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Tecnotree Corporation Interim Report 1 Jan - 30 Jun 2011 (unaudited)

Tecnotree Corporation
Interim Report
10 August 2011 at 8.30 am

Positive operating result in the second quarter

Net sales in the second quarter of the year, EUR 18.5 million (EUR 19.3 million last year), were EUR 7.9 million more than in the previous quarter. The cash flow after investments was EUR -5.5 (-4.6) million. The adjusted operating result* was EUR 3.3 (2.0) million. Net sales for the first half of the year were EUR 29.1 (33.5) million.. The order book at the close of the period stood at EUR 21.5 million (31 December 2010: EUR 14.3 million).
 

* Adjusted operating result = operating result before R & D capitalisation, amortization of this and one-time costs. Details of these are given in the section “Result analysis”.

Unless otherwise stated, all figures presented below are for the review period 1-6/2011 and the figures for comparison are for the corresponding period 1-6/2010.

President and CEO Kaj Hagros:

”During the first half of 2011 net sales fell to EUR 29.1 million from EUR 33.5 million in the same period last year. Sales in the Middle East and Africa were higher than in 2010 but in other regions were lower than in the previous year. However, the company has received an encouraging number of new orders in the product areas prioritised in its revised strategy, and we believe that sales in the second half of the year will increase from the previous year in many areas.  We are currently negotiating new business that would position us for further growth. The 2011 net sales and the adjusted operating result are expected to match or exceed the 2010 figures.”

SALES AND NET SALES

Tecnotree’s net sales in the review period declined 13.2 per cent to EUR 29.1 (33.5) million. The reduction was mainly due to the low net sales in the first quarter.
EUR 14.3 million of sales in the review period have been recognised by stage of completion (IAS 11 Construction Contracts) and EUR 14.8 million on delivery (IAS 18 Revenues).
 

Maintenance and service sales totalled EUR 13.0 (13.6) million or 44.7 per cent (40.6 %) of net sales.

RESULT ANALYSIS

Tecnotree’s business operations are based on project sales. The income and costs recorded for these vary considerably from one quarter to another. For this reason it is important to base an examination of the profitability of the company on the result for more than one quarter.
 

The adjusted operating result was down EUR 3.0 million from the previous year. This was due in particular to low net sales in the first quarter of the year.

Capitalisation of research and development costs and amortisation of this had the net impact of weakening the result by EUR 1.2 million compared to the corresponding period in the previous year.

The operating result for the review period includes one-time costs of EUR 2.4 million for settling the law suit brought against the company early in the year.

Taxes for the period totalled EUR 1.8 (1.1) million, including the following items:
 

Earnings per share were EUR -0.12 (-0.05). Equity per share at the end of the period was EUR 0.81 (EUR 1.11).

FINANCING AND INVESTMENTS

Tecnotree’s liquid funds totalled EUR 10.4 (31.12.2010: 16.7) million. The change in cash and cash equivalents for the review period was EUR -6.3 million.

The balance sheet total on 30 June 2011 stood at EUR 105.1 (123.4) million. Interest-bearing liabilities were EUR 25.6 (17.9) million. The net debt to equity ratio (net gearing) was 23.9 per cent (-6.2 %). The balance sheet structure remained strong and the equity ratio on 30 June 2011 was 57.4 per cent (66.9 %).

Tecnotree’s gross capital expenditure during the review period, excluding the capitalisation of development costs, was EUR 0.6 (0.5) million or 2.2 per cent (1.4 %) of net sales.

Financial income and expenses (net) during the review period totalled EUR 0.5 (-1.3) million. The change from the comparative period is due mainly to the positive change in loan interest hedging in the review period.
 

Tecnotree is planning additional funding in the range of EUR 10 million during the rest of the year, in order to improve its financing structure, finance working capital and accelerate growth.

The company has receivables totalling EUR 5.9 million from a government owned customer in the MEA region, for which impairment totalling EUR 0.9 million has been booked in 2010 and EUR 1.1 million in the review period.

SEGMENT INFORMATION

The operating segments under IFRS 8 reported by Tecnotree are the geographical areas, which are Americas (North, Central and South America), Europe, MEA (Middle East and Africa), and APAC (Asia Pacific). This is because their results are monitored separately in the company’s internal financial reporting. Tecnotree’s chief operating decision maker, as referred to in IFRS 8, is the Group’s management board.

Net sales and the result for the operating segments are presented based on the location of customers. The result for the operating segments includes the costs that can be allocated to the segments on a reasonable basis. Common costs for the whole Group as well as taxes and financial items are not allocated.

GEOGRAPHICAL AREAS

Tecnotree Group operates in the following geographical areas: Americas (North, Central and South America), Europe, MEA (Middle East and Africa) and APAC (Asia Pacific).

Americas (North, Central and South America)

In Latin America net sales were weaker than in the corresponding period in the previous year, although the figures were higher than the targets set in the business plan for the first half of the year. The order book increased significantly. Tecnotree received several orders from existing clients in the region for expansions of current systems and for completely new solutions. Relative growth in regional sales is highest specifically in systems supporting the business of operators, based on products developed by Tecnotree’s business unit in India. Operators are continuously launching new projects in Latin America, investing in the expansion or replacement of existing systems, and these offer growth potential for Tecnotree.

Europe

Net sales in the Europe region fell slightly short of the figure for the previous year. Good progress has been made with delivery projects but income recognition for them fell short of targets. Tecnotree has made a major effort to sell its new solutions in Europe and expects to see concrete results from this in the form of new orders in the second half of the year.

MEA (Middle East and Africa)

Sales in the Middle East and Africa continued to increase in the first half of the year from the previous year. New orders were received especially for support systems and managed services for the operator’s business. The company received orders in new countries through existing clients and began delivery of a major cloud computing business solution for joint use by four clients with operations in different countries. Business growth in Middle East and Africa could be even faster if the scaling up or down of delivery capacity could be improved.

APAC (Asia and Pacific)

Sales in the APAC region in the first half of the year fell clearly from the previous year, but there were signs of improvement in the second quarter. Business at the start of the year focused on renewing annual service contracts and ensuring the company won the contracts for replacing existing systems, and this was very successful. Relatively few completely new projects were underway in the region in the first half of the year, so Tecnotree concentrated on serving existing customers. In the second half of the year the focus will be much more on developing new customer relations and on expansion and replacement projects for existing customers.

RESEARCH AND DEVELOPMENT

Research and development costs during the review period totalled EUR 6.3 (6.7) million, corresponding to 21.8 per cent (20.1 %) of net sales. EUR 0.0 (0.4) million of development costs were capitalised. At the end of review period, Tecnotree does not have any open capitalised research and development projects. Capitalised costs are amortised over 3-5 years from the start of commercial use. R&D costs of EUR 3.7 (2.9) million were amortised during the review period.

PERSONNEL

At the end of June 2011 Tecnotree employed 930 (31.12.2010: 858) persons, of whom 77 (31.12.2010: 70) worked in Finland and 853 (31.12.2010: 788) elsewhere. The company employed on average 895 (756) people during the review period. Personnel by country were as follows:
 

TECNOTREE SHARES AND SHARE CAPITAL

At the end of June 2011 the shareholders’ equity of Tecnotree Corporation stood at EUR 59.5 (31.12.2010: 72.1) million and the share capital was EUR 4.7 million. The total number of shares was 73,630,977. The company held 134,800 of these shares, which represents 0.18 per cent of the company’s total number of shares and votes. Equity per share was EUR 0.81 (31.12.2010 0.98).

A total of 13,510,826 Tecnotree shares (EUR 6,341,616) were traded on the Helsinki Exchanges during the period 3 January – 30 June 2011, representing 18.3 per cent of the total number of shares.

The highest share price quoted in the period was EUR 0.63 and the lowest EUR 0.33. The average quoted price was EUR 0.47 and the closing price on 30 June 2011 was EUR 0.53. The market capitalisation of the share stock at the end of the period was EUR 39,024,418.

CURRENT AUTHORISATIONS

The Annual General Meeting held on 23 March 2011 authorised the Board of Directors to decide on the acquisition of a maximum of 7,360,000 of the Company’s own shares. Own shares may be acquired with unrestricted shareholders’ equity otherwise than in proportion to the holdings of the shareholders through public trading of the securities on NASDAQ OMX Helsinki Oy at the market price of the shares in public trading at the time of the acquisition. Own shares may be acquired for the purpose of developing the capital structure of the Company, carrying out corporate acquisitions or other business arrangements to develop the business of the Company, financing capital expenditure, to be used as part of the Company’s incentive schemes, or to be otherwise retained in the possession of the Company, disposed of or nullified in the extent and manner decided by the Board of Directors. The authorisation is valid for one year from the decision of the Annual General Meeting. The Board of Directors has not exercised this authorisation during the review period.

Furthermore, the Annual General Meeting authorised the Board of Directors to decide to issue and/or to convey a maximum of 17,800,000 new shares and/or the Company’s own shares either against payment or for free. New shares may be issued and the Company’s own shares may be conveyed to the Company’s shareholders in proportion to their current shareholdings in the Company or waiving the shareholder’s pre-emption right, through a directed share issue if the Company has a weighty financial reason to do so. The Board of Directors may also decide on a free share issue to the Company itself. The Board of Directors is, within the authorization, authorized to grant the special rights referred to in Chapter 10, Section 1 of the Companies Act. The authorisation is valid for one year from the decision of the Annual General Meeting.

STOCK OPTION PROGRAMMES

During the review period the company had in force the 2006 and 2009 stock option programmes. The exercise period for the 2009A options ended on 31 March 2011 and for the 2006B options on 30 April, 2011.

At its meeting on 9 March 2011, the company’s Board of Directors allocated altogether 575,000 2006C options, 315,000 2009B options, and 445,000 2009C options

The state of the options on 30 June 2011 was as follows:
 

Some of the 2009B and 2009C stock options become available to key personnel based on a performance appraisal. The stock options are part of the incentive and commitment scheme for key personnel.

Altogether 6,481,031 stock options remained on 30 June 2011 of all the company’s stock options in circulation. The shares that could be subscribed on the basis of these stock options accounted for a maximum of 8.09 % of the Company’s shares and the votes carried by the shares after any increase in share capital. On 30 June 2011 the Company still held 2,528,647 of all the current stock options. The issued stock options had a maximum diluting effect on 30 June 2011 of 5.09 %.

RISKS AND UNCERTAINTY FACTORS

The greatest risks in Tecnotree’s operations are related to major customer and partner relationships, to agreements made with these, and to the correct timing of product development decisions.

Tecnotree’s largest customers are much bigger businesses than the company itself and the five largest customers account for more than half of net sales. The relationship between the company and its major customers is one of interdependence, which poses a potential risk but also offers significant new business opportunities.

Certain commitments are associated with the project and maintenance agreements made by the company, and unforeseen costs may arise in the future from these agreements. The company aims to limit these liabilities with limitation of liability clauses in customer contracts. In addition the company has a current global liability insurance to cover any liabilities that may materialise in connection with customer projects.

Project deliveries result in large accounts receivable. Most of Tecnotree’s net sales come from developing countries and some of these contain political and economic challenges. There is the risk of a considerable delay in the payment of invoices in these countries and that Tecnotree will have to record credit losses. The payment record of customers and the situation concerning trade receivables are actively monitored and credit rating checks are made on new customers before confirming an offer.

The company has receivables totalling EUR 5.9 million from a government owned customer in the MEA region, for which impairment totalling EUR 0.9 million has been booked in 2010 and EUR 1.1 million in the review period.

Changes in exchange rates create risks especially in sales activities. A significant part of the company’s net sales is in US dollars. The company hedges its currency denominated net position for a maximum period of 12 months, using currency forward contracts and currency options. Liquid funds are invested, avoiding credit and liquidity risks, in money-market deposits and short-term interest funds with a good credit rating.

Carrying out projects creates risks. They are contained for example in projects that require new product development, where creating new product features may prove more difficult than anticipated. Another problem with project sales arises from variations in net sales and profit during the different quarters of the year. Forecasting these variations is often difficult.

Tecnotree operates in a rapidly changing sector. When making R&D decisions there is the risk that the choice made may not bring the expected returns.

The acquisition of Tecnotree Convergence Limited opened up many new opportunities for Tecnotree. Taking advantage of these requires various changes in sales and R & D activities and in the organisation, and there are risks relating to the success of these changes. The amount paid for the acquisition and the resulting goodwill also involve risks.

Tecnotree’s risks and uncertainties in the near future relate to major projects and to their timing, deliveries, receivables and changes in foreign exchange rates.

EVENTS AFTER THE END OF PERIOD

No significant events have occurred after the end of period.

PROSPECTS IN 2011

The company is currently carrying out its strategy based on an expanded product range. Tecnotree is turning into an advanced supplier of telecommunications system solutions, operating in a broad sector. The company is anticipating new growth based on the new range of products and solutions that it announced on 14 February 2011.

Net sales and the adjusted operating result are expected to match or exceed the 2010 figures. Quarterly variations will be considerable.

The adjusted operating result is the operating result before capitalisation of development costs, amortization of these and one-time costs.

FINANCIAL INFORMATION

Tecnotree is holding a conference for analysts and the media to announce its results for the second quarter of 2011 at 10.00 am on 10 August 2011 in the Pavilion conference room at the Scandic Hotel Simonkenttä, Simonkatu 9, Helsinki. The interim review will be presented by CEO Kaj Hagros and the conference will be held in Finnish. The material to be presented at the press conference will be available at www.tecnotree.com.


TECNOTREE CORPORATION

Board of Directors


FURTHER INFORMATION
Mr Kaj Hagros, President and CEO, tel. +358 (0)40 849 1749
Mr Tuomas Wegelius, CFO, tel. +358 (0)400 433 228


DISTRIBUTION
NASDAQ OMX Helsinki Ltd
Main media
www.tecnotree.com


TABLE SECTION

The financial figures in the income statement, balance sheet and key indicators are presented in million euros. The figures shown here have been calculated using exact values.
 

CALCULATION OF CHANGES IN SHAREHOLDERS’ EQUITY, MEUR
 

A = Share capital
B = Share premium fund
C = Own shares
D = Translation differences
E = Invested non-restricted equity reserve
F = Other reserves
G = Retained earnings
H = Total equity attributable to equity holders of parent company
I = Non-controlling interest
J = Total shareholders’ equity
 

1. ACCOUNTING PRINCIPLES FOR THE INTERIM REPORT

This interim report has been prepared in accordance with the international financial reporting standard IAS 34 Interim Financial Reporting. The formulas for calculating the key figures presented and the accounting principles for the interim report are the same as the principles published in the 2010 Annual Report. The new and revised IFRS regulations that came into force on 1 January 2011 have not had a significant impact on the accounting principles and basis for preparing the interim report.

2. SEGMENT INFORMATION

The operating segments under IFRS 8 reported by Tecnotree are the geographical areas, which are Americas (North, Central and South America), Europe, MEA (Middle East and Africa), and APAC (Asia Pacific). This is because their results are monitored separately in the company’s internal financial reporting. Tecnotree’s chief operating decision maker, as referred to in IFRS 8, is the Group’s management board.

Net sales and the result for the operating segments are presented based on the location of customers. The result of the operating segments includes costs that can be allocated to the segments on a reasonable basis, such as sales, customer service and delivery costs. Product management, product development and administrative costs, depreciation, taxes and financial items are not allocated
 

3. INTANGIBLE ASSETS

During the review period EUR 0.0 (0.4) million of development costs have been capitalised and will be amortised over 3-5 years from the start of commercial use. Research and development costs of EUR 3.7 (2.9) million were amortised during the review period.

4. TANGIBLE ASSETS

Acquisitions of tangible assets in the review period totalled EUR 0.3 (0.5) million. Disposals during the review period were EUR 0.0 (0.0) million.
 

6. INSIDER EVENTS

The operating result for the January-March period includes one-time costs of EUR 2.4 million that are mentioned under ‘Result analysis’. The costs are related to settling the law suit against the company at the beginning of the year. EUR 2.1 million of these costs concern the company’s insiders. The insider events include compensation of EUR 0.4 million for settlement of terms of employment and share based payments of EUR 1.7 million.
 

* Adjusted result = operating result before R & D capitalisation, amortization of this and one-time costs. Details of these are given in the section “Result analysis”.


About Tecnotree
Tecnotree is a global provider of a broad range of telecom IT solutions focused on charging, billing, customer care, messaging and content services. Tecnotree empowers communication service providers to create and monetize a broad marketplace of digital services, and augment value across the customer lifecycle. Acknowledged for agility and commitment, Tecnotree has more than 900 employees serving over 120 operators globally. Tecnotree is listed on the main list of NASDAQ OMX Helsinki Ltd. with the trading code TEM1V. For more information on Tecnotree visit www.tecnotree.com