Chief Executive’s Statement and Review

Intec has had an excellent year by any standards and it is the sum of the individual contributions that make it so. Therefore I must begin my review by recording my thanks to the customers, investors and advisers who have supported us, the partners and suppliers who work alongside us and, most of all, the hardworking and dedicated staff at Intec who ultimately make it possible.

Overview

One trend we have noted in 2003 is a growing focus by customers on financial performance of vendors. Many OSS suppliers remain financially fragile or with high levels of cash expenditure and their long-term viability is clearly a cause for customer concern. Intec continues to pursue its policy of tight financial management, improved profitability and good cash flow. The high-profile customers we have been able to secure in 2003 are evidence not only of our good product and support capabilities but also that our stability and long-term investment plans are seen as a benefit of doing business with us.

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2003 Results

Intec has the same challenges. We must deliver complex, carrier-grade support systems and services within a technical environment that is evolving rapidly, in a business environment that is very competitive and where each investment decision faces close scrutiny. Recognising this challenge at the start of the year we set ourselves relatively modest growth targets, at least in comparison to previous years, although still above industry averages, but with the ambition of delivering substantially enhanced operating performance.

We have met those objectives and thereby created a business that is both more successful and more capable for the future. This has been achieved by focusing effort on winning profitable new business, ensuring that existing customers remain satisfied, and by eliminating any areas of expenditure that we do not see as making an appropriate contribution to our business model. Revenues from new customers have been the greatest challenge for all OSS companies this year, so Intec’s ability to continue to win both new major accounts and additional business from existing customers is very pleasing. Our customer numbers have grown strongly, both organically and by acquisition, and the recurring revenue streams we derive from our customer base give us a solid foundation for the future.

Intec has had a strong focus on operating costs in 2003 as part of our drive to enhance profitability and cash flow. The telecoms industry has been operating in an environment where margins and discretionary expenditure have been under constant pressure. Intec has therefore adjusted its own business model appropriately. By eliminating low-return expenditure, re-organising for greater productivity, adopting more cost-efficient processes, and seeking better value in our own purchases we have been able to trim many cost areas substantially without any material impact on business performance. Cost of sales, distribution and general administration are all lower in 2003 compared to 2002. The only area with a material increase has been development, reflecting our expanded portfolio of products as well as important new investment to meet the needs of new markets. Staff numbers, before the acquisition of Digiquant, have remained essentially static, indicating increased productivity.

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Products

We have retained our view of the need to have a investment-based business case for all products. This allows us to ensure that development expenditure is aligned to both potential returns and strategic importance. This is particularly important as we expand the product portfolio with new capabilities as well as developing new versions of existing core products. 2004 will see us roll out major new versions of both InterconnecT and Inter-mediatE, both substantial, long-term projects. During the year we disposed of one small non-core historic revenue stream which provided customised business solutions to the automotive sector. We also ceased to operate a small contract providing services to the US Federal government.

Of several new products brought to market in 2003 undoubtedly the most significant in terms of future direction is the Intec Dynamic Charging Platform, a solution for operators looking to secure revenues from next-generation services. Now enhanced with the capabilities we have acquired with Digiquant, DCP is a powerful, capable product that will be a key part of a new range of products, the Advanced Services Framework, which we are bringing to market over the coming months.

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Strategy

Intec’s strategy is based on the following objectives:
		profitable growth within the OSS sector through leadership in market share, product quality and financial performance;
		expansion into new, complementary markets through targeted acquisitions or internal development;
		continuing, critical review of business performance and future potential of all product offerings;
		targeted investment in markets and technologies that have the highest potential for good returns; and
		continuous improvement in quality, performance and efficiency of all aspects of the business.

During 2003 we have seen many companies in the OSS sector make substantial cuts to their businesses in an attempt to deliver stability or improved financial performance within a difficult marketplace. Although Intec has managed to achieve substantially lower costs in a number of key operating areas we have not cut back on either staff expertise or development investment. We view both areas as vital to the attainment of our strategic goals and the delivery of high levels of customers satisfaction. We consider cuts in either as a matter of last resort.

Last year I noted that ‘Intec has an obligation to its shareholders to maximise the value of their investment. Improved shareholder value will naturally follow business success as markets recover.’ I firmly believe that Intec has demonstrated that this is the right view. Short-term cuts to achieve short-term improvements may be attractive but do not deliver the potential for real value growth in the long term. Our strategy will remain focused on good, longterm performance allied to continuous improvement of current operations.

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Business Review

The biggest influences on our performance this year have been the general reduction in capital expenditure by telecommunications operators, the pricing pressure inevitable in a market dominated by the buy side, and intense competition from other vendors for business. Vendor stability also continues to be an issue for purchasers, with much higher levels of financial due diligence evident before contractual decisions are made. Fortunately Intec, as a public company with sound finances and a good trading record, is an attractive partner in this respect.

The balance of business in 2003 has reflected general market trends as well as Intec’s growing maturity as a software and services company. New licence sales, while down on 2002 figures, still represent 23% of turnover, a very robust result in present markets. Both recurring revenue and professional services have grown with our recurring revenue reaching a very satisfactory 50% of turnover, up from 41% in 2002. Our growing customer base and high levels of customer satisfaction are the key factors in this good result.

Our core products, InterconnecT and Inter-mediatE, retain their market leadership, with over 200 and 130 installed sites respectively. New customer wins announced in 2003 include Belgacom Mobile, Ukrainian Mobile Communications, Slovak Telekom, VimpelCom, U.S. Cellular, Taiwan’s first 3G operator APBW, Telikom Papua New Guinea, eircom, ChinaSat, Swisscom Mobile, Mobilkom Austria and many others. These cover all areas of the telecoms industry, from major fixed-line providers through to next-generation mobile carriers, underlining the truly convergent capabilities of Intec’s products.

Intec made two acquisitions in the period under review so the results for 2003 are not directly comparable with 2002 although the contributions from acquisitions amounted to only 5% of turnover. New licence revenues were most under pressure from competitive market conditions. Prices also suffered from the same factors, although Intec was still able to sign notable deals in many regions as a result of the dynamic growth in certain markets, particularly mobile communications. Perhaps more importantly from a forward-looking perspective Intec gained 114 new customers during the year, which will feed through in recurring revenues in future periods. Intec now counts over 550 active customer installations within almost 400 customers in 73 countries. Over half of the world’s top 100 carriers now use Intec technology.

InterconnecT continues to be the outstanding solution in a global marketplace. Our acquisition of Ericsson’s ‘Settler’ product in December 2002 brought us both extra market share (with 31 customers), good technology which has fed through into new products, and a global partner in Ericsson which now resells InterconnecT Settler. Other notable wins for InterconnecT announced in 2003 included Belgacom Mobile, Ukrainian Mobile Communications, Slovak Telekom, Telikom Papua New Guinea, 3G operator APBW in Taiwan, and ChinaSat. In 2004 we will bring a new version of InterconnecT, Version 7, to market, which will offer many advantages to customers as well as a single, unified development platform replacing all current offerings.

Our US Carrier Access Billing System, InterconnecT CABS CG, has been a very strong performer, winning 9 new licences and 29 new service contracts. We now provide access billing for over 120 US customers.

InterconnecT ITU, our version for international settlements according to ITU rules, has been the subject of a sustained sales and marketing campaign in 2003. New clients added in the year include SOTELMA in Mali, and Reach in Asia-Pacific.

Inter-mediatE, our high performance mediation system, remains one of the industry’s most comprehensive, carrier-grade convergent solutions, with over 130 installed systems. Inter-mediatE is in use by all types of operator, from the world’s largest fixed-line carriers to new, high-technology broadband start-ups operating advanced UMTS networks. Notable wins included SOTELMA in Mali, Telenet in Belgium, a major client in New Zealand, eircom in Ireland and Eurotel in the Czech Republic.

Inter-activatE, our new solution for service activation, is still at a relatively early stage in its commercial development. However, it is now in production at customer sites and we have a good pipeline of opportunities for Inter-activatE in 2004 following a sustained marketing and sales campaign. A new release, Version 2, with substantially broader capabilities is imminent.

Professional services income rose by 12% in 2003 to £13.8 million, representing over 27% of turnover. This figure primarily comprises revenue from implementations, consulting and training associated with licence sales, and from ongoing professional services that help customers maximise the benefit of their investment, such as customisation work or special reports. We have noted a growing complexity in implementations, with Inter-mediatE particularly being required to process more complex data types from more types of network devices, including servers, routers and gateways not found in traditional voice networks. In addition Inter-mediatE is being called on to provide more complex processing for a wider range of downstream systems, with the provision of business intelligence data for management purposes a growing requirement. We have introduced a specific solution, Inter-mediatE Reporting, to enhance our capabilities in this area.

Our professional services teams are based in four Centres of Excellence — in the UK, the US, Malaysia and Brazil — allowing us to provide local, highly-trained consultants for all customers. Intec also performs many implementations through, or in partnership with, other companies, including IBM, HP Compaq, Accenture and LogicaCMG. These partnerships give us substantial additional reach in a global marketplace and allow us to absorb variations in staff demand for professional services.

A healthy increase in recurring revenues was a notable feature of the year, up from 41% to 50% of turnover. We believe that constant effort to improve our products, hard work by our dedicated support teams, and good communications with customers all play a part in this. Intec’s rate of customer churn remains at the very lowest levels within the industry with many customers now entering the fifth or even sixth year of their relationship with us. One of our key business goals is to increase our recurring revenue stream steadily, through ensuring high levels of customer satisfaction and retention, to the point where this income underpins a significant proportion of our basic operating costs. This is an important long-term objective for any mature software company as it provides high business stability and the opportunity to deliver good operating margins through additional new business sales. In 2003 a growing contribution came from bureau services, as InterconnecT CABS bureau sales grew significantly, particularly in larger CLEC and ILEC customers.

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Regions

Some regional differences have become more apparent this year. The North American market has been the most challenging with efforts by carriers to control costs aggressively feeding through into lower sales and lower prices for all suppliers. In EMEA there have been marked contrasts between developed and less developed countries. The African market has a rapidly growing mobile telecoms population whereas Northern Europe has very little underlying mobile growth. In Asia the rapid growth in telecoms penetration in markets like India and China is widely reported, although similar dynamism is also apparent in states such as Indonesia. However, there is constant pressure on pricing for software as well as for professional services in these low labour cost markets. In South America political and economic instability is an ever-present factor in some regions. We also cannot ignore geo-political concerns such as global terrorism and regional warfare. These have acted as barriers to trade in 2003 and must be expected to remain influential in 2004. Finally, the decline of the dollar has been sufficiently great to have had an impact on revenues and earnings. This point is addressed more fully in the Finance Director’s review.

Intec’s approach to these issues is to shape our own offerings, business processes and economic arrangements to suit regional differences as far as is practicable. Telecoms is a relatively homogeneous market globally with similar technologies deployed in most countries. Some adaptation of our products is still required to meet regional differences and local technical standards, for example the different ways that some countries approach the complex issue of automated interconnect bill reconciliation. We review all such requirements for business potential and only invest where we see a prospect of genuine return. Similarly, with languages, we have good capabilities in our technology to adapt products for overseas market requirements (such as Cyrillic characters) but we only do so on the basis of a good business case. From a financial perspective we attempt to protect revenues and margins by operating in stable currencies (typically US dollars, Sterling or Euros) where possible. We also conduct certain operations in low-cost regions where that makes business and technical sense, such as our large development centre in Cape Town, South Africa.

In EMEA, 2003 has seen the commercial arrival of next-generation mobile services from a small number of operators, and Intec is well positioned in this space with customers such as ‘3’ and Eurotel. Other operators are now anticipating these changes by upgrading older OSS technology to deal with the more complex, high-value services that are expected. Our growth in EMEA came in almost all regions, with revenue from Eastern Europe notably strong, up 135% at £2.9 million.

Our Asia-Pacific region revenues grew 20% despite very competitive conditions, particularly from some local suppliers. Labour rates are low across the region and this makes local development still attractive. Nevertheless we have had some important successes including APBW in Taiwan, Reach in Australia/Hong Kong, and ChinaSat in China.

The North American market has been the most difficult region to generate new licence business for all software suppliers, and we saw a reduction in sales to £15.5 million against £21.0 million in 2002. The change in the US dollar exchange rate has not been favourable and this has impacted overall revenues by approximately £1.6 million. However, other aspects of our North American business have offset this to a degree and we have worked hard to manage costs in this market.

Intec’s CALA region has done well in 2003, with a new management team helping growth of 70%, despite the many political and economic uncertainties in the area. The acquisition of the Ericsson Settler business also brought us many new customers in the region. Notable wins included a major operator in Colombia and several new clients in the Caribbean.

The acquisitions we have made, plus good growth in our existing customer base, have allowed us to report the milestone figure of over 550 active customer installations at the end of our business year, representing almost 400 separate companies as Intec customers. Intec now counts over half of the world’s top 100 telecoms companies as customers, including all of the top five by market capitalisation. This quality of customer base gives us very solid recurring revenue streams (representing 50% of revenues in 2003 against 41% in 2002) and good cross-selling opportunities. Intec also has, I believe, one of the lowest rates of customer churn in the OSS industry as a result of dedicated efforts to achieve high levels of customer satisfaction. It is a source of pride to Intec that almost all of the customers won in the early years of our existence remain with us.

Intec has become an even more focused and efficient business in 2003 in the areas of sales and marketing, clearly demonstrated by higher revenues generated despite a fall in distribution costs. This can be attributed to a number of factors, but particularly a reorganisation of sales teams and offices in the regions to deploy resources more efficiently and the elimination of some low-return items of expenditure as well as generally good cost management. Marketing programmes have focused on both regional and product-oriented campaigns, targeting particular Intec strengths such as our capabilities in international settlements and our ability to offer well-tailored solutions for specific problems. Our Partner channel remains a key route to market and we have continued to train Partner staff in our products for both sales and implementation purposes. During 2003 we won a number of important new customers with Partners that included Ericsson, H-P and Alcatel.

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User Groups

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Staff and Infrastructure

We have continued to adjust our corporate structure during the year to reflect changes in the external business environment and our own processes. A couple of small regional sales offices have been closed and others expanded as levels of business fluctuate. We have moved our major offices in Atlanta, Cape Town and Brazil to new locations, taking advantage of local property market conditions to both reduce costs and improve facilities. We expect that our UK headquarters in Woking will also be expanded and updated later in 2004 to provide additional facilities for training, customer presentations, and staff.

During the year we grew staff numbers from 500 at the end of 2002 to 630 at the end of the period under review. In the main the increase is attributable to two acquisitions: our purchase of Ericsson’s Settler business unit in December, which brought us approximately 30 staff with expertise in billing and related areas; and the acquisition of Digiquant in September which brought us around 130 staff with expertise in billing and service management of advanced communications services. Some duplicated functions in these operations have been eliminated but the majority of staff have been retained. Where possible offices have been merged.

Our record for employee retention remains well above industry averages, and we continue to operate best practice remuneration and staff management policies with consistency of benefits and employment conditions in the light of local regulations. Many employees are shareholders, and the majority of employees can participate in a share option program. 2003 also saw the rollout of ‘Employee Relations Forums’. These are mandatory for companies above a certain size based in the European Union. Intec has not yet reached this threshold, but we believe that ERFs represent a good example of best practice in staff relations and we have implemented them across the company in 2003. Intec has continued to invest in its business infrastructure with numerous programs to improve internal communications, information systems, working conditions and customer support facilities.

In conclusion 2003 has been another good year of progress at Intec towards our long-term objective of building a stronger, more successful business within the OSS sector. Market conditions have continued to be competitive, but Intec has responded with good growth and substantially improved operating results. Our acquisitions of Digiquant and the Ericsson Settler business have been two highlights of the year and we are pleased with their progress and future potential. Our investment in new products and the development of existing systems positions us very well as a supplier to the world’s telecommunications market, particularly for advanced services.

Kevin Adams
Chief Executive Officer
24 November 2003

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