Annual Report Delivering on our strategy

Transcription

1 Annual Report 2014 Delivering on our strategy

2 STRATEGIC REVIEW 02 Operating and Financial Highlights 04 Chairman s Statement 06 President and CEO s Review 12 Business Overview 14 Financial Review 17 Business Risks 21 Corporate Social Responsibility GOVERNANCE 24 Directors and Professional Advisers 24 Board of Directors 26 Statement of Directors Responsibilities 27 Report of the Board of Directors 29 Corporate Governance Statement 31 Report of the Remuneration Committee 36 Report of the Audit Committee 38 Report of the Nomination Committee FINANCIAL STATEMENTS 40 Report of the Independent Auditors 41 Consolidated Statement of Financial Position 42 Consolidated Statement of Comprehensive Income 43 Consolidated Statement of Changes in Equity 44 Consolidated Statement of Cash Flows 45 Company Statement of Financial Position 46 Company Statement of Comprehensive Income 47 Company Statement of Changes in Equity 48 Company Statement of Cash Flows 49 Notes to Consolidated Financial Statements 79 Financial Summary COMPANY INFORMATION 80 Shareholder Information 82 Corporate Directory 82 Glossary 82 Disclaimer

3 Strategic Review Our Business Governance Financial Statements Company Information Optimal Payments is a global provider of online payment solutions, trusted by businesses and consumers in over 200 countries and territories to move and manage billions of dollars each year. With over 650 employees, we maintain offices and datacentres in Europe, North America and the UK. We have an exciting and growing business and have made real progress in delivering solutions that are built on strong technological and risk management foundations. This report provides a detailed review of the Group s performance in 2014 and sets out our vision, strategy and plans for 2015 and beyond. is quoted on the London Stock Exchange s AIM, with a ticker symbol of OPAY. Subsidiary company Optimal Payments Ltd is authorised and regulated as an e-money issuer by the UK s Financial Conduct Authority (FRN: ). Please visit our website at for further information. Merchants use the NETBANX platform and services to simplify how they accept credit and debit card, direct-from-bank, and alternative and local payments. We offer high performance payment processing solutions that use our proprietary rich feature set, risk management expertise and flexible technology. Our understanding, knowledge and experience allow us to help merchants open new markets and optimise the value of the ones they serve today. Consumers use the multilingual and multicurrency NETELLER and Net+ Card stored value offering to make secure and convenient payments worldwide. NETELLER allows merchants to increase revenues, expand their businesses and access millions of consumers. ANNUAL REPORT

4 Financial Statement Significant growth with progress on all strategic initiatives achieved in 2014 Financial Highlights EBITDA ($m) +65% Revenue ($m) +44% Net Profit/Loss ($m) +83% $86.1m (2013: $52.5m) $365.0m (2013: $253.4m) $57.7m (2013: $31.5m) Operational Highlights Full year performance reflects significant organic and inorganic growth. Revenue and profitability significantly boosted by the World Cup in the first half. Substantial improvement in NETELLER Stored Value ( SV ) business driven by underlying improvements in customer conversion and further development of VIP programs. Strong growth from NETBANX Straight Through Processing ( STP ) business incorporating revenue from the acquired US businesses incorporated in the second half of Good progress on strategic objectives in European acquiring, regulated US online gaming, integration of mobile payment technologies and card issuing. Acquisitions The successful acquisition of the Meritus and GMA businesses in the US in July 2014 has contributed to the growth and diversification of the Group. 02 ANNUAL REPORT 2014

5 Strategic Review Governance Financial Statements Company Information Cash Position ($m) Earnings Per Share (cents) 2014 Free Cash (reported) Group Cash (adjusted diluted) Free Cash (reported) Group Cash (adjusted diluted) 25 Net debt position of $26.3m 52% increase in adjusted diluted EPS Recognition A number of awards were won across the business in the past year demonstrating our commitment to delivering an excellent service to customers globally and the Group s continued contribution as a provider of outsourced technology solutions to the online gambling industry. The igb Affiliate Awards 2014 Winner, Best Payment System for Affiliates (January 2015) GA Gaming Awards 2012 Winner, Payment Solutions Provider Company of the Year (January 2015) UK Stock Market Award 2014 Winner, Joel Leonoff CEO of the Year (March 2014) Card Not Present Awards Winner, (May 2014) European Counsel Awards 2015 Winner, Elliott Wiseman Regulatory (Financial Services) General Counsel (March 2015) Ernst & Young Entrepreneur of the Year 2014 Winners: Joel Leonoff & Danny Chazonoff (COO) EY Quebec IT Entrepreneur (October 2014) Prepaid365 Awards 2014 Winner: Best General Spend Prepaid Card, Best Gaming Prepaid Card, Best Privacy Prepaid Card (May 2014) The AiM Awards Winner, International Company of the Year Award (2013) ANNUAL REPORT

6 Chairman s Statement Building on our momentum This is my first statement to shareholders following my appointment as Chairman in July 2014 and I am pleased to be able to report material progress during operationally and financially. Dennis Jones Chairman Introduction We have continued to successfully grow our businesses organically, and this growth has been supplemented by the acquisition, mid-year, of Meritus and GMA, which significantly expanded our presence in the North American online payments market. Strategy Optimal Payments has set out five strategic initiatives to grow the Company: 1. Drive organic growth in our core business lines of Straight-Through-Processing, Stored- Value and, from 2014, Card Services; 2. Develop multi-channel solutions for these businesses so that their services offered are available on the widest and most up-to-date platforms; 3. Deliver new and innovative white label solutions to our customers that will help them retain and win business from their own customers; 4. Position our businesses to take maximum advantage of any further legalisation of online gambling (a worldwide market we know intimately) in the US, and; 5. Continue our successful M&A strategy to add scale to our operations providing the acquisition can be completed on terms that are earnings accretive from the outset. In 2014 the Company advanced all of these initiatives and I believe that we will make further significant progress in A detailed report on 2014 s achievements is set out in the CEO s Review. Results Revenues for 2014 increased by 44% to $365 million (2013: $253.4 million) boosted by the FIFA World Cup in the first half of the year and, the contribution of the US businesses that were acquired in July Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 65% to $86.1 million (2013: $52.2 million) reflecting the operational leverage of our businesses where revenue rises, with low marginal cost increases, lead to larger increases in profits. Basic earnings per share (EPS) increased by 64% to 36 cents (2013: 22 cents) and adjusted fully diluted EPS increased 52% to 38 cents (2013: 25 cents). The Group ended 2014 with cash (excluding customer merchant cash) of $106.5 million (2013: $93.8 million) and free cash of $44 million after funding $26.6 million in part consideration and acquisition costs for the US businesses. The net debt position at year end was $26.3 million, a bank facility of $150 million was secured to fund the US acquisitions, and the Group was in full compliance with its debt covenants and cleared the remaining shareholder loans in January Dividend The Board is not recommending the payment of a dividend in respect of 2014, in line with our stated policy to reinvest cash generated in further growth opportunities. Board and governance In addition to my appointment as Non-Executive Chairman, there have been a number of further changes to the composition of the Board as we seek to put in place the people and 04 ANNUAL REPORT 2014

7 Strategic Review Governance Financial Statements Company Information processes that are appropriate for the much larger enterprise that we seek to become. Ian Jenks and Andrew Dark became Non-Executive Directors at the same time as my appointment and they bring with them a wealth of experience and the type of governance necessary to sustain and accelerate our growth plans. John Bateson and Jonathan Comerford resigned as Non-Executive Directors on our appointment and, on behalf of the Board; I would like to take this opportunity to thank them for their valuable contributions. Shortly after my appointment, the Board instituted a search for a CFO with large public company experience in the technology industry. In December, we announced the appointment of Brian McArthur-Muscroft as CFO and Executive Director of the Company. Brian was most recently Group Finance Director at Telecity Group Plc where he led the IPO of the business in 2007 and was chosen as the ICAEW s FTSE 250 Finance Director of the Year in 2012 and Business Week s Finance Director of the Year in He holds a Law degree and qualified as a Chartered Accountant in London with PricewaterhouseCoopers. Brian succeeded Keith Butcher whom I must also thank for his valuable contribution during the Company s early growth phase. With the appointment of the new Non-Executive Directors, Brian s appointment as CFO and the tightened corporate governance regime the Board has now put in place, I believe that we have a Board structure and governance platform that positions us well for the future. The future We announced the proposed acquisition of the Skrill Group with the release of the full year results, taking advantage of an opportunity to acquire a business we know well which, combined with Optimal Payments will be a UK based, world class and scale online payments business. These opportunities are few and far between. The Board believes this transaction will be accretive for shareholders from the first full year of ownership, will further diversify our client base and, additionally, enable us to deliver enhanced services to existing and prospective merchants and customers around the world. Dennis Jones Chairman 22 March 2015 ANNUAL REPORT

8 President and CEO s Review Positioned for further growth 2014 was a year of significant growth for Optimal Payments with substantial increases in revenue and profitability, setting a solid foundation for the year ahead. Joel Leonoff President and CEO Introduction We are extremely pleased with the significant growth and strong performances across the business in 2014 with revenues up 44% to $365.0 million (2013: $253.4 million) and EBITDA increasing 65% to $86.1 million (2013: $52.2 million); this resulted in the Group s profit after tax increasing by 83% to $57.7 million (2013: $31.5 million), which was also favourably impacted by an unrealised fair value gain of $18.8 million during the current year. We also achieved a number of significant milestones in 2014: the launch of the NETELLER and NET+ offerings in the US to enhance our position in the regulated online gambling market, attaining Principal Membership status with Visa and MasterCard to strengthen our NETBANX offering in the European Union and the successful acquisition and ongoing integration of the Meritus and GMA online payments companies to our NETBANX business to establish a significant presence and merchant base in the US. More recently, we have launched of a new card issuing services division and our NETELLERGO! offering for ecommerce merchants outside of gambling to contribute to continued growth. These achievements have all been important strategic goals as we continue to deliver on our stated objectives. We believe that the investment we have made in these and other areas will help to drive further growth. The NETELLER Stored Value business continued to perform well through 2014, driven by underlying growth in customer metrics and an improvement in the gross margin which has significantly contributed to the increase in EBITDA. The NETBANX Straight Through Processing business also performed strongly, revenues from the US businesses were incorporated in the second half of the year following the completion of the acquisitions in July. Our largest merchant contributed 36.7% of overall revenue, significantly boosted by the World Cup in the first half; this contribution was diluted by the inclusion of revenues from the US businesses in the second half of We continue to provide NETELLER and NETBANX services to this customer worldwide. The regulatory environment has continued to evolve and while this did not materially impact our revenues in 2014, some uncertainty persists in this regard. The Group was highly cash generative during the year, enabling us to acquire Meritus and GMA for a combined cost of $225 million payable in cash and shares, partly financed by new bank debt of $150 million. The Group s own cash (excluding any merchant cash) increased to $106.5 million at year end (31 Dec 2013: $93.8 million) with free cash of approximately $44.0 million. In January 2014, we successfully placed our then major shareholder s entire stake (25.2% of the then issued share capital) into the market with the resulting transformation of our shareholder base, with 72 institutional shareholders participating in the placement. The remaining shareholder loans of $9.5 million that were related to the 2011 acquisition of OP Inc. were converted into equity and formed part of this placement. 06 ANNUAL REPORT 2014

9 Strategic Review Governance Financial Statements Company Information NETELLER Stored Value ( SV ) The Group s NETELLER SV business (comprising the NETELLER and Net+ prepaid card stored value offering) performed strongly throughout 2014 with revenues up 50% to $89.6 million (2013: $59.8 million) and the gross margin improved to 85% (2013: 84%). The improved cash-back based VIP member loyalty program, a strengthened sales team, an enhanced affiliate program and numerous additions to deposit options for members worldwide have contributed to increased market share, primarily in the European online gambling market where NETELLER remains one of the two major providers of stored-value offerings. Key lead indicators such as number of member signups and member conversion rates continued to improve. In 2014, we built upon our Principal Issuer membership of MasterCard through improvement of existing products and the development of a wider product suite. We have seen consistent growth with our award winning Net+ product, with over 450,000 Net+ prepaid cards issued and an average of 35,000 cardholders active every month. Our Issuing business made good progress in 2014 with the continued organic growth of our Net+ programme with transaction value of $376 million (2013: $324 million). A new card issuing services division was launched in October 2014 to offer a variety of different programmes from white labelled cards to fully customised prepaid and multi-channel payment solutions, leveraging the Group s extensive experience in multi-currency issuance and settlement to create repeatable scalable processes to merchants. Key strategic projects for 2015 are to enhance the offering with a pooled accounts solution to support real time loading of consumer funds and an agency banking solution which will allow prepaid card programmes to offer a more comprehensive banking experience to their clients (including internet banking and electronic payments). In July we announced the shirt sponsorship of UK Premier League football club Crystal Palace FC which has given extensive exposure to and raised the awareness of the NETELLER brand in the UK and internationally. Our focus has traditionally been on the online gambling market where NETELLER has a strong market position however, we recently launched NETELLERGO! for ecommerce merchants to offer their consumers the flexibility of access to indemnified alternative payment types to complete their purchases. ANNUAL REPORT

10 Progress on strategic initiatives Having accomplished all of our stated goals in 2014, we are excited about the year ahead and the evolving opportunities for Optimal Payments. Drive growth in core business lines Obtained Principal Membership with Visa Europe and MasterCard Europe for merchant acquiring in the European Union in January MasterCard Principal Membership for issuing achieved in November Develop multi-channel solutions Integrating with our partners to expand on the innovative solutions we make available for our customers. Develop new white-label propositions Deploy our technologies in new markets to develop Integrated payments solutions with key strategic partners. US gaming opportunity Strong and growing presence in the US and established as a leader in gaming payments having serviced all top global brands since Inorganic growth through acquisition To enhance growth and diversify the business. 08 ANNUAL REPORT 2014

11 Strategic Review Governance President and CEO s Review continued Financial Statements Company Information NETBANX Straight Through Processing ( STP ) The Group s NETBANX STP business also showed strong growth with full year revenues up 42% to $274.7 million (2013: $193.0 million). The growth was due to increasing demand from gambling and non-gambling customers alike, including our largest merchant whose revenue increased significantly during the World Cup. The gross margin in NETBANX was stable at 41% (2013: 42%) with the bulk of the direct processing costs being fees to acquiring banks and other intermediate processors. Customer retention remains high as NETBANX provides a wide range of payment and fraud prevention services through a single customer integration point as well as access to more than a dozen acquiring banks worldwide. The underlying platform is scalable, and can accommodate a large number of new customers. The integration of the Meritus and GMA businesses is progressing well, contributing to the growth of the NETBANX division in the second half of the year. Acquisition of these profitable, fast growing and cash generative businesses will significantly accelerating Optimal Payments expansion into the rapidly expanding US ecommerce market by providing it with a diversified merchant client base, a highly agile multi-channel sales force operating in complimentary and new vertical markets and, partnerships with leading US acquiring banks. Having secured Principal Membership with Visa and MasterCard in the European Union, we are now able to offer competitive acquiring services to merchants which gives us the opportunity to increase the addressable market for our NETBANX offering. Principal Membership allows us to compete with banks and also benefit from interchange pricing from Visa and MasterCard. We expect to be more competitive in the lower risk processing markets whereas, to date, we have mainly focused on moderate to high risk markets. Our lower cost base should result in a more balanced mix of merchants in our portfolio. This business model underpins our confidence that NETBANX can continue to win business in all territories. We have also continued to invest in building out our product infrastructure with the specific focus of providing etailers and retailers with the tools necessary to integrate technologies, such as our Developer centre giving code examples and test access to developers. In addition, we have the tools to enable merchants to access alternative payment types such as Apple Pay, MasterPass and Pingit to enhance the shopping experience for their customers using the most secure payment solutions available. US gaming NETELLER and Net+ products launched in the US in March 2014 and we have seen wide acceptance and adoption by merchants in New Jersey, Nevada and Delaware where online gambling has been regulated. Larger and more populous US states, including California and Pennsylvania, are currently considering licensing online gambling in 2015 and beyond. We are well positioned to gain market share in the US market, having acquired significant US operations through our California based businesses Meritus and GMA. We have continued to develop our relationships with current and potential merchants and have forged successful partnerships in the rapidly developing area of fantasy sports leagues. ANNUAL REPORT

12 President and CEO s Review continued Recognition We have won a number of awards across the business in the past year demonstrating the excellent service which we deliver to customers globally and the Group s continued contribution as a provider of outsourced technology solutions to the online gaming industry. NETELLER most recently won Best Payment System for Affiliates at the igb Affiliate Awards and Corporate Services Supplier of the Year at the International Gaming Awards in February Our Net+ card achieved Best General Spend Prepaid Card, Best Free Prepaid Card, Best Prepaid Card and Best Gaming Prepaid Card at the Prepaid 365 Awards. Optimal Payments won Regional Payments Solution of the Year at the egaming Review and was recognised as the leading ecommerce platform gateway provider at the Card not Present (CNP) Awards. In October 2014, Danny Chazonoff (our Chief Operations Officer) and I were honoured to be named as the winners of Ernst & Young s Entrepreneur of the Year Quebec s Information Technology category. Most recently we were proud to announce that Elliott Wiseman, our General Counsel, won the Individual Award in the Regulatory (Financial Services) category at the European Counsel Awards 2015 in recognition of the considerable expertise he has shown in leading our legal and compliance functions from joining the Group in Current trading and outlook The underlying business continues to perform well. Having accomplished all we set out to do during the year, both financially and operationally, we have emerged with a solid foundation for 2015 and look forward to maintaining the momentum established in Our Executive Management Team has been strengthened through the addition of talented and experienced executives from Meritus and GMA and the recent appointment of Brian McArthur-Muscroft as CFO provides us with FTSE 250 level experience and pedigree as well as great leadership, discipline and value for our growing business. We continue to assess M&A opportunities that provide a strategic fit at the right valuation to further accelerate earnings growth, diversify our business and, most importantly, deliver value to shareholders. I would like to thank the management team and all staff for their outstanding contributions, without which the Group s success today could not have been achieved. Joel Leonoff President and Chief Executive Officer 22 March 2015 Joel Leonoff and Danny Chazonoff win Ernst & Young s Entrepreneur of the Year (Quebec s Information Technology category) in October ANNUAL REPORT 2014

13 Strategic Review Governance Financial Statements Company Information Well positioned in US gaming NETELLER and Net+ products were launched in the US in March 2014 and further partnerships have been forged including the rapidly developing area of fantasy sports leagues. NETELLER sponsors Crystal Palace The shirt sponsorship of UK Premier League football club Crystal Palace has raised the awareness of the NETELLER brand in the UK and internationally. ANNUAL REPORT

14 Business Overview Two main lines of business: NETELLER SV The NETELLER and Net+ stored value offering allows consumers to store monetary value, which can then be used to pay for transactions at merchant s online sites. NETELLER, established in 1999, has attracted millions of consumers who value simplicity, convenience, anonymity and security. Consumers deposit funds into their NETELLER and Net+ accounts via one of over 100 payment options, such as credit or debit cards, internet bank transfers and vouchers, and then use those funds to pay directly for goods or services online. The NETELLER and Net+ prepaid card stored value account allows members to withdraw funds directly from their NETELLER accounts via ATMs or to pay for goods and services. NETELLER derives its revenues by charging transaction fees to customers (members) as they deposit funds into their NETELLER account. It also charges fees to merchants when funds in the NETELLER account are moved to that merchant s site. NETELLER processed over $7 billion in transaction value in NETELLER Stored Value ( SV ) Comprised of the NETELLER and Net+ prepaid card stored value service. NETBANX Straight Through Processing ( STP ) Comprised of payment gateway and bureau services. NETBANX STP The Group s STP business, NETBANX, provides payment processing services for gambling and non-gambling merchants whose customers transact principally online. These services are provided on platforms in Europe, North America and Asia. In Europe and North America, NETBANX processes both card and non-card payments for a very diverse set of e-commerce businesses. This is a fully PCI DSS Level 1 compliant and certified service for multi-channel cardholder not present transactions, including web, IVR, call centre, mail order, and telephone order purchases. NETBANX processes all major credit and debit cards including Visa and MasterCard, with additional payment support for global processing of American Express, NETELLER, PayPal, Ukash, and direct from bank payments such as ideal, Giropay and Direct Debit all through a single integration, via multiple acquiring banks. In Asia, NETBANX provides a bespoke gateway service via an outsourced service provider that leverages in-country processors to facilitate payments to merchants. Most of these payments are initiated via debit cards. The acquisition of the Meritus and GMA businesses has substantially increased our US portfolio and will drive multichannel sales growth in that market. NETBANX earns fees for processing online transactions either as a fixed fee per transaction (the gateway model) or as a percentage of the transaction value (the bureau model, where the Group takes on the risk of managing the transaction process instead of an acquiring bank). NETBANX processed over $13 billion in transaction value in 2014 with over 130 million transactions completed. The Group by numbers $20bn in transaction volume in 2014 (from $18bn in 2013) years track record, UK FCA regulated & PCI certified countries and territories served ,000+ employees in 4 countries corporate customers from various industries 12 ANNUAL REPORT 2014

15 Strategic Review Governance Financial Statements Company Information Acquisition of leading payment processing company substantially increases scale and drives multi-channel sales growth in rapidly expanding US ecommerce market. Established in 2008, Meritus is a high growth and profitable organisation with a similar entrepreneurial corporate culture and set of values to Optimal Payments. It has approximately 100 employees and processes more than $3 billion in transaction volume annually. Meritus has a proprietary technology platform and operates a streamlined and efficient merchant on boarding process. Revenues grew from $38.3 million in 2012 to $74.4 million in 2013 and strong growth is expected to continue. Meritus Solutions Meritus provides Global Payment Solutions that include mobile, credit and debit cards, gift and loyalty cards, fraud management, Automated Clearing House (ACH) and more. Proprietary products such as payment platform, Payment XP, Recurring Billing Manager, Fraud XP and Chargeback Management System, allow companies to conduct business wherever it takes them. Built on a foundation of excellence, Meritus strives to shape the payment processing industry. Accept all major credit cards Tokenised to protect data Flexible API for seamless integration Fraud & Chargeback Management, Meritus Mobile, Update XP, ACH, Recurring Billing Card Not Present, Point-of-Sale, MOTO, Mobile ecommerce, Digital Goods, B2B, Direct Response, Retail, Healthcare, and more The US market represents the single greatest expansion opportunity for Optimal Payments. After careful evaluation of a number of potential candidates, Meritus stood out as the perfect choice on all fronts. Joel Leonoff President and CEO ANNUAL REPORT

16 Financial Review Strengthening the Group through diversification and growth Continued focus on generating controlled, sustainable and profitable growth across the business. Brian McArthur-Muscroft Chief Financial Officer Introduction This is the first review following my appointment as Chief Financial Officer and I am pleased to present the consolidated Group results for the year ended 31 December I will continue to focus on generating controlled, sustainable and profitable growth across the business. EBITDA increased 65% to $86.1 million (2013: $52.2 million) and profit after tax increased by 83% to $57.7 million (2013: $31.5 million); adjusted diluted EPS increased 52% to $0.38 (2013: $0.25) with basic EPS increased 64% to $0.36 (2013: $0.22). Gross profit Full year revenues increased by 44% to $365 million in 2014 (2013: $253.4 million) driven by a substantial improvement in high margin NETELLER SV revenues and strong growth in the NETBANX STP division. Revenues for the H2 totalled $205.9 million (2013: $135.0 million) incorporating revenues from Meritus and GMA following the completion of these acquisitions on 23 July; revenues in the H1 were $159.1 million (2013: $118.4 million) boosted by c$5 million from the World Cup. NETELLER SV performed strongly, with revenues increased by 50% to $89.6 million (2013: $59.8 million) and the gross margin improved to 85% in 2014 (2013: 84%) as the number of new member monthly signups increased by 78% between December 2013 and December 2014 and monthly conversions increased by 109% resulting in the conversion of 95% more members in 2014 than The principal direct costs of the NETELLER SV division that vary directly with revenue (included in cost of sales) are transaction related deposit and withdrawal fees and bad debts, accounting for 13% and 2% of revenue respectively in 2014, in line with Additionally, with growth in customer signups, there are stepped costs of additional headcount in the call centre and the risk department and marketing and promotions fees where VIP loyalty cash back costs vary in line with VIP revenues. NETBANX STP revenues increased by 42% to $274.7 million (2013: $193.0 million) and the gross margin adjusted to 41% in 2014 (2013: 42%), incorporating revenue and processing costs derived from the US businesses in H2. Processing costs and bad debts are the only costs that are directly variable in line with revenues in the STP division, accounting for 59% and 0.2% of revenue respectively in 2014, in line with Meritus and GMA revenues of $45 million and net earnings incurred of $8.9 million are included in NETBANX STP revenues from the date of acquisition (23 July 2014), with a gross margin of 34%. The Group has one merchant, located and licensed in Europe, who represented 36.7% of total fee revenue in 2014 (2013: 41.4%) across all reportable segments and geographies. The majority of this revenue comes from the merchant s activities in Asia. In 2014, the proportion of revenue contributed by this merchant increased significantly as a result of the World Cup in H1 but slowed in the following months to contribute 29% overall in H2 (further diluted by the inclusion of revenues from the US acquisitions). Overall, H2 saw a slowdown in revenues generated from the Group s merchants activities in Asia which has now stabilised. We would expect the concentration of Asian based revenues to reduce further in the years ahead as the Group continues to diversify. 14 ANNUAL REPORT 2014

17 Strategic Review Governance Financial Statements Company Information Group revenue by business ($ millions) FY 2014 FY 2013 Growth H H Growth NETELLER SV fees % % NETBANX STP fees % % Fee revenue % % Investment income % Total revenue % Group revenue by geography ($ millions) FY 2014 FY 2013 Asia & Rest of World % % North America % % Europe % % Fee revenue % % Investment income of $0.7 million in 2014 (2013: $0.5 million) of revenue was derived from interest earned on the Group s cash and the cash held by the Group on behalf of merchants and members. The Group s gross profit, incorporating investment income and cost of sale expenses, is reported at $189.1 million in 2014 (2013: $131.8 million). The overall gross margin remained stable at 52% in 2014 (2013: 52%). Operating expenses Operating expenses increased by 50% to $146.9 million in 2014 (2013: $98.2 million) due primarily to consolidating more than five months of operations of the US acquisitions. Salaries and employee expenses increased by approximately $13.7 million as we increased our headcount by approximately 200 heads to over 700 full-time employees as at 31 December The NETBANX division now incorporates employees at the US businesses acquired in July, additions to headcount beyond this was mainly in technology as we continue to invest in our STP platform and product offerings on both sides of the business. The continued growth in NETELLER necessitated that we added staff in our call centre and risk operations to handle the higher number of NETELLER member applications and enquiries (which have doubled since June 2012). Share option expenses in 2014 were $8.3 million (2013: $4.5 million), the Group continues to use share options and LTIPs to incentivise its employees and management team. The performance conditions for the LTIP awards granted in 2012 were met in 2014 and the cost has therefore been recognised in We have also recognised some of the cost of the 2014 award based on an expected outturn. The share options available to employees in 2011 also vested in December Technology and Software costs increased by $2.1 million as we invested in both platforms and our outsourced third party costs for our Asia operations increased in line with the growth in that business through Marketing and promotions increased by $7.2 million to $15.2 million incorporating costs associated with the NETELLER loyalty programme and cash back costs plus costs associated with the sponsorship of Crystal Palace. A foreign exchange loss of $3.0 million was incurred in 2014 (2013: gain of $0.9 million) due primarily to the fact that each of the EURO and GBP weakened against the USD in 2014 while the Group maintained significant cash balances in EURO and GBP in excess of what was owed to members and merchants. The Group employs forward exchange contracts to mitigate some of the exposure of financial risk associated with foreign currency balances. Large balances in a number of currencies are held on deposit for members and merchants and these balances fluctuate due to members and merchants not always choosing to deposit and withdraw funds in the same source currency, whilst this benefits the Group through the generation of foreign exchange revenue, it is impossible to perfectly predict balances to hedge. Furthermore, the results from the Group s subsidiaries in Canada, UK and Bulgaria are reported in local functional currencies; as required under IFRS, foreign exchange on consolidation of a subsidiary s balance sheet is captured in equity, but the subsidiary s individual exposure to foreign currency is captured in income. There were no restructuring costs in 2014 (2013: $0.8 million) and, impairment charges were not incurred. EBITDA EBITDA increased 65% to $86.1 million (2013: $52.2 million) with the EBITDA margin increased to 24% (2013: 21%) due to the addition of the US businesses and the continued scalability of operations. Cash conversion remains strong and the Group was highly cash generative. Profit after tax Depreciation and amortisation was $21 million in 2014 (2013: $13.5 million) which included $15.6 million of amortisation of intangible assets (2013: $9.3 million) and $5.5 million in depreciation of capital assets (2013: $4.2 million). Approximately $3.1 million of the depreciation and amortisation charge in 2014 relates to the assets acquired through the acquisition of OP Inc. in 2011 (2013: $3.3 million) and an additional $6.1 million relates to the assets acquired through the acquisitions of Meritus and GMA in 2014; the NETELLER SV platform was launched at the end of 2010 and is being amortised over five years on a straight line basis. Finance costs were $2 million in 2014 (2013: $1 million), due to the debt incurred to fund the acquisitions of the US businesses in July The Group earns income and pays tax principally in Canada, the USA, the UK and the Isle of Man. Tax liabilities in these countries are calculated on an arm s length basis in line with internationally recognised transfer pricing principles. The 2014 tax charge is $1.3 million (2013: $1.2 million). The 2014 year-end provision for income taxes of $4.8 million (2013: $5.12 million) includes $4.8 million (2013: $4.8 million) in relation to Canadian withholding taxes that were deemed to have arisen on the relocation of assets to the Isle of Man from Canada in the 2004 and 2005 taxation years. Following a seven year investigation, the Canadian Revenue Agency (CRA) claimed that additional withholding taxes were payable by the Group. The provision in place at the beginning of the year has not been increased during the year as it is believed to represent the amount the group will likely be required to pay in respect of such withholding taxes and interest. Without this provision the group s income tax liability at the balance sheet date would have been $0.04 million. The Group s profit for the year, adjusting for these expenses and taxation paid is reported at $57.7 million in 2014 (2013: $31.5 million). ANNUAL REPORT

18 Financial Review continued FY 2014 FY 2013 FY 2014 FY 2013 Result ($m) Result ($m) EPS ($) EPS ($) Reported profit before tax / diluted EPS* FX gains (losses) 3.0 (0.9) 0.02 (0.0) Exceptionals - acquisition costs Share based payments Fair value gains on share consideration payable (18.8) 0.0 (0.1) 0.00 Amortisation on acquired intangibles (1) Adjusted profit before tax/adjusted diluted EPS* Adjusted Tax Adjusted profit after tax/diluted EPS* *Weighted average of shares in issue - diluted (million) (1) Includes: Meritus (acquired in July 2014) & Optimal Payments (acquired in 2011) Earnings per share The significant growth in revenue and EBITDA has resulted in an increase of adjusted diluted earnings per share of 52% to $0.38 (2013: $0.25) as compared to basic EPS which increased 64% to $0.36 (2013: $0.22). Adjusted EPS is calculated based on adjusted profit after tax, reconciliation to unadjusted earnings is shown above. Cash position Total gross cash available to the Group was $151.1 million at 31 December 2014 (2013: $170.6 million). This includes the unrestricted cash and cash equivalents of $142.3 million (2013: $164.4 million) plus restricted merchant cash balances and restricted member cash balances which is the excess of qualifying liquid assets held in respect of e-money issued to members over member balances payable. Included in cash and cash equivalents is a transient cash balance totalling $44.6 million (2013: $76.8 million) that relates to merchant transactions processed via the NETBANX gateway operations and security deposits held from the Group s bureau merchants. These gateway operations do not fall within the EU definition of e-money nor does a legal right of offset exist between this cash and the corresponding merchant liabilities. The cash and the merchant liabilities relating to gateway operations and merchant security deposits are therefore recognised both on the face of the balance sheet as cash and cash equivalents and as a liability in trade and other payables respectively. Group own cash position is $106.5 million (2013: $93.8 million) after deducting merchant cash balances, this does not represent the free cash of the business as a significant portion is tied up in various payment processing channels and security deposits. Free cash, available for long term investment, was approximately $44.0 million (2013: $38.0 million) at 31 December Intangible assets The net book value of intangible assets at 31 December 2014 was $76.1 million (2013: $22.8 million). This includes assets of $19.8 million acquired from OP Inc. on 1 February 2011 and assets of $63.6 million acquired from Meritus and GMA in 2014 (per note 16 of the Group s financial statements). Management considered that the carrying value of these acquired assets did not need to be impaired. During the year, the Group incurred development costs to add new functionality to the NETELLER SV and NETBANX platforms. Management determined that no impairment was required at 31 December 2013 in relation to this platform. Liabilities The remaining shareholder loans of $9.5 million (as at end 2013, including accrued interest) were converted into equity in the Company at pence per share and formed part of the placement on 28 January 2014, these loans were related to the 2011 acquisition of OP Inc. Total current liabilities have decreased to $113.6 million at 31 December 2014 (2013: $117.6 million) despite new debt instruments added in 2014 related to the acquisition of the Meritus and GMA. This is attributed in large part to the decrease in NETBANX merchant cash processing liabilities (to $44.6 million at end 2014 from $76.8 million at end 2013) relating to large sums of transient cash due to NETBANX merchants which has an equal and opposite liability included in trade and other payables. Net debt The Group was highly cash generative during the year and was effectively debt free at 30 June 2014, enabling us to acquire Meritus and GMA for a combined cost of $225 million in July. These acquisitions were partly funded by a new bank debt facility of $150 million provided by the Bank of Montreal, consisting of a $100 million term loan facility and a $50 million revolving loan facility that are repayable over three years. The balance was funded by cash of $26.6 million and shares. Year end net debt was $26.3 million, the increase of $109.2 million is due to the debt facilities taken to finance the US acquisitions, the Group was in full compliance with its debt covenants and has capacity for additional debt finance should this be required to capitalise any further acquisition opportunities that arise. Off balance sheet arrangements As of 31 December 2014, the Group had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources. Brian McArthur-Muscroft Chief Financial Officer 22 March ANNUAL REPORT 2014

19 Strategic Review Business Risks Managing risk remains a key focus Governance Financial Statements Company Information Managing risk in our business Effective risk management is critical to achieving the Group s objectives. Optimal Payments has a comprehensive system of controls in place to manage risks. We conduct regular reviews of the major risks which may affect our business and its financial performance. Risks are identified, evaluated and mitigated through a combination of a top down approach (driven by the Audit Committee and the Board) and a bottom up process (originating from the operations). The Risk Management Committee comprising a number of senior executives including the Chief Operating Officer, the Group s General Counsel, Head of Compliance and the Group s Director of Operational Risk, is tasked with identifying and evaluating group risks. These are pulled together into an Enterprise Risk Management framework where the risks are prioritised and responsibility assigned to an executive for monitoring and risk mitigation. Optimal Payments has appointed Raymond Chabot Grant Thornton to undertake regular reviews across the Group s operations to assess the controls that are in place to mitigate the risks we face. Responsibility The Board has oversight responsibility for the effective management of all major risks affecting the Group. In each area, the Board is supported by members of the executive management team and other managers with key functional responsibilities. Appropriate policies and procedures Detailed policies and procedures support risk management across the Group and the application and consistency of these procedures is reviewed regularly by the Group s Internal Audit function. Further details of this are included in the Corporate Governance section on pages 36 to 37. Risk analysis The Group s principal risks can be categorised as either strategic, financial, operational, regulatory or market risks as shown below: Strategic risks Loss of a major customer Loss of one or more major customers of the Group could result in a material loss of revenue and profit to the Group. The Group derived approximately 37% of its revenue in FY2014 from one customer. Examples of mitigating activities include: Developing a diversified customer portfolio, both geographically and by industry sector. Building and maintaining close relationships with customers to determine and adapt to their current needs, providing the solutions and flexibility that they require. Dedicated account management for major customers. Failure of a major customer The business failure of a merchant of the NETBANX Straight Through Processing division might result in chargebacks from the merchant being passed on to the Company which could have a materially adverse effect on the Group s financial condition. Ensuring that the Group holds the appropriate rolling reserves and collateral/security and insures against the risk in certain circumstances where appropriate and available. Assessment of the financial risk before accepting the merchant as a customer and regular ongoing review of the merchant s performance and general financial health. Reacting quickly to any marked changes in behaviour including transaction patterns, cashflows and/or chargeback levels. Changes in the Online Gambling Industry The Group relies on the continued supply of its services to merchants within the online gambling industry. If such merchants are subject to heavier taxes, compliance costs, levies or licence fees or are forced to cease operating in a jurisdiction as a result of prohibitive legislation it may result in reduced demand for the services of the Group within the online gambling industry. Acquisitions and partnerships Acquisitions and partnerships can play a key role in the Group s strategy and the failure to integrate and operate acquired businesses and/or partnerships represents a commercial risk to the business. Attracting and retaining the best talent The Group s success depends on its ability to attract and retain key management to drive the business development and respond to the challenges and opportunities it faces. Ensuring that the Group builds on the international diversification of its merchant base to reduce the impact of changes in one jurisdiction having a material impact on the Group. Increasing the supply of the Group s services to merchants outside of the online gambling industry. Managing corporate activity through a structured acquisition and integration process using multifunctional teams and major programme specialists. Developing the skills and capabilities of identified staff as part of talent management. Creating opportunities within the Group for personal development and career enhancement by corporate activity. ANNUAL REPORT

20 Business Risks continued Financial risks Relationships with financial institutions The nature of the Group s business requires it to enter into numerous commercial and contractual relationships with banks, card schemes, issuers and other financial institutions. The Group depends on these relationships to operate on a day-to-day basis. If, for any reason, any banks, payment card schemes, issuers or financial institutions ceased to supply the Group with the services it requires to conduct its business it could impact the Group s ability to provide its digital payment services. Secure sufficient funding The Group has working capital needs which can limit the Group s ability to utilise cash for investment purposes. Access to funding is therefore important to retain sufficient flexibility in the Group s strategic development. Cost and capital expenditure control The Group s ability to deliver sustainable improvement in financial performance is dependent on controlling costs and capital expenditures. Examples of mitigating activities include: Maintain strong relationships with financial institution partners. Continue to seek new financial institution partners to help build latency into the network. Developing strong relationships with financial institutions and shareholders. Adopting appropriate cash management strategies aligned to operational and strategic priorities. Adopting sufficiently detailed budgets and business plans as part of a comprehensive annual budgeting process. Monthly reporting of budget variance and performance to the Board, including capital expenditure reviews. Operational risks Complex global operations The Group operates in global markets with customers in over 200 countries and territories, and has a physical presence in a number of countries around the world. The Group runs a number of different operating platforms supporting core payment processing services. This creates complexity within the Group s operations: different time zones; technical interfaces; business processes; cultures and work practices. Product innovation The Group must continue to enhance and improve the responsiveness, functionality and features of its products and services and the underlying network infrastructure. The Internet and e-commerce industries are characterised by rapid technological change, changes in user requirements and preferences, frequent new product and service introductions embodying new technologies, and the emergence of new industry standards and practices that could render our technology and systems obsolete. Examples of mitigating activities include: Building strong interaction and communication frameworks between those operations. Defined management structures with clear reporting lines. Developing the Group s capability to internally develop, acquire, partner or licence leading technologies to enhance existing products and services and also to develop new products and services. Continuing to address the increasingly sophisticated and varied needs of the Group s merchants, and responding to technological advances and emerging industry standards and practices on a cost-effective and timely basis. Security, fraud and money laundering The Group is focused on providing trusted services to consumers and merchants and ensuring that data and confidential information is transmitted and stored securely. Ensuring customer data security, privacy, and ongoing compliance with Payment Card Industry regulations requires significant capital expenditure. Operating a number of automated monitoring tools and response procedures to identify and react to threats. Continuing to invest in solutions that improve the Group s ability to manage credit risk and fraud and ensure compliance with regulations in the most cost-effective and appropriate manner. As an online business with little or no face-to-face contact with its customers, the Group faces the possibility of reputational damage if there was a serious case of a customer using the Group s services to carry out money laundering or terrorist financing. 18 ANNUAL REPORT 2014