Fred Mulder, Executive Chairman of Artilium said: 

"The results for this year reflect the end of our transition planning and the Board now believes the business is on a stable footing in line with our long-term strategic plan, both in terms of revenues and costs. We remain on track to achieve our target to reach operating cash breakeven in the year ending 30 June 2011. Although the new business model, which is OPEX rather than CAPEX based, has resulted in an anticipated drop in revenues this financial year, it should ultimately generate more consistent recurring income.

"Some exciting software developments have come from our Research and Development division, particularly in the area of location based services which will enhance the functionality of the ARTA8 platform and which we believe represent cutting edge developments in relation to real industry demand. We can now enable for instance, location based mobile advertising and mobile vouchers, not only from Artilium enabled SIM card functionality but also supporting iPhone, Android and Windows mobile handsets with our presence platform.

"During the period, we saw the number of ARTA based 'MNVO's' in operation double to just under fifty, all of which are targeting potential customers in specific interest groups such as travelling business men, ethnic & regional communities, as well as small and medium sized companies. Today, we are also announcing a new venture with NarrowMinds which will see the launch of the next stage of our technology with an 'MVNE' in The Netherlands aimed at enabling communities to launch their own innovative mobile offering, such as national sports federations, individual towns and cities and other small communities. This is an exciting time for the business, Artilium is delivering on its strategy and the new orders we are receiving from our customers reflect this.

"The Company has also been able to settle a long-standing dispute with QiComm Limited relating to a contract dating back to 2005 (which pre-dated the Company's ownership of Artilium NV); this was the last element of the Group's historical issues. The terms of the settlement are confidential but the Company has financed the costs out of the issue of a further tranche of convertible notes and retains the right to seek recovery of the costs from a third party.

"The Company is now committed to cementing financial stability and core customer service which together should maximize shareholder value; this continuing strategy may necessarily result in the Company pursuing a transformational strategic partnership or transaction.

"I would like to extend my sincere thanks to my fellow Board members and to the Group's entire staff for their commitment and dedication in seeing this transitional process through to fruition."

For further information contact: 

Artilium - Notes to Editors

·; Founded in 1995, Artilium develops and sells software solutions to telecoms companies and service providers under its ARTA family of products. Its clients include BT, Vodafone Spain, Ziggo (NL), Belgacom Mobile (BE) Telenet and KPN.

·; ARTA enables telecoms companies to market to consumers in a highly targeted manner, creating packages which are tailor made to the precise requirements of small groups of subscribers such as a municipality or interest group.

·; The ability to offer a commercially viable solution for customers to sell their services to small groups (e.g. supporters of a football team), is possible using other technologies but substantially more expensive.

·; ARTA technology provides:

o A low cost solution for creating a commercial communications network for communities and companies. Used by major Mobile Virtual Network Operators and smaller Operators who maybe targeting subscriber bases of less than 1.000

o A low cost, low energy use mobile phone based alternative to GPS for movement tracking for customers ranging from haulage firms through to families wishing to know where their children are.

o A real time, low cost rerouting of calls to provide the cheapest solution to Mobile Network Operator's and Mobile Virtual Network Operators

CEO STATEMENT

Overview

During the period under review, the Company has executed the planned strategy change from a volatile CAPEX based revenue model to a more stable and recurring OPEX model and successfully achieved our financial targets. Our technology has proved to be robust, reliable and efficient in supporting the business of our customers and we now have a management team with a hands-on approach to implement our new strategy.

Financial Results

The Company agreed a long term strategic plan at the beginning of the current financial year. This plan moves the Company to an OPEX business model (predictable recurring revenue) and also has significant cost saving measures embedded in it (significantly reducing operating expenses) aimed at achieving cash flow breakeven in the current period.

As we move to the OPEX business model, revenues for the year ended 30 June 2010 were €3.2 million (2009: €6.6 million) of which a significant element came 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 ceased activity in the low margin area of resale of hardware and as a result revenues from this activity were €0.3m versus €2.6 million in the previous year. The quality of earnings has significantly improved and equally importantly, revenues are in line with our longer term strategic plan and demonstrate the Company is capable of performing against its targets.

Revenue for the year does not comprise any recognition of the deferred income, currently on the group's balance sheet with respect to the KPN deal. At the time that these revenues will be booked they will not have a cash effect and will therefore not have a material impact on the operation of the business.

The Company generated a gross profit of €2.2 million or 68.1% of revenues (2009: €3.5 million or 53.5% of revenues) and incurred an operating loss of €3.9 million (2009: €11.2 million), inclusive of operating expenses of €6.2 million (2009: € 14.2 million). Operating loss includes a charge for share-based payments of €0.3 million, a charge for share options of €0.4 million and a formal provision of €0.5 million covering the Company's maximum exposure to QiComm.

The underlying operating costs of the business before share-based payment expenses and one-off items are €5.0 million, contributing to an operating loss before share-based payment expenses and one-off items of €2.7 million. This not only represents an improvement of 43.8% over the same period last year (2009 loss before share-based payment expenses and one-off items: €4.8 million) but is, more importantly, fully in line with the plan set forth to achieve cash flow breakeven in the current financial year.

In the past days we have initiated the raising of up to a further €0.8 million of convertible loan notes. The Notes are secured, carry a coupon of 10% and are convertible into ordinary shares at a price of 8.25p (being approximately a 10% discount to the average mid market price of the Company's shares on AIM). The existing unsecured loan notes have been rebased on the same terms. Initial take up of the new issue to date has provided immediate cash resources to enable the Company to settle the QiComm case referred to above without materially impacting the Company's operational cash-flow. A further announcement as to the exact sum raised will be made in the next few days. Whilst the Company currently has sufficient existing authorities to issue shares in connection with the conversion rights attaching to the Notes it will seek a specific authority for the issue of such shares at its next general meeting.

The Company agreed with Lanstead on 18 October 2010 to accelerate the final equity swaps outstanding under the 24 month performance contract which has resulted in the Company receiving the sum of £37,000; this has brought the Company's relationship with Lanstead to an end.

Market Dynamics

In the past year there have been a number of positive developments in the market for our community, location and intelligent routing solutions. Companies are increasingly identifying the commercial opportunity of targeting the specific needs of smaller communities of users, such as municipalities or local football team supporters and they recognize that Artilium is the only company capable of providing these services on a commercial basis. Efficient handling of telecommunication flows has technical and financial benefits in both the wholesale and the retail markets and we believe that these can both be significant revenue drivers for the Company. Artilium also seeks to take advantage of the trend of telecom operators to move away from buying products, software and solutions to buying services: Software as a Service (SaaS) or even Network as a Service (NaaS). Our technology is well suited to supply this and Artilium can then provide the ongoing support necessary to ensure its smooth operation.

Business update

The first half of the period under review was focussed on filling our pipeline, following our marketing and sales reorganisation, and this resulted in a number of contract wins including Lebara and Interfon. Revenue growth came principally from Europe whilst the development of the Indian market was behind expectations, mainly due to implementation issues with regards to legal requirements and bureaucracy. We are now actively tackling these issues and are expecting the result of this in the near future. This will also give us a unique position in the Indian market as potential competitors will have to overcome the same hurdles.

We have established a new venture with the Dutch Company NarrowMinds with the objective of setting up a new Mobile Virtual Network Enabler ("MVNE") in The Netherlands, enabling communities to launch their own innovative mobile offering, including SIM embedded location based and presence services. Through this venture, we have agreed a Memorandum Of Understanding ("MOU") with T-Mobile NL for the implementation of this MVNE. The technology will be based on the Artilium platform capable of using the full functionality of ARTA 8. The Company is convinced this will accelerate the revenue potential of its software. Although this new activity is not expected to contribute to the Company's financial results in the current financial period, we believe that the new company will act as an important opportunity to showcase ARTA's capabilities. More details on this can be found in a separate announcement released today.

Although, during this financial year, Artilium focused our marketing and sales organisation's efforts on Europe and India, we strongly believe that wider opportunities exist which we will be able to exploit by strengthening our sales team.

Pipeline

Within India and Europe our pipeline looks healthy and, in line with the aim of achieving operating cash break even, we have already secured more than 50% of our expected revenue for the year to June 2011. This is either as recurring revenue included within concluded contracts or in the form of proposals to existing and new customers weighted by our estimate of the probability of winning these proposals and reflects our move to a recurring revenue based business model. Part of the pipeline consists of projects with new and existing partners that are being offered in a SaaS model. This also includes existing customer implementations that can be transformed into a SaaS delivery model.

Organisation

In the year ended 30 June 2010 the company has seen a true transformation. We now have a lean hands-on organisation that uses its resources to deliver solutions to our customers. The implementation achievements of the past year proves this point, the Company now expects this achievement to translate into better financial results over the next year. At the same time and without any negative impact on client service levels, (both with regard to maintenance side and delivery), we have been able to realise the most significant cost savings and, more importantly, we firmly believe that these will be sustainable in the medium to long term. This implies the Company is on track to successfully complete its transition as set forth in its plan.

Outlook

The company has gone through a difficult period, with many challenges and many changes. We are now on a stable footing and look forward to a more predictable future. The management team sees some room for improvement, especially on the Marketing and Sales effort, and expects to be able to achieve its targets for next year as well.

Artilium plc

Consolidated income statement

Year ended 30 June 2010

Artilium plc

Consolidated statement of total comprehensive income

Year ended 30 June 2010

Artilium plc

Consolidated statement of financial position

Year ended 30 June 2010

Artilium plc

Consolidated statement of financial position

Year ended 30 June 2010

Artilium plc

Consolidated statement of changes in equity

Year ended 30 June 2010

Artilium plc

Consolidated statement of cash flows

Year ended 30 June 2010

Artilium plc

Notes to the consolidated financial statements

Year ended 30 June 2010

1. Basis of preparation

Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (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 20 October 2010.

This announcement is prepared on the basis of the accounting policies to be adopted for the full set of financial statements for the year ended 30 June 2010.

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.

The comparative financial information has been extracted from the 2009 annual report and financial statements of Artilium plc. The 2009 financial statements, which have been filed with the Registrar of Companies, received a qualified audit opinion with a disclaimer of opinion in respect of revenue recognition on the KPN contract.

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.

Change in reporting currency

The Group changed the reporting currency of its Group accounts from sterling to Euro, reflecting the profile of revenue and operating profit, which are now primarily generated in Euro.

The change is effective from the results for the year ended 30 June 2010. All comparatives were restated in Euro.

As a consequence of this change, future dividends will be determined in Euro. Sterling dividends, translated at the prevailing exchange rate when the dividend is declared, will continue to be paid to all shareholders who currently receive a sterling dividend.

Artilium Plc, which is registered and has its headquarters in England, will maintain its primary listing on AIM, with the shares quoted in sterling.

Revenue recognition on KPN contract

In the previous financial year, the new management team completed an exercise to estimate the relative fair value of software delivered under the KPN licence agreement of 19 March 2008, and of software and functionalities yet to be delivered. Given the nature of the licence agreement, it was not possible to provide sufficient audit evidence to support management's estimates and a disclaimer of audit opinion was issued on the financial statements for the year ended 30 June 2009.

Based on the valuation exercise, 58.6% of the contract deliverables (€2.9 million) had been delivered at 30 June 2009, with 41.4% still to be delivered and held on the balance sheet as deferred income. No further software or functionalities were delivered during the year ended 30 June 2010, and therefore no licence revenue in respect of this contract has been recognised during the year. The licence fee of €5.0 million has been received in full, and the amount paid is non-refundable under the terms of the licence agreement. As in the previous year, a provision has been recognised for the estimated loss for the delivery of the maintenance and support services under this agreement.

It is still not possible to provide sufficient audit evidence to support management's estimates of the fair value of elements of the contract delivered and yet to be delivered, and the auditors will modify their opinion on the financial statements for the year ended 30 June 2010 on this basis.

Going concern

The Directors have adopted the going concern basis in preparing the accounts, having carried out a going concern review. In carrying out the review the Directors have made assumptions about the revenue that will be generated in the financial years ending 30 June 2011 and 2012 based on its pipeline.

The Company has focussed on the European and Indian market and has identified various prospects in this market. In order to reach the break even point in 2011, the company has now already secured more than 50% of its expected revenue for the year to June 2011 either as recurring revenue included within concluded contracts or in the form of proposals to existing and new customers weighted for its estimate of the probability of winning these. This is the first result of the Company's strategy to move to a recurring revenue based business model. The incoming cash flows will as such be spread over the total life as opposed to licence sales where the cash is paid upfront. This is giving the Company greater visibility and predictability of its revenues. However, as this future revenue is not fully supported by sales contracts or confirmed orders yet, there is material uncertainty as to the amount of revenue that the Group will generate.

 The Company also adjusted its cost base in the previous accounting year to reflect and fit with the new business model. The real effect of these changes has now come in full effect in the current year, clearly proving the sustainability of the cost level reductions.

As highlighted above, there is a material uncertainty related to events or conditions, related to 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.

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 made assumptions about revenue in the near and longer term, which, due to the nature of the Company's 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 Company as a whole is considered as one single cash-generating unit 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 first to reduce the carrying amount of any goodwill and then to the other intangible assets and finally to Property, Plant and Equipment.

Cash flows for the impairment test 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 year five net cash flows forecast to perpetuity using a discount rate of 15%, which is appropriate for the industry. Based on these assumptions the recoverable amount exceeds the carrying amount by € 3.4 million. If the net present value of forecast future cash flows decreased by 23.55 the recoverable amount will be less than the carrying amount.

As a consequence of the material uncertainty on revenue highlighted above the auditors will issue 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.

2. Loss for the year

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

3. Revenue

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

The Group's sales of goods and services have been generated entirely from the subsidiary based in Belgium and hence the Directors believe that there are no significant reportable amounts relating to the other geographical locations which require segmental disclosure.

4. Taxation

5. Note to the consolidated statement of cash flows

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.

6. Report and financial information

The audited statutory accounts for the year ended 30 June 2010 will be posted 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.

A copy of the audited statutory accounts together with a 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 14 December 2010 will be sent to shareholders in due course. The audit report will contain a qualified audit opinion as set out in Note 1.