Interim Report of Comptel Corporation for January - March 2012

Comptel Corporation          Stock exchange release, 20 April 2012 at 8.30 am

Net sales grew significantly from the previous year; results were impacted by an impairment loss and investments for growth.

• Net sales EUR 19.9 million (January - March 2011: 16.8), growth 18.4%
• Operating result EUR -12.0 million (-0.2), of which impairment loss EUR 10.2 million
• Operating result excluding impairment loss EUR -1.9 million (-0.2)
• Earnings per share EUR -0.10 (-0.02)
• Order backlog EUR 41.1 million (34.6)

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

Juhani Hintikka, President and CEO:

”In the first quarter Comptel’s business proceeded favourably as net sales grew significantly from the previous year, according to our expectations. We also managed to turn the Europe East region back on a growth track.

In line with our stated strategy, we continued to invest for growth and this decreased our operative profitability. The one-off costs relating to rebranding and marketing, the arbitration of the Cisco dispute and the Xtract acquisition increased our costs during the period under review. Subcontracting related to delivery projects and low license sales in the first quarter also declined the profitability. We will continue our efforts to bring new products into the market in order to increase the share of license sales. However, our total costs were exceptionally high during the quarter and we have taken measures to decrease our cost level.

We took a major step in executing our strategy by acquiring a leading customer analytics company, Xtract. The transaction completes our ‘event-analysis-action’ vision to help operators analyse events from the network and transform them into relevant and timely actions. The acquisition has been very favourably received by our customers and business integration has progressed as planned. By driving real-time business decisions telecom operators can provide value to their customers and operations.

Our operating result was impacted by an impairment loss, which we recorded following a change in our allocation method of goodwill.

After the reporting period, Comptel and Cisco have settled their dispute concerning the Axioss software which was under arbitration. In accordance with the settlement, the parties have agreed to withdraw all their claims against each other and the arbitration process has been terminated. It has been agreed that no financial compensation will be made between the parties.”

Business Review of the First Quarter 2012

Comptel’s net sales grew in the first quarter by 18.4 per cent from the previous year, to EUR 19.9 million (16.8). Project deliveries increased the Group’s net sales. License sales remained low in the period under review.

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 10.2 million in the first quarter result.

Following the impairment loss, the operating result for the period was EUR -12.0 million (-0.2), which corresponds -60.4 per cent of net sales (-0.9). Operating result excluding impairment loss was EUR -1.9 million (-0.2). Compared to the previous year, the share of service sales increased significantly and affected subcontracting costs. Also, the one-off costs relating to rebranding and marketing, the arbitration of the Cisco dispute and the acquisition decreased the operative profitability of the period. The company continued to invest in sales and service organisation and R&D. Comptel’s total costs were exceptionally high during the quarter and the company has taken measures to decrease the cost level.

Loss before taxes was EUR 12.5 million (0.3) and net loss was EUR 10.4 million (1.6). Earnings per share for the period under review were EUR -0.10 (-0.02).

Tax expense for the period was EUR -2.1 million (1.3), of which EUR 0.5 million were 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 8.2 million.

The Group’s order backlog grew from the previous year and was EUR 41.1 million (34.6) at the end of the period. Maintenance agreements represent EUR 24.3 million (20.8) and other order backlog EUR 16.8 million (13.8) of the total.

During the period under review, Comptel Corporation acquired Xtract Oy, a Finnish 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 has approximately 20 customers including telecom operators AVEA in Turkey, DNA in Finland, Megafon in Russia and TeliaSonera in Finland as well as insurance company If, retail and media companies. Xtract’s net sales were EUR 2.4 million in 2011. Xtract has 27 highly skilled employees. 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

Net sales grew significantly 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 and in the Americas.

In January - March, Comptel received 3 significant orders (3), 2 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.

The share of partner sales increased from the previous year.

Financial Position

The impairment loss was reflected in statement of financial position total which was EUR 62.8 million. The acquisition of Xtract Oy decreased the liquid assets which were EUR 6.8 million at the end of the period. Operating cash flow was EUR -0.7 million (3.1) in the first quarter.

The trade receivables were EUR 24.9 million (21.5) at the end of the period. The accrued income was EUR 12.7 million (8.0). The deferred income related to partial debiting was EUR 1.5 million (1.7).

Comptel Corporation withdrew a loan of EUR 2.0 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 56.9 per cent (67.1) and the gearing ratio was -13.1 per cent (-20.8).

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 26.0 per cent (22.9) of net sales.

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. During the review period three software releases were launched in these respective product areas.

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. In the first quarter, the personnel expenses were 53.6 per cent of net sales (52.6).

At the end of the period, 33.0 per cent (36.6) of the personnel were located in Finland, 23.7 per cent (25.2) in Malaysia, 9.6 per cent (5.7) in Bulgaria, 7.3 per cent (9.2) in the United Kingdom, 6.7 per cent (4.9) in the United Arab Emirates, 5.2 per cent (6.7) in Norway, and 14.5 per cent (11.7) in other countries where Comptel operates.

Comptel share

The closing share price of the period was EUR 0.57 (0.68). Comptel’s market value at the end of the period was EUR 60.9 million (72.7).

Of Comptel’s outstanding shares, 5.6 per cent (6.5) 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.

No share options were distributed during the review period.

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.

Ms Ulla Koivukoski joined Comptel as Senior Vice President, Marketing and Communications, and member of the Group Executive Board as of 1 February 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.

Events after the Reporting Period

Comptel Corporation and Cisco Systems Inc. have 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.

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.

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 earlier stated, in 2012 Comptel net sales are estimated to grow over 10 per cent from the previous year.

Following the impairment loss, operating result is estimated to remain negative. Operating profit excluding one-off items is estimated to represent 5 - 10 per cent of net sales.

Earlier Comptel had estimated the operating profit to represent 5 - 10 per cent of net sales.

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.

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.

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

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 199 thousand and result EUR -382 thousand for the period 10 February to 31 March 2012 is included in the comprehensive statement of income. Comptel Group net sales for 1 January – 31 March 2012 would have been EUR 20,292 thousand and loss EUR 10,166 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 2,094 thousand positive (EUR 1,329  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 543 thousand in January – March (EUR 690 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.

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 31 March 2012 and 31 March 2011.

9. Contingent liabilities

10. Events after the Reporting Period

Comptel Corporation and Cisco Systems Inc. have 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.

11. Key figures

12. Definition of key figures

Schedule for Comptel’s interim reports in 2012:

January - June: 18 July 2012
January - September: 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