Half yearly results

10 May 2011

2ergo Group plc

Half yearly results

2ergo Group plc (AIM: RGO, "2ergo" or "the Group"), the international mobile business and marketing solutions company has published its half yearly results for the six months ended 28 February 2011.

Highlights

·; Group revenues up 7% to £11.0 million (2010: £10.2 million)

o 23% increase in core market of direct and business partner sales

o Recurring transactional and monthly fees now account for 86% of total revenue

·; Gross profit up 18%, gross margins increasing from 49% to 54%

·; EBITDA increased to £1.2 million (2010: £0.2 million)

·; Pretax profit(1) £0.1 million (2010: loss £0.7 million)

·; Earnings per share(1) 0.12p (2010: loss 1.72p)

·; £2.9 million net cash proceeds received 1 March 2011 following placing of shares

·; Significant new business wins with leading organisations in all regions of operation

·; Further progress in technology development

(1) figures stated before notional interest charge on deferred consideration

Neale Graham, Joint Chief Executive of 2ergo, commented:

"We have seen further strong progress in the first half, secured notable new business in all our key geographies, built a solid pipeline and delivered on key strategic goals in terms of product development.

"We have also built a compelling set of customer propositions and services that differentiate us from apps companies and point product solution providers. More than 86% of our revenues are now derived from recurring transactional and monthly fees, which gives us excellent visibility.

"Taken together these steps put us in a strong position to capitalise on a fast growing mobile market which is rapidly transitioning from niche to mainstream. We look forward to the future with growing confidence."

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About 2ergo Group plc

2ergo is the international mobile business and marketing solutions company. It combines innovative proprietary mobile technologies and professional services to help organisations of all sizes to develop and execute their mobile strategy.

Organisations such as ESPN, the Australian Broadcasting Corporation, Vodafone Hutchison Australia, Fox Sports, Fox Business, Orange, Aviva, Fidelity, Transport for London, Ladbrokes, Times of India, Airtel, O2 and Procter & Gamble have all benefited from 2ergo's proprietary end-to-end mobile solutions to increase sales, mobilise business processes, reduce costs and enhance customer relationships.

2ergo touches all types of mobile users millions of times each day through innovative mobile business solutions that incorporate search, security, advertising, location, proximity, coupons, tickets, mCommerce and data network analytics enabling fully-integrated and personalised one to one marketing communications.

Headquartered in the UK, 2ergo has been a pioneer of enabling innovative mobile business solutions across multiple sectors and geographies since 1999. Its international presence spans North America, Latin America, India and Australia. 2ergo is AIM listed on the London Stock Exchange (AIM: RGO). For more information, visit www.2ergo.com.

The Group continued to make solid progress during the first six months of the financial year and is now well positioned to capitalise on the mobile business market. This market has seen a huge upswing in interest over the past 18 months, following the continuing strong growth in smartphone sales and the launch of the iPad and similar tablet devices.

The Board remains confident that its investment programme to the technology platforms over the last 11 years will pay dividends as major multinational organisations increasingly seek to work with highly competent technology partners to deliver more sophisticated and future-proof mobile business applications.

In addition to investing in its core technology, the Group has developed a focused sales and marketing strategy with a comprehensive set of propositions and products that address and resolve typical client challenges.

The continued development of the Group's strong sales pipeline, together with direct customer feedback, underlines the fact that 2ergo's mobile centric technology platform and rich services offering have become key differentiators in winning new business. The market is now looking for end-to-end solutions for customer acquisition, engagement, loyalty, footfall, sales growth and business process/cost reduction.

A key development during the first six months of the financial year was announced on 14 February 2011 when 2ergo was selected as the exclusive mobile technology and platform development provider to Microsoft's Innovation Outreach Program (IOP) for 2011. The IOP is a premier community of senior innovation executives from 30 top global companies, including 3M, Procter and Gamble and NCR.

2ergo will provide focused development capabilities to members of the IOP community for strategic projects involving innovation through mobile technologies, platforms and services. This exclusive relationship enables the Group to engage in dialogue with key senior decision makers. 2ergo is already working alongside an IOP member on a ground breaking innovative mobile loyalty and acquisition programme.

Product and operational development

The Group made further progress with the development of key components of its core technology, the Multiserve Platform, in particular harnessing mobileDNA, its consumer analytical and profiling module, with VoucherNet, 2ergo's patented mobile couponing solution.

Pivotal to this development, there has been extensive work carried out integrating VoucherNet with 2ergo's EPOS manufacturing partners. This means that the Group is now able to process mobile coupons/vouchers/tickets at the point of sale through a wide range of EPOS terminal types. This integrated coupon redemption facility creates a truly end-to-end service.

Since 2004 the "un-integrated" version of VoucherNet has delivered over 30 million mobile coupons worldwide. By combining this technology with the Group's mobile DNA database 2ergo has created a compelling customer proposition for organisations that want to use mobile technology to drive traffic or footfall, incentivise, reward and measure response rates through one fully integrated service.

The Group also continued to develop its mobile security and payment technology and has made a strategic decision to move towards securing all data transfer services at the earliest opportunity. Mobile security will become a major issue for the wider mobile market over the next few years and adopting this strategy early will provide a further and key differentiator. In the shorter term, coupon and ticketing security is an imminent challenge for organisations operating in that space. 2ergo's security technology overcomes these issues.

The Group made good progress with its commitment to work to the ISO 27001 information security standard. This standard is not mandatory but it underlines the Group's commitment to reach the highest standards in industry regulation and client satisfaction. Current regulation in and around mobile payments and marketing continues to be a concern as current industry guidelines are weak at best and left open to interpretation by inconsistently applied regulation of client services.

As a result, 2ergo is taking an active role in working with the wider mobile arena to implement the industry's 12th Code of Practice in September, which is intended to provide the industry with far clearer operating guidelines and responsibilities.

Business review

2ergo has continued to build a healthy pipeline of business and secured significant new business wins with leading organisations in all regions of operation.

In the UK, these include an interactive, location-sensitive mobile solution for Enjoy England which provides details and images for thousands of England's top attractions, and payasUgym, which is a rapidly growing business offering a 'pay as you go' service across multiple gym chains. This allows customers to redeem prepaid gym vouchers at reception via their mobile device. The system operates across multiple outlets, each with their own EPOS systems and processes and uses 2ergo's tried and tested mobile vouchering capabilities, deployed on the Orange Wednesday campaign.

2ergo's work with Transport for London (TFL), which is part of a four year contract to develop and manage a mobile services platform for its Journey Planner services portfolio ahead of the 2012 Olympic Games, covering London Underground, DLR, bus, cycle and taxi information, continues to progress well. The Group's work with TFL, Enjoy England and other key clients is also providing the Group with the blueprint and strategy for further location based interactive services.

In Australia, the Group signed a three year agreement with the Australian Securities Exchange (ASX). It has created a mobile business solution which enables the ASX to deliver content and equity prices to investors and market followers, allowing users to view and search real-time company announcements via alerts, 'push notifications' and PDF downloads.

In the US, the Group continues to deepen its relationship with key established clients through the development of new initiatives to enhance their mobile propositions, including Fox and AT&T. The business also recently established a Managed Services team to expand the Group's regional capability and to differentiate the business from many competitors who either have only a technology platform or are only a marketing agency.

In India, 2ergo is delivering mobile services for the prestigious Times of India group, and has secured deals with several large media organisations. The Group also launched a mobile advertising lead generation proposition which is already generating revenue. The solution uses targeted advertising on third party mobile sites to generate qualified sales leads. The Group has also continued to invest in its Indian development team to enable more efficient and responsive solution delivery for clients across all regions.

Group revenue for the six months to 28 February increased 7% to £11.0 million (2010: £10.2 million). Revenues from the core target market of direct and business partner sales grew by 23%. The Group continued to actively manage the decline in its low margin wholesale operations, having taken the decision to de-prioritise these low margin activities in 2008.

2ergo continues to generate revenue in three ways: from initial set up fees, from ongoing monthly fees and from recurring transactions which leads to high revenue visibility. Income from recurring transactional and monthly fees now accounts for 86% of total Group revenue.

The gross profit margin from the Group's recurring transactional and monthly business rose to 52% (2010: 42%). These fees now account for 83% of total gross profit. Overall gross profit grew 18% to £5.9 million (2010: £5.0 million) with gross margins rising from 49% to 54%.

Overheads increased marginally from £5.8 million to £5.9 million, reflecting increased amortisation costs related to the Group's patented technology.

EBITDA increased to £1.2 million (2010: £0.2 million) as a result of completion of the investment programme in the previous financial year. Of the £0.8 million amortisation charge for the period, £0.2 million was in respect of acquisitions made by the Group. Operating profits were £0.1 million (2010: loss £0.7 million).

Net interest charges were £0.1 million (2010: £0.2 million), and relate to IAS 23 notional interest charges in respect of the deferred consideration arising on the acquisition in 2009 of Activemedia Technologies Limited.

The reported loss before and after tax was £0.1 million (2010: loss before tax of £0.9 million and loss after tax of £0.7 million). Earnings per share excluding the notional interest charge was 0.12p (2010: loss 1.72p). The basic loss per share was 0.26p (2010: loss 2.25p).

The Group continued its investment in the development of its patented technology and its next generation deployment platform. The Group invested £2.1 million (2010: £1.4 million) in its technology including all hardware, software licences and product and platform development. Cash balances at 28 February were £0.4 million (31 August 2010: £1.5 million).

Included within other debtors were £2.9 million net proceeds from the placing of 2.4 million shares on 24 February 2011. These funds, received on 1 March 2011, will provide additional working capital and allow certain capital expenditure plans to be brought forward to build on forthcoming opportunities. Net assets at the period end stood at £26.0 million (31 August 2010: £23.0 million).

The Group is building a healthy pipeline of business and looks forward to an exciting period over the coming months. The increased visibility and acceptance of mobile over the past 18 months plays well into the Group's strategy of developing market-leading technology early, to provide clients with a truly multi dimensional mobile solution.

2ergo has numerous key differentiators that, to date, have not been fully exploited. However, the Board is confident that the Group is nearing that tipping point where its ability to provide end-to-end business solutions based on a proven secure technology platform will become a major factor in deploying truly integrated, relevant and advanced mobile services that the more discerning clients are starting to demand.

The announcement today of a new agreement with U.S. Cellular, highlights the breadth and depth of the Group's offer. As part of the agreement, 2ergo will provide this leading operator with mobile marketing consulting, project management and creative services, in addition to its core technology platforms. The Group will also assist with direct marketing to U.S. Cellular's 6.1 million customers using 2ergo's messaging, mobile website and mobile voucher platforms.

The successful VoucherNet EPOS integration will render couponing a leading mobile service for the retail market and mobile security, with an emphasis on payment, will follow that over the next few years.

Mobile usage is continuing on its rapid upward trajectory, the latest market statistics for Q4 2010 reveal smartphone shipments have increased to 25.6 million units - 99.4% higher than the same period in 2009, representing 44% of total mobile sales (Channelweb.co.uk).

Mobile advertising revenues across Western Europe will grow to £4.3 billion by 2015 (FirstPartner). Retailers are having to adapt rapidly to mobile commerce as mobile devices and location sensitive applications become a major part of consumers' lives. Mobile payments will quadruple by 2014, reaching £400 billion globally (Generator Research). A rapidly growing social media channel will also prove to be a major growth area over the coming months and years.

The Board believes that 2ergo is extremely well positioned to maximise the tremendous opportunities that this presents.

-Ends-

Condensed consolidated unaudited interim income statement

for the six months ended 28 February 2011

All activities relate to continuing operations

Condensed consolidated unaudited interim statement of comprehensive income

for the six months ended 28 February 2011

Condensed consolidated unaudited interim statement of financial position

as at 28 February 2011

Condensed consolidated unaudited interim statement of changes in equity

for the six months ended 28 February 2011

Condensed consolidated unaudited interim statement of cash flows

for the six months ended 28 February 2011

Notes to the condensed consolidated unaudited interim financial statements

1. Basis of preparation

The interim financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) as described in the accounting policies set out in the financial statements for the year ended 31 August 2010 and AIM rules.

The statement of financial position as at 28 February 2010 has been restated for the adjustments to the fair value of the net assets acquired and associated goodwill on the acquisitions of Broca plc and Activemedia Technologies Limited as described in note 5. Other than this, the comparative financial information for the period ended 28 February 2010 and the year ended 31 August 2010 has been extracted from the interim and annual financial statements of 2ergo Group plc. These interim results for the period ended 28 February 2011, which are not audited, do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006.

Full audited accounts of the Group in respect of the year ended 31 August 2010, which received an unqualified audit opinion and did not contain a statement under section 498(2) of the Companies Act 2006, have been delivered to the Registrar of Companies.

2. Segmental analysis

1 Earnings before interest, tax, depreciation and amortisation

3. Taxation

The tax charge/(credit) accrued in these interim financial statements reflects an estimated tax rate of 25% on the profit before tax and notional interest for the period (2010: 25%), which is the anticipated effective composite rate for the current financial year.

4. Earnings per share

The calculation of basic and diluted loss per share is based on the result attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue during the period. The weighted average number of shares for the purpose of calculating the basic and diluted measures is the same. This is because the outstanding share options would have the effect of reducing the loss per ordinary share and therefore would be anti-dilutive.

An adjusted earnings per share, before the notional interest charge arising in respect of the deferred consideration for the acquisition of Activemedia Technologies Limited has been presented in addition to the loss per share as defined in IAS 33 since, in the opinion of the directors, this provides a more meaningful indicator for investors. It can be reconciled from the basic measure as follows:

5. Business Combinations

Broca acquisition

Until 7 April 2009 the Group held 19.2% of the ordinary share capital of Broca plc. On 8 April 2009, the Group acquired the balance of the entire issued share capital of Broca plc and its subsidiary undertakings, Broca Communications Limited and Sure on Sight Limited for consideration of the issue of 2,872,856 ordinary shares in 2ergo Group plc. The fair value of the shares issued was determined with reference to market price on the date of acquisition.

Subsequent to the acquisition the deferred tax position of Broca was revised. This resulted in a change to the fair values at acquisition and increased the goodwill arising on acquisition and as a result the statement of financial position at 28 February 2010 has been restated. The impact of the acquisition on the Group's assets and liabilities is set out below.

Activemedia Technologies acquisition

On 24 July 2009, the Group acquired the entire issued share capital of Activemedia Technologies Limited and its Indian subsidiary undertaking Active Media Technologies Private Limited (now renamed Two Ergo India Private Limited) for an initial cash consideration of £179,000 with further estimated discounted consideration payable of £6,890,000, subsequently revised to £4,967,000 in the second half of 2010. Following the acquisition of Activemedia Technologies the existing business was divided into two separate cash generating units (Ticketing & Couponing and India), consistent with the calculation for deferred contingent consideration. This division resulted in adjustments being made to the provisional fair value of certain assets and liabilities acquired. The impact of the acquisition of the Ticketing & Couponing cash generating unit on the Group's assets and liabilities is set out below:

* The deferred contingent consideration, which is payable in tranches, is discounted and calculated as 2.8 times forecast Ticketing & Couponing operating profit for the year to 31 August 2012 based on management projections. It is dependent on the financial performance of the acquired business and is subject to an overall cap (covering both the Ticketing & Couponing and India cash generating units) related to Group performance. Consideration is payable between November 2009 and November 2013 and will be settled, at the discretion of the Group, by the issue of new ordinary shares in the Company or loan notes.

The impact of the acquisition of the Indian cash generating unit on the Group's assets and liabilities is set out below.

* The deferred contingent consideration, which is payable in tranches, is discounted and calculated as 4 times forecast Indian profit after tax for the year to 31 August 2012 based on management projections. It is dependent on the financial performance of the acquired business and is subject to an overall cap (covering both the Ticketing & Couponing and India cash generating units) related to Group performance. Consideration is payable between November 2009 and November 2013 and will be settled, at the discretion of the Group, by the issue of new ordinary shares in the Company or loan notes.

The adjustments to the fair values at acquisition detailed above reduce goodwill and as a result the statement of financial position at 28 February 2010 has been restated.