28th Mar 2006 07:02
NETeller PLC28 March 2006 NETELLER PLC Preliminary Results For The Year Ended 31 December 2005 NETELLER Plc (LSE: NLR), the world's leading independent online money transferservice provider, today announces its preliminary results for the year ended 31December 2005. FINANCIAL HIGHLIGHTS 2005 2004 % increase• Revenue: $172.1 million $82.6 million up 108 %• Gross margin: 74% 69%• Profit before tax: $97.8 million $45.8 million up 114 %• Profit for the year: $91.5 million $33.0 million up 177 %• Basic EPS: $0.76 $0.37 up 105 % OPERATIONAL HIGHLIGHTS 2005 2004 % increase• Average daily receipts: $3.44 million $1.81 million up 90 %• Average daily sign ups: 2,930 1,821 up 61 %• Total year end customers: 2,320,670 1,251,031 up 86 % All figures in US$ unless otherwise stated. BUSINESS HIGHLIGHTS • Record performance in 2005 in terms of revenue, profitability, customer sign ups and receipts • Geographic expansion proceeding with localised products in North America, Europe and Asia • Implementation of next generation platform and migration substantially complete • Strengthening of management team, led by Ron Martin's appointment as President & CEO on 1 January 2006 • 2.5 millionth customer signed up during first quarter 2006 Commenting on today's announcement, Ron Martin, President & CEO, said: "2005 represented a year of 'Business Fast Forward' for NETELLER. Our recordresults demonstrate our continuing determination to exceed our merchants' andcustomers' expectations. 2006 promises to be another impressive year in thegrowth and expansion of NETELLER. I have been impressed with the depth andexperience of the NETELLER team and with resolute focus we will drive thisCompany to new levels of achievement. We intend to drive additionalprofitability through improving our merchant value proposition and our 'deepenand extend' strategy. I am confident that through a combination of theseinitiatives and the resources we are applying, NETELLER will improve itscompetitive advantage in 2006." * Please refer to page 24 for supplementary 4th quarter information. Enquiries: NETELLER Plc Ron Martin, President & CEOEric Hughes, CFOAndrew Gilchrist, Vice President - Communications 28 March: +44 (0) 7747 637 248 Thereafter: +44 (0) 1293 897 515 Citigate Dewe Rogerson +44 (0) 207 638 9571Sarah Gestetner/Seb Hoyle/George Cazenove NETELLER will hold a conference call on 28 March 2006 at 2.00 pm (GMT) foranalysts and institutional investors. This can be accessed by dialling +44 (0)20 7138 0809 (UK participants), +1 718 354 1158 (US Participants) or +33 (0) 155 17 41 41 (European Participants). There will also be a replay facility following the conference call which can beaccessed by dialling +44 (0) 20 7806 1970 (UK), +1 718 354 1112 (US) or +33 (0)1 71 23 02 48 (Europe). The replay passcode is 3514295#. This replay will beavailable for 48 hours following the call. In addition, a recording of the callwill be available on our website, www.neteller.com, with effect from 29 March,together with a transcript of the call and question and answer session withmanagement. Notes to Editors The NETELLER Group The NETELLER Group operates an online money transfer service that uses andextends the existing international banking structure to provide a secure meansof transferring funds worldwide. A NETELLER account acts as a virtual walletthat enables customers (individuals who open NETELLER accounts) to load,withdraw and transfer funds by purchasing e-money. E-money can be instantlytransferred to or from any merchant (or internet site) that supports NETELLER'sonline payments system for goods and services. Additionally, funds can betransferred between individual customers in peer-to-peer exchanges. NETELLERhas over 2.5 million customers and more than 3,400 supporting merchants, makingthe Company a leader in online payment services. NETELLER UK Limited isauthorised by the Financial Services Authority (FSA) to operate as a regulatede-money issuer. Further information may be obtained from the NETELLER's websiteat www.neteller.com. NETELLER will report its results for its first quarter ending 31 March 2006 inmid May 2006. Message from the Chairman and Vice Chairman NETELLER has continued to make significant progress during 2005, its second yearas a quoted company on AIM, and is now recognised as the world's largestindependent online money transfer business. It was another year of excellentperformance, with NETELLER achieving significant growth across all businessmetrics. The Group grew revenue 108% to $172.1 million, and even moreimpressively, we doubled basic EPS from $0.37 to $0.76. We now have more than2.5 million customers and more than 3,400 online merchants as at 27 March 2006.We have continued to expand our business into Europe and Asia, making strategicinvestments in both these regions during 2005. We have also strengthened our business. We added Dale Johnson and Ron Martin tothe Board in 2005, and Ian Cobbold, a director of NETELLER (UK) Limited, joinedthe Audit Committee. The Management Team has been expanded substantially, inparticular with the appointment of Ron Martin as President and Chief ExecutiveOfficer, with effect from 1 January 2006. Ron is an excellent addition to theteam and we have every confidence in his abilities to lead NETELLER into itsnext phase of development. As part of the continuing development of the Company, we are pleased to announcethat Gord Herman will succeed Steve Lawrence as Chairman of NETELLER with effectfrom the date of this year's Annual General Meeting. This business has beenincredibly successful in its short history and Gord has the vision andcapabilities to guide NETELLER to even greater achievements. We have everyconfidence in the management team and together with the Board, we believe theGroup will go from strength to strength during 2006 and beyond under the capablestewardship of Gord and Ron. Steve will continue to serve as a non-executivedirector. John Lefebrve, who assisted in the development of NETELLER in 2000, left theBoard in December 2005 to pursue other business opportunities. We thank Johnfor his very significant contribution and support in helping to build NETELLERinto the successful business it is today and we wish him well for the future. We also thank our shareholders for their support, and all of our staff for theirhard work on behalf of NETELLER. 2005 has been a year of substantialachievement, and we believe we have the platform in place to maximise theopportunities available to the Group in 2006 and beyond. The Board looks forwardto NETELLER's continued success and growth in 2006. Steve Lawrence Gord HermanChairman Vice Chairman 27 March 2006 President & CEO's Statement 2005 was another year of outstanding performance, with NETELLER achievingsignificant growth across all of its business metrics. We made considerableprogress in extending our presence as the world's leading independent onlinemoney transfer business, strengthening our offering to both customers andmerchants through innovative product development and excellent customer service.The business is now entering a new phase of development and growth, epitomisedby our core strategy of "deepen and extend". Having joined the Company in June 2005 as Chief Operating Officer, I wasinstantly impressed by the quality, experience and drive of the NETELLER team.Since becoming President & CEO on 1 January 2006, I have been working with clearfocus to ensure that NETELLER is well placed to improve on the excellentperformance achieved under the leadership of Gord Herman in and prior to 2005.Gord's vision, leadership and drive have positioned NETELLER well to execute ourstrategies as we move forward and I am looking forward to continuing to workwith him in his role as Executive Chairman. The ability of the Group to adaptpositively to a rapidly changing environment, and to thrive in it, has been theresult of an enormous amount of work and is a tribute to the entire NETELLERteam. The extension of our shareholder base following the secondary offering inNovember 2005, with the free float now at more than 75% of the issued sharecapital is a significant achievement. Many new shareholders representsubstantial institutional investors and look forward to meeting as many of youas possible during the coming months to update you on our strategy and prospectsfor 2006 and beyond. 2005 Performance NETELLER continued to demonstrate substantial growth during 2005. Our customerbase increased 86%, from 1,251,031 to 2,320,670 in the year ended 31 December2005. Adding more than one million customers in 12 months represents asignificant achievement, and during the first quarter of 2006, we signed-up our2.5 millionth customer. We have recruited a further 170 employees in ourCalgary contact centre to handle the increased number of enquiries we receive byphone, email and, most recently, by webchat - we now handle more than 100,000customer calls per month in our contact centre. Our average daily receipts from customers grew 90%, from $1.81 million in 2004to more than $3.44 million in 2005. Average daily sign-ups for 2005 were 2,930,rising from 2,072 in Q4 2004 to 3,197 in Q4 2005. Our revenue growth continuesto outpace both growth in customers and daily receipts, as we have become betterat generating more revenue from every dollar transferred to the e-wallet. Wecontinue to add more customers at low cost, and new initiatives in both productdevelopment and improving the value proposition for merchants should sustainthis growth in 2006. Top line growth has been impressive, with revenue more than doubling again to$172.1 million - up 108% from $82.6 million in 2004. We have improved marginsat the gross level, demonstrating our continuing ability to manage costseffectively while growing the business at such a rapid pace. In particular, baddebts reduced as a percentage of revenue from 14.2% to 12.1% - this is a creditto our security and customer service teams. Basic EPS for the year ended 31December 2005 is $0.76 compared to prior year at $0.37. We have a strong balance sheet with $114.6 million of free cash. As thebusiness continues to grow, we will utilise this cash, where appropriate, todevelop our operations through both organic growth and acquisitions. We areconstantly examining ways to improve shareholder value and will look at themerits of returning cash to shareholders should this be a better alternativethan reinvesting in the business. Strategy Our key objective for 2006 is to continue the record growth and profitabilitywhile improving our market leading position. The key focus for NETELLER will beto "deepen and extend": Deepen: Re-focus on our merchants and customers, by offering compelling valuethrough the introduction of innovative new offerings. Extend: Become a truly global business with localised products and services infive new European and Asian markets. A key part of this strategy will be the implementation of initiatives to drivethe acquisition of new customers, to become better at converting them into moreactive users of the NETELLER e-wallet, and to retain them for longer. We willwork even more closely with our online merchants to improve the merchant valueproposition, through innovative, localised products and continued excellence inmerchant and customer support. Platform and Product Development The transition of NETELLER's systems to our distributed architecture platformhad made significant progress by the end of 2005. Our IT team continues tosuccessfully manage the migration process to put in place an IT system that willsupport the growth of the business: scalable - to cope with anticipatedincreases in customer and processing volumes; modular - to allow us to addfunctionality to our existing system, for example, languages and currencies; androbust - secure, reliable and effective, to ensure minimum downtime. During the year we extended the Direct Accept product for our customers andmerchants. This allows our customers to deposit funds instantly into the systemwhile the receiving merchant pays the related transaction fees. Merchant feesnow represent the majority of our revenue income (approximately 61% of directfees). We continue to develop innovative new products tailored to eachgeographical market where we process online payments. Online payments have forever changed the way that money moves betweenindividuals and businesses. Our global online money transfer platform, coupledwith our continued development of innovative payment options, will ensure thattransferring money online will be made easier and more cost effective forindividuals and businesses alike. Geographical Expansion North America NETELLER continues to grow strongly in its original markets of North America.Through NT Services Ltd., our Calgary operations have been the cornerstone ofgrowth during 2005. We added over 300 new staff across all our departments,strengthening Customer Service, Quality Assurance, Investigations, Marketing andHuman Resources. In addition, we recently moved to a larger site which hasimproved the effectiveness of our customer service, security and IT teams. InJuly 2005, the Calgary-based contact centre achieved the prestigious ContactCentre Employer of ChoiceTM (CCEOC) Gold level award on its first assessment,distinguishing NETELLER's contact centre as one of the best contact centreoperations to work for in North America. The quality and experience of ourCalgary-based team will ensure we are able to commit to offering our merchantsand customers exceptional service. The Group continues to monitor the US regulatory environment. NETELLER hasmerchants that are involved with the online gambling business, which is subjectto US regulatory uncertainty. Should the current regulatory environment changesuch that US-based individuals are unable to use NETELLER as a payments service,the Company would be materially adversely affected. Europe Our European operations have continued to expand to support this increasinglyimportant market. NETELLER (UK) Limited is authorised by the FSA to operate asa regulated e-money issuer. We have been able to passport this regulated statusinto all European Economic Area member states, extending our presence in Europeand enhancing our competitive advantage in this market. More than 250,000customers have now signed up from the European region and we expect asubstantial increase in this during 2006, particularly with the forthcoming 2006FIFA World Cup in Germany. The roll-out of language-specific sites in certainmajor European countries will enable more focused merchant coverage and shouldlead to increasing penetration in key markets of Germany, France, Italy andSpain during 2006. Furthermore, we have initiated specific market researchwhich will provide us with a deeper understanding of what our European customerswant from NETELLER - and how we should deliver that to them. In October 2005 we completed the acquisition of NetInvest and NetBanx, thelatter being a UK-based payment processing business, for $23 million. Thisacquisition doubled the number of merchants of the Group to over 3,400 and moreimportantly, allowed us to enhance the value proposition to our existingmerchants by offering new card processing services alongside the existinge-wallet funds transfer. NetBanx represents a prime example of NETELLER'sstrategy of vertical integration in the payment processing area. We willcontinue to look at extending our products and platform within this space,including possible further acquisitions. Asia The Asian business has made considerable progress during 2005. We announced inSeptember that Dale Johnson had assumed the role of President - Asian Operationson an interim basis. This renewed focus will position Quick Access, acquired inJanuary 2005, to be a leading payment platform in the region. Our primary focusin Asia in 2005 was to develop localised products for our key target countriesof Japan, China and Australia. A new version of our Japanese language application was launched in the firstquarter 2006, following successful beta testing. The Japanese e-wallet is fullyintegrated within the NETELLER main platform, and we are beginning to seeincreasing sign-ups as merchants expand their offerings in this region. Our newAsian e-wallet, based on the Quick Access 1-Pay platform, was developed andtested during 2005 and early 2006 and the product launch is planned for thesecond quarter of 2006. We are now able to offer a localised e-wallet to ourChinese customers, which has improved our product offering to merchants. Chinaremains a difficult market to predict in terms of sign-ups and volumes.However, we are confident that our localised and innovative products willgenerate value for the Company and its shareholders over the medium term.Australia represents a clear opportunity given the recent legislative changesand new merchant entrants, and also the ability to leverage our English languageplatform to serve this important market. We are beginning to see considerableinterest in our services from merchants in Australia, and expect a correspondinglift in sign-ups during 2006. We remain alert to other possible opportunitiesin the Asian region, which will permit us to grow in this dynamic businessmarket. Isle of Man Our corporate headquarters in the Isle of Man ("IOM") continues to be the centrefor driving our global expansion efforts. Our senior management team is basedhere and this location provides us with convenient access to our investors and alarge portion of our merchant base. The IOM's commitment to developing a centreof excellence for business and e-commerce continues to support our business andwe work closely with both IOM government and regulatory bodies on variousfinancial and regulatory issues. Our continuing low corporate tax rate reflectsthe tax-friendly jurisdiction of the IOM and this has contributed to our strongnet income margin after tax. Improving Our Bench Strength Our principal market continues to grow rapidly and we aim to meet the demandfrom online gaming merchants for our products while ensuring the highestcommitment to exceptional service to both customers and merchants. Our employeebase doubled to over 660 at 31 December 2005. We now have more than 250 peoplewithin Customer Service, 120 in Fraud & Security, and more than 200 peoplefocused on IT development and maintenance. As we deepen and extend our businessin 2006, there has been a significant focus on product management and marketingwith the appointments of Rohit Joshi as Executive Vice President, Products, andDan Starr as Vice President, Worldwide Marketing. Mark Healy joined us as VicePresident, Security and Risk for North America and in Europe Tim Hoskins, VicePresident Business Development was appointed Acting General Manager of NetBanx.Andrew Gilchrist also joined as Vice President, Corporate Development &Communications, to lead our investor relations programme. NETELLER has attracted a high-quality team with in-depth industry and technicalexperience. This team will build upon the value propositions we offer ourmerchants and customers through improved market analysis, customer help, qualityassurance in IT and customer service, fraud prevention, identity verification,and anti-money laundering processes. In an ever-increasing knowledge andcreativity-based global economy, the skills and experience of our team arecrucial to our continued success. I would like to thank all our employees fortheir efforts during 2005 and I look forward to working with you all to delivereven more to our shareholders, customers and merchants in 2006. Current Trading and Outlook 2005 represented a significant milestone in the development of NETELLER's globalpayment platform. We have again demonstrated our ability to executesuccessfully and continue to grow the business while building for the future.With the new initiatives targeted for 2006, there is considerable opportunity tofurther our global expansion, through deepening and extending our reach tomerchants and customers. New products, new customers and new merchants will allhelp to sustain NETELLER's competitive advantage in a rapidly changingenvironment. I look forward to leading such a vibrant organisation and amconfident our achievements in 2005 will represent the foundation of another yearof excellence in 2006. Ron Martin President & Chief Executive Officer 27 March 2006 Financial Review The NETELLER team is proud to present the consolidated results for the Companyand Group for the year ended 31 December 2005. Another record year illustratescontinuation of our growth story. Revenue for the year totalled $172.1 million - up 108% from $82.6 million in2004. Our fee revenue, which includes charges paid by individual and merchantcustomers, has increased 104% from $80.7 million to $164.5million. Theremainder of the increase resulted from expanded interest revenues. Net profit after tax for 2005 was $91.5 million, an increase of 177% over 2004.The EPS based on weighted average shares outstanding of 120,029,461 is $0.76compared to prior year at $0.37. Fully diluted EPS for the year ended 31December 2005 was $0.75 compared to 31 December 2004 fully diluted EPS of $0.37. Our mix of fees is now 61% (60% in 2004) paid by the merchant and 39% (40% in2004) paid by the customer. This allocation reflects two ongoing trends.Firstly, our merchants are increasingly offering our Direct Accept product,which provides customers access to funds instantly and at no personal cost.Secondly, our merchant base, with access to over 80% of worldwide gamingmerchants, provides an increase in transfer revenues from merchants. The success of our evolving business model is clearly evident in the increasingstrength of the gross margin at 73.5%, compared to 69.4% in 2004. This yield isthe result of expanding high margin revenue sources such as foreign exchangefees and interest, while maintaining a focus on increased business efficienciesresulting in lower direct costs. Foreign exchange fees have increased from $2.4million (2004) to $8.5 million (2005), and interest revenues from $1.9 million(2004) to $7.5 million (2005). Our revenue per dollar receipted has increased from $0.125 in 2004 to $0.137 in2005. This figure reflects the ability of the Company to earn revenue from eachnew dollar transferred from individual customers. Customers are more frequentlycycling funds to the increased number of merchants we serve, resulting ingreater fees to NETELLER. The Group earns revenue each time funds move to amerchant, called the multiplier effect. The multiplier has increased from 1.8times in 2004 to 2.1 times in 2005. This is calculated by dividing fundstransferred to merchants by customer funds transmitted to NETELLER. This trend,combined with increased revenues from foreign exchange, interest andpeer-to-peer fees has contributed to a healthy growth in the fee per dollarratio, with minimal direct cost to the Company. Direct costs Over the year, direct costs of the business have increased from $25.3 million to$45.6 million. However as a percentage of revenue, the direct costs fell from31% to 27%. Direct costs have a strong correlation with revenue - nonetheless,significant efficiencies have been realised as NETELLER matures. Bad debt is the major component of direct costs. These costs mainly occur ascustomers default on InstaCASHTM or Direct Accept transaction payments. Baddebt as a percent of sales moved from 14.2% of revenues in 2004 to 12.1% in2005. Successful reduction in bad debt is credited to sophisticated fraudprevention measures and enhanced customer verification tools. The Groupcontinues to strive for reductions in this area and has developed proprietarynew technologies for continued curtailment in 2006. Customer Service, the second largest direct cost, is composed of contact centreand support staff. Contact centre staff levels continue to rise in line withrevenues from 187 staff at the beginning of the year to 360 at year end.Services provided by the contact centre include customer support, fraud andsecurity, account retention and investigations. General and Administrative (G&A) costs Over the course of the year, NETELLER strengthened its pool of talent in keymanagement positions. Successful recruitment of senior management across alldepartments, combined with diligent expense control, allowed a healthy growth ininfrastructure while maintaining G&A at approximately 12.6% of revenues. General and administrative expenses include a $3.2 million non-cash,share-option-based compensation charge compared with the previous year's chargeof $0.4 million. The Company commenced recording share option-basedcompensation expenses in Q4 2004. These expenses are a factor of the number ofoptions granted, the share volatility, the risk-free interest rate and otherfactors. Foreign exchange gain The results from NETELLER subsidiaries in Canada, UK and Macau are reported inlocal functional currencies. As required under International Financial ReportingStandards, foreign exchange on consolidation of a subsidiary's balance sheet iscaptured in equity, but the subsidiary's individual exposure to foreign currencyis captured in income. During 2005, foreign exchange gains of $0.5 millionwere generated primarily in the UK subsidiary due to the relative strengtheningof the US dollar against the British Pound. Depreciation and Amortization Depreciation and amortisation of $5.5 million (2004 $2.7 million) includesamortisation of the initial intangible assets of $2.2 million, amortization ofthe intangible assets related to the acquisitions of Quick Access and NetBanx of$1.0 million and $2.3 million, for their capital asset depreciation. Taxes The provision for income taxes in 2005 was $6.3 million and yielded an effectivetax rate of 6.4% as a result of tax benefits related to corporate restructuringcompleted in January 2005. This rate is lower than the Group anticipated forthe full year. The ratio of revenue to expenses subject to mark up was strongerthan expected which resulted in a lower effective tax rate. The tax model isbased on mark-up of services provided by various subsidiaries to the Company inthe Isle of Man, where source revenues are non-taxable. The provision for incometaxes in 2004 was $12.8 million, which yielded an effective tax rate of 27.9%. Acquisitions NETELLER has taken several important strategic steps to enhance its marketpresence and drive continued growth from new markets and business lines. Quick Access, a Macau-based debit card payment processing company, was acquiredin January 2005 for total consideration of $12.5 million. This strategicacquisition facilitates the provision of NETELLER's payment services to China.This represents one of several initiatives that NETELLER expects to complete aspart of its Asia expansion programme. NetInvest Limited and its subsidiary NetBanx Limited, one of the leadingindependent full service payment service providers in the UK, were acquired inOctober 2005 for total cash consideration of $23 million. This was a keystrategic acquisition for NETELLER, enabling integration of the paymentprocessing solution from customer to merchant. NetBanx has relationships withall of the major UK acquiring banks, as well as MasterCard, Visa, AmericanExpress, Diners Club, Pago and Euroconex. NetBanx was founded in 1996 andcurrently processes approximately $18 million of payments each month. It hasdeveloped a complete payment solution, providing both direct and bureauprocessing to a wide range of market sectors, including retail, mail order,leisure, publishing, marketing services, professional services, travel andtourism and e-commerce more widely. NetBanx has in excess of 1,500 merchants. Both acquisitions were accounted for using the purchase method. The balancesheets of Quick Access and NetBanx are included in NETELLER's consolidatedfinancial statements as at 31 December 2005, based on preliminary valuation andpurchase price allocation. Balance sheet Cash and cash equivalents balances at 31 December 2005 of $114.6 millionrepresent the unrestricted cash of the Group at that date. For Non-European customers and merchants the Group maintains trust accounts withits principal bankers in the IOM, which have legal right of offset between thesetrust accounts and the Company's customer and merchant balances. The effect ofthis is to net the cash and customer and merchant liabilities presented on thebalance sheet, and disclose these amounts in the notes to the financialstatements. Restricted cash is the surplus amount of cash held in the trust accounts inexcess of the customer and merchant balances. The Group, as a matter of policy,holds small amounts of excess cash in the accounts to ensure intraday balancemovements do not result in a shortfall in the cash position. The net excess isdisclosed as a corporate asset. In compliance with Financial Services Authority rules and regulations the Groupholds Qualifying Liquid Assets for European customers totalling $31.6 million.These funds are segregated from operating funds. The balances are maintained atlevels which are at least equal to the amounts owing to European customers of$28.9 million. These Qualifying Liquid Assets and the Payable to Europeancustomers are reported in gross on the balance sheet. Balances due from customers increased to $1.9 million (2004 $1.7 million). Thisis in line with the increased level of activity, and represents amounts to berecovered from customers in the normal course of business. Capital assets increased from an opening balance of $5.7 million to a closingbalance of $9.5 million. The assets purchased include the acquisition assets ofQuick Access and NetBanx along with building improvements and furniture relatedto new and existing buildings. In September 2005, the Group entered into alease agreement for new office space in Calgary required to accommodate futureexpansion of staffing and infrastructure. The hardware, software and databaserequirements have also increased in line with the business and staffingrequirements. The Group has demonstrated efficiency in the employment ofcapital assets; after tax net profits are 9.6 times total capital assetsemployed in the Group (versus 2004 yield of 5.8 times). Goodwill on the balance sheet at the end of 2005 amounted to $16.0 million,compared to zero at the end of 2004. Goodwill was created on the acquisition oftwo subsidiaries, Quick Access in January 2005 and NetBanx in October 2005. Thebalance sheets of Quick Access and NetBanx were included in NETELLER'sconsolidated financial statements as at 31 December 2005, based on preliminaryvaluation and purchase price allocation. Goodwill will be tested annually forimpairment. Impairment is determined by comparing fair value of the asset toits carrying value. The estimate of fair value was based on the net presentvalue approach, which includes making assumptions and estimates in a number ofareas, including future cash flows, cash flow periods, and discount rates. Inestimating future cash flows, the Company uses its internal plans. These plansreflect management's best estimates; however, they are subject to change as theyhave inherent uncertainties that management may not be able to control. At yearend, goodwill impairment testing determined no write-down was necessary. Intangible assets on the balance sheet increased from $4.9 million at 31December 2004 to $26.8 million at 31 December 2005. The large increase wasprimarily created on the acquisitions of Quick Access and NetBanx in 2005.Using the purchase method, intangible assets arising on the purchases of QuickAccess and NetBanx amounted to $7.4 million and $10.8 million, respectively.Intangible assets resulting from these acquisitions are amortised straight lineover 8 - 10 years. Internally generated intellectual property has beenamortised over its estimated useful life of three years during 2005 as planned.Net book value of intellectual property at 31 December 2005 was $18.8 million.Website development of the Next Generation Platform of $7.1 million is includedin intangible assets, as it represents an expansion of the Group's intellectualproperty. Eric Hughes Chief Financial Officer 27 March 2006 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 Year ended 31 December Year ended 31 2005 December 2004 $ $Revenue (Note 13) 172,055,462 82,580,750Cost of sales Customer support 12,113,493 7,011,251 Website maintenance 3,326,272 2,618,791 Deposit and withdrawal fees 9,393,869 3,894,126 Bad debts 20,769,796 11,744,368Gross profit 126,452,032 57,312,214 Operating expenses/(income) General and administrative 21,723,645 9,272,925 Management bonus 1,795,622 1,058,000 Foreign exchange gain (469,645) (1,555,014) Depreciation and amortisation 5,548,318 2,717,725 Loss on investment 75,000 -Profit before tax 97,779,092 45,818,578 Income tax expense (Note 15) 6,267,275 12,797,319 Net profit for the year 91,511,817 33,021,259 Basic earnings per share (Note 16) $0.76 $0.37 Diluted earnings per share (Note 16) $0.75 $0.37 CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2005 31 December 2005 31 December 2004 $ $ASSETSCURRENT Cash and cash equivalents 114,570,429 76,969,314 Restricted cash (Note 4) 16,116,858 1,783,787 Qualifying Liquid Assets held for European customers 31,595,306 -(Note 5) Receivable from customers (Note 6) 1,947,000 1,655,000 Trade and other receivables 250,958 32,499 Prepaid expenses and deposits 1,390,453 837,810 165,871,004 81,278,410NON-CURRENT ASSETS Capital assets (Note 7) 9,524,848 5,714,265 Intangible assets (Note 8) 26,803,576 4,850,810 Investment - 75,000 Goodwill (Note 9) 16,020,663 - 218,220,091 91,918,485LIABILITIESCURRENT Trade and other payables (Note 10) 5,493,711 2,616,196 Payable to European customers (Note 5) 28,891,291 - Taxes payable (Note 15) 3,559,783 9,209,356 Conditional consideration payable (Note 11) 2,608,001 - 40,552,786 11,825,552 NON-CURRENT Conditional consideration payable (Note 11) 2,604,741 - 43,157,527 11,825,552SHAREHOLDERS' EQUITY Share capital (Note 12) 39,794 39,708 Share premium 48,410,150 46,651,224 Equity reserve on share option issuance 3,576,870 380,742 Translation reserve (1,497,326) - Accumulated profits 124,533,076 33,021,259 175,062,564 80,092,933 218,220,091 91,918,485 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 Year ended Year ended 31 December 2005 31 December 2004 $ $OPERATING ACTIVITIESProfit before tax 97,779,092 45,818,578 Adjustments for: Depreciation and amortisation 5,548,318 2,717,725 Unrealised foreign exchange loss (180,910) 34,650 Loss on sale of capital assets - 3,755 Loss on investment 75,000 - Share option expense 3,196,128 380,742Operating cash flows before movements in working capital 106,417,628 48,955,450 Increase in receivable from customers (233,743) (1,174,242) Increase in trade and other receivables (218,459) 21,546 Increase in prepaid expenses and deposits (552,643) (618,767) Increase in trade and other payables 2,878,270 2,250,257Cash generated by operations 108,291,053 49,434,244 Tax paid (11,916,848) (3,587,963) Net cash from operating activities 96,374,205 45,846,281 INVESTING ACTIVITIES Increase in payable to European customers 28,891,291 - Decrease in payable to customers and merchants due to legal offset from investment in Trust - (48,868,070)accounts Purchase of capital and intangible assets (31,311,667) (5,830,709) Proceeds on sale of capital assets - 44,154 Purchase of investment - (50,000) Increase in restricted cash accounts (14,333,071) (1,783,787) Increase in Qualifying Liquid Assets held for European (31,595,306) -customers Acquisition of subsidiaries (25,033,470) - Net cash used in the investing activities (73,382,223) (56,488,412) FINANCING ACTIVITIES Conditional consideration 5,132,791 - Proceeds on issuance of shares, net of share issuance 1,759,012 46,690,931costs Receivable from NETELLER Inc. - 17,081,598 Funds held in trust - 6,500,000 Repayment of amounts due to shareholders - (6,500,099) Repayment of notes payable to NETELLER Inc. - (7,473,633) Net cash generated from financing activities 6,891,803 56,298,797 INCREASE IN CASH AND CASH EQUIVALENTS DURING THE YEAR 29,883,785 45,656,666CASH AND CASH EQUIVALENTS ACQUIRED ON PURCHASE OF BUSINESSES 9,012,808 -NET EFFECT OF FOREIGN EXCHANGE ON CASH AND CASH EQUIVALENTS 201,848 282,193TRANSLATION OF FOREIGN OPERATIONS (1,497,326) - CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 76,969,314 31,030,455 CASH AND CASH EQUIVALENTS, END OF YEAR 114,570,429 76,969,314 SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005 1. GENERAL NETELLER Plc (the "Company") was a private company incorporated under the lawsof the Isle of Man on 31 October 2003 and registered as a public company on 1April 2004. This financial information is presented in US dollars ("US$" or"$") since that is the currency in which the majority of the Group'stransactions are denominated. At 31 December 2005, the Group had 665 employees (2004: 326 employees). 2. STATUS OF FINANCIAL INFORMATION The financial information set out in this press release does not constitute theGroup's statutory accounts for the year ended 31 December 2005 or the year ended31 December 2004. The financial information for the period ended 31 December2004 is derived from the statutory accounts for that period. The auditorsreported on those accounts and their report was unqualified. The statutoryaccounts for the year ended 31 December 2005 will be finalized on the basis ofthe financial information presented by the directors in this annual pressrelease. The financial information set out in this press release for the yearended 31 December 2005 has been prepared using the same accounting policies asthose adopted in the statutory accounts for the year ended 31 December 2004. 3. NATURE OF OPERATIONS The Group provides services to businesses and individuals to allow theprocessing of direct debit, electronic cheque and credit card payments. TheGroup processes direct debit, electronic cheques and credit card payments forinternet merchants. 4. RESTRICTED CASH The Company holds trust accounts which are segregated from operating funds.Balances in the trust accounts are maintained at a sufficient level to fullyoffset amounts owing to NETELLER merchants and members. There exists a legalright of offset between the balances owing to the members and merchants and thecash balances segregated in the trust accounts. As such only the net balance ofsurplus cash is disclosed on the balance sheet as Restricted Cash. At 31 December 2005, the Group has the following balances: Trust Account Funds Balance Owing Restricted Cash $ $ $Members 108,680,447 97,522,961 11,157,486Merchants 112,010,026 107,050,654 4,959,372 220,690,473 204,573,615 16,116,858 4. RESTRICTED CASH (continued) At 31 December 2004, the Group has the following balances: Trust Account Funds Balance Owing Restricted Cash $ $ $Members 56,309,576 55,831,314 478,262Merchants 53,137,533 51,832,008 1,305,525 109,447,109 107,663,322 1,783,787 5. QUALIFYING LIQUID ASSETS HELD FOR EUROPEAN CUSTOMERS In compliance with the Financial Services Authority rules and regulations, theGroup holds Qualifying Liquid Assets at least equal to the amounts owing toEuropean customers. These accounts are maintained in accounts which aresegregated from operating funds. At 31 December 2005, the group had the following balances: As at 31 December 2005 $Qualifying Liquid Assets held for European customers 31,595,306Payable to European customers (28,891,291) 2,704,015 6. RECEIVABLE FROM CUSTOMERS The Group has the following balances: As at As at 31 December 31 December 2005 2004 $ $Receivable from customers 12,036,430 9,655,942Provision for doubtful accounts (10,089,430) (8,000,942) 1,947,000 1,655,000 Receivable from customers consists of balances that are due from customers andare in the process of collection. The net receivable from customers representsthe accounts which are expected to be collected through the normal course ofbusiness. 7. CAPITAL ASSETS The Group has the following balances: Furniture Communication and Computer Computer Building and Equipment Equipment Equipment Software Improvements Land Total $ $ $ $ $ $ $Cost As at31 December 2004 439,000 257,045 1,848,494 707,765 1,971,239 936,396 6,159,939Additions 364,555 835,155 1,042,102 2,271,032 1,038,412 - 5,551,256 As at31 December 2005 803,555 1,092,200 2,890,596 2,978,797 3,009,651 936,396 11,711,195 Accumulateddepreciation As at 31 December 2004 101,032 25,045 137,025 109,694 72,878 - 445,674 Charge for the year 82,709 97,465 621,611 805,391 133,497 - 1,740,674 As at 31 December 2005 183,741 122,510 758,636 915,085 206,375 - 2,186,348 Net book value As at 31 December 2005 619,814 969,690 2,131,960 2,063,712 2,803,276 936,396 9,524,848 Net book value As at 31 December 2004 337,968 232,000 1,711,469 598,071 1,898,361 936,396 5,714,265 8. INTANGIBLE ASSETS The Group has the following balances: Intellectual Website Property Development Total $ $ $CostAs at 31 December 2004 6,500,000 573,762 7,073,762Additions 17,638,156 8,122,254 25,760,410 As at 31 December 2005 24,138,156 8,696,016 32,834,172Accumulated amortisationAs at 31 December 2004 2,166,667 56,285 2,222,952Charge for the year 3,160,563 647,081 3,807,644 As at 31 December 2005 5,327,230 703,366 6,030,596 Net book valueAs at 31 December 2005 18,810,926 7,992,650 26,803,576 Net book valueAs at 31 December 2004 4,333,333 517,477 4,850,810 9. GOODWILL Quick Access International Limited NetBanx Limited Total $ $ $Cost and carrying amount At 1 January 2005 - - - Arising on acquisition 5,402,436 10,753,871 16,156,307 Exchange differences 416,830 (552,474) (135,644) Balance at 31 December 2005 5,819,266 10,201,397 16,020,663 During 2005, the Group determined that goodwill has no indications of impairment. 10. TRADE AND OTHER PAYABLES The Group has the following balances: As at As at 31 December 31 December 2005 2004 $ $Accounts payable 1,701,039 1,326,326Accrued accounts payable 2,082,301 570,199Payroll liabilities 1,710,371 719,671 5,493,711 2,616,196 11. ACQUISITION OF SUBSIDIARIES Quick Access International Limited On 1 January 2005, the Group acquired 100 per cent of the issued sharecapital of Quick Access International Limited (Quick Access) for totalconsideration of MOP(Macau Pataca)100 million. Cash of MOP60.025 million waspaid as initial consideration, with a remaining MOP20 million and MOP19.975million to be paid on the first and second anniversary of acquisitionrespectively on a conditional basis. The conditions involve maintaining servicecontracts between Quick Access and various parties providing electronic paymentand communication equipment services. The Group believes these conditions to beprobable and has included the conditional consideration in the cost of thepurchase. This transaction has been accounted for using the purchase method. 11. ACQUISITION OF SUBSIDIARIES (continued) Acquiree's Fair value Fair value Fair value carrying amount adjustments before combination MOP MOP MOP $ **Net assets acquired: Cash and cash equivalents 30,083,753 - 30,083,753 3,907,879Trade and other receivables 54,229 - 54,229 7,044Prepaid expenses and deposits 12,062 - 12,062 1,568Capital assets 221,363 - 221,363 28,755Intangible assets - 56,966,898 56,966,898 7,400,000Trade and other payables (611,995) - (611,995) (79,498)Income taxes payable (340,699) - (340,699) (44,257)Due to merchants (31,011,877) - (31,011,877) (4,028,443) (1,593,164) 56,966,898 55,373,734 7,193,048 Goodwill 44,626,266 5,402,436 Total Consideration 100,000,000 12,595,484 Net cash outflow arising on acquisition: Cash consideration (60,025,000) (7,462,693)Conditional consideration Due within 1 year (20,000,000) (2,568,001) Due after 1 year (19,975,000) (2,564,790) (39,975,000) (5,132,791)Cash & cash equivalents acquired 30,083,753 3,907,879 (69,916,247) (8,687,605) ** Based on an exchange rate of 1 MOP = 0.1299 US$ Intangible assets acquired include existing contracts with merchants andprocessors, and intellectual property consisting of material software necessaryto operate the Quick Access payment system and website and the Company's URL. The goodwill arising on the acquisition of Quick Access is attributable to theanticipated profitability of the company, as well as securing the Group'sentrance into the Asian market. Revenue and Net Income of Quick Access for the year ended 31 December 2005amounted to MOP 10,535,253 ($1,370,446) and MOP 830,448 ($107,187) respectively. 11. ACQUISITION OF SUBSIDIARIES (continued) NetBanx Limited On 1 October 2005, the Group acquired 100 per cent of the issued share capitalof NetInvest Limited and it's wholly owned subsidiary NetBanx Limited (togetherknown as NetBanx) for total cash consideration of GBP12,360,160. Thistransaction has been accounted for using the purchase method. Acquiree's Fair value Fair value Fair value carrying amount adjustments before combination £ £ £ $ **Net assets acquired: Cash and cash equivalents 2,815,341 - 2,815,341 5,104,928Trade and other receivables 137,580 - 137,580 249,468Capital assets 465,090 - 465,090 843,247Intangible assets - 5,930,705 5,930,705 10,753,871Trade and other payables (2,631,551) - (2,631,551) (4,771,669) 786,460 5,930,705 6,717,166 12,179,926 Goodwill 5,930,705 10,753,871 Total Consideration 12,647,871 22,933,797 Net cash outflow arising on acquisition: Purchase price (12,360,160) (22,420,341)Acquisition costs (287,711) (513,456) (12,647,871) (22,933,797) Cash & cash equivalents acquired 2,815,341 5,104,928 (9,832,530) (17,828,869) ** Based on an exchange rate of 1 £ = 1.8133 US$ Intangible assets acquired include existing contractual and non-contractualrelationships with merchants, the NetBanx brand name, and intellectual propertyconsisting of computer software, servers and web-interfacing necessary tooperate the NetBanx payment system. The goodwill arising on the acquisition of NetBanx is attributable to theanticipated profitability of the company, as well as providing synergies within-house credit card processing facilities. Revenue and Net Income of Netbanx for the period 1 October 2005 to 31 December2005 amounted to £658,901 ($1,152,364) and £188,238 ($329,349), respectively. 12. SHARE CAPITAL As at As at 31 December 2005 31 December 2004 £ £Authorised:200,000,000 ordinary shares of £0.0001 per share (At 31 December 2004: 200,000,000 ordinary shares of £0.0001 per share) 20,000 20,000 1,000,000 deferred shares of £0.01 per share (At 31 December 2004: 1,000,000 deferred shares £0.01 per 10,000 10,000 share) Issued and fully paid $ $ 120,268,153 ordinary shares of £0.0001 per share (At 31 December 2004: 119,800,000 ordinary shares of £0.0001 21,794 21,708 per share) 1,000,000 deferred shares of £0.01 per share (At 31 December 2004: 1,000,000 deferred shares of £0.01 per 18,000 18,000 share) Total share capital 39,794 39,708 Holders of the ordinary shares are entitled to receive dividends and otherdistributions, to attend and vote at any general meeting, and to participate inall returns of capital on winding up or otherwise. Holders of the deferred shares are not entitled to vote at any annual generalmeeting of the Company and are only entitled to receive the amount paid up onthe shares after the holders of the ordinary shares have received the sum of£1,000,000 for each ordinary share held by them and shall have no other right toparticipate in assets of the Company. 13. REVENUE An analysis of the Group's revenue is as follows: Year Ended Year Ended 2005 2004 $ $Transaction fees 164,540,538 80,714,613Investment Income 7,514,924 1,866,137 Total revenue 172,055,462 82,580,750 14. PROFIT FROM OPERATIONS Profit from operations has been arrived at after charging (crediting): Year Ended Year Ended 2005 2004 $ $ Depreciation of property, plant and equipment 1,740,674 494,773 Amortisation of intellectual property 3,807,644 2,222,952, 5,548,318 2,717,725 Remuneration of the auditors for audit, listing and other services has beenrecorded as follows: Year Ended Year Ended 2005 2004 $ $Audit Services Statutory audit 600,000 192,538Non - Audit Services Services in connection with the AIM listing - 1,267,892 Transfer pricing - 156,795 Tax and other advisory services - 314,830 - 1,739,517Total 600,000 1,932,055 15. TAX The Company is incorporated in the Isle of Man and has received an exemptionunder the provisions of Income Tax (Exempt Companies) Act 1984 and accordinglypays no tax in the Isle of Man. Taxation for other jurisdictions is calculated at the rates prevailing in therespective jurisdictions. The charge for the year can be reconciled to the profit per the income statementas follows: Year Ended Year Ended 2005 2004 $ $ Profit before tax 97,779,092 45,818,578 Effect of different tax rates of subsidiaries operating in other 6,267,275 12,797,319jurisdictions Income tax expense and effective tax rate for the year 6.4% 27.9% At 31 December 2005, foreign taxes of US$3,559,783 (2004: US$9,209,356) areoutstanding. 16. EARNINGS PER SHARE From continuing operations The calculation of the basic and diluted earnings per share is based on thefollowing data: Year Ended Year Ended 2005 2004 $ $EarningsEarnings for the purposes of basic and diluted earnings per share being net profit attributable to equity share holders of the parent 91,511,817 33,021,259 Number of sharesWeighted average number of ordinary shares for the purpose of basic earnings per share 120,029,461 89,636,165 Effect of dilutive potential ordinary shares due to employee share options 1,854,478 228,849 Weighted average number of ordinary shares for the purpose of diluted earnings per share 121,883,939 89,865,014 Basic earnings per share $0.76 $0.37 Fully diluted earnings per share $0.75 $0.37 Additional Financial Information The additional information presented below has been prepared for informationpurposes only. Please note that this information is outside of the scope of the auditedfinancial statements Q4 - 2005 Q3 - 2005 Q4 - 2004 Q4 2005 vs Q3 Q4 2005 vs Q4 2005 2004 $ $ $ % change % changeRevenue 53,627,972 44,942,816 27,591,548 19 % 94 % Direct Costs 14,173,895 11,722,016 8,731,069 21 % 62 %Gross profit 39,454,077 33,220,800 19,220,479 19 % 105 % General and Admin 6,153,578 4,411,649 3,760,540 39 % 64 %Operating income 33,320,499 28,809,151 15,459,939 16 % 116 % Other income (expense) Foreign exchange gain 522,693 (216,532) 1,375,622 Management bonus - - - Depreciation and (1,935,535) (1,335,674) (847,354) Amortisation Stock option expense (1,046,835) (981,249) (380,742)Income before tax 30,860,822 26,275,696 15,607,465 17 % 98 % Income taxes (71,854) 2,663,921 2,583,554 Net income after tax 30,932,676 23,611,775 13,023,911 31 % 138 % Average daily sign ups 3,197 3,085 2,072 4 % 54 %Total customers (at period 2,320,670 2,026,413 1,251,031 15 % 86 %end)Average daily receipts from 4,175,418 3,640,823 2,348,669 15 % 78 %customers This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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