724 Solutions Announces Fourth Quarter and Year End 2004 Results; 724

724 Solutions Announces Fourth Quarter and Year End 2004 Results; 724 Solutions Achieves 72% Revenue Growth over Previous Year's Fourth Quarter

    Business Editors

    SANTA BARBARA, Calif.--(BUSINESS WIRE)--Feb. 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 fourth quarter and year ended December 31, 2004 (all figures are in U.S. dollars).
    724 Solutions' total revenue in the fourth quarter was $5.5 million, compared to $3.5 million in the previous quarter and $3.2 million in the fourth quarter of the previous year. Revenue from the sale of products was $3.1 million and revenue from the sale of services was $2.4 million.
    The net loss for the fourth quarter of 2004, computed using United States generally accepted accounting principles ("GAAP"), was $308,000, or $0.05 per share, compared to a loss of $1.5 million or $0.25 per share in the previous quarter and a loss of $11.3 million or $1.89 per share in the fourth quarter of the previous year. The Company's total GAAP cost of revenue and operating expenses were $5.6 million in the fourth quarter compared to $4.8 million in the previous quarter and $14.8 million in the same period a year ago.
    Non-GAAP income for the fourth quarter was $48,000, or $0.01 per share, compared to a non-GAAP loss of $1.3 million, or $0.21 per share, in the previous quarter and a non-GAAP loss of $2.5 million, or $0.41 per share, in the fourth quarter of the previous year. The Company's total non-GAAP operating expenses were $5.4 million in the fourth quarter compared to $4.8 million in the previous quarter and $5.7 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.
    For the year ended December 31, 2004, revenue was $15.1 million, compared to $12.9 million for the previous year. The net loss under GAAP was $8.0 million or $1.34 per share, compared to $28.3 million or $4.73 per share for the year ended December 31, 2003. Non-GAAP net loss was $5.6 million or $0.93 per share, compared to $11.8 million or $1.97 per share in the previous year.
    The Company said that it expects total non-GAAP operating expenses to be in the range of $5.6 million to $5.9 million in the first quarter of 2005 including approximately $400,000 of hardware that will be reported as cost of revenue.
    "This is a milestone quarter for 724 Solutions. We have been able to deliver meaningful revenue growth and, for the first time in the Company's history, non-GAAP income," said John Sims, Chief Executive Officer of 724 Solutions. "Our fourth quarter performance was driven by the deployment of our products with new customers, including those won through our OEM relationship with Nokia."

    Key accomplishments in the fourth quarter:

--	Non-GAAP income for the first time in the Company's history.
--	The second consecutive quarter of revenue growth, with a 58% increase in revenues over the third quarter.
--	Through the Nokia OEM arrangement, new Multimedia Application Gateway (AGW) customers and capacity extensions by existing customers throughout the world. AGW enhances standard multimedia messaging service center (MMSC) deployments with ready-to-deploy revenue generating services that accelerate adoption, reduce churn, and stimulate usage.
--	Significantly strengthened our management team with the addition of Michael E. Luna as Chief Technology Officer. Mr. Luna brings over twenty years of management and design experience in data engineering and networking and demonstrated technology leadership to the 724 Solutions executive team.

    Today's announcement was rescheduled from January 26 to allow the company more time to complete the quarterly and year-end close procedures required by recent regulatory changes.

    Conference Call Information

    The Company will host a conference call to discuss the results on February 9, 2005 at 5:00 pm EST. The conference call will be available over the Internet through the company's web site at www.724.com or by telephone at 416-641-6444. A replay will be available for 48 hours following the conference call and can be accessed by dialing 800-633-8284, pass code 21221027.

    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 (costs of terminated employees on a defined transition plan, contractual bonuses paid relating to historic acquisitions and foreign exchange gains and losses). 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 at 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 (unaudited) (in thousands of US dollars)

December 31, December 31, 2004 2003

Assets

Current assets: Cash and cash equivalents $5,417 $13,436 Short-term investments 8,005 1,748 Restricted cash 210 198 Accounts receivable - trade, net of allowance of $18 (December 31, 2003 - $60) 2,831 2,297 Prepaid expenses and other receivables 583 648 -------------------------- Total current assets 17,046 18,327

Deferred charges 286 -

Fixed assets 1,135 612 -------------------------- Total assets $18,467 $18,939 --------------------------

Liabilities and Shareholders' Equity

Current liabilities: Accounts payable $613 $411 Accrued liabilities 2,101 3,402 Interest payable 103 - Deferred revenue 173 410 -------------------------- Total current liabilities 2,990 4,223

Long-term liabilities 92 -

Notes payable to related parties 7,947 -

Long-term interest payable 343 - -------------------------- Total liabilities 11,372 4,223

Shareholders' equity: Share capital: Authorized: Unlimited common shares Unlimited preferred shares Issued and outstanding: 5,989,300 common shares (December 31, 2003 - 5,983,349) 764,530 764,508 Additional paid-in capital 279 62 Accumulated deficit (757,921) (749,887) Accumulated other comprehensive income 207 33 -------------------------- Total shareholders' equity 7,095 14,716

Contingent liabilities (a)

-------------------------- Total liabilities and shareholders' equity $18,467 $18,939 --------------------------

(a) See note 17 to our consolidated financial statements set forth in our 2003 annual report.

724 Solutions Inc. - Summary of Operations (unaudited) (In 000's of U.S. dollars, except shares and per share amounts)

Three months ended Twelve months ended ----------------------------- ------------------- December September December December December 31, 2004 30, 2004 31, 2003 31, 2004 31, 2003 Revenue: Product $3,140 $2,013 $1,643 $8,844 $6,964 Services 2,380 1,489 1,574 6,228 5,891 ----------------------------- ------------------- Total revenue 5,520 3,502 3,217 15,072 12,855 Cost of revenue 2,070 1,505 1,577 6,640 9,499 ----------------------------- ------------------- Gross margin 3,450 1,997 1,640 8,432 3,356

Operating expenses: Research and development (b) 1,339 1,410 1,920 6,271 9,433 Sales and marketing (b) 1,316 1,093 1,241 4,985 6,968 General and administrative (b) 690 796 1,004 3,074 4,086 Depreciation 166 124 168 595 908 Stock-based compensation Cost of revenue 6 4 6 15 14 Research and development 17 10 16 40 1,227 Sales and marketing 14 9 14 34 296 General and administrative 26 16 26 63 141 Restructuring charges (26) (181) (250) 993 50 Write down of goodwill - - 9,097 9,097 ----------------------------- ------------------- Total operating expenses 3,548 3,281 13,242 16,070 32,220 ----------------------------- ------------------- Loss from operations (98) (1,284) (11,602) (7,638) (28,864)

Interest income (expense) (210) (183) 32 (396) 254 Gain on sale of long- term investments - - 283 - 283 ----------------------------- ------------------- Net loss for the period $(308) $(1,467) $(11,287) $(8,034) $(28,327) ----------------------------- -------------------

Basic and diluted net loss per share $(0.05) $(0.25) $(1.89) $(1.34) $(4.73) Weighted-average number of shares used in computing basic and diluted net loss per share (in thousands) 5,985 5,983 5,983 5,984 5,983 ----------------------------- -------------------

Total cost of revenue and operating expenses $5,618 $4,786 $14,819 $22,710 $41,719

724 Solutions Inc. - Summary of Non-GAAP Adjustments (unaudited) (In 000's of U.S. dollars, except per share amounts)

Three months ended Twelve months ended ----------------------------- ------------------- December September December December December 31, 2004 30, 2004 31, 2003 31, 2004 31, 2003

GAAP net loss for the period $(308) $(1,467) $(11,287) $(8,034) $(28,327)

Depreciation 166 124 168 595 908 Amortization of intangibles - - - - 3,468 Stock-based compensation 63 39 62 152 1,678 Interest expense (income) 210 183 (32) 396 (254) Restructuring charges (26) (181) (250) 993 50 Write down of goodwill - - 9,097 - 9,097 Gain on sale of long- term investments - - (283) - (283) Transition, acquisition and foreign exchange costs (c) (57) 52 48 307 1,849 ----------------------------- ------------------- Non-GAAP net income (loss) for the period $48 $(1,250) $(2,477) $(5,591) $(11,814) ----------------------------- -------------------

Non-GAAP net income (loss) per share $0.01 $(0.21) $(0.41) $(0.93) $(1.97)

(b) Non-GAAP operating expenses Cost of revenue $2,044 $1,505 $1,577 $6,614 $5,961 Research and development 1,339 1,410 1,920 6,117 8,597 Sales and marketing 1,316 1,093 1,241 4,900 6,195 General and administrative 747 744 956 3,006 3,916 --------- --------- --------- --------- --------- Total non-GAAP operating expenses 5,446 4,752 5,694 20,637 24,669

(b) Certain comparative figures for 2003 have been reclassified to conform to the financial statement presentation adopted in the current year. (c) Transition, acquisition and foreign exchange costs include direct costs related to terminated employees and direct costs related to historic acquisitions as well as gains and losses related to currency fluctuations.

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

Cash and cash equivalents, short-term investments and restricted cash: At September 30, 2004 $14.2 At December 31, 2004 13.6 -------------

Total cash used in quarter ended December 31, 2004 0.6

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

Operating cash used in quarter ended December 31, 2004 $0.6

--30--EH/la*

CONTACT: 724 Solutions Kelly Lazarus, 805-884-8306 email: klazarus@724.com

KEYWORD: CALIFORNIA INTERNATIONAL CANADA INDUSTRY KEYWORD: TELECOMMUNICATIONS SOFTWARE NETWORKING INTERNET E-COMMERCE EARNINGS CONFERENCE CALLS SOURCE: 724 Solutions

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