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18 January 2007 - NETELLER Plc (LSE: NLR), the leading independent online money transfer business, today issued the following update regarding its position in the US market in the light of the Unlawful Internet Gaming Enforcement Act of 2006 (the "Act" or "UIGEA") and the Act's associated anticipated regulations.
US market withdrawal
- Withdrawal of US Transfers to Gambling Merchants: The Board confirms that the Group will cease processing online transactions related to gambling for the US market with effect from today in light of the passing of the UIGEA and the uncertainties and likely delays relating to the drafting and implementing of regulations.
- Phased Compliance: This announcement reflects the culmination of a series of deliberations and steps the Group has taken since the passing of the UIGEA in October 2006. Previous steps have included the development of country blocking and instant funds transfer restriction enhancements to the Group's software platform.
- Timeline: As of today Thursday 18 January 2007, at 12:01AM GMT, US resident customers were no longer able to transfer funds using NETELLER's services to or from any online gambling site.
- Continued Safe Choice: Customer funds, including those of US residents, are held in segregated trust accounts and are fully secure and will be available for withdrawal by customers, on demand. US customers continue to be able to use their e-wallet accounts for non-gambling transactions.
- Group's Future Focus: These decisions will allow the Group to focus on opportunities available in the growing markets of Europe, Asia and the Americas outside of the United States.
Recent US developments
- On 16 January 2007 shares in the Company were temporarily suspended pending clarification of the situation surrounding the detention, by US authorities, of Mr Stephen Lawrence and Mr John Lefebvre, two founder shareholders and former directors of the Company.
- On 16 January 2007 the US Attorney's office in the Southern District of New York charged Mssrs. Lawrence and Lefebvre with conspiring to transfer funds with the intent to promote illegal gambling. The charges are a matter of public record. As of this point, neither of Mssrs. Lawrence nor Lefebvre has responded to the charges. The federal authorities allege as one of the bases in the complaints against Mssrs. Lawrence and Lefebvre that NETELLER's involvement in handling financial transactions between gambling customers in the United States and numerous offshore online gaming businesses constitutes illegal conduct.
- As noted above, today's withdrawal from the US market by NETELLER is the culmination of months of careful planning. Along with this action, the Group is actively assessing what further steps it may take in light of the two arrests made earlier this week to clarify the Company's position in this matter.
- Pending further clarification of this the shares of the Company will remain suspended.
Trading highlights
- Following the passage of the UIGEA and as preparations for a withdrawal of services to US residents were being completed, the Group experienced slowing fourth quarter growth in terms of customer receipts and new customer sign ups.
- Average daily receipts from customers in Q4 2006: US$ 5.75m; average daily new customer sign ups for Q4 2006: 3,493; total customers at 31 December 2006: 3,526,325.
- Active customers in Q4 2006: 640,701, with a growing percentage from outside of the United States.
- Revenue for the full year 2006 expected to be between US$ 255 million and US$ 260 million.
- Continued focus on geographic diversification through further product launches in response to customer and merchant demand, in particular in Europe and Asia.
- Realignment of Group's cost base commenced in Q4 2006.
Voluntary withdrawal from US
The Board today confirms that the Group has voluntarily ceased processing funds transfers between NETELLER e-wallets and online gambling merchants on behalf of US residents. This decision represents the culmination of a series of deliberations over recent months by the Board which, in light of impending regulations related to the Act, believed that NETELLER's position in the US market was no longer sustainable. Since the passing of the Act, the Company has been working diligently on a programme of operational and technical planning measures and procedures to allow implementation of any such decision at the earliest opportunity. NETELLER has committed to an orderly withdrawal for the benefit of its customers and will endeavour to maintain a high degree of service throughout the process.
With immediate effect, as of today Thursday 18 January 2007, at 12:01AM GMT, US resident customers were no longer able to transfer funds using their NETELLER e-wallets to or from any online gambling site.
In line with the Group's standard business practices for all customers, the funds of US resident customers are held in segregated trust accounts and are fully secure and will be available for withdrawal by customers, on demand. The ability to withdraw funds will exist regardless of the customer's location or ability to transfer to any site. All US resident customers will continue to be able to use their NETELLER e-wallet accounts to safely transfer funds to and from non-gambling merchants and are not required to close their accounts or withdraw their funds.
NETELLER customers not resident in the US are not affected at all by this withdrawal from the US market. The Group will continue to operate its non-US business as normal, maintaining existing customer and merchant support across all the markets it currently serves.
In order to be able to support this US withdrawal, NETELLER has dedicated the last few months to developing product enhancements to its software platform in order to be able to block automatically transfers to online gambling merchants from US residents. These features are now fully deployed and integrated into the Group's core platform.
Today's updated position with respect to the US market leaves the Group able to focus on its continuing business and the opportunities available in the growing markets of Europe, Asia and the Americas outside of the United States. NETELLER remains focused on developing its business in line with its stated strategic objectives, including geographical and product diversification for all markets. The Group will continue to launch localised services within the global market and a number of new product launches are scheduled for early this year.
Operational Highlights
Average daily receipts from customers was approximately US$ 5.75 million during Q4 2006 (Q4 2005: US$ 4.18 million) - representing an increase of 38 %. Q4
average daily receipts from customers were up by 8 % on the Q3 2006 average daily receipts of US$ 5.31 million. Average daily receipts from customers for the full year 2006 were US$ 5.11 million, up by 50% on average daily receipts for 2005 of US$ 3.44 million.
As at 31 December 2006, NETELLER had 3,526,325 signed-up customers, an increase of 1,205,656 or 52 % from 2,320,670 since 31 December 2005. Average daily sign-ups of new customers was 3,493 during Q4 2006 (Q3 2006: 3,197) - representing an increase of 9 %. North American sign ups were 74 % of total sign ups in the fourth quarter, with the Americas outside the United States accounting for 8 %. European sign ups represented 20 % of total Q4 2006 sign ups, while Asia / ROW represented 6 %. Average daily sign-ups were 3,303 for the year to 31 December 2006 compared to 2,930 for 2005 - representing an increase of 13%.
Total active customers in the quarter were 640,701, an increase of 29 % from Q4 2005 and an increase of 3 % from Q3 2006. Of these, 24 % of our active customers in Q4 2006 came from outside of the US, compared with 23 % in Q3 2006. 548,870 were from North America, including 59,335 from the Americas outside the United States (9 % of the total), 11 % (71,421) were from Europe, and 3 % (20,410) were from Asia / ROW.
Financial Highlights
Performance during the fourth quarter of 2006 is slightly lower than seasonal trends as a result of the passing of the Act on 13 October 2006. As a result, the Company expects that revenue for the full year is likely to be between US$ 255 million and US$ 260 million. Fee income will likely represent between US$ 237 million and US$ 242 million of this total, with interest income making up the balance. This 2006 revenue estimate is unaudited and is subject to change in conjunction with the Company's final close procedures and external audit.
Since 13 October 2006, a programme to realign the Group's cost base was commenced which identified staff reductions and other initiatives to realise cost savings on an annualised basis. These will continue in line with expected reductions in volumes of transfers and customer enquiries through the Group's contact centres since the Company has ceased processing funds transfers for US residents related to online gambling.
The total cash costs associated with staff restructuring are expected to be in the region of US$ 1.1 million in 2006 and a further US$ 3.7 million in 2007. Bad debt is expected to temporarily spike by approximately US$ 10 million to US$ 12 million in 2007 due to unavoidable events associated with withdrawing its e-wallet services to the US online gambling market. Other 2007 non-cash write downs associated with US withdrawal are expected to total between approximately US$ 18 million and US$ 20 million, related to impairment of assets including website development, leasehold improvements, redundant servers and unamortized portion of licenses and trademarks.
The Company took an impairment charge in the fourth quarter of 2006 related to the carrying amount of its goodwill and intangible assets. Based upon the impairment analysis, a charge of $ 11.7 million (approximately 9.7 pence per share) was recorded for the impairment of goodwill and intangible assets, measured as the amount that the carrying value exceeded the estimated fair value.
Other highlights
NETELLER has continued to make progress diversifying its products for customers and merchants in the fourth quarter, with launches of its localised language services in Sweden, Denmark, Turkey and Poland. This has helped contribute to an increasing number of active customers from European countries. The "Refer-a-Friend" referral program is continuing to drive non-US customer sign ups.
The Company has also recently rolled out a service on its platform which allows merchants to maintain country black-lists to block any money transfers from customers in those countries. A number of online gambling merchants are already using this feature to block transfers from US residents in the light of the Act.
Despite the challenges to the business after the passing of the Act, NETELLER and its employees remain focused on the opportunities ahead. The Group has recently received several awards - the Contact Centre Employer of Choice (R) award from the CCEOC Institute recognising our Calgary-based contact centre as one of the best operations to work for in North America; and the JD Power & Associates Call Center Certification designation, acknowledging the quality and experience of the Group's contact centre and its staff.
The Company has recently launched a new version of its corporate website at www.netellergroup.com to provide further information on the Group and its activities, while distinguishing from the customer facing website www.neteller.com.
Further communication
In the light of recent events, the Company has cancelled the conference call previously scheduled for 3pm GMT later today. The Company currently intends to
release its preliminary announcement of results for the 12 months ended 31 December 2006 towards the end of February 2007. The Company will provide further updates in due course. |
