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Quote:Strong growth following consolidation of Eastern European businesses
QXL ricardo plc (“QXL” or the “Group”, QXL.L), Europe’s online trading community, today announces results for the second quarter and six months ended 30 September 2006.
The highlight of the quarter was the completion of the settlement agreement under which the Group obtained undisputed ownership of QXL Poland and acquired related Eastern European businesses and agreed to issue up to 566,640 ordinary shares as part of that agreement. These results include the contribution of QXL Poland and these Eastern European businesses from 10 August 2006.

Second quarter ended 30 September 2006

Statutory financial highlights
• Revenue increased 179% to £6.90m (Q2 FY 05/06: £2.47m)
• Operating expenses (excluding non-trading expenses) increased 124% to £5.11m (Q2 FY 05/06: £2.28m)
• Trading profit increased 1,046% to £1.66m (Q2 FY 05/06: £145,000)
• Operating profit increased 12,036% to £1.34m (Q2 FY 05/06: £11,000)
• Basic and diluted earnings per share of 47p and 39p respectively (Q2 FY 05/06: basic and diluted loss of 3p)

Pro forma financial highlights
• On a pro forma basis, quarterly revenue increased 50% to £9.49 million and quarterly trading profit increased 49% to £2.94 million compared to the same period in the previous year
• On a pro forma basis, six month revenue increased 57% to £19.67 million and trading profit increased 46% to £6.07 million compared to the same period in the previous year

Commenting on the results, Bruce McInroy, Interim Chairman, said:
“I am delighted to announce excellent year on year growth in both revenue and profit resulting from the inclusion of results from our Eastern European region for part of the quarter and continued organic year-on-year growth. Going forward, we will stay focussed on growth and expect to increase our marketing expenditure during the rest of this financial year with major campaigns in each of our main markets. With Poland as a strong and profitable base we will continue to develop and explore opportunities for expansion in Eastern Europe.”

Operating review
These results reflect the transformation of the Group’s financial and trading position following the completion of the settlement agreement regarding QXL Poland and related Eastern European businesses. Although completion took place on 28 July 2006, the Company only obtained management control of QXL Poland on 10 August 2006, following the removal of the court-appointed administrator. The statutory financial results therefore only include the contribution of the Eastern European businesses from this date. In order to present underlying trends more clearly, this operating review focuses on the pro forma results.

On a pro forma basis, Group revenue for the quarter ended 30 September 2006 was £9.49 million, a 50% increase compared to the same period last year. On the same basis Gross Merchandise Volume, the value of goods traded through our sites, increased by 54% to £147 million.

Operating expenses (excluding non-trading expenses) in the quarter increased to £6.36 million, a 67% increase compared to the same period last year. As a result, trading profit for the quarter increased 49% to £2.94 million compared to £1.97 million for the same quarter last year.

Our Eastern European businesses continue to perform strongly. On a pro forma basis, Gross Merchandise Volume for the quarter to 30 September 2006 of £98.6 million represented a 73% increase compared to the quarter ended 30 September 2005 and revenues for the quarter of £6.68 million represented a 74% increase compared to the same period last year.

As the largest economy in the Eastern European region, Poland represents a key gateway to other Eastern European markets. Our Polish online trading site, Allegro.pl is the most significant business in the Group and recent market data (source: Gemius) shows that Allegro is the most viewed of any website in Poland with 2.7 billion page impressions in August 2006.

In addition to Allegro.pl, we also operate two classified sites in Poland. otoMoto.pl, a car classified site established in 2004, is according to recent market data now the leading Polish car classified site in terms of page views. Following the success of otoMoto.pl, we have recently launched otoDom.pl, a real estate classified site. We have high expectations for otoDom to be as successful as otoMoto.

We are also very pleased with the progress and growth prospects of Aukro.cz, our online trading business in the Czech Republic, which has shown excellent growth this year. Our Hungarian joint venture, in which we hold a 35% stake, is at an earlier stage of development, but is also showing good growth. We also have an early stage business in the Ukraine/Russia and operate an online payment system, PayU, primarily in Poland.

Our Western European business consists primarily of our ricardo.ch site in Switzerland, QXL.dk in Denmark and QXL.no in Norway. Revenues in this region for the quarter of £2.80 million represented a 13% increase compared to the quarter ended 30 September 2005. Although we had anticipated the usual seasonal slowdown in trading over the summer, trading was further impacted in the latter part of the quarter by the consolidation of our Western European sites onto a single platform. The consolidation and upgrade of our sites included new interface designs and introduced improved buying and selling features, but it has taken longer than we expected for our members to adjust to these changes. Notwithstanding this we believe that these changes and the move to a single, more scaleable platform is now providing an enhanced member experience and is a better foundation for future growth.

With the site consolidation now complete, we intend to launch advertising campaigns in Switzerland, Denmark and Norway over the coming months, which will increase our marketing expenditure in Western Europe for the remainder of the financial year.

Board
As previously announced, Mark Zaleski resigned as Chief Executive Officer and both he and Thomas Power resigned from the Board on 25 September. We thank Mark and Thomas for their contributions to the business.

A formal search for a new independent Chairman, an additional non-executive director and a new Chief Executive Officer is under way with the help of a leading executive search firm.

Outlook
We are pleased with the pick-up in trading as we move into our seasonally stronger quarters. We have completed the consolidation of our sites onto a single Western European platform, are progressing the integration of the Eastern European businesses into the Group and are anticipating further strong revenue growth going forward. We will continue to focus on our key territories and opportunities in emerging markets. As part of this strategy we are reviewing our operations in those markets that are not material to the Group and have already decided to close our Italian site.

With the benefit of our stronger cash flows we plan to increase marketing expenditure in our Western European markets over the next two quarters to enhance revenue growth and increase our brand awareness. In addition, we are planning further enhancements to the sophistication and resilience of our technology systems resulting in an increase in technology costs as a percentage of revenue.

Given the significant impact of the consolidation of our Eastern European businesses, the Company has provided unaudited pro forma data relating to the combined group to illustrate more clearly the enlarged Group’s overall performance. Pro forma consolidated revenue in the quarter ended 31 December 2005 was approximately £8.1 million. The Company believes that in the quarter ended 31 December 2006, it will achieve an annualised revenue growth rate of 40-50%.

Financial review
This review and the quarterly results presented include the acquired Eastern European businesses from 10 August 2006, the date on which effective control was achieved.

Revenue
For the quarter ended 30 September 2006, revenue increased by 179% to £6.90 million from £2.47 million for the same quarter in the previous year and increased 104% from £3.38 million in the quarter ended 30 June 2006. This increase in revenue was primarily due to the consolidation of the Eastern European businesses for part of the quarter and also to 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 remained negligible at 2% of revenue. Gross profit therefore increased broadly in line with revenue by 179% to £6.77 million in the last quarter from £2.43 million in the quarter ended 30 September 2005.

Operating expenses
Sales and marketing expenses (excluding non-trading expenses as detailed below) for the quarter increased 132% to £3.84 million from £1.65 million in the quarter ended 30 September 2005 and increased 115% from £1.78 million in the previous quarter. The increase was primarily due to the inclusion of the sales and marketing expenditure in our Eastern European region. The marketing costs in our Western European region remained relatively flat year on year as we focussed on consolidation of all our Western European businesses onto a single trading platform. For the remainder of the financial year we are planning significant branding campaigns across our major markets, which will increase sales and marketing expenses, but also we believe have a positive impact on revenue growth.

Technology and development costs (excluding non-trading expenses) for the quarter increased 231% to £951,000 from £287,000 for the quarter ended 30 September 2005 and increased 102% from £470,000 in the previous quarter. These increases resulted from the inclusion of the costs associated with the operation of our Eastern European businesses and continued investment in the Group’s systems. We expect to expand our systems steadily in the future in order to accommodate further increases in transaction volumes. In addition, we are planning to increase the resilience and sophistication of our technology systems. In the medium term we expect this to increase technology costs as a percentage of revenue.

General and administrative costs (excluding non-trading expenses) for the quarter decreased 6% year-on-year to £321,000 from £343,000 and decreased 24% from £424,000 in the previous quarter. In the future we expect general and administrative costs to increase, but to decrease as a percentage of revenue.

Overall operating expenses (excluding non-trading expenses) therefore increased 124% to £5.11 million in the quarter from £2.28 million in the same quarter in the previous year.

Trading profit
As a result of the above, we recorded a trading profit of £1.66 m in the quarter ended 30 September 2006 compared to a trading profit of £145,000 in the quarter ended 30 September 2005.

Non-trading items
International Financial Reporting Standards (”IFRS”) do not allow the recognition of items as “exceptional” in the principal financial statements, but the Group will, in addition to its IFRS obligations, continue to report “non-trading items” separately for the purpose of calculating a “trading profit” which it believes provides a better measure of performance of the Group’s underlying trading operations than does operating profit.

Other operating income
In the quarter, other operating income of £1.05 million resulted from the repayment of pre-existing loans from QXL Poland prior to its reacquisition by the Group. There was no other operating income in the quarter ended 30 September 2005.

Share-based payments
In the quarter ended 30 September 2006, the Group recorded a share-based payment charge, as required by IFRS2, of £477,000 compared to £120,000 in the quarter ended 30 September 2005. The significant increase was due primarily to a one-time charge related to the resignation of Mark Zaleski as CEO. Going forward we expect this cost to be in line with prior quarters.

Taxes on share options
The Group has accrued for expected future employer’s taxes incurred on the exercise of shares options by employees. During the quarter ended 30 September 2006, the Group expensed £14,000 related to taxes on share options. These charges relate primarily to movements in QXL’s share price and not to the Group’s trading.

Amortisation of intangible assets
As a result of the acquisition of the Eastern European businesses, the Group has recognised goodwill in its consolidated balance sheet and according to IAS 38 has separately identified and valued intangible assets. The goodwill will be subject to an annual impairment review, but the intangible assets are depreciated over an estimated useful economic life. As a result, the Group recorded a charge of £238,000 in the quarter ended 30 September 2006. We plan to record an amortisation charge of £476,000 per quarter over the next 10 quarters, the expected life of the intangible assets acquired.

Restructuring charge
The group has taken a one-time charge of £651,000 relating to the various changes to the Board and the recruitment of new Directors.

Operating profit
As a result, operating profit in the quarter ended 30 September 2006 was £1.34 million compared to £11,000 in the quarter ended 30 September 2005.

Interest
Net interest receivable of £53,000, primarily interest on bank deposits, was recorded in the quarter ended 30 September 2006 compared to £12,000 in the comparative quarter in 2005.

Tax
During the quarter ended 30 September 2006 the Group recorded a tax charge of £462,000 primarily related to tax on profits in Poland. In the quarter ended 30 September 2005, the Group recorded a tax charge of £51,000 relating to the release of a deferred tax asset.

Minority interest
A minority interest charge of £15,000 was incurred during the quarter ended 30 September 2006, compared to £21,000 in the same quarter in the previous year.

Profit attributable to equity shareholders
Profit attributable to equity shareholders for the quarter ended 30 September 2006 was £911,000 compared to a loss of £49,000 in the comparative quarter in 2005.

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 quarter ended 30 September 2006 were 47p and 39p respectively, compared to a basic and diluted loss of 3p per ordinary share respectively for the quarter ended 30 September 2005.

Cash flow and balance sheet
The Group’s cash position has been significantly strengthened by the acquisition of the Eastern European businesses, which had £8.46 million of cash at the date of acquisition. Operating cash flow was adversely affected by the payment of fees relating to the settlement and acquisition of the Eastern European businesses.

Financing and treasury
The Group’s cash position at 30 September 2006 was £11.66 million compared to £2.53 million a year earlier. In general the bulk of the Group’s cash balances will be held in Sterling, Euro, Swiss Franc and Polish Zloty denominated floating rate deposits. However, currently, the bulk of the Group’s cash deposits are held in Polish Zloty. This position is likely to remain in the short-term until certain tax related restructuring has been completed and for that period the Group will have an increased exposure to exchange movements in Polish Zloty relative to Sterling.