TIDMNCC
RNS Number : 9447B
NCC Group PLC
16 January 2018
NCC Group plc
First half results reflect significant improvements to revenue
and gross margins since H2 in the prior year and deliver financial
performance in line with the Board's expectations.
NCC Group plc (LSE: NCC, "NCC Group" or "the Group"), the
independent global cyber security and risk mitigation expert, has
reported its half year results for the six months to 30 November
2017 ('the Half', 'H1', 'the Period').
Operational and financial highlights
Continuing operations H1 - 18 H1 - 17 Change % H2 - 17 Change %
(1) GBPm GBPm GBPm
Revenue (GBPm) 118.2 110.3 +7.2% 107.5 +10.0%
--------- --------- ------------ --------- -------------
Gross profit (GBPm) 46.6 40.6 +14.8% 38.1 +22.3%
--------- --------- ------------ --------- -------------
GM% (2) 39.4% 36.8% +2.6% pts 35.4% +4.0% pts
--------- --------- ------------ --------- -------------
Adjusted (3) operating
profit 14.1 16.2 (13.0%) 9.2 +53.3%
--------- --------- ------------ --------- -------------
Operating profit 6.6 7.4 (10.8%) (54.6) +112.1%
--------- --------- ------------ --------- -------------
Net cash flow from operations 14.7 12.2 +20.5% 15.8 (7.0%)
--------- --------- ------------ --------- -------------
Net debt (44.4) (48.8) +9.0% (43.7) (1.6%)
--------- --------- ------------ --------- -------------
Cash conversion ratio
(5) 71.0% 57.5% +13.5% pts 106.0% (35.0% pts)
--------- --------- ------------ --------- -------------
-- Group revenue from continuing operations grew by 7.2%:
o Organic(4) retained Assurance growth 14.3% - all four
territories double-digit growth
o Escrow organic growth 1.8% (2.1% before FX)
-- GM% improved by 2.6% points from 36.8% to 39.4%:
o Assurance GM% from continuing operations grew by 2.7% points
to 32.3% through utilisation gains
o Escrow GM% recovered by 4.9% points through better cost
control and improved verification testing delivery processes
-- Adjusted operating profit from continuing operations fell to
GBP14.1m (2017: GBP16.2m) due largely to planned overhead increases
committed in the prior year and adverse FX charges of GBP1.3m which
more than offset GM gains
-- Operating profit fell from GBP7.4m to GBP6.6m for the same reasons noted above
-- Adjusted basic earnings per share 3.7p (2017: 4.7p), Basic
earnings per share 1.4p (2017: earnings 2.0p)
-- Improved net cash flow from operations of GBP14.7m (2017:
12.2m) driven by improving working capital management;
-- Relocation to new Manchester HQ completed incurring GBP3.7m
capital expenditure in the Period
-- Interim dividend maintained at 1.5p per share
Strategy progress update
-- Assurance division now reorganised along geographic lines.
-- Changes to sales structures and go-to-market strategies in
the new Target Operating Model will complete by Q4.
-- Focus on realisation in professional services starting to yield some margin benefit.
-- Benefit also delivered by selling more value-added specialist
services for specific sectors such as our hardware and automotive
practices.
-- Initiatives underway in a group wide change programme
designed to improve the effectiveness and efficiency of internal
business processes such as resource scheduling and working capital
management.
-- Business disposals of Web Performance and Software Testing
underway - expect completion in the second half of the current
financial year.
-- New CEO, Adam Palser, in post December 2017.
Outlook
-- Demand in our core markets around cyber security and business
continuity risk remains healthy with NCC Group first half growth
rates continuing into the traditionally quiet third quarter.
-- Cost headwinds are reducing as increases committed to in the
prior year are now complete. Overheads will stabilise in H2 at the
current run rate, adjusted for an extra quarter of Manchester HQ
costs.
-- In the second half, the combination of further gross margin
gains and continuing organic revenue growth will offset remaining
committed cost increases to deliver full year Adjusted operating
profit in line with the Board's current expectations.
Chris Stone, Chairman, comments:
"Strong organic revenue growth in our core assurance businesses
continues to drive positive momentum in the business. The
combination with gross margin gains flowing from improved
realisation has delivered a significant recovery from the low point
of the second half of the prior year.
"Many of the projects and recruitment plans that were committed
in the prior year to support growth are largely complete. Our
opportunity now is to deliver operational leverage gains driven by
further organic growth and gross margin improvements while
controlling any further increase in overheads.
"Our customers continue to see significant value in our service
offerings. We are starting to promote attractive business lines
across the wider NCC Group network. The business remains well
placed to take advantage of the continued growth and importance of
independent cyber security and business risk mitigation
markets."
The Group expects to report its full year results, for the year
ended 31 May 2018 on Tuesday, 17 July 2018.
A briefing for analysts will be held at 9am at the offices of
Maitland, 13 King's Boulevard, King's Cross, London N1C 4BU. The
briefing will also be webcast live and can be accessed via the
Group's website.
16 January 2018
(1) References to the Group's results, unless stated to the
contrary, are to continuing operations only and exclude the
performance of businesses being actively marketed for sale (Web
Performance and Software Testing) as well as the Domain Services
business that was sold in December 2016.
(2) GM% is the gross margin ratio and is defined as revenue less
costs of sale (gross margin) divided by revenue
(3) Adjusted operating profit excludes individually significant
items, share based payments, unwinding of discounts on deferred
consideration and amortisation of acquired intangible assets.
(4) Organic results exclude the impact of acquisitions and
re-translation effects of foreign exchange movements. Organic
results also exclude the planned reduction in the re-sale of low
margin third party product and services (an MSS business line
acquired with Accumuli plc) following the Strategic Review.
(5) Cash conversion ratio is defined as net cash flow from
operating activities divided by adjusted EBITDA.
NCC Group
Enquiries:
NCC Group (www.nccgroup.trust) +44 (0)161 209 5432
Chris Stone, Chairman
Adam Palser, CEO
Brian Tenner, CFO
Maitland +44 (0) 207 379 5151
Neil Bennett / Al Loehnis
Chairman's statement
Overview
The Strategic Review undertaken in the second half of 2017
confirmed that NCC Group has a great opportunity: we hold leading
positions in growing markets, our customers value us, and our
workforce is exceptionally skilled. It also confirmed the need to
improve how we organise ourselves, our go-to-market strategies and
the ways we manage and deploy our highly skilled delivery teams
across multiple geographies. A wide range of business improvement
projects have therefore been initiated during the period to ensure
that we have the foundations to continue to take advantage of
strong market growth while improving our margins.
Business Performance and Progress on Strategic Goals
The financial performance of the Group was in line with the
Board's expectations and represents a firm recovery from the weak
second half of the prior year. We delivered continuing adjusted
operating profit of GBP14.1m (H1 - 2017: GBP16.2m and H2 - 2017:
GBP9.2m). Continuing revenues grew by GBP7.9m (7.2%) to GBP118.2m.
Our retained organic Assurance businesses delivered double-digit
growth across the combined four geographies (UK, North America,
Netherlands and Denmark). The Escrow division also returned to
growth with revenue 1.8% higher than the prior year period (2.1%
excluding the impact of FX rates).
We improved GM% in both divisions and at 39.4% for the Group as
a whole, GM margins were up on both the first half (36.8%) and
second half (35.4%) of the prior year. The benefits of growth and
improved gross margins were offset by the impact of increases in
overheads, depreciation and amortisation that were largely
committed in the first half of the prior year. So while adjusted
EBIT margin rose by 3.3% to 11.9% compared to the second half of
the prior year (8.6%), this represented a year-on-year fall of 2.8%
(H1 - 2017: 14.7%).
We have made good progress in implementing the findings of the
Strategic Review and also the associated work on a new Target
Operating Model (TOM). During the Period our efforts have focused
on our sales teams and go-to-market strategies. We expect the
changes to be fully deployed by the end of the current financial
year to support growth and margin initiatives in the next financial
year.
We have also initiated a number of new improvement projects to
improve our internal business processes. These projects are both
short and long term in nature and we expect benefits from them to
gather pace in the second half of the year to support margin
expansion and operational leverage in the next financial year. We
are already seeing benefits in terms of the timeliness and quality
of reporting of management information with the deployment of a new
consolidation and reporting tool and working capital is showing the
early benefits of increased focus and active management.
We continue to develop our technical and specialised service
offering. One such example in the period was the launch of our
unique and highly sought after CENTA service (Centre for Evolved
Next Generation Threat Assurance) as part of our UK Assurance
business. This was made possible with an investment in a new team
of highly capable individuals with experience operating at the
highest level with regulators and regulated industries, as well as
with central governments around the world. The offering generates
revenue in its own right and the halo effect also helps open a
number of boardroom doors.
We have also been reviewing how we manage and develop our
people. This has included Group-wide workshops aimed at developing
a set of shared values and evaluating the need for additional
management training and support as we transition to the new TOM.
While the strength of the market continues to create talent
retention issues in a number of our locations such as California,
on a global basis employee engagement remains strong and employee
turnover remains at a similar level to prior years.
Finally, the processes to sell the Web Performance and Software
Testing businesses are well advanced. We still expect to announce
the disposal of each in the second half of the financial year.
The operating and financial performance for the period is set
out in more detail in the performance review on pages 7 to 15.
Dividends
The Board has reviewed business performance in the first half of
the current financial year and the fall in earnings compared to the
first half of the prior financial year. While mindful of the need
for investment over the next few years, the Board is confident in
our prospects and hence recommends that the dividend is maintained
at the current level.
An interim dividend of 1.50p is therefore being recommended by
the Board. This is in line with the Interim Dividend in the prior
year although adjusted EPS is still significantly below the level
achieved in 2016, when the current level of dividend was first
paid. The dividend policy will remain under review.
Board composition
On 1 December 2017 we announced Adam Palser as the Group's new
Chief Executive Officer. At that time, Brian Tenner stood down from
his role as interim Chief Executive Officer and has returned full
time to his duties as Chief Financial Officer. I would like to
express the Board's appreciation for the efforts and dedication
Brian demonstrated to the Group in performing both of those roles
in parallel during an important period in the Group's
evolution.
During the period, Mike Ettling joined the Board as a
non-Executive Director and brings with him a wealth of experience
of both the digital and cloud sectors.
In line with best practice, after nine years' tenure, Debbie
Hewitt MBE, Senior Independent Director, will resign and step down
from the Board on 28 March 2018. Chris Batterham, Non-Executive
Director, will become Senior Independent Director and Jonathan
Brooks, Non-Executive Director will become Chairman of the
Remuneration Committee.
In addition, as part of the broader Board succession planning,
after six years' tenure, Thomas Chambers, Non-Executive Director,
will relinquish the Chair of Audit role with effect from April 2018
and will resign and step down from the Board, following the
Company's AGM on 19th September 2018. Chris Batterham,
Non-Executive Director, will become Chairman of the Audit Committee
from 1st April 2018. The Board is in the process of recruiting an
additional Non-Executive Director and an announcement will be made
in due course.
We would like to thank Debbie for her valuable contribution to
the business over the last nine years, for her commitment and for
her contribution to the appointment of four new Directors to the
Board over the last 12 months. Similarly, we thank Thomas for his
valuable contribution over the last six years, for his diligent
approach and for his leadership of the Audit Committee. The Board
is appreciative of the role that they have both played and wish
them well for the future.
With Adam and Brian now in their permanent roles, I have
relinquished my executive responsibilities and will now continue on
the Board as Non-Executive Chairman with additional
responsibilities as Chairman of the Nominations Committee and of
the Cyber Security Committee.
Employees
Throughout the last six months our employees have demonstrated
once again their commitment to our business and to delivering
excellent service to our customers. We have seen active engagement
in our internal projects and many great ideas for improving our
systems and processes and how we deliver services to our customers.
We are working to develop new training support and career paths for
our staff and expect that this investment will not only increase
our capabilities but also add to the attractiveness of NCC Group as
a place to forge a worthwhile and rewarding career.
Current trading and outlook
Our core markets remain buoyant, though some month-to-month
volatility in performance remains a feature of the business. We
expect double-digit year-on-year growth to continue in Assurance.
Fox High Assurance is delivering improving prospects and changes to
the management structure in UK Managed Security Services will
initially deliver more stable revenues before then returning to
growth. The roll-out of TOM sales structures in the Assurance
division in the second half will support our growth rates in the
new financial year.
Escrow growth in the UK is expected to remain at low
single-digit levels and the changes to the US Escrow management
team and sales structure are expected to return that business to
growth in the second half.
Continuing work on charge rates and realisation improvements
will feed into underlying GM% gains in the second half, though this
is likely to be somewhat muted in the traditionally quiet third
quarter. General and administrative costs are now targeted to
remain broadly flat with the only material increase being the full
impact of the Manchester HQ move (H1 only saw one quarter's
occupancy charge of approximately GBP0.6m).
The expected continuation of year-on-year growth and margin
gains in the second half of the financial year combined with
control of overhead costs, gives added confidence to delivering
full year Adjusted operating profit in line with current Board
expectations.
Chris Stone, Chairman
16 January 2018
Performance Review
Group Revenue
Unless stated to the contrary, the narrative which follows
refers to continuing operations. Continuing revenue increased by
7.2% to GBP118.2m (H1 2017: GBP110.3m). We announced in July 2017
that as a result of the Strategic Review, the Web Performance and
Software Testing businesses were to be sold. Since both disposal
processes are now actively underway, both businesses are now
classified as held for sale and their contribution to the Period's
results (and prior year income statement comparatives) have been
re-stated to exclude them from continuing operations. The table
below shows the components of growth for each continuing division
as well as the two businesses held for sale. The Domain Services
business that was sold in the prior year is also shown on a similar
basis:
Revenue analysis H1 2017 FX Acq'ns Disposals Organic H1 2018 Total
GBPm GBPm GBPm GBPm GBPm GBPm Growth
GBPm /
%
Escrow 18.7 (0.1) - - 0.4 19.0 0.3 / +1.6%
Assurance 91.6 (0.1) 4.2 - 3.5 99.2 7.6 / +8.3%
-------------------- -------- ------ ------- ---------- -------- ------------------ ------------
Continuing revenue 110.3 (0.2) 4.2 - 3.9 118.2 7.9 / +7.2%
-------------------- -------- ------ ------- ---------- -------- ------------------ ------------
Businesses held
for sale (4) 15.5 - - (2.3) (1.2) 12.0 n/a / na
-------------------- -------- ------ ------- ---------- -------- ------------------ ------------
Group total 125.8 (0.2) 4.2 (2.3) 2.7 130.2 4.4 / +3.5%
==================== ======== ====== ======= ========== ======== ================== ============
The small net FX impact above is driven by the GBP strengthening
by around 3.0% against the US$ (c.GBP0.9m sales reduction), partly
offset by GBP weakening by 3.5% against the EURuro (c.GBP0.7m sales
growth). With the higher growth rates being achieved in the
Assurance division, its share of Group revenue has now risen to
83.9% (2017: 83.0%). The Group continued to have minimal reliance
on any one customer or sector. Within Assurance the largest
customer represents approximately 4% of total Assurance revenue.
The largest customer in Escrow is just over 1% of total Escrow
revenue.
Revenue performance is discussed further in each Operating
Segments performance report below.
Group profitability and margins
The Board and Executive management use a number of non-GAAP
measures (also known as Alternative Performance Measures or
'APM's') in the day-to-day management of the business. The table
below sets out the reconciliation between the APM's and reported
statutory measures.
H1 2018 H1 2017 H2 2017
GBPm GBPm GBPm
Continuing operations adjusted EBITDA 19.9 19.8 13.4
Depreciation of property plant and
equipment (3.0) (2.4) (2.7)
Amortisation internally developed intangible
assets (2.8) (1.2) (1.5)
---------------------------------------------- -------- -------- --------
Continuing operations adjusted operating
profit (EBIT) 14.1 16.2 9.2
Individually significant items (2.6) (3.2) (59.8)
Amortisation acquired intangible assets (4.9) (5.1) (5.2)
Share based payments - (0.5) -
Profit on sale of subsidiaries - - 1.2
---------------------------------------------- -------- -------- --------
Continuing operations operating profit
(EBIT) 6.6 7.4 (54.6)
============================================== ======== ======== ========
The Group's primary financial profitability measure is Adjusted
operating profit (sometimes referred to as 'Adjusted EBIT'). It is
management's view that Adjusted EBIT is more closely aligned to the
underlying performance of the business. Adjusted EBITDA is also
disclosed as this is used by some stakeholders and in some other
KPI's used in the business (such as the Cash Conversion ratio). The
Group delivered a GM% of 39.4% in the period, an improvement of
2.6% on the 36.8% achieved in H1 of the prior year. The improvement
has been driven by a combination of four factors:
-- improved utilisation rates in the Assurance division with
revenue growth being delivered by staff numbers that have been kept
relatively flat since the start of Q4 in the prior year;
-- in Escrow, the prior year saw a significant increase in
headcount and associated costs in the first half of the prior year
which were then reduced again to close to the original starting
level by the end of the year. The current year has not repeated
that trajectory;
-- an improved mix being delivered by the two acquisitions in the US in the prior year; and
-- the planned reduction in lower margin third party product re-selling noted earlier.
The GM% improvement combined with good revenue growth delivered
a GBP6.0m increase in gross profit to GBP46.6m compared to GBP40.6m
in H1 of the prior year and GBP8.5m compared to GBP38.1 in the
second half of the prior year for the reasons noted above.
Group adjusted operating profit from continuing operations of
GBP14.1m was a reduction of GBP2.1m year-on-year (H1 2017:
GBP16.2m). This was mainly the result of overhead ('G&A')
increases committed in the first and second half of the prior
year.
The main causes of G&A increases from H1 2017(excluding the
impact of acquisitions) were as follows:
-- support salaries across both operating divisions and the
corporate centre increased GBP1.7m due to additional headcount
added in the first three quarters of the prior year and additional
bonus provisions in the current year. The headcount increases
included new capabilities such as in-house tax, treasury and
expanded legal skills to match our scale and complexity;
-- occupancy costs which include rent, rates and other office
related expenditure across the Group, increased by GBP1.4m
year-on-year, reflecting a significant expansion of the size and
fit out of a number of the Group's offices in various
territories;
-- an increase in professional fees of GBP0.6m as we work to
design and implement new processes and systems while also
remediating some historical shortcomings and weaknesses; and
-- an adverse GBP1.3m swing in the impact of transactional FX
(H1 2017 saw a gain of GBP0.1m, the current period a loss of
GBP1.2m).
The Group's profit after tax for the year includes GBP0.5m of
from discontinued operations (H1 2017: profit after tax GBP0.7m).
See Note 3 for more details.
Assurance Division - Business Performance Review
In Assurance, the four core geographies (UK, North America,
Netherlands and Denmark), delivered good double-digit organic
growth (on a constant currency basis). The Assurance result
includes reduced sales from the UK Managed Security Services
business ('MSS' - formerly known as Accumuli) of GBP7.9m of which
approximately GBP7.6m relates to a fall in sales of third party
products and services. This is a continuation of a reduction in the
relative small share of the Group's business that involved the
single transaction re-selling of third party products. This
reduction was flagged in the Preliminary Results for the year ended
31 May 2017 and those sales are now at a level where little or no
further contraction is expected. Furthermore, no material
allocation of Group resources is being made in this area to deliver
growth. References to 'retained' assurance exclude the impact of
changes in this third party re-sale offering.
The underlying performance of the Assurance business lines is
easier to understand using constant currency and also by splitting
performance between organic and acquisition based growth as shown
in the table below:
Assurance revenue bridge Growth Growth
GBPm %
Revenue for 6 months ended 30 November 2016 91.6
Impact of FX movements (0.1) n/a
Prior year acquisitions 4.2 n/a
--------------------------------------------- ------- --------
Net revenue growth from FX and acquisitions 4.1
--------------------------------------------- ------- --------
Net 'retained' organic growth 11.1 +14.3%
MSS - product sales (7.6) (62.0%)
--------------------------------------------- ------- --------
Net organic growth 3.5 +3.9%
--------------------------------------------- ------- --------
Total Assurance revenue growth 7.6 +8.3%
--------------------------------------------- ------- --------
Revenue for 6 months ended 30 November 2017 99.2
============================================= ======= ========
Assurance benefitted from the full year effect of the
acquisitions of PSC and VSR in the USA during the second half of
the prior year (GBP4.1m benefit in the Period). Changes in FX rates
had a minimal GBP0.1m adverse impact in the current period.
Net retained organic growth was GBP11.1m, which represented
year-on-year growth of 14.3%. Year-on-year organic growth in
consulting revenues in all four core territories was at healthy
double-digit levels. This was driven primarily by a combination of
market growth coupled with our ability to capture share due to our
scale. In addition, we have begun to see differential pricing
having an impact on areas of deep specialism such as our hardware
and automotive practices. The early signs are that our efforts to
expand our offering beyond transactional activity are starting to
bear fruit: our Risk Management and Governance service line which
focuses on Board or Strategic level cyber risk has shown good
growth and we are starting leverage this capability overseas.
In Fox we saw encouraging progress in all service lines. There
was a welcome start to the recovery of orders and revenue in the
High Assurance product line which had seen a slow-down throughout
the prior year. Managed services in Fox, an attractive and scalable
business line, also delivered 20.0% growth year-on-year. The CTMp
project to migrate existing MSS customers in the Netherlands to the
new platform and then to roll it out in the UK will complete in the
second half. The scalability of the CTMp platform will also support
margin recovery across the Group as a whole.
Somewhat disappointingly, core UK MSS which is an area of focus
for the business going forward, actually fell slightly year-on-year
(GBP0.3m or 5.5%). This was in part the result of the number and
scale of change initiatives impacting the MSS business unit,
particularly amongst the sales force, and work is already underway
to remedy this.
Assurance profitability analysis
Our GM% increased across the division by 2.7% points to 32.3%
(H1 2017 29.6%) and by an even more impressive 4.3% compared to the
28.0% seen in the second half of the prior year. This was the
result of improved utilisation rates, attractive GM% delivered by
the businesses acquired in the prior year and an improved mix with
the move away from reselling 3(rd) party products.
G&A costs were GBP1.0m greater than H1 2017 (excluding VSR /
PSC and FX), but are in line with H2 2017. Amortisation charges
increased in the period as a result of prior year spend on projects
and a greater number of projects are now 'live' and hence being
amortised. Finally, during the Period and following the outcome of
the Strategic Review, we reviewed our product portfolio and any
software assets linked to each product. In a small number of cases,
delays in commercialisation led to the decision to write off
GBP0.7m of assets in total across a range of projects.
The net result of these factors was that the absolute level of
adjusted operating profit grew year-on-year by GBP0.8m (8.9%) to
GBP9.8m. Adjusted EBIT margins increased slightly to 9.9% (H1 2017:
9.8%).
Escrow Division Business Performance Review
Revenue performance
The Escrow division accounts for 16.0% of continuing Group
revenues (2017: 17.0%). Escrow revenue for the year grew by GBP0.3m
(1.6%) to GBP19.0m (H1 2017: GBP18.7m). Excluding the impact of FX,
at constant currency rates underlying growth was GBP0.4m
(2.1%).
Escrow revenue analysis H1 2018 H1 2017 Change H2 2017 Change
GBPm GBPm % GBPm %
UK and RoW 13.3 12.8 3.9% 12.1 9.9%
USA 3.8 4.0 (5.0%) 4.4 (13.6%)
Europe 1.9 1.9 - 2.0 (5.0%)
------------------------ ------- ------- ------ ------- -------
Total Escrow revenue 19.0 18.7 +1.6% 18.5 2.7%
======================== ======= ======= ====== ======= =======
Escrow revenues and growth can be further analysed as
follows:
Escrow services revenue H1 2018 H1 2017 Change H2 2017 Change
GBPm GBPm % GBPm %
Escrow contracts 13.2 13.1 0.8% 13.2 -
Verification testing 5.2 5.0 4.0% 4.6 13.0%
Other services 0.6 0.6 - 0.7 (14.3%)
------------------------ ------- ------- ------ ------- -------
Total Escrow revenue 19.0 18.7 +1.6% 18.5 2.7%
======================== ======= ======= ====== ======= =======
The Escrow revenue comparison benefitted in the first quarter
from a one-off change in revenue recognition as noted at end of
last year. However, the same factor meant that the second quarter
was more challenging than the prior year and therefore the overall
impact in the first half was broadly neutral. The division also
started to reorganise the process to deliver verification testing
and this led to an increase in the volume of work actually
delivered in the current period that underpins the small overall
increase in revenue noted above.
Escrow UK recurring revenues increased to GBP9.6m (2017:
GBP9.5m) and the terminations rate at 11% remains at around the
same level as the prior year.
Revenues in US Escrow fell year-on-year to GBP3.8m (H1 2017:
GBP4.0m) with recurring revenues of GBP2.7m. Approximately GBP0.1m
of the total revenue fall related to the impact of changes in FX
rates. The US senior management team was changed at the back end of
the prior year and this undoubtedly had an impact on performance.
While the new team is now in place, it will take some time for them
to be fully effective in this market where we do still see
significant opportunity for growth.
Revenues in Escrow Europe were maintained at GBP1.9m (H1 2017:
GBP1.9m) with recurring revenues of GBP1.1m. While relatively small
in scale, the European business continues to give the division
useful footholds in various European geographies.
Escrow profitability analysis
The table below shows the split of Operating Profit by Escrow
region. For reporting purposes, RoW EBIT is included within the
UK.
Adjusted EBIT H1 2018 H1 2017 Change H2 2017 Change
GBPm GBPm % GBPm %
UK and RoW 9.2 8.6 7.0% 8.8 4.5%
USA 2.2 2.0 10.0% 1.7 29.4%
Europe 1.1 0.9 22.2% 1.0 10.0%
Allocated shared central
costs (2.5) (1.2) n/a (2.7) n/a
------------------------- ------- ------- ------ ------- ------
Escrow adjusted EBIT 10.0 10.3 (2.9%) 8.8 13.6%
========================= ======= ======= ====== ======= ======
In the first half of the prior year there was a marked increase
in headcount and salary costs which had largely been reversed by
the end of that financial year. The current year did not repeat
that cost increase and hence underlying profit margins improved as
a result, with adjusted operating profit (before shared cost
allocations) of GBP12.5m being up GBP1.0m on the prior year (H1
2017 GBP11.5m).
The significant increase in gross and net margins in the
division is a welcome return to a more normalised Escrow margin
basis. However, we still believe that there remains scope for
smaller incremental gains in the next few years, particularly in
the smaller US and European markets where we have an established
cost base that could support higher revenues, without a
proportionate increase in costs.
Central costs
The overall operating profit performance of both operating
divisions is impacted by the allocation of shared central costs. At
the prior year end the allocation methodology was updated to
reflect the current shape and size of the two divisions. The
methodology adopted in the Period is wholly consistent with that
approach. However, it had not been adopted in the first half of the
prior year and the results for that period have not been re-stated.
If they had been, the GBP1.0m increase in Escrow operating profit
before the allocation of shared central costs would likely have
been reflected in a slightly smaller increase in operating profit
after the allocation due to increases in shared overheads such as
the new Manchester HQ.
Discontinuing operations
Revenue in the three businesses classified as discontinuing fell
in the period from GBP15.5m to GBP12.0m. The largest contributing
factor to the fall in was the Domain Services business which was
exited in the prior year (GBP2.3m of revenue in the prior period,
Nil in the current year). Between them, Web Performance and
Software Testing saw a fall in combined revenue of GBP1.2m which
largely relates to a one-off non-recurring project in Software
Testing in the first half of the prior year which was cancelled in
the wake of the Brexit vote.
The net profit after tax associated with the three discontinuing
businesses fell in the period to GBP0.5m (H1 2017: GBP0.7m). This
was largely the result of lower capitalisation of development costs
(GBP0.6m) in Web Performance following the impairment of certain
assets at the prior year end.
Discontinued operations are set out in more detail in Note
3.
Individually significant items
Individually significant costs incurred during the Period and in
the prior year are set out in the table below:
H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Individually significant items
Impairment of goodwill - - (54.3)
Revisions to deferred and contingent
consideration (0.6) (2.6) (2.7)
Restructuring costs (1.1) - (1.3)
Acquisition / market related costs (0.2) (0.6) (0.8)
Property related costs (0.7) - (2.2)
Vacation pay catch up provision - - (1.7)
------------------------------------- ------- ------- -------
Total individually significant items (2.6) (3.2) (63.0)
===================================== ======= ======= =======
The change in value of deferred and contingent consideration (in
the current and prior period all relates to Fox-IT and reflects
changes in FX rates (it is denominated in Euro's). 90% of the
second tranche of deferred payment for Fox-IT (equating to
EUR11.25m / GBP9.9m at period end exchange rates) remains
outstanding as at 30 November 2017. The Group had been due to make
this final payment on 27 November 2017 but in light of ongoing
discussion with the Vendors of Fox-IT in respect of some matters
relating to the SPA, the Group withheld the payment due to the
primary shareholders. Further details are set out in Note 14.
Restructuring costs in the current year relate to the costs of
completing the Strategic Review and subsequent work to develop and
implement the new Target Operating Model as well as some redundancy
costs amongst the senior management team that are a direct result
of those reviews.
Acquisition and market related costs in the current year were in
respect of the shareholder circular issued to remedy invalid
dividend payments over the previous years which had arisen
following an administrative oversight. In the prior year the costs
of GBP0.6m consisted of fees incurred in relation to the
acquisitions of PSC and VSR in the USA.
Property related costs in the current year were in respect of
ongoing pre-occupancy double running costs of the Manchester HQ
that started in the prior year and are now largely complete.
The individually significant items recorded in the last
financial year ending 31 May 2017 are set out in detail in the
Annual Report and Accounts for that year.
The Group's reported post-tax profit was GBP3.8m (November 2016:
GBP5.5m) after including the unwinding of the discount on
contingent consideration, amortisation of acquired intangible
assets, share based payments and individually significant
items.
Taxation
The Group's adjusted effective tax rate for the period to 30
November 2017 was 27.6% (H1 2017: 23.7%). The effective rate is
higher than the UK basic rate due to profitability in overseas
territories with higher rates of tax, notably the US, where
relatively higher full year forecast profitability was expected as
of H1 2018 compared to H1 2017.
The tax charge and effective tax rate for the 6 months to 30
November 2017 is based on the application of tax rates enacted as
of 30 November 2017 to full year forecast profits. The Group is in
the process of evaluating the impact of the recent legislative
changes to the US tax code that were enacted on 22 December 2017,
including a reduction in the US federal tax rate effective 1
January 2018. At this stage we estimate that the impact on the
Group's effective tax rate for the year to 31 May 2018 will be
positive by approximately 3.0% or more. The impact on the overall
tax charge in the full year accounts will be limited due to the US
rate change becoming effective mid-year and a proportion of the
change will be attributable to the revaluation of relevant deferred
tax assets and liabilities.
Earnings per share
Adjusted fully diluted earnings per share from continuing
operations was 3.7p (H1 2017: 4.7p) while reported fully diluted
earnings per share was 1.3p (H1 2017: 2.0p). The calculation of
adjusted EPS is set out in Note 7.
Dividends
As noted in the Chairman's statement, the Board is recommending
an unchanged interim dividend of 1.5p per ordinary share (H1 2017:
1.5p).
Cash
The table below summarises the Group's cash flow for the
year.
H1 2018 H1 2017
GBPm GBPm
Cash flow before changes in working
capital 18.5 20.5
Changes in working capital (0.7) (7.1)
Interest paid (0.7) (0.9)
Income taxes paid (2.4) (0.3)
------------------------------------ ------- -------
Net cash from operating activities 14.7 12.2
Net capital expenditure (7.1) (5.7)
Capitalised development costs (1.4) (2.2)
------------------------------------ ------- -------
Free cash flow 6.2 4.3
Acquisitions (1.0) (29.9)
Disposals - 1.8
Dividends (8.7) (8.7)
Share issues 1.1 1.0
------------------------------------ ------- -------
Net cash flow before financing (2.4) (31.5)
Opening net debt (43.7) (12.7)
Foreign exchange impacts 1.7 (4.6)
------------------------------------ ------- -------
Closing net debt (44.4) (48.8)
==================================== ======= =======
The Group generated a net GBP14.7m of cash from operating
activities (H1 2017 - GBP12.2m). This is before deducting GBP1.4m
of internally capitalised development costs (H1 2017 -
GBP2.2m).
Working capital benefitted from improved collections and a
reduction in overdues in the period. despite the growth in revenue.
The sales working capital ratio (defined as accrued income plus
trade debtors divided by annualised trailing quarter sales)
improved from 26.2% to 21.4% as a result of the collections
benefits noted above as well as a GBP4.6m reduction in accrued
income - approximately half of which related to the sale of Open
Registry and half to improved billing processes.
The calculation of the cash conversion ratio is set out
below:
H1 2018 H1 2017 H2 2017
Net cash generated from operating
activities (A) 14.7 12.2 15.8
Adjusted EBITDA (B) 20.7 21.2 14.9
----------------------------------- -------- -------- --------
Cash conversion ratio (A) / (B) 71.0% 57.5% 106.0%
=================================== ======== ======== ========
The main driver for the improvement in the cash conversion ratio
has been early, relatively straight-forward gains, in debt
collection activity noted above. There remains much to be achieved
here.
Interest cash costs remained modest. The difference in cash tax
paid from H1 2017 to H1 2018 is a result of an overpayment on
account for UK corporation tax refunded in H1 2017, while H1 2018
cash tax paid is reflective of the underlying UK tax payment
profile.
Net capital expenditure was GBP7.1m (H1 2017: GBP5.7m), the
increase being predominantly due to the move to the Group's head
offices to the Manchester XYZ building which incurred GBP3.9m of
costs in the period and is now largely complete.
Financing facilities
The Group's facilities and covenants are summarised below:
-- Maximum facility GBP105.3m (GBP25.3m amortising term loan and
GBP80m revolving credit facility) - current net debt is
GBP44.4m
-- Liability for deferred consideration on Fox-IT acquisition is
included in net debt for covenant purposes - GBP54.3m
-- Leverage limit of 2.5 times Adjusted EBITDA - current leverage 1.5 times
-- Net Interest cover minimum 3.5 times - current ratio 24.1 times.
The Group remains comfortably within its banking facilities and
covenants.
Principal risks and uncertainties
The Group operates in a dynamic and evolving market place. As
new events occur or the business transitions into new activities or
phases of its development, the risk register is updated
accordingly.
For example, the number and scale of business improvement
projects, alongside implementation of the Strategic Review and the
TOM, create new risks. These include challenges to management
bandwidth as well as some organisational capabilities. These new
risks are being closely managed with the assistance of outside
contractors with experience of major change management
programs.
As explained in the full year results, the scale and complexity
of the Group increased and enhanced controls and processes need to
be put in place. In order to address this, the Board approved the
appointment of a Director of Risk and Assurance who joins the Group
in January 2018.and The Group Tax and Treasury Manager was a
similar such requirement and they joined the Group during the first
quarter of the current financial year.
A summary extract (from the Annual Report and Accounts for the
year ended 31 May 2017) of the principal risks and uncertainties
faced by the Group, their potential impact and mitigating processes
and controls are set out below. No significant changes have been
identified in the current period.
Risk Areas Potential Impact Mitigation
1. Strategy Poor strategy or ineffective Significant Board member
execution would have a material experience in evolving business
negative impact on the Group's strategies.
financial performance and Complemented with external
value. advisers.
------------------------------------ ----------------------------------
2. Management Could lead to ineffective The Board have extensive
of change projects that cost more experience of change management.
to complete and deliver Regular staff engagement.
fewer benefits.
------------------------------------ ----------------------------------
3. Information Could affect our ability Significant IT infrastructure
Technology to deliver revenue generating investment to ensure continuity.
services, result in the Controls to reduce and mitigate
loss of sensitive data and the impact of risks.
compromise the Group's reputation.
------------------------------------ ----------------------------------
4. Recruitment Could result in a lack of Rewarding career structures
& Retention necessary expertise to execute and attractive salary packages.
of key personnel. the Group's strategy. Succession plans being finalised
for key staff where not already
in place.
------------------------------------ ----------------------------------
5. Conduct and Damage to reputation, loss Group Quality systems and
reputational of repeat business and potential policies.
risk litigation. Oversight, risk management,
project reviews and customer
feedback.
Employee vetting processes.
------------------------------------ ----------------------------------
6. Cyber risk Disruption to the Group's Board Cyber Security Committee.
business and harm the Group's Regular internal security
reputation. testing
Extensive measures to identify
and dealing with security
incidents.
Dedicated Information Security
Management Forum.
------------------------------------ ----------------------------------
7. Acquisitions Poorly executed acquisitions Establishing a robust and
and disposals and disposals or those with scalable 'Target Operating
excessive purchase prices Model'.
can destroy shareholder Board review of acquisition
value. processes to identify areas
for improvement.
------------------------------------ ----------------------------------
8. Competition A major technology change Group employs industry experts.
or failure to could lead to a decline Group wide technology and
respond to market in an individual service technical forums share market
trends line's revenue stream. intelligence.
------------------------------------ ----------------------------------
9. Ethical and Could potentially damage Policies and operational
legal breaches NCC Group's reputation and controls..
commercial standing, could Continued investment in people,
lead to fines, litigation processes and training.
and claims for compensation.
------------------------------------ ----------------------------------
10. Failure Could potentially no longer Patents applied for where
to protect intellectual be able to offer a particular appropriate.
property service in some or all countries. Intellectual property is
only disclosed under a licence
agreement or confidentiality
agreement.
------------------------------------ ----------------------------------
11.Banking facilities Could call into doubt the The Group's current banking
Group's longer-term viability facilities cover all of its
or inhibit delivery of the medium term needs.
Group's strategy. Dedicated Tax and Treasury
Manager.
------------------------------------ ----------------------------------
The full detail of these risks, associated mitigating controls
and their potential impact is set out in full in the Annual Report
and Accounts for the year ended 31 May 2017.
On behalf of the Board
Chris Stone Brian Tenner
Chairman Chief Financial Officer
16 January 2018
INDEPENT REVIEW REPORT TO NCC Group PLC
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 November 2017 which comprises consolidated
income statement, consolidated statement of comprehensive income,
consolidated condensed statement of financial position,
consolidated condensed statement of cash flows, consolidated
condensed statement of changes in equity and the related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
November 2017 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted by
the EU and the Disclosure Guidance and Transparency Rules ("the
DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with IAS
34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
Stuart Burdass
for and on behalf of KPMG LLP
Chartered Accountants
1 St Peter's Square, Manchester, M2 3AE
16 January 2018
Consolidated Income Statement - for the six months ended 30
November 2017
Note H1 H1 2018 H1 2018 H1 H1 2017 H1 2017 FY 2017 FY 2017 FY 2017
2018 2017
Total Adjustments Continuing Total Adjustments Continuing Total Adjustments Continuing
Adjusted Adjusted Adjusted
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 2 118.2 - 118.2 110.3 - 110.3 217.8 - 217.8
Cost of Sales (71.6) - (71.6) (69.7) - (69.7) (139.1) - (139.1)
Gross profit 46.6 - 46.6 40.6 - 40.6 78.7 - 78.7
Administration
expenses (40.0) 7.5 (32.5) (33.2) 8.8 (24.4) (125.9) 72.6 (53.3)
--------------- ---- ------ ----------- ---------- ------ ----------- ---------- ------- ----------- ----------
Analysed as:
General & admin
costs (32.5) - (32.5) (24.4) - (24.4) (53.3) - (53.3)
Profit on sale
of
subsidiaries - - - - - - 1.2 (1.2) -
Amortisation
acq'd
intangibles 9 (4.9) 4.9 - (5.1) 5.1 - (10.3) 10.3 -
Individually
significant
items 5 (2.6) 2.6 - (3.2) 3.2 - (63.0) 63.0 -
Share based
payments - - - (0.5) 0.5 - (0.5) 0.5 -
--------------- ---- ------ ----------- ---------- ------ ----------- ---------- ------- ----------- ----------
Operating
profit 2 6.6 7.5 14.1 7.4 8.8 16.2 (47.2) 72.6 25.4
Net Interest
expense (0.7) - (0.7) (0.6) - (0.6) (1.4) - (1.4)
Unwinding
acquisition
discount (0.2) 0.2 - (0.3) 0.3 - (0.5) 0.5 -
Net financing
costs (0.9) 0.2 (0.7) (0.9) 0.3 (0.6) (1.9) 0.5 (1.4)
--------------- ---- ------ ----------- ---------- ------ ----------- ---------- ------- ----------- ----------
Profit before
taxation 5.7 7.7 13.4 6.5 9.1 15.6 (49.1) 73.1 24.0
Taxation 6 (2.4) (1.3) (3.7) (1.7) (2.0) (3.7) (1.4) (4.8) (6.2)
--------------- ---- ------ ----------- ---------- ------ ----------- ---------- ------- ----------- ----------
Profit from
continuing
operations 3.3 6.4 9.7 4.8 7.1 11.9 (50.5) 68.3 17.8
Profit from
discontinued
operation, net
of
tax 3 0.5 (0.5) - 0.7 (0.7) - (6.1) 6.1 -
--------------- ---- ------ ----------- ---------- ------ ----------- ---------- ------- ----------- ----------
Profit for the
period 3.8 5.9 9.7 5.5 6.4 11.9 (56.6) 74.4 17.8
Attributable to
equity
holders of the
parent
company 3.8 5.9 9.7 5.5 6.4 11.9 (56.6) 74.4 17.8
Continuing
operations
EPS 7
Basic EPS 1.4p - - 2.0p - - (20.4)p - -
Consolidated Statement of comprehensive income
for the six months ended 30 November 2017
H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
-------------------------------------------- ------- ------- -------
Profit / (Loss) for the period 3.8 5.5 (56.6)
-------------------------------------------- ------- ------- -------
Items that may be reclassified subsequently
to profit or loss (net of tax)
Foreign exchange translation differences (0.1) 17.4 17.9
-------------------------------------------- ------- ------- -------
Total comprehensive income / (loss)
for the period, net of tax 3.7 22.9 (38.7)
-------------------------------------------- ------- ------- -------
Attributable to:
-------------------------------------------- ------- ------- -------
Equity holders of the parent 3.7 22.9 (38.7)
-------------------------------------------- ------- ------- -------
Consolidated condensed statement of financial position
at 30 November 2017
Notes H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Non-current assets
Intangible assets 9 247.8 334.7 267.6
Plant and equipment 10 20.3 14.6 18.3
Investments 0.4 0.3 0.4
Deferred tax assets 4.1 1.7 4.2
--------------------------------- ----- -------------- -------------- --------------
Total non-current assets 272.6 351.3 290.5
--------------------------------- ----- -------------- -------------- --------------
Current assets
Trade and other receivables 63.0 77.3 66.7
Inventories 0.7 0.5 1.1
Cash and cash equivalents 13.4 22.1 12.3
Assets held for sale 17.8 - -
--------------------------------- ----- -------------- -------------- --------------
Total current assets 94.9 99.9 80.1
--------------------------------- ----- -------------- -------------- --------------
Total assets 367.5 451.2 370.6
--------------------------------- ----- -------------- -------------- --------------
Current Liabilities
Trade and other payables 28.2 31.9 29.7
Provisions 0.8 0.3 1.5
Consideration on acquisitions 13 12.0 10.4 12.9
Deferred revenue 29.5 35.0 35.6
Interest bearing loans 11 5.0 5.0 5.0
Current tax payable 3.6 1.8 3.0
Liabilities held for sale 7.2 - -
--------------------------------- ----- -------------- -------------- --------------
Total current liabilities 86.3 84.4 87.7
--------------------------------- ----- -------------- -------------- --------------
Non-current liabilities
Deferred tax liability 13.2 15.1 14.2
Provisions 5.4 4.0 3.5
Consideration on acquisitions 13 1.9 4.2 2.1
Interest bearing loans 52.8 65.9 51.0
--------------------------------- ----- -------------- -------------- --------------
Total non-current liabilities 73.3 89.2 70.8
--------------------------------- ----- -------------- -------------- --------------
Net Assets 207.9 277.6 212.1
================================= ===== ============== ============== ==============
Equity
Issued capital 2.8 2.8 2.8
Share premium 148.9 149.0 148.0
Merger reserve 42.3 42.3 42.3
Retained earnings (12.1) 57.9 (7.1)
Currency translation reserve 26.0 25.6 26.1
--------------------------------- ----- -------------- -------------- --------------
Total equity attributable
to equity holders of the parent 207.9 277.6 212.1
================================= ===== ============== ============== ==============
These financial statements were approved by the Board of
Directors on 16 January 2018 and were signed on its behalf by:
Chris Stone Brian Tenner
Chairman Chief Financial Officer
Consolidated condensed statement of cash flows
for the six months ended 30 November 2018
H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Profit/(loss) for the year 3.8 5.5 (56.6)
Adjustments for:
Depreciation 3.2 2.5 5.2
Depreciation - individually significant
item - - 0.9
Share based charges (0.1) 0.5 0.6
Amortisation of intangible assets 8.0 6.6 13.8
Net financing costs 0.9 0.9 1.9
Profit on sale of plant and equipment - - (0.1)
Exchange rate loss 0.2 2.6 -
Impairment of intangible assets - - 7.7
Impairment of goodwill - - 54.3
Individually significant items - - 6.0
Profit on disposal of subsidiaries - - (1.2)
Income tax expense 2.5 1.9 1.3
Cash inflow for the year before changes
in working capital 18.5 20.5 33.8
Increase in trade and other receivables (1.1) (7.1) (2.3)
Decrease in trade and other payables 0.4 - 0.2
--------------------------------------------- ------- ------- -------
Cash generated from operating activities
before interest and tax 17.8 13.4 31.7
Interest paid (0.7) (0.9) (1.9)
Income taxes paid (2.4) (0.3) (1.8)
--------------------------------------------- ------- ------- -------
Net cash generated from operating activities 14.7 12.2 28.0
Cash flows from investing activities
Purchase of plant and equipment (6.0) (4.0) (11.0)
Capital contribution for property, plant
and equipment - - 3.7
Proceeds from disposal of property - 0.4 0.4
Capitalised development costs (1.4) (2.2) (3.7)
Software expenditure (1.1) (2.1) (3.7)
Acquisition of businesses (1.0) (29.9) (28.4)
Cash acquired with subsidiaries - 1.8 1.9
Cash disposed of from sale of subsidiaries - - (1.7)
Proceeds from sale of subsidiaries - - 1.7
--------------------------------------------- ------- ------- -------
Net cash used in investing activities (9.5) (36.0) (40.8)
Cash flows from financing activities
Sale of own shares - 0.3 -
Proceeds from the issue of ordinary share
capital 1.1 0.7 0.7
Draw down / (repayment) of borrowings 3.9 37.5 18.9
Equity dividends paid (8.7) (8.7) (12.8)
--------------------------------------------- ------- ------- -------
Net cash (used) / generated in financing
activities (3.7) 29.8 6.8
--------------------------------------------- ------- ------- -------
Net increase / (decrease) in cash and
cash equivalents 1.5 6.0 (6.0)
--------------------------------------------- ------- ------- -------
Cash and cash equivalents at beginning
of period 12.3 20.7 20.7
Effect of foreign currency exchange rate
changes (0.4) (4.6) (2.4)
Cash and cash equivalents at end of period 13.4 22.1 12.3
============================================= ======= ======= =======
Reconciliation of net change in cash and cash equivalents to movement
in net debt
H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Increase/(decrease) in cash and cash equivalents 1.5 6.0 (6.0)
Change in net debt resulting from cashflows (3.9) (37.5) (18.9)
Foreign currency translation differences on
cash and cash equivalents (0.4) (4.6) (2.4)
Foreign currency translation differences on
borrowings 2.1 - (3.7)
------------------------------------------------- ------- ------- -------
Change in net debt during the year (0.7) (36.1) (31.0)
------------------------------------------------- ------- ------- -------
Net debt at start of period (43.7) (12.7) (12.7)
------------------------------------------------- ------- ------- -------
Net debt at end of period (44.4) (48.8) (43.7)
================================================= ======= ======= =======
Net debt comprises H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Cash and cash equivalents 13.4 22.1 12.3
Total borrowings (Note 11) (57.8) (70.9) (56.0)
------------------------------------------------- ------- ------- -------
Net debt (44.4) (48.8) (43.7)
================================================= ======= ======= =======
Consolidated condensed statement of changes of equity
for the six months ended 30 November 2017
Share Share Merger Currency Reserve Retained Total
Capital Premium Reserve Translation for own Earnings
Reserve shares
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 June 2016 2.8 147.3 42.3 8.2 (0.2) 62.5 262.9
Profit for the year - - - - - 5.5 5.5
Foreign currency translation
differences - - - 17.4 - - 17.4
----------------------------- -------- -------- -------- ------------ -------- --------- ------
Total comprehensive
income
for the year - - - 17.4 - 5.5 22.9
----------------------------- -------- -------- -------- ------------ -------- --------- ------
Transactions with owners
recorded directly in
equity
Dividends to equity
shareholders - - - - - (8.7) (8.7)
Share based payment
transactions - - - - - (1.2) (1.2)
Current and deferred
tax on share based payments - - - - - (0.2) (0.2)
Shares issued - 1.7 - - - - 1.7
Purchase of own shares - - - - 0.2 - 0.2
----------------------------- -------- -------- -------- ------------ -------- --------- ------
Total contributions
by and distributions
to owners - 1.7 - - 0.2 (10.1) (8.2)
----------------------------- -------- -------- -------- ------------ -------- --------- ------
Balance at 30 November
2016 2.8 149.0 42.3 25.6 - 57.9 277.6
============================= ======== ======== ======== ============ ======== ========= ======
Share Share Merger Currency Reserve Retained Total
Capital Premium Reserve Translation for own Earnings
Reserve shares
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 June 2016 2.8 147.3 42.3 8.2 (0.2) 62.5 262.9
Profit for the year - - - - - (56.6) (56.6)
Foreign currency translation
differences - - - 17.9 - - 17.9
-------- -------- -------- ------------ -------- --------- ------
Total comprehensive
income for the year - - - 17.9 - (56.6) (38.7)
-------- -------- -------- ------------ -------- --------- ------
Transactions with owners
recorded directly in
equity
Dividends to equity
shareholders - - - - - (12.8) (12.8)
Share based payment
transactions - - - - - 0.2 0.2
Current and deferred
tax on share based payments - - - - - (0.4) (0.4)
Shares issued - 0.7 - - - - 0.7
Purchase of own shares - - - - 0.2 - 0.2
----------------------------- -------- -------- -------- ------------ -------- --------- ------
Total contributions
by and distributions
to owners - 0.7 - - 0.2 (13.0) (12.1)
----------------------------- -------- -------- -------- ------------ -------- --------- ------
Balance at 31 May 2017 2.8 148.0 42.3 26.1 - (7.1) 212.1
============================= ======== ======== ======== ============ ======== ========= ======
Share Share Merger Currency Reserve Retained Total
Capital Premium Reserve Translation for own Earnings
Reserve shares
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 June 2017 2.8 148.0 42.3 26.1 - (7.1) 212.1
Profit for the year - - - - - 3.8 3.8
Foreign currency translation
differences - - - (0.1) - - (0.1)
-------- -------- -------- ------------ -------- --------- -------
Total comprehensive
income for the year - - - (0.1) - 3.8 3.7
-------- -------- -------- ------------ -------- --------- -------
Transactions with owners
recorded directly in
equity
Dividends to equity
shareholders - - - - - (8.7) (8.7)
Share based payment
transactions - - - - - (0.1) (0.1)
Current and deferred - -
tax on share based payments
Shares issued - 0.9 - - - - 0.9
Purchase of own shares - - - - - - -
----------------------------- -------- -------- -------- ------------ -------- --------- -------
Total contributions
by and distributions
to owners - 0.9 - - - (8.8) (7.9)
----------------------------- -------- -------- -------- ------------ -------- --------- -------
Balance at 30 November
2017 2.8 148.9 42.3 26.0 - (12.1) 207.9
============================= ======== ======== ======== ============ ======== ========= =======
Notes
1. Accounting policies Basis of preparation
The Group condensed half-year financial statements for the six
months ended 30 November 2017 have been prepared in accordance with
IAS 34, "Interim Financial Reporting" as adopted by the EU.
As required by the Disclosure Guidance and Transparency Rules of
the Financial Services Authority the financial information
contained in this report has been prepared using the accounting
policies and presentation that were applied in the company's
published consolidated financial statements for the year ended 31
May 2017. They do not contain all the information required for full
annual financial statements and should be read in conjunction with
the annual financial statements for the year ended 31 May 2017.
The financial statements of the Group for the year ended 31 May
2017 are available from the Company's registered office, or from
the website www.nccgroup.trust.
The comparative figures for the financial year ended 31 May 2017
are not the Company's statutory accounts for that financial year.
Those accounts, which were prepared under IFRS as adopted by the EU
("adopted IFRS"), have been reported on by the company's auditors
and delivered to the registrar of Companies. The report of the
auditors was (i) unqualified, (ii) did not include a reference to
any matters to which the auditors drew attention by way of emphasis
without qualifying their report, and (iii) did not contain a
statement under section 498(2) or (3) of the Companies Act
2006.
NCC Group plc ("the Company") is a company incorporated in the
UK.
Significant accounting policies
There are no IFRS or IFRIC interpretations effective for the
first time in this financial period which are relevant that have
had a material impact on the Group.
Going concern
The Group's activities, together with the factors likely to
affect its future development, performance and position are set out
in the financial and operational reviews.
The directors have reviewed the trading and cash flow forecasts
as part of their going concern assessment, together with the
available facilities at 30 November 2017, (see note 11), including
reasonable downside sensitivities which take into account the
uncertainties in the current operating environment.
Taking into account the above uncertainties and circumstances,
the directors formed a judgement that there is a reasonable
expectation that the group has adequate resources to continue in
operational existence for the foreseeable future. Accordingly they
continue to adopt the going concern basis in preparing the group's
condensed half-year financial statements for the period ended 30
November 2017. The principal risks and uncertainties facing the
Group are set out on pages 14 to 15.
Use of estimates and judgements
The preparation of the consolidated half-year financial
statements in conformity with IFRSs requires management to make
judgements, estimates and assumptions that affect the application
of accounting policies and the reported amounts of assets,
liabilities, income and expenses. Actual results may differ from
these estimates.
In preparing the consolidated half-year financial statements,
the significant judgements made by management in applying the
Group's accounting policies and key sources of estimated
uncertainty were the same as those applied to the consolidated
financial statements for year ended 31 May 2017.
Held for Sale
For each reporting period, the Group identifies any assets and
liabilities that meet the definition of held for sale, these
being:
-- management is committed to a plan to sell;
-- the asset is available for immediate sale;
-- an active programme to locate a buyer has been initiated;
-- the sale is highly probable, within 12 months of classification as held for sale;
-- asset is being actively marketed for sale at a sales price
reasonable in relation to its fair value; and
-- actions required to complete the plan indicate that it is
unlikely that plan will be significantly changed or withdrawn
Where such assets and liabilities are identified, these are
presented separately and held at the lower of carrying amount and
fair value less costs to sell. Details of net assets held for sale
are disclosed in note 4.
2. Segmental information
The Group is organised into two operating segments Escrow and
Assurance (30 November 2016: three - Escrow, Assurance and Domain
Services) each of which is separately reported.
Whilst revenue and profitability are monitored by individual
business units within these operational segments it is only at the
operating level that resource allocation decisions are made.
Performance is measured based on segment profit, which comprises
segment operating profit excluding amortisation of acquired
intangible assets, share based payment charges and individually
significant items. Interest and tax are not allocated to business
segments and there are no intra-segment sales.
The Group's half-yearly revenue profile has fluctuated over the
last few years with differing proportions of revenue arising in the
first or second half from year to year.
H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Analysis of revenue
Escrow UK 13.3 12.8 24.9
Escrow Europe 1.9 1.9 3.9
Escrow USA 3.8 4.0 8.4
Total Escrow 19.0 18.7 37.2
Security Consulting 99.2 91.6 180.6
Total Assurance 99.2 91.6 180.6
-------------------------------------- ------- ------- -------
Revenue from continuing operations 118.2 110.3 217.8
====================================== ======= ======= =======
Revenue from discontinuing operations 12.0 15.5 26.7
====================================== ======= ======= =======
Total Revenue 130.2 125.8 244.5
====================================== ======= ======= =======
During the Strategic Review it was identified that the Software
Testing business (as well as Web performance) was distinct from the
Group's other cyber security businesses in the Assurance division
and the decision was taken to sell that business. However, it was
also identified that one service line within Software Testing was
closely aligned to the Group's retained Risk Management and
Governance (RM&G) service line which forms part of Security
Consulting, than Software Testing. That part of Software Testing
was therefore transferred to Security Consulting at the start of
the current financial year. As a result, GBP1.1m of revenue has
been reclassified in H1 2017 from Software Testing to Security
Consulting.
H1 2018 H1 2017 FY 2017
CONTINUING OPERATIONS GBPm GBPm GBPm
Analysis of EBITDA by division
Escrow 10.4 10.6 19.3
Assurance 13.5 11.6 18.2
Head office costs (4.0) (2.4) (4.3)
--------------------------------------------- ------- ------- -------
Adjusted EBITDA of continuing operations 19.9 19.8 33.2
============================================= ======= ======= =======
Analysis of Depreciation & Amortisation
Escrow (0.5) (0.3) (0.2)
Assurance (3.6) (2.5) (3.7)
Head office costs (1.7) (0.8) (3.9)
--------------------------------------------- ------- ------- -------
Depreciation & Amortisation of continuing
operations (5.8) (3.6) (7.8)
--------------------------------------------- ------- ------- -------
Adjusted operating profit 14.1 16.2 25.4
--------------------------------------------- ------- ------- -------
Amortisation of acquired intangible
assets
- Escrow (0.3) (0.4) (0.8)
- Assurance (4.6) (4.4) (9.1)
- Domain Services - (0.3) (0.4)
Share based payments - (0.5) (0.5)
Profit on disposal of subsidiary - - 1.2
--------------------------------------------- ------- ------- -------
Operating profit before individually
significant items 9.2 10.6 15.8
Individually significant items (2.6) (3.2) (63.0)
--------------------------------------------- ------- ------- -------
Operating profit 6.6 7.4 (47.2)
--------------------------------------------- ------- ------- -------
Net financing costs (0.9) (0.9) (1.9)
--------------------------------------------- ------- ------- -------
Profit before tax continuing operations 5.7 6.5 (49.1)
DISCONTINUING OPERATIONS
Adjusted EBITDA of discontinuing
operations 0.9 1.4 2.9
============================================= ======= ======= =======
Depreciation & Amortisation of discontinuing
operations (0.4) (0.5) (1.0)
============================================= ======= ======= =======
Operating profit before amortisation,
share based payments and exceptional
items (discontinuing) 0.5 0.9 1.9
--------------------------------------------- ------- ------- -------
Individually significant items - - (8.0)
Share based payments 0.1 - (0.1)
--------------------------------------------- ------- ------- -------
Profit before tax discontinuing operations 0.6 0.9 (6.2)
============================================= ======= ======= =======
*Note: in the previous year, the Domain Services result was
included within individually significant items and therefore
excluded from this analysis. This year it has been included as
discontinuing operations.
The table below provides an analysis of the Group's revenue by
geographical market where the customer is based.
H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Revenue by geographical destination
UK 51.7 59.1 104.4
Rest of Europe 25.6 20.0 44.6
Rest of the World 40.9 31.2 68.8
------------------------------------ ------- ------- -------
Revenue from continuing operations 118.2 110.3 217.8
==================================== ======= ======= =======
UK 11.6 12.9 23.3
Rest of Europe 0.2 2.4 3.0
Rest of the World 0.2 0.2 0.4
------------------------------------ ------- ------- -------
Revenue from discontinuing
operations 12.0 15.5 26.7
==================================== ======= ======= =======
Total Revenue 130.2 125.8 244.5
==================================== ======= ======= =======
As a result of a new reporting system implemented in the first
half of the current year, we now have a more accurate analysis of
the geographical source of revenue. As a result, GBP8.8m of revenue
previously identified as Rest of the World and GBP1.6m for the Rest
of Europe, has been re-allocated to the UK.
3. Discontinued operations
In January 2017, the Group sold Open Registry, part of the
Domain Services division. In July 2017, the Group also announced
its intention to sell Web Performance and Software Testing, both
part of the Assurance division. These segments were not previously
classified as a discontinued operation. The comparative
consolidated statement of profit or loss and OCI has been
re-presented to show the discontinued operation separately from
continuing operations.
Results of Discontinued operations H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Revenue 12.0 15.5 26.7
Cost of sales (9.6) (12.1) (20.9)
----------------------------------- ------- ------- -------
Gross profit 2.4 3.4 5.8
General & administrative expenses (1.9) (2.5) (3.9)
Individually significant items - - (8.0)
Share based payments 0.1 - (0.1)
----------------------------------- ------- ------- -------
Operating profit 0.6 0.9 (6.2)
Income tax (0.1) (0.2) 0.1
----------------------------------- ------- ------- -------
Results from operating activities,
net of tax 0.5 0.7 (6.1)
=================================== ======= ======= =======
4. Held For Sale
The table below provides analysis of the net assets and
liabilities of the businesses held for sale:
Financial position of discontinued operations H1 2018
GBPm
Goodwill 8.1
Other intangibles 4.8
Plant and equipment 0.2
Trade and other receivables 4.5
Deferred tax asset / (liability) (0.4)
Trade and other payables (3.9)
Deferred Revenue (2.7)
Current tax receivable / (payable) -
Net assets and liabilities 10.6
============================================== =======
5. Individually significant items
The Group separately identifies those items which in
management's judgement, need to be disclosed by virtue of their
nature, size or incidence in order for the user to obtain a proper
understanding of the underlying performance of the business.
H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Individually significant items
Goodwill impairment - - (54.3)
Vacation pay catch up provision - - (1.7)
Acquisition / market related related
costs (0.2) (0.6) (0.8)
Adjustments to deferred and contingent
consideration (0.6) (2.6) (2.7)
Property relocation costs (0.7) - (2.2)
Restructuring costs (1.1) - (1.3)
--------------------------------------- ----- ------- -------
Total (2.6) (3.2) (63.0)
======================================= ===== ======= =======
Current period
Market related costs in the period were in respect of the
shareholder circular and exercise to remediate a number of invalid
dividends. This exercise completed successfully at the September
EGM.
Adjustments to deferred and contingent consideration was in
respect of FX movements as no adjustments to expected payments were
made in the period. Property relocation costs were a continuation
of double running costs that started in the prior year and are now
complete.
Restructuring costs include a number of items related to the
Strategic Review itself and some subsequent implementation steps:
completion of the Strategic Review itself; designing the new Target
Operating Model (TOM); Implementing the associated change program;
and senior management re-organisation costs resulting from the TOM.
Individually significant items are expected to be lower in the
second half given that a number of items are now complete.
Prior period
Acquisition related costs in the period of GBP0.6m consisted of
fees in relation to the acquisitions of Payment Software Company
Inc on 28 September 2016 and Virtual Security Research LLC on 11
November 2016 (note 13). The adjustments to deferred and contingent
consideration of GBP2.6m relate to foreign exchange revaluation
differences.
Full year to 31 May 2017
A full analysis of individually significant items incurred in
the year ending 31 May 2017 is set out in the Annual Report and
Accounts.
6. Taxation
The Group tax charge is based on the estimated annual effective
rate and for the half year is calculated at 27.6% (attributable to
adjusted profits and continuing operations); 30 November 2016:
23.7%) and applied to the profit before tax for the period. The
decrease in the estimated effective tax rate on adjustments to
profit (GBP1.3m (16.9%); H1 2018 GBP2.0m (22.0%)) is a result of a)
the impact of acquisition-related costs for the US business in H1
2018, where a higher tax rate applied and similar costs are not
expected to arise in FY 2018, and b) other non-deductible costs in
the UK that do not have an impact on the adjustments in H2
2018.
7. Earnings per share
The calculation of continuing earnings per share is based on the
following:
Profit used in the EPS calculation H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Profit after tax for the period used
for earnings per share 3.8 5.5 (56.6)
Amortisation of acquired intangible assets 4.9 5.1 10.3
Individually significant items (Note
5) 2.6 3.2 63.0
Unwinding of discount 0.2 0.3 0.5
Share based payments - 0.5 0.5
Profit on sale of subsidiary - - (1.2)
Tax arising on the above items (1.3) (2.0) (4.8)
------------------------------------------- ------- ------- -------
Adjusted profit used for adjusted earnings
per share 10.2 12.6 11.7
Results of discontinuing operations (0.5) (0.7) 6.1
------------------------------------------- ------- ------- -------
Adjusted profit used for adjusted earnings
per share for continuing operations 9.7 11.9 17.8
=========================================== ======= ======= =======
Number of shares used in the EPS calculation Number of Number of Number of
shares m shares m shares m
Basic weighted average number of shares
in issue 277.2 276.1 276.3
Dilutive effect of share options 2.8 2.5 2.3
--------------------------------------------- --------- --------- ---------
Diluted weighted average shares in
issue 280.0 278.6 278.6
============================================= ========= ========= =========
Earnings per share (EPS) H1 2018 H1 2017 FY 2017
pence pence pence
Basic EPS from continuing operations 1.2 1.7 (18.3)
Basic EPS 1.4 2.0 (20.4)
Adjusted Basic EPS 3.7 4.7 4.2
Diluted Basic 1.3 2.0 (20.3)
Diluted Adjusted EPS 3.7 4.5 4.2
------------------------------------- ------- ------- -------
8. Dividends
H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Dividends paid and recognised in the period 8.7 8.7 12.8
Dividends proposed but not recognised
in the period 4.1 4.1 8.7
Dividends per share paid and recognised
in the period 3.15p 3.15p 4.65p
Dividends per share proposed but not recognised
in the period 1.50p 1.50p 3.15p
9. Intangible assets
Additions to internally developed intangible assets during the
Period amounted to GBP2.1m (H1 2017 GBP4.4m, FY 2017 GBP7.4m). The
associated amortisation charge for the period was GBP2.8m (H1 2017
GBP1.6m, FY 2017 GBP3.5m) for the Group's continuing
operations.
Additions and amortisation in respect of discontinued operations
were GBP0.4m and GBP0.3m respectively.
Additions to acquired customer contracts and relationships and
goodwill during the Period amounted to GBPnil (H1 2017 GBP18.7m, FY
2017 GBP19.8m). The associated amortisation charge for the period
was GBP4.9m (H1 2017 GBP5.1m, FY 2017 GBP10.3m) for the Group's
continuing operations.
Additions and amortisation in respect of discontinued operations
were GBPnil and GBPnil respectively.
10. Plant and equipment
Additions to plant and equipment during the Period amounted to
GBP6.0m (H1 2017: GBP4.0m, FY 2017: GBP11.0m) and the depreciation
charged in the period amounted to GBP3.1m for the Group's
continuing operations. Additions and depreciation in respect of
discontinued operations were GBPnil and GBP0.1m respectively.
11. Interest bearing loans
H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
------------------ ------- ------- -------
Secured bank loan 57.8 70.9 56.0
================== ======= ======= =======
Analysed as:
Current 5.0 5.0 5.0
Non-current 52.8 65.9 51.0
------------------ ------- ------- -------
Total 57.8 70.9 56.0
================== ======= ======= =======
As of 30 November 2017, the Group has a multi-currency revolving
credit facility of GBP80m (H1 2017: GBP80m, FY 2017: GBP80m) and a
GBP25.3m multi-currency term loan (H1 2017: GBP27.5m, FY 2017:
GBP29.1m). The effective interest payable on drawn down funds as at
30 November 2017 was 1.1% above LIBOR (H1 2017: 0.9%, FY 2017:
1.1%).
12. Acquisitions
In the prior year, the group acquired Payment Software Company
Inc and Virtual Security Network Research LLC. Details of the
acquisitions are included in the Annual Report and Accounts for the
year ended 31 May 2017. No acquisitions have been made in the
current financial period.
13. Deferred and contingent consideration
H1 2018 H1 2017 FY 2017
GBPm GBPm GBPm
Deferred consideration - Fox-IT 9.9 10.4 10.8
Contingent consideration - PSC 2.7 2.9 2.9
Contingent consideration - VSR 1.3 1.3 1.3
------------------------------------ ----------- ----------- -----------
Total 13.9 14.6 15.0
==================================== =========== =========== ===========
Refer to Note 14 Post Balance Sheet Events for an update on the
deferred consideration for Fox-IT.
14. Post balance sheet events
On 27 November 2017, the Group was due to pay the second and
final tranche of deferred consideration in respect of the
acquisition of Fox-IT in November 2015, being EUR12.5m (GBP11.0m at
period end exchange rates). The Group decided to withhold 90% of
the payment due while it was in discussion with the former
principal shareholders of Fox-IT with regards to certain matters
under the sale and purchase agreement entered into to effect that
acquisition ("SPA").
In accordance with the terms of the SPA, the other 10% of the
payment was paid in full to a trust previously established for the
benefit of employees. The trust was not a party to the matters
under discussion and hence there was no reason to withhold that
portion of the payment.
Subsequent to the period end, the former principal shareholders
issued a formal claim on 22 December 2017 for payment and the
matter is now subject to the dispute resolution procedures
specified in the SPA which will involve an arbitration process. At
this early stage, it is not possible to say when or if any of the
withheld sum will become due for payment. The withheld 90% noted
above (EUR11.25m / GBP9.9m), remains provided for in the Group's
accounts. Any costs associated with the dispute resolution process
and, if applicable, interest due on any final payment at non-penal
rates of interest, will be charged to the profit and loss account
as incurred but are not currently likely to be material.
Responsibility statement of the Directors in respect of the half
year report
We confirm that to the best of our knowledge:
- The condensed set of consolidated financial statements has
been prepared in accordance with IAS 34, "Interim Financial
Reporting" as adopted by the EU;
- The half-year management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency
Rules, being an indication of the important events that have
occurred during the first six months of the financial year and
their impact on the condensed set of financial statements and a
description of the principal risks and uncertainties for the
remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency
Rules, being related party transactions that have taken place in
the first six months of the current financial year and that have
materially affected the financial position or performance of the
entity during that period and any changes in the related party
transactions described in the last annual report that could do
so.
Chris Stone Brian Tenner
Chairman Chief Financial Officer
On behalf of the Board 16 January 2018
This information is provided by RNS
The company news service from the London Stock Exchange
END
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