August 19, 2003 - At the time of the announcement of our preliminary results in April, we indicated that our headline growth rates this year would be held back as a result of the buy-out of a chipset royalty stream and the weakening dollar. We also signalled that the impact of SARS was particularly hard to assess at that time but that an inability to travel over a prolonged period would have an adverse impact on our business. With over 55% of sales revenues generated in South East Asia, SARS has had a significant impact on our order intake in Q1.
With the progressive lifting of travel restrictions to the region during June, sales activity has increased significantly from July onwards. However underlying market conditions continue to be as difficult, as they were throughout last year, making the timing of closure of licensing deals unpredictable.
Consequently although we expect order intake levels to be significantly higher in Q2, we do not expect that they will recover the shortfall seen in Q1, resulting in sales revenues in TTPCom for the six months ending 30 September being lower than they were in the same period last year. The strengthening of sterling against the dollar is expected to reduce sales revenues by £1m.
The revenue shortfall relative to our original expectations will have an adverse impact on operating profits in TTPCom, which will also be held back by:
- The continued planned investment in new product areas, mainly in software, applications and silicon for which we expect to start selling licences and generating sales revenue in the 2H and, more particularly, next year; and by
- The planned expansion of the terminals business, which has necessitated increased spend on tooling and testing.
In addition in the light of the economic conditions prevailing post SARS in South East Asia, we have decided to increase our provisions for potential bad debts.
As a consequence of the above, we expect TTPCom to report an operating loss of between £3.0m and £3.5m for the six months ending 30 September compared with an operating profit of £4.9m for the same period last year. Until the pattern of our business development becomes clearer, the company has taken a number of steps to reduce its cost base. We expect these measures to reduce costs by some £2m in the second half of the year.
ip.access continues to develop as we had indicated in our preliminary announcement in April. Sales revenues for the first six months will be around £1m and operating losses will be around the same level as last year. Progress with T-Mobile continues to be very positive. Trials are close to completion and we are currently working with customer to agree the next stage of the program. We have completed acceptance testing with China Unicom and in Russia work continues with two operators. In addition we have completed or are in the process of completing a further 4 operator trials in Europe and Asia.
The net effect of these factors on the group’s half year results will be that TTP Communications plc is likely to report a pre-tax loss of between £5.0m and £5.5m compared with a pre-tax profit of £3.0m for the same period last year.
Reflecting the operating losses in the period, the acquisition of Mobisys announced in April for $3m and the announcement today of the investment in Synergenix, cash balances are expected to reduce from £38.2m at end March to approx £30m at the end of September.
Although short term trading has been difficult since the year end, a number of developments have taken place that bode well for the growth of the business in the medium term:
- Today we announced a tie-up with Synergenix under which we will merge our Wireless Games Engine (WGE) with Synergenix’ Mophun games engine used in Sony-Ericsson products, to create the leading games accelerator for mobiles;
- We have reached agreement to mount our 3G software on two early baseband solutions allowing us to capture early handset customers;
- The development of the terminals business is proceeding well and we have signed 2 licences with customers in Korea and China. It is intended that these will be more royalty than licence fee based enabling us to grow the per unit value of our IP in the handset as these customers start to ship in volume in the 2H year;
- Intel have announced agreements with leading handset manufacturers in Asia for the PXA 800F baseband device;
- We are likely to have our architecture and our technology in 20 –25m handsets this year compared with 8m-10m last year.
The next trading outlook will be provided when we announce our interim results in October.