24 Jul 2001

A clear path to our breakeven target by year end

"We acquired 370,000 net new customers at reduced acquisition cost and we increased our momentum towards our target of breakeven during Q4. We are also delighted with our recently announced strategic alliance with Microsoft as we continue to develop our network of powerful partnerships."

Paul Gratton, CEO

Financial Highlights:

  • Operating income up 130% to £76.2m (30 June 2000: £33.2m)
  • Reduction of 33% in pre-tax losses in Q2 (£25.5m) compared to Q1 (£37.9m)
  • Pre-tax loss for H1 2001 of £63.4m (30 June 2000: £80.7m loss)
  • Loss per share of 6.0p (30 June 2000: 8.0p)
  • On-track for our target of breakeven during Q4 2001

Business Highlights:

  • Customer growth of 370,000 in first half of 2001, up 19% over H1 2000
  • 218,000 products cross sold in H1 (109,000 in H1 2000)
  • Credit card balances exceed £1.5 billion at 30 June 2001
  • Customer acquisition costs have reduced significantly across product portfolio
  • Strategic alliance signed with Microsoft to distribute financial services products: first steps into establishing international presence

Chief Executive Paul Gratton commented:

"This has been a strong performance for the first half of the year. We are growing our customer base whilst driving down acquisition costs significantly and this positions us well to deliver a profitable business in line with our stated plans. The business is progressing well and we will continue to capitalise on the opportunities provided by the digital economy."

Business Performance

Customer Acquisition

This has been Egg’s most successful six months in terms of customer acquisition with a total of 370,000 net new customers joining Egg, leading to a total customer base of 1.72 million. Growth in customer numbers for H1 2001 has increased by 19% compared to H1 2000. Over the same period, we have succeeded in reducing our Egg Card unit marketing costs from £37 in H1 2000 to £22 in H1 2001.

Cross sales continue to show encouraging growth doubling to 218,000 in first half of 2001 compared with the same period last year, giving us a cross sales ratio of 1.36 up from 1.09 at 30 June 2000.

Banking

Retail assets grew by 21% in six months to £4.5 billion - card balances now exceed £1.5 billion.

The credit card portfolio continues to perform strongly, with a total customer base of 1.13 million. Our card offerings remain compelling and highly competitive in the market and we are attracting an upmarket customer base whose average monthly balance is c. £1,750, approximately double the UK average. Card balances are up 68% to £1,565,000 over the six-month period. We are pleased to report that our customer base is proving loyal to Egg: 89% of credit card customers who originally joined on incentive rates are migrating to paying interest at the full rate.

Egg Personal Loans have performed well with disbursements totalling £219 million (H1 2000: £154 million) and a significant reduction in unit marketing costs to £51 a loan from £127 each in H1 2000. This reflects success in cross selling personal loans, primarily to credit card customers. Cohort analysis shows that cross-sold loans are of higher credit quality than those acquired directly, further improving their profitability.

Our savings balances have decreased by £701 million over the six-month period in line with our expectations following the repricing of the book although we continued to be a net acquirer of deposit customers balances (5,000 increase in the period), albeit with lower average balances. Of particular note is the turnaround in revenue contribution from the savings portfolio. Interest margin when compared to base rate, amounted to a positive contribution of £6.7 million during the first half compared to a loss of £2.2 million in the corresponding period last year.

Our Egg branded mortgage sales were £164 million (H1 2000: £318 million). We have chosen not to compete aggressively in a highly competitive marketplace and have acquired a good volume of business at significantly reduced marketing costs (£55 this half-year, £422 last half-year). We have reduced operational costs as the benefits from what is proving to be a successful mortgage servicing joint venture with Marlborough Stirling come through. In addition we have further strengthened our portfolio of mortgage offerings during the last quarter with the introduction of a new market-beating product, the Egg Saver Mortgage and also the launch of our mortgage supermarket on the website. We are also pleased to report that our standard variable rate mortgage was voted best in the market (for a year to 30 June 2001) by leading financial best buys group, Moneyfacts.

Intermediation

The Egg Invest customer base has trebled in size since the start of the year reaching 32,000 customers. This is primarily due to a healthy end to the ISA season in March and April (where we took 2% of the equity ISA market in the last five weeks of the 2001 season, which is equivalent to approximately 10% of the direct market).

Egg Insure has made steady progress during the half year, doubling the size of its customer base to over 15,000 since 31 December 2000. We have introduced three new product offerings during this period to strengthen the portfolio (travel insurance and life and critical illness insurance).

We are pleased with the continuing demand for new distribution channels – Egg TV, which went live in Q1, is now attracting 1,000 hits a day. Traffic on www.egg.com remains high and we remain one of the most frequently visited financial websites (most recent figures from Jupiter MMXI reported egg.com as the second busiest financial services site with 844,000 visits during May).

Demand for and use of technology continues to increase. According to our latest research from MORI: in the last six months alone 48% of adult Britons are now using interactive technologies outside of work. Notes to Editors 4

Outlook

Paul Gratton continued:
"The second half of the year is important for Egg. We are clear about what we must do to achieve our target of break-even during Q4, whilst continuing to provide best in class products aimed at empowering our customers to manage their financial needs."

"The creation of an international presence remains clearly in view, and a first step in this direction has been made through our alliance with Microsoft."

Financial Overview

Group loss before tax decreased by 21% to £63.4m (30 June 2000: £80.7m).

Net interest income increased by £29.2m to £59.8m for the half year to 30 June 2001, reflecting an increase in net interest margin to 1.69% (30 June 2000: 0.73%).

Other operating income increased by £13.8m to £16.4m primarily reflecting additional fees and commissions earned from the larger banking book, especially unsecured lending products.

Administrative expenses increased by £2.1m to £94.1m. Within this total there has been a £14.5m increase in operational and administrative expenses to £65.4m reflecting the rapid growth in customer numbers and transaction volumes over the past year. This has been offset by a £10.1m decrease in development costs to £7.6m, with the majority of the investment needed to deliver the core systems and product infrastructure being delivered in the previous year.

Depreciation increased by £3.0m to £10.4m reflecting the investment in fixed assets in the previous year.

The charge for bad and doubtful debts was £33.0m (30 June 2000: £14.5m). The increase reflects the significant growth in the credit card balances and the resulting change in mix of the retail asset book with a higher proportion of unsecured lending products.

The tax credit was £14.5m, an effective rate of 23%. Egg’s tax losses will be surrendered, to other Prudential Group companies.

Loss attributable to ordinary shareholders after tax decreased by 16% to £48.9m.

Loss per share decreased to 6.0p from 8.0p

Total assets remained stable at £7.9 billion in the six months ended 30 June 2001. Within this loans and advances to customers grew by £0.8 billion mainly due to the success of the credit card business.

Total liabilities also remained stable at £7.4 billion in the first half of 2001. Customer deposits reduced by £0.7 billion to £6.4 billion. Egg issued its first debt securities (£0.6 billion) in the period. These were issued under the recently launched Euro Medium Term Note programme.

Capital adequacy ratios at 30 June 2001 were 11.4% (tier 1) and 15.2% (total). Egg raised £124 million of subordinated debt to supplement its strong equity capital base. In addition Egg also implemented further capital efficiency initiatives by putting in place a credit derivative on £1.1 billion of asset-backed securities within our treasury investment portfolio. This follows the credit derivative covering £0.9 billion of mortgages that was implemented last year.

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