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November 10, 2005
BEDFORD, Mass. -- Boston Communications Group, Inc. (Nasdaq: BCGI - News) today announced a consolidated GAAP net loss for the third quarter ended September 30, 2005 of $40.6 million, or $(2.29) per share, primarily driven by a $40.3 million non-cash charge in connection with the previously announced judgment in the Freedom Wireless lawsuit, which bcgi continues to contest. On a non-GAAP basis excluding this charge and related legal expenses, the Company would have reported net income of $1.6 million, or $0.09 per share.
The consolidated GAAP net loss compares with net income of $4.2 million, or $0.24 per share, for the third quarter of 2004 and a net loss of $17.9 million, or ($1.01) per share, for the second quarter of 2005. Total revenues for the third quarter of $25.6 million were lower by $1.4 million, or 5%, with the third quarter of 2004 and flat when compared to the second quarter of 2005. Total revenues for the nine months ended September 30, 2005 decreased 5% to $77.6 million from $81.9 million in the nine months ended September 30, 2004.
"Despite the obvious challenges imposed by our ongoing litigation with Freedom Wireless, we continue to deliver high-quality services to a global marketplace in the midst of a strong industry growth cycle," said E.Y. Snowden, President and CEO. "The breadth and depth of our portfolio of products and services enable us to pursue significant business opportunities here and abroad. Our prudent approach to managing our business, the diversification efforts we set in motion over three years ago, and the commitment of our employees continue to carry us forward in these adverse times."
Real-Time Billing revenues of $23.0 million for the three months ended September 30, 2005 decreased 10% from the same quarter in the prior year and 9% on a sequential basis. Other revenues of $2.6 million for the three months ended September 30, 2005 increased 75% from the same quarter in the prior year and 16% from the quarter ended June 30, 2005.
Subscribers on the bcgi Real-Time Billing platform increased by 211,000 on a sequential basis and 129,000 from September 30, 2004, bringing the Company's total subscriber count to approximately 4.0 million as of September 30, 2005. The subscriber increase resulted principally from expansion of existing customers as well as lower than expected churn and conversions. Average billed minutes of use per subscriber per month increased by 12% on a sequential basis and 21% from the same quarter in the prior year, bringing the average billed minutes per subscriber to 131 minutes for the quarter ended September 30, 2005. The average billed rate per minute declined by approximately 17% for the third quarter of 2005 compared to the second quarter of 2005 and declined 29% compared to the same quarter in the prior year. The increases in subscribers and average billed minutes per subscriber were more than offset by the decline in the Company's average billed rate per minute, resulting in the overall decrease in Real-Time Billing revenues compared to prior periods. This decline in the Company's average billed rate per minute was primarily the result of lower contractual rates for customers who signed contracts more recently and who represent a larger percentage of total Real-Time Billing revenues.
The Company's engineering, research and development expense increased $1.1 million on a sequential basis to $5.5 million for the quarter ended September 30, 2005, supporting the ongoing investment in bcgi Access Management and bcgi Payment, along with enhancing the features and functionality of the Company's other products. In addition, the Company's global expansion resulted in an increase in sales and marketing expense of $725,000 from the quarter ended June 30, 2005 to $3.0 million for the quarter ended September 30, 2005. Legal expenses related to the Freedom Wireless litigation decreased $2.0 million from the quarter ended June 30, 2005 to $2.3 million for the quarter ended September 30, 2005 since the second quarter contained the costs for most of the trial, initial post-trial motions and other related matters. While the Company recorded a net loss for the three months ended September 30, 2005, an income tax provision of $590,000 was recorded to reflect the change in the valuation allowance for deferred tax assets that may not be realizable due to the current operating losses being incurred as a result of the Freedom Wireless judgment.
Cash, short-term investments, and restricted cash increased $11.4 million during the third quarter to $73.5 million as of September 30, 2005. This increase was primarily due to cash earned from operations and a reduction in accounts receivable of $6.9 million due to a decrease in days sales outstanding (DSO) to 58 days, down from the second quarter's DSO of 81 days.
Freedom Wireless Litigation Update
The current judgment issued by the U. S. District Court for the District of Massachusetts ("District Court") in the Freedom Wireless patent infringement lawsuit totals $148.1 million in damages against the Company and the other co-defendants, including Cingular Wireless, for past damages through December 31, 2004, an amount which exceeds bcgi's ability to pay. Damages and interest for infringement by bcgi and Cingular from January 1, 2005 through August 31, 2005 could total approximately $15 million. The Company filed an emergency motion with the District Court to clarify the terms of the injunction and to stay the injunction, pending appeal. The District Court denied the motion on November 9, 2005. The Company expects to immediately appeal that decision to the U.S. Court of Appeals for the Federal Circuit ("Appeals Court") and seek a stay of the injunction while the appeal of the entire judgment is pending. If the injunction is not stayed pending appeal, it would prohibit bcgi from providing the multi-frequency (MF), common channel signaling system seven (SS7), and pre-intelligent network (pre-IN) implementations of its prepaid wireless services to the Company's customers who are not licensees of Freedom Wireless in the United States, which represented approximately 64% of the Company's total revenues as of September 30, 2005.
The Company has filed its appeal of the entire case to the Appeals Court. The appeal process may take 12 to 18 months or longer. The potential outcomes vary greatly and could include any of the following:
If the injunction is not stayed or if security is required to be posted for royalties that exceed the Company's ability to pay, bcgi would need to negotiate a settlement and/or a license with Freedom Wireless or would likely seek protection under the U.S. Bankruptcy Code.
If the Appeals Court overturns the judgment of infringement, the Appeals Court could either rule that the Company would have no liability to Freedom Wireless or that the case would be returned to the District Court for a new trial on infringement.
If the Appeals Court overturns the judgment that the patents held by Freedom Wireless were valid or enforceable, bcgi would have no liability to Freedom Wireless, or the case could be returned to the District Court for a new trial on the issue of invalidity or unenforceability.
If the Appeals Court rules in favor of Freedom Wireless, the Company would need to seek protection under the U.S. Bankruptcy Code.
The parties may enter into a settlement agreement.
While the Company continues to believe that it does not infringe these patents and believes that the patents are invalid in light of prior art and other reasons, in light of the adverse judgment, the Company believes it is probable that a loss has been incurred. Although the ultimate amount of such loss, if any, is not currently known, accounting guidelines under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5) and FASB Interpretation 14 (FIN 14), specify that if a loss can be reasonably estimated, it should be recorded. Based on managements' assessment of the potential outcomes of the case and in accordance with FAS 5 and FIN 14, the Company accrued an estimated loss of $24.0 million in the quarter ended June 30, 2005 and has accrued an additional $40.3 million estimated loss in the quarter ended September 30, 2005, for a total estimated loss of $64.3 million with respect to the Freedom Wireless judgment, excluding additional legal charges which are expensed as incurred. However, the actual loss, if any, may be higher or lower than the amount accrued and could be as high as approximately $163 million and may continue to increase, depending on the status of the injunction against the Company.
Business and Financial Outlook
The Company has not provided financial guidance for the remainder of 2005 since it cannot anticipate the impact on the Company's business of the Freedom Wireless litigation and injunction, as well as the related costs and other factors. The Company plans to continue to invest in and focus on its customer and product diversification strategy that includes investment in all of the new and existing products that the Company is marketing on a global basis.
Boston Communications Group Inc.
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