11th Mar 2008 07:01
NETeller PLC11 March 2008 NETELLER Plc Audited Preliminary Results for 2007 Solid 2007 performance underpins platform for growth in 2008 Tuesday, 11 March 2008 - NETELLER Plc (LSE: NLR), the independent global onlinepayments business, announces its audited preliminary results for the year ended31 December 2007. Financial Highlights • Total revenue for 2007 was $84 million; revenue of $69 million from operations outside of North America represented an increase of 15% from 2006. • European revenue grew 28% to $41.7 million in 2007; Asia Pacific grew 44% to $11.4 million • Gross margin in 2007 was 56%, compared to 70% in 2006 and 55% in H1 2007. • Loss before tax of $185.7 million after US settlement of $136 million and related costs and restructuring expenses of $37 million. • Cash flow from operations positive during H2 2007. • Solid balance sheet at 31 December 2007 with $80.8 million cash and cash equivalents. Key performance indicators • Active e-wallet users (ex North America) totalled 99,984 in Q4 2007, up 9% from Q4 2006. • Fee revenue per active e-wallet user was $124 in 2007, an increase of 8% from $115 in 2006. • Average daily sign ups were 1,191 for 2007, with 1,076 sign ups per day in Q4 2007. Operational Highlights • Stabilised business and refocused merchant and consumer business divisions to support our vision - to provide bold payment solutions for e-commerce communities that power the efficient global movement of money. • Revised the e-wallet look and feel to better connect with target demographic - the first step in an overall Group-wide rebranding strategy. • Payment product suite aimed at driving merchant value proposition and extending consumer offering. Current trading • Trading during the first two months of 2008 showed continued growth from 2007. • Final payment of $38.25 million made to US authorities on 16 January 2008. • Sold Calgary property as announced in February 2008 - $33 million net proceeds receivable on 31 March 2008. • Announcement today of Centricom Europe joint venture to distribute POLi online bank payment platform in Europe and UK launch of POLi payment service through NETBANX. Ron Martin, President & Chief Executive Officer, said "2007 represented amilestone for the Group as we successfully resolved our issues with the USauthorities, and energetically refocused the business to put into action ourupdated vision and mission. The renewal of the Group's businesses to leveragechanged market opportunities has created energy and enthusiasm throughout theorganisation. I am confident this will be reflected in our performance in 2008.I would like to thank all our employees for their contributions during a verychallenging period in 2007 and I look forward to greater progress into 2008 andbeyond." Enquiries: NETELLER PlcRon Martin President & CEO for 11 March + 44 (0) 207 638 9571Doug Terry Chief Financial OfficerAndrew Gilchrist VP Communications + 44 (0) 7824 385 829Email: [email protected] Daniel Stewart & Co Plc + 44 (0) 207 776 6550Paul Shackleton Citigate Dewe Rogerson + 44 (0) 207 638 9571Sarah Gestetner / Seb Hoyle / George Cazenove Conference call details and further information NETELLER will hold a briefing for invited UK-based analysts at the offices ofCitigate Dewe Rogerson, 3 London Wall Buildings, London, EC2M 5SY, later thismorning at 9.30 a.m. From this time, copies of the analyst presentation, theGroup's annual report and accounts, and a recording of the statement from thePresident & CEO and CFO will be available on the Company's website,www.netellergroup.com. NETELLER management will also host a conference call on 11 March 2008 at 2.00 pmGMT (10.00 a.m. EST) for analysts and institutional investors that can beaccessed by dialling +1 866 966 1393 (USA toll free), +1 866 766 9320 (Canadatoll free), 0800 694 8018 (UK toll free) or +44 (0) 1452 552 018(International). The passcode for this call is # 35601516. This call will takethe format of a Question and Answer session as the President & CEO's and CFO'sstatements will be available via a pre-recorded audiocast from the Group'swebsite. A replay of this call may be heard from 6:00 pm (GMT) onwards on 11 March 2008by dialling +1 866 247 4222 (USA toll free), +1 866 878 9237 (Canada toll free),0845 245 5205 (UK toll free) or +44 (0) 1452 550 000 (International). Thepasscode for this replay access is # 35601516. This replay will be availablefor one month from the date of the call. Transcripts will also be available onthe Company's website, www.netellergroup.com, from 12 March 2008. Notes to Editors About the NETELLER Group Trusted by consumers and merchants in over 160 countries to move and managebillions of dollars each year, the NETELLER Group operates the world's leadingindependent online payments business. Through its NETELLER, NETBANX, and 1-Paybrands, the Group specialises in providing innovative and instant paymentservices where money transfer is difficult or risky due to identity, trust,currency exchange, or distance. Being independent has allowed the Group tosupport thousands of retailers and merchants in many geographies and acrossmultiple industries. NETELLER Plc is quoted on the London Stock Exchange's AIM market, with a tickersymbol of NLR. NETELLER (UK) Limited is authorised by the Financial ServicesAuthority (FSA) to operate as a regulated e-money issuer. For more informationabout the Group visit www.neteller-group.com or contact us by email [email protected]. Disclaimer This document contains forward-looking statements relating to future events andfuture performance. In some cases, forward looking statements can be identifiedby terminology such as "may," "will," "should," "expects," "projects," "plans,""anticipates," and similar expressions. These statements represent management'sexpectations or beliefs concerning among other things, future operating resultsand various components thereof or the economic performance of the NETELLERGroup. The projections, estimates and beliefs contained in such forward-lookingstatements necessarily involve known and unknown risks and uncertainties, whichmay cause the actual performance and financial results in future periods todiffer materially from any projections of future performance or resultsexpressed or implied by such forward-looking statements. Accordingly, readersare cautioned that events or circumstances could cause results to differmaterially from those predicted. Chairman's Statement My second statement to you comes less than nine months after my first, and I ampleased to report that the Group has made considerable progress since July 2007. Whilst our efforts in the first half of 2007 were necessarily focused onresolving the Group's US situation, the second half of the year represented aperiod during which we refined our vision and strategy for the business, largelycompleted restructuring of our cost base, and redirected our energy to thegrowing markets of Europe and Asia Pacific. We now have a strong foundationfrom which to grow the business in line with our vision and mission. Highlights Our financial results for the twelve months ended 31 December 2007 have beenheavily impacted by the financial settlement agreed with the US authorities inJuly 2007. Whilst the $136 million settlement produced a substantial lossbefore and after tax for the year, the Board is satisfied with the revenue theGroup reported for the year of $69.1 million (excluding North American revenue). This underlines the resilience of the Group's business and is an earlyindication of the potential opportunities within the European and Asia Pacificmarkets that the Group currently serves. Notwithstanding the US settlement, theGroup continues to have a solid balance sheet with cash and cash equivalents of$80.8 million at 31 December 2007. Significant cash events since 31 December2007 include the final payment made to the US authorities on 16 January 2008 of$38.25 million and an offsetting receipt of $33.5 million on 31 March 2008following the closing of the sale of our principal Calgary property announced inFebruary 2008. US resolution Satisfactory progress continues in relation to the Company's resolution andsettlement with the US authorities. The Company has now made all payments owedto the US authorities totalling $136 million. The Group has also madeconsiderable progress in the return of funds owing to its US customers under theDistribution Plan which formed a key part of the US settlement. At 25 January2008, the Group had repaid $81 million to US customers out of a possible totalof $94 million. The balance owing remains in trust and US customers who havenot yet requested their funds may continue to do so by contacting the Companydirectly. The Group continues to be subject to the terms of the DeferredProsecution Agreement ("DPA") dated 18 July 2007 for a further 17 months and iscomplying with the provisions therein including the monitoring of certain of theGroup's activities by Navigant Consulting Inc. The DPA formally expires on 17July 2009. Strategic focus Senior management has invested considerable time and effort in formulating athree year strategic plan through 2010 that is aligned with and extends ouroverarching vision and mission. The Board fully supports this strategy as thecornerstone of the Group's focus and anticipated success over the next fewyears. Further information on the vision and mission and the Group'srealignment into strategic business divisions focusing on its merchants andconsumers is set out in the President & CEO's Review. The Board believes thatthe development of a balanced scorecard approach across the Group will linkindividual executive rewards to the achievement of specific objectives outlinedin the plan and continue to align executive performance directly with theinterests of shareholders. Our competitive advantage - our staff I, together with my fellow directors, have been impressed by the energy,resilience and creativity of the Group's employees in successfully dealing withthe significant challenges in 2007 and adapting to a new business environment.We are enthusiastic about the resulting business renewal, reflected in a broaderand more flexible suite of services offered through restructured and refocusedmerchant and consumer facing business divisions. I extend sincere thanks to allof our employees for their remarkable efforts during 2007 and for the optimismthat they clearly have in the future of the Company and Group. Dale Johnson Chairman 10 March 2008 * * * President & CEO's Review 2007 represented a milestone for the Group as we successfully resolved ourissues with the US authorities, and energetically refocused the business to putinto action our updated vision and mission. We enter 2008 with a reneweddirection and I am pleased to provide in this report an overview of our plansfor 2008 and beyond as well as a summary of the highlights from 2007. 2007 financial highlights Group revenue for 2007 was $84.0 million, compared with $257.3 million in 2006,reflecting the withdrawal of payment services from North American markets inearly 2007. The ongoing business excluding North America recorded revenues of$69.1 million in 2007 compared with $60.1 million in 2006, an increase of 15%.This is a creditable performance considering the considerable impact that the USsituation had across the business. We anticipate continued growth in both theEuropean and Asia Pacific regions as our focus on these markets generates newopportunities for the Group. Gross margin for 2007 was 55.6% compared with 70.4% in 2006. The Group reporteda loss before tax and other items of $12.8 million, compared to a profit of$120.2 million in 2006, as a result of costs incurred in restructuring andstabilising the business. The US settlement of $136 million, related costs andrestructuring expenses of $37 million significantly impacted our performance forthe year. Net loss after tax for 2007 was $185.8 million, compared to a net profit aftertax of $102.5 million in 2006. The loss per share based on weighted averageshares outstanding of 119,920,953 was $1.55 compared with the prior yearearnings per share of $0.85. Key performance indicators The Group's primary driver of fee revenue from its e-wallet is the activee-wallet user base. An active e-wallet user is defined as a consumer whosee-wallet account balance has changed during the past quarter. The change inbalance may be due to adding, removing, transferring or receiving funds. TheGroup reports its active e-wallet user numbers by region for each quarter toallow comparison of regional growth rates. By also disclosing fee revenue (asset out in the Financial Review) for each primary geographic region wheree-wallet services are offered, investors are able to determine the fee revenueper active e-wallet user by region. The table below sets out our active customers by region: Active customers Q4 2007 Q4 2006 % growth Q3 2007 % growthEurope 77,937 71,497 9% 72,849 7%Asia Pacific 17,252 16,014 8% 17,638 -2%Rest of World 4,795 4,528 6% 4,438 8%Total ex North America 99,984 92,039 9% 94,925 5% The Group's active e-wallet user base at the end of 2007 was 99,984, an increaseof 9% over the corresponding period in 2006 (excluding North America). Theregional distribution of active e-wallet users included 77,937 in Europe (anincrease of 9% over the corresponding period in 2006) and 17,252 in Asia Pacific(up 8% from the same period in 2006). These results are very encouragingconsidering the impact of the US situation. The Group's strategy to bringadditional scale to the e-wallet, as well as ongoing marketing programmesdesigned to activate, stimulate and retain existing e-wallet users, is expectedto drive accelerated growth of the active e-wallet user base and revenue peractive e-wallet user throughout 2008. The table below shows by region theGroup's fee revenue per active e-wallet user based on the average quarterly feerevenue per user for 2006 and 2007, and also for the fourth quarter in 2007 and2006: Fee revenue per active 2007 2006 % growth Q4 2007 Q4 2006 % growth e-wallet user ($)Europe 114 111 3% 111 116 -5%Asia Pacific 173 139 24% 176 131 34%Rest of World 103 77 33% 92 66 38%Total ex North America 124 115 8% 121 116 4% Average daily receipts from e-wallet users were approximately $655,000 during2007 (2006: $5.1 million). The decrease of 87% was principally due to thewithdrawal from the North American market during the first quarter. Totalreceipts from e-wallet users during the year totalled $239.2 million (2006:$1.86 billion). Our total e-wallet user base (excluding North American users)totalled 997,219 at 31 December 2007, an increase of 56% from 637,770 at 31December 2006. Average daily sign-ups of new e-wallet users was 1,191 during 2007 (2006: 3,303)representing a decrease of 64%. Again, this decrease was attributable to thewithdrawal from servicing the North American markets during Q1 2007. In Q4 2007,1,076 new consumers per day signed up for the Group's e-wallet, whichdemonstrates solid growth over Q2 (937 new sign ups per day) and in Q3 (900 newsign ups per day), as shown in the table below. Average daily sign ups Q1 2007 Q2 2007 Q3 2007 Q4 2007 FY 2007Europe 867 655 596 745 715Asia Pacific 158 181 188 197 181Rest of World 103 73 79 98 89Total ex North America 1,128 909 863 1,040 985Total 1,411 937 900 1,076 1,191 The Group also generates revenue from non e-wallet related sources, such as itsNETBANX business and interest income on its own cash balances as well as thoseheld on behalf of consumers and merchants in trust accounts. 2007 revenue fromthese sources was $20.7 million compared to $23.6 million in 2006, withNETBANX's revenue increasing by 29% to $6.6 million in 2007. Withdiversification as a strategic growth vector, a primary focus will be onincreasing revenue from non e-gaming sources in 2008 and beyond. Local solutions in our target markets The Group is focused on developing innovative products and solutions for itsmerchants and consumers in targeted markets within Europe and Asia Pacific.With local language and/or payment options in 15 countries, our efforts during2007 were directed at improving the consumer experience and merchant valueproposition in those countries, in line with our objective of providing besttotal solutions to our chosen markets. In late 2007, the Group introduced a localised sign-up process which improvedthe success rate for consumers verifying their identities on first sign-up.This was made possible through the Group's Identity Verification System (IVS)which was first launched in April 2006. The acquisition of a stake in the business that operates the POLi system,Centricom Pty Limited, announced in August 2007, is representative of theefforts to improve our offering to customers and markets with innovative paymentsolutions. The Group is working with Centricom to develop innovative paymentsolutions for other markets within Europe through its joint venture, CentricomEurope Limited. Delivering the strategic vision The second half of 2007 was characterised by a comprehensive planning processwhich culminated in the Group's adoption of a well defined and renewed visionand mission together with a detailed three year action plan. This strategyunderpins our focus on providing bold payment solutions. Solidifying ourpre-eminence in providing payment solutions for the online gaming sector anddiversification of the business are the first two strategic growth vectors for2008 and 2009, each with corresponding measurable objectives. Our mission isset out below: • Establish sustainable pre-eminence in payment solutions for the e-gaming sector; • Aggressively increase the number of active e-wallet users; • Deliver the best total solutions that create dominant positions in selected markets by growing and leveraging merchant relationships; • Multiply customer lifetime value in innovative ways through the extended use of e-wallet as the nexus of our consumer relationship; and • Rapidly exploit market opportunities through optimised build, buy, and partnering approaches. The continuing development of a payment product suite which flexibly integratesthe capabilities of the Group's businesses is a key aspect of our renewedoffering. Coupled with a progressive rebranding of our principal products, theNETELLER e-wallet, our NETBANX payment processing business, and the launch ofthe Net+ prepaid card programme through our card issuing partner, the Group isnow well placed to drive growth in 2008. Our integrated offering has receivedvery positive feedback from customers, merchants, shareholders and employees. As a result of our strategic review, the structure of the organisation wasmodified into two market-facing business divisions, Member Services and MerchantServices, to improve focus on serving our consumers and merchants respectively,supported by Shared Services and Corporate Services divisions. The MemberServices business division, headed by David Gagie, is focused on our globale-wallet users (referred to as "consumers"), and encompasses our e-wallet andNet+ card businesses and our future financial services offerings. The MerchantServices business division is headed by Dan Starr and combines the product suiteof the NETELLER e-wallet, NETBANX, our proposed card offerings to merchants andour e-wallet marketing capabilities. Our intent is to enable cross selling of anintegrated suite of services that are optimised to help individual merchantcustomers grow their businesses. The business divisions will be supported by theShared Services business division, led by Rohit Joshi, to provide world-classcustomer support, fraud and security services, and product and IT teams. Inaddition, the Corporate Services business division provides accounting,processing services, compliance, internal audit, legal, investor relations andother head office related services to the Group. In early 2008, the Group commenced a long-term strategic initiative, known as "Newteller", to re-engineer the many aspects of our business necessary to alignsystems, controls and processes to the needs of the business in order tofacilitate the achievement of our three year strategic objectives. Corporate objectives and management compensation The three year business plan sets clear objectives for the Group, businessdivisions and individual employees in terms of financial, operational anddevelopmental targets combined in a balanced scorecard. Examples of specificmeasures include revenue growth, revenue mix (diversification away from corepayment services for the online gaming market), profitability (margin, EPSgrowth), member lifetime value, retention and activation rates, active and VIPmembers by sector, annual roadmap completion rate, staff retention andcompliance. As more of the balanced scorecard measures are implemented, we plan to sharecertain of these with shareholders during the course of 2008 and beyond toassist in monitoring and analysing the performance of the business. Thebalanced scorecard will form the basis of management compensation as the Groupcontinues to recognise the importance of aligning individual executive rewardswith the performance of the business as a whole within an agreed framework. Market risk assessment and compliance In early 2008 the Board defined a process for assessing the legal and regulatoryrequirements of jurisdictions in which the Group conducts significant businessor intends to target in the future. The Group will continue to monitorregulatory and other developments in those markets and take appropriate actionshould the risks facing the Group in any particular market change significantly.This was reflected in 2007 by the cessations of online gaming related transfersto customers in certain countries, in response to evolving regulatoryconstraints in those jurisdictions. The Group has continued to invest in compliance and internal audit functions toenhance its capabilities in assessing and monitoring the risks facing the Group,and, where appropriate, implementing measures to manage or eliminate these. OurFSA authorised business, NETELLER (UK) Limited, continues to serve Europeanconsumers as a regulated e-money issuer. Current trading and outlook Trading during the first two months of 2008 has shown continued growth from 2007with increases in the active e-wallet user base in Europe and Asia Pacificregions. Average daily sign ups for the two months averaged 1,142, an increaseof 6% from the Q4 2007 figure of 1,076. The re-launch of our consumer brand has produced very positive feedback and weare seeing higher conversions compared to the fourth quarter as a result of thesimplified sign-up process introduced late in 2007. The NETBANX businesscontinues to perform strongly with a number of significant new contract winswith top tier, non-gaming merchants. We are energetically executing plans related to our strategic objectives for2008. Key elements of the Member Services division strategy are therevitalisation of the consumer brands and strengthening the consumer offeringthrough additional products and payment options. Through our Merchant Servicesdivision, we will continue to develop and enhance our merchant value propositionwith the integrated product suite concept accompanied by the revised merchantbrands. These are exciting initiatives and we will share further progress withshareholders as they develop. The Group announced the sale of its principal property in Calgary on 11 February2008 for consideration of $33.5 million, which is receivable on 31 March 2008.With these proceeds, the Group has a solid cash position and the Board continuesto consider on an ongoing basis the most appropriate use of its cash, includingstrategic purchases, dividends, share buy backs and other alternatives. Giventhe Group's financial results for 2007 and strategic intentions for 2008, theBoard has decided not to recommend the payment of a dividend for the year ended31 December 2007. The Board's priority is to retain the capability to supportthe growth opportunities within the business during a year of rebuilding.However, based on current expectations, the Board does anticipate theimplementation of a progressive dividend policy at or before the release of 2008results. A committed team The renewal of the Group's businesses to leverage changed market opportunitieshas created energy and enthusiasm throughout the organisation. I am confidentthis will be reflected in our performance in 2008. I would like to thank allour employees for their contributions during a very challenging period in 2007and I look forward to greater progress into 2008 and beyond. Ron MartinPresident & CEO 11 March 2008 * * * Financial Review This was a year of achievement in overcoming many significant challenges thatthe Group faced and we are proud to present the consolidated results for theGroup and the results for the Company for the year ended 31 December 2007. Highlights The consolidated results of the Group for the year ended 31 December 2007include the results from the Group's operations in North America during thefirst quarter of 2007. The US and Canadian business would have been likely tocontribute significantly to the Group's revenue and profitability during 2007and the loss of this business has had a material negative impact on the Group'sresults for the year ended 31 December 2007. The withdrawal from the US marketon 18 January 2007 and the subsequent cessation of transfers to online gamblingsites in Canada, Turkey and Israel in the first quarter of 2007 required adetermined effort to re-size the Group's business in alignment with sharplylower business volumes. The Group has substantially completed the restructuring and stablilisation ofits operations, reducing its headcount and aligning related costs with theanticipated revenues of its worldwide business. Following these staffreductions, the Group continues to employ approximately 425 staff across itsEuropean, Americas and Asia Pacific operations, down from a peak of over 1,000employees in 2006. Revenue Revenue for the year of $84.0 million included approximately $14.9 million inrevenue from North America. This represents a decrease of 67% from $257.3million for 2006. Fee revenue, which includes charges paid by individual andmerchant customers, decreased 71% from $238.9 million to $69.9 million.Interest revenue of $14.1 million was down compared with $18.5 million in 2006.Interest revenue will decline further in 2008 due to the full effect of cashoutflows of $136 million in forfeiture and of approximately $94 million relatingto distribution of US customer funds during 2007 and early 2008. During 2007, Europe accounted for $41.7 million in revenue before interest (anincrease of 28% over $32.6 million in 2006), and Asia Pacific accounted for$11.4 million during 2007 (an increase of 44% over $7.9 million in 2006). Revenue 2007 2006 % growth Q4 2007 Q4 2006 % growth ($ millions)Europe (ex NETBANX) 35.1 27.5 28% 8.6 8.3 4%Asia Pacific 11.4 7.9 44% 3.0 2.1 44%Rest of World 1.9 1.1 72% 0.4 0.3 47%Total Fee revenue 48.4 36.5 33% 12.0 10.7 12%NETBANX 6.6 5.1 29% 1.7 1.4 21%Interest 14.1 18.5 -24% 2.4 5.2 -54%Total 69.1 60.1 15% 16.2 17.3 -6%North America (1) 14.9 197.7 -92% 0.0 54.4 -100%Total 84.0 257.3 -67% 16.2 71.7 -77% (1) Some residual revenue was earned from North American operations during H1 2007 prior to the Group's withdrawal from the US and subsequently Canada. For 2007, our revenue of $84.0 million comprised transaction fees of $69.9million (83%) and interest income of $14.1 million (17%). Merchant feesrepresented 53% of the total (including merchant share of foreign exchangefees), while fees from consumers comprised 23%. NETBANX represented 8% of theGroup's revenue. Our top 10 merchants represented 62% of Group "transfer to"volumes in 2007. Transaction fee revenue from our top 5 countries representedapproximately 50% of the total for 2007, while the top 10 countries accountedfor approximately 75% of total transaction fees (excluding North America). Gross Margin Gross margin decreased to 55.6% from 70.4% in 2006. This was the result of theGroup's withdrawal from North America and increased direct costs associated withthe Group's strategic expansion in Europe and other global markets. Foreignexchange fees remained relatively stable, decreasing slightly from $15.4 millionin 2006 to $14.9 million in 2007. Foreign exchange fees, which yield high grossmargin, are expected to grow in 2008 as the Company's focus continues to shiftto global markets. In 2007, direct business costs decreased from $76.2 million to $37.3 million asthe result of our North American withdrawal. As a percentage of revenue, directcosts increased from 30% in 2006 to 44% in 2007. The Group had historicallyinvested heavily in the North American instaCASH platform. NETELLER was one ofthe leading North American online payment companies with very efficient,inexpensive and homogeneous payment processes as well as a single languageservice requirement. The markets in Europe and Asia, in comparison, are lessefficient with fragmented banking, payment and language requirements. Althoughcosts are higher in the Group's new areas of concentration, NETELLER continuesto research and build innovative, efficient, global payment processes. Theplanned Net+ debit card programme is one example of building less expensivepayment methodologies that are scalable on a global basis. Bad debt, which has historically been the largest component of direct costs, hasbeen reduced to $7.5 million, representing 9.0% of group revenues (compared to12.8% in 2006). This was an anticipated decrease which reflects our withdrawalfrom the North American market and corresponding shift away from instaCASH andDirect Accept solutions. Approximately $6 million of the 2007 bad debt expenserelates to the first half of January 2007 (prior to the withdrawal from the US),and the subsequent write-down of remaining North American customer receivables.This expense item is anticipated to be sharply lower as a percent of revenuein 2008. The largest direct cost is now the Customer Contact Centre and related supportstaff, which is largely fixed with a concentration in staff costs. This expensehas decreased to $12.4 million and, as a percentage of revenue, rose from 7.1%in 2006 to 14.8% in 2007. Recent global expansion efforts have necessitatedexpanding contact centre staff levels to obtain numerous language skills. As theCustomer Contact Centre is an integral part of our customer acquisition,retention, fraud and security initiatives, there was not an opportunity to cutcosts at an equal rate with loss of revenues associated with North America. Inaddition, due to relative strengthening of the Canadian Dollar (the payrollcurrency for our Customer Contact Centre), operations in Canada have becomeconsiderably more expensive. Nonetheless, there is an opportunity to lower thecosts in this area as a percentage of revenue in future with a scalable platformand increased revenues. Deposit and withdrawal fees were $10.1 million, rising from 7.3% of revenues in2006 to 12.1% in 2007. This occurred partly as a result of launching the debitcard product which has a proportionately higher percentage of direct costs inrelation to corresponding revenues. Although the debit card does not in itselfproduce high margins, it will be integral to driving volume and scale in thee-wallet business. In addition, higher fees have been incurred with a weakeningUS dollar (the Group's reporting currency) along with increased volume anddeposit options in Europe where banking solutions are more expensive. Website maintenance at $7.2 million in 2007 is up as a percentage of revenuefrom 2.4% to 8.5%. This expense is also largely fixed and relates to serverhosting and platform maintenance. As this expense category was not directly andvariably related to North American revenues, it could not be reduced in tandemwith the loss of North American revenues. The Group reduced costs as far aspractical without compromising the quality of services, internal controls,server hosting redundancies and global scalability. Operating expenses and restructuring costs Pursuant to its withdrawal from the US market, the Group has substantiallycompleted the necessary rationalisation of its operations to reduce itsheadcount and align related costs with anticipated revenues of its worldwidebusiness. This rationalisation programme has focused primarily on the Group'sCalgary-based operations where the principal teams formerly serving the USmarket were employed. Transfer volumes and customer enquiries through theGroup's contact centre have decreased substantially since the Group ceasedprocessing transfers for US residents. Global staff reductions totalledapproximately 575 employees, across all levels, from the Group's contact centreand security teams, as well as related support functions in marketing,processing, IT and product support. Many of the reductions were through theGroup's voluntary redundancy programme. Part of this programme included therelocation of the Group's Gatwick-based operations to Cambridge to sharepremises with the Group's NETBANX business. The Group currently employsapproximately 425 staff across its European, Americas and Asia Pacificoperations, down from a peak of over 1,000 during 2006. General and Administrative expense (G&A), which now excludes share optionexpenses, decreased from $40.0 million to $34.0 million (from 15.5% to 40.5% ofrevenue). Consistent with the rationalisation programme, employee relatedexpenses (salary, benefits, profit share, etc) were reduced by $4.2 million.Office costs, including rent and utilities were reduced by $1.5 million.Increases to G&A included additional spending of approximately $1.0 million ondebit card platform expenses. During 2007, the non-cash, share-option-based compensation charge was $13.5million compared with the previous year's charge of $6.1 million. In December2007, the Directors approved a plan to request option holders to surrender theirshare options which were significantly below their respective exercise prices.This plan resulted in additional accelerated share option expense ofapproximately $5.0 million (which will substantially reduce the ongoing cost ofthe options in the income statement going forward). This initiative has beenwidely supported by management and other employees. Since the Group commencedrecording share-option-based compensation expenses in the fourth quarter of2004, the expense has increased based on the number of options granted, theshare volatility, the risk-free interest rate and other factors. This expenseis anticipated to decrease in 2008 due the surrender of 5,897,824 optionscombined with a lower and less volatile stock price. In late 2006, the UIGEA was introduced in the US and, in response to this andthe subsequent withdrawal from the US market in 2007, the Group restructured itsresources and downsized various departments. Total costs related torestructuring, asset impairment, and legal and related professional expensesamounted to $37.0 million. Restructuring costs in 2007 included $13.3 million in asset write-downs andproperty disposals, $16.2 million in professional and legal fees, $3.2 millionin staff restructuring costs, $1.9 million to terminate a significant supplycontract (which will have a positive ongoing impact as the related monthlyexpenditure will be reduced), $1.8 million in settlement and legal costsassociated with a third party vendor to resolve litigation that had beencommenced against the Group and $0.6 million in other restructuring costs. In accordance with IAS 36, the Group completed a comprehensive write-down of allassets directly relating to the North American facing business (includingcomputer software, website development, computer hardware and software licenses).These assets were written down to theirestimated recoverable amounts in the first quarter of 2007. A correspondingexpense of $13.1 million is recognised in the Group's consolidated incomestatement for the year ended 31 December 2007. Professional and legal fees of $16.2 million were incurred in the resolution ofthe US situation (including fees related to the distribution of funds to UScustomers and negotiating potential sanctions against the Group) andfacilitating ongoing cooperation under the terms of the Deferred ProsecutionAgreement. Legal and professional costs relating to the US situation areanticipated to be substantially lower in future years. The Group announced on 11 February 2008 that its subsidiary, NT ServicesBuilding Corp., completed the sale of its principal property in Calgary, Canadato Leben Investment Corporation for a total consideration of approximately $33.5million. In accordance with the terms of the sale agreement, the sale proceedswill be paid to the Group on 31 March 2008. The sale price is very close to thenet book value of the property and as a result there will be no significantgains or losses on disposal. Any marginal gains or losses that may arise willbe reflected in the Group's 2008 results. The Group will continue to lease twoareas of the property from Leben Investment Corporation on normal commercialterms for periods of three years and five years following the sale. Foreign Exchange Gain The results from the Group's subsidiaries in Canada, the UK and Macau arereported in local functional currencies. As required under IFRS, foreignexchange on consolidation of a subsidiary's balance sheet is captured in equity,but the subsidiary's individual exposure to foreign currency is captured inincome. During 2007, foreign exchange losses of $0.5 million were generatedcompared to gains of $0.8 million in 2006. The Group actively hedges itsforeign exchange exposure to reduce financial risk associated with foreigncurrency balances. Depreciation and Amortisation In 2007, amortisation expense related to intangible assets was $4.0 million anddepreciation expense related to capital assets was $4.6 million, totalling $8.6million. In 2006, amortisation expense related to intangible assets was $7.4million and depreciation expense related to capital assets was $3.9 million,totalling $11.3 million. The large decrease in 2007 expense relates to thewrite down in 2006 of an intangible asset relating to Quick Access InternationalLimited, our Asian subsidiary, which was purchased in 2005. Taxes The provision for income taxes in 2007 was approximately $15,000 and yielded aneffective tax rate of nil. This rate is lower than the Group anticipated for2007 as the Company received a favourable ruling on prior period tax accruals,allowing the Company to recover taxes that had previously been expensed. The taxmodel is based on the mark-up of services provided by various subsidiaries tothe parent Company in the IOM, where source revenues are not taxable. Theprovision for income taxes in 2006 was $4.9 million, which yielded an effectivetax rate of 4.6%. The forfeiture paid to the US authorities in 2007 is not atax-allowable deduction. Balance Sheet Cash and cash equivalents balances at 31 December 2007 of $80.8 millionrepresent the unrestricted cash of the Group at that date. The total amount ofcash available to the Group, including restricted cash surpluses and the excessof qualifying liquid assets held for European consumers over balances payable,totalled $96.4 million. This compared to $237.5 million at 31 December 2006. Group cash position ($ millions) 2007 2006Cash and cash equivalents 80.8 216.2Excess restricted cash - consumers 7.4 2.7 - merchants 3.4 9.3Surplus on qualifying liquid assets 4.9 9.4 Total cash (available to Group) 96.4 237.5 Consumer funds owing 34.4 130.7Merchants funds owing 45.5 121.6Payable to European consumers 57.0 54.1 Total cash under management 233.4 543.9 For merchants and non-European consumers, the Group maintains bank accountswhich are segregated from operating funds and which contain funds held on behalfof merchant and non-European consumers, representing pooled customer funds.Balances in the segregated accounts are maintained at a sufficient level tofully offset amounts owing to the Group's merchants and non-European consumers.A legal right of offset exists between the balances owing to the merchants andnon-European consumers and the cash balances segregated in the trust accounts.As such, only the net balance of surplus cash is disclosed on the balance sheetas Restricted Cash. In compliance with FSA rules and regulations, the Group holds Qualifying LiquidAssets for European consumers totalling $61.9 million as at 31 December 2007.These funds are segregated from operating funds. The balances are maintained atlevels which are at least equal to the amounts owing to European consumers of$57.0 million as at 31 December 2007. These Qualifying Liquid Assets and thePayable to European consumers are reported gross on the balance sheet. Balances due from customers decreased from $2.6 million to $0.5 million in 2007,which reflects the withdrawal from North America and the corresponding writedown of amounts due from this customer segment. The balance at 31 December 2007is expected to be recovered from customers in the normal course of business. Capital assets increased from an opening balance of $25.5 million to a closingbalance of $44.3 million due to several significant movements. The Grouppurchased a building in Calgary, Canada, where its principal operations arebased, during the first half of 2007 for a cost of $20 million. During the sameperiod, the Group recorded a write down of $4.4 million related to computerequipment and computer software assets. The Group identified the costrestructuring from the North American market withdrawal as an indication ofasset impairment. Excess computer equipment was disposed of for nominalconsideration and written down to nil net book value. The carrying amount ofcomputer software was written down to the estimated recoverable value based onfuture cash flows expected from non-North American markets. The Group sold itssmaller Calgary property on 4 September 2007 for approximately CAD $4 millionincluding CAD $750,000 as a mortgage with the principal payable at the end ofthree years. In addition, due to the significant depreciation of the US dollarversus the Canadian dollar (approx 16% in 2007) the value of the Canadiansubsidiary's capital assets increased in value by approximately $7.6 million.This increase in value was recognised in the translation reserve at year end,and did not impact net income. Intangible assets on the balance sheet decreased from $23.9 million in 2006 to$17.9 million at 31 December 2007. The Group recorded a write down of $8.3million related to website development assets. The Group identified thecessation of transaction processing in the North American market as anindication of asset impairment. The carrying amount was written down to theestimated recoverable amount based on future cash flows expected from non-NorthAmerican markets. Remaining internally generated intellectual property has beenamortised during 2007 over its estimated useful life of three years, as planned. During August 2007, the Group completed the acquisition of a strategic stake inCentricom Pty Limited for AUD $5 million (approximately $4.4 million). This isclassified on the Group Balance Sheet as an "Investment in associate". TheGroup also has a 50% equity shareholding with equivalent voting power inCentricom Europe Limited, a joint venture established in the UK. As at 31December 2007, the Group has contributed $50,258 of set up costs to the jointventure which has yet to begin operations. Foreign Currency Exposure The focus of substantially all of our operations has shifted to Europe, AsiaPacific and the rest of the World. Accordingly, our foreign currency exposureshave increased substantially and are expected to continue to grow. Theobjective of our treasury policy is to identify material foreign currencyexposures and to manage those exposures to minimise the potential effects ofcurrency fluctuations on our reported consolidated cash flow and results ofoperations. Off Balance Sheet Arrangements As of 31 December 2007, the Group had no off-balance sheet arrangements thathave, or are reasonably likely to have, a current or future material effect onour consolidated financial condition, results of operations, liquidity, capitalexpenditures or capital resources. All merchant and consumer funds, exceptthose related to NETELLER (UK) Limited, are held in trust accounts and areexcluded from the consolidated balance sheet. There are no investments held at31 December 2007 that form part of US sub-prime investment vehicles. Doug TerryChief Financial Officer 11 March 2008 * * * The Group's audited consolidated financial statements and accompanying notes areset out in Part 2 of the Audited Preliminary Results statement and are alsoavailable at www.netellergroup.com. The Group's 2007 annual report and audited accounts is today published on theCompany's website and is being sent to shareholders accordingly. The Companywill hold its fifth annual general meeting in the Isle of Man on Tuesday 13 May2008. For further information, please contact [email protected]. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Paysafe Group