news release |
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Zi Corporation Reports Record 2004 Third Quarter, Nine-Month Results
Year-over-Year Revenue Up More Than 40 Percent in Both Periods
CALGARY, AB, November 15, 2004 - Zi Corporation (Nasdaq:ZICA) (TSX:ZIC), a leading provider of
intelligent interface solutions, today reported strong year-over-year
improvements in top- and bottom-line performance for its third quarter
and first nine months ended September 30, 2004. Revenue increased more
than 40 percent for both the third quarter and first nine months of 2004
from prior year periods and the Company posted its second consecutive
quarterly profit with a year-to-year bottom line improvement in this
year's third quarter of $1 million. President and CEO Michael D. Donnell
said that the third quarter results reflect increasing demand for the
Company's predictive text input applications and the impact of
significant improvements in the operations and financial strength of Zi.
(Effective December 31, 2003, Zi Corporation initiated its financial
reporting in conformity with U.S. GAAP; the Company's financial
statements are in U.S. dollars and unless otherwise indicated, all
monetary amounts in this news release are in U.S. dollars.)
Zi Corporation total revenue for the third quarter of 2004 increased 40
percent to $3.7 million, from $2.7 million in the year earlier period,
and increased sequentially 9 percent from revenues of $3.4 million in
the 2004 second quarter. Net income for the three months ended September
30, 2004 was $725,000, or a basic and diluted $0.02 per share, up from a
$261,000 loss, or a $0.01 loss per share, in the prior year third
quarter. Gross margin as a percentage of revenue was 96.7 percent in
this year's third quarter compared to 97.5 percent in the third quarter
of last year and up modestly from 96 percent in this year's second
quarter.
Revenue from the Company's Zi Technology business unit in the 2004 third
quarter was $3.6 million, up from $2.5 million for the same period last
year. Revenue in this year's third quarter from its e-Learning segment
was even year-over-year at approximately $100,000. Operating profit for
the Zi Technology business unit was $1.7 million in this year's third
quarter, up from $340,000 in the same period last year.
"This year is shaping up to be the best in the history of the Company,
with strong gains in revenue and significant improvements in
profitability," Donnell said. "In recording our second consecutive
quarter of profitability in this year's third quarter, net income was
almost three times that recorded in this year's second quarter. And,
year-over-year, we generated bottom-line improvements for the 2004 third
quarter and nine months of $1 million and $2.4 million, respectively.
These solid sequential and year-over-year increases in profitability
clearly demonstrate the operational and financial progress we have made
and the earnings leverage we gain from our high contribution margins.
"On the product front, we have achieved a number of significant advances
in the last 12 months and today eZiText® and eZiTap™ are more fully
featured than the products of our competitors, which we believe
positions us as the supplier of choice," Donnell added. "Additionally,
we have products currently in late-stage development that can
dramatically improve the user interface and simplify interaction with
mobile devices and that can significantly expand our market and revenue
opportunities over the next couple of years. We also have a number of
new marketing and technology relationships in the pipeline that should
further expand our worldwide reach and market penetration. We are
gaining market share and thanks largely to our focus on innovation,
product development and expansion, a very strong cash position and a
newly bolstered senior management team, we are well positioned for
continued increases in market share, revenue and profitability."
Total revenue for the nine months ended September 30, 2004 rose 46
percent to $10.2 million, up from $7.0 million in the first nine months
of 2003. The net loss for this year's first nine months was $477,000, or
a $0.01 loss per share, a significant improvement from the $2.9 million
loss, or a $0.08 loss per share, in the same period last year. The
results for the first nine months of 2004 include non-cash compensation
expense of $1.0 million for the issuance of restricted stock units, and
$458,000 for the issuance of non-employee stock options. Excluding these
non-cash compensation charges, the Company would have recorded a profit
of approximately $1.0 million for the first nine months of this year.
The results for the first nine months of 2003 include $572,000 of
non-cash compensation expense.
Revenue from the Zi Technology business unit in the first nine months of
2004 increased 49 percent to $9.9 million from $6.6 million for the same
period last year. Revenue from the Company's e-Learning segment for this
year's first nine months was $263,000 compared to $324,000 for the first
nine months of 2003. For the first nine months of this year, the
Company's Zi Technology unit generated a $3.7 million operating profit,
compared to an operating profit of $757,000 for the first nine months of
2003.
Zi earned royalties from 40 and 57 eZiText licensees, respectively, in
this year's third quarter and first nine months, compared to 37 and 40
licensees in the same periods last year. There were 105 new device
models embedded with eZiText released into the market during the 2004
third quarter and a total of 279 for the first nine months of this year,
bringing the total as of September 30, 2004 to 677, up from 345 a year
earlier. The number of new models and the total number of models with Zi
technology embedded are among the leading indicators of the progress the
Company is making in expanding its revenue base.
The Company's balance sheet as of September 30, 2004, showed cash and
cash equivalents of $9.7 million, total assets of $18.4 million, and
shareholders' equity of $13.8 million. On July 16, 2004, the Company
completed a private placement for gross proceeds of CDN$10 million
(US$7.6 million), after which it repaid in full the demand note for the
$1 million borrowed in December of last year.
Selling, general and administrative expense ("SG&A") in the three months
ended September 30, 2004 was $2.1 million compared to $1.8 million in
the same period a year earlier, and SG&A expense in the first nine
months of this year was $7.6 million, compared to $5.9 million in the
prior year period. The year-over-year increase of $1.6 million for the
2004 first nine months was due to $1.4 million in non-cash compensation
expense recognized upon issuance of restricted stock units and
non-employee stock options in this year's first quarter. In the first
nine months of 2003, $572,000 of non-cash compensation expense was
incurred. Excluding these non-cash expenses, SG&A increased $774,000 in
this year's first nine months reflecting lower fixed costs period to
period, offset by higher sales commissions on increased revenue volume
and costs associated with changes in financial reporting currency and
GAAP.
Product research and development expenses for the 2004 third quarter and
first nine months were $411,000 and $1.4 million, respectively, compared
to $552,000 and $1.5 million in the respective year-earlier periods.
Gross expenditures on product development before capitalization of
certain software costs in this year's third quarter and first nine
months increased by $260,000 and $1.0 million over the respective prior
year periods, reflecting the Company's focused efforts on developing
dramatically new and improved language database software. For the three
months ended September 30, 2004, the Company capitalized $418,000 in
software development costs.
/T/
Executive Summary of Operating Results
Three Months Ended Nine Months Ended
September 30, September 30,
(thousands of US$ except
per share amounts) 2004 2003 2004 2003
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Revenue $ 3,718 $ 2,651 $ 10,161 $ 6,973
Gross margin 3,597 2,585 9,791 6,694
Net income (loss) 725 (261) (477) (2,913)
Total assets $ 18,387 $ 8,113 $ 18,387 $ 8,113
Net income (loss)
per share
- basic and diluted $ 0.02 $ (0.01) $ (0.01) $ (0.08)
Outstanding shares,
weighted average 42,584,158 39,319,269 40,496,790 38,504,101
Outstanding shares,
end of period 43,805,924 39,325,560 43,805,924 39,325,560
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All dollar amounts are in United States dollars and in accordance with accounting principles generally accepted in the United States of America. This information should be read in conjunction with the Company's interim consolidated financial statements and notes.
/T/
Conference Call
As previously announced, Zi is conducting a conference call to review its financial results today at 11:30 AM EST (Eastern). The dial-in number for the call in North America is 888-695-0612 and 1-719 457-2663 for overseas callers. A live audio webcast and replay of the call can be accessed for 10 days at the Company's website at www.zicorp.com.
About Zi Corporation
Zi Corporation (www.zicorp.com) is a technology company that delivers intelligent interface solutions to enhance the user experience of wireless and consumer technologies. The company's intelligent predictive text interfaces, eZiTap™ and eZiText®, allow users to personalize the device and simplify text entry providing consumers with easy interaction for short messaging, e-mail, e-commerce, Web browsing and similar applications in almost any written language. Zi supports its strategic partners and customers from offices in Asia, Europe and North America. A publicly traded company, Zi Corporation is listed on the Nasdaq National Market (ZICA) and the Toronto Stock Exchange (ZIC).
Zi, eZiTap and eZiText are either trademarks or registered trademarks of Zi Corporation. All other trademarks are the property of their respective owners.
TABLES FOLLOW
/T/
Zi Corporation
Consolidated Balance Sheets
September 30, December 31,
2004 2003
---------------------------------------------------------------------
(United States of America Dollars) US GAAP
---------------------------------------------------------------------
(unaudited)
Assets (note 2) (note 2)
Current assets
Cash and cash equivalents $ 9,735,134 $ 2,366,885
Accounts receivable -
net of allowance of $126,148
(December 31, 2003 - $507,640) 3,721,353 4,053,451
Prepayments and deposits 547,568 399,767
---------------------------------------------------------------------
Total current assets 14,004,055 6,820,103
Notes receivable 2,000,000 2,000,000
Capital assets - net 902,846 1,097,585
Intangible assets - net 1,479,810 587,720
Investment in significantly
influenced company - -
---------------------------------------------------------------------
$ 18,386,711 $ 10,505,408
---------------------------------------------------------------------
---------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable and accrued
liabilities $ 3,337,160 $ 4,099,307
Deferred revenue 1,250,787 1,099,573
Notes payable - 1,000,000
Current portion of capital
lease obligations 18,176 22,095
---------------------------------------------------------------------
Total current liabilities 4,606,123 6,220,975
Capital lease obligations 11,898 3,340
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4,618,021 6,224,315
---------------------------------------------------------------------
Contingent liabilities and guarantees
Shareholders' equity
Share capital
Unlimited number of Class A, 9%
convertible, preferred shares
authorized and no shares issued
or outstanding - -
Unlimited number of common shares,
no par value, authorized, 43,805,924
(2003 - 39,371,560) issued
and outstanding 104,634,445 94,713,461
Accumulated deficit (90,170,345) (89,692,897)
Accumulated other comprehensive loss (695,410) (739,471)
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13,768,690 4,281,093
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$ 18,386,711 $ 10,505,408
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See accompanying selected notes to consolidated financial
statements.
Zi Corporation
Consolidated Statements of Income (Loss) and Deficit
Three Months Ended
September 30, (unaudited) 2004 2003 2003
---------------------------------------------------------------------
(United States of America Dollars
except per share amounts) US GAAP Cdn. GAAP
(note 2)
Revenue
License and implementation
fees $ 3,615,625 $ 2,509,314 $ 2,509,314
Other product revenue 102,493 141,273 141,273
---------------------------------------------------------------------
3,718,118 2,650,587 2,650,587
---------------------------------------------------------------------
Cost of sales
License and implementation
fees 88,879 38,752 38,752
Other 32,289 26,487 26,487
---------------------------------------------------------------------
121,168 65,239 65,239
---------------------------------------------------------------------
Gross margin 3,596,950 2,585,348 2,585,348
Operating expenses
Selling general and
administrative (2,068,898) (1,755,708) (1,755,708)
Litigation and legal (197,831) (229,326) (229,326)
Product research and
development (410,568) (551,688) (551,688)
Depreciation and amortization (211,175) (312,916) (312,916)
Foreign exchange gain - - 35,781
---------------------------------------------------------------------
Operating income (loss)
before undernoted 708,478 (264,290) (228,509)
Interest on long-term debt (1,651) (1,825) (1,825)
Other interest (6,120) (414) (414)
Interest income and other
income 24,791 5,539 5,539
Equity interest in loss of
significantly influenced company - - -
---------------------------------------------------------------------
Net income (loss) 725,498 (260,990) (225,209)
Deficit, beginning
of period (90,895,843) (89,413,581) (65,856,783)
---------------------------------------------------------------------
Deficit, end of period $(90,170,345) $(89,674,571) $ (66,081,992)
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---------------------------------------------------------------------
Earnings (loss) per share
---------------------------------------------------------------------
Basic $ 0.02 $ (0.01) $ (0.01)
---------------------------------------------------------------------
Diluted $ 0.02 $ (0.01) $ (0.01)
---------------------------------------------------------------------
Weighted average common
shares 42,584,158 39,319,269 39,319,269
Common shares outstanding,
end of period 43,805,924 39,325,560 39,325,560
See accompanying selected notes to consolidated financial statements.
Zi Corporation
Consolidated Statements of Loss and Deficit
Nine Months Ended September 30,
(unaudited) 2004 2003 2003
---------------------------------------------------------------------
(United States of America Dollars
except per share amounts) US GAAP Cdn. GAAP
(note 2)
Revenue
License and
implementation fees $ 9,897,905 $ 6,649,202 $ 6,649,202
Other product revenue 263,407 323,924 323,924
---------------------------------------------------------------------
10,161,312 6,973,126 6,973,126
---------------------------------------------------------------------
Cost of sales
License and
implementation fees 293,625 234,972 234,972
Other 76,697 44,564 44,564
---------------------------------------------------------------------
370,322 279,536 279,536
---------------------------------------------------------------------
Gross margin 9,790,990 6,693,590 6,693,590
Operating expenses
Selling general and
administrative (7,582,634) (5,938,109) (5,938,109)
Litigation and legal (587,582) (520,963) (520,963)
Product research and
development (1,429,291) (1,519,324) (1,519,324)
Depreciation and
amortization (672,181) (1,088,109) (1,088,109)
Foreign exchange gain - - 120,594
---------------------------------------------------------------------
Operating loss before
undernoted (480,698) (2,372,915) (2,252,321)
Interest on long term debt (5,623) (8,643) (8,643)
Other interest (32,887) (553,911) (553,911)
Interest income and other
income 41,760 22,686 22,686
Equity interest in loss of
significantly influenced
company - - -
---------------------------------------------------------------------
Net loss (477,448) (2,912,783) (2,792,189)
Deficit, beginning of
period (89,692,897) (86,761,788) (63,289,803)
---------------------------------------------------------------------
Deficit, end of period $(90,170,345) $(89,674,571) $(66,081,992)
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic and diluted loss
per share $ (0.01) $ (0.08) $ (0.07)
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Weighted average common
shares 40,496,790 38,504,101 38,504,101
Common shares outstanding,
end of period 43,805,924 39,325,560 39,325,560
See accompanying selected notes to consolidated financial statements.
Zi Corporation
Consolidated Statements of Cash Flows
Three Months Ended September 30,
(unaudited) 2004 2003 2003
---------------------------------------------------------------------
(United States of America Dollars) US GAAP Cdn. GAAP
(note 2)
Net cash flow from (used in)
operating activities
Net income (loss) $ 725,498 $ (260,990) $ (225,209)
Items not affecting cash:
Loss on dispositions of
capital assets 2,637 1,142 1,142
Depreciation and
amortization 211,175 312,916 312,916
Non-cash consultant
compensation 10,626 572,360 572,360
Non-cash compensation
expense (32,630) (477,451) (477,451)
Non-cash interest expense - (50,517) (50,517)
Decrease (increase) in
non-cash working capital 629,052 (1,004,429) (1,004,429)
---------------------------------------------------------------------
Cash flow from (used in)
operating activities 1,546,358 (906,969) (871,188)
---------------------------------------------------------------------
Cash flow from (used in)
financing activities:
Proceeds from issuance of
common shares, net of
issuance costs 8,275,618 91,247 91,247
Settlement of note payable (1,000,000) - -
Payment of capital lease
obligations (6,076) (26,128) (26,128)
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Cash flow from financing
activities 7,269,542 65,119 65,119
---------------------------------------------------------------------
Cash flow used in investing
activities:
Purchase of capital assets (74,358) (28,853) (28,853)
Proceeds from capital
dispositions - (5) (5)
Software development costs (417,521) (16,853) (16,853)
---------------------------------------------------------------------
Cash flow used in investing
activities (491,879) (45,711) (45,711)
---------------------------------------------------------------------
Effect of foreign exchange rate
changes on cash and cash
equivalents 48,567 35,781 -
---------------------------------------------------------------------
Net cash inflow (outflow) 8,372,588 (851,780) (851,780)
Cash and cash equivalents,
beginning of period 1,362,546 1,554,410 1,554,410
---------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 9,735,134 $ 702,630 $ 702,630
---------------------------------------------------------------------
---------------------------------------------------------------------
Components of cash equivalents
Cash $ 2,090,812 $ 702,630 $ 702,630
Cash equivalents $ 7,644,322 $ - $ -
Supplemental cash flow
information
Cash paid for interest $ 7,771 $ 2,239 $ 2,239
See accompanying selected notes to consolidated financial statements.
Zi Corporation
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
(unaudited) 2004 2003 2003
---------------------------------------------------------------------
(United States of America Dollars) US GAAP Cdn. GAAP
(note 2)
Net cash flow from (used) in
operating activities:
Net loss $ (477,448) $ (2,912,783) $(2,792,189)
Items not affecting cash:
Loss on dispositions of
capital assets 5,427 100 100
Depreciation and
amortization 672,181 1,088,109 1,088,109
Non-cash consultant
compensation 458,498 572,360 572,360
Non-cash compensation
expense 984,821 - -
Non-cash interest expense - 44,827 44,827
Increase in non-cash working
capital (426,636) (811,509) (811,509)
---------------------------------------------------------------------
Cash flow from (used in)
operating activities 1,216,843 (2,018,896) (1,898,302)
---------------------------------------------------------------------
Cash flow from (used in)
financing activities:
Proceeds from issuance
of common shares, net of
issuance costs 8,477,665 2,825,006 2,825,006
Settlement of note payable (1,000,000) (3,300,000) (3,300,000)
Payment of capital lease
obligations 4,639 (81,101) (81,101)
---------------------------------------------------------------------
Cash flow from (used in)
financing activities 7,482,304 (556,095) (556,095)
---------------------------------------------------------------------
Cash flow from (used in)
investing activities:
Purchase of capital assets (87,254) (40,991) (40,991)
Proceeds from capital
dispositions - 2,662 2,662
Software development costs (1,287,705) (191,176) (191,176)
---------------------------------------------------------------------
Cash flow used in investing
activities (1374,959) (229,505) (229,505)
---------------------------------------------------------------------
Effect of foreign exchange
rate changes on cash and cash
equivalents 44,061 120,594 -
---------------------------------------------------------------------
Net cash inflow (outflow) 7,368,249 (2,683,902) (2,683,902)
Cash and cash equivalents,
beginning of period 2,366,885 3,386,532 3,386,532
---------------------------------------------------------------------
Cash and cash equivalents,
end of period $9,735,134 $ 702,630 $ 702,630
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-cash financing activity
Equipment acquired under
capital lease $ 29,188 $ - $ -
Components of cash
equivalents
Cash $2,090,812 $ 702,630 $ 702,630
Cash equivalents $7,644,322 $ - $ -
Supplemental cash flow
information
Cash paid for interest $ 38,510 $ 517,727 $ 517,727
See accompanying notes to consolidated financial statements.
/T/
Selected Notes to the Consolidated Financial Statements
For the three and nine month periods ended September 30, 2004 (Unaudited)
NATURE OF OPERATIONS
Zi Corporation (the "Company" or "Zi") is incorporated under the
Business Corporations Act of Alberta. Zi develops software designed to
enhance the usability of mobile and consumer electronic devices. Through
its e-Learning business segment which includes Oztime, English Practice
and an equity interest in Magic Lantern Group, Inc. ("MLG"), the Company
is also involved in e-Learning technology, content and customer service
as well as educational content and distribution channels to offer
learning management systems, interactive online courses and network
education solutions to meet diverse client requirements.
SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared by
management in conformity with accounting principles generally accepted
in the United States of America ("US GAAP"), which conforms in all
material respects with Canadian generally accepted accounting principles
("Canadian GAAP"), except as disclosed in note 10 of the Company's
September 30, 2004 unaudited consolidated financial statements. They do
not include all disclosures required by generally accepted accounting
principles required for annual financial statements and should be read
in conjunction with the Company's audited consolidated financial
statements, which were prepared in accordance with US GAAP and are
included in our Annual Report on Form 20-F for the year ended December
31, 2003. In the opinion of management, all normal recurring adjustments
considered necessary for fair presentation have been included in these
interim financial statements. Effective March 31, 2004, the Company
initiated reporting in US dollars, with comparative periods restated to
US dollars.
Historically, the primary consolidated financial statements of the
Company were prepared in accordance with Canadian GAAP and Canadian
dollars with an annual reconciliation of the Company's financial
position and results of operations to US GAAP. Management elected to
report in accordance with US GAAP as of December 31, 2003 to provide
information on a more comparable basis with Zi's industry peers and to
better assist with the understanding of the financial statements to the
majority of their users, who are primarily in the United States of
America. As such, as required under Canadian securities legislation, the
previously filed 2003 interim consolidated financial statements were
refiled to reflect the effects of the change to US GAAP.
- 30 -
FOR FURTHER INFORMATION PLEASE CONTACT:
Investor Inquiries:
Allen & Caron Inc
Jill Bertotti
(949) 474-4300
jill@allencaron.com
or
Zi Corporation
Dale Kearns
Chief Financial Officer
(403) 233-8875
investor@zicorp.com
or
Media Inquiries:
Allen & Caron Inc
Len Hall
(949) 474-4300
len@allencaron.com