1 December 2011

2ergo Group plc

Full year results

2ergo Group plc (AIM: RGO, "2ergo" or "the Group"), the international mobile business and marketing solutions company, has published its full year results for the 12 months ended 31 August 2011.

Highlights

·      Revenues £17.7 million (2010: £21.4 million)

·      Gross profit £9.9 million (2010: £10.6 million) with gross margins of 56% (2010: 50%)

·      EBITDA¹  £10,000 (2010: £1.4 million)

·      Loss before tax £2.8 million (2010: £0.8 million)

·      Cash balances at 31 August 2011 £2.2 million (2010: £1.5 million)

·      Significant new business wins with leading organisations in all regions of operation

·      Further progress in product and services development

·      The Group invested £4.6 million (2010: £5.1 million) in hardware, software licences and product and platform development

¹ Before non-cash share option charge

Neale Graham, Chief Executive of 2ergo, commented:

"The Group has continued to make solid progress during the year even though we have faced challenges with regulatory changes in our industry. We have delivered on a number of key operational objectives in terms of product and service development, and securing significant new business in all regions of operation.

"We have aligned our sales and marketing strategy to meet the needs of increasingly discerning customers, which has given us strong traction in the market and our sales pipeline continues to grow.

"Whilst the difficult macro-economic situation continues to create a challenging trading environment, key client and partner relationships forged during the year are expected to drive the business forward in 2012."

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About 2ergo Group plc

2ergo is the international mobile business and marketing solutions company.  It combines innovative proprietary mobile technologies and professional services to help organisations of all sizes to develop and execute their mobile strategy.

Organisations such as the Australian Broadcasting Corporation, Vodafone Hutchison Australia, Fox Sports, Fox Business, Orange, Aviva, Fidelity, Transport for London, Ladbrokes, Times of India, Airtel, PizzaExpress, O2 and Procter & Gamble have all benefited from 2ergo's proprietary end-to-end mobile solutions to increase sales, mobilise business processes, reduce costs and enhance customer relationships.

2ergo communicates with all types of mobile users, millions of times each day through innovative mobile business solutions that incorporate search, security, advertising, location, proximity, coupons, tickets, mCommerce and data network analytics, enabling fully-integrated and personalised one to one marketing communications.

Headquartered in the UK, 2ergo has been a pioneer of enabling innovative mobile business solutions across multiple sectors and geographies since 1999.  Its international presence spans North America, Latin America, India and Australia. 2ergo is AIM listed on the London Stock Exchange (AIM: RGO).

For more information, visit www.2ergo.com.

Overview

The Group has continued to make solid progress during the year, delivering key operational objectives in terms of product and service development, and securing significant new business in all regions of operation.

The Group's investment in core technology development has strengthened its ability to provide customers with industry-leading services.  It has also responded to changing market conditions by focusing its sales and marketing strategy on fast-growing and high-margin services.

As the mobile partner to major international corporations, the Group's core focus is on working with its clients to grow their revenues through effective customer acquisition, retention and loyalty campaigns in the mobile space.  This involves providing them with integrated solutions, not just one-off products or services.  It thereby directly aligns the Group with the business needs of organisations looking to leverage the mobile channel, when many are seeking new revenue opportunities to offset declining business from traditional, and often more costly, sales channels.

During the year, the Group took the decision to suspend, and ultimately not re-connect, some legacy client services.  This followed a detailed review of the impact of regulatory changes associated with the implementation of the PhonepayPlus 12^th Code of Practice.  The Group also successfully managed a number of other regulatory challenges from PhonepayPlus in respect of its legacy business.  As previously advised to the market, these regulatory issues and the associated management time and cost materially impacted the Group's income streams and profitability during the year.

The mobile market has continued to evolve at a rapid pace, becoming unrecognisable to the market of only two years ago.  The rush to "app" development is having a direct impact on margins and the Group believes that this area is becoming commoditised and unattractive, as well as difficult to scale through the use of "in-house" development teams.

As a result, the Group has taken the strategic decision to reduce its exposure to applications development.  2ergo will now manage the delivery of this area of the business through working in close partnership with external application development partners.  This move will result in a reduction in the Group's cost base.  

The Group's progress in delivering its key objectives, in terms of both its operational development and securing significant new business in all regions of operation, is expected to drive the business forward into 2012.

Partnerships

2ergo was selected as the exclusive mobile technology and platform development provider to Microsoft's Innovation Outreach Program (IOP) for 2011.  The IOP is a premier community of senior innovation executives from 30 top global companies, including 3M, Procter & Gamble and NCR.

This relationship has already delivered a substantial proof of concept trial for a leading US restaurant chain.  2ergo is delivering an end-to-end mobile solution to attract footfall, create loyalty and generate more profitable customer relationships.  The initial trial is being implemented across 60 stores in the US between August and December, with the potential to be rolled out to a further 5,000 stores across the United States.

The partnership with Gondola Group to develop an end-to-end mobile solution for its PizzaExpress restaurant chain has proved to be very successful.  This solution enables PizzaExpress customers to search for their nearest restaurant, make and confirm bookings, and pay their bill via PayPal, using their smartphone, by means of an integrated payment system linked to the restaurant chain's point of sale systems.  The award winning iPhone "app" achieved almost 100,000 downloads in the first week of launch.  As a result of 2ergo's success in this sector, the Group has recently signed a contract to deliver an mCommerce solution and a series of smartphone applications to a large Australian restaurant chain encompassing more than 300 outlets.

As a result of the partnership with U.S. Cellular announced in May, 2ergo is providing the operator with a comprehensive managed service encompassing mobile marketing consultancy, project management and creative services, as well as implementing mobile marketing campaigns to U.S. Cellular's 6.1 million customers.  This model of providing managed mobile services to deliver quantifiable marketing results has subsequently been deployed on a wider scale with well-established clients, notably AT&T.

A key strategic partnership with Callcredit Information Group, a consumer data and marketing firm, has further enhanced the Group's mobileDNA offering.  This is a proprietary database of over 10 million mobile numbers, which contains insights from users' mobile activity and transactions from the Group's 11 years' experience in mobile marketing campaigns and services.  This new partnership will enable the two companies to provide their corporate customers with mobile business solutions that target users, based on their mobile behaviour, as well as their financial and social background.

Product development

The Group made further progress with the development of key components of its core technology, the Multiserve Platform, in particular harnessing mobileDNA and the Group's consumer analytical and profiling module, with VoucherNet, 2ergo's patented mobile couponing solution.  Pivotal to this has been the extensive work carried out integrating VoucherNet with 2ergo's EPOS manufacturing partners.  This means that the Group is now able to process mobile coupons, vouchers and tickets at the point of sale, through a wide range of EPOS terminal types.  This integrated coupon redemption facility creates a truly end-to-end service, enabling customers to pay their retail bill via the smartphone, as utilised by PizzaExpress.

Since 2004 the "un-integrated" version of VoucherNet has delivered over 30 million mobile coupons worldwide.  By combining this technology with 2ergo's mobileDNA database, the Group has created a compelling customer proposition for organisations that want to use mobile vouchers and coupons to drive traffic or footfall, incentivise and reward customers, and measure response rates through one fully integrated service.  This solution has significant appeal to the retail sector, and the Group is in discussion with a number of major retailers with a view to integrating mobile technologies into their multi-channel marketing strategies. 

The fact that the Group has achieved ISO 27001 information security standard underlines 2ergo's commitment to best practice.  This standard is not mandatory, but it reaffirms 2ergo's commitment to reaching the highest standards in industry regulation and client satisfaction.  Current regulation in and around mobile payments and marketing continues to be a concern, as industry guidelines are weak at best, and left open to interpretation by inconsistently applied regulation of client services.

2ergo has made a strategic decision to move towards securing all data transfer services at the earliest opportunity.  Mobile security will become a major issue for the wider mobile market over the next few

years and by adopting this strategy early 2ergo will be able to further differentiate its offer.  

In the shorter term, coupon and ticketing security is an imminent challenge for organisations operating in that space.  2ergo's security technology overcomes these issues.  The Group will continue to develop its mobile security and payment technology 'Secure Connect', a secure mobile communication protocol for smartphone apps and transactional mobile websites, which will become a key differentiator in coming years. 

Geographic review

During the year, 2ergo has continued to build a healthy pipeline of business, and secured significant new business wins across all regions of operation. 

The Group continues to deliver "Orange Wednesdays", widely perceived as the most successful mobile coupon and redemption campaign in the UK.  Interactive, location-sensitive mobile solutions have also been implemented for Visit England, which provides details and images for thousands of England's top attractions and payasUgym.  The latter is a rapidly growing business, offering a 'pay as you go' service across multiple gym chains, within which customers are able to redeem prepaid gym vouchers at reception via their mobile devices. 

2ergo's work with Transport for London (TFL) is part of a four year contract to develop and manage a mobile service platform for its Journey Planner services portfolio ahead of the Olympic Games, covering London Underground, Docklands Light Railway, bus, cycle and taxi information.  The Group's work with TFL, Visit England and similar clients provides 2ergo with the blueprint and strategy for the roll out of other location-based services.

2ergo has continued to grow in Australia by working with clients such as the Australian Broadcasting Corporation, Vodafone Hutchison Australia and Nine MSN, as well as winning several new clients in new sectors.  A three-year agreement with the Australian Securities Exchange (ASX) was agreed in October 2010.  This enables the ASX to deliver content and equity prices to investors and market followers, allowing users to view and search real-time company announcements via alerts, 'push notifications' and PDF downloads.

Progress has been made in the retail sector, with a two-year agreement with Fantastic Holdings in addition to the success in building & supporting mobile sites for leading auto retailer Automotive Holding, house builder Alcock Brown Neaves and St George Bank.  2ergo Australia has also signed agreements to build smartphone solutions for AlphaPharm, Penguin and Eagle Boys Pizza. 

In the US, the Group continues to deepen its relationship with key clients through the development of new initiatives to enhance their mobile propositions.  The business has transitioned its engagement model to a managed, solutions-sales approach, thereby differentiating the business from competitors typically offering single products.  This new consultative approach, embracing consultation, execution, and analytics, has paid dividends and has been the foundation of significant new client engagements, such as those with Microsoft and U.S. Cellular detailed above.  It has also served to expand the engagement with existing key accounts such as AT&T and Procter & Gamble.

2ergo has continued its positive momentum in India.  The Group strengthened its client base in the media sector by signing deals for iPad applications with Radio One and India Today Group, both leading national media companies, thereby building on the Group's previous success in delivering mobile services for the prestigious Times of India group.

2ergo has also made good progress in the Indian retail sector following the signing of a number of new contracts, including one with Samsung for an SMS based application which helps consumers to locate their nearest stockist.  The FMCG sector also saw 2ergo successfully build a number of IVR (Interactive Voice Response) applications for Procter & Gamble and Marico, that helped these companies extend their reach to the large number of Indian consumers that are neither English speaking nor Internet users.

Financial review

On 1 September 2011 the 12th Code of Practice (the Code) issued by PhonepayPlus, the phone-paid services regulator, came into effect.  The Code is principally self-regulating on the industry and sees the mobile network operators become more accountable for ensuring compliance.

As announced by the Group on 14 June 2011, in the run up to the Code becoming effective, the mobile network operators adopted their own operating principles based on their individual interpretations of the Code.  As a result the Group put on hold some client services pending a detailed audit of those services to ensure that they were compliant with each individual network's particular interpretation of the Code.

Following that audit, the Group took the decision not to reconnect some clients' non-core services. Primarily as a result of these actions, together with continued active management by the Group in reducing the scale of its low margin wholesale operations, revenue for the year was £17.7 million (2010: £21.4 million).

2ergo continues to generate revenue in three ways: from initial set up fees, from ongoing monthly fees and from recurring transactions.  Income from transactional and monthly fees accounted for 88% of total revenue and 83% of total gross profit.  The gross margin on these fees rose from 46% in 2010 to 53%.

Gross profit was £9.9 million (2010: £10.6 million) with gross profit margins increasing from 50% to 56%, due to the change in mix of sales as shown above.

Overheads were £12.6 million (2010: £11.2 million).  Of this increase, £0.7 million relates to additional depreciation and amortisation of the Group's patented technology and £0.2 million relates to the non-cash IFRS 2 share based payment charge, with the remainder primarily being the full year annualised effect of the Group's 2010 investment within the mobile market.

EBITDA, before the IFRS 2 share based payment charge, was £10,000 (2010: £1.4 million).  Of the £2.1 million amortisation charge (2010: £1.5 million), £0.3 million (2010: £0.3 million) was in respect of acquisitions made by the Group.

Net interest charges were £0.1 million (2010: £0.2 million) and relate to IAS 23 notional interest charges in respect of the deferred consideration on the acquisition in 2009 of Activemedia Technologies.

Group loss before tax was £2.8 million (2010: £0.8 million).  After a tax credit of £0.2 million (2010: £0.3 million), the basic loss per share was 7.69p (2010: 1.55p).

The Group continued its investment in the development of its patented technology and invested £4.6 million (2010: £5.1 million) in its hardware, software licences and product and platform development.

The successful placing of 2.4 million shares in February 2011, raising £2.9 million net proceeds, allowed certain technology developments to be brought forward as well as providing additional working capital.  This financing has meant 2ergo's patented loyalty technology has been developed ahead of schedule and is already gaining significant interest and traction with major retail brands.

Cash balances at 31 August 2011 were £2.2 million (2010: £1.5 million) with no debt.  The current net cash balance stands at approximately £1 million.

Current trading and outlook

The Group sales pipeline continues to build and current trading is in line with the Board's expectations.  Although deals are taking longer to close than anticipated due to the current economic climate, the Board believes that this is being counter balanced by a fuller pipeline.

The Group has made solid progress and is in a good position to capitalise on the growth of the market.   Mobile devices are now used by 76% of the world's population and are looked at on average 150 times per day; they also have unique characteristics of always being on, location aware,  personally targetable and increasingly being able to interact at point of sale.  Major brands are therefore increasingly incorporating the mobile channel into their marketing and advertising strategies.

Similarly, 2ergo's own research has found that consumers who use a smartphone to browse the internet would feel comfortable making a purchase via mCommerce and one in 10 retail searches online now takes place on a mobile device.  These figures are supported by Google, which reports that between 10% and 15% of all searches on Google's site are coming from mobile phones.

Opportunities across the mobile sector continue to grow and develop internationally and the Board believes 2ergo is extremely well positioned to leverage its 11 year investment in market leading mobile technology and intellectual property in the coming years.

Consolidated income statement

for the year ended 31 August 2011

All activities relate to continuing operations.

Consolidated statement of comprehensive income

for the year ended 31 August 2011

Consolidated statement of financial position

as at 31 August 2011

Consolidated statement of changes in equity

for the year ended 31 August 2011

Consolidated statement of cash flows

for the year ended 31 August 2011

Notes to the consolidated preliminary financial statements

1    Basis of preparation

The financial information set out herein does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006.  The financial information for the year ended 31 August 2011 has been extracted from the statutory accounts of 2ergo Group plc for that year which, if adopted by the members at the Annual General Meeting, will be filed with the Registrar of Companies.  The financial information for the year ended 31 August 2010 has been extracted from the statutory accounts for that year which have been delivered to the Registrar of Companies.  The auditors reported on those accounts; their report was unqualified and did not contain a statement under either section 498 (2) or section 498 (3) of the Companies Act 2006.

The preliminary financial information has been prepared in accordance with the accounting policies set out in the Group's statutory accounts for the year ended 31 August 2010.

2    Segmental analysis

The Group is organised into four principal operating divisions for management purposes representing the geographies which the Group operates in.  Each key territory has one manager responsible for reporting of results for that territory to the chief operating decision maker (CODM).  Each territory segment can access all of the Group's products, with clients benefiting from the opportunities created by combining the Group's products in 2ergo's sector and client specific propositions.  The EMEA segment includes the Group's performance in Europe, the Middle East and Africa.  The Americas segment includes the Group's performance in the US, Central and Southern America.  Other segments reported are for performance in India and Australia.  The Other segment includes non-allocated income and expenditure from the Group's central services.

The CODM assesses the performance of each operating segment based on revenue, gross profit and earnings before interest, tax, depreciation and amortisation (EBITDA) measures.  The Group's revenues and gross profits may be further analysed between Direct and Wholesale services.

¹ Earnings before interest, tax, depreciation and amortisation.

3    Loss per share

The calculation of basic and diluted loss per share is based on the result attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue during the year.  The weighted average number of shares for the purpose of calculating the basic and diluted measures is the same.  This is because the outstanding share options would have the effect of reducing the loss per ordinary share and therefore would be anti-dilutive.

4    Business Combinations

Intangible assets includes £11.1 million (2010: £12.8 million) goodwill in respect of the acquisitions of Broca plc (£7.4 million), Wapfly Technologies Pty Limited (£0.2 million) and Activemedia Technologies Limited (£3.5 million) made during the year ended 31 August 2009.

On 24 July 2009, the Group acquired the entire issued share capital of Activemedia Technologies Limited and its Indian subsidiary undertaking Active Media Technologies Private Limited (now renamed Two Ergo India Private Limited) for initial cash consideration of £0.2 million with further estimated discounted consideration payable of £6.9 million, subsequently revised to £3.3 million in 2011.  The deferred contingent consideration, which is payable in tranches, is discounted and calculated as the sum of 2.8 times Ticketing & Couponing operating profit and 4 times Indian profit after tax for the year to 31 August 2012 based on management projections.  It is dependent on the financial performance of the acquired business and is subject to an overall cap (covering both the Ticketing & Couponing and India cash generating units) related to Group performance. Consideration is payable between November 2009 and November 2013 and will be settled, at the discretion of the Group, by the issue of new ordinary shares in the Company or loan notes.

5    Report and Accounts

A copy of the Annual Report and Accounts will be sent to all shareholders with notice of the Annual General Meeting.