Final Results

Final Results

Next Fifteen Communications Plc

NEXT FIFTEEN COMMUNICATIONS GROUP PLC

FINAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 31 JULY 2012

Next Fifteen Communications Group plc (‘Next 15’ or ‘the Group’), the worldwide digital communications group, today announces its final audited results for the year ended 31 July 2012.

Financial highlights:

• Revenues increased by 6% to £91.6m (2011: £86.0m)
• Adjusted profit before tax increased by 14% to £9.6m (2011: £8.4m) (see note 3)
• Profit before tax decreased by 21% to £6.0m (2011: £7.5m) after the impact of fraudulent activity (see Chairman’s statement)
• Diluted adjusted earnings per share increased by 15% to 10.07p (2011: 8.74p) (see note 8)
• Basic earnings per share decreased by 25% to 6.85p (2011: 9.10p) (see note 8)
• Final dividend of 1.735p per share (2011: 1.535p), raising the total dividend by 12% to 2.30p (2011: 2.05p)
• Adjusted EBITDA¹ increased to £11.2m from £10.7m in the comparative period

Operational highlights:

• Adjusted pre-tax profit margin increased to 10.5% from 9.8% last year
• Net debt increased by just £1.0m year on year to £2.6m, despite spending of £5.7m on acquisition related payments²
• Acquired 80% of the issued share capital of two German-based businesses, Trademark PR and Trademark Consulting, to be integrated within the Bite Communications group
• Acquired the remaining 20% of CMG Worldwide Limited (trading as Bourne) that the Group did not already own
• Acquired a 71.8% shareholding in Paratus Communications Limited, a small UK-based corporate and consumer agency integrated within Lexis
• Acquisition of Content & Motion in August 2012, providing Beyond with a talented social media team creating programmes that drive engagement through blogger and media outreach and clients' owned social media presences

Commenting on the results, Chairman of Next 15, Richard Eyre, said:

Next 15, a worldwide digital communications group, is pleased to report that it has continued to trade well with strong operational performances from almost every part of the Group. This success has been underpinned by the Group's early transition from traditional PR to digital and social marketing services. As I reported last year, this strategy is giving the Group access to new revenue streams and helping drive growth in many global markets. The transition is being driven both through organic expansion and targeted acquisitions. While the global economy continues to struggle, Next 15 continues to deliver revenue and earnings growth with a strong balance sheet.”

¹Operating profit before depreciation amortisation and the impact of fraudulent activity.

²Net debt excludes contingent consideration and share purchase obligations. See note 9 to the final results announcement.

For further information contact:

Next 15

Tim Dyson

Chief Executive Officer
T: [phone]

David Dewhurst

Finance Director and Company Secretary
T: [phone]

Canaccord Genuity

Simon Bridges
Henry Fitzgerald-O’Connor

T: [phone]

Attached:

Chairman’s statement

Business review

Consolidated income statement (audited)

Consolidated statement of comprehensive income (audited)

Consolidated balance sheet (audited)

Consolidated statement of changes in equity (audited)

Consolidated statement of cash flow (audited)

Notes to the final results announcement (audited)

CHAIRMAN’S STATEMENT
for the year ended 31 July 2012

Next 15, a worldwide digital communications group, is pleased to report that it has continued to trade well with strong operational performances from almost every part of the Group. This success has been underpinned by the Group's early transition from traditional PR to digital and social marketing services. As I reported last year, this strategy is giving the Group access to new revenue streams and helping drive growth in many global markets. The transition is being driven both through organic expansion and targeted acquisitions. While the global economy continues to struggle, Next 15 continues to deliver revenue and earnings growth with a strong balance sheet. On a separate note, the recent discovery of a fraud in one of our operations is covered in some detail later in this statement but I'm pleased to report that the initial investigation is now concluded.

The Group has reported revenue up 6% to £91.6m (2011: £86.0m) and adjusted profits (see note 3) before tax were up 14% at £9.6m (2011: £8.4m). Profit before tax was down to £6.0m (2011: £7.5m), following the impact of the fraudulent activity notified to shareholders on 31 October 2012 (see below). Diluted adjusted earnings per share (see note 9) increased 15% to 10.07p (2011: 8.74p) and the Group ended the year with a modest net debt (excluding contingent consideration liabilities and share purchase obligations) of £2.6m. This level of debt represents less than 25% of EBITDA, being £11.2m (2011: £10.7m). On the back of these results the Board is recommending a final dividend of 1.735p per share, which increases the dividend for the year by 12% to 2.30p (2011: 2.05p).

THE DIGITAL TRANSITION

Next 15’s strategy is animated by a core belief that technology is driving fundamental changes in best marketing practices. This is evidenced by the roles Google, Microsoft, Twitter and Facebook now play in the marketing activities of most major companies. Whilst the pace of adoption of new techniques varies from company to company, the Group is now equipped to advise all clients on how to make best use of digital and social opportunities as they continue to emerge.

Next 15 has strong domain expertise in the technology market and advises many of the leading online marketing businesses on the development of their own online influence models. The insights thus developed create a core of expertise applicable to traditional technology vendors as well as broader consumer and business to business brands.

The transition from traditional PR services to more social and digital activities will generate mixed levels of growth across the business as new service lines replace the old. The digital investments made in the Group continue to pay off, with organic growth substantially greater in those agencies that are further along the digital marketing path. This underpins the Board’s view that continued investment – organic and by acquisition – is merited in areas that can accelerate the Group through this extraordinary market transition. For example the Group generated only 3% of its revenues from research and analytics in the last year. This is an important area of potential growth through the sale of products and services complementary to the core service lines.

SEGMENTAL PERFORMANCE

Technology PR, which remains at the heart of the Group, representing 66.1% of revenues, grew by just over 2%, despite the loss of HP, in our Bite Communications business.

The Consumer PR division, representing 16.5% of total revenue, declined by just over 6% following a tough year for Lexis, which has been re-staffed and retooled considerably during the year. This agency completed the acquisition of Paratus in May, strengthening its social and corporate communications capabilities. I am pleased to report that these actions have resulted in a return to growth for the agency and respectable profit margins.

The Corporate Communications division, which now represents 7.2% of Group revenue grew by an impressive 31%, aided by a full-year contribution from The Blueshirt Group, while the Pure Digital/Research segment which now accounts for just over 10% of revenues grew by 67%, assisted by a full-year contribution from Bourne, with organic growth of an impressive 34%.

FRAUDULENT ACTIVITY

On 31 October 2012 we informed shareholders that, in the latter stages of finalising the audit, a fraud was discovered in the San Francisco office of Bite Communications. This has now been thoroughly investigated with the conclusion that this was an act of personal embezzlement by a long-standing member of the finance team in a trusted position. The required accounting adjustment has been to write off as an exceptional item $2.8m (£1.8m) relating to unrecoverable assets and unrecorded liabilities, reflecting cash stolen from the business. The fraud continued into the early part of the current financial year, which will require a further write-off of $0.2m (£0.1m). This crime is now being investigated by the FBI and the SFPD. All steps will be taken to recoup lost assets but it is too soon to estimate the likely scale of any recovery.

The Board is undertaking a comprehensive review of the internal financial controls environment. Meanwhile, as indicated in the statement of 31 October, this regrettable event will not impact the operational performance of the Group or affect its ability to make the investments it has planned for the coming year.

PROSPECTS

The Group continues to recognise the low global economic growth prospects and unsettled currency values, underlining the need for continued fiscal prudence. That said, it is well-positioned in the world’s key markets, in particular the US, which remains an excellent market for the Group’s services. As highlighted above, the Group is also well-placed to benefit from the continued shift of audiences and marketing expenditures to digital and social marketing platforms.

We continue to explore ways to expand digital capabilities through a mix of organic investment and targeted acquisitions using our strong balance sheet position.

As the new financial year begins, the signs are encouraging. We remain confident about the prospects for Next 15 as the year progresses.

Richard Eyre
Chairman

BUSINESS REVIEW
for the year ended 31 July 2012

Last year I devoted my review to the opportunity facing our business. I described the transition that the marketing services industry was going through as ‘the biggest, most exciting industry transition we’ve ever seen’. Twelve months on I can report that the pace and energy surrounding this transition has not decreased. If anything, the industry is witnessing an even greater reorganisation, thanks in large part to the challenges thrown at it by the technology market.

This year, Facebook is expected to generate higher revenues than News Corporation. Meanwhile, Google will generate more revenues than all three major US TV broadcast networks combined. Put another way, the growth of social and digital marketing businesses such as Google, Facebook and Twitter is a reflection of the way companies are now spending their marketing funds. The pace of this transition has surprised many of the major media businesses some of which are over a hundred years old. Google, on the other hand, is one of the oldest of the internet marketing businesses, having recently celebrated its fourteenth birthday and Facebook is just seven.

With marketing spend shifting away from print and traditional broadcast towards digital and social channels such as the ones I’ve mentioned, we are seeing companies change the way they reach and influence their customers. For a business like Next 15 this is a huge, once-in-a-lifetime opportunity. We must add new skills and new products, and change our entire approach to helping clients. But we must do this while also delivering great PR consultancy, a service that remains hugely valuable if delivered through digital and social channels. In other words, it is not an ‘out with the old and in with the new’. Instead it is ‘re-engineer the old and add the new’. As business challenges go, it’s a great problem to have!

As we work through this transition, we are being forced to make some tough decisions but we are also uncovering some exciting opportunities. We are evolving away from a business centred around press relations to a business centred around online influence. This still demands fabulous media skills but these skills are now a component rather than the component. To help us evolve, we have invested in social media skills and the ability to create digital, branded content in our existing businesses. We have also created new agency businesses, such as Beyond, where customer engagement is approached from a social media and social network perspective rather than a media perspective.

It would be easy to see the transition as just a US or UK phenomenon. But it’s also clear that emerging markets such as India and China are leapfrogging aspects of traditional marketing, just as they are leapfrogging certain technologies and jumping straight to the leading products and services. In Next 15 this has resulted in solid growth of 8% in our Asia business. Europe is also moving to the new model but at a slower pace. The slower migration, coupled with a weak economy, have held back our business across mainland Europe, a situation we are not expecting to change dramatically in the coming year.

In the last 12 months we have seen exciting growth coming from our pure digital businesses. Indeed, this segment of our business experienced growth of 67%, while our overall business grew by just over 6%. In other words, we are seeing the sales of traditional services remain at best flat, while the sales of new digital services are expanding rapidly. In the next few years I expect this trend to accelerate, but only if we continue to make the right investments.

Digital is now very much at the core of how we think at Next 15, but as we go through this transition, we recognise that high-value consulting is a persistent need and we intend to continue to expand our capabilities in this respect, albeit with a digital twist. We saw the fruits of this approach in the last year where our corporate businesses saw organic growth of 10%, and we expect them to continue to grow in the current year.

Right now it would be easy for us to stray away from our core business and start selling a wide range of unconnected but nevertheless digital services. We will not do that. Instead we will focus our investment around businesses that complement the agencies we already own. For example, in the next year we intend to invest in the ‘Insight’ space. Thanks to social networks and the ever-increasing amount of online content, brands can use technology to scrape the internet and learn a huge amount about their customers and potential customers in ways that the old market-research industry could only have done with huge budgets and long timelines. Today, gaining these insights can be done at a much lower cost and far more quickly, but it still requires a mix of human analysis and creativity to derive insights upon which a client can act. If this can be achieved, brands can market in real time, knowing their spend is well-directed and has a greater probability of being effective.

Overall, I’m very pleased with the progress that the Group has made in the last year. Transitioning the business from its traditional PR roots is going well, despite tough economic headwinds in Europe. In some cases we are exiting old client relationships and in many cases we are hiring people with social media and digital skills. Through this kind of business re-engineering, the Group is expanding its potential market and elevating its role within the client’s business. Over the next 12 to 18 months we will continue to evolve the skill base and services offered by the Group. If we continue to execute well, we will emerge from this transition as a social and digital marketing powerhouse that represents many of the world’s most exciting and respected companies and organisations. Put another way, even against a tough economic backdrop, I see an exciting future for Next 15.

Tim Dyson
Chief Executive Officer

CONSOLIDATED INCOME STATEMENT
for the year ended 31 July 2012

Â	Â	Note	Â	2012 £’000	Â	2012 £’000	Â	2011 £’000	Â	2011 £’000
Billings	Â	Â	Â	Â	Â	108,453	Â	Â	Â	105,163
Revenue	Â	2	Â		Â	91,583	Â		Â	86,035
Staff costs				62,767				59,699
Depreciation				1,328				1,201
Amortisation and impairment				1,483				1,494
Charge for misappropriation of assets		3		1,778				–
Other operating charges	Â	Â	Â	17,589	Â	Â	Â	15,624	Â	Â
Total operating charges	Â	Â	Â	Â	Â	(84,945)	Â	Â	Â	(78,018)
Operating profit		2				6,638				8,017
Finance expense		6				(2,170)				(3,170)
Finance income	Â	7	Â	Â	Â	1,477	Â	Â	Â	2,680
Net finance expense	Â	Â	Â	Â	Â	(693)	Â	Â	Â	(490)
Share of profits of associate	Â	Â	Â	Â	Â	14	Â	Â	Â	–
Profit before income tax		2,3				5,959				7,527
Income tax expense	Â	Â	Â	Â	Â	(1,652)	Â	Â	Â	(2,260)
Profit for the year	Â	Â	Â	Â	Â	4,307	Â	Â	Â	5,267
Attributable to:
Owners of the parent						3,906				4,997
Non-controlling interests	Â	Â	Â	Â	Â	401	Â	Â	Â	270
Â	Â	Â	Â	Â	Â	4,307	Â	Â	Â	5,267
Earnings per share		8
Basic (pence)						6.85				9.10
Diluted (pence)	Â	Â	Â	Â	Â	6.04	Â	Â	Â	7.82

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 July 2012

Â	Â	2012 £’000	Â	2011 £’000
Profit for the year	Â	4,307	Â	5,267
Other comprehensive income:
Exchange differences on translating foreign operations		229		(1,022)
Translation differences on long-term foreign currency intercompany loans		(80)		583
Net investment hedge	Â	(235)	Â	213
Other comprehensive income for the year	Â	(86)	Â	(226)
Total comprehensive income for the year	Â	4,221	Â	5,041
Total comprehensive income attributable to:
Owners of the parent		3,820		4,771
Non-controlling interests	Â	401	Â	270
Â	Â	4,221	Â	5,041

CONSOLIDATED BALANCE SHEET
as at 31 July 2012

Â	Â	Note	Â	2012 £’000	Â	2012 £’000	Â	2011 £’000	Â	2011 £’000
Assets	Â		Â		Â		Â		Â
Property, plant and equipment				2,721				3,067
Intangible assets				41,019				37,926
Investment in equity accounted associate				292				–
Deferred tax assets				3,320				2,503
Other receivables	Â	Â	Â	875	Â	Â	Â	840	Â	Â
Total non-current assets						48,227				44,336
Trade and other receivables				24,661				25,931
Cash and cash equivalents		9		8,436				8,517
Corporation tax asset	Â	Â	Â	240	Â	Â	Â	321	Â	Â
Total current assets	Â	Â	Â	Â	Â	33,337	Â	Â	Â	34,769
Total assets	Â	Â	Â	Â	Â	81,564	Â	Â	Â	79,105
Liabilities
Loans and borrowings		9		10,750				9,754
Deferred tax liabilities				245				122
Other payables				6				6
Provisions				129				131
Contingent consideration		9		4,987				6,316
Share purchase obligation	Â	9	Â	3,989	Â	Â	Â	4,348	Â	Â
Total non-current liabilities						(20,106)				(20,677)
Loans and borrowings		9		259				272
Trade and other payables				19,605				20,085
Corporation tax liability				1,101				732
Derivative financial liabilities				320				405
Contingent consideration	Â	9	Â	2,945	Â	Â	Â	4,601	Â	Â
Total current liabilities	Â	Â	Â	Â	Â	(24,230)	Â	Â	Â	(26,095)
Total liabilities	Â	Â	Â	Â	Â	(44,336)	Â	Â	Â	(46,772)
Total net assets	Â	Â	Â	Â	Â	37,228	Â	Â	Â	32,333
Equity
Share capital				1,454				1,416
Share premium reserve				6,935				5,996
Merger reserve				3,075				3,075
Share purchase reserve				(2,673)				(4,261)
Foreign currency translation reserve				2,351				2,202
Other reserves				(133)				(525)
Retained earnings	Â	Â	Â	24,100	Â	Â	Â	21,137	Â	Â
Total equity attributable to owners of the parent						35,109				29,040
Non-controlling interests	Â	Â	Â	Â	Â	2,119	Â	Â	Â	3,293
Total equity	Â	Â	Â	Â	Â	37,228	Â	Â	Â	32,333

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 July 2012

Â

Â

Share capital £’000

Â

Share premium reserve £’000

Â

Merger reserve £’000

Â

Share purchase reserve £’000

Â

Foreign currency translation reserve £’000

Â

Other reserves1 £’000

Â

Retained earnings £’000

Â

Equity attributable to owners of the parent £’000

Â

Non-controlling interests £’000

Â

Total equity £’000

At 31 July 2011

Â

1,416

Â

5,996

Â

3,075

Â

(4,261)

Â

2,202

Â

(525)

Â

21,137

Â

29,040

Â

3,293

Â

32,333

Profit for the year

Â

–

Â

–

Â

–

Â

–

Â

–

Â

–

Â

3,906

Â

3,906

Â

401

Â

4,307

Other comprehensive income for the year

Â

–

Â

–

Â

–

Â

–

Â

149

Â

(235)

Â

–

Â

(86)

Â

–

Â

(86)

Total comprehensive income for the year

Â

–

Â

–

Â

–

Â

–

Â

149

Â

(235)

Â

3,906

Â

3,820

Â

401

Â

4,221

Shares issued in satisfaction of vested share options

11

82

–

–

–

595

(595)

93

–

93

Shares issued on acquisitions

27

857

–

–

–

–

–

884

–

884

Share purchase obligation settled on acquisition of non-controlling interest

–

–

–

1,588

–

–

538

2,126

(1,549)

577

Movement due to ESOP share option exercises

–

–

–

–

–

32

(30)

2

–

2

Movement in relation to share-based payments

–

–

–

–

–

–

312

312

–

312

Deferred tax on share-based payments

–

–

–

–

–

–

40

40

–

40

Dividends to Owners of the parent

–

–

–

–

–

–

(1,208)

(1,208)

–

(1,208)

Non-controlling interest arising on acquisition

–

–

–

–

–

–

–

–

254

254

Non-controlling interest dividend

Â

–

Â

–

Â

–

Â

–

Â

–

Â

–

Â

–

Â

–

Â

(280)

Â

(280)

At 31 July 2012

Â

1,454

Â

6,935

Â

3,075

Â

(2,673)

Â

2,351

Â

(133)

Â

24,100

Â

35,109

Â

2,119

Â

37,228

1 Other reserves include ESOP reserve, treasury reserve and hedging reserve.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 July 2011

Â

Â

Share capital £’000

Â

Share premium reserve £’000

Â

Merger reserve £’000

Â

Share purchase reserve £’000

Â

Foreign currency translation reserve £’000

Â

Other reserves £’000

Â

Retained earnings £’000

Â

Equity attributable to owners of the parent £’000

Â

Non-controlling interests £’000

Â

Total equity £’000

At 31 July 2010

Â

1,401

Â

5,575

Â

3,075

Â

(1,359)

Â

2,014

Â

(868)

Â

16,791

Â

26,629

Â

950

Â

27,579

Profit for the year

Â

–

Â

–

Â

–

Â

–

Â

–

Â

–

Â

4,997

Â

4,997

Â

270

Â

5,267

Other comprehensive income for the year

Â

–

Â

–

Â

–

Â

–

Â

(439)

Â

213

Â

–

Â

(226)

Â

–

Â

(226)

Total comprehensive income for the year

Â

–

Â

–

Â

–

Â

–

Â

(439)

Â

213

Â

4,997

Â

4,771

Â

270

Â

5,041

Dividends

–

–

–

–

–

–

(1,045)

(1,045)

–

(1,045)

Share purchase obligation arising on existing subsidiary

–

–

–

(556)

–

–

–

(556)

4

(552)

Share purchase obligation arising on acquisitions

–

–

–

(2,346)

–

–

–

(2,346)

–

(2,346)

Non-controlling interest on business combination

–

–

–

–

–

–

–

–

2,346

2,346

Shares issued on acquisitions

15

421

–

–

–

–

–

436

–

436

Movement in relation to share-based payments

–

–

–

–

–

–

449

449

–

449

Deferred tax on share-based payments

–

–

–

–

–

–

400

400

–

400

Movement due to ESOP share option exercises

–

–

–

–

–

130

(11)

119

–

119

Movements on reserves for non-controlling interests

–

–

–

–

–

–

183

183

(183)

–

Movements on reserves in respect of translation differences on long-term intercompany loans

–

–

–

–

627

–

(627)

–

–

–

Non-controlling interest dividend

Â

–

Â

–

Â

–

Â

–

Â

–

Â

–

Â

–

Â

–

Â

(94)

Â

(94)

At 31 July 2011

Â

1,416

Â

5,996

Â

3,075

Â

(4,261)

Â

2,202

Â

(525)

Â

21,137

Â

29,040

Â

3,293

Â

32,333

CONSOLIDATED STATEMENT OF CASH FLOW
for the year ended 31 July 2012

Â	Â	Note	Â	2012 £’000	Â	2012 £’000	Â	2011 £’000	Â	2011 £’000
Cash flows from operating activities	Â		Â		Â		Â		Â
Profit for the year				4,307				5,267
Adjustments for:
Depreciation				1,328				1,201
Amortisation and impairment				1,483				1,494
Finance expense		6		2,170				3,170
Finance income		7		(1,477)				(2,680)
Share of profit from equity-accounted associate				(14)				–
Loss on sale of property, plant and equipment				11				–
Income tax expense				1,652				2,260
Share-based payment charge				312				449
Movement in fair value of forward foreign exchange contracts	Â	3	Â	13	Â	Â	Â	(13)	Â	Â
Net cash inflow from operating activities before changes in working capital						9,785				11,148
Change in trade and other receivables				3,229				(3,301)
Change in trade and other payables				(2,960)				3,420
(Decrease)/Increase in provisions	Â	Â	Â	(2)	Â	Â	Â	173	Â	Â
Change in working capital	Â	Â	Â	Â	Â	267	Â	Â	Â	292
Net cash generated from operations						10,052				11,440
Income taxes paid	Â	Â	Â	Â	Â	(2,520)	Â	Â	Â	(2,618)
Net cash from operating activities						7,532				8,822
Cash flows from investing activities
Acquisition of subsidiaries and trade and assets, net of cash acquired				(1,101)				(6,304)
Payment of contingent consideration				(4,563)				–
Acquisition of property, plant and equipment				(835)				(1,920)
Proceeds on disposal of property, plant and equipment				3				5
Acquisition of intangible assets				(90)				(77)
Net movement in long-term cash deposits				(35)				168
Interest received	Â	7	Â	51	Â	Â	Â	54	Â	Â
Net cash outflow from investing activities	Â	Â	Â	Â	Â	(6,570)	Â	Â	Â	(8,074)
Net cash from operating and investing activities	Â	Â	Â	Â	Â	962	Â	Â	Â	748

CONSOLIDATED STATEMENT OF CASH FLOW CONTINUED
for the year ended 31 July 2012

Â	Â	Note	Â	2012 £’000	Â	2012 £’000	Â	2011 £’000	Â	2011 £’000
Net cash from operating and investing activities	Â		Â		Â	962	Â		Â	748
Cash flows from financing activities
Proceeds from sale of own shares				96				118
Issue costs on issue of ordinary shares				(8)				–
Capital element of finance lease rental repayment				(72)				(83)
Net cash movement in bank borrowings				983				1,993
Interest paid		6		(521)				(479)
Dividend and profit share paid to non-controlling interest partners				(280)				(94)
Dividend paid to shareholders of the parent				(1,208)				(1,045)
Net cash (outflow)/inflow from financing activities	Â	Â	Â	Â	Â	(1,010)	Â	Â	Â	410
Net (decrease)/increase in cash and cash equivalents	Â	Â	Â	Â	Â	(48)	Â	Â	Â	1,158
Cash and cash equivalents at beginning of the year						8,517				7,296
Exchange (losses)/gains on cash held	Â	Â	Â	Â	Â	(33)	Â	Â	Â	63
Cash and cash equivalents at end of the year	Â	9	Â	Â	Â	8,436	Â	Â	Â	8,517

NOTES TO THE FINAL RESULTS ANNOUNCEMENT
for the year ended 31 July 2012

1 Basis of preparation

The financial information set out in this final results announcement does not constitute the company's statutory accounts for 2011 or 2012.

Statutory accounts for the years ended 31 July 2011 and 2012 have been reported on by the Independent Auditors and their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. The statutory accounts for the year ended 31 July 2011 have been filed with the Registrar of Companies and the statutory accounts for the year ended 31 July 2012 will be delivered to the Registrar in due course.

The financial information set out in this final results announcement have been prepared using the recognition and measurement principles of International Accounting Standards, International Financial Reporting Standards and Interpretations adopted for use in the European Union (collectively Adopted IFRSs). The accounting policies adopted in these final results have been consistently applied to all the years presented and are consistent with the policies used in the preparation of the statutory accounts for the year ended 31 July 2012.

2 Segment information

Reportable segments

The Board of Directors has identified the operating segments based on the reports it reviews as the chief operating decision-maker to make strategic decisions, assess performance and allocate resources. The Group’s business is separated into a number of brands which are considered to be the underlying operating segments. These brands are organised into four reportable segments, being the provision of public relations services in the technology and consumer markets, digital and research consultancy, and corporate communications consultancy. Within these reportable segments the Group operates a number of separate competing businesses in order to offer services to clients in a confidential manner where otherwise there may be issues of conflict.

Measurement of operating segment profit

The Board of Directors assesses the performance of the operating segments based on a measure of adjusted operating profit before intercompany recharges, which reflects the internal reporting measure used by the Board of Directors. This measurement basis excludes the effects of certain fair value accounting charges, including movement in fair value of financial instruments, unwinding of the discount on contingent consideration and share purchase obligation, changes in estimates of contingent consideration and share purchase obligations, amortisation of acquired intangibles, and goodwill impairment charges. Other information provided to them is measured in a manner consistent with that in the financial statements.

Measurement of operating segment profit (continued)

Head office costs relate to group costs before allocation of intercompany charges to the operating segments. Intersegment transactions have not been separately disclosed as they are not material. The Board of Directors does not review the assets and liabilities of the Group on a segmental basis and therefore this is not separately disclosed. They do review results by both service sector and also by geography, and so both are presented.

2 Segment information (continued)

Â

Â

Technology PR £’000

Â

Consumer PR £’000

Â

Pure Digital/ research consultancy £’000

Â

Corporate Communications £’000

Â

Head Office £’000

Â

Total £’000

Year ended 31 July 2012

Â

Â

Â

Â

Â

Â

Revenue

60,556

15,080

9,340

6,607

–

91,583

Segment adjusted operating profit

Â

9,350

Â

2,053

Â

1,308

Â

1,522

Â

(4,186)

Â

10,047

Year ended 31 July 2011

Revenue

59,323

16,103

5,583

5,026

–

86,035

Segment adjusted operating profit

Â

8,022

Â

2,884

Â

670

Â

1,146

Â

(3,899)

Â

8,823

Â

Â

UK £’000

Â

Europe and Africa £’000

Â

US and Canada £’000

Â

Asia Pacific £’000

Â

Head Office £’000

Â

Total £’000

Year ended 31 July 2012

Â

Â

Â

Â

Â

Â

Revenue

19,744

10,470

47,113

14,256

–

91,583

Segment adjusted operating profit

Â

3,345

Â

907

Â

9,312

Â

669

Â

(4,186)

Â

10,047

Year ended 31 July 2011

Revenue

17,986

9,746

45,142

13,161

–

86,035

Segment adjusted operating profit

Â

2,935

Â

855

Â

8,693

Â

239

Â

(3,899)

Â

8,823

A reconciliation of segment adjusted operating profit to profit before income tax is provided as follows:

Â	Â	2012 £’000	Â	2011 £’000
Segment adjusted operating profit	Â	10,047	Â	8,823
Amortisation of acquired intangibles	Â	(1,181)	Â	(819)
Reorganisation costs (note 3)		(437)		–
Charge for misappropriation of assets (note 3)		(1,778)		–
Movement in fair value of forward foreign exchange contracts	Â	(13)	Â	13
Total operating profit	Â	6,638	Â	8,017
Unwinding of discount on contingent consideration		(968)		(1,007)
Unwinding of discount on share purchase obligation		(453)		(322)
Change in estimate of future contingent consideration payable		532		966
Change in estimate of future share purchase obligation		584		285
Movement in fair value of interest rate cap-and-collar contract		84		14
Share of profits of associate		14		–
Other finance expense		(523)		(479)
Other finance income	Â	51	Â	53
Profit before income tax	Â	5,959	Â	7,527

3 Reconciliation of pro forma financial measures

Â	Â	2012 £’000	Â	2011 £’000
Profit before income tax	Â	5,959	Â	7,527
Movement in fair value of interest rate cap-and-collar contract		(84)		(14)
Movement in fair value of forward foreign exchange contracts		13		(13)
Unwinding of discount on contingent and deferred consideration		968		1,007
Unwinding of discount on share purchase obligation		453		322
Charge for misappropriation of assets1		1,778		–
Change in estimate of future contingent consideration payable		(532)		(966)
Change in estimate of future share purchase obligation		(584)		(285)
Reorganisation costs 2		437		–
Amortisation of acquired intangibles	Â	1,181	Â	819
Adjusted profit before income tax	Â	9,589	Â	8,397

Adjusted profit before income tax has been presented to provide additional information which will be useful to the reader to gain a better understanding of the underlying performance of the Group. The adjusted measure is also used for the performance calculation of the adjusted earnings per share used for the vesting of employee share options and performance shares.

¹ The charge for misappropriation of assets relates to a fraud whereby cash was extracted from the business by a long-serving employee in a trusted position and hidden through recognition of fictitious assets and understated liabilities across two of the Group’s North American Bite subsidiaries. Having now been identified, the overstated assets have been written off and liabilities re-instated. The impact on the Group is as follows:

Â	Â	Â	Total impact on Group Income statement £’000
Charge for write off of assets	Â	Â	1,608
Charge for recognition of understated liabilities	Â	Â	170
Pre tax expense	Â	Â	1,778
Tax	Â	Â	(553)
Post Tax expense	Â	Â	1,225

²Reorganisation costs relate to the restructure of one of the Group’s subsidiaries, Lexis. During the year the company rebranded itself as The Lexis Agency and shifted the direction of the business to give a more digitally-focused service offering which was aided by the acquisition of Paratus Communications Limited. As part of this process, the senior management team was re-aligned to better fit the new direction.

4 Income tax expense

The Group’s effective corporation tax rate for the year ended 31 July 2012 (28%) is slightly higher than the standard UK rate (25.33%) due to acquisitions undertaken by the Group and the impact of the reduction in the UK corporation tax rate. As a result of the acquisitions, a greater proportion of Group profit was generated in higher tax regimes and losses arose in territories in which it would not be prudent to recognise deferred tax assets.

5 Dividend

A final dividend of 1.735p per share (2011: 1.535p) has been proposed. This has not been accrued. The interim dividend was 0.565p per share (2011: 0.515p), making a total for the year of 2.30p per share (2011: 2.05p). The final dividend, if approved at the AGM on the 29 January 2013, will be paid on 8 February 2013 to all shareholders on the Register of Members as at 11 January 2013. The ex-dividend date for the shares is 9 January 2013.

6 Finance expense

Â	Â	2012 £’000	Â	2011 £’000
Financial liabilities at amortised cost	Â		Â
Bank interest payable		513		472
Financial liabilities at fair value through profit and loss
Unwinding of discount on contingent consideration		968		1,007
Unwinding of discount on share purchase obligation		453		322
Change in estimate of future contingent consideration payable		118		746
Change in estimate of future share purchase obligation		108		616
Other
Finance lease interest		2		7
Other interest payable	Â	8	Â	–
Finance expense	Â	2,170	Â	3,170

7 Finance income

Â	Â	2012 £’000	Â	2011 £’000
Financial assets at amortised cost	Â		Â
Bank interest receivable		50		54
Financial assets at fair value through profit and loss
Movement in fair value of interest rate cap-and-collar contract		84		14
Change in estimate on contingent consideration		650		1,712
Change in estimate on share purchase obligation		692		900
Other
Other interest receivable	Â	1	Â	–
Finance income	Â	1,477	Â	2,680

8 Earnings per share

Â	Â	2012 £’000	Â	2011 £’000
Earnings attributable to ordinary shareholders	Â	3,906	Â	4,997
Movement in fair value of interest rate cap-and-collar contract		(65)		(10)
Movement in fair value of forward foreign exchange contracts		10		(9)
Unwinding of discount on contingent consideration		968		1,007
Unwinding of discount on share purchase obligation		453		322
Charge for misappropriation of assets (note 3)		1,225		–
Change in estimate of future contingent consideration payable		(534)		(966)
Change in estimate of share purchase obligation		(589)		(285)
Reorganisation costs		336		–
Amortisation of acquired intangibles	Â	803	Â	528
Adjusted earnings attributable to ordinary shareholders	Â	6,513	Â	5,584

8 Earnings per share (continued)

Â	Â	Number	Â	Number
Weighted average number of Ordinary Shares	Â	57,036,925	Â	54,925,003
Dilutive share options/performance shares outstanding		5,008,853		6,127,173
Other potentially issuable shares	Â	2,645,103	Â	2,867,156
Diluted weighted average number of Ordinary Shares	Â	64,690,881	Â	63,919,332
Basic earnings per share		6.85p		9.10p
Diluted earnings per share		6.04p		7.82p
Adjusted earnings per share		11.42p		10.17p
Diluted adjusted earnings per share	Â	10.07p	Â	8.74p

Adjusted and diluted adjusted earnings per share have been presented to provide additional useful information. The adjusted earnings per share is the performance measure used for the vesting of employee share options and performance shares. The only difference between the adjusting items in this note and the figures in note 3 is the tax effect of those adjusting items.

9 Analysis of net debt

Net debt is calculated as total borrowings and finance leases, less cash and cash equivalents. This measure of net debt excludes any acquisition related contingent liabilities or share purchase obligations. The quantum of these obligations is dependent on estimations of forecast profitability. Settlement dates are variable and range from 2012 to 2018.

Â	Â	2012 £’000	Â	2011 £’000
Total loans and borrowings	Â	11,009	Â	10,026
Obligations under finance leases		31		62
Less: cash and cash equivalents	Â	(8,436)	Â	(8,517)
Net debt1		2,604		1,571
Total equity	Â	37,228	Â	32,333
Total capital	Â	39,832	Â	33,904

¹ Net debt includes external bank borrowings and finance obligations but excludes any acquisition-related contingent liabilities or share purchase obligations. The quantum of these obligations is dependent on estimations of forecast profitability whereby if no profits are generated from the businesses over the earnout period, contingent consideration would fall to £Nil. Settlement dates are variable and range from 2012 to 2018.

Â	Â	2012 £’000	Â	2011 £’000
Net debt	Â	2,604	Â	1,571
Share purchase obligation		3,989		4,348
Contingent consideration	Â	7,932	Â	10,917
Â	Â	14,525	Â	16,836