Final Results pt 1

NCC Group PLC
19 July 2005

Organic growth drives NCC Group operating profit up 27%



NCC Group plc, a well-established provider of Escrow Solutions, Testing
Solutions and Consultancy, operating predominately in the UK and Europe,
published its preliminary results for the year ended 31 May 2005 today.  The
Escrow Solutions are provided globally.



Highlights

•   Group turnover up by 24% to £18.0m (2004: £14.5m)

    o     All three business units grew over 23%

•   Group operating profits* up by 27% to £6.1m (2004: £4.8m)

•   Underlying Group pre tax profits** up by 97% to £5.7m (2004: £2.9m)

•   Group pre tax profits up by 143% to £3.4m (2004: £1.4m)

•   Underlying earnings per share*** up by 22% to 12.6p (2004: 10.3p)

•   Final dividend proposed at 1.75p giving a total dividend of 2.50p

•   Net debt free at 31 May 2005

•   Staff numbers up 42% to 216

•   Notable demand for Penetration Testing - 525 tests up 71%

•   Investment programme to extend Escrow Solutions into Continental
    Europe initiated

•   Annual renewals up to £6.7m (2005: £5.8m)



* Before goodwill amortisation of £1.5m. ** Before goodwill amortisation and
exceptional items of £2.36m. *** Fully diluted, before goodwill amortisation and
exceptional items of £2.36m



Rob Cotton, NCC Group Chief Executive, said:



'We have produced our strongest ever result - our first year as a listed public
company.



'We have continued to grow profits and turnover organically by investing in our
people.  The results clearly confirm that good quality recruitment and
strengthening the business units' management has improved the Group's
performance and the sustainable nature of the business model.



'One of the most notable growth areas being in Penetration Testing, where we
carried out 525 tests, averaged over two a day, up 71%.



'We are confident about the current year and we are now looking to extend our
Escrow business into Continental Europe.'



                                                                    19 July 2005




Enquiries:

NCC Group  (www.nccgroup.com)                           0161 209 5432/5200
    Rob Cotton, Chief Executive
    Paul Edwards, Group Finance Director

College Hill
    Adrian Duffield/Clare Warren                        020 7457 2815/2055





Financial review



NCC Group saw strong organic growth for the year to 31 May 2005.  Turnover grew
by 24% to £18.0m (2004: £14.5m).  Each business unit grew revenue by over 23%
with five of the six sub divisions producing record results in both turnover and
profitability.  Overall the split of revenue across the Group's three divisions
remains consistent year-on-year with Escrow Solutions accounting for 46%,
Testing Solutions 24% and Consultancy 30%.



Group operating profits before exceptional items and goodwill were up 27% to
£6.1m (2004: £4.8m).  Operating margin before goodwill amortisation was up to
33.9% (2004: 33.1%) and from 32.9% at the time of the interim results.  The
underlying margin is even stronger when the floatation and plc costs of £0.2m
are excluded.



Underlying Group pre tax profits, before goodwill amortisation and exceptional
items of £2.36m, were up by 97% to £5.7m (2004: £2.9m).  The exceptional charge
of £0.86m related to capitalised deal fees incurred at the time of 2003 buyout,
which has now been written off as the debt has been repaid.



Group profits before tax amounted to £3.4m (2004: £1.4m).



The tax charge, after adding back goodwill amortisation, is 30.3% (2004: 30.7%)
with the Group's underlying tax rate marginally over standard UK rate of 30%
because of a small amount of non-deductible expenses.



Underlying earnings per share, after adjusting for goodwill amortisation and
exceptional costs, were up 22% to 12.6p (2004: 10.3p). The diluted earnings per
share were 6.0p (2004: 2.6p),



Straight forward year on year growth comparisons are distorted due to the change
in capital structure following the floatation.  This has affected the level of
interest payable as debt has been replaced by equity and the average number of
shares in issue has significantly increased.



The Board is committed to a progressive dividend policy and is recommending a
final dividend of 1.75p per ordinary share making a total of 2.5p for the year.
This represents cover of 4.9 times (2004: nil) based on fully diluted earnings
and after adding back goodwill amortisation and exceptional items.  If approved,
the dividend will be paid on 30 September 2005 to shareholders on the register
at 2 September 2005.   The ex-dividend date will be 31 August 2005.



The Group is highly cash generative with operating cash inflows for the year
being £7.7m which represents 125% of operating profits (2004: 109%).  The Group
exceeded expectations by becoming net debt free at the year end.



Capital expenditure increased to £0.8m (2004: £0.2m) representing the expansion
and refurbishment of the Group's new and existing leased accommodation in
Manchester and investments in its IT infrastructure, all of which are essential
to support the planned levels of growth.  The Board does not expect capital
expenditure to increase although it will always seek to provide an appropriate
infrastructure to attract and retain employees.



The Company was admitted to AIM on 12 July 2004.  The floatation raised £38.1m
before expenses through a placing of 22.4m ordinary shares.  Of the proceeds,
£19.8m was for the selling shareholders and £18.3m of the proceeds received by
the Company was used to repay existing debt.



Business unit performance



Overview



The organic growth in each business unit is based on the Group's position as a
leading independent trusted adviser. The Group has also seen real benefits from
its listing.



The Board has not seen any signs of economic decline in the market sectors in
which the Group operates. The Escrow Solution is a 'peace of mind' proposition
which provides real benefit in all economic times, whilst the independence of
the Consultancy and Testing Solutions business units delivers the right
solutions through unbiased opinion.



The Group covers a broad range of market sectors through a wide range of
products and services with a clear and unchanged philosophy.   NCC Group does
not sell or offer third party solutions; it will not operate as a 'body shop' or
become a solution implementer or reseller.



The Board continues to manage the Group through the three distinct business
units; Escrow Solutions, Testing Solutions and Consultancy.  Each is independent
of the others and each is run by an autonomous management team.  There is no
focus on cross selling, other than for Verification Testing.



The increase in the Group's operating margin reported above was helped by the
continued application of strict financial control with the increase in head
office costs arising from the additional costs of being a listed company.



Escrow Solutions



Escrow Solutions is the cornerstone of the business and the management has
experienced good growth in all the key measures of profitability; new contracts
and beneficiaries, renewals and sales opportunities for Verification Testing.



Turnover increased to £8.2m from £6.7m in 2004, up 23%.  With an increase in the
completion of agreements deferred income has increased to £4.9m (2004: £4.0m).
Contract renewals, which represented £5.8m, benefited from improvements in the
termination process.  Contract terminations are at 10.4% and agreement
beneficiary terminations are at 11.4%, which is much lower than the 13% the
management use as a guideline and safe planning assumption.



Profitability for this division grew by 32% to £5.0m (2004: £3.7m).



The beneficiary base has now grown to over 11,000 and the number of contracts is
now above 6,200.  Last year, there were over 9,500 beneficiaries and over 5,300
contracts.



Annual renewals ended the year ahead of forecast reflecting a better than
expected termination rate and are now forecast to be £6.7m for this coming year.




Testing Solutions



Testing Solutions profitability grew to £1.0m, an increase of 18%, with a growth
in turnover of 26% to £4.4m (2004: 3.4m).



The business unit has seen very strong growth in the Penetration Testing
business as UK businesses and the public sector show further signs of taking the
risk of intrusion more seriously.



Penetration Testing is an evolving science; NCC Group has continued to move
further away from the tools based providers by adding social engineering and
forensics to its impressive security armoury.  Businesses are more than ever at
threat from their own employees and the increasing vulnerabilities from the
significant move towards mobile devices, wireless networks and home working.



In the new year, the Board is looking to provide a managed service offering,
where the Group will have the capability to detect network intrusion on behalf
of clients 24 hours a day and seven days a week.



The Escrow Solutions business is responsible for generating the sales lead for
the Full Verification Testing service which is currently the Group's biggest
testing area.  Once the lead is generated, it is the role of the verification
consultants to deliver the verification in association with both the owner of
the application and the licensee.



The Group sees Verification Testing and Penetration Testing to be the areas of
greatest opportunity.  Due to intense day rate pressure the Specialist Testing
unit's revenues declined by 2% year on year.  However, the fall was mitigated by
higher volumes.



Consultancy



Consultancy has seen very strong growth, with a 24% increase in revenue taking
turnover in the year to £5.4m (2004: £4.4m), with profitability growing to
£1.0m, an increase of 14%.



The IT Consultancy unit grew by 9% whilst the IS Consultancy operation grew by
162% as it began to achieve critical mass.



However, the retention of margin has been through IT Consultancy rather than IS
Consultancy where investment is still being made in the business unit.  In
addition, NCC Group has carefully managed utilisation.  The management targets
consultants on 80% utilisation and have resisted the temptation to operate
higher levels.  We continue to only deliver assignments on a time and materials
basis and have avoided the risks of long term fixed price contracts.



Employees, recruitment and retention



Recruitment and retention will always be the biggest obstacle to growth for a
people business such as the NCC Group.  The Board has always stated that it is
its intention to continue to invest in people to forge organic growth across the
Group as the management firmly believe this route can deliver the greatest
returns.



The Board is committed to gaining the best people in the market wherever
possible.  The Group employs 216 staff, which is 64 more than at the end of last
year, an increase of 42%, with recruitment in all areas of the Group.



The management is ambitious in its recruitment and to gain quality candidates
offers very competitive packages with a number of attractive benefits including
share ownership and option based schemes for all employees.  NCC Group has
evolved its offerings in order to compete in a very competitive market as this
is the route to growth but there are more vacancies than ever before, with fewer
available candidates.  This is due to the low levels of unemployment and
businesses succeeding at retaining key staff.



The main focus for recruitment is on Escrow Solutions, where the Group needs
skilled account managers of the highest quality and potential, who understand
how to sell and how to manage accounts.  The sales process does not allow for
the application of a script based, autodialed call centre environment and the
management believe that this approach is an outmoded mechanism for sustainable
growth.



The Board has taken its first steps towards developing a graduate academy. To
date NCC Group has recruited seven new graduates.  Although refinements will be
necessary, the Group is very confident of developing this stream of recruitment
to complement its other activities.



Strategy



The Group's strategy remains unchanged.  It is to build on NCC Group's position
as the UK market leader for escrow solutions by further penetrating the software
escrow market, while continuing to grow its Testing Solutions and Consultancy
businesses. NCC Group has successfully grown organically by increasing its
client base and product range across the Group.



The Board has also been actively looking at acquisitions in complementary
businesses to support its organic growth plans.  To date it has not found a
business where the price or strategic fit meets with its expectations.  The
Board has had detailed discussions with a number of companies involved in
penetration testing, process outsourcing consultancy and escrow, but none have
sufficiently met the criteria for a successful acquisition.



The Board will continue to pursue acquisitions but will not invest without being
very clear that returns on investment and a successful integration can be
achieved. The Group has a strong balance sheet which will enable it to make
acquisitions, either strategic or value enhancing at the right price and where a
successful integration can be achieved.



The lack of an acquisition has not impaired the Group's growth as has been shown
by the ability to grow organically, consistently at over 20% per annum.  The
management's track record has shown that it can quickly revise its strategic and
market objectives and enter markets quickly, for example Penetration Testing and
IS Consultancy.




Investment in Continental Europe



As stated at the time of the Group's floatation, the Directors recognise that
the lack of a significant provider of software escrow solutions in Continental
Europe may provide an opportunity for the Group to address that market in the
future.



In each of the last two years, NCC Group has sold in excess of £1.0m of Escrow
Solutions into Continental Europe, of which only a small proportion has been
directly sold by its single employee German subsidiary.



The Boards now actively plans to invest in its German operation in order to
target both the German and Dutch markets.  It has identified a small team to
establish a stronger presence in Germany, to be followed by an operation in the
Netherlands.  The Board has commissioned market research to confirm its views on
these two markets as it believes that whilst they may is not as mature as the
UK, continental markets have the potential to be as big. The Board expects to
make an initial investment of £0.5m over the next 12 months to establish the
business.



Accounting Standards - IFRS



NCC Group currently plans to adopt International Financial Reporting Standards
(IFRS) in the accounts to 31 May 2006, so as to ensure comparability of its
accounts with those on the Full List.  Accordingly the Board intends to publish
interim accounts to 30 November 2005 under IFRS.  This is two years ahead of the
currently mandated date.



An initial assessment of adopting the standards shows an impact on goodwill
amortisation, a charge for the cost of employee-based share payment schemes, a
change to the accounting for proposed dividends and deferred taxation.



Of these items, the most significant is the charge relating to the cost of
employee-based share payment schemes and the Board has had the charge
independently valued.



The change for amortisation of goodwill would potentially reduce the
amortisation charge whilst the dividend charge would only show dividends
actually paid, not proposed.  A deferred tax asset will be created representing
the credit arising on the cost of employee based share schemes charged to the
profit and loss in the year.  In addition there will be numerous presentational
changes.




IFRS are constantly being updated.  However, by way of illustration the
principal effects on the accounts for the year ended 31 May 2005 are shown
below.


Illustration of potential profit and loss account impact                                              2005
                                                                                                      £000
Charge for share based payment schemes
(£1.013m over a three year period)                                                                     338

Reduction in the charge for goodwill amortisation                                                  (1,500)

Deferred tax credit arising on the cost of employee based share schemes                              (101)

Profit and loss account credit                                                                     (1,263)

Illustration of potential balance sheet impact                                                        2005
                                                                                                    £000's

Increase in intangible assets as a result of the non amortisation of goodwill                        1,500

Reduction in accruals for dividend                                                                     571

Deferred tax asset arising on the cost of employee based share schemes                                 101

Increase in net assets                                                                               2,172



A full reconciliation of the UK GAAP to IFRS accounts will be carried out in the
next few months and the Board intends to include a reconciliation of these
amounts in the interim accounts for the six months to 30 November 2005.



Outlook and current trading



Escrow Solutions will continue to see deeper penetration into the Group's
customer base, whilst providing Verification Testing with more opportunities
than ever before.  NCC Group will continue to retain its specialist testing
business to ensure its technical credibility remains undiminished, with the
objective of retaining its turnover and levels of profitability in a competitive
testing market.



Penetration Testing and Information Security Consultancy are still fledgling
markets, but the Group has positioned itself well.  NCC Group's consultants are
experts who do not rely on tools to provide answers alone and are not confused
by vendor or application relationships.  This, the management believe is the key
to success.



The Information Technology Consultancy targets remain ambitious; the Boards has
balanced profitability and consultant utilisation and will deliver real growth
by continued recruitment of senior experienced consultants. The client base is
ever expanding, but importantly the Board anticipates continuing to work with
the vast majority of its existing clients many of whom have been with NCC Group
for a number of years.



The management believes that we have the right structure and business culture in
place to continue with its ambitious and exciting growth plans.  The Board also
plans to increase the number of employees from our current level of 216.  The
Group is well placed in each of the markets in which it operates in and is
committed to offering high quality business solutions to help alleviate clients'
business risks.



The start to the current financial year sees the Testing Solutions and
Consultancy order books increased to £1.5m and £1.3m respectively up from £1.0m
and £1.1m at last year end.  The improvement in agreement termination rates
means that the Boards now expects the Escrow Solutions annual renewals to be
£6.7m in this financial year an increase from £5.8m in 2005.



The Board remains confident for the outcome of the year.



                                ---------------




                      This information is provided by RNS
            The company news service from the London Stock Exchange          WSWRVKRBAAR