Annual Financial Report Announcement

RNS Number : 8364A

Gresham Computing PLC

26 March 2013

 



26 March 2013

Gresham Computing plc
("Gresham", or the "Group" or the "Company")
Annual Financial Report Announcement
Year ended 31 December 2012

Gresham Computing plc, the specialist provider of software based solutions that enable customers to achieve real-time financial certainty in transaction and cash management, is pleased to report its results for the financial year ended 31 December 2012.

Highlights for 2012

·      Real-Time Financial Solutions revenues up 10%;

·      Profit before tax up 15% to £1.6m (2011: £1.4m);

·      Basic EPS up 12%  to 3.38 pence (2011 - 3.01 pence)

·      Net Cash £2.9m and no debt (2011 £3.6m and no debt);

·      Currently working on a number of significant opportunities for CTC in the bank and non-bank markets; and

·      Management confident about outlook.

Chris Errington, CEO of Gresham, commented:

"2012 was a strong year for Gresham in both strategic and financial terms. We made significant progress in building our recurring annuity base whilst also achieving substantial progress to re-align the business in support of our strategy to position the Company to be a leader in cash and transaction management solutions.  With much of the groundwork now done we fully expect 2013 to be a pivotal year for the Group as we commercialise CTC.  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."

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 Rob Grubb, CFO	[phone]
N+1 Singer Shaun Dobson, Head of Corporate Finance Nick Donovan, Corporate Finance	[phone]

ANNUAL FINANCIAL REPORT ANNOUNCEMENT

In accordance with the Disclosure and Transparency Rules, we set out below the extracts from the 2012 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 2012 Annual Financial Report. 

CHAIRMAN'S STATEMENT

2012 was a strong year for Gresham in both strategic and financial terms.  CTC is a new and competitive technology in the world of financial transaction management and we expect to gain strong traction with new customers and generate new CTC revenues in 2013.  We have significantly increased our budgeted sales and marketing spend for 2013 focused on CTC, slightly ahead of our strategic plans but in line with positive market and prospective customer feedback.

Solid profit contributions from our legacy Software businesses have allowed us to maintain acceptable group profitability and free cash flow, whilst continuing to fund strategic product development to meet customer and market demand.  The successful partnering with ANZ for CTC was a milestone event for the Company as it verified the market opportunity for CTC. Additionally we were successful in selling and successfully deploying CTC to Jones Lang LaSalle, which has the additional benefit of demonstrating the relevance of our CTC offerings to non-Bank verticals.  This represents an important diversification of vertical markets representing further growth opportunities for CTC.

In support of the Company's intended transformation to focus on our CTC offering for growth, management have invested in a global sales and support organisation with new hires in London and Sydney with further plans for expansion in Asia. Our customers operate globally and need us to provide support in all geographies.  Our recently announced strategic alliance with FDM Group will further support our global implementation capacity to enable us to meet peak demand by complementing our own staff with CTC-trained FDM consultants commensurate with client demand. 

Despite challenging market conditions in financial services in 2012, we have built a solid pipeline of opportunity and an organisation capable of selling and delivering solutions to banks and non-banks globally.

I would like to express my thanks to the Board and the work force as a whole for their contribution to the successes of 2012. We have a clear vision; our strategy to achieve the vision is communicated and understood by our stakeholders:  shareholders, customers and staff alike. The Company is positioned, motivated and funded to build on this success in our chosen markets.  I look forward to working with the team to grow profitable revenue through deployment of our distinctive product in 2013 and beyond.

Ken Archer

Chairman

25 March 2013

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 2012 were again improved on prior years, with underlying revenues up 6% to £11.9m, total revenues up 4% to £12.1m, profit before tax up 15% to £1.6m and Adjusted EBITDA up 10% to £2.2m.  The Group's financial position remains strong with cash of £2.9m at year end and no debt.   All parts of the business delivered a strong performance in 2012, with underlying revenues in our core real-time financial solutions business up 10% year on year as a result of the continued traction with our transaction and cash management solutions.

Alongside this growth, we continued to invest a proportion of near term operating cash in the development of Clareti Transaction Control (CTC) 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 have also now invested in a global sales and support organisation with new hires in London and Sydney with further plans for expansion in Asia to serve our chosen markets. 

We fully expect 2013 to be a pivotal year for the Group as CTC is deployed to new customers and we further strengthen the annuity revenues which underpin our strategy and financial performance.

Financial Review

Trading

The following table summarises the Group's financial performance in 2012:

	31 December	31 December
	2012	2011
	£m	£m	%
Software	3.2	3.3	-3%
Real-Time Financial Solutions	8.7	7.9	10%
Underlying revenues	11.9	11.2	6%
Business closures	0.2	0.4	-50%
Total revenues	12.1	11.6	4%
Profit before tax	1.56	1.36	15%
Interest income	(0.03)	(0.03)	0%
Amortisation and depreciation	0.42	0.32	31%
Share option charge / (credit)	0.20	0.30	-33%
Adjusted EBITDA profit	2.15	1.95	10%
Profit after tax	1.97	1.75	13%
Basic Earnings per Share (pence)	3.38	3.01	12%
Cash	2.89	3.60	-20%

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

Business closures relate to the termination of one of the Group's unprofitable RTFS solutions during the year ended 31 December 2012. This closure was not a discontinued operation as its contribution to the Group was not considered significant. The following revenue discussion and analysis is in respect of underlying revenues and excludes this business closure.

Underlying revenues grew 6% to £11.9m, with revenues in our core real-time financial solutions business growing 10% 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 2012, 52% (2011: 48%) of our underlying revenues arose from annuity maintenance and Software as a Service (SaaS) contracts, 36% (2011: 40%) from professional services work and the remaining 12% (2011: 12%) from sales of licences.  We include only third party costs in costs of sales and achieved a total gross margin of 78% (2011: 81%), the slight reduction resulting from our use of third party contractors to deliver some professional services work.  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 £6.4m (2011: £5.9m), which is consistent with the growth in staff numbers, including the recruitment of new sales resource, developers and graduates.

Other administration costs decreased by £0.3m on 2011, with the restructuring of a number of business areas commenced and provided for in 2011 completing in 2012.

The resulting profit before tax was £1.6m (2011: £1.4m) with adjusted EBITDA profit of £2.2m (2011: £1.9m).

Working capital and funding

The following table summarises the Group's cash movements in 2012:

	2012	2011
	£m	£m
Cash at 1 January	3.6	3.1
Net cash inflow from operations	1.0	1.8
Net cash (used in) investing	(1.7)	(1.3)
Net cash generated from financing	0.0	0.0
Cash at 31 December	2.9	3.6

Net cash outflow for 2012 was £0.7m, which was in line with our expectations given the impact of a major customer paying us early in December 2011 rather than January 2012 of £0.3m and cash outflows of £0.4m arising from the business closure that was provided for in 2011 but effected in 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 2012, we spent £1.5m of cash on this development, received £0.3m of associated R&D tax credit and spent £0.2m on capital expenditure to further improve our IT infrastructure and security. 

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 2012, the Group has recorded a net tax credit of £0.4m, mainly comprising a deferred tax credit of £0.1m (2011: £0.2m) arising from the recognition of prior trading tax losses and an R&D tax credit of £0.3m (2011: £0.2m).  The accumulated deferred tax asset of £0.5m will reverse as a non-cash taxation 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 2012, the Group had total tax losses carried forward for offset against future trading profits of £10.1m (2011: £12.2m). 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 44%, or £3.8m, (2011: 38%, or £3.0m) of underlying revenues arose from annuity maintenance and SaaS contracts, 47% or £4.1m (2011: 58% or £4.6m) from professional services work and 9% or £0.8m (2011: 4% or £0.3m) from sales of licences.  In 2012, we saw high utilisation of staff (and sub-contractors) deploying our cash and transaction solutions, especially in Asia Pacific, which primarily accounted for the Group's revenue growth and from which our annuity income will continue to grow over time. 

The increase in annuity revenue of nearly 30%, from £3.0m to £3.8m is a pleasing result and one consistent with our strategy of building such long term recurring revenues over time. Our professional services activity is geared to drive this increase in annuity over time.

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 have built innovative and market leading functionality targeted at specific financial transaction control requirements.

User Developed Applications (UDAs) are commonplace at the majority of global financial institutions and corporates, most often in the form of bespoke internally developed solutions and / or Excel.  They have been deployed to manage areas of the business which would ordinarily be controlled by enterprise class software, either for historic reasons or where incumbent reconciliation vendors are unable to respond, or both. 

Customers find themselves unable to safely migrate from these UDAs to technology products that are fit for purpose because existing vendor solutions are either unable to control the transactions in question or on-boarding to a vendor solution is at best prohibitively expensive and at worst unlikely to actually complete in the required project timeframe, or at all.  This 'technology trap' perpetuates unexpected control breaks, reliance on key people and old internal technology, introducing a higher risk of fraud and error and an inability to grow the business with an adequate control profile.

CTC addresses all these reconciliation technology issues, providing customers with access to innovative functionality and high performance whilst also, and all importantly, providing a robust migration path that is cost effective and certain (which we term 'rapid on-boarding').  Proof of concept projects with several major financial institutions have proven CTC on-boarding speeds of hours, which compares to existing proposals from incumbent vendors running from weeks to months (and in many cases, where the incumbent is unable to respond at all).  This ability to rapidly on-board to CTC releases the business from the 'technology trap', opening up new opportunities including; a significant reduction in operating risk, demonstrably tighter and more effective controls together with an ability to do more business.

Where a business has a large backlog of reconciliations currently being controlled by UDAs, CTC provides a credible migration path to the safety of a controlled enterprise class product environment.

In December 2012, we completed a benchmark study with GigaSpaces and Intel demonstrating that CTC can process 500,000 transactions per second using 'in memory' matching. The ability to manage extreme processing in-memory is a key component of the GigaSpaces XAP solution that Gresham used as a foundation for the CTC solution.  This industry-leading, benchmarked performance, equivalent to 1.8 billion transactions per hour, was achieved by running the application in a pure data and compute GigaSpaces grid with no database attached. We can therefore deal with current and future extreme performance requirements.

In January 2013, we announced that Jones Lang LaSalle had signed up for CTC to automate their receipts matching process, increasing their level of automation in matching and allocating incoming receipts for the UK property management business. This win demonstrates CTC's relevance to non-bank vertical markets, validating our strategy of not being overly reliant on the sometimes turbulent banking markets as a sole target for CTC.

In January 2013, we announced a partnership with FDM Group to provide us with skilled technical resource 'on demand', giving us additional flexibility for delivery of global CTC assignments from an existing and trusted provider of skilled resources to the global financial institution market.

In February 2013, CTC was for the first time included in CEB Tower Group's market report on Reconciliation Applications, scoring highly in their feature audit.  We are pleased to have been asked to participate in this report and look forward to providing relevant customer case studies and experience in future years.

Couple the technological innovation and excellence of CTC with a Gresham team that comprises some of the best, if not the best, reconciliation technology experts in the world and we firmly believe that Gresham has a compelling market proposition. 

Our opportunity is to now re-vitalise what has become a stale market for reconciliation technology with better technology, better people and better solutions.  The next phase for us will be securing further customer sites for CTC, an objective we expect to report strong progress with in 2013.

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 customer use annuity element continued to grow strongly during 2012, delivering an 80% year on year increase in recognised revenue as customer numbers and use 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 in the UK, who market the solution as Barclays Integrated Funds Solution (IFS) and Barclays Account Management Solution (AMS), and ANZ in Australia / New Zealand, who market the solution as ANZ Cashactive Virtual and ANZ Cashactive Control.  The majority of the Group's revenue growth for 2012 arose from the increase in professional services and annuity revenues associated with these contracts.

Clareti Banking and Lending

These core banking and lending systems are sold predominantly into the Caribbean banking market by our standalone wholly owned Canadian subsidiary, Gresham Computing Inc. On 8 March 2013, we announced we had signed and completed an agreement to sell our 100% equity share interest in Gresham Computing Inc (Canada). For further details see note 24.

Software

In our Software business, approximately 75% or £2.4m (2011: 75% or £2.5m) of our revenues arose from annuity maintenance and SaaS contracts and the remaining 25% or £0.8m (2011: 25% or £0.8m) from sales of licences. The Software business continued to generate strong revenues, profitability and cash flows during the year. 

VME (Virtual Machine Environment)

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)

We provide 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.

Market

The general economic environment remains depressed around the world, however there are indications that market conditions are improving in many sectors, including the global financial institution market.

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 other vendors require is a complete re-write of their software but in the current economy and with demanding customers to service 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. We made good progress with growing our annuity base in 2012 and expect further strong growth in 2013, with a growing contribution from CTC.

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 win new CTC customers, grow the existing Clareti Virtual Bank Account business (more customers, new regions and new channels) 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, a process that led to our strategic disposal of the Clareti Banking and Lending business in early 2013.

Future revenue growth will be led by our flagship technology, CTC.

Investment in development of new solutions

We have established and staffed a 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.

Outlook

2012 was a strong year for Gresham in both strategic and financial terms.  CTC is a new and competitive technology in the world of financial transaction management and we expect to gain strong traction with new customers and generate new CTC revenues in 2013.  We have significantly increased our budgeted sales and marketing spend for 2013 focused on CTC, slightly ahead of our strategic plans but in line with positive market and prospective customer feedback.

We continue to make strategic hires to strengthen our team, including a graduate recruitment program, with a strong 2013 focus on CTC sales and delivery resource. 

Our financial position remains strong and we have no debt.  We will continue to invest a proportion of near term operating cash in the development of CTC and existing solutions.

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

25 March 2013

CONSOLIDATED INCOME STATEMENT

	Notes	31 December	31 December
		2012	2011
		£'000	£'000
Revenue	3,4	12,106	11,593
Cost of goods sold		(2,703)	(2,189)
Gross profit		9,403	9,404
Administrative expenses		(7,877)	(8,077)
Trading profit	5	1,526	1,327
Finance revenue	3,8	36	46
Finance costs	8	(5)	(16)
Profit before taxation		1,557	1,357
Taxation	9	408	390
Attributable to owners of the parent	23	1,965	1,747
Earnings per share (total and continuing)
Basic earnings per share - pence	10	3.38	3.01
Diluted earnings per share - pence	10	3.05	2.74

All activities during the year were continuing.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

	31 December	31 December
	2012	2011
	£'000	£'000
Attributable profit for the year	1,965	1,747
Other comprehensive income
Exchange differences on translation of foreign operations	(60)	14
	(60)	14
Total comprehensive income for the year	1,905	1,761

All activities during the year were continuing.

The tax effect of exchange differences recorded within the Consolidated Statement of Comprehensive Income is a credit of £15,000 (2011: charge of £4,000).

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	Notes	31 December	31 December
		2012	2011
		£'000	£'000
Assets
Non-current assets
Property, plant and equipment	12	327	310
Intangible assets	13	4,138	2,914
Deferred tax asset	9	473	400
Trade and other receivables	16	122	-
		5,060	3,624
Current assets
Trade and other receivables	16	3,110	3,131
Income tax receivable	16	348	290
Cash and cash equivalents	17	2,891	3,602
		6,349	7,023
Total Assets		11,409	10,647
Equity and Liabilities
Equity attributable to owners 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	300	360
Retained earnings	23	(11,226)	(13,393)
Total Equity attributable to owners of the parent	23	6,144	4,037
Non-current liabilities
Deferred income	18	548	929
Provisions	18	53	448
		601	1,377
Current liabilities
Trade and other payables	18	4,538	4,962
Financial liabilities	18	-	18
Income tax payable	18	-	-
Provisions	18	126	253
		4,664	5,233
Total liabilities		5,265	6,610
Total Equity and Liabilities		11,409	10,647

The financial statements were approved by the Board of Directors and authorised for issue on 25 March 2013.

On behalf of the Board

C Errington                                                          R Grubb                

25 March 2013                                                      25 March 2013

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 2011	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/(expense)	-	-	-	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
Attributable profit for the period	-	-	-	-	1,965	1,965
Other comprehensive income	-	-	-	(60)	-	(60)
Total comprehensive income	-	-	-	(60)	1,965	1,905
Share based payment expense	-	-	-	-	202	202
At 31 December 2012	2,907	13,124	1,039	300	(11,226)	6,144

CONSOLIDATED STATEMENT OF CASHFLOWS

 

		31 December	31 December
	Notes	2012	2011
		£'000	£'000
Cash flows from operating activities
Profit before taxation		1,557	1,357
Depreciation, amortisation and impairment	5	422	324
Share based payment expense	7,22	202	300
Increase in trade and other receivables		(101)	(132)
Decrease in trade and other payables		(805)	(392)
Movement in provisions	18	(521)	215
Revaluation of foreign exchange instrument		(18)	18
Net finance income	8	(36)	(39)
Cash inflow from operations		700	1,651
Net income taxes received		277	114
Net cash inflow from operating activities		977	1,765
Cash flows from investing activities
Interest received	8	36	46
Purchase of property, plant and equipment	12	(201)	(154)
Payments to acquire intangible fixed assets	13	(1,497)	(1,213)
Net cash used in investing activities		(1,662)	(1,321)
Cash flows from financing activities
Interest paid	8	-	(7)
Net cash generated from / (used in) financing activities		-	(7)
Net (decrease) / increase in cash and cash equivalents		(685)	437
Cash and cash equivalents at beginning of year		3,602	3,146
Exchange adjustments		(26)	19
Cash and cash equivalents at end of year		2,891	3,602

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 2012 and 31 December 2011 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 2011 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 December 2012, prepared under IFRS, will be delivered to the Registrar in due course.  The Group's principal accounting policies as set out in the 2011 statutory accounts have been applied consistently in all material respects.

This Annual Financial Report Announcement was approved by the Board of Directors on 25 March 2013 and signed on its behalf by C Errington and R Grubb.

2. Responsibility statements under the disclosure and transparency rules

The Annual Financial Report for the year ended 31 December 2012 contains the following statements:

The directors confirm that to the best of their knowledge:

·       The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group.

·       The annual report includes a fair review of the development and performance of the business and the financial position of the Group and the parent Company, together with a description or 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 2012.

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.

During the year-ended 31 December 2012 the Group re-evaluated the internal presentation of its operating segments to more appropriately aggregate the differing sets of risks the Group's businesses face. This has increased focus on product groups across businesses rather than the geographic location of the businesses themselves, which is consistent with internal reporting.

The change has had the following impact on classification of operating segments:

Previous classification	Current classification
Software	Software
North America RTFS	North America RTFS
Asia Pacific RTFS	APAC & EMEA RTFS
EMEA RTFS
Adjustments, central & eliminations	Adjustments, central & eliminations

"RTFS" refers to Real Time Financial Reporting.

The Group's Development function, and associated capitalisation of development costs, both previously classified within Adjustments, central & eliminations are now included within RTFS.

Disclosures in respect of the year ended 31 December 2011 have been updated accordingly.

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

·       Software - supply of solutions predominantly to the enterprise level storage market

·       North American RTFS - supply of solutions predominantly to the credit union market in the Caribbean

·       APAC & EMEA RTFS - supply of solutions predominantly to the finance and banking market

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 2012

		North	APAC &	Adjustments,
		America	EMEA	central &
	Software	RTFS	RTFS	eliminations	Consolidated
	£'000	£'000	£'000	£'000	£'000
Revenue
External customer	3,210	1,773	7,123	-	12,106
Inter-segment	-	-	251	(251)	-
Total revenue	3,210	1,773	7,374	(251)	12,106
Interest revenue	-	-	-	36	36
Interest expense	-	-	-	(5)	(5)
Depreciation	(5)	(15)	(140)	-	(160)
Amortisation	(37)	(31)	(174)	-	(242)
Profit / (loss) before taxation	2,196	(29)	(206)	(404)	1,557
Taxation	-	-	-	408	408
Profit / (loss) after taxation	2,196	(29)	(206)	4	1,965
Segment assets	338	777	6,038	4,256	11,409
Segment liabilities	(717)	(452)	(3,585)	(511)	(5,265)

Year Ended 31 December 2011

		North	APAC &	Adjustments,
		America	EMEA	central &
	Software	RTFS	RTFS	eliminations	Consolidated
	£'000	£'000	£'000	£'000	£'000
Revenue
External customer	3,341	1,436	6,241	92	11,110
Inter-segment	116	-	724	(357)	483
Total revenue	3,457	1,436	6,965	(265)	11,593
Interest revenue	-	-	-	46	46
Interest expense	-	-	-	(7)	(7)
Depreciation	(5)	(22)	(110)	(20)	(157)
Amortisation	(38)	(29)	(100)	-	(167)
Profit / (loss) before taxation	2,424	(56)	(362)	(649)	1,357
Taxation	-	-	-	390	390
Profit / (loss) after taxation	2,424	(56)	(362)	(259)	1,747
Segment assets	551	677	4,582	4,837	10,647
Segment liabilities	(892)	(599)	(4,311)	(808)	(6,610)

The Group has two customer relationship with banking customers within the APAC & EMEA 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.

Adjustments, central & eliminations

Adjustments, central & eliminations to segment profit/(loss) represent IT staff placement profit of £nil (2011: £23,000), central management functions of £291,000 (2011: £361,000), including the Board of Directors, Group finance, HR, IT and marketing in addition to adjustments made to reflect share option charge of £202,000 (2011: £300,000), elimination of exchange credit arising on intercompany balances of £89,000 (2011: debit of £11,000) and taxation credit of £408,000 (2011: £390,000).

Adjustments, central & eliminations to segment assets represent cash of £2,891,000 (2011: £3,602,000), taxation of £821,000 (2011: £690,000) and other assets of £546,000 (2011: £545,000).

Geographic information

	2012	2011
	£'000	£'000
Revenues from external customers (by destination)
EMEA	5,047	6,038
North America	2,952	2,517
Asia Pacific	4,107	3,038
	12,106	11,593
	£'000	£'000
Non-current assets
UK	4,215	2,727
North America	25	36
Asia Pacific	698	861
	4,938	3,624

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

EMEA includes revenue from external customers located primarily in the UK, Germany, Switzerland & Austria.

Asia Pacific includes revenue from external customers located primarily in Australia and Malaysia.

4. Taxation

 (a) Tax on loss on ordinary activities

Tax credited in the income statement

	2012	2011
	£'000	£'000
Current income tax
UK Corporation tax credit	(335)	(243)
Overseas withholding tax	-	70
	(335)	(173)
Amounts over provided in previous years - UK	-	(29)
Amounts under provided in previous years - Overseas	-	12
Total current income tax	(335)	(190)
Deferred income tax
Recognition of deferred tax asset	(112)	(228)
Tax rate change adjustments	39	28
	(73)	(200)
Total credit in the income statement	(408)	(390)

 

(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 24.5% (2011 - 26.5%).  The differences are reconciled below:

	2012	2011
	£'000	£'000
Profit before taxation	1,557	1,357
Accounting profit / (loss) multiplied by the UK standard rate of
corporation tax of 24.5% / 26.5%	381	360
R&D tax credit - current year	(337)	(243)
R&D tax credit - prior year	-	(29)
Losses surrendered for R&D tax credit - current year	731	502
R&D enhanced relief	(399)	(243)
Expenses not deductible for tax purposes	6	9
Movement on unrecognised temporary differences	(352)	(270)
Movement on unprovided fixed asset temporary differences	60	(30)
Temporary difference on share based payments	50	-
Overseas tax - prior year	-	12
Overseas withholding tax	-	70
Tax rate change adjustments	39	28
Movement in losses carried forward recognised	(112)	(228)
Movement in losses carried forward not recognised	(475)	(328)
Total tax credit reported in the income statement	(408)	(390)

(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 credit of £15,000 (2011: charge of £4,000).

(d) Temporary differences associated with Group investments

At 31 December 2012, there was no recognised deferred tax liability (2011: 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 (2011: £nil).

(e) Deferred tax

Recognised deferred tax

	2012	2011
	£'000	£'000
1 January	400	200
Recognised in the period	112	228
Impact of change in tax rate	(39)	(28)
31 December	473	400

Deferred tax of £112,000 has been recognised during the year in respect of our profitable Australian operations for which there are unutilised losses available to relieve profits. During the prior year £228,000 was recognised in respect of our profitable EMEA RTFS and 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:

	2012	2011
	£'000	£'000
Depreciation in advance of capital allowances	80	29
Share-based payments temporary differences	314	100
Other temporary differences	22	384
Tax losses	2,332	3,042
Unrecognised deferred tax asset	2,748	3,555
Gross temporary differences unrecognised	1,808	2,048
Gross tax losses unrecognised	10,141	12,166
Gross deferred tax asset unrecognised	11,949	14,214

Future tax rates

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

·       April 2013 - 23%

·       April 2014 - 21%

The proposed April 2013 rate has been substantively enacted and therefore the Group's recognised and unrecognised deferred tax assets have been shown at 23% (2011: 25%) 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:

	2012	2011
	£'000	£'000
Earnings attributable to owners of the parent	1,965	1,747
	2012	2011
Basic weighted average number of shares	58,135,978	58,135,978
Dilutive potential ordinary shares:
Employee share options - weighted (note 22)	6,386,849	5,522,167
Diluted weighted average number of shares	64,522,827	63,658,145
Basic earnings per share - pence	3.38	3.01
Diluted earnings per share - pence	3.05	2.74

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 (2011: None).

7. Intangible Assets

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

31 December 2012

	Development	Patents and
	costs	licences	Goodwill	Total
	£'000	£'000	£'000	£'000
Cost:
At 1 January 2012	6,362	1,047	1,093	8,502
Additions	1,494	3	-	1,497
Exchange adjustment	(10)	-	(29)	(39)
At 31 December 2012	7,846	1,050	1,064	9,960
Amortisation and impairment:
At 1 January 2012	(4,409)	(929)	(250)	(5,588)
Charge for year	(140)	(102)	-	(242)
Exchange adjustment	8	-	-	8
	(4,541)	(1,031)	(250)	(5,822)
Net carrying amount:
At 31 December 2012	3,305	19	814	4,138
At 1 January 2012	1,953	118	843	2,914

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 6 to 20 years (2011: 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.  Development costs have a remaining life of between 1 and 20 years.

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.

8. Principal risks and uncertainties

Liquidity

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 particular products. 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. We continue to invest on a graduate intake scheme which has proven successful in bringing new ideas and skills into the business.

Technology

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. We continue to invest on a graduate intake scheme which has proven successful in bringing new ideas and skills into the business.

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:

	2012	2011
	£'000	£'000
Profit after tax	1,965	1,747
Depreciation and impairment	180	157
Amortisation and impairment	242	167
Interest net	(29)	(30)
Taxation	(408)	(390)
Option charge	202	300
Adjusted EBITDA	2,152	1,951

 

END

 

 

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