Final Results

RNS Number : 2059Y

NCC Group PLC

03 July 2008

 



3 July 2008 

NCC Group plc

Four year momentum maintained - adjusted pre tax profits up 29% and year end dividend up 47%

NCC Group plc, (AIM: NCC, 'NCC Group' or 'the Group') the international, independent provider of Escrow Solutions, Assurance Testing and Consultancy, published its final results for the year ended 31 May 2008 today.  

Financial Highlights

• Group revenue up by 41% to £35.7m (2007: £25.4m) - 17% organic

• Escrow Solutions revenue up by 20% to £18.0m

• Assurance Testing revenue up by 121% to £12.8m

• Consultancy revenue up by 7% to £4.9m 

• Group adjusted operating profits* up by 30% to £10.7m (2007: £8.2m)

• Escrow Solutions operating profits up by 28% to £10.2m

• Assurance Testing operating profits up by 127% to £1.7m

• Consultancy operating profits maintained at £0.7m 

• Group adjusted operating margins* at 30% (2007: 32%)

• Group adjusted pre tax profits** up by 29% to £10.5m (2007: £8.1m)

• Adjusted fully diluted earnings per share* up 33% to 22.4p (2007: 16.8p)

• Final dividend proposed of 4.75p giving a total dividend of 7.00p up 47% from last year

Acquisitions

• Two acquisitions completed and integrated in the year;

• Secure Test a penetration and security testing business in August 2007 for up to £4.0m

• Escrow Europe BV in January 2008 for up to €10.5m, confirming position as world's largest software Escrow provider

* Operating profit is adjusted for amortisation of acquired intangibles and exceptional costs of the move to the Official List and the costs of reorganising Escrow Europe's corporate and contractual structure.  **Pre tax profit is adjusted for these items and the unwinding of the discount on the acquisitions' deferred consideration. 

Rob Cotton, NCC Group Chief Executive commented:  

'We saw an excellent performance from all areas of the Group and in addition we completed two acquisitions, further strengthening the Group's capability in both Escrow Solutions and Assurance Testing.

'We have continued to demonstrate that our strategy of focused sustainable organic growth, allied to carefully targeted acquisitions, five to date, is highly successful.  Our track record over the last four years shows an adjusted pre tax profits CAGR rate of over 22%.

'Despite the current economic climate, we have continued to maintain our growth momentum.  We are confident that we are well insulated against any downturn, given the range of our business critical products and services. 

'Our forward visibility continues to grow, to the extent that even as this very early stage of the financial year, our total orders and renewals stand at £26.9m.'

Enquiries:

NCC Group (www.nccgroup.com)	0161 209 5200
Rob Cotton, Chief Executive
Paul Edwards, Group Finance Director
College Hill
Adrian Duffield / Jon Davies	020 7457 2020

Overview

This year NCC Group plc has delivered its strongest performance to date and is reporting a full year for the first time as a fully quoted company on the Official List on the London Stock Exchange. 

Overall Group revenues for the year grew by 41% to £35.7m (2007: £25.4m). Excluding the acquisitions, the Group showed very strong organic growth up 17%. Adjusted operating profits increased by 30% to £10.7m (2007: £8.2m).  NCC Group continued to generate strong margins, with the adjusted operating profit margin remaining strong at 30% (2007: 32%) in line with the Board's expectations.  

Adjusted pre-tax profits were up 29% to £10.5m (2007: £8.1m) and fully diluted adjusted earnings per share increased 33% to 22.4p (2007: 16.8p).  

The Group continues to be highly cash generative and had only £3.4m net debt at the year end, despite meeting the £10.4m cost of two acquisitions out of cash resources. Operating cash conversion represented 122% of operating profits.

Over the longer term NCC Group has shown consistent, strong and reliable growth. Since the Group gained admission to AIM in 2004, followed by its switch to the Official List in July 2007, revenues have grown at a compound annual growth rate (CAGR) of over 25%. Adjusted pre tax profits have seen a CAGR rate of over 22%. The Group has generated £34m of cash from operations before interest, tax and dividends.

Total shareholder returns over the four years since flotation are 137%.  

Financial review

Revenue 

Group revenues for the year ended 31 May 2008 increased by 41% to £35.7m (2007: £25.4m). Supported by the acquisitions of Secure Test and Escrow Europe in August 2007 and January 2008 respectively, the Group's half year split saw 46% of revenue delivered in the first half (2007: 45%) and 54% in the second half (2007: 55%). Excluding acquisitions made in this financial year, Group revenue grew by 25%.

Group Escrow Solutions accounted for 50% of Group revenue (2007: 59%) including five months of revenue from Escrow Europe. Assurance Testing now accounts for 36% (2007: 23%) with Consultancy, the smallest division, accounting for 14% of revenue (2007: 18%). The change reflects the increased size of the Assurance Division due to its strong organic growth and acquisitions.

The geographic split of revenue has continued to evolve with the acquisition of Escrow Europe, the continued growth in the US Escrow Solutions business and further penetration into continental Europe from the UK. However, the vast majority of the revenue is still contributed by the UK at £29.2m (2007: £20.6m) or 82% (2007: 81%) of total revenues. Revenue from the rest of the world has increased 24% to £3.8m (2007: £3.0m) with Europe contributing £2.7m (2007: £1.8m).

Group Escrow Solutions revenue for the year increased by 20% to £18.0m (2007: £15.0m) driven by continued growth in the UK which increased its revenue by 14% to £15.7m (2007: £13.8m). The US increased its revenue by 16% to £1.2m (2007: £1.0m) and Escrow Verification Testing contributed a 26% increase in revenues.  

Escrow Solutions contract terminations remain constant at approximately 10% with annual renewals increasing by 19% to £11.2m (2007: £9.4m). Excluding the acquisition of Escrow Europe, Group Escrow Solutions grew by 14%. 

The Assurance Testing division delivered strong revenue growth of 121% to £12.8m (2007: £5.8m) and was up by 67% excluding the impact of the two acquisitions made in this financial year. The continued demand for Penetration and Security Testing has seen its revenue increase by 139%. The Performance and Load Testing business of Site Confidence contributed £5.1m of revenue which showed an annualised growth rate of 24%.

Consultancy revenues grew by 7% to £4.9m (2007: £4.6m) with, as expected, a stronger second half of the year.

Profitability

Adjusted Group operating profit, as set out in the table below, grew by 30% to £10.7m (2007: £8.2m). Adjusted operating margins were slightly lower at 30% (2007: 32%) reflecting the inclusion of lower margin acquisitions, but an increase from 29% at the time of the interim results.   The adjusted operating profit includes £0.9m (2007: £0.6m) of share based charges and related costs. Excluding the share based charges adjusted operating profits grew by 32%.

In July 2007 the Group moved to the Official List and incurred one off costs of £531,000 in completing the process. The acquisition of Escrow Europe in January 2008 brought unforeseen legal and financial complexity, which with onerous legal and employment contracts to reorganise, cost the Group a one off charge of over £180,000. These costs are directly as a result of the transaction, are one off, non-trading and exceptional.

The half year split of adjusted operating profits was H1 44%: H2 56% (2007: H1 40%: H2 60%) as expected. 

	Operating profit
	2008	2007
	£000	£000
Reported operating profit	9,217	7,952
Amortisation of acquired intangibles	740	230
Exceptional items	711	-
Adjusted operating profit	10,668	8,182

	Profit before tax
	2008	2007
	£000	£000
Reported profit before tax	8,693	7,785
Amortisation of acquired intangibles	740	230
Exceptional items	711	-
Unwind of the discount on deferred consideration	333	102
Adjusted profit before tax	10,477	8,117

Group Escrow Solutions operating profit for the year ended 31 May 2008 increased 28% to £10.2m (2007: £8.0m). Escrow Solutions UK contributed £9.4m, an increase of 15%, while Escrow Solutions US contributed £0.4m, an increase of 59%. Escrow Solutions Germany broke even following last year's loss of £0.5m, with Escrow Europe contributing £0.4m in its first five months of ownership. In future the Group will report both the German operations' operating profits within Escrow Europe.

Escrow Solutions operating margins remained strong as a consequence of focused control over contract terminations and continued scope for price increases (planned at over 6%) on the back of adding value to the Escrow proposition. Group Escrow Solutions operating margin increased to 56% (2007: 53%), Escrow Solutions UK increased its margins to 60% (2007: 59%).

The continued increase in demand for Penetration and Security Testing and Performance and Load Testing contributed to an Assurance Testing operating profit increase of 127% to £1.7m (2007: £0.7m). The acquisition of Secure Test, a Penetration and Security Testing business, in August 2007 contributed £0.3m in ten months.

The margin in Assurance Testing remained consistent at 13% (2007: 13%) even after significant investment in the management structure in the businesses. 

Consultancy continued the trend of prior years, delivering a stronger second half year and maintained its contribution to operating profit at £0.7m (2007: £0.7m) with a margin of 15% (2007:16%).

Currency fluctuations were minimal with a £15,000 adverse impact on the Group's profits in the financial year ended 31 May 2008.

Adjusted pre-tax profit increased 29% to £10.5m (2007: £8.1m). The Group's reported pre-tax profit was up 12% to £8.7m (2007: £7.8m) after the inclusion of the one off exceptional charges, non cash amortisation of intangible assets and the unwinding of the discount on the acquisitions' deferred consideration.  

Taxation

The Group's effective tax rate is 26.9% (2007: 31.0%).  The effective rate is below the standard UK rate of 30% (28% from 6 April 2008) largely due to the positive impact of the tax allowance on exercise of share options granted in 2004. 

The effective rate is adversely affected by the unwinding of the discount on the retention payment for Site Confidence, Secure Test and Escrow Europe.

Earnings per share

The adjusted fully diluted earnings per share increased 33% to 22.4p (2007: 16.8p). The basic earnings per share increased 15% to 18.9p (2007: 16.5p), whilst fully diluted earnings per share increased 15% to 18.3p (2007: 15.9p). Growth in basic earnings per share is different from the growth in profits in the year, due to the fact that the weighted average number of shares has increased.

The table below analyses the effect on Group's fully diluted earnings per share of the amortisation of acquired intangibles, unwind of the discount on the deferred consideration for acquisitions and the effect of the exceptional costs.

	2008 Pence	2007 Pence
Diluted EPS as per the income statement	18.3	15.9
Amortisation of acquired intangibles	1.6	0.6
Unwind of the discount on the deferred consideration of the acquisitions	1.0	0.3
Exceptional item after tax	1.5	-
Adjusted diluted EPS	22.4	16.8

Dividends

In line with the continuing progressive dividend policy, the Board is recommending a final dividend of 4.75p per ordinary share, making the total 7.00p for the year, up 47% (2007: 4.75p.  This represents cover of 2.7 times (2007: 3.5 times) based on basic earnings.   If approved at the Annual General Meeting, the dividend will be paid on 26 September 2008 to shareholders on the register at 29 August 2008. The ex-dividend date will be 27 August 2008.

Shareholders' funds at the end of the year were £39.5m (2007: £33.4m).

Cash

The Group continues to be highly cash generative with operating cash flow before interest and tax of £11.2m (2007: £7.8m) which is 122% of operating profit before interest and tax (2007: 98%).

After accounting for net cash out flows of £10.4m for acquisitions made during this year, the Group ended the year with net debt of £3.4m (2007: net cash £0.9m). 

Capital expenditure increased to £1.5m (2007: £0.7m). It will increase in the coming financial year as the Group upgrades its core IT systems to meet the demands of a larger global business and with the continuing need to bring facilities up to the appropriate standard.  

Balance sheet

Following the acquisitions of Secure Test and Escrow Europe goodwill increased by £8.8m and intangible assets relating to customer contracts and associated relationships increased by £4.5m. 

Current Markets

Since flotation NCC Group has been positioned to avoid the vagaries of the domestic economy as now most of its products and services fall into the non discretionary expenditure category. Whilst no business can be completely immune from economic cycles, the Board is confident that the Group is as well insulated as it can be against any economic downturn.  

Examples of how the Group's activities occupy areas of IT expenditure where curtailment would be extremely difficult include:

• organisations who understand the need for protection of their business critical applications as corporate failures and product withdrawals increase; 

• systems, networks and data security have not kept pace with the growth of data and of identity theft and hacking, which continue to reach new levels on an almost daily basis; and

• web site performance is critical to all types of businesses as the web is now often their primary shop window on the commercial world.  

Furthermore, the Group has carefully and significantly reduced its reliance on public sector contracts.

NCC Group is now the largest provider of Escrow services in the world. Further, it is the only provider who mandates quality ahead of price.  NCC Group expects that with the continuing economic pressure, low cost, low value propositions will prove to be false economy. This applies as much in the US where the lack of even basic testing compromises the solution sold by most of our competitors.

There is little doubt that the underlying economics of the IT software and services markets are poor, but for the Group this current adversity is beneficial as escrow decisions are not delayed. They are seen as critical by well managed corporate users who are determined to mitigate risk effectively.  

Since the Group last reported it has not seen a large software owner going out of business. However, given the current economic cycle, as history has repeatedly shown, this is now a distinct possibility.  NCC Group has consistently worked with software owners to put together pro-active escrow solutions and are now beginning to see some real benefits, as this offers a very positive commitment from the owners to both their existing and prospective clients.  

The approach has been extended to adapting the less valued two party escrow model, as employed by the competitors, and developing it so that it is truly beneficial for both parties. Traditionally two party agreement cover was low cost and low value as none of the beneficiaries knew if they were covered or not. The NCC Group version of this agreement provides a certificate of cover so the beneficiary knows exactly when cover is being provided, and more importantly when it is not. Respected owners are being proactive towards this proposition and the Group expects the take up by owners to continue to grow.  

Within Assurance Testing, the market for Secure Test, the penetration and security testing service, continues to see strong growth as the headlines are dominated by easily avoidable examples of weak security that have resulted in real data and financial loss. Over the last 12 months the constant stream of media coverage of repeated and significant failures of Government departments to keep data and laptops safe and secure has been the best marketing campaign.  

These constant embarrassing failures highlight the potential for a substantial growth in the demand for the Group's testing services as well as its Information Security Consultancy services. In addition to human error, the criminal world continues to use hacking as a prime method of fraud. It is a big and lucrative business, as demonstrated by the recent hacking into the Cotton Traders website.  

The Secure Test business continues to be the largest team of CESG CHECK accredited ethical security testers in the UK with currently over 44 testers. However, the Group is seeking greater strength and capacity to deliver the more significant contracts for CESG, the information assurance arm of the UK Government Communications Headquarters, as well as to public and private organisations, all of whom require NCC Group services.

Site Confidence continues to offer a highly valued alternative to the entry level unsophisticated web and monitoring services available in the market. It is suitably adaptable, flexible and user friendly to offer a real alternative to the more expensive and complex network test tools. This and the dedicated account management approach will continue to ensure the Group's ongoing success in the market place.

The security side of the Consultancy division complements the Secure Test propositions.  The Group offers advice to organisations to ensure that they are best placed to protect themselves and their business assets from attack.  NCC Group provides information security advice from every perspective, especially for those organisations that are covered by the PCI Data Security Standards.  

The Group's position in the information security market is further enhanced by its being accredited PCI Auditors, having CLAS consultants and the biggest CHECK Test teams in the UK. As the new financial year progresses this area will become an even more significant part of the Consultancy division's offering.

Business performance

NCC Group continues to be managed through three distinct business units, Escrow Solutions, Assurance Testing and Consultancy. Each is independent and run by an autonomous management team responsible for setting and, after Board approval, delivering its own plans, with each area being tasked with generating organic growth.

Group Escrow Solutions

The Group Escrow Solutions business remains the cornerstone of the Group representing 50% of its revenue.  The business has experienced good growth in all its key performance measures of profitability, new contracts, beneficiaries, renewals and Verification Testing.

Group Escrow Solutions profitability grew to £10.2m (2007: £8.0m), an increase of 28%, on revenue of £18.0m, with the UK contributing £15.7m.

Escrow renewals for the Group represented £11.2m (2007: £9.4m) in the year, benefiting from continued tight controls over the termination process. Contract terminations were less than 10% in the year and below 11% for agreement beneficiaries.

Worldwide the beneficiary base has now grown to 25,193. There are 15,102 (2007: 13,521) beneficiaries to 8,124 (2007: 7,440) agreements in the UK and the Group has 844 minimum annual fees on agreements.

The rate of agreement completions, renewals and terminations has been such that the Board is forecasting Group escrow renewals to be £13.8m for 2008/09 with UK renewals forecast to be £11.2m.

Escrow Verification Testing remains a predominantly UK sale, although the Group is seeing very good progress within the US and European marketplaces, with customers beginning to understand the benefits of increased levels of protection.  

The Escrow UK Verification Testing service delivered £3.0m of revenue (2007: £2.4m).  The Group continues to see over 40% of verifications being repeated and has an order book of £1.6m, with a further £0.5m of verifications in the other Escrow businesses.

Assurance Testing

Assurance Testing consists of two components, Secure Test and Site Confidence. Assurance Testing revenue grew 121% to £12.8m with an increase in profitability of 127% to £1.7m (2007: £0.7m).  

Secure Test includes the remainder of the Specialist Testing activities and despite moving out of this area at the start of the financial year and foregoing £0.8m of revenues, growth was still up 139% to £7.7m in 2008 from £3.1m in 2007 or 37% excluding the acquisition. As risk mitigation moves further up the corporate agenda, regardless of budget, NCC Group sees significant growth in this area.  

The Site Confidence operation encompasses the web site monitoring and load testing business and saw revenues increase to £5.1m (2007: £1.6m) in its first full 12 months of ownership. It offers an excellent opportunity across the Group as it fits with all parts of the Assurance Testing offerings and forms part of the framework of the 24/7 Assured security monitoring proposition. The online monitoring business offers a high level of recurring revenues, with at least 90% of it comprising of blue chip customers continuing to renew their annual contracts.

Consultancy

Consultancy revenues grew by 7% to £4.9m (2007: £4.6m) as it continued to grow its presence in the Information Security marketplace. Once again this division had a strong second half, with revenues up 18% to £2.8m (2007: £2.3m) for H2 and a return to the anticipated utilisation levels of c.75%.

As a result of the growth in revenues, the business generated profits of £0.6m in H2. However, the Group remained cautious in its recruitment so did not take full advantage of the margin opportunities as the business relied on high quality trusted associates rather than increasing the headcount. Operating profits for the year were unchanged at £0.7m (2007: £0.7m).

Investment and Product Development

NCC Group has for a long time held the belief that a managed security offering in the market is long overdue. To date, no organisation has been able to provide an effective combination of web monitoring to cover capacity and performance with security assurance to ensure vulnerabilities are not appearing in monitored corporate and internet applications.  

Penetration and Security Testing provides a degree of comfort that a network is safe. However, this needs to be carried out on a regular, minute by minute basis if total assurance is to be achieved.  

The new service offering, 24/7 Assured, helps businesses get closer to that peace of mind and repel the threat of organised crime and opportunist hackers. As more and more money is lost to fraud and it becomes more widely reported, business and importantly the major retailers, are fast beginning to accept the threat as very real. The Group sees 24/7 Assured as offering companies genuine protection.

The investment in this area of £1m to £1.5m over the next 12 months will be on developing new tools for the new product as well as on updating the current monitoring and performance solutions. The Group will not only benefit from monitoring revenues and the new product set revenues but will also become more embedded in customers' web work streams.

Acquisitions 

NCC Group successfully completed two acquisitions in the financial year and through its integration team has carefully brought them into the Group. The Group is already maximising the benefits and returns from the increased scale, territory and customer opportunities they bring.  

The acquisition of Secure Test in August 2007 was a very positive move for the Group. Not only did it confirm the Group's commitment to this market place, but it has proved to be a highly successful complementary business. In addition, it has allowed the Group to develop and maintain the largest team of accredited Security and Penetration Testers in the UK, as it seeks to become the leading player in the market.

The acquisition of Escrow Europe had been a long time coming and the Board was delighted to complete the purchase of the business in January 2008 after many years of negotiation. This acquisition provides the Group with a strong European base from which to operate and strengthens its German business. It allows The Group to grow its multi national customer base by providing local agreements and account management in culturally aligned ways. 

The Group will continue to invest in appropriate complementary businesses by way of company or asset based acquisitions.  It is regularly involved in discussions with suitable target companies but will always remain cautious, as the integration and extraction of enhanced value is of paramount importance to the Group.  

Employees, recruitment and retention

Recruitment and retention remains the biggest challenge to growth for a people business such as NCC Group. The last 12 months has seen a good intake of new testers and technical staff in the Assurance Division, as well as some excellent well qualified Information Security consultants. The Escrow Solutions UK sales teams have gone through a period of change with a refreshing of the teams as practices and processes change.

As a Group the Board is committed to employing the best people in the market wherever possible. The worldwide headcount is 334.

Outlook

The Board believes that the strategy of measured acquisitions, allied to strong organic growth will allow the Group to continue with its ambitious and exciting growth plans despite the widely acknowledged deteriorating economic environment.  

The Group's target remains to be the most significant player in each of the market niches in which the Group operates and to constantly evolve what is offered. The launch of the 24/7 Assured security monitoring proposition is a prime example of this and it will be a key product in the medium term. It also fits with the strategy of delivering products and services that are not discretionary. 

The start to the year sees Group Escrow Solutions renewals at £13.8m, up from £10.5m this time last year, and a verification order book of £1.6m which is over £2.1m worldwide.  

The Assurance Testing businesses' order books have improved to £4.6m from £2.2m in 2007 and have £3.9m of monitoring renewals forecast for 2008/09. The Consultancy business has £2.5m of orders up from £1.8m last year.  

In total the Group has orders and renewals totalling £26.9m for the current financial year.

The Group remains committed to the delivery of organic growth in all of the businesses worldwide as well as the newly acquired operations. The outlook for NCC Group remains good and the Board remains very confident in the Group's ability to deliver good levels of sustainable growth.  

Consolidated income statement

for the year ended 31 May 2008

	Notes	2008	2007
		£000	£000
Revenue	2	35,745	25,400
Cost of sales		(20,055)	(13,365)
Gross profit		15,690	12,035
Administrative expenses before amortisation of intangible assets and exceptional items		(5,022)	(3,853)
Earnings before interest, tax, amortisation and exceptional items		10,668	8,182
Amortisation of intangible assets		(740)	(230)
Exceptional items	3	(711)	-
Total administrative expenses		(6,473)	(4,083)
Operating profit	2	9,217	7,952
Financial income	6	78	109
Finance expense excluding unwinding of discount		(269)	(174)
Net financing costs excluding unwinding of discount		(191)	(65)
Unwinding of discount effect relating to deferred consideration on business combinations		(333)	(102)
Financial expenses	6	(602)	(276)
Net financing costs		(524)	(167)
Profit before taxation	4	8,693	7,785
Taxation	7	(2,340)	(2,411)
Profit for the year		6,353	5,374
Attributable to equity holders of the parent company		6,353	5,374
Profit for the year		6,353	5,374
Earnings per share	9
Basic earnings per share		18.9p	16.5p
Diluted earnings per share		18.3p	15.9p

Group balance sheet

at 31 May 2008

	Notes	2008		2007
		£000	£000	£000	£000
Non current assets
Intangible assets	10	51,833		39,302
Plant and equipment		1,939		1,482
Deferred tax assets		1,145		2,005
Total non-current assets		54,917		42,789
Current assets
Trade and other receivables	12	12,351		7,757
Cash and cash equivalents		1,142		4,377
Total current assets		13,493		12,134
Total assets			68,410		54,923
Equity
Issued capital	17	336		326
Share premium		21,537		19,929
Retained earnings		17,569		13,144
Currency translation reserve		12		39
Total equity attributable to equity holders of the parent			39,454		33,438
Non current liabilities
Interest bearing loans	16	54		3,500
Other financial liabilities	16	92		3,782
Deferred tax liability		1,499		473
Total non current liabilities		1,645		7,755
Current liabilities
Interest bearing loans		4,500		-
Trade and other payables	14	11,270		3,931
Deferred revenue	15	11,009		8,620
Current tax payable		532		1,179
Total current liabilities		27,311		13,730
Total liabilities			28,956		21,485
Total liabilities and equity			68,410		54,923

These financial statements were approved by the Board of Directors on 2 July 2008 and were signed on its behalf by:

Rob Cotton

Chief Executive

NCC Group plc

Group cash flow statement

for the year ended 31 May 2008

	Notes	2008	2007
		£000	£000
Cash inflow from operating activities
Profit for the year		6,353	5,374
Adjustments for:
Depreciation charge		1,045	688
Share based charges		742	575
Amortisation of intangible assets		740	230
Net financing costs		191	167
Profit on sale of plant and equipment		(5)	-
Income tax expense		2,340	2,411
Profit for the year before changes in working capital		11,406	9,445
Increase in receivables		(3,620)	(1,976)
Increase in payables		3,460	314
Cash generated from operating activities before interest and tax		11,246	7,783
Interest paid		(489)	(166)
Income taxes paid		(2,657)	(2,449)
Net cash generated from operating activities		8,100	5,168
Cash flows from investing activities
Interest received		273	109
Proceeds from the sale of plant and equipment		69	1
Acquisition of plant and equipment		(1,466)	(734)
Acquisition of business	13	(10,418)	(3,641)
Net cash used in investing activities		(11,542)	(4,265)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital		1,618	16
Proceeds from borrowings		993	3,500
Purchase of own shares		(559)
Payment of bank loans		-	(3,900)
Equity dividends paid		(1,817)	(1,304)
Net cash from financing activities		235	(1,688)
Net (decrease) in cash and cash equivalents	18	(3,207)	(785)
Cash and cash equivalents at beginning of year		4,377	5,139
Effect of exchange rate fluctuations on cash held		(28)	23
Cash and cash equivalents at end of year		1,142	4,377

Statement of changes of equity

for the year ended 31 May 2008

Group

	Share capital	Share premium	Retained earnings	Currency translation	Total Equity
	£000	£000	£000	£000	£000
Balance at 1 June 2006	326	19,913	7,964	15	28,218
Share based charges	-	-	575	-	575
Deferred tax on share based payments	-	-	535	-	535
Profit for the year	-	-	5,374	-	5,374
Shares issued	-	16	-	-	16
Currency translation reserve	-	-	-	24	24
Dividends to shareholders	-	-	(1,304)	-	(1,304)
Balance at 31 May 2007	326	19,929	13,144	39	33,438
Balance at 1 June 2007	326	19,929	13,144	39	33,438
Share based charges	-	-	742	-	742
Purchase of own shares	-	-	(559)	-	(559)
Deferred tax on share based payments	-	-	(294)	-	(294)
Profit for the year	-	-	6,353	-	6,353
Shares issued	10	1,608	-	-	1,618
Currency translation reserve	-	-	-	(27)	(27)
Dividends to shareholders	-	-	(1,817)	-	(1,817)
Balance at 31 May 2008	336	21,537	17,569	12	39,454

(forming part of the financial statements)

1 Accounting policies

Basis of preparation

NCC Group plc ('the Company') is a company incorporated in the UK.

The Group financial statements consolidate those of the company and its subsidiaries (together referred to as the 'Group'). The parent company financial statements present information about the Company as a separate entity and not about its Group.

Both the parent and the Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU ('Adopted IFRS'). On publishing the parent company financial statements here together with the Group financial statements, the company is taking advantage of the exemption in s230 of the Companies Act 1985 not to present its individual income statement and related notes that form a part of this release.

2 Segmental information

The Group is organised into three primary business segments; Escrow Solutions, Assurance Testing and Consultancy. These three segments are the Group's primary reporting format for segment information. Escrow Solutions (Europe) includes amounts previously reported as Escrow Solutions Germany. All segments are located in the UK unless indicated otherwise.

	2008 £000	2007 £000
Revenue by business segment
Escrow Solutions (UK)	15,724	13,790
Escrow Solutions (Europe)	1,094	203
Escrow Solutions (US)	1,190	1,028
Total Escrow Solutions	18,008	15,021
Assurance Testing	12,835	5,795
Consultancy	4,902	4,584
Total revenue	35,745	25,400
Operating profit by business segment
Escrow Solutions (UK)	9,393	8,182
Escrow Solutions (Europe)	376	(476)
Escrow Solutions (US)	394	248
Total Escrow Solutions	10,163	7,954
Assurance Testing	1,678	740
Consultancy	726	717
Segment operating profit	12,567	9,411
Head office costs	(1,899)	(1,229)
Operating profit before amortisation and exceptional items	10,668	8,182
Amortisation of intangible assets Escrow (US)	(115)	(118)
Amortisation of intangible assets Assurance Testing	(458)	(112)
Amortisation of intangible assets Escrow Europe	(167)	-
Operating profit before exceptional items	9,928	7,952
Exceptional items	(711)	-
Operating profit	9,217	7,952

Interest and tax are not allocated to business segments and there are no inter segment sales.

The table below provides additional disclosure on revenue by geographical market where the customer is based.

	2008 £000	2007 £000
Revenue by geographical segment
UK	29,238	20,620
Rest of Europe	2,745	1,756
Rest of the World	3,762	3,024
Total revenue	35,745	25,400

3 Exceptional Items

The Group identifies separately items as 'exceptional'. These are items which in the management's judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.

Exceptional items in the year ended 31 May 2008 were costs relating to the move to the London Stock Exchange's Official List on 13 July 2007 (£531,000) and reorganisation costs following the acquisition of Escrow Europe (£180,000).

4 Expenses and auditors' remuneration

	2008	2007
	£000	£000
Profit before taxation is stated after charging/(crediting):
Amounts receivable by auditors and their associates in respect of:
Audit of these financial statements	32	5
Audit of financial statements of subsidiaries pursuant to legislation	10	29
Other services pursuant to legislation	-	5
Services relating to corporate finance transactions entered into or proposed to be entered into by or on behalf of the Company or Group	115	-
Depreciation and other amounts written off tangible and intangible fixed assets:
Owned	1,045	688
Amortisation of intangible assets	740	230
Exchange losses	15	11
Operating lease rentals charged:
Hire of property, plant and equipment	604	305
Other operating leases	420	445
Profit on disposal of fixed assets	(5)	-

5 Staff numbers and costs

Group

The average number of persons employed by the Group during the year, including directors is analysed by category as follows:

	Number of employees
	2008	2007
Operational	77	59
Administration, sales and marketing	230	179
	307	238

The aggregate payroll costs of these persons were as follows:

	2008	2007
	£000	£000
Wages and salaries	14,315	9,829
Share based payments	742	575
Social security costs	1,891	1,120
Other pension costs	324	257
	17,272	11,781

6 Net financing costs

	2008	2007
	£000	£000
Financial income
Interest on short term deposits	78	109
	78	109
Financial expenses
Interest payable on bank loans and overdrafts	(269)	(163)
Amortisation of deal fees on term loans	-	(11)
Deferred consideration finance expense (see below)	(333)	(102)
	(602)	(276)

The deferred consideration finance expense of £333,000 (2007: £102,000) relates to the acquisition of Site Confidence, Secure Test and Escrow Europe.

Deferred consideration related to the acquisition of subsidiary undertakings has been discounted to present values. The unwinding of the discount has been treated as a finance expense and is analysed in the table below:

Deferred consideration finance expense			2008	2007
			£000	£000
Site Confidence Limited			233	102
Secure Test Limited			76	-
Escrow Europe Holdings B.V.			24	-
			333	102

 The discount rate used was 6.5% (2007: 6.5%). 

The total net present value of the deferred contingent consideration as at 31 May is shown in the following table:

Current liabilities - deferred consideration			2008	2007
			£000	£000
Site Confidence Limited			3,908	891
Secure Test Limited			1,485	-
Escrow Europe Holdings B.V.			717	-
Source Harbor Inc			-	105
			6,110	996
Non-current liabilities deferred consideration (note 16)
Site Confidence Limited (transferred to current liabilities)			-	3,675
Secure Test Limited			-	-
Escrow Europe Holdings B.V.			-	-
			-	3,675

7 Taxation 

Recognised in the income statement

		2008	2007
		£000	£000
Current tax expense
Current year		2,029	2,571
Adjustment to tax expense in respect of prior periods		4	(11)
Foreign tax		(10)	12
Total current tax		2,023	2,572
Deferred tax		317	(161)
Tax in income statement		2,340	2,411

Reconciliation of effective tax rate

		2008	2007
		£000	£000
Profit before taxation		8,693	7,785
Current tax using the UK corporation tax rate of 30% (2007: 30%)		2,608	2,336
Effects of:
Items not (taxable)/ deductable for tax purposes		(257)	74
Foreign tax		(1)	12
Marginal relief		(2)	-
Difference in tax rates (Deferred tax)		(5)	-
Difference in tax rates (Current tax)		(22)	-
Adjustment to tax charge in respect of prior periods		19	(11)
Total current tax		2,340	2,411

8 Dividends

	2008 £000	2007 £000
Dividends paid and recognised in the year	1,817	1,304
Dividends proposed but not recognised in the year	1,596	1,060
Dividends per share paid and recognised in the year	2.25p	4.00p
Dividends per share proposed but not recognised in the year	4.75p	3.25p

9 Earnings per share

The calculation of earnings per share is based on the following:

	2008 £000	2007 £000
Profit for the year	6,353	5,374
	Number of  Shares 000's	Number of  Shares 000's
Basic weighted average number of shares in issue	33,653	32,611
Dilutive effect of share options	1,021	1,256
Diluted weighted average shares in issue	34,674	33,867

10 Intangible assets - Group

		Customer contracts and relationships	Goodwill	Total
		£000	£000	£000
Cost
At 1 June 2006		2,250	28,217	30,467
Additions		1,964	7,148	9,112
At 31 May 2007		4,214	35,365	39,579
Additions		4,515	8,756	13,271
At 31 May 2008		8,729	44,121	52,850
Amortisation
At 31 May 2007		277	-	277
Charge for year		740	-	740
At 31 May 2008		1,017	-	1,017
Net book value
At 31 May 2008		7,712	44,121	51,833
Net book value
At 31 May 2007		3,937	35,365	39,302

The Group has made two acquisitions in the year, details of which are included in note 13. 

Goodwill considered significant in comparison to the Group's total carrying amount of such assets have been allocated to cash generating units or groups of cash generating units as follows:

	Goodwill
	2008	2007
Cash generating units	£000	£000
Escrow	22,871	22,871
Assurance Testing	2,301	2,301
Consultancy	2,229	2,229
NCC Group plc	27,401	27,401
NCC Group Inc	1,218	1,354
Site Confidence Limited	6,610	6,610
Secure Test Limited	3,351	-
Escrow Holdings Europe B.V.	5,541	-
	44,121	35,365

NCC Group Inc includes goodwill on the acquisition of the escrow division of Recall Information Management Inc and Source Harbor Inc. The recoverable amount of the cash generating units has been calculated with reference to its fair value in use. In calculating this value, management have used the following assumptions. Management have used experience in determining the values assigned to each key assumption, sales levels are based on historical trends and a prudent estimate of market growth. The period over which management approved forecasts are based is three years using a discount rate of 11.5%, the growth rate beyond 3 years is assumed to be zero. There is significant headroom on this basis. 

11 Plant and equipment - Group

	Computer equipment	Plant and equipment	Fixtures and fittings	Motor vehicles	Total
	£000	£000	£000	£000	£000
Cost
At 1 June 2006	2,096	358	500	197	3,151
Additions	627	14	56	42	739
Acquisition of Site Confidence Limited	381	33	38	-	452
Disposals	(1)	-	-	-	(1)
At 31 May 2007	3,103	405	594	239	4,341
Additions	828	-	480	164	1,472
Acquisition of group companies	115	-	95	-	210
Disposals	-	-	-	(122)	(122)
At 31 May 2008	4,046	405	1,169	281	5,901
Depreciation
At 1 June 2006	1,442	193	233	26	1,894
Charge for year	458	64	109	57	688
On disposals	244	10	23	-	277
At 31 May 2007	2,144	267	365	83	2,859
Charge for year	757	56	160	72	1,045
Acquisition of group companies	69	-	48	-	117
Disposals	-	-	-	(59)	(59)
At 31 May 2008	2,970	323	573	96	3,962
Net book value
At 31 May 2008	1,076	82	596	185	1,939
Net book value
At 31 May 2007	959	138	229	156	1,482

12 Trade and other receivables

	Group	Group	Company	Company
	2008	2007	2008	2007
	£000	£000	£000	£000
Trade receivables	10,235	5,792	-	-
Amounts owed by group undertakings	-	-	-	235
Prepayments and accrued income	2,116	1,965	-	-
	12,351	7,757	-	235

13 Acquisitions

A. On 1 August 2007 the Group acquired 100% of the share capital of Secure Test Limited for a maximum consideration of £4,000,000 of which £1,500,000 has been withheld subject to the achievement of performance criteria specified in the purchase agreement. The present value of the deferred consideration on 1 August 2007 was £1,408,000. The performance conditions are required to be satisfied by July 2008.

The acquisition had the following effect on the Group's assets and liabilities:

	Acquiree's  book values	Fair value  Adjustments	Acquisition amounts
	£000	£000	£000
Acquiree's identifiable net assets at the acquisition date:
Plant and equipment	60	-	60
Trade and other receivables	550	-	550
Deferred tax asset	-	29	29
Deferred tax liability	-	(154)	(154)
Cash	222	-	222
Creditors & Accruals	(438)	-	(438)
Intangible assets purchased	-	512	512
Net identifiable (liabilities) / assets	394	387	781
Goodwill on acquisition			3,352
Maximum consideration to be paid including expenses			4,133
Less purchase consideration withheld			(1,408)
Net cash outflow			2,725
Cash acquired			(222)
Net cash outflow excluding cash acquired			2,503

Goodwill has arisen on the acquisition because the purchase price exceeds the fair value of the separately identifiable net assets acquired including £512,000 assigned to customer relationships and contracts. Goodwill represents synergies, business processes and the assembled value of the work force including industry specific knowledge and technical skills.

From the date of acquisition Secure Test Limited contributed an operating profit before amortisation of intangible assets of £337,000 and revenue of £3,150,000 to the Group consolidated income statement for the year ended 31 May 2008. After amortisation of intangible assets, operating profits were £169,000. 

B. On 22 January 2008 the Group acquired 100% of Escrow Europe Holdings B.V. for a maximum consideration of £7,955,000 of which £2,299,000 was withheld subject to the achievement of performance criteria specified in the purchase agreement. A second instalment of £647,000 was paid on 10 April 2008 in relation to the partial achievement of the performance conditions. The remaining performance conditions are due to be satisfied by July 2008, £693,000 is recognised as a liability in the financial statements for the year ended 31 May 2008 in relation to the final instalment. 

The acquisition had the following effect on the Group's assets and liabilities.

	Acquiree's  book values	Fair value  Adjustments	Acquisition amounts
	£000	£000	£000
Acquiree's identifiable net assets at the acquisition date:
Goodwill	583	-	583
Plant and equipment	33	-	33
Trade and other receivables	428	-	428
Tax recoverable	25	-	25
Deferred tax liability	-	(1,121)	(1,121)
Cash	98	-	98
Creditors and Accruals	(278)	-	(278)
Interest bearing loans	(61)		(61)
Deferred consideration on acquisition	(319)		(319)
Deferred Income	(823)		(823)
Intangible assets purchased	-	4,003	4,003
Net indentifiable assets	(314)	2,882	2,568
Goodwill on acquisition			4,957
Expected consideration to be paid including expenses			7,525
Less purchase consideration withheld			(693)
Net cash outflow			6,832
Cash acquired			(98)
Net cash outflow excluding cash acquired			6,734

Goodwill has arisen on the acquisition because the purchase price exceeds the fair value of the separately identifiable net assets acquired including £4,003,000 assigned to customer relationships and contracts. Goodwill represents synergies, business processes and the assembled value of the work force including industry specific knowledge and technical skills. 

From the date of acquisition Escrow Europe Holdings B.V. contributed an operating profit before amortisation of intangible assets of £381,000 and revenue of £849,000 to the Group consolidated income statement for the year ended 31 May 2008. After amortisation of intangible assets, operating profits were £214,000.

C. On 7 July 2006, the Group acquired the trade and net assets of Source Harbor Inc for a maximum consideration of £897,000 of which £111,000 was withheld subject to the achievement of performance criteria specified in the purchase agreement. 

The performance conditions were required to be satisfied by 30 September 2006 were not achieved and the liability for deferred consideration recognised in the financial statements for the year ended 31 May 2007 of £111,000 was reversed, in addition a refund of £25,000 was paid 

back to the group in recognition of the shortfall in performance levels, This has been accounted for by reducing the carrying value of goodwill.

D. If all of the acquisitions had occurred at the beginning of the financial year it is estimated that the consolidated revenue and operating profit for the year ended 31 May 2008 would have been approximately £37.5m and £11.2m respectively.

14 Trade and other payables

	Group	Group	Company	Company
	2008	2007	2008	2007
	£000	£000	£000	£000
Trade payables	965	431	-	-
Amounts owed to Group undertakings	-	-	2,987	5,807
Interest payable	4	29	-	-
Non trade payables	1,655	963	-	-
Deferred consideration on acquisition of subsidiary (note 6)	6,110	996	-	-
Accruals	2,536	1,512	172	49
	11,270	3,931	3,159	5,856

15 Deferred revenue

	Group	Group	Company	Company
	2008	2007	2008	2007
	£000	£000	£000	£000
Deferred revenue	11,009	8,620	-	-
	11,009	8,620	-	-

Deferred revenue of £9,043,000 (2007: £6,856,000) consists of Escrow Solutions agreement revenue and maintenance revenue that has been deferred to be released to the income statement over the contract term on a pro-rata basis. 

Deferred revenue of £1,966,000 (2007: £1,764,000) consists of internet monitoring and load testing agreement revenue that has been deferred to be released to the income statement over the contract term on a pro-rata basis. 

16 Non-current liabilities

	Group	Group	Company	Company
	2008	2007	2008	2007
	£000	£000	£000	£000
Unsecured bank loan	54	-	-	-
Revolving credit facility	-	3,500	-	-
Other financial liabilities	92	3,782
Total	146	7,282	-	-
Issue costs	-	(26)	-	(26)
Amortisation of issue costs	-	26	-	26
Net book value	146	7,282	-	-

The issue costs have been amortised to zero since the term loan to which it relates has been repaid.

Other financial liabilities of £92,000 relates to the balance of a rent free period (2007: £107,000) which is released to the income statement over the term of the lease. In the prior year, £3,675,000 related to deferred consideration on acquisitions.

17 Called up share capital

		Number of shares	2008	2007
			£000	£000
Authorised
Ordinary shares of 1p each		50,000,000	500	500
			500	500
Allotted, called up and fully paid
Ordinary shares of 1p each at the beginning of the year		32,613,969	326	326
Ordinary shares of 1p each issued in the year		1,005,471	10	-
Ordinary shares of 1p each at the end of the year		33,619,440	336	326

During the year 1,005,471 shares were issued for total consideration of £1,618,000 settled in cash. 

18 Cash and cash equivalents

	At beginning of year	Cash flow	Non cash items	At end of year
	£000	£000	£000	£000
Cash and cash equivalents per balance sheet	4,377	(3,207)	(28)	1,142
Cash and cash equivalents per cash flow statement	4,377	(3,207)	(28)	1,142

 

END

 

 

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