We achieved much in 2006. In headline terms, we grew revenues to £6.0m from £4.7m in 2005. This was underpinned by 36 license orders and extensions, taking the total number of licensed customers to 87. Full-year revenues were 30% higher than the prior year, and we achieved breakeven EBITDA (earnings before interest, tax, depreciation and amortization) for the first time in our history. Coming into 2007 we continue to enjoy high levels of activity in our sales pipeline, reinforcing our belief that we are the leading independent vendor in the market for Product Portfolio Management (PPM) solutions. This market is projected to triple in size between 2006 and 2010. Implementing a system like Accolade represents a serious commitment for any organization and this continues to weigh on our sales cycles. However, as our business matures in scale we believe that this area, which has always brought unpredictability to our revenues, will show improvement.
At the start 2006, we made a strategic decision to move beyond the chemicals, materials, and food & beverage markets that have historically been our focus. In particular, we began to pursue opportunities in non-food & beverage segments of the consumer packaged goods sector. This effort encompassed marketing programs and targeted business development activity. It led to our securing a number of new clients, exemplified by Timex, the leading watchmaker in North America, and Electrolux, the world’s leading international appliance company. Leveraging our partnerships will be critical to achieving our longer term goals in this area, and we were delighted to announce our first major automobile customer, secured in collaboration with Hewlett-Packard. Geographical reach was also extended with sales for the first time in Scandinavia, France, Israel, Portugal and New Zealand. Some of these were secured through our growing reseller channel.
Sopheon’s consolidated turnover grew to £6.0m (2005: £4.7m). This overall result included a strong new sales performance by our European business, which grew revenues by 68% in the year. This was offset by a relatively flat performance in the US, accentuated by the weakening of the US dollar in global currency markets. This growth pattern is the opposite of what took place in 2005, when we experienced stronger growth in North America. Over the years we have invested heavily in maintaining a truly international footprint for our business and this is proving to be both a key differentiator in our business development and implementation efforts, and a source of balance for our revenue performance. Since the introduction of Accolade six years ago, our average annualized growth in US dollar terms continued to hold at approximately 50%.
Overall, Sopheon’s revenues for 2006 were 30% higher than the preceding year. Unlike in 2005, however, revenues were evenly spread across the first and second half. Although we look forward to strong growth, we believe that our performance in any particular period will remain relatively unpredictable for some time to come. This is a function of sales cycle time and of transaction value.
During 2006 we closed 16 new license customers and 20 extension orders from existing customers. In past statements we have noted the growing influence of larger sales, which have the potential to increase revenue volatility, but also underpin growth. Such transactions also have the effect of pulling through substantial consulting and other service opportunities due both to the more extensive nature of the implementations in question, and also to a growing trend of existing customers returning to Sopheon to support expansion efforts through additional configuration and consultancy work following the initial roll-out. During 2006, we enjoyed £0.6m of such repeat services business.
In addition to license and services revenues, our third major revenue stream is recurring maintenance income which coming into 2007 has grown to £1.7m, compared to £1.4m a year before.
In 2006 our business delivered a 37:25:38 ratio of license, maintenance, service respectively compared to 40:25:35 in the prior year. We expect our consulting revenues to continue to grow strongly and to provide another source of stability and maturity to our business. However, we believe that this will be offset as a proportion of our total revenues by the effect of license business coming through our expanding reseller network, for which associated services work is unlikely to be performed by Sopheon. We expect maintenance to hold at approximately a quarter of our overall revenues.
As we first signaled in 2005, the higher proportion of services in our revenue mix has required us to make extensive use of subcontractor partners. This requirement has increased as the scope of deployments and the geographic spread of our customers have continued to expand. A recent example was our Accolade installation at Electrolux, where we contracted with Arthur D Little to perform the bulk of the implementation work. In spite of this we achieved an overall gross margin, measured after deducting the costs of such partners as well as our own client services resources, of 72% (2005: 73%).
RESEARCH & DEVELOPMENT EXPENDITURE
During 2006, our R&D effort focused on three different areas. During the year we developed and launched the Accolade Accelerators, a group of new applications which expand Accolade’s out-of-the-box capabilities in key process automation areas such as Stage-Gate® implementations, roadmapping and planning, and product portfolio management. The Accelerators feature built in best-practice content and reports that allow a company to leverage Accolade in these areas with much reduced configuration effort.
In addition, we completed the majority of the effort required to transfer our legacy healthcare protocol management system onto the Accolade platform, and our hospital clients have now started the upgrade process. Finally, we continued to invest substantial resources in developing the next release of Accolade which is due in late 2007. This release will bring a host of new features to our flagship offering, enabling Sopheon to maintain its leadership position and expand to new markets.
As a result of the above, £0.5m (2005: £0.4m) of our 2006 R&D expenditure met the criteria of IAS38 for capitalization.
As noted in the Remuneration Report a bonus was earned by the majority of the Group’s employees in respect of the 2006 performance. This has resulted in an increase in payroll costs relative to 2005 in all areas, with the principal exception of members of Sopheon’s sales teams for whom incentives are tied to individual or territory results.
More specifically, if the effect of the capitalization and amortization of R&D costs is added back, we increased total R&D expenditure by £0.2m. In particular, this reflects the formation of an internal organization that we call RAD, short for Research & Application Development. The Group is chartered to work with clients to investigate and create new software applications built on the Accolade platform that would extend the utility and value of the core offering; the Accelerators described above were developed by the RAD team.
Distribution costs are slightly lower than the previous year in spite of the higher revenues. Some of this apparent reduction is attributable to the reclassification of c