Billing Services Group Limited Audited results for year ended December 31, 2016 (5357A)

TIDMBILL

RNS Number : 5357A

Billing Services Group Limited

29 March 2017

For Immediate Release

Billing Services Group Limited

("BSG" or the "Company")

Audited results for the year ended December 31, 2016

FAVORABLE NET INCOME AND CASH FLOW COINCIDE WITH SUCCESSFUL INTRODUCTION OF DIRECT BILLING SERVICE

(March 29, 2017) San Antonio, Texas, USA and Aldermaston, United Kingdom - BSG, a leading provider of telecommunications clearing and financial settlement products, Wi-Fi data solutions and verification services, today announces its audited results for the year ended December 31, 2016.

Financial Highlights

(All amounts in US$)

 
                           Year Ended December 
                                    31 
                        2016                  2015 
                --------------------  ------------------- 
 
 Revenues         $   30.2   million   $   36.4   million 
 
 EBITDA (1)       $    5.7   million   $    6.4   million 
 
 Net income       $   10.9   million   $    8.7   million 
 
 Net income 
  per basic 
 and diluted                 per                  per 
  share           $   0.04    share    $   0.03    share 
 

(1) EBITDA (a non-GAAP measure) is computed as earnings before interest, income taxes, depreciation, amortization and other non-cash and nonrecurring expenses

 
 
      *    Generated $5.7 million of EBITDA (2015: $6.4 million) 
 
      *    Recorded net income of $0.04 per share (2015: $0.03 
           per share) 
 
            *    Improved gross margin by 2.0 percentage points (53.0% 
                 in 2016 
 
 
           vs. 51.0% in 2015) 
 
      *    Reduced operating expenses by $1.9 million ($10.3 
           million in 2016 vs. $12.2 million in 2015) 
 
      *    Repaid $2.1 million (through the date of this report) 
           of a total $5.2 million pursuant to our settlement 
           with the Federal Trade Commission (FTC) 
 

BSG Wireless and TPV Operational Highlights

 
 
      *    Completed development of the new Wi-Fi Location Data 
           Service (WLDS) and engaged with lead customers, 
           including Comcast, Boingo Wireless, AT&T and TELUS 
 
      *    Increased network partner interconnections to over 
           80, and Roaming Hub traffic grew 48% compared to 2015 
 
      *    Selected by Panasonic Avionics to provide in-flight 
           Wi-Fi connectivity services 
 
      *    Completed development of a Software Development Kit 
           (SDK) for our hotspot finder and connection suite and 
           engaged with Panasonic Aviation to provide "white 
           labeled" Wi-Fi connection managers 
 
      *    Continued to extend penetration of the North American 
           cable operator market by deploying upgraded releases 
           of our hotspot finder product with Bright House 
           Networks, Comcast and Shaw 
 
      *    Signed a contract with Kyrio (a CableLabs subsidiary) 
           for "white label" hub services 
 
      *    Expanded our hotspot finder and connection product 
           suite delivered to Deutsche Telekom "Business Wi-Fi" 
           product line with usage reporting and in-flight 
           connectivity 
 
      *    Signed nine new third-party verification (TPV) 
           agreements, including six within the energy sector. 
           We're delighted to be providing TPV services to 
           Direct Energy and welcome them to the VoiceLog family 
 

Current Trading and Strategy

 
 
      *    We have initiated a strategic review to assist the 
           Board in determining the future composition of the 
           group, including its capital structure and business 
           lines. No decisions have been made at this time 
 
      *    Current trading remains in line with the Board's 
           expectations and consistent with the recent trading 
           conditions experienced by the Company 
 
      *    The Company expects that revenues and EBITDA in 2017 
           will continue to be affected by the secular decline 
           in the volume of billable long distance and operator 
           service calls initiated on landline phones, coupled 
           with a decision by a local exchange carrier to exit 
           third-party billing as described in the Company's 
           announcements dated August 9, 2016 and September 12, 
           2016 
 
      *    Although still in its first several months, our 
           direct billing initiative has developed solid 
           traction, and we expect this to continue over the 
           course of 2017. Given the relatively early stage of 
           this product offering, coupled with the strategic 
           review that is underway, we expect to provide 
           financial performance guidance later this year 
 

Commenting on the results, Patrick D. Heneghan, Non-Executive Chairman, said:

"2016 was a remarkable year. While earning $0.04 per share of net income and generating $7.7 million of cash flow, the Company expanded its service platform to meet the direct billing needs of customers. This was a complex task, requiring broad revisions to intricate processes and historical practices. I cannot overstate both the challenge and the success."

INQUIRIES:

 
 Billing Services Group 
  Limited                   [phone] 
 Norman M. Phipps 
 
 finnCap Limited            [phone] 
 Stuart Andrews/Scott 
  Mathieson 
 
 BSG Media Relations        [phone] 
 Leslie Komet Ausburn 
 

About BSG:

BSG has locations in San Antonio, Texas, USA and Aldermaston, United Kingdom. The Company is traded on the London Stock Exchange (AIM: BILL). For more information on BSG, visit (www.bsgclearing.com).

Chief Executive's Statement

2016 was a milestone year for the Company. In addition to delivering impressive financial results in the circumstances, we expanded our service platform to allow direct billing and payment options to end-user consumers, giving our clearinghouse customers an alternative to LECs as their billing and collection vehicle.

Revenue and earnings

We achieved $5.7 million of EBITDA on revenues of $30.2 million. As expected, both figures were lower than the 2015 results. Net income, however, was a different story. Driven by a 2.0 percentage point increase in gross margin, a $1.9 million reduction in operating expenses and the benefit of accounting treatment resulting in a favorable recalibration of liabilities related to class action litigation, we earned $10.9 million of net income ($0.04 per share), which compares favorably to the $8.7 million ($0.03 per share) earned in 2015.

The core business of billing and clearing for landline telecommunications providers continued to be adversely affected by the secular migration from landline to wireless communications. In contrast, our wireless business enjoyed solid gains in revenue and new clients during 2016, and we expect 2017 to exceed 2016, which was our best year since we acquired the business.

Cash flow

We generated $7.7 million of cash in 2016, resulting in a year-end cash balance of $15.1 million. With the class action litigation against two LECs in its final stages and settlement of the FTC matter behind us, we are left with a strong cash position, positive working capital ($4.2 million) and a conservative capital structure (99% equity vs. 1% debt).

One of the most important and actively discussed issues facing management and the Board is the optimal allocation of our capital resources. Parties owning more than 55% of the Company's outstanding shares are directly represented on the Board. Accordingly, the Board's interest in capital allocation is both intense and fully aligned with the best interests of all shareholders.

In light of the Board's focus on shareholder value, we have initiated a strategic review to assist the Board in determining the future composition of the group, including its capital structure and business lines. No decisions have been made at this time.

Expansion of billing options in landline business

Some 25+ years ago, our business was founded to serve a newly allowed telecommunications industry which competed against the historical monopoly (which evolved into today's LECs). BSG's raison d'être was to provide the newly established telecommunications providers with a simple, economical and reliable way to bill and collect from end-user consumers for services. BSG's value proposition was largely driven by scale, because it had the ability to aggregate call records from multiple competing telecommunications companies and submit them to the LECs to be billed and collected in the most economical manner. BSG quickly became the industry leader for LEC billing.

In August 2016, one of the largest LECs informed us that it would discontinue its longstanding third-party billing and collection service for a substantial portion of our customers' transactions. In effect, one leg from a 25+ year-old sturdy chair was pulled out from beneath us.

Our team got to work immediately. As the result of advances in billing, payment and money-transfer technology, there has been a proliferation of new options to bill and collect funds in a simple, economical and reliable way. We rapidly developed a new service under which BSG, on behalf of its customers, can bill and collect directly from end-user consumers (i.e., without going through a LEC). End-users can make payments through an online portal or through the mail.

We commenced the direct billing service in December 2016 for customers affected by the substantial cessation of third-party billing by the single large LEC. Our customers have been pleased with the simplicity, transparency and collection rates of the direct billing service.

Expansion of services to wireless applications

Our business plan has focused on an expansion of services offered for wireless telecommunications applications. The strategy underlying the focus on wireless telecommunications applications has been to mitigate the secular decline in revenue from landline-based services. Revenues arising from services to wireless markets are on a promising trajectory, but the gains to date have been insufficient to offset fully the revenue decline in the landline sector.

Outlook

We will continue to be adversely affected by the displacement of landline phone transactions by wireless devices. We expect continuation of growth in revenue from services to wireless markets and our direct bill initiative. Given the relatively early stage of the latter product offering, coupled with the strategic review that is underway, we expect to provide financial performance guidance later this year.

Closing comments

Our employees rose to meet a challenge affecting the foundation of our business. They operate with a culture and enthusiasm more typical of a start-up company, making BSG an exciting and innovative place to work. To them, I am most grateful.

Our Board of Directors has provided valuable guidance and insight once again in 2016. They asked the right questions, made insightful suggestions and focused intently on actions to ensure growth in shareholder value. To them, all shareholders are greatly indebted.

Norman M. Phipps

Chief Executive Officer

FINANCIAL REVIEW

Financial Review of the Year Ended December 31, 2016

The Company's audited results for the year ended December 31, 2016 are compared against the year ended December 31, 2015 in the accompanying financial statements. BSG's consolidated financial statements are prepared in conformity with United States generally accepted accounting principles ("GAAP").

Certain Terms

Revenues. Revenues are derived primarily from fees charged to wireline and wireless service providers for data clearing, financial settlement, information management, payment and financial risk management, third-party verification and customer service functions.

Cost of Services and Gross Profit. Cost of services arises primarily in the Company's clearinghouse business. Cost of services in the clearinghouse business includes billing and collection fees charged by local exchange carriers ("LECs") and other service providers for payment processing. Such fees are assessed for each record submitted and for each bill rendered to end-user consumers. BSG charges its customers a negotiated fee for billing and collection services. Accordingly, gross profit is generally dependent upon transaction volume, processing fees charged per transaction and any differential between the fees charged to customers by BSG and the related fees charged to BSG by LECs and other service providers.

Operating Expenses. Operating expenses include all selling, marketing, customer service, facilities and administrative costs (including payroll and related expenses) incurred in support of operations, substantially all of which are settled through the payment of cash.

Depreciation and Amortization. Depreciation expense applies to software, furniture and fixtures, telecommunications and computer equipment. Amortization expense relates to definite-lived intangible assets that are amortized in accordance with Accounting Standards Codification ("ASC") 350, Intangibles - Goodwill and Other. These assets consist of contracts with customers and LECs. Assets are depreciated or amortized, as applicable, over their respective useful lives. Deferred finance costs are amortized over the term of the related loans.

Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). Earnings before interest, income taxes, depreciation and amortization, a non-GAAP metric, is a measurement of profitability often used by investors and lenders. The computation of EBITDA also excludes other non-cash and nonrecurring items as additions or deductions to earnings.

Third-Party Payables. Third-party payables include amounts owed to customers in the ordinary course of clearinghouse activities and additional amounts maintained as reserves for retrospective charges from LECs and other parties. In its clearinghouse business, the Company aggregates call records received from its customers. It then submits the call records either to (i) LECs for billing to end-user consumers; or (ii) end-user consumers. The Company collects funds from LECs and directly-billed end-user consumers each day.

Under normal circumstances, funds collected from LECs are distributed to the Company's customers approximately ten days after receipt, under weekly settlement protocols. The Company withholds a portion of the funds received from LECs to pay (i) the Company's processing fees, (ii) billing and collection fees of LECs, (iii) sales and other taxes paid by the Company and (iv) an amount deemed necessary to serve as a reserve against retrospective charges from LECs.

Funds collected from directly-billed end-user consumers are credited to the Company's customers when received. The Company withholds a portion of the funds received from end-user consumers to pay (i) the Company's processing fees, (ii) sales and other taxes paid by the Company and (iii) an amount deemed necessary to serve as a reserve against retrospective charges from payment processors or other parties.

When LECs, payment processors and other parties make payments to the Company, they withhold funds to cover a variety of expenses and potential retrospective charges. As noted above, the Company similarly withholds funds from its customers to cover expenses and retrospective charges. The third-party payables balance is computed as the excess of (i) funds owed to the Company's customers, inclusive of reserves for retrospective charges, over the sum of (ii) amounts owed from the Company's customers and (iii) reserves withheld for retrospective charges by LECs, payment processors and other parties.

Comparison of Results for the Year Ended December 31, 2016 to the Year Ended December 31, 2015

Total Revenues. Total revenues of $30.2 million in 2016 were $6.2 million, or 17%, lower than the $36.4 million of revenues recorded during 2015. The $6.2 million decrease reflects lower transaction volumes across all clearing, settlement and customer service activities provided for landline service providers, partially offset by higher managed service fees from BSG Wireless' offerings.

Cost of Services and Gross Profit. Cost of services in 2016 was $14.2 million, compared to $17.8 million in 2015. The $3.6 million, or 20%, decrease in cost of services largely reflects lower fees for billing and collection services related to the lower level of transaction volumes. The Company generated $16.0 million of gross profit in 2016, compared to $18.5 million in 2015. The gross margin of 53.0% in 2016 is 2.0 percentage points higher than the 51.0% margin achieved in 2015. The improved gross margin in 2016 resulted from a favorable mix of services from the landline business and a larger percentage of revenue from the wireless business, which operates at a higher gross margin level than the landline business.

Operating Expenses. Operating expenses were $10.3 million in 2016, compared to $12.2 million in 2015. The $1.9 million, or 16%, decrease largely reflects reduced compensation expense arising from headcount reductions, compensation adjustments and lower legal expenses.

Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). The Company generated $5.7 million of EBITDA during 2016, compared to $6.4 million during 2015. A reconciliation of net income and EBITDA in each period follows:

Year Ended December 31

                             $ millions                                                           2016                2015 
 
 Net income                     $ 10.9     $ 8.7 
 Depreciation expense              1.4       1.9 
 Amortization of intangibles       0.6        0.6 
 Impairment charge                   -       0.2 
 Stock-based compensation 
  expense                            -        0.1 
 Interest expense                  -          0.1 
 Income tax expense                2.4       0.3 
 All other income, net            (9.6)    (5.5) 
     EBITDA                      $ 5.7     $ 6.4 
 

Depreciation and Amortization Expense. Depreciation and amortization expense totalled $2.0 million in 2016, compared to $2.5 million in 2015. The $0.5 million decline reflects cessation of depreciation charges on several categories of capitalized software development costs for which accumulated depreciation reached the assets' respective gross carrying values.

Impairment Charge. In 2015, the Company recorded a $0.2 million non-cash impairment charge against intangible assets. The charge reflected a write-off of the unamortized carrying value of a wireless product offering that was discontinued in 2015. The non-cash impairment charge was not included as a deduction to earnings for purposes of calculating EBITDA.

Stock-based Compensation Expense. The Company recognized $0.1 million of stock-based compensation expense during 2015 which is included within operating expenses. Stock-based compensation expense, all of which is non-cash and related to stock options, was not included as a deduction to earnings for purposes of calculating EBITDA.

Interest Expense. In 2015, the Company incurred $0.1 million of interest expense. Interest expense includes cash payments of interest on borrowed money. The $0.1 million of lower interest expense during 2016 primarily reflected a reduced level of outstanding debt. During 2016, the average debt outstanding was less than $0.1 million compared to an average of $2.7 million in 2015.

Other Income. The Company realized $9.6 million of net other income during 2016, compared to $5.5 million in 2015. Net other income in 2016 was largely attributable to accounting treatment adjustments to indemnification amounts under pending class action litigation, and a net gain arising from the translation of assets and liabilities denominated in British Sterling. The $5.5 million of net other income recognized in 2015 was largely attributable to nonrecurring income arising from the accounting treatment of indemnification charges to former and current clients for their respective shares of direct end-user refunds and allocable expenses related to the class action litigation against two LECs, coupled with write-offs of certain balances owed by former clients, offset by litigation-related accruals.

Other income arises from miscellaneous items typically of a nonrecurring nature. Accordingly, other income items were not included as earnings for purposes of computing EBITDA.

Change in Cash. BSG's cash balance at December 31, 2016 was $15.1 million, compared to $7.4 million at December 31, 2015. The $7.7 million increase in cash during 2016 is largely attributable to a $7.7 million reduction of restricted cash associated with the payment of class action-related expenses and $1.5 million of net receipts on purchased receivables, offset by $0.9 million of capital expenditures, $0.6 million of exchange rate differences and a $0.5 million use of cash in operating activities.

Change in Restricted Cash. In the ordinary course of business, LECs withhold funds from their payments to the Company in order to create a reserve securing potential future obligations of the Company to the LEC. Through December 31, 2014, pursuant to a 2012 agreement with one LEC, the LEC released a net of $14.3 million of cash reserves. The cash was transferred into a restricted Company bank account to be used for funding the Company's indemnification obligation under pending class action litigation against the LEC. During 2015 and 2016, a net amount of $5.0 million and $7.7 million, respectively, were transferred from the restricted cash account to satisfy indemnification obligations, reducing restricted cash to $1.7 million.

Change in Third-Party Payables. Third-party payables at December 31, 2016, inclusive of long-term liabilities, were $10.3 million, compared to $9.6 million at December 31, 2015. The $0.7 million increase in third-party payables during 2016 resulted from $4.2 million of write-offs of amounts owed from former clients, offset by $2.7 million of ordinary course settlement activities and a $0.8 million reduction arising from net collections of purchased receivables.

When the Company purchases receivables from a customer, the Company typically advances approximately 50% of the gross receivable amount to the customer. The remaining 50% is classified as a third-party payable until the Company completes settlement activities related to the purchased receivable. During 2016, the Company decreased purchased receivables by $1.5 million, which resulted in a $0.8 million decrease in third-party payables.

Change in Accrued Liabilities. Accrued liabilities at December 31, 2016 were $6.3 million, compared to $24.2 million at December 31, 2015. The $17.9 million decrease in accrued liabilities resulted from $7.7 million of disbursements for indemnification liabilities to LECs under pending class action litigation (see "Change in Restricted Cash" above), $7.6 million of payments and reserve adjustments to the accrual for legal expenses, $1.6 million of payments to the FTC in connection with a regulatory settlement and $1.0 million of net reductions arising from ordinary course payments and adjustments.

Capital Expenditures. During 2016, the Company invested $0.9 million in capital expenditures, primarily for capitalized software development costs and computer equipment. In 2015, capital expenditures totalled $1.5 million.

Cash Flows for the Year Ended December 31, 2016

Cash flow used in operating activities. Net cash used in operating activities was $0.5 million during 2016. Net cash used was principally attributable to a $17.9 million decrease in accrued liabilities and a $0.7 million decrease in trade accounts payable, offset by $10.9 million of net income, a $2.5 million increase in deferred taxes, $2.0 million of depreciation and amortization, a $1.4 million decrease in accounts receivable and a $0.7 million increase in third-party payables.

Cash flow provided by investing activities. Net cash provided by investing activities was $1.0 million, reflecting $1.5 million of net receipts on purchased receivables and $0.3 million of translation adjustments to the carrying value of intangible assets, offset by $0.9 million of capital expenditures.

Cash flow provided by financing activities. Cash provided by financing activities was $7.8 million, primarily attributable to a $7.7 million reduction in restricted cash.

******************************

A copy of this statement is available on the Company's website (www.bsgclearing.com), and copies are available from BSG's Nominated Advisor at the address below:

Billing Services Group Limited

c/o finnCap Limited

60 New Broad Street

London EC2M 1JJ

United Kingdom

Forward Looking Statements

This report contains certain "forward--looking" statements and information relating to the plans, objectives, expectations and intentions of the Company that are based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend," "projects," "could," "should," "will" and words or phrases of similar meaning are intended to identify forward--looking statements. Forward-looking statements reflect the Company's current views with respect to future events and financial performance. Such statements, including certain information set forth herein under "Financial Review" that is not historical fact or statement of current condition, reflect management's assessment of the current risks, uncertainties and assumptions related to certain factors including, without limitation, the competitive environment, general economic conditions, customer relations, relationships with local exchange carriers and other vendors, availability of credit, borrowing terms, interest rates, foreign exchange rates, litigation, governmental regulation and supervision, capital expenditures, product development, product acceptance, technological change and disruption, changes in industry practices, one-time events and other factors described herein. Based upon changing conditions or circumstances arising from any one or more of these risks or uncertainties, or should any underlying assumptions prove incorrect, actual results may vary materially from historical or anticipated results as described herein.

Readers are cautioned not to place undue reliance on forward-looking statements. The Company does not intend to update or revise these forward--looking statements, whether as a result of new information, future events or otherwise.

Billing Services Group Limited audited financial statements are available here:

http://www.rns-pdf.londonstockexchange.com/rns/5357A_-2017-3-24.pdf

This information is provided by RNS

The company news service from the London Stock Exchange

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March 29, 2017 02:00 ET (06:00 GMT)