Preliminary Results

25 October 2011

Artilium plc

("Artilium" or the "Company")

Preliminary results for the year ended 30 June 2011

Artilium (AIM:ARTA), the developer of advanced software for telecoms companies and service providers, announces its unaudited preliminary results for the year ended 30 June 2011.

Financial Highlights

§ Revenue was €6.1 million (2010: €3.2 million), including the full recognition of the deferred income with respect to the KPN deal for €2.1 million.

§ Excluding the release of deferred income of the KPN contract, revenue has grown by 25%

§ Gross profit of €5.3 million, with gross margin up 18.4% to 86.4% (2010: €2.2 million, gross margin of 68.1%), confirming a move away from hardware sales

§ Administrative expenses stable as compared to previous year at €6.3 million (2010: €6.2 million)

§ Reported operating loss of €0.9 million (2010: €3.9 million)

§ Underlying operating profit excluding exchange rate results, depreciation & amortisation, share based payment results and other one-off items of €0.4 million (2010 loss: €2.7 million)

§ Cash at the end of the period of €1.0 million (2010: €1.4 million)

§ Raised £1.3 million of equity and converted the €3.3 million convertible loan note before year-end. Company is now debt free.

Commenting on the results, Adrie Reinders, Executive Chairman of Artilium said: 

"I am pleased to report that the Group is steadily progressing implementing the process it started in the prior year, moving from Capital Expenditure ("CAPEX") to Operational Expenditure ("OPEX") as its core business model. The fact that recurring revenue is now at the basis of its finance, has had a positive impact thus far and it is anticipated that the growth will increase rapidly over the coming business year.

In addition I am very pleased to announce that the Group has successfully commenced the roll out of a new strategy which will allow it to increase its market. Instead of limiting itself to the telco market, the Group will now also market to Mobile Virtual Network Enablers ("MVNEs") and Fortune 500 companies, the early results of which are already visible. This gives us great confidence in the future of the Group.

I would like to extend my sincere thanks to my fellow Board members and to the Group's entire staff for their commitment and dedication in supporting the implementation of the OPEX business model and the roll out of the new strategy."

For further information contact: 

CEO STATEMENT

Overview

After a difficult period in which Artilium survived on a minimal revenue stream, we have now reached two main goals: the Group was operating at cash flow break even toward the end of the period and we have secured several subscriber fee based platforms and brought them live. This resulted in our first year with an EBITDA* positive result excluding non-operational items since the Group was established. Also we have been able to conclude an extension of the KPN contract ahead of schedule and reengineered the contractual obligations into a continuous involvement of Artilium and therefore a continuous revenue stream. Based on these achievements, management believes it is ready to take the next step and enter into a growth phase. This phase of growth is to be seen as autonomous growth, but could also include acquisitions in distribution and/or technology extension.

Operations

Operationally, we have been very focused on improving the quality of our services to our existing customers. We had some issues on the platform with KPN Group Belgium, but we have mastered these issues and stabilised the platform, which is now fully under control. As a result we have improved several elements of our ARTA solution and are now better equipped to profit from the scalable architecture of this platform and roll it out to other customers. In addition, we have delivered the new projects in Belgium (Interfon on Mobistar) and the Netherlands (NarrowMinds on T Mobile). Both platforms are ready for service and the first Mobile Virtual Network Operators ("MVNOs") and brands will be entering the market over the next few months. 

The focus of our R&D team in Scotland has been on developing the first handset connected solutions in our presence solutions resulting in the launch of our Continuous Location Client (CLC) for BlackBerry, Android and iPhone in February of this year. The R&D team in Belgium has been working on the improvement of the efficiency of the AAA (Authentication, Authorisation and Accounting) function of our platform; this will result in a lower Total Cost of Ownership (TCO) for our customers as hardware can be used more efficiently. Also we have been working on the continuous improvement of our rating, charging, service delivery and customer care functionalities. We will keep on working on the improvement of our solution together with our partners to optimise the result for our customers.

The next phase

Management believes that the most difficult period is behind us and that we can now build on a growth strategy. This strategy can be based on autonomous growth through partners, but can also include mergers and acquisitions in both distribution as well as technology companies. The focus is now shifting from stabilisation to growth, and from organic internal to external growth and will be supported by the new Board appointments which will bring a new level of expertise to the executive management team.

Market Dynamics

We see an increase in requests coming from operators. These have not directly translated into new projects, as sales cycles are long. We believe that delays in the signing of contracts on our CLC solution is principally a lack of focus on sales and the absence of a distribution channel. These issues have been addressed and we have now recruited relevant staff to focus on these matters and improve our sales performance and distribution capabilities together with partners.

Financial Results

The Group agreed a long term strategic plan at the outset of previous financial year. This plan moves the Group to an OPEX business model (predictable recurring revenue) and also has significant cost saving measures embedded in it (significantly reducing operating expenses) aimed at achieving cash flow break even in the current period.

As we move to the OPEX business model, revenues for the year ended 30 June 2011 were €6.1 million (2010: €3.2 million) of which a significant element came from the CAPEX sales of Artilium licenses (including the release of the remaining deferred income with respect to the 2008 KPN contract). Revenues also came from professional services, relating to project management and implementation services and an increasing proportion is now represented by recurring revenue coming from maintenance and support contracts, including monthly subscriber fees. As planned, we significantly decreased activity in the low margin area of resale of hardware already last year and as a result revenues from this activity have remained stable at €0.4 million versus €0.3 million in the previous year. The quality of earnings has significantly improved and equally importantly, revenues are in line with our longer term strategic plan and demonstrate the Group is capable of performing against its targets.

Revenue for the year comprises the full recognition of the deferred income with respect to the KPN deal for €2.1 million. As already announced in previous communications, these revenues being booked in the year ended 30 June 2011, they do not have a cash effect and therefore do not have a material impact on the operation of the business. Excluding the release of the remaining deferred income of the KPN contract, revenue has grown by 25%.

The Group generated a gross profit of €5.3 million or 86.4% of revenues (2010: €2.2 million or 68.1% of revenues) and incurred an operating loss of €0.9 million (2010: €3.9 million), inclusive of operating expenses of €6.3 million (2010: €6.2 million).

The administrative expenses are impacted by unfavourable exchange rate fluctuations of €0,6 million while in 2010 there was a positive impact of €0.5 million. Depreciation and amortisation furthermore impact these administrative expenses with €0.6 million (2010: €0.7 million). In the current financial year, the operating loss includes a charge for share-based payments and share options of €0.1 million (2010: €0.7 million) but holds no other charges for one-off elements (2010: €0.5 million). Stripping all of these non-operational items from the administrative expenses provides a better view of the underlying result of the Group's operations.

The underlying operating costs of the business before non-operational items, share-based payment expenses and one-off items are €4.9 million (2010: €4.8 million) contributing to an operating profit before non-operational items of €0.4 million. This is not only a major improvement versus the same period last year (2010 loss before non-operational items: €2.7 million) but is, more importantly, fully in line with our strategic plan.

Excluding the deferred income release gives an operating loss before non-operational items over the year of €1.7 million versus €2.7 million in previous year. In the second half of the year, the underlying operating loss before non-operational items excluding the deferred income release was €0.7 million and the Group was operating at cash flow break even towards the end of the period.

Outlook

We are trading in line with market expectations and we expect to continue our revenue growth path. We are focused on delivering on existing projects, securing the contracts currently under negotiation and rolling out further technological advancements under the ARTA family of products.

Our presence capabilities have been ported to be smartphone-connected next to the operator connected solutions we already have in place. We can now offer our presence solutions independent of the operator. The next step is to be able to deliver our intelligent routing and community services directly to the smartphone user as well. This will open up a complete new potential, customer base and distribution approach in addition to operators and resellers and we can now address our customers via existing ICT delivery channels to large enterprises.

We have taken the position that our solution will be a multi vendor support strategy. The ARTA platform will therefore be the linking pin between the different smart phone platforms for location, state, presence and convergence solutions.

ARTA will open the possibility to the enterprise market to make the (smart) phone a tool in the business process and integrate it with existing ICT solutions like ERP systems.

* EBITDA is Earnings before interest, taxes, depreciation and amortisation. For the sake of this calculation exchange rate fluctuations and one-off items are not included.

Artilium plc

Consolidated income statement

Year ended 30 June 2011

Artilium plc

Consolidated statement of total comprehensive income

Year ended 30 June 2011

Artilium plc

Consolidated statement of financial position

As at 30 June 2011

Artilium plc

Consolidated statement of financial position (continued)

As at 30 June 2011

Artilium plc

Consolidated statement of changes in equity

Year ended 30 June 2011

Artilium plc

Consolidated cash flow statement

Year ended 30 June 2011

Artilium plc

Notes to the consolidated financial statements

Year ended 30 June 2011

1. General information

Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs.

The financial information contained in this announcement does not constitute statutory accounts as defined by Section 434 of the Companies Act 2006. 

The directors approved this preliminary announcement on 24 October 2011.

This announcement is prepared on the basis of the accounting policies as adopted in the full set of financial statements for the year ended 30 June 2010.

The financial statements have been prepared on the historical cost basis, except that they have been modified to include the revaluation of certain financial assets and liabilities.

The consolidated financial statements incorporate the financial statements of the Company and the entities controlled by the Company (its subsidiaries) made up to 30 June each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

Where necessary, adjustments are made to the financial statements of the subsidiary to bring the accounting policies used into line with those used by the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Revenue recognition on KPN contract

In the previous financial year, the new management team completed an exercise to estimate the relative fair value of software delivered under the KPN licence agreement of 19 March 2008, and of software and functionalities yet to be delivered. Given the nature of the licence agreement, it was not possible to provide sufficient audit evidence to support management's estimates and a disclaimer of audit opinion was issued on the financial statements for the year ended 30 June 2009 and limitation of scope audit opinion for the year ended 30 June 2010 and 30 June 2011.

Based on the valuation exercise, 58.6% of the contract deliverables (€2.9 million) had been delivered at 30 June 2009, with 41.4% still to be delivered and held on the balance sheet as deferred income. No further software or functionalities were delivered during the year ended 30 June 2010, and therefore no licence revenue in respect of this contract was recognised. Revenue for the year ended 30 June 2011 comprises the full recognition of the deferred income with respect to the KPN deal for €2.1 million. As already announced in previous communications, these revenues being booked in the year ended 30 June 2011, they do not have a cash effect and therefore do not have a material impact on the operation of the business.

As in the previous year, a provision has been recognised for the estimated loss for the delivery of the maintenance and support services under this agreement.

Management consider that delivery of ARTA software occurs on provision of software to the customer and therefore this is accounted for as a sale of goods.

It is still not possible to provide sufficient audit evidence to support management's estimates of the fair value of elements of the contract delivered, and the auditors have modified their opinion on the financial statements for the year ended 30 June 2011 on this basis.

Going concern

The Directors have adopted the going concern basis in preparing the financial statements, having carried out a going concern review. In carrying out the review the Directors have made assumptions about the revenue that will be generated to December 2012 based on its pipeline.

The Group has focussed on its existing customers and home markets, mainly with KPN GB but has also delivered the new projects in Belgium (Interfon on Mobistar) and The Netherlands (Narrowminds on T Mobile). In order to reach the break even point in 2012, the Group has now already secured more than 40% of its expected revenue for the year to June 2012, the expected revenue being a combination of recurring revenue included within concluded contracts and proposals to existing and new customers for their estimate of the likelihood of winning these on a project by project basis. This is the result of the Group's strategy to move to a recurring revenue based business model. The incoming cash flows will as such be spread over the total life as opposed to licence sales where the cash is paid up front. This is giving the Group greater visibility and predictability of its revenues. The extension of the KPN contract has contributed significantly in bringing the Group such stable prediction of its revenue pattern. However, as this future revenue is not fully supported by sales contracts or confirmed orders yet, there is material uncertainty as to the amount of revenue that the Group will generate.

The Group also adjusted its cost base to reflect and fit with the new business model. The real effect of these changes did come into full effect in the previous period and did remain at its same level in the year ending 30 June 2011, clearly proving the sustainability of the cost level reductions.

As highlighted above, there is a material uncertainty related to events or conditions, related to revenues, which may cast significant doubt on the entity's ability to generate sufficient cash flows to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business. However the Directors consider that the assumptions made are appropriate and are satisfied that the Group is a going concern.

Carrying value of long term assets

The Directors have carried out impairment tests on the carrying value of the Group's intangible assets and goodwill and concluded that these assets are not impaired. In arriving at this conclusion the Directors have used a value-in-use calculation and made assumptions about revenue in the near and longer term, which, due to the nature of the Group sales and the time-scales involved are not supported by sales contracts. There is thus material uncertainty as to the amount of revenue that will be generated, which may cast significant doubt as to the carrying value of these assets.

For the purpose of impairment testing the Company as a whole is considered as one single cash-generating unit because of the way it is structured, managed and measured by management. The Group tests goodwill and other intangible assets annually for impairment or more frequently if there are indications that it might be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill.

Cash flows for the impairment test have been forecasted for five years and a terminal value has been calculated for the years beyond that. The terminal value is based on the average over the five year net cash flow forecast to perpetuity using a discount rate of 15% (2010: 15%), which is appropriate for the Company. The WACC would need to increase to more than 17% for the goodwill to be impaired. The growth rate factor used in perpetuity in the discounted cash flow model is estimated to be 3% (2010: 3%) in line with long-term forecasts for economic growth expected in Belgium as this is the principal market. The sales growth rate used during the five year forecast is estimated to be around 15% based on management's best estimate of the market opportunities. Based on these assumptions the recoverable amount exceeds the carrying amount by €5.4 million. If the net present value of forecast future cash flows decreased by 23.55% the recoverable amount will be less than the carrying amount.

Last year, in the cash flow forecast, the future revenue was estimated by the Company using a probability criterion based on a weighted average approach by phases defined by the Board of Directors. During the year, the Board of Directors decided to change the estimation approach for recognising future revenue in the cash flow forecast by performing an in-depth analysis of the sales pipeline and after discussion with the Business Development department responsible, a selective approach is undertaken and the selected future revenue is factored in the cash flow forecast without using a probability criterion. Management consider that the updated estimation methodology is more appropriate due to the size and nature of contracts the Group enters in to and gives a better estimate of expected cash flow.

The Group's cost base is forecasted to increase at the rate of 10% per year for the five year forecast period. This is based on management's historic experience of cost increases, and the forecast increases in revenue.

As a consequence of the material uncertainty on revenue highlighted above the auditors have issued an opinion that includes an emphasis of matter paragraph related to this uncertainty which may cast significant doubt on the Group's ability to continue as a going concern and the carrying value of the Group's non-current assets. However the Directors consider that the assumptions made are appropriate and are satisfied that the Group's non-current assets are not impaired.

2. Loss for the year

Loss for the year has been arrived at after charging/(crediting):

3. Revenue

An analysis of the Group's revenue is as follows:

4. Taxation

5. Loss per share

The share options in issue do not have a dilutive effect due to the result for the year being a loss, and as a result diluted loss per share is the same as basic earnings per share.

The weighted average number of ordinary shares is calculated as follows:

Basic and diluted earnings per share is calculated as follows:

6. Goodwill

The Directors have carried out impairment tests on the carrying value of the Group's intangible assets and goodwill and concluded that these assets are not impaired. In arriving at this conclusion the Directors have used a value-in-use calculation and made assumptions about revenue in the near and longer term, which, due to the nature of the Group sales and the time-scales involved are not supported by sales contracts. There is thus material uncertainty as to the amount of revenue that will be generated, which may cast significant doubt as to the carrying value of these assets.

For the purpose of impairment testing the Company as a whole is considered as one single cash-generating unit because of the way it is structured, managed and measured by management. The Group tests goodwill and other intangible assets annually for impairment or more frequently if there are indications that it might be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill.

Cash flows for the impairment test have been forecasted for five years and a terminal value has been calculated for the years beyond that. The terminal value is based on the average over the five year net cash flow forecast to perpetuity using a discount rate of 15% (2010: 15%), which is appropriate for the Company. The WACC would need to increase to more than 17% for the goodwill to be impaired. The growth rate factor used in perpetuity in the discounted cash flow model is estimated to be 3% (2010: 3%) in line with long-term forecasts for economic growth expected in Belgium as this is the principal market. The sales growth rate used during the five year forecast is estimated to be around 15% based on management's best estimate of the market opportunities. Based on these assumptions the recoverable amount exceeds the carrying amount by €5.4 million. If the net present value of forecast future cash flows decreased by 23.55% the recoverable amount will be less than the carrying amount.

Last year, in the cash flow forecast, the future revenue was estimated by the Company using a probability criterion based on a weighted average approach by phases defined by the Board of Directors. During the year, the Board of Directors decided to change the estimation approach for recognising future revenue in the cash flow forecast by performing an in-depth analysis of the sales pipeline and after discussion with the Business Development responsible, a selective approach is undertaken and the selected future revenue is factored in the cash flow forecast without using a probability criterion. Management consider that the updated estimation methodology is more appropriate due to the size and nature of contracts the Group enters in to and gives a better estimate of expected cash flow.

The Group's cost base is forecasted to increase at the rate of 10% per year for the five year forecast period. This is based on management's historic experience of cost increases, and the forecast increases in revenue.As a consequence of the material uncertainty on revenue highlighted above the auditors have issued an opinion that includes an emphasis of matter paragraph related to this uncertainty which may cast significant doubt on the Group's ability to continue as a going concern and the carrying value of the Group's non-current assets.

7. Note to the consolidated statement of cash flows

8. Report and financial information

The above does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. It is an extract from the full accounts for the year ended 30 June 2011 on which the auditor has issued a qualified opinion including the following limitation of scope regarding the assessment of the fair values of delivered elements on the KPN contract.

With respect to €2,570 million included in total group revenue of €6,121 million in the year ended 30 June 2011, and deferred revenue amounts of €0,333 million (2010: €2,073 million) disclosed in Note 19 of the group financial statements, the audit evidence available to us was limited. We were unable to ascertain, for a material contract of the group, whether management's estimate of the fair value of both the delivered and undelivered elements of the contract were reasonable. As a result of this we have been unable to obtain sufficient appropriate audit evidence concerning both revenue and deferred revenue balances in respect of this individual contract.

 The auditor has also included the following emphasis of matter paragraphs in relation to the uncertainties regarding going concern and the carrying value of intangible assets in the financial statements.

 In forming our opinion on the financial statements we have considered the adequacy of the disclosures made in Note 3 of the financial statements concerning the Group and parent Company's ability to continue as a going concern. The Group incurred a net loss of €2,892 million during the year ended 30 June 2011.As explained in Note 3, the Directors' assessment as to the appropriateness of the going concern basis includes an expectation of future revenues which is only partially supported by sales contracts or confirmed sales orders, and as such is inherently uncertain. If future revenue does not meet expectations, the Group and parent Company may not be able to generate sufficient cash flows to pay debts as they fall due or continue as a going concern.

We also draw attention to the disclosures made in Note 3 of the financial statements concerning the carrying value of non-current assets of €10,9 million included in the consolidated statement of financial position. The assessment that these assets are not impaired includes an expectation of future revenues which is only partially supported by sales contracts or confirmed sales orders, and as such is inherently uncertain.

 These conditions, along with other matters as set forth in Note 3, indicate the existence of a material uncertainty which may cast significant doubt about the Group and parent Company's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Group and parent Company were unable to continue as a going concern.

The audited statutory accounts for the year ended 30 June 2011 will be posted on the company's website at www.artilium.com and will be available from the registered office of the Company at the offices of Morrison & Foerster (UK) LLP at 7th Floor, CityPoint, One Ropemaker Street, London EC2Y 9AW in the course of November.

Shareholders who have not signed up to the receipt of electronic communications from the Company will be notified in writing that the accounts and notice of annual general meeting, to be held at the offices of Morrison & Foerster (UK) LLP at 7th Floor, CityPoint, One Ropemaker Street, London EC2Y 9AW at Midday on Friday 9 December 2011, have been posted to the website; shareholders who have signed up to the receipt of electronic communications from the Company will be notified by email in the usual way.