724 Solutions Inc.
NASDAQ : SVNX
TSX : SVN

724 Solutions Inc.

November 09, 2005 16:15 ET

724 Solutions Announces Third Quarter 2005 Results

SANTA BARBARA, Calif.--(CCNMatthews - Nov 9, 2005) -

724 Solutions (NASDAQ: SVNX) (TSX: SVN), a leading provider of next-generation IP-based network and data services, today reported unaudited results for its third quarter ended September 30, 2005 (all figures are in U.S. dollars).

724 Solutions' total revenue in the third quarter was $4.5 million, compared to $4.6 million in the previous quarter and $3.5 million in the third quarter of the previous year, a 27% increase year over year.

The net loss for the third quarter of 2005, computed using United States generally accepted accounting principles ("GAAP"), was $1.5 million, or $0.24 per share, compared to a loss of $1.5 million or $0.25 per share in the previous quarter and a loss of $1.5 million or $0.25 per share in the third quarter of 2004. The third quarter 2004 results included a restructuring charge reversal of $181,000. The Company's total GAAP cost of revenue and operating expenses were $5.8 million in the third quarter, compared to $5.9 in the previous quarter, and $4.8 million in the same period a year ago.

Non-GAAP net loss for the third quarter was $812,000, or $0.13 per share, compared to $783,000, or $0.13 per share, in the previous quarter and a non-GAAP loss of $1.3 million, or $0.21 per share, in the third quarter of the previous year, a 35% improvement year over year. The Company's total non-GAAP cost of revenue and operating expenses were $5.3 million in the third quarter compared to $5.4 million in the previous quarter, and $4.8 million in the same period a year ago. A reconciliation between net income on a GAAP basis and a non-GAAP basis is provided in a table immediately following the Summary of Operations.

"We are proud that the Company produced another quarter of respectable year-over-year growth," said John Sims, Chief Executive Officer, 724 Solutions. "The short term challenge for the Company is to replace the revenue that will be lost from the termination of the HP contract, while our long term opportunity will be defined by our ability to establish a prominent position in the Convergence marketplace. The demonstration of our capabilities through the previously announced Project Golden Gate initiative, working with our MobileIGNITE partner Bridgeport Networks, is a tangible demonstration of the unique value we can bring to bear in this market opportunity."

The Company will be providing no specific revenue guidance for the fourth quarter, and indicates that revenue for the quarter will be determined by its ability to replace the revenue lost as a result of the termination of the HP contract, which ended on October 31, 2005. Total GAAP costs are expected to be in the range of $5.9 million to $6.2 million in the fourth quarter of 2005. The Company said that it expects total non-GAAP cost of revenue and operating expenses to be in the range of $5.2 million to $5.5 million in the fourth quarter of 2005. The differences between these two sets of numbers are projected depreciation of $150,000, projected stock-based compensation expenses of $332,000, and projected net interest expense of $188,000.

Key accomplishments in the third quarter:

-- The live demonstration of a MobileVoIP solution with MobileIGNITE partner Bridgeport Networks, that bridges a person's mobile phone number identity, presence, phone calls and messaging to the user's desktop running Microsoft Office Communicator 2005 client software, extending the reach of Microsoft Live Communications Server 2005.

-- The announcement of Project Golden Gate, a key technology initiative to deliver a solution that enables mobile network operators to bridge the gap between IMS and legacy macro-cellular networks, to allow their existing subscriber base appear as part of the IMS/SIP network.

Conference Call Information

The Company will host a conference call to discuss the results on November 10, 2005 at 8:30 a.m. (ET). The conference call will be available over the Internet through the company's web site at www.724.com or by telephone at +1-415-537-1902. A replay will be available for 30 days following the conference call and can be accessed by dialing 800-558-5253 or +1-416-626-4100 reservation number 21235304.

Non-GAAP Income (Loss) and Total Non-GAAP Operating Expenses

The non-GAAP income (loss) used by 724 Solutions excludes depreciation, amortization of intangibles, stock-based compensation, interest expense (income), restructuring charges, write down of goodwill, gain on sale of long-term investments and transition, acquisition and foreign exchange impacts (direct costs of terminated employees on a defined transition plan, contractual bonuses accrued relating to historic acquisitions considered to be of no value to the ongoing business and foreign exchange gains and losses on our non-US dollar denominated cash, receivables, payables and accrued liabilities balances). Non-GAAP operating expenses are GAAP expenses less depreciation, amortization of intangibles, stock-based compensation, interest expense (income), restructuring charges, write down of goodwill, gain on sale of long-term investments and transition, acquisition and foreign exchange impacts. The reduction in the market value of 724 Solutions and the significant changes undertaken by 724 Solutions over the past two years including the substantial reduction in personnel and the closing of offices, have resulted in restructuring charges, the write-down of goodwill and significant changes in other GAAP expenses such as depreciation, stock-based compensation, amortization of intangibles and interest income (expense). Management believes these non-GAAP metrics provide a meaningful measure of the Company's results to its investors by excluding items that are significantly different than those we experienced in historic periods as our historic costs are not indicative of our restructured cost structure and our expected costs on a forward looking basis. Management believes these measures provide relevant and useful information for investors as these measures are an integral part of our internal management reporting and planning process and are the primary measures used by management to evaluate the operating performance of 724 Solutions. While management believes the non-GAAP measures allow investors to better compare 724 Solutions' results in different periods, the non-GAAP measures may not be comparable to non-GAAP measures of other companies. There are material limitations to using these non-GAAP measures, including the difficulty associated with comparing these performance measures, as we calculate them, to performance measures presented by other companies, and the fact that these performance measures do not take into account certain significant items, including depreciation, amortization of intangibles, stock-based compensation, interest expense (income), restructuring charges and non recurring and acquisition charges.

About 724 Solutions

724 Solutions (NASDAQ: SVNX) (TSX: SVN) delivers reliable, scalable technology and solutions that allow mobile network operators to rapidly deploy flexible and open next generation IP-based network and data services. Additionally, in conjunction with mobile operator partners, the company provides a series of actionable alerting solutions to enterprises to assist them in lowering operating costs and improving customer relationship management. 724 Solutions is a global company with development operations in Canada and Switzerland with its corporate office in Santa Barbara, California. For more information, visit www.724.com.

Cautionary Note Regarding Forward-Looking Statements

This press release contains statements of a forward-looking nature. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements include the statements herein regarding: the services and products that will be offered by 724 Solutions, the benefits that businesses will obtain from these services and products, future demand for these services and products, our future operating and cash performance, our plans and prospects and the sufficiency of our cash resources. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including the risk that 724 Solutions will be unable to deploy its solutions and products, the risk that the demand for these solutions and products, or for 2.5G and 3G networks, will not increase as presently anticipated, the risk that general economic conditions will not improve or deteriorate, the risk that 724 Solutions will be unable to retain its key customers, the risk that 724 Solutions will lose business to competitors with greater resources, and other risks described in 724 Solutions' Securities and Exchange Commission filings, including its annual report on Form 10-K and its quarterly reports on Form 10-Q. These risks are also described in 724 Solutions' filings with the Canadian Securities Administrators. 724 Solutions does not undertake any obligation to update this forward-looking information, except as required under applicable law.



724 Solutions Inc.
Consolidated Balance Sheets
(in thousands of U.S. dollars)

September 30, 2005 and December 31, 2004
----------------------------------------------------------------------
2005 2004
----------------------------------------------------------------------
(Unaudited)

Assets

Current assets:
Cash and cash equivalents $3,375 $5,417
Short-term investments 6,501 8,005
Restricted cash 220 210
Accounts receivable - trade, net of allowance
of $19 (December 31, 2004 - $18) 4,420 2,831
Prepaid expenses and other receivables 619 583
----------------------------------------------------------------------
Total current assets 15,135 17,046

Deferred charges 197 286

Fixed assets, net of accumulated amortization of
$13,801 (December 31, 2004 - $13,732) 948 1,135
----------------------------------------------------------------------
Total assets $16,280 $18,467
----------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable $752 $613
Accrued liabilities 1,999 2,101
Interest payable to related parties 107 103
Deferred revenue 215 173
----------------------------------------------------------------------
Total current liabilities 3,073 2,990

Long-term liabilities - 92

Convertible notes payable to related parties 7,964 7,947

Long-term interest payable to related parties 660 343
----------------------------------------------------------------------
Total liabilities 11,697 11,372

Shareholders' equity:
Share capital:
Authorized:
Unlimited common shares
Unlimited preferred shares
Issued and outstanding:
6,039,444 common shares
(December 31, 2004 - 5,989,300) 764,859 764,530
Additional paid-in capital 980 279
Accumulated deficit (761,350) (757,921)
Accumulated other comprehensive income 94 207
----------------------------------------------------------------------
Total shareholders' equity 4,583 7,095

Contingent liabilities (a)
----------------------------------------------------------------------
Total liabilities and shareholders' equity $16,280 $18,467
----------------------------------------------------------------------

(a) See note 11 to our consolidated financial statements set forth in
our 2004 annual report


724 Solutions Inc. - Summary of Operations (unaudited)
(In thousands of U.S. dollars, except per share amounts)

Three months ended Nine months ended
---------------------------- -------------------
September June September September September
30, 30, 30, 30, 30,
2005 2005 2004 2005 2004
Revenue:
Product $1,295 $1,704 $2,013 $5,984 $5,704
Services 3,166 2,912 1,489 8,898 3,848
---------------------------- -------------------
Total revenue 4,461 4,616 3,502 14,882 9,552
Cost of revenue (a) 1,814 1,917 1,505 5,762 4,570
---------------------------- -------------------
Gross margin 2,647 2,699 1,997 9,120 4,982

Operating expenses:
Research and
development (a) 1,768 1,693 1,410 5,148 4,932
Sales and marketing
(a) 930 1,023 1,093 3,121 3,669
General and
administrative (a) 748 853 796 2,405 2,384
Depreciation 150 165 124 472 429
Stock-based
compensation
Cost of revenue 19 15 4 41 9
Research and
development 43 35 10 97 23
Sales and marketing 53 43 9 112 20
General and
administrative 233 186 16 450 37
Restructuring charges - - (181) - 1,019
---------------------------- -------------------
Total operating
expenses 3,944 4,013 3,281 11,846 12,522
---------------------------- -------------------
Loss from operations (1,297) (1,314) (1,284) (2,726) (7,540)

Interest income
(expense) (172) (180) (183) (538) (186)
Loss on settlement of
liability - - - (165) -
---------------------------- -------------------
Net loss for the
period $(1,469) $(1,494) $(1,467) $(3,429) $(7,726)
---------------------------- -------------------

Basic and diluted net
loss per share $(0.24) $(0.25) $(0.25) $(0.57) $(1.29)
Weighted-average
number of shares used
in computing basic
and diluted net loss
per share (in
thousands) 6,036 6,033 5,983 6,032 5,983
---------------------------- -------------------

Total cost of revenue
and operating
expenses $5,758 $5,930 $4,786 $17,608 $17,092


724 Solutions Inc. - Summary of Non-GAAP Adjustments (unaudited)
(In thousands of U.S. dollars, except per share amounts)

Three months ended Nine months ended
---------------------------- -------------------
September June September September September
30, 30, 30, 30, 30,
2005 2005 2004 2005 2004

GAAP net loss for the
period $(1,469) $(1,494) $(1,467) $(3,429) $(7,726)

Depreciation 150 165 124 472 429
Stock- based
compensation 348 279 39 700 89
Interest expense
(income) 172 180 183 538 186
Loss on settlement of
liability - - - 165 -
Restructuring charges - - (181) - 1,019
Non-recurring and
acquisition
charges (b) - - - - 307
Foreign exchange
losses (gains) (13) 87 52 84 57
---------------------------- -------------------
Non-GAAP net income
(loss) for the period $(812) $(783) $(1,250) $(1,470) $(5,639)
---------------------------- -------------------

Non-GAAP net income
(loss) per share $(0.13) $(0.13) $(0.21) $(0.24) $(0.94)


(b) Non-recurring and acquisition charges include direct costs related
to terminated employees and direct costs related to historic
acquisitions

(a) Non-GAAP operating expenses
Cost of revenue $1,814 $1,917 $1,505 $5,762 $4,570
Research and development 1,768 1,693 1,410 5,148 4,778
Sales and marketing 930 1,023 1,093 3,121 3,584
General and administrative 761 766 744 2,321 2,259
----------------------- ---------------
Total non-GAAP operating
expenses 5,273 5,399 4,752 16,352 15,191


724 Solutions Inc. - GAAP to non-GAAP Reconciliation (unaudited)
(In thousands of U.S. dollars)

Three months ended Nine months ended
--------------------------- -------------------
September June September September September
30, 30, 30, 30, 30,
2005 2005 2004 2005 2004

GAAP cost of revenue $1,814 $1,917 $1,505 $5,762 $4,570
Total reconciling items - - - - -
--------------------------- -------------------
Non-GAAP cost of
revenue 1,814 1,917 1,505 5,762 4,570

GAAP research and
development 1,768 1,693 1,410 5,148 4,932
Transition costs - - - - (154)
--------------------------- -------------------
Non-GAAP research and
development 1,768 1,693 1,410 5,148 4,778

GAAP sales and
marketing 930 1,023 1,093 3,121 3,669
Transition costs - - - - (85)
--------------------------- -------------------
Non-GAAP sales and
marketing 930 1,023 1,093 3,121 3,584

GAAP general and
administrative $748 $853 $796 2,405 2,384
Transition costs - - - - (68)
Foreign exchange gains
(losses) 13 (87) (52) (84) (57)
--------------------------- --------- ---------
Non-GAAP general and
administrative 761 766 744 2,321 2,259


724 Solutions Inc. - Cash Reconciliation (unaudited)
(In thousands of U.S. dollars)

Cash and cash equivalents, short-term
investments and restricted cash:

At September 30, 2005 $10,096
At June 30, 2005 11,455
--------

Total cash flow in quarter ended September 30, 2005 (1,359)

Non-recurring payments -
--------

Operating cash flow in quarter ended September 30, 2005 $(1,359)



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