11th Sep 2006 07:04
NETeller PLC11 September 2006 NETELLER Plc (LSE: NLR), the world's leading independent online money transferservice provider, today announces its interim results for the six months to 30June 2006. All figures in US$ unless otherwise stated. Percentage changes shown are versushalf year 2005 (1). HIGHLIGHTS KEY OPERATING METRICS • Average daily receipts: $4.68 million (up 56 %) • Average daily sign ups: 3,251 (up 19 %) • Total half year end customers: 2,909,190 (up 67 %) • Total active customers in Q2 2006 (2): 535,853 (up 49 % from Q2 2005) KEY FINANCIALS • Revenue: $118.9 million (up 62 %) • Gross margin: 71.8 % (73.2 % in H1 2005) • Profit before tax: $58.0 million (up 43 %) • Net profit: $55.9 million (up 51 %) • EPS: $0.46 ($0.31 in H1 2005) (1) Please refer to full statement for supplementary 2nd quarter information. (2) Active customer is defined as a customer whose e-wallet account balance has changed during the quarter. Ron Martin, President & Chief Executive Officer, commented: "During the first half of 2006, we have invested heavily in the business toimprove the quality and depth of our product offering to both customers andmerchants, in line with our "Deepen and Extend" strategy. Our trading resultsand key metrics demonstrate the continued growth that NETELLER is experiencingfrom enhanced product and service efficiencies and the growth in our merchants'primary market. We have continued to reduce our exposure to the North Americanmarket in line with management's expectations of the Company's diversificationplan. Whilst the gaming industry is subject to continuing regulatoryuncertainty, NETELLER is well placed to report significant progress during thesecond half of 2006." Enquiries: NETELLER Plc +44 (0) 207 638 9571 (11 September) Ron Martin, President & Chief Executive Officer +44 (0) 1624 698 702 (thereafter) Eric Hughes, Chief Financial Officer Andrew Gilchrist, Vice President, Communications +44 (0) 1293 555 726 Citigate Dewe Rogerson +44 (0) 207 638 9571 Sarah Gestetner/Seb Hoyle/George Cazenove 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. NETELLER management will also host a conference call on 11September 2006 at 2.00 pm (BST) 9 am (EST) for analysts and institutionalinvestors that can be accessed by dialling +1 718 354 1171 (North America) or+44 (0) 20 7138 0818 (UK/Europe). A replay of this call may be heard from 6:00pm (BST) onwards on 11 September 2006 by dialling +1 718 354 1112 (NorthAmerica) or +44 (0) 20 7806 1970 (UK/Europe), passcode 8392340 #, and will beavailable until midnight on 13 September 2006. Transcripts of the call and theQ&A session will be available on the Company's website, www.netellerplc.com,together with this release and the investor presentation. PRESIDENT & CEO'S REPORT FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2006 Dear Shareholders, The first half of 2006 represented another period of continued growth andprogress in line with our "deepen and extend" strategy despite regulatorydevelopments affecting our main market, the online gaming industry. NETELLERhas succeeded in extending the functionality and services associated with itsonline payment platform, and now has customers in 160 countries through itsseven language sites. During the second half of 2006 and beyond, NETELLERintends to develop and launch a series of financial services offerings thatleverage the core e-wallet functionality. Customers, merchants and shareholdersshould all benefit from this. The following paragraphs highlight NETELLER's recent achievements anddevelopments, and set out strategic objectives for the future. PERFORMANCE IN FIRST HALF 2006 NETELLER demonstrated continued growth in customers, merchants and paymentvolumes during the first half of 2006. Our customer base grew from 1,745,602 at30 June 2005 to 2,909,190 at 30 June 2006, with average daily sign-ups of 3,251(3,609 in Q1 and 2,898 in Q2). Active customers in Q2 2006 were 535,853compared with 359,467 in Q2 2005 and 146,015 in Q2 2004. We achieved our 3millionth customer sign-up on 1 August. Increased sign-ups in line with typicalseasonal trends have been evident throughout July and August. In the first halfof 2006, average daily receipts from customers grew 56 %, from $3.0 million to$4.68 million ($4.69 million in Q1 and $4.66 million in Q2) which compares to$3.0 million in the same period in 2005. Total customer receipts during thefirst half of 2006 were $846.7 million (compared to $541.5 million in the firsthalf of 2005) and overall transactions processed by NETELLER totalled $5.1billion (compared to $7.3 billion for the full year of 2005). The growth in transaction volumes and customers has resulted in a 62 % increasein revenue in the first half of 2006 to $118.9 million, which compares to $73.5million in the same period in 2005. Europe provides an increasing proportion ofour business, accounting for more than 20 % of daily sign-ups and approximately13 % of revenue before interest. Gross margin decreased slightly to 71.8 % from73.2 % for the same period in 2005. Direct costs were higher due to higherstaff costs in our contact centre and IT teams, as well as a slightly higher baddebt level compared to the full year 2005. Profit before tax was $58.0 million,an increase of 43 % from $40.6 million in H1 2005, while profit after taxincreased 51 % to $55.9 million, up from $37.0 million. EPS for the period was$0.46, an increase of 48 % compared to $0.31 for the first half of 2005. TheCompany ended the first half of 2006 with $136 million of cash. The expanded customer base has been accompanied by growth in the merchant base,which exceeded 3,500 as at 30 June 2006. In this period we added several majormerchants, particularly in Europe, including Paddy Power, Pokershare.com,Unibet, UK Betting, Nordicbet, Betworks and PKR.com. We continue to attract newonline gaming merchants and to target selected non-gaming merchants by providingtrusted, secure and innovative payment services with improving geographiccoverage and product functionality. CONTINUING GEOGRAPHIC EXPANSION Earlier in the year, we shared NETELLER's product roadmap for the first half of2006. We have made substantial progress in relation to the roadmap targets,many of which extend our offering geographically. We announced on 8 May thelaunch of localised versions of our e-wallet offering in Germany, France, Spainand Italy. The language-specific sites were combined with local payment optionsand native speaking 24/7 contact centre support. These launches havecontributed to the increased European sign-ups and revenue highlighted above. On 14 August, we announced the addition of funding options using Visa Delta andVisa Electron debit cards. As part of NETELLER's commitment to superior onlinetransaction security, "Verified by Visa" and MasterCard "SecureCode" cardprotection programmes were implemented in August to reduce the likelihood ofidentity theft and other fraudulent usage of credit and debit cards. Asia represents a challenging new market frontier for NETELLER's merchant base.We have made progress in Asia, primarily in payment services for China andJapan. In April, Quick Access (a subsidiary acquired in January 2005)successfully launched the first fully localised e-wallet service for China,including local currency functionality. Only a few of NETELLER's merchants aretargeting the Chinese market, although interest in this emerging market isgrowing. NETELLER is well positioned to assist merchants to develop theimpressive potential of the Chinese market in the coming years. In Japan, theworld's second largest economy, we are extending the range and convenience oflocalised payment options. Funding via Internet banking has been added andcard-based options are presently being refined based on experience in recentmonths. Growth in sign-ups and revenues has occurred and this is expected toaccelerate following completion of product initiatives in the fourth quarter. A suite of payment options is now being added for Australia, which is already animportant market with good upside potential for NETELLER. The Netbanx operation, acquired in October 2005, continues to perform well,providing debit and credit card processing services to more than 1,600merchants, principally in the UK. The business is expanding its operations toextend the range of services available to NETELLER's existing online merchants. PRODUCT DEVELOPMENTS & MARKETING INITIATIVES In the first half of 2006 we made investments in our bench strength for bothproducts and marketing. Rohit Joshi was promoted to Executive Vice President ofProducts and Dan Starr was hired as Executive Vice President of Marketing. Bothhave aggressively built and driven their respective functions since coming onboard. Rohit joined us in the summer of 2005 and has built a tightly integratedproduct management, development, and delivery capability for the Company. Danjoined us in January 2006 and has expanded the marketing team to 100 peopleglobally. We are now starting to see the fruits of both of these investments. As part of our strategy of deepen and extend, we have again made strongimprovements to our product offering for both customers and merchants. At GIGSE2006, the pre-eminent showcase for many of our merchants, we previewed adramatically improved new merchant product toolset. The toolset, called NetDirect 4.1, enhances the customer and merchant experience while increasing thevolume and velocity of funds transferred. Also included as part of this majorrelease was the first phase of our merchant business intelligence centre, whichprovides important real-time access for merchants into their business withNETELLER. This release has been enthusiastically received by our merchants. An important recent development initiative has focused on a simplified membersign-up process. In the past, a member had to complete a seven stepauthorisation process in order to open a NETELLER account. As a result ofsignificant investment in the Company's real-time identity verificationtechnology, this has been streamlined to two steps, whilst still adhering to theFSA's "know-your-customer" requirements and industry best practice. We havealready seen a material increase in successful account creations compared withthe more complicated seven-step process and we expect to see continuing benefitsfrom this simplified process in the second half of 2006. Secondly, with NetDirect 4.1, we have included enhanced error messaging, which gives our customersresolution paths for any errors they encounter while trying to transact withNETELLER on a merchant site. Within a few clicks from the merchant sites,customers can view their NETELLER balance and increase instaCASH limits.Customers are given a personalized experience when receiving the NETELLER errormessage, including their language of choice, local customer service numbers andVIP front of the line service for our best customers. Customers can even engagein a live chat with a NETELLER customer service representative without leavingthe merchant site. From a marketing perspective, we have continued to roll out our Credit CardDecline Programme, which provides a directed method for customers to fund whentheir credit card is declined on a merchant site. In addition, we have nowsigned up 80% of our top 200 merchants onto our Direct Accept Programme. Thefinancial impacts of this are discussed later, but the programme, which providesno-charge funding for customer e-wallets, has the long term benefits of drivingmore volume for merchants while increasing customer retention for NETELLER. The first half of 2006 also saw NETELLER's first significant marketing campaignsto drive customer retention and increase fees generated from the e-walletservice. The 2006 summer global promotion "Play into Summer" was launched inearly June and ran to the end of August, to coincide with the FIFA World Cup andthe World Series of Poker. The promotion provided opportunities for NETELLER'scustomers to win many prizes, ranging from cars and international vacations tomusic downloads. Sixty thousand existing customers registered for the highlysuccessful promotion, and it contributed to the figures referred in our currenttrading update and outlook. The marketing and product roadmaps for the second half of 2006 contain furtherinnovative developments and programmes which should benefit both customers andmerchants. These will include the full roll out of the simplified sign upprocess, improvements to our VIP programme including higher limits andpromotions, the launch of a new "refer-a-friend" programme, and a "Live YourFantasy" promotion. To complement the new e-wallet products added for Germany,France, Spain, Italy, and China in the first half of the year, furtherlocalisation initiatives are planned for Sweden, Denmark, Turkey, Poland, Braziland Australia in the second half. STRATEGY The e-wallet is the central element of NETELLER's worldwide online paymentplatform and processing capabilities. The success of the e-wallet in servingthe online gaming sector has been evident in our performance to date, and wewill vigorously continue to deepen and extend our product and service offeringsto customers and merchants within this sector. The Board has also recognisedthat it is desirable to extend the use of the e-wallet through diversificationinto new merchant verticals and by enhancing the offering to our customers. Wewill do this by adding additional products and services to the core e-walletfunctionality, which will improve customers' ability to move and manage theirfunds both online and offline. We expect that this will enhance customer LTV(lifetime value) and create multiple customer acquisition channels. The Board is pleased to announce that, as part of the diversified marketstrategy, it has appointed a highly regarded specialist from the bankingindustry, David Gagie, as President of Financial Services. David was formerlyManaging Director of LloydsTSB's Consumer Lending and Current Account businessesin the UK, and most recently worked with PayPal Inc. in California as aconsultant to assist in development of a banking strategy. David has also actedas Chairman of the MasterCard UK board. David is now working closely with meand the Board to develop a financial services business that fits within theGroup's strategic vision. We will be sharing more information on this importantinitiative in the coming months. APPOINTMENTS Gord Herman was appointed as Executive Chairman following the Company's AGM on11 May 2006, replacing Steve Lawrence. The Board thanks Steve for hissignificant contributions as Chairman and as a founder of NETELLER, and looksforward to his continuing contribution as a non-executive director. On 1 September, the Company announced the appointment of HSBC Bank Plc to act asthe Company's nominated adviser and joint broker. Canaccord Adams Limited hasserved NETELLER well and continues to act as the Company's joint broker. Thischange reflects the Board's belief that, as NETELLER's shareholder base andoperations become more global, it is prudent to work with a globally-recognisedadvisory firm with a broad international presence. REGULATORY ENVIRONMENT NETELLER is subject to and continuously monitors varied regulations in thejurisdictions that it operates in. The Company also monitors significantlegislative developments pertaining to its primary merchant base comprised ofonline gaming firms. The Company has an internal anti-money laundering andanti-terrorist financing programme to ensure compliance with legislation in thecountries in which it is domiciled. NETELLER undertakes a rigorous duediligence process prior to acceptance of new merchants. This screening processapplies information and intelligence from internal and external sources,including regulatory bodies, to mitigate risks associated with merchant conductor solvency. * * * FINANCIAL REVIEW Active customer base As NETELLER has grown and matured, the existing, active customer base ratherthan sign-ups has become the primary driver of revenue. Accordingly, theCompany is commencing disclosure of the active customer base to enable investorsto better understand and model the business. An active customer is defined as a customer whose e-wallet account balance haschanged during the quarter. The change in balance may be due to adding,removing, transferring or receiving funds. The active customer count was 535,853 in Q2 2006, 359,467 in Q2 2005 and 146,015in Q2 2004, representing year-on-year growth rates of 49 % and 146 %respectively. The regional distribution of these active customers for Q2 2006was 460,676 in North America (up 43 % from the corresponding period in 2005),58,013 in Europe (100 % over the corresponding period in 2005) and 17,164 inAsia/Rest of World (up 101 % from the same period in 2005). Sign-ups On 1 August 2006, NETELLER reached a key milestone by surpassing three millioncustomers worldwide. The historical, accelerating sign-up trend continues. Theone millionth customer signed up at approximately four years, increasing to twomillion in the fifth year and, within seven months of the sixth year, toppedthree million. Our three millionth customer is in Germany, one of our fastestgrowing markets due, in part, to recent localisation launches in Europe.Average daily sign-ups during the first half of 2006 were 3,251, up 19 % from2,732 during the same period in 2005. Revenue Revenue for the half year of $118.9 million was up 62 % from $73.5 million forhalf year 2005. Fee revenue, which includes charges paid by individual andmerchant customers, increased 56 % from $71 million to $111 million. Interestrevenue of $8 million was up 210 % over half year 2005. Although North America accounts for the majority of revenue, the rate of revenuegrowth is highest in Europe and Asia. During the first half of 2006, Europeaccounted for approximately $14.5 million in revenue before interest or $22.5million including interest. Asia accounted for $3.7 million in revenue duringthe first half of 2006. North America and a token amount from the other regionsmade up the remaining revenue. Revenue per active customer represented $113 inQ2 2006, compared with $109 in Q2 2005. Gross Margin Rapid growth over the past two years has led to a rise in support costs with amove to new premises and increased head count, particularly in contact centreoperations. This has resulted in a marginally reduced gross margin of 71.8 %,compared to 73.5 % for the year ended 31 December 2005. Our contact centre operations are based in Calgary, Canada, where salaries haveinflated by 12 % over the past year due to an increasingly competitive labourmarket. Although the Calgary job market remains very robust, the Companybelieves that the recent salary rate increase is sufficient to sustainappropriate staff levels. Direct costs were also exposed in the first half of2006 to the strengthening of the Canadian Dollar by over 9 % against ourreporting currency, the US Dollar. The contact centre added furthercapabilities such as the credit card decline team, the Viper (VIP) team andoutbound calling staff which increased overall staff levels to provideadditional levels of support to our customers. These additional costs replacedcosts which were allocated in 2006 to General and Admin expenses. The currentlevel of expenditure is not expected to increase as a % of revenue for theremainder of the year. Deposit and withdrawal fees increased from 5.1 % of revenue to 6.5 % of revenuefrom the first half of 2005 to the first half of 2006. The main cause of theincrease is the increasing use of deposit and withdrawal options in Europe wherebanking solutions have been more expensive. The Company is implementingsolutions to reduce the banking fees in Europe by early 2007. Bad debts and collections increased 62 % to $15.0 million in the first half of2006, representing 12.6 % of revenues (in line with 12.6 % reported for thecorresponding period in 2005). The Company is continuing to enhance itsprocedures for managing bad debt. This expense item is anticipated to declinemarginally as a percent of revenue during the remainder of the year. General and Administrative (G&A) Expense In 2006, the Company strengthened its talent pool, including a number of keymanagement positions. This has been necessary to accommodate future growth andeffective execution of strategy. During the first half of 2006, a wholly ownedsubsidiary, NT Services Ltd, moved into a larger and more suitable building,providing the required space and facilities for future growth. In early 2006,the Company introduced an Employee Profit Share Plan for the majority of itsemployees to improve retention and motivation in a very competitive labourmarket. These factors plus a significant reallocation of costs from directcosts (as highlighted in our Q1 2006 trading update) have contributed to anincrease in general and administrative expense to 17 % of revenue, up from 12.5% in the same period in 2005. Recruitment during the first half of the year has staffed NETELLER to a pointwhere significant additional staff will not be necessary during the remainder ofthe year. As revenue is expected to grow during the seasonally busy second halfof the year, general and administration expense for the full year is expected toreduce marginally as a percentage of revenue. Share option expense is included in the general and administrative expense. Forthe first six months of 2006, the share option expense was $2.6 million comparedto $1.2 million in the same period of 2005. The expense is calculated based onthe trinomial model of option valuation, which is impacted by the number ofoptions outstanding and the volatility of the shares, both of which increased inthe first half of 2006 compared to the prior year. Income tax expense The provision for income taxes for half year 2006 was $2.1 million, with aneffective tax rate of 3.7 %. The effective rate is lower than the same periodin 2005 (9.0 %) and for the full year 2005 (6.4 %). In the first half of 2006,the Company received a favourable ruling on prior period reassessments, allowingthe Company to recover taxes that had been previously expensed. Earnings per share (EPS) Half year basic EPS based on weighted average shares outstanding of 120,455,213increased 48 % to $0.46, compared to prior half year at $0.31. Fully dilutedEPS for the half year ended 30 June 2006 was $0.46 compared to prior year of$0.30, an increase of 53 %. During June 2006, the Company purchased 500,000 of its own shares forcancellation. In July 2006, a further 300,000 shares were purchased forcancellation. These purchases, for a total cost of £4.6 million, were part ofthe Company's ongoing opportunistic buy back programme authorised at theCompany's Annual General Meeting in May 2006 for up to 6.1 million shares,representing 5 % of the Company's issued share capital. Current trading and outlook During the first two months of the third quarter, NETELLER has experiencedseasonal trends observed in previous years. July was a relatively flat monthwith unaudited revenue of approximately $19.9 million and August revenueincreased to approximately $22.2 million (revenue for the same months in 2005was $13.8 million and $14.7 million respectively). During the month of July,NETELLER introduced a simpler two-step sign-up process. Sign-ups for thetwo-month period ended 31 August averaged 3,055 per day. The Company endedAugust with 3,098,634 signed-up customers. While the business has been growing, NETELLER has also been successful incontracting with several major gaming sites for the Direct Accept offering. Theconversion of merchants to Direct Accept makes funding a NETELLER wallet free tocustomers as the fee is paid by the merchant. The fees charged for DirectAccept are lower than instaCASH so revenue per dollar receipted is expected todecline marginally during the remainder of the year. It is desirable to movemerchants to Direct Accept based on experience indicating that lower margins forinstant funding using Direct Accept are more than offset by the positive impacton active customer count and transfer volumes. NETELLER is committed to utilising its substantial resources to enhanceshareholder value. We are continuously identifying and evaluating potentialacquisition opportunities which meet our strategic objectives, whilst alsoassessing continuance of the Company's share buy back programme. NETELLER has performed well during a challenging period for our key merchantswithin the online gaming industry. Our employees deserve considerable creditfor their efforts during the first half of 2006. Whilst the gaming industry issubject to continuing regulatory uncertainty, we are well placed to reportsignificant progress in the second half of the year. RON MARTIN President & CEO 11 September 2006 INDEPENDENT REVIEW REPORT TO NETELLER PLC We have reviewed the accompanying consolidated balance sheet of NETELLER Plc at30 June 2006 and the related consolidated statements of income, cash flows andchanges in equity for the six month period then ended. These financialstatements are the responsibility of the Company's management. Ourresponsibility is to issue a report on these financial statements based on ourreview. This report is made solely to the Company, in accordance with the InternationalStandard on Review Engagements (ISRE) 2400. Our work has been undertaken sothat we might state to the Company those matters we are required to state tothem in an independent review report and for no other purpose. To the fullestextent permitted by law, we do not accept or assume responsibility to anyoneother than the Company, for our review work, for this report, or for theconclusions we have formed. We conducted our review in accordance with the International Standard on ReviewEngagements (ISRE) 2400. This Standard requires that we plan and perform thereview to obtain moderate assurance as to whether the financial statements arefree of material misstatement. A review is limited primarily to inquiries ofcompany personnel and analytical procedures applied to financial data and thusprovides less assurance than an audit. We have not performed an audit and,accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believethat the accompanying financial statements do not give a true and fair view inaccordance with International Financial Reporting Standards. KPMG Audit LLC Chartered Accountants Douglas Isle of Man 11 September 2006 CONSOLIDATED INCOME STATEMENT FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2006 (UNAUDITED) Six month period ended 30 Six month period ended 30 June 2006 June 2005 US$ US$ Revenue 118,894,549 73,484,674Cost of sales Customer support (8,157,987) (5,037,403) Website maintenance (2,626,359) (1,590,533) Deposit and withdrawal fees (7,748,267) (3,804,087) Bad debts and collections (15,004,884) (9,275,496) Gross profit 85,357,052 53,777,155Operating expenses General and administrative (20,770,021) (9,150,334) Management bonus (1,949,710) (1,795,622) Foreign exchange gain 303,452 163,484 Depreciation and amortisation (4,936,957) (2,277,109) Loss on investment - (75,000) Profit before tax 58,003,816 40,642,574 Income tax expense (2,126,407) (3,675,208) Net profit for the period 55,877,409 36,967,366 Basic earnings per share (Note 6) $ 0.46 $ 0.31 Fully diluted earnings per share (Note 6) $ 0.46 $ 0.30 CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2006 (UNAUDITED) 30 June 2006 31 December 2005 US$ US$ (Unaudited) (Audited) ASSETSCURRENT ASSETSCash and cash equivalents 135,921,390 114,570,429Restricted cash (Note 3) 28,829,015 16,116,858Qualifying Liquid Assets held for European customers 48,066,791 31,595,306(Note 4)Receivable from customers 2,586,000 1,947,000Trade and other receivables 1,771,910 250,958Prepaid expenses and deposits 5,236,350 1,390,453 222,411,456 165,871,004 NON-CURRENT ASSETSCapital assets 18,032,360 9,524,848Intangible assets 28,630,947 26,803,576Goodwill 16,574,367 16,020,663 285,649,130 218,220,091 LIABILITIESCURRENTTrade and other payables 5,204,924 5,493,711Payable to European customers (Note 4) 41,266,868 28,891,291Income taxes payable 4,976,397 3,559,783Conditional consideration payable 2,598,746 2,608,001 54,046,935 40,552,786 NON-CURRENT LIABILITIESConditional consideration payable - 2,604,741 54,046,935 43,157,527 SHAREHOLDERS' EQUITYShare capital (Note 5) 39,777 39,794Share premium 50,488,152 48,410,150Capital redemption reserve 94 -Equity reserve on share option issuance 6,151,686 3,576,870Translation reserve (56,836) (1,497,326)Accumulated profits 174,979,322 124,533,076Retained earnings 231,602,195 175,062,564 285,649,130 218,220,091 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2006 (UNAUDITED) Share Share Total share Equity Translation capital - capital - capital reserve on reserve on ordinary deferred share foreign Capital shares shares Share option operations redemption premium issuance reserve Accumulated profits Total Balance as at1 January 2005(Audited) 21,708 18,000 39,708 46,651,224 380,742 - - 33,021,259 80,092,933 Issue ofordinarysharesduring the period 62 - 62 1,237,663 - - - - 1,237,725 Equityreserve onoption issuance - - - 1,168,044 - - - 1,168,044 Translationreserve onforeign operations - - - (219,183) - - (219,183) Net profit for theperiod - - - - - - - 36,967,366 36,967,366 Balance as at 30 June2005(Unaudited) 21,770 18,000 39,770 47,888,887 1,548,786 (219,183) - 69,988,625 119,246,885 Issue of ordinarysharesduring theperiod 24 - 24 521,263 - - - - 521,287 Equityreserve onoption issuance - - - - 2,028,084 - - - 2,028,084 Translationreserve onforeign operations - - - - - (1,278,143) - - (1,278,143) Net profit for theperiod - - - - - - - 54,544,451 54,544,451 Balance as at1 January 2006 (Audited) 21,794 18,000 39,794 48,410,150 3,576,870 (1,497,326) - 124,533,076 175,062,564 Issue of ordinarysharesduring theperiod 77 - 77 2,078,002 - - - - 2,078,079 Repurchase of ordinarysharesduring theperiod (94) - (94) - - - 94 (5,431,163) (5,431,163) Equity reserve onoptionissuance - - - - 2,574,816 - - - 2,574,816 Translation reserve onforeignoperations - - - - - 1,440,490 - - 1,440,490 Net profit for theperiod - - - - - - - 55,877,409 55,877,409 Balance asat 30 June2006 (Unaudited) 21,777 18,000 39,777 50,488,152 6,151,686 (56,836) 94 174,979,322 231,602,195 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2006 (UNAUDITED) Six months ended Six months 30 June 2006 ended 30 June (Unaudited) 2005 (Unaudited) US$ US$OPERATING ACTIVITIESProfit before tax 58,003,816 40,642,574 Adjustments for: Depreciation and amortisation 4,936,957 2,277,109 Unrealised foreign exchange loss (gain) (1,782,746) 264,362 Loss on investment - 75,000 Share option expense 2,574,816 1,168,044Operating cash flows before movements in working capital 63,732,843 44,427,089 Increase in receivable from customers (611,874) (137,663) Increase in trade and other receivables (1,520,953) (867,454) Increase in prepaid expenses and deposits (3,845,897) (338,818) Decrease in trade and other payables (272,164) 972,283Cash generated by operations 57,481,955 44,055,437 Income tax paid (709,793) (15,244,719) Net cash from operating activities 56,772,162 28,810,718 INVESTING ACTIVITIES Increase in payable to European customers 12,375,577 - Purchase of capital and intangible assets (15,134,675) (12,014,394) Increase in restricted cash accounts (12,712,157) (7,992,307) Increase in Qualifying Liquid Assets held for European customers (16,471,485) - Acquisition of subsidiary - (5,402,436) Net cash used in the investing activities (31,942,740) (25,409,137) FINANCING ACTIVITIES Conditional consideration payable (2,605,999) 5,132,791 Proceeds on issuance of shares, net of share issuance costs 2,078,079 1,237,725 Repurchase of ordinary shares (5,431,164) - Net cash generated from financing activities (5,959,084) 6,370,516 INCREASE IN CASH AND CASH EQUIVALENTSDURING THE PERIOD 18,870,338 9,772,097 NET EFFECT OF FOREIGN EXCHANGE ON: CASH AND CASH EQUIVALENTS 1,040,133 (554,000) TRANSLATION OF FOREIGN OPERATIONS 1,440,490 (219,183) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 114,570,429 76,969,314 CASH AND CASH EQUIVALENTS, END OF PERIOD 135,921,390 85,968,228 In addition to the increase in cash and cash equivalents during the period,restricted cash increased by US$12,712,157, and Qualifying Liquid Assets heldfor European customers increased by US$16,471,485. NOTES TO THE INTERIM FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2006 (UNAUDITED) 1. Basis of presentation The principal operating currency of the Group is US dollars and accordingly thefinancial statements have been prepared in US dollars. The interim results forthe period ended 30 June 2006 are unaudited and do not constitute statutoryaccounts within the meaning of the Companies Acts 1931 to 2004. The statutoryaccounts of NETELLER PLC for the year ended 31 December 2005 have been filedwith the Registrar of Companies and contain an unqualified audit report. Furthercopies can be obtained from the Registered Office of the Company, 4th Floor,Standard Bank Building, 1 Circular Road, Douglas, Isle of Man, IM1 1AF. 2. Significant accounting policies The interim results for the period ended 30 June 2006 have been prepared inaccordance with the accounting policies adopted in the accounts for the yearended 31 December 2005 and in accordance with IAS 34 "Interim FinancialReporting". 3. Restricted Cash The Company holds trust accounts with its principal banker, which are segregatedfrom operating funds. Balances in the trust accounts are maintained at asufficient level to fully offset amounts owing to NETELLER merchants andcustomers. There exists a legal right of offset between the balances owing tothe customers and merchants and the cash balances segregated in the trustaccounts. As such only the net balance of surplus cash is disclosed on thebalance sheet as Restricted Cash. The Company, as a matter of policy, holdsamounts of excess cash in the trust accounts to ensure intraday balancemovements do not result in a shortfall in the cash position. At 30 June 2006, the Group has the following balances: Trust Account Funds Balance Owing Restricted Cash US$ US$ US$ Customers 131,935,637 120,079,404 11,856,233 Merchants 116,961,662 99,988,880 16,972,782 248,897,299 220,068,284 28,829,015 At 31 December 2005, the Group had the following balances: Trust Account Funds Balance Owing Restricted Cash US$ US$ US$ Customers 108,680,447 97,522,961 11,157,486 Merchants 112,010,026 107,050,654 4,959,372 220,690,473 204,573,615 16,116,858 4. 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 amounts are maintained in accounts which aresegregated from operating funds. The Group has the following balances: As at As at 31 30 June 2006 December 2005 US$ US$ Qualifying Liquid Assets held for European customers 48,066,791 31,595,306 Payable to European customers (41,266,868) (28,891,291) 6,799,923 2,704,015 5. Share capital Six months ended Year ended 30 June 2006 31 December 2005 £ £Authorised: 200,000,000 ordinary shares of £0.0001 per share 20,000 20,000 1,000,000 deferred shares of £0.01 per share 10,000 10,000 Issued and fully paid US$ US$ 120,202,954 ordinary shares of £0.0001 per share (At 31 December 2005: 120,268,153 ordinary shares of £0.0001 21,777 21,794 per share) 1,000,000 deferred shares of £0.01 per share 18,000 18,000 Total share capital 39,777 39,794 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. 6. Earnings per share From continuing operations The calculation of the basic and diluted earnings per share is based onthe following data: Six months ended Six months ended 30 June 2006 30 June 2005 US$ US$EarningsEarnings for the purposes of basic and diluted earnings per share 55,877,409 36,967,366being net profit attributable to equity share holders of theparentNumber of sharesWeighted average number of ordinary shares for the purpose of 120,455,213 119,881,367basic earnings per shareEffect of dilutive potential ordinary shares due to employee 1,655,095 1,750,522share optionsWeighted average number of ordinary shares for the purpose of 122,110,308 121,631,889diluted earnings per shareBasic earnings per share $0.46 $0.31Fully diluted earnings per share $0.46 $0.30 7. Share-based payments The Group's share option plan was adopted pursuant to a resolution passed on 7April 2004. Under this plan, the Board of Directors of the Company may grantshare options to eligible employees including directors to subscribe forordinary shares of the Group. No consideration is payable on the grant of an option. Options may generally beexercised to the extent that it has vested. Options vest equally over a threeyear term following date of grant. The exercise price is determined by the Boardof Directors of the Group, and shall not be less than the market value at thedate of grant. The Group plan provides for a grant price to equal the averagequoted market price of the Company shares on the three days prior to the date ofgrant. Share options are forfeited if the employee leaves the Group before theoptions vest. A participant of the share option plan has 30 days following thedate of grant to surrender the option and if surrendered, the option will not bedeemed granted. On 9 January 2006, the Company granted 80,000 share options to an employee toacquire ordinary shares at an exercise price of £7.78 per share, expiring on 9July 2009. On 14 April 2006, the Company granted 1,970,000 share options to eligibleemployees including directors to acquire ordinary shares at an exercise price of£8.06 per share, expiring on 14 October 2009. On 16 May 2006, the Company granted 200,000 share options to an employee toacquire ordinary shares at an exercise price of £6.88 per share, expiring on 16November 2009. Equity-settled share option plan Six months ended Six months ended Year ended 31 Year ended 31 30 June 2006 30 June 2006 December 2005 December 2005 Weighted average Options Weighted average Options exercise price exercise priceOutstanding at the beginning of period £4.94 5,898,580 £2.09 2,712,000 Granted during the period £7.95 2,250,000 £6.63 3,736,600 Forfeited during the period £4.47 (501,618) £3.78 (81,867) Exercised during the period £2.70 (434,801) £2.06 (468,153) Outstanding at the end of period £6.03 7,212,161 £4.94 5,898,580 Exercisable at the end of the period £4.5572 1,643,382 £2.13 395,459 The weighted average price at the date of exercise for share options exercisedduring the period was £2.70. The options outstanding at the end of the periodhad a weighted average remaining contractual life of 2.45 years (31 December2005: 2.51 years). The options granted are priced using a trinomial lattice model to reflectfactors including employee exercise behaviour, option life and optionforfeitures. The inputs into the model are as follows: Six months ended 30 Year ended 31 June 2006 December 2005 Average share price £5.34 £3.67Weighted average exercise price £7.95 £6.69Expected volatility 56% 55%Expected life 3 years 3 yearsRisk free interest rate 4.5% 4.7%Expected dividends - -Employee exit rate 9% 11% Expected volatility was determined by calculating the historical volatility ofthe Group's share price from the time of issue to the date of grant. Theexpected life used in the model has been adjusted, based on management's bestestimate, for the effects of non-transferability, exercise restrictions, andbehavioural considerations. The Group recognised total expenses of US$2,574,816 (2005: US$1,168,044) relatedto the equity-settled share-based payments transactions in the period. Additional Financial Information The additional information presented below has been prepared for information purposes only. please note that this information is outside of the scope of the independent review opinion Q2- 2006 Q1 - 2006 Q2 - 2005 Q2 2006 vs Q1 Q2 2006 vs Q2 2006 2005 US$ US$ US$ % change % change Revenue 61,003,026 57,891,523 39,291,120 5 % 55 % Direct Costs 18,215,995 15,321,501 10,376,466 19 % 76 % Gross profit 42,787,031 42,570,022 28,914,654 1 % 48 % General and Admin 9,386,773 8,808,432 4,398,552 7 % 112 % Operating income 33,400,258 33,761,590 24,516,102 -1 % 36 % Other income (expense) Foreign exchange gain 768,950 (465,498) 96,053 -265 % 701 % Management bonus - (1,949,710) (17,613) Depreciation and Amortisation (2,527,670) (2,409,288) (1,363,911) 5 % 85 % Stock option expense (1,379,661) (1,195,155) (693,044) 15 % 99 % Loss on investment - - (75,000) 9 % 35 % Income before tax 30,261,877 27,741,939 22,462,587 Income taxes 929,316 1,197,090 1,859,682 -22 % -50 % Net income after tax 29,332,561 26,544,849 20,602,905 11 % 42 % Basic EPS $0.24 $0.22 $0.17 9% 41% Daily sign ups 2,898 3,609 2,604 -20 % 11 % Total customers (at period end) 2,909,190 2,645,502 1,745,602 10 % 67 % Total active customers (in quarter) 535,853 553,802 359,467 -3 % 49 % Average daily receipts from customers 4,663,174 4,692,661 3,152,212 -1 % 48 % Total customer receipts 424,348,841 422,339,463 286,851,292 0 % 48 % This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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