Elephant Talk Communications Reports Third Quarter 2012 Financial Results

Mobile and Security Business - Fifth Consecutive Quarter of Q/Q Revenue Growth, up 109% Y/Y

Nov 08, 2012, 09:00 ET from Elephant Talk Communications, Corp.

SCHIPHOL, The Netherlands, Nov. 8, 2012 /PRNewswire/ -- Elephant Talk Communications, Corp. (NYSE MKT: ETAK) formerly (NYSE Amex: ETAK) (www.elephanttalk.com), an international provider of software and services developed to manage network, billing and systems infrastructure for the telecommunication industry and a market leader in providing solutions to counter electronic fraud for the financial services industry, today announced total revenue of $6.7 million for the third quarter ended September 30, 2012.

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In the third quarter of 2012, revenue for the higher margin mobile and security solutions business increased 108.5% year-over-year to over $2.9 million, 43.8% of total company revenue, from revenue of $1.4 million, 18.1%, for the third quarter of 2011.

Mobile and Security

Quarter

Reported Revenue

($ in millions)

% of Total

Company Revenue

Q211

0.9

12.2

Q311

1.4

18.1

Q411

1.9

23.5

Q112

2.4

28.3

Q212

2.8

39.3

Q312

2.9

43.8

"We are pleased with our third quarter results," stated Steven van der Velden, CEO of Elephant Talk Communication. "We more than doubled our higher margin mobile and security solutions business on a year-over-year basis in the third quarter while remaining focused on controlling cash. We ended 3Q12 with an unrestricted cash balance of $4.3 million, an increase from the end of 2Q12. We continue to expect to achieve our first month of positive operational cash flow in early 2013."

Key Recent Company Highlights

  • ValidSoft Awarded a Contract with Leading US Financial Institution for its core OOB (Out of Band) Authentication and Transaction Verification solution, VALid®.
  • Elephant Talk Awarded Multi-Year Contract with Global Leader in Mobile Telecommunications. This contract expands operations in two new European countries as well as grows our operations in a current country.  It is expected to add several million subscribers to the Company's mobile platforms during the life of the agreement.
  • ValidSoft has Processed Over 5 Million Transactions with a Leading Global Financial Institution that is using our unique SIM Swap solution.
  • ValidSoft Awarded 3rd Privacy Seal. The only security software company in the world to achieve three EuroPriSe Privacy Seals.  Latest seal is associated with the Company's SIM-swap fraud prevention solution, VALid-SSD.
  • ValidSoft Showcased SMART at Finovate Fall, NYC. ValidSoft successfully went through a selection process to participate in the Finovate Fall conference held in New York.  At the conference, the Company performed a live demo showcasing how to securely initialize a mobile based banking application as well as secure a P2P transaction http://www.finovate.com/fall12vid/validsoft.html.

Financial results for the three and nine months ended September 30, 2012

Elephant Talk's business is primarily Euro-based.  The effects of the devaluation of the Euro against the US Dollar have been substantial on the 2012 financials. To determine the constant currency (a non-GAAP measure) revenue growth rates stated below, the year-to-year comparison is calculated by using the average exchange rates over the nine months ended September 30, 2012. These same exchange rates are then used in the income statement of the nine months ended September 30, 2011.

Revenue for the three months ended September 30, 2012, as reported

  • Total revenue was $6.7 million, a decrease of 14.1%, year-over-year, compared to $7.8 million for the three months ending September 30, 2011.
  • The higher margin mobile and security revenue increased 108.5% year-over-year to $2.9 million.
  • In accordance with our strategy to reduce the emphasis on this business, the lower margin legacy landline revenue declined 41.1% year-over-year to $3.8 million

Revenue for the three months ended September 30, 2012, constant currency

  • Total revenue decreased $0.2 million, or (2.5)%, year-over-year when compared to the same period in 2011.
  • On a year-over-over year basis, mobile and security revenue increased 141.3% while landline revenue declined 33.5%.

Revenue for the nine months ended September 30, 2012, as reported

  • Total revenue of $22.4 million decreased 7.2% year-over-year versus $24.1 million for the nine months ending September 30, 2011.
  • A 110.6% year-over-year increase in mobile and security revenue to $8.1 million was fully offset by a 29.7% year-over-year decline in the legacy landline business to $14.2 million.

Revenue for the nine months ended September 30, 2012, constant currency

  • Total revenue increased $0.4 million, or 1.8%, year-over-year when compared to the same period in 2011.
  • On a year-over-over-year basis, mobile and security revenue rose 131.2%, mostly driven by the increased subscriber base hosted on the Company's platforms.
  • The increase in mobile and security revenue was largely offset by the expected continued decline in the Company's lower margin legacy landline business which posted a year-over-year decline of 22.9%. 

Cost of Service

  • Cost of service for the third quarter was $4.6 million, a decrease of 34.2% year-over-year, versus $7.0 million for the three months ending September 30, 2011.
  • Cost of service for the nine months ended September 30, 2012 was $16.7 million, a 24.4% year-over-year decline, versus $22.0 million for the nine months ended September 30, 2011. This decrease is related to the decline in landline revenue.

Revenues minus Cost of Service (further referred to as 'margin')

  • Margin for the third quarter increased 161.8% year-over-year to $2.1 million, approximately 31.3% of revenue, from $0.8 million, 10.3%, for the three months ending September 30, 2011.
  • Margin for the nine months ended September 30, 2012 increased 177.8% year-over-year to $5.7 million, approximately 25.4% of revenue, from $2.0 million, 8.5%, for the nine months ending September 30, 2011.
  • The increase in margin for the three and nine months ended September 30, 2012 was primarily attributable to the increased revenue contribution from the higher-margin mobile and security solution business.

Total Margin*

Quarter

Margin

($ in millions)

% of Total

Company Revenue

Q211

0.3

3.8

Q311

0.8

10.3

Q411

1.5

18.0

Q112

1.7

19.7

Q212

1.9

26.8

Q312

2.1

31.3

* Revenues minus Cost of Service

Selling, general and administrative

  • Selling, general and administrative ("SG&A") expense for the three months ended September 30, 2012 and 2011 were $4.2 million and $4.3 million, respectively.
  • SG&A expenses for the nine months ended September 30, 2012 and 2011 were $13.4 million and $11.6 million, respectively. The 15.5% year-over-year increase was mainly due to the 18.6% year-over-year increase in staffing levels, largely European MNO operational support and commercial staff as well as higher investor relations and sales, marketing & communication related staffing and expense.

Adjusted EBITDA (a non-GAAP measure)

  • Adjusted EBITDA improved to a loss of $2.1 million for the third quarter from a loss of $3.5 million for the same period a year earlier.
  • Adjusted EBITDA improved to a loss of $7.7 million in the nine months ending September 30, 2012 from a loss of $9.5 million in the nine months ended September 30, 2011.

Net Income (loss)

  • Net Loss was $5.5 million and $7.3 million for the three months ended September 30, 2012 and 2011, respectively. A decrease of 24.7% year-over-year.
  • Net Loss for the nine months ended September 30, 2012 was $16.5 million, compared to $18.7 million for the nine months ended September 30, 2011, a decrease of 11.9%, year-over-year.
  • Loss from operations was reduced because of increased revenues from our higher margin mobile and security business combined with a reduced non-cash compensation expenses.

The tables at the end of this press release include a reconciliation of net loss to non-GAAP Adjusted EBITDA and reported to constant currency revenue results for the three and nine months ended September 30, 2012 and 2011. An explanation of these along with margin are included below under the heading "Non-GAAP Financial Measures."

Conference call reminder As a reminder, Elephant Talk Communications will host a Shareholder Update Conference Call on November 8, 2012 at 11:00 a.m. (EST). Anyone interested in participating should dial 1- 480-629-9713 approximately 5 to 10 minutes prior to the start of the call. Participants should ask for the Elephant Talk Shareholder Update conference call. To listen to the playback please utilize the webcast by visiting the company's website at www.elephanttalk.com.

This call is being webcast by ViaVid Broadcasting and can be accessed at either Elephant Talk's website at www.elephanttalk.com or ViaVid's website at http://www.viavid.net. To access the webcast, you will need to have the Windows Media Player on your desktop. For the free download of the Media Player, please visit: http://www.microsoft.com/windows/windowsmedia/en/download/default.asp

Non-GAAP financial measures To supplement the consolidated financial statements presented in accordance with generally accepted accounting principles, or GAAP, Elephant Talk uses measures of non-GAAP Adjusted EBITDA, constant currency and margin. A reconciliation of the non-GAAP financial measures Adjusted EBITDA and constant currency to the closest GAAP financial measure, is presented in the financial table below under the heading "Reconciliation of Non-GAAP Measures to GAAP." Margin is derived from the income statements by subtracting cost of service from revenues. These adjustments to the Company's GAAP results are made with the intent of providing both management and investors a more complete understanding of the Company's underlying operational results and trends and performance.

Management uses these non-GAAP measures to evaluate the Company's financial results, develop budgets, manage expenditures, and determine employee compensation. The presentation of additional information is not meant to be considered in isolation or as a substitute for or superior to net income (loss) or net income (loss) per share determined in accordance with GAAP.

For the three and nine months ended September 30, 2012 and 2011, non-GAAP Adjusted EBITDA is defined as earnings before derivative accounting, such as warrant liabilities and conversion feature expensing, income taxes, depreciation and amortization and stock-based compensation.  It is determined by taking net loss and adding back provision for income taxes, interest income and expense, net loss attributable to non-controlling interest, depreciation and amortization, stock-based compensation expense, other income and expenses, and equity in earnings of unconsolidated joint venture.

Elephant Talk believes these adjustments provide useful information to both management and investors due to the following factors:

  • Stock-based compensation. Although stock-based compensation is an important aspect of the compensation of Elephant Talk's employees and executives, determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the future exercise or termination of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock-based compensation is determined using a complex formula that incorporates factors, such as market volatility, that are beyond Elephant Talk's control. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of Elephant Talk's core business and to facilitate comparison of its results to those of peer companies.

To determine the revenue growth rates on a constant currency basis for the three and nine months ended September 30, 2012, revenue from entities reporting in non-U.S. dollars were translated into U.S. dollars using the average exchange rates over the nine months ended September 30, 2012. These same exchange rates are then used in the income statement of the nine months ended September 30, 2011. The following table shows the USD equivalent of the major currencies for the nine months ended September 30, 2012:

US Dollars

equivalent

Euro

$

1.2812

British Pound

$

1.5775

About Elephant Talk Communications Elephant Talk Communications Corp. (NYSE MKT: ETAK), formerly (NYSE Amex: ETAK) is a leading international provider of mobile networking software and services. The Company's mission is to provide a single service, fully enabling and securing the mobile cloud.

Elephant Talk empowers Mobile Network Operators (MNOs) and Mobile Virtual Network Operators (MVNOs) by providing a cloud based mobile communications infrastructure, operating software and managed services, based mostly on company developed and owned software. We enable these Mobile Operators and Virtual Network Operators by offering a full suite of products, delivery platforms, support services, superior industry expertise and high quality customer service without substantial upfront investment.

As a specialized outsourcing partner, we provide operating software, managed services, cloud and SaaS solutions, an integrated transaction and delivery platform to the mobile telecommunications industry globally. Our products include remote health care, credit card fraud prevention, mobile internet ID security, secure remote file access management, loyalty and transaction management services and a whole range of other emerging mobile services.

Elephant Talk can count several of the world's leading Mobile Operators amongst their customers including Vodafone, T-Mobile and Zain, and most business efforts are focused on tier 1 operators worldwide. Visit www.elephanttalk.com.

About ValidSoft ValidSoft Limited has been a wholly owned subsidiary of Elephant Talk since early 2010 and underpins our mobile/cloud security offering. The company is a market leader in providing solutions to counter electronic fraud relating to a variety of bank, card, internet and telephone channels. ValidSoft's solutions are used to verify the authenticity of both parties to a transaction (Mutual Authentication), the security of the relevant telecommunication channel used (Secure Communications), and the integrity of transactions itself (Transaction Verification) for the mass market, in a highly cost effective and secure manner while being very easy to use.

The company counts several leading worldwide service providers and institutions amongst its customers.  These companies benefit from a very substantial reduction in false positives, thereby freeing up resources to combat actual fraud, as well as a substantial elimination of the fraud itself, all in real time. ValidSoft is the only security software company in the world that has been granted two European Privacy Seals. Visit www.validsoft.com.

Forward-Looking Statements Certain statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, without limitation, statements with respect to the Company's plans and objectives, projections, expectations and intentions. These forward-looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by management. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Because such statements involve risks and uncertainties, the actual results and performance of the Company may differ materially from the results expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made here. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested is contained in the Company's filings with the Securities and Exchange Commission (SEC), copies of which are available from the SEC or may be obtained upon request from the Company.

 

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

For the three months

For the nine months

Period ended September 30,

Period ended September 30,

2012

2011

2012

2011

REVENUES

$

6,699,381

$

7,796,936

$

22,365,318

$

24,095,926

COST AND OPERATING EXPENSES

Cost of service

4,603,588

6,996,525

16,677,853

22,048,689

Selling, general and administrative expenses

4,221,767

4,325,272

13,356,906

11,566,385

Non-cash compensation to officers, directors and employees

1,709,403

2,432,317

4,940,131

5,600,283

Depreciation and amortization of intangibles assets

1,263,137

1,353,450

3,766,494

3,993,900

  Total cost and operating expenses

11,797,895

15,107,564

38,741,384

43,209,257

LOSS FROM OPERATIONS

(5,098,514)

(7,310,628)

(16,376,066)

(19,113,331)

OTHER INCOME (EXPENSE)

Interest income

(85,364)

74,988

194,554

122,119

Interest expense, amortization of discount and financing costs

(649,251)

(35,467)

(1,588,098)

(173,742)

Other income & (expense)

-

-

-

460,000

Change in fair value of conversion feature

617,603

-

1,847,689

-

     Total other income (expense)

(117,012)

39,521

454,145

408,377

LOSS BEFORE PROVISION FOR INCOME TAXES

(5,215,526)

(7,271,107)

(15,921,921)

(18,704,954)

Provision for income taxes

(94,887)

-

(192,175)

(800)

NET LOSS BEFORE NONCONTROLLING INTEREST

(5,310,413)

(7,271,107)

(16,114,096)

(18,705,754)

Net (loss) income attributable to non-controlling interest

-

-

-

-

Equity in earnings of unconsolidated joint venture

(164,252)

(356,667)

NET LOSS

(5,474,665)

(7,271,107)

(16,470,763)

(18,705,754)

OTHER COMPREHENSIVE (LOSS) INCOME

Foreign currency translation gain (loss)

594,468

(2,325,642)

(315,226)

931,961

594,468

(2,325,642)

(315,226)

931,961

COMPREHENSIVE LOSS

$

(4,880,197)

$

(9,596,749)

$

(16,785,989)

$

(17,773,793)

Net loss per common share and equivalents - basic and diluted

$

(0.05)

$

(0.07)

$

(0.15)

$

(0.18)

Weighted average shares outstanding during the period - basic and diluted

111,558,485

107,842,911

111,129,222

101,492,507

 

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

December 31,

2012

2011

ASSETS

CURRENT ASSETS

Cash and cash equivalents

$

4,344,438

$

6,009,576

Restricted cash

1,789,207

190,844

Accounts receivable, net of an allowance for doubtful accounts of $745,735 and $436,546 at September 30, 2012 and December 31, 2011 respectively

4,378,162

6,441,528

Prepaid expenses and other current assets

1,662,776

1,522,461

   Total current assets

12,174,583

14,164,409

OTHER ASSETS

1,844,398

1,392,837

DUE FROM RELATED PARTIES

1,042,931

-

PROPERTY AND EQUIPMENT, NET

13,395,076

13,315,687

INTANGIBLE ASSETS, NET

10,971,247

12,784,199

GOODWILL

3,132,528

3,154,971

TOTAL ASSETS

$

42,560,763

$

44,812,103

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Overdraft

$

340,135

$

312,236

Accounts payable and customer deposits

5,641,109

4,490,455

Deferred Revenue

101,713

132,467

Accrued expenses and other payables

4,211,116

3,035,758

8% Convertible Note

1,631,688

-

Loans payable

962,679

960,869

   Total current liabilities

12,888,440

8,931,785

LONG TERM LIABILITIES

8% Convertible Note

3,897,716

-

Conversion feature

851,623

-

Trade note payable

-

271,915

Loan from joint venture partner

544,936

513,303

   Total long term liabilities

5,294,275

785,218

   Total liabilities

18,182,715

9,717,003

STOCKHOLDERS' EQUITY

Common stock, no par value, 250,000,000 shares authorized, 111,742,350 issued and outstanding  as of September 30, 2012 compared to 110,525,233 shares issued and outstanding as of December 31, 2011

222,260,303

216,188,899

Accumulated other comprehensive income (loss)

(1,458,521)

(1,143,295)

Accumulated deficit

(196,599,134)

(180,128,371)

   Elephant Talk Communications Corp. stockholders' equity

24,202,648

34,917,233

NON-CONTROLLING INTEREST

175,400

177,867

   Total stockholders' equity

24,378,048

35,095,100

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

42,560,763

$

44,812,103

 

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

September 30, 2012

September 30, 2011

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$

(16,470,763)

$

(18,705,754)

Adjustments to reconcile net loss to net cash used in operating activities:

   Depreciation and amortization

3,766,494

3,993,900

   Provision for doubtful accounts

309,429

141,298

   Non-cash compensation

4,923,738

5,185,493

   Equity in earnings of joint venture

356,667

-

   Amortization of shares issued for consultancy

-

414,790

Changes in operating assets and liabilities:

   Decrease (increase) in accounts receivable

1,728,467

(1,156,321)

   Decrease (increase)  in prepaid expenses, deposits and other assets

(129,937)

1,007,688

   Decrease in accounts payable, proceeds from related parties and customer deposits

938,142

(1,123,577)

   Increase (decrease) in deferred revenue

(35,352)

431,794

   Increase (decrease) in accrued expenses and other payables

945,862

(1,488,451)

Net cash used in operating activities

(3,667,253)

(11,299,140)

CASH FLOWS FROM INVESTING ACTIVITIES:

   Purchases of property and equipment

(2,096,026)

(6,438,506)

   Restricted cash

(1,597,168)

37

   Loans to related party

(1,000,589)

-

   Loans to joint venture partners

(107,618)

-

   Loan to third party

(249,827)

(111,236)

  Net cash used in investing activities

(5,051,228)

(6,549,705)

CASH FLOWS FROM FINANCING ACTIVITIES:

   Trade note payable

-

392,590

   Deferred financing costs

(543,438)

-

       Proceeds from 8% convertible note, net of original issue discount

8,000,000

-

       Payments on 8% convertible note installment payments and interest

(964,958)

-

   Proceeds from exercise of warrants & options

969,714

25,601,365

   Payments for share issue costs

(79,643)

-

   Placement & solicitation fees

-

(1,027,522)

  Net cash provided by financing activities

7,381,675

24,966,433

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

(328,332)

1,482,698

NET INCREASE IN CASH AND CASH EQUIVALENTS

(1,665,138)

8,600,286

CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD

6,009,576

2,245,697

CASH AND CASH EQUIVALENTS, END OF THE PERIOD

$

4,344,438

$

10,845,983

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for interest

$

348,383

$

-

 

Reconciliation of Non-GAAP Measures to GAAP

 

Reconciliation of Net loss to Adjusted EBITDA

Nine months ended September 30,

EBITDA Adjusted

2012

2011

2011 in constant currency

Net loss

$

(16,470,763)

$

(18,705,754)

$

(17,812,705)

Provision for income taxes

192,175

800

800

Depreciation and amortization

3,766,494

3,993,900

3,663,684

Stock-based compensation

4,940,131

5,600,283

5,523,024

Other income & expenses

(454,145)

(408,377)

(408,377)

Equity in earnings of unconsolidated joint venture

356,667

0

0

Adjusted EBITDA

$

(7,669,441)

$

(9,519,148)

$

(9,033,574)

Three months ended September 30,

EBITDA Adjusted

2012

2011

2011 in constant currency

Net loss

$

(5,474,665)

$

(7,271,107)

$

(6,857,514)

Provision for income taxes

94,887

0

0

Depreciation and amortization

1,263,137

1,353,450

1,205,060

Non-cash compensation

1,709,403

2,432,317

2,397,897

Other income & expenses

117,012

(39,521)

(36,528)

Equity in earnings of unconsolidated joint venture

164,252

0

0

Adjusted EBITDA

$

(2,125,974)

$

(3,524,861)

$

(3,291,085)

 

Reconciliation of non-GAAP Revenue to GAAP Revenue

Three months ended Sept. 30,

Nine months ended Sept. 30,

2012

2011

% change

2012

2011

% change

(unaudited)

(unaudited)

Constant currency reconciliation:

Total revenue, as reported

$6,699,381

$7,796,936

-14.1%

$22,365,318

$24,095,926

-7.2%

Estimated impact of foreign currency fluctuations

-11.6%

-9.0%

Total revenue constant currency growth rate

-2.5%

1.8%

Three months ended Sept. 30,

Nine months ended Sept. 30,

2012

2011

% change

2012

2011

% change

(unaudited)

(unaudited)

Constant currency reconciliation:

Landline revenue, as reported

$3,763,140

$6,388,824

-41.1%

$14,217,650

$20,227,712

-29.7%

Estimated impact of foreign currency fluctuations

-7.6%

-6.8%

Landline revenue constant currency growth rate

-33.5%

-22.9%

Three months ended Sept. 30,

Nine months ended Sept. 30,

2012

2011

% change

2012

2011

% change

(unaudited)

(unaudited)

Constant currency reconciliation:

Mobile & Security revenue, as reported

$2,936,241

$1,408,112

108.5%

$8,147,668

$3,868,214

110.6%

Estimated impact of foreign currency fluctuations

-32.8%

-20.5%

Mobile & Security revenue constant currency growth rate

141.3%

131.2%

 

Media Contacts UK/Europe: Fishburn Hedges +44 (0)20 7839 4321 etak@fishburn-hedges.co.uk  

US/North America: Jed Hamilton Intermarket Communications +1 212 754 5479 jhamilton@intermarket.com

Investor Relations Contacts Steve Gersten Elephant Talk Communications +1 813 926 8920 steve.gersten@elephanttalk.com

Peter Salkowski The Blueshirt Group +1 415 489 2184 peter@blueshirtgroup.com

SOURCE Elephant Talk Communications, Corp.



RELATED LINKS

http://www.elephanttalk.com


http://www.validsoft.com