Interim Results
NCC Group PLC
23 January 2006
NCC Group plc
Organic growth drives interim profits* up 10%
NCC Group plc, the provider of Escrow Solutions, Testing Solutions and
Consultancy services, published its interim results for the six months to 30
November 2005 today.
Highlights
• Group revenue up by 15% to £9.8m (2004: £8.5m)
• Underlying Group operating profits* up by 10% to £3.0m (2004: £2.7m)
• Group pre-tax profits up by 80% to £2.6m (2004: £1.5m)
• Earnings per share up by 67% to 5.5p (2004: 3.3p)
• Interim dividend increased by 33% to 1.0p (2004: 0.75p)
• Net cash at end of half-year of £1.5m (2004: debt of £3.1m)
• Continued strong demand for verification (up 31%) and penetration
tests (up 47%)
• Acquisition of US Escrow software operation on 31 December 2005
• Annual renewals for current financial year up to £7.0m (£6.8m forecast
in October 2005)
* before the impact of employee share schemes and the investment in the new
German operation.
Rob Cotton, NCC Group Chief Executive, said:
'Despite a tough first six months, we are reporting strong organic growth led by
our Verification and Penetration Testing operations. As a whole our Testing
division showed a 48% increase in profits as the demand for high quality
independent testing continues to grow - over 195 penetration tests were
completed during the six months.
'A very strong forward order book, most secured on rolling annual contracts; a
robust balance sheet; early indications of good growth in Germany; plus the
opportunities in the US, give the Group a very strong platform for the
foreseeable future.'
23 January 2006
Enquiries:
NCC Group (www.nccgroup.com) 0161 209 5432/5200
Rob Cotton, Chief Executive
Paul Edwards, Group Finance Director
College Hill
Adrian Duffield/Corinna Dorward 020 7457 2815/2803
Interim Statement
Trading results
During the first six months of the financial year to 30 November 2005, NCC Group
saw strong growth, with revenue after deferred income increasing by 15% to £9.8m
(£8.5m in 2004.) The Escrow and Testing divisions sharply increased revenue.
Group operating margins declined slightly in the first six months to 27% (31% in
2004) as a consequence of the difficult trading conditions endured by the
Group's smallest business unit, the Consultancy division. Margins in Escrow
Solutions and Testing were stronger.
NCC Group operating profits, stated in accordance with IFRS, have increased to
£2.7m (£2.6m in 2004). Underlying Group operating profit, before the impact of
employee share schemes and the operating profit in the new German operation,
increased 10% to £3.0 m (£2.7m in 2004).
Group pre tax profits increased sharply by 80% to £2.6m (£1.5m in 2004).
Basic earnings per share grew by 67% to 5.5p (3.3p in 2004.) Diluted earnings
per share were up 61% to 5.3p (3.3p in 2004).
The interim dividend has increased by 33% to 1.0p per share up from 0.75p in
2004. It will be paid on 3 March 2006 to shareholders on the register at the
close of business on 3 February 2006.
The business is cash generative with inflows from operating activities before
interest and tax increasing by 3% to £3.1m (£3.0m in 2004) in the period. From
a net debt position of £3.1m at 30 November 2004, the Group had £1.5m net funds
at this half year. After accounting for the cash outflow of the recent
acquisition of a US based escrow solutions provider and the investment in the
German business, NCC Group anticipates that it will be net funds positive by the
financial year end.
Review of divisional performances
Along with delivering good results, attention has been focussed on strengthening
the management team within each division. Each business area is now better
structured and more able to control and manage its day to day business affairs
autonomously, as well as having the capacity to take responsibility for any
potential acquisitions.
Escrow Solutions has seen a strong overall performance with a 22% growth in
revenue to £4.8m (£3.9m in 2004) and a 22% increase in operating profits to
£2.8m (£2.3m in 2004) before the investment in Germany. The overall price
increase, effective from November 2005, was 8%, with clients benefiting from the
adoption of dual depositing of material stored securely under Escrow agreements.
As well as the strong increases in contract business, the Escrow Solutions
account management team has also been directly responsible for the significant
growth in sales of Verification Testing which is reported in the Testing
Solutions business unit. The tremendous uptake in Verification Testing is also
a result of a better understanding of the benefits by clients. NCC Group plans
to replicate this model in the US and Germany.
Escrow Solutions is currently experiencing a 1% better than anticipated
agreement termination rate of 11%. There are now over 12,800 beneficiaries to
the Escrow agreements. NCC Group now has 1.9 beneficiaries per software escrow
agreement (1.8 in 2004).
Recruiting high quality account managers to market, manage and sell the Group's
Escrow Solutions remains a challenge. However, the successful introduction of
the graduate academy has provided an effective and reliable new stream of
recruitment. The Group currently employs 63 sales account managers, an increase
from 62 at the start of the financial year.
Last year NCC Group announced plans to invest £0.5m into the German business
this financial year. As part of the investment, the Group commissioned
independent market research into the size of the market which confirmed that it
was greater than the UK and significantly less mature. The addressable market
was estimated to be worth between £88m and £102m.
To date the Group has invested in the infrastructure and people in Germany
necessary to implement its UK account management model. After completing their
training, the sales team of five have begun selling and the management is
encouraged by the initial feedback received. The Group anticipates that the
business will be able to grow revenues sufficiently quickly to become profitable
in the next financial year, given the substantial investment made in the
business last year.
Testing Solutions has seen a 34% increase in revenue to £2.7m (£2.0m in 2004)
and a 48% increase in operating profits to £0.6m (£0.4m in 2004). All areas,
Verification, Specialist and Penetration Testing have grown substantially in the
last six months carrying on the momentum seen at the year end. It continues to
be the Group's objective to become the market leading provider in Verification
and Penetration Testing and NCC Group sees the recent Europe and US investments
as providing further opportunities.
The Group has carried out a record 148 verification tests and 195 penetration
tests in the first half of the year, an increase of 31%, and 47% respectively.
Specialist Testing continues to be the standard bearer for the Group's technical
excellence in the testing arena and clients are increasingly coming to recognise
the invaluable capabilities of load and performance testing. The area has seen
record levels of utilisation and of orders in the last six months.
Consultancy despite delivering the highest levels of service and strengthening
relationships with clients, the division has been a victim of the sharp downturn
in market confidence and the consequent delay in placing orders. Many current
and potential clients have moved towards buying forums or associations and
framework style agreements, which have been time consuming in negotiation and
have not yet yielded any improvements in spend or performance levels to either
party.
NCC Group has also seen, in its part of the market, a number of the larger
consultancies entering and competing on day rate alone, so as to improve their
utilisation rates. The Group does not believe that winning work at an
artificially low, unsustainable day rate is compatible with building long term
relationships and has chosen not to discount day rates to the level that some of
its competitors have.
As a result of the slowdown and changes in the market, revenue declined to £2.3m
(£2.6m in 2004) and consequently operating profits were marginally below break
even against £0.4m profit in 2004.
The market has shown some early signs of improvement, but the period through to
the year end will still prove difficult. However, the Board anticipates that
with tight cost management and a continued belief and application of the
independent trusted advisor model, the division will be profitable in the second
half of the year.
US acquisition
On 31 December 2005, NCC Group acquired the US based software escrow solutions
business of Recall Total Information Management Inc, a subsidiary of Brambles
Industries plc, for a maximum consideration of £3.0m in cash.
Based in San Jose, California, the business principally focuses on the provision
of escrow solutions to software vendors and customers both on the West Coast and
throughout the US.
The business reported revenues of £0.9m, including approximately £0.7m of annual
recurring revenues, in the year to 31 December 2005. It is anticipated that the
business will contribute over £0.4m of profits for a full year, before any
investment. The business is net working capital neutral on acquisition.
The acquisition of the US business marks a significant move to take NCC Group's
successful escrow business template outside the UK and continental Europe and
into North America. The Group's experience of US clients, serviced out of the
UK, is that they respond extremely well to NCC Group's account management
approach which in turn leads to tremendous opportunities to sell in high value
Verification Services as has been demonstrated by the Group's success in the UK.
The account management and verification testing models will be implemented into
the US during 2006, as well as improving the product offerings and instituting
integrity testing of all code to further add value to the proposition sold.
Current trading and outlook
Combined with the acquisition, these half year results represent a very
satisfactory performance in what proved to be a difficult end to the calendar
year 2005.
The Group's Escrow Solutions and Testing Solutions businesses are in their best
shape ever and are expected to continue to perform strongly throughout 2006,
with both areas benefiting from the US and German opportunities. The Testing
Solutions and Consultancy order books have increased and now stand at £2.0m and
£1.6m respectively (up from £1.7m and £1.4m in October). The continued
improvement in Escrow agreement termination rates means that NCC Group now
expects annual renewals to be £7.0m compared with £6.8m forecast in October 2005
in this financial year.
The Board expects to see an improvement in Group margins in the second half of
the year principally as a result of the November Escrow Solutions price increase
but supported by a good pipeline of work already won in the Testing division.
In the second half of the year, Consultancy is also expected to make a positive
contribution to Group profitability. The Board retains its belief in the
overall Group business model and values the independence and trusted advisor
status, particularly in Consultancy's markets.
The Board remains confident of a strong second half to the year.
Consolidated income statement
2005 2004 2005
six months six months year
ended ended ended
Notes 30 November 30 November 31 May
(unaudited) (unaudited) (audited)
£000 £000 £000
Revenue 2 9,807 8,513 17,971
Cost of sales (5,424) (4,584) (9,415)
Gross profit 4,383 3,929 8,556
Administrative expenses (1,738) (1,307) (2,767)
Operating profit 2 2,645 2,622 5,789
Financial income 105 55 162
Financial expense
- Float related finance costs 3 - (861) (861)
- Other financial expense (144) (365) (534)
Total financial expenses (144) (1,226) (1,395)
Net financing costs (39) (1,171) (1,233)
Profit before taxation 2,606 1,451 4,556
Income tax expense (829) (458) (1,379)
Profit for the period 1,777 993 3,177
Attributable to equity holders of the company 1,777 993 3,177
Profit for the period 1,777 993 3,177
Earnings per share 5
Basic earnings per share 5.5p 3.3p 10.2p
Diluted earnings per share 5.3p 3.3p 10.0p
Group balance sheet
Notes 2005 2004 2005
30 November 30 November 31 May
(unaudited) (unaudited) (audited)
£000 £000 £000 £000 £000 £000
Non current assets
Property, plant and equipment 1,120 761 1,002
Intangible assets 27,419 27,401 27,401
Deferred tax assets 229 110 166
Total non-current assets 28,768 28,272 28,569
Current assets
Trade and other receivables 6 3,742 3,815 3,595
Cash and cash equivalents 5,961 2,581 5,103
Total current assets 9,703 6,396 8,698
Total assets 38,471 34,668 37,267
Equity
Issued capital 326 326 326
Share premium 19,913 19,824 19,819
Retained earnings 5,146 1,648 3,755
Total equity attributable to equity
holders of the parent 25,385 21,798 23,900
Minority interest - (23) (23)
Total equity 25,385 21,775 23,877
Liabilities
Interest bearing loans 3,285 4,478 3,882
Lease incentives 130 69 137
Total non current liabilities 3,415 4,547 4,019
Interest bearing loans 1,200 1,200 1,200
Trade and other payables 7 2,382 2,214 2,563
Deferred revenue 5,234 4,428 4,885
Current tax payable 855 504 723
Total current liabilities 9,671 8,346 9,371
Total liabilities 13,086 12,893 13,390
Total liabilities and equity 38,471 34,668 37,267
Group cash flow statement
2005 2004 2005
six months six months year
ended ended ended
30 November 30 November 31 May
(unaudited) (unaudited) (audited)
Notes £000 £000 £000
Cash inflow from operating activities
Profit for the period 1,777 993 3,177
Adjustments for:
Depreciation charge 248 150 354
Share based charges 208 129 297
Finance expense 39 1,171 1,233
Income tax expense 829 458 1,379
Operating cash flow before changes in working capital 3,101 2,901 6,440
Increase in receivables (147) (362) (142)
Increase in payables 170 500 1,374
Profit on sale of fixed assets - (5) (11)
Cash generated from operating activities before interest and tax 3,034 7,661
3,124
Interest paid (149) (894) (1,059)
Income taxes paid (761) (284) (1,041)
Net cash generated from operating activities 2,214 1,856 5,561
Cash flows from investing activities
Interest received 105 55 123
Proceeds from the sale of plant and equipment - 7 34
Acquisition of property, plant and equipment (366) (367) (834)
Net cash used in investing activities (261) (305) (677)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital 94 19,831 19,826
Proceeds from borrowings - 5,975 5,975
Payment of bank loans (600) (12,275) (12,875)
Receipt on disposal of interest rate swap - - 39
Payment of loan notes - (16,779) (16,779)
Payment for shares in minority interest (18) - -
Equity dividends paid (571) - (245)
Net cash from financing activities (1,095) (3,248) (4,059)
Net increase/ (decrease) in cash and cash equivalents 8 858 (1,697) 825
Cash and cash equivalents at beginning of period 5,103 4,278 4,278
Cash and cash equivalents at end of period 5,961 2,581 5,103
Statement of changes of equity
Share Share Retained Total Minority Total
capital premium earnings interest Equity
£000 £000 £000 £000 £000 £000
Balance at 1 June 2004 100 219 526 845 (23) 822
Share based charges - - 129 129 - 129
Profit for the period - - 993 993 - 993
Shares issued 226 19,605 - 19,831 - 19,831
Balance at 30 November 2004 326 19,824 1,648 21,798 (23) 21,775
Balance at 1 June 2004 100 219 526 845 (23) 822
Share based charges - - 297 297 - 297
Profit for the period - - 3,177 3,177 - 3,177
Shares issued 226 19,600 - 19,826 - 19,826
Dividends to shareholders - - (245) (245) - (245)
Balance at 31 May 2005 326 19,819 3,755 23,900 (23) 23,877
Balance at 1 June 2005 326 19,819 3,755 23,900 (23) 23,877
Share based charges - - 208 208 - 208
Profit for the period - - 1,777 1,777 - 1,777
Recovery of VAT on share issue - 94 - 94 - 94
fees
Purchase of minority interest - - (23) (23) 23 -
Dividends to shareholders - - (571) (571) - (571)
Balance at 30 November 2005 326 19,913 5,146 25,385 - 25,385
Notes to the interim statement
1 Accounting policies
Basis of preparation
As a London Stock Exchange AIM listed company NCC Group plc will be required to
prepare its consolidated accounts in accordance with the recognition and
measurement requirements of International Financial Reporting Standards (IFRS)
in issue that are either endorsed by the EU and effective (or available for
early adoption at 31 May 2006 the first annual reporting date at which IFRS are
to be adopted, having previously prepared its accounts using UK Generally
Accepted Accounting Principles (UK GAAP).
The Group is required to apply all relevant standards and accounting policies
that are in force at the first reporting date. However as some of these policies
are still subject to change, the Directors have made assumptions about the
accounting policies expected to be applied when the first annual IFRS financial
statements are prepared for the year ended 31 May 2006.
The full set of accounting policies under IFRS are set out in NCC Group's IFRS
Restatement Report which was issued on the 17 January 2006. This also includes
reconciliations from UK GAAP to IFRS for the 2004 interim statement. An
explanation of how the transition to IFRS has affected the reported financial
results is provided in note 9. The accounting policies including exemptions in
note 9c have been consistently applied to all periods presented.
The financial information contained in this interim statement does not amount to
statutory financial statements within the meaning of section 240 Companies Act
1985. The financial information contained in this report is unaudited but has
been reviewed by KPMG Audit plc. The financial statements for the year ended 31
May 2005 (prepared under UK GAAP) has been delivered to the Registrar of
Companies. The report of the auditors was unqualified and did not contain a
statement under section 237 (2) or (3) Companies Act 1985.
2 Segmental information
The Group is organised into three primary business segments, namely Escrow
Solutions, Consultancy and Testing Solutions. These three segments are the
Group's primary reporting format for segment information.
2005 2004 2005
30 November £000 30 November 31 May
£000 £000
Revenue by business segment
Escrow Solutions (UK) 4,698 3,837 8,098
Escrow Solutions (Germany) 70 65 140
Testing Solutions 2,722 2,028 4,352
Consultancy 2,317 2,583 5,381
Total revenue 9,807 8,513 17,971
Operating profit by business segment
Escrow Solutions (UK) 2,773 2,268 4,765
Escrow Solutions (Germany) (144) 18 115
Testing Solutions 587 397 972
Consultancy (42) 408 956
Segment operating profit 3,174 3,091 6,808
Head office costs (529) (469) (1,019)
Operating profit 2,645 2,622 5,789
The table below provides additional disclosure on revenue by geographical market
where the customer is based
2005 2004 2005
30 November 30 November 31 May
£000 £000 £000
Revenue by geographical segment
UK 8,561 7,504 15,790
Rest of Europe 634 522 1,104
Rest of the World 612 487 1,077
Total revenue 9,807 8,513 17,971
3 Float related finance costs
During the six months ended 30 November 2005, float related finance costs of nil
(2004: £861,000 relating to the repayment of debt financing following the
Group's listing on AIM) were written off to the income and expenditure account.
4 Dividends
2005 2004 2005
30 November 30 November 31 May
£000 £000 £000
Dividends paid and recognised in the period 571 - 245
Dividends proposed but not recognised in the 326 245 571
period
Dividends per share paid and recognised in the 1.75p - 0.75p
period
Dividends per share proposed but not recognised in 1.00p 0.75p 1.75p
the period
5 Earnings per share
The calculation of earnings per share is based on the following:
2005 2004 2005
30 November 30 November 31 May
£000 £000 £000
Profit for the period 1,777 993 3,177
Number of Number of Number of
Shares Shares Shares
000's 000's 000's
Basic weighted average number of shares 32,604 29,987 31,292
in issue
Dilutive effect of share options 724 170 472
Diluted weighted average shares in issue 33,328 30,157 31,764
6 Trade and other receivables
2005 2004 2005
30 November 30 November 31 May
£000 £000 £000
Trade debtors 2,428 2,666 2,653
Prepayments and accrued income 1,314 1,149 942
3,742 3,815 3,595
7 Trade and other payables
2005 2004 2005
30 November 30 November 31 May
£000 £000 £000
Trade creditors 485 302 332
Other taxation and social security 692 788 951
Accruals 1,146 1,073 1,228
Other creditors 17 - -
Interest 42 51 52
2,382 2,214 2,563
8 Reconciliation of net cash flow to movement in net funds / (debt)
2005 2004 2005
30 November 30 November 31 May
£000 £000 £000
Increase / (decrease) in cash in the period 858 (1,697) 825
Cash outflow from movement in loans and loan notes 600 23,079 23,680
Non cash items (3) (829) (834)
Movement in net funds in the period 1,455 20,553 23,671
Net funds / (debt) at beginning of period 21 (23,650) (23,650)
Net funds / (debt) at end of period 1,476 (3,097) 21
Analysis of net funds / (debt)
At beginning of Cash flow Non cash At end of
year items period
£000 £000 £000 £000
Cash and cash equivalents 5,103 858 - 5,961
Term loan (5,082) 600 (3) (4,485)
Total 21 1,458 (3) 1,476
9 Explanation of transition to IFRS
As a London Stock Exchange AIM listed company NCC Group plc will be required to
prepare its consolidated accounts in accordance with International Accounting
Standards (IAS) and International Financial Reporting Standards (IFRS) as
adopted by the European Union (EU) from the 1 January 2007, having previously
prepared its accounts using UK Generally Accepted Accounting Principles (UK
GAAP). It is the Group's intention to adopt the standards early and therefore
the NCC Group will report under IFRS for the year ended 31 May 2006.
There was no effect on the underlying cash generation and expenditures of the
Group, however there were some presentational changes on the adoption of IAS 7 '
Cash Flow Statements'.
9a Effect of IFRS adoption on profit for this and prior periods
Note 2005 2004 2005
30 November £000 30 November £000 31 May
£000
Profit for the period under UK GAAP 1,176 336 1,895
Share-based charges A (208) (129) (297)
Tax movement on share options D 62 39 89
Goodwill amortisation C 752 752 1,500
Lease incentives B (8) (8) (15)
Tax movement on lease incentives D 3 3 5
Profit for the period reported under IFRS 1,777 993 3,177
9b Effect of IFRS adoption on equity
Note 2005 2004 2005
30 November £000 30 November £000 31 May
£000
Total equity under UK GAAP 22,998 20,745 21,727
Goodwill amortisation C 2,252 751 1,500
Dividends payable E - 245 571
Deferred tax asset - share based payments D 151 39 89
Leasehold incentives B (23) (8) (15)
Tax on leasehold incentives D 7 3 5
Total equity reported under IFRS 25,385 21,775 23,877
9c Explanatory notes to the IFRS adjustments
Transitional arrangements upon first time adoption of IFRS (IFRS 1)
IFRS 1 'First-time Adoption of International Financial Reporting Standards' sets
out the transition rules, which must be applied, when IFRS is adopted for the
first time. The standard sets out certain mandatory exemptions to retrospective
application and certain optional exemptions. The most significant optional
exemptions available and taken by the Group are as follows:
The Group has elected not to apply retrospectively the provisions of IFRS 3 '
Business Combinations', to acquisitions that occurred prior to the Group's
transition date of 1 June 2004.
The Group has elected not to apply the provisions of IFRS 2, Share-based
Payments, to share options granted on or before 7 November 2002 which had not
vested on or before 1 January 2005.
The adjustments between UK GAAP and IFRS for the six month period to 30 November
2004 and the year ended 31 May 2005 are detailed below.
A Share-based payments (IFRS 2)
An additional charge of £208,000 for the period ended 30 November 2005 (£129,000
for the period ended 30 November 2004 and for the year ended 31 May 2005:
£297,000) has been made in the IFRS income statement to spread the fair value of
share options and LTIPs over the service obligations of those incentives.
B Leasehold incentives (SIC 15)
An additional charge of £8,000 for the period ended 30 November 2005 (period
ended 30 November 2004: £8,000 and for the year ended 31 May 2005: £15,000) has
been made in the IFRS income statement to spread a lease incentive over the full
lease term as opposed to the period up to the next break clause under UK GAAP.
C Goodwill (IAS 36)
Under IFRS, goodwill has an indefinite life and is only written down when an
annual impairment test suggests that the carrying value is overstated. The
goodwill amortisation charge of £752,000 for the period to 30 November 2004
(year ended 31 May 2005: £1,500,000) under UK GAAP is reversed under IFRS
following an impairment review of the goodwill.
Notes to the interim statement (continued)
D Taxation effect of IFRS adjustments (IAS 12)
Under IAS 12 the following tax adjustments are required and result in a £42,000
net increase in the tax charge for the period ended 30 November 2004 (year ended
31 May 2005: £94,000). The effect for period ending November 2005 is £158,000.
The temporary difference between the recognition of the IFRS 2 charge for share
based payments and the Group's expected future tax deduction under UK tax
legislation ('Schedule 23') is established as a deferred tax asset under IFRS
calculated by reference to the intrinsic value of all unexercised share options
at each balance sheet date (including those issued prior to November 2002 and
not otherwise valued under the IFRS transitional arrangements). The resultant
credit in the tax charge is restricted to the tax effect of the cumulative IFRS
2 charge with the difference credited directly to the profit and loss reserve.
This restriction also impacts the Schedule 23 tax credit previously recorded as
an exceptional tax credit in the income statement under UK GAAP. The resulting
additional tax charge in the IFRS income statement for the period to 30 November
2004 is £39,000 (year ended 31 May 2005: £89,000). The effect for the period
ending November 2005 is £151,000.
A tax adjustment has been recognised in relation to the lease incentive charge.
E Dividends (IAS 10)
Dividends are non adjusting post-balance sheet events under IFRS and can only be
accrued if they have been formally approved at the balance sheet date.
--------------------------
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