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Quote:QXL ricardo plc - Fourth Quarter and Full Year Results 25 May 2006

58% revenue growth and maiden full-year profits

QXL ricardo plc (“QXL” or the “Group”, QXL.L), Europe’s online trading platform, today announces results for the fourth quarter and the year ended 31 March 2006.

Financial Highlights
• Revenue increased 58% to £11.31m (2005: £7.17m)
• Operating expenses (excluding non-trading expenses) up 38% to £10.14m (2005: £7.35m)
• Trading profit of £940,000 (2005: loss of £368,000)
• Profit on ordinary activities before taxation of £2.05m (2005: loss of £1.45m)
• Basic and diluted earnings per share of 108p and 99p respectively (2005: basic loss of 80p)

Operational Highlights
• Gross merchandise value* up 63% to over £179m (2005: £110m)
• Leading positions in Switzerland, Denmark and Norway led to strong revenue performance
*Gross merchandise value is the total value of goods traded through our sites

Commenting on the result, Mark Zaleski, Chief Executive Officer, said: “I am extremely pleased to announce our first full-year of profitability, driven by a 58% increase in revenue. Our pre-tax profit of £2.05 million is a significant achievement for the Group, demonstrating the underlying strength of the business model, our ability to build market-leading positions and the continuing commitment of our team of employees.

Switzerland, Denmark and Norway, the markets where we already have clear leadership positions,
exhibited strong revenue growth in the year. Despite continuing competitive pressures and a gradual maturing of these markets, we expect further good growth in these countries over the next year, especially after the summer holiday season. We will continue to invest in our technology and marketing during this period.

Going forward, we will focus on growth in our main markets and, assuming we achieve a satisfactory conclusion to discussions about the ownership of our Polish business, on building up our position in Eastern Europe and other selected territories that we believe can offer further significant increases in shareholder value.”

Operating Review
Business performance

I am delighted that we delivered our first full year of profitability, driven by a 58% increase in revenue. Our pre-tax profit of £2.05 million compares to a loss of £1.45 million in the year to 31 March 2005. At an underlying trading level, we achieved a profit of £940,000 compared to a loss of £368,000 in the previous year. The strong growth we have seen in our key markets, Switzerland, Denmark and Norway, was the main contributing factor to the Group’s operating profitability.
Monthly gross merchandise value exceeded £20 million for the first time in March 2006. Annual gross
merchandise value increased by 63% to more than £179 million. The number of successful transactions on our sites exceeded 11 million compared to 6.8 million in the previous year. Overall, the average selling price of items on our sites has remained relatively stable over the past year, although we have recently seen a slight increase in the average selling price in Switzerland due to the sale of more higher priced items, especially cars. We invested substantially in marketing and technology, particularly in the second half of the year. This contributed to an increase in underlying operating expenses of 38% compared to the previous year. This investment has helped to generate increases in our revenue during the year and, equally importantly, has enhanced our longer-term position in terms of brand recognition and our capacity to deal with future growth
on our platforms.

We work in close cooperation with our community of members in order to support their growth and success and as a result we regularly implement new site features. In the coming months we will be introducing further improvements to the navigation of our sites for the benefit of newer members and a substantial upgrade to the administrative tools that help our more active buyers and sellers better manage their online trading. Our customer service teams are highly rated by our members. We believe this is one of our main competitive strengths and we are committed to ensuring that our customer service capability remains highly responsive, as well as cost-efficient, as our business grows.

Marketing initiatives
Our marketing budget is primarily dedicated to Switzerland, Denmark and Norway and, within these
countries, to online marketing where we can clearly measure results. As a result we focus on, for example, pay per click advertising on search engines such as Google. We have also further expanded our affiliate system through which members and other partners introduce new members, which also works on a payment by results basis.

Last year also saw a significant increase in our offline marketing expenditure. Last summer we ran a major TV and radio campaign in Switzerland to help build the ricardo.ch brand. This campaign contributed to a 15% increase in brand reach and the ricardo.ch site being rated number one in Switzerland for time spent per person on a website. In Norway, our recent radio campaign won the prestigious “Silver Mic” radio commercial award and research showed our cinema commercials achieved the highest “enjoyment” rating amongst Norwegian cinema visitors.

We have also continued to develop strategic marketing partnerships during the year:
• In Switzerland, our partnership with Winterthur Insurance, with whom we have developed a closed user online car auction system, is performing extremely well with ninety per cent of cars listed being sold.
• In Denmark, we have signed several co-brand agreements (where we provide our auctions within a partner’s site) with partners such as MSN, Oestrogen (a leading women’s site), SAS Airlines,
Urban (a leading free daily newspaper) and the price comparison site Kelkoo. We have also signed
a licence agreement with a chain of stores that uses the QXL brand as part of its service of
providing a “drop-off” venue for the sale of items online.
• In Norway, we have signed an agreement to host auctions for Dagbladet, the second largest
newspaper and the third highest trafficked site in Norway. We also partnered with the Red Cross
for their annual televised charity auction and worked with McDonald’s on some of their charity
initiatives.
• In the UK, we teamed up with Johnston Press to provide online auctions across their extensive
local newspaper network under the “Lot 24-7” brand. The sites are linked into the QXL trading
community across the UK but retain a local bias.
• In France, we hosted an auction in which celebrities such as Paul Belmondo and Mylène Farmer
sold various personal items for the benefit of the charity AFIPA. We also hosted an auction in
which we sold all the shirts worn by the celebrity participants on the popular television game show
Fort Boyard.

Technical developments
The substantial growth in our business during the past year has required an equally substantial expansion in the capacity of our online platforms. In the second half of the year we centralised our platform hardware to a single location in Switzerland and established a separate back-up facility, which will be developed further in the forthcoming year.

As well as improving the features of the site for our members and maintaining the highest levels of site availability, our technical team continue to enhance our ability to collect, review and manage the information provided by our members. This enables us to respond to our members more efficiently and to target our marketing accordingly. It also helps us to identify further site improvements more quickly. Given the importance of these issues, we intend to invest further in this area in the future.

Disposals
During the year we completed a number of disposals of small or dormant businesses that were no longer material or relevant to the Group in order to focus on our main markets.

In April 2005 we completed the sale of a non-trading Swedish business to Finja Prefab AB to crystallize value from existing tax losses. More recently, at the end of March 2006, we sold our operating business in the Netherlands, ricardo.nl B.V., to Funda N.V., a leading Dutch online real estate business. Although ricardo.nl had developed an attractive niche position in the online sale of art and related items, it was no longer considered material to the Group. In aggregate, these disposals raised almost £300,000.

Poland
Over the past three years, the Company has invested a great deal of time and money in its legal claims to recover full control of QXL Poland Sp z o.o In June 2005, the court-appointed administrator of QXL Poland repaid approximately £1.42 million of the outstanding loan balance due to the Company. Subsequently, in late September 2005, the Company was approached by its two principal shareholders with a proposal under which the Company would settle its legal claims, recover full control of QXL Poland and acquire certain other assets in Eastern Europe in exchange for the issue of shares and/or options over approximately 22% of the Company’s fully-diluted share capital. The Company understands that pre-tax profits of QXL Poland for the year to 31 March 2006 were approximately £8 million. Detailed discussions and due diligence in relation to this settlement proposal have been continuing for the past 8 months. Since the Company’s previous announcement on 21 March 2006, we have made further progress in these discussions and a number of significant issues have been resolved. However some commercial and regulatory issues remain and, given the length of the negotiations to date, additional audit work now has to be completed. There can still be no assurance that any final agreement will be reached
and the Company remains concerned about the damage that the protracted nature of these discussions may cause to its legal claims if no settlement is reached. However in view of the progress that has been made and the nature of the remaining issues to be resolved, the Company anticipates that a resolution can be achieved. I would like to thank our Interim Chairman, Bruce McInroy, and our two principal shareholder groups for their support throughout this process.

People
In delivering the Group’s first full year of profitability, our committed team has shown outstanding drive, professionalism and talent. The past few years have presented enormous challenges but their dedication and unwavering focus on what our members and customers want in each country has resulted in robust underlying growth and market leadership positions in three countries.
Our Board has committed significant time to the Company throughout the year and we are pleased to welcome those Directors who have joined us in this period. Dan Barnea joined us in May 2005 and amongst his other duties has advised us on the upgrading of our technology platform.

Professor Abraham Neyman joined the Board in June 2005 as the representative of the Izaki group and in January 2006 Bruce McInroy joined the Board as the representative of our largest shareholder, Florissant, becoming Interim Chairman in February 2006. All have contributed to the Polish settlement process and I would like to thank them for their advice and guidance.
I would also like to thank Jim Rose, who resigned as Chairman of the Board in February 2006, for his years of dedication and excellent contribution to the Company, first as Chief Executive Officer and most recently as Chairman.

Outlook
Since the year-end, despite additional competitive pressures, we continue to see good year-on-year growth. We believe that online commerce still has significant growth potential and we are well placed to benefit from this even as our current principal markets gradually mature. We will continue to invest in our technology and marketing throughout the coming year.


In the short term we expect to devote significant time and resources to the ongoing negotiations to settle the disputes relating to the ownership of QXL Poland. If successful, we will devote further time over the medium term to the reintegration of QXL Poland into the Group and developing the business into other areas of Eastern Europe.

This was a very exciting year for us and we look forward to another year of good growth in gross
merchandise value, revenue and trading profit.

Financial Review
Year ended 31 March 2006

Revenue
For the year ended 31 March 2006, Group revenue increased by 58% to £11.31 million from £7.17 million for the previous year. This increase in revenue was primarily due to a strong year-on-year increase in transaction volumes and gross merchandise value conducted through the Group’s websites.

Cost of sales and gross profit
Cost of sales for the year ended 31 March 2006 remained relatively negligible at £222,000 compared to £181,000 in the year ended 31 March 2005. As a consequence, gross profit increased 59% to £11.08 million in the year ended 31 March 2006 from £6.99 million in the year ended 31 March 2005.

Operating expenses
Sales and marketing expenses (excluding non-trading expenses as explained below) for the year ended 31 March 2006 increased 44% to £7.26 million from £5.04 million for the year ended 31 March 2005. The vast majority of our marketing expenses remain focussed on our three main markets where we expect further increases as these businesses continue to grow.

Technology and development costs (excluding non-trading expenses) for the year ended 31 March 2006 increased 51% to £1.34m from £889,000 for the year ended 31 March 2005. This increase was the result of significant investment in and strengthening of the Group’s systems following the previous year’s rationalisation where technology costs had reduced slightly. The most significant increases in investment were in the second half of the year. We expect costs in this area to increase steadily in the future due to additional developments and in order to accommodate further increases in transaction volumes.

General and administrative costs (excluding non-trading expenses) for the year ended 31 March 2006 increased 8% to £1.55 million from £1.43 million in the year ended 31 March 2005. In the future we expect general and administrative costs to increase, but to decrease as a percentage or revenue.

Overall operating expenses (excluding non-trading expenses) therefore increased 38% to £10.14 million in the year ended 31 March 2006 from £7.35 million in the previous year. The Group’s higher growth in revenues than costs is a natural function of the high operating leverage of our business model.

Trading profit
As a result of the above, we recorded a trading profit of £940,000 in the year ended 31 March 2006
compared to a trading loss of £368,000 in the year ended 31 March 2005.


Other operating income
In the year ended 31 March 2006, the Group recorded various gains, now classified as “other operating
income” under IFRS.
• £1.42 million as part-repayment of an inter-company balance owed by QXL Poland which had
previously been provided for
• A gain of £292,000 resulting from the sale of a non-trading Swedish subsidiary
• £84,000 from the sale of ricardo.nl BV (as well as a dormant Spanish subsidiary) at the end of the year

In the previous year the group had recorded a profit on sale of investments, now reclassified under IFRS as “other operating income”, of £15,000.

Share-based payments
In the year ended 31 March 2006, the Group recorded a share-based payment charge, as required by IFRS2, of £467,000 compared to £102,000 in the year ended 31 March 2005 (as restated under IFRS). The significant increase was largely due to the increase in the Company’s share price resulting in much higher fair-value charges for options granted in the year ended 31 March 2006. For the purpose of calculating an underlying trading profit, share-based payment charges are treated as non-operating expenses.

Taxes on share options
The Group has accrued for expected future employer’s taxes incurred on the exercise of shares options by employees. Given the dramatic increases in the Company’s share price during the year, these charges have become more material and more likely to be incurred as the Company’s share price now significantly exceeds the exercise price of a large proportion of outstanding employee options. During the year ended 31 March 2006, the Group incurred approximately £47,000 in such charges in its non-UK operations, but has made an additional accrual of £205,000 based on the vesting of options that have not been exercised. Since these charges relate primarily to the Company’s share price and not to the Group’s trading, they are also excluded from the Group’s definition of “trading profit”.

Transaction costs
In the year to 31 March 2006 the Group did not record any other non-trading items. However in the quarter ended 31 December 2005 the Group had recorded a non-trading expense of £302,000 related to negotiations to settle the ongoing dispute over the Group’s Polish business. This charge was reversed in the quarter ended 31 March 2006 and together with £748,000 of additional costs incurred during that quarter has been shown on the Company’s balance sheet as an asset. This is on the assumption that the extended negotiations concerning the recovery of QXL Poland will be successful and the costs therefore subsequently capitalised as part of the resulting investment or, to the extent that some costs relate to the issue of shares, written off directly to the share-premium account. In the event that for any reason the settlement is not completed, these costs will be expensed through the profit and loss account in the future. In the previous year the Group had recorded £917,000 of exceptional expenses (under UK GAAP) related to lapsed takeover offers for the Company.

Operating profit
As a result operating profit in the year ended 31 March 2006 was £2.01 million compared to a loss of £1.37 million in the year ended 31 March 2005.

Interest
Net interest receivable of £39,000, primarily interest on bank deposits, was recorded in the year compared to interest payable of £81,000 in the year ended 31 March 2005. The interest payable in the prior year largely comprised interest due on the Company’s Convertible Bonds, partly offset by interest receivable on the Group’s bank deposits. There were no Convertible Bonds outstanding as of 31 March 2005.

Tax
During the year ended 31 March 2006 the Group recorded a tax charge of £40,000 comprising £107,000 relating to the release of a deferred tax asset, £2,000 relating to overseas income taxes and a £69,000 tax credit relating to research and development. In the prior year the group recognised a deferred tax asset of £237,000, recorded a £125,000 tax credit relating to research and development, which amount was received in cash in April 2006, and recorded a charge of £3,000 relating to overseas income taxes. As of 31 March 2006 there were approximately £161 million of carry forward tax losses within the Group to offset against future taxable income in the UK and overseas jurisdictions.

Minority interest
A minority interest charge of £109,000 was incurred during the year, compared to £85,000 in the previous year. In each year this was mainly related to minority shareholders in the Group’s 91% owned German subsidiary, ricardo.de AG.

Profit attributable to equity shareholders
Profit attributable to equity shareholders for the year was £1.90 million compared to a loss of £1.18 million in the previous financial year.

Profit per ordinary share
Profit per ordinary share has been calculated in accordance with IAS 33. The Group’s basic and diluted profit per ordinary share for the year ended 31 March 2006 were 108p and 99p respectively, compared to a basic loss of 80p per ordinary share for the year ended 31 March 2005.

Financing and treasury
In January 2001, the Company agreed to issue convertible bonds in three tranches of £5 million (the
‘Convertible Bonds’). 417,838 new ordinary shares were issued as a result of three separate bond
conversions in the year ended 31 March 2005. These conversions included the final maturity and
mandatory conversion of all outstanding Bonds. No Bonds or any associated warrants remained
outstanding as at 31 March 2005. The Group’s cash position at 31 March 2006 was £3.27 million compared to £1.06 million as at 31 March 2005. The bulk of the Group’s cash balances are held in Sterling, Euro and Swiss Franc denominated floating rate deposits.

Cash flow
In the year we generated a net inflow of cash from operating activities of £486,000 compared to an outflow of £408,000 in the previous year. The Group’s operating cash inflow was adversely affected to a significant extent by the settlement of fees relating to the takeover offers in the previous year, which were largely settled in the first months of this financial year.

During the year the Group also received significant non-operating cash flows including:
• £1.42 million as part-repayment of an inter-company balance owed by QXL Poland
• £334,000 from the placing of 22,558 ordinary shares
• £358,000 from the exercise of employee options
• £202,000 from the sale of a non-trading Swedish subsidiary
• £194,000 from the receipt of R&D tax credits

Fourth quarter
Revenue for the quarter ended 31 March 2006 increased 49% to £3.32 million from £2.23 million for the quarter ended 31 March 2005 and increased 11% from £2.99 million for the quarter ended 31 December 2005. This increase was primarily due to increased transaction volumes and increased gross merchandise value on our sites in Norway, Denmark and Switzerland.

Cost of sales remained minimal at £62,000 compared to £39,000 for the quarter ended 31 March 2005. The increase in gross profit was therefore in line with the increase in revenue at £3.26 million for the quarter ended 31 March 2006; a 49% increase from £2.19 million for the quarter ended 31 March 2005 and an 11% increase from £2.94 million for the quarter ended 31 December 2005.

Sales and marketing expenses (excluding non-trading expenses) increased 25% to £1.95 million for the quarter ended 31 March 2006 from £1.56 million for the quarter ended 31 March 2005 and increased 4% from £1.87 million in the quarter ended 31 December 2005.

Technology and development costs (excluding non-trading expenses) increased 63% from £266,000 in the quarter ended 31 March 2005 to £434,000 in the quarter ended 31 March 2006, and increased 23% from £352,000 in the quarter ended 31 December 2005. The relatively significant increases resulted from a continued investment in the development of our web sites and related technology, investment in higher levels of back-up systems and a general expansion of our systems to accommodate increasing transaction volumes.

General and administrative costs (excluding non-trading expenses) increased 65% to £393,000 in the quarter ended 31 March 2006, from £238,000 in the quarter ended 31 March 2005, but decreased 12% from £446,000 in the quarter ended 31 December 2005. The significant year-on-year increase was due to the release of certain legal accruals in the quarter ending 31 March 2005.
In total, operating expenses (excluding non-trading expenses) increased 35% year-over-year from £2.06 million in the quarter ended 31 March 2005 to £2.78 million in the quarter ended 31 March 2006 and increased 4% from £2.67 million in the quarter ended 31 December 2005.

As a result of the above, the Group achieved a trading profit of £485,000 in the quarter ended 31 March 2006 compared to a trading profit of £130,000 in the quarter ended 31 March 2005 and a trading profit of £277,000 in the quarter ended 31 December 2005.

In the quarter ended 31 March 2006 the Group recorded several non-trading items.
• The disposal of the Company’s Dutch subsidiary, ricardo.nl B.V., and its dormant Spanish subsidiary, QXL Spain SL, for a total gain of £84,000.
• A share-based payment charge, as required by IFRS2, of £143,000 compared to £25,000 in the
quarter ended 31 March 2005. The significant increase was largely due to the dramatic increase in the Company’s share price resulting in much higher fair-value charges for options granted in the year ending 31 March 2006.
• Approximately £27,000 of employer’s taxes in its non-UK operations related to the exercise of share options by employees and an additional accrual of £205,000 as explained in the full year review.
• The reversal of £302,000 of expenses provided in the previous quarter in relation to the current Polish settlement negotiations. These costs and £748,000 of additional costs incurred during the quarter have been recorded on the Company’s balance sheet as an asset.

In the quarter ended 31 March 2005 a non-trading charge of £462,000 was recorded. This was related to the various fees relating to take-over offers for the Company at that time.

As a result of the above, the Group recorded an operating profit of £496,000 in the quarter ended 31 March 2006 compared to a loss of £346,000 in the quarter ended 31 March 2005 and a loss of £151,000 in the quarter ended 31 December 2005.