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Vyke Communications (VYKE)

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Monday 28 September, 2009

Vyke Communications

Half Yearly Report

RNS Number : 7265Z
Vyke Communications PLC
28 September 2009
 



Vyke Communications plc
('Vyke')

Interim Results for the six months ended 30 June 2009

Results: six months to 30 June 2009

  • Gross billing £10,499,000 for the period compared to £16,689,000 for H1 2008

  • Overall gross margin on revenue increased to 13.6%; up from 10.3% in H1 2008

  • EBITDA before exchange gains and losses: Loss £1,836,000 (H1 2008: Loss £2,243,000)

  • EBITDA on continuing activities: Loss £2,735,000  (H1 2008: Loss £1,857,000

  • Loss on ordinary activities from continuing activities before, and after, tax: £3,609,000 (H1 2008: Loss £2,366,000)

  • Total comprehensive income for the period: Loss £3,173,000 (H1 2008: Loss £3,432,000)

  • Gross billing and margin affected by recession, migration of customers to higher margin products and delay in product launches

  • Operating loss affected by costs of approximately £400,000 relating to platform migration. Costs related to discontinued activities amounted to £407,000 (H1 2008: £691,000)

  • Soft launch of Vyke Mobile in July 2009 successful and sales promotion being developed for remainder of year

  • Vyke Enterprise to be launched during Q4 2009


Tommy Jensen, Executive Chairman, commented:

'The first half of 2009 has provided us with some significant challenges in a difficult economic climate and we have been disappointed that we have not been able to complete the rationalisation of the business and the launch of new products as quickly as anticipated. We have however made considerable strides over the last few months to correct the position'.

'Vyke Mobile has now been launched on its new website and the Vyke Enterprise products are close to launch. We have a number of significant distributorship deals which we are working on and hope to announce in the near future'. 

'We believe that the Vyke Mobile's products are right and that the time is right for us to make significant inroads into the market previously dominated by traditional mobile companies'.


For further information contact:

Vyke Communications plc
Tommy Jensen, Executive Chairman                   +47 67 82 73 60
Kim Berknov, Chief Executive Officer
                 +44 (0)20 7732 3666

Daniel Stewart & Company plc
Graham Webster / Martin Lampshire                  +44(0)20 7776 6550

Threadneedle Communications 
Graham Herring / Josh Royston                              +44(0)20 7653 9850


  Chairman's Interim Statement

Business overview - The opportunity

The market for Mobile VoIP provides a very large opportunity for Vyke.  One major analyst has recently predicted that new non-infrastructure players that use VoIP will provide a direct challenge to the traditional network-based mobile carriers who are set to lose a major slice of their US$ 692bn voice traffic and revenue over the next decade. Another recent report predicts that Mobile VoIP revenues will increase to US$ 32.2bn by 2013 with a registered base of 278 million users.

Vyke is focussed on providing these Mobile VoIP solutions, both for personal and corporate users.  We believe Vyke is uniquely positioned to exploit this market globally which we are pursuing aggressively.  

The first half of 2009 has however provided us some significant challenges which are unrelated to the mobile VoIP market.

Sales and Operations

Revenue has been severely affected by the much faster than anticipated convergence from our high revenue generating call-back products to our full range of mobile VoIP solutions. On some destinations this reduced our revenue by a factor of between 5 and 10 times as the costs of mobile VoIP minutes are significantly lower than those relating to call-back. Whilst revenue is lowered, impact of this conversion on profits is positive as the margin on VoIP calls are significantly higher than those on call-back: margins have therefore increased albeit on a lower revenue base than anticipated.

In addition, the global recession appears to have lowered the demand for international calling in a number of our core markets, in particular in the Middle East, during the summer period.  We have continued to be successful in generating new business in new markets such as Asia but not fast enough to offset the decline from  call-back revenue in the Middle East.

As previously reported, we completed the integration of Callserve, now Vyke Communications (UK), and Iios, now Vyke Wholesale, into the Vyke systems during the second quarter of this year, reducing our overall cost base going forward. Following the closure of the US traditional calling card business, we have also undertaken the migration of US operational systems into the UK. The platform migration from US to UK has provided unforeseen costs of approximately £400,000 in direct cost of sales and administration expenses during the period. This has arisen as a result of both technical issues on our internal billing system and need to use external partners. In addition we have incurred the one-off restructuring costs related to discontinued operations amounting to £407,000 and write downs of accounts receivables of £158,000 from the previous year as a result of the poor economic environment.

The magnitude of the migration has led to significant delays in the launch of the new www.vyke.com products and its associated mobile clients as well as the launch of our Enterprise solution for the corporate market. The estimated effect of these delays will have a significant negative impact on the revenue and EBITDA for the remaining part of the year.

The migration work, which started towards the end of 2008 and which has continued throughout 2009, has provided a platform for additional cost savings well as operational efficiencies going forward which cannot be seen in the results for the year to date.

Considerable investment has been made in the first half of the year on the launch towards the end of the period of Vyke Mobile, previously described as Vyke Air, for our personal and corporate customers providing our major mobile platform for the future. The soft launch has gone successfully and we are now gearing up to promote it strongly over the next few months and to capitalise on the distribution channels we have forged with Nokia and Nimbuzz. The full Vyke Mobile solution is supported on Symbian, Java and RIM operated phones giving us access to approximately 80% of the addressable handset market

We now anticipate Vyke Enterprise being released to the business community in the UK and Scandinavia sometime during Q4 this year and we are currently signing up resellers and introducers for the corporate market.  Interest in the product remains extremely strong and we see this being a larger part of our business going forward into 2010.

Throughout the period, we have been in preliminary discussions with potential acquisition targets with the aim to expand our distribution network, to grow or revenue as earlier announced, and to allow for additional benefits of scale.  These acquisitions have not materialised as anticipated and will not contribute to the expected revenue and earnings for the year.

Operating results

For these factors, overall gross billing from continuing operations for the six months to 30 June 2009, after excluding the discontinued activities in the US and Asia, fell to £10,499,000 compared to £16,689,000 for the first half of 2008 and £29,981,000 for the full year ended 31 December 2008. Net reported revenue, which excludes reseller commissions, fell accordingly to £7,271,000 compared to £11,845,000 for H1 2008 and £20,925,000 for the whole of 2008.  This effect was primarily caused by the shift in from call-back to VoIP and by the lower calling volume out of Middle East.

We have throughout the period concentrated on retaining the best regions and resellers and moving the business from call-back products into our new VoIP products range which provide a higher margin.  We also took the opportunity to move parts of the business which have been previously relying on credit lines to the distributors to a wholly pre-paid operation.  Despite the recession therefore we have been able to increase our overall business margins to 13.6% in 2009 from 10.3% in H1 2008 resulting in a gross profit of £989,000, an improvement of £21,000 over H2 2008.

The integration of the Vyke and Callserve businesses and the migration from the US have successfully produced overhead savings, as we anticipated, with overheads (before exchange gains and losses, amortisation and depreciation) reducing to £2,825,000 for the first half of this year compared with £3,458,000 for the same period in 2008 and £3,827,000 in H2 2008, respectively a reduction of 18% and 26% on those comparative periods. 

The operating loss before exchange gains and losses, depreciation and amortisation, or EBITDA before exchange gains and losses, - a core measure of our performance - therefore reduced from £2,243,000 in H1 2008 to £1,836,000 in the first half of 2009 - a reduction of 18% period-on-period and a reduction of 36% compared to H2 2008.

In arriving at the net loss for the year, exchange losses on operating balances of £899,000 have been taken into account (compared with a net gain of £386,000 in H1 2008 and £1,758,000 for the full year 2008) but in terms of overall impact on the Group's assets, these are effectively hedged by gains of £843,000 on translation of foreign operations in the period (a loss of £375,000 in H1 2008 and a loss of £2,124,000 in the full year 2008) which appear separately as a component of comprehensive income.

Amortisation and depreciation charges for the period increased to £843,000 (H1 2008 £682,000, full year £1,274,000) as a result of the first full year's charges on the business acquired with Callserve and Iios in January 2008 and through the amortisation of research and development costs on products now released to the market such as the extended release of new mobile clients under the name 'Vyke Mobile' and which have been well received by the market and our customers.

Operating loss for the period after taking into account these items amounted to £3,578,000 compared to £2,539,000 for the same period last year and £4,618,000 for the 2008 as a whole.

Finance income fell in the period both as a result of reduced cash balances and of the lower rates available in the market place. Finance expense rose slightly as new equipment leases to support the new operations were executed.

After taking these items into account, the loss before taxation on continuing activities was £3,609,000 compared to £2,366,000 for the same period in 2008 and £4,396,000 for the year as a whole.

Further costs were incurred during the period in respect of closing the US traditional calling card operations giving rise to a loss on discontinued activities of £407,000. These operations have been substantially closed by 30 June 2009 and, barring unforeseen events, we do not anticipate any further significant costs relating to the discontinued activities in the second half of the year.

The loss for the period, including losses on discontinued operations, amounted to £4,016,000 (H1 2008: £3,057,000; full year 2008: £6,603,000). After taking into account the exchange gains and losses on translation of foreign operation, the comprehensive income for the period attributable to equity shareholders was a loss of £3,173,000 compared with £3,432,000 in the same period in the preceding year and £8,727,000 for the full year ended 31 December 2008.

Balance sheet and cash flow

Fixed asset purchases in the period, included those funded through leasing and equity,  amounted to £1,160,000. Additions mainly comprised new expenditure on development and enhancement of our product range for launch during 2009, principally in respect of new Vyke Mobile clients, the updated vyke.com web-site and our Enterprise solution for corporate customers.  The net increase in fixed assets shown in the balance sheet of £780,000 represents those additions, less depreciation and amortisation and sundry minor disposals and after taking into account the effect of exchange rate changes on assets held overseas.

Trade receivables have fallen as a result of both a shift from call-back to IP generated revenue and through our drive to retain only the most stable and profitable resellers

The Group raised an additional £3,060,000 during the period through the placing of 12,489,796 ordinary shares with institution investors. A further 260,470 shares were issued in consideration for product development work valued at £180,000 on terms that was negotiated in early 2008 with the aim to strengthen the relationships with key suppliers.

As regards cash flow, operations consumed £2,986,000 in the period (of which £247,000 related to discontinued operations) compared with £3,563,000 in the first half of 2008 and £8,300,000 in the whole of last year, reflecting the improving gross margin and reduction in operating overheads. Our principal capital expenditure during the period was in terms of development costs and purchase of software, where the cash outflow was £829,000 (1H 2008 £902,000; full year £2,070,000). After taking into account leasing expenditure and other sundry cash receipts and payments, the overall cash outflow for the year amounted £948,000 (H1 2008: £4,457,000; full year 2008: £10,396,000). Cash balances at the end of the period amounted to £1,426,000. 

Events after 1H 2009

Sales and marketing developments have continued since the end of the period. We are currently in discussions with three master resellers; one for Latin and South America, one for China and one for India and Russia which indicate that we now are entering new regions that all provide additional growth for the Group. Further, four resellers and introducer agreements have been signed for the launch of Vyke Enterprise into the corporate marketplace and we are in further discussion with around ten additional partners as well as all the earlier announced corporate clients who are all waiting to get Vyke Mobile installed in their respective organisations.

Current Trading

We are currently seeking additional funding for the Group to enable it to continue to trade and to grow the business. As development work on products matures, more of our resources will be focussed on the sales channels and additional investment will considerably assist our aim in this. Whilst the business can expand significantly through its internal organic growth, we  will continue to look at  potential acquisitions to expand our routes to market and facilitate a faster growth of our personal and enterprise customer base globally.

The results for full year to 31 December 2009 will be below the guidance the Company previously gave to the market on 19 March 2009 and the Board expects the Company will be loss making for the full year. 

We believe that we have taken all the correct steps to build a firm base for the business going forward and to deal with the issues which have faced us over the last few months and we feel comfortable with the established growth initiatives that we will implement during the remaining part of the year and which will provide us a sound basis for 2010. 


Tommy Jensen

Chairman

26 September 2009



  Consolidated interim statement of comprehensive income

For the six months ended 30 June 2009




Unaudited  
six months 
 ended 30 June 
 200


Unaudited  
six months  
ended 
30 June
  2008 
restated note 3


Audited
Year ended 31  December 
200


Notes


£'000 


£'000 


£'000 

Gross billing

1


10,499 


16,689 


29,981 









Revenue

2


7,271 


11,845 


20,925 

Cost of operations



(6,282)


(10,630)


(18,742)

Gross profit



989 


1,215 


2,183 

Administrative expenses excluding exchange gains and losses, amortisation and depreciation 




(2,825)



(3,458)



(7,285)

Operating loss before exchange gains and losses, amortisation and depreciation




(1,836)



(2,243)



(5,102)

Exchange gains and losses



(899)


386 


1,758 

Amortisation and depreciation



(843)


(682)


(1,274)

Total administrative expenses

4


(4,567)


(3,754)


(6,801)









Operating loss

2&5


(3,578)


(2,539)


(4,618)

Finance income



31 


273 


387 

Finance expense



(62)


(100)


(165)

Loss before taxation



(3,609)


(2,366)


(4,396)

Taxation

6




Loss from continuing operations



(3,609)


(2,366)


(4,396)

Loss from discontinued operations

3


(407)


(691)


(2,207)

Loss for the period
all
 attributable to equity holders of the Company




(4,016)



(3,057)



(6,603)

Other Comprehensive income:
Exchange differences on translation of foreign operations





843 




(375)




(2,124)

Total comprehensive income for the period 
all
 attributable to equity holders of the Company




(3,173)



(3,432)



(8,727)


Loss per share 








    Basic and diluted

7


(7.7p)


(6.2p)


(13.2p)


Loss per share from continuing operations 








    Basic and diluted

7


(6.9p)


(4.8p)


(8.8p)

  Consolidated interim balance sheet

At 30 June 2009




Unaudited  
30 June 200


Unaudited  
30 June 200


Audited  
31 December  
200




£'000 


£'000 


£'000 

Non-current assets








    Goodwill



11,900 


11,894  


11,906 

    Other intangible assets



5,499 


4,680  


5,317  

    Property, plant and equipment



637 


682  


966  




18,036 


17,256  


18,189   

Current assets








    Inventory



148 



132 

    Trade and other receivables



1,853 


2,753  


2,323  

    Cash and cash equivalent



1,426 


8,242 


2,408 

    Assets classified as held for resale



160 



224 




3,587 


10,995  


5,087 

Total assets



21,623 


28,251   


23,276  









Current liabilities








    Trade and other payables



2,909 


4,674  


4,584  

    Borrowings, including lease finance



2,363 


2,179 


2,299 

    Liabilities classified as held for resale



48 



55  




5,320 


6,853  


6,938  

Non-current liabilities








    Borrowings, including lease finance



237 


119 


284  




237 


119  


284  

Total liabilities



5,557 


6,972  


7,222  









Equity








    Share capital



7,516 


7,388  


7,388  

    Share premium account



28,239 


25,217  


25,217  

    Translation reserve



(925)


(19)


(1,768)

    Retained earnings



(18,764)


(11,307)


(14,783)

Total equity



16,066 


21,279  


16,054  









Total equity and liabilities



21,623 


28,251  


23,276  


Tommy Jensen

Chairman
26 September 2009

  

Consolidated interim statement of changes in shareholders' equity


Share  
capital 


Share 
 premium 


Translation 
 reserve 


Retained  
earnings 


Total 


£'000 


£'000 


£'000 


£'000 


£'000 

As at 1 January 2008

7,347 


22,313 


356 


(8,336)


21,680 

Shares issued in the period

41 


2,904 




2,945 

Share based payments




86 


86 

Total comprehensive income  for the period






(375)



(3,057
)


(3,432)

As at 30 June 2008

7,388 


25,217 


(19) 


(11,307)


21,279 

Share based payments




70 


70 

Total comprehensive income  for the period






(1,749)



(3,546)



(5,295)

As at 31 December 2008

7,388 


25,217 


(1,768)


(14,783)


16,054 

Shares issued in the period

128 


3,022 




3,150 

Share based payments




35 


35 

Total comprehensive income  for the period






843 



(4,016)


(3,173)

As at 30 June 2009

7,516 


28,239 


(925)


(18,764)


16,066 


  Consolidated interim cash flow statement

For the six months ended 30 June 2008




Unaudited  
six months  
ended
  
30 June 200


Unaudited  
six months  
ended
  
30 June 200


Audited 
 Year ended  
31 December  
200




£'000 


£'000 


£'000 

Net cash flow before tax








Loss from operations



(4,016)


(3,057)


(6,603)

Adjustments for:








    Investment income recognised in loss for the
  
    period




(31)



(273)



(387)

    Finance costs recognised in loss for the period



62 


100 


165 

    Depreciation and amortisation



843 


 694 


1,373 

    Loss on disposal of businesses





184 

    Share based payments



35 


86 


156 

    Net decrease/ (increase) in working capital



121 


(1,113)


(3,188)

Net cash outflow from operations



(2,986)


(3,563)


(8,300)









Cash flows from investing activities








Acquisitions of businesses




(397)


(420)

Cash acquired with businesses




276 


276 

Purchase of intangible assets



(829)


(902)


(2,070)

Purchase of property, plant and equipment



(29)


(132)


(258)

Disposal of property, plant and equipment



34 



Disposal of businesses



-



73 

Net cash used in investing activities



(824)


(1,155)


(2,399)









Cash flows from financing activities








Interest received



31 


273 


387 

Interest paid



(17)


(16)


(36)

Capital element of finance lease repayments



(122)


(40)


(92)

Repayment of loans




(19)


(19)

Proceeds from new share issues



3,060 


63 


63 

Costs of share issues



(90)



Net cash from financing activities



2,862 


261 


303 

Decrease in cash and cash equivalents



(948)


(4,457) 


(10,396)

Cash and cash equivalents at the beginning of the period



2,408 


12,722 


12,722 

Effect of changes in exchange rates



(34)


(23)


82 

Cash and cash equivalents at the end of the period



1,426 


8,242 


2,408

  Notes to the unaudited interim financial information

1.    Basis of preparation and accounting policies

Basis of preparation 

The interim financial information is unaudited. The interim financial information was approved by the Board of Directors on 26 September 2009. 

The information for the year ended 31 December 2008 is extracted from the statutory financial statements for that year which have been reported on by the Group's auditors and delivered to the Registrar of Companies. The audit report was unqualified and did not contain a statement under s237(2) or s237(3) of the Companies Act 1985. 

The interim financial information does not constitute statutory accounts within the meaning of the Companies Act 1985. 

Accounting convention

These interim statements have been prepared in accordance with International Financial Reporting Standards (IFRS) except that International Accounting Standard IAS 34 'Interim Financial Reporting', which is not mandatory for AIM companies, has not been adopted in the preparation of this statement.  

Accounting policies adopted are consistent with those applied at 31 December 2008 and expected to be adopted at 31 December 2009.

Gross billing and revenue

Gross billing represents the revenue before deducting commissions and bonuses payable to distributors. In respect of certain sales of pre-paid cards, the distributor is remunerated by way of commissions and bonuses, payable in terms of additional cards, and this commission or bonus is deductible from the amount invoiced. Under IAS 18, which requires revenue to be measured at the fair value of consideration received or receivable, only the net sum after deducting these payments is regarded as revenue.

The gross billing figure is shown by way of note to aid comparison with other entities which remunerate distributors in other ways and account gross for revenue.

Revenue is measured at the fair value of the consideration received or receivable. Revenue represents invoiced services and goods, in each case net of irrecoverable sales tax and trade discount. Services are recorded as they are delivered. Revenue from goods sold is recorded at the time of delivery.

Going concern

The interim statements are on a going concern basis which assumes adequate financial resources for the business to continue for the forthcoming twelve months and which may require the Group to seek further equity or loan capital. The Group is currently negotiating additional funding.

 

2.    Segmental information

The Group's revenue and loss for the period from its continuing operations arose from the following business segments:




Unaudited 
six months  
ended
  
30 June 200




Audited 
Year ended 
31 December 
200




£'000 




£'000 

Revenue








Vyke enhanced products



6,971 




19,174 

Vyke wholesale



300 




1,751 

Group revenue



7,271 




20,925









Operating loss








Vyke enhanced products



121 




(174)

Vyke wholesale



15 




(534)




136 




(708)

Unallocated expenses



(3,714)




(3,910)

Operating loss



(3,578)




(4,618)


Direct expenses, principally staff salaries for sales staff, commissions, marketing costs and bad debts, are allocated against individual segments. Unallocated expenses include technical and customer support infrastructure costs and administration staff which are common to all segments. Depreciation, amortisation and foreign currency exchange gains and losses are included within unallocated expenses. Inter-segment trading is excluded from revenue.

Segmental information was not prepared for the six months ended 30 June 2008.


The Group's revenue from continuing operations derived from the following regions:




Unaudited 
six months  
ended
  
30 June 200


Unaudited  
six months  
ended
  
30 June 200
restated note 3 


Audited 
Year ended 
31 December 
200




£'000 


£'000 


£'000 

Revenue








Europe, Africa and the Middle East



6,496 


11,559 


20,149 

Americas



377 


259 


649 

Asia



398 


27 


127 

Group revenue



7,271 


11,845 


20,925 


  3.    Discontinued activities

The interim statements for the six months to 30 June 2008 have been restated to show the effect of operations discontinued during the year ended 31 December 2008 separately as required by IFRS 5.


Profits and losses attributable to the discontinued operations were as follows:




Unaudited  
six  months  
ended
  
30 June 200


Unaudited  
six months  
ended
  
30 June 200


Audited  
Year ended  
31 December  
200



£'000 


£'000 


£'000 

Gross billing

1



6,084 


9,020 









Revenue

2



4,611 


6,547 

Cost of operations




(4,502)


(6,951)

Gross profit




109 


(404)

Administrative expenses excluding depreciation and amortisation

4


(407)


(788)


(1,520)

EBITDA

5


(407)


(679)


(1,924)

Depreciation and amortisation




(12)


(99)

Operating loss



(407)


(691)


(2,023)

Loss on sale of businesses





(184)

Loss before taxation



(407)


(691)


(2,207)

Taxation

6




Loss from discontinued operations



(407)


(691)


(2,207)



4.    Administrative expenses relating to continuing activities



Unaudited 
six months  
ended
  
30 June 200


Unaudited 
 six months  
ended
  
30 June 200
restated note 3 


Audited  
Year ended  
31 December  
200



£'000 


£'000 


£'000 

Administrative expenses excluding amortisation and depreciation



2,825 



3,458
 



7,285 

Exchange gains and losses


899 


(386)


(1,758)

Amortisation and depreciation


843 


682 


1,274 

Total administrative expenses


4,567 


3,754 


6,801 


5.    EBITDA

Loss before depreciation, amortisation, share of operating losses of joint ventures, interest and taxation (EBITDA) in respect of continuing operations was as follows:



Unaudited 
 six months  
ended
  
30 June 2009
 


Unaudited  
six months  
ended
  
30 June 200
restated note 3 


Audited  
Year ended  
31 December  
200



£'000 


£'000 


£'000 

EBITDA


(2,735)


(1,857)


(3,344)


6.    Taxation

No tax charge arises in the period. In view of the uncertainty as to the timing of future profits, no deferred tax credit has been provided in respect of the losses in the period or past periods.

7.    Earnings/loss per share 

Loss per share has been calculated as follows



Unaudited 
six months  
ended
  
30 June 2009 


Unaudited 
six months  
ended
  
30 June 2008 


Audited Year  ended  
31 December  
200

Weighted average number of shares in issue used in the calculation of basic and diluted earnings per share


51,966,154 


49,359,944 


50,103,476 

Loss for the period attributable to equity holders of the Company (£'000)


(4,016)


(3,057)


(6,603)

Loss for the period on continuing operations attributable to equity holders of the Company (£'000)


(3,609)


(2,366)


(4,396)


No share options or warrants outstanding at 30 June 2009 were dilutive and all such potential ordinary shares are therefore excluded from the weighted average number of ordinary shares for the purposes of calculating diluted earnings per share.

  

 



This information is provided by RNS
The company news service from the London Stock Exchange
 
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