Half Yearly Report

RNS Number : 0578M

NCC Group PLC

22 January 2009

 



NCC Group plc

Strong organic growth supports 13% increase in profits and dividend up 33%

22 January 2008.  NCC Group plc (LSE: NCC, 'NCC Group' or 'the Group'), the independent information security assurance group, has reported its interim results for the six months to 30 November 2008.

Financial Highlights

• Group revenue up 27% to £20.8m (£16.4m in 2007) - organic growth 18% 

• Group adjusted operating profits* increased by 17% to £5.5m (£4.7m in 2007) - organic growth 9%

  • Escrow Solutions operating profits up 19% to £5.5m

  • Assurance Testing operating profits up 25% to £1.0m

  • Consultancy operating profits up 71% to £0.2m

• Group adjusted pre tax profits* up by 13% to £5.2m (£4.6m in 2007)

• Adjusted diluted earnings* per share up by 13% to 11.0p (9.8p in 2007) 

• Interim dividend up by 33% to 3.00p (2.25p in 2007)

• Ratio of cash inflow from operating activities before interest and tax to operating profit up to 119% (118% in 2007)

• Net debt of £11.9m following acquisition of NGSS Limited (£0.2m net debt in 2007) and payment of deferred consideration payments

Operational Highlights

• Acquisition of NGSS Limited, an Ethical Security Testing business, on 26 November 2008 for total consideration of up to £10.0m, established Group as largest Ethical Security Testing team in Europe

• Consultancy and Assurance have seen excellent growth as the public demands security over its information, held in both the public and private sectors

• New multi option £15m loan and overdraft facilities agreed in principle until July 2010

* Adjusted earnings measures: A reconciliation of adjusted operating profit, profit before tax and diluted earnings per share measures to reported adopted IFRS measures is set out in the notes.  The Directors consider that the adjusted measures better reflect the ongoing performance of the business.

Rob Cotton, NCC Group Chief Executive commented:

'Despite the current economic conditions; our focus on developing a number of complementary international information and security assurance businesses, by acquisition and organic growth, away from discretionary IT services expenditure continues to show excellent returns.

'A combination of our insulation from the worst features of the economic situation, our strong recurring revenues, cash generation and concentration on the fast growing information security markets gives us considerable confidence in our business, as demonstrated by our 33% increase in dividend. We remain on course to deliver another strong set of figures for this financial year.'

Enquiries:

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

Interim management report

Overview

NCC Group has delivered another very strong set of interim results. The Group has seen good organic growth and is also benefitting from all of its acquisitions, both from those businesses' own excellent performance but also as part of an enlarged Group, following their successful integration.

Group revenue grew by 27% to £20.8m (£16.4m in 2007) and adjusted operating profits by 17% to £5.5m (£4.7m in 2007). Excluding acquisitions, the Group's organic revenue growth was 18% and adjusted operating profits grew by 9%.

Adjusted diluted earnings per share improved 13% to 11.0p (9.8p in 2007) and the Board has increased the interim dividend by 33% to 3.00p (2.25p in 2007).

The Group continues to be highly cash generative with the ratio of operating cash before interest and tax of £5.9m, being 119% of operating profit before interest and tax (118% in 2007).

On 26 November 2008 NCC Group acquired Next Generation Security Software Limited ('NGSS') a Surrey based Ethical Security Testing business, for a cash consideration of up to £10.0m to strengthen substantially its position in the fast growing network, testing and software security market.

Although not immune to the current economic environment, the Group's strategy over the last few years has been to develop and grow organically and by acquisition a portfolio of complementary information and security assurance products and services positioned away from discretionary IT services expenditure.

The Group has also established itself as a market leader and premier exponent of security testing which has meant that new client wins and projects have insulated the Group during demanding times.

The Group has seen very good growth in the vast majority of its services, with strong revenue growth whilst protecting its margins, work rates and balance sheet strength.

Group revenues & profits

Group revenues have increased by 27% to £20.8m (£16.4m in 2007). Organic revenue growth was 18%, after adjusting for the acquisitions of Secure Test and Escrow Europe. Acquisitions contributed £1.5m of revenue.  

The table below summarises the revenue by business segment and year on year growth.

	2008 £000	2007 £000	Growth	Organic Growth
Revenue by business segment
Escrow UK	7,847	7,766	1%	1%
Escrow Europe	1,196	125	n/a	n/a
Escrow US	831	516	61%	61%
Group Escrow Solutions	9,874	8,407	17%	6%
Assurance Testing	7,707	5,824	32%	21%
Consultancy	3,217	2,129	51%	51%
Total revenue	20,798	16,360	27%	18%

Group Escrow Solutions accounted for 48% of the total NCC Group revenue (51% in 2007). The enlarged Assurance Testing division following the acquisitions in 2007 of Secure Test, but not NGSS, now accounts for 37% (36% in 2007) of Group revenue. Consultancy revenue also increased and accounts for 15% (13% in 2007) with over half of the revenue relating to Information Security Consultancy.

The table below sets out the geographical turnover of the Group. 

	2008 30 November £000	2007 30 November  £000
Revenue by geographical segment
UK	16,867	13,695
Rest of Europe	1,651	882
Rest of the World	2,280	1,783
Total revenue	20,798	16,360

Adjusted operating profits, operating profit excluding amortisation of intangible assets and exceptional items but not share based deductions, increased by 17% to £5.5m (£4.7m in 2007).  This reflects the continued investments in infrastructure and support functions of the enlarged Group, which will be beneficial in maintaining control of the acquisitions now and for the next financial year.  The acquisitions contributed £0.3m of adjusted operating profit with organic growth of 8% year on year.  

The table below separates out the adjustments made to obtain the adjusted operating profit and adjusted profit before tax.

	Operating profit 2008	Operating profit 2007	Profit before tax 2008	Profit before tax 2007
	£000	£000	£000	£000
As per financial statements	4,947	3,905	4,680	3,699
Amortisation of intangible assets	508	272	508	272
Exceptional items	-	481	-	481
Unwinding of discount	-	-	21	147
Adjusted profits	5,455	4,658	5,209	4,599
Share based charges deducted above	460	359	460	359
Adjusted profit before share based charges	5,915	5,017	5,669	4,958

The effects of exchange rate fluctuations in the USD and Euro increased revenue by £0.1m and operating profits by £18,000.  The Euro did not strengthen significantly until after November 2008 so the majority of the movement is USD related.  The Group's exposure to currency fluctuations is insignificant.

Group adjusted pre tax profits were up 13% to £5.2m (£4.6m in 2007) and reported pretax profit increased by 27% to £4.7m (2007: £3.7m).

Group Escrow 

Escrow UK:  A fall in verification testing revenues, as highlighted in the Group's IMS in October 2008, held back revenues to £7.8m (£7.8m in 2007). Excluding Verification Testing, Escrow UK grew by 6%. Operating profit for the division increased by 10% to £4.9m (£4.5m in 2007).  

The software market place, particularly in financial services, has seen a slowdown of new system upgrades and implementations and this is the prime time to sell the benefits of Verification Testing to customers. This, as well as the demise of a number of customers, has resulted in a fall off in Verification Testing revenues. For example, with the demise of Lehman Brothers, the Group lost a large forward commitment to carry out a number of escrow full verifications.  Escrow Verification Testing revenue, within the overall UK Escrow revenue, fell 20% to £1.2m (£1.5m in 2007) which is £0.5m less than expected for the first half of the year.  

This trend is expected to continue for the remainder of the financial year. However, the Group's marketing message that even those who are perceived to be well positioned and strong may not survive in the current economic climate. This works to emphasise the need to protect applications retrospectively and verify the software, as well as verifying software held under existing escrow agreements. This is partially filling the short fall in Verification Testing revenue. By the year end the Board aims to have significantly closed the gap.

The consolidation in the banking sector has led to a deferral of decision making rather than any loss of opportunity.  Escrow UK implemented price increases of an average of 8% for new business from November 2008 and for renewals from January 2009.

There are now 16,822 beneficiaries (15,946 in May 2008) to the 8,257 Escrow agreements (8,124 in May 2008), including the minimum annual fees (844 in May 2008).  The annualised growth rate in beneficiaries, excluding minimum annual fees, is 11.3%.  The range of Escrow products, services and associated sales within the Escrow operations is much broader than just agreements and beneficiaries. The number of agreements and beneficiaries will no longer be reported because in isolation it is misleading.

The underlying termination rate remains normal as customers understand the critical importance of escrow, but the demise of banks and their subsequent consolidation, as well as the failure of some retailers and other businesses has resulted in a slight rise in termination rates over the last six months. The Group does not expect terminations to exceed the planning assumption of 11% but is currently experiencing a rate closer to that level rather than the below 10% rate previously seen.   

Escrow Europe:  Revenues from this business acquired in January 2008 were £1.2m, representing a positive performance and producing operating profits before amortisation of £0.4m. It has integrated into the Group well with a number of planned management changes implemented. The Group expects to see further growth in the second half of the financial year. 

Escrow USA:  Revenue increased 61% to £0.8m (£0.5m in 2007) and the Group continues to develop a number of verification and testing initiatives.  Operating profits before amortisation of intangible assets increased by 25% to £0.2m (£0.1m in 2007).  

The USA unit within the NGSS testing operation will operate from the San Jose facility. The Group aims to exploit the exceptional reputation NGSS has in the USA and establish a larger operation there.  

Group Escrow renewals:  The rate of agreement completions, renewals and terminations have been such that the Group is forecasting UK escrow renewals to be £11.2m (£11.2m forecast at May 2008), with worldwide renewals forecast to be £13.8m (£13.8m forecast at May 2008) for the year ending 31 May 2009. 

Assurance Testing 

Through a combination of strong organic growth and the benefits of integration, revenue increased substantially by 32% to £7.7m (£5.8m in 2007), of which 21% was through organic growth, whilst operating profits increased 25% to £1.0m (£0.8m in 2007).

Assurance Testing encompasses Secure Test security testing and Site Confidence web monitoring, operating from Dorking, Manchester and Thame, as well as NGSS who perform security testing and forensics from Sutton, Surrey. The division now has nearly 200 employees.

This Division continues to see strong growth from Secure Test through security testing, as organisations today face the stark reality of stealthy, targeted and financially motivated attacks that seek to exploit known and unknown vulnerabilities.  Many of these sophisticated threats and attacks, often by organised crime, evade traditional security solutions, leaving organisations vulnerable to data theft and fraud. 

The growing volumes of spam, viruses, worms, Trojans and blended threats, coupled with more sophisticated malicious attacks, make it imperative that organisations have robust and adaptable defences to protect their networks, users and data from a wide range of vulnerabilities.

Today's hacker landscape seldom resembles tomorrow's, as the 'arms race' continues apace. In 2008 NCC Group saw the significant threat of malware expand beyond a traditional Microsoft base, to attack vulnerabilities in Apple Mac and other cross-platform software. 

This coupled with the proliferation of portable devices such as the iPhone, iPod Touch, Google Android phone and ultra-mobile net-book makes it increasingly difficult to see how organisations can fully defend themselves and their networks, desktops, laptops and mobile devices against a myriad of emerging threats.  NCC Group is well placed to tackle this challenge.

The Site Confidence operation which encompasses the web site monitoring and load testing business, continued to show good growth. The need for high performance from web sites, to the point where users expect almost instant access, and load management on sites grows in importance. However, the rate of revenue growth has been slightly slower as some retailers have held back or delayed monitoring or load testing expenditure.  

To highlight the changing nature of retailing and the importance of web performance, 3.8 million people bought goods online on Christmas Day 2008 and spent on average £26.80 each, a total of £102 million, 21% more than in 2007.  The number of people shopping on Christmas Day was actually 14% lower than in 2007, possibly due to a number of the key sales starting on Christmas Eve and before. However, the volume of transactions was 26% higher.

Consultancy

Consultancy revenue increased 51% to £3.2m (£2.1m in 2007) despite the worst economic market place the division has ever encountered. Utilisation for the division was 76% (61% in 2007) and Consultancy operating profits increased by 71% to £0.2m (£0.1m in 2007).  

This growth is again a reflection of careful market positioning as the Group ensures that the work performed for customers is essential rather than discretionary. Whilst the Group has been very successful at attracting new clients as a result of its reputation, it is the ability to retain them long term that is a key part of its success. Clients are retained by the quality of the division's people and as with the Assurance Testing division the Group employs the very best resource in the market, to ensure clients' expectations are bettered wherever possible.

Information Security now represents over 50% of this division's revenues as the Group continues to focus on this area and the Board expects this proportion to grow.  

24/7 Assured

The current assurance against hackers given by web products available in the market today does not live up to the expectation their names imply. Simply put, rudimentary errors in their construction allow for hackers to compromise the users' data rendering the assurance given to the end user meaningless. Whilst basic scanning can provide some element of safety a properly monitored and evaluated, tailored service is required to give that assurance to the end customer.  

A web safe service cannot be one size fits all. The 24/7 Assured service overcomes this, picking the best features of the Group's Assurance and Consultancy services, to give confidence by meeting head on each of the constituent threats, thus being able to offer credibility and assurance to the client and end user.  

The 24/7 Assured service is being fully launched during January this year and to date the Group is pleased with customers' responses from pilot projects. The Group anticipates that 24/7 Assured will not only deliver revenues in its own right, but help consolidate further existing revenues in the Assurance and Consultancy divisions.

Acquisition - NGSS Limited

On 26 November 2008 NCC Group acquired NGSS for a total cash consideration of up to £10.0m, with an initial payment of £5.0m. This was the Group's third acquisition in the information security testing arena. NGSS will form the cornerstone of the Group's premium security and forensic testing operation within the Assurance division. Its success will be through its research and development into the detection of new vulnerabilities and will provide another good source of opportunity for the Information Security section of the Consultancy division. 

To date NGSS is performing well and its acquisition now positions the Group firmly as the largest Ethical Security Testing team in the UK and Europe. It also provides NCC Group with the opportunity to develop further a testing team in the USA giving that business further critical mass. 

Earnings per share

Adjusted diluted earnings per share increased 13% to 11.0p (9.8p in 2007).  The growth in adjusted diluted earnings per share is lower than the growth in adjusted earnings of 14.7%. The difference between the growth in adjusted earnings and adjusted diluted earnings per share is due to a combination of the increased number of shares and dilutive options in issue in 2008 and the effect of the tax treatment of the professional fees incurred in listing on the London Stock Exchange's Official List in 2007.  

The table below separates out the adjustments made to obtain the adjusted diluted earnings per share.

	2008 30 November	2007 30 November
	Pence	Pence
Diluted earnings per share
Group diluted earnings per share - unadjusted	9.5	7.1
Amortisation of intangible assets	1.4	0.8
Exceptional items	-	1.4
Unwinding of discount	0.1	0.5
Adjusted Group diluted earnings per share	11.0	9.8

Reported basic earnings per share increased by 34% to 9.9p (7.4p in 2007).

Cash and funding

The Group continues to be highly cash generative with the ratio of operating cash before interest and tax of £5.9m being 119% of operating profit before interest and tax (118% in 2007). 

After accounting for acquisition cash outflows of £10.7m for NGSS Limited and the payment of deferred consideration for Site Confidence, Secure Test and Escrow Europe, at the period end the Group has £11.9m of net debt (£0.2m net debt in 2007) against its committed £15m facility.  

The Group's exposure to bad debt has been very low as it constantly assess the financial strength of customers and modify terms accordingly.

Capital expenditure has decreased to £0.6m (£0.9m in 2007) but with the refurbishment of the facilities in Dorking and the implementation of a new Group wide IT system, capital expenditure is likely to increase in the second half of the year. 

The Group remains committed to strong balance sheet management and is an advocate of the basic business principals of strong profitability and cash conversion, whilst borrowing only for value enhancing acquisitions that it can quickly and safely afford to repay.

To that end, the Group in January 2009 renewed its committed multi-option facility, extending it for a further 18 months to July 2010, for up to £13m, with an additional £2m overdraft. However, despite the cash generative nature of the Group's business and track record, the cost of borrowing, including arrangement and non-utilisation fees jump 10 fold to £200,000 (£20,000 in 2007) and the margin increase by 80 basis points to 1.65% above LIBOR.

Taxation

The reported tax charge for the six months ended 30 November 2008 is 29% of profit before tax and is based upon the expected tax charge for the year (34% in 2007.) The decrease is due to the fall in the tax rate in the year, as well as the impact last year of the exceptional disallowable expenses incurred in relation to the transfer to the London Exchange's Official List.

Dividends

In line with the continuing progressive dividend policy, the Board has approved the payment of an interim dividend of 3.00p (2.25p in 2007,) an increase of 33% on last year. This will be paid on 27 February 2009 to shareholders on the register at the close of business on 30 January 2009 with an ex-dividend date of 28 January 2009. 

This represents cover of 3.2 times (3.2 in 2007) based on basic earnings and cover of 3.8 times on an adjusted basic earnings basis (4.4 in 2007).

Current trading and outlook

The Group continues to promote the virtue of acting as independent trusted advisor.  NCC Group has successfully acquired and integrated five businesses that have extended and complemented its range of service and delivery offerings.  All of the Group's three divisions are in very good shape and are expected to continue to perform strongly throughout 2009 and beyond. 

The Assurance Testing and Consultancy order books have increased and now stand at £6.9m and £2.7m respectively (£4.6m and £2.5m in May 2008).  The Group will support NGSS's impressive track record and invest in the technical innovation that has made the business so reputable and successful in the security testing arena.  The renewal rate for Site Confidence monitoring is 89% (90% at May 2008), giving renewal revenue of £3.8m (£3.9m in May 2008) for this financial year.

The Escrow businesses expect annual renewals to be £13.8m (£13.8m in May 2008) in this financial year given the slightly higher termination rates. Escrow Verification Testing worldwide has a forward order book of £2.1m (£2.0m in May 2008).  In total the Group has orders and renewals totalling £29.3m for the current financial year.

Historically the Group's revenue has been biased towards the second half of the financial year and this is expected to continue to be the case again this year. The Board remains confident of a good second half to the financial year in line with current market expectations and sees further opportunities to develop the Group through organic growth whilst benefiting from the enhanced scale and integration of the recent acquisitions. 

Principal risks and uncertainties

The Group faces operational risks and uncertainties which the directors take reasonable steps to mitigate, however the directors recognise that such risks can never be eliminated completely. 

The principal operational risks and uncertainties the Group faces include those in relation to the recruitment of additional staff to meet the Group's ambitious growth plans, the entry of a significant competitor to threaten the Group's position in its domestic Escrow Solutions market, the occurrence of unforeseen difficulties in the integration of future acquisitions the Group may enter into and the dependence on key executives and senior managers.

Risk and uncertainties outside the Group's control include those relating to the availability of credit and the withdrawal of credit facilities due to the failure of the UK's banking system, implementation of changes in government policy for the procurement of IT Services and alterations to the legislative and taxation framework in which the Group operates.

Group income statement

	Notes	2008 six months ended 30 November (unaudited)	2007 six months ended 30 November (unaudited)	2008 year  ended  31 May  (audited)
		£000	£000	£000
Revenue	2	20,798	16,360	35,745
Cost of sales		(12,140)	(9,305)	(20,055)
Gross profit		8,658	7,055	15,690
Administrative expenses before amortisation of intangible assets		(3,203)	(2,397)	(5,022)
Earnings before interest, tax and amortisation		5,455	4,658	10,668
Amortisation of intangible assets		(508)	(272)	(740)
Exceptional items	3	-	(481)	(711)
Total administrative expenses		(3,711)	(3,150)	(6,473)
Operating profit	2	4,947	3,905	9,217
Financial income		16	58	78
Finance expense excluding unwinding of discount		(262)	(117)	(269)
Net finance expense excluding unwinding of discount		(246)	(59)	(191)
Unwinding of discount effect relating to deferred consideration on business combinations		(21)	(147)	(333)
Financial expenses		(283)	(264)	(602)
Net financing costs		(267)	(206)	(524)
Profit before taxation		4,680	3,699	8,693
Income tax expense	6	(1,364)	(1,247)	(2,340)
Profit for the period attributable to equity holders of the parent		3,316	2,452	6,353
Earnings per share	5
Basic earnings per share		9.9p	7.4p	18.9p
Diluted earnings per share		9.5p	7.1p	18.3p

Group balance sheet

	Notes	2008 30 November (unaudited)	2007 30 November (unaudited)	2008 31 May (audited)
		£000	£000	£000
Non current assets
Plant and equipment		2,012	1,922	1,939
Intangible assets		60,136	42,927	51,833
Deferred tax assets		999	1,159	1,145
Total non-current assets		63,147	46,008	54,917
Current assets
Trade and other receivables	8	15,432	9,924	12,351
Cash and cash equivalents		1,763	2,253	1,142
Total current assets		17,195	12,177	13,493
Total assets		80,342	58,185	68,410
Equity
Issued capital		337	335	336
Share premium		21,630	21,417	21,537
Retained earnings		19,090	14,437	17,569
Currency translation reserve		(50)	49	12
Total equity attributable to equity holders of the parent		41,007	36,238	39,454
Non current liabilities
Interest bearing loans		46	2,500	54
Other financial liabilities		84	100	92
Deferred tax liabilities		1,375	529	1,499
Total non current liabilities		1,505	3,129	1,645
Current liabilities
Interest bearing loans		12,000	-	4,500
Bank overdrafts		1,655	-	-
Trade and other payables	9	11,384	9,368	11,270
Deferred revenue		11,555	9,161	11,009
Current tax payable		1,236	289	532
Total current liabilities		37,830	18,818	27,311
Total liabilities		39,335	21,947	28,956
Total liabilities and equity		80,342	58,185	68,410

Group cash flow statement

		2008 six months ended 30 November (unaudited)	2007 six months ended 30 November (unaudited)	2008 year  ended 31 May (audited)
		£000	£000	£000
Cash inflow from operating activities
Profit for the period		3,316	2,452	6,353
Adjustments for:
Depreciation charge		624	455	1,045
Share based charges		460	359	742
Amortisation of intangible assets		508	272	740
Finance expense		246	59	191
Profit on sale of plant and equipment		(3)	(3)	(5)
Income tax expense		1,364	1,247	2,340
Operating cash flow before changes in working capital		6,515	4,841	11,406
Increase in receivables		(1,503)	(1,621)	(3,620)
Increase in payables		886	1,387	3,460
Cash generated from operating activities before interest and tax		5,898	4,607	11,246
Interest paid		(265)	(116)	(489)
Income taxes paid		(625)	(1,334)	(2,657)
Net cash generated from operating activities		5,008	3,157	8,100
Cash flows from investing activities
Interest received		16	58	273
Proceeds from the sale of plant and equipment		17	55	69
Acquisition of plant and equipment		(598)	(885)	(1,466)
Acquisition of business (net of cash acquired)		(10,746)	(3,394)	(10,418)
Net cash used in investing activities		(11,311)	(4,166)	(11,542)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital		94	1,497	1,618
Purchase of own shares		(658)	(559)	(559)
Proceeds from borrowings		8,500	-	993
Payment of bank loans		(1,008)	(1,000)	-
Equity dividends paid		(1,597)	(1,063)	(1,817)
Net cash from financing activities		5,331	(1,125)	235
Net decrease in cash and cash equivalents		(972)	(2,134)	(3,207)
Cash and cash equivalents at beginning of period		1,142	4,377	4,377
Effect of exchange rate fluctuations on cash held		(62)	10	(28)
Cash and cash equivalents at end of period		108	2,253	1,142

Group statement of changes of equity

	Share capital	Share premium	Retained earnings	Currency translation	Total equity
	£000	£000	£000	£000	£000
Balance at 1 June 2007	326	19,929	13,144	39	33,438
Share based charges	-	-	359	-	359
Deferred tax on share based payments	-	-	104	-	104
Profit for the period	-	-	2,452	-	2,452
Shares issued	9	1,488	-	-	1,497
Purchase of own shares	-	-	(559)	-	(559)
Foreign exchange translation differences	-	-	-	10	10
Dividends to shareholders	-	-	(1,063)	-	(1,063)
Balance at 30 November 2007	335	21,417	14,437	49	36,238
Balance at 1 June 2007	326	19,929	13,144	39	33,438
Share based charges	-	-	742	-	742
Deferred tax on share based payments	-	-	(294)	-	(294)
Profit for the period	-	-	6,353	-	6,353
Foreign exchange translation differences	-	-	-	(27)	(27)
Shares issued	10	1,608	-	-	1,618
Purchase of own shares	-	-	(559)	-	(559)
Dividends to shareholders	-	-	(1,817)	-	(1,817)
Balance at 31 May 2008	336	21,537	17,569	12	39,454
Balance at 1 June 2008	336	21,537	17,569	12	39,454
Share based charges	-	-	460	-	460
Profit for the period	-	-	3,316	-	3,316
Shares issued	1	93	-	-	94
Purchase of own shares	-	-	(658)	-	(658)
Foreign exchange translation differences	-	-	-	(62)	(62)
Dividends to shareholders	-	-	(1,597)	-	(1,597)
Balance at 30 November 2008 attributable to equity holders of the parent	337	21,630	19,090	(50)	41,007

Notes to the interim report

1 Accounting policies

Basis of preparation

This condensed interim report for the six months ended 30 November 2008 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, 'Interim Financial Reporting' as adopted by the European Union. The half yearly interim report does not contain all the information required for full annual financial statements and should be read in conjunction with the annual financial statements for the year ended 31 May 2008, which have been prepared in accordance with adopted IFRSs.

The financial information contained in this interim report does not amount to statutory financial statements within the meaning of section 240 Companies Act 1985. The financial information contained in this report has been prepared using the accounting policies applied for the year ended 31 May 2008 and is unaudited but has been reviewed by KPMG Audit Plc. 

The comparative figures for the financial year ended 31 May 2008 are not the company's statutory accounts for that financial year. Those accounts have been reported on by the company's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985.

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. 

	2008 30 November £000	2007 30 November £000	2008 31 May  £000
Revenue by business segment
Escrow Solutions (UK)	7,847	7,766	15,724
Escrow Solutions (Europe)	1,196	125	1,094
Escrow Solutions (US)	831	516	1,190
Total Escrow Solutions	9,874	8,407	18,008
Assurance Testing	7,707	5,824	12,835
Consultancy	3,217	2,129	4,902
Total revenue	20,798	16,360	35,745
Operating profit by business segment
Escrow Solutions (UK)	4,933	4,479	9,393
Escrow Solutions (Europe)	411	4	376
Escrow Solutions (US)	165	132	394
Total Escrow Solutions	5,509	4,615	10,163
Assurance Testing	975	778	1,678
Consultancy	215	126	726
Segment operating profit	6,699	5,519	12,567
Head office costs	(1,244)	(861)	(1,899)
Operating profit before amortisation and exceptional items	5,455	4,658	10,668
Exceptional items	-	(481)	(711)
Amortisation of intangible assets Escrow (US)	(65)	(57)	(115)
Amortisation of intangible assets Escrow (Europe)	(200)	-	(167)
Amortisation of intangible assets Assurance Testing	(243)	(215)	(458)
Operating profit	4,947	3,905	9,217

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

	2008 30 November £000	2007 30 November  £000	2008 31 May  £000
Revenue by geographical segment
UK	16,867	13,695	29,238
Rest of Europe	1,651	882	2,745
Rest of the World	2,280	1,783	3,762
Total revenue	20,798	16,360	35,745

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 six months ended 30 November 2008 were nil (2007: £481,000 in relation to the transfer to the London Stock Exchange's Official List) 

4 Dividends

	2008 30 November £000	2007 30 November £000	2008 31 May  £000
Dividends paid and recognised in the period	1,597	1,063	1,817
Dividends proposed but not recognised in the period	1,010	671	1,596
Dividends per share paid and recognised in the period	4.75p	3.25p	2.25p
Dividends per share proposed but not recognised in the period	3.00p	2.35p	4.75p

5 Earnings per share

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

	2008 30 November	2007 30 November	2008 31 May
	£000	£000	£000
Profit for the period used for earnings per share	3,316	2,452	6,353
Amortisation of intangible assets	508	272	740
Exceptional items	-	481	711
Unwinding of discount	21	147	333
Adjusted profit used for adjusted earnings per share	3,845	3,352	8,137
	Number of  shares 000's	Number of  shares 000's	Number of  shares 000's
Basic weighted average number of shares in issue	33,653	32,984	33,653
Dilutive effect of share options	1,329	1,325	1,021
Diluted weighted average shares in issue	34,982	34,309	34,674

6 Taxation

The Group tax charge represents the estimated annual effective rate of 29% (34% in 2007) applied to the profit before tax for the period. The interim period is regarded as an integral part of the annual period and all tax liabilities are disclosed as such. The decrease in the effective tax rate has arisen largely due to the impact in 2007 of the exceptional fees (£481,000 in relation to the transfer to the London Stock Exchange's Official List) which were treated as disallowable in the 2007 interim report.

7 Capital expenditure

Additions to plant and equipment during the period ended 30 November 2008 amounted to £598,000 (£885,000 in 2007). The net book value of equipment disposed during the period ended 30 November 2008 amounted to £14,000 (£51,000 in 2007).

8 Trade and other receivables 

	2008 30 November £000	2007 30 November £000	2008 31 May  £000
Trade debtors	10,822	7,816	10,235
Prepayments and accrued income	4,610	2,108	2,116
	15,432	9,924	12,351

9 Trade and other payables

	2008 30 November £000	2007 30 November £000	2008 31 May  £000
Trade creditors	845	908	965
Non trade payables	2,048	1,114	1,655
Accruals	3,595	1,985	2,536
Deferred consideration on acquisitions	4,895	5,331	6,110
Interest	1	30	4
	11,384	9,368	11,270

10 Acquisitions

A. On 26 November 2008 the Group acquired 100% of the share capital of Next Generation Security Software Limited for a maximum consideration of £10m of which £5m has been withheld subject to the achievement of performance criteria specified in the purchase agreement. The present value of the deferred contingent consideration on 26 November 2008 was £4.8m and is accounted for within trade and other payables (note 9). The performance conditions are required to be satisfied by 31 May 2009.  

	Acquiree's book values	Fair value Adjustments	Acquisition amounts
	£000	£000	£000
Acquiree's net assets at the acquisition date:
Plant and equipment	110	-	110
Trade and other receivables	1,600	-	1,600
Cash	685	-	685
Trade creditors and other liabilities	(970)	-	(970)
Net identifiable assets	1,425	-	1,425
Goodwill on acquisition			8,845
Maximum consideration to be paid including expenses			10,270
Less purchase consideration withheld			(4,814)
Net cash outflow			5,456
Cash acquired			(685)
Net cash outflow excluding cash acquired			4,771

Goodwill has arisen on the acquisition because the purchase price exceeds the net fair value of the separately identifiable assets, liabilities and contingent liabilities acquired.  Due to the timing of this acquisition only four days before the end of the interim reporting period no value has yet been assigned to intangible assets that existed at the acquisition date in these interim statements. A full valuation exercise of intangible assets is in the process of being completed and the effects of this valuation to the carrying amount of the acquiree's net assets as at the acquisition date will be included in the Group's annual report and accounts for the year ended 31 May 2009. Any goodwill remaining after this fair value exercise has been completed and accounted for will represent synergies, business processes and the assembled value of the work force included industry specific knowledge and technical skills.

As the acquisition of Next Generation Security Software Limited was completed only four days before the end of the interim period no revenue or profit of Next Generation Security Software Limited has been included in this interim report (£nil in 2007). If the acquisition had occurred at the beginning of the financial year the actual consolidated revenue and operating profit for the six months ended 30 November 2008 would have been approximately £23.8m and £5.3m respectively.

B. During the period, £5,975,000 was paid in relation to the settlement of deferred contingent consideration arising from the acquisitions of Site Confidence Limited, Secure Test Limited and Escrow Europe B.V.

11 Related party transactions

NCC Group's Non Executive Chairman Paul Mitchell is a director of Rickitt Mitchell & Partners Limited and the Group conducted business to the value of £182,000 with Rickitt Mitchell & Partners Limited during the period ending 30 November 2008. Included within the charge is £150,000 in relation to advice received in connection with the acquisition of Next Generation Security Software Limited and the remaining £32,000 relates to the services of the Non Executive Chairman. 

 

END

 

 

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