25 Feb 2002

Egg plc Preliminary Results 2001 (Full Year to 31 December 2001)

“Egg has built a significant and sustainable business in the UK, and achieved substantial growth in an increasingly competitive marketplace. We remain committed to delivering long-term value to shareholders through building an international business of scale and leading the industry for innovation in financial services.”

Paul Gratton, Chief Executive, Egg plc

Financial Highlights:

  • Operating income up 103% to £189.4 million (2000: £93.2 million)
  • Reduction of 43% in pre-tax losses to £87.8 million (2000: £155.3 million)
  • Loss per share of 7.6p (2000: 14.3p)
  • Achieved our target of breakeven during Q4 2001

Business Highlights:

  • Strong customer growth: total customers now exceed 2 million
  • Credit card balances double to £1.8 billion (2000: £0.9 billion)
  • Credit quality remains strong with low and stable arrears levels
  • Egg’s launch in Europe accelerated through acquisition of Zebank and associated distribution partnerships

Chief Executive Paul Gratton said:

“Egg has achieved substantial growth in 2001. We acquired 600,000 net new customers during the year, principally through our credit card business, which has now captured over 4% of total balances in the card market in a little over two years.

“Since launch Egg has gone from strength to strength. We have fulfilled our published commitments at time of flotation to bring the UK business into profitability during the fourth quarter of the year and we are confident that our UK business is now sustainably profitable.

“Throughout this year, we have shown at each set of quarterly results, that we are able to increase customers numbers and revenues whilst driving down unit costs. The operational and marketing efficiencies we have achieved during the year position us well for the future.

“In just over three years of trading, Egg has built a significant and sustainable business in the UK, and achieved growth in an increasingly competitive marketplace. We remain committed to delivering long-term value to shareholders through building an international business of scale and leading the industry for innovation in financial services.”

Outlook

Mr Gratton continued:

“2002 will be an important year for Egg. We are now developing our international business, in France through the acquisition of Zebank and associated distribution parnerships. Our commercial alliance with Microsoft is progressing well, and we have extended our deal beyond investments to also offer digital payments services to their 10 million hotmail users in the UK as well as having secured advantageous distribution deals for other products, including credit cards.

“We have had a good start to the year with 82,000 new customers acquired up to 21 February 2002 and we now have over 2 million customers. Our website, egg.com, remains one of the leading financial services websites in the UK with over 1 million unique users (source: Nielsen/Netratings, January 2002). Latest findings from the Egg Index report, conducted by MORI, show the online banking market growing some 5% in the last 3 months to 33% (MORI, Embracing Technology, February 2002).*1

“Egg remains firmly committed to leveraging the opportunities presented in the digital financial services marketplace. We are encouraged by consumers increasing rates of adoption of technology for managing and investing their money. In addition to the digital payments offering we intend to launch shortly with Microsoft, we will also be launching our aggregation service.”

Business Performance

Customer Acquisition

Egg has had a year of strong growth as evidenced by the 600,000 net new customers acquired during 2001 (2000: 559,000), leading to a year-end total of 1.95 million. The final quarter of the year showed a return to previous levels of growth with 147,000 customers acquired (Q4 2000: 140,000). This was encouraging following the slowdown we had experienced in the third quarter in the aftermath of September 11th. Today, we have over 2 million customers.

We achieved over 450,000 product cross sales in 2001 compared to 275,000 in 2000. This led to a year-end cross-holdings ratio of 1.44. Encouragingly this growth in cross-holdings among the customer base has contributed to a strong growth in revenue per customer from £85 on average in 2000 up to £111 on average in 2001.

Banking

The credit card business has performed extremely well during 2001. At year end we had 1.37 million credit card customers and balances nearly doubled to £1.77 billion (2000: £0.93 billion). We are particularly pleased with the continuing loyalty of card customers, with approximately 87% electing to remain with Egg after the introductory rate offer expires. We continue to attract an upmarket customer, who typically earns c. £30k per annum and whose Egg Card has an average balance of £1,600 (national average, £900) and an average spend of £2,600 (national average, £1,400).

Egg Mortgages had a satisfactory year. The book has grown 18% reaching £1.0 billion. The Egg Saver mortgage, which offsets interest against people’s deposit balances now accounts for approximately 65% of our mortgage applications since its launch in June 2001. We have not been actively marketing mortgages in the face of selective and aggressive backbook re-pricing by the larger incumbents. Following the Banking Ombudsman’s recent ruling on this practice by our competitors, allied with the fourth quarter improvement in our volumes thanks to the Egg Saver Mortgage, we are confident that we can continue to profitably grow the mortgage business.

Egg Loans continue to be offered as a cross-sale primarily to the Egg Card base. This is part of Egg’s holistic strategy in relation to unsecured lending. Balances grew 37% year on year to £587 million with disbursements up 21% at £419 million. Customer numbers increased by 25,000 and marketing acquisition cost per customer fell significantly from £109 in 2000 to £27 in 2001.

Credit performance in both the secured and unsecured books remains strong with arrears levels remaining at low levels in all portfolios. Impaired balances as a percentage of total balances in the secured portfolio were 0.32% at the end of both fiscal years. For the unsecured portfolio the figures were 2.41% at end 2001 and 2.29% at end 2000. We continue to maintain a prudent view on provisioning for bad debts.

Egg Savings saw a net outflow of £1.1 billion, which was in line with expectations following the re-pricing of the book. Despite a small net growth in deposit customers, the average savings balance has reduced to approximately £10,000 per account with the loss of the unprofitable larger balances. The overall net interest contribution from deposits was £15.4 million in 2001 compared to a cost of £3.0 million in 2000. Additional re-pricing of the offline book in January 2002 is expected to lead to further outflows on these accounts during the first quarter, but will improve contribution further. We plan to introduce some new initiatives and offers for the savings base later this year, which we believe will increase balances and lead to an overall net inflow for the year across the portfolio of savings products.

Intermediation

Egg Invest has had a satisfactory year with 37,000 customers at end December and approximately £130m invested. The 2001 ISA season was disappointing in absolute terms for all providers with equity ISA volumes significantly down on previous years. Against this backdrop Egg Invest secured 2% of the total equity ISA market in the last five weeks of the season. Whilst we expect the market to have a subdued ISA season again this year it is encouraging that our enquiries for ISAs are currently running ahead of the same period last year.

To further enhance our B2B ambitions in the investment market Egg has recently acquired Fundsdirect, an online fund supermarket. The merger of Egg Invest with Fundsdirect represents the consolidation of two of the UK’s leading fund supermarkets combining Egg’s leading edge, scale, digital service capability and consumer offering with Fundsdirect’s proven ability to serve the B2B marketplace. The net assets of Fundsdirect at 31 December 2001 were £2.7 million.

Egg Insure and Egg Shop continue to provide positive contributions with total intermediation revenues increasing to £2.5 million (2000: £1.5 million).

Egg France

We recently announced our intention to launch Egg in France in 2002. To accelerate this entry strategy we have, subject to regulatory approval, acquired Zebank, the leading French online banking business, for Euro 8 million (c. £5 million) in cash. Zebank’s net asset value as at 31 December 2001 was Euro 31 million (c. £19 million). Zebank will provide valuable capability in terms of call centre, people and system assets. In addition to this deal we have signed distribution partnerships with the French retailers Sephora and La Samaritaine to provide access to their customer bases and physical presence for our brand.

We intend to offer a comprehensive range of financial services products and services, which have researched very well with French consumers. We will not be announcing further details until closer to the launch date to protect our competitive advantage.

The plans for Egg in France target breaking through into profit by the end of 2004. The total size of the profit and loss investment in the first three years in launching the business and acquiring the customer base is expected to be approximately £100 million, by which time Egg expects to have over 1 million customers in France. This includes a planned £50 million of brand and marketing spend and £15 million of development costs.

Microsoft

In addition to the commercial alliance announced in July 2001, Egg has extended its relationship with Microsoft’s leading European consumer portal to offer a wider range of financial services products, including cards, in both the UK and France. We are working together to offer digital payments services to Microsoft’s customers, including hotmail users.

We will shortly be launching our investment platform on MSN in the UK, and we look forward to introducing the egg@msn investment platforms in France later this year.

To download the full version of the Preliminary results as a pdf please click here.

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