Annual Financial Report Announcement

RNS Number : 6510Z

Gresham Computing PLC

20 March 2012

 



20 March 2012

Gresham Computing plc
("Gresham", or the "Group" or the "Company")
Annual Financial Report Announcement
Year ended 31 December 2011

Gresham Computing plc, the specialist provider of software based solutions that enable customers to achieve real-time financial certainty in transaction and cash management, reports its result for the financial year ended 31 December 2011.

Highlights for 2011

·      Revenues up 27% year on year, Real-Time Financial Solutions revenues up over 50%;

·      Adjusted EBITDA profit £2.0m (2010: £0.6m), an increase of 248%;

·      Profit before tax £1.4m (2010: £0.3m), an increase of 404%;

·      Profit after tax £1.7m (2010: £0.6m), an increase of 213%;

·      Cash £3.6m (2010 £3.1m);

·      New tier 1 bank transaction and cash management customer;

·      Clareti Transaction Control launched, with first customer contracted and deployed; and

·      Management confident about outlook.

Chris Errington, CEO of Gresham, commented:

"I am very pleased with our performance in 2011 and excited about our prospects for 2012 as we continue to deliver against our strategic plans for profitable growth.  Our investment in new technology, notably Clareti Transaction Control, combined with improving financial performance across the business continues to give us great confidence in the future prospects of the Group."

- Ends -

A copy of this announcement has been submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.hemscott.com/nsm.do and www.gresham-computing.com. Printed copies of the Annual Financial Report will be posted to shareholders in due course.

For further information please contact:

Gresham Computing plc Chris Errington, CEO Ken Archer, Chairman Rob Grubb, CFO	[phone]
Singer Capital Markets Ltd Shaun Dobson, Partner and Joint Head of Corporate Finance James Maxwell, Director of Corporate Finance	[phone]

ANNUAL FINANCIAL REPORT ANNOUNCEMENT

In accordance with the Disclosure and Transparency Rules, we set out below the extracts from the 2011 Annual Financial Report in un-edited full text. In order to comply with the regulatory requirement to include un-edited text in this Annual Financial Report Announcement, page and note references refer to page and note numbers in the 2011 Annual Financial Report. 

CHAIRMAN'S STATEMENT

I am pleased to report a robust financial performance for Fiscal 2011, exceeding our expectations for Revenue growth, EBITDA and Cash generation. Our overriding objectives for 2011 were to continue to generate profit from all business lines, following our 'stabilisation' year in 2010, and to invest in strategic products and services to drive sustainable profitable growth for 2011 and beyond.  We have maintained our focus on cost containment across the business whilst targeting affordable investment against our growth strategy.  The majority of this investment has been to reposition the Company towards transaction and cash management solutions in the financial markets.  Recent, well documented, failures in many Bank's internal risk and cash management control systems have been the driver for this focus as Banks (and the Regulators) place demands on the market for effective solutions to address these weaknesses.  Good progress has been made in the development of these solutions and in September of 2011 we launched Clareti Transaction Control (CTC) as our newly branded solution set for transaction and cash management. The launch coincided with SIBOS - the largest trade fair for Financial Services participants and their suppliers, and was well received. 

Notably, in July 2011 we announced a new tier 1 customer for a version of our Virtual Bank Account solution which incorporates elements of CTC, for which the client plans a phased rollout to its customers both domestically and internationally.  This in turn will deliver a rising annuity revenue stream to Gresham.  In the UK, we have experienced good expansion of our other flagship Virtual Bank Account client; which continues to build on our annuity revenue - a key element of our strategy for future sustainable revenue growth.

Other business lines also performed well in 2011.  In the Caribbean, we have made several new sales of our Clareti Banking and Lending solution with a good pipeline of opportunity for 2012.  In addition we have experienced solid profit and cash contributions from our software business, and we will continue to support new sales and marketing initiatives to capitalise on this market where we are well placed competitively.

As summarised above, we have taken the first steps in executing on our strategy for profitable growth laid out in 2010.  We are pleased these efforts are already bearing fruit and the Company as a whole is excited about our future prospects.  The management team has taken time to communicate our objectives, messaging and strategy to the whole Company.  As a result there is a renewed focus on a common goal and a clear understanding of the contribution that each employee can make to achieve it.   The Company is investing in the products and the people needed to deliver further progress in 2012 and lay the platform for sustainable, profitable growth in the years ahead.

I'd like to thank management and staff for an excellent performance in 2011 and I look forward to working with them to build on this success.

Ken Archer

Chairman

19 March 2012

CEO OPERATIONAL REVIEW

Gresham Computing plc is a specialist provider of software based solutions that enable customers to achieve real-time financial certainty in transaction and cash management.  We aim to be the market leader in transaction integrity solutions - giving financial institutions and their customers, real-time financial certainty in their cash and transaction processing.

Results for the year ended 31 December 2011 were significantly improved on prior years, with revenues up 27% to £11.6m, profit before tax up 404% to £1.4m and Adjusted EBITDA up 248% to £2.0m.  The Group's financial position remains strong with cash increasing in the year by £0.5m to £3.6m.   All parts of our business delivered a strong performance in 2011, with revenues in our core real-time financial solutions business growing by 55% year on year as a result of the expansion of our transaction and cash management solutions.

Alongside this growth, we are also investing a proportion of near term operating cash in the development of Clareti Transaction Control (CTC) and upgrades to our existing products to provide the Group with a platform for longer term profitable growth.  CTC both complements our existing cash management focus and provides a new market opportunity for us in controlling financial transactions.

We entered 2012 with a solid order book and good opportunities to grow the business further. 

Financial Review

Trading

The following table summarises the Group's financial performance in 2011:

	12 months	12 months
	31 December	31 December
	2011	2010
	£m	£m	%
Software	3.3	3.5	-6%
Real-Time Financial Solutions	8.2	5.3	55%
Underlying revenues	11.5	8.8	31%
IT staff placement	0.1	0.3	-67%
Total revenues	11.6	9.1	27%
Profit before tax	1.36	0.27	404%
Interest income	(0.03)	0.01	-400%
Amortisation and depreciation	0.32	0.49	-35%
Share option charge / (credit)	0.30	(0.21)	-243%
Adjusted EBITDA profit	1.95	0.56	248%
Profit after tax	1.75	0.56	213%
Cash	3.6	3.1	16%

EBITDA refers to earnings before interest, tax, depreciation and amortisation. Adjusted EBITDA refers to EBITDA adjusted for share option charge / (credit).

Underlying revenues grew 31% to £11.5m, with revenues in our core real-time financial solutions business growing 55% year on year. Revenues from our software business reduced slightly compared to the prior year, as planned.

Our business model is to implement solutions through professional services work and to then earn annuity revenues based on number of customers and their usage.  In 2011, we were particularly busy implementing solutions, setting the foundation for longer term annuity growth.  As we grow, this professional services led model has the effect of initially reducing annuity as a % of total revenues whilst growing the annuity itself in £ terms.  In 2011, approximately 50% (2010: 60%) of our revenues arose from annuity maintenance and Software as a Service (SaaS) contracts, 40% (2010: 30%) from professional services work and the remaining 10% (2010: 10%) from sales of licences.  We include only third party costs in costs of sales and achieved a total gross margin of 81% (2010: 81%).  Our primary cost of sales relates to Clareti Virtual Bank Account solutions, where we earn an average mixed gross margin of approximately 75%, after paying out a share of relevant revenues to a partner for use of their technology in the overall solution.  We have no cost of sale associated with our Software business, which increases the Group's overall gross margin significantly.

Underlying staff costs, excluding share option charges and including capitalised development staff costs, were £5.9m (2010: £5.6m), which is consistent with our growth in numbers and within which director costs were down year on year by £0.3m.  Staff numbers have increased slightly during the year, including the recruitment of four graduates; we now have approximately 90 employees.

Other administration costs increased by £1.0m on 2010, with the largest areas of increase being the share option charge (the net turnaround impact of which is £0.5m year on year); a net £0.2m provision increase and £0.2m of additional marketing spend.

The resulting profit after tax was £1.7m (2010: £0.6m) with adjusted EBITDA profit of £2.0m (2010: £0.6m).

Working capital and funding

The following table summarises the Group's cash movements in 2011:

	2011	2010
	£m	£m
Cash at 1 January	3.1	0.7
Net cash inflow from operations	1.8	1.7
Net cash (used in) investing	(1.3)	(0.1)
Net cash generated from financing	0.0	0.8
Cash at 31 December	3.6	3.1

Net cash inflow for 2011 was £0.5m, which was about £0.3m ahead of our expectations, primarily as a result of a major customer paying us early, in December 2011 rather than January 2012. 

We continue to invest a proportion of near term operating cash in the development of CTC and upgrades to our existing products to provide the Group with a platform for long term profitable growth.   In 2011, we spent £1.2m of cash on this development, received £0.1m of associated R&D tax credit and spent a further £0.2m on capital expenditure to improve our IT infrastructure. 

We actively control all aspects of working capital, including the very real cash risks associated with foreign exchange.  Overall, we remain focused on managing cash with an objective of funding our product development and growth plans from cash generated by the business, thereby at least sustaining our underlying cash reserves.

Taxation

For the year ended 31 December 2011, the Group has recorded a net tax credit of £0.4m, mainly comprising a deferred tax credit of £0.2m (2010: £0.2m) arising from the recognition of prior trading tax losses and an R&D tax credit of £0.2m (2010: £0.1m).   The accumulated deferred tax asset of £0.4m will reverse as a non-cash charge to the income statement in future periods whilst the R&D tax credits are receivable in cash during the year following recognition.

At 31 December 2011, the Group had total tax losses carried forward for offset against future trading profits of £12.2m (2010: £14.3m).  As a result, the Group has no material tax charge or liability and remains sheltered from UK tax in particular for quite some time.

Real-time financial solutions

In our real-time financial solutions business, approximately 40% or £3.3m (2010: 49% or £2.6m) of total revenues arose from annuity maintenance and SaaS contracts, 56% or £4.5m (2010: 49% or £2.6m) from professional services work and 4% or £0.3m (2010: 2% or £0.1m) from sales of licences.  In 2011, we saw high utilisation of staff deploying our cash and transaction solutions at two major banks (2010: one major bank) which primarily accounted for the Group's strong revenue growth and from which our annuity income will continue to grow over time. 

In July 2011, we contracted with a major bank in Asia Pacific to deliver transaction and cash management solutions.  This contract helped drive our 2011 growth and is strategically important because (1) we have expanded the deployment of our Clareti Virtual Bank Accounts solution to a further major bank (adding to Barclays), (2) the new customer takes us into a new region where we already have a presence and (3) we are working with the bank to develop a version of our CTC technology suitable for them to offer a transaction matching service to their corporate customers.

Clareti Virtual Bank Accounts

Clareti Virtual Bank Accounts is a real-time cash management solution comprising Clareti Integration and our partner CashFac's Virtual Bank Technology® (VBT).  Our target customer for this solution is typically a major bank that in turn offers the solution to corporate customers as a cash management service.  This bank channel approach provides us with significant gearing, through indirect access to the bank's extensive customer base, initially in one region but with opportunity for expansion to new geographies and customers.  Once a bank channel customer is live, we earn revenue on a usage basis and this annuity element grew strongly during 2011 (by 55% year on year) as customer numbers grew.

The Clareti Virtual Bank Accounts solution provides significant control and efficiency improvements for those managing cash, especially client money or client funds. Re-keying and other high cost, manually intensive operations are removed allowing the corporate to streamline the entire process of managing individual client funds whilst demonstrating compliance with regulatory requirements.

Clareti Integration provides a two way link between the bank's payment systems and CashFac VBT, facilitating a flow of transactions between the two in real-time. Gresham also provides bespoke integration components to provide a two way link between the corporate user's back office systems and the solution itself.

We provide the Clareti Virtual Bank Accounts solution to Barclays Bank PLC, who market the solution in the UK as Barclays Integrated Funds Solution (IFS) and Barclays Account Management Solution (AMS), and, from July 2011, a further major bank in Asia Pacific.  Barclays has been live with the solution for some time and in 2011 we saw continued growth in UK customer numbers and associated revenues.  The new Asia Pacific bank went live in 2011 and we expect full commercialisation to commence in Q1 2012.  

The majority of the Group's revenue growth for 2011 arose from the increase in professional services and annuity associated with these contracts.  Future growth will come from the continued implementation of the existing banks' customers, expansion of existing banks into other geographies and securing new bank channels to market.

Clareti Transaction Control

Clareti Transaction Control (CTC) is a new and innovative technology designed to provide banks and financial institutions with real-time financial certainty in their transaction processing.  At the core of CTC is a versatile high performance transaction matching engine around which we are building functionality targeted at specific financial transaction control requirements.

At the outset of development, our primary focus for CTC was for use in the front to middle office of investment banks and asset managers for them to better control trading activities.  CTC allows real-time, business-driven controls to be put in place as soon as a trade takes place, so that any errors can be identified and rectified from the start (T+0) preventing potential discrepancies or loss events. CTC covers all transaction types and asset classes (including complex OTC FpML) and can handle innovative financial products just as easily as standardized flow products (such as simple equities), so that even the most complex derivative trades are tracked and audited appropriately.

CTC provides banks and financial institutions with a modern and highly flexible platform from which to:

·       Manage these transactional control breaks and resulting loss events;

·       Reduce loss events arising from broken processes in pre and post trade cycle;

·       Monitor transaction flows to prevent errors rather than 'fix after fail';

·       Rapidly control and remediate broken processes; and

·       Reduce the risk of releasing innovative financial products by creating control on launch.

Over the past six months, we have been engaging with potential customers in this primary market to both validate and refine our functionality and purpose. 

During the early phase of CTC development, in March 2011, we began working with a bank channel to complement our cash management solution (Clareti Virtual Bank Accounts) with technology allowing the bank to also offer a financial transaction matching service to its corporate customers.  As a result, in July 2011 we contracted with this major bank in Asia Pacific to not only provide Clareti Virtual Bank Accounts but also CTC.   The core functionality of CTC is perfectly suited to this task and we are currently working to refine functionality for customer needs.

This latter demand from a bank for a variant of CTC demonstrates the flexibility of the technology we are building and its applicability to a wide spectrum of uses in the financial transaction market.  This flexibility to solve different business issues is a strong differentiator for us in the market.

The next phase for us will be to secure further customer sites for CTC and we expect to report progress with that objective in 2012.

Clareti Banking and Lending

These core banking and lending systems are sold predominantly into the Caribbean banking market where we hold a significant market share. The business delivered another solid performance in 2011 and we are beginning to see the benefit from an investment in sales and marketing over the last two years.

Software

In our Software business, approximately 75% or £2.5m (2010: 80% or £2.8m) of our revenues arose from annuity maintenance and SaaS contracts and the remaining 25% or £0.8m (2010: 20% or £0.7m) from sales of licences. The Software business continued to generate strong revenues, profitability and cash flows during the year. 

VME (Virtual Machine Environment)

We are a leading provider of software to the Fujitsu VME market and our leading software is used by most of the world's largest users of the VME platform, including the UK government, and in many cases has been running for periods in excess of 30 years.  Gresham's VME software increases efficiency and effectiveness in the VME environment, with DB/Fastdump and Altadata being our two most prominent and acclaimed products. Our integration software, DataServe, provides a robust link between VME and other open systems.

We provide key VME software components and support to a stable base of predominantly UK customers and whilst we continue to receive license revenues from software upgrades, our primary source of revenue is from support and maintenance.

EDT (Enterprise Distributape)

This business provides global companies with Tape Integration and Tape Connectivity Optimization software in the form of its market leading EnterpriseDistribuTape (EDT) product, which is widely used in IBM's Tivoli Storage Manager (TSM) backup and archive environments.  We continue to sell new licenses for EDT, as users expand their usage, but our primary source of revenue is from support and maintenance.

In 2011, we launched EDTv10, providing customers with the ability to now manage any tape library, virtual or physical, adding to the existing EDT strength for ACSLS controlled tape libraries.  Our target market of TSM users has therefore increased and we are making a small investment in pursuing net new customers for our EDTv10 software.

Market

The general economic environment remains depressed around the world.  The last few years has seen a shake out of most 'nice to have' purchases and whilst there are signs of recovery, all spending remains constrained and subject to firm business cases.  Against that backdrop, we have made good sales progress and grown our business in an economy where many are shrinking. 

Our product set remains relevant to the new world economy and continues to deliver to the customer agenda but we are conscious of ever growing demands and so continue to invest in new product and upgrades.  We firmly believe there is a market for our new CTC technology in the financial transaction market where we see other vendors reducing their investment in technology and seeking to perpetuate what are often at the core old inflexible legacy software solutions designed for a different millennium.  What is required is a complete re-write of their software but in the current economy that simply isn't possible - and there lies our opportunity, with a new and agile solution in CTC that is fit for purpose in this millennium, not the last one.

Customers

Our strategy is to build long term annuity revenues from existing and new customers to increase the visibility of revenues going into future years.  Whilst we typically sell our solutions to banks and financial institutions, we often then roll-out the solution to the corporate customers of these banks and financial institutions.

Gresham has a loyal and diversified customer base with a number of our key software customers having now been on maintenance with Gresham for over 30 years. Typical contract periods for Software maintenance are in the 1 year to 5 year band, with a weighting towards the 1 to 2 year period. Banking contracts for a deployed solution tend to be in the 3 to 10 year band. Our general experience over the years is one of automatic contract renewal at the end of the term and this has not been significantly affected by the economic downturn.

Strategy and vision

We are investing a proportion of near term operating cash in the development of new solutions to improve the growth opportunities available to us both from new offerings but also from upgrades to our existing products for the benefit of customers. We are also investing in our sales and marketing capabilities ahead of bringing this new technology to market.

Our vision is to provide software based solutions that enable customers to achieve real-time financial certainty. We aim to be the leader in reducing control failure risk and optimising business performance through the integration and use of real-time financial transaction data in core business processes.

Our objectives are to grow the existing Clareti Virtual Bank Account business (more customers, new regions and new channels), win new CTC customers and sustain (or grow) the performance of all other areas of the business.  We continue to review underperforming areas and seek opportunities to improve them.

Investment in development of new solutions

In Q4 2010, we established and staffed a new product development centre in Bristol UK, charged with delivering new transaction and cash management technology for both existing and new customers in the financial transactions market. The primary output from this development activity is CTC, which is discussed above.

In 2011, the cash costs of this development investment ran at approximately £70,000 per month net of tax credits and are being capitalised in the balance sheet prior to amortisation against future revenues.  In 2012, we increased this investment slightly to deliver customer specific functionality (for our first customer) and get the technology to market faster to put us in a better position to satisfy demand.

Outlook

2011 was a strong year for Gresham and demonstrates the potential of our business.  We are well placed to grow our Clareti Virtual Bank Account solutions further in 2012 and have developed a number of good customer opportunities to do so.  CTC is emerging as a new and competitive technology in the world of financial transaction management and we expect to gain traction in 2012, whilst also continuing to work with our first customer to meet their deployment requirements. 

We will make a number of strategic hires to strengthen our team and continue our graduate recruitment program, which saw us employ four direct entry graduates in 2011, providing new talent to support future growth.

Our financial position remains solid with cash continuing to track ahead of our expectations from resilient trading.  We will continue to invest a proportion of near term operating cash in the development of CTC and existing solutions, whilst also carefully increasing our expenditure on sales and marketing slightly ahead of trading.

I am pleased to say that our growth plans remain on track and the management team remains excited about the future prospects for the Company.

Chris Errington

Chief Executive Officer

19 March 2011

CONSOLIDATED INCOME STATEMENT

	Notes	31 December	31 December
		2011	2010
		£'000	£'000
Revenue	3,4	11,593	9,133
Cost of goods sold		(2,189)	(1,763)
Gross profit		9,404	7,370
Administrative expenses		(8,077)	(7,085)
Trading profit	5	1,327	285
Finance revenue	3,8	46	7
Finance costs	8	(16)	(21)
Profit before taxation		1,357	271
Taxation	9	390	285
Attributable to equity holders of the parent	23	1,747	556
Earnings per share (total and continuing)
Basic earnings per share - pence	10	3.01	1.00
Diluted earnings per share - pence	10	2.74	0.99

All activities during the year were continuing.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

	31 December	31 December
	2011	2010
	£'000	£'000
Attributable profit for the year	1,747	556
Other comprehensive income
Exchange differences on translation of foreign operations	14	85
	14	85
Total comprehensive income for the year	1,761	641

All activities during the year were continuing.

The tax effect of exchange differences recorded within the Consolidated Statement of Comprehensive Income is a charge of £4,000 (2010: charge of £24,000).

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	Notes	31 December	31 December
		2011	2010
		£'000	£'000
Assets
Non-current assets
Property, plant and equipment	12	310	325
Intangible assets	13	2,914	1,862
Deferred tax asset	9	400	200
		3,624	2,387
Current assets
Trade and other receivables	16	3,131	3,068
Income tax receivable	16	290	146
Cash and cash equivalents	17	3,602	3,146
		7,023	6,360
Total Assets		10,647	8,747
Equity and Liabilities
Equity attributable to equity holders of the parent
Called up equity share capital	21	2,907	2,907
Share premium account	23	13,124	13,124
Other reserves	23	1,039	1,039
Foreign currency translation reserve	23	360	346
Retained earnings	23	(13,393)	(15,440)
Total Equity attributable to equity holders of the parent	23	4,037	1,976
Non-current liabilities
Deferred income	18	929	1,206
Provisions	18	448	423
		1,377	1,629
Current liabilities
Trade and other payables	18	4,962	5,077
Financial liabilities	18	18	-
Income tax payable	18	-	2
Provisions	18	253	63
		5,233	5,142
Total liabilities		6,610	6,771
Total Equity and Liabilities		10,647	8,747

The financial statements were approved by the Board of Directors and authorised for issue on 19 March 2012.

On behalf of the Board

CM Errington                                                        R Grubb                

19 March 2012                                                      19 March 2012

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

	Share	Share	Other	Currency	Retained	Total
	capital	premium	reserves	translation	earnings
	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2010	2,643	12,614	1,039	261	(15,783)	774
Attributable loss for the period	-	-	-	-	556	556
Other comprehensive income	-	-	-	85	-	85
Total comprehensive income/(expense)	-	-	-	85	556	641
Settlement of claim of VAT on previous share issues costs	-	(10)	-	-	-	(10)
Share issue proceeds	264	568	-	-	-	832
Share issue transaction costs	-	(48)	-	-	-	(48)
Share based payment credit	-	-	-	-	(213)	(213)
At 31 December 2010	2,907	13,124	1,039	346	(15,440)	1,976
Attributable profit for the period	-	-	-	-	1,747	1,747
Other comprehensive income	-	-	-	14	-	14
Total comprehensive income	-	-	-	14	1,747	1,761
Share based payment expense	-	-	-	-	300	300
At 31 December 2011	2,907	13,124	1,039	360	(13,393)	4,037

CONSOLIDATED STATEMENT OF CASHFLOWS

 

		31 December	31 December
	Notes	2011	2010
		£'000	£'000
Cash flows from operating activities
Profit before taxation		1,357	271
Depreciation, amortisation and impairment	5	324	492
Share based payment expense / (credit)	7,22	300	(213)
Increase in trade and other receivables		(132)	(497)
(Decrease) / Increase in trade and other payables		(392)	1,521
Movement in provisions	18	215	(176)
Revaluation of foreign exchange instrument		18	(17)
Net finance income	8	(39)	(1)
Cash inflow from operations		1,651	1,380
Net income taxes received		114	279
Net cash inflow from operating activities		1,765	1,659
Cash flows from investing activities
Interest received	8	46	7
Disposal of businesses		-	496
Purchase of property, plant and equipment	12	(154)	(284)
Payments to acquire intangible fixed assets	13	(1,213)	(270)
Net cash used in investing activities		(1,321)	(51)
Cash flows from financing activities
Interest paid	8	(7)	(6)
Receipts from share issue (net of expenses)	23	-	784
Net cash (used in) / generated from financing activities		(7)	778
Net increase in cash and cash equivalents		437	2,386
Cash and cash equivalents at beginning of year		3,146	745
Exchange adjustments		19	15
Cash and cash equivalents at end of year		3,602	3,146

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

1. Basis of preparation

The financial information contained in these condensed financial statements does not constitute the Company's statutory accounts within the meaning of the Companies Act 2006. Statutory accounts for the years ended 31 December 2011 and 31 December 2010 have been reported on, without qualification or drawing attention to any matters by way of emphasis, by the Company's auditors and do not contain a statement under s.498 (2) or s.498 (3) of the Companies Act 2006. Whilst the financial information included in this Annual Financial Report Announcement has been computed in accordance with International Financial Reporting Standards ('IFRS') this announcement, due to its condensed nature, does not itself contain sufficient information to comply with IFRS.

In order to comply with the regulatory requirement to include un-edited text in this Annual Financial Report Announcement, page and note references refer to page and note numbers in the Annual Financial Report. 

Statutory accounts for the year ended 31 December 2010 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 December 2011, prepared under IFRS, will be delivered to the Registrar in due course.  The Group's principal accounting policies as set out in the 2010 statutory accounts have been applied consistently in all material respects.

This Annual Financial Report Announcement was approved by the Board of Directors on 19 March 2012 and signed on its behalf by CM Errington and R Grubb.

2. Responsibility statements under the disclosure and transparency rules

The Annual Financial Report for the year ended 31 December 2011 contains the following statements:

The directors confirm that to the best of their knowledge:

·       The financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and

·       The Directors' Report Chairman's Statement and CEO Operational Review include a fair review of the development and performance of the business and position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

The name and function of each of the directors is listed on page 1 of the Annual Financial Report for the year ended 31 December 2011

3. Segment information

The segmental disclosures reflect the analysis presented on a monthly basis to the chief operating decision maker of the business, the Chief Executive Officer and the Board of Directors.

In addition split of revenues and non-current assets by UK and overseas have been included as they are specifically required by IFRS 8 Operating Segments.

 "RTFS" refers to Real Time Financial Reporting, and "EMEA" refers to Europe, Middle East and Africa.

For management purposes, the Group is organised into the following reportable segments as follows:

·       Software

·       EMEA - RTFS

·       North America - RTFS

·       Asia Pacific - RTFS

The Software solutions segment is a supplier of solutions predominantly to the enterprise level storage market. The RTFS segments are suppliers of solutions predominantly to the finance and banking markets. 

Transfer prices between segments are set on an arm's length basis in a manner similar to transactions with third parties. Segment revenue, segment expense and segment result include transfers between business segments. Those transfers are eliminated in consolidation.

Year Ended 31 December 2011

		North	Asia		Adjustments,
		America	Pacific	EMEA	central &
	Software	RTFS	RTFS	RTFS	eliminations	Consolidated
	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
External customer	3,341	1,436	2,913	3,811	92	11,593
Inter-segment	116	-	125	117	(358)	-
Total revenue	3,457	1,436	3,038	3,928	(266)	11,593
Interest revenue	-	-	6	-	40	46
Interest expense	-	(1)	(2)	-	(4)	(7)
Depreciation	(5)	(22)	(16)	(57)	(57)	(157)
Amortisation	-	-	-	(4)	(163)	(167)
Profit / (loss) before taxation	2,387	(154)	(3)	(162)	(711)	1,357
Taxation	-	-	-	-	390	390
Profit / (loss) after taxation	2,387	(154)	(3)	(162)	(321)	1,747
Segment assets	475	430	2,154	1,403	6,185	10,647
Segment liabilities	(826)	(680)	(1,170)	(3,703)	(231)	(6,610)

Year Ended 31 December 2010

		North	Asia		Adjustments,
		America	Pacific	EMEA	central &
	Software	RTFS	RTFS	RTFS	eliminations	Consolidated
	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
External customer	3,507	1,693	1,333	2,291	309	9,133
Inter-segment	-	-	603	32	(635)	-
Total revenue	3,507	1,693	1,936	2,323	(326)	9,133
Interest revenue	-	-	-	-	7	7
Interest expense	-	-	-	(15)	(6)	(21)
Depreciation	(35)	(32)	(42)	(17)	(20)	(146)
Amortisation	-	-	-	(5)	(92)	(97)
Profit / (loss) before taxation	2,380	99	(115)	(1,676)	(417)	271
Taxation	-	-	-	-	285	285
Profit / (loss) after taxation	2,380	99	(115)	(1,676)	(132)	556
Segment assets	769	298	1,643	1,525	4,512	8,747
Segment liabilities	(1,047)	(640)	(832)	(4,018)	(234)	(6,771)

Included in the Asia Pacific RTFS business segment is £nil charge (2010: £250,000) in respect of impaired goodwill.

The Group has a customer relationship with a banking customer within the EMEA RTFS segment and a banking customer with the Asia Pacific RTFS segment, both of which are considered by the directors to be individually significant relationships; revenue from these relationships both individually exceed 10% of the Group's' revenue.

Segment profit / (loss) represent segment profit after tax, prior to adjustments for reallocation of share option charges and prior to capitalisation and amortisation of development costs.

Adjustments, central & eliminations

Adjustments, central & eliminations to segment profit/(loss) represent IT staff placement profit of £23,000 (2010: £36,000), central development costs of £1,146,000 (2010: £nil), central management functions of £274,000 (2010: £132,000), including the Board of Directors, Group finance, HR, IT and marketing in addition to adjustments made to reflect share option charge of £300,000 (2010: credit of £213,000), capitalisation of development costs of £1,114,000 (2010: £270,000) and amortisation and impairment of capitalised development costs of £129,000 (2010: £342,000) and taxation credit of £390,000 (2010: £285,000).

Adjustments, central & eliminations to segment assets represent capitalised development costs of £1,951,000 (2010: £964,000), cash of £3,602,000 (2010: £3,146,000), taxation of £690,000 (2010: £345,000) and other assets of £11,000 (2010: £57,000).

Geographic information

	2011	2010
	£'000	£'000
Revenues from external customers (by destination)
EMEA	6,038	4,505
North America	2,517	3,295
Asia Pacific	3,038	1,333
	11,593	9,133
	£'000	£'000
Non-current assets
UK	2,727	1,268
North America	36	57
Asia Pacific	861	862
	3,624	2,187

Non-current assets consist of tangible and intangible fixed assets.

4. Taxation

 (a) Tax on loss on ordinary activities

Tax credited in the income statement

	2011	2010
	£'000	£'000
Current income tax
UK Corporation tax credit	(243)	(91)
Overseas withholding tax	70	-
	(173)	(91)
Amounts over provided in previous years - UK	(29)	6
Amounts under provided in previous years - Overseas	12	-
Total current income tax	(190)	(85)
Deferred income tax
Recognition of deferred tax asset	(228)	(200)
Tax rate change adjustments	28	-
	(200)	(200)
Total credit in the income statement	(390)	(285)

 

(b) Reconciliation of the total tax charge

The tax credit in the income statement for the year is lower than the standard rate of corporation tax in the UK of 26.5% (2010 - 28%).  The differences are reconciled below:

	2011	2010
	£'000	£'000
Profit before taxation	1,357	271
Accounting profit / (loss) multiplied by the UK standard rate of
corporation tax of 26.5% / 28%	360	76
R&D tax credit - current year	(243)	(91)
R&D tax credit - prior year	(29)	6
Losses surrendered for R&D tax credit - current year	502	182
R&D enhanced relief	(243)	(82)
Expenses not deductible for tax purposes	9	7
Movement on unrecognised temporary differences	(270)	(50)
Movement on unprovided fixed asset temporary differences	(30)	15
Permanent difference on share based payments	-	(60)
Overseas tax - prior year	12	-
Overseas withholding tax	70	-
Tax rate change adjustments	28	-
Movement in losses carried forward not recognised	(556)	(288)
Total tax credit reported in the income statement	(390)	(285)

(c) Unrecognised tax losses

The Group has tax losses that are available indefinitely for offset against future taxable profits of the companies in which the losses arose as analysed in (e) below. Deferred tax assets have not been recognised in respect of these losses as they may not be used to offset taxable profits elsewhere in the Group and they have arisen in subsidiaries that have been loss-making for some time.

The tax effect of exchange differences recorded within the Consolidated Statement of Comprehensive Income is a charge of £4,000 (2010: charge of £24,000).

(d) Temporary differences associated with Group investments

At 31 December 2011, there was no recognised deferred tax liability (2010: Nil) for taxes that would be payable on the un-remitted earnings of certain of the Group's subsidiaries, as the Group has determined that undistributed profits of its subsidiaries will not be distributed in the foreseeable future.

The temporary differences associated with investments in subsidiaries for which deferred tax liability has not been recognised aggregate to £nil (2010: £nil).

(e) Deferred tax

Recognised deferred tax

	2011	2010
	£'000	£'000
1 January	200	-
Recognised in the period	228	200
Impact of change in tax rate	(28)	-
31 December	400	200

Deferred tax of £228,000 has been recognised during the year in respect of our profitable EMEA RTFS and Software operations for which there are unutilised losses available to relieve profits. During the prior year £200,000 was recognised in respect of our profitable US Software operations for which there are unutilised losses available to relieve profits.

Unrecognised potential deferred tax assets

The deferred tax not recognised in the Group statement of financial position is as follows:

	2011	2010
	£'000	£'000
Depreciation in advance of capital allowances	29	131
Share-based payments temporary differences	100	-
Other temporary differences	384	689
Tax losses	3,042	3,868
Unrecognised deferred tax asset	3,555	4,688
Gross temporary differences unrecognised	2,048	3,037
Gross tax losses unrecognised	12,166	14,327
Gross deferred tax asset unrecognised	14,214	17,364

Future tax rates

The following details the intended UK Standard rate of Corporation taxation as announced by the UK government:

·       April 2012 - 25%

·       April 2013 - 24%

·       April 2014 - 23%

The proposed April 2012 rate has been sustainably enacted and therefore the Group's recognised and unrecognised deferred tax assets have been shown at 25% (2010: 27%) of the gross value.

5. Earnings per ordinary share

Basic earnings per share amounts are calculated by dividing net profit or loss for the year attributable to owners of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit or loss attributable to owners of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares except when such dilutive instruments would reduce the loss per share.

The following reflects the earnings and share data used in the basic and diluted earnings per share computations:

	2011	2010
	£'000	£'000
Earnings attributable to owners of the parent	1,747	556
	2011	2010
Basic weighted average number of shares	58,135,978	55,819,227
Dilutive potential ordinary shares:
Employee share options - weighted (note 22)	5,522,167	582,965
Diluted weighted average number of shares	63,658,145	56,402,192
Basic earnings per share - pence	3.01	1.00
Diluted earnings per share - pence	2.74	0.99

On 9 June 2010, shareholders approved the allotment and issue of 5,285,088 new ordinary shares (ranking pari passu with existing shares in issue) via a placing to existing institutional shareholders. This has been reflected in the basic and diluted weighted average number of shares.

During the year ended 31 December 2010, grants issued under the Employee Share Option Plan 2007 were cancelled and new grants were issued under the Share Options Schemes 2010 adopted on 30 December 2010. Refer to note 22.

There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of this Annual Financial Report.

6. Dividends paid and proposed

No dividends were declared or paid during the year and no dividends are proposed for approval at the AGM (2010: None).

7. Intangible Assets

31 December 2010

	Development	Patents and
	costs	licences	Goodwill	Total
	£'000	£'000	£'000	£'000
Cost:
At 1 January 2010	4,944	891	964	6,799
Additions	271	57	-	328
Exchange adjustment	31	-	124	155
At 31 December 2010	5,246	948	1,088	7,282
Amortisation and impairment:
At 1 January 2010	(4,158)	(884)	-	(5,042)
Charge for year	(92)	(5)	-	(97)
Impairment charge for year	-	-	(250)	(250)
Exchange adjustment	(31)	-	-	(31)
At 31 December 2010	(4,281)	(889)	(250)	(5,420)
Net carrying amount:
At 31 December 2010	965	59	838	1,862
At 1 January 2010	786	7	964	1,757

31 December 2011

	Development	Patents and
	costs	licences	Goodwill	Total
	£'000	£'000	£'000	£'000
Cost:
At 1 January 2011	5,246	948	1,088	7,282
Additions	1,114	99	-	1,213
Exchange adjustment	2	-	5	7
At 31 December 2011	6,362	1,047	1,093	8,502
Amortisation and impairment:
At 1 January 2011	(4,281)	(889)	(250)	(5,420)
Charge for year	(127)	(40)	-	(167)
Exchange adjustment	(1)	-	-	(1)
	(4,409)	(929)	(250)	(5,588)
Net carrying amount:
At 31 December 2011	1,953	118	843	2,914
At 1 January 2011	965	59	838	1,862

Development costs

Development costs are internally generated and are capitalised at cost. These intangible assets have been assessed as having a finite life and are amortised on a straight line basis over their useful lives. These costs are amortised over their useful economic lives of 2 to 10 years (2010: 2 to 10 years). These assets are tested for impairment where an indicator of impairment arises and annually prior to them being made available for use. 

Patents and licences

Patents and licences are the third party costs incurred in seeking and obtaining protection for certain of the Group's products and services. These intangible assets have been assessed as having a finite life and are being amortised evenly over their useful economic life, to a maximum of 10 years. Patents have a remaining life of 6 years and licences have no life remaining (and are fully written down).

Goodwill

Goodwill arose on the acquisition of our Asia Pacific real-time financial solutions business. It is assessed as having an indefinite life and is assessed for impairment at least annually. During the year an impairment charge of £nil has been recognised (2010: £250,000).

8. Principal risks and uncertainties

Liquidity

In the current economy, liquidity risk is something that all companies are seeking to control because access to cash has become a real driver for business compared with prior years. Gresham monitors its liquidity very closely and regularly as discussed in note 20.

Regulation

The financial services market is highly regulated and this regulation continues to evolve in line with the perceived risks in the market. Regulation is typically effected by government, regulatory bodies and industry bodies. Whilst such regulation is generally good news for a solution provider such as Gresham, it is possible that regulation could lead to a change in the market that limits our ability to continue selling. We keep a close track on regulation and seek to ensure that our solutions evolve slightly ahead of regulation so as to mitigate the risk of a regulator limiting our market potential.

People

People are key to Gresham's expertise and ability to deliver on a global basis. Retaining people and allowing them to fulfil their potential is important. Loss of key people could slow our ability to grow the business and we seek to provide rewards and job fulfilment that mitigates this risk. In 2011, we embarked on a graduate intake scheme to bring new ideas and skills into the business which has continued in to 2012.

Technology

Gresham is an innovative Group that develops valuable technology and there is a risk that such technology will be made redundant through copying, further advances in technology or dominant competitive pressures. We aim to keep our technology updated so as to meet both existing and emerging requirements and remain vigilant to changes in market trends. Whilst we carefully assess whether to address emerging trends with new technology there is a risk that the market will ultimately move in a different direction leaving us with technology that no longer addresses the needs of the market. 

Wherever possible we seek to protect our technology through patent applications. We also rely on trade secret, copyright and trademark laws, as well as the confidentiality  and  other  restrictions  contained  in  our  respective  sales contracts  and  confidentiality  agreements to protect our  proprietary  rights. These legal protections afford only limited protection.

9. Additional information

The following additional information is not extracted from the Annual Financial Report:

Related party transactions

No related parties transactions have taken place during the year that have materially affected the financial position or performance of the Company.

Adjusted EBITDA reconciliation

Adjusted EBITDA is calculated as EBITDA before non-cash share option charges, reconciled as follows:

	2011	2010
	£'000	£'000
Profit after tax	1,747	556
Depreciation and impairment	157	146
Amortisation and impairment	167	347
Interest net	(30)	11
Taxation	(390)	(285)
Option charge / (credit)	300	(213)
Adjusted EBITDA	1,951	562
Operating exceptional items	-	150
Adjusted EBITDA after operating exceptional items	1,951	712

 

END

 

 

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