|Calgary, Canada, September 30, 2004, Chartwell Technology Inc. (TSX:CWH) a leading provider of gaming software systems and entertainment content to the online and remote gaming industry, announces unaudited financial results for the third quarter ended July 31, 2004, and accounting policy change.|
Highlights of the quarter included:
Revenue of $3,598K compared with $1,966K during the same period in fiscal 2003;
Net earnings of $1,210K or $0.07 per diluted share compared with net earnings of $ 213K or $0.02 per diluted share during the same period in fiscal 2003;
Cash flow from operations of $1,411K compared with $ 308K during the same period in 2003;
Working capital of $9,708K,
Retroactive change in revenue recognition policy
“Solid revenue and earnings performance continued in the third quarter and we remain on track to achieve our financial objectives for 2004”, states Don Gleason, Chief Financial Officer. “Our license fee revenue continues to grow at planned levels and prudent and effective cost management have enabled the Company to increase operating margins and net earnings. For the remainder of 2004 we will continue to focus on profitability, expanding our customer base and product portfolio”.
Three Months Ended July 31, 2004
All amounts for comparative periods below are as restated.
Compared to the same period of 2003, revenue increased 83%, operating income increased 266%, earnings increased 466% and earnings per diluted share increased 250%.
Total revenue increased to $3,598K from $1,966K in the comparative quarter in 2003. Although software set-up revenues are below last year’s level, recurring license fee revenue continues to show sequential quarterly growth. License fees increased by 26% to $3,392K over the previous quarter and by 100% over the comparable quarter of 2003.
Operating expenses increased to $2,079K from $1,024K in the comparative quarter of 2003. Overall, operating expenses as a percentage of total revenue have decreased to 57.7% of total revenue compared to 78.9% in the third quarter of 2003. Planned headcount additions in the software development and support organizations and investments in building the Poker Community have increased software development costs by 13.3% to $1,172K compared to $1,024K in the comparative quarter of 2003. Software development accounted for 56% of the Company’s costs in the third quarter of 2004 compared to 52% in the comparable quarter of 2003. Sales, general and administrative expenses increased by 62% to $764K compared to $473K in the comparable quarter of 2003. The increase is partially attributable to investments made in sales and marketing including the London office.
Despite planned increases in costs associated with investing in the Company’s growth, income from operations increased to $1,519K from $414K in the comparative quarter of 2003.
For the three months ended July 31, 2004 the Company reported a foreign exchange loss of $105K. The loss resulted from the revaluation of U.S. dollar monetary assets, including outstanding accounts receivable.
Net earnings increased to $1,210K from $213K in the comparative quarter of 2003. Basic and diluted earnings per share increased to $0.08 and $0.07 respectively from $0.02 in the comparative quarter of 2003.
Nine Months Ended July 31, 2004
Compared to the same nine-month period of 2003, revenue increased 67%, operating income increased 211%, earnings increased 731% and earnings per diluted share increased 220%.
Total revenue increased to $8,711K from $5,214K in the comparative nine-month period in 2003. License fees increased by 80% to $8,031K from $4,453K and software set-up fees decreased by 12% to $590K from $674K in the comparative nine-month period of 2003. Recurring license fees have consistently shown quarter over quarter growth in the last six quarters.
Operating expenses increased to $5,924K from $4,321K in the comparative nine-month period of 2003. As a percentage of total revenue, operating costs have decreased to 68% from 83% in the prior year. Software development and support costs increased by 10% to $3,180K from $2,883K and sales, general and administrative costs increased by 96% to $2,514K from $1,285K.
Income from operations increased to $2,787K from $893K in the comparative nine-month period of 2003.
For the nine months ended July 31, 2004 the Company reported a foreign currency gain of $15K compared to a loss of $586K in the comparative period of 2003.
Net earnings increased to $2,560K from $308K in the comparative nine-month period of 2003. Basic and diluted earnings per share increased to $0.18 and $0.16 respectively from $0.05 in the comparative nine-month period of 2003.
Positive cash generation continued to strengthen the Company’s balance sheet. At July 31, 2004, Chartwell had no debt, cash and short-term investments of $7,620K and $9,709K in working capital.
Operating cash flow for the third quarter of 2004 was $1,411K compared to $308K in the same period of 2003. For the nine months ended July 31, 2004 operating cash flow was $2,431K compared to $517K in the same period of 2003. This year’s operating cash flow has significantly increased due to the substantial increase in revenues and the corresponding increase in earnings.
For the three months ended July 31, 2004 the Company generated proceeds of $139K from the exercise of stock options. There were no other financing activities. Cash used in investing to purchase capital assets was $273K.
Change in Revenue Recognition Policy
The third quarter financial statements reflect a change in policy from the separate element to the contract method of accounting for revenue recognition. This change in policy has necessitated a restatement of financial results for the fiscal years ended October 31, 2003, 2002 and 2001 which will be completed over the next thirty days. The anticipated impact of the restatement is described below and the Company regards the change for the years ended October 31, 2002, 2003 and for the six months ended April 30, 2004 to be not adversely material to the financial statements.
This accounting policy change will affect the timing of recognition of revenue and the allocation of that revenue and associated costs to reporting periods but will have no effect on the cumulative revenue or gross margin that the Company will realize from its software licensing contracts. In addition, the policy change does not impact the Company’s past or present cash flow, future business plans or prospects or the Company’s recurring revenue from ongoing license fees. These ongoing license fees represented 92% of revenue for the nine months ended July 31, 2004.
The decision to change the accounting policy followed a recommendation from the Company’s independent auditors, KPMG LLP, arising from an internal KPMG practice review. Prior to 2000, the Company followed the contract method of accounting for revenue recognition. During 2000, the Company appointed KPMG as auditors and adopted the separate element method of accounting for revenue recognition with the full concurrence of KPMG. Until this recent KPMG review, the Company and KPMG believed that the separate element method complied with generally accepted accounting principles. KPMG had satisfactorily completed their audit of the financial statements and had issued unqualified opinions for the years ended October 31, 2003, 2002 and 2001.
Under the separate element accounting policy, the Company recognized revenue for non-refundable set-up and design services upon delivery and recognized ongoing software license fees when receivable, each as separate elements. Under the new policy, contract accounting, all types of revenue are recognized on the bas