Netcall Regulatory News (NET)

21 March 2011

NETCALL PLC

("Netcall", "the Company", or "the Group")

Interim Results

Netcall plc (AIM: NET), a leading provider of customer engagement software, today announces its unaudited interim results for the six months ended 31 December 2010.

Financial Highlights

·; Revenue increased 245% to £6.41m (H1 FY10: £1.86m) following the successful acquisition of Telephonetics during the period

·; Adjusted EBITDA(1) increased by 231% to £1.16m (H1 FY10: £0.35m)

·; Profit before tax of £0.012m (H1 FY10: £0.10m) after one-off reorganisation and acquisition costs of £0.57m and amortisation of acquired intangible assets of £0.42m

·; Cash generated from operations before acquisition and reorganisation payments increased to £0.44m (H1 FY10: outflow £0.16m)

·; Good visibility with revenue of a recurring nature of £4.57m corresponding to 71% of total revenue

·; Adjusted earnings per share increased by 73% to 0.95p (H1 FY10: 0.55p)

·; Earnings per share 0.12p (H1 FY10: 0.17p)

·; Debt free balance sheet with net cash funds of £4.8m (H1 FY10: £1.9m)

1) adjusted EBITDA is defined as profit before interest, taxation, depreciation, amortisation, acquisition and restructuring expenses and share-based charges.

Operational Highlights

·; Successful acquisition of Telephonetics completed 30 July 2010 increasing market presence and expanding product portfolio

·; Integration progressing to plan, including realisation of more than £1.5m annualised net cost savings to date

·; First phase of product integration completed

·; Signed up over 20 new customers in the period

·; Continued progress in second half of the year

Henrik Bang, CEO of Netcall, commented "This has been a period of substantial progress for Netcall, in which we have significantly increased our organisational capability, product suite and customer base through the successful acquisition and integration of Telephonetics. We have reorganised the business, delivering significant savings while focusing on Netcall's market presence.

"The Group has entered the second half of the year with early sales, good profit levels and a healthy and growing pipeline. Therefore, while there remain uncertainties in the current market, the Board is confident of a successful outcome for the year."

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About Netcall PLC

Netcall is a UK company quoted on the AIM market of the London Stock Exchange. Netcall's software product suite provides compelling solutions for end-to-end customer engagement, incorporating call handling, callback, smart automation, workforce management and data unification. Our target markets comprise organisations of all sizes, including many blue-chip companies with global contact centre operations. The Netcall software platform helps organisations meet the growing demands of their customers and prospects whilst improving internal efficiencies, thereby increasing profitability and customer satisfaction.

Netcall's customer base contains over 600 organisations in both the private and public sectors. These include over 60% of the NHS Acute Health Trusts, major telecoms operators such as BT and Cable & Wireless and leading organisations including First Direct, McAfee, Interflora, Lloyds TSB, Oracle, Orange, Prudential, RBS and Standard Life.

Introduction

Netcall successfully completed the acquisition of Telephonetics on 30 July 2010, significantly increasing its market presence by growing its installed base to over 600 customers and augmenting the product portfolio. Importantly, the acquisition also substantially increased revenues of a recurring nature, which now exceed £10m on a pro-forma annualised basis, providing good visibility and a strong foundation for the Group.

The integration of the Telephonetics businesses, including reorganisation and the creation of a new management team, has progressed well. The Group has achieved significant cost savings to date while making targeted investments in key areas, resulting in a net annualised saving of £1.5m in line with original forecasts.

The Group has maintained a good contract win-rate for solutions from across its product portfolio securing more than 20 new customers within a range of industries. In the public sector these included three new Hospital Trusts and seven Local Authorities, one of which was Worcestershire County Council, which will provide a shared service hub for seven councils. New contract wins in the private and corporate sector included a number of well-known and prominent businesses.

Consequently, revenue for the period has grown by 245% to £6.41m, and adjusted EBITDA has grown by 231% to £1.16m resulting in an increase in adjusted EPS of 73% from the previous period to 0.95p.

Given that the integration of Telephonetics is progressing according to plan combined with the enlarged Group's solid financial foundation, strong operating model, and positive reception in its markets, the Board is confident in Netcall's strategy for continued growth.

Financial Review

Group revenue for the six months ended 31 December 2010 was £6.41m (H1 FY10: £1.86m), which includes a five month contribution from Telephonetics of £4.51m. Total revenue is comprised of:

·; SaaS (Software as a Service), maintenance and support contract revenues increased by 7.3% on a pro-forma basis to £3.60m (H1 FY10: £1.56m);

·; license and professional service revenues increased to £1.84m (H1 FY10: £0.30m) and were in line with the pro-forma figures from last year; and

·; revenues from Telephonetics' SaaS-based MovieLine service of £0.97m (H1 FY10: £nil). As previously announced by Telephonetics, revenues from this service continue to decline as expected on a pro-forma basis as transactions shift to the Internet. Notwithstanding this, the service currently remains a good source of cash generation.

Revenue of a recurring nature, from the Group's hosted platforms, maintenance and support agreements, was £4.57m, including a five month contribution from Telephonetics, being 71% of total revenue (pro-forma H1 FY10: 72%) and is now over £10m on a pro-forma annualised basis, providing good visibility for the remainder of the year.

Gross profit margin was 86% compared to 89% in the same period last year, due to a change in product mix resulting from the acquisitions. This compares to pro-forma gross profit margin in H1 FY10 of 84%.

Administrative expenses before separately identifiable charges increased to £4.38m (H1 FY10: £1.31m) as a result of the acquisition of the Telephonetics' business. Pro-forma administrative expenses were 5% lower at £5.09m (H1 FY10: £5.33m) reflecting the impact of net cost savings in the period.

Approximately £1.5m of net cost savings have been achieved to date, comprising £1.3m in staff costs and a £0.2m reduction in professional advisor and AIM listing costs. Of the costs savings achieved, management estimate that the full year results will benefit from an approximate reduction of £0.8m. The associated reorganisation cost is approximately £0.7m, of which £0.5m was booked in the period.

Consequently, the Group recorded a 231% increase in adjusted EBITDA to £1.16m (H1 FY10: £0.35m), a margin of 18% of revenue (H1 FY10: 19%).

This adjusted EBITDA, after taking into account one-off reorganisation and acquisition costs of £0.57m and amortisation of acquired intangible assets of £0.42m, resulted in a profit before tax figure of £0.01m for the period (H1 FY10: £0.1m).

The Group benefited from the utilisation of tax losses brought forward and therefore has no income tax expense. The Board considers that a higher proportion of losses are likely to be utilised in the future and therefore a deferred tax credit of £0.1m has been recorded in the income statement.

Cash generated from operations before acquisition and reorganisation payments increased to £0.44m (H1 FY10: outflow £0.10m). The first half of the financial year typically has a lower conversion of profit to cash as a higher proportion of annual service revenues and maintenance and support agreement billings occur in the second half.

The Group raised £4.25m before expenses in the period through the issue of 22,368,420 shares at 19 pence per share at a premium of 38% to the prevailing mid-market price on the day before the announcement of the placing. The net proceeds of the placing were used to part finance the acquisition of Telephonetics and for general working capital requirements.

The Group used £1.93m of cash during the period in acquiring and integrating Telephonetics, comprising: £1.06m in cash consideration (net of cash acquired); and £0.93m of acquisition and reorganisation cost payments. A further £0.46m of acquisition and reorganisation costs are included in trade and other payables at 31 December 2010 and will be paid in the second half of the financial year.

As a result of these factors, cash increased by £2.35m (H1 FY10: outflow £2.26m). The Group continues to maintain a debt-free balance sheet and had net cash funds of £4.80m at 31 December 2010.

Market drivers

The key market drivers for the Netcall product suite are the continued requirements on organisations to improve efficiencies while also being met with an increasing demand to improve customer service.

Typically, Netcall's solutions are purchased by organisations with large or valuable client bases, with whom they interact predominantly via the telephone but also using other communication channels such as mobile devices and the internet.

As a result of the broad demand for the benefits delivered by the Netcall product suite its solutions are deployed across most sectors.

An example in the public sector is the implementation of its technology to reduce costs for Wandsworth Council, where Netcall deployed its Smart Automation to fully automate the process of telephone direct debit payments. The result was a significant reduction in staff and transaction costs delivering a pay-back of less than 1 year. Following this success the Council is rolling out Smart Automation across its Council Tax refund operations.

Netcall has also enabled many NHS Trusts to improve resource capacity, patient service and the use of staff and budgets. Chelsea and Westminster Hospital, which handles more than 250,000 outpatient appointments every year, rolled out Remind+, a Netcall Intelligent Call Handling solution across most outpatient specialities and is now using the automated solution to contact around 1,000 patients a day to remind them of their appointments and reallocate if required. This has resulted in approximately 800 fewer 'Did Not Attends' (i.e. missed appointments) per month, which equates to an annual saving of close to £1 million.

Within the private sector, Netcall's solutions are also being deployed with similar results. For example, the implementation of Netcall's workforce management solution, Q-Max, by EDF Energy has helped service levels increase by 15% and the abandoned call rate has significantly reduced. In addition to the improved performance there has also been an improvement in staff morale, which has helped to reduce sickness and staff turnover levels.

Products

Netcall is building a focused software portfolio of technologies, and applications that provide customers with a suite of solutions delivering increased efficiencies and improved customer service for their customer engagement activities. The enhanced product portfolio includes solutions for Intelligent Call Handling, Workforce Management and Data Unification. Netcall's:

·; Intelligent Call Handling suite of solutions includes ContactCentre 59R, a software solution which recognises, prioritises, routes and delivers calls to the most appropriate person in an organisation. As part of the product suite Netcall also offers callback solutions using QueueBuster and CallMeBack enabling customers to request a callback from an organisation via telephone, internet, mobile or other devices. In addition the product suite includes Smart Automation solutions including ContactPortal® enabling organisations to use software solutions including speech recognition to automate business processes, such as payments.

·; Q-Max Workforce Management solution enables contact centre managers to accurately forecast, schedule, manage and report on work demand and staff requirements.

·; Data Unification capabilities are enabled by the Eden platform which allows the consolidation and updating of data from multiple sources, such as databases or business applications, and presentation in a single view and thereby increasing business efficiencies.

Each solution in Netcall's product suite can operate as a standalone solution or as part of a fully integrated communications platform. Netcall offers both hosted and premise-based solutions and therefore benefits from the ability to provide solutions to both the emerging SaaS market and the existing premise-based market, as well as being able to provide blended hosted and premise-based solutions, which is currently the preferred choice for many customers.

Since the acquisition of Telephonetics the integration of the Group's enhanced product portfolio has developed in accordance with plans. QueueBuster, CallMeBack and Q-Max are now integrated on Netcall's premised based SEMAP+ platform. Remind+ and Confirmer, part of the Intelligent Call Handling suite, are available on Netcall's hosted platform.

Strategy

The financial position of the Group continues to be robust, with cash of £4.8m at the end of the period and a strong operating model. This strong position underpins the Group's ability to invest confidently in its organisational capabilities and customers.

Netcall will continue to pursue both an organic and acquisitive growth strategy in its fragmented market to achieve greater presence and efficiency and delivering long term shareholder value.

Outlook

Whilst the Board remains mindful of the difficult economic backdrop, the Group has entered the second half with early sales, good profit levels and a healthy and growing pipeline, and the Board is therefore confident of achieving a successful outcome for the full year.

Unaudited consolidated income statement for the six months to 31 December 2010

All activities of the Group in the current and prior periods are classed as continuing.

Statement of comprehensive income for the six months to 31 December 2010

Unaudited consolidated balance sheet at 31 December 2010

Consolidated statement of changes in equity at 31 December 2010

Unaudited consolidated cash flow statement for the six months to 31 December 2010

Notes to the financial information for the six months ended 31 December 2010

1. General information

Netcall Plc (AIM: "NET", "Netcall", or "the Company", a leading provider of customer engagement software, is a limited liability company and is listed on AIM (a market of the London Stock Exchange). The company's registered address is 10 Harding Way, St Ives, Cambridgeshire, United Kingdom, PE27 3WR and the Company's registered number is 1812912.

2. Basis of preparation

The Group interim results consolidate those of the Company and its subsidiaries (together referred to as the 'Group'). The principal trading subsidiaries of Netcall are Netcall Telecom Ltd, Telephonetics VIP Ltd, Q-Max Systems Ltd and Datadialogs Ltd.

These consolidated interim financial statements (the 'results') have been prepared in accordance with those IFRS standards and IFRIC interpretations issued and effective or issued and early adopted as at the time of preparing these statements (March 2011). This results announcement does not constitute statutory accounts of the Group within the meaning of sections 434(3) and 435(3) of the Companies Act 2006. The balance sheet at 30 June 2010 has been derived from the full Group accounts published in the Annual Report and Accounts 2010, which has been delivered to the Registrar of Companies and on which the report of the independent auditors was unqualified and did not contain a statement under either section 237(2) or section 237(3) of the Companies Act 1985.

The results have been prepared in accordance with the accounting policies set out in the Group's 30 June 2010 statutory accounts, which are based on the recognition and measurement principles of IFRS in issues as adopted by the European Union ("EU"). No changes to accounting policies are expected for the year ending 30 June 2011.

The results for the six months ended 31 December 2010 were approved by the Board on 18 March 2011. The Board has decided to not print and post a copy of these interim financial results so as to reinvest the cost savings into other forms of investor relations activities. A copy of these interim results will be available on the Company's web site www.netcall.com from 22 March 2011.

3. Segmental analysis

Management consider that these is one operating business segment being the design, development, sale and support of software products and services, which is consistent with the information reviewed by the Board of Directors, when making strategic decisions. Resources are reviewed on the basis of the whole of the business performance.

The key segmental measure is adjusted EBITDA which is profit before interest, tax, depreciation, amortisation, share-based payments and reorganisation and acquisition expenses, which is set out on the consolidated income statement.

4. Acquisition and reorganisation costs

(1)Acquisition costs are principally professional advisor fees.

(2)Comprising £0.50m in redundancy costs and £0.035m in vacant property provisions.

5. Earnings per share

Adjusted and basic earnings per share have been calculated to exclude the effect of acquisition and reorganisation costs, share-based payment charges (IFRS2) and amortisation of acquired intangible assets (IFRS3). The Board believes this gives a better view of on-going maintainable earnings. The table below sets out a reconciliation of the earnings used for the calculation of earnings per share to that used in the calculation of adjusted earnings per share:

The table below sets out the weighted average number of shares used to calculate the earnings per share figures:

6. Acquisition of subsidiary

On 30 July 2010 Netcall acquired the entire issued share capital of Telephonetics Ltd (formerly Telephonetics plc a Company incorporated in England and Wales), ('Telephonetics'), a UK based provider of speech automation and data integration solutions, by way of a scheme of arrangement. In addition, on 10 September 2010 the Company paid £0.10m for the early settlement of the vendor earn out assumed by Telephonetics on the acquisition of Datadialogs Ltd. The consideration was satisfied by payment of £0.05m cash and the issue of 425,540 new ordinary shares of 5 pence each at 11.75 pence per share.

Analysis of assets and liabilities acquired

Fair value adjustments

On acquisition of Telephonetics, all assets were fair valued and appropriate intangible assets recognised following the principles of IFRS3. A deferred tax liability related to these intangible assets was also recognised. Management identified three material intangible assets: (i) customer relationships; (ii) software; and (iii) brand.

The customer relationships intangible asset acquired with Telephonetics was valued using the excess earnings method. The value of this intangible asset at acquisition is £3.33m. Management believe that these customer relationships have a minimum useful economic life of six years.

The software acquired with Telephonetics remains at their carrying value. The value of this intangible asset at acquisition is £0.87m (including previously capitalised development expenditure, software licenses held for use in the business and Datadialogs software capitalised at the point of its acquisition). Management believe that this software has a minimum useful economic life of four years.

The Telephonetics' brand was valued using the relief from royalty method. The value of this intangible asset at acquisition is £0.05m. Management believe that this brand value has a minimum useful economic life of eighteen months.

A £0.90m credit to deferred tax has been made to record the liability arising on these intangible assets.

Impact of acquisition on results of the Group

The acquired business contributed revenues of £4.51m and net profit of £0.12m (after related amortisation charges and tax credits) to the Group for the period 31 July 2010 to 31 December 2010. If the acquisition had occurred on 1 July 2010, management estimate the acquired business would have contributed revenues of £5.30m and net loss of £0.05m (after related amortisation charges and tax credits). Acquisition costs of £0.03m (H1 FY10 £0.09m) have been charged to the income statement as incurred.