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Final Results for the year ended 31 December 2007
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HIGHLIGHTS
- Group revenues from continuing operations of £12m in a challenging consumer environment with new growth driven by expanded distribution on the internet and a 400% increase in interactive 3G mobile video traffic
- Gross profit from continuing operations increased significantly from a loss of £249,000 in 2006 to a profit of £889,000 in 2007
- Group operating costs and expenses in respect of continuing operations reduced by 18% following rigorous cost-reduction programme
- Operations in India, Sri Lanka, Malaysia and South-East Asia acquired by new regional venture formed by Canaan Partners, with the group's 37.5% retained shareholding valued at £2.6 million against an investment cost of £700,000
- SUMO.tv, the group's incubator of multi-platform technology solutions and user-generated services, now focused on B2B opportunities to enable broadcasters to rapidly integrate UGC content with existing programmes
- Deployment of SUMO technology within existing operations already capturing significant new revenues opportunities arising from the growth of 3G, IPTV, enhanced broadband, video mobile and wireless broadband services
- Group received £1.4 million cash payment from Discovery Networks in channel swap on the Sky Digital satellite television platform, resulting in a £1.1 m profit in H1 2008
- Repaid all short-term debt under overdraft and factoring facilities and renegotiated terms of Headstart convertible term loan facilities during H1 2008
- Positive outlook in uncertain economic conditions, with the group's 3G traffic and revenue doubling since October 2007 on the back of increased distribution across Cellcast’s television output.
Julian Paul, Chairman of Cellcast plc, commented:
“After the massive disruption in 2006 from the Sky EPG reorganisation, the company believes that the UK operations will be profitable in 2008 (before group overheads) following the substantial cost-cutting exercise undertaken over the last year. UK revenues are currently running at over £1.1 million per month, and we anticipate that in 2008 Cellcast will revert to being the substantially UK based business that it was in 2005, with over 95% of its revenues arising in the UK.
“The company has performed surprisingly well and consistently against a backdrop where the participation TV revenues of the large TV broadcasters and the market on the whole had declined by more than 70%. We hope that 2008 will be a significantly better year than 2007.”
CHAIRMAN'S STATEMENT
The financial statements for the year ended 31 December 2007 are the first full year statements that the company has prepared under International Financial Reporting Standards (“IFRS”) as adopted within the EU. The move to IFRS has resulted in a considerable extension of the disclosure requirements and in reconciliation statements with the previously reported UK GAAP numbers, but the financial impact is limited and relates principally to the capitalisation of SUMO.tv development costs, which had previously been expensed under UK GAAP.
2007 results
Headline revenue from continuing operations for the year ended 31 December 2007 was £12 million, down from £12.5 million in 2006. As originally reported under UK GAAP, 2006 revenue was £21.9 million, but following the termination of the limited term arrangements in France, the transfer of the Indian and South East Asian entities to Cellcast Asia Holdings and the deconsolidation of the Brazilian subsidiary for the whole of 2007 due to the cessation of control during the year, these activities have all been treated as discontinued operations in 2007, and 2006 has thus been restated accordingly. As a result, the revenues of the UK continuing business of £11.9 million in 2007 (2006 - £12.3million) represented 99% of the total, and this trend will continue into 2008 and beyond. Gross margin in respect of continuing operations improved significantly, from a negative £249,000 in 2006 to a positive £889,000 in 2007. Operating costs and expenses of continuing operations of £2.7 million were down 18% on 2006 due to cost-cutting measures. Consequently, the group showed a reduced operating loss for the year in respect of continuing operations of £2.2 million (2006 - £3.5 million).
Cellcast Asia Holdings
During the year, the company’s controlling shareholdings in Cellcast India and Cellcast SE Asia were transferred to a new company, Cellcast Asia Holdings, and additional funding of $5.25 million was introduced by Canaan Partners, a global private equity firm. As a result, the company’s interest in Cellcast Asia was diluted to 37.5% and the results of Cellcast Asia ceased to be consolidated from 31 August 2007 onwards. The terms of the Canaan deal valued the company’s residual shareholding at $5.1 million (£2.6 million), compared to an investment cost of £700,000. Importantly the company has no further funding obligations in respect of Cellcast Asia, which is currently seeking further funding to expand its infrastructure.
SUMO.tv
As indicated above, the SUMO.tv costs both internal and external have been capitalised under IFRS whereas previously they had been expensed under UK GAAP. At 31 December 2007 these costs totalled £1.9 million, of which £300,000 represented the license costs of the Sky channels on which the SUMO product was carried and £1.6 million other capitalised costs. In June 2008, the company announced that it had agreed to an exchange of its two SUMO channels on Sky for another Sky channel and a cash payment of £1.4 million which will result in a £1.1 million profit in the first half of 2008. The company carried out an impairment review of the SUMO asset at 31 December 2007, as a result of which the board concluded that the current and future earnings potential of the SUMO technology and content aggregation platform sustains the carrying value (following the Sky channel rearrangement) of £1.6 million. This is based on current and future earnings opportunities from the use of SUMO technology for various internet, mobile and TV applications. Now that the Sumo platform is fully developed and deployed there are unlikely to be further capitalised SUMO development costs from now on.
Cost reductions
The group has continued to make substantial cost reductions in 2007 in response to the changing business environment. Staff costs are the largest component and it is in this area that the main impact has been. At the start of 2007, the group had 86 employees in 4 different locations, mostly in the UK. At 31 December 2007, there were 71 employees, and by the end of June 2008 this will have been further reduced to 26 employees in the UK only. This reflects development staffing reductions on completion of the SUMO technical platform, the deconsolidation of the Indian and South East Asian activities, as well as general staff reductions. Premises are another important cost, and following the reduction in the number of employees in the UK, we have sublet part of the Bolsover Street head office premises to a third party.
Funding
The £1.4 million received following the Sky channel rearrangement described above enabled the company to repay all its short-term debt under overdraft and factoring facilities and to renegotiate the terms of its Headstart convertible term loan facilities. The company has now agreed a repayment programme with Headstart, who have waived their conversion rights if the company meets the repayment schedule, thus removing the potential equity dilution.
Outlook
After the massive disruption in 2006 from the Sky EPG reorganisation, the company believes that the UK operations will be profitable in 2008 (before group overheads) following the substantial cost-cutting exercise undertaken over the last year. UK revenues are currently running at over £1.1 million per month, and we anticipate that in 2008 Cellcast will revert to being the substantially UK based business that it was in 2005, with over 95% of its revenues arising in the UK.
The whole of the UK participation TV business has suffered as a result of controversy arising from the related activities of large terrestrial broadcasters such as ITV, Channel 4 and the BBC who have been investigated by the regulator Ofcom and fined for misconduct involving interactive voting. These actions caused a crisis of consumer confidence in participation TV services and Ofcom is now undertaking a review of the whole sector. There have been no significant consumer complaints relating to Cellcast’s services, but any new Ofcom regulations arising from the review could constrain some of the ways in which the group's products and services can be promoted.
The company has performed surprisingly well and consistently against a backdrop where both in the UK and other European markets, participation TV revenues of the large TV broadcasters and the market on the whole had declined by more than 70%. We hope that 2008 will be a significantly better year than 2007.
Julian Paul
Chairman
27 June 2008
REVIEW OF OPERATIONS
Group overview
The group faced significant challenges in the United Kingdom and internationally in 2007. Regulatory concerns arising from the practices of a number of broadcasters and media companies had a substantial impact on the business environment for interactive digital entertainment and in particular participation TV.
UK operations
The major effort in 2007 was to restore margins and manage a return to profitability after the uncertainties of 2006. This was achieved through the implementation of a major cost reduction programme and renewed efforts to enhance the group’s portfolio of products and services delivered across television, the internet and mobile phone platforms.
The group remains a leading provider of participation television programming in the United Kingdom, with a strong audience base. It produces over 600 hours of live interactive television per week, which is distributed across seven channels on the Sky Digital platform and is syndicated to a further three digital channels. Revenues are derived from audience participation in the television programmes, and increasingly via the web and mobile services, providing users with access 24-hours a day.
Increasingly, the group is deploying innovations developed by its User Generated Content (UGC) incubator, SUMO.tv. Proprietary technology and user-generated applications developed by SUMO are being applied to capture new opportunities arising from the growth of 3G, IPTV, enhanced broadband, video mobile and wireless broadband services in the UK.
International operations
The acquisition in August 2007 of the group’s operations in India, Sri Lanka, Malaysia and South-East Asia by a new regional venture formed by Canaan Partners, with the group retaining a significant but minority interest, was an endorsement of the international business model and secured independent future funding for these operations. The group no longer consolidates revenues from these markets, nor funds the operations in the region.
Network problems and termination issues in Brazil were not resolved in 2007, ceasing the group’s operations and revenues in this market. While South America as a whole continues to offer potential opportunities, the group’s overall strategy for 2008 means it is taking a risk-averse approach to relationships in this and other developing markets.
As a consequence of the divestment of the India and South-East Asia operations, and the difficulties encountered in Brazil, the group’s international revenues as a percentage of total revenues were sharply reduced from the 2006 figure.
In the Middle East, the group continues to offer premium billing services to regional broadcasters, and currently has fourteen direct agreements with GSM operators. With competition increasing – there are over 370 free-to-air TV channels available in the region – Cellcast ME is expanding its relationships with broadcasters and diversifying its revenue stream through offering mobile marketing and bulk SMS, SMS news alert services (primarily in Lebanon), and a new interactive TV production service drawing on the expertise and capacity of the UK operations. Cellcast ME incurred a loss in 2007, but following the diversification of its revenue sources, is expected to return to profitability in 2008.
SUMO.tv
SUMO.tv, the group's incubator of multi-platform technology solutions and new UGC services, built substantial audiences for its UK showcase channel on the Sky Digital platform and associated website in 2007, validating both the key technologies and short-form video content model.
Video services are becoming one of the key drivers of mobile entertainment. During 2007, new content distribution agreements were entered into with iVibe, which services O2 and the 3 Network in the UK and Vodafone in Spain, and with Mobibase in France and Tapuz Mobile in Israel on the Orange networks. Having identified those areas offering the best return on the investment made through the year, it was decided in late 2007 to focus on B2B opportunities in 2008. The group has been very successful in developing turnkey technology solutions to enable broadcasters to rapidly integrate user-generated content with existing programmes, and these are to be licensed to broadcasters worldwide, the majority of whose business models remain under attack from new media.
Proprietary technology
The group continues to build on its reputation as a pioneer of innovative new multi-platform formats and user-generated content applications. These are supported by a proprietary interactive broadcast services architecture which includes the Cellcast Interactive Platform (CIP), Network Attached Storage System (NAS), Transcoding Subsystem, Content Management System (CMS), Digital Asset Management System (DAMS), Rendering Engine, Website Kernel and 3G Subsystem.
In 2007, the technology division delivered the first full product line to use the content management and media delivery systems. Each aspect of user-generated content delivery, from mobile and web to television broadcast, was deployed using the CMS and MDP frameworks. In the first quarter of 2008, all of the group’s content and applications began migration to the new architecture, and in the second quarter of the year it is intended to license the frameworks to third parties as a B2B solution.
The group introduced a number of new and innovative features to its interactive platform in 2007. These included a suite of "Teller" applications which allow the TV system to inform web and mobile users of broadcast related information in real time - for example, informing a user and their friends via SMS when their uploaded video has been selected for broadcast; a suite of Personal Broadcasting applications that give users the ability to create their own personal channels by giving them access to Cellcast's library of rights cleared and complied content; and "Telly Conferencing", a new version of Cellcast's webcam/3G-to-screen technology which utilises flash video to enable participants to interact live with a TV programme presenter or other members of the audience.
Outlook for 2008
With global economic uncertainties having a significant impact on consumer spending in 2008, the group intends to follow a conservative growth strategy by leveraging its interactive content and multi-platform technology assets rather than making any new major investments. At the same time the group will renew its focus on providing innovative products and services to capture the opportunities arising from the growing uptake of 3G services, IPTV, and video mobile services in the UK market, all of which require compelling content to drive subscriptions.
The public consultation process on proposals by the UK regulator Ofcom to tighten the regulation of television and radio programmes which rely on premium rate telephone services is due to be completed in the summer of 2008. The group welcomes regulation intended to offer further protection to consumers, which is good for the interactive entertainment industry, its sustainability and growth. However, the technology driving convergence, together with the new tools facilitating audience participation, are blurring the lines between editorial and advertising, and this remains a significant challenge for regulators addressing new media services.
The international business model has been adapted to the extent that the group will in future partner with third-parties willing to underwrite the costs of distribution in consideration of a higher revenue share, rather than directly investing in media or airtime purchases itself. This will enable the group to minimise risk and better manage its resources in support of its content and application development and related B2B solutions.
Significant benefits are flowing back from the investment in content and technology for SUMO, particularly in regard to Cellcast's core participation TV applications and formats, enabling the company to develop new revenue streams from the internet and from 3G mobile services.
Interactive 3G mobile video products operated by Cellcast saw a 400% increase over the last twelve months. This is attributed to growing 3G handset penetration and increased familiarity with video calling in general and the ease of use of 3G video calling services. 2008 has also seen the integration of 3G video calling products with Cellcast's portfolio of TV channels and websites, offering yet another level of interaction to existing formats. A fully integrated interactive online and mobile chat and messaging platform, incorporating video calling between online webcam users with 3G video callers, is the most recent addition to a growing suite of products. The company's 3G traffic and revenue has more than doubled since October 2007 and is continuing to grow as these applications are distributed across more of Cellcast TV output.
| Andrew Wilson | Bertrand Folliet |
| Chief Executive Officer | Chief Operating Officer |
| 27 June 2008 | 27 June 2008 |
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2005
|
Note | 2007 |
2006 |
|
£ |
£ |
|
| Continuing operations | |||
Revenue |
12,008,998 |
12,477,818 |
|
Cost of sales |
(11,119,565) |
(12,727,205) |
|
|
|
|
|
Gross profit |
889,433 |
(249,387) |
|
|
|
|
|
| Operating costs and expenses: |
|
|
|
General and administrative |
(2,061,806) |
(2,467,988) |
|
Share option expense |
(150,665) |
(298,895) |
|
Amortisation & depreciation |
(489,200) |
(528,175) |
|
|
|
|
|
| Total operating costs and expenses | (2,701,671) |
(3,295,058) |
|
|
|
|
|
Operating loss |
(1,812,238) |
(3,544,445) |
|
|
|
|
|
Interest receivable and similar income |
6 |
4,898 |
31,968 |
Interest payable and similar charges |
7 |
(168,586) |
(6,872) |
| Share of loss in associates | (180,567) |
- |
|
|
|
|
|
| Loss before tax | 5 |
(2,156,493) |
(3,519,349) |
|
|
|
|
Current taxation |
- |
19,900 |
|
| Deferred taxation | 84,698 |
(84,698) |
|
|
|
|
|
| Total taxation | 84,698 |
(64,798) |
|
| Loss after tax for continuing operations | (2,241,191) |
(3,454,551) |
|
|
|
|
|
| Discontinued operations | |||
Profit /(loss) for the period from discontinued operations |
18,591 |
93,728 |
|
|
|
|
|
| Total loss for the year | (2,222,600) |
(3,360,823) |
|
|
|
|
|
Gain / (loss) attributable to minority interests |
30,684 |
(30,684) |
|
| Loss for the year attributable to equity holders of the parent | (2,253,284) |
(3,330,139) |
|
| Total loss for the year | (2,222,600) |
(3,360,823) |
|
| Loss per share | 8 |
||
Basic & diluted – continuing |
(3.8p) |
(10.6p) |
|
Basic & diluted – continuing and discontinued |
(3.7p) |
(10.3p) |
|
CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2007
|
2007 |
2006 |
|
|
|
|
£ |
£ |
|
|
|
Assets |
||
| Non-current assets | ||
Intangible assets |
2,212,605 |
1,099,404 |
Property, plant and equipment |
511,096 |
1,108,507 |
| Investments in associates | 561,217 |
4,933 |
Deferred tax |
- |
84,698 |
|
3,284,918 |
2,297,542 |
Current assets |
||
Inventories and work in progress |
- |
38,984 |
| Trade and other receivables | 2,270,027 |
6,997,017 |
Cash and cash equivalents |
7,533 |
135,677 |
2,277,560 |
7,171,678 |
|
| Total assets | 5,562,478 | 9,469,220 |
|
|
|
Capital and reserves |
||
Called up share capital |
2,265,398 |
1,331,619 |
Share premium account |
5,498,626 |
4,775,743 |
Merger reserve |
1,300,395 |
1,300,395 |
| Cumulative translation reserve | (5,159) |
24,995 |
Retained earnings |
(7,197,933) |
(5,245,614) |
Equity attributable to equity holders of the parent |
1,861,327 |
2,187,138 |
| Minority interest | - |
(30,684) |
| Total equity | 1,861,327 |
2,156,454 |
|
|
|
| Liabilities | ||
| Non-current liabilities | ||
| Finance leases | - |
70,202 |
| Current liabilities | ||
| Trade and other payables | 3,219,042 |
7,053,411 |
| Borrowings | 482,109 | 189,153 |
| Total liabilities | 3,701,151 | 7,312,766 |
| Total equity and liabilities | 5,562,478 | 9,469,220 |
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
| Amounts attributable to the equity holders of the parent undertaking | ||||||||
| Share capital | Share Premium | Merger Reserve | Cumulative Translation Reserve | Retained Loss | Total | Minority Interests | Total | |
| £ | £ | £ | £ | £ | £ | £ | £ | |
| Balance as at 1 January 2007 | 1,331,619 | 4,775,743 | 1,300,395 | 24,995 | (5,245,614) | 2,187,138 | (30,684) | 2,156,454 |
Profit / (loss) for the year |
- | - | - | - | (2,253,284) | (2,253,284) | 30,684 | (2,222,600) |
| Exchange translation | - | - | - | (30,154) | - | (30,154) | - | (30,154) |
| Total recognised income / (expense) for the year | - | - | - | (30,154) | (2,253,284) | (2,283,438) | 30,684 | (2,252,754) |
Share-based payment charge |
- | - | - | - | 150,665 | 150,665 | - | 150,665 |
Proceeds of share issue |
933,779 | 722,883 | - | - | - | 1,656,662 | - | 1,656,662 |
Warrant issue charge |
- | - | - | - | 150,300 | 150,300 | - | 150,300 |
| Balance as at 31 December 2007 | 2,265,398 | 5,498,626 | 1,300,395 | (5,159) | (7,197,933) | 1,861,327 | - | 1,861,327 |
| Balance as at 1 January 2006 | 850,407 | 4,038,676 | 1,300,395 | - | (2,214,370) | 3,975,108 | - | 3,975,108 |
Loss for the year |
- | - | - | - | (3,330,139) | (3,330,139) | (30,684) | (3,360,823) |
| Exchange translation | - | - | - | 24,995 | - | 24,995 | - | 24,995 |
| Total recognised income / (expense) for the year | - | - | - | 24,995 | (3,330,139) | (3,305,144) | (30,684) | (3,335,828) |
Share-based payment charge |
- | - | - | - | 298,895 | 298,895 | - | 298,895 |
Proceeds of share issue |
481,212 | 802,007 | - | - | - | 1,283,219 | - | 1,283,219 |
Share issue costs |
- | (64,940) | - | - | - | (64,940) | - | (64,940) |
| Balance as at 31 December 2006 | 1,331,619 | 4,775,743 | 1,300,395 | 24,995 | (5,245,614) | 2,187,138 | (30,684) | 2,156,454 |
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2007
|
||||
|
|
2007 |
2006 |
|
|
Note |
£ |
£ |
|
|
|
|
|
|
| Net cash outflow from operations | 9a | (432,743) |
(2,899,128) |
|
Income taxes |
|
- |
70,097 |
|
Interest received |
4,898 | 31,968 | ||
| Net cash outflow from operating activities |
|
(427,845) | (2,797,063) | |
Net cash outflow from investing activities |
9b |
(1,207,154) |
(1,145,198) |
|
Net cash generated from financing activities |
9c | 1,705,029 |
1,167,610 |
|
Net (decrease) / increase in cash and cash equivalents |
|
70,030 |
(2,774,651) |
|
Cash and cash equivalents at beginning of period |
(53,476) | 2,696,180 | ||
Exchange gains and losses |
|
(9,021) |
24,995 |
|
| Cash and cash equivalents at end of period | 7,533 | (53,476) | ||
NOTES
Notes to the consolidated cash flow statement and the consolidate financial statements are availble in the pdf download.
