Interim Report of Comptel Corporation 1 January - 30 June 2012

Stock exchange release, 18 July 2012 at 8.00 am

In April - June, order backlog rose to record high, net sales remained at the previous year’s level, high costs and the efficiency measures taken impaired the results.

Key figures for the second quarter:

• Net sales EUR 20.3 million (Q2 2011: 20.0)
• Operating result EUR -3.8 million (1.3)
• Operating result excluding one-off costs EUR -2.5 million (1.3)
• Earnings per share EUR -0.04 (0.00)
• Order backlog EUR 52.0 million (37.7)

Key figures for the first half:

• Net sales EUR 40.2 million (H1 2011: 36.8)
• Operating result EUR -15.7 million (1.2), of which impairment loss EUR 10.2 million
• Operating result excluding one-off costs EUR -4.2 million (1.2)
• Earnings per share EUR -0.14 (-0.01)

As stated earlier, in 2012 Comptel net sales are estimated to grow approximately 10 per cent from the previous year. Operating profit excluding one-off items is estimated to represent 0 - 5 per cent of net sales. Due to the impairment loss recorded in the first quarter and one-off items, operating result is estimated to remain negative. Characteristically a significant part of Comptel’s operating profit and net sales is generated in the second half of the year.

Comptel has restated retrospectively the cost figures for reporting periods 2010 - 2012. The correction declined the option costs for the aforementioned period with EUR 0.6 million and for the period under review with EUR 0.1 million. The changes are described in detail in the table part of this interim report.

Juhani Hintikka, President and CEO:

”During the second quarter, our order backlog rose to a record high level as we won a significant project with a value of EUR 5.4 million to consolidate the mediation systems of a leading operator in Western Europe. Although our net sales did not meet expectations, the growth continued in our largest regions in Europe and Asia. In total, we won seven new customers. The customer analytics expertise that we acquired has raised lot of interest, and during the quarter we won the first deal for Comptel Social Links software.

The operative result of the second quarter was impaired by increased personnel costs as well as costs related to project deliveries and marketing. In addition, the share of license revenue of the net sales remained low. We initiated actions to improve our profitability by streamlining R&D in Norway. Overall, we aim to achieve annual cost savings of approximately EUR 10 million, of which EUR 3 - 4 million will be realised in the latter part of this year. We will continue executing our stated strategy and remain confident that the productivity programme will secure our competitiveness.

In order to achieve profitable growth we will continue our efforts to bring new products into the market. In May, we launched Next Generation Comptel Fulfillment software, a strategic key product that has been very favourably received in our industry.”

Business Review for the Second Quarter and the First Half of 2012

In the second quarter, Comptel’s net sales increased by 1.2 per cent from the previous year and were EUR 20.3 million (20.0). In the first half, net sales grew by 9.1 per cent from the previous year and were EUR 40.2 million (36.8). Project deliveries increased the Group’s net sales. License sales remained low in the period under review.

In the second quarter, the operating result was EUR -3.8 million (1.3), which corresponds to -18.8 per cent of net sales (6.4). The operating result was burdened by restructuring costs related to R&D in Norway and the Group’s office premises. Excluding these one-off items, operating profit was EUR -2.5 million (1.3). The comparable operating result was impaired by increased personnel costs as well as costs related to project deliveries and marketing and by a low share of license sales.

Following the impairment loss recorded in the first quarter, the operating result for the first half was EUR -15.7 million (1.2), which corresponds to -39.1 per cent of net sales (3.2). Operating result excluding impairment loss and one-off items was EUR -4.2 million (1.2). In line with its strategy, Comptel continued to invest in its sales and service organisation and R&D during the first half. The share of services revenue of net sales has increased and this is reflected in the operative profitability. However, total costs were exceptionally high during the quarter and the company has taken measures to decrease the cost level. In order to improve the profitability, company aims to achieve annual cost savings of approximately EUR 10 million, of which EUR 3 - 4 million will be realised in the latter part of this year.

In the first half of the year, profit before taxes was EUR -16.7 million (0.9) and net loss was EUR -14.8 million (-1.4). Earnings per share for the period under review were EUR -0.14 (-0.01).

Tax expense for the review period was EUR -1.8 million (2.3), including EUR 1.0 million of withholding taxes. In connection with the impairment of goodwill, a change of EUR 2.5 million was booked in deferred tax liabilities. The cumulative amount of outstanding, non-credited withholding taxes payment since 2004 is EUR 8.6 million.

The Group’s order backlog grew significantly and was EUR 52.0 million (37.7) at the end of the period. Maintenance agreements represent EUR 26.5 million (20.4) and other order backlog EUR 25.5 million (17.3) of the total. Order flow for the new deliveries increased strongly from the first quarter of the year.

During the period under review, Comptel Corporation acquired Xtract Oy, a software company specialising in analytics, for a total consideration of EUR 3.1 million (enterprise value). By combining the leading analytics capabilities with its existing software, Comptel will this year create an offering which will enable operators to react quickly to events from the network and transform them automatically into relevant and timely actions that improve customer experience. Xtract Group was consolidated into Comptel Group financials as of 10 February 2012. The acquisition was financed through Comptel Corporation's liquid assets. The 20 Xtract employees working in Finland have moved to Comptel office in Helsinki and globally as part of Comptel organisation.

Business areas

In the second quarter, net sales grew in the reporting segments of Europe East, Europe West and in Asia Pacific. In the first half, net sales increased in all regions except Asia Pacific where a major license deal was booked in the previous year. Following the growth of net sales, the proportional profitability improved in Europe East.

In January - June, Comptel received 7 significant orders (H1 2011: 10), 6 policy control & charging and 1 managed services. As significant orders Comptel reports sold projects and licenses with a value of EUR 500,000 at the minimum.

License sales remained low which impaired the profitability. A major part of net sales consisted of project deliveries, which considerably increased the share of services. Maintenance revenue consists of maintenance and support of the delivered systems.

There were no significant changes in the sales distribution between channels.

Financial Position

The impairment loss was reflected in statement of financial position total which was EUR 64.3 million. The acquisition of Xtract Oy decreased the liquid assets which were EUR 6.1 million at the end of the period. The dividends of EUR 3.2 million (4.3) were paid in the second quarter.

Operating cash flow was EUR 0.3 million (3.5) in the second quarter and EUR -0.3 million (6.6) during the first half.

The trade receivables were EUR 26.0 million (20.2) at the end of the period. The accrued income was EUR 11.5 million (7.9). The deferred income related to partial debiting was EUR 3.3 million (2.0).

Comptel Corporation withdrew a loan of EUR 7.0 million during the review period. The company has available a revolving credit facility of EUR 15.0 million maturing in the year 2013. The equity ratio was 47.8 per cent (72.3) and the gearing ratio was 4.8 per cent (-16.6).

Research and Development (R&D)

R&D expenditure increased from the previous year as Comptel actively developed new products for the market. Investments in R&D will increase the expenditure this year. Direct R&D expenditure represented 24.8 per cent (21.0) of net sales in the period under review.

Comptel’s R&D expenditure was mainly targeted at the service fulfillment automation of telecom operators and to the management and analysis in real-time of rapidly increasing data traffic. Comptel seeks market leadership in these areas where key business challenges of operators will be solved. In addition, the company is developing an integrated software platform, which will enable a cost-efficient and solution-based R&D.

This year, the company focuses on developing its offering within the Fulfillment, Policy Control & Charging and Intelligent Customer Interaction product areas. In Intelligent Customer Interaction, integrating the acquired Xtract customer analytics into the Comptel software platform is a priority. With a combined offering, Comptel can help operators to improve customer loyalty as well as enable individually targeted marketing. Comptel introduced Next Generation Comptel Fulfillment software platform into the market in May and in addition five software releases were launched in these respective product areas during the first half of the year.

Investments

The acquisition of Xtract Oy increased the gross investments from the previous year. The other investments comprised of devices, software and furnishings. The investments were funded through cash flow from operations.

Personnel

The number of employees increased significantly from the previous year as Comptel continued to invest in its sales, service and R&D organisation. 27 employees joined Comptel as Xtract was consolidated into Comptel Group during the period under review.

In April - June, personnel expenses were 59.6 per cent of net sales (44.9). In the first half, the personnel expenses were 56.3 per cent of net sales (48.2).

At the end of the period, 32.3 per cent (34.8) of the personnel were located in Finland, 23.3 per cent (24.8) in Malaysia, 9.7 per cent (7.0) in Bulgaria, 7.6 per cent (8.7) in the United Kingdom, 6.9 per cent (5.4) in the United Arab Emirates, 4.8 per cent (6.2) in Norway, and 15.4 per cent (13.1) in other countries where Comptel operates.

Comptel share

Closing share price of the period was EUR 0.41 (0.61). Comptel’s market value at the end of the period was EUR 43.8 million (65.2).

Of Comptel’s outstanding shares, 5.4 per cent (7.3) were nominee registered or held by foreign shareholders at the end of the period.

Elisa Corporation notified on 17 January 2012 that its direct ownership in Comptel Corporation had increased to over the 10% threshold following the merger of Saunalahti Group Oyj into Elisa Corporation. Elisa Group's ownership remained unchanged.

During the period, Comptel Corporation allotted gratuitously 111,186 shares to the members of the Board of Directors as part of their annual compensation and 25,000 shares to the President and CEO of the company according to the terms and conditions of the 2011 share-based incentive plan.

The company held 156,499 of its own shares at the end of the period, which is 0.15 per cent of the total number of its shares. The total counter-book value of the shares held by the company was EUR 3,130.

Corporate Governance

The Annual General Meeting (AGM), held on 26 March 2012, re-elected Mr Hannu Vaajoensuu and Mr Petteri Walldén as members of the Board of Directors and elected Mr Pertti Ervi, Ms Eriikka Söderström and Mr Antti Vasara elected as new members of the Board of Directors. In its meeting held after the AGM, the Board of Directors elected Mr Pertti Ervi as chairman and Mr Hannu Vaajoensuu as vice chairman. The Board decided not to set up committees.

The AGM resolved to elect Ernst & Young Oy as authorised public accountant, Mr Heikki Ilkka being the principal auditor.

The AGM approved the proposal of Board of Directors that a dividend of EUR 0.03 per share be paid for 2011. The dividend was paid on 12 April 2012.

The AGM decided to issue stock options to the key personnel of the Comptel Group as a part of the incentive and commitment program for the key personnel.

The AGM authorised the Board of Directors to decide on share issues amounting to a maximum of 21,400,000 new shares and on repurchase of the company's own shares up to a maximum number of 10,700,000 shares. The authorisations are valid until 30 June 2013. However, the authorisation to implement the company's share-based incentive programs is valid until five years from the AGM resolution.

A separate stock exchange release about the authorisations given and other decisions made by the Annual General Meeting was published on 26 March 2012.

During the period under review, the Board of Directors resolved on a new share-based incentive plan for the Group key personnel. The aim of the new plan is to combine the objectives of the shareholders and the target people in order to increase the value of the company, to commit the target people to the company, and to offer them a competitive reward plan based on long-term shareholding in the company.

In April, Comptel Corporation and Cisco Systems Inc. settled the dispute under arbitration concerning Comptel’s use of a certain sub-set of Axioss software that was sold to Cisco and simultaneously licensed back to Comptel for use in the current release of Comptel Fulfillment. Cisco brought the matter to the London Court of International Arbitration in December 2011. In accordance with the settlement, the parties have agreed to withdraw all their claims against each other and the arbitration process has thereby been terminated. It has been agreed that no financial compensation will be made between the parties. Comptel will continue in the fulfillment business and will, consistent with the terms of Cisco’s license back to Comptel, support its existing Axioss and Comptel Fulfillment customers.

Events after the Reporting Period

In July, Comptel concluded negotiations under the local legal requirements and collective agreements to downsize the R&D personnel in its subsidiary in Norway. Following the negotiations Comptel will make 14 employees redundant in R&D and administration. With these measures, Comptel Corporation will reach annual cost savings of approximately EUR 2 million.

Near-term Risks and Uncertainties

Comptel develops dynamic end-to-end solutions for leading operators globally in the telecom field. This requires Comptel to understand correctly the trends taking place in its business environment and the needs of its customers and resellers by each region. Failure to identify market conditions, address customers’ needs and develop its products in a timely way may significantly undermine the growth of Comptel’s business and its profitability.

If the company fails to realise approximately EUR 10 million cost savings on the annual level, it will have an impact on the company's financial results and financial position.

Characteristics for Comptel’s field of industry are significant quarterly variations of net sales and profit, which are related to customers’ purchasing behaviour and the timing of major single deals.

Comptel operates globally so it is exposed to risks arising from different currency positions. Exchange rate changes between the Euro, which is the company’s reporting currency, and the US Dollar, UK Pound Sterling, Malaysian ringgit and Norwegian Krone affect the company’s net sales, expenses and net profit.

The application process to prevent Comptel’s double taxation is still pending with the Ministry of Finance in Finland. The company believes the treatment of its withholding taxation will be changed. However, the process between the states is very slow and the timing of a change is hard to forecast.

The risks and uncertainties of Comptel are described more in detail in the company’s financial statements and the Board of Directors’ report for 2011.

Outlook

As stated in 15 June 2012, in 2012 Comptel net sales are estimated to grow approximately 10 per cent from the previous year.

Operating profit excluding one-off items is estimated to represent 0 - 5 per cent of net sales. Due to the impairment loss recorded in the first quarter and one-off items, operating result is estimated to remain negative.

Characteristically a significant part of Comptel’s operating profit and net sales is generated in the second half of the year.

TABLE PART

The interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting, as adopted by the EU. The accounting policies and methods of computation adopted in the financial statements are consistent with those of the annual financial statements for the year ended 2011 except for the application of new or amended standards and interpretations as set forth in note 1.

Comptel has adopted IAS 8 to correct errors discovered in the figures for the reporting periods 2010, 2011 and Q1/2012. The nature of the error is described in note 13.

All figures in the financial report have been rounded and consequently the sum of the individual figures can deviate from the sum figure. The interim report is unaudited.

^*Year 2011 error has been corrected.
 

^*Year 2011 error has been corrected.

^*Year 2011 error has been corrected.
 

Notes

1. Application of new or amended standards and interpretations

On 1 January 2012 the Group adopted the following new and amended standards and interpretations endorsed by the EU and that are applicable to Comptel:

Amendments to IFRS 7 Financial Instruments: Disclosures (effective for financial years beginning on or after 1 July 2011). The amendments will promote transparency in the reporting of transfer transactions and improve users’ understanding of the risk exposures relating to transfers of financial instruments and the effect of those risks on an entity’s financial position, particularly those involving securitisation of financial assets.

2. Segment information

Net sales by segment

Operating profit/loss by segment
 

^*Year 2011 error has been corrected.

3. Business combinations

On 9 February 2012, Comptel Corporation acquired all shares of Xtract Oy, a Finnish software company specialising in analytics.

By acquiring Xtract the company creates a unique offering by combining world class analytics capabilities with its existing assets. This offering enables operators to react quickly to events from the network and transform them automatically into relevant and timely actions that improve the customer experience.
 
The total consideration (enterprise value) was EUR 3,100 thousand. The actual purchase price EUR 2,075 thousand was paid in cash.

The goodwill according to IFRS 3 is EUR 1,993 thousand after the fair value allocations reflected in net assets. EUR 215 thousand was recognised in intangible assets which are amortised over five years.

The goodwill is attributable to the skilled workforce of Xtract and the utilisation potential of Comptel’s existing sales channel to promote Xtract products.

The values of the assets and liabilites arising from the acquisition were as follows:

Comptel has expensed acquisition-related consultation fees of EUR 145 thousand. The fees are included in other operating expenses.

Xtract’s net sales EUR 440 thousand and result EUR -1,117 thousand for the period 10 February to 30 June 2012 are included in the comprehensive statement of income. Comptel Group net sales for 1 January – 30 June 2012 would have been EUR 40,552 thousand and loss EUR 14,739 thousand if Xtract had been consolidated from the beginning of the year 2012.

4. Impairment loss on goodwill

Comptel changed the allocation method of goodwill during the first quarter of the year. Due to the change, an impairment testing was carried out on a new cash generating unit level. Previously, it had not been possible to allocate goodwill specifically to any segment or cash generating unit. As a result of impairment testing Comptel recorded an impairment loss of EUR 10,179 thousand in the first quarter result.

In the test, the recoverable amount of goodwill is determined based on value in use calculation. The value in use is computed based on discounted forecast cash flows. The cash flow forecasts rely on the plans approved by the Board of Directors and management concerning in particular profitability and the growth rate of net sales. The plans cover a five-year period taking into account the recent development of business. The used pre-tax discount rate is 16.4%.

The cash flows after the five-year period have been forecast by estimating the future growth rate of net sales to be 0%.

The use of the testing model requires making estimates and assumptions concerning investments, market growth and general interest rate level.

5. Income tax

Income tax according to the statement of comprehensive income for the period was EUR 1,839 thousand positive (EUR 2,275  thousand negative in 2011) as a change of EUR 2,494 thousand in deferred tax liabilities was booked in connection with the impairment of goodwill.

In 2006, Adjustment of the Tax Office for Major Corporations refused to accept the crediting of taxes withheld at source in taxation of 2004 and 2005.

Comptel is pursuing negotiations with the Ministry of Finance and the other countries that have withheld tax at source to avoid double taxation. The company believes the treatment of its withholding taxation will be changed. The negotiation process between countries is, however, very slow and the time for the change to take place is very difficult to predict.

According to the Board of Adjustment’s decision currently in force, Comptel Corporation has expensed taxes withheld at source amounting to EUR 961 thousand in January – June (EUR 921 thousand).

6. Tangible assets

7. Related party transactions

The Comptel Group has a related party relationship with its associate, the Board of Directors, the Executive Board and also with people and companies under Comptel management’s influence.

Transactions, which have been entered into with related parties are as follows:

Remuneration to key management

The key management personnel compensation includes the employee benefits of the members of the Board of Directors and the Executive Board.
 

Guarantees and other commitments

8. Commitments

Minimum lease payments on non-cancellable office facilities and other operating leases are payable as follows:

The group had no material capital commitments for the purchase of tangible assets at 30 June 2012 and 30 June 2011.

9. Contingent liabilities

10. Events after the Reporting Period

In July, Comptel concluded negotiations under the local legal requirements and collective agreements to downsize the R&D personnel in its subsidiary in Norway. Following the negotiations Comptel will make 14 employees redundant in R&D and administration. With these measures, Comptel Corporation will reach annual cost savings of approximately EUR 2 million.

11. Key figures

^*Year 2011 error has been corrected.
 

^*Year 2011 error has been corrected.

12. Definition of key figures

13. Corrections to figures reported in 2010, 2011 and Q1/2012

An error was discovered in the line item Employee benefits for the periods 2010, 2011 and Q1/2012. The errors have been corrected retrospectively according to IAS 8. The errors were related to the calculation of option costs. The correction of the error in 2010 did not have an impact on the amount of equity and no restated opening balances are presented. The key figures for the financial year 2010 will be restated and presented in the financial statements for 2012. The statement of comprehensive income for 2011 was changed as follows:

The earnings per share figure has also been restated. Due to the rounding it did not have impact on the key figure. The correction did not impact the amount of equity.

The restated quarterly figures for 2011 and Q1/2012 are as follows:

Schedule for Comptel’s next interim report: January - September 2012, 18 October 2012

COMPTEL CORPORATION
Board of Directors


Additional information:
Mr Juhani Hintikka, President and CEO, tel. +358 9 700 1131
Mr Mikko Hytönen, CFO, tel. +358 40 758 5801
Mr Samppa Seppälä, Director, IR and Corporate Communications, tel. +358 50 568 0533

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www.comptel.com