Interim Results

Optimal Payments Plc

Interim Results for the six months ended 30 June 2012

Strong first half growth, on track to exceed full year market expectations

Optimal Payments Plc (LSE: OPAY) ("Optimal Payments", the "Group" or the "Company"), a leading online payments provider, today announces its results for the six months ended 30 June 2012.

Highlights

(1) EBITDA is defined as results of operating activities before depreciation and amortisation and exceptional non-recurring items which are defined as items of income and expense of such size, nature or incidence, that in the view of management their disclosure is relevant to explain the performance of the Group.

(2) Excluding discontinued revenues - see note 4.

(3) "Black Friday" refers to the regulatory action taken in April 2011 against certain major poker operators which resulted in many players ceasing to play poker worldwide.

(4) Discontinued revenues were derived from e-money expiry which is now subject to different rules under the Electronic Money Regulations 2011.

(5) 2011 comparables include only 5 months of revenues and costs from the OP Inc business acquired on 1 February 2011.

(6) Tax charge in the period relates to expected reassessment of 2004/5 Canadian taxes following a review by the Canadian Revenue Agency which commenced in 2005. The Board has made a full provision for the amount it believes it is likely to be required to pay in respect of withholding taxes and interest. See note 17 in the Financial Statements for more detail.

Commenting on today's results announcement, Joel Leonoff, President & CEO, said:

The combination of NETELLER and OP Inc. has produced a multi-faceted payment product offering and positioned the emerged business Optimal Payments Plc to benefit from a rapidly evolving online payment market. Our efforts have resulted in a fully integrated and right-sized business with an efficient cost base. Our operationally geared business model, continued focus on product development and R&D, along with our strong presence in the internet payment market have combined to produce significant organic revenue and EBITDA growth.

Our H1 results and strong foundation position the Company well for further growth in H2. The online payment industry continues to consolidate and the Group should benefit from the expected significant growth in both the online and mobile commerce markets.

We see substantial opportunities to provide innovative solutions to merchants and consumers in both the NETELLER eWallet and NETBANX straight through processing divisions. Our R&D focus has positioned Optimal Payments with timely and innovative offerings to take advantage of opportunities in the fast moving marketplace. Additionally, our product strength and long standing experience in the online gaming space positions us well to take advantage of online payment opportunities evolving in the US. The NETELLER brand, which was a market leader in the US prior to UIGEA being enacted, as well as our leadership experience in straight through processing and risk management, should allow Optimal Payments to regain a substantial position in this re-emerging regulated US market.

For further information contact:

Analyst meeting and further information

Optimal Payments will hold a briefing for invited UK based analysts at the offices of Citigate Dewe Rogerson, 3 London Wall Buildings, London, EC2M 5SY, at 9.30 a.m. today. From this time, copies of the analyst presentation will be available on the Company's website, www.optimalpayments.com.

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About Optimal Payments

Optimal Payments is a global provider of online payment solutions. Trusted by businesses and consumers in over 180 countries to move and manage billions of dollars each year, merchants use the NETBANX ® processing service to simplify how they accept and settle credit card, direct-from-bank, and cash payments; and the NETELLER ® payment account to increase margins, capture new customers and increase their lifetime value. Being an independent provider has allowed the company to support tens-of-thousands of merchants around the globe across a wide range of industries. Optimal Payments Plc is quoted on the London Stock Exchange's AIM market, with a ticker symbol of OPAY. Subsidiary company Optimal Payments Ltd is authorised and regulated as an e-money issuer by the UK's Financial Services Authority (FSA) (FRN: 900015).

For more information on Optimal Payments visit www.optimalpayments.com or subscribe at www.optimalpayments.com/feed. You can also follow us on twitter @optimalpayments.

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CEO'S REVIEW

Introduction

2012 is the first full year of results following the acquisition of OP Inc. in February 2011 - a deal which transformed the business by combining two strong technological platforms and product offerings in the NETELLER eWallet and NETBANX straight through processing and risk management businesses. First half revenues were up $21.4m (37%), to $78.9m compared with the same period last year. EBITDA was up $4.8m (76%) to $11.2m, reaffirming the benefits of our multi faceted product offering and continued focus on product enhancement and evolution through R&D. Our strength in all regions, including impressive growth in Asia, reflects the continued growth of online payments worldwide.

The integration and rationalisation of the two businesses is now complete following a reduction in headcount in March 2012, primarily focused on right-sizing the Group's NETELLER eWallet business. As a result, we strongly believe that the Group is now well positioned for sustained improvement in profitability. The Group currently has 346 employees, a reduction of approximately 80 since the acquisition of OP Inc. In early 2012 the Company released its improved version of the NETELLER eWallet and completed its major investment in the new platform. On a go forward basis, the level of capital investment in the business has now been substantially reduced.

Optimal Payments is one of the leading independent players in the global online payments market, which continues to experience impressive growth and consolidation worldwide. The Board believes that the strong performance in H1 and continued focus on product improvement and evolution combine well to form a platform for further growth in the second half of 2012 and beyond.

Financial summary

The Group recorded a strong first half performance with EBITDA up by $4.8m (76%) to $11.2m and revenues up by $21.4m (37%) to $78.9m. Fixed costs in the first half of 2012 were in line with 2011 even though 2011 results included only 5 months of OP Inc. costs. Therefore on a like-for-like basis, fixed costs fell as the SV division headcount was reduced in Q1. Gross margins also fell as higher volumes resulted in lower tiered pricing for some of our larger merchants on the NETBANX STP side while on the NETELLER side expansion of the product into new territories required integration with local payment types with higher marginal costs than debit and credit cards.

Cash, net of merchant cash, remains similar to 31 December 2011 at $45.3m with free cash, net of working capital requirements of $7.0m. The Group has convertible loans of $32.2m following the acquisition of OP Inc. of which $23.6m are repayable within 12 months. These loans are convertible before April 2013 into the Company's shares at a conversion price of either 62.699p/share or 66.248p/ share depending on the date of conversion and therefore may not require cash to repay.

Operational summary

The Group's two core business lines are:

NETBANX Straight Through Processing ("STP") Division

The Group's NETBANX STP business saw strong organic growth, particularly in Asia, with first half revenues of $61.9m up $25.0m (H1 2011: $36.9m). The growth is largely due to strong demand from existing customers and from new customers won during the first half including Ford Credit, Hockey Canada and Rona. A small part of the growth was because the OP Inc. business was acquired on 1 February 2011 and so H1 2011 only included 5 months' revenues from the acquired business.

The strength and depth of our technological innovation is the backbone of our NETBANX offering, enabling us to develop new partnerships with banks such as Desjardins, a leading Canadian bank with which we recently launched an internet payments gateway solution. Rona, a major North American distributor and retailer of hardware, home renovation and gardening products, recently integrated the Desjardins-NETBANX payment gateway. We anticipate launching similar solutions with other partners in due course.

NETBANX provides a large range of payment and risk management services through a single customer integration as well as access to more than a dozen acquiring banks worldwide. As a result of our differentiated solution, customer retention remains extremely high. This business model, continued product improvement through R&D and focused investment in an expanded sales team operating from our UK offices in London and Cambridge underpin our confidence that NETBANX can continue to win business in all territories.

The NETBANX business has seen a blended gross margin of around 42% with the bulk of the direct processing costs being fees to acquiring banks. Lower risk and higher volume merchants typically command lower fees and, consequently, the margin varies by merchant type and size. The underlying platform is scalable, allowing large numbers of new customers to be added without any material addition to the fixed costs of the business.

NETELLER Stored Value ("SV") Division

The Group's NETELLER SV business (comprising the NETELLER eWallet and Net+ prepaid card) produced revenues of $16.2m (2011: $20.1m) which fell following the impact of Black Friday in Q2 2011. As previously announced in the full year 2011 results, the 2011 comparative numbers also included $2.1m of revenue from the expiry of e-money balances which did not recur due to regulatory changes.

We strengthened the NETELLER SV management team in the first half with some key hires. We also launched a member loyalty program in January aimed at attracting and retaining our higher spending 'VIP' members and enhanced our affiliate program, all of which are expected to increase market share, primarily in the European gaming market where NETELLER remains one of the two major eWallet players. We have seen improvement in certain key lead indicators such as signups and conversions and, following a strong start to H2, we expect to deliver an uplift in second half revenues leading to sustained growth in 2013.

This continued investment in the Group's new NETELLER SV platform, which started in 2008, was finally concluded in Q1 of 2012, allowing the IT development team to be significantly downsized. As a result, the investment and cash outlay expended on the NETELLER SV business will be substantially reduced going forward.

The employee downsizing in March 2012 was aimed at rightsizing the cost base of the NETELLER SV business which has now been achieved. The NETELLER SV business remains a key strategic component of the Group's product offering which was expanded into new countries and territories in the first half.

The gearing from the predominantly fixed cost of the NETELLER SV business (as illustrated in note 6 of the Financial Statements) means that modest uplifts in revenues will largely fall through to the bottom line.

In August 2012, we announced that we were to become an issuer of prepaid cards including our own award-winning Net+ Prepaid MasterCard programme into all EEA countries, rather than issuing these cards through a third party at higher cost. The Net+ programme continues to grow, with more than 12,000 active cards in issue. Transactions using Net+ cards totalled more than $115 million in the first half of 2012.

We continue to make progress with our initiatives to position the Company for the anticipated regulated market for online gambling in the United States. Nevada is expected to issue its first licences for online poker shortly and Delaware has recently passed intra-state online gambling legislation. Initiatives in several other states, including New Jersey, are at various stages in the political process. We are in discussions with a number of the leading land based gaming operators in the US regarding possible partnerships. 

Other initiatives

In May, the Company announced that it had been appointed as an Official Partner of the Lotus F1 Team. This innovative commercial agreement provides the opportunity for Optimal Payments to leverage off Lotus F1 Team's corporate relationships and reach to provide payment processing solutions to their business partners and sponsors. The partnership has already generated a number of discussions with Lotus F1 Team partners and we look forward to progressing these relationships in the near future.

The Group continues to be recognised as a leader in payment solutions through a number of awards. Most recently, at the Prepaid365 Awards 2012 in June, the Net+ Prepaid MasterCard® was selected as the winner in three major categories: Best General Spend Prepaid Card, Best Gaming Prepaid Card and Best Free Prepaid Card categories. This is the fourth consecutive year of wining the Best Gaming Prepaid Card award for Net+. Optimal Payments was also named as the winner of the "Innovation in Payment Solutions" Award at the eGaming Review B2B Awards ceremony in London in May. This award followed Optimal's successes in winning "Best Mobile Billing Application" at the mGaming Awards in April, and the "Best Payment Solution Provider - Company of the Year" - won in January at the International Gaming Awards.

Current trading and Outlook

We are pleased with our strong first half performance which, combined with organically growing revenues and a flat fixed cost base means we are well positioned for growth in the second half of 2012. As a result, the Company is on track to exceed the current market consensus full year expectations.

The revenue run rate as we exited the first half of 2012 was significantly ahead of 2011 and this has continued to date through the first few months of H2. In addition, the Group has some exciting growth opportunities including additional partnership deals with major banks and possible re-entry into the US gaming market. Consequently, the Board is both confident and excited about the Group's future prospects.

Disclaimer

Certain statements made in this announcement are forward-looking statements. These forward-looking statements are not historical facts but rather are based on the Company's current expectations, estimates and projections about its industry, its beliefs and assumptions. Words such as 'anticipates,' 'expects,' 'intends,' 'plans,' 'believes,' 'seeks,' 'estimates,' and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors, some of which are beyond the Company's control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. The Company cautions shareholders and prospective shareholders not to place undue reliance on these forward-looking statements, which reflect the view of the Company only as of the date of this announcement. The forward-looking statements made in this announcement relate only to events as of the date on which the statements are made. The Company will not undertake any obligation to release publicly any revisions or updates to these forward-looking statements to reflect events, circumstances or unanticipated events occurring after the date of this announcement except as required by law or by any appropriate regulatory authority.

See accompanying notes to the condensed interim consolidated financial statements

See accompanying notes to the condensed interim consolidated financial statements

See accompanying notes to the condensed interim consolidated financial statements

See accompanying notes to the condensed interim consolidated financial statements

1. Basis of presentation

The consolidated financial statements have been prepared on a going concern basis. Management forecasts that the Group will have sufficient cash to meet all liabilities as they fall due and also believe it is probable that a proportion of the vendor convertible loans made pursuant to the acquisition of OP Inc will convert based on the difference between the current market share price and the loan conversion price of 62.699p per share. However, management will also continue to look at additional sources of debt financing.

The principal operating currency of the Group is US dollars and accordingly the financial statements have been prepared in US dollars. The interim results for the period ended 30 June 2012 are unaudited and do not constitute statutory accounts within the meaning of the Companies Acts 1931 to 2004. The statutory accounts of Optimal Payments Plc for the year ended 31 December 2011 contain an unqualified audit report. Copies can be obtained from the Registered Office of the Company, Audax House, Finch Road, Douglas, Isle of Man, IM1 2PT.

2. Statement of compliance

The condensed consolidated interim financial statements have been prepared in accordance with applicable Isle of Man law and with IAS 34 "Interim Financial Reporting". They do not include all of the information required for the full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 December 2011. The accounting policies and methods of computation used in the interim financial statements are consistent with the most recent annual financial statements. These condensed consolidated interim financial statements were approved by the Board of Directors on 18 September 2012.

3. Restricted merchant cash

The Group maintains bank accounts with the Company's principal bankers which are segregated from operating funds and which contain funds held on behalf of Merchants, representing pooled Merchant funds. Balances in the segregated accounts are maintained at a sufficient level to fully offset amounts owing to the Group's Merchants. A legal right of offset exists between the balances owing to the Merchants and the cash balances segregated in the client accounts. As such, only the net balance of surplus cash is disclosed on the Statement of Financial Position.

At 30 June 2012, the Group had the following balances:

At 31 December 2011, the Group had the following balances:

The Company holds client account funds and balances owing to Merchants on behalf of its wholly owned subsidiary NETELLER Operations Limited.

4. Qualifying Liquid Assets held for Members / Payable to Members

In compliance with the Financial Services Authority (FSA) rules and regulations, the Group holds Qualifying Liquid Assets at least equal to the amounts owing to Members. These amounts are maintained in accounts which are segregated from operating funds.

All Qualifying Liquid assets are held in Optimal Payments Ltd (formerly Neteller (UK) Ltd), which is an FSA regulated entity.

The Group had the following balances:

5. Receivable from Merchants

Receivable from Merchants consists of balances due that are in the process of collection. The net receivable from Merchants represents the amounts which are expected to be collected through the normal course of business.

The Group had the following balances:

6. Segmented Reporting

The Group has two segments as disclosed below. For each of the segments, the Group's CEO reviews internal management reports on at least a quarterly basis. The following summary describes the operations in each of the Group's reportable segments.

Stored Value (SV): fees are generated on transactions between Members and Merchants using the NETELLER e-Wallet and Net+ prepaid cards.

Straight Through Processing (STP): fees are generated through the NETBANX and NETBANX Asia gateway platforms where customers send money directly to Merchants.

Information regarding the results of each reportable segment is included below.

Segmented reporting for the six months ended 30 June 2012:

Segmented reporting for the six months ended 30 June 2011:

Processing costs and bad debts are the only two costs which vary directly with revenue, and accordingly have been shown separately as variable costs. For the six months ended 30 June 2012, variable costs for Stored Value and Straight Through Processing were 23% (2011: 15%) and 58% (2011: 54%) of revenue respectively.

Major Merchants

The Group has one Merchant who represented 33% of total fee revenue for the six months ended 30 June 2012 (2011: 21%) across all reportable segments and geographies.

7. Property, Plant & Equipment

There were no significant disposals or write downs in the current period.

8. Intangible Assets

$1,994,312 was incurred on the ongoing development of the Group's online payment processing platforms (2011: $1,898,766).

9. Goodwill

During 2011, goodwill with a value of $30,492,122 was acquired as part of the asset purchase from Optimal Payments. The Group performs goodwill and intangible asset impairment tests at least annually or whenever events or changes in circumstances indicate that the goodwill and intangible carrying value for a business unit might not be recoverable. The recoverable amount is defined as the higher of fair value less costs to sell and value in use. There was no indication of impairment as at 30 June 2012.

10. Restructuring costs

The Group incurred restructuring costs relating the reorganisation of its cost structure. Severance was paid to employees as a result of operational changes to the Group's NETELLER Stored Value business in order to streamline operations and remain competitive in challenging markets. Additional restructuring costs were incurred to reorganise the business and lease impairment costs.

The Group incurred the following restructuring costs:

11. Share-based payments

The Company's share option plan was adopted pursuant to a resolution passed on 7 April 2004 and amended by the Board on 15 September 2008. The 2008 amendment included the addition of a new 'approved' plan for UK based employees. Under the 'approved' and 'unapproved' plans, the Board of Directors of the Company may grant share options to eligible employees including directors of Group companies to subscribe for ordinary shares of the Company.

No consideration is payable on the grant of an option. Options may generally be exercised to the extent that they have vested. Options vest according to the relevant schedule over the grant period following the date of grant. Typically, options have been granted for a three and a half year grant period and have vested in equal thirds on or about the anniversary of the grant date. The Directors are permitted under the Plan Rules to alter the vesting schedule and the grant period. The exercise price is determined by the Board of Directors of the Company, and shall not be less than the market value at the date of grant. The option plan provides for a grant price to equal the average quoted market price of the Company shares on the three days prior to the date of grant. Subject to the discretion of the Board share options are forfeited if the employee leaves the Group before the options vest. A participant of the share option plan has 30 days following the date of grant to accept or surrender the option and if surrendered, the option will not be deemed granted.

Options recorded under share option expense may not agree to the total options granted in the period. The accounting for options coincides with the day following the last day for acceptance of the option, which is subsequent to their date of grant.

In 2011 a grant of options over the Company's ordinary shares was made to all the Group's employees (except those participating in the Company's Long Term Incentive Plan ("LTIP")). A total of 1,174,700 options with an exercise price of £0.5667 were accepted on 31 January 2012, with 978,300 options under the Company's unapproved scheme and 196,400 options under the Company's approved scheme.

The Company adopted a LTIP which took effect from 1 January 2010. On 1 April 2011, certain executives of the Group were awarded 3,600,063 LTIP options to acquire ordinary shares in the Company for £0.0001 per share. On 11 October 2011 a further 112,944 LTIP options were awarded under the same terms. These LTIP options vest in one tranche based on future performance related to EBITDA targets for the financial year ending on 31 December 2012.

For the six months ended 30 June 2012 a total of 37,500 (2011: 387,146) options were exercised under the LTIP scheme, 398,199 (2011: 10,000) options were exercised under the unapproved share option scheme and 85,603 (2011: 33,333) options were exercised under the approved share option scheme. For the six months ended 30 June 2012 $39,349 (2011: $362,978) of expenses related to the LTIP was recognised.

On 1 April 2011, 9185-2780 Quebec Inc which was owned by a related party, Martin Leroux, a shareholder of the Group sold certain merchant contracts to the Company at fair market value. The balance payable was to be settled in shares based on the lesser of £0.62699 per share or the closing price on the day before the business day of settlement. The first balance owing of $1,466,958 in equivalent shares was granted based on performance conditions satisfied in 2011 and a total of 1,474,466 shares were issued. The second balance owing, estimated at $1,800,000 will be payable when established 2012 performance conditions are satisfied.

For the six month ended 30 June 2012, the Group recognised total expenses of $109,176 (2011: $464,287) related to the equity-settled share-based payments transactions.

Equity-settled share option plan

The options outstanding at the end of the period had a weighted average remaining contractual life of 1.64 years (31 December 2011: 0.93 years).

The options granted in 2008,2009 and 2012 under the Company's share-based payment plan are priced using a trinomial lattice model to reflect factors including employee exercise behaviour, option life and option forfeitures.

The inputs into the model are as follows:

Expected volatility was determined by calculating the historical volatility of the Company's share price from the time of issue to the date of grant. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

12. EBITDA

EBITDA is defined as results of operating activities before depreciation and amortisation and exceptional non-recurring items which are defined as items of income and expense of such size, nature or incidence, that in the view of management their disclosure is relevant to explain the performance of the Group for the period.

EBITDA is not a financial measure calculated in accordance with IFRS. The presentation on these financial measures may not be comparable to similarly titled measures reported by other companies due to the differences in the ways the measures are calculated.

13. Share Capital

Holders of the ordinary shares are entitled to receive dividends and other distributions, to attend and vote at any general meeting, and to participate in all returns of capital on winding up or otherwise.

Holders of the deferred shares are not entitled to vote at any annual general meeting of the Company and are only entitled to receive the amount paid up on the 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 to participate in assets of the Company.

14. Loyalty Program

The Company launched the NETELLER Reward Points Program (the "Program") in February 2012. The Program allows members to earn points on their transactions in the NETELLER eWallet accounts. Members can redeem these points for merchandise, cash exchange, and other NETELLER provided services.

When points are earned by Members, the Group recognises deferred revenue and establishes a liability for future redemptions by multiplying the number of points issued by the estimated cost per point. The actual cost of merchandise redemptions is charged against the pre-established asset account.

The estimated cost per point is determined based on many factors, primarily related to expected future redemption patterns and associated costs. The Group monitors, on an ongoing basis, trends in redemption rates and net cost per point redeemed. Adjustments to the estimated cost per point are made based upon expected future Program activities.

Any variance in the cost per point is recognised in marketing and promotions expenses in the Group's consolidated Statement of Comprehensive Income. The liability account is adjusted based on the outstanding balance of points issued on a monthly basis. The Company continues to evaluate and revise certain assumptions used to calculate the Program liability, based on redemption experience and expected future activities.

15. Shareholder Loans

In September 2012 the $8,000,000 in shareholder loans plus accrued interest were extended by one year to 2014. Based on the extension the liabilities remain classified as non-current in the Statement of Financial Position.

16. Other expenses

Management includes certain balances in other expenses as identified below: 

The Group has implemented a Supplementary Bonus scheme, which is not part of the deal consideration, for the senior management of the acquired Optimal Payments Inc. to incentivise and reward them for delivering performance in excess of the established thresholds. This scheme is based on EBITDA performance of the business acquired and applies in 2011 and 2012.

17. Income Taxes

A provision for taxation of $2.5m has been made in the period in relation to Canadian withholding taxes which are deemed to have arisen on the relocation of assets to the Isle of Man from Canada in the 2004 and 2005 taxation years. Following a seven year investigation, the Canadian Revenue Agency (CRA) claim that additional withholding taxes are payable by the Group. Management has provided in full for the amount it believes it is likely to be required to pay in respect of such withholding taxes and interest.