PATSYSTEMS PLC - Q3 Trading Update

Patsystems, the global supplier of trading systems and exchange technology, is pleased to announce its Q3 Trading Update.

Highlights
• Morgan Stanley confirmed as the unnamed new customer in the last trading statement
• Okato Shoji signed for facilities management solution
• ICAP signed as a new customer
• TradeMark platform launched in Chicago, and second beta test in progress with potential new client
• Extensive enhancements to current platform
• ‘Reflector’ front-end technology launched and patent filed
• eSignal’s real-time quote service linked to Patsystems’ platform
• Revenues continue to increase

Products
Due to unprecedented demand for (funded) development of our current platform we are adding new functionality during the fourth quarter of 2004 and in 2005. The enhancements include extensions to application functionality, and new exchange connectivity. The combined revenue from these signed software development contracts and those in advanced negotiation could exceed £750k, most of which will flow into 2005.

In October we launched our TradeMark platform at the Futures and Options Expo in Chicago, and, as announced recently, filed a patent for ‘Reflector, a key part of our new technology. We have also installed a second TradeMark beta test system with a potential new client for Pro-Mark, our premium TradeMark front-end.

Clients
We are pleased to confirm that Morgan Stanley is the new tier one customer announced in our last trading statement. Deployed globally, the installation already has users in New York, London and Tokyo.

We signed three new contracts during the third quarter: one with ICAP; one with Okato Shoji Co Ltd, a facilities management client in Japan; and one for an additional major installation for an existing global client. We are also negotiating a variety of installations for new clients.

The benefits of this new business will be seen principally in 2005.
Our expanding Partner Solutions programme has been strengthened through an agreement with eSignal. We have linked eSignal’s real-time quote service to our platform, which means that J-Trader users will have access to a range of high-end and customisable tools that enhance the value of our front-end.
Three smaller clients have notified us that they will cease trading / providing systems, although many of their users will migrate to other Patsystems clients.

Financial performance in the third quarter
For the three months to 30 September 2004, total revenues were £2.9m (2003: £2.6m) – an increase of 12%. For the nine months to 30 September 2004, total revenues rose 11% to £8.2m (2003: £7.4m). At last year’s exchange rates, nine-month turnover would have increased by 16%.

Total costs in the third quarter (including exceptional items) were in line with budget and grew by 16% to £3.7m. Operating costs excluding exceptional items, amortisation and depreciation grew by £390k (15%). Operating expenses, compared with the first nine months of 2003, increased by £1.3m (13%) to £10.9m. Excluding exceptional items, amortisation and depreciation costs for the nine months increased by £970k (12%) to £8.8m.

Operating cash burn (net cash flow excluding capital expenditure) for the period fell to £268k. Cash at bank at the quarter end was £1.55m. In addition, Patsystems has signed a debtor financing facility of up to £700k. To date, this facility remains undrawn.

Fourth quarter and prospects for 2005
We expect fourth quarter revenue to be in the region of £3.7m, including £250k as the final instalment of the installation contract for NCEL in Pakistan. In addition, we expect operating costs to continue at about the same rate as the third quarter, and therefore believe that trading cash flow for the fourth quarter will be positive.

End-year cash balances will reflect both the receipt of £373k R&D tax credit (received in October), which essentially relate to expenditure on Trademark in 2002 and 2003, and the larger one-off cash impact of moving office. R&D tax credits for 2004 will be reflected in the full year profit-and-loss account but not in end-year cash.

We are now preparing the full 2005 budget and expect a substantial reduction in unfunded development expenditure. This will have a positive impact on P&L and cash flow (though funded development, as above, may be substantial). Subject to any market uncertainty as result of the patents issue, revenues for 2005 should build on the recurrent revenues achieved in the fourth quarter of 2004.

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