Mobile and Security Revenue up 193% Y/Y, up 233% on a constant currency basis

SCHIPHOL, THE NETHERLANDS—August 1, 2012 - Elephant Talk Communications, Corp. (NYSE MARKET: ETAK) (www.elephanttalk.com), an international provider of software and services developed to manage network, billing and systems infrastructure for the telecommunication industry and a market leader in providing solutions to counter electronic fraud for the  financial services industry, today announced total revenue of $7.1 million for the second quarter ended June 30, 2012. Revenue for the higher margin mobile and security solutions business increased 193.2% year-over-year to $2.8 million in the second quarter of 2012.

Revenue from mobile and security solutions accounted for 39.3% of total revenue for second quarter ended June 30, 2012 compared to 12.2% for the three months ending June 30, 2011. Revenue minus Cost of Service (further referred to as ‘margin’) for the second quarter ended June 30, 2012 increased 541.2% year-over-year to $1.9 million, 26.8% of total revenue, compared to $0.3 million, 3.8% of revenue, for the three months ending June 30, 2011. The increase in margin was primarily attributable to the increased revenue contribution from the higher-margin mobile and security solutions business. 

“We are excited about the numerous milestone achievements Elephant Talk accomplished in the second quarter,” said Steven van der Velden, Chairman and Chief Executive Officer of Elephant Talk Communications. “We successfully surpassed one million active mobile subscribers on our platform in Spain, signed our first large contract in Germany that we expect to generate revenue of over $30 million over its initial two year period, and ValidSoft began providing a SIM swap fraud solution to one of the World’s largest banks.”

Key Operational Highlights for Second Quarter 2012

• World’s First SIM Swap Solution for Banking Industry - ValidSoft, in partnership with Adeptra, a global leader in the business of automated, fully interactive consumer communications, began providing a SIM swap fraud solution to one of the World’s largest banks
• Contract with large German MVNO – The contract, expected to generate at least $30 million of mobile revenue over the initial two-year contract period, began contributing revenue to the Company in July 2012 and based on the planned rollout and a  1 EUR to 1.21 USD exchange rate is expected to generate approximately $8.0 million of total revenue for 2012. Approximately half of this mobile revenue will be recognized on the Company’s income statement during 2012, with approximately 50% recorded as deferred revenue on its balance sheet to be recognized over the 24 month life of each activated SIM.
• Spain Surpasses One Million Active Mobile Subscribers Level – Elephant Talk passed the one million subscriber level on the Vodafone  Spain network
• Utiba Global Partnership – ValidSoft’s SMART™ (Secure Mobile Architecture for Real-time Transactions) to be integrated into Utiba’s market leading suite of mobile financial services
• ValidSoft European Privacy Seal Renewed – The privacy seal for VALid-POS, a telecom-based security solution designed to combat card transaction fraud at ATMs or points of sale (POS), was renewed until 2014
• Spindle & SOCURE Partnerships  - ValidSoft signed partnership agreements with Spindle, US-based provider of mobile commerce and alternative payment solutions for merchants and consumers, and SOCURE, a US-based provider of applications that protect the identity and reputation of users across social networks
• Russell Global Index - Began trading in the index during the quarter

Financial Results for the Second Quarter and Six Months Ended June 30, 2012

For the three months ended June 30, 2012, total revenue was $7.1 million, a decrease of $0.7 million or 9.1% year-over-year, compared to $7.8 million for the three months ending June 30, 2011. A $1.8 million, or 193.2%, year-over-year increase in the Company’s high margin mobile and security solutions business was offset by a $2.5 million, or 37.1%, year-over-year decline in the lower margin legacy landline business.  The decrease in total revenue was the result of reporting currency translation effects.  When adjusted for these currency effects, total revenue increased 2.3% year-over-year. On a constant currency basis, mobile and security revenue increased 233% year-over-year while the landline revenue decreased 29.3% year-over-year. To determine the revenue growth rates on a constant currency basis revenue from entities reporting in non-U.S. dollars were translated into U.S. dollars using the average exchange rates over the six months ended June 30, 2012. The same exchange rates are used for the six month period ended June 30, 2011.

Contributing to the year-over-year growth of our higher margin mobile and security solutions revenue in the second quarter were the migration of a customer with a large consumer base in the 4^th quarter of 2011, higher revenue from existing mobile customers and the implementation of ValidSoft SIM Swap solution by one of the World’s largest financial institutions under our Adeptra partnership. Contributing to the decline of landline revenue was the Company’s decision to terminate a landline contract due to its limited contribution to the Company’s margin and the global trend of communication moving to mobile and wireless platforms.

“We expect to report our fifth consecutive quarter of quarter-over-quarter growth in our mobile and security revenue on a reported and constant currency basis when we report third quarter results later this year and we  believe we are on track to achieve our first month whereby the Company’s margin (defined as revenues minus cost of service) should be sufficient  to cover operational cash outflow, not including non-cash expenses and capital expenditures by the end of 2012, or the beginning of 2013,” stated Mark Nije, Chief Financial Officer of Elephant Talk Communications. “Growth will be driven by our German contract, the migration in early July of an additional 100,000 mobile users from a mobile virtual network operator in Spain and ValidSoft’s further roll-out of its SIM swap fraud and other prevention solutions.’’

Total revenue for the six months ended June 30, 2012 was $15.7 million, a decrease of 3.9% year-over-year when compared to $16.3 million for the six months ending June 30, 2011. The decrease in total revenue was the result of reporting currency translation effects.  When adjusted for these effects, total revenue increased 3.8% year-over-year on a constant currency basis for the first six month of 2012 when compared to the year earlier period. 

For the six months ended June 30, 2012, mobile and security revenue increased 111.8% year-over-year and landline revenue declined 24.3% year-over-year when compared to the same period a year earlier.  When adjusting for currency translation effects, mobile and security revenue increased 128.9% year-over-year and landline revenue decreased 18.3% year-over-year when compared to the first six months of 2011.

Cost of service for the three months ended June 30, 2012 was $5.2 million, a decrease of $2.3 million, or 30.8%, compared to $7.5 million for the three months ending June 30, 2011. This decrease is fully related to the decline in landline revenue.  

Margin improved to 26.8% for the second quarter of 2012 compared to 3.8% in the same period a year earlier.

The following tables summarize the Company’s quarterly mobile and security revenue and Elephant Talk’s total margin since 2Q11. Mobile and security revenue increased as a percentage of total Company revenue to 39.3% in the second quarter of 2012 from 12.2% in the prior year period. 

Total margin as a percentage of total Company revenue increased to 26.8% in the second quarter of 2012 from 3.8% in the prior year period.

Selling, general and administrative (“SG&A”) expense for the three months ended June 30, 2012 and 2011 were $4.6 million and $3.8 million, respectively. SG&A expenses increased $0.7 million, or 19.4%, in the three months ending June 30, 2012 when compared to the same period in 2011. Higher year-over-year SG&A expenses in the second quarter of 2012 were mainly the result of a 22.2% year-over-year increase in staffing levels, largely European (mobile and security) hires, as well as higher investor relations and sales, marketing & communication related staffing and expenses.

Adjusted EBITDA (a non-GAAP measure) improved to a loss of $2.7 million for the period ending June 30, 2012 from a loss of $3.5 million in the three months ended June 30, 2011. Adjusted EBITDA improved $0.2 million quarter-over-quarter for the quarter ended June 30, 2012.

The tables at the end of this press release include a reconciliation of net loss to non-GAAP Adjusted EBITDA for the three and six months ended June 30, 2012 and 2011. An explanation of this along with constant currency comparisons and margin, are also included below under the heading "Non-GAAP Financial Measures."

Net Loss was $5.0 million and $6.7 million for the three months ended June 30, 2012 and 2011, respectively. The $1.7 million improvement in net loss for the quarter was driven by a $1.5 million decrease in the loss from operations and a $0.2 million improvement in other income. Net loss improved $1.0 million quarter-over-quarter for the second quarter of 2012.

Conference Call Reminder

As a reminder, Elephant Talk Communications will host a Shareholder Update Conference Call on August 1, 2012 at 11:00 a.m. (EDT). Anyone interested in participating should dial 1-480-629-9713 approximately 5 to 10 minutes prior to the start of the call. Participants should ask for the Elephant Talk Shareholder Update conference call. To listen to the playback please utilize the webcast by visiting the company's website at www.elephanttalk.com.

This call is being webcast by ViaVid Broadcasting and can be accessed at either Elephant Talk's website at www.elephanttalk.com or ViaVid's website at http://www.viavid.net. To access the webcast, you will need to have the Windows Media Player on your desktop. For the free download of the Media Player, please visit:
http://www.microsoft.com/windows/windowsmedia/en/download/default.asp

Non-GAAP Financial Measures

To supplement the consolidated financial statements presented in accordance with generally accepted accounting principles, or GAAP, Elephant Talk uses measures of non-GAAP Adjusted EBITDA,  constant currency and margin. A reconciliation of the non-GAAP financial measures Adjusted EBITDA and constant currency to the closest GAAP financial measure, is presented in the financial table below under the heading "Reconciliation of Non-GAAP Measures to GAAP." Margin is derived from the income statements by subtracting cost of service from revenues. Elephant Talk believes that the non-GAAP financial information provided in this release can assist investors in understanding and assessing Elephant Talk’s on-going core operations and prospects for the future and provides an additional tool for investors to use in comparing Elephant Talk's financial results with other companies in Elephant Talk’s industry, many of which present similar non-GAAP financial measures to investors. In addition, Elephant Talk believes that these non-GAAP financial measures are useful to investors because they allow for greater transparency into the indicators used by management as a basis for its internal budgeting and operational decision making.

In order to provide investors additional information regarding our financial results, we are disclosing Adjusted EBITDA, a non-GAAP financial measure. We employ Adjusted EBITDA for several purposes, including as a measure of our operating performance. We use Adjusted EBITDA because it removes the impact of items not directly resulting from our core operations, thus allowing us to better assess whether the elements of our growth strategy are yielding the desired results. Accordingly, we believe that Adjusted EBITDA provides useful information for investors and others, which allows them to better understand and evaluate our operating results.

For the three and six months ended June 30, 2012 and 2011, non-GAAP Adjusted EBITDA is defined as earnings before derivative accounting, such as warrant liabilities and conversion feature expensing, income taxes, depreciation and amortization and stock-based compensation.  It is determined by taking net loss and adding back provision for income taxes, interest income and expense, net loss attributable to non-controlling interest, depreciation and amortization, stock-based compensation expense, other income and expenses, and equity in earnings of unconsolidated joint venture.

Elephant Talk believes these adjustments provide useful information to both management and investors due to the following factors:

•          Stock-based compensation. Although stock-based compensation is an important aspect of the compensation of Elephant Talk's employees and executives, determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the future exercise or termination of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock-based compensation is determined using a complex formula that incorporates factors, such as market volatility, that are beyond Elephant Talk's control. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of Elephant Talk's core business and to facilitate comparison of its results to those of peer companies.

To determine the revenue growth rates on a constant currency basis for the three and six months ended June 30, 2012, revenue from entities reporting in non-U.S. dollars were translated into U.S. dollars using the average exchange rates over the six months ended June 30, 2012. The same exchange rates are used in the income statement of the six months ended June 30, 2011.

The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant elements that are required by GAAP to be recorded in Elephant Talk's financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management in determining these non-GAAP financial measures. In order to compensate for these limitations, management of Elephant Talk presents its non-GAAP financial measures in connection with its GAAP results. Investors are encouraged to review the reconciliation of our non-GAAP financial measures to their most directly comparable GAAP financial measure. As previously mentioned, a reconciliation of our historic non-GAAP financial measures to their most directly comparable GAAP measures has been provided below.

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

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Non-GAAP Financial Measures

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ELEPHANT TALK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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