Half Yearly Report

RNS Number : 8136C

NCC Group PLC

22 January 2015

 



22 January 2015

NCC Group plc

Strong revenue growth of 15% drives profit up 6%

NCC Group plc (LSE: NCC, "NCC Group" or "the Group"), the international, independent provider of Escrow, Assurance and Domain Services, has reported its half year results for the six months to 30 November 2014.

Highlights

Financial

·      Group revenue increased 15% to £62.3m (£54.0m in 2013) - 17% on constant currency basis

o   International revenue now 47% (39% in 2013) of Group revenue

o   US revenue growth of 41% on a constant currency basis

·      Group adjusted operating profit* up by 6% to £12.4m (£11.8m in 2013)

o   Group adjusted operating profits* excluding Domain Services grew by 14% to £14.3m (£12.6m in 2013)

·      Reported operating profit was £11.1m (£11.6m in 2013)

·      Group adjusted pre-tax profit* increased 5% to £12.1m (£11.4m in 2013)

·      Adjusted fully diluted earnings* per share increased 6% to 4.50p (4.24p in 2013)

·      Interim dividend up 14% to 1.30p (1.14p in 2013)

·      Cash conversion ratio 105% of operating profit (104% in 2013)

Operational

·      Escrow achieving strong revenue growth of 4% to £15.4m (£14.8m in 2013)

·      Escrow adjusted operating profits* up by 6% to £8.9m (£8.4m in 2013)

·      Assurance revenues increasing by 20% (15% in 2013) to £46.9m (£39.2m in 2013)

·      Assurance adjusted operating profits* up 23% to £7.7m (£6.3m in 2013)

·      Domain Services expanded by £14.9m acquisition of Open Registry (20 January 2015)

·      Purchase of .trust and sale of .secure completed

Outlook

·      Total Group orders and renewals up 11% to £57.2m (£51.4m in November 2013) for the current financial year

·      With Open Registry, Domain Services is now able to offer an end to end, secure domain service capabilities

* Operating profit is adjusted for amortisation of acquired intangibles, exceptional items and share based payment charges. Pre-tax profit is adjusted for these items and the unwinding of the discount on the acquisitions' contingent consideration.

Rob Cotton, Group Chief Executive, comments:

"Both the Escrow and Assurance businesses have seen strong organic growth in revenue and profitability, with a particularly stand out performance by our US operations - it saw a revenue jump up of 41%, on a constant currency basis.

"Our Domain Services division has been transformed.  .trust was successfully acquired whilst we sold .secure on very favourable terms.  The recent acquisition of the Open Registry group of businesses, now means that in the very dynamic and growing domain markets, we can provide a complete suite of secure services to our corporate clients around the world."

Enquiries:

NCC Group  (www.nccgroup.com)	[phone]
Rob Cotton, Chief Executive
Atul Patel, Group Finance Director
Instinctif Partners
Adrian Duffield/Chantal Woolcock	[phone]

Overview

Group revenue in the first half increased by 15% to £62.3m (£54.0m in 2013), or 17% on a constant currency basis, with good growth coming from both the Assurance and Escrow divisions.  All the growth was organic.

International revenue, the majority of which is derived from the US, has continued to grow strongly and is now 47% (39% in 2013) of total Group revenue.

Group adjusted operating profit increased by 6% to £12.4m (£11.8m in 2013). Escrow operating profit grew by 6% to £8.9m (£8.4m in 2013) and Assurance by 23% to £7.7m (£6.3m in 2013). Good operational cost control within Domain Services saw expenditure at £1.9m (£0.8m in 2013).

Domain Services has completed a number of key developments; .trust was bought whilst after the period end .secure was sold. The division's capabilities were significantly enhanced by the acquisition of Open Registry for up to £14.9m on 20 January 2015. Open Registry Domain Services, as it is now known, provide backend registry operations to brand customers as well as registrar and trademark validation services. The division is now able to deliver a secure end-to-end solution for all customers' domain needs.

Group adjusted diluted earnings per share improved 6% to 4.50p (4.24p in 2013). The Board has continued its progressive dividend policy, increasing the interim dividend by 14% to 1.30p (1.14p in 2013).

The Group continues to be highly cash generative with the ratio of operating cash flow before interest and tax being 105% of operating profits (104% in 2013). Net debt at the end of the period was £31.3m (£26.2m in 2013) against existing facilities of £45m at the period end.  In January 2015 this facility was increased to £60m.

Current trading & outlook

The Group remains focused on risk mitigation and delivering client peace of mind, by providing a complementary range of services that has the width and depth to provide multinational clients with a total solution to their information security issues.

The approach of all three Divisions remains unchanged; to develop the business by a combination of acquisitions of earnings enhancing, high quality businesses, with strong organic growth, all focused away from areas of discretionary expenditure.

The Escrow businesses expect annual renewals to be £18.3m (£18.1m in November 2013) in this financial year, based on termination rates at 11%. The Escrow verification testing worldwide order book stands at £2.3m (£2.7m in November 2013). Assurance order books have improved to £29.8m (£23.8m in November 2013) and have £6.8m of monitoring renewals forecast for the current financial year (£6.8m in November 2013).

In total, the Group's orders and renewals for the current financial year have increased by 11% to £57.2m (£51.4m in November 2013), excluding the newly acquired Open Registry business.

The Group's revenue has always been biased towards the second half of the financial year and this is expected to continue this year.

The expansion of service offerings within Domain Services substantially increases the Group's ability to provide an end to end service to customers.  The Group expects that this will see a strong take up of .trust domains in due course, following a process that will involve greatly improving customers' web security in their existing web estate.

The Group is operating in growth markets and expects that the enhanced Domain Services division will start to see revenues delivered soon. 

The Board remains very confident of a strong second half to the financial year.

Financial review

Revenue

Group revenue was £62.3m (£54.0m in 2013) with international revenue now making up 47% (39% in 2013) of total Group revenue. Escrow accounted for 25% of NCC Group's total revenue (27% in 2013) with Assurance representing 75% (73% in 2013).

The table below summarises revenue by division, including their key business areas.

£'000's	2014 Six months ended 30 November	2013 Six months ended 30 November	% Change	% Constant currency
Revenue by business segment
Escrow UK	11,314	10,824	5	-
Escrow Europe	1,553	1,634	(5)	2
Escrow USA	2,520	2,353	7	11
Total Escrow	15,387	14,811	4	5
Security Consulting	36,155	27,185	33	35
Web Performance and Software Testing	10,783	12,003	(10)	(10)
Total Assurance	46,938	39,188	20	21
Total Revenue	62,325	53,999	15	17

On a constant currency basis European and US Escrow growth would be 2% and 11% respectively and 21% for total Assurance revenue growth.

Within Assurance, the Security Consulting unit, grew by 32% in the UK and Europe and 35% in North America, 41% on a constant currency basis.

The table below provides an analysis of the Group's revenue by geographical market where the customer is based. It highlights the significant increase in the scale of the US operations that make up the majority of the rest of the world revenue.

£'000's	2014 Six months ended 30 November	2013 Six months ended 30 November	% Change
Revenue by geographical destination
UK	33,309	33,011	1
Rest of Europe	6,328	4,066	56
Rest of the world	22,688	16,922	34
Total Revenue	62,325	53,999	15

Profitability

Group adjusted operating profit, before amortisation of acquired intangible assets, exceptional items, share-based payments and the unwinding of the discount on acquisitions, increased by 6% to £12.4m (£11.8m in 2013).

Group adjusted operating profit is after the £1.9m (£0.8m in 2013) expensed in respect of the continued investment in Domain Services. Excluding these costs, Group adjusted operating profit increased by 14% to £14.3m (£12.6m in 2013).

The Group adjusted operating profit margin was 20% (22% in 2013) as a result of the continued growth of Assurance, which has lower margins than Escrow and the impact of the expensed Domain Services investment.

Assurance and Escrow operating margin improved to 17% (16% in 2013) and 58% (57% in 2013) respectively.

£'000's	2014 Six months ended 30 November	2013 Six months  ended 30 November
Operating profit by business segment
Group Escrow	8,889	8,366
Assurance Testing	7,747	6,283
Domain Services	(1,887)	(799)
Segment operating profit	14,749	13,850
Head office costs	(2,300)	(2,066)
Operating profit before amortisation of acquired intangibles, charges for share based payments and exceptional items	12,449	11,784
Amortisation of intangible assets Group Escrow	(420)	(355)
Amortisation of intangible assets Assurance	(464)	(925)
Share based payments	(338)	(605)
Operating profit before exceptional items	11,227	9,899
Exceptional items	(158)	1,685
Operating profit	11,069	11,584

The Group's operating profit before exceptional items grew by 14%. The small exceptional cost related to the on-going legal action with the former provider of the failed group SAP IT solution in 2012. In the prior year an exceptional profit was reported due to £1.9m of earn out consideration from a previous acquisition no longer becoming payable.

The Group's reported pre-tax profit was £10.6m (£11.1m in 2013) after the inclusion of the unwinding of the discount on the acquisitions contingent consideration, amortisation of acquired intangible assets, share based payments and exceptional items.

Taxation 

The tax charge for the six months ended 30 November 2014 is 21% (22% in 2013) of profit before tax and is based upon the expected tax rate for the full year. The expected rate reflects the continued reduction in the UK corporate tax rates and the US tax treatment of Domain Services costs.

Earnings per share

The adjusted basic earnings per share from operations increased by 7% to 4.6p (4.3p in 2013) and reported basic earnings per share from operations were 4.0p (4.2p in 2013).

The table below analyses the effect on the Group's basic earnings per share of the amortisation of acquired intangibles, unwinding of the discount on contingent consideration for acquisitions, the effect of the exceptional items and share based payments.

			2014 Six months ended 30 November	2013 Six months ended 30 November
Basic EPS
Group earnings per share - unadjusted			4.0p	4.2p
Amortisation of acquired intangibles			0.4p	0.5p
Exceptional items			0.1p	(0.6p)
Unwinding of the discount on the contingent consideration of the acquisitions			0.0p	0.0p
Share based payments			0.1p	0.2p
Adjusted basic EPS			4.6p	4.3p

The adjusted fully diluted earnings per share from continuing operations increased 6% to 4.5p (2013: 4.2p) whilst reported fully diluted earnings per share was 4.0p (2013: 4.1p).

Dividends

In line with a continuing progressive dividend policy, the Board is paying an interim dividend of 1.30p (1.14p in 2013), an increase of 14%. This will be paid on 27 February 2015 to shareholders on the register at the close of business on 30 January 2015, with an ex-dividend date of 29 January 2015.

This represents cover of 3.1 times (3.7 times in 2013) based on basic earnings from continuing operations and cover of 3.5 times on an adjusted basic earnings on continuing operations basis (3.7 times in 2013).

Cash & funding

Operating cash flow before interest and tax, as a ratio to operating profits of £11.1m, remained strong at 105% (104% in 2013). The Group remains committed to strong balance sheet management and borrowing only for affordable value enhancing acquisitions and the expansion of suitably considered service lines.

The Group had net debt of £31.3m (£26.2m in 2013) at the period end against facilities of £45m.

On 20 January 2015 the Group acquired the Open Registry group of companies for £14.9m (€19.5m) of which £7.9m (€10.3m) was paid on completion.

The Group increased its banking facilities to £60m comprising of a £55m revolving credit facility and a £5m overdraft on the same terms.   

A deferred consideration payment of £0.7m for FortConsult will be paid during the second half of the financial year.

Capital expenditure increased to £9.7m (£4.5m in 2013) as the Group continued its investment in Domain Services with capital expenditure in that Division of £4.1m. The Group also continued to invest in the new Group IT system (£1.2m) and spent £1.8m on the refurbishing and opening of new offices.

Operational review

Group Escrow

Escrow remains the cornerstone of the Group's profitability and cash generation. All of the Escrow businesses offer substantial margins, a high degree of recurring revenue due to the contract renewal rates, as well as notably strong cash conversion characteristics.

Group Escrow revenue increased by 4% (7% in 2013) to £15.4m (£14.8m in 2013) or 5% on a constant currency basis. Global verification revenues continued the trend seen in the second half of the last financial year and grew by 8% to £3.7m (£3.4m in 2013).

Group recurring revenues through the renewals process will grow to £18.3m this financial year (£18.1m in 2013).

Group Escrow operating profitability grew by 6% (8% in 2013) to £8.9m (£8.4m in 2013).

The division was strengthened by the appointment of a new divisional Group Managing Director on 1 June 2014. The division is expected to actively increase headcount in all its sales locations in the next six months. 

In November 2014 Escrow UK prices were increased slightly ahead of inflation and mainland Europe and US are following in the second half of the financial year.

Escrow UK. The first half of the financial year saw a good performance in the traditionally quieter period. Even though the rate of growth was slightly lower, the performance was reassuringly strong as UK revenue grew 5% (7% in 2013) to £11.3m (£10.8m in 2013).

The underlying termination rate fell to about 11% (2013: 12%), the first change in six years. There has been no discernible change in the reasons for termination.

Escrow Europe & Escrow USA. Escrow Europe revenues were£1.6m (£1.6m in 2013), although on a constant currency basis, this would have shown 2% growth. The business has a new General Manager and the European teams are now stable.

Escrow USA revenue increased by 7% (8% in 2013) to £2.5m. On a constant currency basis this would have been a very satisfying 11% growth, with strong performances from both Atlanta and San Francisco.

Assurance Division

Despite the Group's decision to relinquish a number of low margin software testing contracts, Assurance revenue increased by 20% to £46.9m (£39.2m in 2013). Within Assurance, Security Consulting grew by 32% in the UK and Europe and 35% in North America, which is 41% on a constant currency basis.

During the half year, operating profits for the division increased 23% to £7.7m (£6.3m in 2013).

The Group now has one of the largest multi-national accredited security testing teams of consultants in the industry with over 380 members. The Division employs over 800 globally, with a new team currently being formed in Spain where some extremely talented security consultants reside, who are capable of working across Europe. This further enhances the Division's capability to offer complete international support to multi-national organisations seeking to improve their information security.

For Assurance, staff retention and recruitment remain the most important issues. The careful balancing of paid-for utilisation, quality of deliverable work and research ensures that employee churn in the security team is consistently and significantly less than the 10% staff churn Group target and significantly less than 30% is which is regarded as normal in skilled IT environments. Adopting this approach also ensures the Group's exemplary reputation remains intact, which is one of the key draws for new employees.

The Group has a very good reputation for security research as well as for the delivery of web applications, vulnerability assessments and forensics, in addition to being a leading provider of managed security services.

The Group actively promotes a responsible disclosure policy for both paid for and self-funded vulnerability research. In the last 12 months, Group employees uncovered 170 new vulnerabilities, of which 70 were classified as being of critical or high importance. To date, developers and software owners have fixed only five of them. In addition 11 white papers and 36 new security tools were released.

The managed services provided by the Group, the forerunner of the security monitoring service offered in Domain Services, currently runs over 5,000 application, infrastructure and monitoring scans per month. This equates to monitoring over 80,000 live IP addresses monthly or over five million annually. Currently this service is identifying over 160,000 incidents a month, which is five times as high as this time last year.

The web monitoring, performance and load testing business continued to perform strongly. It achieved a recurring revenue rate above 91% (90% in 2013) as businesses continue to recognise the importance of their website to their business prospects.

Security marketplace

The growth of the information security market place remains very strong as cyber crime and data breaches proliferate withreports of corporate breaches hitting the headlines on a daily basis. Details of widespread security vulnerabilities such as Heartbleed, Shellshock and Poodle have been revealed.

If ever there had been any doubt about nation state capability, the visible exposure of the North Korean attack on Sony, and the follow up responses and reprisals, confirmed the reality of global cyber warfare.

The reappearance of Hacktivists, who disrupted both Sony and Microsoft gaming platforms during the holiday season, served as a timely reminder that theft of IP and property, digital vandalism and hacktivism is both malicious and disruptive. Defending against the damage and disruption is expensive, time consuming and can paralyse organisations.

The breaches suffered by the US companies Target and Home Depot are still being globally replicated. In the UK last year more than 80% of large organisations experienced a security breach. According to the 2014 Information Security Breaches Survey commissioned by the UK Department for Business, Innovation & Skills the worst breaches cost large organisations, on average £0.6m - £1.2m, which is an increase of 33% - 50% on last year.

For small businesses the average cost increased by 60% to on average £65k - £115k. The poll found that 59% expect there to be more breaches over the next year.

Despite the almost daily reporting of hacks and data breaches in the UK, the general public is still largely in the dark about what data of theirs has been compromised or about what to do to safeguard their data. The proliferation of generic Top Level Domains (gTLDs) will present more opportunities for on-line fraud along with the weakening potency of anti-virus software, which is no longer capable of providing an active defence. Real investment is required by organisations and government agencies.

From the "Trust in The Internet" survey conducted by IDR, commissioned by NCC Group which surveyed 10,000 people in North America and the UK, 77% of people confirmed that they do not feel very safe when shopping or banking online. Full details are available on www.nccgroup.com.

The poll also revealed that 62% of respondents are more concerned about online security now than they have ever been, while 23% of people are doing less online due to their security concerns. Significantly 59% of respondents said they are uncomfortable sharing sensitive financial and personal information when they shop and interact with organisations online.

Concurringly, 64% of consumers believe that they are likely to end up a victim of a security breach within the next 12 months, while 84% of people believe companies should compensate customers financially for their loss if they experience a breach.

The backdrop of falling consumer confidence and weakening defences is an ideal market for both the Assurance Division and Domain Services Division to thrive in.

Open Registry Domain Services

The Group has made considerable progress in this area and is now able to provide an end-to-end secure domain solution service. The development of the technical capability and the infrastructure to deliver the .trust community has progressed very well. It is on track, ahead of the initial cost estimates and is nearing completion.

The recent acquisition of the Open Registry considerably strengthens the Group's ability to offer a very secure unique service complementing the provision of .trust.

The Group now has the ability to provide a trusted secure domain environment by operating a number of complementary capabilities including backend operator (registry), a corporate registrar, third party data escrow to all parts of the market and anti-abuse monitoring as required by ICANN.

The Group completed the purchase of .trust and has seen it progress through the orderly ICANN  process to becoming a live domain on the Internet. So far it has passed pre-delegation testing and is currently part way through the 90 days name collision process.

The sunrise period is open for customers to register early their interest in .trust domains, but as the service is being sold on a targeted approach to specific brands, this is not expected to yield any issues.

The .trust domain is expected to be live by the end of February and when it is, the Group will be the first organisation to move to the domain with its website becoming www.nccgroup.trust.

The Group is now solely focussed on .trust, having reached, on 3 December 2014, a suitable financial arrangement to relinquish its interest in the .secure domain that had been applied for. The proceeds from relinquishing .secure will be used against capitalised development costs incurred to date.

The total anticipated capital expenditure and operating costs are likely to be around £9.5m in this financial year (£8.3m at 31 May 2014).

To date the Group has capitalised £9.6m (£5.0m at 31 May 2014) of development costs for this project which relates to the cost of the domain, product and infrastructure design, cost and construction, know-how and filing of patents.

During the period £1.9m has been expensed (£0.8m at 30 November 2014).

The Group remains on track to launch the service at the end of Q1 2015.

Roll out of .trust & background to acquisition of Open Registry

The strategy for Domain Services is based primarily around the provision of .trust as a domain.  Behind that stands the Group's high bar Technical Policy. This forms the basis for organisations to set their security policy. NCC Group's unique multi tool based monitoring service has been developed to monitor and report compliance.

This approach is aimed at those organisations that are brand aware, have a substantial Internet presence and whose business is reliant upon the two-way passage of information between organisations or individuals using the Internet. This covers retail and financial organisations, especially those who have high levels of consumer traffic, but also companies who have frequent interaction with their supply chain.

Moving to .trust is a significant step for organisations to contemplate. Internally there are multiple stakeholders to persuade and convince, although within most organisations awareness of the changes taking place in the domain world is still low or non-existent. This lack of understanding is not just specific to .trust but is common to all of the new domains as demonstrated by the much slower than anticipated global take up rate of new domain extensions by companies and individuals.

Awareness is highest amongst the 600 brands who have registered for their own domain, but despite the fact that a number are beginning to be delegated, most remain unclear as to what to use them for.

Equally, there are many who are aware of the changes taking place, who have not registered their brand or name for a myriad of reasons, including, becoming aware of the process too late, consciously deciding not to or because they were unable to as their name contained a generic word or city name.

These are also potential candidates for .trust as they recognise the need to protect their brand and remove confusion from their customers.

The three main issues confronting an organisation contemplating joining the .trust community are; can it meet the security policy standards set; what are its competitors doing; and does it want to be the first member of the community. Within this comes the subset of questions concerning their current .com estate as well as owning, applying for or using their own domains or other generics.

The approach applied to these clients therefore has to be consultative. This typically also brings out other areas of domain control that they have not considered, which slows the decision making process further, such as which of the other multitude of domains that exist they should be considering.

Currently the Group is engaged in detailed discussions with approximately 30 organisations about joining the community. From these, it has become apparent that the decision making process is considerably slower and more involved than was first thought, and this has not been helped by the extended time it has taken to be get .trust live.

The Group has introduced more steps to allow organisations to get the full benefit of .trust in component stages.

To that end customers are now able to secure their .trust domain for a fee as a placeholder and then look at all of the next stages without committing directly to joining the community. Further a number of customers are looking to use the unique monitoring service against their existing estate to provide them with a comprehensive security monitoring service, whilst they formulate their domain strategy.

This approach is being equally applied to monitoring brands' domains for organisations. Consequently it is likely that the revenue streams will be delivered in Domain Services, although not necessarily immediately as was first thought.

A number of the Group's customers now want to be prepared for the next application process and will want to apply for their own domain names, as well as having their entire domain services requirements looked after by a single entity.

In order to provide this service, the Group acquired the Open Registry to expand its offering to cover not only the application process but all the registry, registrar and consultancy services that are required. These complement the Group's capabilities in security, domain abuse monitoring and escrow services.

The services that can be offered by NCC Group Domain Services are end to end. This is unique in an emerging and confused market place, and gives the Group a significant advantage to take the opportunities as they initially slowly arise.

Group IT Systems

The Group's replacement IT system is now partially operational. Some of the benefits are already beginning to be seen, although it will take a further 12 months to complete the project around all the Group's international offices.

The contractual dispute with the third party implementer, who was responsible for the failed SAP project in 2012, Ciber UK, continues. The Group remains committed to pursuing robustly all reasonable and appropriate steps to receive a suitable recompense.

Principal risks & uncertainties

The Group faces operational risks and uncertainties, which the Directors take all reasonable steps possible to mitigate, however the Directors recognise that they 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 occurrence of unforeseen difficulties in the integration of the current or future acquisitions the Group may enter into, the dependence on key executives and senior managers and the speed of adoption of new gTLDs by customers and consumers globally.

There are no persons with whom the Company has contractual or other arrangements that are deemed to be essential to the Group.

Group condensed income statement
		Notes	2014 six months ended 30 November	2013 six months ended 30 November	2014 year ended  31 May
			£000	£000	£000
Continuing operations
Revenue		2	62,325	53,999	110,661
Cost of sales			(42,779)	(35,291)	(71,193)
Gross profit			19,546	18,708	39,468
Administrative expenses before amortisation of acquired intangible assets, share based payments and exceptional items			(7,097)	(6,924)	(13,440)
Operating profit before amortisation, share based payments and exceptional items			12,449	11,784	26,028
Amortisation of acquired intangible assets			(884)	(1,280)	(2,116)
Share based payments			(338)	(605)	(1,108)
Exceptional items		3	(158)	1,685	1,268
Total administrative expenses			(8,477)	(7,124)	(15,396)
Operating profit		2	11,069	11,584	24,072
Financial income			-	-	24
Finance expense excluding unwinding of discount			(395)	(344)	(789)
Net finance expense excluding unwinding of discount			(395)	(344)	(765)
Unwinding of discount effect relating to deferred consideration on business combinations			(65)	(107)	(120)
Financial expenses			(460)	(451)	(885)
Net financing costs			(460)	(451)	(861)
Profit before taxation			10,609	11,133	23,211
Taxation		4	(2,243)	(2,448)	(5,104)
Profit for the period			8,366	8,685	18,107
Attributable to equity holders of the parent company			8,366	8,685	18,107
Earnings per share from continuing operations		5
Basic earnings per share			4.0p	4.2p	8.7p
Diluted earnings per share			4.0p	4.1p	8.6p

Group condensed statement of comprehensive income
		2014 six months ended 30 November	2013 six months ended 30 November	2014 year ended  31 May
		£000	£000	£000
Profit for the period		8,366	8,685	18,107
Other comprehensive income
Foreign exchange translation differences		1,171	(1,175)	(1,968)
Total comprehensive income for the period		9,537	7,510	16,139
Attributable to:
Equity holders of the parent		9,537	7,510	16,139

Group condensed statement of financial position

	Notes	2014 30 November	2013 30 November	2014 31 May
		£000	£000	£000
Non-current assets
Intangible assets	7	118,478	104,398	110,064
Plant and equipment		8,045	5,453	6,244
Deferred tax assets		3,098	1,749	2,299
Total non-current assets		129,621	111,600	118,607
Current assets
Trade and other receivables		30,513	25,200	28,691
Cash and cash equivalents		6,987	7,527	11,212
Total current assets		37,500	32,727	39,903
Total assets		167,121	144,327	158,510
Equity
Issued capital		2,088	2,085	2,085
Share premium		23,935	23,551	23,634
Reserve for own shares		(51)	-	(1,075)
Retained earnings		58,652	48,205	56,003
Currency translation reserve		120	(258)	(1,051)
Total equity attributable to equity holders of the parent		84,744	73,583	79,596
Non-current liabilities
Interest bearing loans		38,290	33,709	34,786
Other financial liabilities		438	531	484
Deferred tax liability		3,387	2,115	2,444
Contingent consideration on acquisitions		1,024	-	1,001
Total non-current liabilities		43,139	36,355	38,715
Current liabilities
Trade and other payables		16,757	11,248	17,363
Contingent consideration on acquisitions		745	4,288	2,940
Deferred revenue		17,690	16,391	17,207
Current tax payable		4,046	2,462	2,689
Total current liabilities		39,238	34,389	40,199
Total liabilities		82,377	70,744	78,914
Total liabilities and equity		167,121	144,327	158,510

Group condensed statement of cash flows

		2014 six months ended 30 November	2013 six months ended 30 November	2014 year ended 31 May
		£000	£000	£000
Cash inflow from operating activities
Profit for the period		8,366	8,685	18,107
Adjustments for:
Depreciation charge		1,182	998	2,092
Share based charges (net of national insurance)		294	465	887
Amortisation of intangible assets		1,125	1,435	2,438
Net financing costs		460	451	861
(Profit)/loss on sale of plant and equipment		(33)	-	10
Adjustments to contingent consideration		-	(1,894)	(1,894)
Income tax expense		2,243	2,448	5,104
Cash inflow for the period before changes in working capital		13,637	12,588	27,605
Increase in trade and other receivables		(1,790)	(726)	(3,414)
(Decrease)/Increase in trade and other payables		(164)	(1,805)	4,661
Cash generated from operating activities before interest and tax		11,683	10,057	28,852
Interest paid		(417)	(423)	(798)
Income tax paid		(715)	(2,058)	(4,489)
Net cash generated from operating activities		10,551	7,576	23,565
Cash flows from investing activities
Interest received		-	23	24
Acquisition of plant and equipment		(2,732)	(1,303)	(3,237)
Development expenditure		(6,993)	(3,192)	(7,520)
Acquisition of business net of cash acquired		(2,260)	(378)	(4,249)  (
Net cash used in investing activities		(11,985)	(4,850)	(14,982)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital		304	475	558
Purchase of own shares		-	(1,048)	(2,123)
Draw down of borrowings		2,087	5,355	6,838
Equity dividends paid		(4,919)	(4,403)	(6,778)
Net cash from financing activities		(2,528)	379	(1,505)
Net (decrease)/increase in cash and cash equivalents		(3,962)	3,105	7,078
Cash and cash equivalents at beginning of period		11,212	4,589	4,589
Effect of exchange rate fluctuations		(263)	(167)	(455)
Cash and cash equivalents at end of period		6,987	7,527	11,212

Group condensed statement of changes in equity

	Share capital	Share premium		Currency Translation reserve	Reserve for own shares	Retained earnings	Total
	£000	£000		£000	£000	£000	£000
Balance at 1 June 2013	2,075	23,086		917	-	44,392	70,470
Profit for the period	-	-		-	-	8,685	8,685
Foreign currency translation differences	-	-		(1,175)	-	-	(1,175)
Total comprehensive income for the period	-	-		(1,175)	-	8,685	7,510
Transactions with owners recorded directly in equity
Dividends to equity shareholders	-	-		-	-	(4,403)	(4,403)
Share based payment transactions	-	-		-	-	465	465
Current and deferred tax on share based payments	-	-		-	-	114	114
Shares issued	10	465		-	-	-	475
Purchase of own shares	-	-		-	-	(1,048)	(1,048)
Total contributions by and distributions to owners	10	465		-	-	(4,872)	(4,397)
Balance at 30 November 2013	2,085	23,551		(258)	-	48,205	73,583
	Share capital	Share premium		Currency Translation reserve	Reserve for own shares	Retained earnings	Total
	£000	£000		£000	£000	£000	£000
Balance at 1 June 2013	2,075	23,086		917	-	44,392	70,470
Profit for the period	-	-		-	-	18,107	18,107
Foreign currency translation differences	-	-		(1,968)	-	-	(1,968)
Total comprehensive income for the period	-	-		(1,968)	-	14,484	16,139
Dividends to equity shareholders	-	-		-	-	(6,778)	(6,778)
Share based payment transactions	-	-		-	-	887	887
Current and deferred tax on share based payments	-	-		-	-	443	443
Shares issued	10	548		-	-	-	558
Purchase of own shares	-	-			(1,075)	(1,048)	(2,123)
Total contributions by and distributions to owners	10	548		-	(1,075)	(6,496)	(7,013)
Balance at 31 May 2014	2,085	23,634		(1,051)	(1,075)	56,003	79,596
	Share capital	Share premium	Currency Translation reserve		Reserve for own shares	Retained earnings	Total
	£000	£000	£000			£000	£000
Balance at 1 June 2014	2,085	23,634	(1,051)		(1,075)	56,003	79,596
Profit for the period	-	-	-		-	8,366	8,366
Foreign currency translation differences	-	-	1,171		-	-	1,171
Total comprehensive income for the period	-	-	1,171		-	8,366	9,537
Transactions with owners recorded directly in equity
Dividends to equity shareholders	-	-	-		-	(4,919)	(4,919)
Share based payment transactions	-	-	-		-	294	294
Current and deferred tax on share based payments	-	-	-		-	(68)	(68)
Shares issued	3	301	-		1,024	(1,024)	304
Total contributions by and distributions to owners	3	301	-		1,024	(5,717)	(4,389)
Balance at 30 November 2014	2,088	23,935	120		(51)	58,652	84,744

Notes to the half-yearly report

1 Accounting policies

Basis of preparation

The Group condensed half-yearly financial statements for the six months ended 30 November 2014 have been prepared in accordance with IAS 34, "Interim Financial Reporting" as adopted by the EU.

As required by the Disclosure and Transparency Rules of the Financial Services Authority the financial information contained in this report has been prepared using the accounting policies applied for the year ended 31 May 2014. They do 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 2014.

The financial statements of the Group for the year ended 31 May 2014 are available from the Company's registered office, or from the website www.nccgroup.com.

The comparative figures for the financial year ended 31 May 2014 are not the company's statutory accounts for that financial year. Those accounts, which were prepared under IFRS as adopted by the EU ("adopted IFRS"), 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 498(2) or (3) of the Companies Act 2006.

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

Significant accounting policies

The accounting policies applied by the Group in these consolidated half-yearly financial statements are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 May 2014.

There are no IFRS or IFRIC interpretations effective for the first time this financial period that have had a material impact on the Group.

Going concern

The Group's activities, together with the factors likely to affect its future development, performance and position are set out in the financial and operational reviews.

The directors have reviewed the trading and cashflow forecasts as part of their going concern assessment including reasonable downside sensitivities which take into account the uncertainties in the current operating environment.

Taking into account the above uncertainties and circumstances, the directors formed a judgement that there is a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. 

Accordingly they continue to adopt the going concern basis in preparing the group's condensed half-yearly financial statements for the period ended 30 November 2014.

Use of estimates and judgements

The preparation of the consolidated half-yearly financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.  Actual results may differ from these estimates.

In preparing the consolidated half-yearly financial statements, the significant judgements made by management in applying the Group's accounting policies and key sources of estimated uncertainty were the same as those applied to the consolidated financial statements for the year ended 31 May 2014.

2 Segmental information

The Group is organised into three operating segments (30 November 2013: three): Group Escrow, Assurance Testing and Domain Services each of which is separately reported.   

Whilst revenue and profitability are monitored by individual business units within these operational segments it is only at the operating level that resource allocation decisions are made.  Performance is measured based on segment profit, which comprises segment operating profit excluding amortisation of acquired intangible assets, share based payment charges and exceptional items.  Interest and tax are not allocated to business segments and there are no intra-segment sales.

	2014 Six months ended 30 November	2013 Six months ended 30 November	2014 Year ended 31 May
Revenue by business segment	£000	£000	£000
Escrow UK	11,314	10,824	22,507
Escrow Europe	1,553	1,634	3,285
Escrow USA	2,520	2,353	4,663
Total Group Escrow	15,387	14,811	30,455
Security Consulting	36,155	27,185	57,506
Web Performance and Software Testing	10,783	12,003	22,700
Total Assurance	46,938	39,188	80,206
Domain Services	-	-	-
Total Revenue	62,325	53,999	110,661

	2014 Six months ended 30 November	2013 Six months ended 30 November	2014 Year ended 31 May
Operating profit by business segment	£000	£000	£000
Group Escrow	8,889	8,366	18,056
Assurance	7,747	6,283	14,052
Domain Services	(1,887)	(799)	(2,126)
Segment operating profit	14,749	13,850	29,982
Head office costs	(2,300)	(2,066)	(3,954)
Operating profit before amortisation, share based payments and exceptional items	12,449	11,784	26,028
Amortisation of acquired intangible assets Group Escrow	(420)	(355)	(1,097)
Amortisation of acquired intangible assets Assurance	(464)	(925)	(1,019)
Share based payments	(338)	(605)	(1,108)
Operating profit before exceptional items	11,227	9,899	22,804
Exceptional items	(158)	1,685	1,268
Operating profit	11,069	11,584	24,072

There are no customer contracts which account for more than 10% of segment revenue.

The table below provides an analysis of the Group's revenue by geographical market where the customer is based.

	2014 Six months ended 30 November	2013 Six months ended 30 November	2014 Year ended 31 May
	£000	£000	£000
Revenue by geographical destination
UK	33,309	33,011	66,366
Rest of Europe	6,328	4,066	10,453
Rest of the World	22,688	16,922	33,842
Total Revenue	62,325	53,999	110,661

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.

	2014 Six months ended 30 November £000	2013 Six months ended 30 November £000	2014 Year ended 31 May £000
Exceptional items and acquisition related costs
Legal fees	(158)	(209)	(334)
Acquisition related costs	-	-	(292)
Revision to estimates of contingent consideration	-	1,894	1,894
Total	(158)	1,685	1,268

Legal fees of £158,000 (30 November 2013: £209,000) are primarily in respect of legal advice received in relation to the Group's claim to recover capitalised and other costs incurred as part of the Group's IT system implementation which was terminated in May 2012. They have been included in exceptional items to be consistent with the treatment of these costs in previous years.

4 Taxation

The Group tax charge represents the estimated annual effective rate of 21% (30 November 2013: 22%) applied to the profit before tax for the period.

5 Earnings per share

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

	2014 Six months ended 30 November £000		2013 Six months ended 30 November £000		2014 Year ended 31 May £000
Profit for the period from continuing operations used for earnings per share	8,366		8,685		18,107
Amortisation of acquired intangible assets	884		1,280		2,116
Exceptional items	158		(1,685)		(1,268)
Unwinding of discount	65		107		120
Share based payments	338		605		1,108
Tax arising on the above items	(301)		(44)		(430)
Adjusted profit from continuing operations used for adjusted earnings per share	9,510		8,948		19,753

	Number of shares 000's	Number of shares 000's	Number of shares 000's
Basic weighted average number of shares in issue	208,811	208,385	208,154
Dilutive effect of share options	3,619	2,711	3,283
Diluted weighted average shares in issue	212,430	211,096	211,437

6 Dividends

	2014 Six months ended 30 November £000	2013 Six months ended 30 November £000	2014 Year ended 31 May £000
Dividends paid and recognised in the period	4,919	4,403	6,779
Dividends proposed but not recognised in the period	2,715	2,376	4,920
Dividends per share paid and recognised in the Period	2.36p	2.12p	3.26p
Dividends per share proposed but not recognised in the period	1.30p	1.14p	2.36p

7 Intangible assets

	Software	Development costs	Customer  contracts and relationships	Goodwill	Total
	£000	£000	£000	£000	£000
Net book value:
At 1 June 2013	2,225	1,457	9,809	92,189	105,680
Other acquisitions - internally developed	1,958	1,234	-	-	3,192
Effects of movements in exchange rates	-	(105)	(532)	(2,402)	(3,039)
Amortisation	(159)	-	(1,276)	-	(1,435)
At 30 November 2013	4,024	2,586	8,001	89,787	104,398
Acquisitions through business combinations	18	-	634	2,735	3,387
Other acquisitions - internally developed	1,908	2,420	-	-	4,328
Effects of movements in exchange rates	-	(32)	(143)	(871)	(1,046)
Amortisation	(163)	-	(840)	-	(1,003)
At 31 May 2014	5,787	4,974	7,652	91,651	110,064
Other acquisitions - internally developed	2,863	4,130	-	-	6,993
Effects of movements in exchange rates	-	448	335	1,793	2,576
Amortisation	(271)	-	(884)	-	(1,155)
At 30 November 2014	8,379	9,552	7,103	93,444	118,478

8 Acquisitions

Matasano Security LLC

On 1 August 2012 the Group acquired 100% of the partnership interests of Matasano Security LLC for a maximum consideration of £8.1m, of which up to a maximum of £4.1m was withheld subject to the achievement of performance criteria specified in the purchase agreement.  The performance conditions were required to be satisfied by 31 July 2013 and 31 July 2014, with the contingent consideration payable in December 2013 and November 2014. During the period, £2.2m was paid in relation to the final settlement of the contingent consideration due on the acquisition of Matasano Security LLC.

FortConsult

On 2 May 2014 the Group acquired 100% of the share capital of FortConsult A/S for a maximum consideration of £4.0m, of which a maximum of £1.8m has been withheld subject to the achievement of performance criteria specified in the purchase agreement. The performance conditions are required to be satisfied by 30 April 2015 and 30 April 2016. The contingent consideration is to be paid in July 2015 and July 2016. The fair value of the contingent consideration at the acquisition was £1.8m, this value is still considered appropriate and is based on the present value of future cash flows. Management expect the amount to be payable based on FortConsult's predicted performance.

9 Related party transactions

The Group's key management personnel comprises the Directors of the Group.

NCC Group's Non-Executive Chairman Paul Mitchell is a director of Rickitt Mitchell & Partners Limited (Rickitt Mitchell) with whom the Group conducted business to the value of £37,500 (2013: £57,500).  Rickitt Mitchell provides the services of the Non-Executive Chairman and an outsourced acquisition service, which facilitates the delivery of acquisition targets, which have been identified and approved by the Board.

10 Post balance sheet events

On 3 December 2014, the Group announced that it had resolved its contention for the application of the generic top level domain ("gTLD")".secure" on acceptable terms to both parties to the application process. The Group withdrew its application for the .secure gTLD in return for cash consideration from the other applicant.

A revision to the existing revolving credit facility was agreed with the Group's bankers to increase the facility to £55m in January 2015.  The facility is on the same terms and due for renewal in July 2016.

On 20 January 2015, the Group acquired the entire share capital of Open Registry S.A (Luxembourg), CHIP S.A. (Luxembourg), Nexperteam C.V.B.A (Belgium) and Sensirius C.V.B.A (Belgium) for total consideration of €19.5m. Of this amount, €10.3m was paid in cash immediately and €9.2m is payable in cash depending on specific profit based performance targets on the first, second and third year anniversaries of the completion date. The companies' principal activities are in the domain services segment. Further disclosures of the acquisition have not been included in this report as there has been insufficient time to obtain and review the relevant financial information from the companies and calculate the accounting treatments for the disclosure.

Responsibility statement of the Directors in respect of the half-yearly report

We confirm that to the best of our knowledge:

-      The condensed set of consolidated financial statements has been prepared in accordance with IAS 34, "Interim Financial Reporting" as adopted by the EU;

-      The half-yearly management report includes a fair review of the information required by:

(a)  DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)  DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period and any changes in the related party transactions described in the last annual report that could do so.

 

END

 

 

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