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Tuesday, 6 November 2007 – NETELLER Plc (LSE: NLR), the world’s leading independent global online payments business, today announces its trading update for the three months ended 30 September 2007.
Highlights
- Continued progress to be pre-eminent provider of online gaming sector related payments solutions
- Active customers (ex North America) up 14% to 94,925 in Q3 2007 from 83,627 (Q3 2006)
- Total revenue in Q3 2007 was US$ 16.9m – fee revenue ex-interest increased 25% from Q3 2006
- European revenue in Q3 2007 grew 19% to US$ 8.4m and Asia Pacific revenue grew 41% to US$ 3.0m both compared to Q3 2006 figures (ex-interest)
- Gross margin in Q3 2007 was 60%, compared to 55% in H1 2007
- Loss before tax in Q3 2007 was US$ 145.9m due to US forfeiture and related US expenses
- Cash at 30 September 2007 was US$ 149.4m; US$ 40m paid to US authorities on 15 October 2007
- Cash flow from operations positive in Q3 2007
Ron Martin, President & Chief Executive Officer of NETELLER, said "The third quarter has demonstrated the resilience of the NETELLER business and the results from our European and Asia Pacific businesses show that we are regaining the trust of customers and continuing to deliver innovative solutions to our merchants. Geographic diversification remains a key part of our growth strategy although the Board continues to be mindful of regulatory concerns in certain markets.
Our strong presence at EiG in Barcelona reiterated our commitment and focus to the online gaming sector and I believe we are progressing well in one of our core mission objectives, to be the pre-eminent provider of payment solutions for selected markets in the online gaming sector. The launch of the first phase of our global card programme is proceeding as planned and we are on track to offer additional card-related services during the first half of 2008.
The Board remains confident about prospects for the business for the full year and beyond."
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This discussion and analysis contains forward-looking statements relating to future events and future performance. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should” “expects”, “projects”, “plans”, “anticipates”, and similar expressions. These statements represent management’s expectations or beliefs concerning, among other things, future operating results and various components thereof or the economic performance of NETELLER. The projections, estimates and beliefs contained in such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. Accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those predicted.
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Operational and Financial Highlights
All financial figures in US$ unless otherwise noted.
Customers and Sign ups
The Group’s active customer base in Q3 2007 increased to 142,153 from the 117,056 active customers recorded in Q2 2007. The Q3 2007 figure included 47,150 active customers in North America whose only “active” transaction was a withdrawal of funds from their NETELLER e-wallet. The number of non-North American active customers at the end of Q3 2007 was 94,925, an increase of 14% from the end of Q3 2006. The regional distribution of active customers included 72,849 in Europe (an increase of 12% over the corresponding period in 2006) and 17,638 in Asia Pacific (up 21% from the same period in 2006). These results demonstrate the Group’s continued focus on the markets of Europe and Asia Pacific.
See the table in the PDF version of this press release for details of active customers by region.
The Group’s total customer base (including North American customers) at end of Q3 2007 was 3,839,807. The total, excluding North America, was 895,334 customers, an increase of 61% from the figure at 30 September 2006.
Average daily receipts from customers were approximately US$ 295k during Q3 2007 (Q3 2006: US$ 5.31 million). The decrease of 94% was principally due to the withdrawal from the North American market during the first quarter of 2007. Total receipts from customers during the period totalled US$ 27.2 million.
Average daily sign-ups of new customers was 900 during Q3 2007 (Q3 2006: 3,218) representing a decrease of 72%. Again, this decrease was almost entirely attributable to the withdrawal from servicing the North American market during Q1 2007. In Q2 2007, 937 new customers per day signed up for the Group’s e-wallet.
Revenue
Revenue for the third quarter of US$ 16.9 million represented a decrease of 75% from US$ 66.7 million for Q3 2006. Excluding North America, fee revenue, which includes charges paid by individual and merchant customers of both the e-wallet and Netbanx, increased 25% from US$ 10.8 million to US$ 13.5 million in Q3 2007. Interest revenue of US$ 3.4 million was significantly lower compared with US$ 5.3 million in Q3 2006 due to the repayment of over US$ 75 million in funds owed to US customers under the Distribution Plan. Interest revenue is expected to decline further during Q4 2007 following the initial payment of US$ 40 million to the US authorities on 15 October 2007 from the Group’s cash resources.
During Q3 2007, Europe accounted for approximately US$ 8.4 million in revenue before interest (an increase of 19% over US$ 7.1 million in Q3 2006), and Asia Pacific accounted for US$ 3.0 million during Q3 2007 (an increase of 41% over US$ 2.1 million during Q3 2006).
See the table in the PDF version of this press release for the fee revenue by region and revenue from NetBanx and interest income.
Gross Margin
Due to recent events and the resulting significant change in market concentration, gross margin has decreased to 60% (compared to 71.8 % during the same period in 2006). This is flat compared to Q2 2007 (60%) and represented an increase from the 51% recorded in Q1 2007. Q1 2007 margin was lower due to increased bad debt incurred on the withdrawal from North America.
Customer support costs continued to represent the largest proportion of direct costs at 15.6% of revenue, as the strength of the Canadian dollar vs the US dollar continues. Website maintenance costs were 10.6% of revenues. Both expense categories are largely fixed being labour-related expenses principally focused in our Calgary operations. Deposit and withdrawal fees decreased to 11.1% of revenue compared to 13.6% in Q2. Although the Group incurred certain charges in returning funds to its US customers, it has been successful in reducing processing costs and local banking fees, particularly in Europe. Bad debts and collections represented 2.4% of revenues in Q3 2007, a reduction which was anticipated following the withdrawal from the North American market and cessation of Instacash® products.
Operating Expenses and Restructuring Costs
The Group incurred an operating loss before tax of US$ 145.9 million. This includes the forfeiture to the US authorities as announced earlier this year of US$ 136 million which was taken through the profit and loss account in this quarter. General and administrative expenses increased to US$ 7.5 million up from US$ 7.4 million in Q2 2007. This was largely due to a strong Canadian Dollar, higher professional fees in the quarter and costs related to the launch of the Group’s European debit card program.
The Group announced in its interim results statement of 23 August 2007 that reorganisation and restructuring costs (including professional and legal fees incurred in the resolution of the US situation) and write-downs of assets directly relating to the North American business were expected to total between US$ 35 million and US$ 40 million. Included in this estimate is a charge of approximately US$ 2 million paid during Q3 2007 in relation to the cessation of a significant supply contract. However, this will have a positive ongoing impact as the related monthly expenditure will be reduced.
Share option expense is included in general and administrative expense. For Q3 2007, the share option expense was US$ 2.2 million. As stated in the Company’s announcement of 1 November 2007, the Group is looking to cancel a significant number of out-of-the-money options and replace them, subject to the agreement of certain executives. This will likely result in a further write-off in Q4 2007 but will substantially reduce the ongoing cost of the options in the profit and loss account going forward in 2008.
The Group sold its property at 41st Avenue, Calgary, in September 2007 for US$ 3.3 million. The sale resulted in a loss on disposal of fixed assets of US$ 216,336. The Group continues to progress discussions regarding the sale of its principal property at 27th Avenue in Calgary and hopes to achieve a sale in line with previous estimates in the first quarter of 2008.
Cash Position of the Group
The total amount of cash available to the Group totalled US$ 149.4 million at 30 September 2007 which is stated after deducting the US$ 60 million of funds seized by the US authorities in January 2007 and thereafter, which forms part of the resolution with the US authorities announced in July 2007. Under this resolution, the Company agreed to forfeit a total of US$ 136 million to the US. The Group made a scheduled payment of US$ 40 million on 15 October 2007, and the remaining balance (approximately US$ 36 million) will be paid on or before 17 January 2008.
As part of the US resolution, the Group implemented the Distribution Plan to return approximately US$ 94 million of funds owed to US customers. The Group has to date repaid approximately US$ 78 million of this amount owing. Any unpaid amounts are currently held in trust accounts with the Group’s European bankers.
Business Highlights
The Group made progress in Q3 2007 with its product development programme and also in furthering its payment options. A key update introduced at the end of the quarter was a simplification of the sign up process designed to improve new customer conversions. Other developments have included a flexible merchant rate plan, additional customer funds top up features, and a pilot of an affiliate programme (developed from the successful “Refer-a-friend” programme NETELLER already offers). The Group’s “Ludicrous” marketing promotion has been successful in generating additional revenue during the traditionally quieter summer months.
The Group has successfully migrated its Japanese site to the core e-wallet platform, and further integration between the e-wallet and the NetBanx operations continue to improve internal payment processing capabilities. A key element of NETELLER’s diversification into financial services, the launch of the Group’s debit card scheme in early Q3 2007 has seen a strong take up of the new cards, with over 18,000 new pre-paid debit cards being issued to customers to date. Further progress is expected in the first half of 2008.
The US$ 4 million investment in Centricom in July demonstrated the Group’s commitment to delivering innovative payment solutions to its customers. The Group continues to examine investment opportunities in line with its strategic vision.
Current Trading
Since the end of September trading has continued to show positive growth trends in both sign ups and average daily receipts, in line with typical seasonal variations. Average daily revenue has been in the region of US$ 100,000 per day and unadjusted fees for October are expected to be approximately 7% higher than September. The Group is continuing to introduce new product features as scheduled and the development pipeline for the fourth quarter should further enhance the offering to both merchants and customers. The Board remains confident about prospects for the business for the full year and beyond.
Third Quarter 2007 Unaudited Financial Information
See the table in the PDF version of this press release for the unaudited financial information. |
