PHOTOCHANNEL SETTING RECORD REVENUES

Transactional revenues increase 188% and Membership fees increase 546%, quarter over quarter, Q2 2004 to Q2 2005

VANCOUVER, BC – May 17, 2005 – PhotoChannel Networks Inc. (TSX – V: PNI; OTCBB: PHCHF) (“PhotoChannel” or the “Company”), one of North America’s leading digital imaging technology providers, today reported its second quarter fiscal 2005 financial statements for the six month period ended March 31, 2005.

For the six months ended March 31, 2005 the Company recorded record revenue of $995,356, up 153% over the corresponding period of 2004. This record revenue continues to be driven by increases in network transactional and membership fees, which increased by 188% and 546%, respectively, from second quarter of 2004.

“PhotoChannel is pleased to report its strongest revenue quarter in its history” stated Peter Fitzgerald, President and CEO of PhotoChannel. “During the quarter which is historically the slowest in the photofinishing industry, the Company recorded record quarterly revenue of $554,742, exceeding its previous record quarter (Q1 – 2005) of $440,614 by 26%.

PhotoChannel is now focusing its sales efforts on the US market. Usage in the Canadian marketplace, where PhotoChannel provides the dominant online solution for photofinishers, continues to accelerate rapidly.

During the quarter, the Company also saw certain of its large retail partners continue an aggressive marketing campaign of their online service. The Company believes this will continue as its retail partners work to maintain and increase market share.

Business Highlights For Q2 –

FY05 PhotoChannel reports:

  • Record revenues for the six months ended March 31, 2005 of $995,356, up 153% over the corresponding period of 2004. This record revenue continues to be driven by increases in network transactional and membership fees, which increased by 188% and 546%, respectively, from second quarter of 2004.
  • Peter Fitzgerald has assumed the role of President and CEO, in addition to his previous role of Chairman of the Board of Directors.
  • Doug Rowan joined the Board of Directors of PhotoChannel at its annual general meeting.
  • Wal-Mart has now deployed over 160 of its 255 locations across Canada, offering direct-to-store printing. The Company’s data indicates that when in-store labs are connected directly (as apposed to the order being sent to a central fulfillment site and delivered back to the store), orders increase by as much as 400% over a six month period.
  • The Company launched live sites for Eckerd Pharmacy (www.eckerd.com), Brooks Pharmacy (www.brooks-rx.com) Drugs and initiated a test for Longs Drugs (www.longs.com) with 10 locations now wiith direct-to-store printing.
  • The Company launched a prepaid photo and printing solution now available in all 7-Eleven Canada locations.
  • TELUS Mobility added a video solution for its digital camera phones.

RESULTS OF OPERATIONS

Network revenue increased 153% to $995,356 for the period ending March 31, 2005. The increase was attributable to three factors: organic growth in usage of the network from customers of the Company’s photofinishing retailers; the Company’s retailers commencing to print in-store; and the addition of additional customers. The two primary increases occurred in transaction commission and membership fees, which increased 188% and 546%, respectively, for the period ending March 31, 2005.

The Company’s costs of operations for the period were $2,224,439, up 21% when compared to the same period of 2004. This increase was primarily attributable to an increase in research and development, as the Company builds out its new Network platform and the cost of Network delivery as the number of transactions processed increases.

General and administration expenses for six months ended March 31, 2005 decreased by $69,131 to $655,764, a decrease of 10% from the comparable period last year. This decrease of was due to a decrease in legal and accounting, office and miscellaneous and interest, but was partially offset by an increase in salaries and consulting and rent.

Sales and marketing expenses for the six months ended March 31, 2005 increased by $60,081 to $315,521, an increase of 24% from the comparable period of 2004. This increase was due to our expansion into the US market and the related increase in staffing, printing, advertising and promotion.

Network delivery expenses for the six months ended March 31, 2005 increased by $160,758 to $367,892, an increase of 78% from the comparable period of 2004. This increase was primarily due to an increase in lab system installations, network usage and related bandwidth requirements and customer service.

Research and development expenses for the six months ended March 31, 2005 increased by $192,166 to $773,421, an increase of 33% from the comparable period of 2004. This increase was primarily due to an increase of staffing and consultants to develop the next generation, multi-media Digital Content distribution platform. Upon completion of our next generation platform, the Company believes that these current costs can be reduced by as much as 20% going forward.

Amortization expense for the six months ended March 31, 2005 increased by $48,874 to $111,841, an increase of 78% from the comparable period of 2004. This increase was due to acquisition of equipment during late fiscal 2004 and the first two quarters of fiscal 2005 related to an increase in infrastructure and staffing.

The Company recorded a six month net loss attributable to common shareholders of $1,220,486 or $0.01 per share compared to $1,359,883 or $0.01 per share in the same period last year. This reduction of 10% was due to a significant increase in revenues.

 
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